Chapter 1: Accounting as a Form of Communication
282. Which of the following events will cause a company’s current ratio to increase?
a. The collection of an account receivable.
b. Selling land for cash at a loss.
c. The discharge of an account payable by signing a short-term note payable.
d. Paying off a long–term loan.
283. 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.
Skyline, Inc.
The balance sheet of Skyline Inc. includes the following items:
Cash
$ 22,400
Accounts receivable
11,700
Inventory
23,300
Prepaid insurance
1,040
Land
80,000
Accounts payable
47,500
Salaries payable
1,200
Capital stock
84,040
Retained earnings
5,700
284. Read the information about Skyline, Inc. What is Skyline’s current ratio?
a. 0.8 to 1
b. 1.6 to 1
c. 1.2 to 1
d. 2.5 to 1
Chapter 1: Accounting as a Form of Communication
285. Read the information about Skyline, Inc. What is Skyline’s working capital?
a. $58,440
b. $89,740
c. $84,040
d. $9,740
286. Which of the following would appear on a multiple-step income statement but not on a single-step income
statement?
a. Net income
b. Total expenses
c. Total revenues
d. Income before income taxes
287. Which of the following would not appear on an income statement?
a. Sales revenue
b. Cost of goods sold
c. Accounts receivable
d. Insurance expense
288. Which statement is true concerning an income statement?
a. The income statement shows how much profit the company has earned since it began operations.
b. Net income on the income statement should be equal to the amount of cash on the balance sheet.
c. The income statement summarizes the results of operations for a period of time.
d. The income statement indicates the liquidity of the company on an annual basis.
289. Which statement is true concerning gains and losses?
a. Gains and losses are reported on the balance sheet in the Assets and Liabilities sections, respectively.
b. Gains and losses are special types of revenues and expenses that are reported on the income statement.
c. The amounts of gains and losses are included in the calculation of the current ratio, in the numerator and
denominator, respectively.
d. Gains and losses are reported only on a multi-step income statement.
Chapter 1: Accounting as a Form of Communication
290. Which one of the following subtotals or totals would appear in a multiple-step, but not a single-step income
statement?
a. Income tax expense
b. Income from operations
c. Cost of goods sold
d. Net income
291. What are the two subtotals that distinguish the multi-step income statement from the single-step income statement?
a. Income before taxes and income taxes
b. Total operating revenues and total operating expenses
c. Income from operations and income before taxes
d. Total revenues and total expenses
292. A question asked by stockholders is, “How much profit did the company make?” What should the stockholder
examine to get the most information that will help evaluate the answer to this question?
a. The balance sheet, because retained earnings represents current profits.
b. The statement of cash flows, as cash inflows and outflows represents current profits.
c. The income statement, since it shows the revenues and expenses for the period.
d. The economic resources of the company.
293. Under current accounting principles, how is net income on the income statement measured?
a. Net change in owners’ equity during the period.
b. Excess of revenues over expenses during the period.
c. Net change in the cash balance during the period.
d. Excess of revenues over expenses less any dividends paid during the period.
294. Which of the following statements is true regarding the multiple-step income statement?
a. The multiple-step income statement is used only by companies that sell products, not those that provide services.
b. The multiple-step income statement is helpful in determining a company’s working capital.
c. The multiple-step income statement reports the same net income as the single-step income statement.
d. The multiple-step income statement is required under generally accepted accounting principles.
Chapter 1: Accounting as a Form of Communication
295. How is income from operations determined?
a. By subtracting the cost of goods sold from sales.
b. By subtracting the total operating expenses from sales
c. By subtracting the total operating expenses from gross profit.
d. By subtracting selling expenses from operating revenues.
296. The following list contains several items that appear on an income statement.
1.
Other revenue and expenses
5.
Net Income
2.
Income before taxes
6.
Operating revenues
3.
Income taxes
7.
Income from operations
4.
Operating expenses
Select the choice that lists the items in the order they would appear on a multi-step income statement
a. 6, 1, 7, 4, 2, 3, 5
b. 7, 6, 1, 4, 2, 3, 5
c. 6, 4, 7, 1, 2, 3, 5
d. 6, 7, 4, 1, 2, 3, 5
Webb Company
Selected data from the accounting records of Webb Company are listed below:
General & administrative expenses
$2,200
$6,000
Selling expenses
1,800
600
Other revenues (expenses)
800
1,200
297. Read the information about Webb Company. What is Webb’s income from operations?
a. $ 1,600
b. $ 2,000
c. $ 2,200
d. $ 2,800
Chapter 1: Accounting as a Form of Communication
298. Read the information about Webb Company. What is Webb’s net income?
a. $ 1,600
b. $ 2,000
c. $ 2,200
d. $ 2,800
299. Read the information about Webb Company. By what amount will net income on a single-step income statement
differ from net income on a multi-step income statement if Webb Company prepares both formats?
a. $ 800
b. $ 600
c. $ 200
d. $ -0–
Deal Mart
The 2014 income statement of Deal Mart shows operating revenues of $130,800, selling expenses of $37,100,
general and administrative expenses of $34,900, interest expense of $900, and income tax expense of $11,430. Deal
Mart’s stockholders’ equity was $280,000 at the beginning of the year and $320,000 at the end of the year. The
company has 20,000 shares of stock outstanding at December 31, 2014.
300. Read the information about Deal Mart. What is Deal Mart’s net income?
a. $80,000
b. $92,190
c.$130,800
d. $46,470
301. Read the information about Deal Mart. What is Deal Mart’s profit margin (to the closest tenth of a percent)?
a. 2.8
b. 35.5
c. 61.2
d. 14.5
Chapter 1: Accounting as a Form of Communication
302. Forman, Inc. earned $600,000 profit during 2015. On which financial statement(s) will you find the dollar amount of
the profit earned by the company?
a. Balance sheet and income statement
b. Income statement only
c. Statement of retained earnings only
d. Income statement and statement of retained earnings
303. Grand Stores, Inc. is concerned about its profitability for the current year, since its profit margin has dropped 10%
since last year. Which of the following is the least useful comparison in evaluating the drop in Grand Stores’ profit
margin?
a. Comparison with the industry average for the current year.
b. Comparison with its current ratio for the current year
c. Comparison with the profit margins for its major competitors for the current year.
d. Comparison with its profit margins for the past five years.
304. Assume that you want to determine the profit margin for a company. Which one of the following
financial statements is the best source of this information?
a. Statement of retained earnings
b. Statement of cash flows
c. Statement of stockholders’ equity
d. Income statement
Hopper, Inc.
Use the information from Hopper Inc. to answer the following question(s).
2014
2013
Operating revenues
$1,900,000
$1,600,000
Operating expenses
1,400,000
1,100,000
Income taxes
200,000
200,000
305. Read the information about Hopper. Inc. Which statement best represents Hopper’s performance?
a. Hopper’s profit margin ratio decreased.
b. Hopper has become more profitable.
c. Hopper’s increase in operating revenues increased the company’s net income.
d. Hopper’s operating expenses as a percentage of operating revenues remained the same.
Chapter 1: Accounting as a Form of Communication
306. Read the information about Hopper, Inc. Which of the following statements is the best answer regarding the
company’s profit margin?
a. The profit margin was 15.8% in 2014.
b. The profit margin was 15.8% in 2013.
c. The profit margin was 31.5% in 2014.
d. The profit margin was 31.5% in 2013.
307. Read the information about Hopper, Inc. Which ratio are you able to calculate given only the information provided
by Hopper?
a. Profit margin
b. Current ratio
c. Working capital
d. Gross profit percentage
308. Which one of the following equations represents retained earnings activity?
a. Beginning balance + net income + dividends = profits for the year
b. Beginning balance + cash inflows – cash outflows = ending balance
c. Beginning balance + dividends – net income = ending balance
d. Beginning balance + net income – dividends = ending balance
Bartlett Industries
Bartlett Industries began operations on January 2, 2015, with an investment of $50,000 by each of its two
stockholders. Net income for its first year of business was $240,000. Bartlett Industries paid a total of $100,000 in
dividends to its stockholders during the year.
309. Read the information about Bartlett Industries. What is the company’s retained earnings balance at December 31,
2015?
a. $140,000
b. $190,000
c. $240,000
d. $340,000
Chapter 1: Accounting as a Form of Communication
310. Read the information about Bartlett Industries. If the company’s revenues were $500,000 for the year ended
December 31, 2015, how much were total expenses?
a. $160,000
b. $260,000
c. $640,000
d. $740,000
311. Read the information about Bartlett Industries. The company’s dividends for the year:
a. reduce the amount of capital stock reported by the company.
b. are part of Bartlett Industries’ operating costs.
c. are reported on the statement of retained earnings.
d. are an expense of Bartlett Industries.
312. A company is not required to prepare both a(n):
a. income statement and statement of stockholders’ equity.
b. income statement and statement of retained earnings.
c. statement of stockholders’ equity and statement of retained earnings.
d. statement of cash flows and statement of retained earnings.
313. In preparing the financial statements for December 31, 2015, an accountant improperly classified the payment of
prepaid rent as rent expense. Which of the following amounts would not be affected by this improper
classification?
a. Retained earnings, January 1, 2015
b. Retained earnings, December 31, 2015
c. Net income
d. Total assets
314. Carnival Bakery borrowed $500,000 from Front Street Bank. Carnival then hired a contractor to build a new cookie
distribution outlet. In which section of Carnival’s statement of cash flows would you find information that indicated
that Carnival acquired the new cookie distribution outlet?
a. Operating Activities
b. Investing Activities
c. Financing Activities
d. Profit Activities
Chapter 1: Accounting as a Form of Communication
315. A bank loaned $62 million to Apex Corporation to finance the construction of a new distribution warehouse. In
which section of Apex’s statement of cash flows would you be able to determine whether the company repaid
any portion of the debt during the year?
a. Operating Activities
b. Investing Activities
c. Financing Activities
d. Profit Activities
316. Which of the following categories on a statement of cash flows is used to report the cash flow effects of
transactions involving a company’s stock?
a. Operating Activities
b. Investing Activities
c. Financing Activities
d. Profit Activities
317. Which one of the following categories on a statement of cash flows is used to report the cash flow effects of
buying and selling property, plant, and equipment?
a. Operating Activities
b. Investing Activities
c. Financing Activities
d. Profit Activities
318. Which one of the following is considered a financing activity?
a. The payment of interest on a note payable to the bank.
b. Selling products to customers
c. Paying wages to employees
d. The payment of a cash dividend.
319. Which one of the following statements is true?
a. The two primary sources of financing available to corporations are borrowed funds and funds invested by
owners.
b. Financing activities involve the acquisition of property, plant and equipment.
c. Borrowed funds are a more permanent source of financing than funds invested by owners.
d. Investing activities involve the selling of products or services and the incurring of expenses related to selling
these products and services.
Chapter 1: Accounting as a Form of Communication
Marvel Shoes
Marvel Shoes reported the following items on its statement of cash flows for the current year:
Net cash inflows from operating activities $70,000
Net cash outflows from investing activities (20,000)
Net cash outflows from financing activities (40,000)
Cash balance at the beginning of the year 30,000
320. Read the information about Marvel Shoes. What was the amount of net increase or decrease in the cash balance
for Marvel Shoes for the current year?
a. $ 10,000 increase
b. $ 30,000 increase
c. $ 40,000 increase
d. $ 70,000 increase
321. Read the information about Marvel Shoes. What was the cash balance for Marvel Shoes at the end of the current
year?
a. $ 10,000
b. $ 30,000
c. $ 40,000
d. $ 70,000
322. Which financial statement reports the sources and uses of an entity’s cash resources?
a. Income statement
b. Statement of retained earnings
c. Balance sheet
d. Statement of cash flows
Chapter 1: Accounting as a Form of Communication
323. During its fifth year of operations, Bright Creations Company reports a beginning cash balance of $132,000, cash
inflows from investing activities of $210,000, cash outflows for financing activities of $79,000, and cash outflows
for operating activities of $13,000. What was Bright Creations’ cash balance at the end of the fifth year?
a. $ 250,000
b. $ 434,000
c. $ 276,000
d. $ 132,000
324. Which of the following best describes a company’s financing activities?
a. Financing activities focus on the sale of products and services.
b. Financing activities include selling products.
c. Financing activities enable a company to acquire assets needed to run a business.
d. Financing activities are represented by the revenues and expenses on the income statement.
325. Which of the following best describes a company’s operating activities?
a. Operating activities focus on the sale of products and services.
b. Operating activities are necessary to provide the money to start a business.
c. Operating activities are needed to provide the valuable assets required to run a business.
d. Operating activities represent the right to receive a benefit in the future.
326. Which one of the following is an investing activity of a business?
a. Paying for purchases of inventory
b. Issuing stock for cash
c. Borrowing money from a bank.
d. Purchasing a manufacturing plant for cash
327. Which one of the following is a financing activity of a business?
a. Paying for purchases of inventory
b. Issuing stock for cash
c. Paying salaries
d. Purchasing a manufacturing plant
Chapter 1: Accounting as a Form of Communication
328. Which one of the following is an operating activity of a business?
a. Paying for purchases of inventory
b. Issuing stock for cash
c. Borrowing money from a bank
d. Purchasing a manufacturing plant.
329. Which of the following represents the correct sequence of the three business activities on the Statement of Cash
Flows?
a. Financing – Operating – Investing
b. Investing – Operating – Financing
c. Operating – Investing – Financing
d. Financing – Investing – Operating
330. Business entities generally carry on:
a. operating, investing, and financing activities.
b. operating activities, but only corporations engage in financing and investing activities.
c. investing and operating activities, but only corporations engage in financing activities.
d. either investing or financing activities, but not both.
331. Although businesses engage in a wide variety of activities, all of these activities can be categorized into three types.
Which of the following choices best reflects these three types of business activities?
a. Operating, financing, reporting
b. Investing, reporting, financing
c. Operating, financing, investing
d. Investing, reporting, operating
332. As used in accounting, the “Notes to the Financial Statements” should be:
a. listed with the liabilities on the balance sheet.
b. omitted at the option of the company.
c. included as an integral part of the financial statements.
d. reported as expenses on the Income Statement.
Chapter 1: Accounting as a Form of Communication
333. Which of the following items will be found in a corporate annual report?
a. Company budgets
b. Notes to the financial statements
c. Selected financial data from competitor companies
d. Management’s statement that the auditors are responsible for the financial statements.
334. Which one of the following sections is least likely to be found in a corporate annual report?
a. Notes to the Financial Statements
b. Forecasts of Cash Flows and Earnings
c. Report of the Independent Accountants
d. Management’s Discussion and Analysis
335. Supplementary disclosures required by GAAP that help explain detail behind the accounting treatment of certain
items in the financial statements is most likely found in which of the following sections of a corporate annual report?
a. Report of the Independent Accountants
b. Notes to the Financial Statements
c. Management’s Discussion and Analysis
d. Balance Sheet
336. An investor found the following in an annual report: “The financial statements, in our opinion, present fairly the
financial position, operating results, and cash flows, in conformity with accounting principles generally accepted
in the United States.” In which section of the annual report did the investor find this?
a. Balance Sheet
b. Notes to the Financial Statements
c. Management’s Discussion and Analysis
d. Report of the Independent Accountants
337. Which of the following represents one of the purposes of the notes to financial statements?
a. To provide a place for management to justify questionable items in the statements.
b. To provide comparative ratios for the company‘s financial data.
c. To provide the CPA‘s opinion of the fairness of the financial statements.
d. To satisfy the need for full disclosure of all the facts relevant to a company’s results and financial position.
Chapter 1: Accounting as a Form of Communication
338. Financial statements are intended to tell the reader the value of a company.
a. True
b. False
339. Accountants are the main reason financial statements are prepared.
a. True
b. False
340. The Financial Accounting Standards Board defined the objectives of financial reporting.
a. True
b. False
341. The purpose of financial reporting is to provide economic information to external decision makers only.
a. True
b. False
342. An objective of financial reporting is to reflect economic information concerning a company’s cash flows.
a. True
b. False
343. The concept of conservatism is the capacity of information to make a difference in a decision.
a. True
b. False
344. Materiality deals with the size of an error in accounting information.
a. True
b. False
345. Most businesses have an operating cycle of less than one year.
a. True
b. False
Chapter 1: Accounting as a Form of Communication
346. Current assets, other than cash, are expected to be sold or consumed are during a company’s normal operating
cycle.
a. True
b. False
347. Obligations related to operating activities that will be paid within the company‘s operating cycle must be reported as
current liabilities on a classified balance sheet.
a. True
b. False
348. The operating cycle for all businesses is one year.
a. True
b. False
349. A construction company that builds skyscrapers is likely to have an operating cycle longer than one year.
a. True
b. False
350. Three common categories of long-term assets are: 1) property, plant, and equipment, 2) investments, and 3)
intangibles.
a. True
b. False
351. In the stockholders‘ equity section of a classified balance sheet, a distinction is made between amounts invested by
owners and amounts accumulated from business earnings.
a. True
b. False
352. One primary purpose of a classified balance sheet is to help users evaluate the liquidity of a company.
a. True
b. False
353. Companies prepare classified financial statements because they are required by international accounting principles.
a. True
b. False
Chapter 1: Accounting as a Form of Communication
354. The current ratio is irrelevant in liquidity analysis for service companies because they do not have inventories
among their current assets.
a. True
b. False
355. An advantage of the current ratio is that it considers the makeup of the current assets.
a. True
b. False
356. The excess of current assets over current liabilities is referred to as working capital.
a. True
b. False
357. A balance sheet shows cash, $75,000; marketable securities, $115,000; accounts receivable, $150,000 and $222,500
of inventories. Current liabilities are $225,000. The current ratio is 2.5 to 1.
a. True
b. False
358. If a firm has a current ratio of 2, the subsequent receipt of a 60–day note receivable to settle an open account will
cause the ratio to decrease.
a. True
b. False
359. The purchase of inventory for cash will cause the current ratio to decrease.
a. True
b. False
360. Income from operations does not include interest revenue and interest expense because these items are considered
to be non-operating in nature.
a. True
b. False
361. A 12% change in sales will result in a 12% change in net income.
a. True
b. False
Chapter 1: Accounting as a Form of Communication
362. Some analysts properly refer to a company’s profit margin as its return on assets.
a. True
b. False
363. Dividends declared and paid reduce a company’s retained earnings balance.
a. True
b. False
364. Dividends paid appears on both the income statement and the statement of retained earnings.
a. True
b. False
365. Investing activities are needed to provide the funds to start a business.
a. True
b. False
366. The statement of cash flows, like the income statement, reports only operating activities of a company.
a. True
b. False
367. Funds raised from financing activities should be invested in assets that can be used to carry on business operations.
a. True
b. False
368. The primary responsibility for the preparation and integrity of the financial statements in an annual report belongs to
the company’s independent accountants (CPAs).
a. True
b. False
369. Independent auditors (CPAs) render an opinion that the financial statements do or do not fairly present a
company’s financial position, operating results, and cash flows.
a. True
b. False
Chapter 1: Accounting as a Form of Communication
370. An independent auditor’s (CPA’s) report is a guarantee that the financial statements are free from fraud or material
error.
a. True
b. False
371. In the independent auditors’ report included with the annual report, management discusses the financial statements
and provides the shareholders with explanations for certain amounts reported in the statements.
a. True
b. False
372. ____________________ and ____________________ have claims to an entity’s economic resources.
373. is the magnitude of an omission or misstatement in accounting information that will
affect the judgment of someone relying on the information.
374. is the capacity of information to make a difference in a decision.
375. ____________________ is the practice of using the least optimistic estimate when two estimates of amounts
are about equally likely.
376. is the quality of accounting information that makes it comprehensible to those willing to
spend the necessary time.
377. is the quality of accounting information that makes it dependable in representing the
events that it purports to represent.
378. is the quality of accounting information that allows a user to analyze two or more
companies and look for similarities and differences.
379. is the quality of accounting information that allows a user to compare two or more
accounting periods for a single company.
Chapter 1: Accounting as a Form of Communication
380. have claims to an entity’s economic resources.
381. are cash and other assets that are reasonably expected to be realized in cash
during the normal operating cycle of the business.
382. Property, plant and equipment are classified as assets on the balance sheet.
383. ____________________ is the process of writing off the cost of tangible assets and ____________________
is the process of writing off the cost of intangible assets.
384. is a liquidity measure that is calculated by subtracting current assets from
current liabilities.
385. The ability of a company to pay its debt as it comes due relates to .
386. In a -step income statement, all expenses and losses are added together, then deducted
from the sum of all revenues and gains.
387. The statement of explains changes in the components of owners’ equity during the
period.
388. On the statement of cash flows, the section involves the acquisition and
sale of long-term assets.
389. On the statement of cash flows, the section involves the purchase and
sale of products and services.
390. On the statement of cash flows, the section involves the issuance and
repayment of long term liabilities and stock transactions.
Chapter 1: Accounting as a Form of Communication
Accounts payable
Interest payable
Income taxes payable
Cargo Corporation
Listed below is information from the financial records of Cargo Corporation at December 31, 2015:
Retained earnings
$37,000
Notes payable—Due July 1, 2018
$12,000
Accumulated depreciation
13,000
Interest payable
1,000
Income taxes payable
24,000
Office supplies
2,000
Buildings
48,000
Accounts payable
36,000
Cash
11,000
Inventory
33,000
Accounts receivable
35,000
Land
50,000
Capital stock
60,000
Prepaid rent
4,000
391. Read the information about Cargo Corporation.
Required:
Prepare the current liabilities section of the balance sheet for Cargo Corp. at December 31, 2015. You may omit
the heading. If the amount of current liabilities were larger, what effect would this have on the current ratio?
392. Read the information about Cargo Corporation.
Required:
Prepare the long-term asset section of Cargo Corp.’s balance sheet at December 31, 2015. You may omit the
heading. Why are these amounts classified as “long-term”?