SAMPLE PAPER

ACCT101 FINANCIAL ACCOUNTING

CAUTION:
1. DO NOT rely on this sample paper only
2. The exam coverage may not the same as this sample
paper. Please refer to the announcement made in class.

PART A
(1 mark each and 10 marks in total. Please choose ONE as your best choice.)
Provide the answers (in CAPITAL letter) on the first page of the Answer Script.
1.
A.
B.
C.
D.

Which of the following is a true statement?

A stock split will increase total stockholders' equity but a stock dividend will not.
Both a stock split and a stock dividend will increase total stockholders' equity
A stock dividend will increase total stockholders' equity but a stock split will not.
Neither a stock split nor a stock dividend will increase total stockholders' equity.

2. A company's accountant expenses a payment that should be capitalized. Which of

the following is TRUE?
A.
B.
C.
D.

Revenue is overstated
Liabilities are overstated.
Expenses are overstated.
Assets are overstated.

3. Which of the following items will NOT appear on the books side of the
reconciliation?
A.

The bank collected an EFT of $1,000.

B.

A nonsufficient funds check of $75 returned to the bank.

C.

The bank recorded a $2,000 deposit as $200.

D.

The bank charged a service fee of $20.

4. A check was written by a business for $205 but recorded in the cash payments
journal as $502. How would this error be included on the bank reconciliation?
A.
B.
C.
D.

A deduction on the bank side

A deduction on the book side
An addition on the bank side
An addition on the book side

5. A corporation has 15,000 shares of 10%, $50 par, noncumulative preferred stock
outstanding and 25,000 shares of no-par common stock outstanding. No dividends
were declared in 2008. At the end of 2009, the corporation declares a dividend of
$150,000. How the dividend allocated between preferred and common
shareholders?
A.
B.

The dividend is allocated $75,000 to preferred shareholders and $75,000 to

common shareholders.
The dividend is allocated $142,500 to preferred shareholders and $7,500 to
common shareholders.

C.
D.

The dividend is allocated $150,000 to preferred shareholders and $0 to common

shareholders.
The dividend is allocated $7,500 to preferred shareholders and $142,500 to
common shareholders.

6. McGrawHill has the following account balances at the end of the current
accounting period.
Beginning inventory
$53,500
Net purchases
75,500
Net sales revenue
93,700
A normal gross profit percent is 30%. What is the estimated ending inventory as
determined by the gross profit?
A.
B.
C.
D.

$100,890
$28,110
$63,410
$65,590

7. An accrued expense is which of the following?

A.
B.
C.
D.

An expense that the business has paid but not yet incurred
An expense that will be incurred and paid in the future
An expense that the business has incurred but not yet paid
An expense that has been paid and incurred

8. On October 2, 2009, Allen Jewelry Company accepted a 120-day, 10% note for $2,400
in settlement of an overdue account receivable. Based on a 360-day year, which of the
following is closest to the interest revenue accrued on December 31, 2009?
A.
B.
2)
D.

$80
$60
$240
$40

9. A corporation issues $400,000 of 10%, 5-year bonds at 103. What will be the total
interest expense over the life of the bonds?
A.
B.
C.
D.

$212,000
$200,000
$40,000
$188,000

10. The following information is available for Andersen Company for the month ending
June 30, 2008. Balance per the bank statement is $10,241.43. Balance per books is
$9,745.06. Check #506 for $1,948.52 and check #510 for $1,800.25 were not recorded

with the June 30 bank statement. A deposit in transit of $5,113.40 had not been
received by the bank when the bank statement was generated. A bank debit memo
indicated an NSF check in the amount of $79 written by Bruce Garrett to Andersen
Company on June 13. A bank credit memo indicated an EFT collected by the bank of
$1,900 and interest revenue of $75 on June 20. The bank statement indicated service
charges of $35. What is the correct cash balance per books?
A.
E.
C.
D.
E.

$11,606.06
$12,000.06
$13,000.00
$14,000.00
None of the above

PART B
Question 1 (18 marks)
Hong Leong Electronic Pte Ltd, with a fully paid-up capital of $100,000 ordinary shares
and $50,000 5% non-cumulative preference shares, was incorporated in SingLand on 1
January 2008. The trial balance below has been extracted from the general ledger of
Hong Leong Electronic Pte Ltd as at December 31, 2008.
Unadjusted Trial Balance of Hong Leong Electronic Pte Ltd
as at December 31, 2008
Accounts Receivable
Inventory (31December 2008)

Cash
Prepaid Rent
Office Equipment
Sales Demonstration Equipment
Accounts Payable
Note Payable
Allowance for Uncollectible Accounts
Provision for Warranty Repairs
Sales Revenue
Ordinary Share Capital
Preferred Share Capital
Cost of Goods Sold
Salary Expense
Advertising Expense
General Office Expense
Total

Dr
407,700
115,000

Cr

30,000
16,000
50,000
46,000
116,200
50,000
8,800
2,100
1,055,800
100,000
50,000
493,000
130,600
81,800
12,800
1,382,900

1,382,900

The following facts came to light after completion of the unadjusted trial balance (the
company makes adjustments annually):
a. Inventory physical stocktaking on 31 December amounts to $100,000.
b. The last day of the period, 31 December 2008, was a Wednesday. The staff is paid
on Friday for their five-day working week ending on Friday. Staff salaries are
$2,510 per week.
c. Hong Leong purchased the office equipment on 1 January 2008 for $50,000 FOB
shipping point. Transportation costs and installation costs amounted to $1,500 and
$4,500, respectively. Hong Leong recorded the office equipment at $50,000 and
recorded the transportation and installation costs under the General Office
Expense. The useful life of the office equipment is expected to be 10 years with
residual value of $2,000. The company decides to depreciate the office equipment
using straight-line method.
5

d. The sales demonstration equipment was purchased on 1 April 2008. The useful
life of the equipment is 5 years with $6,000 residual value. Hong Leong
depreciates the sales demonstration equipment by double-declining method.
e. Hong Leong issued a 12% three-month note payable of $50,000 on 1 December
2008.
f. Hong Leong estimates that the total cost of warranty claim for the electronic
products sold will be 1% of sales revenue in the year of sale.
g. The year-end audit revealed that cash payment of $5,000 to the supplier was
erroneously recorded as a debit to Cash account and a credit to Accounts Payable
account.
h. On April 1, 2008, Hong Leong paid office rental in advance. The amount paid
was for a two-year period.
i. $7,700 of Accounts Receivable needs be written off. Hong Leong then record the
uncollectible-account expense based on the aging of receivables, as follows:

Accounts
Receivable
$400,000
Estimated percent
uncollectible

130
Days
$100,000
0.5%

Age of Accounts
3160
6190
Days
Days
$150,000
$100,000
1.0%
4%

Over
90 Days
$50,000
10%

j. Hong Leong declared a dividend of 10% for the common stockholders and regular
dividends for the preferred stockholders. The declaration has not been recorded by
Hong Leong.
Provide the necessary adjusting journal entries for the above. No explanations are
required for the adjusting journal entries.

Question 2 (10 marks)

HDC issued $2,000,000, 8-pecent bonds on 1 January, Year 1 when the market rate of
interest was 10%. The bonds required HDC to make semiannual payments of 4% of face
value, on June 30 and December 31 of each year. The bonds mature on December 31,
Year 5. HDC amortizes bond premium/discount by the effective-interest method.

Periods

5
10

Present Value of $1
4%
0.822
0.676

5%
0.784
0.614

8%
0.681
0.463

10%
0.621
0.386

Present Value of
Ordinary Annuity of $1
4%
5%
8%
10%
4.452
4.329
3.993
3.791
8.111
7.722
6.710
6.145

Required (all computations are rounded to the nearest dollar)

1) Provide the journal entry when HDC issued the bonds on January 1, Year 1.

2) Provide the journal entry for recognizing interest expense and interest paid on
June 30 and December 31,Year 1.

3) Show how HDC would report the bonds on its balance sheet on December 31,
Year 1.

4) On January 1, Year 2, these bonds are traded at 110 in the market. On this date,
HDC repurchased 20% of these bonds on the open market and retired them.
Provide the journal entry to record the repurchase.

Question 3 (8 marks)
Part A:
The Hill Company purchased some equipment at July 1, 2008, for $16,000. Hill also paid
freight costs $1,500 and sales tax $500 in addition. Hills fiscal year starts from January
1. Upon receipt, the following expenditures were incurred in 2008:
Major repair prior to use
$1,000
Installation
600
Testing prior to use
400
Operating costs after start of production
1,500
Minor repair and maintenance after start of production
500
The company adopted a straight-line depreciation method and estimated that the useful
life of the equipment to be ten years from July 1, 2008. Hill expects that the residual
value of the equipment will be $2,000 at the end of the useful life.
Required:
1) Determine the total depreciable value of the equipment.

2) Determine the book value of the equipment at December 31, 2008.

3) Hill received an offer to sell the equipment at January 1, 2009. If Hill sold the
equipment for $23,000 in cash, what journal entry would they record for the sale of
the equipment? No entry explanation is required.

Part B:
Assume that the book value of the equipment above at December 31, 2008 is $22,000 and
Hill decided not to sell the equipment. On Jan 1 2009, a major improvement to the
equipment took place, costing $900. As a result, the annual capacity was expanded, but
its estimated life and residual value remained unchanged. On Jan 1 2010, due to signs of
severe wear, Hill revised its estimated useful life to be only five remaining years from
January 1, 2010 and its residual value to be $1,000.
Required:
1) Determine the amount of depreciation expense for the equipment in 2009.
2) Determine the amount of depreciation expense for the equipment in 2010.

Question 4 (8 marks)
MBFA Corporation Limited is a manufacturer of furniture, with fiscal year ending on
May 31. It makes high-end home and office furniture for customers and design
innovative products and services to meet the customers needs. The following schedule is
taken from its past three years annual reports (in US dollars). MBFA uses the allowance
method to account for potentially uncollectible receivables.

Allowance for
Uncollectible
Accounts
Year ended May
31, 2007
Year ended May
31, 2008
Year ended May
31, 2009

Balance at
Beginning of
Year

Added to
Expenses

Write-offs

Balance at
End of Year

111,000

30,000

80,000

80,000

20,000

16,000

29,000

90,000

*Note: Assume that no recovery of accounts previously written off occurred from 2007 to
2009.
Required:
1)

Solve for the four unknowns (A to D) in the table above

2)

Make all the journal entries which are related to the allowance for uncollectible
accounts in 2008 (using the figure provided).

3) For this question only, assume that MBFA uses the direct write-off method. In this
case, what would be the journal entries for uncollectible account expenses for
2008?

4)

Assume in 2009, the ending balance of the allowance is 10% account receivables
ending balance. a) How much should it report for net account receivables on its
balance sheet at the end of 2009? b)Show the partial balance sheet related to
account receivables in 2009.

Question 5 (17 marks)

Part A:
Required: Use the letters below (either A or B or C) to indicate the effect of each of
the four transactions (refer to 1 through 8 in the table below) on a firm's cash flows and
on the same firm's net income. Your concern should be with only the transaction
described and at the date of the transaction described. Ignore related transactions
prior to or after the transaction described.
A. Increase
B. Decrease
C. No effect

Transactions
I) Sale of long-term operating asset for $20,000 cash.
The book value of the operating asset at date of sale
was $12,000.
II) Depreciation expense of $5,000 was recorded.
III) Purchase of long-term operating asset for $10,000
on a credit basis (A note is issued).
IV) Cash collection of accounts receivable = $5,000.

Effect on
Total Cash Net Income
Flows
1.?

2.?

3.?

4.?

5.?

6.?

7.?

8.?

10

Part B:
Kocian Co.
Income Statement
For the Year Ended December 31, 2010

($ in thousands)
Sales Revenue
Expenses
COGS
Depreciation Expense
Rent Expense
Interest Expense
Loss on sale of machine
Net income

2,000
800
100
50
360
100
590

Kocian Co.
Balance Sheet
December 31, 2010

($ in thousands)
Assets

2010

2009

Liabilities

Cash

3,615

5,695

Account Receivable

2,000

Inventory
Prepaid Rent

2010

2009

Account payable

800

150

Accrued liabilities

50

300

100

Interest payable

180

175

125

Non-Current Liability

Note payable

3,000

Total Liability

3,180

850

Shareholders Equity
Share Capital

7,000

5,000

810
(1,000)

720
0

6,810

5,720

9,990

6,570

Non-Current Assets

Equipment
Less: Accumulated
Depreciation
Machine
Less: Accumulated
Depreciation

Total asset

4,000

(100)
0

1,000

(500)

9,990

6,570

Retained earnings
Less: Treasury stock
Total shareholders'
equity
Total Liability &
Shareholders Equity

Additional Information:
The machine was sold on Jan. 1st. 2010
The maturity of the note payable issued in 2010 is 2 years.
No noncash investing activity in 2010.
No noncash financing activity in 2010.
Required: Prepare a statement of cash flows for the year ending December 31, 2010
using INDIRECT method.

11

Question 6 (11 marks)

BB Co. is a food wholesaler that uses a perpetual inventory system for all of its food
products. The first-in, first-out (FIFO) method of inventory valuation is used.
Transactions and other related information on coffee carried out by BB Co. are given
below for October 2010:
Standard unit of packaging: Case containing 24, one-pound jars
Inventory 1 Oct 2010:
1,000 cases @ $60.20 per case
Purchases:
(1) 10 Oct 1,600 cases @$62.10 per case
(2) 20 Oct 2,400 cases @$64.00 per case
October sales:

(1) 17 Oct 1,500 cases @ $75 sale price per case

(2) 27 Oct 1,200 cases @ $76 sale price per case

Returns and allowances:

On 28 Oct, a customer returned 50 cases sold on 27 Oct

that had been damaged in transit. The customers account
was credited for $3,800

Required:
1)

Assuming no shrinkages, calculate (a) the number of cases in ending inventory as of

31 Oct; (b) the ending inventory cost as of 31 Oct; and (c) the cost of goods sold in
October.

2)

Calculate the ending inventory cost if the LIFO method were applied instead.

3)

BB paid the supplier the full amount on 18 Oct for the purchases made on 10 Oct.
Record the journals for the purchases made on 10 Oct and the payment made on 18
Oct.

4)

Record the journal for the sales returns and allowances on 28 Oct.

5)

Assume that inventory net realizable value at 31 Oct 2010 is $56 per case.
Record the journal to apply the lower of cost or net realizable value rule.

12

Question 7 (18 marks)

The financial statements of CW Co. for the years ended December 31 are provided below:
CW Co.
Income Statements
For the Year Ended December 31 (in $ thousands)
2007
2006
Net sales
534,000
326,000
Cost of goods sold
(477,000)
(296,000)
Gross Profit
57,000
30,000
Selling and distribution expenses
(3,000)
(1,000)
General and administrative expenses
(37,000)
(18,000)
Operating Income
17,000
11,000
Other income
18,000
20,000
Interest income
5,000
1,000
Interest expense
(4,000)
(2,000)
Profit before tax
36,000
30,000
Tax expense
(3,600)
(6,000)
Net Profit After tax
32,400
24,000
Earnings per share
$6.65
$5.90
CW Co.
Balance Sheets
As at December 31 (in $ thousands)
2007

2006

Assets
Current assets
Cash and cash equivalents
Accounts receivable-net
Inventories
Other current assets (less liquid than inventories)
Non-current assets
Property plant and equipment
Intangible assets
Long term investments
Financial assets
Non-current receivables
Other non-current assets
Total assets
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable
Financial liabilities
Tax payable
Other payables and accruals
Long term liabilities
Financial liabilities
Other long term liabilities
Total liabilities
Common Share capital
Retained earnings/Reserves
Total equity
Total liabilities and Shareholders' equity

51,000
130,000
1,000
1,000

41,000
83,000
2,000
0

220,000
28,000
24,000
32,000
4,000
1,000
492,000

85,000
29.000
21,000
41,000
2,400
1,000
305,400

105,000
37,000
7,000
8,000

67,000
6,000
16,000
8,000

97,000
36,000
288,000
149,000
55,000
204,000

32,400
39,000
168,400
65,000
72,000
137,000

492,000

305,400

13

The answer to each question is independent and should not affect the answers to the
next questions. Calculate all ratios up to four decimal places.
Required:
1) Has CW Co.s ability to meet the short term and long term liabilities improved or
worsened between the years 2007 and 2006? Use four appropriate financial ratios to
support your answers. Explain the asset or liability items that contribute to the change
in financial ratios.
2) If the accounts receivable for 2007 is to include additional write-offs of $500k and
additional allowance of $600k, recalculate the ratios in part (1) for 2007 that are
impacted.
3) One single large customer TQ accounts for 60% of the sales in both years 2007 and
2006. The gross profit margin of sales to TQ is 15%.
What is the gross profit margin of sales to the remaining customers for 2007
(excluding TQ)? Discuss the implication to CW Co.s profitability if TQ were to stop
dealing with CW Co.

4) Use vertical analysis of income statements for the years 2006 and 2007 and explain
the items that contribute to the change in profitability from 2006 to 2007.
5) How well is CW able to generate returns from its assets and shareholders equity in
the year 2007? Calculate two appropriate financial ratios.
Is the return to shareholders higher or lower than the return to creditors?

The End

14

Solutions:
MCQ
1. D
2. C
3. C
4. D
5. A
6. C
7. C
8. B
9. D
10. A

1-5: DC C DA
6-10: CCB DA

15

Question 1

a) Cost of goods sold (or Inventory write-down

expense)
Inventory
b) Salary Expense
Salary Payable

Dr
15,000

Cr

15,000
1,506*
1,506

*note: 2510 x 3/5 = 1506 for Mon-Wed accrued salary

c) Office Equipment
General office expense
*Note: correcting for error
Depreciation expense
Accumulated depreciation for Office
equipment

6,000*
6,000
5,400*
5,400

* (56,000 2,000)/10 = 5400

d) Depreciation expense
Accumulated Depreciation for Demonstration
Equipment

13,800*
13,800

* 46,000 x 2/5 x 9/12 = 13,800

e) Interest expense
Interest payable

500*
500

* 50,000 x 12% x 1/12 = 500

f) Warranty expense
Provision for Warranty Repairs

10,558

g) Accounts payable
Cash
* note: correcting error
h) Rent expense
Prepaid rent

10,000*

10,558

10,000
6,000*
6,000

*(16,000 /2) x 9/12 = 6,000

16

i) Allowance for uncollectible accounts

Accounts receivable
Uncollectible account expense
Allowance for uncollectible accounts

7,700
7,700
9,900*
9,900

*Desired ending balance in Allowance = $100,000 x 0.5% + 150,000 x 1%

+ 100,000 x 4% + 50,000 x 10% = $11,000
Uncollectible expense = $11,000 - (8800-7700) = $9900
j. Retained earnings
Dividend payable - Ordinary Share
Dividend payable - Preference Share
*100,000 x 0.1 **5% x 50,000 = $12500

12,500
10,000*
2,500**

17

Question 2
1)
Cash
Discount on Bonds Payable
Bonds Payable

1,845,760*
154,240
2,000,000

* price:
$2,000,000 x 0.614 (n=10, i=5%)
$80,000 x 7.722 (n=10, i=5%)
Issue price

1,228,000
617,760
1,845,760

2) June 30, Year 1

Interest expense ($1,845,760 x 0.05)
Cash ($2,000,000 x 0.04)
Discount on Bonds Payable

92,288
80,000
12,288

Dec 31, Year 1

Interest expense (($1,845,760 + 12,288) x 0.05)
Cash ($2,000,000 x 0.04)
Discount on Bonds Payable

92,902
80,000
12,902

3) Long term liabilities

Bonds Payable
Less Discount on Bonds Payable*

$2,000,000
129,050
$1,870,950

*154240 12288 12902 = 129,050

4) Purchase price for the retired bonds = $2000000 x 1.1 x 0.2 = $440,000
Bonds Payable (20% x $2000,000)
$400,000
Loss on Repurchase of Bonds
65,810
Discounts on Bonds Payable (129,050 x 0.2)
Cash

25,810
440,000

18

Question 3
PART A:
1) ($16,000+1,500+500+1,000+600+400) - $2,000 = $18,000
2) Dep. Exp. for 2008 = $18,000 / 10yrs * = $900
Book value as at Dec. 31, 2008 = ($20,000 $900) = $19,100
3) DR Cash
DR Accumulated Depreciation
CR Equipment
CR Gain on Sale

23,000
900
20,000
3,900

PART B:
1) Dep. Exp. for 2009 = ($22,000+900-2,000) / 9.5yrs = $2,200
2) Dep. Exp. for 2010 = {($22,000+900-2,200)-$1,000} / 5yrs = $3,940

19

Question 4
Question 4
1). Solve for the four unknowns (A to D) in the table above
A=61,000
B=84,000
C=84,000
D=35,000
2)
a. record uncollectible account expense
Dr uncollectible account expense $20,000
Cr allowance
$20,000
b. write off uncollectible accounts
Dr allowance $16,000
Cr account receivables $16,000
3) Dr uncollectible account expense $16,000
Cr account receivables

$16,000

4)
a) net account receivable= gross account receivable allowance= $810,000
allowance=$90,000
gross account receivable= $90,000/10%=$900,000
b). Partial balance sheet
Account receivables $900,000
LESS: allowance $90,000
Net account receivables $810,000
Question 5

Part A:
1. A
2. A
3. C
4. B
5. C
6. C
7. A
8. C
20

Part B

Kocian Co.
Cash flow statement
For the Year Ended December 31, 2010

Operating
Net income
Depreciation Expense
Loss of sale of machine
Increase in Account Receivable
Increase in Inventory.
Increase in Prepaid Rent
Decrease in Account Payable
Decrease in Accrued liabilities
Increase in Interest Payable

(1,980)
590
100
100
(1,850)
(200)
(50)
(800)
(50)
180

Investing
Purchase of equipment
Sale of Machine

(3,600)
(4,000)
400

Financing
Proceeds from sale of common stock
Proceeds from issuing note
Dividend payment
Purchase of Treasury share

3,500
2,000
3,000
(500)
(1,000)

Net Cash Flows for the period

Beginning cash balance
Ending balance

(2,080)
5,695
3,615

21

Question 6
1. Number of cases in ending inventory = 1000 + 1600 + 2400 1500 1200 + 50 =
2350
Cost of goods sold = 1000*$60.20 + 500*$62.10 + 1100*$62.10 + 50*$64 = $162,760
Ending inventory cost as of 31 Oct = 2350*$64 = $150,400

2. Ending inventory cost = 1000@ $60.20 + 100@ $62.10 + 1250@ $64 = $146,410

3.

Journals

10 Oct

Dr Inventory(1600*$62.1) $99360
Cr Accounts payable
$99360

18 Oct

Dr Accounts payable
Cr Cash

4.
28 Oct

$99360
$99360

Journal
Dr Sales return (50*$76)
$3800
Cr Accounts receivable
$3800
Dr Inventory (50*$64)
Cr Cost of goods sold

$3200
$3200

5.
Ending inventory unit cost = $64
Net realizable value = $56
Amount to mark down = (64-56)*2350 = $18800
Journal:
Dr Inventory write-down expense or COGS
Cr Inventory

$18800
$18800

22

Question 7
1)
2007:
Current ratio = (51,000+130,000+1,000+1,000)/(105,000+37,000+7,000+8,000) =
1.1656
Acid test ratio = (51,000+130,000)/(105,000+37,000+7,000+8,000) = 1.1529
Debt ratio = 288,000/492,000 = 58.54%
Times interest earned = 17,000/4,000 = 4.25

2006:
Current ratio = (41,000+83,000+2,000)/(67,000+6,000+16,000+8,000) = 1.2990
Acid test ratio = (41,000+83,000)/(67,000+6,000+16,000+8,000) = 1.2784
Debt ratio = 168,400/305,400 = 55.14%
Times interest earned = 11,000/2,000 = 5.5

The ability to pay short term debt has worsened from 2006 to 2007. This is shown from
the drop in current ratios and acid test ratios. The accounts payable and financial
liabilities have increased at a higher rate than that of the accounts receivable and cash.
The ability to pay long term debt has worsened from 2006 to 2007. The debt ratio has
increased while the times interest earned ratio have dropped. The increase in accounts
payable and financial liabilities (both short and long term) resulted in a higher debt ratio.
The interest expense has doubled but not the income from operations. This caused the
drop in times interest earned.
2) Write-off will debit allowance and credit accounts receivable. No impact to net
account receivable. No impact to the 4 ratios.
Additional allowance reduces net accounts receivable to $129,400k for 2007.
Revised ratios for 2007:
Current ratio = (51,000+129,400+1,000+1,000)/(105,000+37,000+7,000+8,000) =
1.1618
Acid test ratio = (51,000+129,400)/(105,000+37,000+7,000+8,000) = 1.1490
Debt ratio = 288000/491400 = 0.5861
Times interest earned = (57,000 37,000-3,000- 600)/(4,000) = 4.1
4) 2007:
Sales to TQ = $534000 * 60% = $320,400
COGS to TQ = (1-0.15) * 320,400 = $272,340

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Sales to remaining customers = $213,600

COGS to remaining customers = $477,000 - $272,340 = $204,660
Gross profit to remaining customers = $8940
Gross profit margin to remaining customers = 8940/213600 = 4.1854%
If TQ were to stop dealing with CW, the gross profit drops drastically to $8940 and net
profit turns into a net loss. This is because the gross profit margin to other customers is
only 4.1854%.
4)
As % net sales:
COGS: 2007 (477/534 = 89.33%); 2006 (296/326 = 90.8%)
Gross profit margin: 2007 (57/534 = 10.67%); 2006 (30/326 = 9.20%)
General & admin expense: 2007 (37/534 = 6.93%); 2006 (18/326 = 5.52%)
Other income: 2007 (18/534 = 3.37%); 2006 (20/326 = 6.14%)
Net profit after tax: 2007 (32.4/534 = 6.07%); 2006 (24/326 = 7.36%)
The net profit margin declines from 7.36% in 2006 to 6.07% in 2007 largely due to the
increase in the proportion of general and admin expenses (from 5.52% in 2006 to 6.93%
in 2007) as well as the drop in other income from 6.14% in 2006 to 3.37% in 2007, partly
mitigated by the increase in gross profit margin from 9.2% in 2006 to 10.67% in 2007
(the latter from the drop in COGS from 90.8% of net sales in 2006 to 89.33% in 2007).
5)
Return to shareholder: 2007 (32.4/(204+137)/2 = 19.00%; 2006 (24/137 = 17.52%)
ROA: 2007 (32.4+4)/(492+305.4)/2 = 9.13%; 2006 (24+2)/305.4 = 8.51%
CW is able to generate 18 or 19 cents return to every dollar of shareholder investment
relatively good return. CW is able to generate 8 cents return to every dollar of asset
utilized.
Where return to shareholder > return to total assets, return to shareholder is higher than
return to creditors.

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