Lecture 2 Practice Questions: Financial Statements

Part 1: Multiple Choice Questions

1. Calculate the value of shareholders equity for Omega Limited if it has PPE (net) of
$50,000, long-term debt of $30,000, net working capital of $10,000, and current liabilities
of $15,000.
a. $5,000
b. $20,000
c. $30,000
d. $55,000

E = PPE(Net) + NWC - LTD

E = 50,000 + 10,000 - 30,000 = $30,000

2. Calculate the value of PPE (net) for Pioneer Limited if has shareholders' equity of $40,000,
total debt of $30,000, long-term debt of $20,000, and net working capital of $9,000.
a. $29,000
b. $31,000
c. $40,000
d. $51,000

PPE(Net) = LTD + E - NWC

PPE(Net) = 20,000 + 40,000 - 9,000 = $51,000

3. Calculate the value of net working capital for Sigma Limited if it has total assets of
$100,000, net fixed assets of $70,000, shareholders equity of $30,000, accounts receivable
of $10,000, and current liabilities of $20,000.
a. $10,000
b. $30,000
c. $70,000
d. $80,000

NWC = CA CL
NWC = TA - NFA CL
NWC = 100,000 - 70,000 - 200,000 = $ 10,000

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4. Calculate the value of shareholders equity for Mars Limited if it has long-term debt of
$30,000, net fixed assets of $50,000, current liabilities of $10,000, and net working capital
of $5,000.
a. $15,000
b. $25,000
c. $30,000
d. $45,000

E = TA LTD
E = NFA + NWC LTD
E = 50,000 + 5,000 - 30,000 = $ 25,000

5. Calculate the value of current liabilities for Venus Limited if it has total assets of $50,000,
net fixed assets of $40,000, and net working capital of $5,000.
a. $5,000
b. $10,000
c. $15,000
d. $35,000

CL = CA NWC
CL = TA NFA NWC
CL = 50,000 - 40,000 - 5,000 = 5,000

6. Calculate the value of the long-term debt for Sigma Limited if it has total assets of
$100,000, shareholders equity of $40,000, current assets of $20,000, and current liabilities
of $15,000.
a. $5,000
b. $45,000
c. $60,000
d. $65,000

LTD = TA CL - E
LTD = 100,000 15,000 - 40,000 = 45,000

7. Calculate the value of dividends paid for Pioneer Limited if it an addition to retained
earnings of $7,000, net income of $10,000, and sales of $100,000.
a. $3,000
b. $17,000
c. $83,000
d. $93,000

Dividends = NI Additional RE
Dividends = 10,000 7,000 = $3,000

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8. Calculate the value of the retained earnings account for Alpha Limited of 2016 if it has for
the year 2016 dividends of $10,000, net income of $30,000, and shareholders equity of
$200,000. The year 2015 retained earnings is $100,000.
a. $80,000
b. $120,000
c. $130,000
d. $140,000

End RE = Beg. RE + NI - Div

End RE = 100,000 + 30,000 - 1,000 = 120,000

9. Land is classified as
a. Current assets
b. Current liabilities
c. Intangible assets
d. Tangible assets

10. Which one of the following is included in net working capital?

a. 10-year bonds
b. Accounts payable
c. Contributed capital
d. Machine

11. Gross profit is calculated as

a. Total sales - cost of sales - selling, general and administrative expenses - depreciation
and amortization
b. Total sales - cost of sales - selling, general and administrative expenses
c. Total sales - cost of sales
d. None of the above

12. Which of the following is NOT an operating expense?

a. Interest expense
b. Depreciation and amortization
c. Selling, general and administrative expenses
d. Research and development

13. Which of the following statements regarding net income is correct?

a. Net Income = Additional Retained Earnings - Dividends
b. Additional Retained Earnings = Net Income + Dividends
c. Net Income = Additional Retained Earnings + Dividends
d. Additional Retained Earnings - Net Income = Dividends

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14. Which one of the following is classified as a current asset?
a. Copyright
b. Inventory
c. Land
d. Short term loan

15. Notes payable is classified as

a. Current assets
b. Current liabilities
c. Intangible assets
d. Tangible assets

16. Alpha Limited decreased its accounts payable by $150, decreased its inventory by $300,
and increased its accounts receivable by $200 over the year. The effect on Alphas
statement of cash flows is
a. 50 use of cash
b. 250 use of cash
c. 250 source of cash
d. 350 source of cash

CF=-AR+Inventory-AP=-200+300-150=-50
negative cashflow=cash outflow=uses of cash
positive cashflow=cash inflow=sources of cash

17. On the Statement of Cash Flows, which of the following are considered operating
activities?
I. costs of goods sold
II. decrease in accounts payable
III. interest paid
IV. dividends paid
a. I and III only
b. III and IV only
c. I, II, and III only
d. I, III, and IV only

18. The sources and uses of cash over a stated period of time are reflected on the:
a. Balance sheet
b. Income statement
c. Statement of cash flows
d. Statement of shareholders equity

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19. According to the Statement of Cash Flows, a decrease in accounts receivable will
the cash flow from activities.
a. decrease; operating
b. decrease; financing
c. increase; operating
d. increase; financing

20. According to the Statement of Cash Flows, an increase in interest expense will
the cash flow from activities.
a. decrease; operating
b. decrease; financing
c. increase; operating
d. increase; financing

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Part 2: Case Studies

Question 1

The following transactions from the balance sheets as of June 30, 2014 and 2015
2014 2015
o Accounts payable $20 million $50 million
o Accounts receivable $30 million $60 million
o PPE (Gross) $500 million $620 million
o Goodwill $100 million $100 million
o Notes payable $10 million $5 million
o Inventories $40 million $20 million
o 10 year bonds payable $50 million $40 million
o Accumulated depreciation $200 million $220 million
o Contributed Capital $100 million $130 million
o Long Term Loan $250 million $300 million
o Current Portion of LTD $20 million $20 million
o Retained earnings $50 million $70 million
o Cash $30 million $35 million

Use the above-mentioned transactions to form the balance sheet and calculate the following for
Pioneer Limited:
(1) Total current assets
(2) Total assets
(3) Total current liabilities
(4) Total long-term liabilities
(5) Total shareholders equity
(6) Net Working Capital

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 Balance Sheet as of June 30, 2014 (in millions)

Current Assets Current Liabilities

Cash 30 Accounts Payable 20
Accounts Receivable 30 Notes Payable 10
Inventories 40 Current Portion of LTD 20
Total Current Assets 100 Total Current Liabilities 50

Long Term Assets Long Term Liabilities

PPE (Gross) 500 Long Term Loan 250
Accumulated Depreciation 200 Bonds Payable 50
PPE (Net) 300 Total Long Term Liabilities 300
Goodwill 100
Total Long Term Assets 400 Total Liabilities 350

Shareholders' Equity
Contributed Capital 100
Retained Earnings 50
Total Shareholders' Equity 150

Total Assets 500 Total Liabilities and Equity 500

o Net Working Capital (NWC) = CA CL = 100m 50m = $50 million

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 Balance Sheet as of June 30, 2015 (in millions)

Current Assets Current Liabilities

Cash 35 Accounts Payable 50
Accounts Receivable 60 Notes Payable 5
Inventories 20 Current Portion of LTD 20
Total Current Assets 115 Total Current Liabilities 75

Long Term Assets Long Term Liabilities

PPE (Gross) 620 Long Term Loan 300
Accumulated Depreciation 220 Bonds Payable 40
PPE (Net) 400 Total Long Term Liabilities 340
Goodwill 100
Total Long Term Assets 500 Total Liabilities 415

Shareholders' Equity
Contributed Capital 130
Retained Earnings 70
Total Shareholders' Equity 200

Total Assets 615 Total Liabilities and Equity 615

o Net Working Capital (NWC) = CA CL = 115m 75m = $40 million

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Question 2
The following transactions from the income statement for the year ended June 30, 2014 and
2015.
2014 2015
o Depreciation $15 million $20 million
o Interest Expense $25 million $30 million
o S, G & A $10 million $5 million
o Tax rate 30% 30%
o Sales $200 million $240 million
o COGS $115 million $140 million
o Dividends $9.5 million $11.5 million

Use the above mentioned transactions to calculate the following for Alpha Limited:
(1) Single-step Income Statement
(2) Multiple-step Income Statement
(3) Additional Retained Earnings

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 Income Statement for the year ended June 30, 2014 (in millions)

Single-step Income Statement Multi-step Income Statement

Revenues Sales 200

Sales 200 Cost of Goods Sold (COGS) 115
Total Revenues 200 Gross Profit 85
S, G & A Expenses 10
Expenses Depreciation & Amortization 15
Cost of Goods Sold (COGS) 115 EBIT 60
S, G & A Expenses 10 Interest expense 25
Depreciation & Amortization 15 Earnings Before Tax (EBT) 35
Interest expense 25 Tax expense @ 30% 10.5
Tax expense 10.5 Net income (NI) 24.5
Total Expenses 175.5 Dividends 9.5
Net income (NI) 24.5 Retained Earnings 15
Dividends 9.5
Retained Earnings 15

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 Income Statement for the year ended June 30, 2015 (in millions)

Single-step Income Statement Multi-step Income Statement

Revenues Sales 240

Sales 240 Cost of Goods Sold (COGS) 140
Total Revenues 240 Gross Profit 100
S, G & A Expenses 5
Expenses Depreciation & Amortization 20
Cost of Goods Sold (COGS) 140 EBIT 75
S, G & A Expenses 5 Interest expense 30
Depreciation & Amortization 20 Earnings Before Tax (EBT) 45
Interest expense 30 Tax expense @ 30% 13.5
Tax expense 13.5 Net income (NI) 31.5
Total Expenses 208.5 Dividends 11.5
Net income (NI) 31.5 Retained Earnings 20
Dividends 11.5
Retained Earnings 20

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Question 3
Use the balance sheets and income statements for the years 2014 and 2015 in Question 1 and
2 to calculate statement of cash flows for year 2015.

Cash Flow From Operations

Net Income 31.5
+ Depreciation 20
- Accounts Receivable -30 -(60-30)
- Inventories 20 -(20-40)
+ Accounts Payable 30 +(50-20)

Net Cash Flow From Operations 71.5

Cash Flow From Investment

- PPE -120 -(400-300+20) OR -(620-500)
- Goodwill 0 -(100-100)
Net Cash Flow From Investment -120

Cash Flow From Financing

- Dividends -11.5
+ Notes Payable -5 +(5-10)
+ Current Portion of LTD 0 +(20-20)
+ Long Term Debt 50 +(300-250)
+ Bonds Payable -10 +(40-50)
+ Contributed Capital 30 +(130-100)
Net Cash Flow From Financing 53.5

Net Cash Flow 5 71.5 120 + 53.5

Beginning Cash 20

Ending Cash 35 30 + 5

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