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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
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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
