A Further Look at Financial Statements
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183. Different companies using the same accounting principles is an application of
a. consistency.
b. materiality.
c. full disclosure.
d. comparability.
184. The assumption that requires only those things that can be expressed in money are
included in the accounting records is the
a. economic entity assumption.
b. monetary unit assumption.
c. going concern assumption.
d. periodicity assumption.
185. Which of the following is a constraint in accounting?
a. Comparability
b. Cost
c. Consistency
d. Relevance
186. The accounting concept that indicates assets should be reported at the price received to
sell an asset is the
a. economic entity assumption.
b. monetary unit assumption.
c. fair value principle.
d. historical cost principle.
187. For accounting information to have relevance, it must be
a. consistent.
b. timely.
c. verifiable.
d. understandable.
188. The periodicity assumption states that the economic life of a business can be divided into
a. equal time periods.
b. cyclical time periods.
c. artificial time periods.
d. perpetual time periods.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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189. Which accounting assumption requires that only those things that can be expressed in
dollar values are included in the accounting records?
a. monetary unit assumption.
b. historical cost principle.
c. periodicity assumption.
d. full disclosure principle.
190. The principle that indicates that assets should be reported at the price received to sell an
asset is the
a. historical cost principle.
b. fair value principle.
c. full disclosure principle.
d. consistency principle.
191. Which accounting assumption assumes that an enterprise will continue in operation long
enough to carry out its existing objectives and commitments?
a. Monetary unit assumption
b. Economic entity assumption
c. Periodicity assumption
d. Going concern assumption
192. It is assumed that the activities of Ford Motor company can be distinguished from those of
General Motors because of the
a. going concern assumption.
b. economic entity assumption.
c. monetary unit assumption.
d. periodicity assumption.
193. The going concern assumption assumes that the business
a. will be liquidated in the near future.
b. will be purchased by another business.
c. is in a growth industry.
d. will remain in operation for the foreseeable future.
194. The economic entity assumption states that economic events
a. of different entities can be combined if all the entities are corporations.
b. must be reported to the Securities and Exchange Commission.
c. of a sole proprietorship cannot be distinguished from the personal economic events of
its owners.
d. of every entity can be separately identified and accounted for.
A Further Look at Financial Statements
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195. The concept that a business has a reasonable expectation of remaining in business for
the foreseeable future is called the
a. economic entity assumption.
b. monetary unit assumption.
c. periodicity assumption.
d. going concern assumption.
196. Which of the following is not an accounting assumption?
a. Integrity
b. Going concern
c. Periodicity
d. Economic entity
197. The periodicity assumption states
a. the business will remain in operation for the foreseeable future.
b. the life of a business can be divided into artificial time periods and that useful reports
covering those periods can be prepared.
c. every economic entity can be separately identified and accounted for.
d. only those things that can be expressed in money are included in the accounting
records.
198. The TNT Company has five plants nationwide that cost $300 million. The current fair value
of the plants is $500 million. The plants will be reported as assets at
a. $200 million.
b. $800 million.
c. $300 million.
d. $500 million.
199. The Mac Company has four plants nationwide that cost $350 million. The current fair
value of the plants is $300 million. The plants will be reported as assets at
a. $350 million.
b. $700 million.
c. $300 million.
d. $600 million.
200. The historical cost principle requires that when assets are acquired, they be recorded at
a. market value.
b. the amount paid for them.
c. selling price.
d. list price.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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201. Valuing assets at their fair value rather than at their cost is inconsistent with the
a. economic entity assumption.
b. historical cost principle.
c. periodicity assumption.
d. full disclosure principle.
202. Jackson Cement Corporation reported $35 million for sales when it only had $20 million of
actual sales. Which of the following qualities of useful information has Jackson most likely
violated?
a. Comparability
b. Relevance
c. Faithful representation
d. Consistency
203. Connor Corporation hired a new accountant. Over the next four years, the accountant
used four different accounting methods to depreciation for Connor’s equipment. Which of
the following qualities of useful information has Connor most likely violated?
a. Comparability
b. Relevance
c. Faithful representation
d. Consistency
204. Garrison Company prepares quarterly reports, which it distributes to all stockholders and
other entities that rely on its accounting information. Which of the following is the best
term for the key assumption in financial reporting that Garrison is following?
a. Monetary unit assumption
b. Going concern assumption
c. Economic entity assumption
d. Periodicity assumption.
A Further Look at Financial Statements
FOR INSTRUCTOR USE ONLY
2-45
Answers to Multiple Choice Questions
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
2-46
BRIEF EXERCISES
BE. 205
A list of financial statement items for Maloney Company includes the following:
Accounts receivable $19,500 Prepaid insurance $5,400
Cash $22,400 Supplies $1,800
Debt investments $ 6,200
Prepare the current assets section of the balance sheet listing the items in the proper sequence.
BE. 206
The following information (in millions of dollars) is available for Kline Sportswear for 2014:
Sales revenue $6,300 Net income $588.7
Stock price per share $18.45 Preferred stock dividend $0
Average shares outstanding 336.4 million
Compute the earnings per share for Kline Sportswear.
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Business Economics
A Further Look at Financial Statements
FOR INSTRUCTOR USE ONLY
2-47
BE. 207
For each of the following events affecting the stockholders’ equity of Carney, indicate whether the
event would: increase retained earnings (IRE), decrease retained earnings (DRE), increase
common stock (ICS), or decrease common stock (DCS).
_____1. Declared a cash dividend.
_____2. Issued new shares of common stock.
_____3. Reported net loss of $40,000
_____4. Reported net income of $20,000.
Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
BE. 208
These selected condensed data are taken from a recent balance sheet of Sanson Company (in
millions of dollars).
Cash $ 7.2
Accounts receivable 14.4
Inventory 18.0
Other current assets 11.1
Total current liabilities $ 24.8
Additional information: Current liabilities at the beginning of the year were $35.6 million.
What are (a) the working capital, and (b) the current ratio?
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Business Economics
Solution 208 (5 min.)
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
2-48
BE. 209
Insert the qualitative characteristics listed below that are associated with relevance and faithful
representation.
Confirmatory value Materiality
Free from error Complete
Neutral Predictive value
RELEVANCE FAITHFUL REPRESENTATION
1. _______________________ 1. _______________________
2. _______________________ 2. _______________________
3. _______________________ 3. _______________________
Ans: N/A, LO: 7, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None,
IMA: Reporting
Solution 209 (5 min.)
BE. 210
The following terms relate to the fundamental qualities of useful information. Match the key letter
of the correct term with the descriptive statement below.
a. Confirmatory value
b. Neutral
c. Predictive value
d. Relevant
e. Faithful representation
f. Timely
g. Verifiable
_____ 1. Accounting information that is not biased toward one position or another.
_____ 2. Providing information before it loses its capacity to influence decisions.
_____ 3. Providing information that is proven to be free from error.
_____ 4. Providing information that would make a difference in a business decision.
_____ 5. Provide information that accurately depicts what really happened.
_____ 6. Confirms or corrects prior decisions.
A Further Look at Financial Statements
FOR INSTRUCTOR USE ONLY
2-49
Solution 210 (5 min.)
BE. 211
For each of the independent situations described below, list the fundamental or enhancing of
quality or useful information that has been violated, if any. List only one term for each case.
1. Carrier Company is in its third year of operation and has yet to issue financial statements.
2. Larsen Corporation has selected the FIFO inventory costing method during the current year.
Last year it used the LIFO method and next year it plans to change to the average cost
method.
3. Reiser Company expenses some office equipment that is inexpensive even though it has a
useful life that exceeds 1 year.
Ans: N/A, LO: 7, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
None, IMA: Reporting
Solution 211 (5 min.)
BE. 212
Each of the following statements is justified by an accounting concept. Write the letter in the blank
next to each statement corresponding to the concept involved.
a. Consistency
b. Materiality
c. Full disclosure
d. Periodicity
1. The life of a business is divided into artificial time periods.
2. This characteristic best enhances comparability of financial statements between
years.
3. A merger agreed on just after the balance sheet date nevertheless is reported in the
notes to the financial statement.
4. A large company rounds its financial statement figures to the nearest thousand.
Ans: N/A, LO: 7, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
None, IMA: Reporting
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
2-50
Solution 212 (5 min.)
BE. 213
Each of the following statements is justified by a fundamental quality or an enhancing of quality
accounting. Write the letter in the blank next to each statement corresponding to the quality
involved.
a. Comparability d. Consistency
b. Understandability e. Relevance
c. Verifiable f. Faithful representation
_____ 1. A company uses the same accounting principles from year to year.
_____ 2. Information that is free from error.
_____ 3. Information presented in a clear and concise fashion.
_____ 4. Information that makes a difference in a decision.
_____ 5. Information accurately depicts what really happened.
Ans: N/A, LO: 7, Bloom: C, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None,
IMA: Reporting
Solution 213 (5 min.)
A Further Look at Financial Statements
FOR INSTRUCTOR USE ONLY
2-51
Be. 214
Presented below are the basic assumptions and principles underlying financial statements.
a. Historical cost principle d. Going concern assumption
b. Economic entity assumption e. Monetary unit assumption
c. Full disclosure principle f. Periodicity assumption
Identify the basic assumption or principle that is described below.
____ 1. The economic life of a business can be divided into artificial time periods.
____ 2. The business will continue in operation long enough to carry out its existing objectives.
____ 3. Assets should be recorded at their cost.
____ 4. Economic events can be identified with a particular unit of accountability.
____ 5. Circumstances and events that make a difference to financial statement users should
be disclosed.
____ 6. Only transaction data that can be expressed in terms of money should be included in
the accounting records.
Solution 214 (5 min.)
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
2-52
EXERCISES
Ex. 215
The following information is available for Mullen Company for the year ended December 31,
2014:
Accounts payable 4,700
Stock investments 8,400
Accumulated depreciation, equipment 4,000
Retained earnings 16,000
Common stock 4,800
Intangible assets 2,500
Notes payable (due in 5 years) 6,000
Accounts receivable 1,500
Cash 2,600
Debt investments 3,000
Land 10,000
Equipment 7,500
Instructions
Use the above information to prepare a classified balance sheet for the year ended December 31,
2014.
A Further Look at Financial Statements
FOR INSTRUCTOR USE ONLY
2-53
Solution 215 (Cont.)
Ex. 216
The following lettered items represent a classification scheme for a balance sheet, and the
numbered items represent data found on balance sheets. In the blank next to each account,
write the letter indicating to which category it belongs.
A. Current assets
B. Investments
C. Property, plant, and equipment
D. Intangible assets
E. Current liabilities
F. Long-term liabilities
G. Stockholders’ equity
H. Not on the balance sheet
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None,
IMA: Reporting
Solution 216 (5 min.)
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
2-54
Ex. 217
These items are taken from the financial statements of Donovan Company. at December 31,
2014.
Buildings $95,800
Accounts receivable 15,600
Prepaid insurance 4,680
Cash 18,840
Equipment 79,400
Land 61,200
Insurance expense 780
Depreciation expense 7,300
Interest expense 2,600
Common stock 57,000
Retained earnings (January 1, 2014) 40,000
Accumulated depreciation—buildings 45,600
Accounts payable 15,500
Mortgage payable 88,600
Accumulated depreciation—equipment 18,720
Interest payable 3,600
Service revenue 17,180
Instructions
Prepare a classified balance sheet. Assume that $13,600 of the mortgage payable will be paid in
2015.
Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
Solution 217 (20 min.)
A Further Look at Financial Statements
FOR INSTRUCTOR USE ONLY
2-55
Solution 217 (Cont.)
Ex. 218
The following items are taken from the financial statements of Tracy Company for 2014:
Accounts payable $ 10,000
Accounts receivable 11,000
Accumulated depreciation—equipment 38,000
Advertising expense 21,000
Cash 14,000
Common stock 90,000
Depreciation expense 12,000
Dividends 15,000
Equipment 210,000
Insurance expense 3,000
Notes payable (due 2017) 70,000
Prepaid insurance 6,000
Rent expense 17,000
Retained earnings (beginning) 12,000
Salaries and wages expense 34,000
Salaries and wages payable 3,000
Service revenue 130,000
Supplies 4,000
Supplies expense 6,000
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
2-56
Ex. 218 (Cont.)
Instructions
(a) Calculate the net income.
(b) Calculate the retained earnings balance that would appear on a balance sheet at December
31, 2014
(c) Prepare a classified balance sheet for Tracy Company at December 31, 2014 assuming the
note payable is a long-term liability.
(d) Compute the current ratio, debt to assets ratio, and earnings per share value. The average
number of shares outstanding for 2014 was 10,000.
Ans: N/A, LO: 1, 2, 3, 4 Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting,
AICPA PC: Problem Solving, IMA: Reporting
Solution 218 (20 min.)
A Further Look at Financial Statements
FOR INSTRUCTOR USE ONLY
2-57
Solution 218 (Cont.)
Ex. 219
The following items are taken from the financial statements of Grove Company for 2014:
Accounts payable $18,500
Accounts receivable 8,000
Accumulated depreciation-equipment 4,800
Bonds payable 18,000
Cash 24,000
Common stock 25,000
Cost of goods sold 27,000
Depreciation expense 4,800
Dividends 5,300
Equipment 44,000
Interest expense 2,500
Patents 7,500
Retained earnings, January 1 16,000
Salaries and wages expense 5,200
Sales revenue 50,500
Supplies 4,500
Instructions
(a) Prepare an income statement and a classified balance sheet for Grove Company.
(b) Compute the following ratios and values:
1. Current ratio
2. Debt to assets ratio
3. Working capital
4. Earnings per share (Grove’s average number of shares outstanding during the year was
5,000.)
Ans: N/A, LO: 1, 2, 4, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA
PC: Problem Solving, IMA: Reporting
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
2-58
Solution 219 (25 min.)
A Further Look at Financial Statements
FOR INSTRUCTOR USE ONLY
2-59
Ex. 220
These financial statement items are for Snyder Corporation at year-end, July 31, 2014.
Salaries and wages payable $ 2,580
Salaries and wages expense 50,700
Utilities expense 22,600
Equipment 21,000
Accounts payable 4,100
Service revenue 62,100
Rent revenue 8,500
Notes payable (due 2016) 1,800
Common stock 16,000
Cash 20,200
Accounts receivable 12,780
Accumulated depreciation—equipment 6,000
Dividends 5,000
Depreciation expense 4,000
Retained earnings (beginning of the year) 35,200
Instructions
(a) Prepare an income statement and a retained earnings statement for the year ended July
31, 2014. Snyder Corporation did not issue any new stock during the year.
(b) Prepare a classified balance sheet at July 31, 2014.
Ans: N/A, LO: 1, 3, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA
PC: Problem Solving, IMA: Reporting
Solution 220 (25 min.)