Indicate whether each of the following statements about financial statement analysis is
true or false.
_____ a) Comparing percentages derived from financial statement analysis has the
drawback of varying materiality levels.
_____ b) The materiality of accounting information refers to whether it is viewed as
favorable (good news) or unfavorable (bad news).
_____ c) Companies are exempt from accounting for immaterial items in compliance
with generally accepted accounting principles.
_____ d) To judge the materiality of an absolute financial statement amount, one must
consider the size of the company reporting it.
_____ e) Meaningful comparisons between two companies generally should be made
using percentage analysis or ratio analysis, not absolute amounts.
The carrying value of a bond issued at a premium:
A.decreases by equal amounts each year if straight-line amortization is used.
B.decreases by equal amounts each year if effective interest amortization is used.
C.decreases by larger and larger amounts each year if effective interest amortization is
used.
D.decreases by equal amounts each year if straight-line amortization is used and
decreases by increasing amounts each year if effective interest amortization is used.
Explain the differences in recording the initial issue of stock for (a) par-value, (b)
stated- value, and (c) no-par stock.
The following transactions apply to Matt’s Computer Service for the year 2016.
1) Issued stock to investors for $45,000 cash.
2) Purchased land for $36,000 cash.
3) Performed services on account for $51,000.
4) Collected $33,600 on accounts receivable.
5) Paid operating expenses of $19,500.
Required:
a) Draw T-accounts and post the above transactions to the appropriate T-accounts.
b) Prepare a balance sheet for Matt’s Computer Service for December 31, 2016.
Which of the following items would appear in the cash flow from financing activities
section of a statement of cash flows?
A.Paid cash for dividends.
B.Received cash for common stock.
C.Sold land for cash.
D.sectionPaying cash for dividends and receiving cash from common stock would both
appear in the cash flow from financing activities section.
Indicate whether each of the following statements is true or false.
_____ a) Long-term assets having no physical substance are called intangible assets.
_____ b) Trademarks are examples of an intangible asset.
_____ c) Natural resources are examples of tangible long-term assets.
_____ d) The reason that land is classified separately from other tangible assets is
because the cost is normally much higher.
_____ e) Goodwill is classified as Plant, Property and Equipment.
As of December 31, 2014, Gatewood Corporation had a current ratio of 1.49, quick
ratio of 1.15, and working capital of $48,000. The company uses a perpetual inventory
system and sells merchandise for more than its cost.
On January 1, 2015, Gatewood collected $8,200 of accounts receivable. As a result of
this transaction, Gatewood’s working capital will:
A. Increase.
B.Decrease.
C.Remain the same.
D. Cannot be determined.
The inventory records for Radford Co. reflected the following
Determine the amount of cost of goods sold assuming the LIFO cost flow method.
A.$4,100
B.$4,320
C.$2,360
D.$3,600
At the end of 2016 the following information is available for Grumpy, Happy, and Doc
Companies.
Which company has the highest level of debt risk?
A.Grumpy
B.Happy
C.Doc
D.They all have equal debt risk
The times-interest-earned ratio is calculated by which of the following?
A.Total assets divided by interest expense.
B.Net income divided by interest expense.
C.Earnings before interest and taxes divided by interest expense.
D.None of these answer choices is correct.
Elliston Company accepted credit card payments for $10,000 of services provided to
customers. The credit card company charges a 3% service charge. This transaction
would
A.increase revenue by $9,700.
B.increase assets by $10,000.
C.increase Retained Earnings by $9,700.
D.increase net income by $10,000.
Indicate whether each of the following statements is true or false.
_____ a) An appropriation of retained earnings limits the amount available for
dividends.
_____ b) Appropriating retained earnings is considered an asset exchange transaction.
_____ c) An appropriation is recorded as a debit to the appropriated retained earnings
account and a credit to retained earnings.
_____ d) One reason for an appropriation of retained earnings is that there may be
restrictive covenants in credit agreements.
_____ e) An appropriation has no effect on the accounting equation.
Rainey Company’s true cash balance at October 31, 2016 is $5,710. The following
information is available for the bank reconciliation:
Outstanding checks, $600
Deposits in transit, $450
Bank service charges, $90
The bank had collected an account receivable for Rainey Company, $1,000
The bank statement included an NSF check written by one of Ramsey’s customers for
$600.
Based on this information Rainey’s unadjusted book balance at October 31 is:
A.$5,870.
B.$5,400.
C.$6,400.
D.$5,490.
Policies and procedures designed to reduce the opportunities for fraud are often called:
A.internal controls
B.asset source transactions
C.accounting standards
D.financial systems
Goodwill may be recorded in which of the following circumstances?
A.When the property, plant and equipment of a business increase in value.
B.When a business earns a very high net income.
C.When a business sells property for more than its book value.
D.When one business acquires another business.
Gilligan Corporation was established on February 15, 2014. Gilligan is authorized to
issue 500,000 shares of $6.00 par value common stock. As of December 2016,
Gilligan’s stockholders’ equity accounts report the following balances:
At the end of 2016, Gilligan decides to issue a 5% stock dividend.
At the time of issue, the market price of the stock was $22 per share.
What is the correct journal entry to record this transaction?
A.
B.
C.
D.
Which of the following is an asset source transaction?
A.Issued common stock.
B.Paid a cash dividend to stockholders.
C.Received a payment on accounts receivable.
D.Accrued salary expense.
Adjusting entries are made at the end of the period because of the need to
A.adjust the balance in the cash account for the effects of all daily transactions with
customers and creditors.
B.assure that debits are equal to credits prior to preparing the trial balance.
C.assure that all revenues and expenses are recognized in the period in which they are
earned or incurred.
D.prepare revenue and expense accounts for recording transactions in the next
accounting period by bringing the balances to zero.
As of December 31, 2015, Mason Company had $500 cash. During 2016, Mason
earned $1,200 of cash revenue and paid $800 of cash expenses. The amount of cash
shown on the 2016 balance sheet would be
A.$900.
B.$400.
C.$1,700.
D.$2,500.
Pinehurst Company was formed in 2015 and experienced the following accounting
events during the year:
1) Issued common stock for $15,000 cash
2) Earned cash revenue of $28,000
3) Paid cash expenses of $20,500.
These were the only events that affected the company during the year.
Required:
a) Write the accounting equation and record the effects of each accounting event under
the appropriate general ledger account heading. Precede the amount with a minus sign
if the transaction reduces that section of the equation.
Enter 0 for items not affected.
b) Prepare an income statement for 2015 and a balance sheet as of December 31,
2015.Precede the amount with a minus sign if the transaction reduces that section of the
income statement.
Craig Company experienced an accounting event that is recorded in the following
T-accounts:
Which of the following choices accurately reflects how this event would affect Craig’s
financial statements.
A.
B.
C.
D.
Glick Company purchased oil rights on July 1, 2016 for $2,400,000. If 200,000 barrels
of oil are expected to be extracted over the assets life, and 30,000 barrels are extracted
and sold in 2016, the recognition of depletion expense on December 31, 2016 would
cause:
A.a reduction in equity of $200,000.
B.a reduction in assets of $360,000.
C.a reduction in assets of $300,000.
D.an increase in equity of $400,000.
Santa Fe Company was started on January 1, 2016, when it acquired $9,000 cash by
issuing common stock. During 2016, the company earned cash revenues of $4,500, paid
cash expenses of $3,750, and paid a cash dividend of $250. Based on this information,
A.The December 31, 2016 balance sheet would show total equity of $8,750.
B.The 2016 income statement would show net income of $500.
C.The 2016 statement of cash flows would show net cash inflow from operating
activities of $4,500.
D.The 2016 statement of cash flows would show a net cash flow from financing
activities of $8,750.
Prior to closing, Syracuse Company’s accounting records showed the following
balances:
After closing, Syracuse’s retained earnings balance would be
A.$16,800.
B.$23,700.
C.$21,000.
D.$26,400.
During December 2016, Crowe Company sold 125 units @ $225 each. Cash selling and
administrative expenses for the year were $11,000. All transactions were cash
transactions. The following information is also available:
The company’s income tax rate is 30%.
Required:
a) Prepare an income statement for Crowe Company for 2016 assuming:
1) FIFO inventory cost flow
2) LIFO inventory cost flow
b) Prepare the operating activities section of the statement of cash flows for 2016
assuming:
1) FIFO inventory cost flow
2) LIFO inventory cost flow
Indicate whether each of the following statements is true or false.
_____ a) Double taxation refers to the fact that both a partnership and its partners must
pay income tax on the earnings of the partnership.
_____ b) A sole proprietorship is an accounting entity separate from its owner.
_____ c) Limited liability is a benefit to both corporations and partnerships, but not to
sole proprietorships.
_____ d) Unlike a partnership, a corporation is not terminated when a major
stockholder withdraws his or her investment.
_____ e) Sole proprietorships are, generally, subject to fewer governmental regulations
than corporations.
The Jackson Company issued a one-year $80,000 face value interest-bearing note with
a stated interest rate of 9%. The note was issued to the Galaxy Bank on August 1, 2016.
The amount of cash flow from financing activities on the December 31, 2016 statement
of cash flows would be:
A.$0.
B.$80,000 inflow.
C.$83,000 inflow.
D.($87,200) outflow.
Which of the following is not an asset use transaction?
A.Paying cash dividends
B.Paying cash expenses
C.Paying off the principal of a loan
D.Paying cash to purchase land
On December 31, 2015, the Loudoun Corporation estimated that 3% of its credit sales
of $112,500 would be uncollectible. Loudoun uses the allowance method of accounting
for uncollectible accounts. In February 2016, one of Loudoun’s customers failed to pay
his $1,050 account and the account was written off. On April 4, 2016, this customer
paid Loudoun the $1,050.
Assume that the Loudoun Corporation uses the direct write-off method of accounting
for uncollectible accounts. Which of the following answers correctly describes the
effect of the write-off of the customer’s account on Lindley’s financial statements?
A.
B.
C.
D.
Which of the following is not a common feature of ethical misconduct?
A.The capacity to rationalize.
B.The existence of pressure leading to an incentive.
C.The assistance of others.
D.The presence of an opportunity.
Flannigan Company prepared a trial balance at December 31, 2016. A trial balance that
balances
A.proves that all transactions have been properly recorded.
B.proves that there are no missing transactions.
C.can only be achieved after adjusting entries have been recorded.
D.proves the equality of debits and credits.
What effect does depreciation expense have on net income and cash flows?
A.
B.
C.
D.
On what date do dividends become a legal liability of a corporation?
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. Use only one letter
for each element. You do not need to enter amounts.
On January 1, 2016, Flagler Corporation signed a contract with the City Bank for a line
of credit that permitted Flagler to borrow up to $50,000. Indicate the effects of signing
this contract.
Name some of the restrictive covenants often included in bond indentures.
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.
Kelly Co. sells goods to customers with a three-year warranty. During 2015, Kirk sold
$800,000 of goods. On December 31, 2015, Kelly made the appropriate year-end
adjustment to record the warranty expense related to the goods sold during the year.
During 2016, Kelly paid $4,000 cash to satisfy warranty claims. Show the effects of the
2016 payments to satisfy warranty claims.
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.
Perez Co. paid $220,000 cash in salaries to its employees.
For Perrone Corporation, return on equity is substantially higher than return on
investment. What does that tell you about the company?
Which method of preparing the operating activities section of a cash flow statement is
recommended by the Financial Accounting Standards Board?
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.
In preparing the bank reconciliation for Heath Company, an employee found that a
certified check that the company had used to settle an account payable remained
outstanding.
Selected financial information for Marvin Company for 2015 follows:
Required: How many times did Marvin’s merchandise inventory turnover during 2015?
What was the company’s average days in inventory?
What is the effect on the accounting equation of a cash payment to creditors?
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.
Bell Co. provided consulting services for $20,000 cash.
If a company uses the effective interest method of amortizing a bond discount, does the
interest expense increase, decrease, or stay the same over time? Explain.
What is a primary drawback with examining and comparing absolute amounts from two
businesses’ 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. Use only one letter
for each element. You do not need to enter amounts.
On December 31, 2016, Briand Co. paid cash for interest on bonds it had issued on
January 1, 2016 at 98, and amortized part of the discount on bonds. Briand Co. uses the
straight-line method of amortizing bond discounts. Indicate the effects of the
amortization of the discount only.
When the indirect method is used to prepare the operating activities section of the
statement of cash flows, are increases in current liabilities added or subtracted from net
income to arrive at the net cash flow?
In an inflationary period, which cost flow method, LIFO or FIFO, results in the larger
dollar amount of assets on the balance sheet?