Dividends can be paid in the form of cash, stock, or other property.
When a business sells a plant asset for book value, a gain or loss should be recorded.
The key differences between the cash basis and accrual basis of accounting can be
explained by understanding the rules of debits and credits.
To compute the interest for notes payable, multiply principal times the annual rate of
interest.
Benchmarking is the practice of comparing a company with other leading companies.
When preparing financial statements under the periodic inventory system, a calculation
of cost of goods sold must be made.
A pension plan is a plan that provides benefits to retired employees.
The financing activities section of the statement of cash flows includes paying
dividends and making payments on long-term liabilities.
Benchmarking is the comparison of a company’s current year results with a previous
year’s performance.
Generally Accepted Accounting Principles (GAAP) require the use of the accrual basis
of accounting.
The primary reason that businesses keep their cash in a bank account is the ability to
earn interest.
It is difficult and costly to plan controls that can prevent collusion.
Held-to-maturity debt investments are categorized as long-term assets on the balance
sheet, regardless of the maturity date.
The operating cycle of a merchandiser begins when the company purchases inventory
from a vendor and ends when the company then sells the inventory to a customer.
A company discovers that its cost of goods sold is understated by an insignificant
amount. It does not need to correct the error because of the conservatism principle.
Companies receive cash either over the counter, through the mail, or by electronic funds
transfer.
Mario worked 48 hours during the work week. He earns wages of $18 per hour for
straight time (40 hours). The company pays time-and-half for overtime. Mario’s gross
pay is $864.
The times-interest-earned ratio is calculated as EBIT divided by interest expense.
In a limited-liability company (LLC), the members are personally liable for the debts of
the business.
The units-of-production method allocates a varying amount of depreciation each year
based on an asset’s usage.
On the balance sheet, Merchandise Inventory is listed above Accounts Receivable.
In cloud computing, the accounting software and data are stored on the company’s
server instead of a third-party server.
Vacation pay is an example a liability that exists but the exact amount is not known.
An investment today of $8,424 at 6% will yield $2,000 per year for the next five years
because interest is being earned on principal that is left invested each year. The
following tables are available:
Present value of $1:
Present value of ordinary annuity of $1:
Under the going concern principle, accountants must provide proof that the business
will remain in operations long enough to use existing resources for their intended
purpose.
The statement of retained earnings informs users about how much of the earnings were
kept and reinvested in the company.
Data from a trial balance is used to prepare the income statement, statement of retained
earnings, and the balance sheet.
Stallings, Inc. purchased manufacturing equipment for $8,400. It has an estimated
useful life of seven years and no residual value. The company should record
depreciation expense of $50 per month. (Assume that the company uses the straight-line
method.)
Most public companies use the indirect method to prepare their statement of cash flows
because it is the method the FASB prefers.
The horizontal analysis of the balance sheet is based on the comparative balance sheet.
Depreciation means that the business sets aside cash to replace an asset when it is used
up.
The operating activities section of the statement of cash flows reflects the cash flows
that affect current assets and current liabilities.
An information system is one of the five components by which a company can achieve
its internal control objectives.
The stockholders’ claim to the assets of a business is called equity or stockholders’
equity.
In a balance sheet, prepared under IFRS guidelines, cash is often shown as one of the
last assets listed.
A cash ratio below 1.0 implies that the company has an insufficient amount of cash and
cash equivalents to pay current liabilities.
The asset turnover ratio measures the amount of net sales generated for each average
dollar of total assets invested.
The post-closing trial balance shows the net income for the period just ended.
A company using the perpetual inventory system purchased inventory worth $25,000 on
account with terms of 3/10, n/30. Defective inventory of $1,000 was returned two days
later, and the accounts were appropriately adjusted. If the invoice is paid 10 days after
the invoice date, the amount of the purchase discount that would be available to the
company is ________.
A) $720
B) $780
C) $750
D) $740
The following information is available for Ellen’s Fashions, Inc. for the current month.
What is the adjusted book balance on the bank reconciliation?
A) $10,250
B) $7,750
C) $6,950
D) $7,050
A company’s accountant capitalized a payment that should have been recorded as a
revenue expenditure. How will this error affect the company’s financial statements?
A) Net income will be understated.
B) Expenses will be overstated.
C) Assets will be overstated.
D) Liabilities will be overstated.
A cash payment of $5,000 was made for dividends. Which of the following accounts is
debited?
A) Cash
B) Dividends
C) Dividend Expense
D) Common Stock
On December 1, 2019, Murphy, Inc. had 35,000 shares of $7 par value common stock
issued and outstanding. The next day it declared a 50% stock dividend. The market
value of the stock on that date was $15 per share. Which of the following is the correct
journal entry to record this transaction?
A) debit Stock Dividends $525,000 and credit Cash $525,000
B) debit Stock Dividends $525,000, credit Common Stock $245,000, and credit Paid-In
Capital in Excess of Par $280,000
C) debit Common Stock $122,500 and credit Cash $122,500
D) debit Stock Dividends $122,500 and credit Common Stock Dividend Distributable
$122,500
Notes Payable due within two years are classified as ________.
A) current liabilities
B) current assets
C) long-term liabilities
D) long-term assets
The Loss on Disposal of Equity Investments is reported in the ________.
A) other income and (expenses) section of the income statement
B) stockholders’ equity section of the income statement
C) stockholders’ equity section of the balance sheet
D) losses section of the statement of retained earnings
On October 1, 2019, Westfield, Inc. sold machinery to a customer for $25,000. The
customer could not pay at the time of sale, but agreed to pay 12 months later, and
signed a 12-month note at 9% interest. How much interest revenue was earned during
2019? Round any intermediate calculations to two decimal places, and your final
answer to the nearest dollar.
A) $593
B) $563
C) $5,067
D) $2,250
A merchandiser sold merchandise inventory on account. The journal entry to record a
sales allowance in the books of the merchandiser, using the perpetual inventory system
would be:
A)
B)
C)
D)
Days’ sales in receivables measures ________.
A) how many days it takes to order and receive inventory
B) how many days it takes to collect the average level of accounts receivable
C) how many days it takes to sell inventory
D) the number of times a company collects the average accounts receivable balance in
one year
Investors who want to know the amount of cash a company has available for new
opportunities, such as expanding into a new sales region, should analyze the company’s
________.
A) free cash flow
B) net cash flow from investing activities
C) acid ratio
D) earnings per share
A & B Commercial Cleaning is a new business. During its first year of operations,
credit sales were $40,000 and collections from credit sales were $35,000. One account
for $650 was written off. Management uses the percent-of-sales method to account for
bad debts expense and estimates 2% of credit sales to be uncollectible. What is the
balance of Accounts Receivable at the end of the first year?
A) $5,000
B) $3,550
C) $4,350
D) $4,200
Match the benefit of an effective accounting information system with the
definition.
A) Provides information that will improve decision making and reduce uncertainty.
B) Benefits received outweigh the cost of the system.
C) Works smoothly with the business’s employees and organization structure.
D) Can accommodate changes in the business over time.
E) Provides safeguards for a business’s assets and reduces the likelihood of fraud and
errors.
Control
John’s Food Market had the following financial data at December 31, 2018:
Cash and cash equivalents $ 78,000
Total current liabilities 130,000
a. What is the cash ratio as of December 31, 2018? Show the formula and your
computations.
b. Comment on the cash ratio for Metro Construction Company.
Donaldson’s Delivery Company began operations on January 1, 2019. The following
Trial Balance was prepared on December 31, 2019.
Donaldson’s Delivery Service Company
Trial Balance
December 31, 2019
What is the net income for the year ended December 31, 2019?
A) $15,400
B) $22,200
C) $24,700
D) $74,400
Which of the following accounting methods is used to account for controlling interest
investments?
A) cost method
B) acquisition method
C) consolidation method
D) discounted cash flow method
Crystal Glassware Company issues $1,042,000 of its 14%, 10-year bonds at 97 on
February 28, 2019. The bonds pay interest on February 28 and August 31. Assume that
Crystal uses the straight-line method for amortization. What net amount will be
reported for the bonds on the August 31, 2019 balance sheet?
A) $1,012,303
B) $1,042,000
C) $1,009,177
D) $1,010,740
Bentley Corporation received cash from issuing 17,000 shares of common stock at par
on January 1, 2018. The stock has a par value of $0.05 per share. Which is the correct
journal entry to record this transaction?
A) Cash is debited for $850, and Common Stock—$0.05 Par Value is credited for $850.
B) Cash is credited for $17,000 and Common Stock—$0.05 Par Value is debited for
$17,000.
C) Paid-In Capital in Excess of Par-Common is debited for $16,150, and Common
Stock—$0.05 Par Value is credited for $16,150.
D) Cash is debited for $17,000, Common Stock—$0.05 Par Value is credited for $850,
and Paid-In Capital in Excess of Par-Common credited for $16,150.
Which of the following will be listed in the operating section of the statement of cash
flows that is prepared using the indirect method?
A) collections from customers
B) payments to suppliers
C) interest received
D) increases/decreases in current liabilities
Great Lake Glassware Company issues $1,121,000 of its 12%, 10-year bonds at 99 on
February 28, 2018. The bonds pay interest on February 28 and August 31. Assume that
Great Lake uses the straight-line method for amortization. The journal entry to record
the first interest payment on August 31, 2018 includes a ________.
A) debit to Cash for $67,260
B) debit to Interest Expense for $67,821
C) debit to Interest Expense for $66,699
D) debit to Discount on Bonds Payable for $561
Value Electronics, Inc. started its operations on January 1, 2019. Value engages in
buying and selling different types of electronic gadgets. The first step in its operating
cycle would be to ________.
A) collect cash from customers
B) sell goods to customers
C) purchase inventory from vendors
D) record the sales in accounts
In regards to a company using a computerized accounting system, which of the
following statements is incorrect?
A) Closing entries are completed in a matter of seconds.
B) The accountant must manually prepare the closing entries.
C) The software identifies the temporary accounts.
D) The Retained Earnings balance is up-to-date.
The purchase of three computers for the sales staff, on account, is recorded in the
________ journal.
A) general
B) purchases
C) cash payments
D) equipment
A bond is issued at a discount when a bond’s stated interest rate is ________.
A) equal to the market interest rate
B) more than the effective interest rate
C) less than the market interest rate
D) more than the market interest rate
Which of the following entries would be made because of the matching principle?
A)
B)
C)
D)
Managerial accounting provides information to ________.
A) internal decision makers
B) outside investors and lenders
C) creditors
D) taxing authorities
The times-interest-earned ratio is calculated as ________.
A) earnings before interest and tax divided by interest expense
B) profit before tax divided by interest expense
C) net income divided by interest expense
D) income tax expense plus interest expense divided by interest expense
Analysts look for red flags in financial statements that may signal financial trouble.
Which of the following is a red flag that suggests that a company may be in trouble?
A) a decline in days’ sales in inventory
B) a decrease in days’ sales in receivables from year to year
C) a reduction in the debt ratio
D) net cash provided by operating activities is consistently lower than net income
Assume Metro Corporation had a net income of $2,500 for the year ending December
2018. Its beginning and ending total assets were $32,500 and $19,500, respectively.
Calculate Metro’s return on assets (ROA). (Round your percentage answer to two
decimal places.)
A) 7.69%
B) 12.82%
C) 9.62%
D) 4.81%
Use the following to calculate the acid-test ratio. (Round your answer to two decimal
places.)
A) 0.73
B) 8.67
C) 0.89
D) 0.54
The formula for computing the current ratio is ________.
A) Current ratio = Total Current assets / Total assets
B) Current ratio = Total Current assets / Total liabilities
C) Current ratio = Total Current assets / Total Stockholders’ Equity
D) Current ratio = Total Current assets / Total Current liabilities
The following information is provided for Journey Inc. and Mastery Inc. Both
corporations provide training materials for electricians.
Current Ratio
a. Which company has the stronger current ratio for 2018 and 2019? Defend your answer.
b. Discuss the change in current ratio for each company.
Which of the following occurs when the board of directors declares a 3-for-1 stock split
on 20,000 outstanding shares of $25 par common stock?
A) The par value of the stock remains the same.
B) The par value of the stock increases to $50 per share.
C) The number of outstanding shares remains at 20,000.
D) The number of outstanding shares increases to 60,000.
Amounts earned from delivering goods or services to customers are called ________.
A) notes receivable
B) unearned revenues
C) equity
D) revenues
Modern Lifestyle Furniture began June with merchandise inventory of 45 sofas that
cost a total of $31,500. During the month, Modern purchased and sold merchandise on
account as follows:
Prepare a perpetual inventory record, using the FIFO inventory costing method, and
determine the company’s cost of goods sold, ending merchandise inventory, and gross
profit.
| Purchases | Cost of Goods Sold | Inventory on Hand |
If the likelihood of a future event is remote, how should the company report the
contingency?
On March 1, 2018, LeClaire, Inc. paid $60,000 for office rent covering the three-month
period ending May 31, 2018. Journalize the adjusting entry on March 31 by using the
alternative treatment of deferred expenses. Omit explanation.
Refer to the following bank reconciliation:
Journalize the adjusting entry for the third reconciling item: NSF check. Omit explanation
If the likelihood of a future event is probable and the amount of the expense cannot be
estimated, how should the company report the contingency?
Ten O’Clock, Inc. purchased a van on January 1, 2018, for $800,000. Estimated life of
the van was five years, and its estimated residual value was $90,000. Ten O’Clock uses
the straight-line method of depreciation. Prepare the depreciation schedule.
McDonald Corp. reported the following on its comparative income statement (in
millions):
Prepare a horizontal analysis of revenues and cost of goods sold, both in dollar amounts
and in percentages, for 2019 and 2018. (Round your percentage answers to two decimal
places.)
Hampton, Inc. purchased a van on January 1, 2018, for $800,000. Estimated life of the
van was five years, and its estimated residual value was $90,000. Hampton uses the
straight-line method of depreciation. Prepare the journal entry to record the depreciation
expense for 2018 on the van. Omit explanation.
Hometown Resources, Inc. has a 9% rate of return on total assets and the industry
average is 12%. How was the 9% rate of return on total assets computed? Comment on
this information.
List the four steps, the proper order, of the purchasing and payment process.
Provide the following information for controlling interest equity investments:
1. Which accounting method is used?
2. What is the balance sheet effect when using this accounting method?
3. What is the income statement effect when using this accounting method?
Data for Sherwood, Inc. for the years ended December 31, 2019 and 2018 are as
follows:
Prepare a horizontal analysis of the comparative income statement of Sherman, Inc.
(Round to one decimal place.) Use a multi-step income statement.
The following information is available for Ashley Company for the month ending June
30, 2019.
• Balance as per the bank statement is $11,240.
• Balance as per books is $10,200.
• Check #506 for $1,200 and check #510 for $900 were not shown on the June 30 bank
statement.
• A deposit in transit of $3,110 had not been received by the bank when the bank
statement
was generated.
• A bank debit memo indicated an NSF check for $85 written by Maddie Wolfe to
Ashley Company on June 13.
• A bank credit memo indicated a note collected by the bank of $2,100 and interest
revenue
of $55 on June 20.
• The bank statement indicated service charges of $20.
Prepare bank reconciliation for Ashley Company for June 30, 2019.
Define net realizable value. How is net realizable value affected when a receivable is
written off under the allowance method?
City Petroleum Products owns furniture that was purchased for $20,000. Accumulated
depreciation is $16,000. The furniture was sold for $3,800. Prepare the journal entry to
record this transaction. Omit explanation.
The following is the adjusted trial balance as of December 31, 2019 of Martin Security
Services, Inc.:
Prepare the closing entry for revenues. Omit explanation.
What is a prior-period adjustment? How and when is a prior-period adjustment
recorded?
On January 1, 2019, Eastern Services issued $140,000 of four-year, 9% bonds when the
market rate was 8%. The bonds were issued at $144,713. Eastern uses the
effective-interest method to amortize the bond premium. Semiannual interest payments
are made on June 30 and December 31 of each year. Prepare the amortization table for
the first four interest payments. (Round your answers to the nearest dollar number.)
Complete the following table, which compares the effects of LIFO, FIFO and
weighted-average inventory costing methods on the financial statements in periods of
declining inventory costs. The answer should be lowest, highest, or middle.