1) The payee of a note recognizes a note payable on the balance sheet and interest
expense on its income statement.
2) When plant assets are reported, the current period’s depreciation expense is
subtracted from the original cost on the balance sheet.
3) When a bank pays interest or collects an amount owed to a company by one of the
bank’s customers, the bank issues a debit memorandum.
4) If two companies in the same industry use different methods to value inventory, this
makes comparisons more difficult but not impossible.
5) Expired costs are called assets.
6) The excess of the face value of bonds over the issue price is known as a premium.
7) To be classified as a cash equivalent, an item must be readily convertible to a known
amount of cash and have an original maturity to the investor of three months or more.
8) Which of the following is a current asset?
A.Land
B.Buildings
C.Store fixtures
D.Prepaid insurance
9) Which internal control procedure is followed when a physical count of inventory is
performed in a perpetual inventory system?
A.Segregation of duties
B.Safeguarding assets and records
C.Independent verifications
D.Proper authorizations
10) Morrison Company sells merchandise to customers. Morrison should normally
recognize
A.Revenue and the related expenses in the same accounting period as earned whether
payment is received or not
B.Revenue when the cash is collected and the expenses when Morrison pays its creditor
for the merchandise
C.Revenue and expenses after all payments are collected
D.Expenses in the period the merchandise is sold and defer revenue until the customer
pays for the merchandise
11) Culinary Delights Company
Refer to the financial statements of Culinary Delights Company.
REQUIRED:
(A) Calculate Culinary Delights return on sales ratio for 2012 and 2011. Assume that
the income tax rate is 30%. What information is provided with this ratio?
(B) Calculate the return on common stockholders’ equity ratio for 2012 and 2011.
Stockholders’ equity at December 31, 2010, was $897,431 (in thousands). Why is the
denominator an average instead of a single amount?
12) The following set of items describes activities completed by a company in
collecting cash for merchandise sales. For each activity, identify whether or not the
activity adheres to or violates sound internal control procedures.
Monthly statements, indicating the current balance due, are mailed to customers.
A.Adheres to sound internal control procedures
B.Violates sound internal control procedures
C.Neither strengthens nor violates internal control
13) On January 1, 2012, Breaker, Inc. issued $400,000, 10-year, 10% bonds for
$354,200. The bonds pay interest on June 30 and December 31. The market rate is 12%.
What is the carrying value of the bonds after the first interest payment is made on June
30, 2012?
A.$352,960
B.$354,200
C.$355,452
D.$400,000
14) If Mussel Company has working capital of $540,000 and a current ratio of 3 to 1,
the amount of current assets is:
A.$540,000
B.$810,000
C.$270,000
D.$405,000
15) Which pair of accounts has the same set of rules for debit and credit entries?
A.Service Revenue and Rent Expense
B.Dividends and Retained Earnings
C.Equipment and Salaries Expense
D.Accounts Receivable and Accounts Payable
16) What is the name for the balance sheet under international accounting standards?
A.Assets and Equity Attributable to Shareholders
B.Statement of Financial Position
C.Statement of Balance
D.The Equitable Claims Statement
17) 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
18) Which one of the following events involves a liability for a business?
A.Loans to be repaid to banks
B.Inventories purchased for cash
C.Amounts invested by the owners
D.Stock sold to the general public
19) Which of the following financing activities results in a cash inflow?
A.Buying treasury stock
B.Issuing bonds
C.Repaying a bank loan
D.Paying cash dividends
20) When a company declares a cash dividend, which of the following is true?
A.Stockholders equity is increased
B.Liabilities are increased
C.Assets are increased
D.Assets are decreased
21) The result of using the effective interest method of amortization of discount on
bonds is that the
A.interest expense for each amortization period is constant
B.effective interest rate for each amortization period is constant
C.amount of interest expense decreases each period
D.cash interest payment is greater than the interest expense
22) Which of the following is not classified as a noncurrent liability?
A.Bonds payable
B.Capital lease obligations
C.Current portion of long-term debt
D.Mortgage payable
23) With respect to the statement of cash flows,
A.retirement and repurchase of stock is a financing activity
B.a stock split is a financing activity
C.a stock dividend is an investing activity
D.the declaration of a cash dividend account is an operating activity
24) Which statement is trueconcerning 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
25) Herndon Corp. purchased merchandise on account from Likert Corp. on November
18, 2014. On November 21, 2014, Herndon returned damaged merchandise to Likert
and was granted an adjustment on its account. Herndon uses the periodic inventory
system. What effect does the merchandise return have on Herndons accounting
equation?
A.Assets and stockholders equity decrease
B.Assets and liabilities decrease
C.Liabilities decrease and stockholders equity increases
D.Liabilities and stockholders equity decrease
26) In the reconciliation of a bank statement, “deposits in transit” should be:
A.added to the unadjusted book balance
B.subtracted from the unadjusted bank balance
C.added to the unadjusted bank balance
D.subtracted from the unadjusted bank balance
27) Camp Consulting Services started business on January 1, 2014. Camp performed
services for customers totaling $100,000 of which 40% remain uncollected at the end of
December. Under the accrual basis, what amounts would appear on Camp Consulting’s
financial statements for 2014?
Income Statement Statement of Cash Flows
A.$ 100,000 $ 60,000
B.$ 100,000 $ 100,000
C.$ 60,000 $ 60,000
D.$ 60,000 $ 100,000
28) A company that holds a promissory note from another company has an asset, called
a(n) ____________________.
29) Halston Metal Company
Use the liabilities section of Halston Metal Companys balance sheet to answer the
questions that follow.
Halston Metal Company
Consolidated Balance Sheets
(in millions)
Review the consolidated balance sheets of Halston Metal Company.
REQUIRED:
(1) Which long-term liability would also be listed in the short-term liability section?
Why?
(2) What percent of the total liabilities for 2014 and 2013 are long-term liabilities?
What implication does this have?
30) What is meant by “cash equivalents”?
31) At December 31, 2012, an amount due on December 31, 2013, would be classified
as a(n) ___________________________ liability.
32) The ____________________ principle attempts to associate with the revenue of the
period, all costs necessary to generate that revenue.
33) The present value and future value concepts are applied to measure the amount of
several accounts common in accounting. What are some accounts that are valued in this
manner?
34) Changes in accounts and notes receivable are reported in the __________ Activities
section of a statement of cash flows prepared using the indirect method.
35) Presented below are condensed data from the financial statements of Gallo Factory
for 2014 and 2013. The figures are expressed in thousands. Use this information to
answer the questions that follow.
Required: Which statement indicates the financial position of the company? What
information is provided on that statement that indicates the “financial position” of the
company? Explain.
36) Yu Corporation
Use the following Assets section of Yu Corporations balance sheets for the years ended
December 31, 2013 and 2012 to answer the questions that follow.
Yu Corporation recorded depreciation expense of $344 million for 2012.
Refer to the information for Yu Corporation.
Required:
(1) Explain the impact on net income and cash flows of Yu using straight-line
depreciation for financial reporting and accelerated depreciation methods for income
tax purposes.
(2) In the notes to the financial statements, Yu indicates that it uses different
depreciation methods for different types of plant and equipment assets. Explain why Yu
might follow this policy.
37) Under the indirect method, a loss from the retirement of bonds is
_________________________ to net income in the operating activities section of the
statement of cash flows.