A convertible bond is one where
a. the issuer can convert from a fixed interest rate to a floating rate.
b. the issuer can convert the bond from long-term to short-term.
c. the issuer can retire the bond before its specified maturity date.
d. the bondholder can convert the bond into common stock at a future time.
On May 1, a company borrowed $30,000 from the First National Bank on a 1-year, 6%
note. Assuming the company keeps its records on a calendar year basis, an entry is
needed on December 31st to increase
a. interest expense by $600.
b. interest expense by $1,800.
c. interest payable by $900.
d. interest payable by $1,200.
If a company uses the direct write-off method of accounting for bad debts,
a. It establishes an estimate for the allowance for doubtful accounts.
b. It will record bad debt expense only when an account is determined to be
uncollected.
c. It will reduce the accounts receivable account at the end of the accounting period for
estimated uncollected accounts.
d. When an account is written off, total assets will stay the same.
Outstanding shares represent the
a. number of previously issued shares that have been repurchased by the corporation.
b. number of shares that the corporation has sold.
c. number of shares that are currently held by stockholders.
d. maximum number of shares that can be sold by the corporation.
On January 1, 2013, a company sold a machine for $5,000 that it had used for several
years. The machine cost $11,000, and had accumulated depreciation of $4,500 at the
time of sale. What gain or loss will be reported on the income statement for the sale of
the machine?
a. gain of $5,000
b. loss of $6,500
c. loss of $1,500
d. gain of $1,500
Machinery is purchased on credit. What effect does this transaction have on the
accounting equation?
a. Assets and liabilities increase.
b. Assets and stockholders’ equity increase.
c. Liabilities increase and stockholders’ equity decreases.
d. Assets and liabilities decrease.
A company reported net income of $950,000. Cash from operations
a. will always be more than $950,000.
b. will always be less than $950,000.
c. will be equal to $950,000.
d. cannot be determined without more information.
What is the name for a person who lends funds to a business entity and expects
repayment with interest?
a. creditor
b. owner
c. proprietor
d. stockholder
Which of the following would not be considered to be an intangible asset?
a. franchises
b. copyrights
c. investments
d. trademarks
Based on its income for the month, a company estimates that it will owe $23,000 of
federal income taxes for the month of May. What is the effect of the adjustment on the
financial statements?
a. increase stockholders’ equity
b. increase income taxes expense
c. increase retained earnings
d. decrease income taxes payable
Which of the following transactions affects total liabilities?
a. Equipment is purchased for cash.
b. Services are provided for a customer for credit.
c. Payment is made on a bank loan.
d. Common stock is issued.
A Better Mousetrap
The company sold merchandise to a customer on December 1, 2013, for $100,000. The
customer paid with a promissory note that has a term of 6 months and an annual interest
rate of 9%. The company’s accounting period ends on December 31.Refer to A Better
Mousetrap. What amount should the company recognize as interest revenue on
December 31, 2013?
a. $ -0-
b. $ 750
c. $1,500
d. $9,000
Failure to record accrued interest expense would result in which of the following?
a. Assets being overstated
b. Assets being understated
c. Liabilities being overstated
d. Liabilities being understated
When will bonds sell at a discount?
a. The credit standing of the issuing company is not as good as other companies in a
similar line of business.
b. The stated rate of interest is less than the yield rate of interest at the time of issue.
c. The stated rate of interest is more than the yield rate of interest at the time of issue.
d. The issuing company will be able to retire the bonds at less than face at maturity.
A company completed the following transactions involving investments during 2014.
Purchased money market funds for $50,000
Sold available-for-sale securities (cost $60,000) for $70,000
Purchased trading securities for $55,000
The company uses the indirect method to prepare the operating activities section of the
statement of cash flows. The following statements describe how the company reported
the cash flow effects of the above transactions. Which of the following has been
reported incorrectly?
a. Payments of $50,000 for money market funds were reported as a cash outflow in the
investing activities section.
b. Proceeds of $70,000 were reported as a cash inflow in the investing activities section.
c. Payments of $55,000 for trading securities were reported as a cash outflow in the
operating activities section.
d. A gain of $10,000 on the sale of available-for-sale securities was deducted from net
income in the operating activities section.
Assume that you have received copies of the financial statements for Best Buy for the
years ending December 31, 2013 and 2012. Answer the following questions:
A) If you were a banker, why would you need information from the company’s financial
statements?
B) If you were a potential investor in Best Buy stock, what information would you want
from their financial statements?
C) If you were a labor negotiator for a union that represents a group of Best Buy
employees, which financial statement would provide you with the most useful
information?
An accountant is uncertain about the best estimate of an amount for a business
transaction. If there are two possible amounts that could be recorded, the amount least
likely to overstate assets and earnings is selected. Which of the following qualities is
characterized by this action?
a. comparability.
b. conservatism.
c. materiality.
d. neutrality.
Return ratios are measures of the relationship between the
a. profit earned and the investment made in the company by the various groups of
creditors and investors.
b. revenue earned and the total equity of a company.
c. total equity of a company and its cash flows for the period.
d. profitability and liquidity aspects of a company.
Calculations of future values are projections of the future balance based upon
a. past cash flows.
b. future cash flows.
c. past and future cash flows.
d. expected future cash flows.
For which type of merchandise would a company most likely use the specific
identification method of inventory costing?
a. gasoline held in storage tanks
b. cases of bottled water
c. custom-made boats
d. Barbie dolls
The account which records differences between amounts of cash deposited and amounts
from the cash register tapes is called
a. petty cash.
b. cash over and short.
c. cash equivalents.
d. discrepancy expense.
When using the direct method to determine operating cash flows, how is the collection
of cash from customers 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
Refer to Metz Vets. Which of the following activities results in a cash inflow?
a. increases in noncash current assets (NCCA)
b. decreases in current liabilities (CL)
c. increases in common stock (CS)
d. decreases in retained earnings (RE)
According to the Sarbanes-Oxley Act of 2002, who is primarily responsible for
establishing and maintaining a system of internal control over the company’s financial
reporting?
a. Management of the company
b. The company’s auditor’s
c. The company’s internal auditors
d. The audit committee of the company’s board of directors
The following comparative financial statements for the years ended December 31, 2013
and 2012 are provided for Air Plus Company:
Balance Sheet: 2013 2012
Cash and cash equivalents $87,000 $71,600
Accounts receivables, less allowance for doubtful
accounts of $90 (2012) and $82 (2011) 3,800 2,500
Notes receivable 15,000 20,000
Income Statement:
Net sales for the year $9,700 $8,800
Net income for the year 920 1,050
Answer these questions concerning the company’s receivables:
A) What is the gross amountof accounts receivable at December 31, 2013? Why is this
amount different than the amount of receivables shown in the 2012 column of the
balance sheet?
B) What is the net realizable valueof accounts receivable at December 31, 2013? What
does this amount represent?
C) How should accounts receivable be classified on a classified balance sheet? Why?
When using the indirect method to determine operating cash flows, how would the
declaration and payment of cash dividends be shown on the Statement of Cash Flows?
a. operating activities
b. investing activities
c. financing activities
d. noncash investing and financing activity
e. not reported on the statement of cash flows.
A company issued $1,000,000 of 10% notes that resulted in interest expense of
$100,000 per year. What is the company’s net cash outflow if the effective tax rate is
40%?
a. $100,000
b. $ 60,000
c. $ 40,000
d. $160,000
As used in accounting, the “Notes to the Financial Statements” should be
a. shown at the bottom of the Income Statement.
b. excluded, as they are not an integral part of the financial statements.
c. included as an integral part of the financial statements.
d. considered an optional part of the financial statements.
Which of the following ratios is the best measure for analyzing a company’s efficiency
in using assets to produce sales revenues?
a. current ratio
b. return on assets
c. asset turnover ratio
d. debt-to-total assets ratio
When an investor is evaluating whether to purchase stock in a company, which of the
following considerations is most important?
a. Will working capital be sufficient to support growth?
b. Will the key ratios be reported on the balance sheet?
c. Will cash flows from operations exceed net income in the coming years?
d. Will the company earn a satisfactory return on the amount invested by stockholders?
PROBLEM
Backus Tractor Sales
The accountant prepared the following list of account balances from the company’s
records for the year ended December 31, 2013.
Determine the following amounts for Backus Tractor Sales.
A) Current Assets at the end of 2013
Total Assets at the end of 2013
B) Current Liabilities at the end of 2013
C) What parties have a claim on the company’s assets? Explain your answer in the
terms of the accounting equation.
Refer to Designs on You. What is the company’s adjusted cash balance at May 31?
a. $4,865
b. $5,000
c. $5,365
d. $5,500
The type of business activity that relates to obtaining funds from either issuing stock or
borrowing money is called ____________________.
Refer to Maritime Marine Services. Assuming that the book value of the property, plant
and equipment disposed of during 2014 was $90, what were the cash proceeds from the
disposal?
Re Company prepared the following analysis of its year-end inventory at June 30th:
Historical Cost Replacement Cost
Product Quantity per unit per unit
A 17 $430 $499
B 140 325 299
C 38 75 69
Determine the lower of cost or market value for each product in Re Company’s
inventory and prepare the journal entry needed at year-end to value the inventory at
LCM.
Dividend payments appear on the Statement of Retained Earnings.
The interest rate is the percentage that is multiplied by the future value to yield the
amount of interest for that period.
Aardvark Resale
This company sells merchandise only on credit. For the year ended December 31, 2013,
the following data are available:
Sales
$1,200,000
Sales returns and allowances
50,000
Accounts Receivable–January 1, 2013
225,000
Allowance for doubtful accounts–January 1, 2013
15,000
Collections during 2013
1,050,000
Accounts written off as uncollected during 2013
10,000
Refer to Aardvark Resale. Determine the balance of Accounts Receivable at December
31, 2013.
Free cash flow is equal to net cash flow from operating activities minus capital
expenditures and dividends.
During periods of declining purchase prices, LIFO produces the lowest amount of
ending inventory relative to the other inventory costing methods.
Listed below are several amounts from the accounting records of Big Tom’s Pawn
Shops, for the year ended December 31, 2013. Prepare a single-step income statement
in good form.
The following information is provided for a company that manufactures bicycles. The
factory foreman determines when orders for materials are necessary. The orders are sent
to the purchasing department that places orders with the vendors recommended by the
factory foreman. When the materials are received, they are immediately delivered to a
central storeroom. When invoices are received for the items purchased, they are sent to
the accounting department for payment. The accounting department compares the
invoices with purchase orders. If the two documents are in agreement, the invoice is
approved for payment. The accounting department prepares checks that are signed by
the company treasurer.
Recommend three or four improvements in the company’s procedures for purchasing
and paying for purchases of materials that will provide better internal control.
Refer to Mary Kay Cosmetics. Prepare the operating activities section of the statement
of cash flows for 2014 assuming the direct method is used to determine net cash flow
from operating activities.
A decrease in retained earnings represents dividends that were ____________________
during the period, not necessarily those that were paid.
Identify and describe the four primary rights for the owners of common stock.
Cost of goods sold represents an outflow of a resource, inventory, which is caused by
the sale of products.
Selected data from the financial statements of Mars & Venus Counseling Center for the
years ended December 31, 2014 and 2013, are presented below:
(In thousands) 2014 2013
Cash and cash equivalents $ ? $ 4,500
Total current assets (except cash) 180,000 150,000
Income taxes paid 5,000 2,000
Interest paid 5,100 7,200
Net cash provided by operating activities 9,500 6,400
Net cash used by investing activities 5,100 6,300
Net cash provided by financing activities 1,500 7,400
Depreciation and amortization 7,000 5,000
Total stockholders’ equity 115,000 105,000
Net income 4,000 2,000
What is the amount of cash and cash equivalents at the end of 2014?
When treasury stock is reissued at a price that is greater than their cost, the difference
should be credited to the Treasury Stock account.
A company’s internal control system must be designed and maintained by its external
auditors.
____________________ refers to the ability of a company to meet its short-term
obligations.
Refer to Rhodes Bakery. Calculate the following profitability ratios for 2015 and 2014:
Gross Profit Percentage, Operating Margin Percentage, Net Profit Margin Percentage,
Return on Assets, and Return on Equity. Express each ratio as a percentage and round
your answers to two decimal places, then comment on the company’s performance in
terms of profitability.
The company’s income statements are available below. At December 31, 2013, total
assets and total stockholders’ equity were $325,000 and $287,500, respectively.
For the Years Ended
2015 2014
Net Sales $475,000 $387,500
Cost of Goods Sold 240,000 200,000
Gross Profit 235,000 187,500
Operating Expenses 170,000 138,500
Income from Operations 65,000 49,000
Interest Expense 26,000 1,750
Income before Taxes 39,000 47,250
Income Taxes 15,000 18,500
Net Income $ 24,000 $ 28,750