The operating cycle is the length of time that a company spends acquiring inventory to
sell.
Merchandising businesses include retail companies and manufacturing companies.
After closing, all income statement accounts have non-zero balances.
The debt to equity ratio can be used to assess a firm’s solvency.
If bonds are issued at a premium, the bond issuer will pay the bondholders an amount
lower than the issue price at maturity.
The effective rate of interest for a particular bond issue is the market rate of interest for
other investments with similar levels of risk.
Park Enterprises issued bonds with a term of 5 years and a face value of $500,000,
receiving cash of $508,000. The bonds pay interest once a year, with an annual rate of
7%. Assuming straight-line amortization, the amount of interest expense for the first
year would be $31,600.
The historical cost concept requires that most assets be recorded at the amount paid for
them, regardless of increases in market value.
The adjusting entry to recognize uncollectible accounts expense does not affect the net
realizable value of receivables.
When a customer’s account, previously written off as uncollectible, is reinstated, the net
realizable value of Accounts Receivable increases.
The current ratio is a measure of a company’s liquidity.
When calculating interest expense on a 6-month note, multiply the principal by the
interest rate, and then multiply by 6/12.
The percent of revenue method for estimating uncollectible accounts expense is
considered superior to the percent of receivables method because it is more
conservative.
A company with a high current ratio should be concerned that it is not maximizing its
earnings potential.
Davis Corporation borrowed $50,000 on January 1, 2016. The loan is for a ten-year
period and has an annual interest rate of 9%. At the end of each year, Davis will make a
payment of $7,791, which includes both principal and interest. With this loan, the
amount of interest expense that Davis reports on its income statement will be the same
for each year of the loan.
Treasury Stock is reported on the balance sheet between liabilities and equity.
Most companies strive to receive an unqualified audit opinion.
A purchase of treasury stock is an asset use transaction.
In choosing a depreciation method for financial reporting, a company should use the
method that most closely approximates the amount of depreciation on the tax return.
Sales discounts do not affect a company’s gross margin percentage.
The final or bottom line on the statement of cash flows is the net increase or decrease in
cash for the period.
Powell Corporation had $10 par stock with a market price of $60, when it declared a
2-for-1 stock split. After the stock split, the number of shares outstanding will double,
and the market price of the stock should drop to about $30.
Financial accounting information is usually less detailed than managerial accounting
information.
For a petty cash fund to be most useful to a business, one of the employees of the
business should be designated as responsible for the fund.
Generally accepted accounting principles would allow a company to use FIFO for part
of its inventory and the weighted-average cost flow assumption for the rest of its
inventory.
Financial ratio analysis is a form of horizontal analysis in that comparisons are made
between different accounts in the same set of financial statements.
When using the modified accelerated cost recovery system (MACRS) the highest
amount of depreciation expense will be recognized in the year the asset is acquired.
Late in a plant asset’s useful life, the amount of depreciation that would be recorded
with the double-declining balance method is less than the amount that would be
recognized with straight-line depreciation.
On October 1, 2015, Harrison Company borrowed money by issuing a $24,000 face
value discount note to its bank. The note had an 8% discount rate and had a term of 1
year. On that date, Harrison recorded a Discount on Notes Payable in the amount of
$1,920.
The current ratio is one of the most common measures of liquidity.
A vertical analysis uses percentages to compare each of the parts of an individual
statement to the whole. For example, on an income statement each item would be
shown as a percentage of net sales.
A credit balance in Cash Short and Over represents a shortage of cash and would be
treated as an expense.
Larsen Company began 2016 with balances in accounts receivable and allowance for
doubtful accounts of $45,700 and $1,280, respectively. The company reported credit
sales of $475,250 during the year, collected $480,200, and wrote off $800 of
uncollectible accounts. Larsen Company estimates that 12% of its accounts receivable
balance will be uncollectible.
Required:
a) Calculate Larsen Company’s uncollectible accounts expense for 2016.
b) What will Larsen report as its allowance for doubtful accounts on December 31,
2016?
c) Calculate Larsen’s net realizable value of accounts receivable on December 31, 2016.
Chico Company borrowed $40,000 on a four-year, 8% installment note. Chico will
record the issuance of this note with the following entry:
A.
B.
C.
D.
Grimes Corporation reports the following cash transactions for the year ending
December 31, 2015, its first year of operation:
1) Issued common stock for $35,000
2) Borrowed $25,000 from a local bank
3) Purchased land for $40,000
4) Provided services to clients for $38,000
5) Paid operating expenses of $30,500
6) Paid $2,000 cash dividends to stockholders
Required:
a) What are the total assets for Grimes Corporation at December 31, 2015?
b) Prepare an income statement for 2015.Precede the amount with a minus sign if the
transaction reduces that section of the income statement.
On January 1, 2016 the Mahoney Company borrowed $324,000 cash from Sun Bank by
issuing a five-year 8% term note. The principal and interest are repaid by making
annual payments beginning on December 31, 2016. The annual payment on the loan
based on the present value of annuity factor would be $81,150.
The amount of principal repayment included in the December 31, 2016 payment is:
A.$25,920.
B.$81,150.
C.$74,658.
D.$55,230.
On January 2, 2016, Torres Corporation issued 20,000 shares of $10 par-value common
stock for $11 per share. Which of the following statements is true?
A.The Common Stock account will increase by $220,000.
B.The Cash account will increase by $200,000.
C.Total equity will increase by $200,000.
D.The Paid-in Capital in Excess of Par Value account will increase by $20,000.
Indicate whether each of the following statements is true or false.
_____ a) EBIT stands for earnings before income taxes.
_____ b) EBIT is used in the computation of the return-on-assets ratio.
_____ c) A low times-interest-earned ratio is a sign of a high-risk company.
_____ d) Dividends are deductible in the determination of taxable income.
_____ e) Interest is deducted on the income statement but is ignored on the tax return.
During 2016, Oklahoma Trucking Co. had service revenue on account of $350,000.
Oklahoma had a balance in the Accounts Receivable account of $35,000 at the
beginning of the year and a year-end balance of $42,500. During the year Oklahoma
wrote-off $8,750 of worthless receivables. Oklahoma uses the direct write-off method
for uncollectible accounts.
a) Prepare the journal entry for Oklahoma’s revenue for 2016.
b) Prepare the journal entry to record the write-off of the receivables.
c) What amount of cash did Oklahoma collect from customers during 2016?
The Monticello Company reported gross sales of $800,000, sales returns and
allowances of $5,000 and sales discounts of $10,000. The company has total average
assets of $500,000, of which $250,000 is property, plant, and equipment. What is the
company’s asset turnover ratio?
A.3,14 times
B.1.57 times
C.1.60 times
D.0.64 times
Which of the following financial statement elements is closed at the end of an
accounting cycle?
A.Dividends
B.Common stock
C.Assets
D.Liabilities
A company using the perpetual inventory method paid cash for freight costs to purchase
merchandise. Which of the following answers reflects the effects of this event on the
financial statements?
A.
B.
C.
D.
What does the accounts receivable turnover ratio measure?
A.How quickly accounts receivable turn into cash.
B.How quickly the accounts receivable balance increases.
C.Average balance of accounts receivables.
D.How quickly inventory turns into accounts receivable.
Which of the following is not a significant difference between the allowance method
and the direct write-off method of accounting for uncollectible accounts?
A.One method requires writing off of uncollectible accounts and the other does not.
B.One method conforms to GAAP and the other typically does not.
C.One method reports net realizable value on the balance sheet and the other does not.
D.One method requires the estimation of uncollectible accounts and the other does not.
A cash purchase of land would appear in which of the following sections of the
statement of cash flows?
A.Cash outflow from financing activities.
B.Cash inflow and cash outflow in a separate schedule of noncash investing and
financing activities.
C.Cash outflow from investing activities.
D.Cash inflow from operating activities.
Tetra Company purchased 2,000 units of inventory that cost $4.00 each on January 1,
2016. An additional 3,000 units of inventory were purchased on January 12, 2016 at a
cost of $4.20 each. Tetra Company sold 4,000 units of inventory on January 20, 2016.
Which of the following entries would be required to recognize the cost of goods sold
assuming that Tetra Co. uses the perpetual inventory method and a FIFO cost flow
method?
A.
B.
C.
D.
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.
Which of the following answers correctly states the effect of Loudoun’s recording the
reestablishment of the receivable on April 4, 2016?
A.
B.
C.
D.
Blake Company purchased two identical inventory items. The item purchased first cost
$16.00, and the item purchased second cost $18.00. Blake sold one of the items for
$24.00. Which of the following statements is true?
A.Ending inventory will be lower if Blake uses weighted average than if FIFO were
used.
B.Cost of goods sold will be higher if Blake uses FIFO than if weighted average were
used.
C.The dollar amount assigned to ending inventory will be the same no matter which
cost flow method is used.
D.Gross margin will be higher if Blake uses LIFO than it would be if FIFO were used.
Seattle Company issued a $90,000 face value discount note payable to the First Federal
Bank on September 1, 2016. The note carried a one-year term and a 4% discount rate.
As a result of the recognition of interest expense on December 31, 2016,
A.liabilities will increase and retained earnings will decrease.
B.assets and liabilities will decrease.
C.assets will increase and retained earnings will increase.
D.liabilities will increase and assets will decrease.
Packard Company engaged in the following transactions during 2015, its first year in
operations: (Assume all transactions are cash transactions.)
1) Acquired $950 cash from the issue of common stock.
2) Borrowed $420 from a bank.
3) Earned $650 of revenues.
4) Paid expenses of $250.
5) Paid a $50 dividend.
During 2016, Packard engaged in the following transactions: (Assume all transactions
are cash transactions.)
1) Issued an additional $325 of common stock.
2) Repaid $220 of its debt to the bank.
3) Earned revenues of $750.
4) Incurred expenses of $360.
5) Paid dividends of $100.
The amount of total equity on Packard’s 2015 balance sheet is
A.$1,350.
B.$900.
C.$250.
D.$1,300.
Following the February bank reconciliation, the accountant made the following entry in
the journal of Kincaid Company:
This journal entry may have been used to record:
A.an NSF check received by Kincaid from a customer.
B.the collection of an account receivable by Kincaid that is part of a deposit in transit.
C.bank charges owed by Kincaid to the bank.
D.the collection of an account receivable by the bank that has been deposited in
Kincaid’s account.
Sheldon Company began 2016 with $1,200 in its supplies account. During the year, the
company purchased $3,400 of supplies on account. The company paid $3,000 on
accounts payable by year end. On December 31, 2016, Sheldon counted $1,400 of
supplies on hand. Sheldon’s financial statements for 2016 would show:
A.$1,600 of supplies; $200 of supplies expense
B.$1,400 of supplies; $2,000 of supplies expense
C.$1,400 of supplies; $3,200 of supplies expense
D.$1,600 of supplies; $3,400 of supplies expense
Monroe Minerals Company purchased a copper mine for $120,000,000. The mine was
expected to produce 50,000 tons of copper over its useful life. During 2016, the
company extracted 6,000 tons of copper. The copper was sold for $4,500 per ton.
Assume that the company incurred $8,040,000 in operating expenses during 2016.
Based on this information, how much net income would Monroe report in 2016?
A.$12,600,000.
B.$4,560,000.
C.$6,360,000.
D.$14,400,000.
Blumenthal Company received cash of $600,000 from issuing common stock. As a
result of this transaction, the company’s debt to equity ratio will:
A. Decrease.
B.Increase.
C.Remain the same.
D. Cannot be determined.
Which of the following represents effects of an asset use transaction on a company’s
financial statements?
A.
B.
C.
D.
Delta 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 Delta’s
statements?
A.Paid a cash dividend.
B.Incurred a cash expense.
C.Borrowed money from a bank.
D.Earned cash revenue.
Alaska Energy Corporation paid cash to acquire land to be used for oil production. The
costs incurred by Alaska Energy were the following:
Estimates were made that 3,885,000 gallons of crude oil can be extracted from the site
over the life of the asset.
Required: a) Prepare the journal entry(ies) to record the purchase of the oil field.
b) Given that Alaska Energy was able to extract
230,000 gallons in the first year,
675,000 gallons in the second year, and
554,000 gallons in the third year
Calculate the depletion charge for each year.
Victor Company issued bonds with a $250,000 face value and a 6% stated rate of
interest on January 1, 2016. The bonds carried a 5-year term and sold for 95. Victor uses
the straight-line method of amortization. Interest is payable on December 31 of each
year.
The amount of interest expense appearing on the December 31, 2018 income statement
would be:
A.$17,500.
B.$12,500.
C.$14,250.
D.$15,000.
Select the incorrect statement regarding the return on equity (ROE) measure.
A.ROE is used to measure the profitability of the firm in relation to the amount invested
by stockholders.
B.A company’s ROE is lower than its return on investment because ROE does not
consider that part of the business that is financed by debt.
C.ROE is affected by a company’s use of leverage.
D.ROE equals net income divided by total stockholders’ equity.
Which of the following entities would have the “Paid-in Capital in Excess” account in
the equity section of the balance sheet?
A.A corporation.
B.A municipality.
C.A sole proprietorship.
D.A partnership.
Anchor Company sold merchandise with a cost of $560 to a customer for $890 on
account. Due to an error, this sale was never recorded in the accounting records. What
effect will the failure to make the necessary entries have on the company’s accounting
equation?
A.Total assets and total equity will be overstated.
B.Total assets will be overstated and total equity will be understated.
C.Total assets and total equity will be understated.
D.The accounting equation will not be affected.
Three of the companies are high-end department stores such as Saks Fifth Avenue. One
company is a discount retailer similar to WalMart. Which company is most likely to be
the discount store?
A.Company A
B.Company B
C.Company C
D.Company D
A company that uses the allowance method to account for uncollectible accounts
A.Records Uncollectible Accounts Expense when a receivable is written off.
B.Does not record uncollectible accounts until the amount becomes significant.
C.Reports the net realizable value of its accounts receivable on the balance sheet.
D.None of these answer choices are correct.
Jessup Company was founded in 2015. It acquired $45,000 cash by issuing stock to
investors and an additional $15,000 cash by borrowing from creditors. During 2015 it
received $25,000 cash revenues and paid $32,000 in cash expenses. The company then
went out of business.
Required:
a) Explain the term, “business liquidation.”
b) What amount of cash should Jessup Company have had on hand immediately before
going out of business?
c) What amount of cash will Jessup’s creditors receive?
d) What amount of cash will Jessup’s stockholders receive?
When merchandise inventory is purchased on account, how is the accounting equation
affected? (Assume a perpetual inventory system is in use.)
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.
Cason Company recorded $2,000 of depreciation expense on a delivery van.
Michelle Edwards operates a small dress shop that sells various items of apparel and
accessories. She employs two clerks who make sales to customers, accept returns when
a customer is dissatisfied with merchandise, and put new merchandise on display. One
of the clerks, Kristen Scott, was hired recently. Michelle had always done all the
accounting for the store and had made bank deposits. However, Kristen has offered to
do the accounting for the store during slow periods when there are no customers in the
store; she also has begun making bank deposits as she leaves for the day. Having
Kristen take these responsibilities allows Michelle more time for acquiring merchandise
for the store and for personal errands. What potential risks for the success of Michelle’s
business are present in this situation?
How can cash flow from operating activities be greater than net income from
operations?
Indicate how accounting for lost and stolen merchandise differs between firms using a
perpetual inventory system and those using a periodic inventory system. Which system
provides the best way to account for such losses and why?
For each of the following transactions, indicate the type by entering AS for asset source
transactions, AU for asset use transactions, AE for asset exchange transactions, and CE
for claims exchange transactions.
1) ____Paid $2,000 in dividends to its stockholders.
2) ____Recorded the accrual of $1,000 in salaries to be paid later.
3) ____Issued common stock for $20,000 in cash.
4) ____Earned revenue to be collected next year.
5) ____Paid the salaries accrued in #2 above.
6) ____Received cash from customers in #4 above.
7) ____Purchased supplies on account.
8) ____Received $500 from a customer for services to be provided later.
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.
The Benitez Company purchased an asset for $50,000 on January 1, 2016. The asset
had a zero salvage value and an 8-year estimated useful life. On January 1, 2018, the
company spent $2,400 cash on routine repairs and maintenance. What effect will the
2018 expenditure have on the company’s financial statements?
On December 31, 2016, Ravenwood Company made an annual payment on a long-term
installment note payable. Show how this annual payment affected Ravenwood’s
financial statements.
Describe the difference between temporary and permanent accounts, and state which
ones are closed.
How is the carrying value of a discount note payable computed?
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. Assume that Frank Company uses a perpetual inventory system.
Whetzel Co. sold merchandise to a customer for $950 on account. Whetzel’s cost of the
merchandise was $600.
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.
The Baltimore Company acquired the Chesapeake Company for $650,000 cash.
Chesapeake’s assets had been appraised at $660,000. At the time of sale Chesapeake’s
accounting records showed total assets of $590,000, liabilities of $180,000 and equity
of $410,000. How would the purchase affect Baltimore’s financial statements?
Chastain Company’s current ratio for 2015 was 1.42, which was slightly above the
current ratio for similar companies in its industry. Chastain’s quick ratio for 2015 was
0.68, which is substantially lower than for similar companies in its industry. What
conclusion would you reach based on this information?
What effect does the recording of revenue normally have on total assets?