Assets
Cash
$ 70,000
Short-term investments
56,000
Accounts receivable
28,000
Notes receivable (due in one year)
42,000
Merchandise inventory
98,000
Land held for future use
112,000
Land
140,000
Building
$150,000
Less accumulated depreciation
28,000
122,000
Trademark
92,000
Total assets
$760,000
Liabilities
Notes payable (due in one year)
$ 70,000
Accounts payable
30,000
Salaries payable
14,000
Mortgage payable (due in seven years)
146,000
Total liabilities
$260,000
Stockholders’ Equity
Common stock
$300,000
Retained earnings
200,000
500,000
Total liabilities and stockholders’ equity
$760,000
The total amount of working capital is
a.
b.
c.
d.
86. Working capital measures
a.
b.
c.
d.
87. The asset turnover ratio measures
a.
b.
c.
d.
SHORT ANSWER
1. Each of the following statements is justified by a concept or convention of accounting. Write the letter
in the blank next to each statement corresponding to the concept or convention involved.
a. Consistency
d. Full disclosure
b. Materiality
e. Cost-benefit
c. Conservatism
_____ 1. This convention best enhances comparability of financial statements between
years.
_____ 2. A merger agreed on just after the balance sheet date nevertheless is reported in
the notes to the financial statements.
_____ 3. A company forgoes hiring another full-time accountant, which would add only
slightly to the financial statements’ accuracy.
_____ 4. A company uses lower-of-cost–or-market to value inventory.
_____ 5. A large company rounds its financial statement figures to the nearest $10,000.
ANS:
2. Each of the following statements violates a concept or convention of accounting. Write the letter in the
blank next to each statement corresponding to the concept or convention violated.
a. Consistency
d. Full disclosure
b. Materiality
e. Cost-benefit
c. Conservatism
_____ 1. A note to the financial statements indicating a change in inventory methods is
omitted.
_____ 2. When management is unsure of which estimates to use in a given situation, the
estimate resulting in the largest net income is always used.
_____ 3. In 2009, a company uses straight-line depreciation and in 2010 the company uses
declining-balance depreciation.
_____ 4. A small company expenses all expenditures under $10,000.
_____ 5. A small company purchases a $50,000 computer to save $3,000 per year in
bookkeeping wages.
ANS:
3. Why is it important for a company to maintain the same accounting methods and practices from period
to period?
4. The following lettered items represent a classification scheme for a balance sheet, and the numbered
items represent accounts. In the blank next to each account, write the letter indicating to which
category it belongs.
a. Current assets
e. Current liabilities
b. Investments
f. Long-term liabilities
c. Property, plant, and equipment
g. Stockholders’ equity
d. Intangible assets
h. Not on balance sheet
_____ 1. Accumulated Depreciation
_____ 7. Trademark
_____ 2. Revenues Received in Advance
_____ 8. Notes Payable (in five years)
_____ 3. Interest Expense
_____ 9. Depreciation Expense
_____ 4. Wages Payable
_____ 10. Prepaid Interest
_____ 5. Retained Earnings
_____ 11. Land Held for Future Use
_____ 6. Inventory
ANS:
5. The following lettered items represent a classification scheme for a balance sheet, and the numbered
items represent accounts. In the blank next to each account, write the letter indicating to which
category it belongs.
a. Current assets
f. Long-term liabilities
b. Investments
g. Contributed capital
c. Property, plant, and equipment
h. Retained earnings
d. Intangible assets
i. Not on balance sheet
e. Current liabilities
_____ 1. Additional paid-in capital
_____ 6. Mortgage Payable (due in ten years)
_____ 2. Cost of Goods Sold
_____ 7. Common Stock
_____ 3. Customer Advances
_____ 8. Goodwill
_____ 4. Land
_____ 9. Notes Payable (due in ten months)
_____ 5. Temporary Investments
_____ 10. Special Fund for Purchase of a
Building
ANS:
6. State the definition of a current asset.
7. Distinguish between cost of goods sold and operating expenses, describing the nature of these two
items and their placement on the income statement.
8. The following lettered items represent a classification scheme for a multistep income statement. In the
blank next to each account, write the letter indicating to which category it belongs.
a. Revenues
d. General and administrative expenses
b. Cost of goods sold
e. Other revenues and expenses
c. Selling expenses
f. Not on income statement
_____ 1. Interest Income
_____ 6. Utilities Expense for Store
_____ 2. Accumulated Depreciation
_____ 7. Interest Expense
_____ 3. Sales Returns and Allowances
_____ 8. Freight-Out Expense
_____ 4. Inventories
_____ 9. Office Salaries Expense for
Headquarters
_____ 5. Company President’s Salary
_____ 10. Interest Receivable
ANS:
9. The following lettered items represent a classification scheme for a multistep income statement. In the
blank next to each account, write the letter indicating to which category it belongs.
a. Revenues
d. General and administrative expenses
b. Cost of goods sold
e. Other revenues and expenses
c. Selling expenses
f. Not on income statement
_____ 1. Depreciation Expense (for
delivery truck)
_____ 6. Rent Expense (for main office)
_____ 2. Dividend Income
_____ 7. Advertising Expense
_____ 3. Cash
_____ 8. Personnel Expense
_____ 4. Interest Income
_____ 9. Unearned Revenue
_____ 5. Prepaid Rent
_____ 10. Sales Discounts
ANS:
10. Use the following information to calculate the liquidity and profitability ratios listed below. Round to
two decimal places.
Average stockholders’ equity
$ 9,250
Net income
$ 1,500
Average total assets
18,000
Net sales
15,625
Current assets
11,250
Total liabilities
8,750
Current liabilities
7,500
a. Current ratio
b. Working capital
c. Return on equity
d. Profit margin
e. Debt to equity
f. Return on assets
g. Asset turnover
11. Use the following information to calculate the liquidity and profitability ratios listed below. Round to
two decimal places.
Average stockholders’ equity
$14,000
Net income
$ 2,100
Average total assets
21,000
Net sales
17,500
Current assets
15,000
Total liabilities
10,500
Current liabilities
10,000
a. Current ratio
b. Working capital
c. Return on equity
d. Profit margin
e. Debt to equity
f. Return on assets
g. Asset turnover
12. Using the following amounts taken from the balance sheet and income statement of a business,
compute the measures listed below. After each answer, write “L” if it is a measure of liquidity or “P” if
it is a measure of profitability. Round to two decimal places.
Current assets
$ 6,000
Average stockholders’ equity
$15,000
Average total assets
30,000
Net sales
19,500
Current liabilities
4,500
Net income
2,400
Long-term liabilities
10,500
a. Return on assets
b. Working capital
c. Return on equity
d. Current ratio
13. Using the following amounts taken from the balance sheet and income statement of a business,
compute the measures listed below. After each answer, write “L” if it is a measure of liquidity or “P” if
it is a measure of profitability. Round to two decimal places.
Current assets
$ 30,000
Average stockholders’ equity
$60,000
Average total assets
120,000
Net sales
64,000
Current liabilities
20,000
Net income
3,000
Long-term liabilities
40,000
a. Current ratio
b. Return on equity
c. Return on assets
d. Working capital
14. Bill Pierce owns several ice cream shops all within 50 miles of his home. He has plans to expand
greatly the number of shops he owns. This planned expansion will require a large bank loan. Bill has
always done his own accounting work and has prepared a set of financial statements for each of the
past five years of operations to present to the bank. Because some periods were more profitable than
others, Bill attempted to streamline his earnings by switching depreciation and inventory valuation
methods frequently. This created the appearance that his company earnings were very consistent over
the years. Discuss the merits of Bill’s financial statements with regard to his streamlining decisions.
15. Using the following data, prepare a classified balance sheet for Blanchard Corporation as of December
31, 2010.
Cash
$ 200
Accumulated Depreciation–
Building
$ 1,000
Investments in Short-Term
Government Securities
400
Franchise
1,800
Accounts Receivable
800
Accounts Payable
1,600
Inventory
3,000
Revenues Received in Advance
400
Prepaid Rent
100
Notes Payable (in two years)
4,000
Investment in Land Held
for future use
2,700
Common Stock—$10 par value,
10,000
Land
2,000
Retained Earnings
2,000
Building
8,000
securities
Accounts receivable
Total current assets
16. Using the following data, prepare a classified balance sheet as of December 31, 2010, for the Lee
Company. There are 2,000 shares of $10 par value common stock issued and outstanding.
Accounts Payable
$1,600
Accounts Receivable
3,000
Building Not Currently Used
19,000
Cash
5,200
Accumulated Depreciation,
Equipment
8,000
Unearned Revenue
800
Short-Term Investments
2,000
Common Stock
20,000
Land
16,000
Retained Earnings
22,600
Equipment
15,000
Copyright
5,000
Long-Term Investments
800
Bonds Payable (due in 20
years)
13,000
17. Using the following data, prepare a multistep income statement for Matthew’s Dry Goods for the
month ended February 28, 2010.
Cost of Goods Sold
$15,000
General and Administrative Expenses
4,000
Net Sales
25,000
Selling Expenses
3,500
Income Taxes
475
18. Sean and Dylan Matthews are brothers who each own and operate sports memorabilia shops in
neighboring towns. They decide to have a contest to see whose shop can be more profitable for the
year. At year-end, Sean’s records show sales of $105,000, cost of goods sold of $55,000, and operating
expenses of $21,000. The records of Dylan’s shop reveal sales of $108,000, cost of goods sold of
$62,000, and operating expenses of $19,000. Dylan’s shop also had other revenue of $3,000 received
for allowing the shop to be used in taping a television show. Each brother claims to have won the
contest. Provide explanations as to why each would think so, and then name the winner.
19. Use the information from the following single-step income statement to prepare a condensed multistep
income statement in proper form.
Midway Industries
Income Statement
For the Month Ended December 31, 2010
Revenues
Net sales
$10,000
Interest income
300
Total revenues
$10,300
Costs and expenses
Costs of goods sold
$ 5,000
Selling expenses
3,000
General and administrative expenses
1,800
Interest expense
800
Total costs and expense
10,600
Net (loss)
($ 300)
20. Use the information from the following multistep income statement to prepare a single-step income
statement in proper form.
Olga & Daughters, Inc.
Income Statement
For the Month Ended July 31, 2010
Net sales
$15,000
Cost of goods sold
9,000
Gross margin
$ 6,000
Operating expenses
Selling expenses
$1,200
General and administrative expenses
800
Total operating expenses
2,000
Income from operations
$ 4,000
Other revenues and expenses
Dividend income
$ 250
Interest income
350
Less interest expense
150
Excess of other revenues over other expenses
450
Income before income taxes
$ 4,450
Income taxes
1,780
Net income
$ 2,670
21. 1. From the simplified balance sheet and income statement of the business below, compute the
following ratios. Assume that the June 30 amounts for total assets and stockholders’ equity also
represent their average amounts for the period. Round percentages to the nearest whole percent.
a. Working capital
b. Current ratio
c. Profit margin
d. Return on assets
e. Debt to equity
f. Return on equity
g. Asset turnover
Sci-Tech Enterprises, Inc.
Balance Sheet
June 30, 2010
Assets
Liabilities
Current assets
$ 4,000
Current liabilities
$ 4,000
Investments
2,000
Long-term liabilities
6,000
Property, plant, and
Total liabilities
$10,000
equipment
12,000
Intangible assets
2,000
Stockholders’ Equity
Common stock
$ 8,000
Retained earnings
2,000
Total stockholders’ equity
$10,000
Total assets
$20,000
Total liabilities and stockholders’
equity
$20,000
Sci-Tech Enterprises, Inc.
Income Statement
For the Year Ended June 30, 2010
Net sales
$24,000
Cost of goods sold
12,000
Revenues
Net sales
Dividend income
Interest income
Total revenues
Costs and expenses
Selling expenses
General and administrative expenses
Interest expense
Total costs and expenses
Income before income taxes
Income taxes
Net income
Gross margin
$12,000
Operating expenses
8,000
Income before income taxes
$ 4,000
Income taxes
1,600
Net income
$ 2,400
2. Discuss the liquidity and profitability of Sci-Tech Enterprises, Inc.
22. 1. From the simplified balance sheet and income statement of the business below, compute the
following ratios. Assume that the April 30 amounts for total assets and stockholders’ equity also
represent their average amounts for the period. Round percentages to the nearest whole percent.
a. Working capital
b. Current ratio
c. Profit margin
d. Return on assets
e. Debt to equity
f. Return on equity
g. Asset turnover
Gruen Enterprises, Inc.
Balance Sheet
April 30, 2010
Assets
Liabilities
Current assets
$ 4,000
Current liabilities
$ 2,000
Investments
6,000
Long-term liabilities
8,000
Property, plant, and
equipment
16,000
Total liabilities
$10,000
Intangible assets
4,000
Stockholders’ Equity
Common stock
$14,000
Retained earnings
6,000
Total stockholders’ equity
$20,000
Total assets
$30,000
Total liabilities and stockholders’
equity
$30,000
Gruen Enterprises, Inc.
Income Statement
For the Year Ended April 30, 2010
Net sales
$40,000
Cost of goods sold
22,000
Gross margin
$18,000
Operating expenses
12,000
Income before income taxes
$ 6,000
Income taxes
2,400
Net income
$ 3,600
2. Discuss the liquidity and profitability of Gruen’s Enterprises, Inc.
23. Match the following financial statement ratios with their definition.
1. Working capital _____
2. Current ratio _______
3. Profit margin ______
4. Return on assets______
5. Debt to equity ratio________
6. Return on equity_______
7. Asset turnover_________
a. A measure of profitability that shows the proportion of a company’s assets that is financed by
creditors and the proportion financed by stockholders
b. A measure of liquidity that shows the net current assets on hand to continue business operations
c. A measure of profitability that relates the amount earned by a business to the stockholders’
investment in the business
d. A measure of profitability that shows the percentage of each sales dollar that results in net income
e. A measure of liquidity; current assets divided by current liabilities
f. A measure of profitability that shows how efficiently a company uses its assets to produce income
g. A measure of how efficiently assets are used to produce sales