Indicate whether each of the following statements about financial statement analysis is
true or false.
_____ a) Both dividends and earnings performance are indicators of the value of a
company’s stock.
_____ b) The most widely quoted measure of a company’s earnings performance is
earnings per share.
_____ c) Earnings per share is calculated for a company’s preferred stock.
_____ d) Investors need to understand that the value of a company’s earnings per share
is affected by its choices of accounting principles and assumptions.
_____ e) The book value per share measures the market value of a corporation’s stock.
Jones Company issued bonds with a $200,000 face value on January 1, 2016. The
five-year term bonds were issued at 97 and had a 7 % stated rate of interest that is
payable in cash on December 31st of each year. Jones amortizes the bond discount
using the straight-line method. Based on this information:
The total amount of liabilities shown on Jones’s December 31, 2017 balance sheet
would be:
A.$191,600.
B.$194,000.
C.$196,400.
D.$195,200.
Cost of goods sold/average inventory is the formula for which of these analytical
measures?
A. Inventory turnover
B. Number of days’ sales in inventory
C. Return on investment
D. Debt to assets ratio
Seattle Company issued a $90,000 face value discount note payable to the First Federal
Bank on September 1, 2016. The note carried a one-year term and a 4% discount rate.
The carrying value of the liability appearing on the December 31, 2016 balance sheet
will amount to:
A.$80,400
B.$87,600
C.$90,000
D.$88,800
Common methods of financial statement analysis include all of the following except:
A.Incremental analysis.
B.Horizontal analysis.
C.Vertical analysis.
D.Ratio analysis.
The most favorable audit opinion that a company can receive is a(n):
A.adverse opinion
B.unqualified opinion
C.disclaimer of opinion
D.qualified opinion
Duke Company’s unadjusted bank balance at March 31, 2016 is $2,300. The bank
reconciliation revealed outstanding checks amounting to $500 and deposits in transit of
$400. Based on this information, Duke’s true cash balance is:
A.$2,200.
B.$2,000.
C.$2,700.
D.$2,400.
Indicate whether each of the following statements is true or false.
_____ a) A debit may increase a liability.
_____ b) Closing a revenue account includes a debit to Retained Earnings.
_____ c) A debit may decrease equity.
_____ d) A credit may decrease an asset.
_____ e) Debits to the cash account are reported as cash outflows on the statement of
cash flows.
Chopin Co. sells product A. The beginning inventory for product A was 70 units @
$240 per unit. During the year, Chopin purchased 110 units of product A at $216 per
unit. The company sold 140 units of product A @ $400 per unit at the end of the year.
Required: Determine the amount of product cost that would be allocated to cost of
goods sold and ending inventory using (1) FIFO, (2) LIFO, and (3) weighted average.
Company A and Company B are identical in all regards except that during 2016
Company A borrowed $40,000 at an interest rate of 10%. In contrast, Company B
obtained financing by acquiring $40,000 from sale of common stock. Company B
agreed to pay a $4,000 cash dividend each year. Both companies are in a 30% tax
bracket. Which company would show the greater retained earnings at the end of 2016,
and by what amount?
A.Company A’s retained earnings would be higher by $4,000.
B.Company B’s retained earnings would be higher by $2,800.
C.Company A’s retained earnings would be higher by $1,200.
D.Both would show the same retained earnings.
Indicate whether each of the following statements about corporate governance is true or
false.
_____ a) The Financial Accounting Standards Board issues a code of ethical behavior
by which public accountants must abide.
_____ b) The Sarbanes Oxley Act created the Public Company Accounting Oversight
Board (PCAOB).
_____ c) Because of the Sarbanes Oxley Act, audit firms are not permitted to provide
many nonaudit services to audit clients.
_____ d) The fraud triangle identifies opportunity, pressure, and rationalization as the
three elements that are typically present when fraud is committed.
_____ e) An executive found guilty of falsely certifying a company’s financial
statements faces up to a $100,000 fine and 5 years in prison.
An audit is useful to financial statement users because it
A.Guarantees that the financial statements are accurate and correct.
B.Guarantees that management has not been involved in misappropriation of assets.
C.Provides reasonable assurance that the financial statements do not have material
misstatements.
D.Assures users that confidentiality is maintained.
Romero Company has cash of $40,000, accounts receivable of $60,000, inventory of
$32,000, and equipment of $100,000. Assuming current liabilities of $48,000, this
company’s working capital is:
A.$12,000.
B.$52,000.
C.$84,000.
D.$144,000.
Indicate whether each of the following statements about equity is true or false.
_______ a) Operating expenses reported on the income statement decrease retained
earnings.
_______ b) Owners’ equity and liabilities can be viewed either as sources of assets or
claims to assets of the business.
_______ c) Retained earnings is increased by loans received from a bank.
_______ d) Dividends paid to stockholders decrease common stock.
_______ e) Owners’ equity is the residual interest in the company resulting from the
difference between assets and liabilities.
On January 1, 2015, Li Company purchased an asset that cost $80,000. The asset had an
expected useful life of five years and an estimated salvage value of $16,000. Li uses the
straight-line method for the recognition of depreciation expense. At the beginning of the
fourth year of usage, the company revised its estimated salvage value to $8,000. Based
on this information, the amount of depreciation expense to be recognized at the end of
2018 is:
A.$12,800.
B.$16,800.
C.$33,600.
D.$20,800.
An error that results in overstating ending inventory would have what effect on the
company’s financial statements in the current year?
A.
B.
C.
D.
Which of the following is a potential limitation of financial statement analysis?
A.Lack of comparability of firms in different industries
B.The impact of changing economic conditions
C.The impact of having more than one acceptable alternative accounting principle for
accounting for a given transaction or economic event
D.All of these answer choices are correct.
Which of the following terms is applied to long-term assets that have no physical
substance and provide rights, privileges and special opportunities to businesses?
A.Tangible assets
B.Intangible assets
C.Natural resources
D.Property, plant and equipment
Zimmerman Company sold land for $25,000 cash. The original cost of the land was
$25,000. Select the answer that indicates how this event affects the company’s financial
statements.
A.
B.
C.
D.
The lower-of-cost-or-market rule: can be applied to
A.can be applied tomajor classes or categories of inventory.
B.can be applied tothe entire stock of inventory in aggregate.
C.can be applied toeach individual inventory item.
D.can be applied to any of these answer choices.
On June 1, 2016, merchandise subject to terms 2/10, n/30 was sold on account to a
customer for $26,500. On June 3, the seller issued a credit memorandum for $5,800,
accepting merchandise returned by the customer. This was prior to payment by the
customer.
a) What is the amount of cash collected by the seller if the payment is made by the
customer on June 8, 2016?
b) What is the amount of cash collected by the seller if payment is made by the
customer on June 21, 2016?
The practice of reporting the net realizable value of receivables in the financial
statements is commonly called:
A.the cash flow method of accounting for uncollectible accounts.
B.the allowance method of accounting for uncollectible accounts.
C.the direct write-off method of accounting for uncollectible accounts.
D.the accrual method of accounting for uncollectible accounts.
The following is a random list of the accounts of Wyoming Company:
If these accounts were presented in a trial balance, the total of the credit column would
be equal to:
A.$112,200.
B.$114,200.
C.$116,200.
D.$79,800.
Kincaid Company provided consulting service of $2,500 to a customer who paid $1,300
and promised to pay the remainder next month. Which of the following journal entries
correctly records this transaction?
A.
B.
C.
D.
Which of the following conditions indicate a company has a relatively high level of
financial risk?
A.A low times interest earned ratio.
B.A low debt to assets ratio.
C.A high return on equity.
D.A high current ratio.
Indicate whether each of the following statements about financial statement analysis is
true or false.
_____ a) In vertical percentage analysis, an item from the financial statements is
expressed as a percentage of the same item from a previous year’s financial statements.
_____ b) The reason behind a financial statement ratio or percentage analysis result is
usually self-evident and does not require further study or analysis.
_____ c) Horizontal analysis for several years can be done by choosing one year as a
base year and calculating increases or decreases in relation to that year.
_____ d) Vertical analysis compares two or more financial statement items within the
same time period.
_____ e) One form of horizontal analysis is the preparation of common size financial
statements.
In 2016, West Virginia Mining Co. purchased a coal mine that contained an estimated
1,200,000 tons of coal, of which 1,000,000 tons can be profitably extracted, for a cash
price of $58,500,000. The company mined 50,000 tons of coal in 2016.
Required: a) What is the amount of depletion to be recorded per ton of coal?
b) What is the amount of depletion expense for 2016?
Below are listed several transactions that a business may enter into.
1) Provide services to customers on account
2) Purchase land by paying cash
3) Purchase a fire insurance policy that will provide coverage for a two-year period
4) Acquire cash by issuing common stock
5) Recognize expense for amount of office supplies that had been used during the
period
6) Receive payment from a customer for services that will be provided over the next six
months
Required:
a) In the table below, indicate the accounts that would be debited and credited for each
of the preceding transactions.
b) Show how each transaction affects the financial statements by placing a + for
increase, – for decrease, and NA for not affected under each component in the horizontal
financial statements model shown below. In the Cash Flow column, use the letters OA
for operating activities, IA for investing activities, and FA for financing activities. Insert
NA if cash flow is not affected.
The following balance sheet information was provided by Warner Company:
Assume 2015 net credit sales totaled $150,000. The company’s average days to collect
receivables is closest to:
A.9 days
B.44 days
C.71 days
D.40 days
Revenue on account amounted to $5,000. Cash collections of accounts receivable
amounted to $2,300. Expenses for the period were $2,100. The company paid dividends
of $450. Net income for the period was
A.$1,200.
B.$2,900.
C.$2,850.
D.$2,450.
A company purchased inventory on account. If the perpetual inventory method is used,
which of the following choices accurately reflects how the purchase affects the
company’s financial statements?
A.
B.
C.
D.
Jantzen Company recorded employee salaries earned but not yet paid. Which of the
following represents the effect of this transaction on the financial statements?
A.
B.
C.
D.
Indicate how each event affects the elements of financial statements. Use the following
letters to record your answer in the box shown below each element. You do not need to
enter amounts. Assume that Frank Company uses a perpetual inventory system.
Whetzel Co. discovered that a recent shipment of merchandise it had purchased was not
of the same quality it had expected. The seller agreed to grant Whetzel an allowance of
$250. Whetzel had not yet paid the amount owed on the shipment.
Why is land classified separately from other tangible long-term assets?
Indicate how each event affects the elements of financial statements. Use the following
letters to record your answer in the box shown below each element. You do not need to
enter amounts.
An adjusting entry recorded as a debit to Interest Expense and a credit to Interest
Payable.
Explain the meaning of the terms “tangible” and “intangible” and discuss how these
terms are used in describing assets.
Indicate how each event affects the elements of financial statements. Use the following
letters to record your answer in the box shown below each element. You do not need to
enter amounts.
Stan’s Surf Shack purchased 5 surfboards for $200 each. Later it purchased 2 more
surfboards for $250 each. Stan’s uses the perpetual inventory system. Assume that 6
surfboards were sold during the period for $350 cash each.
Assume that Stan’s Surf Shack purchased the first five surfboards on account. How
would the purchase transaction affect its financial statements?
In which section of the balance sheet would Treasury Stock be reported?
When bonds are issued at a premium, which will be higher each year, the interest
expense or the interest payment amount?
When a “debit memo” is included in a bank statement, what effect does that have on the
cash balance?
Wiggins Company issued a $66,000, 8% note payable, with a one year term on
September 1, 2015. What amount of interest expense will be recognized on the income
statement for 2015? 2016?
What financial statement elements are reported on a balance sheet?
When a credit card sale is recorded, what is the effect on the accounting equation?
Are liability accounts increased by debits or credits?
How does a classified balance sheet enhance the usefulness of accounting information?
Discuss the advantages of establishing a line of credit.
Steven, Inc. uses the perpetual inventory system. The company’s management, under
pressure to report favorable results to shareholders, counted $15,000 of inventory that
had already been sold at year-end. Compared to an accurate inventory count, what is the
effect of counting this inventory on the financial statements?
Indicate how each event affects the elements of financial statements. Use the following
letters to record your answer in the box shown below each element. You do not need to
enter amounts.
Indicate how each event affects the elements of financial statements. Use the following
letters to record your answer in the box shown below each element. You do not need to
enter amounts. Enter only one letter for each element.
The Boothe Company paid $9,000 to extend the useful life of one of its assets. How
will this expenditure affect Boothe’s financial statements?
What asset is generally most susceptible to theft?