11
7) If a company‘s cash balance increases during the year, and the company also reports positive net
income, then the company‘s retained earnings balance must increase.
Keywords: Retained Earnings
Learning Obj.: L.O. 3.2
AACSB: Analytical Thinking
8) Fixed assets are assets whose balances will remain the same throughout the year.
Keywords: Fixed Assets
Learning Obj.: L.O. 3.2
AACSB: Reflective Thinking
9) Inventories are considered fixed assets because inventory levels remain fairly constant throughout the
year.
Keywords: Inventory, Fixed Assets
Learning Obj.: L.O. 3.2
AACSB: Reflective Thinking
10) Finished goods held for sale are inventory, but raw materials to be used in the production process are
considered other assets.
Keywords: Finished Goods Inventory, Raw Materials Inventory, Other Assets
Learning Obj.: L.O. 3.2
AACSB: Reflective Thinking
11) Accounting rules specify that assets on the balance sheet must be reported at current market value,
because this is the valuation most useful to potential investors.
Keywords: Accounting Book Value
Learning Obj.: L.O. 3.2
AACSB: Reflective Thinking
12) The retained earnings balance on IBM’s balance sheet at the end of 2010 is equal to IBM’s 2010 net
income minus dividends paid in 2010.
Keywords: Retained Earnings, Dividends
Learning Obj.: L.O. 3.2
AACSB: Reflective Thinking
12
13) Financing activities have no impact on the income statement, but rather are reflected in changes in
long-term debt and short-term debt on the balance sheet.
Keywords: Financing Activities, Income Statement, Balance Sheet
Learning Obj.: L.O. 3.2
AACSB: Reflective Thinking
14) Common stockholders’ equity equals common stock issued minus treasury stock.
Keywords: Stockholders‘ Equity, Common Stock, Treasury Stock
Learning Obj.: L.O. 3.2
AACSB: Reflective Thinking
15) An income statement reports the firm’s revenues and expenses for a specific period of time such as
one year.
Keywords: Income Statement, Revenues, Expenses
Learning Obj.: L.O. 3.2
AACSB: Reflective Thinking
16) A balance sheet is a statement of the financial position of the firm on a given date, including its asset
holdings, liabilities, and equity.
Keywords: Balance Sheet, Assets, Liabilities, Equity
Learning Obj.: L.O. 3.2
AACSB: Reflective Thinking
17) The profit and loss (income) statement is compiled on a cash basis.
Keywords: Income Statement, Cash Basis
Learning Obj.: L.O. 3.2
AACSB: Reflective Thinking
18) The income statement describes the financial position of a firm on a given date.
Keywords: Income Statement
Learning Obj.: L.O. 3.2
AACSB: Reflective Thinking
19) Under current accounting rules, the plant and equipment account shows the historical cost (purchase
price) of, plus any subsequent improvements to, the plant and equipment.
Keywords: Plant and Equipment, Historical Cost
Learning Obj.: L.O. 3.2
AACSB: Reflective Thinking
13
20) A balance sheet reflects the current market value of a firm’s assets and liabilities.
Keywords: Balance Sheet, Current Market Value
Learning Obj.: L.O. 3.2
AACSB: Reflective Thinking
21) Net working capital is equal to gross working capital minus depreciation.
Keywords: Net Working Capital
Learning Obj.: L.O. 3.2
AACSB: Reflective Thinking
22) The balance sheet reflects the accounting equation: Assets = Liabilities + Owners‘ Equity.
Keywords: Profit Margins
Learning Obj.: L.O. 3.2
AACSB: Reflective Thinking
23) Liquidity refers to the ability to quickly convert an asset into cash without lowering the selling price.
Keywords: Liquidity
Learning Obj.: L.O. 3.2
AACSB: Reflective Thinking
14
Please refer to Table 3-1 for the following questions.
Table 3-1
Jones Company
Financial Information
December 2009
December 2010
Net Income
$2,000
$4,000
Accounts receivable
750
950
Accumulated depreciation
1,000
1,500
Common stock
4,500
5000
Paid-in capital
7,500
8500
Retained earnings
1,500
3,500
Accounts payable
750
750
24) Based on the information in Table 3-1, calculate the amount of dividends paid by Jones Company in
2010 (no assets were disposed of during the year, and there was no change in interest payable or taxes
payable).
A) $2,000
B) $2,500
C) $3,500
D) $4,000
Keywords: Dividends, Retained Earnings
Learning Obj.: L.O. 3.2
AACSB: Analytical Thinking
25) Based on the information in Table 3-1, assuming that no assets were disposed of during 2010, the
amount of depreciation expense was
A) $375.
B) $500.
C) $2,500.
D) $3,500.
Keywords: Depreciation Expense
Learning Obj.: L.O. 3.2
AACSB: Analytical Thinking
15
26) Based on the information in Table 3-1, assuming that no common stock was repurchased during the
year, the firm issued how much new common stock during 2010?
A) $500
B) $1,000
C) $1,500
D) $2,000
Keywords: Common Stock, Balance Sheet
Learning Obj.: L.O. 3.2
AACSB: Analytical Thinking
27) The December 31, 2009 balance sheet shows net fixed assets of $150,000 and the December 31, 2010
balance sheet shows net fixed assets of $250,000. Depreciation expense for 2009 is $25,000 and
depreciation expense for 2010 is $35,000. Based on this information, the cost of fixed assets purchased
during 2010 is
A) $100,000.
B) $110,000.
C) $135,000.
D) $160,000.
Keywords: Net Fixed Assets, Depreciation Expense, Accumulated Depreciation, Balance Sheet
Learning Obj.: L.O. 3.2
AACSB: Analytical Thinking
28) All of the following would result in an increase in stockholders equity EXCEPT
A) the company sold common stock at par value.
B) the company sold common stock above par value.
C) the company purchased treasury stock.
D) the company had positive net income greater than dividends paid.
Keywords: Stockholders‘ Equity, Treasury Stock, Balance Sheet
Learning Obj.: L.O. 3.2
AACSB: Reflective Thinking
29) Wheeler Corporation had retained earnings as of 12/31/10 of $15 million. During 2011, Wheeler‘s net
income was $7 million. The retained earnings balance at the end of 2011 was equal to $20 million.
Therefore,
A) Wheeler paid a dividend in 2010 of $5 million.
B) Wheeler paid a dividend in 2010 of $2 million.
C) Wheeler sold common stock during 2010 for $5 million.
D) Wheeler purchased treasury stock in 2010 for $2 million.
Keywords: Retained Earnings, Dividends
Learning Obj.: L.O. 3.2
AACSB: Analytical Thinking
16
30) All of the following are equity accounts on a balance sheet EXCEPT
A) retained earnings.
B) cash.
C) common stock.
D) paid-in capital.
Keywords: Balance Sheet, Equity
Learning Obj.: L.O. 3.2
AACSB: Reflective Thinking
31) The two principal sources of financing for corporations are
A) debt and accounts payable.
B) debt and equity.
C) common equity and preferred equity.
D) cash and common equity.
Keywords: Sources of Financing, Debt, Equity
Learning Obj.: L.O. 3.2
AACSB: Reflective Thinking
32) Net working capital is equal to
A) total assets minus total liabilities.
B) current assets minus total liabilities.
C) total operating capital minus net income.
D) current assets minus current liabilities.
Keywords: Net Working Capital, Current Assets, Current Liabilities
Learning Obj.: L.O. 3.2
AACSB: Reflective Thinking
17
33) Given the following financial statements for ACME Corporation, what amount did the company pay
in dividends for 2010?
Income Statement
Balance Sheet
Year Ended 12/31/10
12/31/2010
12/31/2009
Sales
$1,300,000
Current Assets
$50,000
$45,000
Cost of Goods Sold
750,000
Gross Fixed Assets
880,000
650,000
Operating Expenses
200,000
Less Accumulated
Depreciation
450,000
350,000
Depreciation Expense
100,000
Fixed Assets
430,000
350,000
EBIT
250,000
Total Assets
$480,000
$395,000
Interest Expense
50,000
EBT
200,000
Current Liabilities
$35,000
$50,000
Taxes
80,000
Long-term Debt
330,000
270,000
Net Income
$120,000
Common Stock
5,000
5,000
Retained Earnings
110,000
70,000
Total Liabilities & Equity
$480,000
$395,000
A) $45,000
B) $25,000
C) $100,000
D) $80,000
Keywords: Retained Earnings, Dividends
Learning Obj.: L.O. 3.2
AACSB: Analytical Thinking
34) All of the following statements about balance sheets are true EXCEPT
A) Assets – Liabilities = Shareholders’ Equity.
B) assets are reported at historical cost.
C) balance sheets show average asset balances over a one-year period.
D) a balance sheet reports a company‘s financial position at a specific point in time.
Keywords: Balance Sheet
Learning Obj.: L.O. 3.2
AACSB: Reflective Thinking
18
35) California Retailing Inc. has sales of $4,000,000; the firm‘s cost of goods sold is $2,500,000; and its total
operating expenses are $600,000. The firm‘s interest expense is $250,000, and the corporate tax rate is 40%.
The firm paid dividends to preferred stockholders of $40,000, and the firm distributed $60,000 in
dividend payments to common stockholders. What is California Retailing’s “Addition to Retained
Earnings”?
A) $650,000
B) $390,000
C) $330,000
D) $290,000
Keywords: Retained Earnings, Common Dividends, Preferred Dividends
Learning Obj.: L.O. 3.2
AACSB: Analytical Thinking
36) What information does a firm’s balance sheet provide to the viewing public?
A) a report of investments made and their cost for a specific period of time
B) a complete listing of all of a firm’s cash receipts and cash expenditures for a defined period of time
C) a report of revenues and expenses for a defined period of time
D) an itemization of all of a firm’s assets, liabilities, and equity as of the balance sheet date
Keywords: Balance Sheet, Assets, Liabilities, Equity
Learning Obj.: L.O. 3.2
AACSB: Reflective Thinking
37) Which of the following accounts belongs on the asset side of a balance sheet?
A) depreciation expense
B) accounts payable
C) inventory
D) accruals
Keywords: Balance Sheet, Inventory, Assets
Learning Obj.: L.O. 3.2
AACSB: Reflective Thinking
38) Which of the following accounts does NOT belong on the asset side of a balance sheet?
A) accounts receivable
B) marketable securities
C) cash
D) common stock
Keywords: Balance Sheet, Assets
Learning Obj.: L.O. 3.2
AACSB: Reflective Thinking
19
39) Which of the following accounts does NOT belong on the asset side of a balance sheet?
A) accounts receivable
B) accumulated depreciation
C) cash
D) accruals
Keywords: Balance Sheet, Assets
Learning Obj.: L.O. 3.2
AACSB: Reflective Thinking
40) Which of the following accounts belongs in the liability section of a balance sheet?
A) interest expense
B) accumulated depreciation
C) accounts payable
D) preferred stock
Keywords: Balance Sheet, Liabilities, Accounts Payable
Learning Obj.: L.O. 3.2
AACSB: Reflective Thinking
41) Which of the following accounts does NOT belong in the liability section of a balance sheet?
A) accruals
B) short-term debt
C) additional paid-in capital
D) long-term debt
Keywords: Balance Sheet, Liabilities
Learning Obj.: L.O. 3.2
AACSB: Reflective Thinking
42) Which of the following accounts belongs in the equity section of a balance sheet?
A) retained earnings
B) cash
C) long-term debt
D) dividends
Keywords: Balance Sheet, Equity, Retained Earnings
Learning Obj.: L.O. 3.2
AACSB: Reflective Thinking
20
43) Which of the following accounts does NOT belong in the equity section of a balance sheet?
A) retained earnings
B) paid-in-surplus
C) long-term debt
D) preferred stock
Keywords: Balance Sheet, Equity
Learning Obj.: L.O. 3.2
AACSB: Reflective Thinking
44) Universal Financial, Inc. has total current assets of $1,200,000; long–term debt of $600,000; total current
liabilities of $500,000; and long-term assets of $800,000. How much is the firm‘s net working capital?
A) $1,000,000
B) $900,000
C) $600,000
D) $700,000
Keywords: Balance Sheet, Net Working Capital
Learning Obj.: L.O. 3.2
AACSB: Analytical Thinking
45) Siskiyou Corp. has cash of $75,000; short-term notes payable of $100,000; accounts receivables of
$275,000; accounts payable of $135,000: inventories of $350,000; and accrued expenses of $75,000. What is
the firm’s net working capital?
A) $390,000
B) $175,000
C) $700,000
D) $210,000
Keywords: Balance Sheet, Net Working Capital
Learning Obj.: L.O. 3.2
AACSB: Analytical Thinking
46) A corporation has annual sales of $18 million, total assets of $4 million, a debt ratio of 40%,
depreciation expense of $200,000, and a tax rate of 40%. The corporation’s total stockholders’ equity is
equal to
A) $5,600,000.
B) $2,800,000.
C) $2,400,000.
D) $1,800,000.
Keywords: Stockholders‘ Equity, Debt Ratio
Learning Obj.: L.O. 3.2
AACSB: Analytical Thinking