1) Noncontrolling interest relects income from ownership of noncontrolling
shareholders in the equity of consolidated subsidaries less than wholly owned.
2) The principal asset of a merchandising firm will usually be accounts receivable.
3) There are three methods of accounting for a business combination.
4) A review of the disclosure of allowance for loan losses for a bank may indicate
significant losses charged.
5) In computing earnings per share, preferred dividends are subtracted from net income.
6) The ability of an entity to maintain its short-term, debt-paying ability is important to
all users of financial statements.
7) A shortening of the credit terms is an indication that there will be more risk in the
collection of future receivables.
8) The regulated utility is building into the cost base an amount for an assumed rate of
return on equity funds by increasing the balance sheet account (Construction Work in
Progress) for an assumed rate of return on equity funds.
9) DuPont analysis breaks return on assets into net profit margin and borrowing
capacity.
10) Noncontrolling interest should be presented at the bottom of stockholders equity.
11) The income statement is a summary of revenues and expenses and gains and losses,
ending with net income, for a particular period of time.
12) Redeemable preferred stock is best considered as equity for ratio analysis.
13) Management should usually strive to keep the cash ratio high.
14) A partnership is a business owned by two or more individuals. Each owner is
personally responsible for the debts of the partnership.
15) If liabilities total $70,000 and stockholders’ equity totals $50,000, then total assets
must be:
a. $20,000
b. $80,000
c. $120,000
d. $30,000
e. $30,000
16) Accounting for regulated utilities, banks, and transportation firms is similar in that:
a. all are monopolies
b. all report property, plant, and equipment first on the balance sheet
c. all are controlled by the Interstate Commerce Commission
d. all carry heavy inventory
e. all utilize some form of uniform accounting system
17) Purple Tortoise Bus Company had the following operating results in the past two
years:
Required:
18) Cash receipts and disbursements, of governmental agencies, related to the payment
of interest and principal on long-term debt describe which of the following?
a. Appropriations
b. Debt service
c. Capital projects
d. General fund
e. Proprietary funds
19) The following data are presented for Rocket Company.
Z Score Formula:
Z = .012X1 + .014X2 + .033X3 + .006X4 + .010X5
X1 = Working Capital/Total Assets
X2 = Retained Earnings (balance sheet)/Total Assets
X3 = Earnings Before Interest and Taxes/Total Assets
X4 = Market Value of Equity/Book Value of Total Debt
X5 = Sales/Total Assets
Required:
20) Annual Statement Studies reported the following figures for manufacturers of screw
machine products for the ratio of current assets to current debt. The following figures
are for a particular industry’s current ratio: 1.6; 1.3; 1.2. Which best describes these
three numbers?
a. One third of each of the companies experienced each of the ratios
b. The average ratio was 1.3. The best firm had 1.6; The worst had 1.2
c. The median was 1.3. 1.6 is the figure for the upper quartile; 1.2 is the figure for the
lower quartile
d. The median was 1.3. 1.6 is the figure for the lower quartile; 1.2 is the figure for the
upper quartile
e. None of the answers are correct
21) Which of the following would most likely cause a rise in net profit margin?
a. Increased sales
b. Decreased preferred dividends
c. Increased cost of sales
d. Decreased operating expenses
e. Decreased earnings per share
22) Francis Company had operating expenses of $20,000 and depreciation expenses of
$4,000. Assuming no other transactions, what was the cash paid for operating expenses?
a. $24,000
b. $22,000
c. $16,000
d. $20,400
e. $23,000
23) Other than December, the most popular month for fiscal year-end is:
a. January
b. March
c. June
d. September
e. October
24) Liquidity ratios can be used:
a. to measure the degree of protection of long-term suppliers of funds
b. to measure borrowing capacity
c. to measure the earning ability of a firm
d. to measure the firm’s ability to meet its current obligations
e. to measure the worth of the firm
25) Shaffer Company presents the following data for 2012 .
The merchandise inventory turnover for 2012 is:
a. 5.6
b. 15.6
c. 7.5
d. 7.7
e. 5.2
26) Statistics from New State Electric Company’s annual report are presented below.
Required:
27) Listed below are several ratios.
Required:
Match the ratio that goes with each formula.
a. days’ sales in receivables
b. accounts receivable turnover
c. accounts receivable turnover in days
d. days’ sales in inventory
e. inventory turnover
f. inventory turnover in days
g. operating cycle
h. working capital
i. current ratio
j. acid-test ratio
k. cash ratio
l. sales to working capital
1>
2>
3>Current Assets – Current Liabilities
4>
5>
6>
7>
8>
9>
10>Accounts Receivable Turnover in Days + Inventory Turnover in Days
11>
12>
28) Management is a user of financial analysis. Which of the following comments does
not represent a fair statement as to the management perspective?
a. Management is interested in the view of investors
b. Management is interested in the view of creditors
c. Management is interested in the financial structure of the entity
d. Management is interested in the asset structure of the entity
e. Management is always interested in maximum profitability
29) Which of the following is a permanent account?
a. Dividends
b. Advertising expense
c. Building
d. Selling expense
e. Insurance expense
30) Operating income is:
a. net sales less cost of goods sold
b. earnings before interest and tax
c. earnings before tax and nonrecurring items
d. gross profit less operating expenses
e. net income plus interest
31) Which of the following ratios appears most frequently in annual reports?
a. Earnings per Share
b. Return on Equity
c. Profit Margin
d. Effective Tax Rate
e. Debt/Equity
32) The Clothes Clutch, a retail clothier, has had average sales of $400,000 for the last
five years, 2008-2012. The firm’s total assets at the end of 2010 were $400,000.
An internal staff cost analyst has prepared the following financial data from the annual
reports. You have been hired as a consultant to help analyze the financial position.
Required:
a. Explain the trend in liquidity. Make specific reference to the effect of receivables and
inventory on this trend.
b. Briefly describe the trend in the long-term, debt-paying ability of The Clothes Clutch.
Explain the cause(s) of this trend.
c. The net profit margin has declined substantially. Cite and discuss specific causes of
this.
d. Has the firm utilized its total assets effectively? Discuss the ability of the firm to
generate sales based on total assets. (Use DuPont analysis.)
e. Specifically cite and briefly describe two additional types of information that would
aid in your analysis.
33) Hind Company presents the following data for 2012:
Required:
a. Compute the days’ sales in receivables.
b. Compute the days’ sales in inventory, using the cost figure.
c. Compute the days’ sales in inventory, using the replacement cost for the inventory
and the cost of goods sold.
d. Explain which days’ sales in inventory figure is probably more realistic, the one
computed in (b) or (c).
34) Which of the following is a government document that provides industry statistics?
a. The Wall Street Journal
b. Business Week
c. Dun’s
d. The Department of Commerce Financial Report
e. Standard and Poor’s Industry Survey
35) Assume that Algary, Inc. uses the following financial statements for the year ended
December 31, 2012 .
Categories on these statements follow:
A. Current Assets
B. Investments
C. Fixed Assets
D. Intangible Assets
E. Current Liabilities
F. Long-Term Liabilities
G. Stockholders’ Equity
H. Sales and Other Operating Revenue
I. Cost of Goods Sold
J. Operating Expenses
K. Other Income
L. Other Expense
M. Additions to Retained Earnings
N. Deductions from Retained Earnings
Required:
Indicate by the statement abbreviation and category number how each of the following
is best classified or where it is included in the computation. If an item is not reported
anywhere, use the letter “X” to indicate this. Only the best answer should be selected.
For balance sheet accounts only, if the account balance is normally opposite that of a
typical account (contra), set off the answer in parentheses.
Samples:
36) What is the effect of the exercise of stock options?
a. They generate cash to the issuing firm and therefore increase profit per share
b. They are an expense at the time of exercise. This lowers net income
c. They increase debt and lower borrowing capacity but have no effect on profit
d. They increase the number of shares outstanding
e. They have no immediate effect on profitability
37) Under the Employee Retirement Income Security Act, a company can be liable for
its pension plan up to:
a. 30 percent of its total assets
b. 30 percent of its net worth
c. 40 percent of its total assets
d. 40 percent of its net worth
e. 50 percent of its total assets
38) Which of the following is a recurring item?
a. Equity in earnings of nonconsolidated subsidiaries
b. Error of a prior period
c. Discontinued operations
d. Extraordinary gain
e. Cumulative effect of change in accounting principle
39) The going concern assumption:
a. is applicable to all financial statements
b. primarily involves periodic income measurement
c. allows for the statements to be prepared under generally accepted accounting
principles
d. requires that accounting procedures be the same from period to period
e. none of the answers are correct