Finance Chapter 2 Financial statements are intended to tell the reader the value of a company

Chapter 2: Financial Statements and the Annual Report

True / False

1. Financial statements are intended to tell the reader the value of a company.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-01 – LO: 03-01

KEYWORDS:

Bloom’s: Remembering

2. Accountants are the main reason financial statements are prepared.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-01 – LO: 03-01

KEYWORDS:

Bloom’s: Remembering

3. The SEC created the objectives of financial reporting.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-01 – LO: 03-01

KEYWORDS:

Bloom’s: Remembering

4. The purpose of financial reporting is to provide economic information to external decision makers only.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-01 – LO: 03-01

KEYWORDS:

Bloom’s: Remembering

5. An objective of financial reporting is to reflect economic information concerning a company’s cash flows.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-01 – LO: 03-01

KEYWORDS:

Bloom’s: Remembering

6. The concept of conservatism is the capacity of information to make a difference in a decision.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-02 – LO: 02-02

KEYWORDS:

Bloom’s: Remembering

7. Materiality deals with the insignificance of an error in accounting information.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-02 – LO: 02-02

KEYWORDS:

Bloom’s: Remembering

8. Most businesses have an operating cycle of greater than one year.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-03 – LO: 02-03

KEYWORDS:

Bloom’s: Remembering

9. Current assets, other than cash, are expected to be sold or consumed beyond a company’s normal operating cycle.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-03 – LO: 02-03

KEYWORDS:

Bloom’s: Remembering

10. Obligations related to operating activities that will be paid within the company‘s operating cycle must be reported as

current liabilities on a classified balance sheet.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-03 – LO: 02-03

KEYWORDS:

Bloom’s: Remembering

11. The operating cycle for all businesses is one year.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-03 – LO: 02-03

KEYWORDS:

Bloom’s: Remembering

12. A construction company that builds skyscrapers is likely to have an operating cycle longer than one year.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-03 – LO: 02-03

KEYWORDS:

Bloom’s: Applying

13. Three common categories of long-term assets are: 1) property, plant, and equipment, 2) investments, and 3)

intangibles.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-03 – LO: 02-03

KEYWORDS:

Bloom’s: Remembering

14. In the stockholders’ equity section of a classified balance sheet, a distinction is made between amounts invested by

owners and amounts accumulated from business earnings.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-03 – LO: 02-03

KEYWORDS:

Bloom’s: Remembering

15. One primary purpose of a classified balance sheet is to help users evaluate the liquidity of a company.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-04 – LO: 02-04

KEYWORDS:

Bloom’s: Remembering

16. Companies prepare classified financial statements because they are required by international accounting principles.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-04 – LO: 02-04

KEYWORDS:

Bloom’s: Remembering

17. The current ratio is irrelevant in liquidity analysis for service companies because they do not have inventories among

their current assets

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-04 – LO: 02-04

KEYWORDS:

Bloom’s: Remembering

18. An advantage of the current ratio is that it considers the makeup of the current assets.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-04 – LO: 02-04

KEYWORDS:

Bloom’s: Remembering

19. The excess of current assets over current liabilities is referred to as working capital.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-04 – LO: 02-04

KEYWORDS:

Bloom’s: Remembering

20. A balance sheet shows cash, $75,000; marketable securities, $115,000; accounts receivable, $150,000 and $222,500 of

inventories. Current liabilities are $225,000. The current ratio is 2.5 to 1.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-04 – LO: 02-04

KEYWORDS:

Bloom’s: Analyzing

21. If a firm has a current ratio of 2, the subsequent receipt of a 60-day note receivable to settle an open account will cause

the ratio to decrease.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-04 – LO: 02-04

KEYWORDS:

Bloom’s: Analyzing

22. The purchase of inventory for cash will cause the current ratio to decrease.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-04 – LO: 02-04

KEYWORDS:

Bloom’s: Remembering

23. Income from operations does not include interest revenue and interest expense because these items are considered to

be non-operating in nature.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-05 – LO: 02-05

KEYWORDS:

Bloom’s: Remembering

24. A 12% change in sales will result in a 12% change in net income.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-05 – LO: 02-05

FACC.PONO.13.02-06 – LO: 02-06

KEYWORDS:

Bloom’s: Analyzing

25. Some analysts properly refer to a company’s profit margin as its return on assets.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-06 – LO: 02-06

KEYWORDS:

Bloom’s: Remembering

26. Dividends declared and paid reduce a company’s retained earnings balance.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-07 – LO: 02-07

KEYWORDS:

Bloom’s: Remembering

27. Dividends paid appears on both the income statement and the statement of retained earnings.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-07 – LO: 02-07

KEYWORDS:

Bloom’s: Remembering

28. Financing activities are needed to provide the funds to start a business.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-08 – LO: 02-08

KEYWORDS:

Bloom’s: Remembering

29. The statement of cash flows, like the income statement, reports only operating activities of a company.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-08 – LO: 02-08

KEYWORDS:

Bloom’s: Remembering

30. Funds raised from operating activities should be invested in assets that can be used to carry on business operations.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-08 – LO: 02-08

KEYWORDS:

Bloom’s: Remembering

31. The primary responsibility for the preparation and integrity of the financial statements in an annual report belongs to

the company’s independent accountants (CPAs).

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-09 – LO: 02-09

KEYWORDS:

Bloom’s: Remembering

32. 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.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-09 – LO: 02-09

KEYWORDS:

Bloom’s: Remembering

33. An independent auditor’s (CPA’s) report is a guarantee that the financial statements are free from fraud or material

error

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-09 – LO: 02-09

KEYWORDS:

Bloom’s: Remembering

34. In the independent auditors’ report included with the annual report, management discusses the financial statements and

provides the shareholders with explanations for certain amounts reported in the statements.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-09 – LO: 02-09

KEYWORDS:

Bloom’s: Remembering

35. The quality of accounting information that allows a user to analyze two or more companies and look for similarities

and differences is known as understandability.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-02 – LO: 02-02

KEYWORDS:

Bloom’s: Remembering

36. The quality of accounting information that makes it comprehensible to those willing to spend the necessary time is

consistency.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-02 – LO: 02-02

KEYWORDS:

Bloom’s: Remembering

37. The quality of accounting information that allows a user to compare two or more accounting periods for a single

company is known as consistency.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-02 – LO: 02-02

KEYWORDS:

Bloom’s: Remembering

38. There is a standard threshold for materiality set by the Financial Accounting Standards Board for all companies.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-02 – LO: 02-02

KEYWORDS:

Bloom’s: Remembering

39. The lack of a common depreciation method makes it impossible to compare the performance companies using

different methods.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-02 – LO: 02-02

KEYWORDS:

Bloom’s: Remembering

40. The amount of a transaction may be immaterial by company standards but still be considered significant by financial

statement users.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-02 – LO: 02-02

KEYWORDS:

Bloom’s: Remembering

45. Relevant information can be quantitative or qualitative. In deciding whether to go to college part-time or full-time,

which of the following is a qualitative factor for a student?

a.

The cost of tuition

b.

The opportunity to make friends

c.

The price of football tickets

d.

“Good Student” discounts on auto insurance rates.

ANSWER:

b

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-02 – LO: 02-02

KEYWORDS:

Bloom’s: Understanding

46. The preparation of financial statements requires that the information be understandable

a.

Only to CPAs.

b.

To those willing to spend the time to understand it.

c.

Only to those who take an accounting course.

d.

Only to financial analysts and brokers.

ANSWER:

b

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-02 – LO: 02-02

KEYWORDS:

Bloom’s: Understanding

47. Jones, Inc., a manufacturer of tires, has given you its most recent annual report in an effort to obtain a sizable loan.

The company is very profitable and appears to have a sound financial position. Based on a report presented on prime-time

television last night, you are aware that Jones is a defendant in several lawsuits related to its defective tires that cause

vehicles to overturn. The information presented on television is an example of financial information that is

a.

Relevant

b.

Consistent

c.

Predictable

d.

Comparable

ANSWER:

a

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-02 – LO: 02-02

KEYWORDS:

Bloom’s: Applying

48. If an investor can use accounting information for two different companies to evaluate the types and amounts of

expenses, the information is said to have the quality of

a.

Comparability

b.

Consistency

c.

Neutrality

d.

Understandability

ANSWER:

a

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-02 – LO: 02-02

KEYWORDS:

Bloom’s: Applying

49. Jackson Transportation purchases many pieces of office furniture with an individual cost below $200 each. Jackson

chooses to account for these expenditures as expenses when acquired rather than reporting them as property, plant, and

equipment on its balance sheet. The company’s accountant and independent CPA agree that no accounting principle has

been violated. What accounting justification allows Jackson to expense the furniture?

a.

Conservatism

b.

Matching

c.

Materiality

d.

Verifiability

ANSWER:

c

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-02 – LO: 02-02

KEYWORDS:

Bloom’s: Applying

50. Tavella Company applies the consistency convention. What does this mean?

a.

Tavella Co. uses the same names for all its expenses as its competitors.

b.

Tavella Co. has selected certain accounting principles that can never be changed.

c.

Tavella Co. applies the same accounting principles each accounting period.

d.

Tavella Co. applies the same accounting principles as it competitors.

ANSWER:

c

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-02 – LO: 02-02

KEYWORDS:

Bloom’s: Applying

51. Information that is material means that an error or alternative method of handling a transaction

a.

Would possibly affect the judgment of someone relying on the financial statements

b.

Would not affect the decisions of users

c.

Might cause a company to understate its earnings for the accounting period

d.

Could increase the profitability of a company

ANSWER:

a

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-02 – LO: 02-02

KEYWORDS:

Bloom’s: Understanding

52. An accountant is uncertain about the best estimate of an amount for a business transaction. If two amounts are about

equally likely, the amount least likely to overstate assets and income is selected. Which of the following qualities is

characterized by this action?

a.

Comparability

b.

Conservatism

c.

Materiality

d.

Neutrality

ANSWER:

b

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-02 – LO: 02-02

KEYWORDS:

Bloom’s: Applying

53. The qualitative characteristics of accounting data include

a.

Assets reported on the balance sheet

b.

All accounting information

c.

Cash flows

d.

Reliability

ANSWER:

d

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-02 – LO: 02-02

KEYWORDS:

Bloom’s: Understanding

54. Which of the following is a current asset?

a.

Building

b.

Office supplies

c.

Land

d.

Truck

ANSWER:

b

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-03 – LO: 02-03

KEYWORDS:

Bloom’s: Understanding

55. Which of the following is a noncurrent asset?

a.

Land

b.

Accounts receivable

c.

Cash

d.

None of these choices.

ANSWER:

a

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-03 – LO: 02-03

KEYWORDS:

Bloom’s: Remembering

56. Which of the following include only current assets?

a.

Accounts receivable, cash, inventory, office supplies

b.

Cash, accounts payable, inventory, office supplies

c.

Cash, land, accounts receivable, inventory

d.

Accounts receivable, cash, furniture, office supplies

ANSWER:

a

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-03 – LO: 02-03

KEYWORDS:

Bloom’s: Understanding

57. To determine the source of a company’s noncurrent assets, on which financial statement will you look?

a.

Income statement only

b.

Balance sheet only

c.

Both the balance sheet and the income statement

d.

Both the income statement and the statement of retained earnings

ANSWER:

b

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-03 – LO: 02-03

KEYWORDS:

Bloom’s: Understanding

Bevco Company

Bevco Company has provided the following information from its accounting records for the current year:

Cash

$ 55,000

Accounts receivable

$ 45,000

Inventory

65,000

Land

75,000

Accounts payable

50,000

Notes payable (due 2020)

150,000

Retained earnings

?

Capital stock

20,000

58. Read the information for Bevco Corporation. What are Bevco’ current assets?

a.

$ 100,000

b.

$ 165,000

c.

$ 210,000

d.

$ 240,000

ANSWER:

b

RATIONALE:

($55,000 Cash + $45,000 Accounts Receivable + $65,000 Inventory = $165,000)

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-03 – LO: 02-03

KEYWORDS:

Bloom’s: Analyzing

59. Read the information for Bevco Company. What are Bevco’ current liabilities?

a.

$ 50,000

b.

$ 125,000

c.

$ 200,000

d.

$ 230,000

ANSWER:

a

RATIONALE:

($50,000 Accounts Payable)

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-03 – LO: 02-03

KEYWORDS:

Bloom’s: Analyzing

60. Which one of the following items is reported as a current asset on a classified balance sheet?

a.

Trucks

b.

Accounts receivable

c.

Land

d.

Common stock

ANSWER:

b

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-03 – LO: 02-03

KEYWORDS:

Bloom’s: Understanding

61. The following information is given for Camino Company:

Cash

$ 50,000

Inventory

$ 45,000

Land

75,000

Accumulated Depreciation

40,000

Plant & Equipment

150,000

Accounts Payable

60,000

What are the company’s current assets?

a.

$220,000

b.

$155,000

c.

$130,000

d.

$ 95,000

ANSWER:

d

RATIONALE:

($50,000 Cash + $45,000 Inventory = $95,000)

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-03 – LO: 02-03

KEYWORDS:

Bloom’s: Analyzing

62. Which of the following accounts are normally reported as noncurrent liabilities on a classified balance sheet?

a.

Notes payable due in 5 years and bonds payable

b.

Interest payable and mortgage payable

c.

Income taxes payable and salaries payable

d.

Capital stock and accounts payable

ANSWER:

a

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-03 – LO: 02-03

KEYWORDS:

Bloom’s: Understanding

63. Which one of the following is not a major category for long-term assets?

a.

Receivables

b.

Property, plant, and equipment

c.

Intangibles

d.

Goodwill

ANSWER:

a

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-03 – LO: 02-03

KEYWORDS:

Bloom’s: Understanding

64. Which of the following would not be considered to be an intangible asset?

a.

Franchises

b.

Copyrights

c.

Investments

d.

Goodwill

ANSWER:

c

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-03 – LO: 02-03

KEYWORDS:

Bloom’s: Understanding

65. Which of the following statements is true concerning intangible assets?

a.

Intangible assets have no economic substance.

b.

Intangible assets lack physical existence.

c.

Intangible assets are listed in the stockholders’ equity section of the balance sheet.

d.

Intangible assets appear in the current assets section of the balance sheet.

ANSWER:

b

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-03 – LO: 02-03

KEYWORDS:

Bloom’s: Understanding

66. How are assets which are expected to be realized in cash, sold, or consumed within the normal operating cycle of a

business or within one year (if the operating cycle is shorter than one year) reported on a classified balance sheet?

a.

Property, plant, and equipment

b.

Current assets

c.

Intangible assets

d.

Current liabilities

ANSWER:

b

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-03 – LO: 02-03

KEYWORDS:

Bloom’s: Understanding

67. Which of the following terms characterizes the time period between the investment of cash in merchandise and the

collection of cash from the sale of that merchandise?

a.

Operating cycle

b.

Natural business year

c.

Accounting period

d.

Fiscal period

ANSWER:

a

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-03 – LO: 02-03

KEYWORDS:

Bloom’s: Understanding

68. Which set of items below are current assets?

a.

Accounts receivable, net income, inventory, and dividends

b.

Cash, accounts receivable, capital stock, and sales

c.

Net income, cash, office supplies, and inventory

d.

Cash, accounts receivable, inventory, and office supplies

ANSWER:

d

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-03 – LO: 02-03

KEYWORDS:

Bloom’s: Understanding

69. One significant difference between a classified and a non-classified balance sheet is the distinction between which of

the following items?

a.

Assets and liabilities

b.

Current and noncurrent items

c.

Liabilities and owners’ equity

d.

Resources invested by the owners and amounts borrowed from creditors

ANSWER:

b

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-03 – LO: 02-03

KEYWORDS:

Bloom’s: Understanding

70. For several years, Bosco Corporation has had a current ratio that was consistent with other companies in its industry.

For the most recent year, Bosco’s current ratio was significantly higher than that for the industry. What is the best possible

explanation for this situation?

a.

The other companies in the industry were not as profitable.

b.

Bosco’s liquidity has improved or is not leveraging financial resources effectively.

c.

Bosco has less property, plant and equipment than other companies.

d.

Bosco has too much debt.

ANSWER:

b

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-03 – LO: 02-03

KEYWORDS:

Bloom’s: Applying

Chapter 2: Financial Statements and the Annual Report

Guinther & Sons, Inc.

Guinther & Sons, Inc. a retailer of men’s clothing, earned a net profit of $77,000 for 2016. The balance sheet for Guinther

& Sons includes the following items:

Cash

$29,000

Accounts receivable

$39,000

Inventory

79,000

Prepaid insurance

3,000

Land

90,000

Accounts payable

14,000

Taxes payable

29,000

Capital stock

50,000

Retained earnings

97,000

Long-term notes payable

43,000

71. Read the information for Guinther & Sons. Calculate the total amount of current assets for Guinther & Sons.

a.

$ 100,000

b.

$ 147,000

c.

$ 150,000

d.

$ 249,000

ANSWER:

c

RATIONALE:

($29,000 Cash + $39,000 Accounts Receivable + $79,000 Inventory + $3,000 Prepaid

Insurance = $150,000)

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-03 – LO: 02-03

KEYWORDS:

Bloom’s: Analyzing

72. Read the information for Guinther & Sons, Inc. Calculate the current ratio for Guinther & Sons.

a.

2.58 to 1

b.

2.75 to 1

c.

3.00 to 1

d.

2.00 to 1

ANSWER:

c

RATIONALE:

($29,000 Cash + $39,000 Accounts Receivable + $79,000 Inventory + $3,000 Prepaid

Insurance) / ($21,000 Accounts Payable + $29,000 Taxes Payable) = 3.00 to 1

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-04 – LO: 02-04

KEYWORDS:

Bloom’s: Analyzing

73. Read the information for Guinther & Sons, Inc. The average current ratio for stores such as Guinther & Sons is 2.4 to

1. What does this comparison tell you about its liquidity?

a.

It is more liquid than its competitors.

b.

It has more long-term assets than its competitors.

c.

Since a rule of thumb for current ratios is 2 to 1, neither Guinther & Sons, Inc. nor its competitors is liquid.

d.

Guinther & Sons, Inc. is more profitable than its competitors.

ANSWER:

a

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-04 – LO: 02-04

KEYWORDS:

Bloom’s: Analyzing

74. Rosu Company has total current assets of $150,000 and total current liabilities of $50,000. What is the amount of

working capital for Rosu Company?

a.

$200,000

b.

$100,000

c.

$125,000

d.

$ 179,000

ANSWER:

b

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-04 – LO: 02-04

KEYWORDS:

Bloom’s: Analyzing

75. What is the correct method for calculating working capital?

a.

Total Assets minus Total Liabilities

b.

Current Assets minus Total Liabilities

c.

Current Assets minus Current Liabilities

d.

Current Assets plus Current Liabilities

ANSWER:

c

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-04 – LO: 02-04

KEYWORDS:

Bloom’s: Applying

76. Oreo Company has current assets of $20,000, current liabilities of $8,000, and long-term liabilities of $3,000. Oreo

wants to buy new equipment. How much of its existing cash can Oreo use to acquire equipment without allowing its

current ratio to decline below 2.0 to 1?

a.

$ 4,000

b.

$ 8,000

c.

$ 10,000

d.

$ 12,000

ANSWER:

a

RATIONALE:

($16,000 / $8,000 = 2.0 to 1; $20,000 – $16,000 = $4,000)

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-04 – LO: 02-04

KEYWORDS:

Bloom’s: Analyzing

77. Excursion Corp. increased its dollar amount of working capital over the past several years. To further evaluate the

company’s short-run liquidity, which one of the following measures should be used?

a.

The current ratio

b.

An analysis of the company’s long-term debt

c.

An analysis of the return on stockholders’ equity

d.

An analysis of retained earnings

ANSWER:

a

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-04 – LO: 02-04

KEYWORDS:

Bloom’s: Applying

78. Which financial statement reports information helpful in assessing working capital?

a.

Income statement

b.

Balance sheet

c.

Statement of retained earnings

d.

Statement of cash flows

ANSWER:

b

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-04 – LO: 02-04

KEYWORDS:

Bloom’s: Understanding

79. Use Rizwi Corporation’s list of accounts at December 31, 2016 to answer the following question.

Rizwi Corporation

List of Accounts at December 31, 2016

Cash

$30,000

Accumulated depreciation

$ 12,000

Merchandise inventory

14,000

Notes payable—

Due12/31/2024

120,000

Land

40,000

Accounts payable

14,000

Buildings

80,000

Equipment

33,000

Accounts receivable

25,000

Notes Payable—

Due07/01/2018

14,000

What is Rizwi Corp.’s current ratio?

a.

0.48 to 1

b.

2.00 to 1

c.

2.55 to 1

d.

2.86 to 1

ANSWER:

b

RATIONALE:

($30,000 Cash + $21,000 Merchandise Inventory + $25,000 Accounts Receivable) / ($14,000

Accounts Payable + $24,000 Notes Payable—Due 07/01/2015) = 2.00 to 1

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-04 – LO: 02-04

KEYWORDS:

Bloom’s: Analyzing

80. If the current ratio is 2.5 to 1, net income is $6,000, and current liabilities are $18,000, how much is working capital?

a.

$ 6,000

b.

$ 14,000

c.

$ 27,000

d.

$ 45,000

ANSWER:

c

RATIONALE:

($18,000 Current Liabilities × 2.5 = $45,000 Current Assets; $45,000 – $18,000 = $27,000)

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-04 – LO: 02-04

KEYWORDS:

Bloom’s: Analyzing

81. For which of the following is the current ratio most useful?

a.

In evaluating a company’s profitability.

b.

In evaluating a company’s solvency

c.

In evaluating a company’s profitability

d.

In evaluating a company’s liquidity.

ANSWER:

d

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-04 – LO: 02-04

KEYWORDS:

Bloom’s: Applying

82. Which of the following events will cause a company’s current ratio to decrease?

a.

The sale of inventory for cash

b.

The sale of inventory for credit (accounts receivable)

c.

Issuing stock for cash

d.

Paying off long-term debt with cash

ANSWER:

d

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-04 – LO: 02-04

KEYWORDS:

Bloom’s: Applying

83. Which of the following events will cause a company’s current ratio to rise?

a.

The collection of an account receivable

b.

Selling land for cash.

c.

The discharge of an account payable by signing a short-term note payable

d.

None of these choices.

ANSWER:

b

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.02-04 – LO: 02-04

KEYWORDS:

Bloom’s: Applying

84. Liquidity relates to a company’s ability to do which of the following?

a.

The ability to pay its financial obligations as they become due

b.

The ability to stay in business over the long run

c.

The ability to pay dividends to its stockholders

d.

The ability to collect the amount their customers owe the company

ANSWER:

a

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.02-04 – LO: 02-04

KEYWORDS:

Bloom’s: Understanding