Learning Objective 4.5 Questions
4.5-1) Nationwide Bank of Medina loaned $12,000 to Graf, Inc., on March 1, 20X9, accepting a 3–year, 8%
note. The bank recorded the transaction properly on March 1. No other journal entry pertaining to the
note has been made since March 1. As of year–end on December 31, 20X9, what adjusting entry will the
bank make with respect to this note?
A) Interest receivable 800
Interest revenue 800
B) Notes receivable 800
Interest revenue 800
C) Interest receivable 960
Interest revenue 960
D) Notes receivable 960
Interest revenue 960
E) Unearned interest 960
Interest revenue 960
4.5-2) The adjusting entry to record accrued interest receivable has what effect on the basic accounting
equation?
A) Increase assets, increase liabilities
B) Decrease assets, decrease liabilities
C) Increase assets, increase stockholders’ equity
D) Increase assets, decrease stockholders’ equity
E) Decrease liabilities, increase stockholders’ equity
4.5-3) The collection in cash of interest receivable previously accrued has what effect on the basic
accounting equation?
A) Increase assets, increase liabilities
B) Decrease assets, decrease liabilities
C) Increase assets, decrease liabilities
D) Increase liabilities, decrease stockholders’ equity
E) It has no effect as one asset increases while another asset decreases.
4.5-4) The adjusting entry to record accrued interest revenue includes a debit to interest payable.
4.5-5) If the adjusting entry to record revenue earned during the current period when cash was received
in the last accounting period is not recorded, liabilities will be understated.
4.5-6) Failure to adjust for accrued revenue will understate stockholders’ equity.
4.5-7) Journalizing amounts for unearned revenue can cause ethical dilemmas for many accountants since
estimates are often used when exact completion amounts are uncertain. Discuss potential problems that
this may cause for financial statement users. How does the concept of conservatism affect an accountant’s
recognition of revenue of a particular project? How would underestimating revenue of a project affect net
income?
Learning Objective 4.6 Questions
4.6-1) The order of the recording process has
A) the adjusted trial balance after preparing the financial statements.
B) the journalization and posting of adjustments before the ledger.
C) the adjusted trial balance before the ledger.
D) journalization after the adjusted trial balance.
E) the unadjusted trial balance after the ledger.
4.6-2) Which of the following is the correct order in the recording process?
A) Journalize and post adjustments, unadjusted trial balance, adjusted trial balance, ledger, financial
statements
B) Ledger, journalize and post adjustments, unadjusted trial balance, adjusted trial balance, financial
statements
C) Ledger, unadjusted trial balance, journalize and post adjustments, adjusted trial balance, and financial
statements
D) Unadjusted trial balance, journalize and post adjustments, ledger, adjusted trial balance, financial
statements
E) Journalize and post adjustments, adjusted trial balance, ledger, unadjusted trial balance, financial
statements
4.6-3) Cash flows
A) always follow the adjusting entries.
B) always precede the adjusting entries.
C) may precede or follow the adjusting entries.
D) always follow the unadjusted trial balance.
E) always precede the closing entries.
4.6-4) The accrual of unrecorded expenses has
A) assets increased by later cash payments.
B) equity decreased by later cash payments.
C) equity increased by later cash payments.
D) liabilities increased by later cash payments.
E) liabilities decreased by later cash payments.
4.6-5) Entries for the accrual of unrecorded expenses and the accrual of unrecorded revenues are made
prior to the associated cash flows.
4.6-6) Adjusting entries are journalized after the financial statements are prepared.
4.6-7) Advance cash payments for future services to be received create noncash assets in the balance
sheet.
4.7-1) A classified balance sheet
A) can only be viewed by upper management.
B) classifies assets as “current” if possessed at the end of the current month and as “deferred” if they are
expected to be owned at the end of the following month.
C) classifies accounts as either assets, liabilities, or owners’ equity.
D) groups accounts into subcategories to help readers quickly gain a perspective on the company’s
financial position.
E) is always used when making organizational strategic decisions.
4.7-2) An example of a current asset is
A) paid–in capital.
B) equipment.
C) inventory.
D) retained earnings.
E) fixed assets.
4.7-3) An example of a current liability is
A) unearned revenue.
B) accumulated depreciation.
C) long–term note payable.
D) paid–in capital.
E) retained earnings.
4.7-4) Working capital is defined as
A) the difference between paid–in capital and retained earnings.
B) the difference between current assets and current liabilities.
C) the difference between cash and retained earnings.
D) the difference between sales and cost of goods sold.
E) the difference between total assets and total liabilities.
4.7-5) Calvey Enterprises likes to maintain a current ratio near 1.5; however, the CFO for Calvey
Enterprises has noticed a decline in previous months. The current ratio for May, 2009 produced a ratio of
0.7. What would be the CFO’s major concern with a declining current ratio of less than 1.5?
A) The company has not sold enough products on credit, thus distorting the accounts receivable balance
and the current ratio.
B) The company may have difficulty meeting its short–term obligations.
C) The company has not purchased enough inventory to meet current demand.
D) Long–term obligations such as notes payable may need to be deferred, causing potential investor
concerns.
E) The company has excessive holdings of current assets.
4.7-6) Which of the following statement regarding the current ratio is true?
A) The current ratio is calculated as the difference between current assets and current liabilities.
B) Other things being equal, the lower the current ratio, the more assurance creditors have about being
paid in full and on time.
C) The current ratio is widely used to evaluate solvency.
D) The main components of the current ratio are cash and property, plant, and equipment.
E) The comparison of a company’s current ratio to the industry average is meaningless.
4.7-7) Prepaid expenses are listed as current assets on the balance sheet.
4.7-8) Current assets must be greater than current liabilities.
4.7-9) Current assets are cash plus those assets that are expected to be converted to cash or sold or
consumed during the next 12 months or within the normal operating cycle if longer than a year.
4.7-10) The excess of cash over current liabilities is known as working capital.
4.7-11) Working capital is the difference between total assets and total liabilities.
4.7-12) The current ratio can help users of financial statements assess a business entity’s liquidity.
4.7-13) A high current ratio means that a company is highly profitable.
4.7-14) The account format of the balance sheet reports assets at the top of the statement.
4.7-15) An entity’s ability to meet its immediate financial obligations as they become due is known as
profitability.
4.7-16) Current assets on the balance sheet are listed in descending order of monetary amount.
4.7-17) A balance sheet that groups the accounts into subcategories to help users gain a perspective on the
company’s financial position is referred to as a single–step balance sheet.
4.7-18) Given the following balances for McCann Products, prepare a classified balance sheet dated
December 31, 20X9.
Long–term Note Payable $ 11,000
Accounts Receivable 4,400
Accounts Payable 6,300
Additional Paid–in Capital 12,500
Prepaid Insurance 900
Wages Payable 2,600
Accumulated Depreciation 9,100
Capital Stock 3,700
Inventory 8,200
Interest Payable 3,700
Retained Earnings 24,000
Equipment 55,200
Cash 4,200
4.7-19) Given the following year–end balances, prepare a classified balance sheet for Searcy Utility
Company dated December 31, 20X9. (Hint: Compute net income first.)
Interest Expense $ 2,000
Beginning Retained Earnings 13,100
Depreciation Expense 5,200
Cash 26,900
Accounts Payable 3,300
Rent Expense 7,200
Accumulated Depreciation 13,500
Wage Expense 59,200
Prepaid Rent 1,400
Paid–in Capital 9,000
Accounts Receivable 13,600
Wages Payable 3,200
Equipment 63,000
Sales 249,600
Inventory 14,400
Long–term Note Payable 20,000
Income tax Expense 24,500
Dividends Declared 21,000
Cost of Goods Sold 94,300
Dividends Payable 21,000
4.7-20) A classified balance sheet groups assets and liabilities into two categories. Identify and define
those two categories for both assets and liabilities. Why is this categorization made? Finally, two
measures of financial solvency can be generated using these two categories. What are the two measures
of financial solvency and how are they calculated?
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4.7-21) Robertson Manufacturing
Balance Sheet
December 31, 20X9
Assets:
Cash $ 25,000
Accounts Receivable 62,500
Inventory 66,500
Prepaid Rent 4,800
Fixed Assets $ 135,900
Less: Accumulated Depr. (51,900) 84,000
Total Assets $242,800
Liabilities:
Accounts Payable $31,000
Wages Payable 8,500
Income Taxes Payable 6,400
Interest Payable 4,500
Note Payable, long–term 71,600
Total Liabilities $122,000
Stockholders’ Equity:
Capital Stock ($10 par) 15,000
Additional Paid–in Capital 45,000
Retained Earnings 60,800
Total Stockholders’ Equity 120,800
Total Liab. & Stockholders’ Equity $242,800
Robertson Manufacturing
Income Statement
For the Year Ended December 31, 20X9
Sales $973,700
Less: Cost of Goods Sold (706,750)
Gross Profit 266,950
Less: Operating Expenses:
Wages Expense $170,000
Depreciation Expense 10,150
Rent Expense 27,350
Total Operating Expenses 207,500
Operating Income 59,450
Less Other Expenses:
Interest Expense (15,350)
Income Before Taxes 44,100
Less: Income Tax Expense (17,600)
Net Income $ 26,500
Required:
1. What is the current ratio?
2. What is the working capital?
3. What is the return on sales?
4. If the beginning stockholders’ equity balance for Robertson Manufacturing was $85,000, then what is
the return on stockholders’ equity?
Learning Objective 4.8 Questions
4.8-1) Gross profit appears on a
A) single–step income statement.
B) classified balance sheet.
C) multiple–step balance sheet.
D) multiple–step income statement.
E) single–step balance sheet.
4.8-2) Which account is usually a separate line item on the multiple–step income statement?
A) Cash
B) Interest expense
C) Paid–in capital
D) Executive stock option expense
E) Income taxes
4.8-3) Gross profit is defined as
A) net income before the effect of income taxes.
B) the income generated by the company after subtracting all operating expenses.
C) the difference between total assets and total liabilities.
D) net income less the dividends declared during the period.
E) sales minus cost of goods sold.
4.8-4) An income statement without any intermediate subtotals is referred to as a multiple–step income
statement.
4.8-5) On a multiple–step income statement, operating expenses are deducted from cost of goods sold to
obtain operating income.
4.8-6) An advantage of the multiple–step income statement over the single–step is comparability.
4.8-7) Gross profit equals sales minus operating expenses.
4.8-8) Convert the following single–step income statement for Vaughn Catering into a multiple–step
income statement for the year ended December 31, 20X9.
Vaughn Catering
Income Statement
For the year ended December 31, 20X9
Revenues:
Sales $510,500
Interest Revenue 4,900
$505,600
Expenses:
Cost of Goods Sold 272,400
Depreciation Expense 1,700
Income tax Expense 56,300
Insurance Expense 2,100
Interest Expense 3,700
Rent Expense 4,800
Wage Expense 103,700
Total Expenses: 444,700
Net Income $ 60,900
4.8-9) Two companies have the following balance sheets as of December 31, 20X9:
Lin Company
Cash $ 25,000 10% Note Payable, $ 50,000
Other Assets 75,000 Stockholders’ Equity 50,000
Total Liabilities And
Total Assets $100,000 Stockholders’ Equity $100,000
Lu Company
Cash $ 25,000
Other Assets 75,000
Total Assets $100,000 Stockholders’ Equity $100,000
In 20X9, each company had sales of $225,000 and expenses (excluding interest) of $200,000. Ignore income
taxes. Assume Lin’s 10% Note Payable is outstanding the entire year.
Required:
a. Calculate net income for both Lin and Lu.
b. Calculate operating income for both Lin and Lu.
4.8-10) Briefly explain the difference between operating income and net income. Why do companies
calculate both?
4.8-11) Name and define the subtotals that appear on a multiple–step income statement and not on a
single–step income statement. Explain why income tax expense is usually the final deduction on both
single–step and multiple–step income statements.
Learning Objective 4.9 Questions
4.9-1) Which of the following statements is true with respect to the gross profit percentage?
A) The gross profit percentage shows the relationship of net income to sales revenue.
B) The gross profit percentage is widely regarded as the ultimate measure of overall accomplishment.
C) Retailers have high gross profit percentages because product costs are their main expense.
D) The gross profit percentage is useful to retailers in choosing a pricing strategy and in judging its
results.
E) Gross profit percentages vary very little across industries.
4.9-2) Which of the following statements is NOT true?
A) Companies where product costs represent a high percentage of total costs would be expected to have a
low gross profit percentage.
B) It is appropriate to compare a company’s current financial ratio with the same financial ratio for (1)
that company in prior years and/or (2) the ratio for the industry in which the company operates.
C) Return on sales ratios are useful in choosing a pricing strategy for a company’s products.
D) Profitability evaluation ratios have a higher power than solvency determination ratios for predicting
performance for both income and solvency.
E) Ratios are used to evaluate trends both internally and externally.
4.9-3) Ratios such as the return on sales ratio allow readers to assess whether or not a company will
provide them with a particular rate of return on their investment.
4.9-4) Analysts will compare a company’s financial ratios from the current year with those of past years in
order to make judgments about a company’s financial status, but comparison to other companies’ ratios is
usually not performed.
4.9-5) The gross profit percentage is calculated as sales divided by gross profit.
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4.9-6) Sterling Corporation’s condensed income statement is shown below.
Sterling Corporation
Condensed Income Statement
Year Ended December 31, 2009
Sales $200,000
Cost of goods sold 120,000
Gross profit $ 80,000
Operating expenses
Wages $45,000
Depreciation 2,000
Rent 8,000 55,000
Operating income $ 25,000
Other revenues and expenses
Rent revenue $ 800
Interest revenue 200
Total other revenue $ 1,000
Deduct: interest expense 500 500
Income before income taxes $ 24,500
Income taxes 9,800
Net Income $ 14,700
Required:
1. Calculate the gross profit percentage.
2. Calculate the return on sales.
3. What term is often used in place of sales or sales revenue? Which organizations typically use this term?