CHAPTER 2: FINANCIAL STATEMENTS AND THE ANNUAL REPORT
1. What is the primary objective of financial reporting?
a. To help investors make credit decisions.
b. To help management assess cash flows.
c. To protect users from fraudulent financial information.
d. To provide useful information for decision making
2. “Claims to economic resources” are known as:
a. assets and liabilities.
b. liabilities and stockholders’ equity.
c. owners’ equity and stockholders’ equity.
d. retained earnings and revenues.
3. Which of the following is not an objective of financial reporting?
a. To reflect prospective cash receipts to investors and creditors.
b. To reflect prospective cash flows to an enterprise.
c. To reflect resources and claim to resources.
d. To reflect current stock prices and information concerning stock markets.
4. Which of the following statements is true concerning external users of financial information?
a. External users need detailed records of the business to make informed decisions.
b. External users are primarily responsible for the preparation of financial statements.
c. External users rely on the financial statements to help make informed decisions.
d. External users rely on management to tell them whether the company is a good investment
5. Relevant information can be quantitative or qualitative. In deciding whether to go to college part–time or full–time,
which of the following is a qualitative factor for a student?
a. The cost of tuition
b. The opportunity to make friends
c. The price of football tickets
d. “Good Student” discounts on auto insurance rates.
Chapter 2: Financial Statements and the Annual Report
6. The preparation of financial statements requires that the information be understandable:
a. only to CPAs.
b. to those willing to spend the time to understand it.
c. only to those who take an accounting course.
d. only to financial analysts and brokers.
7. Cook, Inc., a manufacturer of tires, has given you its most recent annual report in an effort to obtain a sizable loan.
The company is very profitable and appears to have a sound financial position. Based on a report presented on
prime-time television last night, you are aware that Cook is a defendant in several lawsuits related to its defective
tires that cause vehicles to overturn. The information presented on television is an example of financial information
that is:
a. Relevant.
b. Consistent.
c. Predictable.
d. Comparable.
8. If an investor can use accounting information for two different companies to evaluate the types and amounts of
expenses, the information is said to have the quality of:
a. Comparability.
b. Consistency.
c. Neutrality.
d. Understandability.
9. Button Transportation purchases many pieces of office furniture with an individual cost below $200 each. Button
chooses to account for these expenditures as expenses when acquired rather than reporting them as property, plant,
and equipment on its balance sheet. The company‘s accountant and independent CPA agree that no accounting
principle has been violated. What accounting justification allows Button to expense the furniture?
a. Conservatism
b. Matching
c. Materiality
d. Verifiability
Chapter 2: Financial Statements and the Annual Report
10. Madden Company applies the consistency convention. What does this mean?
a. Madden Co. uses the same names for all its expenses as its competitors.
b. Madden Co. has selected certain accounting principles that can never be changed.
c. Madden Co. applies the same accounting principles each accounting period.
d. Madden Co. applies the same accounting principles as it competitors.
11. Information that is material means that an error or alternative method of handling a transaction:
a. would possibly affect the judgment of someone relying on the financial statements.
b. would not affect the decisions of users.
c. might cause a company to understate its earnings for the accounting period.
d. could increase the profitability of a company.
12. An accountant is uncertain about the best estimate of an amount for a business transaction. If two amounts are
about equally likely, the amount least likely to overstate assets and income is selected. Which of the following
qualities is characterized by this action?
a. Comparability
b. Conservatism
c. Materiality
d. Neutrality
13. The qualitative characteristics of accounting data include:
a. assets reported on the balance sheet.
b. all accounting information.
c. cash flows.
d. reliability.
14. Which of the following is a noncurrent asset?
a. Inventories
b. Office supplies
c. Land
d. Accounts receivable
Chapter 2: Financial Statements and the Annual Report
15. Which of the following is a current asset?
a. Land
b. Buildings
c. Store fixtures
d. Prepaid insurance
16. Which of the following include only current assets?
a. Accounts receivable, cash, inventory, office supplies
b. Cash, accounts payable, inventory, office supplies
c. Cash, land, accounts receivable, inventory
d. Accounts receivable, cash, furniture, office supplies
17. To determine the source of a company’s assets, on which financial statement will you look?
a. Balance sheet only
b. Income statement only
c. Both the balance sheet and the income statement
d. Both the income statement and the statement of retained earnings
Moss Company
Moss Company has provided the following information from its accounting records for the current year:
Cash
$55,000
Accounts receivable
$45,000
Inventory
65,000
Land
75,000
Accounts payable
50,000
Notes payable (due 2020)
150,000
Retained earnings
?
Capital stock
20,000
18. Read the information for Moss Corporation. What are Moss’ current assets?
a. $100,000
b. $165,000
c. $210,000
d. $240,000
Chapter 2: Financial Statements and the Annual Report
19. Read the information for Moss Company. What are Moss’ current liabilities?
a. $50,000
b. $125,000
c. $200,000
d. $230,000
20. Which one of the following items is reported as a current asset on a classified balance sheet?
a. Inventory
b. Accounts payable
c. Land
d. Common stock
21. The following information is given for Sego Company:
Cash
$50,000
Inventory
$45,000
Land
75,000
Accumulated Depreciation
40,000
Plant & Equipment
150,000
Accounts Payable
60,000
What are the company’s current assets?
a. $220,000
b. $155,000
c. $130,000
d. $ 95,000
22. Which of the following accounts are normally reported as current liabilities on a classified balance sheet?
a. Accounts payable and bonds payable
b. Interest payable and mortgage payable
c. Income taxes payable and salaries payable
d. Capital stock and accounts payable
Chapter 2: Financial Statements and the Annual Report
23. Which one of the following is not a major category for long-term assets?
a. Intangibles
b. Property, plant, and equipment
c. Receivables
d. Goodwill
24. Which of the following would not be considered to be an intangible asset?
a. Franchises
b. Copyrights
c. Investments
d. Goodwill
25. Which of the following statements is true concerning intangible assets?
a. Intangible assets have no economic substance.
b. Intangible assets lack physical existence.
c. Intangible assets are listed in the stockholders’ equity section of the balance sheet.
d. Intangible assets appear in the current assets section of the balance sheet.
26. How are assets which are expected to be realized in cash, sold, or consumed within the normal operating cycle of a
business or within one year (if the operating cycle is shorter than one year) reported on a classified balance sheet?
a. Property, plant, and equipment
b. Current assets
c. Intangible assets
d. Current liabilities
27. Which of the following terms characterizes the time period between the investment of cash in merchandise and the
collection of cash from the sale of that merchandise?
a. Operating cycle
b. Natural business year
c. Accounting period
d. Fiscal period
Chapter 2: Financial Statements and the Annual Report
28. Which set of items below are current assets?
a. Accounts receivable, net income, inventory, and dividends
b. Cash, accounts receivable, capital stock, and sales
c. Net income, cash, office supplies, and inventory
d. Cash, accounts receivable, inventory, and office supplies
29. One significant difference between a classified and a non-classified balance sheet is the distinction between which
of the following items?
a. Assets and liabilities
b. Current and noncurrent items
c. Liabilities and owners’ equity
d. Resources invested by the owners and amounts borrowed from creditors
30. For several years, Flame Corporation has had a current ratio that was consistent with other companies in its
industry. For the most recent year, Flame’s current ratio was significantly higher than that for the industry. What is
the best possible explanation for this situation?
a. The other companies in the industry were not as profitable.
b. Flame’s liquidity has improved or is not leveraging financial resources effectively.
c. Flame has less property, plant and equipment than other companies.
d. Flame has too much debt.
Guinther & Sons, Inc.
Guinther & Sons, Inc. a retailer of men’s clothing earned a net profit of $77,000 for 2014. The balance sheet for
Guinther & Sons includes the following items:
$29,000
Accounts receivable
$39,000
79,000
Prepaid insurance
3,000
90,000
Accounts payable
21,000
29,000
Capital stock
50,000
97,000
Long-term notes payable
43,000
31. Read the information for Guinther & Sons. Calculate the total amount of current assets for Guinther & Sons.
a. $100,000
b. $147,000
c. $150,000
d. $249,000
Chapter 2: Financial Statements and the Annual Report
32. Read the information for Guinther & Sons, Inc. Calculate the current ratio for Guinther & Sons.
a. 2.58 to 1
b. 2.75 to 1
c. 3.00 to 1
d. 2.00 to 1
33. Read the information for Guinther & Sons, Inc. The average current ratio for stores such as Guinther & Sons is 2.4
to 1. What does this comparison tell you about its liquidity?
a. It is more liquid than its competitors
b. It has more long-term assets than its competitors
c. Since a rule of thumb for current ratios is 2 to 1, neither Guinther & Sons, Inc. nor its competitors is liquid.
d. Guinther & Sons, Inc. is more profitable than its competitors.
34. Lamar Company has total current assets of $122,000 and total current liabilities of $57,000. What is the amount of
working capital for Lamar Company?
a. $57,000
b. $65,000
c. $122,000
d. $179,000
35. What is the correct method for calculating working capital?
a. Total Assets minus Total Liabilities
b. Current Assets minus Total Liabilities
c. Current Assets minus Current Liabilities
d. Current Assets plus Current Liabilities
36. Oreo Company has current assets of $20,000, current liabilities of $8,000, and long-term liabilities of $3,000. Oreo
wants to buy new equipment. How much of its existing cash can Oreo use to acquire equipment without allowing
its current ratio to decline below 2.0 to 1?
a. $4,000
b. $8,000
c. $10,000
d. $12,000
Chapter 2: Financial Statements and the Annual Report
37. Excursion Corp. increased its dollar amount of working capital over the past several years. To further evaluate the
company‘s short–run liquidity, which one of the following measures should be used?
a. The current ratio
b. An analysis of the company’s long-term debt
c. An analysis of the return on stockholders’ equity
d. An analysis of retained earnings
38. Which financial statement reports information helpful in assessing working capital?
a. Income statement
b. Balance sheet
c. Statement of retained earnings
d. Statement of cash flows
39. Use Rizwi Corporation’s list of accounts at December 31, 2015 to answer the following question.
Rizwi Corporation
List of Accounts at December 31, 2015
Cash
$30,000
Accumulated depreciation
$12,000
Merchandise inventory
21,000
Notes payable—Due 12/31/2022
120,000
Land
40,000
Accounts payable
14,000
Buildings
80,000
Equipment
33,000
Accounts receivable
25,000
Notes Payable—Due 07/01/2016
24,000
What is Rizwi Corp.’s current ratio?
a. 0.48 to 1
b. 2.00 to 1
c. 2.55 to 1
d. 2.86 to 1
40. If the current ratio is 2.5 to 1, net income is $6,000, and current liabilities are $18,000, how much is working capital?
a. $6,000
b. $24,000
c. $27,000
d. $45,000
Chapter 2: Financial Statements and the Annual Report
41. For which of the following is the current ratio most useful?
a. In evaluating a company’s liquidity.
b. In evaluating a company’s solvency.
c. In evaluating a company’s profitability.
d. In evaluating a company’s leverage.
42. Which of the following events will cause a company’s current ratio to decrease?
a. The sale of inventory for cash.
b. The sale of inventory for credit (accounts receivable).
c. Issuing stock for cash.
d. Paying off long–term debt with cash.
43. 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.
44. 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.
Chapter 2: Financial Statements and the Annual Report
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
45. 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
46. Read the information about Skyline, Inc. What is Skyline’s working capital?
a. $58,440
b. $89,740
c. $84,040
d. $9,740
47. 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
Chapter 2: Financial Statements and the Annual Report
48. 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
49. 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.
50. 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.
51. 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
52. 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
Chapter 2: Financial Statements and the Annual Report
53. 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.
54. 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.
55. 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.
56. 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.
Chapter 2: Financial Statements and the Annual Report
57. 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
Operating revenues
$6,000
Selling expenses
1,800
Income taxes
600
Other revenues (expenses)
800
Dividends paid
1,200
58. 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
59. Read the information about Webb Company. What is Webb’s net income?
a. $1,600
b. $2,000
c. $2,200
d. $2,800
Chapter 2: Financial Statements and the Annual Report
60. 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.
61. 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
62. 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
63. 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
Chapter 2: Financial Statements and the Annual Report
64. 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.
65. 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
66. 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.
67. 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.
Chapter 2: Financial Statements and the Annual Report
68. 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
69. 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.
70. 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
71. 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
Chapter 2: Financial Statements and the Annual Report
72. 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.
73. 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.
74. 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
75. 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
76. 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
Chapter 2: Financial Statements and the Annual Report
77. 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
78. 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
79. 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.
80. 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 2: Financial Statements and the Annual Report
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
81. 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
82. 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
83. 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