Engineering Management Exam Help
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PROBLEMS 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
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2011
2010
2009
Account Payable
50
110
175
Loan
150
200
200
Contributed Capital
310
310
310
Retained Earning
(g)
(e)
(300)
1500
1300
900
Expenses
(h)
(1100)
(1200)
Net Income
300
(f)
(300)
Dividends
100
0
(c)
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
Liabilities and Stockholder’s Equity
P&L Income
Cash Flow
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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). liveexamhelper.com
ASSETS Transaction Cash
Acount Receivable (including order)
Mark the effect on Loan Shareholder Leverage Equity Ratio
LIABILITIES Equipment Interest payable
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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ASSETS Transaction Cash
Acount Receivable (including order)
Mark the effect on Loan Shareholder Leverage Equity Ratio
LIABILITIES Equipment Interest payable
EQUITY
decrease Increase No.change decrease Increase No.change decrease Increase No.change decrease Increase No.change decrease
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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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Cash Flow from Operating Activities:
Cash Flow from Financing Activities:
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CONSOLIDATED BALANCE SHEETS FOR TEST CORPORATION Oct 31, 2011
Oct 31, 2010
ASSETS Current Assets Cash and Cash Equivalents Accounts Receivables Inventory
420 90 300
Total Current Assets
810
150 40 680 870
Property, Plant, and Equipment Property, Plant and Equipment*** Less Cumulative Depreciation
470 (210)
Total Property, Plant, and Equipment
260
290
1,070
1,160
Total Assets
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470 (180)
LIABILITIES Current Liabilities Accounts Payable Other Current Liabilities
310 200
150 300
Total Current Liabilities
510
450
0 0
400 400
510
850
230 330
80 230
Long-term Liabilities Loan Total Long-term Liabilities Total Liabilities SHAREHOLDER’S EQUITY Paid-in Capital Retained Earnings Total Stockholder Equity
560
310
Total Liabilities & Stockholders’ Equityliveexamhelper.com
1,070
1,160
CONSOLIDATED INCOME STATEMENT FOR TEST CORPORATION Period Ending
Oct 31, 2011
Total Revenue Cost of Goods Sold Gross Profit
2,000 1,225 775
Operating Expenses Research Development Selling General and Administrative Depreciation and amortization
250 170 30
Total Operating Expenses
450
Operating Income or Loss Finance Expenses
425 25
Income Before Tax Non-recurring Events Income Tax Expense
400 100
Net Income From Continuing Ops
200 liveexamhelper.com
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 150,000 160,000 Accounts Receivable 130,000 Expenses 40,000 Land
300,000
Accounts Payable Accrued Long Term Loan
100,000
Shareholder's Equity 80,000 Paid in Capital 110,000 Retained Earnings 90,000 liveexamhelper.com
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 liveexamhelper.com
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 liveexamhelper.com e=(100)
f) NI = Income + Expenses f = 1300 + (1100) f = 200 g) REend = REbegin+NI-Dividends g = e + 300100 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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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 Transa ction
Cash
1
+10,000
Acount Receivable (including order)
Mark the effect on Loan Shareholder Leverage Equity Ratio
LIABILITIES Equipment Interest payable
EQUITY
+10,000
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Increase No.change decrease
2A - on 1/1/10
(2,400) +2,400
2B - on 12/31/10 3A -on 1/1/10
(1,200) (900)
(1,200) +900
3B -on 12/31/10
(300)
4
+3,000
5
+1,500 (1,500)
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(300)
Increase No.change decrease Increase No.change decrease Increase No.change decrease Increase No.change decrease Increase No.change decrease Increase No.change decrease
ASSETS Transacti on
6A -on 7/1/10
Cash
Acount Receivable (including order)
LIABILITIES Equipmen t
+2,000
Loan
Sharehol der Equity
+2,000
6B -on 12/31/10 7
Interest payable
EQUITY
+100
(600)
Mark the effect on Leverage Ratio
Increase No.change decrease (100)
Increase No.change decrease
(600)
Increase No.change decrease Not required
Total
9,600
2,700
600
100
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2,000
10,800
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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Period Ending Net Income
31-0ct-11 100
Max score: 0.5
Non Cash Adjustments Increase in Cumulative Depreciation Increase in Accounts Receivable Decrease in Inventory Increase in Accounts Payable Decrease in Other Current Liabilities Loss from stolen property Net Cash Increase from Operating Activities
30 -50 380 160 -100 100 620
3 3 3 3 3 1
Cash Flow from Investing Activities Purchase of Property, Plant, and Equipment Net Cash Decrease from Investing Activities
-100
2
-100
Cash Flow From Financing Activities Payment of Long Term Loan Issuance of Stocks (Paid in Capital)
-400 150 liveexamhelper.com
3 3
Net Cash Decrease from Financing Activities
-250
Total Increase in Cash during the year 2011 Beginning Cash Balance Ending Cash Balance
270 150 420
0.5 25
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 oneyear 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: liveexamhelper.com
Total
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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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. liveexamhelper.com