Chapter 14 2 Andy's line of credit with a local bank is likely

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

Objective: 14.3

81. One manager (Adam) says that the income statement should be strong this year because the

company has achieved a high level of sales revenue. Another manager (Eve) says that even with strong

sales revenue, the income statement might not look particularly good. What is the flaw in Adam’s

reasoning?

a. He is not taking into accounting all of the possible sources of revenue for the company.

b. He is not including owners’ equity as part of sales revenue.

c. He is saying that the income statement is not as important as the balance sheet in portraying a

company’s fiscal health.

d. He knows that many employees are dissatisfied with the direction the company is taking.

e. He is not accounting for the effect that expenses will have on the income statement.

Difficulty: 3 Page-Reference: 439-441

Question ID: 14-1-81 Skill: Analysis

Objective: 14.3

82. At Lexi Corp., sales revenue is $20 million, the cost of goods sold is $14 million, operating

expenses are $3 million, and income taxes are $1 million. What are retained earnings?

a. $6 million

b. $17 million

c. $3 million

d. $2 million

e. It is not possible to tell with the information provided

Difficulty: 3 Page-Reference: 439

Question ID: 14-1-82 Skill: Application

Objective: 14.3

83. If you wanted to see how much Mega Computer owed your company, where would be the best

place to look for the information?

a. The income statement

b. The balance sheet

c. The cash flow statement

d. The budget

e. None of these would provide the information

Difficulty: 3 Page-Reference: 438

Question ID: 14-1-83 Skill: Comprehension

Objective: 14.3

84. Andy’s line of credit with a local bank is likely a(n)

a. intangible asset.

b. prepaid expense.

c. current liability.

d. account receivable.

e. long-term liability.

Difficulty: 2 Page-Reference: 438

Question ID: 14-1-84 Skill: Comprehension

Objective: 14.3

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

85. If Eric wants to know the cost of obtaining materials to make products that were sold during the

year, he would look at the

a. income statement.

b. statement of cash flows.

c. operating expenses statement.

d. balance sheet.

e. none of these.

Difficulty: 1 Page-Reference: 440

Question ID: 14-1-85 Skill: Comprehension

Objective: 14.2

86. What factor explains the difference between operating income and net income?

a. The cost of goods sold

b. Line of credit expenses

c. Income taxes paid

d. Goodwill

e. Reinvested profits

Difficulty: 2 Page-Reference: 441

Question ID: 14-1-86 Skill: Knowledge

Objective: 14.3

87. Maggie’s Antiques and Collectibles opened her store with $14 000 beginning inventory. Maggie

purchased an additional $5500 in antiques and sold all but $7500. What is Maggie’s cost of goods sold?

a. $27 000

b. $12 000

c. $19 500

d. $13 000

e. none of these

Difficulty: 3 Page-Reference: 440

Question ID: 14-1-87 Skill: Application

Objective: 14.3

88. If the following facts are known, which one would NOT strengthen the argument that a company

must closely monitor its cash flow?

a. The company needs to make sure it is not spending too much.

b. The company needs to generate a lot of revenue.

c. The company needs to make sure its employees are high performers.

d. The company needs to make sure it can pay its bills.

e. The company needs to make sure it can make capital expenditures in a timely fashion.

Difficulty: 3 Page-Reference: 442

Question ID: 14-1-88 Skill: Analysis

Objective: 14.3

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

89. What is the difference between “profit” and “cash flow”?

a. Profit refers to what is left after expenses have been subtracted from revenues, while cash flow

refers to cash receipts and cash payments.

b. A firm cannot make a profit unless its cash flow is positive.

c. A firm can maximize its profit only at the expense of cash flow.

d. A firm can maximize its cash flow only at the expense of its profit.

e. There is no real difference between profit and cash flow.

Difficulty: 2 Page-Reference: 439, 442

Question ID: 14-1-89 Skill: Comprehension

Objective: 14.3

90. A(n) ______________ is a detailed statement of estimated receipts and expenditures for a period

of time in the future.

a. statement of cash flows

b. balance sheet

c. budget

d. income statement

e. profitability ratio

Difficulty: 1 Page-Reference: 442

Question ID: 14-1-90 Skill: Knowledge

Objective: 14.3

91. Which of the following financial statements is designed primarily for internal use by a company’s

managers (e.g., the production manager)?

a. Income statements

b. Statement of retained earnings

c. Budget

d. Balance sheets

e. Statements of cash flow

Difficulty: 1 Page-Reference: 442

Question ID: 14-1-91 Skill: Comprehension

Objective: 14.3

92. What is a budget?

a. The estimated number of people required to complete a manufacturing project

b. An estimate of costs submitted to a buyer in order to make a sale

c. An estimate of the cash balance for the year

d. A detailed estimate of receipts and expenditures for a given period of time

e. An estimate of research and development costs

Difficulty: 2 Page-Reference: 442

Question ID: 14-1-92 Skill: Knowledge

Objective: 14.3

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

93. Revenue recognition is the formal recording and reporting of revenues in the financial statements.

Earnings are not reported until

a. the earnings cycle is completed.

b. the end of the refund period.

c. the money is in the bank.

d. the sale has been agreed upon.

e. the auditors have approved the sale.

Difficulty: 2 Page-Reference: 443

Question ID: 14-1-93 Skill: Comprehension

Objective: 14.4

94. The earnings cycle is complete under two conditions: ___________ and ___________.

a. revenue recognition; matching

b. the sale is complete; the customer has paid the company

c. at least two years have passed; the customer has paid the company

d. the sale is complete; the customer has promised to pay the company

e. the cost of goods sold has been determined; operating revenues exceed operating expenses

Difficulty: 2 Page-Reference: 443

Question ID: 14-1-94 Skill: Comprehension

Objective: 14.3

95. The matching principle states that

a. expenses will be matched with revenues to determine net income for an accounting period.

b. the costs of goods sold must match the total expenses of the firm.

c. the firm needs to match the assets and liabilities in order to record the transaction in its journal.

d. revenue recognition occurs before the earnings cycle is completed.

e. the total receipts must match the expenditures for a given period of time.

Difficulty: 2 Page-Reference: 443

Question ID: 14-1-95 Skill: Knowledge

Objective: 14.4

96. ________ is the formal recording and reporting of revenues in financial statements.

a. Compliance

b. Materiality

c. Full disclosure

d. Matching

e. Revenue recognition

Difficulty: 2 Page-Reference: 443

Question ID: 14-1-96 Skill: Knowledge

Objective: 14.4

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

97. ________ requires that expenses will be matched with revenues to determine net income for the

accounting period.

a. Full disclosure

b. Compliance

c. Materiality

d. Revenue recognition

e. Matching

Difficulty: 2 Page-Reference: 443

Question ID: 14-1-97 Skill: Knowledge

Objective: 14.4

98. The ________ principle requires that financial statements include not only numbers, but also

management’s interpretations and explanations of those figures.

a. full disclosure

b. materiality

c. compliance

d. revenue recognition

e. matching

Difficulty: 2 Page-Reference: 445

Question ID: 14-1-98 Skill: Knowledge

Objective: 14.4

99. Executives at Belize Inc. want to see the company’s short-term solvency ratios. What question do

they most likely want to have answered?

a. Can immediate debts be paid without obtaining more loans?

b. Is there enough inventory to fulfill sales demands?

c. How much inventory does the company have on hand?

d. How much debt is the company carrying?

e. Are the company’s products priced correctly to maximize revenue?

Difficulty: 1 Page-Reference: 445

Question ID: 14-1-99 Skill: Analysis

Objective: 14.5

100. Suppose a company unexpectedly receives a huge order for its main product. To cope with this,

the owner borrows money to rent an additional facility to fill the orders and to pay the temporary workers

who will produce the large order. The owner does this hoping that the additional costs will be more than

covered by the revenue from selling the additional units of the product. Which ratio will be MOST affected

by these decisions?

a. the short-term solvency ratio

b. the long-term solvency ratio

c. the profitability ratio

d. the activity ratio

e. the equity ratio

Difficulty: 1 Page-Reference: 445

Question ID: 14-1-100 Skill: Analysis

Objective: 14.5

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

101. Realm Company has fixed assets of $4 billion, current assets of $1.7 billion, long–term liabilities

of $2 billion, and current liabilities of $0.34 billion. What is Realm’s current ratio?

a. 2

b. 5

c. 5.88

d. 5.1

e. 6.33

Difficulty: 2 Page-Reference: 445

Question ID: 14-1-101 Skill: Application

Objective: 14.5

102. What is the purpose of computing the current ratio?

a. To provide investors with some measurement of the returns they can expect from their

investment

b. To measure the extent to which a firm is financed through borrowed money

c. To measure how much cash the firm has

d. To measure the firm’s ability to meet emergency demands for cash

e. To measure the firm’s ability to meet its current obligations out of its current assets

Difficulty: 2 Page-Reference: 445

Question ID: 14-1-102 Skill: Comprehension

Objective: 14.5

103. The debt-to–owners’ equity ratio measures a firm’s ability to meet

a. dividend payments.

b. long-term liabilities.

c. interest payments.

d. short-term liabilities.

e. all liabilities.

Difficulty: 2 Page-Reference: 446

Question ID: 14-1-103 Skill: Knowledge

Objective: 14.5

104. Which of the following calculates the debt–to-owners‘ equity ratio?

a. Long-term liabilities divided by owners’ equity

b. Current liabilities divided by owners‘ equity

c. Long-term liabilities divided by retained earnings

d. Total liabilities divided by retained earnings

e. Total liabilities divided by owners‘ equity

Difficulty: 2 Page-Reference: 446

Question ID: 14-1-104 Skill: Knowledge

Objective: 14.5

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

105. Delavan Company has fixed assets of $5 billion, current assets of $2 billion, long–term liabilities

of $2 billion, current liabilities of $1 billion, and owners’ equity of $5 billion. What is Delavan’s debt–to–

equity ratio?

a. .6

b. .9

c. 1.2

d. .4

e. .8

Difficulty: 2 Page-Reference: 446

Question ID: 14-1-105 Skill: Application

Objective: 14.5

106. What does the debt-to-owners’-equity ratio tell us?

a. The extent to which the firm is financed through borrowed money

b. How much net income the business earns for each dollar invested

c. How readily the firm can meet unexpected demands for cash

d. The percentage of revenue that will be profit

e. The percentage of profits paid out to debt holders

Difficulty: 2 Page-Reference: 446

Question ID: 14-1-106 Skill: Comprehension

Objective: 14.5

107. ________ ratios give investors an idea of what returns they can expect on their investment;

dividing ________ by total owners’ equity is one such ratio.

a. Profitability; earnings per share

b. Long-term liquidity; net income

c. Activity; average inventory

d. Short-term liquidity; earnings per share

e. Profitability; net income

Difficulty: 2 Page-Reference: 446

Question ID: 14-1-107 Skill: Comprehension

Objective: 14.5

108. Marilyn wants to know how to determine the amount of net income the business earns for each

dollar invested by the owner. You tell her that she should

a. compute the earnings–per–share ratio.

b. compute an acid-test ratio.

c. compute the current ratio.

d. compute return-on-equity ratio.

e. compute the return-on–sales ratio.

Difficulty: 2 Page-Reference: 446

Question ID: 14-1-108 Skill: Application

Objective: 14.5

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

109. The current ratio is an example of ________, while earnings per share is an example of

__________:

a. a long-term solvency ratio; a leverage ratio

b. a short-term solvency ratio; an activity ratio

c. a short-term solvency ratio; a profitability ratio

d. a leverage ratio; a profitability ratio

e. an activity ratio; a profitability ratio

Difficulty: 3 Page-Reference: 445-446

Question ID: 14-1-109 Skill: Comprehension

Objective: 14.5

110. Jack wants to compare Algoma Steel and Dofasco’s earnings per share. Which formula would

Jack use?

a. Net income divided by the market value of the common shares.

b. Net income divided by the market value of the preferred shares.

c. Total assets divided by number of common and preferred shares outstanding.

d. Total assets divided by value of common shares outstanding.

e. Net income divided by number of common shares outstanding.

Difficulty: 2 Page-Reference: 447

Question ID: 14-1-110 Skill: Application

Objective: 14.5

111. ABC Company has net income of $5 million, $40 million of assets, and $10 million of liabilities.

The number of outstanding shares of stock is 3 870 000 shares. What are earnings per share?

a. $1.29

b. $0.77

c. $2.35

d. $7.75

e. Earnings per share cannot be computed with the information provided.

Difficulty: 2 Page-Reference: 447

Question ID: 14-1-111 Skill: Application

Objective: 14.5

112. Don wants to compute the earnings per share for SFX Ltd. How does he do it?

a. Divide sales by the number of common shares outstanding

b. Divide cost of goods sold by the number of common shares

c. Divide net income by the number of common shares outstanding

d. Divide cost of goods sold by average inventory

e. Divide net income by sales

Difficulty: 1 Page-Reference: 447

Question ID: 14-1-112 Skill: Application

Objective: 14.5

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

113. What does return on equity measure?

a. The amount of pre-tax profit earned for each dollar invested

b. The amount of profit earned for each share of stock

c. The amount of profit earned for each dollar of previous profit retained in the business

d. The amount of profit earned for each dollar invested

e. The amount of pre-tax profit earned for each share of stock

Difficulty: 2 Page-Reference: 446

Question ID: 14-1-113 Skill: Knowledge

Objective: 14.5

114. An activity ratio measures a firm’s

a. sales per employee.

b. frequency of purchases.

c. level of inventory.

d. efficiency in using its assets.

e. sales per selling expense dollar.

Difficulty: 1 Page-Reference: 447

Question ID: 14-1-114 Skill: Knowledge

Objective: 14.5

115. The inventory turnover ratio is calculated by

a. dividing cost of goods sold by revenues.

b. dividing average inventory by cost of goods sold.

c. dividing revenues by cost of goods sold.

d. dividing cost of goods sold by average inventory.

e. dividing revenues by average inventory.

Difficulty: 2 Page-Reference: 447

Question ID: 14-1-115 Skill: Knowledge

Objective: 14.5

116. Firm A enjoys a better activity ratio than Firm B. What might this mean?

a. Firm A likely generates greater profits or sales than Firm B.

b. Firm A uses its resources less efficiently than Firm B.

c. Firm A has more customers than Firm B.

d. Firm A generates greater profits on sales and uses its resources more efficiently than B.

e. It might not mean anything.

Difficulty: 2 Page-Reference: 447

Question ID: 14-1-116 Skill: Analysis

Objective: 14.5

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

117. A(n) _____ ratio evaluates management’s use of assets.

a. financial

b. solvency

c. activity

d. profitability

e. liability

Difficulty: 1 Page-Reference: 447

Question ID: 14-1-117 Skill: Knowledge

Objective: 14.5

118. The ______________ ratio is calculated by dividing the cost of goods sold by average

inventory.

a. inventory turnover

b. earnings per share

c. current

d. debt–to–equity

e. none of these

Difficulty: 2 Page-Reference: 447

Question ID: 14-1-118 Skill: Knowledge

Objective: 14.5

119. What is the primary thing the inventory turnover ratio says about a business?

a. How profitable it is

b. How risky it is

c. How much inventory it has

d. How much average inventory it has

e. How often new merchandise replaces old merchandise

Difficulty: 2 Page-Reference: 447

Question ID: 14-1-119 Skill: Comprehension

Objective: 14.5

120. The ________ is the value of a nation’s currency as determined by market forces.

a. market multiplier

b. foreign currency exchange rate

c. balance of trade

d. foreign equity factor

e. trade deficit

Difficulty: 1 Page-Reference: 448

Question ID: 14-1-120 Skill: Knowledge

Objective: 14.6

1. One of the purposes of accounting is to communicate financial information.

a. True

b. False

Difficulty: 1 Page-Reference: 429

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

Question ID: 14-2-121 Skill: Knowledge

Objective: 14.1

2. Bookkeeping is a comprehensive system for collecting, analyzing, and communicating financial

information.

a. True

b. False

Difficulty: 1 Page-Reference: 429

Question ID: 14-2-122 Skill: Knowledge

Objective: 14.1

3. Accounting is more comprehensive than bookkeeping because it involves more than merely

recording information.

a. True

b. False

Difficulty: 1 Page-Reference: 429

Question ID: 14-2-123 Skill: Comprehension

Objective: 14.1

4. There are really only two users of accounting information: the business managers whose activities

have generated the information, and the government taxation officials who tax the business.

a. True

b. False

Difficulty: 1 Page-Reference: 429

Question ID: 14-2-124 Skill: Comprehension

Objective: 14.1

5. The various users of accounting information include business managers, employees, unions,

regulatory agencies, lenders, and the public.

a. True

b. False

Difficulty: 1 Page-Reference: 430

Question ID: 14-2-125 Skill: Knowledge

Objective: 14.1

6. The most important user of accounting information is the government.

a. True

b. False

Difficulty: 1 Page-Reference: 430

Question ID: 14-2-126 Skill: Comprehension

Objective: 14.1

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

7. If a company does not produce accurate accounting information, the group that is hurt the most is

investors.

a. True

b. False

Difficulty: 1 Page-Reference: 430

Question ID: 14-2-127 Skill: Comprehension

Objective: 14.1

8. A chartered accountant receives an operating license from the federal government that is good for a

three-year period.

a. True

b. False

Difficulty: 2 Page-Reference: 431

Question ID: 14-2-128 Skill: Knowledge

Objective: 14.1

9. Financial and managerial accounting can be distinguished by the different users they serve.

a. True

b. False

Difficulty: 2 Page-Reference: 431

Question ID: 14-2-129 Skill: Knowledge

Objective: 14.1

10. Financial accounting is primarily for people outside the firm while managerial accounting is

primarily for people inside the firm.

a. True

b. False

Difficulty: 1 Page-Reference: 431

Question ID: 14-2-130 Skill: Knowledge

Objective: 14.1

11. Documents generated by the financial accounting system focus on the activities of the company

as a whole, rather than on individual departments or divisions. By contrast, documents generated by the

management accounting system focus on individual departments.

a. True

b. False

Difficulty: 1 Page-Reference: 431

Question ID: 14-2-131 Skill: Comprehension

Objective: 14.1

12. An audit involves an examination of a firm’s accounting system to determine whether the financial

reports fairly present its financial operations.

a. True

b. False

Difficulty: 2 Page-Reference: 433

Business, Eighth Canadian Edition Griffin, Ebert, Starke, Dracopoulos, Lang

Chapter 14—Understanding Accounting Issues

Question ID: 14-2-132 Skill: Knowledge

Objective: 14.1

13. Accountants have historically used generally accepted accounting principles when preparing

financial reports, but in 2011 many companies switched to the new international accounting standards.

a. True

b. False

Difficulty: 2 Page-Reference: 434

Question ID: 14-2-133 Skill: Knowledge

Objective: 14.1

14. A forensic accountant is a special type of accountant who audits companies which have gone

bankrupt.

a. True

b. False

Difficulty: 3 Page-Reference: 433

Question ID: 14-2-134 Skill: Knowledge

Objective: 14.1

15. A private accountant deals with a company’s day–to-day activities.

a. True

b. False

Difficulty: 2 Page-Reference: 435

Question ID: 14-2-135 Skill: Knowledge

Objective: 14.1

16. Marla is a private accountants who uses a six-step process to develop and analyze a company’s

financial reports. The first step in the process is to do a trial balance.

a. True

b. False

Difficulty: 2 Page-Reference: 435

Question ID: 14-2-136 Skill: Knowledge

Objective: 14.1

17. Assets = liabilities plus owners‘ equity.

a. True

b. False

Difficulty: 1 Page-Reference: 435

Question ID: 14-2-137 Skill: Knowledge

Objective: 14.2