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2 A CHAPTER FURTHER LOOK AT FINANCIAL STATEMENTS SUMMARY OF QUESTIONS BY STUDY OBJECTIVE AND BLOOM'S TAXONOMY Item 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 205. 206. SO 1 1 1 1 1 1 1 2 2 2 3 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 4 4 1 1 1 4 4 1 1 2 BT K K K K C K C K C K K K K K K K K K K K K K K K K K K AP K K AP AP AP AP AP AP AP AP AP AP AP AP AP Item 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 207. 208. SO 3 3 3 4 4 4 4 4 5 5 5 1 1 1 1 4 4 2 2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 3 3 3 4 3 4 BT C C K K C K K K K K K AP AP AP AP AP AP K AP AP K K C K AN AN AP AN AP AP C K K C C C AP AP AN AN K C AP Item 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 209. 210. SO 5 5 5 6 6 6 7 7 7 7 7 4 4 4 4 4 4 4 4 4 4 4 1 4 4 4 2 4 4 4 2 4 4 4 4 4 4 4 4 4 4 7 7 BT K K C K K K K K K C K K K C K K K K C C K K AP AP AP AP AP AP AP AP AP AP K K K C C C C AP AP K K Item 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. 167. 168. 169. 170. 171. 172. 173. 174. 175. 211. 212. SO 7 7 7 7 7 7 7 7 7 7 7 4 4 5 5 5 5 5 5 5 5 5 5 6 6 6 6 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 BT K C K K C K K K K K K AP AP K K K K AP AP AN AP AP C K K K K K K K K K K K K K K K K K K C C Item 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 176. 177. 178. 179. 180. 181. 182. 183. 184. 185. 186. 187. 188. 189. 190. 191. 192. 193. 194. 195. 196. 197. 198. 199. 200. 201. 202. 203. 204. SO 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 BT K K K K C K C C K K K K C C C K C C C C K C C K K K K C K K K K K C C K K C C C True-False Statements Multiple Choice Questions Brief Exercises 213. 214. 7 7 C K 2-2 Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition Exercises 215. 216. 217. 218. 231. 232. 239. 240. 241. 242. 1 1 1. 1, 2, 3 6 7 1-7 1 2,4 1, 4 AP K AP AP K K K 219. 220. 221. 222. 233. 234. 1, 2, 4 1, 3 1, 3 2 7 7 AP AP AP AP K K 223. 224. 225. 226. 235. 236. 2, 4 2, 4 2, 4 2, 4, 5 4 1 AP AP AP A N K K 227. 228. 229. 230. 237. 2, 4, 5 2, 4 3 4 4 K AP AP AN K 238. 5 K Completion Statements Matching Short Answer Essay K K K 243. 244. 245. 2, 4 7 7 C C C 246. 247. 248. 7 7 7 C K K 249. 4 E 250. 7 E SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item 1. 2. 3. 4. 5. 6. 7. 56. 57. Item 8. 9. 10. 92. 93. Item 11. 12. 13. 14. Type TF TF TF TF TF TF TF MC MC Type TF TF TF MC MC Type TF TF TF TF Item 58. 59. 60. 61. 62. 63. 64. 65. 66. Item 94. 95. 96. 97. 98. Item 103. 104. 105. 106. Type MC MC MC MC MC MC MC MC MC Type MC MC MC MC MC Type MC MC MC MC Study Objective Item Type Item 67. MC 76. 68. MC 77. 69. MC 80. 70. MC 81. 71. MC 82. 72. MC 85. 73. MC 86. 74. MC 87. 75. MC 88. Study Objective Item Type Item 99. MC 135. 100. MC 206. 101. MC 218. 102. MC 219. 131. MC 222. Study Objective Item Type Item 107. MC 111. 108. MC 112. 109. MC 113. 110. MC 114. 1 Type MC MC MC MC MC MC MC MC MC 2 Type MC BE Ma Ex Ma 3 Type MC MC MC MC Item 89. 127. 205. 215. 216. 217. 218. 219. 220. Item 223. 224. 225. 226. 227. Item 207. 218. 220. 221. Type MC MC BE Ex Ma Ma Ma Ex Ma Type Ex Ma Ma Ma Ex Type BE Ma Ma Ma Item 221. 236. 239. 240. 242. Type Ma CS Ma SA SA Item 228. 239. 241. 243. Type Ma Ma SA SA Item 229. 239. Type Ma Ma A Further Look at Financial Statements 2-3 Item 15. 16. 17. 18. 19. 78. 79. 83. 84. 90. Item 20. 21. 22. 23. Item 26. 27. Type TF TF TF TF TF MC MC MC MC MC Type TF TF TF TF Type TF TF Item 91. 115. 116. 117. 118. 119. 120. 121. 122. 123. Item 24. 25. 148. 149. Item 28. 158. Type MC MC MC MC MC MC MC MC MC MC Type TF TF MC MC Type TF MC Item Type Item Type 29. TF 44. TF 30. TF 45. TF 31. TF 46. TF 32. TF 47. TF 33. TF 48. TF 34. TF 49. TF 35. TF 50. TF 36. TF 51. TF 37. TF 52. TF 38. TF 53. TF 39. TF 54. TF 40. TF 55. TF 41. TF 162. MC 42. TF 163. MC 43. TF 164. MC Note: TF = True-False MC = Multiple Choice Ma = Matching Study Objective 4 Item Type Item Type Item 124. MC 137. MC 147. 125. MC 138. MC 208. 126. MC 139. MC 219. 128. MC 140. MC 223. 129. MC 141. MC 224. 130. MC 142. MC 225. 132. MC 143. MC 226. 133. MC 144. MC 227. 134. MC 145. MC 228. 136. MC 146. MC 230. Study Objective 5 Item Type Item Type Item 150. MC 154. MC 226. 151. MC 155. MC 227. 152. MC 156. MC 238. 153. MC 157. MC 239. Study Objective 6 Item Type Item Type Item 159. MC 161. MC 239. 160. MC 231. CS Study Objective 7 Item Type Item Type Item 165. MC 180. MC 195. 166. MC 181. MC 196. 167. MC 182. MC 197. 168. MC 183. MC 198. 169. MC 184. MC 199. 170. MC 185. MC 200. 171. MC 186. MC 201. 172. MC 187. MC 202. 173. MC 188. MC 203. 174. MC 189. MC 204. 175. MC 190. MC 209. 176. MC 191. MC 210. 177. MC 192. MC 211. 178. MC 193. MC 212. 179. MC 194. MC 213. C = Completion Ex = Exercise SA = Short Answer Essay Type MC BE Ex Ex Ma Ma Ma Ex Ma Ma Type Ma Ex CS Ma Type Ma Item 235. 237. 239. 241. 242. 243. 249. Type CS CS Ma SA SA SA SA Item Type Item Type Type MC MC MC MC MC MC MC MC MC MC BE BE BE BE BE Item 214. 232. 233. 234. 239. 244. 245. 246. 247. 248. 250. Type BE CS CS CS Ma SA SA SA SA SA SA 2-4 Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition CHAPTER STUDY OBJECTIVES 1. Identify the sections of a classified balance sheet. In a classified balance sheet, companies classify assets as current assets; long-term investments; property, plant, and equipment; or intangibles. They classify liabilities as either current or long-term. A stockholders' equity section shows common stock and retained earnings. 2. Identify and compute ratios for analyzing a company's profitability. Profitability ratios, such as earnings per share (EPS), measure aspects of the operating success of a company for a given period of time. 3. Explain the relationship between a retained earnings statement and a statement of stockholders' equity. The retained earnings statement presents the factors that changed the retained earnings balance during the period. A statement of stockholders' equity presents the factors that changed stockholders' equity during the period, including those that changed retained earnings. Thus, a statement of stockholders' equity is more inclusive. 4. Identify and compute ratios for analyzing a company's liquidity and solvency using a balance sheet. Liquidity ratios, such as the current ratio, measure the short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash. Solvency ratios, such as the debt to total assets ratio, measure the ability of an enterprise to survive over a long period. Use the statement of cash flows to evaluate solvency. Free cash flow indicates a company's ability to generate cash from operations that are sufficient to pay debts, acquire assets, and distribute dividends. 5. 6. Explain the meaning of generally accepted accounting principles. Generally accepted accounting principles are a set of rules and practices recognized as a general guide for financial reporting purposes. The basic objectives of financial reporting is to provide information that is useful for decision making. 7. Discuss financial reporting concepts. To be judged useful, information should posses these qualitative characteristics relevance, reliability, comparability, and consistency. The monetary unit assumption requires that companies include in the accounting records of the economic entity only transaction data capable of being expressed in terms of money. The economic entity assumption states that economic events can be identified with a particular unit of accountability. The time period assumption states that the economic life of a business can be divided into artificial time periods and that meaningful accounting reports can be prepared for each period. The going concern assumption states that the enterprise will continue in operation long enough to carry out its existing objectives and commitments. The cost principle states that the companies should record assets at their cost. The full disclosure principle dictates that companies disclose circumstances and events that matter to financial statement users. The major constraints are materiality and conservation. A Further Look at Financial Statements 2-5 TRUE-FALSE STATEMENTS 1. Cash and supplies are both classified as current assets. Register to View AnswerSO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 2. Long-term investments appear in the property, plant, and equipment section of the balance sheet. Register to View AnswerSO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 3. A liability is classified as a current liability if it is to be paid within the coming year. Register to View AnswerSO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 4. Stockholders' equity is divided into two parts: common stock and retained earnings. Register to View AnswerSO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 5. It is possible for an asset to be a current asset even though the expected conversion of that asset into cash is to be longer than one year or the normal operating cycle. Register to View AnswerSO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 6. The investment category on the balance sheet normally includes investments that are intended to be held for a short period of time (less than one year). Register to View AnswerSO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 7. The main difference between intangible assets and property, plant and equipment is the length of the asset's life. Register to View AnswerSO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 8. Profitability means having enough funds on hand to pay debts when they fall due. Register to View AnswerSO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Management, AICPA PC: None, IMA: Business Economics 9. Earnings per share is calculated by dividing net income minus preferred stock dividends for the period by the average number of common shares outstanding during the period. Register to View AnswerSO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 10. Earnings per share measures the net income earned on each share of common stock. Register to View AnswerSO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 11. The retained earnings statement describes the changes in retained earnings during the period. Register to View AnswerSO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 12. The retained earnings statement is more comprehensive than the statement of shareholders' equity. Register to View AnswerSO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 2-6 13. Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition Revenues have the effect of increasing retained earnings. Register to View AnswerSO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 14. Most companies use a retained earnings statement rather than a statement of stockholders' equity. Register to View AnswerSO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 15. The excess of current assets over current liabilities is called working capital. Register to View AnswerSO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 16. The current ratio takes into account the composition of current assets. Register to View AnswerSO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 17. Solvency ratios measure the short-term ability of the company to pay its maturing obligations. Register to View AnswerSO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 18. The debt to total assets ratio measures the percentage of assets financed by creditors. Register to View AnswerSO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 19. Two primary objectives of management are to achieve profitability and liquidity. Register to View AnswerSO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Management, AICPA PC: Project Management, IMA: 20. Companies get cash from just two sources: operating activities and financing activities. Register to View AnswerSO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 21. Both investors and creditors have an interest in a company's ability to generate favorable cash flows. Register to View AnswerSO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 22. The statement of cash flows is divided into two sections corresponding to investing activities and financing activities. Register to View AnswerSO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 23. The statement of cash flows discloses significant events related to the operating, investing, and financing activities of a business. Register to View AnswerSO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 24. Free cash flow is cash from operations less dividends. Register to View AnswerSO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 25. Long term creditors consider a high free cash flow amount an indication of solvency. Register to View AnswerSO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Management, AICPA PC: None, IMA: Business Economics A Further Look at Financial Statements 2-7 26. The primary accounting standard-setting body in the United States is the Securities and Exchange Commission. Register to View AnswerSO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 27. Generally accepted accounting principles are rules and practices that are recognized as a general guide for financial reporting purposes. Register to View AnswerSO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 28. GAAP stands for generally accepted accounting procedures. Register to View AnswerSO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 29. To be reliable, accounting information should predict future events, confirm prior expectations, and be reported on a timely basis. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 30. In order for information to be relevant, it must be reported on a monthly basis. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 31. For information to be useful, it must be both relevant and reliable. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 32. Consistent use of the same accounting principles and methods is necessary for meaningful analysis of trends within a company. Register to View AnswerSO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 33. A major function of management is to provide the accountant with relevant and useful information. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 34. The advantage of accounting information is that it provides exact and completely reliable measures. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 35. Consistency in accounting means that a company uses the same generally accepted accounting principles from one accounting period to the next accounting period. Register to View AnswerSO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 36. The convention of consistency pertains to the use of the same accounting principles by firms in the same industry. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 37. The time period assumption states that the business will remain in operation for the foreseeable future. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Management, AICPA PC: None, IMA: Business Economics 2-8 38. Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition If a building is offered for sale at $100,000 and the buyer pays $95,000 cash for it, the buyer would record the building at $100,000. Register to View AnswerSO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 39. The most generally accepted value used in accounting is market value. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 40. For accounting purposes, business transactions should be kept separate from the personal transactions of the stockholders of the business. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 41. The economic entity assumption states that economic events can be identified with a particular unit of accountability. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 42. The economic entity assumption states that assets should be recorded at their cost. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 43. The monetary unit assumption states that transactions that can be measured in terms of money should be recorded in the accounting records. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 44. The monetary unit assumption has led to an increase in the notes to financial statements. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 45. The going concern assumption is that the business will continue in operation long enough to carry out its existing objectives and commitments. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Management, AICPA PC: None, IMA: Business Economics 46. When preparing financial statements, the accountant assumes that the business will stay in business for the foreseeable future. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 47. Full disclosure of all important facts aids in overcoming the limitations of accounting information. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 48. The economic entity assumption is that an enterprise will remain in operations for the foreseeable future. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 49. A common application of the materiality constraint is in the valuing of inventory at market value if market value is below cost. Register to View AnswerSO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA A Further Look at Financial Statements 2-9 50. Materiality and conservatism are two constraints in accounting. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Management, AICPA PC: None, IMA: Business Economics 51. The concept of materiality requires a large company to record the purchase of a $10 wastepaper basket as an asset and depreciate it over its useful life. Register to View AnswerSO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 52. The concept of materiality permits a large company to report amounts in its financial statements to the nearest thousand of dollars. Register to View AnswerSO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 53. Conservatism in accounting means the accountant should understate assets and income. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 54. A material item is one that is likely to affect a user's decision. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 55. The conservatism constraint should not be used when the accountant is confident of a particular measure. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Answers to True-False Statements 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. T F T T F F F F T T T 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. F T F T F F T T F T F 23. 24. 25. 26. 27. 28. 29. 30. 31 32. 33. T F T F T F F F T T F 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44 45. F T F F F F T T F T F T 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. T T F F T F T F T F 2-10 Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition MULTIPLE CHOICE QUESTIONS 56. In a classified balance sheet, assets are usually classified as: a. current assets; long-term assets; property, plant, and equipment; and intangible assets. b. current assets; long-term investments; property, plant, and equipment; and common stocks. c. current assets; long-term investments; tangible assets; and intangible assets. d. current assets; long-term investments; property, plant, and equipment; and intangible assets. Register to View AnswerSO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 57. On a classified balance sheet, marketable securities are classified as a. an intangible asset. b. property, plant, and equipment. c. a current asset. d. a long-term investment. Register to View AnswerSO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 58. A current asset is a. the last asset purchased by a business. b. an asset which is currently being used to produce a product or service. c. usually found as a separate classification in the income statement. d. expected to be converted to cash or used in the business within a relatively short period of time. Register to View AnswerSO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 59. Which of the following is not classified properly as a current asset? a. Supplies b. Marketable securities c. A fund to be used to purchase a building within the next year d. A receivable from the sale of an asset to be collected in two years Register to View AnswerSO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 60. An intangible asset a. derives its value from the rights and privileges it provides the owner. b. is worthless because it has no physical substance. c. is converted into a tangible asset during the operating cycle. d. cannot be classified on the balance sheet because it lacks physical substance. Register to View AnswerSO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting A Further Look at Financial Statements 2-11 61. Which of the following is not considered an asset? a. Equipment b. Dividends c. Accounts receivable d. Inventory Register to View AnswerSO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 62. Trademarks would appear in which balance sheet section? a. Intangible assets b. Investments c. Property, plant, and equipment d. Current assets Register to View AnswerSO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 63. Liabilities are generally classified on a balance sheet as a. small liabilities and large liabilities. b. present liabilities and future liabilities. c. tangible liabilities and intangible liabilities. d. current liabilities and long-term liabilities. Register to View AnswerSO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 64. Which of the following would not be classified as a long-term liability? a. Current maturities of long-term debt b. Bonds payable c. Mortgage payable d. Lease liabilities Register to View AnswerSO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 65. Which of the following is not a current liability? a. Wages payable b. Accounts payable c. Taxes payable d. Bonds payable Register to View AnswerSO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 66. Office equipment is classified on the balance sheet as a. a current asset. b. property, plant, and equipment. c. an intangible asset. d. a long-term investment. Register to View AnswerSO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 67. It is not true that current assets are resources that are expected to be a. realized in cash within one year. b. sold within one year. c. consumed within one year. d. acquired within one year. Register to View AnswerSO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 2-12 68. Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition The operating cycle of a company is the average time that is required to go from cash to a. sales in producing revenues. b. cash in producing revenues. c. inventory in producing revenues. d. accounts receivable in producing revenues. Register to View AnswerSO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 69. On a classified balance sheet, companies usually list current assets a. in alphabetical order. b. with the largest dollar amounts first. c. in the order in which they are expected to be converted into cash. d. in the order of acquisition. Register to View AnswerSO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 70. Intangible assets are a. listed directly under current assets on the balance sheet. b. not listed on the balance sheet because they do not have physical substance. c. listed after property, plant, and equipment. d. listed as a long-term investment on the balance sheet. Register to View AnswerSO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 71. Which statement about long-term investments is not true? a. They will be held for more than one year. b. They are not currently used in the operation of the business. c. They include investments in stock of other companies and land held for future use. d. They can never include cash accounts. Register to View AnswerSO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 72. These are selected account balances on December 31, 2010. Land (location of the corporation's office building) $100,000 Land (held for future use) 150,000 Corporate Office Building 600,000 Inventory 200,000 Equipment 450,000 Office Furniture 100,000 Accumulated Depreciation 300,000 What is the total amount of property, plant, and equipment that will appear on the balance sheet? a. $1,300,000 b. $1,100,000 c. $1,600,000 d. $950,000 Register to View AnswerSO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting A Further Look at Financial Statements 2-13 73. What is the order in which assets are generally listed on a classified balance sheet? a. current and long-term b. current; property, plant and equipment; long-term investments; intangibles c. current; property, plant and equipment; intangibles; long-term investments d. current; long-term investments; property, plant and equipment, intangibles Register to View AnswerSO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 74. Which of the following is not an alternative means of expressing ratio relationships? a. proportion b. qualitative c. rate d. percentage Register to View AnswerSO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 75. Use the following data to determine the total dollar amount of assets to be classified as current assets. Koonce Office Supplies Balance Sheet December 31, 2010 Accounts Payable Salaries Payable Mortgage Payable Total Liabilities Common Stock Retained Earnings Total Stockholders' Equity Total Liabilities and Stockholders' Equity $ 70,000 10,000 80,000 $160,000 $120,000 250,000 $370,000 $530,000 Cash $ 65,000 Prepaid Insurance 30,000 Accounts Receivable 50,000 Inventory 70,000 Land held for Investment 75,000 Land 90,000 Building $100,000 Less Accumulated Depreciation (20,000) 80,000 Trademark 70,000 Total Assets $530,000 a. b. c. d. $290,000. $215,000. $180,000. $145,000. Register to View AnswerSO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 2-14 76. Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition Use the following data to determine the total dollar amount of assets to be classified as property, plant, and equipment. Koonce Office Supplies Balance Sheet December 31, 2010 Accounts Payable Salaries Payable Mortgage Payable Total Liabilities Common Stock Retained Earnings Total Stockholders' Equity Total Liabilities and Stockholders' Equity $ 70,000 10,000 80,000 $160,000 $120,000 250,000 $370,000 $530,000 Cash $ 65,000 Prepaid Insurance 30,000 Accounts Receivable 50,000 Inventory 70,000 Land held for Investment 75,000 Land 90,000 Building $100,000 Less Accumulated Depreciation (20,000) 80,000 Trademark 70,000 Total Assets $530,000 a. b. c. d. $320,000. $170,000. $245,000. $190,000. Register to View AnswerSO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 77. Use the following data to determine the total dollar amount of assets to be classified as investments. Koonce Office Supplies Balance Sheet December 31, 2010 Accounts Payable Salaries Payable Mortgage Payable Total Liabilities Common Stock Retained Earnings Total Stockholders' Equity Total Liabilities and Stockholders' Equity $ 70,000 10,000 80,000 $160,000 $120,000 250,000 $370,000 $530,000 Cash $ 65,000 Prepaid Insurance 30,000 Accounts Receivable 50,000 Inventory 70,000 Land held for Investment 75,000 Land 90,000 Building $100,000 Less Accumulated Depreciation (20,000) 80,000 Trademark 70,000 Total Assets $530,000 a. b. c. d. $0. $150,000. $75,000. $180,000. Register to View AnswerSO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting A Further Look at Financial Statements 2-15 78. Use the following data to determine the total amount of working capital. Koonce Office Supplies Balance Sheet December 31, 2010 Accounts Payable Salaries Payable Mortgage Payable Total Liabilities Common Stock Retained Earnings Total Stockholders' Equity Total Liabilities and Stockholders' Equity $ 70,000 10,000 80,000 $160,000 $120,000 250,000 $370,000 $530,000 Cash $ 65,000 Prepaid Insurance 30,000 Accounts Receivable 50,000 Inventory 70,000 Land held for Investment 75,000 Land 90,000 Building $100,000 Less Accumulated Depreciation (20,000) 80,000 Trademark 70,000 Total Assets $530,000 a. b. c. d. $135,000. $295,000. $75,000. $60,000. Register to View AnswerSO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics 79. Use the following data to calculate the current ratio. Koonce Office Supplies Balance Sheet December 31, 2010 Accounts Payable Salaries Payable Mortgage Payable Total Liabilities Common Stock Retained Earnings Total Stockholders' Equity Total Liabilities and Stockholders' Equity $ 70,000 10,000 80,000 $160,000 $120,000 250,000 $370,000 $530,000 Cash $ 65,000 Prepaid Insurance 30,000 Accounts Receivable 50,000 Inventory 70,000 Land held for Investment 75,000 Land 90,000 Building $100,000 Less Accumulated Depreciation (20,000) 80,000 Trademark 70,000 Total Assets $530,000 a. b. c. d. 1.94 1.57 3.14 2.69 : 1. : 1. : 1. : 1. Register to View AnswerSO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics 2-16 80. Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition Use the following data to determine the total dollar amount of assets to be classified as current assets. Carne Auto Supplies Balance Sheet December 31, 2010 Accounts Payable Salaries Payable Mortgage Payable Total Liabilities Common Stock Retained Earnings Total stockholders' equity Total Liabilities and Stockholders' Equity $ 65,000 10,000 90,000 $165,000 $120,000 250,000 $370,000 $535,000 Cash $ 60,000 Prepaid Insurance 40,000 Accounts Receivable 50,000 Inventory 70,000 Land held for investment 80,000 Land 95,000 Building $100,000 Less Accumulated Depreciation (30,000) 70,000 Trademark 70,000 Total Assets $535,000 a. b. c. d. $220,000. $150,000. $300,000. $180,000. Register to View AnswerSO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 81. Use the following data to determine the total dollar amount of assets to be classified as property, plant, and equipment. Carne Auto Supplies Balance Sheet December 31, 2010 Accounts Payable Salaries Payable Mortgage Payable Total Liabilities Common Stock Retained Earnings Total stockholders' equity Total Liabilities and Stockholders' Equity $ 65,000 10,000 90,000 $165,000 $120,000 250,000 $370,000 $535,000 Cash $ 60,000 Prepaid Insurance 40,000 Accounts Receivable 50,000 Inventory 70,000 Land held for investment 80,000 Land 95,000 Building $100,000 Less Accumulated Depreciation (30,000) 70,000 Trademark 70,000 Total Assets $535,000 a. b. c. d. $315,000. $245,000. $165,000. $195,000. Register to View AnswerSO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting A Further Look at Financial Statements 2-17 82. Use the following data to determine the total dollar amount of assets to be classified as investments. Carne Auto Supplies Balance Sheet December 31, 2010 Accounts Payable Salaries Payable Mortgage Payable Total Liabilities Common Stock Retained Earnings Total stockholders' equity Total Liabilities and Stockholders' Equity $ 65,000 10,000 90,000 $165,000 $120,000 250,000 $370,000 $535,000 Cash $ 60,000 Prepaid Insurance 40,000 Accounts Receivable 50,000 Inventory 70,000 Land held for investment 80,000 Land 95,000 Building $100,000 Less Accumulated Depreciation (30,000) 70,000 Trademark 70,000 Total Assets $535,000 a. b. c. d. $0. $150,000. $80,000. $180,000. Register to View AnswerSO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 83. Use the following data to determine the total amount of working capital. Carne Auto Supplies Balance Sheet December 31, 2010 Accounts Payable Salaries Payable Mortgage Payable Total Liabilities Common Stock Retained Earnings Total stockholders' equity Total Liabilities and Stockholders' Equity $ 65,000 10,000 90,000 $165,000 $120,000 250,000 $370,000 $535,000 Cash $ 60,000 Prepaid Insurance 40,000 Accounts Receivable 50,000 Inventory 70,000 Land held for investment 80,000 Land 95,000 Building $100,000 Less Accumulated Depreciation (30,000) 70,000 Trademark 70,000 Total Assets $535,000 a. b. c. d. $155,000. $145,000. $60,000. $150,000. Register to View AnswerSO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics 2-18 84. Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition Use the following data to calculate the current ratio. Carne Auto Supplies Balance Sheet December 31, 2010 Accounts Payable Salaries Payable Mortgage Payable Total Liabilities Common Stock Retained Earnings Total stockholders' equity Total Liabilities and Stockholders' Equity $ 65,000 10,000 90,000 $165,000 $120,000 250,000 $370,000 $535,000 Cash $ 60,000 Prepaid Insurance 40,000 Accounts Receivable 50,000 Inventory 70,000 Land held for investment 80,000 Land 95,000 Building $100,000 Less Accumulated Depreciation (30,000) 70,000 Trademark 70,000 Total Assets $535,000 a. b. c. d. 1.86 2.00 3.38 2.93 : 1. : 1. : 1. : 1. Register to View AnswerSO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics 85. N3 Corporation has assets of $2.7 million, common stock of $702,000, and retained earnings of $428,000. What are the creditors' claims on their assets? a. $2,426,000 b. $1,130,000 c. $1,570,000 d. $2,974,000 Register to View AnswerSO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 86. K2 Corporation has assets of $1.35 million, common stock of $351,000, and retained earnings of $214,000. What are the creditors' claims on their assets? a. $1,213,000 b. $ 565,000 c. $ 785,000 d. $1,487,000 Register to View AnswerSO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting A Further Look at Financial Statements 2-19 87. Use the following data to determine the total dollar amount of assets to be classified as current assets. Eddy Auto Supplies Balance Sheet December 31, 2010 Accounts Payable Salaries Payable Mortgage Payable Total Liabilities Common Stock Retained Earnings Total stockholders' equity Total Liabilities and Stockholders' Equity $ 55,000 10,000 90,000 $155,000 $120,000 250,000 $370,000 $525,000 Cash $ 50,000 Prepaid Insurance 30,000 Accounts Receivable 40,000 Inventory 70,000 Land held for investment 80,000 Land 75,000 Building $110,000 Less Accumulated Depreciation (20,000) 90,000 Trademark 70,000 Total Assets $525,000 a. b. c. d. $270,000. $120,000. $190,000. $130,000. Register to View AnswerSO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 88. Use the following data to determine the total dollar amount of assets to be classified as property, plant, and equipment. Eddy Auto Supplies Balance Sheet December 31, 2010 Accounts Payable Salaries Payable Mortgage Payable Total Liabilities Common Stock Retained Earnings Total stockholders' equity Total Liabilities and Stockholders' Equity $ 55,000 10,000 90,000 $155,000 $120,000 250,000 $370,000 $525,000 Cash $ 50,000 Prepaid Insurance 30,000 Accounts Receivable 40,000 Inventory 70,000 Land held for investment 80,000 Land 75,000 Building $110,000 Less Accumulated Depreciation (20,000) 90,000 Trademark 70,000 Total Assets $525,000 a. b. c. d. $335,000. $255,000. $205,000. $165,000. Register to View AnswerSO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 2-20 89. Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition Use the following data to determine the total dollar amount of assets to be classified as investments. Eddy Auto Supplies Balance Sheet December 31, 2010 Accounts Payable Salaries Payable Mortgage Payable Total Liabilities Common Stock Retained Earnings Total stockholders' equity Total Liabilities and Stockholders' Equity $ 55,000 10,000 90,000 $155,000 $120,000 250,000 $370,000 $525,000 Cash $ 50,000 Prepaid Insurance 30,000 Accounts Receivable 40,000 Inventory 70,000 Land held for investment 80,000 Land 75,000 Building $110,000 Less Accumulated Depreciation (20,000) 90,000 Trademark 70,000 Total Assets $525,000 a. b. c. d. $0. $155,000. $80,000. $185,000. Register to View AnswerSO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 90. Use the following data to determine the total amount of working capital. Eddy Auto Supplies Balance Sheet December 31, 2010 Accounts Payable Salaries Payable Mortgage Payable Total Liabilities Common Stock Retained Earnings Total stockholders' equity Total Liabilities and Stockholders' Equity $ 55,000 10,000 90,000 $155,000 $120,000 250,000 $370,000 $525,000 Cash $ 50,000 Prepaid Insurance 30,000 Accounts Receivable 40,000 Inventory 70,000 Land held for investment 80,000 Land 75,000 Building $110,000 Less Accumulated Depreciation (20,000) 90,000 Trademark 70,000 Total Assets $525,000 a. b. c. d. $205,000. $125,000. $50,000. $80,000. Register to View AnswerSO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics A Further Look at Financial Statements 2-21 91. Use the following data to calculate the current ratio. Eddy Auto Supplies Balance Sheet December 31, 2010 Accounts Payable Salaries Payable Mortgage Payable Total Liabilities Common Stock Retained Earnings Total stockholders' equity Total Liabilities and Stockholders' Equity $ 55,000 10,000 90,000 $155,000 $120,000 250,000 $370,000 $525,000 Cash $ 50,000 Prepaid Insurance 30,000 Accounts Receivable 40,000 Inventory 70,000 Land held for investment 80,000 Land 75,000 Building $110,000 Less Accumulated Depreciation (20,000) 90,000 Trademark 70,000 Total Assets $525,000 a. b. c. d. 1.85 2.92 4.15 1.07 : 1. : 1. : 1. : 1. Register to View AnswerSO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics 92. A measure of profitability is the a. current ratio. b. debt to total assets ratio. c. earnings per share. d. working capital. Register to View AnswerSO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 93. For 2010 Kuhlman Corporation reported net income of $28,000; net sales $400,000; and average share outstanding 6,000. There were no preferred stock dividends. What was the 2010 earnings per share? a. $4.67 b. $0.25 c. $66.67 d. $14.86 Register to View AnswerSO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 94. For 2010 Fielder Corporation reported net income of $30,000; net sales $400,000; and average share outstanding 6,000. There were no preferred stock dividends. What was the 2010 earnings per share? a. $4.66 b. $0.20 c. $66.67 d. $5.00 Register to View AnswerSO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 2-22 95. Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition Earnings per share are calculated by dividing a. gross profit by average common shares outstanding. b. (net income less preferred stock dividends) by average common shares outstanding. c. net income by average common shares outstanding. d. net sales by average common shares outstanding. Register to View AnswerSO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 96. The three ways that ratios can be expressed are a. as a percentage, a rate, and as a simple proportion. b. as a dollar amount, a rate, and as a proportion. c. as a decimal, a whole number, and as a proportion. d. not known. Register to View AnswerSO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 97. Which of the following statements is true? a. Earnings per share is an internal measure and is not used by shareholders. b. The denominator used in computing earnings per share represents the shares of common stock outstanding on the last day of the accounting period. c. Net income is not adjusted when computing earnings per share. d. By comparing earnings per share of a single corporation over time, a shareholder can evaluate the corporation's relative earnings performance. Register to View AnswerSO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 98. Earnings available to common stockholders is equal to: a. Total revenues b. Net income + Preferred stock dividends c. Preferred stock dividends Net income d. Net income Preferred stock dividends Register to View AnswerSO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 99. The following information is available for Bradshaw Corporation and Newell Corporation: Bradshaw Corporation 2010 2009 25 10 500 480 200 180 180 150 Newell Corporation 2010 0 490 150 200 2009 30 520 200 220 (in millions) Preferred stock dividends Net income Shares outstanding at the end of the year Shares outstanding at the beginning of the year Based on this information, the earnings per share calculations (rounded to two decimals) suggest: a. Lower performance in 2009 than in 2010 for Bradshaw Corporation. b. Higher performance in 2010 than in 2009 for Bradshaw Corporation. c. Fewer earnings available to Bradshaw's common stockholders in 2010 than in 2009. d. An increase in the average number of common shares outstanding between 2009 and 2010 for Bradshaw Corporation. Register to View AnswerSO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting A Further Look at Financial Statements 2-23 100. The following information is available for Bradshaw Corporation and Newell Corporation: Bradshaw Corporation 2010 2009 25 10 500 480 200 180 180 150 Newell Corporation 2010 0 490 150 200 2009 30 520 200 220 (in millions) Preferred stock dividends Net income Shares outstanding at the end of the year Shares outstanding at the beginning of the year Based on this information, which of the following is suggested by the earnings per share calculations (rounded to two decimals) and the information given? a. There is lower performance in 2009 than in 2010 for Newell Corporation. b. There is higher performance in 2009 than in 2010 for Newell Corporation. c. There are fewer earnings available to Newell's common stockholders in 2010 than in 2009. d. There is a decrease in preferred shares of stock in 2010 as compared with 2009. Register to View AnswerSO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics 101. The following information is available for Bradshaw Corporation and Newell Corporation: Bradshaw Corporation 2010 2009 25 10 500 480 200 180 180 150 Newell Corporation 2010 0 490 150 200 2009 30 520 200 220 (in millions) Preferred stock dividends Net income Shares outstanding at the end of the year Shares outstanding at the beginning of the year Based on this information, what is the amount of Bradshaw's earnings per share (rounded to two decimals) for 2010? a. $2.76 b. $2.50 c. $1.25 d. $1.32 Register to View AnswerSO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 2-24 102. Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition The following information is available for Bradshaw Corporation and Newell Corporation: Bradshaw Corporation 2010 2009 25 10 500 480 200 180 180 150 Newell Corporation 2010 0 490 150 200 2009 30 520 200 220 (in millions) Preferred stock dividends Net income Shares outstanding at the end of the year Shares outstanding at the beginning of the year Based on the information for both Bradshaw and Newell over the two-year period, the earnings per share calculations (rounded to two decimals) indicate that: a. Bradshaw is seeing a greater performance improvement than Newell. b. The earnings available to common stockholders is decreasing for Newell and increasing for Bradshaw. c. The earnings per share calculations for both companies assume that changes in shares between 2009 and 2010 occur in the middle of the year. d. Newell is more financially stable than Bradshaw. Register to View AnswerSO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 103 Dawson Corporation has the following information available for 2009: Issued common stock Retired common stock Paid dividends Net income Beginning Common Stock balance Beginning Retained Earnings balance (in millions) $45 $65 $75 $130 $575 $425 Based in this information, what is Dawson's Common Stock balance at the end of the year? a. $555 b. $685 c. $195 d. $630 Register to View AnswerSO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting A Further Look at Financial Statements 2-25 104. Dawson Corporation has the following information available for 2009: Issued common stock Retired common stock Paid dividends Net income Beginning Common Stock balance Beginning Retained Earnings balance (in millions) $45 $65 $75 $130 $575 $425 Based on this information, what is Dawson's Retained Earnings balance at the end of the year? a. $630 b. $480 c. $370 d. $555 Register to View AnswerSO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 105. Which of the following is the least likely consideration that management uses when deciding whether to pay a dividend? a. Does the company have more cash than it has opportunities? b. Is the company's average number of common shares outstanding decreasing? c. Does the company have uses for cash that will increase its value? d. What are the company's cash needs? Register to View AnswerSO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 106. Most companies use a(n) _________ rather than a retained earnings statement. a. balance sheet b. income statement c. statement of cash flows d. statement of stockholders' equity Register to View AnswerSO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 107. Dividends appear on a. the retained earnings statement only. b. the income statement only. c. both the retained earnings statement and the balance sheet. d. the balance sheet only. Register to View AnswerSO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 108. Issuing new shares of common stock will a. increase retained earnings. b. decrease retained earnings. c. increase common stock. d. decrease common stock. Register to View AnswerSO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 2-26 109. Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition Declaring a cash dividend will a. increase retained earnings. b. decrease retained earnings. c. increase common stock. d. decrease common stock. Register to View AnswerSO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 110. Reporting a net income of $95,000 will a. increase retained earnings. b. decrease retained earnings. c. increase common stock. d. decrease common stock. Register to View AnswerSO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 111. McKinney Corporation had beginning retained earnings of $2,292,000 and ending retained earnings of $2,499,000. During the year they issued common stock totaling $141,000. What was their net income for the year? a. $207,000 b. $ 66,000 c. $348,000 d. $273,000 Register to View AnswerSO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 112. Wilton Corporation had beginning retained earnings of $764,000 and ending retained earnings of $833,000. During the year they issued common stock totaling $47,000. What was their net income for the year? a. $69,000 b. $22,000 c. $116,000 d. $91,000 Register to View AnswerSO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 113. At December 31, 2010 Lowery Company had retained earnings of $2,184,000. During 2010 they issued stock for $98,000, and paid dividends of $34,000. Net income for 2010 was $402,000. The retained earnings balance at the beginning of 2010 was: a. $2,552,000 b. $1,816,000 c. $1,914,000 d. $2,454,000 Register to View AnswerSO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting A Further Look at Financial Statements 2-27 114. At December 31, 2010 Keen Company had retained earnings of $1,092,000. During 2010 they issued stock for $49,000, and paid dividends of $17,000. Net income for 2010 was $201,000. The retained earnings balance at the beginning of 2010 was: a. $1,276,000 b. $908,000 c. $957,000 d. $1,227,000 Register to View AnswerSO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 115. The relationship between current assets and current liabilities is important in evaluating a company's a. profitability. b. liquidity. c. market value. d. solvency. Register to View AnswerSO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 116. Which of the following is a measure of liquidity? a. Working capital b. Profit margin c. Earnings per share d. Debt to equity ratio Register to View AnswerSO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 117. Current assets divided by current liabilities is known as the a. working capital. b. current ratio. c. profit margin. d. capital structure. Register to View AnswerSO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 118. The most important information needed to determine if companies can pay their current obligations is the a. net income for this year. b. projected net income for next year. c. relationship between current assets and current liabilities. d. relationship between short-term and long-term liabilities. Register to View AnswerSO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 119. A short-term creditor is primarily interested in the __________ of the borrower. a. liquidity b. profitability c. consistency d. solvency Register to View AnswerSO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 2-28 120. Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition The current ratio is a. current assets plus current liabilities. b. current assets minus current liabilities. c. current assets divided by current liabilities. d. current assets times current liabilities. Register to View AnswerSO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 121. Working capital is calculated by taking a. current assets plus current liabilities. b. current assets minus current liabilities. c. current assets divided by current liabilities. d. current assets times current liabilities. Register to View AnswerSO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 122. Working capital is a measure of a. consistency. b. liquidity. c. profitability. d. solvency. Register to View AnswerSO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 123. Long-term creditors are usually most interested in evaluating a. liquidity and profitability. b. consistency and profitability. c. liquidity and solvency. d. consistency and solvency. Register to View AnswerSO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 124. A liquidity ratio measures the a. income or operating success of a company over a period of time. b. ability of a company to survive over a long period of time. c. short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash. d. percentage of total financing provided by creditors. Register to View AnswerSO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 125. Working capital is a. calculated by dividing current assets by current liabilities. b. used to evaluate a company's liquidity and short-term debt paying ability. c. used to evaluate a company's solvency and long-term debt paying ability. d. calculated by subtracting current assets from current liabilities. Register to View AnswerSO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics A Further Look at Financial Statements 2-29 126. The ability of a business to pay obligations that are expected to become due within the next year or operating cycle is a. leverage. b. liquidity. c. profitability. d. wealth. Register to View AnswerSO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 127. Based on the following data, what is the amount of current assets? Accounts payable................................................................. $31,000 Accounts receivable.............................................................. 50,000 Cash.................................................................................. 15,000 Intangible assets.................................................................. 50,000 Inventory............................................................................ 69,000 Long-term investments.......................................................... 80,000 Long-term liabilities...................................................................... 100,000 Marketable securities............................................................. 40,000 Notes payable...................................................................... 28,000 Plant assets........................................................................ 670,000 Prepaid expenses................................................................. 1,000 a. b. c. d. $ 96,000 $175,000 $106,000 $105,000 Register to View AnswerSO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 128. Based on the following data, what is the amount of working capital? Accounts payable................................................................. Accounts receivable.............................................................. Cash.................................................................................. Intangible assets.................................................................. Inventory............................................................................ Long-term investments.......................................................... Long-term liabilities.................................... ......................... Marketable securities............................................................. Notes payable (short-term)...................................................... Plant assets........................................................................ Prepaid expenses................................................................. a. b. c. d. $127,000 $151,000 $170,000 $148,000 $32,000 57,000 20,000 50,000 69,000 80,000 100,000 40,000 28,000 670,000 1,000 Register to View AnswerSO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 2-30 129. Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition Using the following balance sheet and income statement data, what is the total amount of working capital? Current assets $ 7,000 Net income $ 12,000 Current liabilities 4,000 Stockholders' equity 27,000 Average assets 40,000 Total liabilities 9,000 Total assets 30,000 Average common shares outstanding was 10,000 a. b. c. d. $1,000 $7,000 $2,000 $3,000 Register to View AnswerSO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics 130. Using the following balance sheet and income statement data, what is the current ratio? Current assets $ 7,000 Net income $ 12,000 Current liabilities 4,000 Stockholders' equity 27,000 Average assets 40,000 Total liabilities 9,000 Total assets 30,000 Average common shares outstanding was 10,000 a. b. c. d. 1.75 : 1 1.6 : 1 0.57 : 1 2:1 Register to View AnswerSO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics 131. Using the following balance sheet and income statement data, what is the earnings per share? Current assets $ 7,000 Net income $ 12,000 Current liabilities 4,000 Stockholders' equity 27,000 Average assets 40,000 Total liabilities 9,000 Total assets 30,000 Average common shares outstanding was 10,000 a. b. c. d. $3.60 $4.00 $1.20 $0.83 Register to View AnswerSO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting A Further Look at Financial Statements 2-31 132. Using the following balance sheet and income statement data, what is the debt to total assets? Current assets $ 7,000 Net income $ 12,000 Current liabilities 4,000 Stockholders' equity 27,000 Average assets 40,000 Total liabilities 9,000 Total assets 30,000 Average common shares outstanding was 10,000 a. b. c. d. 22.5 percent 13 percent 75 percent 30 percent Register to View AnswerSO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics 133. Using the following balance sheet and income statement data, what is the total amount of working capital? Current assets $ 9,000 Net income $ 12,000 Current liabilities 4,000 Stockholders' equity 27,000 Average assets 44,000 Total liabilities 6,000 Total assets 30,000 Average common shares outstanding was 10,000 a. b. c. d. $9,000 $7,000 $5,000 $2,000 Register to View AnswerSO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics 134. Using the following balance sheet and income statement data, what is the current ratio? Current assets $ 9,000 Net income $ 12,000 Current liabilities 4,000 Stockholders' equity 27,000 Average assets 44,000 Total liabilities 6,000 Total assets 30,000 Average common shares outstanding was 10,000 a. b. c. d. 1.75 : 1 2.00 : 1 0.44 : 1 2.25: 1 Register to View AnswerSO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics 2-32 135. Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition Using the following balance sheet and income statement data, what is the earnings per share? Current assets $ 9,000 Net income $ 12,000 Current liabilities 4,000 Stockholders' equity 27,000 Average assets 44,000 Total liabilities 6,000 Total assets 30,000 Average common shares outstanding was 10,000 a. b. c. d. $1.20 $2.00 $0.83 $0.44 Register to View AnswerSO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 136. Using the following balance sheet and income statement data, what is the debt to total assets? Current assets $ 9,000 Net income $ 12,000 Current liabilities 4,000 Stockholders' equity 27,000 Average assets 44,000 Total liabilities 6,000 Total assets 30,000 Average common shares outstanding was 10,000 a. b. c. d. 13.6 percent 20 percent 75 percent 27.3 percent Register to View AnswerSO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics 137. The debt to total assets ratio is computed by dividing a. long-term liabilities by total assets. b. long-term liabilities by average assets. c. total liabilities by total assets. d. total liabilities by average assets. Register to View AnswerSO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 138. A useful measure of solvency is the a. current ratio. b. earnings per share. c. return on assets ratio. d. debt to total assets ratio. Register to View AnswerSO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 139. Which of the following is not considered a measure of liquidity? a. Current ratio b. Working capital c. Debt to total assets ratio d. Each of the above are liquidity measures Register to View AnswerSO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics A Further Look at Financial Statements 2-33 140. Which measure would a long-term creditor be least interested in reviewing? a. free cash flow b. debt to total assets ratio c. current ratio d. solvency measure Register to View AnswerSO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 141. Bathlinks Corporation has a debt to total assets ratio of 73%. This tells the user of Bathlinks's financial statements a. Bathlinks is getting a 27% return on its assets. b. There is a risk that Bathlinks cannot pay its debts as they come due. c. 73% of the assets are financed by the stockholders. d. Based on this measure, the user should not invest in Bathlinks. Register to View AnswerSO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 142. Ace Company is a retail store. Due to competition, it is having trouble selling its products. Thus, inventory has been building up. Ace's current ratio has not changed for the past three years, in spite of the inventory build up. Which of the following statements is true? a. As long as the current ratio remains constant, there is no need for concern. b. The composition of current assets and current liabilities does not matter. c. The management of Ace should consider the affect of slow moving inventory on its liquidity. d. Since inventory is a current asset, any increases should automatically cause the current ratio to rise. Register to View AnswerSO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics 143. How can a company improve its current ratio? a. Work with a creditor to reclassify some current debt into long-term debt b. Use cash to reduce current liabilities c. Nothing can ethically be done to improve the current ratio d. Use excess cash to buy new equipment Register to View AnswerSO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 144. Kingery Corporation has current assets of $1,250,000 and current liabilities of $750,000. If they pay $250,000 of their accounts payable what will their new current ratio be? a. 2.0:1 b. 1.7:1 c. 2.5:1 d. 1.25:1 Register to View AnswerSO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics 145. Kingery Corporation has current assets of $1,250,000 and current liabilities of $750,000. If they issue $100,000 of new stock what will their new current ratio be? (rounded) a. 1.8:1 b. 1.6:1 c. 1.5:1 d. 1.7:1 Register to View AnswerSO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics 2-34 146. Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition Mitchell Corporation has current assets of $1 million and current liabilities of $750,00. If they pay $250,000 of their accounts payable what will their new current ratio be? a. 1.5:1 b. 2.0:1 c. 2.0:1 d. 1.25:1 Register to View AnswerSO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics 147. Mitchell Corporation has current assets of $1 million and current liabilities of $750,00. If they issue $100,000 of new stock what will their new current ratio be? (rounded) a. 1.47:1 b. 1.29:1 c. 1.18:1 d. 1.33:1 Register to View AnswerSO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics 148. The statement of cash flows begins with cash flows from a. financing activities. b. investing activities. c. operating activities. d. solvent activities. Register to View AnswerSO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 149. Free cash flow provides an indication of a company's ability to a. generate cash to invest in new capital expenditures. b. generate net income. c. generate cash to pay dividends. d. both a and c. Register to View AnswerSO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 150. Free cash flow represents a. cash provided by operations less adjustments for capital expenditures and dividends b. a measurement of a company's cash generating ability c. a measure of solvency d. all of the above Register to View AnswerSO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 151. Which financial statement is used to determine cash generated from operations? a. income statement b. statement of operations c. statement of cash flows d. retained earnings statement Register to View AnswerSO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting A Further Look at Financial Statements 2-35 152. In 2010 Grider Corporation had cash receipts of $21,000 and cash disbursements of $12,000. Grider's ending cash balance at December 31, 2010 was $33,000. What was Grider's beginning cash balance? a. $24,000 b. $30,000 c. $45,000 d. $42,000 Register to View AnswerSO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 153. In 2010 Grider Corporation had cash receipts of $14,000 and cash disbursements of $8,000. Grider's ending cash balance at December 31, 2010 was $22,000. What was Grider's beginning cash balance? a. $16,000 b. $20,000 c. $30,000 d. $28,000 Register to View AnswerSO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 154. Suppose that Morgan Corporation produced and sold 4,800 laptop computers during 2010. It reported $250,000 cash provided by operating activities. In order to maintain production at 4,800 laptops, Morgan invested in $8,600 in equipment. Morgan paid $1,400 in dividends. What is Morgan's free cash flow? a. $240,000 b. $260,000 c. $257,000 d. $250,000 Register to View AnswerSO: 5, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics 155. The following information is available for Cooke Corporation: Cash receipts from operating activities Cash payments from operating activities Net cash used by investing Net cash provided by financing Net increase in cash and equivalents Cash and equivalents at start of year Cash and equivalents at year-end What is the net increase in cash and equivalents? a. $820 b. $610 c. $335 d. $1,095 (in million) $460 $120 $105 $375 ? $275 ? Register to View AnswerSO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 2-36 156. Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition The following information is available for Cooke Corporation: Cash receipts from operating activities Cash payments from operating activities Net cash used by investing Net cash provided by financing Net increase in cash and equivalents Cash and equivalents at start of year Cash and equivalents at year-end What is the cash and equivalents amount at year-end? a. $615 b. $335 c. $885 d. $1,335 (in million) $460 $120 $105 $375 ? $275 ? Register to View AnswerSO: Bloom: 5, AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 157. If Morris Corporation has a negative $131 million free cash flow, which of the following statements is most likely true? a. Morris' capital expenditures plus its cash dividends are less than its cash provided by operations. b. This free cash flow indicates that Morris is in good shape to repay its long-term obligations when they come due. c. This free cash flow indicates that Morris presents good cash generating ability to retire stock. d. Morris' cash provided by operations is less than its cash dividends plus capital expenditures. Register to View AnswerSO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Management, AICPA PC: None, IMA: Business Economics 158. Which of the following organizations issues accounting standards for countries outside the United States? a. SEC b. GAAP c. IASB d. FASB Register to View AnswerSO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 159. Generally accepted accounting principles a. are accounting rules formulated by the Internal Revenue Service. b. are sound in theory but rarely used in real life. c. are accounting rules that are recognized as a general guide for financial reporting. d. have eliminated all errors in accounting. Register to View AnswerSO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting A Further Look at Financial Statements 2-37 160. The agency of the United States Government that oversees the U.S. financial markets is the a. Internal Revenue Service b. Security Exchange Commission c. Financial Accounting Standards Board. d. International Auditing Standards Committee. Register to View AnswerSO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 161. What organization issues U.S. accounting standards? a. Security Exchange Commission. b. International Accounting Standards Committee. c. International Auditing Standards Committee. d. Financial Accounting Standards Board. Register to View AnswerSO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 162. Which one of the following is not a qualitative characteristic of useful accounting information? a. Relevance b. Reliability c. Conservatism d. Comparability Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 163. All of the following are characteristics of accounting information except a. Reliability. b. Comparability. c. Relevance. d. Flexibility. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 164. Two of the major characteristics that make accounting information useful are a. Relevance and reliability. b. Verifiability and timeliness. c. Comparability and flexibility. d. Understandability and consistency. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 165. The convention of consistency refers to consistent use of accounting principles a. among firms. b. among accounting periods. c. throughout the accounting periods. d. within industries. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 2-38 166. Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition The characteristic of consistency relates most closely to a. relevance. b. materiality. c. comparability. d. reliability. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 167. Adherence to the procedure of choosing the accounting method that will be least likely to overstate assets and income is an example of the constraint of a. relevance. b. reliability. c. conservatism. d. comparability. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 168. In order for accounting information to be relevant, it must a. have very little cost. b. help predict future events or confirm prior expectations. c. not be reported to the public. d. be used by a lot of different firms. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 169. Accounting information should be verifiable in order to enhance a. comparability. b. reliability. c. consistency. d. relevance. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 170. Accounting information is relevant to business decisions because it a. has been verified by external audit. b. is prepared on an annual basis. c. confirms or corrects prior expectations. d. is neutral in its representations. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 171. If accounting information has relevance, it is useful in making predictions about a. future IRS audits. b. new accounting principles. c. foreign currency exchange rates. d. the future events of a company. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting A Further Look at Financial Statements 2-39 172. Relevant accounting information a. is information that has been audited. b. must be reported within the operating cycle or one year, whichever is longer. c. has been objectively determined. d. is information that is capable of making a difference in a business decision. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 173. Which of the following is not a qualitative characteristic associated with reliability? a. Verifiable b. Conservatism c. Neutral d. Faithful representation Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 174. Accounting information should be neutral in order to enhance a. reliability. b. consistency. c. comparability. d. relevance. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 175. Qualitative characteristics associated with relevant accounting information are a. consistency, faithful representation, and timely. b. predict future events, confirm prior expectations, and timely. c. neutral, predict future events, and reliability. d. consistency and materiality. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 176. Qualitative characteristics associated with reliable accounting information are a. verifiable, materiality, and timely. b. faithful representation, materiality, and neutral. c. neutral, verifiable, and faithful representation. d. relevance, faithful representation, and verifiable. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 177. Which of the following statements is not true? a. Comparability means using the same accounting principles from year to year within a company. b. Reliability is the quality of information that gives assurance that it is free of error or bias. c. Relevant accounting information must be capable of making a difference in the decision. d. The FASB's overriding criterion is that the accounting rule adopted should be the one that generates the most useful financial information for making a decision. Register to View AnswerSO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 2-40 178. Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition A company can change to a new method of accounting if management can justify that the new method results in a. more meaningful financial information. b. a higher net income. c. a lower net income for tax purposes. d. less likelihood of clerical errors. Register to View AnswerSO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 179. An item is considered material if a. it doesn't costs a lot of money. b. it is of a tangible good. c. it is likely to influence the decision of an investor or creditor. d. the cost of reporting the item is greater than its benefits. Register to View AnswerSO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 180. The practice of large corporations reporting all financial statement amounts to the nearest thousand dollars is an example of the application of a. consistency. b. conservatism. c. full disclosure. d. materiality. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 181. Selecting the method or procedure that yields less net income is an application of a. consistency. b. conservatism. c. full disclosure. d. materiality. Register to View AnswerSO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 182. Expensing the purchase of a waste paper basket with an estimated useful life of 10 years is an application of a. materiality. b. consistency. c. going concern. d. economic entity. Register to View AnswerSO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 183. The writing down of inventory to market follows the constraint of a. consistency. b. materiality. c. full disclosure. d. conservatism. Register to View AnswerSO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics A Further Look at Financial Statements 2-41 184. A practical decision to expense small capital expenditures rather than record them as property, plant, and equipment and depreciate them probably is made on the basis of the characteristic of a. consistency. b. materiality. c. full disclosure. d. conservatism. Register to View AnswerSO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 185. Which of the following is a constraint in accounting? a. Comparability b. Conservatism c. Consistency d. Relevance Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 186. To determine the materiality of an account, an accountant would compare it with any of the following except a. total assets. b. total liabilities. c. total employees. d. net income. Register to View AnswerSO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 187. A common application of the conservatism constraint is the use of the 1. straight-line depreciation method for plant assets. 2. lower of cost or market method for inventories. 3. FIFO method for inventory valuation. a. b. c. d. 1 2 3 1 and 2 Register to View AnswerSO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 188. The time period assumption states that the economic life of a business can be divided into a. equal time periods. b. cyclical time periods. c. artificial time periods. d. perpetual time periods. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 189. The going concern assumption underlies the a. cost principle. b. monetary unit assumption. c. time period assumption. d. full disclosure principle. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 2-42 190. Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition The going concern assumption is inappropriate when a. the business is just starting up. b. liquidation appears likely. c. market values are higher than costs. d. the business is organized as a proprietorship. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Management, AICPA PC: None, IMA: Business Economics 191. Which accounting assumption assumes that an enterprise will continue in operation long enough to carry out its existing objectives and commitments? a. Monetary unit assumption b. Economic entity assumption c. Time period assumption d. Going concern assumption Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 192. It is assumed that the activities of Ford Motor Corporation can be distinguished from those of General Motors because of the a. going concern assumption. b. economic entity assumption. c. monetary unit assumption. d. time period assumption. Register to View AnswerSO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 193. The going concern assumption assumes that the business a. will be liquidated in the near future. b. will be purchased by another business. c. is in a growth industry. d. will remain in operation for the foreseeable future. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 194. The economic entity assumption states that economic events a. of different entities can be combined if all the entities are corporations. b. must be reported to the Securities and Exchange Commission. c. of a sole proprietorship cannot be distinguished from the personal economic events of its owners. d. of every entity can be separately identified and accounted for. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 195. The concept that a business has a reasonable expectation of remaining in business for the foreseeable future is called the a. economic entity assumption. b. monetary unit assumption. c. time period assumption. d. going concern assumption. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting A Further Look at Financial Statements 2-43 196. Which of the following is not an accounting assumption? a. Integrity b. Going concern c. Time period d. Economic entity Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 197. The time period assumption states a. the business will remain in operation for the foreseeable future. b. the life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared. c. every economic entity can be separately identified and accounted for. d. only those things that can be expressed in money are included in the accounting records. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 198. The TNT Company has five plants nationwide that cost $300 million. The current market value of the plants is $500 million. The plants will be reported as assets at a. $200 million. b. $800 million. c. $300 million. d. $500 million. Register to View AnswerSO: 7, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 199. The Mac Company has four plants nationwide that cost $400 million. The current market value of the plants is $300 million. The plants will be reported as assets at a. $400 million. b. $800 million. c. $300 million. d. $500 million. Register to View AnswerSO: 7, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 200. The cost principle requires that when assets are acquired, they be recorded at a. market value. b. the amount paid for them. c. selling price. d. list price. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 201. Valuing assets at their market value rather than at their cost is inconsistent with the: a. economic entity assumption. b. cost principle. c. time period assumption. d. full disclosure principle. Register to View AnswerSO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 2-44 202. Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition Jackson Cement Corporation reported $35 million for sales when it only had $20 million of actual sales. Which of the following characteristics of useful information has Jackson most likely violated? a. comparability b. relevance c. reliability d. consistency Register to View AnswerSO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 203. Connor Corporation hired a new accountant. Over than next four years, the accountant used four different accounting methods to depreciation for Connor's equipment. Which of the following characteristics of useful information has Connor most likely violated? a. comparability b. relevance c. reliability d. consistency Register to View AnswerSO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 204. Garrison Company prepares quarterly reports, which it distributes to all stockholders and other entities that rely on its accounting information. Which of the following is the best term for the key assumption in financial reporting that Garrison is following? a. monetary unit assumption b. going concern assumption c. economic entity assumption d. time period assumption. Register to View AnswerSO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Answers to Multiple Choice Questions 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71 72. 73. 74. 75. 76. 77. d c d d a b a d a d b d b c c d d d b b b c 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. a d a c c b d c c c d c b b c a d b a d d d 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. a b c a b b d a c b a a a b b b a b c a c b 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. b c c b b b a d a c d c d a b c d c c b c a 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. a a a a c d d c a a a b c d c c b d c d a b 166. 167. 168. 169. 170. 171. 172. 173. 174. 175. 176. 177. 178. 179. 180. 181. 182. 183. 184. 185. 186. 187. c c b b c d d b a b c a a c d b a d b b c B 188. 189. 190. 191. 192. 193. 194. 195. 196. 197. 198. 199. 200. 201. 202. 203. 204. c a b d b d d d a b c a b b c d d A Further Look at Financial Statements 2-45 BRIEF EXERCISES BE. 205 A list of financial statement items for Maloney Company includes the following: Accounts receivable $14,500 Prepaid insurance $3,400 Cash $18,400 Supplies $1,800 Short-term investments $6,200 Prepare the current assets section of the balance sheet listing the items in the proper sequence. Ans: N/A, SO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution 205 (5 min.) MALONEY COMPANY Balance Sheet (PARTIAL) Assets Current Assets Cash. ...................................................................... Short-term investments ........................................... Accounts receivables .............................................. Supplies ................................................................. Prepaid insurance.................................................... Total Current Assets............................................................ BE. 206 $ 18,400 6,200 14,500 1,800 3,400 $44,300 The following information (in millions of dollars) is available for Kline Sportswear for 2010: Sales revenue $6,300 Net income $504.6 Stock price per share $18.45 Preferred stock dividend $0 Average shares outstanding 420.5 million Compute the earnings per share for Kline Sportswear. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution 206 (5 min.) $504.6 0 420.5 = $1.20 Earnings per share = 2-46 Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition BE. 207 For each of the following events affecting the stockholders' equity of Carney, indicate whether the event would: increase retained earnings (IRE), decrease retained earnings (DRE), increase common stock (ICS), or decrease common stock (DCS). _____1. Declared a cash dividend. _____2. Issued new shares of common stock. _____3. Reported net loss of $40,000 _____4. Reported net income of $20,000. Ans: N/A, SO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution 207 1. DRE BE. 208 (5 min.) 2. ICS 3. DRE 4. IRE These selected condensed data are taken millions of dollars). Cash Accounts receivable Inventories Other current assets Total current assets Total current liabilities from a recent balance sheet of Sanson Company (in $ 2.2 10.4 18.0 11.1 $ 41.7 $ 24.8 Additional information: Current liabilities at the beginning of the year were $35.6 million. What are (a) the working capital, and (b) the current ratio? Ans: N/A, SO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution 208 a. $16.9 b. 1.68: 1 (5 min.) ($41.7 $24.8) ($41.7/$24.8) A Further Look at Financial Statements 2-47 BE. 209 Insert the qualitative characteristics listed below that are associated with relevance and reliability. Confirm Prior Expectations Verifiable Neutral RELEVANCE 1. _________________________ 2. _________________________ 3. _________________________ Timely Faithful Representation Predict Future Events RELIABILITY 1. _________________________ 2. _________________________ 3. _________________________ Ans: N/A, SO: 7, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Solution 209 (5 min.) RELIABILITY 1. Verifiable 2. Faithful Representation 3. Neutral RELEVANCE 1. Confirm Prior Expectations 2. Predict Future Events 3. Timely BE. 210 The following terms relate to the characteristics of useful information. Match the key letter of the correct term with the descriptive statement below. a. b. c. d. _____ Provide feedback Neutral Predict Relevant e. f. g. h. Faithful representation Timely Verifiability Reliability 1. Accounting information cannot be selected, prepared, or presented to favor one set of interested users over another. _____ 2. Providing information before the decision is made. _____ 3. Providing information that can be confirmed or duplicated by independent parties. _____ 4. Providing information that would make a difference in a business decision. _____ 5. Provide information that is factual. _____ 6. Helping evaluate prior decisions. Ans: N/A, SO: 7, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 2-48 Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition Solution 210 1. b 2. f BE. 211 (5 min.) 3. g 4. d 5. e 6. a For each of the independent situations described below, list the qualitative characteristic or constraint that has been violated, if any. List only one term for each case. 1. Carrier Company is in its third year of operation and has yet to issue financial statements. 2. Larsen Corporation has selected the FIFO inventory costing method during the current year. Last year it used the LIFO method and next year it plans to change to the average cost method. 3. Garner Company is carrying inventory at its current market value of $110,000. The inventory had an original cost of $135,000. 4. Reiser Company expenses some office equipment that is inexpensive even though it has a useful life that exceeds 1 year. Ans: N/A, SO: 7, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Solution 211 (5 min.) 3. No violation (conservatism) 4. No violation (materiality) 1. Relevance (timely) 2. Consistency (qualitative characteristic) Be. 212 Each of the following statements is justified by a concept or convention of accounting. Write the letter in the blank next to each statement corresponding to the concept involved. a. b. c. d. Consistency Materiality Full disclosure Conservatism 1. A company uses the lower of cost or market to value inventories. 2. This characteristic best enhances comparability of financial statements between years. 3. A merger agreed on just after the balance sheet date nevertheless is reported in the notes to the financial statement. 4. A large company rounds its financial statement figures to the nearest thousand. Ans: N/A, SO: 7, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting A Further Look at Financial Statements 2-49 Solution 212 1. d Be. 213 2. a (5 min.) 3. c 4. b Each of the following statements is justified by a characteristic or constraint of accounting. Write the letter in the blank next to each statement corresponding to the characteristic or constraint involved. a. b. c. Comparability Materiality Conservatism d. e. f. Consistency Relevance Reliability _____ 1. A company uses the same accounting principles from year to year. _____ 2. _____ 3. _____ 4. _____ 5. A company uses lower of cost or market to value inventory. A company decides to expense capital items that cost less than $500 each. All factors that could affect a decision will be considered. Outside documents will be used to verify transactions whenever possible. Ans: N/A, SO: 7, Bloom: C, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Solution 213 1. d 2. c (5 min.) 3. b 4. e. 5. f 2-50 Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition Be. 214 Presented below are the basic assumptions and principles underlying financial statements. a. Cost principle b. Economic entity assumption c. Full disclosure principle d. Going concern assumption e. Monetary unit assumption f. Time period assumption Identify the basic assumption or principle that is described below. _____ 1. The economic life of a business can be divided into artificial time periods. _____ 2. The business will continue in operation long enough to carry out its existing objectives. _____ 3. Assets should be recorded at their cost. _____ 4. Economic events can be identified with a particular unit of accountability. _____ 5. Circumstances and events that make a difference to financial statement users should be disclosed. _____ 6. Only transaction data that can be expressed in terms of money should be included in the accounting records. Ans: N/A, SO: 7, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Solution 214 1. f 2. d 3. a (5 min.) 4. b 5. c 6. E A Further Look at Financial Statements 2-51 EXERCISES Ex. 215 The following information is available for Mullen Company for the year ended December 31, 2010: Accounts payable Building not currently used Accumulated depreciation, equipment Retained earnings Common stock Intangible assets Notes payable (due in 5 years) Accounts receivable Cash Short-term investments Land Equipment Long-term investments Instructions Use the above information to prepare a classified balance sheet for the year ended December 31, 2010. Ans: N/A, SO: 1, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 2,700 9,500 4,000 16,000 4,800 2,500 7,500 1,500 2,600 1,000 10,000 7,500 400 Solution 215 (20 min.) MULLEN COMPANY Balance Sheet December 31, 2010 Assets Current Assets Cash........................................................................ Short-term investments ........................................... Accounts receivables .............................................. Total Current Assets............................................................ Investments Building not currently used...................................... Long-term investments............................................ Total Investments................................................................ Property, Plant, and Equipment Land ..................................................................... Equipment................................................................ Less Accumulated depreciation, Equipment............ Total Property, Plant and Equipment.................................. Intangible Assets ............................................................... Total Assets ...................................................................... $ 2,600 1,000 1,500 $5,100 9,500 400 $9,900 $10,000 $7,500 4,000 3,500 $13,500 2,500 $31,000 2-52 Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition Solution 215 (Cont.) Liabilities and Stockholders' Equity Current Liabilities Accounts payable ................................................... Long-term liabilities Notes payable.......................................................... Total Liabilities..................................................................... Stockholders' equity Common stock......................................................... Retained earnings.................................................... Total stockholders' equity.................................................... Total liabilities and stockholders' equity.............................. $ 2,700 7,500 $10,200 4,800 16,000 20,800 $31,000 Ex. 216 The following lettered items represent a classification scheme for a balance sheet, and the numbered items represent data found on balance sheets. In the blank next to each account, write the letter indicating to which category it belongs. A. B. C. D. E. F. G. H. Current assets Investments Property, plant, and equipment Intangible assets Current liabilities Long-term liabilities Stockholders' equity Not on the balance sheet Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Solution 216 _____ _____ _____ _____ _____ 1. C 1. 2. 3. 4. 5. 2. G (5 min.) _____ _____ _____ _____ _____ 6. A 7. D 6. 7. 8. 9. 10. 8. A Inventory Patents Prepaid Interest Mortgage Payable Land Held for Investment 9. F 10. B Accumulated Depreciation Common Stock Interest Expense Salary Payable Retained Earnings 3. H 4. E 5. G A Further Look at Financial Statements 2-53 Ex. 217 These items are taken from the financial statements of Donovan Co. at December 31, 2010. Building Accounts receivable Prepaid insurance Cash Equipment Land Insurance expense Depreciation expense Interest expense Common stock Retained earnings (January 1, 2010) Accumulated depreciation--building Accounts payable Mortgage payable Accumulated depreciation--equipment Interest payable Bowling revenues $95,800 7,600 4,680 13,840 79,400 61,200 780 7,300 2,600 52,000 40,000 45,600 7,500 88,600 18,720 3,600 17,180 Instructions Prepare a classified balance sheet. Assume that $13,600 of the mortgage payable will be paid in 2011. Ans: N/A, SO: 1, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution 217 (20 min.) DONOVAN COMPANY Balance Sheet December 31, 2010 ____________________________________________________________________________ Assets Current assets Cash ........................................................ Accounts receivable .................................. Prepaid Insurance ..................................... Total current assets ............................. Property, plant, and equipment Land ........................................................ Building....................................................... Less: Accumulated depreciation-- building............................................... Equipment.................................................. Less: Accumulated depreciation-- equipment....................................... Total assets......................................... $13,840 7,600 4,680 $ 26,120 $61,200 $95,800 45,600 79,400 18,720 50,200 60,680 172,080 $198,200 2-54 Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition Solution 217 (Cont.) Liabilities and Stockholders' Equity Current liabilities Accounts payable............................................................ Current portion of note payable......................................... Interest payable................................................................. Total current liabilities...................... Long-term liabilities Mortgage payable.................................... Total liabilities................................ Stockholders' equity Common stock.................................................................... Retained earnings ($40,000 + $6,500*)....................................................... Total stockholders' equity............... Total liabilities and Stockholders' equity................... *Net income = $17,180 $780 $7,300 $2,600 = $6,500 $ 7,500 13,600 3,600 $ 24,700 75,000 99,700 52,000 46,500 98,500 $198,200 Ex. 218 The following items are taken from the financial statements of Tracy Company for 2010: Accounts Payable Accounts Receivable Accumulated Depreciation--Video Equipment Advertising Expense Cash Common Stock Depreciation Expense Dividends Insurance Expense Note Payable (due 2013) Prepaid Insurance Rent Expense Retained Earnings (beginning) Salaries Expense Salaries Payable Service Revenue Supplies Supplies Expense Video Equipment $ 15,000 11,000 28,000 21,000 24,000 90,000 12,000 15,000 3,000 70,000 6,000 17,000 12,000 34,000 3,000 145,000 4,000 6,000 210,000 A Further Look at Financial Statements 2-55 Ex. 218 Instructions (a) (b) (c) (d) (Cont.) Calculate the net income. Calculate the balance of Retained Earnings that would appear on a balance sheet at December 31, 2010 Prepare a classified balance sheet for Tracy Company at December 31, 2010 assuming the note payable is a long-term liability. Compute the current ratio, debt to total assets ratio, and earnings per share value. The average number of shares outstanding for 2010 was 10,000. Ans: N/A, SO: 1, 2, 3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution 218 (a) (b) (20 min.) Net income = $52,000: ($145,000 $21,000 $12,000 $3,000 $17,000 $34,000 $6,000) Retained Earnings, January 1 Add: Net Income Less: Dividends Retained Earnings, December 31 $12,000 52,000 64,000 15,000 $49,000 TRACY COMPANY Balance Sheet December 31, 2010 ____________________________________________________________________________ Assets Current assets Cash .................................................................................... $ 24,000 Accounts receivable ............................................................. 11,000 Supplies ............................................................................... 4,000 Prepaid insurance ................................................................ 6,000 Total current assets ...................................................... Property, plant, and equipment Video equipment .................................................................. $210,000 Less: Accumulated depreciation--video equipment ............ 28,000 Total assets .................................................................. (c) 45,000 182,000 $227,000 2-56 Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition Solution 218 (Cont.) Liabilities and Stockholders' Equity Current liabilities Accounts payable ................................................................ $ 15,000 Salaries payable .................................................................. 3,000 Total current liabilities ................................................... Long-term liabilities Note payable ........................................................................ Total liabilities ............................................................... Stockholders' equity Common stock...................................................................... $90,000 Retained earnings ................................................................ 49,000 Total liabilities and stockholders' equity ........................ (d) Current ratio: $45,000 $18,000 = 2.5:1 Debt to total assets ratio: $88,000 $227,000 = 38.8% Earnings per share: $49,000 10,000= $4.90 18,000 70,000 88,000 139,000 $227,000 Ex. 219 The following items are taken from the financial statements of Grove Company for 2010: Accounts Payable Accounts Receivable Accumulated Depreciation Bonds Payable Cash Common Stock Cost of Goods Sold Depreciation Expense Dividends Equipment Interest Expense Patents Retained Earnings, January 1 Salaries Expense Sales Revenue Supplies Instructions (a) Prepare an income statement and a classified balance sheet for Grove Company. (b) Compute the following ratios and values: 1. Current ratio 2. Debt to total assets ratio 3. Working capital 4. Earnings per share (Grove's average number of shares outstanding during the year was 5,000.) Ans: N/A, SO: 1, 2, 4, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting $18,500 4,000 4,800 18,000 24,000 25,000 13,000 4,800 5,300 48,000 2,500 7,500 16,000 5,200 36,500 4,500 A Further Look at Financial Statements 2-57 Solution 219 (a) (25 min.) GROVE COMPANY Income Statement For the Year Ended December 31, 2010 Sales revenues Cost of goods sold Gross profit Operating expenses Depreciation expense Salaries expense Income from operations Other expenses and losses Interest expense Net income GROVE COMPANY Balance Sheet December 31, 2010 $36,500 13,000 23,500 $4,800 5,200 10,000 13,500 2,500 $ 11,000 Assets Current assets Cash ............................................................................................ Accounts receivable .................................................................... Supplies ...................................................................................... Total current assets ............................................................ Property, plant, and equipment Equipment ................................................................................... Less: Accumulated depreciation--Equipment ............................ Intangible assets Patents ........................................................................................ Total assets ........................................................................ Liabilities and Stockholders' Equity Current liabilities Accounts payable ........................................................................ Long-term liabilities Bonds payable ............................................................................ Total liabilities ..................................................................... Stockholders' equity Common stock............................................................................. Retained earnings ....................................................................... Total liabilities and stockholders' equity ............................. *Retained earnings = $21,700 ($16,000 + $11,000 $5,300). (b) 1. 2. 3. 4. Current ratio: $32,500 $18,500 = 1.76:1 Debt to total assets ratio: $36,500 $83,200 = 43.9% Working capital $32,500 $18,500 = $14,000 Earnings per share ( $11,000 5,000) = $2.20 $24,000 4,000 4,500 32,500 $48,000 4,800 43,200 7,500 $83,200 $18,500 18,000 36,500 $25,000 21,700* 46,700 $83,200 2-58 Ex. 220 Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition These financial statement items are for Snyder Corporation at year-end, July 31, 2010. Salaries payable Salaries expense Utilities expense Equipment Accounts payable Commission revenue Rent revenue Long-term note payable Common stock Cash Accounts receivable Accumulated depreciation Dividends Depreciation expense Retained earnings (beginning of the year) $ 2,580 48,700 22,600 21,000 4,100 61,100 8,500 1,800 16,000 24,200 9,780 6,000 5,000 4,000 35,200 Instructions (a) Prepare an income statement and a retained earnings statement for the year. Snyder corporation did not issue any new stock during the year. (b) Prepare a classified balance sheet at July 31. Ans: N/A, SO: 1, 3, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution 220 (a) (25 min.) SNYDER CORPORATION Income Statement For the Year Ended July 31, 2010 ______________________________________________________________________________ Revenues Commission revenue.................................... $61,100 Rent revenue................................................ 8,500 Total revenues............................. $69,600 Expenses Salaries expense........................................... 48,700 Utilities expense............................................ 22,600 Depreciation expense.................................... 4,000 Total expense................................ 75,300 Net loss........................................................... $( 5,700) SNYDER CORPORATION Retained Earnings Statement For the Year Ended July 31, 2010 ______________________________________________________________________________ Retained earnings, August 1, 2009.................... $35,200 Less: Net loss............................................................ $5,700 Dividends......................................................... 5,000 10,700 Retained earnings, July 31, 2010........................ $24,500 A Further Look at Financial Statements 2-59 Solution 220 (b) (25 min.) SNYDER CORPORATION Balance Sheet July 31, 2010 ______________________________________________________________________________ Assets Current assets Cash $24,200 Accounts receivable 9,780 Total current assets $33,980 Property, plant, and equipment Equipment $21,000 Less: Accumulated depreciation 6,000 15,000 Total assets $48,980 Liabilities and Stockholders' Equity Current liabilities Accounts payable $ 4,100 Salaries payable 2,580 Total current liabilities Long-term note payable Total liabilities Stockholders' equity Common stock 16,000 Retained earnings 24,500 Total stockholders' equity Total liabilities and stockholders' equity $6,680 1,800 8,480 40,500 $48,980 Ex. 221 These items are taken from the financial statements of Drew Corporation for 2010. Retained earnings (beginning of year) Utilities expense Equipment Accounts payable Cash Salaries payable Common stock Dividends Service revenue Prepaid insurance Repair expense Depreciation expense Accounts receivable Insurance expense Salaries expense Accumulated depreciation $33,000 2,000 56,000 15,300 14,900 3,000 13,000 14,000 77,000 3,500 1,800 3,300 14,200 2,200 47,000 17,600 2-60 Ex. 221 Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition (Cont.) Instructions Prepare an income statement, a retained earnings statement, and a classified balance sheet as of December 31, 2010. Ans: N/A, SO: 1, 3, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution 221 (25 min.) DREW CORPORATION Income Statement For the Year Ended December 31, 2010 ______________________________________________________________________________ Revenues Service revenue..................................... Expense Salaries expense................................................... Depreciation expense........................................... Insurance expense................................................. Utilities expense..................................................... Repair expense...................................................... Total expenses.................................. Net income........................................................ $77,000 $47,000 3,300 2,200 2,000 1,800 56,300 $20,700 DREW CORPORATION Retained Earnings Statement For the Year Ended December 31, 2010 ______________________________________________________________________________ Retained earnings, January 1, 2009................... $33,000 Add: Net income............................................................................... 20,700 53,700 Less: Dividends............................................................................... 14,000 Retained earnings, December 31, 2010.............. $39,700 DREW CORPORATION Balance Sheet December 31, 2010 ______________________________________________________________________________ Assets Current assets Cash..................................................................... $14,900 Accounts receivable............................................. 14,200 Prepaid insurance................................................ 3,500 Total current assets......................... $32,600 Property, plant, and equipment Equipment.............................................................. 56,000 Less: Accumulated depreciation.......................... 17,600 38,400 Total assets........................................ $71,000 A Further Look at Financial Statements 2-61 Solution 221 (Cont.) Liabilities and Stockholders' Equity Current liabilities Accounts payable.......................................... $15,300 Salaries payable............................................. 3,000 Total current liabilities............................... Stockholders' equity Common stock................................................ 13,000 Retained earnings........................................... 39,700 Total stockholders' equity......................... Total liabilities and stockholders' equity.... Ex. 222 $18,300 52,700 $71,000 The Dobson Company gathered the following condensed data for the year ended December 31, 2010: Cost of goods sold $ 710,000 Net sales 1,279,000 Administrative expenses 239,000 Interest expense 68,000 Dividends paid 38,000 Selling expenses 45,000 Instructions Prepare an income statement for the year ended December 31, 2010. Ans: N/A, SO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution 222 (10 min.) DOBSON COMPANY Income Statement For the Year Ended December 31, 2010 Revenues Net sales ........................................................................................ Expenses Cost of goods sold ......................................................................... Selling expenses ............................................................................ Administrative expenses ................................................................ Interest expense ............................................................................ Total expenses ...................................................................... Net income .................................................................................... $710,000 45,000 239,000 68,000 1,062,000 $ 217,000 $1,279,000 2-62 Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition Ex. 223 The following data are taken from the financial statements of Rosen, Inc. as of the end of the year 2010. The data are in alphabetical order. Accounts payable $ 28,000 Accounts receivable 66,000 Cash 54,000 Gross profit 160,000 Income before income taxes 54,000 Net income Other current liabilities Total assets Total liabilities Wages payable $ 48,000 17,000 250,000 200,000 5,000 Additional information: The average common shares outstanding during the year was 40,000. Instructions Compute the following: (a) Current ratio. (b) Working capital. (c) Earnings per share. (d) Debts to total assets ratio. Ans: N/A, SO: 2, 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution 223 (a) (b) (5 min.) Current ratio = Current assets Current liabilities = $120,000 $50,000 = 2.4 : 1 Working capital = Current assets Current liabilities = $120,000 $50,000 = $70,000 (c) Earnings per share = Net incomePreferred Stock dividends Average common shares outstanding = $48,000 40,000 = $1.20 (d) Debt to total assets ratio = Total debt Total assets = $200,000 $250,000 = 80% Ex. 224 Use the following data to calculate the liquidity and profitability ratios listed below. Average common shares outstanding $10,000 Capital expenditures 20,000 Cash provided by operations 28,000 Dividends paid 5,000 Current assets 150,000 Instructions Compute the following: (a) Current ratio. (b) Working capital. (c) Earnings per share. Current liabilities Net income Net sales Total liabilities Total assets $100,000 21,000 150,000 105,000 175,000 (d) Debt to total assets ratio. (e) Free cash flow. Ans: N/A, SO: 2, 4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics A Further Look at Financial Statements 2-63 Solution 224 (a) (b) (c) (d) (e) (15 min.) Current ratio = Current assets Current liabilities = $150,000 $100,000 = 1.5 : 1 Working capital = Current assets Current liabilities = $150,000 $100,000 = $50,000 Earnings per share ratio = (Net income Preferred stock dividends) Average common share outstanding = $21,000 10,000 = $2.10 Debt to total assets ratio = Total debt Total assets = $105,000 $175,000 = 60% Free cash flow = Cash provided by operations Capital expenditures Dividends paid = $28,000 $20,000 $5,000 = $3,000. The data are 500,000 20,000 7,000 169,000 325,000 Ex. 225 The following data are taken from the financial statements of Edington Company. in alphabetical order. Accounts payable $ 28,000 Net sales Accounts receivable 65,000 Other current liabilities Average common shares O/S 20,000 Salaries payable Cash 56,000 Stockholders' equity Gross profit 190,000 Total assets Net income $ 50,000 Instructions Compute the following: (a) Current ratio. (b) Working capital. (c) Earnings per share. (d) Debt to total assets ratio. Ans: N/A, SO: 2, 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution 225 (a) (10 min.) Current ratio = Current assets Current liabilities = $121,000 $55,000 = 2.2 : 1 Working capital = Current assets Current liabilities = $121,000 $55,000 = $66,000 Earnings per share = Net income Average common shares outstanding = $50,000 20,000 = $2.50 Debt to total assets ratio = Total debt Total assets = $156,000 $325,000 = 48% (Total debt = Total assets Stockholders' equity = $325,000 $169,000) (b) (c) (d) 2-64 Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition Ex. 226 Comparative financial statement data for Arthur Corporation and Lancelot Corporation, two competitors, appear below. All balance sheet data are as of December 31, 2010. Arthur Corporation 2010 $1,850,000 1,175,000 303,000 9,000 85,000 427,200 532,000 66,325 158,500 Lancelot Corporation 2010 $620,000 365,000 98,000 3,800 36,800 130,336 139,728 35,348 29,620 $41,000 $20,000 $15,000 50,000 Net sales Cost of goods sold Operating expenses Interest expense Income tax expense Current assets Plant assets (net) Current liabilities Long-term liabilities Additional Information: Cash from operating activities $153,000 Capital expenditures $90,000 Dividends paid $36,000 Average number of shares outstanding 100,000 Instructions (a) Comment on the relative profitability of the companies by computing the net income and earnings per share for each company for 2010. (b) Comment on the relative solvency of the companies by computing the debt to total assets ratio and the free cash flow for each company for 2010. Ans: N/A, SO: 2, 4, 5, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution 226 (a) (15 min.) Arthur Company appears to be more profitable. Its net income for 2010 is $278,000 ($1,850,000 $1,175,000 $303,000 $9,000 $85,000). Its earnings per share is $2.78 ($278,000 100,000 shares outstanding). Lancelot's net income for 2010 is $117,200 ($620,000 $365,000 $98,000 $3,800 $36,800). Its earnings per share is $2.34 ($117,200 50,000 shares outstanding). Arthur appears to be slightly more solvent. Arthur's 2010 debt to total assets ratio of 23.4% ($224,825 $959,200)a is lower than Lancelot's ratio of 24.1% ($64,968 $270,064)b. The lower the percentage of debt to total assets, the lower the risk that a company may be unable to pay its debts as they income due. Another measure of solvency, free cash flow, also indicates that Arthur is more solvent. Arthur had $27,000 ($153,000 $90,000 $36,000) of free cash flow while Lancelot had only $6,000 ($41,000 $20,000 $15,000). (b) A Further Look at Financial Statements 2-65 Solution 226 a (Cont.) $224,825 ($66,325 + $158,500) is Arthur's 2010 total liabilities $959,968 ($427,200 + $532,000) is Arthur's 2010 total assets. b $64,968 ($35,348 + $29,620) is Lancelot's 2010 total liabilities $270,064 ($130,336 + $139,728) is Lancelot's 2010 total assets. Ex. 227 For each of the ratios listed below, indicate by the appropriate code letter, whether it is a liquidity ratio, a profitability ratio, or a solvency ratio. Code: L = P = S = _____ _____ _____ _____ _____ Liquidity ratio Profitability ratio Solvency ratio 1. Price-earnings ratio 2. Free cash flow 3. Debt to total assets ratio 4. Earnings per share 5. Current ratio Ans: N/A, SO: 2, 4, 5, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution 227 P S S P L 1. 2. 3. 4. 5. (5 min.) Price-earnings ratio Free cash flow Debt to total assets ratio Earnings per share Current ratio 2-66 Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition Ex. 228 The following information is available from the annual reports of Marin Company and Nance Company. (amounts in millions) Marin Nance Sales $26,510 $34,512 Gross profit 6,610 8,887 Net income 565 1,271 Current assets 11,712 28,447 Beginning total assets 17,102 33,130 Ending total assets 22,088 36,167 Current liabilities 7,966 14,950 Total liabilities 16,136 31,222 Average common shares outstanding 125 240 Preferred stock dividends paid -0-0Instructions (a) For each company, compute the following ratios: 1. Current ratio 2. Debt to total assets ratio 3. Earnings per share (b) Based on your calculations, discuss the relative liquidity, solvency, and profitability of the two companies. Ans: N/A, SO: 2, 4, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution 228 (a) (12 min.) Marin 1.47:1 ( $11,712 $7,966) 73% ($16,136 22,088) $4.52 ($565 125) Nance______ 1.90:1 ($28,447 $14,950) 86% ($31,222 $36,167) $5.30 ($1,271 240) 1. Current ratio 2. Debt to total assets ratio 3. Earnings per share (b) Based on the current ratio, Nance is more liquid than Marin since its current ratio (1.90:1) is 29% higher than Marin's ratio (1.47:1). However, Marin would be considered more solvent than Nance since its debt to total assets ratio (73%) is 15% lower than Nance's debt ratio (86%). A lower debt to total assets ratio indicates a company is more solvent and better able to survive over a long period of time. Nance is more profitable than Marin since its earnings per share and is higher than Marin's respective vaules. Nance's earnings per share ($5.30) is 17.3% higher than Marin's value. A Further Look at Financial Statements 2-67 Ex. 229 You are provide with the following information for Trent Company, effective as of its April 30, 2010, year-end. Accounts, payable Accounts receivable Building, net of accumulated depreciation Cash Common stock Cost of goods sold Current portion of long-term debt Depreciation expense Dividends paid during the year Equipment, net of accumulated depreciation Income tax expense Income taxes payable Interest expense Inventories Land Long-term debt Prepaid expenses Retained earnings, beginning Revenues Selling expenses Short-term investments Wages expense Wages payable $ 834 810 1,537 770 900 1,500 450 335 475 1,220 265 265 400 967 1,600 3,500 12 1,600 5,600 310 1,200 700 222 Instructions Prepare an income statement and a retained earnings statement for Trent Company for the year ended April 30, 2010. Ans: N/A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution 229 (15 min.) TRENT COMPANY Income Statement For the Year Ended April 30, 2010 ______________________________________________________________________________ Revenue............................................................... Expense Cost of good sold.................................................. Wages expense.................................................... Interest expense.................................................... Depreciation expense........................................... Selling expenses................................................... Income tax expense.............................................. Total expenses...................................... Net income.......................................................... $1,500 700 400 335 310 265 3,510 $2,090 $5,600 2-68 Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition Solution 229 (Cont.) TRENT COMPANY Retained Earnings Statement For the Year Ended April 30, 2010 ______________________________________________________________________________ Retained earnings, May 1, 2009............................................ $1,600 Add: Net income................................................................... 2,090 475 Less: Dividends.................................................................... 3,690 Retained earnings, April 30, 2010......................... $3,215 Ex. 230 The chief financial officer (CFO) of SuperClean Corporation requested that the accounting department prepare a preliminary balance sheet on December 30, 2010, so that the CFO could get an idea of how the company stood. He knows that certain debt agreements with its creditors require the company to maintain a current ration of at least 2:1. The preliminary balance sheet is as follows. SUPERCLEAN CORPORATION Balance Sheet December 30, 2010 Current assets Cash Accounts receivable Prepaid insurance $30,000 25,000 15,000 $ 70,000 Current liabilities Accounts payable Salaries payable Long-term liabilities Notes payable Total liabilities Stockholders' equity Common stock Retained earnings 100,000 140,000 $270,000 90,000 130,000 $ 25,000 15,00 0 $ 40,000 Property, plant, and equipment (net) Total assets 200,00 0 $270,00 0 40,00 0 Total liabilities and stockholders equity Instructions (a) Calculate the current ratio and working capital based on the preliminary balance sheet. (b) Based in the results in (a), the CFO requested that $20,000 of cash be used to pay off the balance of the accounts payable account on December 31, 2010. Calculate the new current ratio and working capital after the company takes these actions. Ans: N/A, SO: 4, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics A Further Look at Financial Statements 2-69 Solution 230 (a) (10 min.) $70,000* $40,000** = 1.75:1 Current ratio = Working capital = $70,000 $40,000 = $30,000 (b) Current ratio = $50,000* $20,000** = 2.5:1 Working capital = $50,000 $20,000 = $30,000 *$70,000 $20,000 **$40,000 $20,000 COMPLETION STATEMENTS 231. The rules and practices that are recognized as general guides for financial reporting are called ______________ _____________ _______________. Ans: N/A, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: FSA 232. In accounting, ____________ results when different companies use the same accounting principles. Ans: N/A, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 233. The constraint of _______________ refers to items in financial statements that are likely to influence the decision of a reasonably prudent investor or creditor. Ans: N/A, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 234. The constraint of _______________ means that when preparing financial statements, a company should choose the accounting method that will be least likely to overstate assets and income. Ans: N/A, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 235. The earnings per share value is calculated by dividing net income preferred stock dividends by _______________ ______________ ______________. Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 236. Assets that are expected to be converted to cash or used in the business within a relatively short period of time are called ______________. Ans: N/A, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 237. The ________________ is current assets divided by current liabilities. Ans: N/A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 2-70 Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition 238. A measurement to provide additional insight regarding a company's cash-generating ability is _____________. Ans: N/A, SO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics Answers to Completion Statements 231. 232. 233. 234. 235. 236. 237. 238. generally accepted accounting principles comparability materiality conservatism average common shares outstanding current assets current ratio free cash flow MATCHING 239. Match the items below by entering the appropriate code letter in the space provided. A. B. C. D. E. F. _____ _____ _____ _____ _____ _____ _____ _____ _____ Relevance Liquidity ratios Comparability Consistency Intangible assets Free cash flow G. H. I. J. K. L. Working capital Current ratio Earnings per share Solvency ratios Economic entity assumption Materiality 1. Measures of the ability of the company to survive over a long period of time. 2. Current assets divided by current liabilities. 3. Information that has a bearing on a decision. 4. Economic events can be identified with a particular unit of accountability. 5. An item important enough to influence a prudent investor. 6. Same accounting principles and methods used from year to year within a company. 7. Cash from operating activities less capital expenditures and cash dividends. 8. Noncurrent assets that do not have physical substance. 9. (Net income preferred stock dividends) divided by average common shares outstanding. _____ 10. Different companies using the same accounting principles. _____ 11. Measures of the short-term ability of the enterprise to pay its maturing obligations. _____ 12. The excess of current assets over current liabilities. Ans: N/A, SO: 1-7, Bloom: K, Difficulty: Easy, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics A Further Look at Financial Statements 2-71 Answers to Matching 1. 5. 9. J L I 2. 6. 10. H D C 3. 7. 11. A F B 4. 8. 12. K E G SHORT-ANSWER ESSAY QUESTIONS S-A E 240 Identify the two parts of stockholders' equity in a corporation and indicate the purpose of each. Ans: N/A, SO: 1, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting Solution 240 The two parts of stockholders' equity and the purpose of each are: (1) Common stock is used to record investments of assets in the business by the owners (stockholders). (2) Retained earnings is used to record net income retained in the business. S-A E 241 What do these classes of ratios measure? (a) Liquidity ratios. (b) Profitability ratios. (c) Solvency ratios. Ans: N/A, SO: 2,4, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Business Economics Solution 241 (a) Liquidity ratios measure the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash. (b) Profitability ratios measure the income or operating success of a company for a given period of time (c) Solvency ratios measure the company's ability to survive over a long period of time. S-A E 242 Please give the definition of current assets, current liabilities and the current ratio. Ans: N/A, SO: 1, 4, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Business Economics 2-72 Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition Solution 242 Current assets are cash or other resources that are reasonably expected to be realized in cash or sold or consumed in the business within one year or the operating cycle, whichever is longer. Current liabilities are obligations reasonably expected to be paid from the existing current assets or through the creation of other current liabilities within the next year or operating cycle, whichever is longer. The current ratio is a measure used to evaluate a company's liquidity and short-term debt paying ability, computed by dividing current assets by current liabilities. S-A E 243 Are short-term creditors, long-term creditors, and stockholders primarily interested in the same characteristics of a company? Explain. Ans: N/A, SO: 2, 4, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Business Economics Solution 243 The three parties are not primarily interested in the same characteristics of a company. Shortterm creditors are primarily interested in the liquidity of the enterprise. In contrast, long-term creditors and stockholders are primarily interested in the profitability and solvency of the company. S-A E 244 Relevance and reliability are two characteristics of useful accounting information. (a) Briefly define each term. (b) Why are these characteristics important to users of financial statements? Ans: N/A, SO: 7, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting Solution 244 Relevance represents the quality of information that makes a difference in a decision. In other words, the user has information that is meaningful for the decision at hand. Relevance includes information that helps predict future events and provides feedback about prior predictions. Reliability represents the quality of information that provides assurance that it is free of error and bias. In other words, the information can be relied upon because it is objective and accurate. Reliability includes a faithful representation of what is being reported and neutral accounting information. Relevance and reliability are important to the users of financial statements because these users do not have first hand knowledge of the operations of the business. In order for these users to make decisions, they must have assurances that the information provided by the company is relevant makes a difference and reliable means what the company says. Without these assurances, the users cannot have confidence in the information provided to them. A Further Look at Financial Statements 2-73 S-A E 245 You and the CEO of your company are waiting on an elevator. You are going to the 25 th floor and the CEO is going to the 35th floor. The CEO says "What is the difference between consistency and comparability?" You have two minutes to respond. What will you say? Ans: N/A, SO: 7, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting Solution 245 You have asked an excellent question and I am glad to respond. Consistency means that a company uses the same accounting principles and methods each year. Decision makers can work with accounting information, knowing that the company is consistently applying with the principles and methods it has chosen. This is why it is so important that we carefully make these choices. There are procedures for making changes and communicating those changes to financial statement users. Comparability allows users to compare accounting information of different companies. The financial statement footnotes identify many of the principles and procedures that companies use. Comparisons can be made for companies within certain industries or other groupings. S-A E 246 Comparability and consistency are qualitative characteristics that make accounting information useful for decision-making purposes. Briefly explain the difference between these two characteristics and explain how they are related to each other. Ans: N/A, SO: 7, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting Solution 246 Comparability results when different companies use the same accounting principles and methods, while consistency results when one company uses the same principles and methods from year to year. The two characteristics are related because information must possess relevance, reliability, comparability, and consistency to achieve the highest level of decision usefulness. In addition, accounting information for two entities cannot be comparable unless both companies practice consistency in their choice of principles and methods. S-A E 247 List the four characteristics of useful information. Ans: N/A, SO: 7, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting Solution 247 To be useful, information should possess these qualitative characteristics: relevance, reliability, comparability and consistency. 2-74 Test Bank for Financial Accounting: Tools for Business Decision Making, Fifth Edition S-A E 248 What are four of the six characteristics that explain relevance and reliability? Ans: N/A, SO: 7, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting Solution 248 When information is relevant it helps predict future events, it provides feedback about prior expectations and it must be timely. For information to be reliable it must be: verifiable or provable, a faithful representation or factual, and neutral where information cannot be selected, prepared, or presented to favor one set of interested users over another. S-A E 249 (Ethics) Many bonus plans are based upon the attainment of some specified short-term goal. For example, sales personnel at Metal Crafters are given a bonus of 5% of the amount by which their sales exceed $100,000. Sometimes the attainment of these goals is achieved by methods detrimental to the long-term needs of the company. Sales representative Sara Crown, for example, finds herself tempted to court certain customers that place large orders, even though she knows they may not be able to pay. She complains that the bonus system itself is unethical. Required: Is a bonus system like the one at Metal Crafters unethical? Explain. Ans: N/A, SO: 4, Bloom: E, Difficulty: Medium, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Decision Modeling, AICPA PC: Communication, IMA: Performance Measurement Solution 249 The bonus system described is not necessarily unethical, but it may be short-sighted. When employees are able to identify and address larger concerns (such as Sara's identification of the problem regarding the ability of a customer to pay) then such issues should probably become part of the system of bonuses. It is very difficult to set a bonus plan that allows for all contingencies, however. Since sales representatives are hired to generate sales, they most often are rewarded based on generating sales. Some of the future events, such as customers defaulting on payments, may not be the fault of the sales representative. For Sara Crown to create sales by soliciting customers with a poor payment record would be unethical on her part. She is required to use integrity, even when the possibility exists of her not using it, and even when she might gain by not using it. A Further Look at Financial Statements 2-75 S-A E 250 (Communication) Sunshine Sugar grows sugar cane in Florida, California, and Hawaii. Its investment in land to grow sugar exceeds $2 million. Currently, land whose original cost was more than $300,000 in Florida is threatened by plans to flood the Everglades to reclaim the wetlands. Sunshine plans to fight vigorously to keep its land in production, particularly because most of the rest of its land is in California, which is threatened by water shortages. The land in Florida is also significantly more productive than that in California, and the wages paid to workers to process the sugar cane are substantially less. Current plans include litigation to prevent government seizure of the land, an extensive public education campaign, and intense lobbying efforts. Required: Sunshine has determined that a footnote disclosure should be made in the financial statements to alert the investors of the threat to the land. Carefully consider how much of the above information is appropriate for inclusion in the footnote. Write the footnote. Ans: N/A, SO: 7, Bloom: E, Difficulty: Medium, Min: 5, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting Solution 250 NOTE: A portion of the most valuable land owned by the company is the subject of plans by the Environmental Protection Agency to flood the Florida Everglades to "reclaim" the so-called wetlands. The company is working with the United States Department of Agriculture and other agencies to prevent this result. The company will be spending money to educate the public about this issue. Currently, land costing around $300,000 is at risk. Usually the details of exactly why the land is so valuable to the company are not appropriate for inclusion. Footnotes need not be emotional or dramatic, either. There should be a systematic listing of at least the minimum amount the public has a right to know--how much land is at risk, and the nature of the risk. ... View Full Document

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