1) A transaction may be an exchange of assets or services by one business for assets,
services, or promises to pay from a different business.
2) Working capital increases when a company purchases equipment and signs a 2-year
note payable.
3) Due to the relationships among financial statements, the statement of stockholders’
equity links the income statement to the balance sheet.
4) Some analysts do not use the cash ratio because they see it as too stringent a test of
liquidity and it is very sensitive to small events.
5) Issuing stock in exchange for cash creates an increase in cash from a financing
activity.
6) An annuity is a series of consecutive and unequal payments over time.
7) Shares which a corporation has the ability to issue, as documented in its charter in
the state where incorporated, are outstanding shares of stock.
8) An income statement with each line divided by net sales and shown as a percentage
is called a common statement.
9) Your goal is to be able to withdraw $10,000 for each of the next nine years beginning
one year from today and also to withdraw $50,000 ten years from today. The return on
the investment is expected to be 6%. The amount that needs to be invested today is
closest to:
A.$68,017.
B.$95,937.
C.$78,176.
D.$132,075.
10) Chang Corp. purchased $1,000,000 of bonds at par value on April 1, 2014. The
bonds pay interest at the rate of 10%. Chang intends to hold these bonds to maturity.
Which of the following statements is false?
A.Since the bonds were issued at par value, the cash interest will be the same as interest
revenue.
B.The bonds will earn $75,000 of interest by December 31, 2014.
C.The bond investment must be accounted for using the fair value method.
D. Since the bonds were classified as held-to-maturity, the company would not
recognize unrealized gains or losses on the bonds during the period held by Chang.
11) When considering an investment, which of the following is not one of the three
critical factors used to evaluate future earnings potential of that investment?
A.Global event factors.
B.Economy-wide factors.
C.Industry factors.
D.Individual company factors.
12) Which of the following is not reported as an operating expense on the income
statement?
A.Salaries expense.
B.Rent expense.
C.Interest expense.
D.Cost of goods sold.
Interest expense is the result of borrowing money and not of day-to-day operations of
making and/or selling products and/or services. Therefore, interest expense is not listed
as an operating expense.
13) Which of the following accounts requires a debit to close the account at year-end?
A.Prepaid rent.
B.Service revenue.
C.Unearned revenue.
D.Wage expense.
14) The Soft Company has provided the following information after year-end
adjustments:
♦ Allowance for doubtful accounts was $11,000 at the beginning of the year and
$30,000 at the end of the year.
♦ Accounts receivable were $80,000 at the beginning of the year and $420,000 at the
end of the year.
♦ Accounts written off as uncollectible totaled $20,000.
♦ Net sales totaled $2,700,000.
♦ Sales discounts were $100,000.
How much was Soft’s bad debt expense for the year?
A.$39,000.
B.$1,000.
C.$19,000.
D.$20,000.
15) Which of the following equations is the balance sheet equation?
A.Assets + Liabilities = Stockholders’ Equity.
B.Assets + Stockholder’s Equity = Liabilities.
C.Assets = Liabilities + Stockholders’ Equity.
D.Assets = Liabilities + Common Stock.
16) The declaration of a $5,000 dividend by JLH Company would be reported on which
of JLH’s financial statements?
A.The income statement only.
B.The statement of stockholders’ equity.
C.The balance sheet only.
D.The statement of cash flows.
17) Which of the following statements is correct?
A.Dividend income is a component of operating income.
B.Operating income is decreased by the loss from the sale of plant assets.
C.A gain on the sale of a stock investment does not increase operating income.
D.Income before taxes does not change when a gain results from the sale of plant
assets.
Gain or losses from the sale of investments are not the central focus of the business and
do not increase operating income.
18) KAJ Incorporated purchased a machine costing $250,000 by paying $35,000 cash
and signing a $215,000 note payable. How would this transaction be reported within the
cash flow from financing activities section of the cash flow statement?
A.An inflow of $215,000.
B.An outflow of $215,000.
C.An outflow of $35,000.
D.It would not be reported in the financing activities section.
19) Which of the following journal entries is used to record a deferral?
A.Option A
B.Option B
C.Option C
D.Option D
20) Which of the following accounts would not be included in the closing process at
year-end?
A.Rent expense.
B.Sales revenue.
C.Additional paid-in capital.
D.Cost of goods sold.
21) Which of the following journal entries is not consistent with the use of a periodic
inventory system?
A.Option A
B.Option B
C.Option C
D.Option D
22) Panmar Inc. is preparing a statement of stockholders’ equity for 2014. On January 1,
2014, Panmar started the year with a $200,000 credit balance in its retained earnings
account. During 2014, the company earned net income of $140,000. Panmar declared
dividends of $80,000 and paid $50,000 of those dividends. Also, the company received
cash of $100,000 for additional shares of common stock issued and then paid $30,000
to repurchase shares of common stock. What is the balance in retained earnings on
December 31, 2014?
A.$260,000.
B.$290,000.
C.$330,000.
D.$390,000.
23) A company’s income statement reported net income of $80,000 during 2014. The
income tax return excluded a revenue item of $10,000 (reported on the income
statement) because under the tax laws the $10,000 would not be reported for tax
purposes until 2015.
Prepare the journal entry to record the 2014 income tax expense assuming a 40% tax
rate.
24) In a recent year, The Walt Disney Company reported the following increases and
decreases in current assets and current liabilities.
Identify whether each of these increases or decreases caused cash to increase or
decrease. Enter an I if the change in the account balance caused an increase in cash flow
or enter a D if the change in the account balance caused a decrease in cash flow.
25) Prior to the year-end adjustment to record bad debt expense for 2014 the general
ledger of Stickler Company included the following accounts and balances:
Cash collections on accounts receivable during 2014 amounted to $450,000. Sales
revenue during 2014 amounted to $800,000, of which 75% was on credit, and it was
estimated that 2% of these credit sales made in 2014 would ultimately become
uncollectible.
A Calculate the bad debt expense for 2014.
B Determine the adjusted 2014 year-end balance of the allowance for doubtful
accounts.C Determine the net realizable value of accounts receivable for the December
31, 2014 balance sheet.
26) At the beginning of 2014, Jeffrey Company disposed of a segment of its business
and incurred a pre-tax loss of $40,000 on the disposal, which resulted in an after-tax
loss on disposal of $32,000. In the same year, a flood caused $15,000 of damages to the
building. The flood damage qualified as an extraordinary item. The resulting
extraordinary loss net of tax was $12,000. Income from continuing operations before
taxes was $100,000 for 2014 and a 20% tax rate applied to all of the items above.
Prepare a partial income statement starting with income from continuing operations
before taxes for the year ending 2014 and concluding with net income.
27) On January 1, 2014, Mission Company agreed to buy some equipment from Anna
Company. Mission Company signed a note, agreeing to pay Anna Company the entire
$500,000 for the equipment on December 31, 2016. The market rate of interest for this
note was 10%.
(Round all answers to whole dollar amounts.)
A Prepare the journal entry Mission Company would record on January 1, 2014 related
to this purchase.
B Prepare the December 31, 2014, adjusting entry to record interest expense related to
the note for the first year. Assume that no adjusting entries have been made during the
year.
C Prepare the December 31, 2015, adjusting entry to record interest expense related to
the note for the second year. Assume that no adjusting entries have been made during
the year.
D Prepare the entry Mission Company would record on December 31, 2016, the due
date of the note to record interest expense for the third year and payment of the note.
Assume that no adjusting entries have been made during the year. Round the interest
expense to an amount that will increase notes payable to the correct final payoff
amount.
28) The following data were provided by the detailed payroll records of Mountain
Corporation for the last week of March 2015, which will not be paid until April 5, 2015:
FICA taxes at a 7.65% rate (no employee had reached the maximum).
A Prepare the March 31, 2015 journal entry to record the payroll and the related
employee deductions.
B Prepare the March 31, 2015 journal entry to record the employer’s FICA payroll tax
expense.
C Calculate the total payroll-related liabilities at March 31, 2015 using the results of
requirements (A) and (B) above.
