978-1337276337 Test Bank Chapter 2 Part 2

Chapter 2

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59. The following information is given for Camino Company:

Cash $ 50,000 Inventory $ 45,000

Land 75,000 Accumulated depreciation 40,000

Plant and equipment 150,000 Accounts payable 60,000

What are the company’s current assets?

a. $220,000

b. $155,000

c. $130,000

d. $ 95,000

60. Which of the following accounts are normally reported as long-term liabilities on a classified balance sheet?

a. Notes payable due in five years and bonds payable

b. Interest payable and mortgage payable

c. Income taxes payable and salaries payable

d. Capital stock and accounts payable

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61. Which one of the following is not a major category for long-term assets?

a. Receivables

b. Property, plant, and equipment

c. Intangibles

d. Investments

62. Which of the following would not be considered to be an intangible asset?

a. Franchises

b. Copyrights

c. Investments

d. Goodwill

63. Which of the following statements is true concerning intangible assets?

a. Intangible assets have no economic substance.

b. Intangible assets lack physical existence.

c. Intangible assets are listed in the Stockholders’ Equity section of the balance sheet.

d. Intangible assets appear in the Current Assets section of the balance sheet.

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64. How are assets that are expected to be realized in cash, sold, or consumed within the normal operating cycle of a

business or within one year (if the operating cycle is shorter than one year) reported on a classified balance sheet?

a. Property, plant, and equipment

b. Current assets

c. Intangible assets

d. Current liabilities

65. Which of the following terms characterizes the time period between the investment of cash in merchandise and the

collection of cash from the sale of that merchandise?

a. Operating cycle

b. Natural business year

c. Accounting period

d. Fiscal period

66. Which set of items below includes current assets?

a. Accounts receivable, net income, inventory, and dividends

b. Cash, accounts receivable, capital stock, and sales

c. Net income, cash, office supplies, and inventory

d. Cash, accounts receivable, inventory, and office supplies

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67. One significant difference between a classified and a non-classified balance sheet is the distinction between which of

the following items?

a. Assets and liabilities

b. Current and noncurrent (or long-term) items

c. Liabilities and owners’ equity

d. Resources invested by the owners and amounts borrowed from creditors

68. For several years, Bosco Corporation has had a current ratio that was consistent with other companies in its industry.

For the most recent year, Bosco’s current ratio was significantly higher than that for the industry. What is the best possible

explanation for this situation?

a. The other companies in the industry were not as profitable.

b. Bosco’s liquidity has improved or is not leveraging financial resources effectively.

c. Bosco has less property, plant, and equipment than other companies.

d. Bosco has too much debt.

Guinther & Sons, Inc.

Guinther & Sons, Inc., a retailer of men’s clothing, earned a net profit of $77,000 for 2017. The balance sheet for Guinther

& Sons includes the following items:

Cash $29,000 Accounts receivable $39,000

Inventory 79,000 Prepaid insurance 3,000

Land 90,000 Accounts payable 21,000

Taxes payable 29,000 Capital stock 50,000

Retained earnings 97,000 Long-term notes payable 43,000

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69. Read the information for Guinther & Sons. Calculate the total amount of current assets for Guinther & Sons.

a. $100,000

b. $147,000

c. $150,000

d. $249,000

70. Read the information for Guinther & Sons, Inc. Calculate the current ratio for Guinther & Sons.

a. 2.58 to 1

b. 2.75 to 1

c. 3.00 to 1

d. 2.00 to 1

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71. Read the information for Guinther & Sons, Inc. The average current ratio for stores such as Guinther & Sons is 2.4 to

1. What does this comparison tell you about its liquidity?

a. It is more liquid than its competitors.

b. It has more long-term assets than its competitors.

c. Since a rule of thumb for current ratios is 2 to 1, neither Guinther & Sons, Inc. nor its competitors is liquid.

d. Guinther & Sons, Inc. is more profitable than its competitors.

72. Rosu Company has total current assets of $150,000 and total current liabilities of $50,000. What is the amount of

working capital for Rosu Company?

a. $200,000

b. $100,000

c. $125,000

d. $ 179,000

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73. What is the correct method for calculating working capital?

a. Total Assets – Total Liabilities

b. Current Assets – Total Liabilities

c. Current Assets – Current Liabilities

d. Current Assets + Current Liabilities

74. Oreo Company has current assets of $20,000, current liabilities of $8,000, and long-term liabilities of $3,000. Oreo

wants to buy new equipment. How much of its existing cash can Oreo use to acquire equipment without allowing its

current ratio to decline below 2.0 to 1?

a. $4,000

b. $8,000

c. $10,000

d. $12,000

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75. Excursion Corp. increased its dollar amount of working capital over the past several years. To further evaluate the

company’s short-run liquidity, which one of the following measures should be used?

a. The current ratio

b. An analysis of the company’s long-term debt

c. An analysis of the return on stockholders’ equity

d. An analysis of retained earnings

76. Which financial statement reports information helpful in assessing working capital?

a. Income statement

b. Balance sheet

c. Statement of retained earnings

d. Statement of cash flows

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77. Use Rizwi Corporation’s list of accounts at December 31, 2017 to answer the following question:

Rizwi Corporation

List of Accounts at December 31, 2017

Cash $30,000 Accumulated Depreciation $ 12,000

Merchandise Inventory 21,000 Notes Payable—Due 12/31/2025 120,000

Land 40,000 Accounts Payable 14,000

Buildings 80,000 Equipment 33,000

Accounts Receivable 25,000 Notes Payable—Due 07/01/2019 2,000

What is Rizwi Corporation’s current ratio?

a. 0.48 to 1

b. 2.00 to 1

c. 2.55 to 1

d. 2.86 to 1

78. If the current ratio is 2.5 to 1, net income is $6,000, and current liabilities are $18,000, how much is working capital?

a. $ 6,000

b. $ 14,000

c. $ 27,000

d. $ 45,000

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79. For which of the following is the current ratio most useful?

a. In evaluating a company’s profitability

b. In evaluating a company’s solvency

c. In evaluating a company’s return on assets

d. In evaluating a company’s liquidity

80. Which of the following events will cause a company’s current ratio to decrease?

a. The sale of inventory for cash

b. The sale of inventory for credit (accounts receivable)

c. Issuing stock for cash

d. Paying off long-term debt with cash

81. Which of the following events will cause a company’s current ratio to rise?

a. The collection of an account receivable

b. Selling land for cash

c. The discharge of an account payable by signing a short-term note payable

d. None of these are correct

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82. Liquidity relates to a company’s ability to do which of the following?

a. The ability to pay its financial obligations as they become due.

b. The ability to stay in business over the long run.

c. The ability to pay dividends to its stockholders.

d. The ability to collect the amount its customers owe the company.

Jobston, Inc.

The balance sheet of Jobston Inc. includes the following items:

Cash $22,400

Accounts receivable 11,700

Inventory 23,300

Prepaid insurance 1,040

Land 80,000

Accounts payable 47,500

Salaries payable 1,200

Capital stock 84,040

Retained earnings 5,700

83. Read the information about Jobston, Inc. What is Jobston’s current ratio?

a. 0.8 to 1

b. 1.6 to 1

c. 1.2 to 1

d. 2.5 to 1

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84. Read the information about Jobston, Inc. What is Jobston’s working capital?

a. $58,440

b. $89,740

c. $84,040

d. $9,740

85. Which of the following would appear on a multiple-step income statement but not on a single-step income statement?

a. Net income

b. Total expenses

c. Total revenues

d. Income before income taxes

86. Which of the following would not appear on an income statement?

a. Sales revenue

b. Cost of goods sold

c. Accounts receivable

d. Insurance expense

87. Which statement is true concerning an income statement?

a. The income statement shows how much profit the company has earned since it began operations.

b. Net income on the income statement should be equal to the amount of cash on the balance sheet.

c. The income statement summarizes the results of operations for a point in time.

d. None of these are correct.

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90. What are the two subtotals that distinguish the multiple-step income statement from the single-step income statement?

a. Income before taxes and income taxes

b. Total operating revenues and total operating expenses

c. Income from operations and income before taxes

d. Total revenues and total expenses

91. A question asked by stockholders is, “How much profit did the company make?” What should the stockholder

examine to get the most information that will help evaluate the answer to this question?

a. The balance sheet, because retained earnings represents current profits

b. The statement of cash flows, as cash inflows and outflows represents current profits

c. The income statement, since it shows the revenues and expenses for the period

d. The economic resources of the company

92. Under current accounting principles, how is net income on the income statement measured?

a. Net change in owners’ equity during the period

b. Excess of revenues over expenses during the period

c. Net change in the cash balance during the period

d. Excess of revenues over expenses less any dividends paid during the period

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93. Which of the following statements is true regarding the multiple-step income statement?

a. The multiple-step income statement is used only by companies that sell products, not those that provide services.

b. The multiple-step income statement is helpful in determining a company’s working capital.

c. The multiple-step income statement reports the same net income as the single-step income statement.

d. The multiple-step income statement is required under generally accepted accounting principles.

94. How is income from operations determined?

a. By subtracting the total operating expenses from gross profit

b. By subtracting the total operating expenses from sales

c. By subtracting the cost of goods sold from sales

d. By subtracting selling expenses from operating revenues

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95. The following list contains several items that appear on an income statement.

1. Other revenue and expenses 5. Net income

2. Income before taxes 6. Operating revenues

3. Income taxes 7. Income from operations

4. Operating expenses

Select the choice that lists the items in the order they would appear on a multiple-step income statement.

a. 6, 1, 7, 4, 2, 3, 5

b. 7, 6, 1, 4, 2, 3, 5

c. 6, 4, 7, 1, 2, 3, 5

d. 6, 7, 4, 1, 2, 3, 5

Cobb Company

Selected data from the accounting records of Cobb Company are listed below.

General and administrative expenses $2,200 Operating revenues $6,000

Selling expenses 1,800 Income taxes 600

Other revenues (expenses) 800 Dividends paid 1,200

96. Read the information about Cobb Company. What is Cobb’s income from operations?

a. $1,600

b. $2,000

c. $2,200

d. $2,800

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97. Read the information about Cobb Company. What is Cobb’s net income?

a. $1,600

b. $2,000

c. $2,200

d. $2,800

98. Read the information about Cobb Company. By what amount will net income on a single-step income statement differ

from net income on a multiple-step income statement if Cobb Company prepares both formats?

a. $800

b. $600

c. $200

d. $0

Seikoson

The 2017 income statement of Seikoson shows operating revenues of $130,800, selling expenses of $37,100, general and

administrative expenses of $34,900, interest expense of $900, and income tax expense of $11,430. Seikoson’s

stockholders’ equity was $280,000 at the beginning of the year and $320,000 at the end of the year. The company has

20,000 shares of stock outstanding at December 31, 2017.

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99. Read the information about Seikoson. What is Seikoson’s net income?

a. $80,000

b. $92,190

c. $130,800

d. $46,470

100. Read the information about Seikoson. What is Seikoson’s profit margin (to the closest tenth of a percent)?

a. 2.8%

b. 35.5%

c. 61.2%

d. 14.5%

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101. Forman, Inc. earned $600,000 profit during 2017. On which financial statement(s) will you find the dollar amount of

the profit earned by the company?

a. Balance sheet and income statement

b. Income statement only

c. Statement of retained earnings only

d. Income statement and statement of retained earnings

102. Lottony, Inc. is concerned about its profitability for the current year, since its profit margin has dropped 10% since

last year. Which of the following is the least useful comparison in evaluating the drop in Lottony’s profit margin?

a. Comparison with the industry average for the current year

b. Comparison with its current ratio for the current year

c. Comparison with the profit margins for its major competitors for the current year

d. Comparison with its profit margins for the past five years

103. Assume that you want to determine the profit margin for a company. Which one of the following financial statements

is the best source of this information?

a. Statement of retained earnings

b. Statement of cash flows

c. Statement of stockholders’ equity

d. Income statement

Hopper, Inc.

Use the information from Hopper, Inc. to answer the following question.

2018 2017

Operating revenues $1,900,000 $1,600,000

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Operating expenses 1,400,000 1,100,000

Income taxes 200,000 200,000

104. Read the information about Hopper, Inc. Which statement best represents Hopper’s performance?

a. Hopper’s profit margin ratio decreased.

b. Hopper has become more profitable.

c. Hopper’s increase in operating revenues increased the company’s net income.

d. Hopper’s operating expenses as a percentage of operating revenues remained the same.

105. Read the information about Hopper, Inc. Which of the following statements is the best answer regarding the

company’s profit margin?

a. The profit margin was 15.8% in 2018.

b. The profit margin was 15.8% in 2017.

c. The profit margin was 31.5% in 2018.

d. The profit margin was 31.5% in 2017.