Planning, Performance, Evaluation, and Control

1. Vandall Corporation manufactures and sells a single product. The company uses units as the
measure of activity in its budgets and performance reports. During April, the company budgeted
for 7,300 units, but itsactual level of activity was 7,340 units. The company has provided the
following data concerning the formulas used in its budgeting and its actual results for April:
Data used in budgeting:
Fixed element Variable element
per month per unit

Revenue ___-___ $35.40

Direct labor 0 $3.30
Direct materials 0 15.90
Manufacturing overhead 49,200 1.20
Selling and
administrative expenses 26,600 0.10
Total expenses $75,800 $20.50

Actual results
for April:
Revenue $254,146
Direct labor $24,722
Direct materials $116,496
Manufacturing overhead $59,608
Selling and
administrative expenses $26,494

The overall revenue and spending variance (i.e., the variance for net operating income in the revenue and
spending variance column on the flexible budget performance report) for April would be closest to
A. $6,144 F.
B. $6,740 U.
C. $6,740 F.
D. $6,144 U.

2. Coles Company, Inc. makes and sells a single product, Product R. Three yards of Material K
are needed to make one unit of Product R. Budgeted production of Product R for the next five
months is as follows:

14,000
August units
 14,500
September
units
15,500
October
units
12,600
November
units
11,900
December
units

The company wants to maintain monthly ending inventories of Material K equal to 20% of the following
month's production needs. On July 31, this requirement wasn't met because only 2,500 yards of Material K
were on hand. The cost of Material K is $0.85 per yard. The company wants to prepare a Direct Materials
Purchase Budget for the rest of the year.

The total cost of Material K to be purchased in August is

A. $42,300.
B. $40,970.
C. $48,200.
D. $33,840.

3. Which of the following will not result in an increase in return on investment (ROI), assuming other
factors remain the same?
A. An increase in sales
B. An increase in operating assets
C. An increase in net operating income
D. A reduction in expenses

4. The Charade Company is preparing its Manufacturing Overhead budget for the fourth quarter of the
year. The budgeted variable factory overhead is $5.00 per direct-labor hour; the budgeted fixed factory
overhead is $75,000 per month, of which $15,000 is factory depreciation. If the budgeted direct-labor time
for December is 8,000 hours, then total budgeted factory overhead per direct-labor hour (rounded) is
A. $16.25.
B. $14.38.
C. $12.50.
D. $9.38.

5. A company's average operating assets are $220,000, and its net operating income is $44,000. The
company invested in a new project, increasing average assets to $250,000 and increasing its net operating
income to $49,550. What is the project's residual income if the required rate of return is 20%?
A. ($450)
B. ($600)
C. $600
D. $450

Use the following information to answer this question.

Cole Laboratories makes and sells a lawn fertilizer called Fastgro. The company has developed standard
costs for one bag of Fastgro as follows:

Standard Standard Cost

Quantity per bag
Direct material 20 pounds $8.00
Direct labor 0.1 hours $1.10
Variable overhead 0.1 hours $0.40

The company had no beginning inventories of any kind on January 1. Variable overhead is applied to
production on the basis of standard direct-labor hours. During January, the company recorded the following
activity:

• Production of Fastgro: 4,000 bags

• Direct materials purchased: 85,000 pounds at a cost of $32,300
• Direct-labor worked: 390 hours at a cost of $4,875
• Variable overhead incurred: $1,475
• Inventory of direct materials on January 31: 3,000 pounds

6. The labor efficiency variance for January is

A. $110 F.
B. $130 U.
C. $350 U.
D. $475 F.

Use the following information to answer this question.

Moorhouse Clinic uses client visits as its measure of activity. During December, the clinic budgeted for
3,700 client visits, but its actual level of activity was 3,690 client visits. The clinic has provided the
following data concerning the formulas used in its budgeting and its actual results for December:

Data used in budgeting:

Fixed element Variable element
per month per client-visit

Revenue ____-____ $25.10

Personnel expenses $27,100 $7.10
Medical supplies 1,500 4.50
Occupancy expenses 6,000 1.00
Administrative expenses 3,000 0.10
Total expenses $37,600 $12.70

Actual results
for December:
Revenue $96,299
Personnel expenses $51,009
Medical supplies $17,425
Occupancy expenses $9,240
Administrative expenses $3,239
7. The revenue variance for December would be closest to
A. $3,429 F.
B. $3,680 U.
C. $3,429 U.
D. $3,680 F.

8. The company plans to sell 22,000 units of Product WZ in June. The finished-goods
inventories on June 1 and June 30 are budgeted to be 100 and 400 units, respectively. The
direct labor hours are 11,000 and the direct labor rate is $10.50. Budgeted direct-labor
costs for June would be
A. $234,150.
B. $462,000.
C. $455,700.
D. $117,075.

9. Super Drive is a computer hard-drive manufacturer. The company's balance sheet for the
fiscal year ended on November 30 appears below:

Super Drive, Inc.

Statement of Financial Position
For the year ended November 30
Assets:
Cash $52,000
Accounts receivable 150,000
Inventory 315,000
Property, plant, and equipment 1,000,000
Total Assets $1,517,000
Liabilities and stockholders' equity:
Accounts payable $175,000
Common stock 900,000
Retained earnings 442,000
Total liabilities and
stockholders' equity $1,517,000

Additional information regarding Super Drive's operations appears below:

• Sales are budgeted at $520,000 for December and $500,000 for January.
• Collections are expected to be 60% in the month of sale and 40% in the month following sale. There are
no bad debts.
• 80% of the disk-drive components are purchased in the month prior to the month of the sale, and 20%
are purchased in the month of the sale. Purchased components comprise 40% of the cost of goods sold.
• Payment for components purchased is made in the month following the purchase.
• Assume that the cost of goods sold is 80% of sales.

The budgeted cash collections for the upcoming December should be

A. $462,000.
B. $520,000.
C. $208,000.
D. $402,000.
 10. Division X of Charter Corporation makes and sells a single product which is used by
manufacturers of fork lift trucks. Presently it sells 12,000 units per year to outside customers at
$24 per unit. The annual capacity is 20,000 units and the variable cost to make each unit is $16.
Division Y of Charter Corporation would like to buy 10,000 units a year from Division X to
use in its products. There would be no cost savings from transferring the units within the
company rather than selling them on the outside market. What should be the lowest acceptable
transfer price from the perspective of Division X?
A. $16.00
B. $21.40
C. $17.60
D. $24.00

11. The budget or schedule that provides necessary input data for the direct-labor budget is the
A. cash budget.
B. raw materials purchases budget.
C. schedule of cash collections.
D. production budget.

Use the following information to answer this question.

Moorhouse Clinic uses client visits as its measure of activity. During December, the clinic budgeted for
3,700 client visits, but its actual level of activity was 3,690 client visits. The clinic has provided the
following data concerning the formulas used in its budgeting and its actual results for December:

Data used in budgeting:

Fixed element Variable element
per month per client-visit

Revenue ____-____ $25.10

Personnel expenses $27,100 $7.10
Medical supplies 1,500 4.50
Occupancy expenses 6,000 1.00
Administrative expenses 3,000 0.10
Total expenses $37,600 $12.70

Actual results
for December:
Revenue $96,299
Personnel expenses $51,009
Medical supplies $17,425
Occupancy expenses $9,240
Administrative expenses $3,239

12. The spending variance for medical supplies in December would be closest to
A. $680 F.
B. $725 F.
C. $725 U.
D. $680 U.

13. Last year, the House of Orange had sales of $826,650, net operating income of
$81,000, and operating assets of $84,000 at the beginning of the year and $90,000 at the end of
the year. What was the company's turnover rounded to the nearest tenth?
A. 9.8
B. 9.5
C. 9.2
D. 10.2

Use the following information to answer this question.

Moorhouse Clinic uses client visits as its measure of activity. During December, the clinic budgeted for
3,700 client visits, but its actual level of activity was 3,690 client visits. The clinic has provided the
following data concerning the formulas used in its budgeting and its actual results for December:

Data used in budgeting:

Fixed element Variable element
per month per client-visit

Revenue ____-____ $25.10

Personnel expenses $27,100 $7.10
Medical supplies 1,500 4.50
Occupancy expenses 6,000 1.00
Administrative expenses 3,000 0.10
Total expenses $37,600 $12.70

Actual results
for December:
Revenue $96,299
Personnel expenses $51,009
Medical supplies $17,425
Occupancy expenses $9,240
Administrative expenses $3,239

14. The medical supplies in the flexible budget for December would be closest to
A. $17,472.
B. $17,378.
C. $18,150.
D. $18,105.

Use the following information to answer this question.

Werber Clinic uses client visits as its measure of activity. During January, the clinic budgeted for 2,700
client visits, but its actual level of activity was 2,730 client visits. The clinic has provided the following data
concerning the formulas used in its budgeting and its actual results for January:
Data used in budgeting:
Fixed element Variable element
per month per client-visit
Revenue ___-___ $33.60
Personnel expenses $22,100 $8.70
Medical supplies 1,100 6.60
Occupancy expenses 5,600 1.60
Administrative expenses 3,700 0.40
Total expenses $32,500 $17.30

Actual results
for January:
Revenue $93,408
Personnel expenses $46,251
Medical supplies $19,348
Occupancy expenses $9,508
Administrative expenses $4,772

15. The activity variance for personnel expenses in January would be closest to
A. $261 U.
B. $661 U.
C. $261 F.
D. $661 F.

16. The cash budget must be prepared before you can complete the
A. budgeted balance sheet.
B. schedule of cash disbursements.
C. production budget.
D. raw materials purchases budget.

Use the following information to answer this question.

Moorhouse Clinic uses client visits as its measure of activity. During December, the clinic budgeted for
3,700 client visits, but its actual level of activity was 3,690 client visits. The clinic has provided the
following data concerning the formulas used in its budgeting and its actual results for December:

Data used in budgeting:

Fixed element Variable element
per month per client-visit

Revenue ____-____ $25.10

Personnel expenses $27,100 $7.10
Medical supplies 1,500 4.50
Occupancy expenses 6,000 1.00
Administrative expenses 3,000 0.10
Total expenses $37,600 $12.70

Actual results
for December:
Revenue $96,299
Personnel expenses $51,009
Medical supplies $17,425
Occupancy expenses $9,240
Administrative expenses $3,239

17. The personnel expenses in the planning budget for December would be closest to
A. $51,147.
B. $53,299.
C. $51,009.
D. $53,370.

Use the following information to answer this question.

Werber Clinic uses client visits as its measure of activity. During January, the clinic budgeted for 2,700
client visits, but its actual level of activity was 2,730 client visits. The clinic has provided the following data
concerning the formulas used in its budgeting and its actual results for January:

Data used in budgeting:

Fixed element Variable element
per month per client-visit
Revenue ___-___ $33.60
Personnel expenses $22,100 $8.70
Medical supplies 1,100 6.60
Occupancy expenses 5,600 1.60
Administrative expenses 3,700 0.40
Total expenses $32,500 $17.30

Actual results
for January:
Revenue $93,408
Personnel expenses $46,251
Medical supplies $19,348
Occupancy expenses $9,508
Administrative expenses $4,772

18. The activity variance for net operating income in January would be closest to
A. $2,019 F.
B. $489 F.
C. $2,019 U.
D. $489 U.

Use the following information to answer this question.

Moorhouse Clinic uses client visits as its measure of activity. During December, the clinic budgeted for
3,700 client visits, but its actual level of activity was 3,690 client visits. The clinic has provided the
following data concerning the formulas used in its budgeting and its actual results for December:

Data used in budgeting:

Fixed element Variable element
per month per client-visit

Revenue ____-____ $25.10

Personnel expenses $27,100 $7.10
Medical supplies 1,500 4.50
Occupancy expenses 6,000 1.00
Administrative expenses 3,000 0.10
Total expenses $37,600 $12.70

Actual results
for December:
Revenue $96,299
Personnel expenses $51,009
Medical supplies $17,425
Occupancy expenses $9,240
Administrative expenses $3,239

19. The activity variance for personnel expenses in December would be closest to
A. $71 U.
B. $2,361 F.
C. $2,361 U.
D. $71 F.

Use the following information to answer this question.

Cole Laboratories makes and sells a lawn fertilizer called Fastgro. The company has developed standard
costs for one bag of Fastgro as follows:

Standard Standard Cost

Quantity per bag
Direct material 20 pounds $8.00
Direct labor 0.1 hours $1.10
Variable overhead 0.1 hours $0.40

The company had no beginning inventories of any kind on January 1. Variable overhead is applied to
production on the basis of standard direct-labor hours. During January, the company recorded the following
activity:

• Production of Fastgro: 4,000 bags

• Direct materials purchased: 85,000 pounds at a cost of $32,300
• Direct-labor worked: 390 hours at a cost of $4,875
• Variable overhead incurred: $1,475
• Inventory of direct materials on January 31: 3,000 pounds

20. The labor rate variance for January is

A. $585 F.
B. $475 U.
C. $585 U.
D. $475 F.

21. The Clemson Company reported the following results last year for the manufacture and sale of
one of its products known as a Tam.

Sales (6,500 Tams at $130 each) $845,000

Variable cost of sales 390,000
Variable distribution costs 65,000
Fixed advertising expense 275,000
Salary of product line manager 25,000
Fixed manufacturing overhead 145,000
Net operating loss $(55,000)

Clemson Company is trying to determine whether to discontinue the manufacture and sale of Tams. The
operating results reported above for last year are expected to continue in the foreseeable future if the
product isn't dropped. The fixed manufacturing overhead represents the costs of production facilities and
equipment that the Tam product shares with other products produced by Clemson. If the Tam product
were dropped, there would be no change in the fixed manufacturing costs of the company.
Assume that discontinuing the manufacture and sale of Tams will have no effect on the sale of other
product lines. If the company discontinues the Tam product line, the change in annual operating income (or
loss) should be a
A. $70,000 increase.
B. $90,000 decrease.
C. $65,000 decrease.
D. $55,000 decrease.

Use the following information to answer this question.

Financial statements for Larkins Company appear below:

Larkins Company
Statement of Financial Position
December 31, Year 2 and Year 1
(dollars in thousands)

Year 2 Year 1
Current assets:
Cash and marketable securities $180 $180
Accounts receivable, net 210 180
 Inventory 130 120
Prepaid expenses 50 50
Total current assets 570 530
Noncurrent assets:
Plant & equipment, net 1,540 1,480
Total assets $2,110 $2,010

Current liabilities:
Accounts payable $100 $130
Accrued liabilities 60 60
Notes payable, short term 90 120
Total current liabilities 250 310
Noncurrent liabilities:
Bonds payable 480 500
Total liabilities 730 810
Stockholders' equity:
Preferred stock, $20 par, 10% 120 120
Common stock, $10 par 180 180
Additional paid-in capital--common stock 240 240
Retained earnings 840 660
Total stockholders' equity 1,380 1,200
Total liabilities & stockholders' equity $2,110 $2,010

Larkins Company
Income Statement
For the Year Ended December 31, Year 2
(dollars in thousands)

Sales (all on account) $2,760

Cost of goods sold 1,930
Gross margin 830
Selling and administrative expense 330
Net operating income 500
Interest expense 50
Net income before taxes 450
Income taxes (30%) 135
Net income $315

Dividends during Year 2 totaled $135 thousand, of which $12 thousand were preferred dividends. The
market price of a share of common stock on December 31, Year 2 was $150.

22. Larkins Company's book value per share at the end of Year 2 was closest to:
A. $23.33.
B. $76.67.
C. $70.00.
D. $10.00.

23. An increase in the market price of a company's common stock will immediately affect its
A. debt-to-equity ratio.
B. dividend yield ratio.
C. dividend payout ratio.
D. earnings per share of common stock.

Use the following information to answer this question.

The most recent balance sheet and income statement of Teramoto Corporation appear below:

Ending Beginning
Comparative Balance Sheet Balance
Balance
Assets:
Cash and cash equivalents $43 $35
Accounts receivable 53 59
Inventory 73 69
Plant and equipment 582 490
Less accumulated depreciation 301 286
Total assets $450 $367
Liabilities and stockholders' equity
Accounts payable $57 $48
Wages payable 21 18
Taxes payable 15 13
Bonds payable 21 20
Deferred taxes 20 21
Common stock 55 50
Retained earnings 261 197
Total liabilities and stockholders' equity $450 $367

Income Statement

Sales $893
Cost of good sold 587
Gross margin 306
Selling and administrative expense 189
Net operating income 117
Income taxes 35
Net income $82
24. The net cash provided by (used by) investing activities for the year was
A. ($92).
B. $77.
C. ($77).
D. $92.

Use the following information to answer this question.

The most recent balance sheet and income statement of Teramoto Corporation appear below:

Ending Beginning
Comparative Balance Sheet Balance
Balance
Assets:
Cash and cash equivalents $43 $35
Accounts receivable 53 59
Inventory 73 69
Plant and equipment 582 490
Less accumulated depreciation 301 286
Total assets $450 $367
Liabilities and stockholders' equity
Accounts payable $57 $48
Wages payable 21 18
Taxes payable 15 13
Bonds payable 21 20
Deferred taxes 20 21
Common stock 55 50
Retained earnings 261 197
Total liabilities and stockholders' equity $450 $367

Income Statement

Sales $893
Cost of good sold 587
Gross margin 306
Selling and administrative expense 189
Net operating income 117
Income taxes 35
Net income $82
 25. The net cash provided by (used by) operations for the year was
A. $117.
B. $112.
C. $52.
D. $30.

26. Products A, B, and C are produced from a single raw material input. The raw
material costs $90,000, from which 5,000 units of A, 10,000 units of B, and 15,000 units
of C can be produced each period. Product A can be sold at the split-off point for $2 per
unit, or it can be processed further at a cost of
$12,500 and then sold for $5 per unit. Product A should be
A. processed further, since this will increase profits by $2,500 each period.
B. processed further, since this will increase profits by $12,500 each period.
C. sold at the split-off point, since further processing would result in a loss of $0.50 per unit.
D. sold at the split-off point, since further processing will result in a loss of $2,500 each period.

27. Which of the following would be considered a "use" of cash for the purpose of
constructing a statement of cash flows?
A. Selling the company's own common stock to investors
B. Purchasing equipment
C. Amortizing a patent
D. Issuing long-term debt

28. VIM Company purchased $100,000 in inventory from its suppliers on credit terms.
The company's acid- test ratio would most likely be
A. be impossible to determine without more information.
B. increase.
C. be unchanged.
D. decrease.

Use the following information to answer this question.

Financial statements for Larkins Company appear below:

Larkins Company
Statement of Financial Position
December 31, Year 2 and Year 1
(dollars in thousands)

Year 2 Year 1
Current assets:
Cash and marketable securities $180 $180
Accounts receivable, net 210 180
Inventory 130 120
Prepaid expenses 50 50
Total current assets 570 530
Noncurrent assets:
Plant & equipment, net 1,540 1,480
Total assets $2,110 $2,010

Current liabilities:
Accounts payable $100 $130
Accrued liabilities 60 60
Notes payable, short term 90 120
Total current liabilities 250 310
Noncurrent liabilities:
Bonds payable 480 500
Total liabilities 730 810
Stockholders' equity:
Preferred stock, $20 par, 10% 120 120
Common stock, $10 par 180 180
Additional paid-in capital--common stock 240 240
Retained earnings 840 660
Total stockholders' equity 1,380 1,200
Total liabilities & stockholders' equity $2,110 $2,010

Larkins Company
Income Statement
For the Year Ended December 31, Year 2
(dollars in thousands)

Sales (all on account) $2,760

Cost of goods sold 1,930
Gross margin 830
Selling and administrative expense 330
Net operating income 500
Interest expense 50
Net income before taxes 450
Income taxes (30%) 135
Net income $315

Dividends during Year 2 totaled $135 thousand, of which $12 thousand were preferred dividends. The
market price of a share of common stock on December 31, Year 2 was $150.

29. Larkins Company's return on total assets for Year 2 was closest to:
A. 15.3%.
B. 17.0%.
C. 16.0%.
D. 13.6%.

Use the following information to answer this question.

Financial statements for Larkins Company appear below:

Larkins Company
Statement of Financial Position
December 31, Year 2 and Year 1
(dollars in thousands)

Year 2 Year 1
Current assets:
Cash and marketable securities $180 $180
Accounts receivable, net 210 180
Inventory 130 120
Prepaid expenses 50 50
Total current assets 570 530
Noncurrent assets:
Plant & equipment, net 1,540 1,480
Total assets $2,110 $2,010

Current liabilities:
Accounts payable $100 $130
Accrued liabilities 60 60
Notes payable, short term 90 120
Total current liabilities 250 310
Noncurrent liabilities:
Bonds payable 480 500
Total liabilities 730 810
Stockholders' equity:
Preferred stock, $20 par, 10% 120 120
Common stock, $10 par 180 180
Additional paid-in capital--common stock 240 240
Retained earnings 840 660
Total stockholders' equity 1,380 1,200
Total liabilities & stockholders' equity $2,110 $2,010

Larkins Company
Income Statement
For the Year Ended December 31, Year 2
(dollars in thousands)

Sales (all on account) $2,760

Cost of goods sold 1,930
Gross margin 830
Selling and administrative expense 330
Net operating income 500
Interest expense 50
Net income before taxes 450
Income taxes (30%) 135
Net income $315
Dividends during Year 2 totaled $135 thousand, of which $12 thousand were preferred dividends.
The market price of a share of common stock on December 31, Year 2 was $150.

30. Larkins Company's return on common stockholders' equity for Year 2 was closest to:
A. 26.9%.
B. 25.9%.
C. 24.4%.
D. 23.5%.

31. Degner Inc. has some material that originally cost $19,500. The material has a scrap value of
$13,300 as is, but if reworked at a cost of $2,100, it could be sold for $14,000. What would be the
incremental effect on the company's overall profit of reworking and selling the material rather than
selling it as is asscrap?
A.
$11,900
B. -
$7,600
C. -
$20,900
D. -
$1,400

32. A company's current ratio and acid-test ratios are both greater than 1. If obsolete inventory is
written off, this would
A. decrease the current ratio.
B. increase net working capital.
C. decrease the acid-test ratio.
D. increase the acid-test ratio.

33. A weakness of the internal rate of return method for screening investment projects is that it
A. implicitly assumes that the company is able to reinvest cash flows from the project at the internal rate of return.
B. doesn't consider the time value of money.
C. doesn't take into account all of the cash flows from a project.
D. implicitly assumes that the company is able to reinvest cash flows from the project at the company's discount rate.

34. Cridwell Company's selling and administrative expenses for last year totaled $210,000. During the
year, the company's prepaid expense account balance increased by $18,000, and accrued liabilities
increased by
$12,000. Depreciation charges for the year were $24,000. Based on this information, selling and
administrative expenses adjusted to a cash basis under the direct method on the statement of cash flows
would be
A. $228,000.
B. $180,000.
C. $192,000.
D. $240,000.

35. Fonics Corporation is considering the following three competing investment proposals:

Aye Bee Cee

Initial investment required $62,000 $74,000 $95,000
Net present value $10,000 $8,000 $12,000
Internal rate of return 15% 17% 18%

Using the project profitability index, how would the above investments be ranked (highest to lowest)?
A. Bee, Cee, Aye
B. Aye, Bee, Cee
C. Cee, Bee, Aye
D. Aye, Cee, Bee

Use the following information to answer this question.

The most recent balance sheet and income statement of Teramoto Corporation appear below:

Ending Beginning
Comparative Balance Sheet Balance
Balance
Assets:
Cash and cash equivalents $43 $35
Accounts receivable 53 59
Inventory 73 69
Plant and equipment 582 490
Less accumulated depreciation 301 286
Total assets $450 $367
Liabilities and stockholders' equity
Accounts payable $57 $48
Wages payable 21 18
Taxes payable 15 13
Bonds payable 21 20
Deferred taxes 20 21
Common stock 55 50
Retained earnings 261 197
Total liabilities and stockholders' equity $450 $367

Income Statement

Sales $893
Cost of good sold 587
Gross margin 306
Selling and administrative expense 189
Net operating income 117
Income taxes 35
Net income $82

Cash dividends were $18.

36. The net cash provided by (used by) financing activities for the year was
A. ($12).
B. $5.
C. ($18).
D. $1.

37. (Ignore income taxes in this problem.) The following data pertain to an investment:

Cost of the investment $18,955

Life of the project 5 years
Annual cost savings $5,000
Estimated salvage value $1,000
Discount rate 10%

The net present value of the proposed investment is

A. $621.
B. $3,355.
C. $0.
D. $(3,430).

Use the following information to answer this question.

Financial statements for Larkins Company appear below:

Larkins Company
Statement of Financial Position
December 31, Year 2 and Year 1
(dollars in thousands)

Year 2 Year 1
Current assets:
Cash and marketable securities $180 $180
Accounts receivable, net 210 180
Inventory 130 120
Prepaid expenses 50 50
Total current assets 570 530
Noncurrent assets:
Plant & equipment, net 1,540 1,480
Total assets $2,110 $2,010

Current liabilities:
Accounts payable $100 $130
 Accrued liabilities 60 60
Notes payable, short term 90 120
Total current liabilities 250 310
Noncurrent liabilities:
Bonds payable 480 500
Total liabilities 730 810
Stockholders' equity:
Preferred stock, $20 par, 10% 120 120
Common stock, $10 par 180 180
Additional paid-in capital--common stock 240 240
Retained earnings 840 660
Total stockholders' equity 1,380 1,200
Total liabilities & stockholders' equity $2,110 $2,010

Larkins Company
Income Statement
For the Year Ended December 31, Year 2
(dollars in thousands)

Sales (all on account) $2,760

Cost of goods sold 1,930
Gross margin 830
Selling and administrative expense 330
Net operating income 500
Interest expense 50
Net income before taxes 450
Income taxes (30%) 135
Net income $315

Dividends during Year 2 totaled $135 thousand, of which $12 thousand were preferred dividends. The
market price of a share of common stock on December 31, Year 2 was $150.

38. Larkins Company's price-earnings ratio on December 31, Year 2 was closest to:
A. 20.79
B. 6.00
C. 8.91
D. 8.57

Use the following information to answer this question.

Financial statements for Larkins Company appear below:

Larkins Company
Statement of Financial Position
December 31, Year 2 and Year 1
(dollars in thousands)

Year 2 Year 1
Current assets:
Cash and marketable securities $180 $180
Accounts receivable, net 210 180
 Inventory 130 120
Prepaid expenses 50 50
Total current assets 570 530
Noncurrent assets:
Plant & equipment, net 1,540 1,480
Total assets $2,110 $2,010

Current liabilities:
Accounts payable $100 $130
Accrued liabilities 60 60
Notes payable, short term 90 120
Total current liabilities 250 310
Noncurrent liabilities:
Bonds payable 480 500
Total liabilities 730 810
Stockholders' equity:
Preferred stock, $20 par, 10% 120 120
Common stock, $10 par 180 180
Additional paid-in capital--common stock 240 240
Retained earnings 840 660
Total stockholders' equity 1,380 1,200
Total liabilities & stockholders' equity $2,110 $2,010

Larkins Company
Income Statement
For the Year Ended December 31, Year 2
(dollars in thousands)

Sales (all on account) $2,760

Cost of goods sold 1,930
Gross margin 830
Selling and administrative expense 330
Net operating income 500
Interest expense 50
Net income before taxes 450
Income taxes (30%) 135
Net income $315

Dividends during Year 2 totaled $135 thousand, of which $12 thousand were preferred dividends. The
market price of a share of common stock on December 31, Year 2 was $150.

39. Larkins Company's dividend payout ratio for Year 2 was closest to:
A. 40.6%
B. 14.8%
C. 42.9%
D. 24.6%

40. The net present value method assumes that the project's cash flows are reinvested at the
A. discount rate used in the net present value calculation.
B. simple rate of return.
C. payback rate of return.
D. internal rate of return.

End of exam