In the calculation of free cash flow, dividends and sales of plant assets are both
deducted.
The term salaries refers to the compensation of employees who are paid at an hourly
rate.
The quick ratio and the current ratio are measures of short-term debt-paying ability.
Held-to-maturity securities that will mature within one year are classified as short-term
investments and valued on the balance sheet at fair value.
The change in merchandise inventory level from the beginning to the end of the year
affects cost of goods sold.
It is possible that an investor with less than a 50 percent ownership interest may qualify
for accounting recognition of control and appropriately prepare consolidated financial
statements.
Delivery expense is a selling expense on the income statement.
Internal control involves, in part, the protection of a company’s assets.
The interest coverage ratio measures the degree of protection a company has from
default on interest payments.
For details about the financial histories of companies, one could consult publications of
Moody’s and Standard & Poor’s.
A negative free cash flow means that all cash commitments have been met.
In accounting, $1,000 is generally considered the dividing line between material and
immaterial amounts.
Sound internal control activities dictate that extra cash should always be on hand.
The declaration of a cash dividend causes an increase in a corporation’s liabilities at the
date of declaration.
Managerial accounting focuses on internal decision making.
The par value of a bond is equal to its face value.
In order to manage a company’s liquidity, managers and other users of financial
information must understand the difference between transactions that generate
immediate cash and those that do not.
U.S. Treasury bills are considered equity securities.
The days’ payable shows the maximum time a company takes to pay its accounts
payable.
Income or loss can be allocated to partners based solely on average capital balances.
Gains and losses on the sale of investments appear as adjustments within the financing
activities section of the statement of cash flows.
Public companies must have their financial statements audited, but are not required to
have their internal control systems audited.
Equity is reduced when owner’s withdrawals exceed net income.
The fee for factoring without recourse is normally higher than it would be with
recourse.
An intangible asset with a determinable useful life should be amortized over that useful
life.
A debit has an unfavorable effect on an account.
The Income Statement columns of the work sheet show all the accounts that need to be
closed, except for the Withdrawals account.
Under the equity method of accounting for a stock investment, a proportionate share of
the investee’s income is recorded on the investor’s records.
The holder of a note adjusts for accrued interest by debiting Interest Receivable and
crediting Interest Income.
The number of outstanding shares should exceed the number of authorized shares.
The word preferred in the phrase preferred stock means that an owner of preferred stock
has some advantages over a bondholder.
Obsolescence is not a reason for an asset’s limited useful life.
Form 10-QK refers to the annual report filed with the SEC.
Under the perpetual inventory system, the purchase of merchandise is recorded with a
debit to Purchases.
In a trial balance, all debits are listed before all credits.
The LIFO method is rarely used because most companies do not sell the last goods they
purchase first.
The costs included in work in process and finished goods inventories would properly
contain manufacturing overhead costs.
When a partner withdraws from a partnership, an audit might be performed and the
assets reappraised.
The board of directors of Lark Corporation declared a cash dividend of $3.50 per share
on 57,000 shares of common stock on June 14, 20×5. The dividend is to be paid on July
15, 20×5, to shareholders of record on July 1, 20×5. The proper entry to be recorded on
June 14, 20×5 is,
A. Dividends 199,500
Dividends Payable 199,500
B. No journal entry is necessary on this date.
C. Dividends 199,500
Retained Earnings 199,500
D. Dividends payable 199,500
Unlimited liability refers to
A. a claim to the partners’ personal assets by creditors if the partnership cannot pay its
debts.
B. the ability of any partner to bind the partnership to a business agreement as long as
he or she acts within the scope of the company’s normal operations.
C. co-ownership of partnership property.
D. the method of income and loss distribution.
The federal government grants patents for
A. 10 years.
B. 20 years.
C. 40 years.
D. the useful life of the patent.
Explain why each of the following persons or groups would be interested in seeing the
financial statements of a company. Also state whether each has a direct or indirect
financial interest.
a. Potential investor
b. Internal Revenue Service
c. A labor union
d. Securities and Exchange Commission
e. Potential creditor
f. Management
g. Economic planners
Use this inventory information for the month of August to answer the following
question.
Assuming that a perpetual inventory system is used, what is ending inventory (rounded)
under the average-cost method?
A. $3,764
B. $3,826
C. $3,968
D. $3,986
Use this information to answer the following question.
The following totals for the month of September were taken from the payroll register of
Meadors Company:
Salaries expense $24,000
Social security and Medicare taxes withheld 1,100
Income taxes withheld 5,000
Medical insurance deductions 500
Life insurance deductions 400
Salaries subject to federal and state unemployment taxes of 6.2 percent 8,000
The entry to record the accrual of federal unemployment tax (assume FUTA tax of 0.8
percent) would include a
A. credit to Federal Unemployment Tax Payable for $64.
B. debit to Federal Unemployment Tax Payable for $64.
C. debit to FUTA Tax Expense for $64.
D. credit to Payroll Taxes and Benefits Expense for $64.
Of a company’s employees, 50 percent typically qualify to receive two weeks’ paid
vacation a year (50 weeks). The entry to record the estimated liability for vacation pay
for a week in which the total payroll is $8,800 would be
A. Estimated Liability for Vacation Pay 352
Cash 352
B. Vacation Pay Expense 704
Cash 704
C. Vacation Pay Expense 176
Estimated Liability for Vacation Pay 176
D. Cash 88
Lewis Company purchased a machine for $60,000. The machine has an estimated life
of 20,000 hours and no salvage value. The entry to record the depreciation charge under
the production method assuming that the machine was used for 4,000 hours is:
A. Depreciation Expense—Machinery 12,000
Accumulated Depreciation—Machinery 12,000
B. Depreciation Expense—Machinery 12,000
Machinery 12,000
C. Machinery 40,000
Accumulated Depreciation—Machinery 40,000
D. Machinery 60,000
Powell’s inventory turnover is 4.8. What is Powell’s day’s inventory on hand?
A. 6 days
B. 13 days
C. 34 days
D. 76 days
On January 2, 20×5, Clair Inc. signed a 9% mortgage payable for $200,000 with equal
monthly payments of $2,400. When Clair makes the first payment, how much interest
expense will be recorded?
A. $0
B. $1,500.
C. $18,000.
D. $750.
Winters Corporation purchased 15,000 shares of Poores Corporation common stock for
$60 per share on January 2, 2014. Poores Corporation reported net income of
$1,500,000 for 2014 and paid dividends of $300,000 during 2014. Poores has a total of
50,000 shares of common stock outstanding. The entry that would be recorded to
recognize the income is:
A. Cash 90,000
Dividend Income 90,000
B. Investment in Poores Corporation 450,000
Income, Poores Corporation Investment 450,000
C. Dividend Income 450,000
Cash 450,000
D. Investment in Poores Corporation 450,000
A company receives $360 for a sale, of which $20 is for sales tax. The journal entry to
record the sale is:
A. Sales Tax Expense 20
Cash 340
Sales 360
B. Cash 340
Sales 340
C. Cash 360
Sales 360
D. Cash 360
Which of the following statements best describes the behavior over time of the
components of equal mortgage payments?
A. The proportion of interest expense to payment of principal remains the same.
B. Payment of principal increases and interest expense decreases.
C. Both payment of principal and interest expense decrease.
D. Interest expense increases and payment of principal decreases.
Which of the following companies would be most likely to use the retail method?
A. An auto dealer
B. A computer service company
C. A clothing store
D. A restaurant supply company
Which of the following is not considered an operating expense?
A. General office expenses.
B. Cost of goods sold.
C. Freight-out expense.
D. Advertising expense.
In a limited partnership
A. the general partners have limited liability
B. all partners have limited liability
C. all but the general partners have unlimited liability
D. all but the general partners have limited liability
Which of the following statements is not true when FLK Company discounts a note
receivable to the bank?
A. FLK may ultimately have to pay the bank when the note is due.
B. If the maker of the note pays the bank on time, no liability will result to FLK.
C. FLK will receive the maturity value from the bank.
D. A contingent liability arises for FLK.
Before a check authorization is issued, the following documents must be in agreement,
except for the
A. purchase order.
B. receiving report.
C. remittance advice.
D. invoice.
Which of the following does not result in the dissolution of a partnership?
A. Death of a partner
B. Admission of a new partner
C. Withdrawal of a partner
D. Sale of partnership assets
A $155 credit item is posted as a debit. The trial balance column totals therefore will
differ by
A. $310
B. $620
C. $155
D. $0
The debt to equity ratio equals
A. owner’s equity divided by total liabilities.
B. owner’s equity divided by long-term liabilities.
C. total liabilities divided by owner’s equity.
D. current liabilities divided by average owner’s equity.
Holders of preferred stock normally do not have
A. preference as to dividends.
B. preference as to assets in liquidations.
C. full voting rights.
D. ownership interests in the corporation.
On November 1, 2013, Rob’s Auto Repair purchased diagnostic equipment for $18,000.
The equipment had an estimated residual value of $3,000 and a five-year life and was
sold on May 1, 2015. Assuming that the company depreciates the asset on a
straight-line basis and reports on a calendar-year basis, journalize the following
independent transactions in the journal provided. (Omit explanations.)
a. The entry to update depreciation to May 1, 2015
b. The entry to record the sale for $15,000
c. The entry to record the sale instead for $11,000
d. The entry to record the sale instead for $13,500
Information from the Income Statement columns of the work sheet of Landry Laundry
Service is provided below:
The entry to close the Cleaning Revenue account is
A. Cleaning Revenue 2,500
Income Summary 2,500
B. Income Summary 2,500
Cleaning Revenue 2,500
C. Landry, Capital 2,500
Income Summary 2,500
D. Income Summary 2,500
Baylor Enterprises has bonds outstanding with a face value of $200,000 and a carrying
value of $206,000 on December 31, 20×5. If the company calls in and retires these
bonds on December 31, 20×5, for $210,000, the entry to record the retirement will
include a
A. debit to Bonds Payable for $206,000.
B. credit to Cash for $206,000.
C. debit to Loss on Retirement of Bonds for $6,000.
D. debit to Loss on Retirement of Bonds for $4,000.
Using the accounts receivable aging method, estimated uncollectible accounts are
$40,000. If the balance of the Allowance for Uncollectible Accounts is an $8,000 debit
before adjustment, what is the balance after adjustment?
A. $8,000
B. $32,000
C. $40,000
D. $48,000
Which of the following describes the interest coverage ratio?
A. Income before income taxes plus interest expense divided by interest expense
B. Income after income taxes plus interest expense divided by interest expense
C. Income after income taxes divided by interest expense
D. Income before income taxes minus interest expense divided by interest expense
In which of the following cases would the gross profit method most likely be used?
A. In a company with good accounting records
B. In applying the average-cost method
C. In estimating the market value of inventory for application of the
lower-of-cost-or-market rule
D. In estimating an inventory loss from fire
On the work sheet, under what circumstances will the last two columns be in balance
after the initial footing?
A. Under all circumstances, assuming no arithmetical errors have been made
B. When net income is zero
C. When no adjustments have been entered on the work sheet
D. Under no circumstances
Use this information pertaining to Tucson Company to answer the following question.
1) The corporation’s Supplies account showed a beginning debit balance of $400 and
supplies purchased of $1,600. There were $600 of supplies on hand at year end.
2)Depreciation on a building is estimated to be $10,000.
3)A one-year insurance policy was purchased for $4,800. Five months have passed
since the purchase.
4)Accrued interest on a note receivable amounted to $200.
5)The company received a $3,600 advance payment during the year on services to be
performed. By the end of the year, one-third of the services had been performed.
The adjusting entry for Supplies is
A. Supplies Expense 1,400
Supplies 1,400
B. Supplies Expense 1,600
Supplies 1,600
C. Supplies 1,400
Supplies Expense 1,400
D. Supplies Expense 600
If average accounts receivable is $35,000 and net sales total $100,000, what is the
receivables turnover?
A. 0.3 times
B. 0.4 times
C. 2.9 times
D. 126 times
Days’ payable is the shortest in which of the following industries?
A. Grocery stores
B. Computers
C. Machinery
D. Auto and home supply
Under the perpetual inventory system, in addition to making the entry to record a sale, a
company would
A. record an increase in inventory corresponding to the amount of the sale.
B. record a decrease in inventory and an increase in cost of goods sold for the cost of
the merchandise sold.
C. record an increase in inventory corresponding to the cost of the inventory.
D. make no additional entry until the end of the period.
Partners A and B receive a salary of $16,000 and $14,000, respectively. They agree to
share income and losses equally. If the partnership has income of $280,000 in 20×5, the
entry to close the income into their capital accounts is:
A contract limiting the rights of others to go into business in a specific industry or line
of business for a specified period is called a
A. noncompete covenant.
B. patent.
C. copyright.
D. trademark.
The 20×5 income statement for Almond Company showed rent expense of $10,800 and
salaries expense of $7,200.
Briefly answer each of the following questions about bond issue costs:
1) What type of cost is included in bond issue costs?
2) As a percentage of a bond issue, how significant are bond issue costs?
3) What is the impact of bond issue costs on a bond issue and the amount of interest
expense a company records over the life of the bond?
Valdez Corporation has outstanding $1,500,000 of 10 percent bonds callable at 103. On
July 1, a semiannual interest payment date, the unamortized bond premium equaled
$60,000. On that date, $900,000 of the bonds were called and retired. Prepare an entry
in journal form without explanation to record the retirement of the bonds on July 1.
Using the direct method, calculate the amount of cash payments for operating expenses.
Show your work
Why is the LIFO cost flow assumption an acceptable valuation method for merchandise
inventory when it rarely matches the physical movement of the product?
Using the following data, prepare a classified balance sheet as of December 31, 20×5,
for Paula’s Picture Frame Company.
Mike’s Manufacturing purchased equipment for $300,000.
Mandisa Sounds, Inc., a specialty retailer of customized audio systems for automobiles,
installed a perpetual inventory system in the second quarter of 2011. The new system
allowed the firm to adjust its merchandise inventories to sales patterns more effectively
and to prepare monthly financial statements. Although the system led to an
improvement in sales and income, the gross margin on the monthly income statements
was falling below both management’s expectations and the industry average. At the end
of 2014, a physical inventory revealed that actual merchandise inventory was
considerably lower than the perpetual inventory records indicated. The merchandise
inventories of some stores were off more than others, but all had deficiencies. What
probably caused these losses and what steps could be taken to prevent them in the
future?
Jack Stephan, a house painter, has entered into a $2,400 contract to do a paint job that
will begin in 20×5 and end in 20×6.
On its December 31, 20×4, balance sheet, Mesquite Corporation reported its
stockholders’ equity as follows:
During 20×5, the following transactions occurred:
Reacquired 2,500 shares at $7 per share.
Sold 1,200 shares of treasury stock at $8 per share.
Sold 500 shares of treasury stock at $6 per share.
Net income for 20×5 amounted to $80,000. No dividends were declared.
Prepare the stockholders’ equity section of the balance sheet as it should appear on
December 31, 20×5.
Distinguish between the financial statement presentation of unrealized gains and losses
related to trading securities and the financial statement presentation of unrealized gains
and losses related to available-for-sale securities.
Gravel Manufacturing had supplies on hand costing $480 on December 31. During the
same year, supplies costing $320 were purchased, and $640 in supplies were consumed
during the year. What was the cost of supplies on hand on January 1 of that year?
When a bond sells at a discount, what is probably true about the market interest versus
the face interest rate? Discuss.
Given the adjusted trial balance below, prepare (in good form) an income statement,
statement of owner’s equity, and balance sheet.
