1) from a creditor’s point of view, the higher the total debt to total assets ratio, the lower
the risk that the company may be unable to pay its obligations.
2) in accounting for stock investments of less than 20%, the equity method is typically
used.
3) if the market rate of interest is greater than the contractual rate of interest, bonds will
sell at a discount.
4) retained earnings represents the amount of cash available for dividends.
5) internal control is most effective when several people are responsible for a given
task.
6) the allowance method of handling bad debts violates the matching principle.
7) joe laramie owns and operates joe’s burgers, a small fast food store, located at the
edge of city college campus in newton, ohio. after several very profitable years, joe’s
burgers began to have problems. most of the problems were related to joe’s expansion
of the eating area in the restaurant without corresponding increases in the food
preparation area. joe does not have the cash or financial backing to expand further. he
has therefore decided to sell his business.
william sheets is interested in purchasing the business. however, he is located in another
city and is unfamiliar with newton. he has asked joe why he is selling joe’s burgers. joe
replies that his elderly mother requires extra care, and that his brother needs help in his
manufacturing business. both are true, but neither is his primary reason for selling. joe
reasons that william should not have asked him anyway, since profitable businesses
don’t come up for sale.
8) the net income reported on the income statement for the current year was $1,260,000.
depreciation recorded on plant assets was $57,000. accounts receivable and inventories
increased by $12,000 and $48,000, respectively. prepaid expenses and accounts payable
decreased by $6,000 and $66,000, respectively. how much cash was provided by
operating activities?
a.$1,140,000
b.$1,260,000
c.$1,197,000
d.$1,476,000
9) the trial balance for greenway corporation appears as follows:
if, on december 31, 2011, the insurance still unexpired amounted to $15, the adjusting
entry would contain a:
a.debit to prepaid insurance for $45
b.credit to prepaid insurance for $15
c.debit to insurance expense for $45
d.debit to prepaid insurance for $15
10) a debit to an asset account indicates a(n)
a.error.
b.credit was made to a liability account.
c.decrease in the asset.
d.increase in the asset.
11) when equipment is sold for cash, the amount received is reflected as a cash
a.inflow in the operating section
b.inflow in the financing section
c.inflow in the investing section
d.outflow in the operating section
12) which of the following methods of computing depreciation is production based?
a.straight-line
b.declining-balance
c.units-of-activity
d.none of these
13) inventories are defined by ifrs as
a.held-for-sale in the ordinary course of business
b.in the process of production for sale in the ordinary course of business
c.in the form of materials or supplies to be consumed in the production process or in the
providing of services
d.all of the above
14) the entry to record the return of goods from a customer would include a
a.debit to sales revenue
b.credit to sales revenue
c.debit to sales returns and allowances
d.credit to sales returns and allowances
15) suppose that morgan corporation produced and sold 4,800 laptop computers during
2012. it reported $250,000 cash provided by operating activities. in order to maintain
production at 4,800 laptops, morgan invested in $8,600 in equipment. morgan paid
$1,400 in dividends. what is morgans free cash flow?
a.$240,000
b.$260,000
c.$257,000
d.$250,000
16) corporations are granted the power to issue bonds through
a.tax laws
b.state laws
c.federal security laws
d.bond debentures
17) a machine with a cost of $240,000 has an estimated salvage value of $15,000 and
an estimated useful life of 5 years or 15,000 hours. it is to be depreciated using the
units-of-activity method of depreciation. what is the amount of depreciation for the
second full year, during which the machine was used 5,000 hours?
a.$75,000
b.$45,000
c.$65,000
d.$80,000
18) on january 1, a machine with a useful life of five years and a residual value of
$30,000 was purchased for $90,000. what is the depreciation expense for year 2 under
the double-declining-balance method of depreciation?
a.$21,600
b.$36,000
c.$28,800
d.$17,280
19) if a company pays dividends of $10,000,
a.stockholders’ equity will be reduced by $10,000.
b.net income will be reduced by $10,000.
c.retained earnings will be reduced by $10,000.
d.both retained earnings and stockholders’ equity will be reduced by $10,000.
20) bonds are frequently issued at amounts greater or less than face value. describe how
the market rate of interest, relative to the contractual rate of interest, affects the selling
price of bonds.
21) the declining-balance method of computing depreciation is known as an
_____________ depreciation method.
22) the process of allocating to expense the cost of an asset over its useful life is called
__________________ for tangible plant assets and __________________ for
intangible assets.
23) baxter corporation makes an investment in 100 shares of gilbert company’s common
stock. the stock is purchased for $50 a share plus brokerage fees of $300. the entry for
the purchase is
24) cost of goods available for sale must be allocated between cost of goods
___________ and ______________.