The equity method of accounting for an investment is used when a company purchases
a. More than 20% of the debt securities of a second company.
b. 100% of the debt securities of a second company.
c. 15% of the equity securities of a second company.
d. More than 20% of the equity securities of a second company.
The accounts receivable turnover ratio is used to evaluate how well a company does in
collecting its accounts receivable.
a. True
b. False
When revenue is earned before the receipt of cash, an adjustment that increases a
receivable and decreases a liability account is recorded.
a. True
b. False
The direct write-off method estimates the amount of bad debts before they occur.
a. True
b. False
Liquidity relates to a company’s ability to do which of the following?
a. The ability to pay its financial obligations as they become due
b. The ability to stay in business over the long run
c. The ability to pay dividends to its stockholders
d. The ability to collect the amount their customers owe the company
Match the inventory-related accounts to costs that may be included in inventories for
retailers and manufacturers.
a. Merchandise Inventory
b. Raw Materials
c. Work in Process
d. Finished Goods
e. Cost of Goods Sold
Costs of direct materials, overhead, and direct labor used in unfinished goods.
Several transactions are listed below, with the accounting equation stated to the right
side of each. Use the following identification codes to indicate the effects of each
transaction on the accounting equation. Write your answers in the space provided under
the accounting equation. You need an identification code for each element of the
accounting equation. An example is given before the first transaction.
I-Increase D-Decrease NE-No Effect
Assets = Liabilities + Owners’ Equity
Example Common stock is issued to investors in the company I
NE
I
A) Cash sales are made.B)
Equipment is purchased on credit
C) Payment is made for the equipment purchased on credit
D) Sales are made on account.
_______
_________
_____________
E) Cash is collected from customers for accounts receivable balances.
_____________________________
F) Dividends are declared and paid to stockholders.
_______
_________
_____________
G) Land and a building are acquired in exchange for shares of the company’s common
stock._______
_________
_____________
H) Utility bills are received and recorded; payment will be made later.
_____________________________
Depreciation is a process by which
a. replacement funds are accumulated for plant and equipment.
b. the decline in market value of plant and equipment is determined and recorded.
c. the cost of plant and equipment is allocated to expense over the time periods which
benefit from the use of the asset.
d. the difference between current market value and historical cost of plant and
equipment.
An example of a cash flow related to a liability that would not appear in the financing
activities category of the statement of cash flows is
a. mortgage payable.
b. bonds payable.
c. deferred income taxes.
d. a lease obligation.
Bonds are sold at a premium if the
a. issuing company has a better reputation than other companies in the same business.
b. market rate of interest was less than the face rate at the time of issue.
c. market rate of interest was more than the face rate at the time of issue.
d. company will have to pay a premium to retire the bonds.