1) A 12% change in sales will result in a 12% change in net income.
2) Every transaction affects equal numbers of ledger accounts and is recorded by equal
dollar amounts of debits and credits.
3) Someone to whom a company has a debt is known as an investor.
4) If a firm has a current ratio of 2, the subsequent receipt of a 60-day note receivable to
settle an open account will cause the ratio to decrease.
5) Long-term liabilities are a component of the capital structure of a company.
6) The debt-to-equity ratio is defined as total long-term liabilities divided by total
stockholders’ equity.
7) A company’s chart of accounts will reflect the nature of its business.
8) A company prepares adjusting entries for debit memorandums but not for credit
memorandums
9) When treasury stock is reissued and the cost is less than the reissue price, the
difference increases additional paid-in capital.
10) Current assets, other than cash, are expected to be sold or consumed are during a
company’s normal operating cycle.
11) The weighted average cost is calculated by adding up the units’ costs from each
purchase and then dividing by the number of purchases.
12) One primary purpose of a classified balance sheet is to help users evaluate the
liquidity of a company.
13) Acquisition cost includes all of the costs that are normal and necessary to acquire
and maintain a plant asset over its useful life
14) The gross profit ratio is calculated as gross profit divided by net income.
15) The reason the allowance method of recognizing bad debts is used is primarily
because it recognizes the maximum amount of write-off in each period.
16) The following accounting principles and assumptions are included in the conceptual
framework of accounting:
For each situation in A through C below, identify which assumption or principle applies
by selecting from the list provided above, and explain why that assumption or principle
applies.
A) Global Corp. has divisions in several countries around the world. Each of these
countries has a currency different from the U.S. dollar. Global Corp. is a U.S. company
and must include the financial data of its worldwide divisions in its financial
statements.
B) Steve and Mike operate a security business as a partnership. They are considering
the advantages of changing over to the corporate form of business.
C) Island Pasta is a locally owned and operated fast-food business. The owners have
decided to expand into nearby cities. Expansion will require more capital, but
management doesn’t expect it will stay in business for more than a year or so regardless
if it expands or not.
17) When using the direct method, how are salaries paid to employees reported on the
statement of cash flows?
A.Operating activity
B.Investing activity
C.Financing activity
D.Noncash investing and financing activity
18) Arena, Inc. uses straight-line depreciation for its equipment. Arena purchased
equipment for $300,000 and estimated its useful life at 8 years. The bookkeeper failed
to consider the residual value of $50,000. What is the impact on earnings per share and
operating income of failing to consider the residual value?
A.Earnings per share will be overstated and operating income will be understated
B.Earnings per share will be understated and operating income will be overstated
C.Both earnings per share and operating income will be overstated
D.Both earnings per share and operating income will be understated
19) The concept of leverage is
A.it is appropriate to borrow if the return on the assets is greater than the cost of the
financing.
B.it is appropriate to borrow as long as the lender approves the loan.
C.it is unfavorable to borrow funds rather than raise the capital from stockholders
D.that a high debt-to-equity ratio is favorable.
20) Satir Corp. reported the following information for 2013 and 2014.
How much cash was paid for salaries during 2014?
A.$55,100
B.$55,200
C.$57,000
D.$58,900
21) The effect of recording depreciation for the year is a(n)
A.decrease in assets and a decrease in net income
B.decrease in assets but no change in owners equity
C.increase in assets and an increase in net income
D.decrease in net income and no change in assets
22) Which of the following statements regarding the inclusion of liabilities on the
statement of cash flows is true?
A.All current liabilities affect the operating activities section
B.Long-term liabilities generally affect the investing activities section
C.A decrease in a current liability from the beginning to the end of the year is
accompanied by a decrease of cash
D.A decrease in a current liability from the beginning to the end of the year is
accompanied by an inflow of cash
23) Caruso, Inc. has an inventory turnover rate of 8 times. If its cost of goods sold is
$150,000, then
A.The company will report sales of $1,200,000
B.The gross margin will be $1,200,000
C.The company’s average inventory is $18,750
D.It sells its inventory 1,200 times per year
24) The primary reason for a stock split is to
A.distribute cash to the investor
B.decrease the market value of the stock
C.decrease the number of shares outstanding
D.increase the contributed capital of the corporation
25) Which of the following statements regarding the activities of Marcus Corp. is true?
A.Revenues decrease Marcus stockholders equity
B.Expenses increase Marcus stockholders equity
C.Expenses decrease Marcus stockholders equity
D.None of these answer choices is correct
26) On September 20, Lark Inc.presents credit card drafts to its bank in the amount of
$10,000;
the collection charge is 4%.
Required: Identify and analyze the effect of Lark’s September 20 transactions (the date
of deposit).
27) 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: How much of Gallo Factory is financed by creditors at the end of December
of 2014? Evaluate the change from 2013 to 2014.
28) If a company has a choice of acceptable methods to estimate bad debts, what factors
should be considered in the selection?
29) Cooking Corner
Cooking Corner reported inventory on its balance sheet at December 31, 2013 at
$32,000. During 2014, Cooking Corner purchased goods totaling $634,000 on account
with terms of 2/10, n/30, FOB shipping point. Total charges paid by Cooking Corner
directly to the freight company were $1,000. At the end of 2014, inventory on hand
totaled to $45,000. Net sales for 2014 totaled $1,300,000. Cooking Corner employs a
periodic inventory system.
Refer to the information about Cooking Corner.
How much is Cooking Corners cost of goods sold assuming that Cooking Corner takes
advantage of one-half of the cash discount?
30) Ficus Company calculated the following amounts concerning its financial
information for the years ending December 31, 2014 and 2013:
REQUIRED:
Examine Ficus ratios. Is the change in the current ratio favorable or not? Explain.
31) The purchase of merchandise is an important ____________________ activity for a
retailer.