Income tax expense would be found on the income statement of a corporation, but not
on the income statement of a sole proprietorship.
A company does not need to record the receipt of a bill for utilities used during this year
if the company will not pay the bill until next year.
Depreciation is an allocation method, not a valuation method.
In the decline phase, the company continues to enjoy positive operating cash flows but
stops spending cash on investing activities and instead uses its cash for financing
activities such as repaying lenders and returning excess cash to shareholders.
A major advantage of debt financing is that interest expense is tax deductible.
Accumulated Depreciation is classified as an expense.
An entertainment company received $6 million in cash for advance season ticket sales.
Prior to the beginning of the season, these sales should be recorded as a liability.
The components of an internal control system include control environment, risk
assessment, control activities, information and communication, and rationalization.
If a company forgot to record depreciation on equipment for a period, Total Assets
would be overstated and Total Stockholders’ Equity would be understated on the
balance sheet.
A company owes $200,000 on a bank loan. It will be reported by the company as Notes
Payable.
A healthy company typically shows positive cash flows in the financing activities
section of the statement of cash flows.
FICA payments consist of Social Security taxes and Medicare taxes.
Liquidity measures the ability of a company to meet its current financial obligations.
The principal of a loan does not include any interest charges.
A highly effective internal control should not be implemented if the cost is greater than
the benefit.
Which account is least likely to be credited when an expense is recorded?
A) Cash
B) Accounts Payable
C) An account with the word “Prepaid” in its title
D) Accounts Receivable
Which of the following is not an internal control procedure relating to cash payments?
A) Using an voucher system
B) Using an imprest system
C) Preparing a bank reconciliation
D) The use of cash count sheets
If an analyst wants to examine a company’s short-run ability to survive, which of the
following would best be considered?
A) Liquidity
B) Market share
C) Profitability
D) Solvency
The Tuck Shop began the current month with inventory costing $10,000, then
purchased inventory at a cost of $35,000. The perpetual inventory system indicates that
inventory costing $30,000 was sold during the month for $40,000. If an inventory count
shows that inventory costing $14,500 is actually on hand at month-end, what amount of
shrinkage occurred during the month?
A) $500
B) $5,000
C) $14,495
D) $15,000
Which of the following accounts has a normal credit balance?
A) Cash
B) Notes Receivable
C) Salaries and Wages Expense
D) Unearned Revenue
An adjustment to ending inventory under the lower of cost or market (LCM) rule would
be least likely to be recorded by a company that sells:
A) a household staple like laundry detergent.
B) a fad product like Slap Wraps bracelets.
C) seasonal items like snow blowers.
D) high-tech goods like cell phones.
A company issues $20 million in new stock. The company later uses this money to
acquire a building. What is the effect of these two transactions on the company’s
accounts?
A) Buildings increases and Common Stock increases.
B) Buildings increases and Common Stock decreases.
C) Cash increases, Buildings increases, and Common Stock increases.
D) Cash decreases, Buildings increases, and Common Stock decreases.
A company’s quarterly income statements show that in the last three quarters both Sales
Revenue and net income have been falling. Given this information, which of the
following conclusions drawn by users are valid?
A) Creditors are likely to conclude that the risk of lending to the company is declining
and might be willing to accept a lower interest rate on loans.
B) Investors are likely to conclude that the stock price is likely to rise, making the
company more attractive as a potential investment.
C) Customers are likely to conclude that the company is struggling; therefore it is
permissible to take longer to pay amounts they owe to the company.
D) Owners may conclude that the company will be less likely to distribute dividends.
Which of the following is not the same as book value?
A) Carrying value
B) Cost less accumulated depreciation
C) Unused cost
D) Market value
Which of the following statements concerning a voucher is not correct?
A) The voucher consists of the purchase requisition, the purchase order, the receiving
report, and the invoice.
B) The voucher is marked €paid€ so that it cannot be accidentally or intentionally
resubmitted for duplicate payment
C) The voucher must be prepared before the goods or services are ordered.
D) After the voucher is prepared, the company processes a check or electronic funds
transfer to pay for the items purchased and received.
Consider the following information for Maynor Company, which uses a perpetual
inventory system:
The company sold 25 units on May 1 and 20 units on October 28.
Required:
Calculate the company’s ending inventory and cost of goods sold using the each of
following inventory costing methods.
Part a. FIFO
Part b. LIFO
Part c. Weighted Average
Momentum Products Inc. just recorded an adjusting journal entry for the current year’s
estimate of bad debts. Assuming all else is equal, this adjusting journal entry will cause:
A) the accounts receivable turnover ratio to increase.
B) net income to increase.
C) total assets to remain unchanged.
D) net accounts receivable to increase.
Choose the appropriate letter of the explanation to match the term. Not all explanations
will be used.
Term
1) _____ Long-lived assets
2) _____ Average net fixed assets
3) _____ Capitalization of cost
4) _____ Units-of-production method
5) _____ Carrying value
6) _____ Asset impairment loss
7) _____ Depreciation
8) _____ Net sales revenue
9) _____ Declining-balance method
Explanation
A. The average proportion of a company’s total assets that is long-lived.
B. A depreciation method that produces higher amounts of depreciation expense in the
early years of an asset’s life and lower amounts in the later years.
C. The cost of financing an asset.
D. Also known as book value.
E. Assets that have physical substance.
F. The denominator of the fixed asset turnover ratio.
G. How expenses are reported in the income statement.
H. A depreciation method that spreads asset cost by use rather than time.
I. Assets that will be used for more than a year.
J. The process of transferring the cost of long-lived tangible assets to expenses.
K. When a company writes down the value of an asset when estimated future cash
flows fall below the original level estimated.
L. The numerator of the fixed asset turnover ratio.
M. When costs are recorded as assets rather than expenses.
N. When a company writes down the value of an asset because estimated future cash
flows fall below the book value.
During Year 3, a company’s assets increase by $56,000 and its liabilities increase by
$38,000. If no dividends were paid and there were no changes in the amount of
common stock issued during the year, net income for Year 3 was:
A) $56,000.
B) $18,000.
C) $94,000.
D) $38,000.
A company had total assets of $400,000 and a debt-to-assets ratio was 0.35. Which of
the following statements is not true?
A) Total liabilities are $140,000.
B) The debt-to-assets ratio of 0.35 indicates that the company relies less on equity
financing than on debt financing.
C) If other companies in the same industry are used as benchmarks and report a lower
debt-to-assets ratio, this indicates that this company has a more risky financing strategy.
D) If the ratio this year is lower than it was last year for this company, it indicates that
the company is relying less on debt financing this year.
Mercedes, Co. has the following quarterly financial information.
Required:
Part a. Calculate the gross profit percentage for each quarter.
Part b. Calculate the net profit margin for each quarter.
Part c. Calculate the EPS for each quarter.
Part d. Calculate the Price/Earnings ratio at the end of the year.
Part e. Evaluate the company’s profitability.
Round all ratios to two decimal places.
Your company contracted for a 30-second commercial (an advertisement) that aired
during the Super Bowl at a cost of $1.2 million. It is legally obligated to pay for the
commercial, but has not yet done so. How is your company’s balance sheet affected on
the day the commercial aired?
A) It increases both assets and liabilities by $1.2 million.
B) It increases assets and decreases stockholders’ equity by $1.2 million each.
C) It does not affect the balance sheet.
D) It increases liabilities and decreases stockholders’ equity by $1.2 million each.
Choose the appropriate letter to match the term and the definition. There are more
definitions than terms.
Term
1) ____ Inventory
2) ____ Purchase Discount
3) ____ Purchase Returns and Allowances
4) ____ Sales Discount
5) ____ Sales Returns & Allowances
6) ____ Shrinkage
Definition
A. The sum of beginning inventory and purchases for the period.
B. The cost of inventory lost to theft, fraud, and error.
C. A reduction in the cost of inventory purchases associated with unsatisfactory goods.
D. A cash discount received for prompt payment of a purchase on account.
E. Refunds and price reductions given to customers after goods have been sold and
found unsatisfactory.
F. Assets acquired for resale to customers.
G. A sales price reduction given to customers for prompt payment of their account
balance.
H. Presents important subtotals, such as gross profit, to help distinguish core operating
results from other, less significant items that affect net income.
I. Net sales minus cost of goods sold. It is a subtotal, not an account.
J. A ratio indicating the percentage of profit earned on each dollar of sales, after
considering the cost of products sold.