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. The amount of the
payment for 2016 that is reduction of principal is $3,587.
An adjusting entry that decreases unearned revenue and increases service revenue is a
claims exchange transaction.
The income statement is not affected by a purchase of merchandise.
A trial balance can only be prepared at the end of the fiscal year, as part of the adjusting
and closing processes.
A banker may perform a financial ratio analysis to assess a firm’s ability to repay debt
in a timely manner.
Investing activities on the statement of cash flows always involve long-term assets,
including investments.
Retained earnings reduces a company’s commitment to use its assets for the benefit of
its stockholders.
While horizontal analysis examines one item over many time periods, vertical analysis
examines many items in the same interval of time.
For a company that uses a perpetual inventory system, a physical count of the inventory
can reveal the amount of inventory shrinkage the company has experienced.
A discount merchandiser is likely to have a higher inventory turnover than more upscale
stores with higher merchandise prices.
Title search and document costs incurred to purchase a building are expensed in the
period the building is acquired.
The times interest earned ratio is usually calculated as the ratio of net income to interest
expense.
On the statement of cash flows, cash receipts from interest and dividends are classified
as investing activities.
In a closely held corporation, exchanges of stock are limited to transactions between
individuals.
Most companies report receivables on their balance sheets at the net realizable value.
Willis Company had $200,000 in credit sales for 2016, and it estimated that 2% of the
credit sales would not be collected. The balance in Accounts Receivable at the end of
the year was $38,000. Willis had never used the allowance method to account for its
receivables till 2016. The net realizable value of its accounts receivable at the end of the
year was $34,000.
The year for which companies prepare their financial statements is their fiscal year.
The amount of increase in accounts receivable is added to credit sales to calculate the
amount of cash inflow from customers when using the direct method to prepare the
operating activities section of the statement of cash flows.
When depreciation is recorded on equipment, Depreciation Expense is debited and
Equipment is credited.
Accrual-basis accounting often fails to match expenses with revenues.
With a periodic inventory system, inventory purchases are recorded in the Purchases
account at the time of purchase.
The direct method of preparing the operating activities section of the statement of cash
flows shows increases and decreases in noncash current assets and current liabilities to
arrive at cash flows from operating activities.
A company’s amount of cost of goods sold reported on the income statement will be the
same with a periodic inventory system as it would be with a perpetual system.
The tax deductibility of interest expense on bonds makes the effective cost of
borrowing less than the amount of cash paid for interest.
The current ratio is calculated as total current assets divided by total assets.
The three primary asset use transactions are incurring expenses, accruing liabilities, and
paying dividends.
Even a good system of internal controls can be overridden by collusion among
employees.
Chadwick Company’s sales for 2016 were $8,700,000. Its accounts receivable were
$801,000 at the end of the year. During 2016, Chadwick collected $8,400,000 on its
accounts receivable. The accounts receivable turnover ratio for the year was 10.5.
A high price-earnings ratio generally means that investors are optimistic about a
company’s future growth.
After journal entries have been made related to a bank reconciliation, the book balance
will be equal to the true cash balance.
The effective interest rate method of amortizing bond premium or discount results in a
constant amount of interest expense every period.
Goodloe Corporation’s credit sales for 2016 were $500,000, and the balance in its
accounts receivable increased by $26,000 during the year. In 2016, Goodloe collected
$526,000 in cash from its customers.
If a company is located in an area where floods or earthquakes are deemed to be
possible, the company should record a contingent liability.
The stockholders of a business have a priority claim to its assets in the event of
liquidation.
In a period of rising prices, use of the FIFO cost flow method would cause a company
to pay more income taxes than would use of LIFO.
Closing entries move all the yearly data for revenues, expenses, and dividends into the
Retained Earnings account.
The adjusting entry to recognize uncollectible accounts expense is an asset use
transaction.
Singleton Company’s perpetual inventory records included the following information:
If Singleton uses the LIFO cost flow method, its ending inventory would be $1,260.
The types of resources needed by a business are financial, physical, and labor resources.
The stock market crash in 1929 led to the beginning of extensive regulation of
corporations.
The amount of accounts receivable that is actually expected to be collected is known as:
A.Allowance for doubtful accounts.
B.Uncollectible accounts expense.
C.The present value of accounts receivable.
D.Net realizable value.
What is one effect of the following general journal entry?
A.Reduces liabilities
B.Increases Retained Earnings
C.Reduces assets
D.Reduces equity
Two ratios that provide insight on the relationship between credit sales and receivables
are:
A. Current ratio and inventory turnover ratio.
B. Accounts receivable turnover and current ratio.
C. Average days to collect receivables and asset turnover.
D. Accounts receivable turnover and average days to collect receivables.
The only difference between the direct and indirect methods of preparing the statement
of cash flows is the manner in which the
A.cash flows from operating activities is presented.
B.cash flows from investing activities is presented.
C.cash flows from financing activities is presented.
D.the schedule of noncash items is presented.
The following account balances prior to closing entries were taken from the records of
Kendall Company:
After closing entries at December 31, 2016, Retained Earnings will be:
A.$19,900.
B.$7,400.
C.$2,900.
D.$24,400.
On January 1, 2016, the Colgate Corporation decided to switch from the direct method
to the indirect method of preparing the statement of cash flows. Assuming a positive net
income figure but a decrease in the cash balance, what can be said about the change in
method of preparing the statement?
A.The direct method will yield a larger amount for cash flows from operating activities.
B.The only difference will be in the cash flows from financing activities section.
C.The indirect method will yield a larger amount for cash flows from operating
activities.
D.There will be no difference in the totals on the statement of cash flows.
Which of the following is an asset exchange transaction?
A.Issued common stock.
B.Accrued salary expense at the end of the accounting period.
C.Collected cash on accounts receivable.
D.Recognized revenue earned on a contract where the cash had been collected at an
earlier date.
Issuing a note payable is a(n)
A.claims exchange transaction.
B.asset source transaction.
C.asset use transaction.
D.asset exchange transaction.
Indicate whether each of the following statements about liabilities is true or false.
_______ a) A net loss on the income statement decreases liabilities.
_______ b) The acquisition of a bank loan increases both assets and liabilities.
_______ c) The accounting equation requires that liabilities be equal to equity.
_______ d) The amount of a company’s liabilities is equal to (assets – equity).
_______ e) Liabilities are reported on the statement of cash flows of a business.
A machine with a book value of $38,000 is sold for $32,000. Which of the following
answers would accurately represent the effects of the sale on the financial statements?
A.
B.
C.
D.
Iona Corporation’s ending inventory as of December 31, 2015, was overstated by
$28,000. Indicate whether each of the following statements relating to the above error is
true or false.
_____ a) Cost of goods sold is overstated in 2015 by $28,000.
_____ b) Net Income is overstated in 2015 by $14,000.
_____ c) Retained Earnings at December 31, 2015 is overstated by $28,000.
_____ d) Beginning inventory will be understated in 2016 by $28,000.
_____ e) Retained Earnings will not be affected by this error at the end of 2016.
All of the following are considered to be measures of a company’s short-term
debt-paying ability except:
A.Current ratio.
B.Earnings per share.
C.Inventory turnover.
D.Average collection period.
When using the indirect method to prepare the statement of cash flows, a decrease in
current liabilities is:
A.subtracted from current liabilities in the cash flows from financing activities section.
B.subtracted from current assets in the cash flows from financing activities section.
C.added to net income in the cash flows from operating activities section.
D.added to inventory purchases in the cash flows from investing activities section.
The bank statement for Tetra Company contained the following items: a bank service
charge of $10; a credit memo for interest earned, $15; and a $50 NSF check from a
customer. The company had outstanding checks of $100 and a deposit in transit of
$300.
The entry to record the customer’s NSF check will:
A.increase the Accounts Receivable balance.
B.decrease the Cash account.
C.decrease equity.
D.increase the Accounts Receivable balance and decrease the Cash account balance.
Rushmore Company provided services for $45,000 cash during the 2016 accounting
period. Rushmore incurred $36,000 expenses on account during 2016, and by the end of
the year, $9,000 of that amount had been paid with cash. Assuming that these are the
only accounting events that affected Rushmore during 2016,
A.The amount of net loss shown on the income statement is $9,000.
B.The amount of net income shown on the income statement is $27,000.
C.The amount of net income shown on the income statement is $9,000.
D.The amount of net cash flow from operating activities shown on the statement of cash
flows is $18,000.
Which of the following would be considered as primarily a merchandising business?
A.West Consulting
B.Martin’s Supermarket
C.Sandridge and Associates Law Offices
D.KPM Accounting and Tax Service
Fred and Barney started a partnership. Fred invested $20,000 in the business and
Barney invested $32,000. The partnership agreement stipulated that profits would be
divided as follows: Each partner would receive a 15% return on invested capital with
the remaining income being distributed equally between the two partners. Assuming
that the partnership earned $38,000 during an accounting period, the amount of income
assigned to the two partners would be:
A.
B.
C.
D.
Vailes Company reissued 200 shares of its treasury stock. The treasury stock originally
cost $25 per share and was reissued for $35 per share. Select the answer that accurately
reflects how the reissue of the treasury stock would affect Vailes’s financial statements.
A.
B.
C.
D.
The 2016 income statement of Gregg Co. reported wages expense of $160,000; the
2015 balance sheet showed a balance in wages payable of $16,000, while the 2016
balance sheet included wages payable of $22,000. What amount of cash was paid for
wages in 2016?
A.$176,000.
B.$160,000.
C.$154,000.
D.$144,000.
Jing Company was started on January 1, 2016 when it issued common stock for
$50,000 cash. Also, on January 1, 2016 the company purchased office equipment that
cost $34,000 cash. The equipment was delivered under terms FOB shipping point, and
transportation cost was $2,000. The equipment had a five-year useful life and a $12,000
expected salvage value.
Assume that Jing Company earned $30,000 cash revenue and incurred $19,000 in cash
expenses in 2018. Using straight-line depreciation and assuming that the office
equipment was sold on December 31, 2018 for $16,000, the amount of net income or
(loss) appearing on the December 31, 2018 income statement would be:
A.($6,600).
B.$6,600.
C.$600.
D.$5,400.
Erie Company reports the following comparative balance sheets and income statement
information.
Assuming accounts payable is used for inventory purchases only, the amount of cash
paid for inventory purchases during 2016 was:
A.$32,000.
B.$176,000.
C.$192,000.
D.$160,000.
The accountant for Ye Olde Bookstore balanced out the cash register for the day. The
register indicates $1,031.50 in sales, the change fund at the beginning of the day was
$125 and the actual cash in the register is $1,150.25 (including the change fund,
previously accounted for). What is the effect on the financial statements of the entry to
record the day’s sales and any related overage or shortage?
A.
B.
C.
D.
Frank Company earned $15,000 of cash revenue. Which of the following choices
accurately reflects how this event affects the company’s financial statements?
A.
B.
C.
D.
Which of the following general journal entries would be used to recognize $7,500 of
uncollectible accounts expense under the direct write-off method?
A.
B.
C.
D.
Which of the following items appears in the investing activities section of the statement
of cash flows?
A.Cash inflow from interest revenue.
B.Cash inflow from the issuance of common stock.
C.Cash outflow for the payment of dividends.
D.Cash outflow for the purchase of land.
Which of the following items would be least likely to appear in the current liabilities
section of a classified balance sheet?
A.Interest Payable.
B.Wages Payable.
C.Accounts Payable.
D.Bonds Payable.
The following information applies to Mendez Company:
Additional information: Net credit sales = $460,000; beginning accounts receivable =
$21,000.
Required: Compute Mendez’s
(a) Quick ratio
(b) Current ratio
(c) Working capital
(d) Accounts receivable turnover
(e) Average days to collect receivables
The term “FOB Destination” means
A.The seller pays the shipping cost.
B.The seller records transportation-out expense.
C.The buyer pays the shipping cost.
D.The seller pays the shipping cost and records transportation-out expense.
Wheaton Co. performed services for a customer on account. Indicate whether each of
the following statements about this transaction is true or false.
_____ a) Assets and equity both increase when the revenue is recognized.
_____ b) This transaction did not affect cash flows.
_____ c) The company recorded an increase in revenue and a decrease in accounts
receivable.
_____ d) Recognition of revenue would be delayed until cash was received.
_____ e) This transaction is an example of an asset exchange transaction.
Warren Company began the accounting period with a $32,000 debit balance in its
accounts receivable account. During the accounting period, the company recorded
revenue on account amounting to $88,000. The accounts receivable account at the end
of the accounting period contained a $16,000 debit balance. Based on this information,
the cash collected from accounts receivable during the period is
A.$104,000
B.$40,000
C.$72,000
D.$84,000
What is the issue price of $200,000 in bonds that sell at 95.5?
The 2016 income statements for the Alpha Company and the Omega Company appear
below:
Required:
1) Prepare common size income statements for the Alpha Company and the Omega
Company.
2) What is the gross margin percentage for each company?
3) What is the net income percentage for each company?
4) Briefly comment on the pricing policies of each company as well as the ability to
control expenses. Disregarding the difference in size, which company appears to be
doing a better job?
Discuss a few common reasons for increases in the market price of a corporation’s
common stock.
The following information is for Lattimer Company for 2016:
As of May 31, 2016, the bank statement of Xi Company showed an ending balance of
$8,632.52. The following information was available:
Required: Compute Xi’s true cash balance at May 31, 2016.
What is the name of the tax rule that requires six months of depreciation expense to be
taken in the year of purchase of the asset and the year of disposal regardless of the
purchase date?
Why would cash sales companies, such as Wendy’s, Domino’s, and Krispy Kreme have
accounts receivables on their 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. You do not need to
enter amounts. Enter only one letter for each element.
Ping Company made its remittance to the state sales tax authority.
What is meant by the net realizable value for accounts receivable?
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 of Heath Company, an employee found that the
company had deposits in transit of $2,200.
What is meant by “double taxation?” Which type of organizational form is more likely
to be subject to double taxation?
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.
Gulfshore Oil Company recognized $2,000,000 of depletion expense related to an oil
reserve. How does this entry affect Gulfshore’s 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. You do not need to
enter amounts. Assume that Frank Company uses a perpetual inventory system.
A customer returned goods to Whetzel Co. that had been purchased for $60 on account.
The goods had originally cost Whetzel $35. Frank credited the customer’s account for
the return.
Why does interest expense decrease during the life of an installment note payable? How
is the amount of interest expense computed?
What is aging of accounts receivable, and how is it used to account for uncollectible
accounts?
Does the amortization of a bond premium increase, decrease, or not affect interest
expense for an accounting period? Explain.
When is revenue recognized under accrual accounting?