Qualls Department Store counted some of its inventory items twice. As a result, its
operating expenses will be
a. correct assuming the company calculates its cost of goods sold correctly.
b. correct since operating expenses are not affected by inventory costs.
c. overstated.
d. understated.
What is the primary objective of financial reporting?
a. To help investors make credit decisions.
b. To help management assess cash flows.
c. To protect users from fraudulent financial information.
d. To provide useful information for decision making.
Refer to Memorial Corporation. How much cash was paid for dividends during 2014?
a. $40,000
b. $50,000
c. $60,000
d. $80,000
Go Cars has $200 in cash, $500 in accounts receivable, $400 in marketable securities,
and $700 in inventory. Assuming the company also has $200 in accounts payable and
$200 in unearned sales revenue, what is its cash ratio?
a. 4.50
b. 3.00
c. 2.75
d. 1.50
What type of account is increased with a debit but represents a decreasein retained
earnings?
a. liability
b. asset
c. revenue
d. dividends
Which internal control activity is violated when the cashier at a cash register in a retail
store also records the daily receipts in a journal?
a. segregation of duties
b. adequate documents and records
c. independent checks on recorded amounts
d. safeguards over assets and records
Abbot Safe & Lock
The following information was obtained from the company’s records for 2013:
Credit sales during the year $3,200,000
Accounts receivable–December 31, 2013 325,000
Allowance for doubtful accounts–December 31, 2013 35,000
Bad debt expense for the year 20,000
Refer to Abbot Safe & Lock. What amount will the company show on its year-end
balance sheet for the net realizable value of its accounts receivable?
a. $305,000
b. $290,000
c. $270,000
d. $325,000
When are revenues and expenses recognized in the same accounting period that cash
receipts and payments occur?
a. under the cash basis of accounting
b. under the accrual basis of accounting
c. under the adjusting method of accounting
d. under the finance method
A treasurer preparing the October bank reconciliation identified the following items:
Cash balance per the company’s records $32,800
Deposits in transit 4,300
Outstanding checks 2,200
Interest earned on the checking account 100
NSF check from customer 400
What is the company’s adjusted cash balance at October 31?
a. $34,600
b. $34,900
c. $32,500
d. $32,800
What is the impact on the accounting equation of recording a payment to a supplier on
account?
a. Both assets and liabilities decrease.
b. Both assets and stockholders’ equity decrease.
c. Liabilities decrease and stockholders’ equity increases.
d. Liabilities increase and stockholders’ equity decreases.
Which of the following statements is true?
a. Only the effects of internal transactions must be recognized and recorded in the
accounting system.
b. An internal transaction represents a business activity between an entity and its
environment.
c. Evidence used to record transactions affecting a business entity comes from source
documents.
d. Only the effects of external events must be recognized, measured, and recorded in an
entity’s accounting system.
Cash flows from issuing and repurchasing stock or issuing and repaying debt are
classified as
a. operating activities.
b. investing activities.
c. financing activities.
d. borrowing activities.
Match these terms to their correct definition.
a. Common size statements e. Ratio analysis
b. Cross-sectional analysis f. Short-term liquidity ratios
c. Dupont analysis g. Time series analysis
d. Horizontal analysis h. Vertical analysis
42/ compares a single corporation across time.
43/ decomposes the return on equity ratio into margin, turnover, and leverage
components.
44/ each financial statement line item is expressed as a percentage of the largest
statement amount, for example, net sales on the income statement.
45/ each financial statement line item is expressed as a percent of the base year
(typically the least recent year shown).
46/ provides analysts with a wealth of information to evaluate such things as the
corporation’s profitability, asset and debt management, and short-term liquidity.
47/ express each financial statement line item in percentage terms in order to highlight
differences. Typically, this conversion from dollar amounts to percentages is done with
horizontal or vertical analysis.
48/ assess the likelihood that a company will be able to pay its current obligations as
they come due.
49/ compares a corporation’s financial statements to its primary competitors and
industry averages.
Dividends in arrears are required to be reported in
a. a liability account.
b. a contra-equity account.
c. a stockholders’ equity account.
d. the footnotes accompanying the financial statements.
Which of the following accounts are normally reported as current liabilities on a
classified balance sheet?
a. Accounts Payable and Prepaid Insurance
b. Interest Payable and Interest Receivable
c. Income Taxes Payable and Salaries Payable
d. Capital Stock and Accounts Payable
Xu, Inc. reported the following information for 2013 and 2012:
2013 2012
Sales $850,000 $890,000
Sales discounts 15,000 23,000
Purchases 500,000 600,000
Ending inventory 50,000 40,000
Transportation-in 10,000 19,000
Purchase discounts 5,000 5,000
Determine the following amounts for Xu, Inc. for 2013:
A) Net cost of inventory purchases
B) Cost of goods available for sale
C) Cost of goods sold
D) Net sales
E) Gross profit ratio
F) Inventory turnover ratio
G) Average days to sell inventory
Cash flows from acquiring and selling products are classified as
a. operating activities.
b. investing activities.
c. financing activities.
d. distribution activities.
Refer to the information provided for Stallworth Corp. If the company uses the LIFO
inventory costing method, the cost of goods sold for November would be
a. $1,505.00.
b. $1,517.50.
c. $2,109.00.
d. $2,121.50.
If a corporation repurchases 500 shares of its previously-issued common stock for
$5,000 and then reissues it for $4,000, which of the following statements is true
regarding the difference in the amounts of the repurchase and reissuance?
a. It is reported as a loss on the sale of treasury stock.
b. It is reported as a gain on the sale of treasury stock.
c. It is a decrease in stockholders’ equity.
d. It is an increase in stockholders’ equity.
Which of the following statements is true?
a. If a debit entry is made to an account in the general journal, the same account will
receive a credit entry when the amount is posted to the general ledger.
b. If all transactions are correctly posted to the general ledger, the sum of the accounts
with debit balances should be equal to the sum of the accounts with credit balances.
c. Posting occurs when numbers in the general ledger accounts are transferred to the
general journal.
d. If the sum of the debit balances equals the sum of the credit balances, this proves that
there were no mistakes made in the posting process.
Which pair of accounts has the same set of procedures for debit and credit entries?
a. service revenue and rent expense
b. dividends and retained earnings
c. equipment and salary expense
d. accounts receivable and accounts payable
Several transactions are listed below, with the accounting equation stated to the right
side of each. Use the following identification codes to indicate the effects of each
transaction on the accounting equation: I = Increase; D = Decrease; NE = No Effect.
Write your answers in the space provided under the accounting equation, being sure to
include an identification code for each element of the accounting equation. An example
is provided before the first transaction.
Stockholders’
Assets =
Liabilities + Equity
Example: Common stock is issued to investors in the company I
NE I
A) Services are sold for cash.
B) Equipment is purchased on credit.
C) Payment is made for equipment purchased on
credit.
D) Services are sold for credit.
E) Cash is collected from customers for accounts receivable
balances.
F) Dividends are paid to stockholders.
G) Land and building are acquired in exchange for shares of common
stock.
H) Utility bill is received and recorded; will pay later.
A company reported the following information in its 2014 annual report:
Cash flows from operating activities $295,000
Additions to property, plant and equipment 110,000
Proceeds from disposals of property, plant and equipment 57,000
Total payments expected to retire long-term debt over the next 5 years 250,000
What is the cash flow adequacy ratio for 2014?
a. 6.96
b. 5.90
c. 3.70
d. 0.74
The Income Statement shows
a. how much profit the company has earned since it began operations.
b. net Income equal to the amount of cash on the Balance Sheet.
c. a summary of the results of operations for a period of time.
d. the liquidity of the company on an annual basis.
Which of the following is a reconciling item on the bank side of a bank reconciliation?
a. canceled checks
b. Outstanding checks
c. NSF checks
d. both b and c
The following journal entry was included in the accounting records of Jumani
Company:
Feb. 11 Merchandise Inventory 7,000
Cost of Goods Sold 7,000
This entry is needed to record the:
a. cost of merchandise sold.
b. sales price of merchandise sold.
c. cost of merchandise returned by a customer.
d. net effect of a sales transaction.
Refer to AT&U Company. If the company estimates its bad debt to be 2% of net credit
sales, what will be the balance in the Allowance for Doubtful Accounts account after
the adjustment for bad debts?
a. $20,000
b. $19,000
c. $49,000
d. $69,000
Which of the following costs related to the purchase of production equipment would be
considered a revenue expenditure?
a. installation costs for equipment
b. purchase price of the equipment less the cash discount
c. repair and maintenance costs during the equipment’s first year of service
d. transportation charges for getting the equipment delivered to the business
Use the following codes to indicate how the cash flow effect, if any, of each transaction
or event would be reported on a statement of cash flows if the operating activities
section is prepared using the indirect method. (Choices may be used more than once.)
a. Operating activity–add to net income
b. Operating activity–deduct from net income
c. Inflow from investing activity
d. Outflow from investing activity
e. Inflow from financing activity
f. Outflow from financing activity
g. Noncash investing and financing activity
h. Not reported on statement of cash flows
11/ Purchased land for cash.
12/ Issued a twenty-year mortgage note for cash.
13/ Increase in the inventory balance.
14/ Resold treasury stock for cash.
15/ Increase in the unearned revenue balance.
16/ Issued stock to buy a building.
17/ Declared cash dividends.
18/ Paid cash dividends.
19/ Received cash from the sale of securities.
20/ Recognized a gain on the sale of securities.
21/ Recorded depreciation expenses for the year.
22/ Issued long-term bonds.
A graphics design company issued bonds in the amount of $1,000,000 with a stated
interest rate of 8%. If the interest is paid semiannually and the bonds are due in 10
years, what would be the total amount of interest paid over the life of the bonds?
a. $1,000,000
b. $400,000
c. $800,000
d. $80,000
A company that uses leverage is attempting to earn an overall return that is higher than
the cost of funds received from
a. preferred and common stockholders.
b. common stockholders only.
c. customers.
d. borrowing.
While preparing a bank reconciliation, which of the following items would be added to
the bank statement balance?
a. outstanding checks
b. deposits in transit
c. bank service charges
d. interest earned on the bank account
When using the direct method to determine operating cash flows, how are salaries paid
to employees reported 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
Which of the following statements is false?
a. The inventory account is updated after every sale and after every merchandise
purchase under the perpetual inventory system.
b. The inventory account is updated only at the end of the accounting period under the
periodic inventory system.
c. A cost of goods sold account is updated after each sale of merchandise under the
periodic inventory system.
d. A purchases account is used only under the periodic inventory system.
A company reported net income for the current year. Which of the following business
transactions would cause its cash from operating activities to be higher than its net
income?
a. Cash dividends were paid to stockholders during the year.
b. Depreciation expense was recorded for the year.
c. A bank loan was repaid during the year.
d. Equipment was purchased for cash during the year.
Refer to Mary Kay Cosmetics. Prepare the company’s statement of cash flows for the
year ended December 31, 2014. Use the direct method of determining net cash flows
from operating activities.
Mortgage bonds are secure bonds.
To encourage prompt payment, sellers offer a(n) ____________________.
How are research and development costs reported in the financial statements? Why is
this treatment required?
When stockholders receive a distribution of additional shares of stock, and there is a
corresponding capitalization of retained earnings, a stock ____________________ has
occurred.
What type of entry is made to create a credit balance in the Estimated Warranty
Liability account on the balance sheet? What account would be debited in this entry?
Refer to the information presented for Tarpley & Underwood. What is the gross profit
ratio?
The amount of interest accrued is added to the note payable account and reported in the
liabilities section of the balance sheet.
The statement of cash flows helps users understand the reasons for the differences
between net income and related cash receipts and payments.
Special forms of factoring are called ____________________.
The inventory turnover ratio is defined as cost of goods sold divided by average
inventory.
The operating cash flow ratio is calculated by dividing current assets by cash flows
from operating activities.
Independent auditors (CPAs) render an opinion that the financial statements do or do
not fairly present a company’s financial position, operating results, and cash flows.
The cash ratio is calculated as follows: (Cash + Marketable Securities) / Current
Liabilities.
Accrued revenue is recognized when cash is received.
Refer to California Condos. On January 1, the Utilities Payable Account had a zero
balance. The company paid cash for utilities totaling $50,000 during 2013. How much
should be reported as utilities expense for the year ended December 31, 2013?
Income Statement accounts are closed to the income summary.
One reason management may choose the straight-line method of depreciation is because
it is easy to compute.