17 - 17 Student 1 Accounting is an easy subject for people...

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Unformatted text preview: 17 Student: _______________________________________________________________________________________ 1. Accounting is an easy subject for people to understand because almost everyone is exposed to basic accounting concepts in their everyday life. True False 2. Although managers who work for large firms must know something about accounting, people who run small businesses only need to know the basics of bookkeeping. True False 3. It is impossible to run a company effectively without the ability to read and understand basic accounting reports and financial statements. True False 4. With increased computer technology, the ability to read and understand financial statements is no longer an important skill for managers. True False 5. Accounting provides information about the financial condition and operating performance of a firm. True False 6. The sole purpose of accounting is to help managers evaluate the financial condition of the firm so that they may make better pricing decisions. True False 7. Inputs to the accounting system include sales documents. True False 8. Purchasing insurance, paying employees, and using supplies are examples of financial transactions. True False 9. Accounting provides financial information that can be useful to owners, creditors, suppliers, employees, and competitors of an organization. True False 10. Accountants do the work involved in recording financial events and transactions, but the actual classifying and interpreting of this data is left to financial managers. True False 11. Accounting involves both the recording and the interpreting of financial events. True False 12. In an effort to maintain a competitive advantage, firms do not share accounting information with people outside of the firm. True False 13. The U.S. government is a user of a firm's accounting information. True False 14. A business manager who keeps his/her customers satisfied can be successful without having a great deal of knowledge about accounting practices. True False 15. Jeremy operates his own small business, but he doesn't want to be bothered with accounting information. He tells his friends, "All I need accounting for is to prepare my income tax return for my business. I'll hire someone to do that for me." Jeremy's attitude would be disastrous if he managed a large firm, but is a reasonable view for a small business owner. True False 16. Good decisions are based on good information. Organizations need accounting—to provide good financial information. True False 17. A firm's financial statements represent a health report regarding the condition of the firm. True False 18. As noted in the story about the Bakery Barn, CPA Sean Perich's small business venture, trying to be everything for your business is often an impossible task. Due to the fact that solid accounting procedures are one of the lifelines for your business, it makes sense to hire an accountant even if you are knowledgeable about that functional unit of the business. True False 19. Referring to an accounting system, inputs refers to events and transactions that occur within the business, while outputs refers to the journal entries and ledger categorization that occurs after the events and transactions are recorded. True False 20. Government organizations such as the IRS and other government regulatory agencies are interested in a firm's accounting information in order to help the firm strategize about ways to cut costs in order to minimize net income before taxes. True False 21. There are five key working areas in accounting: financial accounting, managerial accounting, auditing, tax accounting, and government and not-for-profit accounting. True False 22. Accounting information is not relevant for nonprofit organizations. True False 23. Churches, schools, and charitable organizations all hire accountants. True False 24. The accounting profession is divided into two main fields: bookkeeping and auditing. True False 25. Budget preparation is one aspect of managerial accounting. True False 26. The work of a certified management accountant is intended to enable people outside of the organization to make investment decisions. True False 27. Activities of managerial accountants include measuring and reporting the costs of production, marketing and other functions within the organization. True False 28. Financial accounting and managerial accounting are similar in that they both provide information intended primarily for people inside the organization. True False 29. Financial accounting involves activities such as preparing budgets and measuring production costs. True False 30. Financial accounting is used to provide information and analysis managers within the organization can use to assist them in decision making. True False 31. Financial accountants prepare reports for owners, creditors, suppliers, and others outside of the organization. True False 32. A firm's annual report is a yearly statement of the financial condition, progress, and expectations of the organization during one year. True False 33. An individual who provides accounting services to individuals and businesses on a fee basis is referred to as a private accountant. True False 34. All firms with more than four employees should have a full-time accountant. True False 35. The job of reviewing and evaluating the records used to prepare a company's financial statements is referred to as auditing. True False 36. Independent audits are prepared by accountants within the organization to ensure that proper accounting procedures are followed. True False 37. An independent audit is an evaluation and unbiased opinion about the accuracy of a company's financial statements. True False 38. A tax accountant is responsible for preparing tax returns and developing tax strategies. True False 39. An accountant who has a bachelor's degree, two years of experience in internal auditing and who has passed an exam by the Institute of Internal Auditors can become recognized as a certified internal auditor. True False 40. The Internal Revenue Service is responsible for establishing accounting standards used by accountants working in government accounting. True False 41. Citizens and special interest groups often have interest in the information generated by government accounting. True False 42. GAAP refers to a set of standards concerning accounting principles that were established by the Financial Accounting Standards Board. True False 43. Information contained in a firm's annual report largely represents work done by managerial accountants. True False 44. A series of high-profile scandals in the early 2000s put the accounting profession under intense scrutiny. True False 45. Accounting is not important for nonprofit organizations since financial data is not critical to their success. True False 46. Accounting, as the language of business, is solely concerned with providing information useful to managers of profit-seeking firms. True False 47. As a certified public accountant, you would be working in the area of managerial accounting. True False 48. Jamal is an accountant employed full-time by The Barkley Company. Jamal is an example of a public accountant. True False 49. Managers who are concerned about keeping costs under controlshould be very interested in the information and advice provided by their company's managerial accountants. True False 50. Recent accounting scandals raised serious questions about the legitimacy of an accounting firm performing both auditing and consulting work for the same company. True False 51. As a certified public accountant (CPA), Kay might become involved in helping clients select appropriate accounting computer software for their firm. True False 52. In large companies, certified internal auditors are usually responsible for preparing tax returns and developing tax strategies for businesses. True False 53. According to the "Legal Briefcase" box in Chapter 17, a forensic accountant investigates company records for evidence of fraud. True False 54. As the burden of taxes grows, the role of the auditor becomes increasingly important to the organization. True False 55. The Sarbanes-Oxley Act strengthens the protection for whistleblowers who report wrongful actions of company officers. True False 56. The Sarbanes-Oxley Act prohibits accounting firms from providing certain non-auditing work (such as consulting services) to companies they audit. True False 57. Because each business is unique, the accounting profession recognizes that the accounting principles followed by one company may need to be completely different from the accounting principles followed by another firm. True False 58. Derek has a bachelor's degree in accounting and additional training in tax law. He is responsible for preparing tax returns and developing tax strategies for his employer, and has done so for the past seven years. Derek is a certified government accountant. True False 59. Citywide Insurance Corporation's internal accountants can prepare an audit for the company. True False 60. The Financial Accounting Standards Board only sets standards for accountants in the private sector; however, government accountants have no universally accepted procedures that they must follow. True False 61. Martha is a member of a conservative political group that wants to identify and publicize examples of wasteful government spending. The type of accounting information Martha and her group will follow most closely is provided by certified public accountants. True False 62. Bookkeeping is part of the accounting cycle, but accounting goes far beyond the activities involved in bookkeeping. True False 63. A major part of a bookkeeper's job is to interpret financial data and suggest strategies for improving the firm. True False 64. After recording a business's transactions, bookkeepers usually classify the recorded transactions into groups with common characteristics. True False 65. A bookkeeper's first task is to record the firm's transactions in a journal. True False 66. The books where accounting data are first entered are called ledgers. True False 67. Double-entry bookkeeping requires that every transaction be recorded in two places. True False 68. Double-entry bookkeeping can help identify a recording error made by a bookkeeper. True False 69. A journal is where the initial record of a day's transactions is entered. True False 70. The accounting book that provides all the information about a single account in one place is called the ledger. True False 71. At present, accounting software packages have proven to be too complex and expensive to be useful for owners of small businesses. True False 72. The accounting cycle is a six-step procedure that results in the preparation and analysis of major financial statements. True False 73. Posting is a step in the accounting cycle that involves transferring information from the journal into the appropriate accounts in a ledger. True False 74. There are two major financial statements prepared at the completion of the accounting cycle: the journal and the ledger. True False 75. The accounting cycle usually involves the work of both the bookkeeper and the accountant. True False 76. The purpose of a trial balance is to prepare a practice balance sheet. True False 77. One of the statements prepared in the accounting cycle is the statement of cash flows. True False 78. Many businesses now use computers and accounting software to simplify the mechanical aspects involved in accounting. True False 79. Accounting software for small businesses has become so sophisticated that most small business owners will never need to consult with an actual accountant or understand accounting information themselves. True False 80. Accounting software has proven to be especially helpful for small business owners. True False 81. Carol has worked as a bookkeeper for a small clothing store for almost three years. Her old boss recently retired and a new manager took over. The new manager frequently asks her for information and advice about how to interpret the information she records. Carol's experience as a bookkeeper means she is qualified to provide this type of advice. True False 82. One advantage of the double-entry method of bookkeeping is that it helps to identify mistakes made in recording financial transactions. True False 83. Bark Three Times Pet Store recently hired an accountant to make sense of each day's transactions, and keep better financial records for the business. The accountant showed the owner that the ledger in a computerized accounting system would automatically take entries and post them to the correct accounts in the ledger, making the bookkeeping tasks much easier. True False 84. Computerized accounting programs have eliminated the need to prepare a trial balance. True False 85. Olivia is a public accountant. She prepares monthly financial statements for her client, Chick's Auto Body Shop. Presently, though, she must summarize the data in the accounting ledgers to determine if the figures are correct and balanced. Olivia will prepare a statement of cash flows in order to complete this step of the cycle. True False 86. Mike is the head of the accounting department at Micro flash. After completing the trial balance, he will proceed with the preparation of the balance sheet, the income statement and the statement of cash flows. True False 87. In addition to the tasks of recording and classifying accounting information, the best accounting software programs currently available for small businesses have the ability to make financial decisions, thus eliminating the need for owners of small businesses to consult with accountants or understand accounting terminology. True False 88. Juliet has found that her small business needs a better way to maintain accounting records and analyze business opportunities. Currently, she uses a manual accounting system. These days, any off-the-shelf accounting package available at a local software retailer should do an excellent job of meeting her firm's accounting needs. True False 89. The steps in the accounting cycle do not need to be followed in the order stated. Monthly financial statements can be prepared with a good amount of accuracy, prior to posting in the ledger or preparing the trail balance. True False 90. Courtney McRae started the Row-Your-Boat paddle boat and row boat business at a nearby lake resort. She wanted to combine her accounting degree with her love of the outdoors and fishing. One of her first business purchases was a computerized accounting system. She learned in her college classes that a good software system will eliminate accounting cycle steps and the time it takes for her interpret the results. As she put it, "It should make the decisions for me!" True False 91. The key financial statements are the balance sheet, the income statement, and the statement of cash flows. True False 92. The income statement reports the difference between a firm's assets and its liabilities as of a certain date. True False 93. A firm's balance sheet reports its financial condition on a specific date. True False 94. The balance sheet reports revenues and selling costs for a period of time. True False 95. An income statement reports what a company owns and owes on a certain day. True False 96. Assets are reported on the firm's balance sheet. True False 97. Liabilities are reported on the income statement. True False 98. Assets are economic resources that are owned by a firm. True False 99. The fundamental accounting equation is as follows: Assets = Liabilities + Owners' equity. True False 100. The balance sheet reflects the fact that assets equal the sum of liabilities and owners' equity. True False 101. A balance sheet is composed of assets, liabilities, and revenues. True False 102. The cost of goods sold includes all the costs of buying and keeping merchandise available for sale. True False 103. Rent, salaries, insurance and depreciation are examples of the cost of goods sold. True False 104. Gross profit represents profit after the deduction of cost of goods sold, and before the deduction of all other selling expenses, general expenses, and tax expense. True False 105. Rents, salaries, utilities and insurance are examples of operating expenses. True False 106. The two major classes of operating expenses are current expenses and long-term expenses. True False 107. General expenses include office salaries, rent, and insurance. True False 108. Net income before taxes is found by deducting total operating expenses from gross profit. True False 109. A statement of cash flows summarizes a company's cash receipts and cash payments over a period of time. True False 110. Cash flow statements identify three sources of cash receipts and disbursements: Assets, liabilities and owners' equity. True False 111. The statement of cash flows calculates cash flows from operations, investing activities, and financing activities. True False 112. An analysis of the statement of cash flows can help a firm prevent cash shortages. True False 113. The statement of cash flows shows a firm's revenues, costs of goods sold, expenses, and net income. True False 114. The equipment a firm owns and the money it has in its bank account are considered assets. True False 115. Brand names such as Coca-Cola and McDonald's are examples of intangible assets. True False 116. Assets are listed on the balance sheet in order of liquidity, with the most liquid assets listed first. True False 117. The firm's most valuable assets are listed at the top of its balance sheet. True False 118. Patents and copyrights are examples of intangible assets. True False 119. Liquidity refers to how quickly liabilities must be paid. True False 120. Net income is simply the difference between revenue and cost of goods sold. True False 121. The cost of goods sold reflects the selling price of the merchandise sold over a period of time. True False 122. The cash a firm raised from issuing new debt or equity capital would be reported on a statement of cash flows. True False 123. The Barkley Company's balance sheet shows: what the business owns, minus what the business owes, equals the book value (or, net worth) of the business. True False 124. The Barkley Company bought supplies in early January that it must pay for by the end of the month. These purchases are posted to accounts payable and listed as assets on the firm's balance sheet. True False 125. One important source of financing for most small businesses is the owners savings. If the owner contributes money to the business from his/her personal savings, it is will be recorded in the Owner's Equity account on the balance sheet. True False 126. The Barkley Company has recorded its unpaid bill for supplies under a current liabilities account on the balance sheet. This payment will be due to the supplier in less than a year. True False 127. The Barkley Company wants to know the value of its owners' equity. It will total its assets and subtract its liabilities. True False 128. The Barkley Company balance sheet shows the following items: Accounts payable totaling $50,000; salaries payable totaling $65,000, and notes payable totaling $100,000. These are liabilities, or money that the firm owes others. True False 129. The "bottom line" of the Barkley Company's income statement is equal to the net worth of the firm. True False 130. The Barkley Company will refer to its income statements to determine whether it was profitable, or, whether it lost money over the past year. True False 131. The income statement computes net income by subtracting liabilities from assets. True False 132. Revenue on the income statement represents the dollar amount of what is received for goods sold, services rendered and/or from other revenue sources. True False 133. The Barkley Company has several automobiles that are used in the business. Recently, the owners were told that even though the government permits the firm to depreciate the vehicles, it is not a deductible expense on the income statement. True False 134. When an accountant "writes off" the cost of a tangible asset over its estimated lifetime, it is called depreciation. True False 135. The total cost of goods sold reported on an income statement is not affected by the inventory valuation method the firm uses. True False 136. Although a firm may use different inventory valuation methods, generally accepted accounting principles (GAAP) states that these methods must produce the same dollar value for the cost of goods sold. True False 137. Generally accepted accounting principles (GAAP) permits firms to choose among different methods of depreciation and inventory valuation. True False 138. FIFO and LIFO are two common methods used to compute the depreciation of tangible assets. True False 139. FIFO is a method of computing net cash flows by subtracting financial inflows from financial outflows. True False 140. FIFO is a method of inventory valuation that assumes the items most recently purchased are also the items that are sold first. True False 141. The LIFO method of inventory valuation assumes the newest items in inventory are sold first. True False 142. When Bark Three Times Pet Store sells inventory, the value of the cost of goods sold reported on the income statement will depend on which inventory valuation method it uses. True False 143. According to generally accepted accounting principles (GAAP), a firm must use the inventory valuation method that most accurately reflects the actual movement of goods through its inventory. True False 144. Banks are likely to request a firm's balance sheet when determining whether or not to loan money to the firm. However, banks would have little interest in the firm's income statement since it covers a short period of time. True False 145. Harrison Manufacturing owns land worth $600,000 and has $130,000 worth of cash in its bank account. In the asset section of the balance sheet, Harrison lists its land holdings prior to listing its cash since it is a higher value. True False 146. Julio borrowed money from a close friend to obtain a liquor license for his pub, and gave him a written promise to repay the amount within six months. Julio should list this business debt as an operating expense on his pub's balance sheet. True False 147. Bark Three Times Pet Store established a line of credit with its local banker and used (borrowed) $85,000 against it to purchase its first year's inventory. Since it is required to repay the money before the end of its fiscal year, the company's accountant lists this liability with the current liabilities on the balance sheet. True False 148. At this point in time, Bark Three Times Pet Store's balance sheet shows $100,000 in assets and $90,000 in liabilities. The company's accounting system will show the owners' equity as $190,000. True False 149. Marissa is taking her first course in accounting this semester. One of the first things she learns is that "revenue" and "net income" mean the same thing. True False 150. Bark Three Times Pet Store's owner is concerned with how his business decisions affect the "bottom line". This is another way of saying that he is concerned with the impact of his decisions on net income after taxes. True False 151. Potential investors are interested in both a firm's balance sheet and income statement when evaluating whether or not to invest in a firm. True False 152. Money received from tickets sold for the Rolling Stones concert is recorded as net income on the concert promoter's income statement. True False 153. When valuing items in inventory for financial reporting purposes, generally accepted accounting principles (GAAP) requires firms to value the cost of goods sold by assuming that the items that have been in inventory the longest are the ones that are sold first. True False 154. The net income of a firm can change significantly depending upon the specific accounting procedures that are used for depreciation and inventory valuation. True False 155. If prices of inventory are unchanged throughout the year, LIFO and FIFO inventory valuation methods will produce the same reported net income. True False 156. During a period of rising prices, the FIFO technique of inventory valuation will result in a lower net income figure than would the LIFO technique. True False 157. In businesses that handle a lot of perishable items (such as supermarkets) the actual movement of goods through inventory most closely resembles the LIFO inventory valuation technique. True False 158. If the economy began experiencing a prolonged period of deflation in which the prices of most goods are falling, many firms would find that the LIFO method of inventory valuation would result in higher reported profits. True False 159. During periods of rising prices, firms that want to report more attractive profits would tend to favor the FIFO technique of inventory valuation. True False 160. If the goal of a business is to pay lower taxes on its income during an inflationary period, it is likely to use the FIFO inventory costing method. True False 161. A hospital emergency room serves several patients from a ten car pile-up on the local interstate. Most of the victims require bandages, antibiotics, foot and arm casts, topical ointments, and pain pills. These items are part of the costs of good sold for the hospital emergency room. True False 162. The best way for a firm to avoid serious cash flow problems is to sustain a rapid growth in sales. True False 163. Cash flow difficulties are unlikely for a firm that is profitable. True False 164. Preferred Pet Care, Inc. a mobile veterinary care clinic has more appointments than it ever expected to have when it opened its doors. Each week it orders more vaccines, antibiotics, and preventive care supplies from a major veterinary supplier, with the understanding that it will pay for these supplies in one month's time. Most of the company's clients are elderly and on fixed incomes, and often do not pay for services for two or more months. This is not a problem because as long as the company continues to increase its appointments, it will create profits and growth. True False 165. Cash revenues from the sale of new cars at Pete's Auto Emporium would be listed as a cash inflow from operations on Pete's statement of cash flows. True False 166. A loan officer at Southwest Bank is considering a loan application from Preferred Pet Care, Inc. He is concerned about the company's ability to make payments on the loan. The loan officer is likely to be interested in Preferred Pet Care's statement of cash flows. True False 167. Preferred Pet Care, Inc. successfully took out a loan for $130,000 from Southwest Bank. It used $80,000 of this loan to pay-off an existing loan that had a higher interest rate, and purchased X-ray equipment with the remaining funds. These events were noted as financing and investing activities on its balance sheet. True False 168. One of the problems with current accounting procedures is that there is no way for firms to systematically write off the costs of property and equipment over time. True False 169. Financial ratios are used to analyze a firm's financial condition and financial performance. True False 170. Liquidity ratios are of particular importance to stockholders, but have little relevance for creditors. True False 171. The purpose of liquidity ratios is to indicate the degree to which a firm relies on borrowed funds in its operations. True False 172. Liquidity refers to how fast an asset can be converted to cash. True False 173. The current ratio is used to evaluate a firm's ability to pay its short-term debts. True False 174. The current ratio is found by dividing the firm's total assets by its total liabilities. True False 175. The current ratio is a good indicator of the degree to which a firm relies on borrowed funds in its operations. True False 176. Both the current ratio and the acid-test ratio are liquidity ratios. True False 177. The acid-test ratio is found by dividing inventory by cost of goods sold. True False 178. For firms that sometimes have difficulty selling their inventory, the current ratio is likely to be a better measure of liquidity than the acidtest ratio. True False 179. A firm that takes on too much debt could experience problems repaying its lenders or meeting promises made to stockholders. True False 180. Leverage ratios are concerned with the extent to which a firm relies on borrowed funds in its operations. True False 181. The debt to owners' equity ratio is a common type of liquidity ratio. True False 182. Profitability ratios are often used to measure management's earnings performance. True False 183. A firm's basic earnings per share measures how much profit was earned for each dollar invested by the firm's owners. True False 184. The return on sales ratio measures a firm's use of leverage. True False 185. The basic earnings per share ratio does not take stock options, warrants, and preferred stock into account. True False 186. The higher the risk of a particular investment, the greater the expected rate of return required by investors. True False 187. Activity ratios measure the effectiveness of the firm's management in using its various resources to achieve profits. True False 188. Return on equity measures how much was earned for each dollar invested by the firm's creditors. True False 189. The inventory turnover ratio measures the speed of inventory moving through the firm and its conversion into sales. True False 190. An extremely high inventory turnover ratio may represent lost sales due to holding inadequate stocks of merchandise. True False 191. Prattville Manufacturing has applied for a short-term loan with the First National Bank. The loan officers of the bank are likely to look carefully at Prattville's liquidity ratios before they decide to grant the loan. True False 192. The acid-test ratio emphasizes the ability to convert inventory quickly into cash. True False 193. Accountant Alison Padilla was asked by her company's CEO to calculate the current return on equity. She quickly gathers Total Assets from the company balance sheet and the total net income from the income statement. Armed with this information, she will be able to provide the CEO with the information he/she requested. True False 194. The inventory turnover ratio for all firms should be greater than 2 times. True False 195. The Barkley Company is a fast growing start-up. The accountant calculated earnings per share = $.13. This information will provide him/her with insight into the firm's ability to pay dividends. True False 196. One way to make ratio analysis more meaningful is to compare the ratios of one firm to those of other firms in the same industry. True False 197. A debt to owners' equity ratio of 25% indicates that a firm has more debt than equity. True False 198. The basic earnings per share and the diluted earnings per share would have quite different values for a firm that relied heavily on preferred stock and convertible debt securities to acquire funds. True False 199. A lower than average inventory turnover ratio indicates excellent inventory management practices. True False 200. Preferred Pet Care, Inc., has recorded the following on its income statement for the period ending, December 31, 2009: The return on sales = 34%. This return is outstanding and there is no need to compare this return to competitors in the veterinary services industry. True False 201. Stockholders of a company in a risky market environment would expect lower return on equity ratio than stockholders in a less risky market. True False 202. It is always better for a firm to have a high inventory turnover ratio than a low turnover ratio. True False 203. Bark Three Times Pet Store's accountant has recorded the following: Total current assets = $60,000, including Cash = $24,000; Accounts Receivable = $20,000; and, Inventory = $16,000. Total assets = $230,000; Total current liabilities = $48,000; and, Total current and long-term liabilities = $98,000. The store's current ratio = 1.25. The store's acid-test ratio = .92 True False 204. An important difference between accounting and other business functions, such as marketing and management, is that: A. Accounting functions must be performed by an "outsider" (rather than by an employee of the business) in order to avoid conflicts of interest. B. Accounting offers us insight into whether the business is financially sound. C. Accounting involves mainly clerical activities and thus requires very little analysis. D. Accounting deals exclusively with numbers. 205. To effectively run a business, it is necessary to: A. B. C. D. Hire a full-time accountant. Use a public accounting firm. Understand and use accounting information. Make certain that you do not spend too much time on your accounting system. 206. Which of the following is an example of a financial transaction? A. B. C. D. A firm purchases a fire insurance policy. An internal auditor discovers an error in a firm's inventory valuation. A potential customer accesses a firm's Web page. A manager reviews the financial statements prepared by an accountant. 207. Although accounting has several specific uses, the overall purpose of accounting can be summarized as: A. B. C. D. To provide financial information that is useful to decision makers. To meet the legal requirements of the Financial Accounting Standards Board (FASB). To allow the government to track business activity levels. To compute the profit or loss and declared dividend of a business firm. 208. Which of the following responses is the best and most comprehensive? "A company's accounting information is useful to _____________." A. B. C. D. Managers within the firm, exclusively Marketing research firms for pricing insights Primarily the IRS and other government agencies that regulate the firm Managers, owners, creditors, employees, and the government 209. Accountants record, classify, and ____________ the results of the financial information they gather. A. B. C. D. interpret sell buy change 210. The reports and financial statements prepared by accountants: A. B. C. D. Are more useful for profit-seeking businesses than they are for not-for-profit organizations. Are mainly used to help the firm complete its tax forms. Provide information that can be used by decision-makers both inside and outside the organization. Are not as useful now that firms have moved into a more global environment. 211. Which of the following is an area of importance in accounting? A. B. C. D. Employee scheduling Summarizing information in order to create reports and financial statements Analyzing strategic direction Setting prices for goods and services sold by the organization 212. As an accountant, Joe Billings responsibilities include: A. B. C. D. Developing plans to help his company establish a supply chain. Setting prices for specific goods and services. Summarizing and interpreting financial information needed by his firm's managers. Developing a fringe benefit program that improves employee morale. 213. A person's pulse rate and blood pressure are indicators of a person's health. Similarly, _________ can help assess the health of a business. A. B. C. D. financial statements production schedules transactions databases 214. Accounting transactions are very important to a firm's operations. Which of the following activities would affect the firm's account balances? A. B. C. D. Buying and selling goods and services Interviewing prospective employees Understanding economic reports Forecasting consumer demand 215. Jill wants to start her own business, but knows little about how to set up an accounting system or interpret financial information. "I'm not worried about accounting," she tells her friends. "I'll just hire a part-time bookkeeper to handle all that type of stuff, and focus my attention on what I like—finding ways to satisfy my customers." Which of the following is the best response to Jill's comments? A. Fine. Just make sure the bookkeeper you hire knows how to use a database, since this type of software is the heart of any efficient accounting system. B. Although you can hire someone to keep your books, you'll still need to know how to read, understand, and interpret basic accounting reports in order to make good business decisions. C. Most entrepreneurs would agree with your opinion. The work done by accountants is mainly clerical in nature, so time spent by business owners on accounting tends to take them away from more important tasks. D. You have a good plan. Only managers of large firms require knowledge of accounting. Owners and managers of small businesses can easily get by with just a part-time bookkeeper. 216. Before starting his landscape business, Andrew took a marketing class at the local Community College. He decided that his time would be better utilized in this class because if he could learn to sell his services well, the revenues and profits would follow. Your assessment of his plan might include which of the following: A. Andrew understands that Marketing is the life-blood of the company, and he is right on track with his approach. B. Andrew has elected to operate like a virtual company and leave various parts of the business including accounting, environmental trends scanning, and management to outsourcers. C. Andrew knows that increasing revenues will always keep the business profitable and in a positive cash position. D. Andrew needs to realize that the ability to understand and interpret financial statements provided by his accountant might enhance his profits. 217. Phil O'Keefe is opening a small sports store in his town. At the advice of a friend who is a bookkeeper, he keeps the receipts of everything he purchases for the business in the bottom drawer of his desk, along with all other business expenses, such as his retail license, his rent expense, and insurance expense. You suggest that ________. A. Phil continues with this procedure, but only until the store opens, at which time he will need an additional drawer for his sales transactions. B. Phil invests some time in exploring an accounting system that will make it easier to classify and summarize accounting information. C. Phil continues with this procedure because there is very little difference between one expense and another. D. Phil stops wasting valuable time saving the receipts because accountants only record sales transactions. 218. Given that measuring a firm's financial health is important to its survival, which of the following strategies is good advice for a person just starting a business? A. Create a method for keeping your books that makes sense to you. Outside agencies such as creditors and suppliers will not evaluate you by the way you keep books. B. All transactions are important. Separating transactions only serves to create a perception that some transactions are of lesser importance than others. C. Accounting systems used by big business are not suitable for small businesses. D. Select an accounting system that helps you make decisions, and helps you report information to others outside your firm. 219. The accounting profession is divided into 5 key working areas, two of which are: A. B. C. D. Auditing and managerial accounting. Forecasting and logistical accounting. Inventory control and budgeting. Income accounting and expenditure accounting. 220. The area of accounting that provides managers inside the organization with information they need to make decisions is called: A. B. C. D. Tax accounting. Managerial accounting. Informational accounting. Financial accounting. 221. The preparation of financial statements for people outside the firm (creditors, unions, suppliers, and others) is the goal of: A. B. C. D. Auditing. Financial accounting. Managerial accounting. Cost accounting. 222. A(n) __________ provides accounting services to individuals or firms on a fee basis. A. B. C. D. contract accountant account agent public accountant independent accountant 223. An accountant who works for a single business or government agency is referred to as a: A. B. C. D. Public accountant. Private accountant. Certified accountant. Commission accountant. 224. __________ involves the review and evaluation of the records that are used to prepare the organization's financial statements. A. B. C. D. Auditing Financial accounting Managerial accounting Certified bookkeeping 225. A(n) _________ is a yearly published statement of the financial condition, progress and expectations of an organization. A. B. C. D. balance sheet independent audit mission statement annual report 226. A(n) ___________ is an evaluation and unbiased opinion of the accuracy of a firm's financial statements. A. B. C. D. internal audit annual report independent audit certified audit 227. Skilled professionals who are responsible for the development of strategies to minimize taxes are called: A. B. C. D. tax accountants. certified public accountants. certified management accountants. certified internal auditors. 228. The accounting scandals of the early 2000s led many people to question the legitimacy of: A. B. C. D. Ratio analysis as a means of evaluating the performance of a firm. Relying on the recommendations of tax accountants to find ways of reducing the taxes owed by a business organization. Publishing financial information about a firm on the Internet. Allowing an accounting firm to do both consulting and auditing work for the same company. 229. The accounting profession follows generally accepted accounting principles as defined by ___________________. A. B. C. D. the GAAP the PCAOB (Public Company Accounting Oversight Board) the FASB (Financial Accounting Standards Board) the Sarbanes-Oxley Act 230. Important provisions of the Sarbanes-Oxley Act: A. B. C. D. Approve corporate loans to directors of the company. Encourage the destruction of financial documents. Require the CEO and CFO of corporations to certify the accuracy of financial reports. Encourage outside CPA firms to deliver several services to their clients, including auditing services and consulting services. 231. The __________ sets accounting standards used in government accounting. A. B. C. D. Federal Accounting Review Board Governmental Accounting Standards Board Academy of Public Sector Accountants Federal Reserve Board 232. Benjamin works in the accounting department for a textbook publishing firm preparing budgets and reporting production costs. He is a: A. B. C. D. Managerial accountant. Financial accountant. Tax accountant Auditor. 233. For the past several years, Bill Reynolds has retained accountant Chelsea Jones for help in preparing his personal income tax forms. Bill's boss recommended Chelsea because she had done a good job setting-up the company's new accounting system. Bill is very satisfied with Chelsea's work and feels that the fees she charges are quite reasonable. Chelsea would be classified as a(n): A. Independent auditor. B. Private accountant. C. Public accountant. D. Accounting broker. 234. Jose just graduated from college with a bachelor's degree in accounting. He plans to go to work for the American Cancer Society as an accountant. Jose will be a(n): A. B. C. D. private accountant. public accountant. forensic accountant. independent accountant. 235. As U.S. firms focus on cost cutting in order to stay competitive with producers in low-wage countries, they will rely on __________ to create strategies to help reduce costs. A. B. C. D. managerial accountants financial accountants government accountants auditors 236. Taylor Casual, a chain of retail clothing stores, wants to assure investors and other outsiders that its financial statements are accurate. One way to do so would be to hire a public accounting firm to: A. B. C. D. Produce an internal audit. Take over all of its accounting functions. Provide a "generally accepted practices" endorsement. Perform an independent audit. 237. Which of the following agencies would have the greatest impact on the methods used to record, classify, summarize, and interpret accounting information for the State of Kentucky's Department of Transportation? A. B. C. D. Commission on Accounting Practices for State Governments Government Accounting Standards Board Independent Not-For-Profit Accounting Standards Board Institute for Public Sector Accounting Standards 238. Kelley's Kloset, LLC has applied for a business loan. Her prospective banker has requested information concerning the financial condition of her business. Which accounting discipline is responsible for providing accounting information to outside stakeholders? A. B. C. D. Management accounting. Financial accounting. Tax accounting. Certified bookkeeping. 239. Stockholders of the Sasha Deal Company are concerned about irregularities in the firm's accounting system. One approach to identify problems in the records of the company would be to have a(n) ________ performed. A. B. C. D. internal audit independent audit unofficial audit GAAP analysis 240. According to the boxed material in the Legal Briefcase box in Chapter 17, you would be most likely to ask for the help of a forensic accountant if you: A. B. C. D. Wanted to decide which accounting system to adopt for a new business. Believed that someone in your organization was employing unethical or illegal accounting methods. Faced severe financial hardship and needed to find the most effective way to cut costs quickly. Wanted to determine the best depreciation and inventory valuation methods to use to minimize the income taxes paid by your organization. 241. Fraudulent accounting practices do not just occur in firms who do not have on site accountants. According to the Legal Briefcase box provided in your textbook, illegal and questionable accounting practices have been the demise of some large multi-national corporations. The professionals assigned to investigate these improprieties are: A. B. C. D. forensic accountants certified public accountants independent auditors certified financial planners 242. Unfortunately, during bad economic times, and a fear of job loss, company executives are more likely to ask an accountant to "cook the books." If a boss or manager should ask a staff accountant to change data to make the firm's financial position look better in the eyes of investors, what are the accountant's alternatives? A. According to the FASB (Financial Accounting Standards Board) ruling says if the boss agrees to sign-off on accounting documents, the accountant is safe from prosecution. B. According to the FASB, as long as you are not a certified internal auditor, you will not be held accountable for such actions. C. As a professional, the accountant is held to the standards of generally accepted accounting principles and the FASB. If these guidelines are not followed, the accountant is potentially liable for illegal and unethical behavior. D. Investors use a variety of methods to determine if a firm is fundamentally sound, so they are less likely to grimace at your actions as the IRS, who want to make certain that your firm is paying its taxes. For investors, your books are only one piece of the puzzle. 243. Becky Hunter is an accountant employed by FAF Enterprises. Recently she has spent much of her time working on defining measures of costs for the production department and checking to ensure that various departments are staying within their budgets. Becky is a: A. B. C. D. Public accountant whose work is mainly concerned with auditing. Public accountant whose work is mainly concerned with financial accounting. Private accountant whose work is mainly concerned with managerial accounting. Private accountant whose work is mainly concerned with financial accounting. 244. A basic difference between managerial accounting and financial accounting is that managerial accounting: A. adheres to rules set by the GASB, while financial accounting uses a different group of rules set by the FASB. B. involves the preparation of the balance sheet and income statement while financial accounting involves the preparation of the statement of cash flows. C. handles recording and classifying information about transactions that have no direct financial impact on the firm, while financial accounting handles the recording and classifying of information about transactions that do have a financial impact. D. provides information primarily intended for managers and others inside the company, while financial accounting provides information primarily intended for people outside the organization. 245. While reviewing the books at his firm, Chad Cooper noticed discrepancies between how the firm recorded revenues last year and how it elected to record revenues during the recent quarter of the current year. As a recent business graduate, Chad felt confident that the changes needed clarification. To get another opinion, Chad suggested to the company's controller that the firm solicit _______________. A. B. C. D. the assistance of the Government Accounting Standards Board the services of a certified internal auditor the services of a senior executive at the IRS the services of an independent auditor 246. CPA Experts, Inc., a well-known public accounting firm has enjoyed a long-standing relationship with one of its clients, Generation Technologies, Inc. Recently, at a company-wide gala, the CEO of Generation Technologies announced that CPA Experts has performed the firm's independent audits for the past ten years, and he is looking forward to exploring other services that CPA Experts has to offer, including financial consulting. "After all," he exclaims, "A recent magazine article called CPA Experts the ‘profitability geniuses '!" As a senior accountant for Generation Technologies, how do you advise your CEO? A. You inform the CEO that in order to remain competitive, Generation Technologies needs to utilize the expertise of professional accounting firms who can deliver new and innovative techniques for cutting costs and improving profitability. B. You explain that it would create a conflict of interest to have both internal and external accountants. C. You inform the CEO about Sarbanes-Oxley rulings concerning the utilization of the same firm for auditing and consulting. D. You explain that hiring CPA Experts, Inc. to perform consulting would constitute a more in-depth partnership. Generally Accepted Accounting Principles would require Generation Technologies to purchase stock in CPA Experts. 247. In spite of his assertions that he carried-out fraud alone, convicted investment advisor Bernard Madoff's independent auditor is now under investigation. The auditor is accused of not doing his job. Rather than verify Madoff's company records, the F.B.I claims that he "rubber-stamped" the records. Knowing what you have learned about the importance of auditing, which of the following statements do you understand to be most accurate? A. Investment firms should always hire private accountants. Public accountants do not have enough information about the firm to prepare audits. B. Independent auditors only prepare audits for not-for-profit firms. Madoff hired the wrong professional for the job. C. Independent auditors must follow strict rules, including new rules put in place by the Sarbanes-Oxley Act. D. The Sarbanes-Oxley Act does not institute rules of practice for independent auditors. Independent auditors follow strict rules created by the AICPA, American Institute of Certified Public Accountants. 248. As a first step in the accounting cycle, _________ involves the recording of business transactions. A. B. C. D. Marketing Bookkeeping Auditing Economics 249. __________ is the accounting practice of recording each transaction in two places in the accounting journal. A. B. C. D. Double-entry bookkeeping Trial balancing Account matching Entry duplication 250. A __________ is a specialized accounting book, where transactions are categorized according to type. For example, all utility transactions are recorded in the same category. A. B. C. D. journal trial balance ledger balance sheet 251. A bookkeeper's first task is to: A. B. C. D. Separate all of the firm's transactions into meaningful categories. Prepare the firm's financial statements. Summarize the firm's financial data. Interpret and report data to the firm's management. 252. In the course of their jobs, bookkeepers: A. Interpret accounting data. B. Approve decisions about major expenditures. C. Record business transactions. D. Prepare financial statements. 253. The accounting book or computer program where each day's transactions are first recorded is called a(n): A. B. C. D. posting workbook. general ledger. balance sheet. journal. 254. A _________ summarizes all the data from the account ledgers to verify that they are correct and balanced. A. B. C. D. ledger statement balance sheet trial balance statement of cash flows 255. The purpose of a trial balance is to: A. B. C. D. Affirm whether the figures in the account ledgers are correct and balanced. Prepare a mock up of a real balance sheet. Review the income statement accounts. Meet a reporting requirement of the Securities and Exchange Commission (SEC). 256. The __________ is a six-step procedure that results in the preparation and analysis of the major financial statements. A. B. C. D. double-entry method financial management process financial performance appraisal accounting cycle 257. Once a trial balance has been prepared, the next step of the accounting cycle involves: A. B. C. D. Posting the information to the correct ledger accounts. Completing a balance sheet and ratio analysis. Preparing financial statements such as the balance sheet, income statement, and statement of cash flows. Classifying the transactions into logical categories. 258. One of the key financial statements prepared in the fifth step of the accounting cycle is: A. B. C. D. general journal. statement of cash flows. asset summary. social audit. 259. The Balance Sheet, the Statement of Cash Flows, and the ______________ are three key financial statements prepared by accountants. A. B. C. D. Income Statement Statement of Retained Earnings Statement of Changes in Financial Position Trial Balance 260. ___________ refers to the difference between cash coming into the firm and cash leaving the firm. A. B. C. D. Liquidity Cash flow Accounts payable Retained earnings 261. The sixth and final step in the accounting cycle involves: A. B. C. D. Performing a trial balance to verify that the accounting statements are internally consistent. Auditing the books to ensure that they were prepared according to generally accepted accounting principles. Preparing the income statement. Analyzing major accounting statements to evaluate the financial condition of the firm. 262. Careful consideration of the use of computers in accounting indicates that computers _____________________. A. B. C. D. will soon eliminate all of the accounting functions are tools to help the accountant perform his or her job are of little use to small-business owners that need accounting services have a very limited use in accounting due to inadequate privacy controls 263. Today's computerized accounting programs are: A. Very helpful for small business owners who lack strong accounting support within their companies. B. Too expensive and complicated for most small businesses. C. A poor investment for small start-up companies due to the fact that these programs are seldom needed unless the firm is considered a midsized to large company. D. So sophisticated that they can make most financial decisions without the aid of an accountant. 264. Accountants not only provide financial information to the firm, they: A. B. C. D. Replace the firm's need for managers. Also provide information regarding competitors. Assist in interpreting that information. Design the computer information systems. 265. A comparison of bookkeeping and accounting indicates that: A. The two are virtually the same in practice. B. Bookkeeping involves recording financial information, while accounting is concerned with classifying, summarizing, and interpreting this information. C. Bookkeeping is more useful for small businesses while accounting is more useful for large businesses. D. Accounting is a subsystem of the process of bookkeeping. 266. Sales receipts, purchase orders, and payroll records are all examples of accounting transactions that would be recorded by a(n): A. B. C. D. Auditor. Forensic accountant. Bookkeeper. Purchasing agent. 267. Jasmine is categorizing journal entries in order to post to the ________. A. B. C. D. income statement balance sheet working papers ledger 268. Which of the following is a key step in the accounting cycle? A. B. C. D. Recording information into journals Collecting data from customers Forecasting expenses and revenues Preparing the advertising message 269. The main reason an accountant would conduct a trial balance is to: A. B. C. D. Determine whether account figures in the ledger are correct and balanced. Obtain an estimate of the amount of taxes the firm owes. Ensure the audit was done correctly. Verify the validity of last year's balance sheet before beginning the next accounting cycle. 270. Hap owns and operates a small business with only four full-time employees and less than $500,000 in annual sales. He currently uses a manual accounting system and relies on a part-time bookkeeper to keep his records in order. In evaluating the possible adoption of a computerized accounting system, Hap will probably discover that: A. B. C. D. The expense of setting up a computerized accounting system would not be affordable at this time. He would be better off hiring a full-time accountant. He could benefit from adopting such a system, but should also consult with an accountant for advice about what's best. A computerized system would be affordable, but that he would have little need for it unless his company became significantly larger. 271. The use of computerized accounting systems ______________. A. B. C. D. makes it possible for most firms to operate without the expense of hiring or consulting with accountants. reduces the pressure on managers in making financial decisions. allows firms to generate financial information almost instantly and whenever the organization needs it. creates an environment in which accounting has become nothing more than glorified bookkeeping, as all accountants are required to do is enter data into the system and monitor the results the program generates. 272. Brianna is a bookkeeper for Monograms, Limited. She takes the firm's transactions and record them in a record book or computer program referred to as: A. B. C. D. A credit account. An asset database. A journal. A debit program. 273. Jim works in the accounting department at the Kansas Sunflower Corporation, where it is his job to record all transactions into journals. After completing this task, the next step in the accounting process is to: A. B. C. D. Prepare the firm's financial statements. Post the information to the ledger. Determine the tax liability of the firm. Balance the difference between assets and liabilities. 274. April works in the accounting department at Henson's Tire & Auto. She is concerned that the company has been placing too many orders for office supplies and wants to look at all of the transactions involving the purchase of office supplies for the past several months. April can find such information by looking at the supplies account in the: A. B. C. D. ledger. cash flow statement. journal. account debit book. 275. Perry is responsible for recording sales transactions at Turncoat Enterprises. Perry's company utilizes ______________________, to help minimize entry errors. A. B. C. D. auditing capital budgeting double-entry bookkeeping revenue assessment 276. Heather works in the accounting department of Colorado Manufacturing. Today she will use the firm's ledger to summarize information that was posted over the most recent time period. Her goal is to determine if the accounts are balanced as required by the double-entry method of bookkeeping. To be sure they are correct, Heather will prepare a(n): A. B. C. D. Account analysis. Statement of cash flows. Balance sheet. Trial balance. 277. Tyler works as an accountant for a mid-sized retail store. He has just completed a trial balance that resulted in no unexpected problems. Tyler's next task is likely to be: A. B. C. D. Conducting the full audit. Preparing a tax return for the company. Preparing the store's balance sheet and other major financial statements. Presenting the trial balance to the company owners. 278. Accountant Alan Wingspan has just finished working on the balance sheet, income statement, and statement of cash flows for his company. The next step in the accounting cycle involves: A. B. C. D. Posting the results of these statements to the appropriate journal. Analyzing the firm's financial statements to evaluate the financial condition of the firm. Conducting forensic tests of the data to ensure its accuracy. Placing the data used to construct the statements into an archive known as a data warehouse. 279. Oklahoma Chemicals plans to use its computers to post information from journals to the ledger instantaneously. One obvious benefit of this technology is: A. B. C. D. A reduction in the number of accountants required by the firm. Less scrutiny from agencies such as the Internal Revenue Service. To shift financial decision making from people to programmed technology. Readily available financial information. 280. Ralph owns a small business. Some friends have suggested that he should switch from his current manual accounting system to one that is computerized. Ralph is not certain he wants to use computers in his small firm's accounting system. He is concerned about the time it would take to learn the system, and wonders whether the benefits will justify the costs of setting up the system. As a small business owner, Ralph would probably find that: A. Computer software tends to be very helpful to small business owners who lack strong accounting support within their companies. B. Today's accounting software tends to be very complex, so only people with extensive accounting experience can understand its features and use it effectively. C. Even though it is not yet cost effective, he should go ahead and adopt a computerized system, because government regulations will require most business functions to be computerized in the near future. D. Such systems actually reduce costs, because they eliminate the need to consult with an accountant. 281. Johnson Products is a small manufacturing firm specializing in custom-order tool and die work. A computerized accounting system would help Johnson Products by: A. B. C. D. Making key accounting and financial decisions. Helping management identify cash flow and other financial difficulties more quickly. Eliminating the need to prepare financial statements and other reports. Eliminating the need to perform the three middle steps of the accounting cycle. 282. The three important financial statements prepared by accountants are: A. B. C. D. Ledger, journal, and trial balance. Cash budget, capital budget, and master budget. Revenue summary, expense summary, and consolidation statement. Balance sheet, income statement, and statement of cash flows. 283. The __________ is an accounting statement that reports the financial condition of a firm at a specific point in time. A. B. C. D. income statement balance sheet statement of cash flows trial balance 284. A firm's ________ reports the profit or loss for the firm over a specified time period. A. B. C. D. income statement balance sheet statement of cash flows bank statement 285. The _____ shows the assets, liabilities, and owners' equity of a firm, at a specific point in time. A. B. C. D. income statement balance sheet statement of cash flows trial balance 286. Which financial statement reports the company's revenues and selling costs over a period of time? A. B. C. D. income statement balance sheet statement of cash flows trial balance 287. A ___________ provides a summary of cash coming into and money going out of a firm from operations activities, financing activities, and investing activities. A. B. C. D. income statement statement of cash flows cash budget cash receivables and payables report 288. The balance sheet is composed of the following types of accounts: A. B. C. D. Revenue, expenses, and earnings. Operating expenses, cash flow, and capital expenditures. Capital, cost, and valuation. Assets, liabilities, and owners' equity. 289. A balance sheet lists assets in order of their _______________. A. B. C. D. Dollar value, from smallest to largest Date of acquisition, with the most recently acquired assets listed first Liquidity, with the most liquid assets listed first Income generating ability 290. _________ refers to how quickly an asset can be converted into cash. A. B. C. D. Liquidity Velocity Fundability Accessibility 291. When companies owe money to creditors, suppliers, and others, these outstanding amounts are recorded on the balance sheet as __________. A. B. C. D. Contra-assets Liabilities Owners' equity. Expenses 292. _______ refers to the value that stockholders or owners have in a company. A. B. C. D. Assets. Liabilities. Owners' equity. Contra receivables. 293. The fundamental accounting equation states: Assets = __________. A. B. C. D. liabilities minus owners' equity. liabilities plus receivables. payables plus cash equivalents. liabilities plus owners' equity. 294. Company resources that are purchased with the intention that they will convert to cash within one year are: A. B. C. D. Fixed assets Current liabilities Current assets Owners' equity 295. Resources that a firm owns are called: A. B. C. D. Revenues. Assets. Equities. Credits. 296. The most liquid asset is: A. Sales. B. Cash. C. Accounts payable. D. Owners' equity. 297. Patents and copyrights are classified as ___________ on the Balance Sheet. A. B. C. D. Fixed assets. Intangible assets. Current assets. Owners' equity. 298. Debts that are due in one year or less are classified on the Balance Sheet as: A. B. C. D. Current liabilities. Bonds payable. Callable bonds. Immediate expenses. 299. The value of resources the firm owns, minus the amount of money the firm owes to others = ____________. A. B. C. D. liabilities liquidity leverage owners equity 300. The _____ account on the Balance Sheet shows profits that the firm has reinvested in the company. A. B. C. D. retained earnings stockholder's equity intangible assets notes payable 301. Which of the following items is found on an income statement? A. B. C. D. current assets cost of goods sold cash flows from investments owners' equity 302. Revenue, minus cost of goods sold =____________. A. B. C. D. retained earnings fundamental accounting equation gross profit net income 303. Rent, depreciation, and salaries are examples of: A. B. C. D. Current assets. Current liabilities. Owners' equity. Operating expenses. 304. ________ is the monetary value that is received for goods sold, services rendered and money received from other sources. A. B. C. D. Revenue Gross margin Net income Cost of goods sold 305. Net Profit refers to: A. B. C. D. The result of deducting liabilities from the assets of the firm. The result of subtracting cost of good sold from revenues. The result of deducting depreciation expense from revenues. The net earnings after the deduction of all expenses, including tax expense. 306. Depreciation is a systematic write-off of the cost of a tangible asset that is listed on ___________. A. B. C. D. The Statement of Cash Flows The Balance Sheet The Income Statement The Statement of Retained Earnings 307. The Statement of Cash flows identifies cash receipts and disbursements that result _______________. A. B. C. D. from selling goods and/or services, exclusively. solely from a firm's investments. from a firm's operations and investment activities, but not from financing activities. from a firm's operations, investment, and financing activities. 308. The balance sheet is set up to reflect the Fundamental Accounting Equation. This equation shows: A. B. C. D. Assets = Liabilities + Owners' equity. Revenues - Expenses = Gross profit. Cash inflows = Cash outflows. Current assets + Current liabilities = Owner's equity. 309. The "bottom line" of an income statement shows the firm's: A. B. C. D. Retained earnings. Gross profit. Net income or net loss. Owners' equity. 310. Expenses a firm incurs for insurance, office salaries, and rent are classified as: A. B. C. D. Selling expenses on an income statement. General expenses on an income statement. Current liabilities on a balance sheet. General expenses on a cash flow statement. 311. Debts owed by a business are called ___________. A. B. C. D. revenues liabilities equities assets 312. When it comes to the treatment of depreciation and valuation of inventory, generally accepted accounting principles _____________________. A. B. C. D. provide almost no guidance to accountants allow accountants to choose among different methods for depreciation and for the valuation of inventory require accountants to use only one specific method of depreciation, but permit several methods of inventory valuation require accountants to use one specific method for valuing inventory, but permit several methods for depreciating fixed assets 313. FIFO and LIFO are two common: A. B. C. D. depreciation strategies. ways to structure a balance sheet. inventory valuation methods. current ratios. 314. The LIFO method of inventory valuation bases the cost of goods sold on the cost of: A. B. C. D. Merchandise that has been held in inventory for the longest period of time. Most recent merchandise purchased by the firm. Actual units customers purchased. Merchandise the firm acquired at the lowest cost. 315. _________ is the systematic write-off of the value of a tangible asset over its useful life. A. B. C. D. Expense structuring Depreciation Capital budgeting Gross margin allocation 316. Accounting recognizes that assets, such as machinery and buildings, lose value over time. Accountants will record a portion of the cost of an asset as an expense each year through the use of: A. B. C. D. Asset valuation. Asset audits. Appreciation. Depreciation. 317. The ______________ shows how the capital is structured in the business, including the value of assets and the amount the firm owes at a specific point in time. A. B. C. D. income statement balance sheet statement of cash flows trial balance 318. As Hector was packing to return to State University after his summer vacation, he realized that he owned many valuable things such as a laptop computer, a stereo system, and a DVD player. An accountant would list all of these as Hector's: A. B. C. D. assets. liabilities. owners' equity. intangibles. 319. Keith will graduate from Southern State University this year. He has accumulated $18,000 in student loans during his four years at college. An accountant would classify the loans as: A. B. C. D. assets. liabilities. owners' equity. intangibles. 320. The Balance Sheet for Renuvation LLC shows assets totaling $107,000 and liabilities totaling $75,000. Which of the following statements is correct? A. B. C. D. Owner's Equity equals $182,000. Current Assets are worth $32,000. Net Income for the period is $32,000. Owner's Equity equals $32,000. 321. Use the fundamental accounting equation to solve the following: Assets minus liabilities equals: A. B. C. D. net income. gross margin. owners' equity. cash reserves. 322. On December 31, 2001, Virginia Laboratories had assets of $235,000 and owners equity of $84,000. We can conclude that on December 31, 2001, Virginia Laboratories balance sheet showed: A. B. C. D. Total liabilities of $151,000. Suffered a net loss of $151,000. Experienced a cash inflow of $319,000. Paid a dividend of $3.00 per share. 323. Scott Drilling Contractors recently issued a corporate bond on which it expects to pay interest for the next twenty years. Scott would record this as a __________ on its balance sheet. A. B. C. D. declining balance asset retained earning long-term liability long-term expense 324. Blast-off Airlines is a recent start-up commuter airline that flies between eight regional cities on the east coast. Although it has attracted numerous investors who see value in the company's service, it does not pay dividends. Last year, the firm claimed profits of $4,800,000, which will be used to purchase an additional commuter plane. The Balance Sheet accounts that will show this affect are: A. B. C. D. Retained earnings and fixed asset accounts Long-term liabilities and fixed asset accounts Retained earnings and accounts receivable accounts Accounts payable and accounts receivable accounts 325. Many business decisions are made in hopes of improving a firm's "bottom line." Which of the following financial statements will reveal a firm's "bottom line"? A. B. C. D. income statement balance sheet statement of cash flows trial balance 326. A company's income statement is important to accountants and other stakeholders. It reveals: A. B. C. D. A company's sources of funding. A company's ability to distribute goods or services in a timely manner. A company's ability to earn a profit over time. A company's capitalized value. 327. When creating the income statement, which of the following statements is accurate? A. B. C. D. Revenues, minus general operating expenses = gross profit. Revenues, minus tax expense = gross profit. Revenues, minus depreciation expense = gross profit. Revenues, minus cost of goods sold = gross profit. 328. Meg Malloy is running an income statement on her QuickBooks™ computer accounting program. Which of the following accounts will be used to calculate gross profit? A. B. C. D. Revenues, net sales, depreciation, and operating expenses Revenues, general expenses Revenues, cost of goods sold, tax expenses, net income before taxes Revenues, cost of goods sold 329. In calculating cost of goods sold, Meg Malloy noticed that her accounting software included the freight charges on purchased goods. Your response to this procedure is: A. B. C. D. Freight charges are a legitimate part of cost of goods sold. Freight charges should be subtracted as part of general expenses. Freight charges cannot be deducted as an expense on the income statement. Freight charges are part of revenues. 330. Which of the following would be classified as a general expense on an income statement? A. B. C. D. Salaries paid to salespeople Dividends paid to stockholders Payments made for insurance Costs associated with an advertising campaign 331. During a period of rising prices, using FIFO (first in, first out) inventory valuation method will result in ________ net income figures than would LIFO (last in, first out). A. B. C. D. higher lower the same less accurate 332. Retailers attempt to sell older merchandise before more recently acquired merchandise is sold. The assumptions made by the __________ method of inventory valuation are most consistent with this approach. A. B. C. D. FIFO (first in, first out) LIFO (last in, first out) average costing accelerated costing 333. During a period of rising prices, if a firm desires to report a low gross profit figure in hopes of reducing their income tax liability, the firm will use the __________ inventory valuation method. A. B. C. D. FIFO (first in, first out) LIFO (last in, first out) sliding scale average cost 334. Rapidly growing companies often buy increasing amounts of merchandise from suppliers on credit, and then sell the goods to their customers on credit. These companies sometimes have difficulty repaying their suppliers when customers who buy on credit don't pay on time. Firms that experience this difficulty need to do a better job of: A. B. C. D. Generating revenue. Controlling inventory. Managing cash flows. Balancing assets with liabilities. 335. At the time the Jepson Plumbing Supply prepared its financial statements, it had several customers who bought goods over the past three months on its "90 days same as cash" credit plan. These customers had not yet paid their bills, but they have good credit ratings and Jepson is confident that they will make their payments on time. The amount these credit customers owe would show up as part of the: A. B. C. D. current assets listed on Jepson's balance sheet. current liabilities listed on Jepson's balance sheet. a deferred cash flow on Jepson's statement of cash flows. unrealized revenue reported on Jepson's income statement. 336. Bridget Cartier has privately invested $100,000 in Jacques and Jacqueline's Idaho Ski Resort. The business will use the money to purchase new ski lift chairs. $100,000 will be recorded on the balance sheet as part of the owners' equity account. In order to keep the accounts balanced, the balance sheet will also show: A. B. C. D. An increase of $100,000 cash. A fixed asset [ski lift chairs] = $100,000. A liability for $100,000. An increase in accounts receivable for $100,000.her QuickBooks 337. Green Living Construction Company installs solar panels in large newly constructed buildings. The company employs several expert installers who work on a full-time basis. Although the installers work everyday, the company pays them at the end of the month, for the previous month's work. Employee salaries are recorded as ___________ on Green Living's Balance Sheet. A. B. C. D. capital cash flows current liabilities retained earnings long-term liabilities 338. Miko is preparing her homework for her accounting class. She is uncertain as to the proper handling of patents and copyrights on a firm's financial statements. Which of the following is correct? A. B. C. D. Patents and copyrights are included with the firm's intangible assets on the balance sheet. Patents and copyrights are included with the firm's long-term liabilities on the balance sheet. Patents and copyrights are included with the firm's cost of goods sold on the income statement. Patents and copyrights are included with the firm's fixed assets on the balance sheet. 339. "You Incorporated", Figure 17.6, in Chapter 17 shows how to calculate your personal balance sheet. You can list your assets as well as your debts, in order to calculate your _________. A. B. C. D. cash flow real income working capital net worth 340. If a firm can reduce its cost of goods sold and continue to sell its product for the same price, we would expect the firm to enjoy an increase in its: A. B. C. D. revenue. liabilities. employee turnover. gross profit. 341. McCartney Consulting Group is a management-consulting firm that provides its expertise to businesses that employ its services. Since it does not hold an inventory of goods or produce any goods itself: A. B. C. D. its revenue will equal its net income. its gross profit could be identical to its net revenue. it is unlikely to have any operating expenses. its balance sheet will not record any current assets. 342. Cindy is concerned because during the past four months her company has experienced difficulty in paying its bills on time. She knows if this continues, the firm will have difficulties in accomplishing its goals. Cindy is concerned with: A. B. C. D. asset disbursement. cash flow. profit and loss. inventory valuation. 343. Monica noted that she disbursed $6,347 in payments for operations in her travel agency and received $6,189 in cash receipts for services rendered. She had no cash receipts or disbursements from investments or financing activities. Thus, Monica had a: A. B. C. D. positive disbursement. negative cash flow. bad debt allowance. tax credit payment. 344. Carlisle Communications is preparing its statement of cash flows. Among other things, this statement will show: A. B. C. D. net income from operations after taxes. general expenses and operating expenses. cash inflows and cash outflows that resulted from financing activities. the total owners' equity for the firm. 345. 10th Generation Electronics had two transformers in its inventory, one purchased in February for $11,800 and the other acquired in September for $13,300. In December, they sold one of the transformers to Ram Enterprises for $16,400 and reported a gross profit of $3,100. 10th Generation Electronics evidently uses the ________ inventory valuation method. A. B. C. D. FIFO LIFO Average Flexplus 346. Nebraska Communications is considering the purchase of a new satellite. The firm believes the satellite will help generate future earnings. In addition, the firm recognizes the tax benefits of a lower net income provided by the annual ________ of the asset. A. B. C. D. inventory valuation declining balance appreciation depreciation 347. Carole Grand and Bonnie Lamore run a shuttle service from Western Illinois to the busy Chicago O'Hare airport. Last month, they recorded the following: Carole and Bonnie's gross profit for the past month was: A. B. C. D. $682.00 Carole: $341.00; Bonnie: $341.00 $1250.00 $2750.00 348. Carole Grand and Bonnie Lamore run a shuttle service from Western Illinois to the busy Chicago O'Hare airport. Last month, they recorded the following: If 25% of their net income is paid to the government in taxes, what is their net income after taxes? A. B. C. D. $1410.00 $1160.00 $682.00 $870.00 349. Costas Calendar Company's Statement of Cash Flows showed the following activities for the year ended December 31, 2009: The year end cash balance for this firm is: A. B. C. D. $7,000.00 $53,000.00 $23,000.00 $30,000.00 350. Preferred Pet Care Clinic, Inc is a mobile veterinary care company that travels to its clients' homes to administer veterinary care to well and sick pets. Its business is booming, with a full schedule of appointments each week. On a weekly basis, the office manager orders a larger amount of vaccines, antibiotics, and other products from its suppliers with the understanding that it will pay for these supplies in one month's time. A sizeable percentage of Preferred Pet Care's clients are elderly persons who are on fixed incomes. These customers eventually pay their bills, but usually not upon receipt of service. It sometimes takes them upwards of two months to remit. As an accounting intern willing to advise the owner, which of the following statements is important to your analysis? A. Noting the fact that the clinic continues to order more supplies each month, the veterinary clinic will certainly not experience a cash flow crunch. If anything, it would be a good idea to hire additional veterinarians. B. Noting the fact that the clinic continues to order larger amounts of supplies each month, the company should make certain that its cost of goods sold is not greater than 50% of the price it is charging. C. Due to the fact that clients are not paying when service is received, the clinic may experience a cash flow crunch; an inability to maintain enough cash to pay for its supplies each month. D. Preferred Pet Care is doing everything right. It was wise to develop a niche market because senior citizens have greater savings than younger families. This is a good business and recessionary proof. The firm will continue to grow and prosper. 351. The financial ratios that measure a firm's ability to pay its short-term debts are called: A. B. C. D. leverage ratios. liquidity ratios. equity ratios. profitability ratios. 352. The current ratio is a type of ________ ratio. A. B. C. D. leverage profitability activity liquidity 353. Which of the following ratios is a liquidity ratio? A. B. C. D. inventory turnover ratio acid-test ratio debt to owners' equity ratio basic earnings per share 354. The purpose of the current ratio is to evaluate the firm's ability to: A. B. C. D. Generate sales with a given level of current assets. Utilize current assets profitably. Pay its bills in the short run. Effectively use borrowed funds. 355. The _______ ratio helps determine the ability of a firm to repay its short-term debts even if it has difficulty selling its inventory. A. B. C. D. acid-test cash flow diluted current asset required reserve 356. Financial ratios that reflect the degree to which a firm relies on borrowed funds are called ________ ratios. A. B. C. D. leverage liquidity activity profitability 357. Earnings per share, return on sales, and return on equity are examples of: A. leverage ratios. B. liquidity ratios. C. equity ratios. D. profitability ratios. 358. ________ measures the amount of profit earned by a company for each share of outstanding common stock. A. B. C. D. Basic earnings per share (basic EPS) Diluted earnings per share (diluted EPS) Simple earnings per share (simple EPS) Return on shares outstanding (RSO) 359. __________ earnings per share measures the amount of profit a firm earns per share of outstanding common stock when preferred stock, stock options, warrants and convertible debt securities are also taken into account. A. B. C. D. Basic Diluted Restricted Broad-based 360. Generally the higher the risk involved in an activity, the ________ the rate of return expected by investors. A. B. C. D. higher lower more stable less frequent 361. A firm's efficient use of its assets in running the business is key to maintaining sufficient cash flow. Ratios that accountants utilize to measure the efficient use of assets are called ____________ ratios. A. B. C. D. leverage liquidity activity profitability 362. ________ measures the speed of inventory moving through the firm and its conversion into sales. A. B. C. D. Asset turnover ratio Inventory turnover ratio Sales turnover ratio Cost of goods sold turnover ratio 363. In order to understand if the results of ratio calculations indicate a financially strong company, the results: A. B. C. D. Should be compared to other firms in the same industry. Are compared to same size firms in the same geographic region of the country. Are compared to the norms established by generally accepted accounting principles. Are compared to the largest firms in the country. 364. If a firm has a debt to owners' equity ratio of .54 (or 54%) we can conclude that: A. B. C. D. It has relied more on debt than equity to finance its operations. The firm is likely to have trouble paying its short term debts when they come due. Its total liabilities are less than its owners' equity. The firm has expenses that are exactly 54% of its gross profit. 365. Generally, a high ___________ ratio could lead investors and creditors to view the company as being very risky. A. B. C. D. debt to owners' equity acid-test diluted earnings per share inventory turnover 366. In order to calculate the current ratio for your firm, you divide the total value of current assets by: A. B. C. D. Earnings per share. The total value of current liabilities. The total owners' equity. The total cost of goods sold. 367. Leverage ratios indicate the extent to which ________ has been used to fund a business's operations. A. B. C. D. debt equity owner invested capital profit 368. Your firm is a supplier to a major chain of discount stores. You have heard rumors that this chain of discount stores is in financial difficulty. Which financial ratios would indicate the discount store's ability or inability to pay its short-term debts? A. B. C. D. liquidity ratios leverage ratios activity ratios profitability ratios 369. As a bank loan officer, you are considering a loan application by Peak Performance Sporting Goods. The company has provided you with the following information from its Balance Sheet: Peak Performance's current ratio is: A. B. C. D. 1.0. 1.5. 2.5. 3.0. 370. Peak Performance Sporting Goods Company has just applied for a bank loan in order to expand the business. Using the most recent Balance Sheet data provided by the company owner, you calculate that the company's current ratio is 2.5. In your presentation to the company boss, you remark: A. B. C. D. Peak Performance's is currently having trouble meeting its short-term obligations. Peak Performance's has $2.50 that it owes each month, for every $1.00 of cash that it is generating. Peak Performance has $2.50 of current assets for each $1.00 of currently liabilities. Due to the fact that most of Peak Performance's current assets are tied-up in inventory, there is no need to worry about whether Peak Performance will be able to make loan payments. 371. As a bank loan officer, you are considering a loan application by Peak Performance Sporting Goods. The company has provided you with the following information: Peak Performance's debt to owners equity ratio (rounded to the nearest tenth of a percent) is: A. B. C. D. 45.4%. 66.7%. 112.5%. 133.3%. 372. In the current economic climate, banks are remaining very conservative in their lending practices. Peak Performance Sporting Goods is seeking a loan for expansion. As a loan officer for the local bank, you calculate the acid-test ratio for Peak Performance Sporting Goods. Using the information below, you determine Peak Performance's acid-test ratio = _____. A. B. C. D. 1.0 1.5 2.5 3.0 373. You have just calculated the acid-test ratio for Peak Performance Sporting Goods [acid test ratio = 1.0]. As a loan officer for the local bank, you are called into your boss's office to interpret the results of this ratio. Which of the following statements best reflects an understanding of these results? A. A company with an acid-test ratio = 1.0 demonstrates the ability to operate very conservatively. The bank should anticipate that this firm will always be able to meet its short-term liabilities. B. This company is already having problems meeting its short-term liabilities. C. An acid-test ratio = 1.0 means that this firm has $1.00 in current assets for every $2.00 in current liabilities. Peak Performance is a wellrun operation, as long as it can continue to sell-off its inventory. D. An acid test ratio = 1.0 tells us that without adequate inventory turnover, this company may represent a higher risk. Peak Performance's acid test ratio shows that the firm maintains $1.00 in current assets for every $1.00 in current liabilities. 374. Backstreet Books, a small eclectic bookstore in a bustling college town wants to open another store at the west end of campus. Allison Robards, the store owner, plans to visit her banker in the hopes of obtaining additional financing. In preparation for her visit, the banker asks her for the following information: Calculate the debt to equity ratio for Backstreet Books. A. B. C. D. 250% 105% 75% 30% 375. Peak Performance Sporting Goods Company continues to perform well in spite of an economic recession. Company executives credit this to the strong partnerships it enjoys with category killer and large discount chains. Last week Peak Performance reported basic EPS [earnings per share] = $.80/share. If the firm has 4,000,000 shares outstanding, net income after taxes for the same period = ______. A. B. C. D. $80,000 $5,000,000 $3,200,000 $32,000 376. The top managers of Highbrow Bookstores want to indicate to the firm's shareholders how effectively they have managed the company. Perhaps the most meaningful way to do this would be by reporting strong: A. B. C. D. liquidity ratios. leverage ratios. activity ratios. profitability ratios. 377. Peak Performance Sporting Goods Company competes with several other firms in the retail industry for important visibility and retail space in large stores. The company's chief financial officer knows that in order to attract investors, the company must demonstrate growth, and its management must outperform the competition. The CFO continuously watches __________________ because these are key to measuring growth. A. B. C. D. activity ratios profitability ratios leverage ratios liquidity ratios 378. Peak Performance Sporting Goods Company has collected the following information about itself and its competitors: Which of the following statements explains the importance of this information? A. Return on Sales is an indication of how well Peak Performance is competing with others in the industry in generating income from sales. B. Although this information is important to Peak Performance, it is an internal calculation. Investors will not compare Peak Performance's return on sales with others. There are too many other variables such as higher expenses, which may prevent Peak Performance from maintaining the lowest measure. C. Unlike other measurements, a firm hopes that its Return on Sales is the lowest in the industry, thus, Peak Performance is neither doing the best nor doing the worst in its industry. D. As a profitability measurement, return on sales is not as important to the CFO as earnings per share, because this calculation does not show a dilution of ownership. 379. Peak Performance Sporting Goods Company has reported net income after taxes = $3,750,000, with 18,250,000 shares outstanding. Basic Earning per Share for Peak Performance = _________. A. B. C. D. approximately $.21/share approximately $20.50/share approximately $4.87/share approximately - $2.00/share 380. Bob Stewart plans to visit his financial planner today to discuss investment strategy. As a young, "20 something" accountant, he knows he can afford to invest in a few riskier investments. Which of the following ratios will be an important measure of profitability for Bob? A. B. C. D. return on sales return on equity inventory turnover acid test ratio 381. Marshall McBride inherited $10,000 from his Great Aunt Martha. He invested $5,000 in a new start-up venture, 10th Generation, Inc., and the other $5,000 in Major Chemicals, Inc, a well-known chemical company that's been around for years. Yesterday, he gathered the following information from the financial statements of these companies At this time, Marshall's return on equity is: A. 16% on the 10th Generation, Inc. stock; 11% on the Major Chemicals, Inc. stock B. 8.5% on the 10th Generation, Inc stock; 10.5% on the Major Chemicals, Inc. stock C. 2.24% on the 10th Generation, Inc stock; 2.8% on the Major Chemicals, Inc. stock D. 4.5% on the 10th Generation, Inc. stock; 5.60% on the Major Chemicals, Inc. stock 382. Marshall McBride inherited $10,000 from his Great Aunt Martha. He invested $5,000 in a new, risky start-up venture, 10th Generation, Inc., and the other $5,000 in Major Chemicals, Inc, a well-known chemical company that's been around for years. Today, his financial planner called to inform him that the Return on Equity on 10th Generation = 6.28%; and, Return on Equity on Major Chemicals = 10.50%. Which of the following facts is important information for Marshall McBride? A. B. C. D. The return on equity on new companies is always lower than the return on equity of well established firms. Investors willing to take added risk, expect higher returns. Return on equity is a liquidity ratio that has very little bearing on profitability. If Marshall wants to know how well his investments are performing, he should employ leverage ratios such as the debt to equity ratio. 383. Allison Robards is the owner of Backstreet Books, a small eclectic style bookstore in a bustling college town. Allison prides herself in selecting hard to find books and magazines that her clientele enjoy. Recently, Allison is experiencing a cash flow shortage, and she is concerned that she may be purchasing too many copies of each title. Having recently completed a business class, you suggest to Allison that she calculate the ______________ ratio for her store, and then compare it to other stores in her industry. A. B. C. D. current debt to equity Return on equity Inventory turnover 384. We would expect the inventory turnover ratio for a ski shop to be _______ than the turnover for a convenience store. A. B. C. D. higher more meaningful lower less helpful 385. Explain the differences between managerial and financial accounting, and give examples of the types of problems and issues examined by each of these areas of accounting. 386. Discuss the role of an independent auditor. Provide information about the types of accounting activities they perform and the recent laws that have emerged to help guide them as they do their job. 387. Thoroughly describe each of six parts of the accounting cycle. 388. What is the difference between a journal and a ledger? How are journals and ledgers incorporated into the accounting cycle? 389. Explain the meaning of the fundamental accounting equation and its relation to the Balance Sheet. If it is helpful, create an example using numbers. 390. Explain the difference between current, fixed, and intangible assets. Give two examples of each of these different types of assets. 391. Identify the three key financial statements that corporations are required to prepare, and describe the type of information found on each. 392. Identify and explain the differences between LIFO and FIFO inventory valuation methods. What would be the difference in gross margin using FIFO versus LIFO? 393. What is ratio analysis? Explain the four different types of ratios and how each is used. 394. What is the difference between a profit [net income after taxes] on an income statement and the cash balance reflected at the bottom of the statement of cash flows? Mini-Case Minnie A. Wright-Hoff works as an accountant for Double Entry Doors, Inc. Her company sells and installs oversized garage doors needed by large vehicles. Most of Minnie's work involves helping department heads and other decision-makers by measuring and reporting costs for their departments, and by identifying areas where departments are exceeding their budgets. However, as one of only three accountants employed by Double Entry Doors, Minnie is something of a "jill-of-all-trades" in terms of her accounting assignments. For example, she recently spent several hours summarizing all of the financial data in account ledgers to see if the information was correct and balanced. Her efforts revealed no problems, so she is now ready to start working on the firm's financial statements. Minnie is interested in this part of the accounting cycle because she likes to be one of the first to know the "bottom line" her company will report. She knows that she and the other accountants who work on these statements can influence the results by the choices they make about the way they report certain items. 395. The fact that Minnie spends most of her time measuring costs and checking to see if departments are staying within their budgets suggests that she is often involved in: A. B. C. D. Auditing. Managerial accounting. Bookkeeping. Departmental certification. 396. The last major task Minnie completed before getting ready to prepare the firm's financial statements was the preparation of the: A. B. C. D. Cash budget. Master budget. Trial balance. Internal audit. 397. The fact that Minnie wants to determine the "bottom line" for Double Entry Doors means that she is particularly interested in preparing her firm's: A. B. C. D. Income statement. Cash flow statement. Master budget. Capital budget. 398. Double Entry Door's suppliers maintained very stable prices for many years, but Minnie has noticed that the cost of doors has been rising steadily for the past few years. She is concerned that, given the company's current accounting methods of basing its cost on the most recent doors purchased, this will result in a much lower net income than in the past. The most likely reason for her concern is that Double Entry has apparently been using: A. B. C. D. The FIFO inventory valuation method to determine its cost of goods sold. A great deal of equity financing to purchase the doors. The LIFO inventory valuation method to determine its cost of goods sold. A depreciation method based on the average value of inventory. 399. Minnie knows that Double Entry has a lot of short-term debt coming due in the next year, and wants to make sure that the company will have the ability to make the required payments. Given a troubling downturn in construction activity over the past couple of months, she is not confident that Double Entry can count on selling its current inventory of doors before the debt comes due. Which of the following ratios would be most relevant to Minnie? A. B. C. D. current ratio debt to equity ratio return on sales acid-test ratio 17 KEY 1. (p. 456) Accounting is an easy subject for people to understand because almost everyone is exposed to basic accounting concepts in their everyday life. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-1 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #1 Topic: The Role of Accounting Information 2. (p. 456) Although managers who work for large firms must know something about accounting, people who run small businesses only need to know the basics of bookkeeping. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-1 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #2 Topic: The Role of Accounting Information 3. (p. 456) It is impossible to run a company effectively without the ability to read and understand basic accounting reports and financial statements. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-1 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #3 Topic: The Role of Accounting Information 4. (p. 456) With increased computer technology, the ability to read and understand financial statements is no longer an important skill for managers. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-1 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #4 Topic: The Role of Accounting Information 5. (p. 456) Accounting provides information about the financial condition and operating performance of a firm. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-1 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #5 Topic: The Role of Accounting Information 6. (p. 456) The sole purpose of accounting is to help managers evaluate the financial condition of the firm so that they may make better pricing decisions. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-1 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #6 Topic: The Role of Accounting Information 7. (p. 457) Inputs to the accounting system include sales documents. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-1 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #7 Topic: Figure 17.1 8. (p. 456) Purchasing insurance, paying employees, and using supplies are examples of financial transactions. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-1 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #8 Topic: The Role of Accounting 9. (p. 457) Accounting provides financial information that can be useful to owners, creditors, suppliers, employees, and competitors of an organization. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-1 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #9 Topic: The Role of Accounting 10. (p. 456) Accountants do the work involved in recording financial events and transactions, but the actual classifying and interpreting of this data is left to financial managers. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-1 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #10 Topic: The Role of Accounting Information 11. (p. 456) Accounting involves both the recording and the interpreting of financial events. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-1 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #11 Topic: The Role of Accounting 12. (p. 456 457) In an effort to maintain a competitive advantage, firms do not share accounting information with people outside of the firm. FALSE Accounting is the measurement and reporting of financial information to users inside and outside of the organization. People outside the firm would include owners, creditors, suppliers, employees, and the government. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-1 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #12 Topic: The Role of Accounting 13. (p. 456) The U.S. government is a user of a firm's accounting information. TRUE The U.S. government's Internal Revenue Service requires that a firm report its income so that the firm's tax liability can be determined; government regulatory agencies also sometimes require accounting information. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-1 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #13 Topic: The Role of Accounting 14. (p. 456) A business manager who keeps his/her customers satisfied can be successful without having a great deal of knowledge about accounting practices. FALSE Financial information, provided mainly by accountants, is a critical input into managerial decision-making. In order to be a successful manager, you must know something about accounting. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-1 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #14 Topic: The Role of Accounting 15. (p. 456) Jeremy operates his own small business, but he doesn't want to be bothered with accounting information. He tells his friends, "All I need accounting for is to prepare my income tax return for my business. I'll hire someone to do that for me." Jeremy's attitude would be disastrous if he managed a large firm, but is a reasonable view for a small business owner. FALSE The fact is that you have to know something about accounting if you want to understand business. Accounting information reveals the financial health of a business. AACSB: Reflective Thinking Blooms: Synthesis Learning Goal: 17-1 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #15 Topic: The Role of Accounting 16. (p. 456) Good decisions are based on good information. Organizations need accounting—to provide good financial information. TRUE Accounting provides management and other interested parties the information they need to make better decisions. AACSB: Reflective Thinking Blooms: Synthesis Learning Goal: 17-1 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #16 Topic: The Role of Accounting 17. (p. 456) A firm's financial statements represent a health report regarding the condition of the firm. TRUE Financial statements tell the owner, manager, and other stakeholders about the financial health of the business. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-1 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #17 Topic: The Role of Accounting 18. (p. 455 As noted in the story about the Bakery Barn, CPA Sean Perich's small business venture, trying to be everything for your business is often an impossible task. Due to the fact that solid accounting procedures are one of the lifelines for your business, it makes sense to hire an accountant even if you are knowledgeable about that functional unit of the business. 456) TRUE Setting up an accounting system, preparing weekly and monthly financial statements, and monitoring cash flows take a lot of time. You may find it nearly impossible to handle the operations of the business, and the bookkeeping and accounting responsibilities. Hiring another professional may pay for itself. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-1 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #18 Topic: The Role of Accounting 19. (p. 457) Referring to an accounting system, inputs refers to events and transactions that occur within the business, while outputs refers to the journal entries and ledger categorization that occurs after the events and transactions are recorded. FALSE An accounting system consists of inputs, processes, and outputs. Inputs are the events and transactions that occur within the business operations; processes are the recording of events and transactions into journals and posting of journal entries to the ledger; outputs refer to the financial statements that accountants prepare. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-1 Level of Learning 3: Application of principles Nickels - Chapter 17 #19 Topic: Figure 17.1 20. (p. 457) Government organizations such as the IRS and other government regulatory agencies are interested in a firm's accounting information in order to help the firm strategize about ways to cut costs in order to minimize net income before taxes. FALSE Government agencies such as the IRS collect tax revenues. They are interested in the firm's tax obligations; and/or they audit publicly traded firm's accounting records to make certain they follow generally accepted accounting principles. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-1 Level of Learning 3: Application of principles Nickels - Chapter 17 #20 Topic: Figure 17.2 21. (p. 457) There are five key working areas in accounting: financial accounting, managerial accounting, auditing, tax accounting, and government and not-for-profit accounting. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #21 Topic: Accounting Disciplines 22. (p. 457) Accounting information is not relevant for nonprofit organizations. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #22 Topic: Accounting Disciplines 23. (p. 457) Churches, schools, and charitable organizations all hire accountants. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #23 Topic: Accounting Disciplines 24. (p. 457) The accounting profession is divided into two main fields: bookkeeping and auditing. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #24 Topic: Accounting Disciplines 25. (p. 457) Budget preparation is one aspect of managerial accounting. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #25 Topic: Managerial Accounting 26. (p. 458) The work of a certified management accountant is intended to enable people outside of the organization to make investment decisions. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #26 Topic: Managerial Accounting 27. (p. 457) Activities of managerial accountants include measuring and reporting the costs of production, marketing and other functions within the organization. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #27 Topic: Managerial Accounting 28. (p. 458) Financial accounting and managerial accounting are similar in that they both provide information intended primarily for people inside the organization. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #28 Topic: Managerial Accounting 29. (p. 458) Financial accounting involves activities such as preparing budgets and measuring production costs. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #29 Topic: Financial Accounting 30. (p. 458) Financial accounting is used to provide information and analysis managers within the organization can use to assist them in decision making. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #30 Topic: Financial Accounting 31. (p. 458) Financial accountants prepare reports for owners, creditors, suppliers, and others outside of the organization. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #31 Topic: Financial Accounting 32. (p. 458) A firm's annual report is a yearly statement of the financial condition, progress, and expectations of the organization during one year. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #32 Topic: Financial Accounting 33. (p. 459) An individual who provides accounting services to individuals and businesses on a fee basis is referred to as a private accountant. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #33 Topic: Financial Accounting 34. (p. 459) All firms with more than four employees should have a full-time accountant. FALSE AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #34 Topic: Financial Accounting 35. (p. 460) The job of reviewing and evaluating the records used to prepare a company's financial statements is referred to as auditing. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #35 Topic: Auditing 36. (p. 460) Independent audits are prepared by accountants within the organization to ensure that proper accounting procedures are followed. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #36 Topic: Auditing 37. (p. 460) An independent audit is an evaluation and unbiased opinion about the accuracy of a company's financial statements. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #37 Topic: Auditing 38. (p. 461) A tax accountant is responsible for preparing tax returns and developing tax strategies. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #38 Topic: Tax Accounting 39. (p. 460) An accountant who has a bachelor's degree, two years of experience in internal auditing and who has passed an exam by the Institute of Internal Auditors can become recognized as a certified internal auditor. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #39 Topic: Auditing 40. (p. 461) The Internal Revenue Service is responsible for establishing accounting standards used by accountants working in government accounting. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #40 Topic: Government and Not-for-Profit Accounting 41. (p. 461) Citizens and special interest groups often have interest in the information generated by government accounting. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #41 Topic: Government and Not-for-Profit Accounting 42. (p. 459) GAAP refers to a set of standards concerning accounting principles that were established by the Financial Accounting Standards Board. TRUE GAAP refers to generally accepted accounting principles that are established by the Financial Accounting Standards Board. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-2 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #42 Topic: Accounting Disciplines 43. (p. 458) Information contained in a firm's annual report largely represents work done by managerial accountants. FALSE Annual reports are documents used by persons outside the organization to gain knowledge about the organization. Financial accountants prepare the financial documents for this report. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-2 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #43 Topic: Accounting Disciplines 44. (p. 459) A series of high-profile scandals in the early 2000s put the accounting profession under intense scrutiny. TRUE In the early 2000s, the accounting profession was plagued with several accounting scandals which have resulted in new laws such as the Sarbanes-Oxley Act which adheres to tough government reporting standards. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-2 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #44 Topic: Accounting Disciplines 45. (p. 457) Accounting is not important for nonprofit organizations since financial data is not critical to their success. FALSE Nonprofit organizations require accounting information. These organizations hire accountants to show contributors how their money is being used. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-2 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #45 Topic: Accounting Disciplines 46. (p. 456) Accounting, as the language of business, is solely concerned with providing information useful to managers of profit-seeking firms. FALSE One purpose of accounting is to help managers evaluate the financial condition and the operating performance of an organization so they may make better decisions. This type of information is useful to managers of both profit-seeking and not-for-profit organizations. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-2 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #46 Topic: Accounting Disciplines 47. (p. 459) As a certified public accountant, you would be working in the area of managerial accounting. FALSE A certified management accountant works in the area of managerial accounting. A certified public accountant is involved primarily in financial accounting. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-2 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #47 Topic: Financial Accounting 48. (p. 459) Jamal is an accountant employed full-time by The Barkley Company. Jamal is an example of a public accountant. FALSE A private accountant works for a single firm, government agency, or nonprofit organization. A public accountant provides services to individuals or businesses on a fee basis. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-2 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #48 Topic: Financial Accounting 49. (p. 457) Managers who are concerned about keeping costs under controlshould be very interested in the information and advice provided by their company's managerial accountants. TRUE Managerial accountants provide information and analysis to managers to help them make better decisions. Among the areas of concern for managerial accountants are the reporting of costs of production, marketing and other functions of an organization, and checking to determine if units in the organization are staying within their budgets. AACSB: Reflective Thinking Blooms: Synthesis Learning Goal: 17-2 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #49 Topic: Managerial Accounting 50. (p. 459) Recent accounting scandals raised serious questions about the legitimacy of an accounting firm performing both auditing and consulting work for the same company. TRUE The purpose of legislation such as the Sarbanes-Oxley Act is to prevent conflicts of interest occurring when an outside accounting firm is hired to perform both auditing and consulting services for a company. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-2 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #50 Topic: Auditing 51. (p. 459) As a certified public accountant (CPA), Kay might become involved in helping clients select appropriate accounting computer software for their firm. TRUE Many big public accounting firms earn a sizable percentage of revenues from consulting and other services. Public accountants may design an accounting system for a firm, and help select the appropriate computer and software to run the system. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-2 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #51 Topic: Financial Accounting 52. (p. 460) In large companies, certified internal auditors are usually responsible for preparing tax returns and developing tax strategies for businesses. FALSE Internal auditors perform audits for organizations and also look into operational efficiencies and effectiveness. Tax returns are prepared by tax accountants. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-2 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #52 Topic: Auditing 53. (p. 460) According to the "Legal Briefcase" box in Chapter 17, a forensic accountant investigates company records for evidence of fraud. TRUE Forensic accountants are hired by a court of law to investigate accounting fraud and accounting improprieties by studying the books of the organization and talking with employees who may have information on fraudulent company operations. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-2 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #53 Topic: Legal Briefcase box 54. (p. 460) As the burden of taxes grows, the role of the auditor becomes increasingly important to the organization. FALSE The burden of staying current with tax laws is the responsibility of the tax accountant. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-2 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #54 Topic: Accounting Disciplines 55. (p. 459) The Sarbanes-Oxley Act strengthens the protection for whistleblowers who report wrongful actions of company officers. TRUE By definition, whistleblowers are stakeholders who report fraudulent and other illegal behavior to government authorities. The Sarbanes Oxley Act encourages whistleblowing. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-2 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #55 Topic: Figure 17.3 56. (p. 459) The Sarbanes-Oxley Act prohibits accounting firms from providing certain non-auditing work (such as consulting services) to companies they audit. TRUE One of the main parts of this legislation prohibits firms from hiring public accounting firms to perform both independent audits and consulting services. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-2 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #56 Topic: Figure 17.3 57. (p. 457) Because each business is unique, the accounting profession recognizes that the accounting principles followed by one company may need to be completely different from the accounting principles followed by another firm. FALSE In order for investors, creditors, government officials, employees, and other stakeholders to have faith and confidence in accounting reports and financial statements, it is important that methods used by accountants adhere to specific guidelines. The Financial Accounting Standards Board (FASB) defines the generally accepted accounting principles (GAAP) that accountants must follow. AACSB: Reflective Thinking Blooms: Synthesis Learning Goal: 17-2 Level of Learning 3: Application of principles Nickels - Chapter 17 #57 Topic: Accounting Disciplines 58. (p. 461) Derek has a bachelor's degree in accounting and additional training in tax law. He is responsible for preparing tax returns and developing tax strategies for his employer, and has done so for the past seven years. Derek is a certified government accountant. FALSE Derek is a tax accountant. In addition to being trained in tax law, tax accountants are responsible for preparing tax returns and developing tax strategies. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-2 Level of Learning 3: Application of principles Nickels - Chapter 17 #58 Topic: Tax Accounting 59. (p. 460) Citywide Insurance Corporation's internal accountants can prepare an audit for the company. TRUE Internal audits are performed by accountants within the organization to ensure that proper accounting procedures and reports are being carried on within the company. Accountants outside of the firm prepare independent audits. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-2 Level of Learning 3: Application of principles Nickels - Chapter 17 #59 Topic: Auditing 60. (p. 461) The Financial Accounting Standards Board only sets standards for accountants in the private sector; however, government accountants have no universally accepted procedures that they must follow. FALSE The Government Accounting Standards Board (GASB) has established generally accepted procedures for government accountants. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-2 Level of Learning 3: Application of principles Nickels - Chapter 17 #60 Topic: Government and Not-for-Profit Accounting 61. (p. 461) Martha is a member of a conservative political group that wants to identify and publicize examples of wasteful government spending. The type of accounting information Martha and her group will follow most closely is provided by certified public accountants. FALSE Concerned citizens and special interest groups that want to determine how the government is using the taxpayers' money will be most interested in information provided by government accountants. AACSB: Reflective Thinking Blooms: Synthesis Learning Goal: 17-2 Level of Learning 3: Application of principles Nickels - Chapter 17 #61 Topic: Government and Not-for-Profit Accounting 62. (p. 462) Bookkeeping is part of the accounting cycle, but accounting goes far beyond the activities involved in bookkeeping. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #62 Topic: The Accounting Cycle 63. (p. 462) A major part of a bookkeeper's job is to interpret financial data and suggest strategies for improving the firm. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #63 Topic: The Accounting Cycle 64. (p. 462) After recording a business's transactions, bookkeepers usually classify the recorded transactions into groups with common characteristics. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #64 Topic: The Accounting Cycle 65. (p. 462) A bookkeeper's first task is to record the firm's transactions in a journal. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #65 Topic: The Accounting Cycle 66. (p. 462) The books where accounting data are first entered are called ledgers. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #66 Topic: The Accounting Cycle 67. (p. 462) Double-entry bookkeeping requires that every transaction be recorded in two places. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #67 Topic: The Accounting Cycle 68. (p. 462) Double-entry bookkeeping can help identify a recording error made by a bookkeeper. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #68 Topic: The Accounting Cycle 69. (p. 462) A journal is where the initial record of a day's transactions is entered. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #69 Topic: The Accounting Cycle 70. (p. 462) The accounting book that provides all the information about a single account in one place is called the ledger. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #70 Topic: The Accounting Cycle 71. (p. 463) At present, accounting software packages have proven to be too complex and expensive to be useful for owners of small businesses. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #71 Topic: Accounting Technology 72. (p. 462) The accounting cycle is a six-step procedure that results in the preparation and analysis of major financial statements. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #72 Topic: Figure 17.4 73. (p. 462) Posting is a step in the accounting cycle that involves transferring information from the journal into the appropriate accounts in a ledger. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #73 Topic: Figure 17.4 74. (p. 462) There are two major financial statements prepared at the completion of the accounting cycle: the journal and the ledger. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #74 Topic: Figure 17.4 75. (p. 462) The accounting cycle usually involves the work of both the bookkeeper and the accountant. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #75 Topic: Figure 17.4 76. (p. 462) The purpose of a trial balance is to prepare a practice balance sheet. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #76 Topic: The Accounting Cycle 77. (p. 463) One of the statements prepared in the accounting cycle is the statement of cash flows. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #77 Topic: The Accounting Cycle 78. (p. 463) Many businesses now use computers and accounting software to simplify the mechanical aspects involved in accounting. TRUE Although computers and accounting software greatly reduces the time involved in posting journal entries to the ledger, performing the trial balance, and preparing financial statements, they do not take the place of expertise provided by the accountant. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #78 Topic: Accounting Technology 79. (p. 463) Accounting software for small businesses has become so sophisticated that most small business owners will never need to consult with an actual accountant or understand accounting information themselves. FALSE Although computers and accounting software greatly reduces the time involved in posting journal entries to the ledger, performing the trial balance, and preparing financial statements, they do not take the place of expertise in understanding and interpreting results provided by the accountant. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #79 Topic: Accounting Technology 80. (p. 463) Accounting software has proven to be especially helpful for small business owners. TRUE Small business owners often lack the knowledge about the steps in the accounting cycle. Accounting software minimizes the work and time involved to perform these tasks. The software does not provide the decision making capabilities of a trained accountant. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #80 Topic: Accounting Technology 81. (p. 462) Carol has worked as a bookkeeper for a small clothing store for almost three years. Her old boss recently retired and a new manager took over. The new manager frequently asks her for information and advice about how to interpret the information she records. Carol's experience as a bookkeeper means she is qualified to provide this type of advice. FALSE Bookkeepers typically handle the part of the accounting cycle that involves recording information about business transactions. Bookkeepers do not normally have the training and experience needed to analyze and interpret this information. That job is generally left to accountants. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-3 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #81 Topic: The Accounting Cycle 82. (p. 462) One advantage of the double-entry method of bookkeeping is that it helps to identify mistakes made in recording financial transactions. TRUE To avoid mistakes and entry errors, bookkeepers record all transactions in two places. They then can check one list against the other to make sure that they add up to the same amount. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-3 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #82 Topic: The Accounting Cycle 83. (p. 462) Bark Three Times Pet Store recently hired an accountant to make sense of each day's transactions, and keep better financial records for the business. The accountant showed the owner that the ledger in a computerized accounting system would automatically take entries and post them to the correct accounts in the ledger, making the bookkeeping tasks much easier. TRUE A specialized accounting book or computer program in which information from journals is accumulated into specific categories and posted so that managers can find all the information about one account in the same place is called a ledger. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-3 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #83 Topic: The Accounting Cycle 84. (p. 463) Computerized accounting programs have eliminated the need to prepare a trial balance. FALSE Accounting software eliminates much of the time needed to prepare a trial balance. However, as part of the accounting cycle, a trial balance is required in order to prepare the financial statements of the firm. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-3 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #84 Topic: Accounting Technology 85. (p. 462) Olivia is a public accountant. She prepares monthly financial statements for her client, Chick's Auto Body Shop. Presently, though, she must summarize the data in the accounting ledgers to determine if the figures are correct and balanced. Olivia will prepare a statement of cash flows in order to complete this step of the cycle. FALSE Olivia is at the step of the cycle where she should prepare a trial balance. The purpose of a trial balance is to summarize all the data in the ledger accounts to determine if the figures are correct and balanced. A statement of cash flows is a financial statement prepared in the fifth stage of the accounting cycle. AACSB: Reflective Thinking Blooms: Synthesis Learning Goal: 17-3 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #85 Topic: The Accounting Cycle 86. (p. 463) Mike is the head of the accounting department at Micro flash. After completing the trial balance, he will proceed with the preparation of the balance sheet, the income statement and the statement of cash flows. TRUE After the trial balance is completed, the accounting cycle moves to the preparation and analysis of the key financial statements: The balance sheet, income statement, and statement of cash flows. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-3 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #86 Topic: The Accounting Cycle 87. (p. 463) In addition to the tasks of recording and classifying accounting information, the best accounting software programs currently available for small businesses have the ability to make financial decisions, thus eliminating the need for owners of small businesses to consult with accountants or understand accounting terminology. FALSE No computer software program yet has the ability to make good financial decisions by itself. A trained, experienced accountant is still needed to assist a firm in achieving its financial goals. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-3 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #87 Topic: Accounting Technology 88. (p. 463) Juliet has found that her small business needs a better way to maintain accounting records and analyze business opportunities. Currently, she uses a manual accounting system. These days, any off-the-shelf accounting package available at a local software retailer should do an excellent job of meeting her firm's accounting needs. FALSE Businesses differ in their accounting needs. A computerized accounting system is a wonderful tool, but business owners should understand exactly which computer accounting system is best suited for their particular needs. Thus, it's a good idea for small-business owners to hire or consult with an accountant to identify the particular needs of the firm. AACSB: Reflective Thinking Blooms: Synthesis Learning Goal: 17-3 Level of Learning 3: Application of principles Nickels - Chapter 17 #88 Topic: Accounting Technology 89. (p. 462) The steps in the accounting cycle do not need to be followed in the order stated. Monthly financial statements can be prepared with a good amount of accuracy, prior to posting in the ledger or preparing the trail balance. FALSE Financial statements rely on the accurate posting in the ledger, and the checks provided by the trial balance. Financial statements cannot be verified for accuracy if the proper entries are not transferred to the ledger, and into the appropriate accounts. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-3 Level of Learning 3: Application of principles Nickels - Chapter 17 #89 Topic: The Accounting Cycle 90. (p. 463) Courtney McRae started the Row-Your-Boat paddle boat and row boat business at a nearby lake resort. She wanted to combine her accounting degree with her love of the outdoors and fishing. One of her first business purchases was a computerized accounting system. She learned in her college classes that a good software system will eliminate accounting cycle steps and the time it takes for her interpret the results. As she put it, "It should make the decisions for me!" FALSE A good computerized accounting system will not replace the need for the decision making skills of an accountant. AACSB: Reflective Thinking Blooms: Analysis Learning Goal: 17-3 Level of Learning 3: Application of principles Nickels - Chapter 17 #90 Topic: Accounting Technology 91. (p. 464) The key financial statements are the balance sheet, the income statement, and the statement of cash flows. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #91 Topic: Understanding Key Financial Statements 92. (p. 464) The income statement reports the difference between a firm's assets and its liabilities as of a certain date. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #92 Topic: Understanding Key Financial Statements 93. (p. 464) A firm's balance sheet reports its financial condition on a specific date. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #93 Topic: Understanding Key Financial Statements 94. (p. 464) The balance sheet reports revenues and selling costs for a period of time. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #94 Topic: Understanding Key Financial Statements 95. (p. 464) An income statement reports what a company owns and owes on a certain day. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #95 Topic: Understanding Key Financial Statements 96. (p. 466) Assets are reported on the firm's balance sheet. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #96 Topic: Classifying Assets 97. (p. 466) Liabilities are reported on the income statement. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #97 Topic: Liabilities and Owners Equity Accounts 98. (p. 466) Assets are economic resources that are owned by a firm. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #98 Topic: Classifying Assets 99. (p. 464) The fundamental accounting equation is as follows: Assets = Liabilities + Owners' equity. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #99 Topic: The Fundamental Accounting Equation 100. (p. 465) The balance sheet reflects the fact that assets equal the sum of liabilities and owners' equity. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #100 Topic: The Fundamental Accounting Equation 101. (p. 465) A balance sheet is composed of assets, liabilities, and revenues. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #101 Topic: The Balance Sheet 102. (p. 469) The cost of goods sold includes all the costs of buying and keeping merchandise available for sale. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #102 Topic: Liabilities and Owners Equity Accounts 103. (p. 469) Rent, salaries, insurance and depreciation are examples of the cost of goods sold. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #103 Topic: Liabilities and Owners Equity Accounts 104. (p. 468 Gross profit represents profit after the deduction of cost of goods sold, and before the deduction of all other selling expenses, general expenses, and tax expense. 469) TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #104 Topic: Liabilities and Owners Equity Accounts 105. (p. 469) Rents, salaries, utilities and insurance are examples of operating expenses. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #105 Topic: Operating Expenses 106. (p. 469) The two major classes of operating expenses are current expenses and long-term expenses. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #106 Topic: Operating Expenses 107. (p. 468) General expenses include office salaries, rent, and insurance. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #107 Topic: Operating Expenses 108. (p. 469) Net income before taxes is found by deducting total operating expenses from gross profit. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #108 Topic: Net Profit or Loss 109. (p. 471) A statement of cash flows summarizes a company's cash receipts and cash payments over a period of time. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #109 Topic: The Statement of Cash Flows 110. (p. 471) Cash flow statements identify three sources of cash receipts and disbursements: Assets, liabilities and owners' equity. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #110 Topic: The Statement of Cash Flows 111. (p. 471) The statement of cash flows calculates cash flows from operations, investing activities, and financing activities. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #111 Topic: The Statement of Cash Flows 112. (p. 472) An analysis of the statement of cash flows can help a firm prevent cash shortages. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #112 Topic: The Statement of Cash Flows 113. (p. 471) The statement of cash flows shows a firm's revenues, costs of goods sold, expenses, and net income. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #113 Topic: The Statement of Cash Flows 114. (p. 466) The equipment a firm owns and the money it has in its bank account are considered assets. TRUE Firm's hold current assets and fixed assets. Cash, accounts receivable, and inventory are examples of current assets. Property and equipment are examples of fixed assets. Typically, fixed assets have an estimated useful life, whereas current assets are used-up with a year's time. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #114 Topic: Classifying Assets 115. (p. 466) Brand names such as Coca-Cola and McDonald's are examples of intangible assets. TRUE Brand recognition has value. With the help of other firms who calculate the value of various brands, firms often include the value of its brand (s) as an intangible asset on its balance sheet. AACSB: Reflective Thinking Blooms: Synthesis Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #115 Topic: Classifying Assets 116. (p. 466) Assets are listed on the balance sheet in order of liquidity, with the most liquid assets listed first. TRUE Liquidity refers to an assets ability to turn into cash. Cash of course is the most liquid asset. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #116 Topic: Classifying Assets 117. (p. 466) The firm's most valuable assets are listed at the top of its balance sheet. FALSE Both current and fixed assets are needed and valued by most companies in order to efficiently and effectively run their operations. A firm purchases fixed assets with the intention of using them over an extended period of time - greater than one year. Fixed assets have an estimated useful life. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #117 Topic: Classifying Assets 118. (p. 466) Patents and copyrights are examples of intangible assets. TRUE Intangible assets do not have physical form, yet they have monetary value for the firm. Sometimes these are referred to as intellectual capital due to their importance as a valuable economic resource. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #118 Topic: Classifying Assets 119. (p. 466) Liquidity refers to how quickly liabilities must be paid. FALSE Liquidity is a term applied to a firm's assets. Liabilities are debts owed by the firm. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #119 Topic: Liabilities and Owners Equity Accounts 120. (p. 468) Net income is simply the difference between revenue and cost of goods sold. FALSE Revenues - cost of goods sold = gross profit. Net income represents the "bottom line" of the Income statement. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #120 Topic: The Income Statement 121. (p. 469) The cost of goods sold reflects the selling price of the merchandise sold over a period of time. FALSE The cost of goods sold reflects the price that a firm paid for merchandise that it plans to resell; or the price of raw materials that a firm paid for in order to produce a good or service for resale. Revenues = Selling Price X Volume. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #121 Topic: Cost of Goods Sold 122. (p. 469) The cash a firm raised from issuing new debt or equity capital would be reported on a statement of cash flows. TRUE Cash received or disbursed through financing activities are recorded on the statement of cash flows. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #122 Topic: The Statement of Cash Flows 123. (p. 465) The Barkley Company's balance sheet shows: what the business owns, minus what the business owes, equals the book value (or, net worth) of the business. TRUE Assets [what the firm owns], minus liabilities [what the firm owes], = the owners' equity [its net worth]. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #123 Topic: The Balance Sheet 124. (p. 465) The Barkley Company bought supplies in early January that it must pay for by the end of the month. These purchases are posted to accounts payable and listed as assets on the firm's balance sheet. TRUE When a firm makes purchases on account, and those purchases must be paid for in less than a year, they are recorded as accounts payable obligations and recorded under the liabilities section of the balance sheet. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #124 Topic: The Balance Sheet 125. (p. 467) One important source of financing for most small businesses is the owners savings. If the owner contributes money to the business from his/her personal savings, it is will be recorded in the Owner's Equity account on the balance sheet. TRUE Two important sources of financing for businesses are borrowed funds (liabilities) and contributed funds (owners' equity). AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #125 Topic: Liabilities and Owners Equity Accounts 126. (p. 466) The Barkley Company has recorded its unpaid bill for supplies under a current liabilities account on the balance sheet. This payment will be due to the supplier in less than a year. TRUE Current liabilities are debts that are due in less than one year. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #126 Topic: Liabilities and Owners Equity Accounts 127. (p. 467) The Barkley Company wants to know the value of its owners' equity. It will total its assets and subtract its liabilities. TRUE Assets - liabilities = owners' equity AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #127 Topic: Liabilities and Owners Equity Accounts 128. (p. 466) The Barkley Company balance sheet shows the following items: Accounts payable totaling $50,000; salaries payable totaling $65,000, and notes payable totaling $100,000. These are liabilities, or money that the firm owes others. TRUE Also known as debt, liabilities are obligations the firm owes others. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #128 Topic: Liabilities and Owners Equity Accounts 129. (p. 470) The "bottom line" of the Barkley Company's income statement is equal to the net worth of the firm. FALSE The "bottom line" of an income statement shows net profit (or net loss) after taxes are paid. The balance sheet will reflect the "net worth" of the firm. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #129 Topic: Net Profit or Loss 130. (p. 470) The Barkley Company will refer to its income statements to determine whether it was profitable, or, whether it lost money over the past year. TRUE The "bottom line" of the income statement shows profits (or net losses) over a period of time. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #130 Topic: Net Profit or Loss 131. (p. 468) The income statement computes net income by subtracting liabilities from assets. FALSE The income statement records revenues and then subtracts all expenses (including taxes) in order to calculate net income. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #131 Topic: The Income Statement 132. (p. 468) Revenue on the income statement represents the dollar amount of what is received for goods sold, services rendered and/or from other revenue sources. TRUE Revenues constitute sales from goods sold and/or services rendered, as well as monies received from other sources such as rent income or interest income from marketable securities. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #132 Topic: The Income Statement 133. (p. 469) The Barkley Company has several automobiles that are used in the business. Recently, the owners were told that even though the government permits the firm to depreciate the vehicles, it is not a deductible expense on the income statement. FALSE Depreciation is a legitimate expense on the Income Statement. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #133 Topic: Operating Expenses 134. (p. 469) When an accountant "writes off" the cost of a tangible asset over its estimated lifetime, it is called depreciation. TRUE Depreciation is the write-off each year of part of an asset over its estimated useful life. The government permits firms to depreciate a fixed asset over its lifetime, rather than deduct the entire expense when the asset is purchased. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #134 Topic: Operating Expenses 135. (p. 470) The total cost of goods sold reported on an income statement is not affected by the inventory valuation method the firm uses. FALSE The inventory valuation method used by a firm will affect the value of Cost of Goods Sold. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #135 Topic: Spotlight on Small Business box 136. (p. 470) Although a firm may use different inventory valuation methods, generally accepted accounting principles (GAAP) states that these methods must produce the same dollar value for the cost of goods sold. FALSE The accounting treatment of inventory may be different. Depending upon whether the accountant is using FIFO [first-in, first-out] or LIFO [last-in, first-out], the value of cost of goods sold may be different. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #136 Topic: Spotlight on Small Business box 137. (p. 470) Generally accepted accounting principles (GAAP) permits firms to choose among different methods of depreciation and inventory valuation. TRUE GAAP permits firms to choose among different methods of depreciation and inventory valuation, as long as the firms are consistent with their use. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #137 Topic: Spotlight on Small Business box 138. (p. 470) FIFO and LIFO are two common methods used to compute the depreciation of tangible assets. FALSE FIFO [first-in, first-out] and LIFO [last-in; last-out] are inventory valuation methods. Depreciation methods include, but are not limited to "straight-line" and "double-declining". AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #138 Topic: Spotlight on Small Business box 139. (p. 470) FIFO is a method of computing net cash flows by subtracting financial inflows from financial outflows. FALSE FIFO [first-in; first-out] is an inventory valuation method used for computing the cost of goods sold on an income statement. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #139 Topic: Spotlight on Small Business box 140. (p. 470) FIFO is a method of inventory valuation that assumes the items most recently purchased are also the items that are sold first. FALSE FIFO [first-in; first-out] assumes that the oldest items in inventory are sold first. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #140 Topic: Spotlight on Small Business box 141. (p. 470) The LIFO method of inventory valuation assumes the newest items in inventory are sold first. TRUE LIFO [last-in; first-out] assumes that the newest items in inventory are sold first. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #141 Topic: Spotlight on Small Business box 142. (p. 470) When Bark Three Times Pet Store sells inventory, the value of the cost of goods sold reported on the income statement will depend on which inventory valuation method it uses. TRUE Firms may utilize a few different methods of inventory valuation. The cost of goods sold value will differ depending upon which method is used. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #142 Topic: Spotlight on Small Business box 143. (p. 470) According to generally accepted accounting principles (GAAP), a firm must use the inventory valuation method that most accurately reflects the actual movement of goods through its inventory. FALSE GAAP does not concern itself with the movement of goods through a firm's inventory system. It is concerned with a firm choosing a method of valuation and consistently using that method. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #143 Topic: Spotlight on Small Business box 144. (p. 468) Banks are likely to request a firm's balance sheet when determining whether or not to loan money to the firm. However, banks would have little interest in the firm's income statement since it covers a short period of time. FALSE Both the income statement and the balance sheet are important in evaluating the financial health of an organization. Specifically, the income statement would show the firm's ability to generate the profits with which to pay back a loan. AACSB: Reflective Thinking Blooms: Synthesis Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #144 Topic: The Income Statement 145. (p. 466) Harrison Manufacturing owns land worth $600,000 and has $130,000 worth of cash in its bank account. In the asset section of the balance sheet, Harrison lists its land holdings prior to listing its cash since it is a higher value. FALSE A balance sheet lists assets in order of liquidity—i.e., how easily and quickly they can be converted into cash. The most liquid assets are called current assets, and they are listed first on the balance sheet. Obviously, cash is the most liquid asset of all. Land is not considered a liquid asset because it usually takes a significant amount of time and paperwork to sell it and collect the cash proceeds. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #145 Topic: Understanding Key Financial Statements 146. (p. 466) Julio borrowed money from a close friend to obtain a liquor license for his pub, and gave him a written promise to repay the amount within six months. Julio should list this business debt as an operating expense on his pub's balance sheet. FALSE Debts are listed as liabilities on a firm's balance sheet. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #146 Topic: The Balance Sheet 147. (p. 466) Bark Three Times Pet Store established a line of credit with its local banker and used (borrowed) $85,000 against it to purchase its first year's inventory. Since it is required to repay the money before the end of its fiscal year, the company's accountant lists this liability with the current liabilities on the balance sheet. TRUE Liabilities (borrowed funds) that must be repaid within a year's time are listed as current assets on the firm's balance sheet. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #147 Topic: Liabilities and Owners Equity Accounts 148. (p. 464 At this point in time, Bark Three Times Pet Store's balance sheet shows $100,000 in assets and $90,000 in liabilities. The company's accounting system will show the owners' equity as $190,000. 465) FALSE The fundamental accounting equation states: Assets = Liabilities + Owners equity. The equation can be manipulated by subtracting the Liabilities term from both sides of the equation and canceling the Liabilities term: Assets - Liabilities = Liabilities - Liabilities + Owners' Equity. It is then restated as: Assets - Liabilities = Owners' Equity. Therefore, $100,000 - $90,000 = $10,000. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #148 Topic: The Fundamental Accounting Equation 149. (p. 469) Marissa is taking her first course in accounting this semester. One of the first things she learns is that "revenue" and "net income" mean the same thing. FALSE Although both of these accounts are noted on the income statement, they mean different things. Revenues are the money coming into the business from the sale of goods and services. Net income is calculated by subtracting the cost of goods sold, operating expenses, and taxes from the revenues. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #149 Topic: Revenue 150. (p. 470) Bark Three Times Pet Store's owner is concerned with how his business decisions affect the "bottom line". This is another way of saying that he is concerned with the impact of his decisions on net income after taxes. TRUE The term "bottom line" refers to the bottom line on an income statement, which is the firm's net income (or net loss). AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #150 Topic: Net Income or Loss 151. (p. 463 Potential investors are interested in both a firm's balance sheet and income statement when evaluating whether or not to invest in a firm. 464) TRUE Financial statements provide insight into a firm's financial health. Investors and potential investors seek-out both the balance sheet and the income statement to measure the fundamentals of a firm. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #151 Topic: Understanding Key Financial Statements 152. (p. 469) Money received from tickets sold for the Rolling Stones concert is recorded as net income on the concert promoter's income statement. FALSE Money received from the sale of tickets is considered revenue for a concert promoter. Net income is calculated by subtracting the cost of goods sold, operating expenses, and taxes from the sales revenue. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #152 Topic: Revenue 153. (p. 470) When valuing items in inventory for financial reporting purposes, generally accepted accounting principles (GAAP) requires firms to value the cost of goods sold by assuming that the items that have been in inventory the longest are the ones that are sold first. FALSE GAAP permits businesses to select from a few different methods of inventory valuation, including FIFO (first-in, first-out) and LIFO (last-in, first-out). AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #153 Topic: Spotlight on Small Business box 154. (p. 470) The net income of a firm can change significantly depending upon the specific accounting procedures that are used for depreciation and inventory valuation. TRUE A firm's net income will vary according to the type of inventory valuation method the accountant employs when preparing financial statements. AACSB: Reflective Thinking Blooms: Synthesis Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #154 Topic: Spotlight on Small Business box 155. (p. 470) If prices of inventory are unchanged throughout the year, LIFO and FIFO inventory valuation methods will produce the same reported net income. TRUE If the value of inventory items and/or the value of raw materials remain the same during the accounting period, the first items purchased and the last items purchased in inventory will have the same value. Both FIFO and LIFO accounting methods will produce the same figures. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #155 Topic: Spotlight on Small Business box 156. (p. 470) During a period of rising prices, the FIFO technique of inventory valuation will result in a lower net income figure than would the LIFO technique. FALSE During a period of rising prices, each time a firm purchases inventory, the cost of goods will increase. The last goods purchased will cost more than the first goods purchased. In this case, the FIFO technique (first-in, first-out) will result in higher net income, while the LIFO technique (last-in, first-out) will result in lower net income. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #156 Topic: Spotlight on Small Business box 157. (p. 470) In businesses that handle a lot of perishable items (such as supermarkets) the actual movement of goods through inventory most closely resembles the LIFO inventory valuation technique. FALSE For a business that sells perishable items, the movement of goods will more closely resemble FIFO (First-in, First-out). When firms are concerned about perishable goods, they attempt to sell their older stock before selling newer items. Dated, perishable items will be placed on the sales floor in the order received. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #157 Topic: Spotlight on Small Business box 158. (p. 470) If the economy began experiencing a prolonged period of deflation in which the prices of most goods are falling, many firms would find that the LIFO method of inventory valuation would result in higher reported profits. TRUE The last in, first out (LIFO) inventory valuation technique would base the cost of goods sold on the items most recently put in inventory. In a period of falling prices, this would result in a lower cost of goods sold because the most recently purchased items are lower in price. Since cost of goods sold is subtracted from revenue as part of the process of computing net income, LIFO would result in a higher reported net income. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #158 Topic: Spotlight on Small Business box 159. (p. 470) During periods of rising prices, firms that want to report more attractive profits would tend to favor the FIFO technique of inventory valuation. TRUE In a period of rising prices, the last inventory purchased would cost more than earlier purchases of the same items. The FIFO (items purchased earlier) approach will yield a lower cost of goods sold figure. This will cause the net income to be greater than if the LIFO method had been used. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #159 Topic: Spotlight on Small Business box 160. (p. 470) If the goal of a business is to pay lower taxes on its income during an inflationary period, it is likely to use the FIFO inventory costing method. FALSE During a period of inflation, prices are rising. Using a LIFO method of inventory valuation will produce a lower gross profit, and subsequently, a lower net income before taxes. Taxes are paid only on the net income produced, after all expenses (including depreciation) are deducted. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #160 Topic: Spotlight on Small Business box 161. (p. 469) A hospital emergency room serves several patients from a ten car pile-up on the local interstate. Most of the victims require bandages, antibiotics, foot and arm casts, topical ointments, and pain pills. These items are part of the costs of good sold for the hospital emergency room. TRUE Any costs directly related to producing the products this firm sells are considered part of the cost of goods sold. In this case, the business sells hamburgers which include buns and condiments, such as mustard and pickles. AACSB: Reflective Thinking Blooms: Synthesis Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #161 Topic: Cost of Goods Sold 162. (p. 472) The best way for a firm to avoid serious cash flow problems is to sustain a rapid growth in sales. FALSE Rapid growth can put a serious strain on a company's cash position. For example, a firm may be able to expand its sales rapidly by offering very easy credit, but if customers who buy on credit are late with their payment (or, even worse, default on their payments) the company could have serious problems with its cash flow. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #162 Topic: The Need for Cash Flow Analysis 163. (p. 472) Cash flow difficulties are unlikely for a firm that is profitable. FALSE A firm's net income after taxes shows whether the company had a profit or on a loss from operations. However, profits and cash do not mean the same thing. A firm may have the ability to generate revenues and profits, but still have a cash flow shortage. The company should always prepare a statement of cash flows in order to determine its ability to continue to generate cash flow. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #163 Topic: The Need for Cash Flow Analysis 164. (p. 472) Preferred Pet Care, Inc. a mobile veterinary care clinic has more appointments than it ever expected to have when it opened its doors. Each week it orders more vaccines, antibiotics, and preventive care supplies from a major veterinary supplier, with the understanding that it will pay for these supplies in one month's time. Most of the company's clients are elderly and on fixed incomes, and often do not pay for services for two or more months. This is not a problem because as long as the company continues to increase its appointments, it will create profits and growth. FALSE Increasing revenues and profits does not always increase cash flow. If payment from the sale of goods and services is not received in a timely manner, the business can experience a cash flow deficit. AACSB: Reflective Thinking Blooms: Analysis Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #164 Topic: The Need for Cash Flow Analysis 165. (p. 471) Cash revenues from the sale of new cars at Pete's Auto Emporium would be listed as a cash inflow from operations on Pete's statement of cash flows. TRUE Cash flows associated with the normal running of the business are shown as operating cash flows. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #165 Topic: The Statement of Cash Flows 166. (p. 471) A loan officer at Southwest Bank is considering a loan application from Preferred Pet Care, Inc. He is concerned about the company's ability to make payments on the loan. The loan officer is likely to be interested in Preferred Pet Care's statement of cash flows. TRUE Firms must manage cash flows carefully to ensure they have enough cash to pay debts as they come due. The statement of cash flows can help the loan officer determine if the firm is managing its cash inflows efficiently. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #166 Topic: The Statement of Cash Flows 167. (p. 471) Preferred Pet Care, Inc. successfully took out a loan for $130,000 from Southwest Bank. It used $80,000 of this loan to pay-off an existing loan that had a higher interest rate, and purchased X-ray equipment with the remaining funds. These events were noted as financing and investing activities on its balance sheet. FALSE These activities are financing and investing activities recorded on the statement of cash flows. AACSB: Reflective Thinking Blooms: Synthesis Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #167 Topic: The Statement of Cash Flows 168. (p. 469) One of the problems with current accounting procedures is that there is no way for firms to systematically write off the costs of property and equipment over time. FALSE Firms are permitted to use one of several methods of depreciation to write-off the cost of machinery, plant, and equipment over their estimated useful lives. AACSB: Reflective Thinking Blooms: Synthesis Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #168 Topic: Operating Expenses 169. (p. 473) Financial ratios are used to analyze a firm's financial condition and financial performance. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-5 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #169 Topic: Analyzing Financial Performance Using Ratios 170. (p. 473 474) Liquidity ratios are of particular importance to stockholders, but have little relevance for creditors. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-5 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #170 Topic: Liquidity Ratios 171. (p. 473 474) The purpose of liquidity ratios is to indicate the degree to which a firm relies on borrowed funds in its operations. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-5 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #171 Topic: Liquidity Ratios 172. (p. 474) Liquidity refers to how fast an asset can be converted to cash. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-5 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #172 Topic: Liquidity Ratios 173. (p. 474) The current ratio is used to evaluate a firm's ability to pay its short-term debts. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-5 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #173 Topic: Liquidity Ratios 174. (p. 474) The current ratio is found by dividing the firm's total assets by its total liabilities. FALSE AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-5 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #174 Topic: Liquidity Ratios 175. (p. 474) The current ratio is a good indicator of the degree to which a firm relies on borrowed funds in its operations. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-5 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #175 Topic: Liquidity Ratios 176. (p. 473 474) Both the current ratio and the acid-test ratio are liquidity ratios. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-5 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #176 Topic: Liquidity Ratios 177. (p. 474) The acid-test ratio is found by dividing inventory by cost of goods sold. FALSE AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-5 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #177 Topic: Liquidity Ratios 178. (p. 474) For firms that sometimes have difficulty selling their inventory, the current ratio is likely to be a better measure of liquidity than the acid-test ratio. FALSE AACSB: Reflective Thinking Blooms: Analysis Learning Goal: 17-5 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #178 Topic: Liquidity Ratios 179. (p. 474) A firm that takes on too much debt could experience problems repaying its lenders or meeting promises made to stockholders. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-5 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #179 Topic: Leverage (Debt) Ratios 180. (p. 474) Leverage ratios are concerned with the extent to which a firm relies on borrowed funds in its operations. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-5 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #180 Topic: Leverage (Debt) Ratios 181. (p. 474) The debt to owners' equity ratio is a common type of liquidity ratio. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-5 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #181 Topic: Leverage (Debt) Ratios 182. (p. 475) Profitability ratios are often used to measure management's earnings performance. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-5 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #182 Topic: Profitability (Performance) Ratios 183. (p. 475) A firm's basic earnings per share measures how much profit was earned for each dollar invested by the firm's owners. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-5 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #183 Topic: Profitability (Performance) Ratios 184. (p. 475) The return on sales ratio measures a firm's use of leverage. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-5 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #184 Topic: Profitability (Performance) Ratios 185. (p. 475) The basic earnings per share ratio does not take stock options, warrants, and preferred stock into account. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-5 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #185 Topic: Profitability (Performance) Ratios 186. (p. 475) The higher the risk of a particular investment, the greater the expected rate of return required by investors. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-5 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #186 Topic: Profitability (Performance) Ratios 187. (p. 475) Activity ratios measure the effectiveness of the firm's management in using its various resources to achieve profits. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-5 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #187 Topic: Activity Ratios 188. (p. 475) Return on equity measures how much was earned for each dollar invested by the firm's creditors. FALSE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-5 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #188 Topic: Activity Ratios 189. (p. 476) The inventory turnover ratio measures the speed of inventory moving through the firm and its conversion into sales. TRUE AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-5 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #189 Topic: Activity Ratios 190. (p. 476) An extremely high inventory turnover ratio may represent lost sales due to holding inadequate stocks of merchandise. TRUE A high inventory turnover ratio can reflect the fact that inventory is turning over rapidly, and the firm may find it difficult to replenish the inventory in a timely way. AACSB: Reflective Thinking Blooms: Analysis Learning Goal: 17-5 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #190 Topic: Activity Ratios 191. (p. 474) Prattville Manufacturing has applied for a short-term loan with the First National Bank. The loan officers of the bank are likely to look carefully at Prattville's liquidity ratios before they decide to grant the loan. TRUE Prattville's liquidity ratios will indicate it ability to pay its short-term liabilities. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-5 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #191 Topic: Liquidity Ratios 192. (p. 474) The acid-test ratio emphasizes the ability to convert inventory quickly into cash. TRUE Inventory is not included as a highly liquid asset in the acid-test ratio. Thus, the acid-test ratio is actually a better measure of liquidity than the current ratio for firms that are likely to have difficulty converting inventory into cash. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-5 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #192 Topic: Liquidity Ratios 193. (p. 475) Accountant Alison Padilla was asked by her company's CEO to calculate the current return on equity. She quickly gathers Total Assets from the company balance sheet and the total net income from the income statement. Armed with this information, she will be able to provide the CEO with the information he/she requested. FALSE In order to calculate the Return on Equity ratio, Allison will need the Total owners' equity from the balance sheet, and the net income from the income statement. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-5 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #193 Topic: Analyzing Financial Performance Using Ratios 194. (p. 475 476) The inventory turnover ratio for all firms should be greater than 2 times. FALSE There is no set gauge for what constitutes a good inventory turnover ratio. Most businesses try to determine an acceptable industry average, and then evaluating the firm's capabilities, the business will utilize internal strategies to meet or exceed that industry norm. AACSB: Reflective Thinking Blooms: Analysis Learning Goal: 17-5 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #194 Topic: Activity Ratios 195. (p. 475) The Barkley Company is a fast growing start-up. The accountant calculated earnings per share = $.13. This information will provide him/her with insight into the firm's ability to pay dividends. TRUE EPS (earnings per share) is calculated using net income after taxes. Dividends are always paid from earnings (or net income) after taxes. If there is a "net loss" instead of a "net income", funds are not available for investor dividends. AACSB: Reflective Thinking Blooms: Analysis Learning Goal: 17-5 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #195 Topic: Profitability (Performance) Ratios 196. (p. 473) One way to make ratio analysis more meaningful is to compare the ratios of one firm to those of other firms in the same industry. TRUE In order to gain a competitive advantage, firms should compare the results of their ratio analysis with competing firms in their industry. Firms with market commonality and resource similarities should also have comparable ratios. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-5 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #196 Topic: Analyzing Financial Performance Using Ratios 197. (p. 474) A debt to owners' equity ratio of 25% indicates that a firm has more debt than equity. FALSE Debt to owners' equity ratio = Total liabilities divided by total owners' equity. [Total liabilities/total owners' equity]. A percentage less than 100% or 1.00 means that the company is using less borrowed funds than contributed funds to run the business. Borrowing provides 25% of the funds used to run the business, while stockholders are contributing 75% of the funds used to run the business. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-5 Level of Learning 3: Application of principles Nickels - Chapter 17 #197 Topic: Leverage (Debt) Ratios 198. (p. 475) The basic earnings per share and the diluted earnings per share would have quite different values for a firm that relied heavily on preferred stock and convertible debt securities to acquire funds. TRUE Diluted earnings per share measures the amount of profit earned for each share of outstanding common stock, but also considers stock options, warrants, preferred stock, and convertible debt securities in the calculation. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-5 Level of Learning 3: Application of principles Nickels - Chapter 17 #198 Topic: Profitability (Performance) Ratios 199. (p. 476) A lower than average inventory turnover ratio indicates excellent inventory management practices. FALSE Low inventory turnover ratio indicates the firm is not selling its inventory in a timely manner, preventing the business from holding a larger cash position. Cash flow problems can occur when a firm does not sell its inventory in a timely manner. It prevents inventories from turning to cash. AACSB: Reflective Thinking Blooms: Analysis Learning Goal: 17-5 Level of Learning 3: Application of principles Nickels - Chapter 17 #199 Topic: Activity Ratios 200. (p. 475) Preferred Pet Care, Inc., has recorded the following on its income statement for the period ending, December 31, 2009: The return on sales = 34%. This return is outstanding and there is no need to compare this return to competitors in the veterinary services industry. FALSE While the calculation is accurate: Net income after taxes/net sales = $85,000/$250,000 = .34 or 34%, in order to determine if this is a good return, the firm would need to compare it with the ratio of competitor firms in the same industry. AACSB: Reflective Thinking Blooms: Analysis Learning Goal: 17-5 Level of Learning 3: Application of principles Nickels - Chapter 17 #200 Topic: Profitability (Performance) Ratios 201. (p. 475) Stockholders of a company in a risky market environment would expect lower return on equity ratio than stockholders in a less risky market. FALSE Investors experiencing a risky market environment would expect a higher return on equity. An investor is willing to take a higher calculated risk if he/she expects to receive a higher return. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-5 Level of Learning 3: Application of principles Nickels - Chapter 17 #201 Topic: Profitability (Performance) Ratios 202. (p. 476) It is always better for a firm to have a high inventory turnover ratio than a low turnover ratio. FALSE The inventory turnover ratio measures the speed of inventory moving through the firm and being sold. A high turnover ratio could indicate that the firm is holding too little inventory, which could result in opportunity costs. The goal is to maintain a balance that is appropriate for the type of business. The firm should compare its inventory ratio with competing firms in its industry. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-5 Level of Learning 3: Application of principles Nickels - Chapter 17 #202 Topic: Activity Ratios 203. (p. 474) Bark Three Times Pet Store's accountant has recorded the following: Total current assets = $60,000, including Cash = $24,000; Accounts Receivable = $20,000; and, Inventory = $16,000. Total assets = $230,000; Total current liabilities = $48,000; and, Total current and long-term liabilities = $98,000. The store's current ratio = 1.25. The store's acid-test ratio = .92 TRUE The current ratio = Total current assets/total current liabilities = $60,000/$48,000 = 1.25. The acid-test ratio = Cash + Accounts Receivables/total current liabilities = .92. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-5 Level of Learning 3: Application of principles Nickels - Chapter 17 #203 Topic: Liquidity Ratios 204. (p. 456) An important difference between accounting and other business functions, such as marketing and management, is that: A. Accounting functions must be performed by an "outsider" (rather than by an employee of the business) in order to avoid conflicts of interest. B. Accounting offers us insight into whether the business is financially sound. C. Accounting involves mainly clerical activities and thus requires very little analysis. D. Accounting deals exclusively with numbers. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-1 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #204 Topic: The Role of Accounting Information 205. (p. 456) To effectively run a business, it is necessary to: A. B. C. D. Hire a full-time accountant. Use a public accounting firm. Understand and use accounting information. Make certain that you do not spend too much time on your accounting system. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-1 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #205 Topic: The Role of Accounting Information 206. (p. 456) Which of the following is an example of a financial transaction? A. B. C. D. A firm purchases a fire insurance policy. An internal auditor discovers an error in a firm's inventory valuation. A potential customer accesses a firm's Web page. A manager reviews the financial statements prepared by an accountant. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-1 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #206 Topic: What is Accounting? 207. (p. 456) Although accounting has several specific uses, the overall purpose of accounting can be summarized as: A. B. C. D. To provide financial information that is useful to decision makers. To meet the legal requirements of the Financial Accounting Standards Board (FASB). To allow the government to track business activity levels. To compute the profit or loss and declared dividend of a business firm. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-1 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #207 Topic: What is Accounting? 208. (p. 456) Which of the following responses is the best and most comprehensive? "A company's accounting information is useful to _____________." A. B. C. D. Managers within the firm, exclusively Marketing research firms for pricing insights Primarily the IRS and other government agencies that regulate the firm Managers, owners, creditors, employees, and the government AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-1 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #208 Topic: What is Accounting? 209. (p. 456) Accountants record, classify, and ____________ the results of the financial information they gather. A. B. C. D. interpret sell buy change AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-1 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #209 Topic: What is Accounting? 210. (p. 456) The reports and financial statements prepared by accountants: A. B. C. D. Are more useful for profit-seeking businesses than they are for not-for-profit organizations. Are mainly used to help the firm complete its tax forms. Provide information that can be used by decision-makers both inside and outside the organization. Are not as useful now that firms have moved into a more global environment. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-1 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #210 Topic: What is Accounting? 211. (p. 456) Which of the following is an area of importance in accounting? A. B. C. D. Employee scheduling Summarizing information in order to create reports and financial statements Analyzing strategic direction Setting prices for goods and services sold by the organization Accounting is the recording, classifying, summarizing, and interpreting of financial events and transactions to provide management and other interested parties the information they need to make good decisions. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-1 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #211 Topic: What is Accounting? 212. (p. 456) As an accountant, Joe Billings responsibilities include: A. B. C. D. Developing plans to help his company establish a supply chain. Setting prices for specific goods and services. Summarizing and interpreting financial information needed by his firm's managers. Developing a fringe benefit program that improves employee morale. Accounting is the recording, classifying, summarizing, and interpreting of financial events. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-1 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #212 Topic: What is Accounting? 213. (p. 456) A person's pulse rate and blood pressure are indicators of a person's health. Similarly, _________ can help assess the health of a business. A. B. C. D. financial statements production schedules transactions databases Financial statements can be used as diagnostic tools to identify existing and potential problem areas. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-1 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #213 Topic: The Role of Accounting Information 214. (p. 456) Accounting transactions are very important to a firm's operations. Which of the following activities would affect the firm's account balances? A. B. C. D. Buying and selling goods and services Interviewing prospective employees Understanding economic reports Forecasting consumer demand Accounting transactions will result in a change in two or more account balances. Forecasting consumer demand implies that this has yet to occur. Understanding economic reports does not require buying or selling items that would affect financial statements. Interviewing prospective employees also does not require buying or selling items or information. These therefore would not change any account balances. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-1 Level of Learning 3: Application of principles Nickels - Chapter 17 #214 Topic: What is Accounting? 215. (p. 456) Jill wants to start her own business, but knows little about how to set up an accounting system or interpret financial information. "I'm not worried about accounting," she tells her friends. "I'll just hire a part-time bookkeeper to handle all that type of stuff, and focus my attention on what I like—finding ways to satisfy my customers." Which of the following is the best response to Jill's comments? A. Fine. Just make sure the bookkeeper you hire knows how to use a database, since this type of software is the heart of any efficient accounting system. B. Although you can hire someone to keep your books, you'll still need to know how to read, understand, and interpret basic accounting reports in order to make good business decisions. C. Most entrepreneurs would agree with your opinion. The work done by accountants is mainly clerical in nature, so time spent by business owners on accounting tends to take them away from more important tasks. D. You have a good plan. Only managers of large firms require knowledge of accounting. Owners and managers of small businesses can easily get by with just a part-time bookkeeper. It is almost impossible to effectively run a business without being able to read, understand, and analyze accounting reports and financial statements. AACSB: Reflective Thinking Blooms: Evaluation Learning Goal: 17-1 Level of Learning 3: Application of principles Nickels - Chapter 17 #215 Topic: What is Accounting? 216. (p. 456) Before starting his landscape business, Andrew took a marketing class at the local Community College. He decided that his time would be better utilized in this class because if he could learn to sell his services well, the revenues and profits would follow. Your assessment of his plan might include which of the following: A. Andrew understands that Marketing is the life-blood of the company, and he is right on track with his approach. B. Andrew has elected to operate like a virtual company and leave various parts of the business including accounting, environmental trends scanning, and management to outsourcers. C. Andrew knows that increasing revenues will always keep the business profitable and in a positive cash position. D. Andrew needs to realize that the ability to understand and interpret financial statements provided by his accountant might enhance his profits. It is almost impossible to effectively run a business without being able to read, understand, and analyze accounting reports and financial statements. AACSB: Analysis Blooms: Application Learning Goal: 17-1 Level of Learning 3: Application of principles Nickels - Chapter 17 #216 Topic: The Role of Accounting Information 217. (p. 456) Phil O'Keefe is opening a small sports store in his town. At the advice of a friend who is a bookkeeper, he keeps the receipts of everything he purchases for the business in the bottom drawer of his desk, along with all other business expenses, such as his retail license, his rent expense, and insurance expense. You suggest that ________. A. Phil continues with this procedure, but only until the store opens, at which time he will need an additional drawer for his sales transactions. B. Phil invests some time in exploring an accounting system that will make it easier to classify and summarize accounting information. C. Phil continues with this procedure because there is very little difference between one expense and another. D. Phil stops wasting valuable time saving the receipts because accountants only record sales transactions. It is almost impossible to effectively run a business without utilizing an accounting system to record, classify, and summarize financial events and transactions. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-1 Level of Learning 3: Application of principles Nickels - Chapter 17 #217 Topic: The Role of Accounting Information 218. (p. 456) Given that measuring a firm's financial health is important to its survival, which of the following strategies is good advice for a person just starting a business? A. Create a method for keeping your books that makes sense to you. Outside agencies such as creditors and suppliers will not evaluate you by the way you keep books. B. All transactions are important. Separating transactions only serves to create a perception that some transactions are of lesser importance than others. C. Accounting systems used by big business are not suitable for small businesses. D. Select an accounting system that helps you make decisions, and helps you report information to others outside your firm. It is almost impossible to effectively run a business without utilizing an accounting system to record, classify, and summarize financial events and transactions. We use our accounting systems to help make well-informed decisions, as well as to report financial information about the firm to interested stakeholders. AACSB: Communication Blooms: Synthesis Learning Goal: 17-1 Level of Learning 3: Application of principles Nickels - Chapter 17 #218 Topic: The Role of Accounting Information 219. (p. 457) The accounting profession is divided into 5 key working areas, two of which are: A. B. C. D. Auditing and managerial accounting. Forecasting and logistical accounting. Inventory control and budgeting. Income accounting and expenditure accounting. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #219 Topic: Accounting Disciplines 220. (p. 457) The area of accounting that provides managers inside the organization with information they need to make decisions is called: A. B. C. D. Tax accounting. Managerial accounting. Informational accounting. Financial accounting. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #220 Topic: Managerial Accounting 221. (p. 458) The preparation of financial statements for people outside the firm (creditors, unions, suppliers, and others) is the goal of: A. B. C. D. Auditing. Financial accounting. Managerial accounting. Cost accounting. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #221 Topic: Managerial Accounting 222. (p. 459) A(n) __________ provides accounting services to individuals or firms on a fee basis. A. B. C. D. contract accountant account agent public accountant independent accountant AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #222 Topic: Financial Accounting 223. (p. 458) An accountant who works for a single business or government agency is referred to as a: A. B. C. D. Public accountant. Private accountant. Certified accountant. Commission accountant. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #223 Topic: Financial Accounting 224. (p. 460) __________ involves the review and evaluation of the records that are used to prepare the organization's financial statements. A. B. C. D. Auditing Financial accounting Managerial accounting Certified bookkeeping AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #224 Topic: Auditing 225. (p. 458) A(n) _________ is a yearly published statement of the financial condition, progress and expectations of an organization. A. B. C. D. balance sheet independent audit mission statement annual report AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #225 Topic: Financial Accounting 226. (p. 460) A(n) ___________ is an evaluation and unbiased opinion of the accuracy of a firm's financial statements. A. B. C. D. internal audit annual report independent audit certified audit AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #226 Topic: Auditing 227. (p. 461) Skilled professionals who are responsible for the development of strategies to minimize taxes are called: A. B. C. D. tax accountants. certified public accountants. certified management accountants. certified internal auditors. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #227 Topic: Tax Accounting 228. (p. 459) The accounting scandals of the early 2000s led many people to question the legitimacy of: A. B. C. D. Ratio analysis as a means of evaluating the performance of a firm. Relying on the recommendations of tax accountants to find ways of reducing the taxes owed by a business organization. Publishing financial information about a firm on the Internet. Allowing an accounting firm to do both consulting and auditing work for the same company. AACSB: Ethics Blooms: Knowledge Learning Goal: 17-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #228 Topic: Auditing 229. (p. 459) The accounting profession follows generally accepted accounting principles as defined by ___________________. A. B. C. D. the GAAP the PCAOB (Public Company Accounting Oversight Board) the FASB (Financial Accounting Standards Board) the Sarbanes-Oxley Act AACSB: Ethics Blooms: Knowledge Learning Goal: 17-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #229 Topic: Accounting Disciplines 230. (p. 459) Important provisions of the Sarbanes-Oxley Act: A. B. C. D. Approve corporate loans to directors of the company. Encourage the destruction of financial documents. Require the CEO and CFO of corporations to certify the accuracy of financial reports. Encourage outside CPA firms to deliver several services to their clients, including auditing services and consulting services. The Sarbanes-Oxley Act includes several key provisions. It disapproves of corporate loans to director; it disapproves of CPA firms providing both auditing and consulting services to clients. It considers the destruction of important financial documents as a crime that can result in felony charges. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-2 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #230 Topic: Figure 17.3 231. (p. 459) The __________ sets accounting standards used in government accounting. A. B. C. D. Federal Accounting Review Board Governmental Accounting Standards Board Academy of Public Sector Accountants Federal Reserve Board The U.S. government has its own agency that defines accounting standards for government accountants. It is known as the GASB (Governmental Accounting Standards Board). AACSB: Ethics Blooms: Knowledge Learning Goal: 17-2 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #231 Topic: Government and Not-for-Profit Accounting 232. (p. 457) Benjamin works in the accounting department for a textbook publishing firm preparing budgets and reporting production costs. He is a: A. B. C. D. Managerial accountant. Financial accountant. Tax accountant Auditor. Managerial accounting provides information to managers within an organization to assist them in decision-making. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-2 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #232 Topic: Managerial Accounting 233. (p. 459) For the past several years, Bill Reynolds has retained accountant Chelsea Jones for help in preparing his personal income tax forms. Bill's boss recommended Chelsea because she had done a good job setting-up the company's new accounting system. Bill is very satisfied with Chelsea's work and feels that the fees she charges are quite reasonable. Chelsea would be classified as a(n): A. B. C. D. Independent auditor. Private accountant. Public accountant. Accounting broker. A public accountant provides services to individuals and businesses on a fee basis. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-2 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #233 Topic: Financial Accounting 234. (p. 458) Jose just graduated from college with a bachelor's degree in accounting. He plans to go to work for the American Cancer Society as an accountant. Jose will be a(n): A. B. C. D. private accountant. public accountant. forensic accountant. independent accountant. A private accountant works for a single business, government agency, or nonprofit organization. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-2 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #234 Topic: Financial Accounting 235. (p. 457 As U.S. firms focus on cost cutting in order to stay competitive with producers in low-wage countries, they will rely on __________ to create strategies to help reduce costs. 458) A. B. C. D. managerial accountants financial accountants government accountants auditors Managerial accountants provide information and analyses to managers within the organization to assist them in decision-making. An important function of managerial accounting involves creating strategies to minimize costs within a firm. Managerial accounts measure and report the costs of production, marketing, and other functions. With a growing emphasis on global competition, company rightsizing, and organizational cost cutting, managerial accounting is gaining importance. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-2 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #235 Topic: Managerial Accounting 236. (p. 460) Taylor Casual, a chain of retail clothing stores, wants to assure investors and other outsiders that its financial statements are accurate. One way to do so would be to hire a public accounting firm to: A. Produce an internal audit. B. Take over all of its accounting functions. C. Provide a "generally accepted practices" endorsement. D. Perform an independent audit. An independent audit is an evaluation and unbiased opinion about the accuracy of a company's financial statements. Such audits are performed by public accountants. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-2 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #236 Topic: Auditing 237. (p. 459) Which of the following agencies would have the greatest impact on the methods used to record, classify, summarize, and interpret accounting information for the State of Kentucky's Department of Transportation? A. B. C. D. Commission on Accounting Practices for State Governments Government Accounting Standards Board Independent Not-For-Profit Accounting Standards Board Institute for Public Sector Accounting Standards The Government Accounting Standards Board (GASB) sets standards for generally accepted practices in governmental accounting. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-2 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #237 Topic: Government and Not-for-Profit Accounting 238. (p. 458) Kelley's Kloset, LLC has applied for a business loan. Her prospective banker has requested information concerning the financial condition of her business. Which accounting discipline is responsible for providing accounting information to outside stakeholders? A. B. C. D. Management accounting. Financial accounting. Tax accounting. Certified bookkeeping. The intended audience of financial accounting information and reports is people outside of the organization. This would include creditors, banks, owners, unions, and government units. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-2 Level of Learning 3: Application of principles Nickels - Chapter 17 #238 Topic: Accounting Disciplines 239. (p. 460) Stockholders of the Sasha Deal Company are concerned about irregularities in the firm's accounting system. One approach to identify problems in the records of the company would be to have a(n) ________ performed. A. B. C. D. internal audit independent audit unofficial audit GAAP analysis An independent audit is an evaluation and unbiased opinion about the accuracy of a firm's financial statements. A firm's annual report often includes a written opinion by an auditor. AACSB: Ethics Blooms: Comprehension Learning Goal: 17-2 Level of Learning 3: Application of principles Nickels - Chapter 17 #239 Topic: Auditing 240. (p. 460) According to the boxed material in the Legal Briefcase box in Chapter 17, you would be most likely to ask for the help of a forensic accountant if you: A. B. C. D. Wanted to decide which accounting system to adopt for a new business. Believed that someone in your organization was employing unethical or illegal accounting methods. Faced severe financial hardship and needed to find the most effective way to cut costs quickly. Wanted to determine the best depreciation and inventory valuation methods to use to minimize the income taxes paid by your organization. According to the information in the Legal Briefcase box in Chapter 17, forensic accountants are the profession's "super sleuths," who dig into paper trails, mine data from hard drives and bank records, and talk to the organization's employees in order to find out whether someone is "cooking the books" to make the company's finances look better than they really are, embezzling company funds, or engaging in some other type of unethical or illegal behavior. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-2 Level of Learning 3: Application of principles Nickels - Chapter 17 #240 Topic: Legal Briefcase box 241. (p. 460) Fraudulent accounting practices do not just occur in firms who do not have on site accountants. According to the Legal Briefcase box provided in your textbook, illegal and questionable accounting practices have been the demise of some large multi-national corporations. The professionals assigned to investigate these improprieties are: A. forensic accountants B. certified public accountants C. independent auditors D. certified financial planners Forensic accounting is a growing profession due to the need to investigate the financial statements of firms suspicious of carrying on corrupt accounting practices. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-2 Level of Learning 3: Application of principles Nickels - Chapter 17 #241 Topic: Legal Briefcase box 242. (p. 473) Unfortunately, during bad economic times, and a fear of job loss, company executives are more likely to ask an accountant to "cook the books." If a boss or manager should ask a staff accountant to change data to make the firm's financial position look better in the eyes of investors, what are the accountant's alternatives? A. According to the FASB (Financial Accounting Standards Board) ruling says if the boss agrees to sign-off on accounting documents, the accountant is safe from prosecution. B. According to the FASB, as long as you are not a certified internal auditor, you will not be held accountable for such actions. C. As a professional, the accountant is held to the standards of generally accepted accounting principles and the FASB. If these guidelines are not followed, the accountant is potentially liable for illegal and unethical behavior. D. Investors use a variety of methods to determine if a firm is fundamentally sound, so they are less likely to grimace at your actions as the IRS, who want to make certain that your firm is paying its taxes. For investors, your books are only one piece of the puzzle. Misappropriating accounting results, including accounting for revenues and earnings before or after they occur is against the FASB, the Financial Accounting Standards Board, and if convicted of falsifying documents, the accountant could lose his/her license or even serve jail time. AACSB: Ethics Blooms: Evaluation Learning Goal: 17-2 Level of Learning 3: Application of principles Nickels - Chapter 17 #242 Topic: Making Ethical Decisions box 243. (p. 457 Becky Hunter is an accountant employed by FAF Enterprises. Recently she has spent much of her time working on defining measures of costs for the production department and checking to ensure that various departments are staying within their budgets. 458) Becky is a: A. B. C. D. Public accountant whose work is mainly concerned with auditing. Public accountant whose work is mainly concerned with financial accounting. Private accountant whose work is mainly concerned with managerial accounting. Private accountant whose work is mainly concerned with financial accounting. Becky is a private accountant because she works for a single organization. Measuring costs and working on budgets are two common tasks involved in managerial accounting. AACSB: Reflective Thinking Blooms: Synthesis Learning Goal: 17-2 Level of Learning 3: Application of principles Nickels - Chapter 17 #243 Topic: Managerial Accounting 244. (p. 457 459) A basic difference between managerial accounting and financial accounting is that managerial accounting: A. adheres to rules set by the GASB, while financial accounting uses a different group of rules set by the FASB. B. involves the preparation of the balance sheet and income statement while financial accounting involves the preparation of the statement of cash flows. C. handles recording and classifying information about transactions that have no direct financial impact on the firm, while financial accounting handles the recording and classifying of information about transactions that do have a financial impact. D. provides information primarily intended for managers and others inside the company, while financial accounting provides information primarily intended for people outside the organization. Managerial accounting provides information that managers use to make better decisions. Financial accounting provides information to people outside the firm such as owners and potential owners, creditors, the government and the general public. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-2 Level of Learning 3: Application of principles Nickels - Chapter 17 #244 Topic: Accounting Disciplines 245. (p. 460) While reviewing the books at his firm, Chad Cooper noticed discrepancies between how the firm recorded revenues last year and how it elected to record revenues during the recent quarter of the current year. As a recent business graduate, Chad felt confident that the changes needed clarification. To get another opinion, Chad suggested to the company's controller that the firm solicit _______________. A. B. C. D. the assistance of the Government Accounting Standards Board the services of a certified internal auditor the services of a senior executive at the IRS the services of an independent auditor An independent auditor is responsible for providing an unbiased opinion about the accuracy of a company's financial statements and reporting procedures. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-2 Level of Learning 3: Application of principles Nickels - Chapter 17 #245 Topic: Auditing 246. (p. 459) CPA Experts, Inc., a well-known public accounting firm has enjoyed a long-standing relationship with one of its clients, Generation Technologies, Inc. Recently, at a company-wide gala, the CEO of Generation Technologies announced that CPA Experts has performed the firm's independent audits for the past ten years, and he is looking forward to exploring other services that CPA Experts has to offer, including financial consulting. "After all," he exclaims, "A recent magazine article called CPA Experts the ‘profitability geniuses '!" As a senior accountant for Generation Technologies, how do you advise your CEO? A. You inform the CEO that in order to remain competitive, Generation Technologies needs to utilize the expertise of professional accounting firms who can deliver new and innovative techniques for cutting costs and improving profitability. B. You explain that it would create a conflict of interest to have both internal and external accountants. C. You inform the CEO about Sarbanes-Oxley rulings concerning the utilization of the same firm for auditing and consulting. D. You explain that hiring CPA Experts, Inc. to perform consulting would constitute a more in-depth partnership. Generally Accepted Accounting Principles would require Generation Technologies to purchase stock in CPA Experts. The Sarbanes-Oxley Act put in place new rules about auditing and consulting to ensure the integrity of the auditing process. A conflict of interest can arise when the same CPA firm provides auditing oversight and financial consulting services to the same firm. If the consulting arm should propose accounting actions that the auditing arm deems inappropriate by GAAP, the firm may find itself operating outside of the legal limits of the law. AACSB: Reflective Thinking Blooms: Synthesis Learning Goal: 17-2 Level of Learning 3: Application of principles Nickels - Chapter 17 #246 Topic: Figure 17.3 247. (p. 459) In spite of his assertions that he carried-out fraud alone, convicted investment advisor Bernard Madoff's independent auditor is now under investigation. The auditor is accused of not doing his job. Rather than verify Madoff's company records, the F.B.I claims that he "rubber-stamped" the records. Knowing what you have learned about the importance of auditing, which of the following statements do you understand to be most accurate? A. Investment firms should always hire private accountants. Public accountants do not have enough information about the firm to prepare audits. B. Independent auditors only prepare audits for not-for-profit firms. Madoff hired the wrong professional for the job. C. Independent auditors must follow strict rules, including new rules put in place by the Sarbanes-Oxley Act. D. The Sarbanes-Oxley Act does not institute rules of practice for independent auditors. Independent auditors follow strict rules created by the AICPA, American Institute of Certified Public Accountants. The Sarbanes-Oxley Act put in place new rules about auditing and consulting to ensure the integrity of the auditing process. Independent auditors must abide by these rules and cautiously avoid conflicts with of interest with their clients. AACSB: Ethics Blooms: Comprehension Learning Goal: 17-2 Level of Learning 3: Application of principles Nickels - Chapter 17 #247 Topic: Figure 17.3 248. (p. 462) As a first step in the accounting cycle, _________ involves the recording of business transactions. A. B. C. D. Marketing Bookkeeping Auditing Economics AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #248 Topic: The Accounting Cycle 249. (p. 462) __________ is the accounting practice of recording each transaction in two places in the accounting journal. A. B. C. D. Double-entry bookkeeping Trial balancing Account matching Entry duplication AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #249 Topic: The Accounting Cycle 250. (p. 462) A __________ is a specialized accounting book, where transactions are categorized according to type. For example, all utility transactions are recorded in the same category. A. B. C. D. journal trial balance ledger balance sheet AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #250 Topic: The Accounting Cycle 251. (p. 462) A bookkeeper's first task is to: A. B. C. D. Separate all of the firm's transactions into meaningful categories. Prepare the firm's financial statements. Summarize the firm's financial data. Interpret and report data to the firm's management. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #251 Topic: The Accounting Cycle 252. (p. 462) In the course of their jobs, bookkeepers: A. B. C. D. Interpret accounting data. Approve decisions about major expenditures. Record business transactions. Prepare financial statements. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #252 Topic: The Accounting Cycle 253. (p. 462) The accounting book or computer program where each day's transactions are first recorded is called a(n): A. B. C. D. posting workbook. general ledger. balance sheet. journal. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #253 Topic: The Accounting Cycle 254. (p. 462) A _________ summarizes all the data from the account ledgers to verify that they are correct and balanced. A. B. C. D. ledger statement balance sheet trial balance statement of cash flows AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #254 Topic: The Accounting Cycle 255. (p. 462) The purpose of a trial balance is to: A. B. C. D. Affirm whether the figures in the account ledgers are correct and balanced. Prepare a mock up of a real balance sheet. Review the income statement accounts. Meet a reporting requirement of the Securities and Exchange Commission (SEC). AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #255 Topic: The Accounting Cycle 256. (p. 462) The __________ is a six-step procedure that results in the preparation and analysis of the major financial statements. A. B. C. D. double-entry method financial management process financial performance appraisal accounting cycle AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #256 Topic: Figure 17.4 257. (p. 462) Once a trial balance has been prepared, the next step of the accounting cycle involves: A. B. C. D. Posting the information to the correct ledger accounts. Completing a balance sheet and ratio analysis. Preparing financial statements such as the balance sheet, income statement, and statement of cash flows. Classifying the transactions into logical categories. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #257 Topic: Figure 17.4 258. (p. 462) One of the key financial statements prepared in the fifth step of the accounting cycle is: A. general journal. B. statement of cash flows. C. asset summary. D. social audit. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #258 Topic: Figure 17.4 259. (p. 462) The Balance Sheet, the Statement of Cash Flows, and the ______________ are three key financial statements prepared by accountants. A. B. C. D. Income Statement Statement of Retained Earnings Statement of Changes in Financial Position Trial Balance AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #259 Topic: Figure 17.4 260. (p. 472) ___________ refers to the difference between cash coming into the firm and cash leaving the firm. A. B. C. D. Liquidity Cash flow Accounts payable Retained earnings AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #260 Topic: The Accounting Cycle 261. (p. 462) The sixth and final step in the accounting cycle involves: A. B. C. D. Performing a trial balance to verify that the accounting statements are internally consistent. Auditing the books to ensure that they were prepared according to generally accepted accounting principles. Preparing the income statement. Analyzing major accounting statements to evaluate the financial condition of the firm. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #261 Topic: Figure 17.4 262. (p. 463) Careful consideration of the use of computers in accounting indicates that computers _____________________. A. B. C. D. will soon eliminate all of the accounting functions are tools to help the accountant perform his or her job are of little use to small-business owners that need accounting services have a very limited use in accounting due to inadequate privacy controls AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #262 Topic: Accounting Technology 263. (p. 463) Today's computerized accounting programs are: A. Very helpful for small business owners who lack strong accounting support within their companies. B. Too expensive and complicated for most small businesses. C. A poor investment for small start-up companies due to the fact that these programs are seldom needed unless the firm is considered a midsized to large company. D. So sophisticated that they can make most financial decisions without the aid of an accountant. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #263 Topic: Accounting Technology 264. (p. 462) Accountants not only provide financial information to the firm, they: A. B. C. D. Replace the firm's need for managers. Also provide information regarding competitors. Assist in interpreting that information. Design the computer information systems. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #264 Topic: The Accounting Cycle 265. (p. 462) A comparison of bookkeeping and accounting indicates that: A. The two are virtually the same in practice. B. Bookkeeping involves recording financial information, while accounting is concerned with classifying, summarizing, and interpreting this information. C. Bookkeeping is more useful for small businesses while accounting is more useful for large businesses. D. Accounting is a subsystem of the process of bookkeeping. The bookkeeping function in the Accounting Cycle involves the recording of transactions. The accounting function goes further and includes classifying, summarizing, and interpreting the recorded information. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-3 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #265 Topic: The Accounting Cycle 266. (p. 462) Sales receipts, purchase orders, and payroll records are all examples of accounting transactions that would be recorded by a(n): A. B. C. D. Auditor. Forensic accountant. Bookkeeper. Purchasing agent. Sales receipts, purchase orders, and payroll records are original transaction documents. Bookkeepers record the data from these documents into journals. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #266 Topic: The Accounting Cycle 267. (p. 462) Jasmine is categorizing journal entries in order to post to the ________. A. B. C. D. income statement balance sheet working papers ledger A ledger is a specialized accounting book in which information from the journal is classified into specific categories and posted so managers can find all the information about one account in the same place. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-3 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #267 Topic: The Accounting Cycle 268. (p. 462) Which of the following is a key step in the accounting cycle? A. B. C. D. Recording information into journals Collecting data from customers Forecasting expenses and revenues Preparing the advertising message Steps in the accounting cycle include all of the following: (1) Categorize source documents, (2) record transactions in journals, (3) post journal entries to the ledger, (4) perform a trial balance, (5) prepare financial statements, and (6) analyze financial statements. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #268 Topic: Figure 17.4 269. (p. 463) The main reason an accountant would conduct a trial balance is to: A. B. C. D. Determine whether account figures in the ledger are correct and balanced. Obtain an estimate of the amount of taxes the firm owes. Ensure the audit was done correctly. Verify the validity of last year's balance sheet before beginning the next accounting cycle. The accountant performs the trail balance, as a check to verify the accuracy of data recorded in the account ledger. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-3 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #269 Topic: The Accounting Cycle 270. (p. 463) Hap owns and operates a small business with only four full-time employees and less than $500,000 in annual sales. He currently uses a manual accounting system and relies on a part-time bookkeeper to keep his records in order. In evaluating the possible adoption of a computerized accounting system, Hap will probably discover that: A. B. C. D. The expense of setting up a computerized accounting system would not be affordable at this time. He would be better off hiring a full-time accountant. He could benefit from adopting such a system, but should also consult with an accountant for advice about what's best. A computerized system would be affordable, but that he would have little need for it unless his company became significantly larger. Computerized accounting systems have proven to be especially helpful for small business owners who often lack any strong accounting support within their companies. This appears to be the situation facing Hap. However, Hap should also realize that no computer program has yet been developed that makes good financial decisions. Thus, advice from an accountant would also be beneficial. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #270 Topic: Accounting Technology 271. (p. 463) The use of computerized accounting systems ______________. A. B. C. D. makes it possible for most firms to operate without the expense of hiring or consulting with accountants. reduces the pressure on managers in making financial decisions. allows firms to generate financial information almost instantly and whenever the organization needs it. creates an environment in which accounting has become nothing more than glorified bookkeeping, as all accountants are required to do is enter data into the system and monitor the results the program generates. Today, computerized accounting programs post information from journals into ledgers, and instantaneously produce reports, so that financial information is readily available whenever the organization needs it. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-3 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #271 Topic: Accounting Technology 272. (p. 462) Brianna is a bookkeeper for Monograms, Limited. She takes the firm's transactions and record them in a record book or computer program referred to as: A. B. C. D. A credit account. An asset database. A journal. A debit program. Journals are the books where accounting transactions are first recorded. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-3 Level of Learning 3: Application of principles Nickels - Chapter 17 #272 Topic: The Accounting Cycle 273. (p. 462) Jim works in the accounting department at the Kansas Sunflower Corporation, where it is his job to record all transactions into journals. After completing this task, the next step in the accounting process is to: A. B. C. D. Prepare the firm's financial statements. Post the information to the ledger. Determine the tax liability of the firm. Balance the difference between assets and liabilities. All journal entries are posted to the ledger on a regular basis. This is the third step in the accounting cycle. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-3 Level of Learning 3: Application of principles Nickels - Chapter 17 #273 Topic: Figure 17.4 274. (p. 462) April works in the accounting department at Henson's Tire & Auto. She is concerned that the company has been placing too many orders for office supplies and wants to look at all of the transactions involving the purchase of office supplies for the past several months. April can find such information by looking at the supplies account in the: A. B. C. D. ledger. cash flow statement. journal. account debit book. A ledger is a specialized accounting record in which information from journals is classified into specific categories so that managers can find all of the information about a single account (such as office supplies) in one place. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-3 Level of Learning 3: Application of principles Nickels - Chapter 17 #274 Topic: The Accounting Cycle 275. (p. 462) Perry is responsible for recording sales transactions at Turncoat Enterprises. Perry's company utilizes ______________________, to help minimize entry errors. A. B. C. D. auditing capital budgeting double-entry bookkeeping revenue assessment Double-entry bookkeeping requires the bookkeeper to record two entries for each transaction. This procedure emphasizes accuracy in the recording of all transactions. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-3 Level of Learning 3: Application of principles Nickels - Chapter 17 #275 Topic: The Accounting Cycle 276. (p. 462) Heather works in the accounting department of Colorado Manufacturing. Today she will use the firm's ledger to summarize information that was posted over the most recent time period. Her goal is to determine if the accounts are balanced as required by the double-entry method of bookkeeping. To be sure they are correct, Heather will prepare a(n): A. B. C. D. Account analysis. Statement of cash flows. Balance sheet. Trial balance. A trial balance is a summary of all the financial data in the ledger to make certain the figures are correct and balanced. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-3 Level of Learning 3: Application of principles Nickels - Chapter 17 #276 Topic: The Accounting Cycle 277. (p. 462) Tyler works as an accountant for a mid-sized retail store. He has just completed a trial balance that resulted in no unexpected problems. Tyler's next task is likely to be: A. B. C. D. Conducting the full audit. Preparing a tax return for the company. Preparing the store's balance sheet and other major financial statements. Presenting the trial balance to the company owners. The trial balance is the fourth step in the accounting cycle. If the accounts are correct and balanced, the next step is to prepare major financial statements such as the balance sheet, income statement, and statement of cash flows. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-3 Level of Learning 3: Application of principles Nickels - Chapter 17 #277 Topic: Figure 17.4 278. (p. 462) Accountant Alan Wingspan has just finished working on the balance sheet, income statement, and statement of cash flows for his company. The next step in the accounting cycle involves: A. B. C. D. Posting the results of these statements to the appropriate journal. Analyzing the firm's financial statements to evaluate the financial condition of the firm. Conducting forensic tests of the data to ensure its accuracy. Placing the data used to construct the statements into an archive known as a data warehouse. Preparing financial statements is the fifth stage of the accounting cycle. The next step is to analyze the information in these statements to better understand and evaluate the financial health of the firm. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-3 Level of Learning 3: Application of principles Nickels - Chapter 17 #278 Topic: Figure 17.4 279. (p. 463) Oklahoma Chemicals plans to use its computers to post information from journals to the ledger instantaneously. One obvious benefit of this technology is: A. B. C. D. A reduction in the number of accountants required by the firm. Less scrutiny from agencies such as the Internal Revenue Service. To shift financial decision making from people to programmed technology. Readily available financial information. Computerized accounting programs post information from journals instantaneously so that financial information is readily available whenever the organization needs it. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-3 Level of Learning 3: Application of principles Nickels - Chapter 17 #279 Topic: Accounting Technology 280. (p. 463) Ralph owns a small business. Some friends have suggested that he should switch from his current manual accounting system to one that is computerized. Ralph is not certain he wants to use computers in his small firm's accounting system. He is concerned about the time it would take to learn the system, and wonders whether the benefits will justify the costs of setting up the system. As a small business owner, Ralph would probably find that: A. Computer software tends to be very helpful to small business owners who lack strong accounting support within their companies. B. Today's accounting software tends to be very complex, so only people with extensive accounting experience can understand its features and use it effectively. C. Even though it is not yet cost effective, he should go ahead and adopt a computerized system, because government regulations will require most business functions to be computerized in the near future. D. Such systems actually reduce costs, because they eliminate the need to consult with an accountant. Small business owners seldom have full-time accountants or bookkeepers working for their companies. Accounting software programs can help with many bookkeeping and accounting tasks, and even allow accounting novices to do fairly sophisticated financial analysis. However, this type of software does not eliminate the need to consult with an accountant. No software yet developed has the ability to make good financial decisions by itself. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-3 Level of Learning 3: Application of principles Nickels - Chapter 17 #280 Topic: Accounting Technology 281. (p. 463) Johnson Products is a small manufacturing firm specializing in custom-order tool and die work. A computerized accounting system would help Johnson Products by: A. B. C. D. Making key accounting and financial decisions. Helping management identify cash flow and other financial difficulties more quickly. Eliminating the need to prepare financial statements and other reports. Eliminating the need to perform the three middle steps of the accounting cycle. Computerized accounting programs post information from journals instantaneously, permitting accountants to run financial statements and reports at a moment's notice. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-3 Level of Learning 3: Application of principles Nickels - Chapter 17 #281 Topic: Accounting Technology 282. (p. 464) The three important financial statements prepared by accountants are: A. B. C. D. Ledger, journal, and trial balance. Cash budget, capital budget, and master budget. Revenue summary, expense summary, and consolidation statement. Balance sheet, income statement, and statement of cash flows. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #282 Topic: Understanding Key Financial Statements 283. (p. 464) The __________ is an accounting statement that reports the financial condition of a firm at a specific point in time. A. B. C. D. income statement balance sheet statement of cash flows trial balance AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #283 Topic: Understanding Key Financial Statements 284. (p. 464) A firm's ________ reports the profit or loss for the firm over a specified time period. A. B. C. D. income statement balance sheet statement of cash flows bank statement AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #284 Topic: Understanding Key Financial Statements 285. (p. 465) The _____ shows the assets, liabilities, and owners' equity of a firm, at a specific point in time. A. B. C. D. income statement balance sheet statement of cash flows trial balance AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #285 Topic: Understanding Key Financial Statements 286. (p. 464) Which financial statement reports the company's revenues and selling costs over a period of time? A. B. C. D. income statement balance sheet statement of cash flows trial balance AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #286 Topic: Understanding Key Financial Statements 287. (p. 464) A ___________ provides a summary of cash coming into and money going out of a firm from operations activities, financing activities, and investing activities. A. income statement B. statement of cash flows C. cash budget D. cash receivables and payables report AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #287 Topic: Understanding Key Financial Statements 288. (p. 465) The balance sheet is composed of the following types of accounts: A. B. C. D. Revenue, expenses, and earnings. Operating expenses, cash flow, and capital expenditures. Capital, cost, and valuation. Assets, liabilities, and owners' equity. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #288 Topic: The Balance Sheet 289. (p. 465) A balance sheet lists assets in order of their _______________. A. B. C. D. Dollar value, from smallest to largest Date of acquisition, with the most recently acquired assets listed first Liquidity, with the most liquid assets listed first Income generating ability AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #289 Topic: The Balance Sheet 290. (p. 466) _________ refers to how quickly an asset can be converted into cash. A. B. C. D. Liquidity Velocity Fundability Accessibility AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #290 Topic: Classifying Assets 291. (p. 466) When companies owe money to creditors, suppliers, and others, these outstanding amounts are recorded on the balance sheet as __________. A. B. C. D. Contra-assets Liabilities Owners' equity. Expenses AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #291 Topic: The Balance Sheet 292. (p. 467) _______ refers to the value that stockholders or owners have in a company. A. B. C. D. Assets. Liabilities. Owners' equity. Contra receivables. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #292 Topic: Liabilities and Owners Equity Accounts 293. (p. 464) The fundamental accounting equation states: Assets = __________. A. B. C. D. liabilities minus owners' equity. liabilities plus receivables. payables plus cash equivalents. liabilities plus owners' equity. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #293 Topic: The Fundamental Accounting Equation 294. (p. 466) Company resources that are purchased with the intention that they will convert to cash within one year are: A. Fixed assets B. Current liabilities C. Current assets D. Owners' equity AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #294 Topic: Classifying Assets 295. (p. 466) Resources that a firm owns are called: A. B. C. D. Revenues. Assets. Equities. Credits. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #295 Topic: Classifying Assets 296. (p. 466) The most liquid asset is: A. B. C. D. Sales. Cash. Accounts payable. Owners' equity. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #296 Topic: Classifying Assets 297. (p. 466) Patents and copyrights are classified as ___________ on the Balance Sheet. A. B. C. D. Fixed assets. Intangible assets. Current assets. Owners' equity. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #297 Topic: Classifying Assets 298. (p. 466) Debts that are due in one year or less are classified on the Balance Sheet as: A. B. C. D. Current liabilities. Bonds payable. Callable bonds. Immediate expenses. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #298 Topic: Liabilities and Owners Equity Accounts 299. (p. 464, The value of resources the firm owns, minus the amount of money the firm owes to others = ____________. 467) A. B. C. D. liabilities liquidity leverage owners equity AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #299 Topic: Liabilities and Owners Equity Accounts 300. (p. 467) The _____ account on the Balance Sheet shows profits that the firm has reinvested in the company. A. B. C. D. retained earnings stockholder's equity intangible assets notes payable AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #300 Topic: Liabilities and Owners Equity Accounts 301. (p. 467) Which of the following items is found on an income statement? A. current assets B. cost of goods sold C. cash flows from investments D. owners' equity AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #301 Topic: Figure 17.6 302. (p. 467) Revenue, minus cost of goods sold =____________. A. B. C. D. retained earnings fundamental accounting equation gross profit net income AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #302 Topic: Figure 17.6 303. (p. 469) Rent, depreciation, and salaries are examples of: A. B. C. D. Current assets. Current liabilities. Owners' equity. Operating expenses. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #303 Topic: Operating Expenses 304. (p. 469) ________ is the monetary value that is received for goods sold, services rendered and money received from other sources. A. B. C. D. Revenue Gross margin Net income Cost of goods sold AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #304 Topic: Revenue 305. (p. 470) Net Profit refers to: A. B. C. D. The result of deducting liabilities from the assets of the firm. The result of subtracting cost of good sold from revenues. The result of deducting depreciation expense from revenues. The net earnings after the deduction of all expenses, including tax expense. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #305 Topic: Net Profit or Loss 306. (p. 469) Depreciation is a systematic write-off of the cost of a tangible asset that is listed on ___________. A. B. C. D. The Statement of Cash Flows The Balance Sheet The Income Statement The Statement of Retained Earnings AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #306 Topic: The Income Statement 307. (p. 471) The Statement of Cash flows identifies cash receipts and disbursements that result _______________. A. B. C. D. from selling goods and/or services, exclusively. solely from a firm's investments. from a firm's operations and investment activities, but not from financing activities. from a firm's operations, investment, and financing activities. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #307 Topic: The Statement of Cash Flows 308. (p. 465) The balance sheet is set up to reflect the Fundamental Accounting Equation. This equation shows: A. B. C. D. Assets = Liabilities + Owners' equity. Revenues - Expenses = Gross profit. Cash inflows = Cash outflows. Current assets + Current liabilities = Owner's equity. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #308 Topic: The Fundamental Accounting Equation 309. (p. 468) The "bottom line" of an income statement shows the firm's: A. B. C. D. Retained earnings. Gross profit. Net income or net loss. Owners' equity. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #309 Topic: Net Income or Loss 310. (p. 469) Expenses a firm incurs for insurance, office salaries, and rent are classified as: A. B. C. D. Selling expenses on an income statement. General expenses on an income statement. Current liabilities on a balance sheet. General expenses on a cash flow statement. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #310 Topic: Operating Expenses 311. (p. 466) Debts owed by a business are called ___________. A. B. C. D. revenues liabilities equities assets AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #311 Topic: Liabilities and Owners Equity Accounts 312. (p. 470) When it comes to the treatment of depreciation and valuation of inventory, generally accepted accounting principles _____________________. A. B. C. D. provide almost no guidance to accountants allow accountants to choose among different methods for depreciation and for the valuation of inventory require accountants to use only one specific method of depreciation, but permit several methods of inventory valuation require accountants to use one specific method for valuing inventory, but permit several methods for depreciating fixed assets AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #312 Topic: Spotlight on Small Business box 313. (p. 470) FIFO and LIFO are two common: A. B. C. D. depreciation strategies. ways to structure a balance sheet. inventory valuation methods. current ratios. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #313 Topic: Spotlight on Small Business box 314. (p. 470) The LIFO method of inventory valuation bases the cost of goods sold on the cost of: A. B. C. D. Merchandise that has been held in inventory for the longest period of time. Most recent merchandise purchased by the firm. Actual units customers purchased. Merchandise the firm acquired at the lowest cost. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #314 Topic: Spotlight on Small Business box 315. (p. 469) _________ is the systematic write-off of the value of a tangible asset over its useful life. A. B. C. D. Expense structuring Depreciation Capital budgeting Gross margin allocation AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #315 Topic: Operating Expenses 316. (p. 469) Accounting recognizes that assets, such as machinery and buildings, lose value over time. Accountants will record a portion of the cost of an asset as an expense each year through the use of: A. B. C. D. Asset valuation. Asset audits. Appreciation. Depreciation. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #316 Topic: Operating Expenses 317. (p. 465) The ______________ shows how the capital is structured in the business, including the value of assets and the amount the firm owes at a specific point in time. A. B. C. D. income statement balance sheet statement of cash flows trial balance A balance sheet reports the firm's assets (what the firm owns), liabilities (debts of the firm), and owners' equity at a specific point in time. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #317 Topic: Understanding Key Financial Statements 318. (p. 466) As Hector was packing to return to State University after his summer vacation, he realized that he owned many valuable things such as a laptop computer, a stereo system, and a DVD player. An accountant would list all of these as Hector's: A. B. C. D. assets. liabilities. owners' equity. intangibles. Assets refer to tangible or intangible resources the firm owns and uses in order to operate the business. This question refers to personal assets the student will use for school purposes and/or for recreation. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #318 Topic: Classifying Assets 319. (p. 466) Keith will graduate from Southern State University this year. He has accumulated $18,000 in student loans during his four years at college. An accountant would classify the loans as: A. B. C. D. assets. liabilities. owners' equity. intangibles. Liabilities represent debts or obligations of an individual or a firm. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #319 Topic: Liabilities and Owners Equity Accounts 320. (p. 464) The Balance Sheet for Renuvation LLC shows assets totaling $107,000 and liabilities totaling $75,000. Which of the following statements is correct? A. B. C. D. Owner's Equity equals $182,000. Current Assets are worth $32,000. Net Income for the period is $32,000. Owner's Equity equals $32,000. The fundamental accounting equation states that: Assets = Liabilities + Owners' Equity. By subtracting liabilities from both sides of the equation, we arrive at: Assets - Liabilities = Liabilities - Liabilities + Owner's Equity. The Liabilities terms on the right side of the equation cancel out. The equation becomes Assets - Liabilities = Owner's Equity. Substituting the information provided, $107,000 - $75,000 = $32,000. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #320 Topic: The Fundamental Accounting Equation 321. (p. 467) Use the fundamental accounting equation to solve the following: Assets minus liabilities equals: A. net income. B. gross margin. C. owners' equity. D. cash reserves. Owners' equity is the residual claim of the owners on the assets of the business. After the creditors have made their claims against the assets of the firm, the remaining assets belong to the owners. In other words, owners' equity is the amount of the business that belongs to the owners minus any liabilities owed by the business. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #321 Topic: The Fundamental Accounting Equation 322. (p. 464) On December 31, 2001, Virginia Laboratories had assets of $235,000 and owners equity of $84,000. We can conclude that on December 31, 2001, Virginia Laboratories balance sheet showed: A. B. C. D. Total liabilities of $151,000. Suffered a net loss of $151,000. Experienced a cash inflow of $319,000. Paid a dividend of $3.00 per share. The fundamental accounting equation states that Assets = Liabilities + Owners' equity. A restatement of this equation is: Liabilities = Assets Owners' equity. Therefore, the liabilities = $235,000 - $84,000 = $151,000. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #322 Topic: The Fundamental Accounting Equation 323. (p. 466) Scott Drilling Contractors recently issued a corporate bond on which it expects to pay interest for the next twenty years. Scott would record this as a __________ on its balance sheet. A. B. C. D. declining balance asset retained earning long-term liability long-term expense Long-term liabilities are obligations that come due in a time period greater than one year. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #323 Topic: Liabilities and Owners Equity Accounts 324. (p. 465) Blast-off Airlines is a recent start-up commuter airline that flies between eight regional cities on the east coast. Although it has attracted numerous investors who see value in the company's service, it does not pay dividends. Last year, the firm claimed profits of $4,800,000, which will be used to purchase an additional commuter plane. The Balance Sheet accounts that will show this affect are: A. B. C. D. Retained earnings and fixed asset accounts Long-term liabilities and fixed asset accounts Retained earnings and accounts receivable accounts Accounts payable and accounts receivable accounts Profits are often kept in (retained) the firm to grow the business. The accountant will post these profits to the retained earnings account and to a subsequent asset account, order to keep the accounts balanced. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #324 Topic: Liabilities and Owners Equity Accounts 325. (p. 468) Many business decisions are made in hopes of improving a firm's "bottom line." Which of the following financial statements will reveal a firm's "bottom line"? A. B. C. D. income statement balance sheet statement of cash flows trial balance The financial statement that shows the "bottom line" (profit after expenses and taxes) is the income statement. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #325 Topic: The Income Statement 326. (p. 468) A company's income statement is important to accountants and other stakeholders. It reveals: A. B. C. D. A company's sources of funding. A company's ability to distribute goods or services in a timely manner. A company's ability to earn a profit over time. A company's capitalized value. The income statement contains several elements including revenues, expenses, and net income or loss. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #326 Topic: The Income Statement 327. (p. 468 469) A. B. C. D. When creating the income statement, which of the following statements is accurate? Revenues, minus general operating expenses = gross profit. Revenues, minus tax expense = gross profit. Revenues, minus depreciation expense = gross profit. Revenues, minus cost of goods sold = gross profit. The First line item on the income statement reports revenues earned over a period of time. The "cost of goods sold" is subtracted from revenues in order to determine gross profit. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #327 Topic: The Income Statement 328. (p. 468 Meg Malloy is running an income statement on her QuickBooks™ computer accounting program. Which of the following accounts will be used to calculate gross profit? 469) A. B. C. D. Revenues, net sales, depreciation, and operating expenses Revenues, general expenses Revenues, cost of goods sold, tax expenses, net income before taxes Revenues, cost of goods sold The first two elements of the income statement are 1) revenue and 2) cost of goods sold. Revenues - cost of goods sold = gross profit. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #328 Topic: The Income Statement 329. (p. 469) In calculating cost of goods sold, Meg Malloy noticed that her accounting software included the freight charges on purchased goods. Your response to this procedure is: A. B. C. D. Freight charges are a legitimate part of cost of goods sold. Freight charges should be subtracted as part of general expenses. Freight charges cannot be deducted as an expense on the income statement. Freight charges are part of revenues. Freight charges (associated with the purchase of goods for resale or the purchase or inventory) are included as part of the cost of goods sold. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #329 Topic: The Income Statement 330. (p. 470) Which of the following would be classified as a general expense on an income statement? A. B. C. D. Salaries paid to salespeople Dividends paid to stockholders Payments made for insurance Costs associated with an advertising campaign Operating expenses are usually divided into two categories. Selling expenses include things like salaries for salespeople and advertising costs. General expenses include office salaries, insurance, and depreciation. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #330 Topic: Operating Expenses 331. (p. 470) During a period of rising prices, using FIFO (first in, first out) inventory valuation method will result in ________ net income figures than would LIFO (last in, first out). A. B. C. D. higher lower the same less accurate During periods of rising prices, using FIFO, the cost of goods sold is based upon older, less expensive merchandise. Using LIFO, the cost of goods sold would reflect the more recent, more expensive merchandise. FIFO, therefore, yields a smaller cost of goods sold figure. Subtracting this smaller cost of goods sold from the sales revenue will produce a higher net income. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #331 Topic: Spotlight on Small Business box 332. (p. 470) Retailers attempt to sell older merchandise before more recently acquired merchandise is sold. The assumptions made by the __________ method of inventory valuation are most consistent with this approach. A. B. C. D. FIFO (first in, first out) LIFO (last in, first out) average costing accelerated costing FIFO inventory valuation method bases cost of goods sold on the items that have been in inventory longest (i.e. those units that were "first in"). This is consistent with the behavior of retailers who try to sell older merchandise first. AACSB: Reflective Thinking Blooms: Synthesis Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #332 Topic: Spotlight on Small Business box 333. (p. 470) During a period of rising prices, if a firm desires to report a low gross profit figure in hopes of reducing their income tax liability, the firm will use the __________ inventory valuation method. A. B. C. D. FIFO (first in, first out) LIFO (last in, first out) sliding scale average cost The cost of goods sold figure will reflect more recent, higher costs when the LIFO method is used. Subtracting this higher cost of goods sold figure from sales revenue will produce a lower gross profit. AACSB: Reflective Thinking Blooms: Synthesis Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #333 Topic: Spotlight on Small Business box 334. (p. 472) Rapidly growing companies often buy increasing amounts of merchandise from suppliers on credit, and then sell the goods to their customers on credit. These companies sometimes have difficulty repaying their suppliers when customers who buy on credit don't pay on time. Firms that experience this difficulty need to do a better job of: A. B. C. D. Generating revenue. Controlling inventory. Managing cash flows. Balancing assets with liabilities. These firms are generating lots of revenue. Revenues that are tied-up in credit sales are not the same as cash. Firms need cash to pay their bills. This shows that even companies that enjoy increased sales and higher profits can suffer greatly from cash flow problems. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #334 Topic: The Need for Cash Flow Analysis 335. (p. 465) At the time the Jepson Plumbing Supply prepared its financial statements, it had several customers who bought goods over the past three months on its "90 days same as cash" credit plan. These customers had not yet paid their bills, but they have good credit ratings and Jepson is confident that they will make their payments on time. The amount these credit customers owe would show up as part of the: A. B. C. D. current assets listed on Jepson's balance sheet. current liabilities listed on Jepson's balance sheet. a deferred cash flow on Jepson's statement of cash flows. unrealized revenue reported on Jepson's income statement. A current asset is an asset that can or will be converted into cash in less than a year. Current assets include cash, accounts receivable, and inventory. Because Jepson expects payments on these accounts receivable within 90 days, they are considered a current asset. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #335 Topic: Classifying Assets 336. (p. 465) Bridget Cartier has privately invested $100,000 in Jacques and Jacqueline's Idaho Ski Resort. The business will use the money to purchase new ski lift chairs. $100,000 will be recorded on the balance sheet as part of the owners' equity account. In order to keep the accounts balanced, the balance sheet will also show: A. B. C. D. An increase of $100,000 cash. A fixed asset [ski lift chairs] = $100,000. A liability for $100,000. An increase in accounts receivable for $100,000.her QuickBooks The Balance Sheet reflects the fundamental accounting equation: Assets = Liabilities + Owner's Equity. If $100,000 is added to one side of the equation, it must also be added to the other side of the equation. In this case, the problem indicates that the money will use used to purchase a fixed asset: ski lift chairs. Ski lift chairs are considered fixed assets because they have an estimated useful life greater than one year. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #336 Topic: Classifying Assets 337. (p. 466) Green Living Construction Company installs solar panels in large newly constructed buildings. The company employs several expert installers who work on a full-time basis. Although the installers work everyday, the company pays them at the end of the month, for the previous month's work. Employee salaries are recorded as ___________ on Green Living's Balance Sheet. A. B. C. D. capital cash flows current liabilities retained earnings long-term liabilities The company is obligated to pay salaries out each month. This is a current liability, called "salaries payable." AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #337 Topic: Liabilities and Owners Equity Accounts 338. (p. 466) Miko is preparing her homework for her accounting class. She is uncertain as to the proper handling of patents and copyrights on a firm's financial statements. Which of the following is correct? A. B. C. D. Patents and copyrights are included with the firm's intangible assets on the balance sheet. Patents and copyrights are included with the firm's long-term liabilities on the balance sheet. Patents and copyrights are included with the firm's cost of goods sold on the income statement. Patents and copyrights are included with the firm's fixed assets on the balance sheet. Intangible assets include items of value that have no physical form, such as patents and copyrights. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #338 Topic: Classifying Assets 339. (p. 467) "You Incorporated", Figure 17.6, in Chapter 17 shows how to calculate your personal balance sheet. You can list your assets as well as your debts, in order to calculate your _________. A. B. C. D. cash flow real income working capital net worth The fundamental accounting equation can be used for individuals as well as businesses, except that the difference between assets and liabilities is called net worth instead of owners' equity. This equation can be rewritten as follows: Assets - Liabilities = Net Worth. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #339 Topic: Figure 17.6 340. (p. 469) If a firm can reduce its cost of goods sold and continue to sell its product for the same price, we would expect the firm to enjoy an increase in its: A. B. C. D. revenue. liabilities. employee turnover. gross profit. Gross profit is calculated by subtracting cost of goods sold from sales revenue. Revenues - cost of goods sold = gross profit. If the cost of goods sold amount is reduced, gross profit will increase. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #340 Topic: The Income Statement 341. (p. 469) McCartney Consulting Group is a management-consulting firm that provides its expertise to businesses that employ its services. Since it does not hold an inventory of goods or produce any goods itself: A. B. C. D. its revenue will equal its net income. its gross profit could be identical to its net revenue. it is unlikely to have any operating expenses. its balance sheet will not record any current assets. In a service firm, there may be no cost of goods sold. In this case, there is no difference between net revenue and gross profit. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #341 Topic: The Income Statement 342. (p. 472) Cindy is concerned because during the past four months her company has experienced difficulty in paying its bills on time. She knows if this continues, the firm will have difficulties in accomplishing its goals. Cindy is concerned with: A. asset disbursement. B. cash flow. C. profit and loss. D. inventory valuation. Cash flow is simply the difference between cash flowing in and the cash flowing out of a business. If a firm is strapped for cash, it has difficulty purchasing and paying for needed inventory, supplies, and labor that ultimately help increase revenues. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #342 Topic: The Need for Cash Flow Analysis 343. (p. 471 Monica noted that she disbursed $6,347 in payments for operations in her travel agency and received $6,189 in cash receipts for services rendered. She had no cash receipts or disbursements from investments or financing activities. Thus, Monica had a: 472) A. B. C. D. positive disbursement. negative cash flow. bad debt allowance. tax credit payment. Cash flow is the difference between cash flowing in and the cash flowing out of a business. If disbursements exceed receipts, the cash flow is negative. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #343 Topic: The Need for Cash Flow Analysis 344. (p. 471) Carlisle Communications is preparing its statement of cash flows. Among other things, this statement will show: A. B. C. D. net income from operations after taxes. general expenses and operating expenses. cash inflows and cash outflows that resulted from financing activities. the total owners' equity for the firm. The statement of cash flows identifies cash receipts and disbursements from operations, investments, and financing activities. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #344 Topic: The Statement of Cash Flows 345. (p. 470) 10th Generation Electronics had two transformers in its inventory, one purchased in February for $11,800 and the other acquired in September for $13,300. In December, they sold one of the transformers to Ram Enterprises for $16,400 and reported a gross profit of $3,100. 10th Generation Electronics evidently uses the ________ inventory valuation method. A. B. C. D. FIFO LIFO Average Flexplus Using the LIFO (last in, first out) method will produce a cost of goods sold of $13,300, the cost of the September acquisition. Sales revenue ($16,400) minus cost of goods sold ($13,300) will reflect a gross profit of $3,100. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #345 Topic: Spotlight on Small Business box 346. (p. 469) Nebraska Communications is considering the purchase of a new satellite. The firm believes the satellite will help generate future earnings. In addition, the firm recognizes the tax benefits of a lower net income provided by the annual ________ of the asset. A. B. C. D. inventory valuation declining balance appreciation depreciation Businesses are permitted to use depreciation as an expense of business operations. This extra expense will lower a firm's taxable income. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #346 Topic: Operating Expenses 347. (p. 469) Carole Grand and Bonnie Lamore run a shuttle service from Western Illinois to the busy Chicago O'Hare airport. Last month, they recorded the following: Carole and Bonnie's gross profit for the past month was: A. B. C. D. $682.00 Carole: $341.00; Bonnie: $341.00 $1250.00 $2750.00 Gross profit is calculated by subtracting cost of goods sold from revenues. Cost of goods sold represent items that are directly related to producing the product or service. In this problem, fuel charge represents a cost of goods sold. Revenues [$2000.00], minus cost of goods sold [$750] = gross profit [$1250.00] AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #347 Topic: Cost of Goods Sold 348. (p. 468 Carole Grand and Bonnie Lamore run a shuttle service from Western Illinois to the busy Chicago O'Hare airport. Last month, they recorded the following: 469) If 25% of their net income is paid to the government in taxes, what is their net income after taxes? A. B. C. D. $1410.00 $1160.00 $682.00 $870.00 Revenues [$2400.00] - expenses [total $1240.00] = net income before taxes [$1160.00]. Taxes are calculated at 25% of the net income before taxes. [25% of $1160 = $290.00] Net income after taxes = $1160.00 - $290 = $870.00. AACSB: Reflective Thinking Blooms: Synthesis Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #348 Topic: The Income Statement 349. (p. 471) Costas Calendar Company's Statement of Cash Flows showed the following activities for the year ended December 31, 2009: The year end cash balance for this firm is: A. B. C. D. $7,000.00 $53,000.00 $23,000.00 $30,000.00 Statement of Cash Flows shows cash generated from three sources: operating activities; investing activities, and, financing activities. Costas Calendar Company records show a positive cash position from operating activities; and, a negative position for cash from investing and financing activities. $30,000 + (15,000) + (8,000) = cash balance of $7,000. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #349 Topic: The Statement of Cash Flows 350. (p. 471 Preferred Pet Care Clinic, Inc is a mobile veterinary care company that travels to its clients' homes to administer veterinary care to well and sick pets. Its business is booming, with a full schedule of appointments each week. On a weekly basis, the office manager 472) orders a larger amount of vaccines, antibiotics, and other products from its suppliers with the understanding that it will pay for these supplies in one month's time. A sizeable percentage of Preferred Pet Care's clients are elderly persons who are on fixed incomes. These customers eventually pay their bills, but usually not upon receipt of service. It sometimes takes them upwards of two months to remit. As an accounting intern willing to advise the owner, which of the following statements is important to your analysis? A. Noting the fact that the clinic continues to order more supplies each month, the veterinary clinic will certainly not experience a cash flow crunch. If anything, it would be a good idea to hire additional veterinarians. B. Noting the fact that the clinic continues to order larger amounts of supplies each month, the company should make certain that its cost of goods sold is not greater than 50% of the price it is charging. C. Due to the fact that clients are not paying when service is received, the clinic may experience a cash flow crunch; an inability to maintain enough cash to pay for its supplies each month. D. Preferred Pet Care is doing everything right. It was wise to develop a niche market because senior citizens have greater savings than younger families. This is a good business and recessionary proof. The firm will continue to grow and prosper. The clinic owes money to its supplier each month, while its clients only pay (at best) every two months. The intern should warn the owner that he/she may experience cash flow problems if the timeliness of the cash receipts do not improve or the timeliness of cash disbursements is not more lenient. AACSB: Reflective Thinking Blooms: Analysis Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #350 Topic: The Need for Cash Flow Analysis 351. (p. 473 474) A. B. C. D. The financial ratios that measure a firm's ability to pay its short-term debts are called: leverage ratios. liquidity ratios. equity ratios. profitability ratios. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-5 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #351 Topic: Analyzing Financial Performance Using Ratios 352. (p. 474) The current ratio is a type of ________ ratio. A. B. C. D. leverage profitability activity liquidity AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-5 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #352 Topic: Liquidity Ratios 353. (p. 474) Which of the following ratios is a liquidity ratio? A. B. C. D. inventory turnover ratio acid-test ratio debt to owners' equity ratio basic earnings per share AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-5 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #353 Topic: Liquidity Ratios 354. (p. 474) The purpose of the current ratio is to evaluate the firm's ability to: A. B. C. D. Generate sales with a given level of current assets. Utilize current assets profitably. Pay its bills in the short run. Effectively use borrowed funds. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-5 Level of Learning 1: Knowledge of key terms Nickels - Chapter 17 #354 Topic: Liquidity Ratios 355. (p. 474) The _______ ratio helps determine the ability of a firm to repay its short-term debts even if it has difficulty selling its inventory. A. B. C. D. acid-test cash flow diluted current asset required reserve The acid test ratio eliminates the inventory account from the current ratio. Acid test ratio = cash + accounts receivable = marketable securities/current liabilities. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-5 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #355 Topic: Liquidity Ratios 356. (p. 474) Financial ratios that reflect the degree to which a firm relies on borrowed funds are called ________ ratios. A. B. C. D. leverage liquidity activity profitability Leverage ratios measure the degree which firm relies on borrowed funds as opposed to funds contributed by the owners. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-5 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #356 Topic: Leverage (Debt) Ratios 357. (p. 475) Earnings per share, return on sales, and return on equity are examples of: A. B. C. D. leverage ratios. liquidity ratios. equity ratios. profitability ratios. Profitability ratios measure how effectively the company is using its resources to create profits. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-5 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #357 Topic: Profitability (Performance) Ratios 358. (p. 475) ________ measures the amount of profit earned by a company for each share of outstanding common stock. A. B. C. D. Basic earnings per share (basic EPS) Diluted earnings per share (diluted EPS) Simple earnings per share (simple EPS) Return on shares outstanding (RSO) Basic EPS measures the earnings per share of common stock outstanding. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-5 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #358 Topic: Profitability (Performance) Ratios 359. (p. 475) __________ earnings per share measures the amount of profit a firm earns per share of outstanding common stock when preferred stock, stock options, warrants and convertible debt securities are also taken into account. A. B. C. D. Basic Diluted Restricted Broad-based Diluted Earnings per share takes into account stock options, convertible preferred stock, warrants, and other convertible debt securities in the earnings per share calculation. The addition of these sources of funds will dilute the earnings per share. It will be something less than the basic earnings per share calculation. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-5 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #359 Topic: Profitability (Performance) Ratios 360. (p. 475) Generally the higher the risk involved in an activity, the ________ the rate of return expected by investors. A. B. C. D. higher lower more stable less frequent An axiom of finance, investors are willing to take on added risk, if they realize higher returns. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-5 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #360 Topic: Profitability (Performance) Ratios 361. (p. 475 A firm's efficient use of its assets in running the business is key to maintaining sufficient cash flow. Ratios that accountants utilize to measure the efficient use of assets are called ____________ ratios. 476) A. B. C. D. leverage liquidity activity profitability Activity Ratios such as the Inventory Turnover ratio measure a firm's efficient use of assets. The goal is to maintain a relatively high turnover ratio. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-5 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #361 Topic: Activity Ratios 362. (p. 475 476) A. B. C. D. ________ measures the speed of inventory moving through the firm and its conversion into sales. Asset turnover ratio Inventory turnover ratio Sales turnover ratio Cost of goods sold turnover ratio The inventory turnover ratio utilizes the value of the cost of goods sold (the inventory that the firm has sold) and divides by the value of the average inventory the firm maintains. A sufficient turnover ratio (higher is better) will add to the company's cash flow. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 17-5 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #362 Topic: Activity Ratios 363. (p. 474) In order to understand if the results of ratio calculations indicate a financially strong company, the results: A. B. C. D. Should be compared to other firms in the same industry. Are compared to same size firms in the same geographic region of the country. Are compared to the norms established by generally accepted accounting principles. Are compared to the largest firms in the country. Financial ratios are especially useful in analyzing the actual financial performance of the company compared to its financial objectives and compared to other firms within its industry. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-5 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #363 Topic: Analyzing Financial Performance Using Ratios 364. (p. 474 475) A. B. C. D. If a firm has a debt to owners' equity ratio of .54 (or 54%) we can conclude that: It has relied more on debt than equity to finance its operations. The firm is likely to have trouble paying its short term debts when they come due. Its total liabilities are less than its owners' equity. The firm has expenses that are exactly 54% of its gross profit. This ratio compares the debt (total liabilities) invested in the company with the total equity (total owners equity) invested in the company. If the result is greater than 1 (or 100%), the firm is funded with more debt capital than equity capital. AACSB: Reflective Thinking Blooms: Synthesis Learning Goal: 17-5 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #364 Topic: Leverage (Debt) Ratios 365. (p. 474) Generally, a high ___________ ratio could lead investors and creditors to view the company as being very risky. A. B. C. D. debt to owners' equity acid-test diluted earnings per share inventory turnover A high debt to owners' equity ratio indicates that the company is relying heavily on debt to fund its operations. Many investors and creditors would view this as a risky approach. AACSB: Reflective Thinking Blooms: Synthesis Learning Goal: 17-5 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #365 Topic: Leverage (Debt) Ratios 366. (p. 474) In order to calculate the current ratio for your firm, you divide the total value of current assets by: A. B. C. D. Earnings per share. The total value of current liabilities. The total owners' equity. The total cost of goods sold. The current ratio is calculated by dividing current assets by current liabilities. [Current Ratio = Current Assets/Current Liabilities] AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-5 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #366 Topic: Liquidity Ratios 367. (p. 474) Leverage ratios indicate the extent to which ________ has been used to fund a business's operations. A. B. C. D. debt equity owner invested capital profit Leverage ratios refer to the degree to which a firm relies on borrowed funds in its operations. Borrowed funds represent debts of the business. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-5 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 17 #367 Topic: Leverage (Debt) Ratios 368. (p. 473 Your firm is a supplier to a major chain of discount stores. You have heard rumors that this chain of discount stores is in financial difficulty. Which financial ratios would indicate the discount store's ability or inability to pay its short-term debts? 474) A. liquidity ratios B. leverage ratios C. activity ratios D. profitability ratios Liquidity ratios measure the company's ability to pay its short-term debts. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-5 Level of Learning 3: Application of principles Nickels - Chapter 17 #368 Topic: Liquidity Ratios 369. (p. 474) As a bank loan officer, you are considering a loan application by Peak Performance Sporting Goods. The company has provided you with the following information from its Balance Sheet: Peak Performance's current ratio is: A. B. C. D. 1.0. 1.5. 2.5. 3.0. The current ratio is found by dividing total current assets by total current liabilities. Peak Performance's current assets = $210,000 and its current liabilities = $70,000. $210,000/$70,000 = 3.0. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-5 Level of Learning 3: Application of principles Nickels - Chapter 17 #369 Topic: Liquidity Ratios 370. (p. 474) Peak Performance Sporting Goods Company has just applied for a bank loan in order to expand the business. Using the most recent Balance Sheet data provided by the company owner, you calculate that the company's current ratio is 2.5. In your presentation to the company boss, you remark: A. B. C. D. Peak Performance's is currently having trouble meeting its short-term obligations. Peak Performance's has $2.50 that it owes each month, for every $1.00 of cash that it is generating. Peak Performance has $2.50 of current assets for each $1.00 of currently liabilities. Due to the fact that most of Peak Performance's current assets are tied-up in inventory, there is no need to worry about whether Peak Performance will be able to make loan payments. The current ratio compares total current assets to total current liabilities. A current ratio of 2.5 can be written as a fraction: 2.5/1. This means: The firm has $2.50 worth of current assets for every $1.00 of current liabilities. AACSB: Reflective Thinking Blooms: Analysis Learning Goal: 17-5 Level of Learning 3: Application of principles Nickels - Chapter 17 #370 Topic: Liquidity Ratios 371. (p. 474) As a bank loan officer, you are considering a loan application by Peak Performance Sporting Goods. The company has provided you with the following information: Peak Performance's debt to owners equity ratio (rounded to the nearest tenth of a percent) is: A. B. C. D. 45.4%. 66.7%. 112.5%. 133.3%. Step one: Use the fundamental accounting equation to calculate Owner's Equity: Total Assets - Total Liabilities = Owner's Equity. Total Assets = $400,000 [$25,000 + $45,000 + $140,000 + $190,000]. Total Liabilities = $160,000 [$70,000 + $90,000]. Total Assets of $400,000 Total Liabilities of $160,000 = Owner's Equity of $240,000. Step two: Calculate the debt to owners equity ratio = Debt [total Liabilities]/Owner's Equity. The ratio of total liabilities to owners equity = $160,000/$240,000 = 0.667 (or 66.7%). AACSB: Reflective Thinking Blooms: Analysis Learning Goal: 17-5 Level of Learning 3: Application of principles Nickels - Chapter 17 #371 Topic: Leverage (Debt) Ratios 372. (p. 474) In the current economic climate, banks are remaining very conservative in their lending practices. Peak Performance Sporting Goods is seeking a loan for expansion. As a loan officer for the local bank, you calculate the acid-test ratio for Peak Performance Sporting Goods. Using the information below, you determine Peak Performance's acid-test ratio = _____. A. B. C. D. 1.0 1.5 2.5 3.0 The acid-test ratio is found by dividing the sum of cash + accounts receivable + marketable securities, by the firm's current liabilities. Peak Performance has no marketable securities, so the numerator of this ratio equals $25,000 + $45,000 + $0 = $70,000. Since the denominator (current liabilities) is also $70,000, the ratio = $70,000/$70,000 = 1.0. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-5 Level of Learning 3: Application of principles Nickels - Chapter 17 #372 Topic: Liquidity Ratios 373. (p. 474) You have just calculated the acid-test ratio for Peak Performance Sporting Goods [acid test ratio = 1.0]. As a loan officer for the local bank, you are called into your boss's office to interpret the results of this ratio. Which of the following statements best reflects an understanding of these results? A. A company with an acid-test ratio = 1.0 demonstrates the ability to operate very conservatively. The bank should anticipate that this firm will always be able to meet its short-term liabilities. B. This company is already having problems meeting its short-term liabilities. C. An acid-test ratio = 1.0 means that this firm has $1.00 in current assets for every $2.00 in current liabilities. Peak Performance is a wellrun operation, as long as it can continue to sell-off its inventory. D. An acid test ratio = 1.0 tells us that without adequate inventory turnover, this company may represent a higher risk. Peak Performance's acid test ratio shows that the firm maintains $1.00 in current assets for every $1.00 in current liabilities. The acid test ratio calculation: [Cash + Accounts Receivables + Marketable Securities/Current Liabilities]. Unlike the current ratio, the acidtest ratio does not include the inventory value in the calculation. It is a more conservative measure of liquidity. AACSB: Reflective Thinking Blooms: Analysis Learning Goal: 17-5 Level of Learning 3: Application of principles Nickels - Chapter 17 #373 Topic: Liquidity Ratios 374. (p. 474) Backstreet Books, a small eclectic bookstore in a bustling college town wants to open another store at the west end of campus. Allison Robards, the store owner, plans to visit her banker in the hopes of obtaining additional financing. In preparation for her visit, the banker asks her for the following information: Calculate the debt to equity ratio for Backstreet Books. A. B. C. D. 250% 105% 75% 30% The formula for calculating debt to equity ratio = Total Liabilities/Owner's Equity. Total Liabilities = Current Liabilities + Long Term Liabilities. For this problem, the debt to equity ratio = $210,000/$200,000 = 1.05 or 105%. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-5 Level of Learning 3: Application of principles Nickels - Chapter 17 #374 Topic: Leverage (Debt) Ratios 375. (p. 475) Peak Performance Sporting Goods Company continues to perform well in spite of an economic recession. Company executives credit this to the strong partnerships it enjoys with category killer and large discount chains. Last week Peak Performance reported basic EPS [earnings per share] = $.80/share. If the firm has 4,000,000 shares outstanding, net income after taxes for the same period = ______. A. B. C. D. $80,000 $5,000,000 $3,200,000 $32,000 Basic Earning per share = Net Income after taxes/Number of common stock shares outstanding. This problem asks the student to determine one component of this formula: net income after taxes. Net Income after taxes = Basic Earnings per share X Number of common stock shares outstanding. Net Income after taxes = $.80 X 4,000,000 shares = $3,200,000. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-5 Level of Learning 3: Application of principles Nickels - Chapter 17 #375 Topic: Profitability (Performance) Ratios 376. (p. 475) The top managers of Highbrow Bookstores want to indicate to the firm's shareholders how effectively they have managed the company. Perhaps the most meaningful way to do this would be by reporting strong: A. B. C. D. liquidity ratios. leverage ratios. activity ratios. profitability ratios. Profitability ratios measure how effectively managers are using the firm's resources to generate profits for the firm's owners. AACSB: Reflective Thinking Blooms: Synthesis Learning Goal: 17-5 Level of Learning 3: Application of principles Nickels - Chapter 17 #376 Topic: Profitability (Performance) Ratios 377. (p. 475) Peak Performance Sporting Goods Company competes with several other firms in the retail industry for important visibility and retail space in large stores. The company's chief financial officer knows that in order to attract investors, the company must demonstrate growth, and its management must outperform the competition. The CFO continuously watches __________________ because these are key to measuring growth. A. B. C. D. activity ratios profitability ratios leverage ratios liquidity ratios Profits and the reinvestment of profits help companies grow. Profitability ratios measure how effectively a firm is using its various resources to achieve profits. AACSB: Reflective Thinking Blooms: Synthesis Learning Goal: 17-5 Level of Learning 3: Application of principles Nickels - Chapter 17 #377 Topic: Profitability (Performance) Ratios 378. (p. 475) Peak Performance Sporting Goods Company has collected the following information about itself and its competitors: Which of the following statements explains the importance of this information? A. Return on Sales is an indication of how well Peak Performance is competing with others in the industry in generating income from sales. B. Although this information is important to Peak Performance, it is an internal calculation. Investors will not compare Peak Performance's return on sales with others. There are too many other variables such as higher expenses, which may prevent Peak Performance from maintaining the lowest measure. C. Unlike other measurements, a firm hopes that its Return on Sales is the lowest in the industry, thus, Peak Performance is neither doing the best nor doing the worst in its industry. D. As a profitability measurement, return on sales is not as important to the CFO as earnings per share, because this calculation does not show a dilution of ownership. Firms calculate return on sales in order to evaluate how they are performing against other firms in their industry. The goal is to generate more income from sales than the competition. In this example, Olympic, Inc. is outperforming Peak Performance. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-5 Level of Learning 3: Application of principles Nickels - Chapter 17 #378 Topic: Profitability (Performance) Ratios 379. (p. 475) Peak Performance Sporting Goods Company has reported net income after taxes = $3,750,000, with 18,250,000 shares outstanding. Basic Earning per Share for Peak Performance = _________. A. B. C. D. approximately $.21/share approximately $20.50/share approximately $4.87/share approximately - $2.00/share Basic EPS = Net Income after taxes/Number of common stock shares outstanding. For this problem, EPS = $3,750,000/18,250,000 = $.2050/share or approximately $.21/share. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-5 Level of Learning 3: Application of principles Nickels - Chapter 17 #379 Topic: Profitability (Performance) Ratios 380. (p. 475) Bob Stewart plans to visit his financial planner today to discuss investment strategy. As a young, "20 something" accountant, he knows he can afford to invest in a few riskier investments. Which of the following ratios will be an important measure of profitability for Bob? A. B. C. D. return on sales return on equity inventory turnover acid test ratio Risk is a market variable that concerns investors. Investors are willing to take on more risk, if they can expect to get a higher return. As an investor, Bob should be calculating his return on equity. Return on equity measures how much was earned for each dollar invested by owners. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-5 Level of Learning 3: Application of principles Nickels - Chapter 17 #380 Topic: Profitability (Performance) Ratios 381. (p. 475) Marshall McBride inherited $10,000 from his Great Aunt Martha. He invested $5,000 in a new start-up venture, 10th Generation, Inc., and the other $5,000 in Major Chemicals, Inc, a well-known chemical company that's been around for years. Yesterday, he gathered the following information from the financial statements of these companies At this time, Marshall's return on equity is: A. B. C. D. 16% on the 10th Generation, Inc. stock; 11% on the Major Chemicals, Inc. stock 8.5% on the 10th Generation, Inc stock; 10.5% on the Major Chemicals, Inc. stock 2.24% on the 10th Generation, Inc stock; 2.8% on the Major Chemicals, Inc. stock 4.5% on the 10th Generation, Inc. stock; 5.60% on the Major Chemicals, Inc. stock Return on equity = Net Income after Taxes divided by Total Owner's Equity. For this problem, the student will calculate a separate return on equity for each investment: For 10th Generation, Inc Return on Equity = $3,000,000/$66,000,000 = 045 or 4.5%. For Major Chemicals, Inc Return on Equity = $224,000,000/$4,000,000,000 = .056 or 5.60%. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-5 Level of Learning 3: Application of principles Nickels - Chapter 17 #381 Topic: Profitability (Performance) Ratios 382. (p. 475) Marshall McBride inherited $10,000 from his Great Aunt Martha. He invested $5,000 in a new, risky start-up venture, 10th Generation, Inc., and the other $5,000 in Major Chemicals, Inc, a well-known chemical company that's been around for years. Today, his financial planner called to inform him that the Return on Equity on 10th Generation = 6.28%; and, Return on Equity on Major Chemicals = 10.50%. Which of the following facts is important information for Marshall McBride? A. B. C. D. The return on equity on new companies is always lower than the return on equity of well established firms. Investors willing to take added risk, expect higher returns. Return on equity is a liquidity ratio that has very little bearing on profitability. If Marshall wants to know how well his investments are performing, he should employ leverage ratios such as the debt to equity ratio. Risk is an important concern for investors. Investors are willing to accept higher risk, if they are rewarded with higher returns. In this particular situation, the riskier investment is producing lower returns. This should signal concern for the investor. AACSB: Reflective Thinking Blooms: Synthesis Learning Goal: 17-5 Level of Learning 3: Application of principles Nickels - Chapter 17 #382 Topic: Profitability (Performance) Ratios 383. (p. 476) Allison Robards is the owner of Backstreet Books, a small eclectic style bookstore in a bustling college town. Allison prides herself in selecting hard to find books and magazines that her clientele enjoy. Recently, Allison is experiencing a cash flow shortage, and she is concerned that she may be purchasing too many copies of each title. Having recently completed a business class, you suggest to Allison that she calculate the ______________ ratio for her store, and then compare it to other stores in her industry. A. B. C. D. current debt to equity Return on equity Inventory turnover A higher inventory turnover ratio indicates greater efficiency in the operation. The goal is to maximize the use of cash and minimize inventories. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-5 Level of Learning 3: Application of principles Nickels - Chapter 17 #383 Topic: Activity Ratios 384. (p. 476) We would expect the inventory turnover ratio for a ski shop to be _______ than the turnover for a convenience store. A. B. C. D. higher more meaningful lower less helpful The inventory turnover ratio measures the speed of inventory moving through a firm and into sales. Due to the nature of the products involved, a ski shop would more than likely have a lower turnover. AACSB: Reflective Thinking Blooms: Synthesis Learning Goal: 17-5 Level of Learning 3: Application of principles Nickels - Chapter 17 #384 Topic: Activity Ratios 385. (p. 457 Explain the differences between managerial and financial accounting, and give examples of the types of problems and issues examined by each of these areas of accounting. 461) Managerial accounting is used to provide information and analyses to managers within the organization to assist them in decision making. Managerial accounting is involved with measuring and reporting costs of production, marketing, and other functions; preparing budgets; checking whether or not units are staying within their budgets; and designing strategies to minimize taxes. Financial accounting is different because the information and analyses are for people outside of the organization. Creditors, lenders, prospective owners, investors, employee unions, customers, governmental units, and the general public are all interested in financial accounting information. A good deal of the firm's information is compiled in the company's annual report that shows the financial position and progress of the firm. This report typically includes key financial statements such as the balance sheet, income statement, and statement of cash flows. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-2 Level of Learning 3: Application of principles Nickels - Chapter 17 #385 Topic: Accounting Disciplines 386. (p. 459 Discuss the role of an independent auditor. Provide information about the types of accounting activities they perform and the recent laws that have emerged to help guide them as they do their job. 460) Auditors can be either private or public accountants. Internal audits are performed by private accountants who work inside a firm. Independent audits are performed by public accountants who work on a fee basis. Auditors can earn professional accreditation as a certified internal auditor. The Sarbanes-Oxley Act put in place new rules about auditing and consulting to ensure the integrity of the auditing process. This law prohibited a firm from serving as an outside auditor and an outside consultant for the same client. It also required key executives of the company such as the CEO and CFO to certify the accuracy of financial reports. It established a Public Accounting Oversight Board to oversee the accounting industry. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-2 Level of Learning 3: Application of principles Nickels - Chapter 17 #386 Topic: Accounting Disciplines 387. (p. 462 463) Thoroughly describe each of six parts of the accounting cycle. Part 1 requires the bookkeeper or accountant to separate documents into logical groupings, such as sales transactions, utility disbursements, travel records, etc. Part 2 requires the bookkeeper to record all events and transactions into journals, which are accounting records. The recorder will enter each entry in two different areas. This is called double-entry bookkeeping. Part 3 requires the bookkeeper to post each journal entry to the ledger. This posting will put the entry into the proper classification (grouping of similar activities) so that a manager can quickly determine the total amount in each category. Computerized software such as QuickBooks or Peachtree will do the journal entry and the ledger posting at the same time. Part 4 requires the accountant to perform the trail balance to make certain that entries were posted correctly and that the accounts balance. Part 5 requires the accountant to prepare the firm's financial statements, including the balance sheet, the income statement, and the statement of cash flows. Part 5 requires the accountant to analyze the financial statements by calculating liquidity, activity, profitability, and leverage ratios. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-3 Level of Learning 3: Application of principles Nickels - Chapter 17 #387 Topic: The Accounting Cycle 388. (p. 462 463) What is the difference between a journal and a ledger? How are journals and ledgers incorporated into the accounting cycle? A journal is a record book or computer program where information about financial transactions are first recorded. This information is based on original transaction documents such as sales slips and checks and invoices, and the information is entered in chronological order. Analyzing and categorizing documents is the first step of the accounting cycle, and recording information in the journal is the second step in this process. Both of these steps are performed on a continual basis. A journal will include information about a wide variety of transactions that affect a number of different accounts. Thus, while the journal provides a complete description of all of the transactions that occur on a given day, it would be awkward to use the journal to examine information about a single type of account. Ledgers are books or computer programs that have separate sections for each type of account. Thus, a ledger would have one section devoted to transactions affecting the cash account, another for transactions affecting accounts payable, yet another for office supplies, and so on. The third task in the accounting cycle is transferring information from the journal to appropriate accounts in the ledger. This process is called posting. Like the first two steps in the cycle, posting is done on a continual basis. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-3 Level of Learning 3: Application of principles Nickels - Chapter 17 #388 Topic: The Accounting Cycle 389. (p. 463 Explain the meaning of the fundamental accounting equation and its relation to the Balance Sheet. If it is helpful, create an example using numbers. 467) The fundamental accounting equation is a mathematical formula that equates a firm's assets, with its liabilities and owners' equity. Mathematically, it is written: Assets = Liabilities + Owners' Equity. If we manipulate this equation by subtracting the liabilities from both sides of the equation, we arrive at: Assets - Liabilities = Liabilities - Liabilities + Owners' Equity The liabilities on the right side of the equation cancel, and we arrive at: Assets - Liabilities = Owners' Equity Assets = What the business owns; Liabilities = What the business owes (its debts); Owners' Equity = the business' net worth. As a mathematical sentence, the equation states: [What the business owns] - [What the business owes] = [the business' net worth] The Balance Sheet is set-up like the fundamental accounting equation. The three main parts of the balance sheet are the same as the three main terms of the fundamental accounting equation: Assets, liabilities, and owners' equity. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #389 Topic: Understanding Key Financial Statements 390. (p. 466) Explain the difference between current, fixed, and intangible assets. Give two examples of each of these different types of assets. Current assets are items that can be converted to cash within one year. Cash would certainly be a current asset as would such items as accounts receivable, and inventory. These are listed on the balance sheet in order of liquidity, with the most liquid listed at the top. Fixed assets are items such as land, buildings, machinery, equipment, and fixtures that are relatively permanent and cannot be converted to cash quickly. Intangible assets are assets that have no real physical form but do have value. Patents, trademarks, copyrights, and goodwill are examples of intangible assets. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #390 Topic: Understanding Key Financial Statements 391. (p. 466) Identify the three key financial statements that corporations are required to prepare, and describe the type of information found on each. Balance sheet - reports the firm's financial position on a specific date. It is composed of three major sections: assets, liabilities, and owners' equity. The asset section lists the things of value the firms owns, such as its cash, inventory, land, buildings, machinery and any intangible assets such as patents or goodwill. The liabilities section describes the claims that others have against the firm—in other words, what the firm owes to outsiders. Examples would include any short term amounts owed to suppliers or workers and any long-term claims by banks or bondholders. The owners' equity section shows the value of the firm to its owners. It is the difference between the total assets of a firm and its total liabilities. The way the balance sheet is organized reflects the fundamental accounting equation: Assets = Liabilities + Owners' equity. The income statement identifies the revenue, cost of goods sold (or cost of goods manufactured), and operating expenses for the firm over a specific time period. The "bottom line" of the income statement reports the firm's net income (or net loss) for that period. According to generally accepted accounting principles, this statement is organized to reflect the following formulas, which define specific measures that appear on the statement: • Revenue - Cost of goods sold (or Cost of goods manufactured) = Gross margin • Gross margin - Operating expenses (which include selling and general expenses) = Net income before taxes • Net income before taxes - Taxes = Net income (or Net loss) The statement of cash flows reports cash receipts and disbursements related to (1) operations, (2) investing activities, and (3) financing activities. Cash flows from operations are cash transactions associated with running the business, such as the receipt of cash due to a cash sale or the disbursement of cash to pay workers. Cash flows from investing activities refer to cash received from investments made by the firm, or cash disbursed to obtain additional investments. An investment could also be the purchase of a new fixed asset, or the selling of an old fixed asset. Cash flows from financing refer to cash raised by issuing securities such as stocks or bonds, or cash disbursed to pay off debts or to pay dividends. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #391 Topic: Understanding Key Financial Statements 392. (p. 470) Identify and explain the differences between LIFO and FIFO inventory valuation methods. What would be the difference in gross margin using FIFO versus LIFO? FIFO stands for first-in, first-out. This means that the oldest merchandise is used as the basis for determining the firm's cost of goods sold. LIFO stands for last-in, first-out. This means the cost of the most recently purchased merchandise would be used as the basis for determining the cost of the goods the firm sold. For example when prices are rising, firms that wish to show high gross margin will generally use a FIFO system of valuation. Since inflation tends to drive prices up, the first-in merchandise would generally be valued at a lower cost. Hence, gross margin would be higher. Firms that wish to show lower gross margin will generally use a LIFO system of valuation. The last-in merchandise would generally be valued at a higher cost. Hence, gross margin would be lower. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #392 Topic: Understanding Key Financial Statements 393. (p. 473 476) What is ratio analysis? Explain the four different types of ratios and how each is used. Ratio analysis is the assessment of a firm's financial condition and performance through calculations and interpretation of financial ratios developed from the firm's financial statements. Financial ratios are especially useful in analyzing the actual performance of the company compared to its financial objectives and compared to other firms within its industry. Liquidity ratios measure a company's ability to turn assets into cash to pay its short-term debts. These short-term debts are of particular importance to lenders of the firm who expect to be paid on time. Two key liquidity ratios are the current ratio (current assets divided by current liabilities) and the acid-test ratio (cash + accounts receivable + marketable securities divided by current liabilities). Leverage ratios measure the degree to which a firm relies on borrowed funds in its operations. The debt to owners' equity ratio measures the degree to which the company is financed by borrowed funds that must be repaid (total liabilities divided by owners' equity). Profitability ratios measure how effectively a firm is using its various resources to achieve profits. Company management's performance is often measured by the firm's profitability ratios. Three of the more important ratios used are earnings per share (net income after taxes divided by number of common stock shares outstanding), return on sales (net income divided by net sales), and return on equity (net income after tax divided by total owners' equity). Activity ratios measure the effectiveness of a firm's management in using the assets that are available. The inventory turnover ratio (cost of goods sold divided by average inventory) measures the speed of inventory moving through the firm and its conversion into sales. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-5 Level of Learning 3: Application of principles Nickels - Chapter 17 #393 Topic: Understanding Key Financial Statements 394. (p. 470 What is the difference between a profit [net income after taxes] on an income statement and the cash balance reflected at the bottom of the statement of cash flows? 472) The income statement will show: • net revenues recorded by the company, even if these revenues were created on account, and the firm has not yet received payment • depreciation expense, even though the firm has not actually dispersed funds for the expense • taxes for an entire period, even though the firm may not have dispersed the entire tax payment. The net income after taxes will reflect all revenues and deductions (expenses) allowable for a period of time, even if the firm has not yet received cash for all the revenues, nor dispersed cash payments for all the expenses. The statement of cash flows will analyze all the cash changes that occurred in the firm over a period of time. The accountant records all cash exchanges made by the company: cash coming in and cash going out. These may be different from the revenues and expenses recorded on the income statement. The statement of cash flows reconciles the cash position at the end of an accounting period. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #394 Topic: Understanding Key Financial Statements Mini-Case Minnie A. Wright-Hoff works as an accountant for Double Entry Doors, Inc. Her company sells and installs oversized garage doors needed by large vehicles. Most of Minnie's work involves helping department heads and other decision-makers by measuring and reporting costs for their departments, and by identifying areas where departments are exceeding their budgets. However, as one of only three accountants employed by Double Entry Doors, Minnie is something of a "jill-of-all-trades" in terms of her accounting assignments. For example, she recently spent several hours summarizing all of the financial data in account ledgers to see if the information was correct and balanced. Her efforts revealed no problems, so she is now ready to start working on the firm's financial statements. Minnie is interested in this part of the accounting cycle because she likes to be one of the first to know the "bottom line" her company will report. She knows that she and the other accountants who work on these statements can influence the results by the choices they make about the way they report certain items. Nickels - Chapter 17 395. (p. 457) The fact that Minnie spends most of her time measuring costs and checking to see if departments are staying within their budgets suggests that she is often involved in: A. B. C. D. Auditing. Managerial accounting. Bookkeeping. Departmental certification. Managerial accounting is used to provide managers with information that will help them make decisions. This area of accounting is frequently concerned with measuring and reporting costs, preparing budgets, and checking to see whether or not units are staying within their budgets. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-2 Level of Learning 3: Application of principles Nickels - Chapter 17 #395 Topic: Managerial Accounting 396. (p. 462) The last major task Minnie completed before getting ready to prepare the firm's financial statements was the preparation of the: A. Cash budget. B. Master budget. C. Trial balance. D. Internal audit. A trial balance is a summary of all the financial data in the account ledgers to see whether they are correct and balanced. This is the fourth step in the accounting cycle. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-3 Level of Learning 3: Application of principles Nickels - Chapter 17 #396 Topic: The Accounting Cycle 397. (p. 468) The fact that Minnie wants to determine the "bottom line" for Double Entry Doors means that she is particularly interested in preparing her firm's: A. B. C. D. Income statement. Cash flow statement. Master budget. Capital budget. An income statement reports the net income (or net loss) for the firm. Net Income after taxes and the "bottom line" are the same. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #397 Topic: The Income Statement 398. (p. 470) Double Entry Door's suppliers maintained very stable prices for many years, but Minnie has noticed that the cost of doors has been rising steadily for the past few years. She is concerned that, given the company's current accounting methods of basing its cost on the most recent doors purchased, this will result in a much lower net income than in the past. The most likely reason for her concern is that Double Entry has apparently been using: A. B. C. D. The FIFO inventory valuation method to determine its cost of goods sold. A great deal of equity financing to purchase the doors. The LIFO inventory valuation method to determine its cost of goods sold. A depreciation method based on the average value of inventory. The LIFO inventory valuation method uses the cost of the last items bought to determine the cost of goods sold. With FIFO, the cost of goods sold is based on the oldest (first) items in inventory. In a period of rising inventory prices, LIFO would result in a higher cost of goods sold than FIFO. Since cost of goods sold is subtracted from revenue in the determination of net income, LIFO would result in a smaller net income. AACSB: Reflective Thinking Blooms: Analysis Learning Goal: 17-4 Level of Learning 3: Application of principles Nickels - Chapter 17 #398 Topic: Spotlight on Small Business box 399. (p. 474) Minnie knows that Double Entry has a lot of short-term debt coming due in the next year, and wants to make sure that the company will have the ability to make the required payments. Given a troubling downturn in construction activity over the past couple of months, she is not confident that Double Entry can count on selling its current inventory of doors before the debt comes due. Which of the following ratios would be most relevant to Minnie? A. B. C. D. current ratio debt to equity ratio return on sales acid-test ratio Liquidity ratios, such as the current ratio and the acid-test ratio, are calculated to provide insight into the ability of firms to meet their shortterm debt obligations. They do this by comparing current assets (which are expected to convert into cash in the next year) to current liabilities (which must be paid within the year). In a situation where a firm may have difficulty selling its inventory, the acid-test ratio is a better measure of liquidity because the acid-test ratio excludes inventory from the calculation. AACSB: Reflective Thinking Blooms: Application Learning Goal: 17-5 Level of Learning 3: Application of principles Nickels - Chapter 17 #399 Topic: Liquidity Ratios 17 Summary Category # of Questions AACSB: Analysis AACSB: Communication AACSB: Ethics AACSB: Reflective Thinking Blooms: Analysis Blooms: Application Blooms: Comprehension Blooms: Evaluation Blooms: Knowledge Blooms: Synthesis Learning Goal: 17-1 Learning Goal: 17-2 Learning Goal: 17-3 Learning Goal: 17-4 Learning Goal: 17-5 Level of Learning 1: Knowledge of key terms Level of Learning 2: Understanding of concepts and principles Level of Learning 3: Application of principles Nickels - Chapter 17 Topic: Accounting Disciplines Topic: Accounting Technology Topic: Activity Ratios Topic: Analyzing Financial Performance Using Ratios Topic: Auditing Topic: Classifying Assets Topic: Cost of Goods Sold Topic: Figure 17.1 Topic: Figure 17.2 Topic: Figure 17.3 Topic: Figure 17.4 Topic: Figure 17.6 Topic: Financial Accounting Topic: Government and Not-for-Profit Accounting Topic: Legal Briefcase box Topic: Leverage (Debt) Ratios Topic: Liabilities and Owners Equity Accounts Topic: Liquidity Ratios Topic: Making Ethical Decisions box Topic: Managerial Accounting Topic: Net Income or Loss Topic: Net Profit or Loss Topic: Operating Expenses Topic: Profitability (Performance) Ratios Topic: Revenue Topic: Spotlight on Small Business box Topic: Tax Accounting Topic: The Accounting Cycle Topic: The Balance Sheet Topic: The Fundamental Accounting Equation Topic: The Income Statement Topic: The Need for Cash Flow Analysis Topic: The Role of Accounting Topic: The Role of Accounting Information Topic: The Statement of Cash Flows Topic: Understanding Key Financial Statements Topic: What is Accounting? 1 1 6 391 13 70 96 2 193 25 35 73 66 154 71 169 117 113 400 17 15 11 5 13 16 3 2 1 5 13 3 14 6 3 10 19 23 1 11 2 4 12 21 3 25 3 38 7 8 14 7 10 13 12 20 9 ...
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This document was uploaded on 10/17/2011.

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