For users of financial statements, the current liability classification in the balance sheet
is important because it is most closely tied to the concept of profitability.
a. True
b. False
Carlton, Inc. presented the following information in a note to its financial statements for
the year ending December 31, 2016: The company has a loan agreement with Beachside
Bank that states: 1> The current ratio should remain at least 2.0 to 1 at all times.
2> The debt-to-equity ratio should not exceed .7 to 1 at any time.
3> The times-interest-earned should be 5.0 or better.
4> The inventory-turnover should be 4.0 or better. The ratios at year-end are: current
ratio, 2.3 to 1; debt-to-equity ratio, .6 to 1; times-interest-earned, 7.1; and
inventory-turnover, 3.7. Which of the following statements is true?
a. Carlton was in default because of the inventory turnover.
b. Carlton was in default because of the current ratio.
c. Carlton was in default because of the debt-to-equity ratio.
d. Carlton was in default because of the times-interest-earned.
Choose from the following list of account titles the one that most accurately fits the
description of that account or is an example of that account. An account title may be
used more than once or not at all.
a. Cash
b. Prepaid Asset
c. Investments
d. Taxes Payable
e. Preferred Stock
f. Accounts Receivable
g. Land
h. Accounts Payable
i. Retained Earnings
j. Notes Receivable
k. Buildings
l. Notes Payable
m. Common Stock
A written obligation to repay a fixed amount, with interest, at some time in the future
Knife Corp. Use the selected data presented below from the financial statements of
Knife Corp. for 2016 and 2015 to answer the questions that follow.
Refer to the data for Knife Corp. REQUIRED:
(A) Calculate earnings per share for 2016 for Knife. Why is this considered one of the
most quoted ratios for public companies? Which investors, common or preferred or
both, desire this information? (B) Calculate the price/earnings ratio for 2016 for Knife.
Why is this ratio important to investors? Explain.
Blanket Airlines acquires a new aircraft. It has an estimated life of 15 years and should
be used for 15,000 hours of flight. What is the most appropriate method of depreciation
to properly match revenues and expenses?
a. Double-declining-balance
b. Revenue expenditure method
c. Straight-line
d. Units-of-production
Native Mike’s Consultants had the following balance sheet amounts at the beginning of
the year: Total assets $400,000
Total owner’s equity 150,000 During the year, total assets increased by $100,000 and
total liabilities increased by $40,000. The company also paid $30,000 in dividends. No
other transactions occurred except revenues and expenses. How much is net income for
the year?
a. $30,000
b. $60,000
c. $70,000
d. $90,000
Which organization, in addition to the Financial Accounting Standards Board (FASB),
occasionally issues authoritative rules for financial statements?
a. The Accounting Profession
b. International Accounting Standards Board (IASB)
c. Securities and Exchange Commission (SEC)
d. Internal Revenue Service (IRS)
Texas Inc. sold merchandise to Fagin Corp. on December 28, 2014, with shipping terms
of FOB destination. Fagin Corp. received the merchandise on January 3, 2015. Which
one of the following statements is true?
a. Texas should record sales revenue on December 28, 2014.
b. Fagin Corp. should pay the transportation costs.
c. Fagin Corp. should include the merchandise in its inventory at December 31, 2014.
d. Fagin Corp. should record a liability for the purchase on January 3, 2015.
Barnhill, Inc. uses straight-line depreciation for its equipment with an estimated useful
life of 10 years and zero residual value. The CEO points out that the equipment will last
much longer than 10 years, perhaps up to 20 years. What is the impact on earnings per
share and net income of depreciating equipment over 20 years rather than 10 years?
a. Both earnings per share and net income will decrease.
b. Both earnings per share and net income will increase.
c. Earnings per share will decrease and net income will increase.
d. Earnings per share will increase and net income will decrease.
When using the indirect method, how would the retirement of bonds payable at their
maturity date be shown on the statement of cash flows?
a. Operating activity
b. Investing activity
c. Financing activity
d. Noncash investing and financing activity
An abbreviated version of an account which is useful for analyzing the effects of
business transactions is the
a. chart of accounts
b. double entry system
c. T account
d. trial balance
Obligations related to operating activities that will be paid within the company’s
operating cycle must be reported as current liabilities on a classified balance sheet.
a. True
b. False
Profits from operating activities distributed to business owners are called dividends.
a. True
b. False
Which of the following is a true statement about the terms used on the balance sheet?
a. U.S. GAAP requires a standard set of terms on the balance sheet.
b. IFRS requires a standard set of terms on the balance sheet.
c. Terminology is consistent across all countries.
d. Neither IFRS nor U.S. GAAP requires a standard set of terms on the balance sheet.