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51) On October 1, 2009 CW Oil Drilling Company paid $2,400,000 for a two-year insurance
policy that covers all of its drilling equipment around the world. The company recorded the
purchase as prepaid insurance. Complete the chart below:
Cash paid
Insurance
expense
Prepaid
insurance
Year ended Dec. 31, 2009
$
$
$
Year ended Dec. 31, 2010
$
$
$
Year ended Dec. 31, 2011
$
$
$
52) Ima Hogg wants to borrow money to expand her business. Her plan is to open a new store on
each of the major islands in the Caribbean. She knows that her bank will want to see a full set of
this year’s financial statements before agreeing to lend the company money. Ima tells the
company accountant, Tom Trueheart, to double the useful lives of all of the company’s
equipment before he prepares the financial statements this year.
1. What effect will doubling the useful lives for all of the equipment have on this year’s income
statement? How will the balance sheet be affected? Why would Ima Hogg ask Tom Trueheart to
do this?
2. Would it be ethical for Tom to do as Ima asks? Why?
53) Ima Hogg wants to borrow money to expand her business. Her plan is to open a new store on
each of the major islands in the Caribbean. She knows that her bank will want to see a full set of
this year’s financial statements before agreeing to lend the company money. Ima tells the
company accountant, Tom Trueheart, not to pay December rent or utilities. That way there will
be less rent expense and utility expense on this year’s income statement.
1. What effect will failing to pay these bills have on this year’s income statement? How will the
balance sheet be affected? Why would Ima Hogg ask Tom Trueheart to do this?
2. Would it be ethical for Tom to do as Ima asks? Why?
54) On June 1, Ren, Inc. paid $12,000 for one year of rent in advance. In Ren’s information
system, the $12,000 was recorded as prepaid rent. Ren forgot to make the necessary adjusting
entry before preparing its annual financial statements on December 31. Put an X in the
appropriate box to show how each of these line items will be reported on Ren’s financial
statements. Dollar amounts are not required.
Overstated
Understated
Correctly Stated
1.
Rent expense
2.
Prepaid rent
3.
Cash paid for rent
4.
Net income
5.
Retained earnings
6.
Total assets
7.
Total liabilities
8.
Total shareholders’
equity
55) Stimpy, Inc. collected $3,600 on December 20, 2011 from a customer for services to be
performed next year in 2012. In Stimpy’s information system, the entire cash receipt of $3,600
was recorded as revenue earned. Stimpy forgot to make the necessary adjusting entry before
preparing financial statements on December 31, 2011. Put an X in the appropriate box to show
how each of these line items will be reported on Stimpy’s December 31, 2011 financial
statements. Dollar amounts are not required.
Overstated
Understated
Correctly Stated
1.
Revenue
2.
Cash received from
customers
3.
Unearned revenue
4.
Net income
5.
Retained earnings
6.
Total assets
7.
Total liabilities
8.
Total shareholders’
equity
56) Put an X in the appropriate box to indicate the financial statement(s) where the following line
items would appear. Some items may appear on more than one statement.
Income
Statement
Statement of
Changes in
Shareholders'
Equity
Statement of
Cash Flows
Balance Sheet
1.
Supplies
2.
Supplies expense
3.
Cash paid for supplies
4.
Cash paid for salaries
5.
Salaries payable
6.
Salaries expense
7.
Unearned service fees
8.
Cash collected from
customers
9.
Service fees earned
10.
Accounts receivable
11.
Accumulated
depreciation
12.
Depreciation expense
13.
Equipment (net)
14.
Prepaid advertising
15.
Advertising expense
16.
Cash paid for
advertising
17.
Interest expense
18.
Cash paid for interest
19.
Interest payable
20.
General &
administrative expenses
21.
Net earnings
22.
Retained earnings
23.
Income tax expense
24.
Income taxes payable
25.
Gross profit
57) Indicate which financial statement would report the following items of information. Some
items may appear on more than one statement. You should include all of them.
Your choices are as follows:
IS = Income statement
OE = Statement of changes in shareholders’ equity
BS = Balance sheet
CF = Statement of cash flows
NONE = Item does not appear on any of the financial statements
Interest expense
Sales revenue
Unearned revenue
Office supplies
Equipment
Cash flow from operating activities
Net income
Salaries expense
Cash flow from financing activities
Accumulated depreciation
Interest receivable
Salaries payable
58) Indicate which financial statement would report the following items of information. Some
items may appear on more than one statement. You should include all of them in your answer. If
an item does not appear on any financial statement, write NONE.
Your choices are as follows:
IS = Income statement
OE = Statement of changes in shareholders’ equity
BS = Balance sheet
CF = Statement of cash flows
NONE = Item does not appear on any of the financial statements
Cash flow from operating activities
Unearned revenue
Interest payable
Profit margin on sales ratio
Depreciation expense
Cash flow from investing activities
Prepaid rent
Cash
Operating expenses
Accumulated depreciation
Interest receivable
Interest expense
59) Data from the accounting system of On-a-Roll, Inc. are provided below. All amounts are
before the current year’s adjustments are recorded. All adjustments are recorded at yearend.
On-a-Roll, Inc.
Balance Sheet
December 31, 2011
Assets Liabilities and shareholders' equity (SE)
Cash $ 10,500 Accounts payable $ 350
Inventory 11,000 Salaries payable 450
Supplies 200 Notes payable 3,000
Prepaid rent 300
Equipment 40,000 Common stock 20,200
Accumulated depreciation (10,000) Retained earnings 28,000
Total assets $52,000 Total liabilities & SE $52,000
Prepare the balance sheet after year-end adjustments using the following additional information.
a. A count of supplies reveals $20 on hand at the end of the year.
b. One-third of the prepaid rent was used up during the year.
c. One-fourth of the equipment is depreciated each year.
d. $350 of work for customers has been completed but not yet billed or collected.
e. Salaries of $150 have been earned by employees but not paid.
f. On January 1 of the current year, the company borrowed $3,000 on a three-year note payable.
Interest accrues on the note at the rate of 6% per year.
60) Sam Sleimy wants to borrow money to expand his lawn maintenance business. He knows
that his bank will want to see a full set of this year’s financial statements before agreeing to lend
the company money. Normally his company bills customers at the end of each month, for
services that have already been performed. Sam tells the company accountant, Tom Trueheart, to
start billing all regular customers in advance, and record revenue for the amounts that have been
billed. This means that bills for January of next year will be sent out in December.
1. What effect will billing customers in advance have on this year’s income statement for the
year ended December 31? How will the balance sheet be affected? Why would Sam ask Tom
Trueheart to do this?
2. Would it be ethical for Tom to do as Sam asks? Why?
61) Use the following code to identify the financial statement(s) where each of these line items is
shown. (Remember that some line items may be found on more than one statement.)
a. Balance sheet
b. Income statement
c. Statement of changes in shareholders’ equity
d. Statement of cash flows
______ 1. Cash collected from customers
______ 2. Revenues earned
______ 3. Unearned revenue
______ 4. Salaries payable
______ 5. Salaries expense
______ 6. Cash paid to employees
62) Match the following terms with the appropriate definitions below. Definitions have not been
provided for all of these terms.
a. Net income
b. Net loss
c. Net cash flows from operating activities
d. Gross profit
e. Total expenses
f. Depreciation expense
g. Accumulated depreciation
______ 1. What the income statement reports when expenses exceed revenues for a given
accounting period
______ 2. The cost of long-term assets used up during a single accounting period
______ 3. The successful operating results of a business based on matching accomplishment
against efforts
______ 4. The cumulative amount of a long-term asset used up from the time it was purchased to
the date of the financial statements
______ 5. What the income statement reports when revenues exceed expenses for a given
accounting period
63) Use the following code to identify each of the assets listed below:
a. a long-term asset subject to depreciation
b. a long-term asset that does NOT need to be depreciated
c. is NOT a long-term asset
______ 1. Office supplies
______ 2. Land
______ 3. Factory equipment
______ 4. Office computers
______ 5. Cash
______ 6. Accounts receivable
______ 7. Depreciation expense
______ 8. Office furniture
______ 9. Truck
______ 10. Building
64) Use the following code to classify the accounts listed below by the appropriate balance sheet
category:
a. Asset
b. Liability
c. Shareholders’ equity
______ 1. Cash
______ 2. Accounts receivable
______ 3. Common stock
______ 4. Office computers
______ 5. Office supplies
______ 6. Accounts payable
______ 7. Factory equipment
______ 8. Salaries payable
______ 9. Accumulated depreciation
______ 10. Interest receivable
65) Use the following code to identify the financial statement(s) where each of these line items is
shown. (Remember that some line items may be found on more than one statement.)
a. Balance sheet
b. Income statement
c. Statement of changes in shareholders’ equity
d. Statement of cash flows
______ 1. Interest receivable
______ 2. Interest expense
______ 3. Interest paid to creditors
______ 4. Office supplies
______ 5. Depreciation expense
______ 6. Equipment
______ 7. Accumulated depreciation
______ 8. Office supplies expense
______ 9. Prepaid rent
______ 10. Rent expense
66) Use the following code to classify the accounts listed below by the appropriate category:
a. Current asset
b. Long-term asset
c. Current liability
d. Long-term liability
e. Revenue
f. Expense
_____1. Interest receivable (to be collected within 3 months)
_____2. Interest income
_____3. Rent expense
_____4. Prepaid rent (eight months remaining)
_____5. Salaries expense
_____6. Salaries payable (due within 1 week)
_____7. Depreciation expense
_____8. Accumulated depreciation
67) Use the following code to classify the accounts listed below by the appropriate category:
a. Revenue
b. Expense
c. Neither a revenue nor an expense
______ 1. Retained earnings
______ 2. Prepaid insurance
______ 3. Interest expense
______ 4. Accumulated depreciation
______ 5. Salaries expense
______ 6. Sales
______ 7. Unearned revenue
Learning Objective 3-5
1) Use the following information from Hormel Foods Corporation’s income statement to
calculate the company’s 2012 profit margin on sales ratio.
(in thousands)
Fiscal Year Ended
October 26, 2012
October 28, 2011
Net sales
$6,754,903
$6,193,032
Net income
$285,500
$301,892
A) 23.7%
B) 4.2%
C) 4.4%
D) 5.0%
2) Use the following information from Hot Spots, Inc.’s income statement to calculate the
company’s 2012 profit margin on sales ratio.
December 31, 2012
December 31, 2011
Net sales
$6,000,000
$4,000,000
Net income
$600,000
$500,000
A) 10.0%
B) 12.0%
C) 12.5%
D) 20.0%
3) Using the following income statement, calculate the profit margin on sales ratio.
Sails for Sale
Income Statement
For the Month Ended September 30, 2011
Net sales $80,000
Cost of goods sold 40,000
Rent 12,000
Utilities 3,000
Salaries 18,000
Depreciation 5,000
Net income (loss) $2,000
A) 2.5%
B) 50.0%
C) 47.5%
D) 5.0%
4) Using the following income statement, calculate the profit margin on sales ratio.
Sails for Sale
Income Statement
For the Month Ended September 30, 2009
Net sales $80,000
Cost of goods sold 40,000
Rent 12,000
Utilities 3,000
Salaries 18,000
Depreciation 5,000
Net income (loss) $12,000
A) 6.7%
B) 50.0%
C) 15.0%
D) 30.0%
5) Use the following information from Mountaineers Mania Corporation’s income statement to
calculate the company’s 2012 profit margin on sales ratio.
Mountaineers Mania
Income Statement
For the Month Ended December 31, 2012
Revenyes $220,000
Cost of goods sold 140,000
Rent 30,000
Utilities 15,000
Salaries 18,000
Depreciation 6,000
Net income (loss) $11,000
Mountaineers Mania
Balance Sheet
December 31, 2012
Cash $61,200 Accounts Payable $30,000
Prepaid rent 21,600 Common stock 30,000
Equipment 60,000 Retained earnings 82,800
Total assets $142,800 Total liabilities & SE $142,800
A) 20.0%
B) 5.0%
C) 7.7%
D) 13.3%
6) Company A has a profit margin on sales ratio of 8% and Company B has a profit margin on
sales ratio of 12%. Which of the following must be true?
A) Company B must charge more for its goods than Company A.
B) Company B must have a higher gross profit margin than Company A.
C) Company B’s expenses must be less than Company A’s.
D) Company B must make more on each dollar of sales than Company A.
7) Company A has a profit margin on sales ratio of 8% and Company B has a profit margin on
sales ratio of 12%. Which of the following must be true?
A) Company A must charge less for its goods than Company B.
B) Company A must have a lower gross profit margin than Company B.
C) Company A must make less per dollar of sales than Company B.
D) Company A must charge more for its goods than Company B.
8) Which of the following must be true?
A) The higher the profit margin on sales ratio the better.
B) Too high of a profit margin on sales ratio may mean the company is charging too much for its
goods.
C) The profit margin on sales ratio is greater than the gross profit ratio of a company.
D) If a company’s gross profit ratio is greater than 10% than its profit margin on sales ratio must
also be greater than 10%.
9) The profit margin on sales ratio measures the markup on a company’s goods.
10) The profit margin on sales ratio equals net income divided by net sales.
11) An increase in a company’s profit margin on sales ratio from one year to the next is
considered an improvement in operations.
12) If a company neglected to record depreciation expense for the year, the company’s profit
margin on sales ratio would be overstated.
