1) Ideally, a proposed comprehensive budget should be compared with financial ratios
that have been agreed upon as part of the firm’s corporate objectives.
2) In practice, some of the required information in the 10-K is incorporated by
reference.
3) The LIFO inventory costing method results in the acid-test ratio being overstated.
4) The manner of recognizing revenue on insurance contracts is unique for the
insurance industry. In general, the duration of the contract governs the revenue
recognition.
5) Noncontrolling interest reflects the ownership of noncontrolling stockholders in the
equity of consolidated subsidiaries less than wholly occurred.
6) SFAS No. 123(R) results in greater international comparability in the accounting for
share-based transactions.
7) Some revenue and expense items never go on the tax return, but do go on the income
statement.
8) Inventory is particularly sensitive to changes in business activity. Therefore,
management should keep inventory at a minimum.
9) The statement of retained earnings reconciles the beginning retained earnings
balance to the retained earnings balance at the end of the current period.
10) The financial statement format for regulated firms will never differ from those of
manufacturers and retailers; the format is prescribed by the FASB.
11) The purchase of equipment using cash is an investing activity.
12) The balance sheets of insurance companies are not classified by current assets and
current liabilities.
13) Treasury stock is best classified as:
a. a current asset
b. a long-term investment
c. a contra liability
d. a reduction of stockholders’ equity
e. a reduction of retained earnings
14) The comment that “items that are not material may be recorded in the financial
statements in the most economical and expedient manner possible” is representative of:
a. matching
b. conservatism
c. realization
d. materiality
e. None of the answers are correct
15) The following data relate to Rocket Company for the year ended December 31,
2012. Rocket Company uses the cash basis.
Which of the following amounts represents income for Rocket Company for the year
ended December 31, 2012?
a. $30,000
b. $5,000 loss
c. $40,000
d. $45,000
e. $50,000
16) The following data relate to Swift Company for the year ended December 31, 2012.
Swift Company uses the accrual basis.
Which of the following amounts represents income for Swift Company for the year
ended December 31, 2012?
a. $60,000
b. $50,000
c. $40,000
d. $35,000
e. $30,000
17) The principle that assumes the reader of the financial statements is not interested in
the liquidation values is:
a. conservatism
b. matching
c. time period
d. realization
e. None of the answers are correct
18) Which of the following expresses DuPont analysis?
a. Net profit margin = total asset turnover times return on assets
b. Total asset turnover = operating asset turnover times financial leverage
c. Return on assets = net profit margin times total asset turnover
d. Return on investment = return on equity (1 – tax rate)
e. Dividend yield = dividend payout times earnings per share
19) In 2012, Revelation, Inc., reported the following statistics.
In 2013, their comparative earnings per share were reported as follows.
However, the note referred to by the asterisk (*) was inadvertently omitted. You are
informed that the firm is basically the same and that there has been no change in
accounting principle.
Required:
a. What information should have been reported in the missing note?
b. Should the price/earnings ratio be changed by the transaction that caused the change
in earnings per share?
c. List two other profit-related measures other than earnings per share that would be
changed because of this transaction.
20) For Bob and Jane, the assets and liabilities and the effective income tax rates are as
follows at December 31, 2012 .
Required:
21) Tangible assets on the balance sheet should include:
a. equipment
b. inventory
c. trademarks
d. investments
e. accrued insurance
22) Parts of the operating statistics for Big State Power are given below.
Required:
23) Who is responsible for the preparation and integrity of financial statements?
a. A cost accountant
b. Management
c. An auditor
d. A bookkeeper
e. The FASB
24) Understating assets and revenues is justified based on:
a. realization assumption
b. matching
c. consistency
d. realization
e. None of the answers are correct
25) The DuPont method return on assets uses two component ratios. What are they?
a. Inventory turnover gross profit margin
b. Times interest earned debt ratio
c. Return on equity dividend payout
d. Net profit margin total asset turnover
e. Return on investment total investment turnover
26) Which of the following is not a type of audit opinion?
a. Unqualified opinion
b. Qualified opinion
c. Adverse opinion
d. Clean opinion
e. Disclaimer of opinion
27) Which of the following variables indicates a measure of cumulative profitability
over time?
a. Retained earnings (balance sheet)/total assets
b. Earnings before interest and taxes/total assets
c. Working capital/total assets
d. Market value of equity/book value of total debt
e. Sales/total assets
28) The income statement and other selected data for Pat Gibson Company is shown
below.
Other data:
a. Cost of goods sold includes depreciation expense of $20,000.
b. Selling and administrative expense includes goodwill amortization of $10,000.
c. Decrease in deferred income taxes (a liability account), $5,000.
d. Increase in accounts receivable, $20,000.
e. Increase in accounts payable, $10,000.
f. Increase in inventories, $30,000.
g. Decrease in income taxes payable, $20,000.
Required:
29) Data per passenger-mile is often used by transportation companies to analyze:
a. capacity
b. revenue
c. borrowing ability
d. earnings per share
e. leverage
30) Comparative income statements for 2012 and 2011 follow.
Required:
31) Decort Company’s working capital accounts at December 31, 2012, are given
below:
During 2013, DeCort Company completed the following transactions:
a. Purchased fixed assets for cash, $20,000.
b. Exchanged DeCort Company common stock for land. Estimated value of transaction,
$80,000.
c. Payment of $40,000 on short-term notes payable.
d. Sold marketable securities costing $20,000 for $25,000 cash.
e. Sold DeCort Company common stock for $70,000.
f. Wrote off an account receivable in the amount of $20,000.
g. Declared a cash dividend in the amount of $5,000.
h. Paid the above cash dividend.
i. Sold inventory costing $10,000 for $15,000 cash.
j. Sold inventory costing $5,000 for $8,000 on account.
k. Paid accounts payable in the amount of $20,000.
l. Sold marketable securities costing $20,000 for $20,000 cash.
m. Issued a credit memo on an account receivable, $1,000.
Required:
Format:
32) Which of these statements is not true?
a. Asset, liability, and stockholders’ equity accounts are referred to as permanent
accounts
b. Revenue, expense, and dividend accounts are described as temporary accounts
c. Temporary accounts are closed at the end of the period to retained earnings
d. The balance sheet will not balance until the temporary accounts are closed to retained
earnings
e. With double-entry, each transaction is recorded twice
33) Which of the following types of business would normally have the longest
operating cycle?
a. A seller of resort property
b. A car dealer
c. A car manufacturer
d. A grocery store
e. A record store
34) The income statement for Lifeline Products in single-step format follows.
Required:
a. Convert the statement to multiple-step format.
b. Recompute net income with the unusual loss removed.
c. Why may net income with the unusual loss removed be preferable to use for trend
analysis?
d. Speculate on why this loss is not considered extraordinary or as a disposal of a
segment.
35) The following data relate to Sparrow Company for the current year.
Note: Sparrow Company uses the calendar year.
Required:
36) Which of the following types of businesses would normally have the shortest
operating cycle?
a. A retail clothing store
b. A grocery store
c. A wholesale furniture store
d. A car manufacturer
e. A car dealer
37) Management should not use the statement of cash flows for which of the following
purposes?
a. To determine dividend policy
b. To determine cash flow from operations
c. To determine cash flow from investing activities
d. To determine cash flow from financing activities
e. To determine the balance in accounts receivable
38) Which of the following accounts would not be classified as a current asset?
a. Cash restricted for retirement of bonds
b. Cash and equivalents
c. Cash and certificates of deposit
d. Time deposits
e. Cash
39) Which of the following ratios does not represent some form of comparison between
accounts in current assets and accounts in current liabilities?
a. Working capital
b. Current ratio
c. Acid-test ratio
d. Cash ratio
e. Merchandise inventory turnover
40) Which of the following statements is incorrect?
a. The North American Industry Classification System (NAICS) was created jointly by
the United States, Canada, and Mexico
b. For the NAICS, economic units with similar production processes are classified in
the same industry, and the lines drawn between industries demarcate differences in
production processes
c. NAICS provides enhanced industry comparability among the three NAFTA trading
partners
d. NAICS divides the economy into twenty sectors
e. In most sectors, NAICS provides for compatibility at the industry (six-digit) level
41) In analyzing the borrowing position of a utility, which of the following is primary?
a. Liquidity
b. Ability to earn a profit
c. Return to shareholders
d. Long-term debt capacity
e. Utilization of current assets
42) Required:
Indicate the effect of each of the following transactions on the ratios listed. Use + to
indicate an increase, – to indicate a decrease, and 0 to indicate no effect. Assume an
initial times interest earned ratio of 3 to 1, debt ratio of 0.5 to 1, debt/equity ratio of 1.0
to 1, and total debt to tangible net worth ratio of 1.1 to 1 .
Times Debt Total Debt
Interest Debt Equity Tangible Net
Transaction Earned Ratio Ratio Ratio Worth Ratio
a. Collection of accounts receivable.
b. Firm has decreasing profits due to rising cost of sales.
c. Firm appropriates a substantial amount for expansion.
d. Conversion of preferred stock to common.
e. Repayment of a short-term bank loan (ignore interest).
f. Payment for a valuable trademark.
g. The stock is split two for one.
h. Purchase of equipment financed by a long-term note (consider interest).
i. Conversion of bonds to stock.
j. Declaration and payment of dividend.
k. The firm experiences a rise in the rate charged on its line of credit.
43) Which of the following is not true relating to treasury stock?
a. A firm creates treasury stock when it repurchases its own stock and does not retire it
b. Treasury stock lowers the stock outstanding
c. Treasury stock may be recorded at the cost of the stock
d. Treasury stock may be recorded at par or stated value
e. Treasury stock is, in essence, an increase in paid-in capital
44) The most popular depreciation method for financial reporting is the following:
a. units-of-production
b. sum-of-the-years’-digits
c. declining-balance
d. straight-line
e. other
45) Which of the following circumstances will cause sales to fixed assets to be
abnormally high?
a. A recent purchase of land
b. A labor-intensive industry
c. A highly mechanized facility
d. High direct labor costs from a new union contract
e. The use of units-of-production depreciation
46) Interim reporting recognizes that timeliness of data offsets lack of detail and
requires only minimum data.
47) At the beginning of the year, Execon Company had total assets of $200,000, total
liabilities of $110,000, and shareholders’ equity of $90,000. For the year, Execon
Company earned net income of $75,000 and declared cash dividends of $30,000. At the
end of the year, the company had total assets of $300,000 and its shareholders’ equity
was at $135,000. At the end of the year, Execon Corporation had total liabilities of:
a. $0
b. $45,000
c. $50,000
d. $165,000
e. None of the answers are correct
48) Typically, which of the following would be considered to be the most indicative of a
firm’s short-term debt paying ability?
a. Working capital
b. Current ratio
c. Acid test
d. Cash ratio
e. Days’ sales in receivables
49) Bill’s Produce does 60 percent of its business during June, July, and August.
Required:
a. Compute the days’ sales in receivables for July 31, 2012, and December 31, 2012,
based on the data above.
b. Compute the accounts receivable turnover for the period ended July 31, 2012, and
December 31, 2012 .
c. Comment on the results from (a) and (b).
50) Drama Products Inc. has issued redeemable preferred stock. For analysis purposes,
these securities are best classified as:
a. marketable securities
b. long-term investments
c. long-term debt
d. paid-in capital
e. retained earnings
51) The assumption that enables us to prepare periodic statements between the time that
a business commences operations and the time it goes out of business is:
a. time period
b. business entity
c. historical cost
d. transaction
e. None of the answers are correct
52) A retailing firm has which type of inventory?
a. Raw materials
b. Work in process
c. Merchandise
d. Raw materials and merchandise
e. Raw materials, work in process, and merchandise
53) For Bill and Linda, the changes in net worth for the year ended December 31, 2012,
are detailed as follows.
Required:
Prepare a statement of changes in net worth for the year ended December 31, 2012 .
54) Condensed comparative financial statements for Woodstock Manufacturing
Company appear below.
Required:
Perform a horizontal, common-size analysis of the balance sheet items, using 2010 as
the base year. Also include a horizontal analysis of sales and net income. Comment on
significant trends and relationships revealed by the computations.
55) The following balance sheet, prepared by a careless bookkeeper, has been given to
you to review.
Required:
List any corrections that need to be made. Errors can be in classification, lack of
disclosure, format, or terminology.
56) Information related to Batavia Furniture Company for the year ended December 31,
2012, follows.
Required:
Prepare in good form a multiple-step income statement for the year 2012 . Assume a
50% tax rate and that 5,000 shares of common stock were outstanding during the year.
57) Required:
How will switching from FIFO to LIFO for inventory valuation affect financial analysis
of liquidity and profitability? Cite two ratios that will be affected and indicate how they
will change. (Assume an inflationary condition.)
58) Oregm Imports engages in the retail sale of household products and clothing.
During 2012, the company disposed of the clothing segment. Oregm Imports had
150,000 shares of stock outstanding all year. The results of operations for 2012 follow.
Income taxes of 40% apply to all items.
Required:
Prepare a multiple-step income statement for the year ended December 31, 2012, in
good format.
59) Mr. Jones has asked you to advise him of the long-term debt position of Dryden
Corporation. He provides you with the ratios indicated below.
Required:
Give the implications and limitations of each item separately and then the collective
inference one may draw about Dryden’s long-term, debt-paying ability.
60) Alpha Company would like to estimate how long it will take to realize cash from its
ending inventory. For this purpose the following data are submitted:
Required:
Estimate how long it will take to realize cash from the ending inventory.