1) Under the direct method, depreciation expense is treated as an outflow in the
Investing Activities section of the statement of cash flows.
2) Under the perpetual inventory system, each time goods are purchased, the inventory
account is transferred to sales revenue.
3) Interim financial statements are prepared annually.
4) All changes in long-term liabilities are reflected in the financing activities category
of the statement of cash flows.
5) Because net income is on an after-tax basis, interest in the return on assets ratio must
be placed on a before-tax basis.
6) A subsidiary is a separate legal entity that is owned or controlled by another entity.
7) Capitalizing an expenditure rather than recording it as a revenue expenditure
A.affects the total book value of plant assets reported on the balance sheet and the
amount of net income reported during a period
B.affects the total book value of plant assets on the balance sheet, but has no effect on
the amount of net income reported during an accounting period
C.affects the amount of net income reported during an accounting period, but has no
effect on the total book value of plant assets on the balance sheet
D.has no effect on the book value of plant assets on the balance sheet or the amount of
income reported on the income statement
8) Farris Finese operates an automatic car wash business, The Final Finese. The
following amounts were taken from the company’s unadjusted trial balance at
December 31, 2013:
Determine the effect on the accounting equation of any adjusting entries necessary at
December 31, 2013, for each of the transactions that follow.
9) During its fifth year of operations, Bright Creations Company reports a beginning
cash balance of $132,000, cash inflows from investing activities of $210,000, cash
outflows for financing activities of $79,000, and cash outflows for operating activities
of $13,000. What was Bright Creations cash balance at the end of the fifth year?
A.$ 250,000
B.$ 434,000
C.$ 276,000
D.$ 132,000
10) Which of the following activities is most likely to have a cash flow effect?
A.Investing in money market funds
B.Declaring cash dividends
C.Reissuing treasury stock
D.Issuing stock to acquire a patent
11) Upon review of Jerrys Canoe Gallery statement of cash flows, the following was
noted:
From this information, the most likely explanation is that Jerry is
A.using cash from operations and selling long-term assets to pay back debt
B.using cash from operations and borrowing to purchase long-term assets
C.using its profits to expand growth
D.using cash from investors to provide for operations
12) The book value per share for a corporation is
A.the market price of the stock
B.the cost of investments in stock of other corporations
C.based on the excess of total assets over total liabilities
D.the amount stockholders would receive if they sold their shares back to the
corporation
13) An example of a cash flow related to a liability that would not appear in the
financing activities category of the statement of cash flows is
A.mortgage payable
B.bonds payable
C.deferred income taxes
D.a lease obligation
14) When using the direct method, how is the payment of a cash dividend shown on the
statement of cash flows?
A.Operating activity
B.Investing activity
C.Financing activity
D.Noncash investing and financing activity
15) 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 face rate of interest is less than the market rate of interest at the time of issue
C.The face rate of interest is more than the market 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
16) Which of the following will decrease working capital?
A.collection of accounts receivable
B.purchase of a new computer with cash
C.payment of salaries payable
D.purchase of merchandise on credit
17) During December, Dearborne Inc. purchased $800 of supplies for use in its
business. At the end of December, 20% of the supplies were still on hand, but only 75%
had been paid. What amounts will appear on the companys balance sheet on December
31?
Supplies on Hand Accounts Payable
A.$ 800 $ 600
B.$ 160 $ 200
C.$ 640 $ 200
D.$ 160 $ 800
18) Which of the following is not considered a business (source) document?
A.Time card
B.Purchase order
C.Sales invoice
D.Schedule listing all the insurance policies in force
19) Which of the following transactions has an effect on the statement of cash flows?
A.The sale of preferred stock
B.The declaration of a cash dividend
C.A small stock dividend
D.A large stock dividend
20) Assume that on December 31, 2014, Potaw Company has outstanding 8,000 shares
of $15par, 6%noncumulative, preferred stock and 40,000 shares of $5 par common
stock. Potaw was unable to declare a dividend in 2012 or 2013 but wants to declare a
$75,000 dividend for 2014.
REQUIRED:
1>How much total cash is distributed to preferred stockholders?
2>How much total cash is distributed to common stockholders?
3>What is the dividend per share to preferred stock?
4>What is the dividend per share to common stock?
21) Valance & Company
Use the selected data from the balance sheet and cash flow statements for Valance &
Company to answer the questions that follow.
Valance & Company
Balance Sheet
(Selected Information)
(in millions)
Valance & Company
Statements of Cash Flow
(Selected Information)
(in millions)
Refer to the data for Valance & Company.
REQUIRED:
(1) Give a possible explanation for each change in the liabilities listed in the cash flow
statement. Do you think these changes are beneficial for Valance? Why or why not?
(2) If there were a balance in the dividends payable account at the end of the year,
would this appear in the operating activities category of the cash flow statement? Why
or why not?
22) Assume that the Stockholders Equity section of Cherokee Companys balance sheet
on December 31, 2012, appears as follows:
Common stock, $10 par value, 1,500 shares issued and outstanding $15,000
Additional paid-in capitalCommon 17,000
Retained earnings 11,000
Total stockholders equity $43,000
1> If on February 1, 2013, Cherokee buys 120 of its shares as treasury stock at $30 per
share, identify and analyze the effects of the transaction for the company?
2> How with the Stockholders Equity section of Cherokees balance sheet appear on
February 1, 2013, after the purchase of the treasury stock?
23) Starlight Cruises reported net income of $2,880 million for the year ended
December 31, 2012. Total stockholders equity for the year ended December 31, 2012
was $20,100 million and on December 31, 2011, it was $20,900 million. No preferred
stock was outstanding in either year.
REQUIRED:
1> Compute Starlights return on common stockholders equity for the year ended
December 31, 2012.
2> What other ratio would you want to compute to decide whether Starlight is
successfully employing leverage? Explain your answer.
24) Carrington Inc. manufactures digital cameras and has experienced noticeable
declines in the purchase price of many of the components it uses, including memory
components. Which inventory costing method should Carrington use if it wants to
maximize net income? Explain your answer.
25) A friend of yours has asked you whether off-balance-sheet financing means that the
amounts are immaterial and therefore are not reported. In a short paragraph, tell him
what off-balance-sheet financing is and why firms engage in off-balance-sheet
transactions?
26) Explain the differences between the cash and accrual basis of accounting and how
the adjusting process fits in.