4) Net income is generally referred to as the company’s “bottom line.”
5) The Statement of Retained Earnings for a merchandiser is prepared differently than that of a
service business.
6) Long-term assets on the Balance Sheet represent assets that will last longer than one operating
cycle of the business.
7) On the Balance Sheet, assets are listed in alphabetical order.
8) A company has net sales of $126,000, cost of goods sold of $72,000, operating expenses of
$38,000, and other expenses of $3,000. The company’s gross profit is:
A) $13,000.
B) $54,000.
C) $51,000.
D) $16,000.
9) A company has net sales of $126,000, cost of goods sold of $72,000, operating expenses of
$38,000, and other expenses of $3,000. The company’s operating income is:
A) $13,000.
B) $54,000.
C) $51,000.
D) $16,000.
10) A company has net sales of $126,000, cost of goods sold of $72,000, operating expenses of
$38,000, and other expenses of $3,000. The company’s net income is:
A) $13,000.
B) $54,000.
C) $51,000.
D) $16,000.
11) A company has net sales of $223,000, cost of goods sold $85,000, operating expenses of
$54,000, and other expenses of $6,000. The company’s operating income is:
A) $31,000.
B) $78,000.
C) $84,000.
D) $132,000.
12) A company has net sales of $223,000, cost of goods sold $85,000, operating expenses of
$54,000, and other expenses of $6,000. The company’s net income is:
A) $31,000.
B) $78,000.
C) $84,000.
D) $132,000.
13) Current assets are listed on the Balance Sheet in:
A) alphabetical order.
B) order of liquidity.
C) ascending order of value.
D) descending order of value.
14) Wages Payable, Income Taxes Payable and Accounts Payable are:
A) long-term liabilities.
B) long-term assets.
C) short-term liabilities.
D) short-term assets.
15) A 10-year note payable to be repaid in equal payments throughout the 10-year period, would
be listed on the Balance Sheet as:
A) a current liability only.
B) a long-term liability only.
C) partly a current liability with the balance listed as a long-term liability.
D) a long-term asset.
16) The Balance Sheet format that lists assets above liabilities is the:
A) account form.
B) report form.
C) alphabetical form.
D) liquidity form.
17) Cash is listed as the first current asset because it is the account:
A) with the most value.
B) that is most liquid.
C) that is most used.
D) that is first alphabetically.
18) Land is an example of a:
A) current asset.
B) long-term asset.
C) current liability.
D) long-term liability.
19) In a Balance Sheet prepared in report form, liabilities must be listed after:
A) assets in alphabetical order.
B) assets with long-term liabilities listed first.
C) assets with current liabilities listed first.
D) Stockholders’ Equity.
20) Kramer and Associates has the following account balances listed in alphabetical order:
Accumulated Depreciation, $23,000; Accounts Payable, $8,500, Accounts Receivable, $12,000;
Cash, $3,500; Equipment, $44,000, Land, $21,000, Mortgage Payable, $45,000; Prepaid
Insurance, $7,500; Supplies, $2,000; Unearned Revenue, $6,000; Wages payable, $4,500.
Kramer and Associates’ current assets are:
A) $15,500.
B) $25,000.
C) $17,500.
D) $67,000.
21) Kramer and Associates has the following account balances listed in alphabetical order:
Accumulated Depreciation, $23,000; Accounts Payable, $8,500, Accounts Receivable, $12,000;
Cash, $3,500; Equipment, $44,000, Land, $21,000, Mortgage Payable, $45,000; Prepaid
Insurance, $7,500; Supplies, $2,000; Unearned Revenue, $6,000; Wages payable, $4,500.
Kramer and Associates’ long-term assets are:
A) $90,000.
B) $25,000.
C) $42,000.
D) $65,000.
22) Kramer and Associates has the following account balances listed in alphabetical order:
Accumulated Depreciation, $23,000; Accounts Payable, $8,500, Accounts Receivable, $12,000;
Cash, $3,500; Equipment, $44,000, Land, $21,000, Mortgage Payable, $45,000; Prepaid
Insurance, $7,500; Supplies, $2,000; Unearned Revenue, $6,000; Wages payable, $4,500.
Kramer and Associates’ current liabilities are:
A) $19,000.
B) $58,000.
C) $13,000.
D) $64,000.
23) What is liquidity?
A) Liquidity is gross profit minus operating expenses.
B) Liquidity is a shipping term that applies to freight sent by boat.
C) Liquidity is the ability to convert an asset to cash quickly.
D) Liquidity is a measure of the fragility of certain types of inventory.
24) The Cost of Goods Sold account appears on the:
A) Balance Sheet.
B) Statement of Retained Earnings.
C) Income Statement.
D) post-closing trial balance.
25) The Inventory account appears on the:
A) Balance Sheet.
B) Statement of Retained Earnings.
C) Income Statement.
D) list of liabilities.
26) The major difference in the Statement of Retained Earnings between a service business and a
merchandising business is:
A) that the Retained Earnings statement of a service business includes Dividends.
B) that the Retained Earnings statement of a merchandising business includes Dividends.
C) that the Retained Earnings statement of a merchandising business shows the Cost of Goods
Sold.
D) nothing. There are no differences between the two.
4.7 Questions
1) Gross profit percentage is computed by dividing net sales by cost of goods sold.
2) The net income percentage is computed by dividing net income by gross profit.
3) If a company has $115,000 net sales, $65,000 in gross profit, and $12,000 in net income, the
net income percentage would be approximately 57%.
4) If a company had net sales of $56,000, gross profit of $33,000, and net income of $8,000, the
gross profit percentage would be approximately 59%.
5) If a company has net sales of $134,000, gross profit of $48,000, and $14,000 net income. The
net income percentage would be approximately 36%.
6) If a company has net sales of $134,000, gross profit of $48,000, and $14,000 net income. The
gross profit percentage would be approximately 36%.
7) A company has a net income percentage of 27.3%. This means that the company makes a little
over $0.27 on every dollar of sales.
8) A gross profit percentage of 43% means that for every $1 of gross profit, the company has
$0.43 of net income.
9) Which of the following is TRUE of gross profit?
A) The company will subtract taxes from this number to arrive at net profit or net loss.
B) The company has this much money to pay for all other expenses, except taxes.
C) The company has this much money to pay for all other expenses, including taxes.
D) This number is the same as net income.
10) A company has net sales of $126,000, cost of goods sold of $72,000, operating expenses of
$38,000, and other expenses of $3,000. The company’s gross profit percentage is approximately:
A) 0.127.
B) 0.103.
C) 0.241.
D) 0.429.
11) A company has net sales of $126,000, cost of goods sold of $72,000, and operating expenses
of $41,000. The company’s net income percentage is approximately:
A) 0.241.
B) 0.429.
C) 0.103.
D) 0.127.
12) A company has net sales of $56,700 and a cost of goods sold of $26,700. The company’s
gross profit percentage is approximately:
A) 52.9%.
B) 47.1%.
C) 89.0%.
D) 189%.
13) Which of the following would most likely cause the net income percentage to increase?
A) Cost of Goods Sold as a percentage of net sales increases.
B) Operating expenses as a percentage of net sales increases.
C) Gross profit as a percentage of net sales decreases.
D) Operating expenses as a percentage of net sales decreases.
14) A high gross profit percentage means:
A) the cost of goods sold was relatively low.
B) the cost of goods sold was relatively high.
C) selling expenses are very low.
D) general and administrative expenses are very high.
15) A low gross profit percentage means that:
A) the cost of goods sold was relatively low.
B) the cost of goods sold was relatively high.
C) selling expenses are very low.
D) general and administrative expenses are very high.
16) If net sales decreases and cost of goods sold increases, the gross profit percentage:
A) remains the same.
B) decreases.
C) increases.
D) will change based upon the change in total assets.
17) If net sales increases and cost of goods sold decreases, the gross profit ratio:
A) remains the same.
B) decreases.
C) increases.
D) cannot be determined from the information given.
18) A company’s gross profit percentage increased from 37% to 41%. What does this mean?
A) This means that cost of goods sold as a percentage of net sales increased.
B) This means that cost of goods sold as a percentage of net sales decreased.
C) This means that operating expenses as a percentage of net sales decreased.
D) There is not enough information to explain the increase.
19) A company’s gross profit percentage decreases from 58% to 51%. What does this mean?
A) This means that net income will be higher.
B) This means that net income will be lower.
C) This means that there will be a net loss.
D) We cannot determine anything definite from the information given.