1) Focus, Inc. determined that it had incorrectly estimated both the estimated life and
the estimated residual value of equipment that it purchased two years ago. When Focus
accounts for the change in accounting estimates, it must depreciate the remaining book
value of the asset over the current and future accounting periods.
2) Contingent assets may be disclosed in the notes if probable and reasonably
estimable.
3) Analysts trying to make investment decisions may very well ignore discontinued
operations, and extraordinary items.
4) In a compound interest problem, if you know the future value, the present value, and
the number of periods, then you can solve for the interest rate.
5) The cash flow adequacy ratio can only be calculated if a company uses the direct
method to report cash flows from operating activities.
6) A T account for Cash cannot contain any credits.
7) The direct method of reporting cash flows from operating activities involves
reconciling net income and cash flow from operations.
8) Inventory is more liquid than accounts receivable because receivables must be
collected and some customers may not be willing to pay, while inventory need only be
sold in a retail store.
9) The excess of current assets over current liabilities is referred to as working capital.
10) Under the periodic inventory system, a physical inventory must be taken at the end
of the period to determine cost of goods sold.
11) A company in the process of liquidation meets the requirements under the going
concern assumption.
12) Capitalizing interest increases the recorded cost of a plant asset.
13) Payment of a dividend increases both cash and stockholders equity of the
distributing business.
14) The cash-to-cash operating cycle is the number of days’ sales in
A.receivables and working capital.
B.receivables and plant assets.
C.inventory and receivables.
D.inventory and plant assets.
15) How is treasury stock shown on the balance sheet?
A.treasury stock is not shown on the balance sheet
B.an increase in stockholders equity
C.a decrease in stockholders equity
D.an asset
16) Captain Lewis, Inc. purchased equipment at the beginning of 2014 for $60,000. In
addition, Captain Lewis’ paid $2,000 for delivery of the equipment to its plant and
$1,000 for installation of the equipment. The equipment has an estimated residual value
of $7,000 and an estimated life of 7 years or 70,000 hours of operation. Captain Lewis’
is looking at alternative depreciation methods for the equipment. Calculate the
following:
A. The depreciation expense for the year 2014 using the straight-line depreciation
method.
B. The total accumulated depreciation at December 31, 2015, using the
units-of-production depreciation method. Assume that the equipment is operated for
15,000 hours in 2014 and 12,000 hours in 2015.
C. The book value of the equipment at December 31, 2014, using the
double-declining-balance depreciation method.
D. Which of the above methods is considered accelerated?
E. What are the advantages of using an accelerated depreciation method as compared to
the straight-line method for lowering taxes early in the life of the equipment?
17) Which one of the following is a correct expression of the accounting equation?
A.Assets + Liabilities = Owners Equity
B.Assets = Liabilities – Owners Equity
C.Assets + Owners Equity = Liabilities
D.Assets = Liabilities + Owners Equity
18) [APPENDIX] Which of the following statements regarding partnerships is true?
A.Partnerships have two owners
B.The partnership ends when a new partner is added
C.The partnership is responsible for its own taxes
D.The partnership is a separate legal entity from its owners
19) Which of the following statements is true?
A.Investments in commercial paper or U.S. Treasury bills must be treated as cash
equivalents
B.Investments in stock cannot be treated as cash equivalents because they are not
convertible into a known amount of cash
C.Investments which are convertible into a known amount of cash and mature within
three months after the balance sheet date are treated as cash equivalents
D.Investments in money market accounts cannot be treated as cash equivalents because
they do not have a specific maturity date
20) The landlord records the security deposit she collects from the tenant as a(n)
A.asset
B.liability
C.contingent liability
D.contra liability
21) Megan Farms received a promissory note from a customer on March 1, 2014. The
face amount of the note is $8,000; the terms are 90 days and 9% interest. At the
maturity date, the customer pays the amount due for the note and interest.
What entry is required on the books of Megan Farms on the maturity date, assuming
none of the interest had already been recognized?
A.One that increases Cash, $8,000, and decreases Notes Receivable $8,000
B.One that increases Cash, $8,180, increases Interest Revenue, $180, and decreases
Notes Receivable, $8,000
C.One that increases Cash $8,720, decreases Notes Receivable $8,000, and increases
Interest Revenue, $720
D.No entry is required; the customer pays the amount due to the bank
22) The qualitative characteristics of accounting data include
A.Assets reported on the balance sheet
B.All accounting information
C.Cash flows
D.Reliability
23) Readers.com uses a perpetual inventory system.
If Readers.com uses the moving average method, how much is cost of goods sold for
the units sold on February 15?
A.$245
B.$255
C.$260
D.$270
24) Louisiana Enterprises received payment from its customers for previous sales on
credit. What was the impact on its working capital?
A.Increase in working capital
B.Decrease in working capital
C.No effect on working capital
D.Unable to determine
25) Cripple Creek Inc.
Use the information presented below for Cripple Creek, Inc. for 2013 and 2012 to
answer the questions that follow. Cripple Creek uses the straight-line depreciation
method.
Refer to the information for Cripple Creek Inc.
Using the 2013 data, what is the average age of Cripple Creek’s property, plant, and
equipment?
A.1.60 years
B.2.50 years
C.4.00 years
D.10.00 years
26) Given below are three ratios calculated for Lantana, Tera, and Bake Companies for
2012 and 2011.
27) Jose Exports Inc. reported net income of $150,000 for 2013, but its cash balance
decreased $40,000. Which financial statement should Jose Exports management refer to
for an explanation of this situation?
A.Balance Sheet
B.Income Statement
C.Statement of Retained Earnings
D.Statement of Cash Flows
28) Which one of the following is least likely to be a user of financial information of a
grocery store?
A.The manager of the grocery store
B.The supplier of milk to the grocery store
C.A stockbroker looking for a possible investment
D.A customer at the grocery store
29) Houston Corp. prepares monthly bank reconciliations of its checking account
balance. The bank statement for July 2014 indicated the following:
An analysis of canceled checks and deposits and the records of Houston revealed the
following items:
The correct amount of check #205 is $540, but it was recorded as a cash disbursement
of $450. The check was issued to pay for merchandise purchases. The check appeared
on the bank statement correctly.
30) Winston Corp. had $1,800 of supplies on hand at January 1. During the year,
supplies with a cost of $4,000 were purchased. At December 31, the actual supplies on
hand amount to $1,300. After the adjustments are recorded and posted at December 31,
determine the balances in the Supplies and Supplies Expense accounts.
Supplies Supplies Expense
A.$ 1,800 $ 4,000
B.$ 1,300 $ 4,500
C.$ 5,300 $ 5,800
D.$ 1,300 $ 5,800
31) The solution to this problem requires time value of money calculations. Reference
to Tables 9-1 through 9-4 in the text is necessary to complete the calculations.
The present value of $7,000 to be received in 7 years at 7% compounded annually is
A.$3,430
B.$6,657
C.$4,361
D.$7,000
32) Significant differences exist in terms on financial statements around the world. For
example, another name for what we know as Contingent Liabilities in the U.S. is:
A.Share Capital
B.Capital Reserves
C.Provisions for Other Risks
D.Deferred Income
33) Mill Valley Corporation was organized on January 1, 2014, with the investment of
$225,000 in cash by its stockholders. The company immediately purchased an office
building for $300,000, paying $201,000 in cash and signing a three-year promissory
note for the balance. Mill Valley signed a five-year, $50,000 promissory note at a local
bank during 2014 and received cash in the same amount. During its first year, Mill
Valley collected $93,000 from its customers. It paid $60,600 for inventory, $22,400 in
salaries and wages, and another $5,100 in taxes. Mill Valley paid $5,300 in cash
dividends.
Required
1> Prepare a statement of cash flows for the year ended December 31, 2014
2> What does this statement tell you that an income statement does not?
34) If a company records a $310 receipt as $130, this type of error is called a(n)
____________________.
35) Evanston Inc. started the year with $35,000 in accounts receivable and ended the
year with
$50,000 in the account. Describe how information regarding the companys accounts
receivable should be reflected on its statement of cash flows, assuming use of the
indirect
method.
36) The statement of ____________________ explains changes in the components of
owners equity during the period.
37) What is the difference between par value and market value? Which is the better
indicator of the true worth of the stock?
38) Mega Trends Inc. and Energize Electronics are competitors in the same industry.
The following information was summarized from a recent annual report of Mega
Trends Inc.:
(In millions)
Receivables:
December 31, 2013 $ 1,968
December 31, 2012 642
Revenue for the year ended:
December 31, 2013 46,980
December 31, 2012 40,023
The following information was summarized from a recent annual report of Energize
Electronics:
(In millions)
Accounts and notes receivable, net
December 31, 2013 $ 246
December 31, 2012 264
Revenues for the year ended:
December 31, 2013 4,335
December 31, 2012 4,251
REQUIRED:
1> Calculate the accounts receivable turnover ratios for Mega Trends and Energize for
the most recent year.
2> Calculate the average collection period, in days, for both companies for the most
recent year. Comment on the reasonableness of the collection periods for these
companies considering the nature of their business.
3> Which company appears to be performing better? What other information should
you consider in determining how these companies are performing?
39) Improv Corporation issued $95,000 face value bonds at a discount of $5,000. The
bonds contain a call price of 102. Improv decides to redeem the bonds early when the
unamortized discount is $2,750.
REQUIRED:
1> Calculate Improv Corporations gain or loss on the early redemption of the bonds.
2> Describe how the gain or loss would be reported on the income statement and in the
notes to the financial statements.
40) Albion Company reported the following amounts on its balance sheet at January 1,
2012:
The following transactions occurred during 2012:
Show the effects of the transactions on the accounting equation and prepare the
stockholders’ equity section of Albion’s balance sheet at December 31, 2012.
