Depreciation Expense is not reported on the statement of cash flows when prepared
using the direct method.
A transaction is an exchange or event that directly affects the assets, liabilities, or
stockholders’ equity of a company.
Investing activities include receiving cash from the sale of land and also the resulting
gain or loss on the sale.
The higher the times interest earned ratio, the greater the risk of nonpayment of interest.
Benchmarks are required to evaluate a company’s performance.
The entry recorded when the petty cash fund is replenished includes a debit to Petty
Cash and a credit to Cash.
A company can use LIFO to prepare its U.S. tax return and FIFO to prepare its financial
statements.
Impairment occurs when the estimated future cash flows from a long-lived asset are less
than its book value.
If total assets increase, then either total liabilities or total stockholders’ equity must also
increase.
Under the allowance method for uncollectible accounts, the write-off of a specific
account will not affect total assets.
Adjusting entries often involve cash.
Because it is easier to use, the direct write-off method for uncollectible accounts is
typically used instead of the allowance method.
Accounts increase on the same side as they appear in the accounting equation: A = L +
SE.
When faced with an ethical dilemma, an accountant should:
A) Identify who will be affected by the situation, identify and evaluate the alternative
courses of action, and choose the alternative that is the most ethical.
B) report the matter to the SEC.
C) report the matter to the IRS.
D) resign.
Which of the following would not be considered an operating activity?
A) Pay employees for work completed
B) Purchase supplies on account
C) Purchase equipment for cash
D) Sell goods to customers
A current asset is one that the company:
A) has owned for over one year.
B) has owned for over five years.
C) will use up or converted into cash in less than 12 months.
D) has updated to reflect its current value.
When the market value of inventory drops below the cost recorded in the financial
records, applying the lower of cost or market (LCM) rule causes:
A) a decrease in cost of goods sold.
B) no change in net income, other things being equal.
C) a decrease in total assets.
D) an increase in net income.
Intel makes microchips from raw materials acquired from suppliers. Intel is a:
A) service company.
B) retail company.
C) manufacturer.
D) merchandising company.
Brief Respite, Inc. sold underwear made from a fabric that gave many of its customers a
serious rash. The customers are suing the company in a class action suit. Although the
verdict is not yet in, Brief Respite’s attorneys think it is probable that the case will cost
the company $2 million. The company should:
A) not include this information in its annual report.
B) record a liability and a gain for $2 million.
C) only explain the situation in the notes to the financial statements.
D) record a liability and a loss for $2 million.
West Corporation issued a $100 gift card. What journal entry will West Corporation
record?
A) Debit Cash and credit Sales Revenue for $100.
B) Debit Cash and credit Unearned Revenue for $100.
C) Debit Unearned Revenue and credit Cash for $100.
D) Debit Accounts Receivable and credit Cash for $100.
When Harmony Inc. performs $1,000 of services on account for a customer, Harmony
will record a journal entry with a debit to:
A) Cash and a credit to Accounts Receivable.
B) Accounts Receivable and a credit to Service Revenue.
C) Service Revenue and a credit to Unearned Revenue.
D) Cash and a credit to Accounts Payable.
The selected financial information set forth below was summarized from the most
recent income statements and balance sheets of the Pixel Company.
Required:
Part a. Determine the company’s receivables turnover during Years 2 and 3.
Part b. Determine the company’s days to collect during Years 2 and 3.
Part c. Interpret the results of this analysis.
A company that purchases inventory for $10,000 with terms 2/10, n/30. It then returns
$2,000 of the inventory purchased to the supplier and also receives an allowance for
defective inventory of $100. The company pays the amount due within the discount
period. What is the amount of the discount that will be taken?
A) $200
B) $158
C) $160
D) $198
Complete the table below by filling in the Formula blank with the letter that
corresponds to the correct formula for each ratio and filling in the Interpretation blank
with the letter that corresponds to the interpretation provided. Not all ratio formulas and
interpretations will be used.
Ratio Formulas
A. 365 / Inventory Turnover
B. (Sales – Cost of Goods Sold) / Sales
C. Net Income / Sales
D. Net Operating Income / Interest Expense
E. (Net income – Preferred dividends) / Average number of common shares outstanding
F. Total Liabilities / Total Assets
G. Current stock price (per share) / Earnings per Share
H. (Net income – Preferred dividends) / Average common stockholders’ equity
Ratio Interpretations
A. The portion of sales that is attributable to merchandise profit.
B. Ability of a company to pay its short-term debts as they come due.
C. The percent of each sales dollar that is left over after covering costs and expenses.
D. How many times more than the current year’s earnings investors are willing to pay
for a company’s common stock
E. Ability of a company to quickly pay its short-term debts as they come due.
F. The portion of a company’s total financing that comes from debt.
G. The amount of income generated for each share of common stock owned by
stockholders
H. How effectively a company is using its assets to generate revenue.
I. The amount of income earned for each dollar of common stockholders’ equity.
The Accounts Receivable account:
A) has a normal credit balance.
B) is increased by a debit.
C) is a liability.
D) is increased when a company receives cash from its customers.
An increase in operating expenses would have which of the following effects on a
company’s profit margin?
A) Net profit margin would increase.
B) Net profit margin would decrease.
C) Net profit margin would remain unchanged.
D) There is not enough information given to determine the effect.
Each December 31, Davis Company prepares an aging analysis of its accounts
receivable to determine the amount of its adjustment for bad debts. At the end of the
current year, management estimated that $16,900 of the accounts receivable balances
would be uncollectible. The Allowance for Doubtful Accounts account had a debit
balance of $3,200 before any year-end adjustment for bad debts.
Required:
Prepare the adjusting journal entry that Davis Company should make on December 31
of the current year to estimate Bad Debt Expense.
Garcia Company is trying to decide whether to purchase identical inventory from one of
the following suppliers.
Assume the company will pay within the discount period.
Required:
What is the actual cost of the inventory if purchased from each supplier?
Describe each of the five components of an internal control system.
The following activities took place during the month of July at a corporation that earns
service revenue as a law firm.
1> The law firm completes legal work relating to a real estate transaction and is paid
$5,500 when the papers are signed.
2> Legal work in the amount of $26,000 is performed on account for customers.
3> A customer makes a payment of $2,500 on account for legal services that were
performed last month.
4> A new client calls to request assistance in filing the documents for a patent; a fee of
$3,000 is paid and the parties agree that the work will commence next month.
5> A client pays a retainer (deposit) of $15,000 for legal work; one-third of the work is
performed in the current month and the remainder will be provided over the next two
months.
6> The law firm borrows $10,000 from a local bank.
Required:
Indicate what accounts would be used to record the initial transaction arising from each
activity.
Haltom Company updates its inventory perpetually. The company reported a beginning
inventory of $7,500. During the year, the company recorded inventory purchases of
$38,500 and cost of goods sold of $25,000.
Required:
Determine the amount of ending inventory.
Selected balance sheet information and the income statement for Fountainhead
Corporation for the current year are presented below.
Required:
Prepare the cash flows from operating activities section of the statement of cash flows
using the indirect method.
Identify whether each of the following list of items is an operating activity cash flow
(O), an investing activity cash flow (I), a financing activity cash flow (F), or none of
these (None).
1> _____ Proceeds from sale of equipment
2> _____ Cash collected from customers
3> _____ Payments to suppliers
4> _____ Stock repurchases
5> _____ Repayment of bond principal
6> _____ Payment of income tax
7> _____ Purchases of bonds from other companies
8> _____ Purchases of equipment financed with a note
9> _____ Interest and cash dividends received
10> _____ Payment of cash dividends
The following information is available for the Tierney Company for the month of
November.
On November 30, after all transactions have been recorded, the balance in the
company’s Cash account has a balance of $27,202.
The company’s bank statement shows a balance on November 30 of $29,279.
Outstanding checks at November 30 include check #3030 in the amount of $1,525 and
check #3556 in the amount of $1,459.
Included with the bank statement was a credit memo in the amount of $770 for an EFT
in payment of a customer ‘s account.
The bank deducted $67 for an NSF check from a customer deposited on November 22.
A deposit placed in the bank’s night depository on November 30 totaled $1,675 and did
not appear on the bank statement.
Examination of the checks on the bank statement with the entries in the accounting
records reveals that check #3445 for the payment of an account payable was correctly
written for $2,450, but was recorded in the accounting records as $2,540.
Included with the bank statement was a debit memorandum in the amount of $25 for
bank service charges.
Required:
Prepare a bank reconciliation for Tierney Company as of November 30.