Which of the following statements is falsewith respect to the qualitative characteristics
of useful accounting information?
a. Comparability is concerned with different companies using the same accounting
methods; whereas, consistency is concerned with a single company using the same
accounting methods over time.
b. Trade-offs are often necessary in evaluating relevant versus reliable information.
c. All external and internal events must be fully disclosed in the accounting system.
d. The full disclosure policy should be followed in all situations that would made a
difference to financial statement users.
The following amounts were taken from the accounting records at December 31, 2013:
Refer to Fireworks City. Determine the asset turnover ratio for 2013.
a. 7.84 times
b. 1.60 times
c. 4.00 times
d. 4.55 times
Which one of the following is an accurate description of the Allowance for Doubtful
Accounts?
a. Contra Account
b. Liability Account
c. Revenue Account
d. Expense Account
A corporation reported the following information at December 31, 2014:
12% Cumulative, Nonparticipating Preferred Stock, $10 par, 50,000
shares authorized; callable at par value $500,000
Common Stock, $2 par, 30,000 shares authorized 40,000
Paid-in Capital in Excess of Par:
Preferred Stock 50,000
Common Stock 50,000
Total Capital Stock 640,000
Retained Earnings 30,000
Less: Treasury Stock (500 common shares at cost) 5,000
Total Stockholders’ Equity $665,000
A) How many shares of preferred stock are issued?
B) How many shares of common stock are issued?
C) How many shares of preferred stock are outstanding?
D) How many shares of common stock are outstanding?
E) How many of the preferred shares will receive dividends if they are paid?
F) How many of the common shares will receive dividends if they are paid?
G) What is the stated dividend per share on the preferred stock?
H) What is the total amount of dividends to be paid to preferred stockholders this year?
I) If all of the preferred stock was issued at the same price, what was the issue price per
share?
J) If all of the common stock were issued at the same price, what was the issue price per
share?
If bonds were initially issued at a discount, the carrying value of the bonds on the
issuer’s books will
a. decrease as the bonds approach their maturity date
b. increase as the bonds approach their maturity date
c. remain constant throughout the bonds’ life
d. fluctuate throughout the bonds’ life
Diamond Corp. prepares monthly bank reconciliations of its checking account balance.
The bank statement for October 2013 indicated the following:
Balance, October 31, 2013 $29,700
Bank service charges for October 80
Interest earned during October 120
NSF Check from a customer which had been previously deposited by Diamond 230
Collection of note ($4,000) and the related interest ($100) from Diamond’s
customer 4,100
An analysis of canceled checks and deposits and the records of Diamond revealed the
following items:
Checking account balance per Diamond’s accounting records $26,040
Outstanding checks as of October 31 2,950
Deposits in transit on October 31 3,110
Error in recording check # 627 issued by Diamond 90
The correct amount of check # 627 is $980, but it was recorded as a cash disbursement
of $890. The check was issued to pay for merchandise purchased. The check was
written correctly and appeared on the bank statement correctly.
A) Prepare a bank reconciliation in proper form for October 31, 2013.
B) What amount would Diamond report its cash balance on its October 31, 2013,
balance sheet?
Red Oak Manufacturing
The following information is available for the year ended December 31, 2015:
Net income $ 844,200
Net sales 6,809,000
Average total assets 5,911,000
Average stockholders’ equity 2,575,000
Refer to Red Oak Manufacturing. DuPont analysis return on equity (ROE) is
a. 32.8%.
b. 34.1%.
c. 35.8%.
d. 38.9%.
When a firm borrows money, one effect on the accounting equation is a(n)
a. decrease in contributed capital.
b. increase in assets.
c. decrease in liabilities.
d. decrease in assets.
On October 1, 2013, a company paid $9,000 rent in advance. The rent per month is
$1,000. Assuming the company’s accounting period ends on December 31, 2013, what
will be reported on the financial statements?
a. Prepaid Rent of $6,000 on its balance sheet at December 31, 2013
b. Prepaid Rent of $9,000 on its balance sheet at December 31, 2013
c. Rent Expense of $9,000 on its 2013 income statement
d. Rent Revenue of $6,000 on its 2013 income statement
The equity section of a balance sheet at December 31, 2015 is provided below:
5% Preferred Stock, $10 par, 2,000 shares issued and outstanding $ 20,000
Common Stock, $1 par, 10,000 shares issued and outstanding 10,000
Paid-in Capital in Excess of Par–Common Stock 12,500
Total Capital Stock 42,500
Retained Earnings 74,500
Total Stockholders’ Equity $117,000
No dividends were paid during 2013 and 2014, but the company plans to issue a cash
dividend of $2,000 on December 31, 2015. Determine the total dividend for each class
of stock under each of the following assumptions:
A) The preferred stock is noncumulative and nonparticipating.
B) The preferred stock is cumulative and nonparticipating.
The balance in the retained earnings account represents
a. cash in the bank.
b. the amount of cash available for dividends.
c. accumulated revenues from all prior years of operations.
d. accumulated earnings that have not been distributed to stockholders.
Which of the following accounts is decreased by a debit entry?
a. cash
b. prepaid insurance
c. accounts payable
d. insurance expense
Assume a company has a current ratio of 2. Payment of accrued wages payable would
cause the current ratio to
a. decrease.
b. increase.
c. be unchanged since the effects offset one another.
d. be unchanged since it has no impact on any current asset or liability accounts.
The Securities Exchange Commission (SEC) is concerned with
a. Developing a new conceptual framework in order to reduce differences in financial
reports for global companies.
b. Setting accounting rules for all companies that are incorporated in the United States.
c. Setting accounting rules for publicly-traded companies in the United States.
d. Working to reduce differences in accounting reports issued by governmental units.
Which of the following debt management ratios is the most inclusive for measuring the
degree to which a company relies on outsiders for financing?
a. debt-to-equity ratio
b. times interest earned ratio
c. long-term debt-to-equity ratio
d. long-term debt-to-total assets ratio
When using the indirect method to determine operating cash flows, how is the purchase
of equipment for cash shown on the Statement of Cash Flows?
a. operating activity
b. investing activity
c. financing activity
d. noncash investing and financing activity
e. not reported on the statement of cash flows
The telephone bill for the current period is received and recorded, but payment will be
made later. What effect does this transaction have on the accounting equation?
a. Assets and liabilities increase.
b. Assets and contributed capital increase.
c. Liabilities increase and retained earnings decrease.
d. Assets and liabilities decrease.
Which balance sheet accounts are most affected by operating activities?
a. Current assets and current liabilities.
b. Long-term assets.
c. Long-term liabilities.
d. Stockholders’ equity.
Been There Used Furniture
Been There Used Furniture began operation on January 1, 2013, with an initial
investment of $100,000 from each of its five stockholders. During the year, the
company had net income of $200,000 and paid dividends of $50,000.
Refer to Been There Used Furniture. Calculate the retained earnings balance at
December 31, 2013.
a. $150,000
b. $200,000
c. $500,000
d. $650,000
Match the term with its correct definition.
a. Form 8-K d. Forms S1 and S2
b. Form 10-K e. MD&A
c. Form 10-Q
37/ Form that represents the company’s annual report by providing a comprehensive
overview of the corporation’s business and financial condition, including audited
financial statements.
38/ In this section of the annual report, management discusses its views of the financial
condition and performance of the company.
39/ Form that companies must file with the SEC to announce major events that are
important to investors and creditors.
40/ Form that includes unaudited financial statements and provides a continuing view
of the corporation’s financial position during the year since it must be filed for each of
the first three fiscal quarters of the corporation’s fiscal year.
41/ Forms that companies must file with the SEC to “register” their securities prior to
offering them to investors.
Refer to Medstar Ambulance Service. The following statements describe how the
company reported the cash flow effects of the items described above on its 2014
statement of cash flows. The indirect method is used to prepare the operating activities
section. Which of the following has been reported incorrectly?
a. Proceeds of $1,200,000 from the issuance of notes were reported as a cash inflow in
the financing activities section.
b. The loss on note retirement of $45,000 was added to net income in the operating
activities section.
c. Payments of $1,260,000 were reported as a cash outflow in the investing activities
section.
d. Interest expense of $75,000 was not reported separately because it is included in net
income in the operating activities section.
Tom liquidates an investment, and his proceeds will be received in 8 annual payments
of $10,000 each with interest computed at 7%. What is the Present Value of this
Annuity?
a. $89,228.00
b. $59,713.00
c. $17,181.90
d. $5,820.10
The FASB’s concept of comprehensive income
a. allows items that are not necessarily under management’s control, such as currency
translation adjustments, to be shown as an appropriation of retained earnings.
b. has a primary drawback because it allows management considerable flexibility in
determining the net income figure.
c. excludes transactions that involve the payment of dividends and other transactions
affecting owners.
d. requires that all transactions representing changes in asset and liability accounts must
be shown on the income statement.
One way analysts measure the ability of a company to meet its obligations is to
calculate the times interest earned ratio for any outstanding debt the company may
have. How would a company with $100,000 of outstanding bonds paying 8.5%
annually and income before interest and taxes of $50,000, calculate the interest
coverage (accrual basis) ratio?
a. Income before interest and taxes divided by the interest expense.
b. Income before interest and taxes divided by carrying value of the bonds outstanding.
c. Income before interest and taxes divided by the face value on bonds.
d. Face value of the bonds divided by income before interest and taxes.
The Earnings Per Share measure appears on which of the following financial
statements?
a. Statement of Cash Flows
b. Retained Earnings Statement
c. Income Statement
d. Balance Sheet
What is the interest rate of a single $20,000 cash flow in 3 years if the present value is
$15,443.60?
a. 7%
b. 8%
c. 9%
d. 10%
Refer to the Ace Computing Company. The net realizable value of receivables
appearing on the 2013 balance sheet will amount to
a. $40,648.
b. $39,648.
c. $41,300.
d. $39,800.
Failure to record depreciation expense for the period results in which of the following?
a. Net income being overstated.
b. No effect on total assets.
c. Stockholders’ equity being overstated.
d. Both a and c.
While reconciling the checking account, the accountant noticed that an error had been
made in recording a check received by the company. The bookkeeper had recorded the
receipt as $729 but the correct amount of the check was $279. Which of the following
reconciling adjustments is necessary?
a. Add $450 to the company’s records.
b. Deduct $450 from the company’s records.
c. Add $450 to the bank statement balance.
d. Deduct $450 from the bank statement balance.
The quick ratio
a. is generally larger than the current ratio.
b. decreases when a company’s assets becomes more liquid.
c. increases when a company has more cash sales than credit sales.
d. is larger when a company’s assets are more liquid.
The amount of interest paid is a function of three variables, the amount borrowed, the
interest rate, and the length of the loan period.
The concept that assumes that an entity is notin the process of bankruptcy is called the
___________ concept.
Distinguish between tangible and intangible operating assets.
Refer to King Cotton Company. What is the percent increase/decrease of long-term
liabilities from 2012 to 2013? Which liability appears to have caused the greatest
change?
List several employee withholdings that impact an employee’s net pay. Describe the
types of payroll taxes that an employer might be required to pay.
The preemptive right entitles a common stockholder to a proportionate share of any
dividend payouts.
Listed below are selected accounts. In the blank spaces provided for each account,
indicate what type of account it is, its normal balance, and the debit/credit rules for
increasing and decreasing it. Use the following abbreviations for your answer:
Normal Rules to Increase or
Type of Account Account Balance Decrease the Account
A = Asset Dr = Debit Dr = Debit
L = Liability Cr = Credit Cr = Credit
SE = Stockholders’ Equity
R = Revenue
E = Expense
D = Dividend
Type of Normal Rule to Rule to
Account Balance Increase Decrease
Example: Cash A Dr Dr Cr
a. Accounts Payable
b. Retained Earnings
c. Prepaid Insurance
d. Service Revenues
e. Notes Payable
f. Intangibles
g. Common Stock
h. Salary Expense
i. Accounts Receivable
j. Unearned Revenues
Refer to Mary Kay Cosmetics. Prepare the financing activities section of the company’s
statement of cash flows for 2014.
Common size financial statements exclude the dollar amount as a relevant variable in
the analysis, which makes comparison of one period with the next more meaningful.
A sales invoice that bears the notation 2/10 means ____________________.
Refer to Fabulous Creations. The company spends significant dollars on research and
development initiatives each year to develop new products that allow it to remain
competitive. Yet, the company’s balance sheet does not reflect these costs. Why?
Riverdale Drugs has an inventory turnover ratio of 15 times while RJ’s Drugs has an
inventory turnover of 14 times. RJ’s is less efficient in managing its inventory.
The least liquid of all assets is cash.
One primary purpose of a classified balance sheet is to help users evaluate the working
capital of a company.
What is the primary weaknesses of using raw financial statement numbers in cross
sectional analysis? How can the problem be solved?
The amount of earnings distributed to stockholders can be found in the income
statement as an expense.
Refer to Recovery Solutions, Inc. Evaluate the company’s profitability ratios for 2015
and 2014, including the gross profit percentage, operating margin percentage, net profit
margin percentage, return on assets, and return on equity. Assume that total assets and
total stockholders’ equity at June 30, 2013 were $1,250,000 and 969,000, respectively.
Also assume that the tax rate is 30% for all periods presented.