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2. Question 1: Financial Interpolation
Complete the missing values from (a) to (i) in the chart below. Show your calculations
(write an equation and solve it). Note that the first year of operations is 2009. Answers
without calculations will not get credit.
If you can’t find the value for A please use the number 90.
If you can’t find the value for I please use the number (150).
2011 2010 2009
Assets 160 110 (a)
Cash 100 60 70
Accounts Receivable 150 (d) 80
Inventory 40 40 40
Land 160 140 (b)
Property, plant and equipment
PROBLEMS
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3. 2011 2010 2009
Liabilities and Stockholder’s Equity
Account Payable 50 110 175
Loan 150 200 200
Contributed Capital 310 310 310
Retained Earning (g) (e) (300)
P&L
Income 1500 1300 900
Expenses (h) (1100) (1200)
Net Income 300 (f) (300)
Dividends 100 0 (c)
Cash Flow
Net cash increase (decrease) from operating activities 220 55 (275)
Net cash increase (decrease) from Investing activities (20) (35) (145)
Net cash increase (decrease) from Financing activities (i) 0 510
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4. Question 2: Recording Transactions
Test Corp. (“the Company”) made the following transactions during 2010 fiscal years
(assume that they are listed in chronological order):
1. The business was started on January 1st by the owner when she contributed $10,000
in cash.
2. On January 1st the Company paid rent for two years in the total amount of $2,400.
3. On January 1st the Company purchased computers in the amount of $900. The
computers have a useful life of 3 years and a salvage value of 0.
4. The Company provided service to customers and recognized $3,000 revenue on
account (did not receive cash).
5. The Company Collected $1,500 cash from customers.
6. On July 1 the company borrowed $2,000 from M-E Bank at an interest rate of 10%
for 12 months. The interest is payable on June 30, 2011.
7. On December 31 the Company distributed dividends in the amount of $600 to the
owners
(a) Record ALL the effects of each of the events above on the table provided below.
Mark an increase with a + and a decrease with ( ).
(b) Evaluate the effect of each transaction on the Leverage ratio (circle whether the ratio
will increase/not change/decrease).
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5. ASSETS LIABILITIES EQUITY Mark the
effect on
Leverage
Ratio
Transaction Cash Acount
Receivable
(including
order)
Equipment Interest
payable
Loan Shareholder
Equity
Increase
No.change
decrease
Increase
No.change
decrease
Increase
No.change
decrease
Increase
No.change
decrease
Increase
No.change
decrease
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6. ASSETS LIABILITIES EQUITY Mark the
effect on
Leverage
Ratio
Transaction Cash Acount
Receivable
(including
order)
Equipment Interest
payable
Loan Shareholder
Equity
decrease
Increase
No.change
decrease
Increase
No.change
decrease
Increase
No.change
decrease
Increase
No.change
decrease
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7. Question 3: Cash Flow Statement
Use the balance sheet and income statement on the FOLLOWING PAGES (PAGE 8-9) to
generate a cash flow statement for 2011 in the space below.
CASH FLOW STATEMENT (2011)
Cash Flow from Operating Activities:
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8. Cash Flow from Operating Activities:
Cash Flow from Financing Activities:
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9. CONSOLIDATED BALANCE SHEETS FOR TEST CORPORATION
Oct 31, 2011 Oct 31, 2010
ASSETS
Current Assets
Cash and Cash Equivalents 420 150
Accounts Receivables 90 40
Inventory 300 680
Total Current Assets 810 870
Property, Plant, and Equipment
Property, Plant and Equipment*** 470 470
Less Cumulative Depreciation (210) (180)
Total Property, Plant, and Equipment 260 290
Total Assets 1,070 1,160
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10. LIABILITIES
Current Liabilities
Accounts Payable 310 150
Other Current Liabilities 200 300
Total Current Liabilities 510 450
Long-term Liabilities
Loan 0 400
Total Long-term Liabilities 0 400
Total Liabilities 510 850
SHAREHOLDER’S EQUITY
Paid-in Capital 230 80
Retained Earnings 330 230
Total Stockholder Equity 560 310
Total Liabilities & Stockholders’ Equity 1,070 1,160
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11. CONSOLIDATED INCOME STATEMENT FOR TEST CORPORATION
Period Ending Oct 31, 2011
Total Revenue 2,000
Cost of Goods Sold 1,225
Gross Profit 775
Operating Expenses
Research Development 250
Selling General and Administrative 170
Depreciation and amortization 30
Total Operating Expenses 450
Operating Income or Loss 425
Finance Expenses 25
Income Before Tax 400
Non-recurring Events
Income Tax Expense 100
Net Income From Continuing Ops 200
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12. Non-recurring Events
Loss from stolen property*** 100
Net Income
100
Question 4: Ratios
Company “WinBig”is interested in raising funding for a new activity. Here is the
company’s Balance sheet for January 1st, 2011 (the day in which the company is trying to
raise the money):
Cash 150,000 Accounts Payable 160,000
Accounts Receivable 130,000 Accrued Expenses 40,000
Land 300,000 Long Term Loan 100,000
Shareholder's Equity 80,000
Paid in Capital 110,000
Retained Earnings 90,000
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13. The company received two funding alternatives:
1. A loan in a sum of $100,000 fully due at the end of the year, carrying a 5% interest
payable at the end of the year. In addition, the company must maintain a debt to equity
ratio equal or lower than 1.25.
2. A loan in a sum of $100,000 fully due at the end of the year, carrying a 6% interest
payable at the end of the year. In addition, the company must maintain a debt to assets
ratio equal or lower than 0.75.
*** The loan in the company’s balance sheet above is a previous loan (not one of
these alternatives).
(a) Which of these alternatives WinBig should choose in order to maintain the
requirements detailed above? Explain your answer and show your calculations
Bonus Question:
5. Which of the following could cause an increase in the Current Ratio?
a. Purchasing inventory with cash.
b. Purchasing inventory on credit (Accounts Payable).
c. Purchasing fixed assets with cash.
d. None of the above
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14. SOLUTIONS
SOUTION 1 There are generally multiple valid equations to get to the correct answers.
These are just examples. Also, note the order of performing these calculations is not simply
a→i. Up to -2 marks per error.
a) Assets = Liabilities + Shareholder Equity
a+70+80+40+b=175+200+310+(300)
a = 90
b) Net Cash from Investing = (Incr in Land) +
(Incr in PPE) (145) = (40) -b
b = 105
c) REend = REbegin + NI - Dividends (300) = 0
+ (300) - c
c = 0
d) Assets = Liabilities + Shareholder Equity
110+60+d+40+140=110+200+310+e
d=170
e) REend = REbegn + NI - Dividends e =
(300)+f-0
e=(100) liveexamhelper.com

15. f) NI = Income + Expenses f = 1300 + (1100)
f = 200
g) REend = REbegin+NI-Dividends g = e + 300-
100
g = 100
h) NI = Income + Expenses 300=1500+h
h=(1200)
i) Net Cash from Financing = Incr in Cash -
Net Cash from Operating - Net Cash from
Investing
i = 50-220-(20)
i = (150)
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16. SOUTION 2 We accepted two alternative calculations for the Leverage Ratio (Debt to
Equity Ratio or The Current Ratio). Accordingly, there were multiple right answers to
some of the sections (for the effect on the Leverage Ratio part). The correct answers are
marked in Bold and Underlined.
Each Transaction was worth 4 points (including 1 point for the effect on the ratio).
You were required to record ALL the effects of each of the
transactions. Recording the ones listed below provides a complete answer. Here are some
comments about reoccurring mistakes:
1. Transaction 2B is the end of year adjustment for the prepaid rent expenses.
2. Transaction 3B is depreciation (End of year).
3. Transaction 6B is required to record interest expenses for the period from July 1st to
December 31 of 2010.
ASSETS LIABILITIES EQUITY Mark the
effect on
Leverage
Ratio
Transa
ction
Cash Acount
Receivable
(including
order)
Equipment Interest
payable
Loan Shareholder
Equity
1 +10,000 +10,000 Increase
No.change
decrease
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17. 2A - on
1/1/10
(2,400) +2,400 Increase
No.change
decrease
2B - on
12/31/10
(1,200) (1,200) Increase
No.change
decrease
3A -on
1/1/10
(900) +900 Increase
No.change
decrease
3B -on
12/31/10
(300) (300) Increase
No.change
decrease
4 +3,000 Increase
No.change
decrease
5 +1,500 (1,500) Increase
No.change
decrease
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18. ASSETS LIABILITIES EQUITY Mark the
effect on
Leverage
Ratio
Transacti
on
Cash Acount
Receivable
(including
order)
Equipment Interest
payable
Loan Sharehol
der
Equity
6A -on
7/1/10
+2,000 +2,000 Increase
No.change
decrease
6B -on
12/31/10
+100 (100) Increase
No.change
decrease
7 (600) (600) Increase
No.change
decrease
Total 9,600 2,700 600 100 2,000 10,800
Not
required
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19. SOUTION 3 In the next page you can find the complete answer for this question. The
maximum score for a complete answer for each line is described on the right column.
In addition, for every additional entry (something that should not appear in this report
but you added it anyway) we reduced 1 point.
Here are some comments about reoccurring mistakes:
1. Since the Income statement includes a loss of 100$ (due to the stolen property)
which did not have an effect on cash -you were required to add an adjustment in the
Non Cash adjustments part.
2. Although it seems the PP&E did not change during the year (Beginning Balance and
Ending Balance are the same), since we know property in a value of 100$ was stolen
(reduced the PP&E by a 100$) than we must assume the company purchased additional
PP&E in the same amount.
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20. Period Ending 31-0ct-11
Net Income 100
Non Cash Adjustments
Increase in Cumulative Depreciation 30
Increase in Accounts Receivable -50
Decrease in Inventory 380
Increase in Accounts Payable 160
Decrease in Other Current Liabilities -100
Loss from stolen property 100
Net Cash Increase from Operating Activities 620
Cash Flow from Investing Activities
Purchase of Property, Plant, and Equipment -100
Net Cash Decrease from Investing Activities -100
Cash Flow From Financing Activities
Payment of Long Term Loan -400
Issuance of Stocks (Paid in Capital) 150
Max score:
0.5
3
3
3
3
3
1
2
3
3
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21. Net Cash Decrease from Financing Activities -250
Total Increase in Cash during the year 2011 270
Beginning Cash Balance 150
Ending Cash Balance 420
0.5
25 Total
SOUTION 4 “Shareholder's Equity" was meant to read IShareCapital", such that you
were supposedto add all three lines to get $280,000 in Shareholder Equity. However, if
you directly used Shareholder Equity of $80,000 and made the correct conclusion given
that choice, you were not penalized. Also, if you elected to use long-term debt in these
ratios instead of the more common total liabilities, you should have realized that a one-
year loan is not long-term debt. In real life, you would clarify these conditions with your
debtors. Also, note that taking a loan provides cash assets in addition to showing up as a
liability with interest. Up to 5 marks per calculation, 5 marks for conclusion. There were
4 possible correct solutions:
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22. If equity is $80,000 and debt is considered to be total liabilities, WinBig should choose
alternative 2 since it is the only possibility:
If equity is $80,000 and debt is considered to be long-term debt, WinBig should choose
alternative 2 since it is the only possibility:
If equity is $280,000 and debt is considered to be total liabilities, WinBig should choose
alternative 2 since it is the only possibility:
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23. If equity is $280,000 and debt is considered to be long-term debt, WinBig should choose
alternative 1 since both are possible, but alternative 1 has a lower interest rate:
SOUTION 5 (Bonus)
The answer is b could increase current ratio if the ratio is currently less than unity. 5 marks
with good explanation , 2 marks for what could have been a lucky guess with a
missing/incorrect/incomplete or otherwise unsatisfactory explanation.
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