1) A company gives a two-year warranty for its product. The estimated liability for
product warranties is a current liability.
2) The time period assumption assumes a company prepares financial statements every
month.
3) The issuance of common stock in exchange for a building would appear both as a
cash inflow in the financing activities section of the cash flow statement and also as a
cash outflow in the investing activities section.
4) Bad Debts Expense is a contra account that is used to reduce accounts receivable to
its net realizable value.
5) Treasury stock is reported as a reduction in stockholders’ equity.
6) If a company accepts a major credit card such as VISA from a customer, then the
company is responsible for the amount of the sale in a case of nonpayment from a
cardholder.
7) One reason management may choose the straight-line method of depreciation is
because it is easy to compute.
8) An investor views a high debt-to-equity ratio and a low times interest earned as a
favorable sign of a companys abilities to meet its long-term obligations.
9) What is the impact on the cash flow statement from a decrease in accounts
receivable, assuming the indirect method is used?
A.A decrease in the cash flow from operating activities
B.An increase in the cash flow from operating activities
C.An increase in the cash flow from financing activities
D.None. A decrease in accounts receivable has an impact only if the direct method is
used
10) Which one of the following is not an external user of financial statements?
A.Suppliers
B.Creditors
C.Investors
D.The companys controller
11) Las Palmas Company reported the following items on its financial statements for
the year ending December 31, 2014:
How much will be reported as retained earnings on Las Palmas balance sheet at
December 31, 2014, if this is the first year of operations?
A.$ 45,000
B.$ 65,000
C.$ 85,000
D.Not enough information is provided.
12) Sunshine Farm Supply
Following are selected data from the financial statements of Sunshine Farm Supply:
Refer to the data for Sunshine Farm Supply.
Which of the following would result from a horizontal analysis of its income statement?
A.Cost of goods sold is 42.1% of net sales for 2012
B.Gross profit is 42.1% of net sales for 2012
C.Cost of goods sold decreased $50,000 or 23.8% during 2012
D.Accounts receivable total 13.3% of total assets for 2012
13) Which one of the following items is a reconciling item on the bank side of a bank
reconciliation?
A.Canceled checks
B.Outstanding checks
C.NSF checks
D.Service charge
14) Failure to record the earned portion of unearned revenue would result in which of
the following?
A.Net income being understated
B.No effect on total liabilities
C.Stockholders equity being overstated
D.Total assets being understated
15) Which of the following is true?
A.The sale of stock to stockholders is an investing activity
B.The repurchase of stock from stockholders is an investing activity
C.The declaration of stock dividends is a financing activity
D.The payment of cash dividends is a financing activity
16) Sheffield Ridge Co. purchased new trucks at the beginning of 2012 for $600,000.
The trucks had an estimated life of 4 years and an estimated residual value of $50,000.
Sheffield Ridge uses straight-line depreciation. At the beginning of 2013, Sheffield
Ridge sold the trucks for $480,000 and purchased new trucks for $700,000. Determine
the following amounts:
17) Which one of the following statements is true?
A.The two primary sources of financing available to corporations are borrowed funds
and funds invested by owners
B.Financing activities involve the acquisition of property, plant and equipment
C.Borrowed funds are a more permanent source of financing than funds invested by
owners
D.Investing activities involve the selling of products or services and the incurring of
expenses related to selling these products and services
18) Webb Company
Selected data from the accounting records of Webb Company are listed below:
Read the information about Webb Company. What is Webbs income from operations?
A.$ 1,600
B.$ 2,000
C.$ 2,200
D.$ 2,800
19) Which of the following countries do not use a common law system?
A.The United States
B.Germany
C.The United Kingdom
D.Both a and c are correct
20) In 2012, Accu Heating Company sold 400 water heaters for $350 each. The water
heaters carry a 2-year warranty for repairs. Accu estimates that repair costs will average
2% of the total selling price. How much is recorded in the warranty liability account as
a result of selling the water heaters during 2012?
A.$4,200
B.$2,800
C.$1,400
D.no liability should be recorded until the water heaters are brought back for repairs
21) A bank loaned Shrugg Stone Company $35,000 on a 1-year, 6% note, but deducted
the interest in advance. Shrugg Stone would show which of the following to record
receipt of the cash?
A.increase in Cash for $35,000
B.decrease in Notes Payable for $32,900
C.increase in Discount on Notes Payable for $2,100
D.increase in Interest Revenue for $2,100
22) Squidly Products sold and delivered modems to Detail Solutions for $6,600 to be
paid by Detail Solutions in three equal installments over the next three months. The
journal entry made by Squidly to record this transaction will include:
A.A credit to Cash for $6,600
B.A debit to Accounts Receivable for $6,600
C.A debit to Accounts Receivable for $2,200
D.A debit to Sales Revenue for $6,600
23) The Trenton Corporation began 2014 with $390,000 in assets, $140,000 in
liabilities, and $170,000 of retained earnings. Net income for the year was $120,000,
and dividends of $110,000 were declared and paid.
A) Prepare a statement of retained earnings for 2014.
B) What is the nature or purpose of the statement of retained earnings?
C) What was the amount of capital stock for Trenton Corporation at the beginning of
2014?
D) Identify what business events might occur in Trenton Corp.s business operations that
would cause the two stockholders equity items to increase.
E) How do you identify whether Trenton was profitable during 2014 by examining the
statement of retained earnings?
24) Each of the following transactions would be classified as either an investing or a
financing activity except
A.investments in stock are purchased
B.a bank loan is obtained
C.stock is issued to acquire land
D.dividends are paid
25) Which of the following is not a current reporting requirement for a statement that
reports changes in cash over a period of time?
A.This statement must classify cash flows into three categories: operating, investing,
and financing activities
B.Cash equivalents must be combined with cash in preparing this statement
C.Working capital may be used as a substitute for cash in preparing this statement
D.The title for this statement is “Statement of Cash Flows”
26) Mobile Power Corp. reported the following information for the year ended
December 31, 2014.
What was the retained earnings balance for Mobile Power at December 31, 2013?
A.$ 165,000
B.$ 168,000
C.$ 182,000
D.$ 192,000
27) How are research and development costs reported in the financial statements? Why
is this treatment required?
28) The payment of salaries and wages decreases cash and increases a(n)
____________________.
29) Distribution of additional shares of stock and reduction of the par value of the stock
is ______________________________.
30) Crystal, Inc.
Crystal, Inc. reported $52,000 of net income for 2014. Crystals balance sheet at
December 31, 2014 includes the following amounts:
Read the information about Crystal, Inc. Which item is most “liquid”? Why is liquidity
important?
31) Genenco, Inc., a supplier, is thinking of extending credit to a Fab Company but
decides not to because the Fabs current ratio is only 0.60. Do you agree with the
suppliers decision? What other factors need to be considered in drawing any
conclusions about a companys liquidity?
32) The gross accounts receivable less the allowance for doubtful accounts is known as
the _________________________.
net realizable amountor