When the direct method is used to prepare the operating activities section of the
statement of cash flows, cash inflows from customers and cash outflows for
depreciation are among the categories of cash flows likely to be reported.
The cost of natural resources includes the purchase price, as well as exploration costs
and surveys.
The specific identification inventory method is not practical for companies that sell
many low-priced, high turnover items.
The face value of Accounts Receivable plus the balance in the Allowance for Doubtful
Accounts is equal to the net realizable value of the receivables.
When debt is used to finance purchase of assets, the term or time span of the debt
should be similar to the lifespan of the assets.
The only requirement involved in communicating useful information is that the
information be accurate.
The Sarbanes-Oxley Act includes several significant reforms that affect the auditing
profession, but it did not reduce an audit firm’s ability to provide non-audit services to
its audit clients.
With a perpetual inventory system, the cost of merchandise inventory is recognized at
the time of purchase.
If a bond discount is amortized using the effective interest method, the total amount of
interest recognized over the life of the bond is the same as if the straight-line method is
used.
Tangible assets include land, equipment, and goodwill.
A loss resulting from application of the lower-of-cost-or-market rule is included in Cost
of Goods Sold if the loss is material in amount.
If the stated interest rate for bonds is the same as the effective interest rate, the bonds
will be issued at their face value.
In September of 2016, Hansen Company issued a note payable to borrow money from
its bank. Principal and interest on the note would come due in June 2017. Interest
expense on this note must be accrued at the end of 2016 for the period from issuance of
the note to the last day of the accounting period.
If a company uses the percent of receivables method to estimate uncollectible accounts,
the company will first determine the required ending balance in Allowance for Doubtful
Accounts, and Uncollectible Accounts Expense will be the difference between that
amount and the current balance in the allowance.
A classified balance sheet is necessary for calculating a company’s current ratio.
In most businesses, the physical flow of goods occurs on a FIFO basis, but a different
cost flow method is allowed under generally accepted accounting principles.
The return on sales ratio indicates the amount of each sales dollar that is left over after
covering the cost of goods sold.
When Company X purchases Company Y, X should record Y’s assets at their fair value
at the time of the acquisition.
Singleton Company’s perpetual inventory records included the following information:
If Singleton uses the FIFO cost flow method, its cost of goods sold would be $4,490.
For a long-term note payable, repaying a portion of principal along with interest
payments is called loan amortization.
All corporations are subject to extensive government regulation.
The depreciable cost of a long-term asset is the difference between the amount paid for
the asset and its salvage value.
In preparing a bank reconciliation, typical adjustments to the book balance include bank
service charges, customer NSF checks, and certified checks.
If a bond issuer’s bond ratings drop, the company probably will have to pay higher
interest rates on bonds that have already been issued.
If a company sells equipment at a loss, the loss from selling the equipment is reported
in the investing activities section of the statement of cash flows.
A company that purchases merchandise treats a cash discount as a reduction to the cost
of merchandise inventory.
Loans that require payment of interest at regular intervals and payment of principal at
maturity are installment notes.
To record an asset source transaction, an asset account would be debited and a liability
or equity credited.
After the check is signed, the third employee is the one who records the check in the
ledger and examines the appropriate supporting documents.
An increase in an expense may be accompanied by a decrease in a liability.
Working capital is current assets divided by current liabilities.
The entry to record revenue earned on account includes a debit to accounts receivable
and a credit to revenue.
A multistep income statement shows Sales, Cost of Goods Sold, and Gross Margin.
Generally accepted accounting principles require that, when the estimated useful life of
a long-term asset is changed, previously-issued financial statements should not be
revised.
A company uses a cost flow method (such as LIFO or FIFO) to allocate product costs
between cost of goods sold and beginning inventory.
Intangible assets include patents, copyrights, and franchises.
Sales tax is reported as revenue when it is collected, and reported as an expense when it
is paid.
Issuing bonds payable when the market interest rate is less than the stated interest rate:
A.results in bonds being issued at a premium.
B.results in bonds being issued at less than their face value.
C.raises the effective interest rate above the stated rate of interest.
D.results in bonds being issued at a premium and the effective interest rate is higher
than the stated rate.
Borrowing cash from the bank is an example of which type of transaction?
A.Asset source
B.Claims exchange
C.Asset use
D.Asset exchange
Abbott Company purchased $6,500 of merchandise inventory on account. Advent uses
the perpetual inventory method. Which of the following entries would be required to
record this transaction?
A.
B.
C.
D.
Indicate whether each of the following statements is true or false.
_____ a) A benefit of making credit card sales is that there is no cost to the merchant.
_____ b) A benefit of accepting credit cards is that increased sales may be generated.
_____ c) Recording a credit card sale increases total assets and increases total
liabilities.
_____ d) Recording the collection of cash from the credit card company increases cash
and increases revenue.
_____ e) The income statement is not affected at the time the cash receipt is recorded.
Indicate whether each of the following statements regarding effective interest
amortization is true or false.
_____ a) The effective interest method of bond premium amortization matches interest
expense with the declining carrying value of the bond.
_____ b) Interest expense on a bond issued at a discount will be lower in the bond’s first
year than if the company had used straight-line amortization.
_____ c) The carrying value of a bond issued at a premium will decrease by smaller and
smaller amounts each year.
_____ d) Interest expense is calculated by multiplying the beginning carrying value of
the bond by the stated rate of interest.
_____ e) Effective interest amortization can only be used on bonds that pay interest
annually.
The following balance sheet information is provided for Kingsport Company:
The company’s current ratio is closest to:
A.0.4
B.1.4
C.1.1
D.2.3
The following are the income statements of the Hancock Company for two consecutive
years. Increases in which expenses contributed to the net loss in 2016?
A.Cost of goods sold and selling expenses
B.Selling expenses and administrative expenses
C.Cost of goods sold and administrative expenses
D.Administrative expenses
Company A and Company B are similar retailing businesses. A uses FIFO, and B uses
LIFO. In a period of rising prices, B should have a lower inventory turnover than A.
Net income divided by sales is the formula for which of these analytical measures?
A. Earnings per share
B. Return on equity
C. Net margin
D. Return on assets
Farmer Company purchased equipment on January 1, 2015 for $82,000. The machines
are estimated to have a 5-year life and a salvage value of $4,000. The company uses the
straight-line depreciation method.
At the beginning of 2018, Furst revised the expected life to eight years. The annual
amount of depreciation expense for each of the remaining years would be:
A.$6,240.
B.$4,400.
C.$7,040.
D.$3,900.
Which of the following is not a common restrictive covenant included in bond
indentures to reduce risk to the investor?
A.Maintenance of designated thresholds measured by financial ratios
B.Restrictions on future borrowing activities
C.Requirements that the names and addresses of the bondholders be registered with the
bond issuer
D.Limitations on the payment of dividends
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 amount of interest expense shown on Jones’s December 31, 2016 income statement
would be:
A.$16,200.
B.$21,000.
C.$15,000.
D.$13,800.
Under the indirect method, which of the following items would be added to net income
to determine the cash flow from operating activities?
A.Gain on the sale of equipment.
B.Depreciation expense.
C.Accrued interest receivable.
D.Decrease in the balance of accounts payable.
The Spokane Company called in bonds at a price that was above the carrying value of
the bond liability. Which of the following choices accurately reflects how this event will
affect Spokane’s financial statements?
A.
B.
C.
D.
Which of the following transactions is a use of cash?
A.Short-term borrowing of cash.
B.Acquisition of land by issuing a short-term note payable.
C.Issuance of a stock dividend.
D.Purchase of treasury stock.
A mortgage issued in exchange for a building would be reported on the statement of
cash flows in the
A.financing activity section.
B.investing activity section.
C.operating activity section.
D.noncash financing and investing section.
Reynolds Company experienced an accounting event that affected its financial
statements as indicated below:
Which of the following accounting events could have caused these effects on Reynolds’
statements?
A.Paid a cash dividend.
B.Earned cash revenue.
C.Borrowed money from a bank.
D.The information provided does not represent a completed event.
The following partial balance sheet is provided for Trenton Company:
The company’s debt to assets ratio is closest to:
A.54%
B.35%
C.67%
D.None of these answer choices are correct.
Consider the following independent scenarios:
a) At January 1, 2016, accounts receivable was $24,000. Cash collected on accounts
receivable during 2016 was $55,000. At December 31, 2016, accounts receivable was
$30,000.
What were the revenues earned on account during 2016?
b) At January 1, 2016, accounts payable was $19,000. During 2016, expenses on
account were $68,000. At December 31, 2016, accounts payable was $15,000.
What was the amount of cash paid on accounts payable during 2016?
c) At January 1, 2016, the balance in the prepaid insurance account was $480. On
March 1, 2016, the company paid $3,000 for insurance coverage for the next 12
months. What was the amount of insurance expense for 2016?
d) At January 1, 2016, the balance in the supplies account was $550. At December 31,
2016, the company counted $400 of supplies on hand. The company reported supplies
expense in 2016 of $3,300. What was the total of supplies purchases during 2016?
You are considering an investment in Freedom Airlines stock and wish to assess the
firm’s earnings performance. All of the following ratios can be used to assess
profitability except:
A.Net margin.
B.Average days to collect receivables.
C.Return on investment.
D.Asset turnover.
The following events apply to Deb’s Dance Wholesalers.
1) Sold merchandise to a customer. The goods were shipped FOB destination, with a
freight cost of $50.
2) Purchased merchandise with freight cost of $75, shipped with the terms FOB
shipping point.
3) Sold merchandise to a customer with freight cost of $40, shipped FOB shipping
point.
Required: a) Based on the above events, what is the total amount of freight that will be
paid by Deb’s Dance Wholesalers?
b) How much of the freight cost will be recorded as an expense when incurred?
A company using the perpetual inventory method paid cash for a transportation-in cost.
Which of the following choices reflects the effects of this event on the financial
statements?
A.
B.
C.
D.
Chester Company has established internal control policies and procedures in order to
achieve the following objectives:
1) Effective evaluation of management performance.
2) Assure that the accounting records contain reliable information.
3) Safeguard the company’s assets.
4) Assure that employees comply with company policy.
Which of these objectives are achieved by accounting controls?
A.Objectives 1 and 2
B.Objectives 2 and 3
C.Objectives 3 and 4
D.All four objectives
Williams Company issued $200,000 of callable bonds at face value on January 1, 2016.
The bonds carried a 2% call premium. If Williams calls the bonds, this event would
A.decrease equity by $4,000.
B.decrease liabilities by $200,000.
C.decrease assets by $204,000.
D.all of these answer choices are correct.
The following information is taken from the balance sheet of Atlanta Company:
Atlanta Company’s current ratio is:
A.2.5 to 1
B.1.6 to 1
C.1.76 to 1
D..66 to 1
Which of the following general journal entries shows the proper recording of an
impairment loss of $15,000 for goodwill?
A.
B.
C.
D.
Receivables are normally reported on the balance sheet at net realizable value. In
contrast, payables are carried at face value. Which accounting principle requires this
treatment of payables?
A.Materiality concept.
B.Monetary unit assumption.
C.Going concern assumption.
D.Matching concept.
Alabama Company purchased a machine on January 1, 2016 for $26,000 cash. The
machine has an estimated useful life of 4 years and a $6,000 salvage value. What would
be the book (carrying) value of the machine reported on Alabama’s December 31, 2016
balance sheet?
A.$26,000
B.$19,500
C.$21,000
D. $15,000
Indicate whether each of the following statements about financial statement analysis is
true or false.
_____ a) Ratio analysis may involve studying relationships between an item reported
on the balance sheet and another reported on the income statement.
_____ b) Comparing sales in 2015 with sales for 2014 is a form of horizontal analysis.
_____ c) Comparing net income in 2015 with sales for 2015 is a form of vertical
analysis.
_____ d) Liquidity ratios measure a company’s ability to generate profits in the short
term.
_____ e) Working capital is calculated by using the following formula: quick assets –
current liabilities.
Short-term creditors are usually most interested in assessing:
A. Liquidity.
B. Solvency.
C. Managerial effectiveness
D. Profitability.
Marvin Corp. issued $500,000 of 8%, 10 year bonds for 98 on January 1, 2016. Interest
is payable annually on December 31.
Required: Assuming that Marvin uses the straight-line method for amortization of
premium or discount on bonds payable,
a) Prepare the journal entry to record the issuance of the bond.
b) Prepare the required journal entry on December 31, 2016.
c) Prepare the liabilities section of the December 31, 2016 balance sheet.
d) What amount of interest expense will be shown on the 2016 income statement?
e) Prepare the operating activities section of the 2016 statement of cash flows.
Working capital is defined as:
A.Total assets minus total liabilities.
B.Current assets minus current liabilities.
C.Current assets divided by current liabilities.
D.Current liabilities divided by total liabilities.
Chubb Company paid cash to purchase equipment on January 1, 2016. Select the
answer that shows how the recognition of depreciation expense in 2017 would affect
assets, liabilities, equity, net income, and cash flow (+ means increase, – decrease, and
NA not affected).
A.
B.
C.
D.
Weller Company issued bonds with a face value of $400,000, a 10% stated rate of
interest, and a 10-year term. The bonds were issued on January 1, 2016, and Weller uses
the effective interest method of amortization. The market rate of interest on the date of
issue was 8%. Interest is paid annually on December 31.
Assuming Weller issued the bond for $431,940, the amount of interest expense
appearing on the 2018 income statement would be:
A.$33,649.
B.$20,000.
C.$34,120.
D.$46,350.
Explain the effects of an understatement of ending inventory on both the present year’s
net income and the following year’s net income. What is the effect of this error on the
inventory balance at the end of the following year?
Deale Corporation and Winkler Company are in different industries. Deale’s current
ratio is 1.89, while Winkler’s current ratio is 1.65. Therefore, is it safe to conclude that
Deale’s liquidity position is better than that of Winkler?
If a business chooses to use the straight-line method for tax purposes, how will this
affect income tax in the first year of an asset’s life, compared to MACRS?
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, Morris Co. issued $100,000 of bonds at the face value. Indicate the
effects of issuing these bonds.
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.
Charles Company recorded accrued vacation pay.
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.
Charles Company submitted payment for withheld state and federal employment taxes.
Greenwood Company issued 150 $1,000, 6% bonds that mature in ten years. Interest is
paid annually. The bonds were sold at 103 , and Greenwood amortizes bond discounts
and premiums using the straight-line method.
Calculate the amount of annual interest expense for Greenwood Co.
The Prince Company had its entire inventory destroyed when a tornado destroyed the
company’s warehouse on April 30, 2016. The following information for the period up to
the date of the tornado was taken from the accounting records
How is the number of days to collect accounts receivable computed? What information
does this ratio provide?
Why would some bonds be classified as “secured bonds”? Provide an example of a
common type of secured bond.
Jack Grimes is hired by Furst Associates at a salary of $4,000 per month. He is shocked
when his first monthly paycheck is only $3,150. Explain to Jack some of the factors that
may have contributed to the difference.
For internal control purposes, what is meant by “separation of duties?”
Define the terms FIFO and LIFO.
Explain the meaning of “internal control” and distinguish between administrative
controls and accounting controls.
What is the “fraud triangle”?
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.
On October 1, 2015, Kramer Co. issued a one-year discount note with a face value of
$100,000 and interest of 6% to the North Star Bank and received cash in the amount of
$94,000.
Young Company reported the following balance sheet for the end of 2015:
During 2016, Young reported the following transactions:
– Repaid $9,000 to a local bank on a note payable
– Provided services to clients for $27,400 cash
– Paid operating expenses of $20,200
– Paid $4,500 cash dividends to stockholders
Required:
Prepare Young Company’s balance sheet as of December 31, 2016.
Discuss a few of the characteristics of sole proprietorships, partnerships and
corporations.