Accounting Questions

App_CStudent: ___________________________________________________________________________

1. The value of $1 today is worth more than $1 one year from now. True False

2. The time value of money is a concept which means that the value of $1 increases over time.

True False

3. Simple interest is interest earned on the initial investment only.

True False

4. If you put $500 into a savings account that pays simple interest of 8% per year and then withdraw the

money two years later, you will earn interest of $80. True False

5. If you put $600 into a savings account that pays simple interest of 10% per year and then withdraw the

money two years later, you will earn interest of $126. True False

6. Compound interest is interest you earn on the initial investment and on previous interest.

True False

7. If you put $200 into a savings account that pays annual compound interest of 8% per year and then

withdraw the money two years later, you will earn interest of $32. True False

8. If you put $300 into a savings account that pays annual compound interest of 10% per year and then

withdraw the money two years later, you will earn interest of $63. True False

9. Future value is how much an amount today will grow to be in the future.

True False

10. The more frequent the rate of compounding, the more interest that is earned on previous interest, resulting

in a higher future value. True False

11. Present value indicates how much a present amount of money will grow to in the future.

True False

12. The discount rate is the rate at which someone is willing to give up current dollars for future dollars. True False

13. An annuity is a series of equal cash payments over equal time intervals.

True False

14. The future value of $1,000 invested today for three years that earns 10% compounded annually is greater

than the future value of a $500 annuity with the same interest rate over the same period. True False

15. The present value of $1,000 received three years from today with a discount rate of 10% is less than the

present value of a $500 annuity with the same discount rate over the same period. True False

16. The concept that interest causes the value of money received today to be greater than the value of that same

amount of money received in the future is referred to as the: A. Monetary unit assumption.B. Historical cost principle.C. Time value of money.D. Matching principle.

17. The value today of receiving an amount in the future is referred to as the:

A. Future value of a single amount.B. Present value of a single amount.C. Future value of an annuity.D. Present value of an annuity.

18. The value that an amount today will grow to in the future is referred to as the:


19. Reba wishes to know how much would be in her savings account in five years if she deposits a given sum

in an account that earns 6% interest. She should use a table for the: A. Future value of $1.B. Present value of $1.C. Future value of an annuity of $1.D. Present value of an annuity of $1.

20. LeAnn wishes to know how much she should set aside now at 7% interest in order to accumulate a sum of

$5,000 in four years. She should use a table for the: A. Future value of $1.B. Present value of $1.C. Future value of an annuity of $1.D. Present value of an annuity of $1.

21. Samuel is trying to determine what it's worth today to receive $10,000 in four years at a 7% interest rate. He should use a table for the: A. Future value of $1.B. Present value of $1.C. Future value of an annuity of $1.D. Present value of an annuity of $1.

22. Below are excerpts from interest tables for 8% interest.

Column 2 is an interest table for the: A. Future value of $1.B. Present value of $1.C. Future value of an annuity of $1.D. Present value of an annuity of $1.



24. How much will $25,000 grow to in seven years, assuming an interest rate of 12% compounded annually?

A. $55,267.B. $46,000.C. $61,899.D. $52,344.

25. How much will $8,000 grow to in five years, assuming an interest rate of 8% compounded quarterly?

A. $10,989.B. $11,755.C. $11,888.D. $12,013.

26. What is the value today of receiving $2,500 at the end of three years, assuming an interest rate of 9% compounded annually? A. $1,984.B. $1,930.C. $2,104.D. $3,238.

27. What is the value today of receiving $5,000 at the end of six years, assuming an interest rate of 8%

compounded semiannually? A. $3,151.B. $3,203.C. $3,428.D. $3,123.

28. Davenport Inc. offers a new employee a lump-sum signing bonus at the date of employment. Alternatively,

the employee can take $30,000 at the date of employment and another $50,000 two years later. Assuming the employee's time value of money is 8% annually, what lump-sum at employment date would make her indifferent between the two options? A. $60,000.B. $62,867.C. $72,867.D. $80,000.

29. Today, Thomas deposited $100,000 in a three-year, 12% CD that compounds quarterly. What is the

maturity value of the CD? A. $109,270.B. $119,410.C. $142,576.D. $309,090.

30. Carol wants to invest money in a 6% CD that compounds semiannually. Carol would like the account to

have a balance of $50,000 five years from now. How much must Carol deposit to accomplish her goal? A. $35,069.B. $43,131.C. $37,205.D. $35,000.

31. Shane wants to invest money in a 6% CD that compounds semiannually. Shane would like the account to

have a balance of $100,000 four years from now. How much must Shane deposit to accomplish his goal? A. $88,848.B. $78,941.C. $25,336.D. $22,510.

32. Bill wants to give Maria a $500,000 gift in seven years. If money is worth 6% compounded semiannually, what is Maria's gift worth today? A. $66,110.B. $81,310.C. $406,550.D. $330,560.

33. At the end of the next four years, a new machine is expected to generate net cash flows of $8,000, $12,000,

$10,000, and $15,000, respectively. What are the cash flows worth today if a 3% interest rate properly reflects the time value of money in this situation? A. $41,557.B. $47,700.C. $32,403.D. $38,108.

34. Monica wants to sell her share of an investment to Barney for $50,000 in three years. If money is worth 6%

compounded semiannually, what would Monica accept today? A. $8,375.B. $41,874.C. $11,941.D. $41,000.

35. How much must be invested now at 9% interest to accumulate to $10,000 in five years?

A. $9,176.B. $6,499.C. $5,500.D. $5,960.

36. The value today of receiving a series of payments in the future is referred to as the:


37. The value that a series of payments will grow to in the future is referred to as the:


38. A series of equal periodic payments is referred to as:

A. The time value of money.B. An annuity.C. The future value.D. Interest.

39. How much will $5,000 invested at the end of each year grow to in six years, assuming an interest rate of 7% compounded annually? A. $35,766.B. $26,813.C. $23,833.D. $7,504.

40. How much will $1,000 invested at the end of each year grow to in 20 years, assuming an interest rate of

10% compounded annually? A. $6,728.B. $8,514.C. $83,159.D. $57,275.

41. What is the value today of receiving $5,000 at the end of each year for the next 10 years, assuming an

interest rate of 12% compounded annually? A. $87,744.B. $28,251.C. $50,000.D. $15,529.

42. What is the value today of receiving $3,000 at the end of each year for the next three years, assuming an

interest rate of 3% compounded annually? A. $8,486.B. $8,251.C. $9,000.D. $9,273.

43. Tammy wants to buy a car that costs $10,000 and wishes to know the amount of the monthly payments,

which will be made at the end of the month, with interest of 12% on the unpaid balance. She should use a table for the: A. Future value of $1.B. Present value of $1.C. Future value of an annuity of $1.D. Present value of an annuity of $1.

44. George Jones is planning on a cruise for his 70th birthday party. He wants to know how much he should set

aside at the end of each month at 6% interest to accumulate the sum of $4,800 in five years. He should use a table for the: A. Future value of $1.B. Present value of $1.C. Future value of an annuity of $1.D. Present value of an annuity of $1.

45. Zulu Corporation hires a new chief executive officer and promises to pay her a signing bonus of $2 million per year for 10 years, starting at the end of the first year. The value of this signing bonus is: A. The present value of the annuity.B. The future value of the annuity.C. $20 million.D. $0 because no cash is owed immediately.

46. Sandra won $5,000,000 in the state lottery which she has elected to receive at the end of each month over

the next thirty years. She will receive 7% interest on unpaid amounts. To determine the amount of her monthly check, she should use a table for the: A. Future value of $1.B. Present value of $1.C. Future value of an annuity of $1.D. Present value of an annuity of $1.





49. Quaker State Inc. offers a new employee a lump-sum signing bonus at the date of employment.

Alternatively, the employee can take $8,000 at the date of employment plus $20,000 at the end of each of his first three years of service. Assuming the employee's time value of money is 10% annually, what lump-sum at employment date would make him indifferent between the two options? A. $23,026.B. $57,737.C. $62,711.D. None of the above is correct.

50. At the end of each quarter, Patti deposits $500 into an account that pays 12% interest compounded quarterly. How much will Patti have in the account in three years? A. $7,096.B. $7,013.C. $7,129.D. $8,880.

51. Miller borrows $300,000 to be paid off in three years. The loan payments are semiannual with the first

payment due in six months, and interest is at 6%. What is the amount of each payment? A. $55,379.B. $106,059.C. $30,138.D. $60,276.

52. Claudine Corporation will deposit $5,000 into a money market account at the end of each year for the next

five years. How much will accumulate by the end of the fifth and final payment if the account earns 9% interest? A. $32,617.B. $29,924.C. $27,250.D. $26,800.

53. What is the value today of receiving five annual payments of $500,000, beginning one year from now,

assuming an 11% discount rate? A. $2,500,000.B. $2,225,000.C. $1,847,950.D. $2,115,270.

54. Compute the future value of the following invested amounts at the specified periods and interest rates.

55. Anthony would like to have $18,000 to buy a new car in three years. Currently, he has saved $15,000. If he puts $15,000 in an account that earns 6% interest, compounded annually, will he be able to buy the car in three years?

56. Michaela would like to have $10,000 for a European vacation in four years. Currently, she has saved

$8,000. If she puts $8,000 in an account that earns 6% interest, compounded annually, will she be able to take the vacation in four years?

57. Compute the present value of the following single amounts to be received at the end of the specified period

at the given interest rate.

58. Compute the present value of the following single amounts to be received at the end of the specified period at the given interest rate.

59. If you had an investment opportunity that promises to pay you $20,000 in three years and you could earn a

10% annual return investing your money elsewhere, what is the most you should be willing to invest today in this opportunity?

60. Touche Manufacturing is considering a rearrangement of its manufacturing operations. A consultant

estimates that the rearrangement should result in after-tax cash savings of $6,000 the first year, $10,000 for the next two years, and $12,000 for the next two years. Assuming a 12% discount rate, calculate the total present value of the cash flows.

61. Price Mart is considering outsourcing its billing operations. A consultant estimates that outsourcing should result in after-tax cash savings of $9,000 the first year, $15,000 for the next two years, and $18,000 for the next two years. Assuming a 12% discount rate, calculate the total present value of the cash flows.

62. Hillsdale is considering two options for comparable computer software. Option A will cost $25,000 plus

annual license renewals of $1,000 for three years, which includes technical support. Option B will cost $20,000 with technical support being an add-on charge. The estimated cost of technical support is $4,000 the first year, $3,000 the second year, and $2,000 the third year. Assume the software is purchased and paid for at the beginning of year one, but that technical support is paid for at the end of each year. The discount rate is 8%. Ignore income taxes. Determine which option should be chosen based on present value considerations.

63. Incognito Company is contemplating the purchase of a machine that provides it with net after-tax cash

savings of $80,000 per year for 5 years. Assuming an 8% discount rate, calculate the present value of the cash savings.

64. Samson Inc. is contemplating the purchase of a machine that will provide it with net after-tax cash savings

of $100,000 per year for 8 years. Assuming a 10% discount rate, calculate the present value of the cash savings.

65. DON Corp. is contemplating the purchase of a machine that will produce net after-tax cash savings of $20,000 per year for 5 years. At the end of five years, the machine can be sold to realize after-tax cash flows of $5,000. Assuming a 12% discount rate, calculate the total present value of the cash savings.

66. Baird Bros. Construction is considering the purchase of a machine at a cost of $125,000. The machine is

expected to generate cash flows of $20,000 per year for ten years and can be sold at the end of ten years for $10,000. The discount rate is 10%. Assume the machine would be paid for on the first day of year one, but that all other cash flows occur at the end of the year. Ignore income tax considerations. Determine if Baird should purchase the machine.

67. Dobson Contractors is considering buying equipment at a cost of $75,000. The equipment is expected to

generate cash flows of $15,000 per year for eight years and can be sold at the end of eight years for $5,000. The discount rate is 12%. Assume the equipment would be paid for on the first day of year one, but that all other cash flows occur at the end of the year. Ignore income tax considerations. Determine if Dobson should purchase the machine.

The following answers point out the key phrases that should appear in students' answers. They are not intended to be examples of complete student responses. It might be helpful to provide detailed instructions to students on how brief or in-depth you want their answers to be.

68. Briefly explain why the value of $100 received today is greater than the value of $100 received one year from now.

69. Briefly describe the difference between simple interest and compound interest.

70. Two banks each have stated CD rates of 12%. Bank A compounds quarterly and Bank B compounds

semiannually. Explain which bank offers the better CD.

71. Explain the difference between present value and future value.

72. Which three factors are necessary in calculating the present value of a single amount?

73. What is the relationship between the present value of a single amount and the present value of an annuity?

74. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms.

Match each phrase with the best term placing the letter designating the term in the space provided.

1. Time value of money A dollar now is worth more than a dollar later.

____

2. Compound interest A series of equal periodic payments.

____

3. Future value of a single amount Accumulation of a series of equal payments.

____

4. Annuity Interest earned on the initial investment and

on previous interest.

____

5. Future value of an annuity Accumulation of an amount with interest.

____

75. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms.

Match each phrase with the best term placing the letter designating the term in the space provided.

1. Present value of an annuity

Amount today equivalent to a specified future amount.

____

2. Discount rate The rate at which future dollars are equal to current

dollars.

____

3. Interest Interest earned on the initial investment only.

____

4. Present value of a single amount

The factor that causes money today to be worth more than the same amount in the future.

____

5. Simple interest Current worth of a series of equal payments

received in the future.

____

App_C Key

1. TRUE 2. FALSE 3. TRUE 4. TRUE 5. FALSE 6. TRUE 7. FALSE 8. TRUE 9. TRUE 10. TRUE 11. FALSE 12. TRUE 13. TRUE 14. FALSE 15. TRUE 16. C 17. B 18. A 19. A 20. B 21. B 22. B 23. A 24. A 25. C 26. B 27. D 28. C 29. C 30. C 31. B 32. D

33. A 34. B 35. B 36. D 37. C 38. B 39. A 40. D 41. B 42. A 43. D 44. C 45. A 46. D 47. D 48. C 49. B 50. A 51. A 52. B 53. C 54. a. $43,178; b. $41,057; c. $54,736. 55. No. 56. Yes. 57. a. $10,337; b. $4,660; c. $17,609. 58. a. $1,364; b. $1,240; c. $1,127; d. $1,025. 59. $15,026. 60. $34,882.

Feedback:

61. $52,324.

Feedback: 62. Option A should be chosen because it has the lower cost based on present value considerations.

Feedback: 63. $319,417. 64. $533,493. 65. $74,933.

Feedback: 66. Baird Bros. Construction should buy the machine.

Feedback: 67. Dobson Construction should buy the machine.

Feedback: 68. The $100 received today can be invested to receive interest. Simple interest is computed only on the initial investment amount. Compound interest includes not only interest on the initial investment, but also interest on the accumulated interest to date. 69. Simple interest is computed only on the initial investment amount. Compound interest includes not only interest on the initial investment, but also interest on the accumulated interest to date.

70. The yield on a CD increases with more frequent compounding periods. Therefore, since both CDs have the same stated rate of 12%, Bank A, that compounds quarterly, offers a better yield than Bank B with semiannual compounding. 71. Present value tells us the value today of receiving some amount in the future. Future value is the value that an amount today will grow to in the future. The difference between the present value and the future value is the time value of money. 72. You need to know (1) the future amount, (2) the interest rate per period, and (3) the number of periods. 73. The present value of a single amount is the value today of receiving that amount in the future; whereas, the present value of an annuity is the sum of the present values of a series of cash payments. 74. Time value of money :: A dollar now is worth more than a dollar later. and Annuity :: A series of equal periodic payments. and Future value of an annuity :: Accumulation of a series of equal payments. and Compound interest :: Interest earned on the initial investment and on previous interest. and Future value of a single amount :: Accumulation of an amount with interest. 75. Present value of a single amount :: Amount today equivalent to a specified future amount. and Discount rate :: The rate at which future dollars are equal to current dollars. and Simple interest :: Interest earned on the initial investment only. and Interest :: The factor that causes money today to be worth more than the same amount in the future. and Present value of an annuity :: Current worth of a series of equal payments received in the future.

App_C Summary

Category # of Questions

AACSB: Analytic 20

AACSB: Critical Thinking 17

AACSB: Measurement 21

AACSB: Reflective Thinking 17

AICPA: Analytic 21

AICPA: Critical Thinking 17

AICPA: Decision Making 3

AICPA: Measurement 17

AICPA: Reflective Thinking 17

Blooms: Analysis 41

Blooms: Comprehension 18

Blooms: Knowledge 15

Blooms: Synthesis 1

Difficulty: Easy 12

Difficulty: Hard 23

Difficulty: Medium 40

Learning Objective: AppC-01 Contrast simple and compound interest. 14

Learning Objective: AppC-02 Calculate the future value and present value of a single amount 39

Learning Objective: AppC-03 Calculate the future value and present value of an annuity. 29

Spiceland - Appendix C... 76

App_DStudent: ___________________________________________________________________________

1. Companies with large expansion plans, called growth companies, prefer to reinvest earnings in the growth of the company rather than distribute earnings back to investors in the form of cash dividends. True False

2. Seasonal refers to the revenue activities of a company varying based on the time (or season) of the year.

True False

3. When insignificant influence exists, the investment should be accounted for by the equity method.

True False

4. When significant influence exists, the investment should be accounted for by the equity method.

True False

5. When the investor has insignificant influence, the receipt of cash dividends is recorded as dividend

revenue. True False

6. Investments are reported at fair value when a company has an insignificant influence over another company

in which it invests. True False

7. Unrealized gains and losses from changes in the fair value of available-for-sale securities are reported as

part of current net income. True False

8. Unrealized gains and losses from changes in the fair value of trading securities are reported as part of

current net income. True False

9. Gains and losses on the sale of equity investments are recorded in the income statement as part of net

income. True False

10. The statement of comprehensive income is a statement in which we report all changes in stockholders'

equity other than investment by stockholders and payment of dividends. True False

11. The statement of comprehensive income is a statement that includes net income plus investment by stockholders less payment of dividends. True False

12. Investments are reported at fair value when a company has a significant influence over another company in

which it invests. True False

13. Under the equity method, the investor includes in net income its portion of the investee's net income.

True False

14. When the investor has significant influence, the receipt of cash dividends is recorded as dividend revenue.

True False

15. Consolidated financial statements combine the separate financial statements of the purchasing company

and the acquired company into a single set of financial statements. True False

16. Bond investments are long-term assets that earn interest revenue, while bonds payable are long-term

liabilities that incur interest expense. True False

17. The cash received from interest equals the face value of the investment in bonds times the stated interest

rate. True False

18. Interest revenue is calculated as the carrying value of the investment in bonds times the stated interest rate.

True False

19. Because the carrying value of bonds purchased at a premium increases over time, interest revenue will also

increase each semi-annual interest period. True False

20. Because the carrying value of bonds purchased at a discount increases over time, interest revenue will also

increase each semi-annual interest period. True False

21. One of the primary reasons for investing in equity securities includes:

A. Acquiring debt of competing companies.B. Appreciation in the value of the stock.C. Earning interest revenue.D. Deducting dividend payments for tax purposes.

22. One of the primary reasons for investing in debt securities includes: A. Receiving dividend payments.B. Acquiring significant influence.C. Earning interest revenue.D. Deducting interest payments for tax purposes.

23. Which of the following is true with regard to how to account for company A's investment in company B's

common stock? A. The fair value method is used when A owns more than 50% of B.B. The equity method is used when A owns from 20% to 50% of B.C. The consolidation method is used when A owns less than 20% of B.D. All of the above are true. (Is this type answer option OK??)

24. Libby Company purchased equity securities for $100,000 and classified them as trading securities. At the

end of the year, the fair value of the securities was $105,000. How should the investment be reported in the year-end financial statements? A. The investment in trading securities would be reported in the balance sheet at its $100,000 cost.B. The investment in trading securities would be reported in the balance sheet at its $105,000 fair value.C. An unrealized holding gain would be reported in other comprehensive income.D. Both b. and c. are correct.

25. Libby Company purchased equity securities for $100,000 and classified them as available-for-sale

securities. At the end of the year, the fair value of the securities was $105,000. How should the investment be reported in the year-end financial statements? A. The investment in available-for-sale securities would be reported in the balance sheet at its $100,000

cost.B. The investment in available-for sale securities would be reported in the balance sheet at its $105,000

market value.C. An unrealized holding gain would be reported in other comprehensive income.D. Both b. and c. are correct.

26. Sports Spectacular purchased 1,000 shares of stock in The Athletic Warehouse for $30 per share. The

investment is properly classified as a trading security. By the end of the year, the stock price has increased to $32 per share. How would the change in stock price affect Sports Spectacular's net income? A. Increase net income by $32,000.B. Increase net income by $30,000.C. Increase net income by $2,000.D. No effect.

27. Sports Spectacular purchased 1,000 shares of stock in The Athletic Warehouse for $30 per share. The

investment is properly classified as an available-for-sale security. By the end of the year, the stock price has increased to $32 per share. How would the change in stock price affect Sports Spectacular's net income? A. Increase net income by $32,000.B. Increase net income by $30,000.C. Increase net income by $2,000.D. No effect.

28. The primary difference in accounting for available-for-sale securities and accounting for trading securities

is: A. Option aB. Option bC. Option cD. Option d

29. On January 1, 2012, Gilman Company purchased 10,000 of the 200,000 shares of common stock of Burke

Corporation at $40 per share as a long-term investment. The records of Burke Corporation showed the following at December 31, 2012:

What amount should Gilman Company report in its December 31, 2012, balance sheet for its investment in

Burke? A. Option aB. Option bC. Option cD. Option d

30. When the equity method of accounting for investments is used by the investor, the Investments account

increases when: A. A cash dividend is received from the investee.B. The investee reports a net income for the year.C. The investor records additional depreciation related to the investment.D. The investee reports a net loss for the year.

31. When using the equity method to account for an investment, cash dividends received by the investor from

the investee should be recorded: A. As a reduction in the Investments account.B. As an increase in the Investments account.C. As dividend income.D. As a contra item to stockholders' equity.

32. The equity method of accounting for investments in voting common stock is appropriate when:

A. The investor can significantly influence the investee.B. The investor has voting control over the investee.C. The investor intends to hold the common stock indefinitely.D. The investor is assured of a continued supply of a valuable raw material.

33. Sports Spectacular purchased 100,000 shares of stock in The Athletic Warehouse for $30 per share. The investment is properly recorded using the equity method. By the end of the year, the stock price has increased to $32 per share. How would the change in stock price affect Sports Spectacular's net income under the equity method? A. Increase net income by $32,000.B. Increase net income by $30,000.C. Increase net income by $2,000.D. No effect.

34. On January 1, 2012, Gilman Company purchased 10,000 of the 40,000 shares of common stock of Burke

Corporation at $40 per share as a long-term investment. Gilman can exercise significant influence over Burke and properly records the investment using the equity method. The records of Burke Corporation showed the following at December 31, 2012:

What amount should Gilman Company report in its December 31, 2012, balance sheet for its investment in

Burke? A. Option aB. Option bC. Option cD. Option d

35. Consolidated financial statements are prepared when one company has:

A. Accounted for the investment using the equity method.B. Accounted for the investment as available-for-sale securities.C. Control over another company.D. None of these is correct. (Is this type OK??)

36. Which of the following investment securities held by Zoogle Inc. may be classified as held-to-maturity

securities in its balance sheet? A. Debt securities.B. Equity securities.C. Common stock.D. All of these are correct. (Is this OK??)

37. General Investment Co. (GIC) purchased bonds on January 1, 2012. GIC's accountant has projected the following amortization schedule from purchase until maturity:

GIC purchased the bonds: A. At par.B. At a discount.C. At a premium.D. Cannot be determined from the given information.

38. General Investment Co. (GIC) purchased bonds on January 1, 2012. GIC's accountant has projected the

following amortization schedule from purchase until maturity:

GIC purchased the bonds for: A. $200,000.B. $194,758.C. $242,000.D. Cannot be determined from the given information.



Recording the bond purchase would have what effect on the financial statements? A. Increase assets.B. Increase liabilities.C. Increase assets and liabilities.D. No effect on total assets and total liabilities.

40. General Investment Co. (GIC) purchased bonds on January 1, 2012. GIC's accountant has projected the following amortization schedule from purchase until maturity:

The investment in bonds has a maturity in: A. Two years.B. Three years.C. Six years.D. Cannot be determined from the given information.



What is the annual market interest rate on the bonds? A. 4%.B. 3.5%.C. 7%.D. 8%.



GIC sells the bonds for $196,000 immediately after the interest payment on 12/31/12. What gain or loss, if any, would GIC record on this date? A. No gain or loss.B. $370 loss.C. $4,000 loss.D. $4,000 gain.

43. On September 1, Investors, Inc. purchases 1,000 shares (insignificant influence) of $1 par value common stock of Hamilton International at $15 per share. On October 15, the investment is sold for $18 per share. Record the purchase and sale of the investment in Hamilton International.

44. California Designs is diversifying its investment portfolio by making a small investment (less than 5%) in

the common stock of Oregon Outfitters. California Designs engages in the following transactions relating to its investment:January 1 Purchases 1,000 shares of Oregon Outfitters common stock for $20 per share. The investment is properly classified as an available-for-sale security.July 12 Sells 300 shares of Oregon Outfitters stock for $18 per share.September 30 Receives a cash dividend of $1 per share.December 31 Adjusts the investment to fair value. The fair value of Oregon Outfitters stock is now $15 per share.1. Record each of these transactions, including the December 31 adjustment to fair value.2. Calculate the balance of the Investments account on December 31.

45. Athletic Accessories has the following transactions related to investments in common stock.

May 1 Purchases 5,000 shares (insignificant influence) of Endurance Wear common stock for $22 per share. The investment is properly classified as an available-for-sale security.June 30 Receives a cash dividend of $1 per share.October 18 Sells 2,000 shares of Endurance Wear common stock at $25 per share.December 31 Adjusts the investments to fair value. The fair value of Endurance Wear common stock is now $30 per share.1. Record each of these transactions, including an entry on December 31 to adjust the investment to fair value.2. Calculate the balance of the investment account on December 31.

46. Sandy Sensations purchases twenty, $1,000, 7%, 10-year bonds issued by Pizza Pier for $20,000 on January 1, 2012. The market interest rate for bonds of similar risk and maturity is 7%. Interest is received semiannually on June 30 and December 31.1. Record the investment in bonds.2. Record receipt of the first interest payment on June 30, 2012.

47. Sandy Sensations purchases twenty, $1,000, 7%, 10-year bonds issued by Pizza Pier for $18,641 on

January 1, 2012. The market interest rate for bonds of similar risk and maturity is 8%. Interest is received semiannually on June 30 and December 31.1. Record the investment in bonds.2. Record receipt of the first interest payment on June 30, 2012.

48. Sandy Sensations purchases twenty, $1,000, 7%, 10-year bonds issued by Pizza Pier for $21,488 on

January 1, 2012. The market interest rate for bonds of similar risk and maturity is 6%. Interest is received semi-annually on June 30 and December 31.1. Record the investment in bonds.2. Record receipt of the first interest payment on June 30, 2012.

49. How can an investor benefit from an equity investment that does not pay dividends?

50. Investments in equity securities for which the investor has insignificant influence over the investee are classified for reporting purposes under the fair value method in one of two categories. What are these two categories? How do we report unrealized holding gains and losses under each of these two categories?

51. Under what circumstances do we use the equity method to account for an investment in stock? Explain how

we record dividends received from an investment in a company accounted for using the equity method.

52. Discuss the meaning of consolidated financial statements. When is it appropriate to consolidate financial

statements of two companies?

53. Investments in debt securities are classified for reporting purposes in one of three categories. List these

three categories and explain which investments are included in each category. Also briefly describe how the reporting differs for each category.

54. Listed below are five terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the best term placing the letter designating the term in the space provided.

1. Held-to-maturity securities Used when an investor has controlling influence.

____

2. Equity method This category is not used for equity investments.

____

3. Trading securities

Used when an investor has insignificant influence and does not expect to sell in the near future.

____

4. Available-for-sale securities

Used when an investor has significant, but not controlling influence.

____

5. Consolidation method

Used when an investor expects to sell in the near future.

____

55. Listed below are five terms followed by a list of phrases that describe or characterize the terms. Match each

phrase with the best term placing the letter designating the term in the space provided.

1. Consolidation method This category is used only for debt securities.

____

2. Equity method An investor owns 40% of the common voting shares

in the company and can exercise significant influence.

____

3. Held-to-maturity securities

Common stock not held for immediate resale and the investor owns 2% of the outstanding shares.

____

4. Trading securities

An investor owns over 50% of the common voting shares in the company.

____

5. Available-for-sale securities Common stock held for immediate resale.

____

App_D Key

1. TRUE 2. TRUE 3. FALSE 4. TRUE 5. TRUE 6. TRUE 7. FALSE 8. TRUE 9. TRUE 10. TRUE 11. FALSE 12. FALSE 13. TRUE 14. FALSE 15. TRUE 16. TRUE 17. TRUE 18. FALSE 19. FALSE 20. TRUE 21. B 22. C 23. B 24. B 25. D 26. C 27. D 28. C 29. A 30. B 31. A 32. A

33. D 34. C 35. C 36. A 37. B 38. B 39. D 40. B 41. D 42. B

43.

44. The balance in the Investments account on December 31 is $10,500, equal to the 700 remaining shares times $15 per share fair value. The balance in the Investments account can be verified by posting all transactions to a T-account.

45. The balance in the Investments account on December 31 is $90,000, equal to the 3,000 remaining shares times $30 per share fair value. The balance in the Investments account can be verified by posting all transactions to a T-account.

46.

47.

48. 49. Companies can gain from the increase in the value of their investment. Even without receiving dividends, investors still benefit when companies reinvest earnings, leading to even more profits in the future, and eventually higher stock prices. Many companies also make investments for strategic purposes to develop closer business ties, increase market share, or expand into new industries. 50. The two categories are trading securities and available-for-sale securities. Trading securities are reported at fair value, and resulting holding gains and losses are included in the determination of net income for the period. Available-for-sale securities are reported at fair value, and resulting holding gains and losses are not included in the determination of net income for the period. Rather, they are reported as part of other comprehensive income. 51. The equity method is used when an investor can't control, but can "significantly influence" the investee. For example, if effective control is absent, the investor still might be able to exercise significant influence over the operating and financial policies of the investee if the investor owns a large percentage of the outstanding shares relative to other shareholders. By voting those shares as a block, the investor often can sway decisions in the direction desired. We presume, in the absence of evidence to the contrary, that the investor exercises significant influence over the investee when it owns between 20% and 50% of the investee's voting shares.The investor should account for dividends from the investee as a reduction in the Investments account. Since investment revenue is recognized as the investee earns it, it would be inappropriate to recognize revenue again when earnings are distributed as dividends. 52. Consolidated financial statements combine the parent's and subsidiary's operating activities as if the two companies were a single reporting company, even though both companies continue to operate as separate legal entities.It is appropriate to consolidate financial statements of two companies when the parent company owns a controlling interest (more than 50%) in the voting stock of the subsidiary. 53. Investments in debt securities are classified as "held-to-maturity," "trading," or "available-for-sale" securities. Held-to-maturity securities are debt securities that the company expects to hold until they mature, which means until they become payable. Trading securities are securities that the investor expects to sell in the near future. These investments are adjusted to fair value with the unrealized gain or loss included in net income. Available-for-sale securities are investments that do not fit the other two categories; they are not expected to be sold in the near future, yet they are not expected to be held to maturity either. These investments are adjusted to fair value with the unrealized gain or loss included in comprehensive income. 54. Consolidation method :: Used when an investor has controlling influence. and Held-to-maturity securities :: This category is not used for equity investments. and Available-for-sale securities :: Used when an investor has insignificant influence and does not expect to sell in the near future. and Equity method :: Used when an investor has significant, but not controlling influence. and Trading securities :: Used when an investor expects to sell in the near future. 55. Held-to-maturity securities :: This category is used only for debt securities. and Equity method :: An investor owns 40% of the common voting shares in the company and can exercise significant influence. and Available-for-sale securities :: Common stock not held for immediate resale and the investor owns 2% of the outstanding shares. and Consolidation method :: An investor owns over 50% of the common voting shares in the company. and Trading securities :: Common stock held for immediate resale.

App_D Summary


AACSB: Analytic 16




AICPA: Reporting 22

Blooms: Analysis 12

Blooms: Application 4



Difficulty: Easy 13

Difficulty: Hard 9


Learning Objective: AppD-01 Explain why companies invest in other companies. 8

Learning Objective: AppD-02 Account for investments in equity securities when the investor has insignificant influence.

19

Learning Objective: AppD-03 Account for investments in equity securities when the investor has significant influence. 11

Learning Objective: AppD-04 Account for investments in equity securities when the investor has controlling influence. 5

Learning Objective: AppD-05 Account for investments in debt securities. 18

Spiceland - Appendix D... 55

App_EStudent: ___________________________________________________________________________

1. In common law countries (such as the U.S., the U.K., and Canada), greater emphasis is placed on public information than in code law countries (such as France and Germany). True False

2. For countries whose tax standards are closely tied to financial reporting standards (Continental Europe and

Japan), accounting earnings tend to be lower so companies can minimize tax payments. True False

3. In countries where debt financing is more common (Japan) compared to equity financing, there is greater

emphasis on reporting the ability of the company to earn profits for its investors rather than the ability to repay debt. True False

4. Some countries are more secretive (Brazil and Switzerland), leading to fewer financial disclosures.

True False

5. More economically developed economies (the U.S. and the U.K.) have a need for more complex

accounting standards. True False

6. Convergence of accounting practices is expected to increase the flow of investment across borders.

True False

7. The primary objective of the IASB is to develop accounting standards in the U.S.

True False

8. By late 2007, over 100 jurisdictions, including China, Australia, and all of the countries in the European

Union (EU), either require or permit the use of IFRS. True False

9. The Norwalk Agreement formalizes the commitment between the FASB and IASB to the convergence of

U.S. GAAP and IFRS. True False

10. The FIFO inventory method is not allowed under IFRS.

True False

11. IFRS allows, but does not require, revaluation of property, plant and equipment to fair value. True False

12. Under U.S. GAAP, development expenditures are capitalized, while under IFRS, these expenditures must

be expensed immediately. True False

13. Under IFRS, inventory write-downs due to using the lower-of-cost-or-market rule are allowed to be

reversed in a future year if the market value subsequently increases. True False

14. When preparing a statement of cash flows, IFRS allows companies to report cash outflows from interest

payments as either operating or financing cash flows, while U.S. GAAP requires these outflows to be reported as only operating activities. True False

15. When preparing a statement of cash flows, IFRS allows companies to report cash inflows from interest

and dividends as either operating or investing cash flows, while U.S. GAAP requires these inflows to be reported as only operating activities. True False

16. IFRS stands for:

A. Independent Financial Reporting System.B. International Financing Reform System.C. International Financial Reporting Standards.D. International Financial Regulation of Securities.

17. Which of the following characteristics of a country most likely affects the extent of companies' financial

disclosure practices? A. Inflation.B. Tax laws.C. Population.D. Culture.

18. Which of the following is not a reason why accounting differs across countries?

A. Culture.B. Population.C. Tax laws.D. Sources of financing.

19. Countries that have different rules for financial accounting and tax accounting, rely more on equity financing, and have historical political and economic ties with Great Britain are referred to as what types of countries? A. Code law countries.B. European Union countries.C. Common law countries.D. Conformist countries.

20. Countries that have similar rules for financial accounting and tax accounting, rely more on debt financing,

and have historical political and economic ties with Germany are referred to as what types of countries? A. Code law countries.B. European Union countries.C. Common law countries.D. Conformist countries.

21. When a country establishes financial reporting rules that closely resemble tax reporting rules, reported

accounting profits tend to be: A. Negative.B. Higher.C. Lower.D. Misreported.

22. One motivation for reducing differences in accounting practices across countries is to:

A. Decrease the flow of international capital.B. Allow greater competition among companies.C. Reduce companies' tax burdens.D. Make it easier for investors to compare companies from different countries.

23. The body primarily responsible for establishing a single set of global accounting standards is the:

A. IASB.B. SEC.C. FASB.D. IOSCO.

24. The Norwalk Agreement:

A. Allows foreign companies listed on U.S. stock exchanges to prepare financial statements in accordance

with IFRS.B. Formalizes the commitment between the FASB and IASB to converge U.S. GAAP and IFRS.C. Eliminates the requirement that U.S. firms report under U.S. GAAP.D. Gives authority to the IASB to set accounting standards for U.S. companies.

25. For which of the following topics is accounting under both U.S. GAAP and IFRS essentially the same?

A. Receivables.B. Long-term assets.C. Inventory.D. Research and development expenditures.

26. Which inventory cost flow assumption is allowed under U.S. GAAP but not under IFRS? A. Specific identification.B. FIFO.C. LIFO.D. Average cost.

27. Which of the following statements is true regarding revaluation of property, plant, and equipment to fair

value? A. Only IFRS allows revaluation of property, plant, and equipment to fair value.B. Only U.S. GAAP allows revaluation of property, plant, and equipment to fair value.C. Both U.S. GAAP and IFRS allow revaluation of property, plant, and equipment to fair value.D. Neither U.S. GAAP nor IFRS allows revaluation of property, plant, and equipment to fair value.

28. Compared to that in the U.S, the cost to companies in other countries of documenting effective internal

controls is: A. Much greater.B. Slightly greater.C. About the same.D. Much less.

29. Why are some U.S. companies opposed to elimination of the LIFO inventory method?

A. Inventory amounts are more difficult to calculate under FIFO.B. LIFO most likely matches actual flow of inventory.C. Increased tax burden.D. Most international companies use LIFO.

30. Assuming rising costs, the switch from LIFO to FIFO or average cost would most likely have what

effect(s)? A. Increase reported net income in the income statement.B. Decrease tax obligations to the Internal Revenue Service (IRS).C. Increase reported net income and tax obligations.D. Decrease reported net income and tax obligations.

31. Suppose a company has research costs of $100,000 and development costs of $200,000 for the year. Under

IFRS, what amount would be reported as an expense in the current year's income statement? A. $100,000.B. $150,000.C. $200,000.D. $300,000.

32. Suppose a company has research costs of $100,000 and development costs of $200,000 for the year. Under

U.S. GAAP, what amount would be reported as an expense in the current year's income statement? A. $100,000.B. $150,000.C. $200,000.D. $300,000.

33. Would a company be more likely to report a contingent liability under U.S. GAAP or IFRS? A. U.S. GAAP.B. IFRS.C. Equally likely.D. Contingent liabilities are not reported under IFRS.

34. Suppose a severe storm floods a company's headquarters, causing damages to the building of $300,000

and destruction of inventory of $200,000. Because of the unusual nature of this event, the company had no flood insurance to cover these losses. Under IFRS, how much would the company report as an extraordinary loss in the current year's income statement? A. $0.B. $200,000.C. $300,000.D. $500,000.

35. Suppose a severe storm floods a company's headquarters, causing damages to the building of $300,000

and destruction of inventory of $200,000. Because of the unusual nature of this event, the company had no flood insurance to cover these losses. Under U.S. GAAP, how much would the company report as an extraordinary loss in the current year's income statement? A. $0.B. $200,000.C. $300,000.D. $500,000.

36. Suppose a company pays interest of $10,000 for the year on borrowed amounts due in two years. Under

IFRS, what is the most the company can report as cash outflows from financing activities? A. $10,000.B. $2,000.C. $5,000.D. $0.

37. How is the organization responsible for standard setting in the U.K. different from that in France? Which of

these organizations is closer to the FASB in the U.S.?

38. Describe at least five reasons why accounting practices differ across countries. Which reason do you think is most important? Explain why.

39. Which inventory cost flow assumption is allowed under U.S. GAAP but not under IFRS? Explain why some

U.S. companies will lobby strongly to keep this method as an allowable alternative.

40. What does it mean to revalue a long-term asset? How do U.S. GAAP and IFRS differ regarding revaluation

of long-term assets?

41. How is preferred stock reported differently under U.S. GAAP and IFRS? Do you think preferred stock is a

liability or an equity item? Why?

42. Listed below are seven reasons why accounting practices differ across countries followed by a list of descriptions. Match each description with the best reason placing the letter designating the reason in the space provided.

1. Inflation The extent of public disclosure depends on the

secretiveness of society.

____

2. Political and economic ties

In some countries, asset values increase rapidly because of the general price level changes.

____

3. Culture Countries share business activities and have political

connections.

____

4. Tax laws Some countries rely more heavily on debt

capital than on equity capital to fund operations.

____

5. Legal system Common law countries rely more heavily on public

information.

____

6. Economic development

More developed economies have more complex business transactions.

____

7. Sources of financing

Alignment between financial reporting and tax reporting rules.

____

43. Below are seven reasons for differences in accounting practices among countries. For each reason, at least

two options are provided. For each reason, select the option that best describes the United States. Low inflationInflation 1. Transparent Legal system Options ____ 2. More equity financing Tax laws ____ 3. Different tax and financial accounting rules Sources of financing ____ 4. British ties Culture ____

5. Common law Political and economic

ties ____ 6. Developed economy Economic development ____

44. Below are seven reasons for differences in accounting practices among countries. For each reason, at least two options are provided. For each reason, select the option that best describes Germany.

1. Similar tax and financial accounting rules Legal system Options

____

2. Low inflation Tax laws

____

3. Developed economy Sources of financing

(a) More equity financing

____

4. More debt financing Inflation

____

5. Secretive Culture

____

6. German ties Political and economic ties

____

7. Code law Economic development

____

App_E Key

1. TRUE 2. TRUE 3. FALSE 4. TRUE 5. TRUE 6. TRUE 7. FALSE 8. TRUE 9. TRUE 10. FALSE 11. TRUE 12. FALSE 13. TRUE 14. TRUE 15. TRUE 16. C 17. D 18. B 19. C 20. A 21. C 22. D 23. A 24. B 25. A 26. C 27. A 28. D 29. C 30. C 31. A 32. D

33. B 34. A 35. D 36. A 37. The organization responsible for standard setting in the U.K. is a private standard setter. In France, the organization responsible for standard setting is part of the government. The U.K. is closer to the format used for standard setting in the U.S., as both countries develop standards using a private standard setter. 38. Financial accounting standards and practices differ from country to country for many reasons, including different legal systems, the influence of tax laws, sources of financing, inflation, culture, political influence of other countries, and the level of economic development. See Illustration D-1 in the textbook for further details.Legal system (common law vs. code law) is often used as a way to describe overall differences in accounting practices between countries. Common law countries, such as the U.S., U.K., Australia, and Canada, have separate rules for financial accounting and tax accounting, rely more on equity financing, and have political and economic ties with Britain. Code law countries such as those in Central Europe and Japan, have similar rules for financial accounting and tax accounting, rely more on debt financing, and many have political and economic ties with Germany. 39. LIFO is allowed under U.S. GAAP, but not under IFRS. U.S. companies currently using LIFO will lobby to keep this method because a switch from LIFO would greatly increase taxes for many U.S. companies. 40. To revalue a long-term asset is to periodically adjust the asset to fair value. Under U.S. GAAP, companies are not allowed to revalue long-term assets to fair value for financial reporting purposes. IFRS allows, but does not require, revaluation of long-term assets to fair value. 41. Under U.S. GAAP, preferred stock is usually recorded as stockholders' equity with dividends reported as a reduction of retained earnings. Under IFRS, most preferred stock is reported as debt with the dividends reported in the income statement as interest expense.As we learned in Chapter 10, preferred stock has characteristics of both liabilities and stockholders' equity. Preferred stock can have characteristics nearly identical to bonds or characteristics nearly identical to common stock. 42. Culture :: The extent of public disclosure depends on the secretiveness of society. and Inflation :: In some countries, asset values increase rapidly because of the general price level changes. and Political and economic ties :: Countries share business activities and have political connections. and Sources of financing :: Some countries rely more heavily on debt capital than on equity capital to fund operations. and Legal system :: Common law countries rely more heavily on public information. and Economic development :: More developed economies have more complex business transactions. and Tax laws :: Alignment between financial reporting and tax reporting rules. 43. Common law :: Legal system Options and Different tax and financial accounting rules :: Tax laws and More equity financing :: Sources of financing and Transparent :: Culture and British ties :: Political and economic ties and Developed economy :: Economic development 44. Code law :: Legal system Options and Similar tax and financial accounting rules :: Tax laws and More debt financing :: Sources of financing (a) More equity financing and Low inflation :: Inflation and Secretive :: Culture and German ties :: Political and economic ties and Developed economy :: Economic development

App_E Summary


AACSB: Analytic 5

AACSB: Reflective 3




AICPA: Reporting 15

Blooms: Analysis 5




Blooms: Synthesis 2

Difficulty: Easy 15

Difficulty: Hard 2


Learning Objective: AppE-01 Determine the financial statement effects of inventory errors. 18

Learning Objective: AppE-02 Understand the role of the International Accounting Standards Board (IASB) in the development of International Financial Reporting Standards (IFRS).

5

Learning Objective: AppE-03 Recognize the major differences between U.S. GAAP and IFRS. 21

Spiceland - Appendix E... 44

Ch1Student: ___________________________________________________________________________

1. Accounting is a system of maintaining records of a company's operations and communicating this information to decision makers. True False

2. Accounting information is used by investors to decide whether to invest in a company's stock.

True False

3. Accounting information is used by creditors to decide whether to invest in a company's stock.

True False

4. The primary functions of financial accounting are to measure business activities of a company and to

communicate those measurements to internal parties for decision-making purposes. True False

5. Financing activities are transactions involving externals sources of funding.

True False

6. Investing activities include the purchase and sale of (1) long-term resources and (2) any resources not

directly related to a company's normal operations. True False

7. Operating activities include transactions that relate to the primary operations of the company.

True False

8. A corporation is an entity that is legally separate from its owners.

True False

9. Cash, inventory, supplies, and buildings are examples of liabilities.

True False

10. Amounts owed to suppliers, workers, governments, and utility companies are examples of liabilities.

True False

11. If total assets of a company equal $12,000 and total stockholders' equity equals $4,000, then total liabilities

equal $8,000. True False

12. If total liabilities of a company equal $16,000 and total stockholders' equity equals $9,000, then total assets equal $7,000. True False

13. The accounting equation shows that a company's resources equal creditors' and owners' claims to those

resources. True False

14. The costs of advertising, utilities, and salaries in the current reporting period are examples of liabilities.

True False

15. The difference between revenues and expenses is referred to as net income or net loss.

True False

16. If a company reports revenues of $17,000 and expenses of $12,000, then net income equals $5,000.

True False

17. Expenses are regular cash payments by a corporation to its stockholders.

True False

18. Dividends represent a return of the company's profits to its owners, the stockholders.

True False

19. One of the differences between a partnership and a corporation is that owners of a partnership have limited

liability. True False

20. Limited liability means the stockholders are not held personally responsible for the financial obligations of

the corporation. True False

21. One advantage of the corporate form of business is double taxation.

True False

22. Double taxation refers to a corporation's income being taxed twice—first when the company earns it and

pays corporate income taxes on it, and then again when stockholders pay personal income taxes on any amounts the firm distributes to them as dividends. True False

23. Financial statements are periodic reports published by the company for the purpose of providing

information to managers. True False

24. The balance sheet is a financial statement that reports the company's revenues and expenses over an interval of time. True False

25. The statement of stockholders' equity is a financial statement that summarizes the changes in stockholders'

equity over an interval of time. True False

26. The two primary components of stockholders' equity include common stock and revenue.

True False

27. Common stock represents an external source of stockholders' equity, whereas retained earnings represents

an internal source. True False

28. Retained earnings represents the cumulative amount of net income earned over the life of the company that

has not been distributed to stockholders as dividends. True False

29. Dividends are considered an expense in running the business and reported in the income statement.

True False

30. All cash transactions reported in the statement of cash flows are classified as either (1) operating activities,

(2) investing activities, or (3) financing activities. True False

31. Investing cash flows generally include cash receipts and cash payments for transactions involving revenues

and expenses. True False

32. Operating cash flows generally include cash transactions for the purchase and sale of investments and

productive long-term assets. True False

33. Financing cash flows include cash transactions with lenders, such as borrowing money and repaying debt,

and with stockholders, such as issuing stock and paying dividends. True False

34. Any transaction that affects the income statement ultimately affects the balance sheet through the balance

of retained earnings. True False

35. Financial accounting has an impact on everyday business decisions as well as wide-ranging economic consequences. True False

36. Investors and creditors rely heavily on financial accounting information in making investment and lending

decisions. True False

37. In general, if a company's net income is increasing, so will its stock price.

True False

38. The rules of financial accounting are called Generally Accepted Accounting Principles (GAAP).

True False

39. Today, financial accounting and reporting standards in the United States are established primarily by the

Financial Accounting Standards Board (FASB). True False

40. The 1933 Securities Act and the 1934 Securities Exchange Act were designed to restore investor

confidence in financial accounting following the stock market crash in 1929. True False

41. The 1934 act gives the Securities and Exchange Commission (SEC) the power to require companies with

publicly traded securities to prepare periodic financial statements for distribution to investors and creditors. True False

42. The role of auditors is to help ensure that management has in fact appropriately applied Generally Accepted

Accounting Principles (GAAP) in preparing the company's financial statements. True False

43. Auditors are trained individuals hired by a company as an independent party to express a professional

opinion of the accuracy of that company's financial statements. True False

44. The primary objective of financial reporting is to provide useful information to managers in making

decisions. True False

45. Public accounting firms are professional service firms that traditionally have focused on three areas:

auditing, tax preparation/planning, and business consulting. True False

46. The Financial Accounting Standards Board's conceptual framework does not prescribe Generally Accepted Accounting Principles. It provides an underlying foundation for the development of accounting standards and interpretation of accounting information. True False

47. The primary focus for financial accounting information is to provide information useful for:

A. Option aB. Option bC. Option cD. Option d

48. What is the primary purpose of financial accounting?

A. Determine the amount of tax liability owed to the government.B. Communicate business transactions to internal management.C. Measure business transactions and communicate those measures to external users to make decisions.D. Measure the profitability of the company in order to assist employees with making decisions.

49. Financial accounting does not deal with which of the following?

A. Measuring a company's economic activity.B. Preparing financial reports.C. Making business decisions.D. Communicating financial results to investors.

50. Which of the following groups is not among the external users for whom financial statements are prepared?

A. Creditors.B. Regulators.C. Investors.D. Managers.

51. Financial accounting:

A. Provides information primarily for external decision makers.B. Provides information primarily for a company's employees.C. Provides information primarily for the use of managers of the company.D. Is primarily used to compute a company's tax obligation.

52. The accounting equation is defined as:

A. Assets = Liabilities + Stockholders' Equity.B. Assets = Liabilities -Stockholders' Equity.C. Net Income = Revenues -Expenses.D. Liabilities + Revenues = Assets.

53. Which statement below best describes the accounting equation? A. The change in retained earnings equals net income less dividends.B. Equality of revenue and expense transactions over time.C. Resources of the company equal creditors' and owners' claims to those resources.D. Financing activities equal investing and operating activities.

54. If a company has stockholders' equity of $60,000 at the end of the year, which of the following statements

must be true? A. The company's assets exceed liabilities by $60,000.B. The company has issued $60,000 of common stock.C. Net income for the year equals $60,000.D. Total revenues earned during the year equal $60,000.

55. Emmitt had the following final balances after the first year of operations: assets, $55,000; stockholders'

equity, $25,000; dividends, $3,000; and net income, $10,000. What is the amount of Emmitt's liabilities? A. $55,000.B. $30,000.C. $13,000.D. $7,000.

56. Transactions of a company involving external sources of funding are referred to as:

A. Investing activities.B. Financing activities.C. External activities.D. Operating activities.

57. Transactions of a company that include the purchase and sale of long-term productive assets are referred to

as: A. Investing activities.B. Financing activities.C. Expenditure activities.D. Operating activities.

58. McGill purchases additional office equipment to better serves its customers. This purchase is classified as

what type of activity? A. Company activity.B. Financing activity.C. Investing activity.D. Operating activity.

59. Transactions related to the primary business activities of the company, such as selling goods and services to

customers, are referred to as: A. Investing activities.B. Management activities.C. Operating activities.D. Financing activities.

60. Stimpleton Company engages in the following cash payments:

What is the total amount of cash paid for operating activities? A. $6,000.B. $2,000.C. $7,000.D. $1,500.

61. The form of business organization that is legally separate from its owners is a:

A. Partnership.B. Sole proprietorship.C. Corporation.D. Separation entity.

62. Which business form has the advantage of limited liability?

A. Corporation.B. Sole proprietorship.C. Partnership.D. All business forms share equal limited liability.

63. Limited liability means:

A. Stockholders of a corporation are not obligated to pay the corporation's debts out of their own pocket.B. Liabilities of a company cannot exceed its assets.C. Companies are not allowed to borrow unless they are profitable.D. Companies are less likely to be sued if they are formed as a corporation.

64. One disadvantage of the corporate form of business is:

A. Limited liability.B. Access to more capital.C. Smaller in size.D. Double taxation.

65. The costs of providing goods and services to customers are referred to as:

A. Assets.B. Expenses.C. Liabilities.D. Revenues.

66. The accounts which represent the resources of the company are called:

A. Liabilities.B. Revenues.C. Expenses.D. Assets.

67. An alternative form of the accounting equation is: A. Net Income = Revenues -Expenses.B. Stockholders' Equity = Assets + Liabilities.C. Assets = Liabilities -Stockholders' Equity.D. Assets -Liabilities = Stockholders' Equity.

68. The owners' interest in a corporation is called:

A. Dividends.B. Assets.C. Liabilities.D. Stockholders' equity.

69. Creditors' claims to a corporation's resources are referred to as:

A. Dividends.B. Assets.C. Liabilities.D. Stockholders' equity.

70. Net income can best be described as:

A. Net cash received by a company during the year.B. Revenues minus expenses.C. The amount of profits retained in a company for the year.D. Resources owned by a company.

71. Use the following appropriate amounts to calculate net income: Revenues, $12,000; Liabilities, $5,000;

Expenses, $4,000; Assets, $19,000; Dividends, $4,000. A. $6,000.B. $8,000.C. $4,000.D. $14,000.

72. Liabilities are best defined as:

A. Amounts the company expects to collect in the future from customers.B. Debts or obligations the company owes resulting from past transactions.C. The amounts that owners have invested in the business.D. Payments to stockholders.

73. Which of the following best describes a revenue?

A. Resources owned.B. Cash received from a customer.C. Amounts earned from providing goods and services to a customer.D. Dividends paid to stockholders.

74. The account type that represents payments to stockholders is called: A. Liabilities.B. Assets.C. Stockholders' equity.D. Dividends.

75. Which of the following accounts appears in the statement of stockholders' equity?

A. Supplies.B. Cash.C. Salaries Payable.D. Retained Earnings.

76. Sooner Company has had a net income of $8,000, $5,000, $12,000, and $10,000 over the first four years of

the company's existence. If the average annual amount of dividends paid over the last four years is $3,000, what is the ending retained earnings balance? A. $47,000.B. $35,000.C. $23,000.D. $7,000.

77. The equation best describing the income statement is:

A. Revenues -Expenses = Net Income.B. Assets = Revenues -Expenses.C. Assets = Liabilities + Stockholders' Equity.D. Revenues + Expenses = Net Income.

78. On January 1, 2012, Gucci Brothers Inc. started the year with a $492,000 balance in Retained Earnings

and a $605,000 balance in Common Stock. During 2012, the company earned net income of $92,000, paid a dividend of $15,200, and issued more common stock for $27,500. What is total stockholders' equity on December 31, 2012? A. $1,231,700.B. $1,097,000.C. $1,201,300.D. $1,588,300.

79. The financial statement that represents activity over the entire life of the company is the:

A. Income statement.B. Statement of financial accounting.C. Balance sheet.D. Statement of cash flows.

80. Which of the following is the correct order for preparing the financial statements?

A. Balance sheet, statement of stockholders' equity, and income statement.B. Balance sheet, income statement, and statement of stockholders' equity.C. Statement of stockholders' equity, income statement, and balance sheet.D. Income statement, statement of stockholders' equity, and balance sheet.

81. The financial statement(s) that record activity over an interval of time is (are) the: A. Income statement.B. Balance sheet.C. Balance sheet and income statement.D. Income statement and statement of cash flows.

82. Which of the following items would not appear in an income statement?

A. Salaries expense.B. Advertising expense.C. Service revenue.D. Cash.

83. The two categories of stockholders' equity usually found in the balance sheet of a corporation are:

A. Common stock and liabilities.B. Assets and liabilities.C. Common stock and retained earnings.D. Revenues and expenses.

84. Which of the following statements regarding financial reports is not correct?

A. A balance sheet contains assets, liabilities, and stockholders' equity information.B. An income statement shows revenues and expenses.C. A statement of stockholders' equity reports revenues, net income, and dividends information.D. A statement of cash flows shows cash inflows and outflows from operating, investing, and financing

activities. 85. Which of the following is not a balance sheet item?

A. Assets.B. Common stock.C. Retained earnings.D. Revenues.

86. In what order are the following financial statements prepared: (1) balance sheet, (2) income statement, and

(3) statement of stockholders' equity? A. 1, 2, 3.B. 3, 2, 1.C. 1, 3, 2.D. 2, 3, 1.

87. Nina Corp. had the following net income (loss) the first three years of operation: $7,100, ($1,600), and

$3,600. If the Retained Earnings balance at the end of year three is $1,100, what was the total amount of dividends paid over these three years? A. $500.B. $0.C. $9,100.D. $8,000.

88. Aikman Company has paid dividends of $2,410, $0, $1,570 and $1,060 over the first four years of the company's existence. If Retained Earnings after year four has an ending balance of $9,700, what is the average annual amount of net income (loss) over the past four years for Aikman? A. $3,685.B. $14,740.C. $840.D. $1,260.

89. The equation best describing the balance sheet is:

A. Assets = Liabilities + Stockholders' Equity.B. Revenues -Expenses = Net Income.C. Ending Retained Earnings + Dividends = Net Income.D. Revenues + Expenses = Net Income.

90. DW has an ending Retained Earnings balance of $51,100. If during the year DW paid dividends of $4,300

and had net income of $22,500, then what was the beginning Retained Earnings balance? A. $24,300.B. $300.C. $32,900.D. $69,300.

91. The ending Retained Earnings balance of Boomer Inc. decreased by $1.0 million from the beginning of the

year. The company declared a dividend of $5.4 million during the year. What was the net income earned during the year? A. $7.5 million.B. $6.4 million.C. $4.4 million.D. $1.0 million.

92. Which financial statement is typically prepared first?

A. Balance sheet.B. Income statement.C. Statement of stockholders' equity.D. Statement of cash flows.

93. Expenses are shown in which of the following statements?

A. Income statement.B. Statement of cash flows.C. Balance sheet.D. Statement of stockholders' equity.

94. Given the information below about Thomas Corporation, what was the amount of dividends the company paid in the current period?

A. $13,000.B. $110,000.C. $28,000.D. $18,000.

95. Retained earnings at the end of the year is calculated using:

A. Beginning retained earnings, net income, and dividends.B. Common stock and dividends.C. Stockholders' equity, net income, and dividends.D. Net income and dividends.

96. The financial statement that represents the accounting equation is the:


97. Which of the following is not a major section in the statement of cash flows?

A. Cash flows from operating activities.B. Cash flows from financing activities.C. Cash flows from customers.D. Cash flows from investing activities.

98. Given the information below about David Corporation, what was the amount of dividends the company

paid in the current period?

A. $140,000.B. $0.C. $30,000.D. $20,000.

99. Liabilities are shown in which of the following statements?


100.Which accounting amount best represents value created for stockholders during the current period? A. Retained earnings.B. Total assets.C. Net income.D. Stockholders' equity.

101.Which accounting number has the single greatest impact on stock prices?

A. Total dividends.B. Total assets.C. Total revenues.D. Net income.

102.GAAP is an abbreviation for:

A. Generally authorized accounting procedures.B. Generally applied accounting procedures.C. Generally accepted auditing practices.D. Generally accepted accounting principles.

103.Generally Accepted Accounting Principles (GAAP) are best defined as:

A. Standards or methods for presenting financial accounting information.B. Government-mandated rules that companies must follow.C. Rules that best estimate profitability for a company.D. The group of individuals that create and enforce all accounting rules.

104.Today, financial accounting and reporting standards in the United States are established primarily by the:

A. Securities and Exchange Commission.B. International Accounting Standards Board.C. Financial Accounting Standards Board.D. U.S. Congress.

105.Financial reporting objectives do not include providing information:

A. Useful to investors and creditors in making decisions.B. To determine market values, assess profit potential, and evaluate management.C. Helpful to investors in predicting cash flows.D. That tells about a company's economic resources and claims to those resources.

106.Of the following, the most important objective for financial reporting is to provide information useful for:

A. Predicting cash flows.B. Determining taxable income.C. Providing accountability.D. Increasing future profits.

107.The International Accounting Standards Board: A. Is governed by the U.S. Securities and Exchange Commission.B. Can overrule the FASB when their policies disagree.C. Promotes the use of high-quality, understandable global accounting standards.D. Is the primary standard-setting body in the United States.

108.Independent auditors express an opinion on the:

A. Fairness of financial statements.B. Amount of income taxes a company owes to the government.C. Quality of the company's products.D. Quality of a company's workforce.

109.The assumption that a business can continue to remain in operation into the future is the:

A. Monetary unit assumption.B. Periodicity assumption.C. Economic entity assumption.D. Going concern assumption.

110.The qualitative characteristic that says accounting information can influence users' decisions by allowing

them to assess past performance is: A. Timeliness.B. Neutrality.C. Confirmatory value.D. Predictive value.

111.The major underlying assumptions of accounting include all of the following except:

A. Economic entity.B. Monetary unit.C. Legal liability.D. Going concern.

112.The assumption that the assets and liabilities of the business are accounted for on the books of the company

but not included in the records of the owner is the: A. Monetary unit assumption.B. Going concern assumption.C. Economic entity assumption.D. Periodicity assumption.

113.Accounting information that does not provide measurement bias in favor of a particular set of companies

has the characteristic of: A. Relevance.B. Consistency.C. Materiality.D. Neutrality.

114.If accounting information is considered to have faithful representation, then which of the following is true? A. The information represents to users what it claims to represent.B. The information follows conservatism principles and is also material.C. The information is considered pertinent to or affects decisions.D. The information will have predictive value, feedback value, and is timely.

115.For accounting information to be relevant, it must have which of the following characteristics?

A. Predictive value or confirmatory value.B. Large in amount and timely.C. Comparability or consistency.D. Freedom from material error, neutrality, or completeness.

116.Materiality is based upon which factor(s)?

A. Timeliness of an item.B. Amount and nature of an item.C. Consistency of an item.D. Relevance of an item.

117.If a company has gone bankrupt, its financial statements likely violate the:

A. Periodicity assumption.B. Monetary unit assumption.C. Going concern assumption.D. Economic entity assumption.

118.The conceptual framework's qualitative characteristic of relevance includes:

A. Predictive value.B. Verifiability.C. Completeness.D. Neutrality.

119.The conceptual framework's qualitative characteristic of faithful representation includes:

A. Predictive value.B. Neutrality.C. Confirmatory value.D. Comparability.

120.Constraints on qualitative characteristics of accounting information include:

A. Freedom from material error.B. Going concern.C. Neutrality.D. Cost effectiveness.

121.Primary qualitative characteristics of accounting information are: A. Relevance and comparability.B. Comparability and consistency.C. Faithful representation and relevance.D. Faithful representation and consistency.

122.Enhancing qualitative characteristics of accounting information include:

A. Relevance and comparability.B. Comparability and consistency.C. Faithful representation and relevance.D. Cost effectiveness and materiality.

123.For each transaction, indicate whether a company would classify the related account as an asset, liability,

stockholders' equity, dividend, revenue, or expense.

124.Account classifications include assets, liabilities, stockholders' equity, dividends, revenues, and expenses. Indicate the account classification for each account name.

125.Indicate whether a company would classify the transaction as financing, investing, or operating.

126.Below are typical transactions for a company. Indicate whether each transaction is classified as a financing, investing, or operating activity.

127.Below are typical transactions for a company. Indicate whether each transaction is classified as a financing,

investing, or operating activity.

128.At the end of the current period, Maltese, Inc. reports the following amounts: Assets = $50,000; Liabilities = $28,000; Dividends = $4,000; Revenues = $22,000; Expenses = $16,000. Calculate net income and stockholders' equity at the end of the period.

129.At the end of the current period, Rogers Company reports the following amounts: Assets = $25,000;

Liabilities = $15,000; Dividends = $3,000; Revenues = $20,000; Expenses = $13,000. Calculate net income and stockholders' equity at the end of the period.

130.Below are the account balances for Huffman Corporation at the end of December. Use only the appropriate

accounts to prepare an income statement.

131.At the beginning of the year (January 1), Maurice and Sons has $12,000 of common stock outstanding and retained earnings of $4,200. During the year, the company reports net income of $3,200 and pays dividends of $1,200. In addition, the company issues additional common stock for $5,000. Prepare the statement of stockholders' equity at the end of the year (December 31).

132.Klein Interiors has the following account balances at the end of the year. Use only the appropriate accounts

to prepare a balance sheet.

133.Thomason Financial has the following cash transactions for the year. Assume cash at the beginning of the period is $6,000. Prepare a statement of cash flows.

134.Each of the following independent situations represents amounts shown on the four basic financial

statements. Fill in the missing blanks using your knowledge of amounts that appear on the financial statements.1. Revenues = $27,000; Expenses = $18,000; Net income = ____.2. Increase in stockholders' equity = $20,000; Issuance of common stock = $12,000; Dividends = $5,000; Net income = ____.3. Assets = $25,000; Liabilities = $13,000; Stockholders' equity = ____.4. Total change in cash = $28,000; Net operating cash flows = $30,000; Net financing cash flows = $18,000; Net investing cash flows = ____.

135.During its first five years of operations, Della Manufacturing reports net income and pays dividends as follows. Calculate the balance of retained earnings at the end of each year. Note that retained earnings will always equal $0 at the beginning of year 1.

136.Below is information related to retained earnings for five independent situations. Calculate the answer to

each.1. A company reports an increase in retained earnings of $3,200 and net income of $4,800. What is the amount of dividends?2. A company reports beginning retained earnings of $1,800, net income of $1,200, and $200 dividends. What is the amount of ending retained earnings?3. A company reports an increase in retained earnings of $2,500 and dividends of $1,500. What is the amount of net income?4. A company reports ending retained earnings of $2,700, net income of $900, and dividends of $500. What is the amount of beginning retained earnings?5. A company reports an increase in retained earnings of $1,900 and net income of $1,200. What is the amount of dividends?

137.Below is balance sheet information for five independent situations. Calculate the answer to each.1. A company reports total assets of $2,000 and total liabilities of $900. What is the amount of stockholders' equity?2. A company reports total liabilities of $2,400 and stockholders' equity of $1,100. What is the amount of total assets?3. A company reports total assets of $2,700 and total stockholders' equity of $700. What is the amount of total liabilities?4. A company reports an increase in assets of $1,700 and an increase in liabilities of $400. What is the amount of the change in stockholders' equity?5. A company reports an increase in liabilities of $300 and a decrease in stockholders' equity of $800. What is the amount of the change in total assets?

138.Below is cash flow information for five independent situations. Calculate the answer to each.

1. A company reports operating cash flows of $3,200, investing cash flows of $700, and financing cash flows of $400. What is the amount of the change in total cash?2. A company reports operating cash flows of $1,800, investing cash flows of $400, and financing cash flows of $1,100. If the beginning cash amount is $500, what is the ending cash amount?3. A company reports operating cash flows of $700, investing cash flows of $300, and a change in total cash of $100. What is the amount of cash flows from financing activities?4. A company reports operating cash flows of $600, financing cash flows of $400, and a change in total cash of $100. What is the amount of cash flows from investing activities?5. A company reports investing cash flows of $1,400, financing cash flows of $900, and a change in total cash of $200. What is the amount of cash flows from operating activities?

139.Riley Incorporated reports the following amounts at the end of the year:

In addition, the company had common stock of $65,000 at the beginning of the year and issued an additional $5,000 during the year. The company also had retained earnings of $20,700 at the beginning of the year and paid dividends of $2,000 during the year. Prepare the income statement, statement of stockholders' equity, and balance sheet.

140.Below are incomplete financial statements for Beasley, Incorporated. Calculate the missing amounts.

141.Use the following information available at the end of 2012 to prepare an income statement and balance sheet on December 31, 2012, for Goldie Company.Fees for services performed during the year, $120,000Accounts payable, $18,500Accounts receivable, $17,300Miscellaneous costs for the year $8,700Supplies on hand, $2,700Notes payable outstanding $30,000Interest cost on the note for the year, $3,000Equipment 84,400Cash on hand, 11,200Salaries cost for the year, 71,500Supplies cost for the year, $9,400Rent cost for the year, $12,000Common stock that has been issued, $60,000Retained earnings at the end of the year, $7,100

The following answers point out the key phrases that should appear in students' answers. They are not intended to be examples of complete student responses. It might be helpful to provide detailed instructions to students on how brief or in-depth you want their answers to be. 142.Define accounting. Describe the two primary functions of financial accounting and its role in our society.

143.Describe the three fundamental business activities that accountants measure. What account classifications

are typically associated with each type of business activity?

144.List and describe the four financial statements most frequently provided to external users.

145.How does the value of an audit affect financial statements?

146.Define the four basic assumptions underlying Generally Accepted Accounting Principles: (a) economic

entity, (b) going concern, (c) periodicity, (d) monetary unit.

147.Match each account classification with its example.

148.Match each business activity with its example.

149.Match each financial statement with the accounts reported in it.

150.Match each qualitative characteristic with its definition.

151.The body of rules and procedures that guide the measurement and communication of financial accounting

information is known as: A. Standards of Professional Compliance (SPC).B. Generally Accepted Accounting Principles (GAAP).C. Generally Accepted Auditing Standards (GAAS).D. Rules of Financial Reporting (RFR).

152.The independent, private-sector group that is primarily responsible for setting financial reporting standards

in the United States is the: A. FASB.B. IASB.C. SEC.D. IRS.

153.Consider the following account balances of the Shattuck Law Firm as of December 31, 2012:

Accounts Payable $4,400Salaries Expense 12,800Cash 1,700Common Stock 2,400Service Revenue 8,300Supplies 4,300Retained Earnings 1,100Utilities Expenses 5,000How many of these accounts would appear in Shattuck's 2012 income statement? A. Five.B. Four.C. Three.D. Two.

154.Consider the following account balances of the Shattuck Law Firm as of December 31, 2012:

Accounts Payable $4,400Salaries Expense 12,800Cash 1,700Common Stock 2,400Service Revenue 8,300Retained Earnings 1,100Utilities Expense 5,000How many of these accounts would appear in Shattuck's 2012 balance sheet? A. Five.B. Four.C. Three.D. Two.

155.If total change in cash = $44,000, net operating cash flows = $22,000, and net investing cash flows =

($13,000); then net financing cash flows = A. $15,000.B. $25,000.C. $35,000.D. $45,000.

156.For the past five years, Mookie Consulting Services reported the following annual net income and dividend amounts:Year Net Income Dividends1. $22,000 $2,0002 17,000 2,0003 9,000 1,0004 14,000 3,0005 25,000 4,000If Mookie had Retained Earnings of $88,000 at the end of year 5, what was the company's Retained Earnings at the beginning of Year 1? A. $13,000.B. $25,000.C. $7,000.D. $1,000.

157.Which of the following items is reported in the statement of stockholders' equity?

A. Total assets.B. Total expenses.C. Net income.D. Operating cash flows.

158.Which of the following statements is NOT correct about the financial statements?

A. An income statement reports revenues, expenses, and net income information.B. The statement of stockholders' equity presents common stock, dividends, and retained earnings

information.C. A balance sheet reports assets, liabilities, revenues, and expenses.D. The statement of cash flows shows cash inflows and outflows from operating, financing, and investing

activities. 159.The primary purpose(s) of financial accounting is (are) to:

A. Measure and record business transactions.B. Prepare federal and state tax returns.C. Communicate financial results to investors and creditors.D. a and c

160.The accounts that represent resources owed to creditors are called:

A. Assets.B. Liabilities.C. Dividends.D. Stockholders' equity.

161.Which financial accounting number impacts stock prices more than any other single piece of information?

A. Retained earnings.B. Net income.C. Common stock.D. Total assets.

162.The balance sheet depicts which of the following equations? A. Net income = revenue - expenses.B. Ending retained earnings = beginning retained earnings + net income - dividends.C. Assets = liabilities + stockholders' equity.D. Net cash flows = total cash inflows - total cash outflows.

163.Using the information below from the accounting records of Thomas Corporation, owners' claims to the

company's resources amount to: A. $1,200,000.B. $800,000.C. $250,000.D. $400,000.

164.Which financial statement reports a company's retained earnings?

A. Income statement.B. Balance sheet.C. Statement of cash flows.D. All of the above.

165.Which of the following is an operating activity?

A. Issuing common stock.B. Paying dividends.C. Borrowing cash from a bank to acquire a factory.D. Paying electricity bills for the month.

166.How many of the following transactions are operating activities?

Borrowed $50,000 from the bankPurchased $12,000 in suppliesProvide services to customers for $27,000Paid the utility bill of $750Purchased a delivery truck for $12,000Received $25,000 from issuing common stock A. 1.B. 2.C. 3.D. 4.

167.Which statement below best describes the objectives of financial accounting?

A. Provide information that helps predict cash flows.B. Provide information about the economic resources, claims to resources and changes in resources and

claims.C. Provide information that is useful in making decisions.D. All of the above are correct.

168.Net income appears in which two financial statements? A. Balance sheet and income statement.B. Statement of stockholders' equity and balance sheet.C. Income statement and statement of stockholders' equity.D. Net income appears in only one financial statement.

169.The costs associated with producing revenues are referred to as:

A. Dividends.B. Assets.C. Liabilities.D. Expenses.

170.Accountants are responsible for measuring various operating, investing and financing activities. Which of

the following correctly matches the activity with its type? A. Investing - paying utilities for the month.B. Investing - purchasing land.C. Operating - paying dividends to stockholders.D. Financing - selling equipment for cash.

171.Which definition below best describes financial accounting?

A. Process of measuring income taxes owed to the government.B. System of maintaining communication with a company's customers and suppliers.C. Procedures designed to enhance the company's image to potential investors.D. Measuring business activities and communicating them to external parties.

172.Which of the following accounts appears in the statement of stockholders' equity?

A. Accounts PayableB. Accounts ReceivableC. Common StockD. Supplies

173.Which of the following accounts appears in the statement of stockholders' equity?

A. Delivery expense.B. Accounts payable.C. Service revenue.D. Utilities expense.

174.Which of the following is not a balance sheet item?

A. Assets.B. Retained Earnings.C. Expenses.D. Liabilities.

Ch1 Key

1. TRUE 2. TRUE 3. FALSE 4. FALSE 5. TRUE 6. TRUE 7. TRUE 8. TRUE 9. FALSE 10. TRUE 11. TRUE 12. FALSE 13. TRUE 14. FALSE 15. TRUE 16. TRUE 17. FALSE 18. TRUE 19. FALSE 20. TRUE 21. FALSE 22. TRUE 23. FALSE 24. FALSE 25. TRUE 26. FALSE 27. TRUE 28. TRUE 29. FALSE 30. TRUE 31. FALSE 32. FALSE

33. TRUE 34. TRUE 35. TRUE 36. TRUE 37. TRUE 38. TRUE 39. TRUE 40. TRUE 41. TRUE 42. TRUE 43. TRUE 44. FALSE 45. TRUE 46. TRUE 47. A 48. C 49. C 50. D 51. A 52. A 53. C 54. A 55. B 56. B 57. A 58. C 59. C 60. D 61. C 62. A 63. A 64. D 65. B 66. D 67. D

68. D 69. C 70. B 71. B 72. B 73. C 74. D 75. D 76. C 77. A 78. C 79. C 80. D 81. D 82. D 83. C 84. C 85. D 86. D 87. D 88. A 89. A 90. C 91. C 92. B 93. A 94. C 95. A 96. C 97. C 98. C 99. C 100. C 101. D 102. D

103. A 104. C 105. B 106. A 107. C 108. A 109. D 110. C 111. C 112. C 113. D 114. A 115. A 116. B 117. C 118. A 119. B 120. D 121. C 122. B 123. 1. Stockholders' equity; 2. Expense; 3. Asset; 4. Dividend; 5. Revenue. 124. 1. Stockholders' equity; 2. Asset; 3. Liability; 4. Revenue; 5. Expense; 6. Asset; 7. Expense; 8. Asset; 9. Liability; 10. Dividends. 125. 1. Financing; 2. Operating; 3. Investing; 4. Financing; 5. Operating. 126. 1. Investing; 2. Operating; 3. Operating; 4. Operating; 5. Financing; 6. Operating; 7. Investing; 8. Financing. 127. 1. Financing; 2. Operating; 3. Operating; 4. Operating; 5. Operating; 6. Operating; 7. Operating; 8. Investing; 9. Operating; 10. Financing.

128.

129.

130.

131.

132.

133.

134.

135. * Retained earnings = beginning retained earnings + net income -dividends

136.

137.

138.

139.

140. In the statement of stockholders' equity, $25,000 + (c) = $30,000(c) = $5,000In the statement of stockholders' equity, $12,000 + 5,000 -(d) = $15,000(d) = $2,000In the income statement, (b) = $5,000 (in the statement of stockholders' equity)In the income statement, (a) -$20,000 = $5,000(a) = $25,000In the balance sheet, (g) = $30,000 and (h) $15,000 (in the statement of stockholders' equity)(i) = $15,000 + $30,000 (g) + $15,000 (h)(i) = $60,000(f) = $60,000 (i)(e) = $60,000 (f) -$15,000 -$7,000 -$35,000(e) = $3,000

141. 142. Accounting is "the language of business." The functions of financial accounting are to measure the business activities of a company and to communicate those measurements to external parties for decision-making purposes. A large number of people, including investors and creditors, rely on financial accounting information to make informed, and presumably, better decisions about companies. 143. Financing activities are transactions involving external sources of funding. There are two basic sources of this external funding—the owners of the company who invest their own funds in the business, and creditors who lend money to the company. Investing activities include the purchase and sale of (1) long-term resources such as land, buildings, equipment, and machinery; and (2) any resources not directly related to a company's normal operations. Operating activities include transactions that relate to the primary operations of the company, such as providing products and services to customers and the associated costs of doing so, like utilities, taxes, advertising, wages, rent, and maintenance. In general, financing activities are associated with long-term liabilities and stockholders' equity (including dividends), investing activities are associated with long-term assets, and operating activities are associated with revenues and expenses. 144. The income statement presents revenues and expenses over an interval of time. The statement of shareholders' equity summarizes the changes in stockholders' equity (common stock and retained earnings) over an interval of time. The balance sheet presents the assets, liabilities, and stockholders' equity at a point in time. The statement of cash flows presents the cash flows over an interval of time for operating, investing, & financing activities. 145. Outside auditors add credibility to financial statements, increasing the confidence of capital market participants who rely on financial statements in making investment and credit decisions and recommendations. 146. Economic entity - All economic events can be identified with a particular economic entity. Going concern - In the absence of information to the contrary, it is anticipated that a business entity will continue to operate indefinitely. Periodicity - The life of a company can be divided into artificial time periods to provide timely information to external users. Monetary unit - In the U.S., financial statement elements should be measured in terms of the U.S. dollar. It assumes that the value of a dollar is stable over time. 147. 1. b; 2. d; 3. f; 4. e; 5. c; 6. a. 148. 1. c; 2. a; 3. b. 149. 1. a; 2. c; 3. b. 150. 1. c; 2. a; 3. b; 4. f; 5. e; 6. d. 151. B 152. A

153. C 154. A 155. C 156. A 157. C 158. C 159. D 160. B 161. B 162. C 163. D 164. B 165. D 166. C 167. D 168. C 169. D 170. B 171. D 172. C 173. B 174. C

Ch1 Summary


AACSB: Analytic 2

AACSB: Analytical 24





AICPA: Reporting 42

Blooms: Analysis 27



Blooms: Synthesis 5

Difficulty: Easy 90

Difficulty: Hard 23


Learning Objective: 01-01 Describe the two primary functions of financial accounting. 12

Learning Objective: 01-02 Identify the three fundamental business activities that financial accounting measures. 57

Learning Objective: 01-03 Discuss how financial accounting information is communicated through financial statements.

64

Learning Objective: 01-04 Describe the role that financial accounting plays in the efficient distribution of societys resources.

5

Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting.

18

Learning Objective: 01-06 Identify career opportunities in accounting. 1

Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles.

17

Spiceland - Chapter 01 175

Ch2Student: ___________________________________________________________________________

1. External transactions are transactions the firm conducts with a separate economic entity, such as selling products to a customer, purchasing supplies from a vendor, paying salaries to an employee, and borrowing money from a bank. True False

2. Internal transactions are events that affect the financial position of the company but do not include an

exchange with a separate economic entity. Examples are using supplies on hand and earning revenues after having received cash in advance from a customer. True False

3. A list of all account names used to record transactions of a company is referred to as a T-account.

True False

4. After recording each transaction, total assets must equal total liabilities plus stockholders' equity.

True False

5. If a transaction causes total assets of the company to increase by $2,000, then liabilities plus stockholders'

equity also increases by $2,000. True False

6. If a transaction causes total assets of the company to increase by $5,000 and total liabilities to increase by

$3,000, then stockholders' equity increases by $8,000. True False

7. Borrowing cash from the bank causes assets to increase and liabilities to increase.

True False

8. Purchasing equipment using cash causes assets to increase.

True False

9. Providing services to customers for cash causes stockholders' equity to increase.

True False

10. Incurring employees' salaries but not paying them causes no change to stockholders' equity.

True False

11. Paying dividends to its stockholders causes a company's stockholders' equity to decrease.

True False

12. Selling common stock for cash causes assets to increase and stockholders' equity to decrease. True False

13. Purchasing office supplies on account causes assets to increase and liabilities to increase.

True False

14. Providing services to customers on account causes assets to increase and stockholders' equity to increase.

True False

15. Receiving cash in advance from a customer for services to be provided in the future causes assets to

increase and stockholders' equity to increase. True False

16. Paying for one year of rent in advance does not affect the accounting equation.

True False

17. Purchasing supplies on account increases the balance of the Accounts Receivable account.

True False

18. Amounts owed from customers are recorded in the Accounts Receivable account.

True False

19. The two components of stockholders' equity are Debits and Credits.

True False

20. Revenues have the effect of increasing retained earnings.

True False

21. Expenses have the effect of decreasing retained earnings.

True False

22. Receiving cash in advance from customers increases the Service Revenue account.

True False

23. Unearned Revenue is a liability account.

True False

24. Liability accounts increase with a debit and decrease with a credit.

True False

25. Liability accounts increase with a credit and decrease with a debit.

True False

26. Common Stock increases with a credit and decreases with a debit. True False

27. Revenue accounts increase with a debit and decrease with a credit.

True False

28. Expense accounts increase with a debit and decrease with a credit.

True False

29. The Dividends account increases with a credit and decreases with a debit.

True False

30. A debit to an account balance always results in the balance increasing.

True False

31. A credit to an account balance always results in the balance decreasing.

True False

32. A journal provides a chronological record of all transactions affecting a firm.

True False

33. For each transaction, there must be at least one debit amount and one credit amount.

True False

34. For each transaction, the total debit amounts must equal the total credit amounts.

True False

35. Selling common stock for cash is recorded with a debit to common stock.

True False

36. Borrowing cash from the bank is recorded with a debit to cash.

True False

37. Purchasing office supplies is recorded with a credit to office supplies.

True False

38. Paying employees' salaries for the current period is recorded with a debit to Salaries Expense.

True False

39. Providing services to customers is recorded with a debit to Service Revenue.

True False

40. The general ledger includes all accounts used to record the company's transactions. True False

41. The process of transferring the debit and credit information from the journal to individual accounts in the

general ledger is called journalizing. True False

42. After we've posted transactions to the general ledger accounts, the sum of the accounts with debit balances

should equal the sum of the accounts with credit balances. True False

43. A trial balance is a list of all accounts and their balances at a particular date, showing that assets equal

liabilities. True False

44. If total debits equal total credits in the trial balance, then all balances are correct.

True False

45. Which of the following is not part of measuring external transactions?

A. Using source documents to analyze accounts affected.B. Recording transactions.C. Making payments on all amounts owed.D. Analyzing transactions for their effect on the accounting equation.

46. External events include all of the following except:

A. Paying employees' salaries.B. Purchasing equipment.C. Using office supplies.D. Collecting an account receivable.

47. For each transaction recorded in an accounting system, the basic equation that must be maintained at all

times is: A. Assets = Liabilities +Stockholders' Equity.B. Cash Increases = Cash Decreases.C. Revenues = Expenses + Dividends.D. Assets = Liabilities.

48. The following amounts are reported in the ledger of Mariah Company:

What is the balance in the Common Stock account? A. $44,000.B. $32,000.C. $48,000.D. $42,000.

49. When a company incurs workers' salaries but does not pay them, how will the basic accounting equation be

affected? A. Stockholders' equity decreases.B. Revenues decrease.C. Expenses decrease.D. Liabilities decrease.

50. When cash payments are made to stockholders, what is the effect on the company's accounts?

A. Cash decreases and dividends increase.B. Cash increases and dividends decrease.C. Cash decreases and common stock decreases.D. Cash increases and common stock increases.

51. Which of the following is not an asset account?

A. Supplies.B. Accounts Payable.C. Equipment.D. Accounts Receivable.

52. An account receivable can best be defined as:

A. A payment to the owners.B. A sale of goods and services.C. A resource owned by the company.D. An amount owed by the company.

53. Receiving assets from customers before services are performed results in:

A. Prepaid Assets.B. Service Revenue.C. Unearned Revenues.D. Accounts Receivable.

54. When the company pays stockholders a dividend, what is the effect on the accounting equation for that

company? A. Decrease stockholders' equity and increase assets.B. Increase liabilities and increase assets.C. Decrease assets and decrease liabilities.D. Decrease assets and decrease stockholders' equity.

55. Pumpkin Inc. sold $500 in pumpkins to a customer on account on January 1. On January 11 Pumpkin collected the cash from that customer. What is the impact on Pumpkin's accounting equation from the collection of cash? A. No net effect to the accounting equation.B. Decrease assets and increase liabilities.C. Increase assets and increase liabilities.D. Decrease assets and decrease liabilities.

56. A company receives a $50,000 cash deposit from a customer on October 15 but will not provide services

until November 20. Which of the following statements is true? A. The company records service revenue on October 15.B. The company records cash collection November 20.C. The company records an unearned revenue on October 15.D. The company records nothing on October 15.

57. Which of the following would increase assets and increase liabilities?

A. Provide services to customers on account.B. Purchase office supplies on account.C. Pay dividends to stockholders.D. Received a utility bill but do not pay for it.

58. Receiving cash from an account receivable:

A. Increases a revenue and decreases an asset.B. Decreases a liability and increases an asset.C. Increases an asset and increases a revenue.D. Increases one asset and decreases another asset.

59. An expense has what effect on the accounting equation?

A. Decrease liabilities.B. Decrease stockholders' equity.C. Increase assets.D. No effect.

60. A revenue has what effect on the accounting equation?

A. Increase liabilities.B. Decrease assets.C. Increase stockholders' equity.D. No effect.

61. Investments by stockholders have what effect on the accounting equation?

A. Assets increase and liabilities increase.B. Expenses increase and liabilities increase.C. Assets increase and revenues increase.D. Assets increase and stockholders' equity increases.

62. Which of the following is not possible when recording a transaction? A. Liabilities increase and assets decrease.B. Stockholders' equity increases and assets increase.C. One asset increases and another asset decreases.D. Stockholders' equity decreases and assets decrease.

63. Amounts owed to suppliers for supplies purchased on account are defined as:

A. Cash.B. Accounts Receivable.C. Accounts Payable.D. Supplies Expense.

64. Purchasing office supplies on account will:

A. Not change assets.B. Increase assets and decrease liabilities.C. Increase assets and increase liabilities.D. Increase assets and increase stockholders' equity.

65. Providing services and receiving cash will:

A. Increase assets and increase stockholders' equity.B. Increase assets and increase liabilities.C. Decrease assets and increase liabilities.D. Decrease liabilities and increase stockholders' equity.

66. When a company provides services on account, the accounting equation would be affected as follows:

A. Assets increase.B. Revenues increase.C. Assets increase and liabilities decrease.D. Assets increase and stockholders' equity increases.

67. If a company provides services on account, which of the following is true?

A. Expenses increase.B. Liabilities increase.C. Stockholders' equity increases.D. Assets decrease.

68. When a payment is made on an account payable:

A. Assets and stockholders' equity decrease.B. Assets and liabilities decrease.C. Liabilities and revenues decrease.D. Assets and expenses decrease.

69. Purchasing office equipment on account has what impact on the accounting equation? A. Stockholders' equity decreases and assets increase.B. Liabilities increase and assets increase.C. Assets decrease and liabilities decrease.D. Assets increase and stockholders' equity increases.

70. Purchasing supplies for cash has what effect on the accounting equation?

A. Increase assets.B. Decrease stockholders' equity.C. Decrease liabilities.D. No effect.

71. The Unearned Revenue account is shown in which statement?


72. On January 1, Brad Inc. sold $30,000 in products to a customer on account. Then, on January 10, Brad

collected the cash on that account. What is the impact on Brad's accounting equation from the collection of cash on January 10? A. No net effect to the accounting equation.B. Assets increase and liabilities decrease.C. Assets decrease and liabilities decrease.D. Assets increase and stockholders' equity increases.

73. Which of the accounts are decreased on the debit side and increased on the credit side?

A. Liabilities, stockholders' equity, and revenues.B. Dividends, liabilities, and assets.C. Expenses, dividends, and stockholders' equity.D. Assets, dividends, and expenses.

74. Which of the following is/are true about a "debit"?

I. It is part of the double-entry procedure that keeps the accounting equation in balance.II. It represents an increase to assets.III. It represents a decrease to liabilities.IV. It is on the right side of a T-account. A. I and II.B. IV only.C. I, II, and III.D. I, II, III, and IV.

75. Which of the following is/are true about a "credit"? I. It is part of the double-entry procedure that keeps the accounting equation in balance.II. It represents a decrease to assets.III. It represents an increase to liabilities.IV. It is on the right side of a T-account. A. I and II.B. IV only.C. I, II, and III.D. I, II, III, and IV.

76. Dividends normally carry a _______ balance and are shown in the _________.

A. Debit; Statement of stockholders' equityB. Debit; Income statementC. Credit; Balance sheetD. Debit; Balance Sheet

77. Expenses normally carry a _______ balance and are shown in the _________.


78. Liabilities normally carry a _______ balance and are shown in the _________.


79. Which of the following accounts has a debit balance?

A. Accounts Payable.B. Unearned Revenue.C. Service Revenue.D. Salaries Expense.

80. Which of the following accounts would normally have a credit balance?

A. Accounts Payable, Service Revenue, Common Stock.B. Salaries Payable, Unearned Revenue, Delivery Expense.C. Income Tax Payable, Service Revenue, Dividends.D. Cash, Repairs and Maintenance Expense, Dividends.

81. Which of the following accounts would normally have a debit balance?

A. Accounts Payable, Service Revenue, Common Stock.B. Salaries Payable, Unearned Revenue, Utilities Expense.C. Income Tax Payable, Service Revenue, Dividends.D. Cash, Delivery expense, Dividends.

82. Which of the following accounts would normally have a debit balance and appear in the balance sheet? A. Accounts Receivable.B. Unearned Revenue.C. Salaries Expense.D. Dividends.

83. Which of the following accounts has a credit balance?

A. Salaries Expense.B. Income Tax Payable.C. Land.D. Prepaid Rent.

84. The following statements pertain to recording transactions. Which of them are true?

I. Total debits should equal total credits.II. It is possible to have multiple debits or credits in one journal entry.III. Assets are always listed first in journal entries.IV. Some journal entries will have debits only. A. I only.B. I and II.C. I, II, and IV.D. II, III, and IV.

85. Which of the following is not a possible journal entry?

A. Credit assets; Debit expenses.B. Debit assets; Debit stockholders' equity.C. Credit revenues; Debit assets.D. Debit expenses; Credit liabilities.

86. Which of the accounts are increased with a debit and decreased with a credit?

A. Liabilities, stockholders' equity, and revenues.B. Dividends, liabilities, and assets.C. Expenses, dividends, and stockholders' equity.D. Assets, dividends, and expenses.

87. Providing services on account would be recorded with a:

A. Debit to Service Revenue.B. Credit to Accounts Receivable.C. Credit to Accounts Payable.D. Debit to Accounts Receivable.

88. Xenon Corporation borrows $75,000 from First Bank. Xenon Corporation records this transaction with a:

A. Debit to Investments.B. Credit to Retained Earnings.C. Credit to Notes Payable.D. Credit to Interest Expense.

89. Childers Service Company provides services to customers totaling $3,000, for which it billed the customers. How would the transaction be recorded? A. Debit Cash $3,000, credit Service Revenue $3,000.B. Debit Accounts Receivable $3,000, credit Service Revenue $3,000.C. Debit Accounts Receivable $3,000, credit Cash $3,000.D. Debit Service Revenue $3,000, credit Accounts Receivable $3,000.

90. A company received a bill for newspaper advertising services received, $400. The bill will be paid in 10

days. How would the transaction be recorded today? A. Debit Advertising Expense $400, credit Accounts Payable $400.B. Debit Accounts Payable $400, credit Advertising Expense $400.C. Debit Accounts Payable $400, credit Cash $400.D. Debit Advertising Expense $400, credit Cash $400.

91. When a company pays utilities of $1,800 in cash, the transaction is recorded as:

A. Debit Utilities Expense $1,800, credit Utilities Payable $1,800.B. Debit Utilities Payable $1,800, credit Cash $1,800.C. Debit Cash $1,800, credit Utilities Expense $1,800.D. Debit Utilities Expense $1,800, credit Cash $1,800.

92. Assume that cash is paid for rent to cover the next year. The appropriate debit and credit are:

A. Debit Rent Expense, credit Cash.B. Debit Prepaid Rent, credit Rent Expense.C. Debit Prepaid Rent, credit Cash.D. Debit Cash, credit Prepaid Rent.

93. Summer Leasing received $12,000 for 24 months rent in advance. How should Summer record this

transaction? A. Debit Prepaid Rent; credit Rent Expense.B. Debit Cash; credit Unearned Revenue.C. Debit Cash; credit Service Revenue.D. Debit Rent Expense; credit Cash.

94. Styleson Inc. performed cleaning services for its customers for cash. These transactions would be recorded

as: A. Debit Service Revenue, credit Cash.B. Debit Cash, credit Service Revenue.C. Debit Cash, credit Accounts Receivable.D. Debit Accounts Receivable, credit Service Revenue.

95. Assume that $18,000 cash is paid for insurance to cover the next year. The appropriate debit and credit are:

A. Debit Insurance Expense $18,000, credit Prepaid Insurance $18,000.B. Debit Prepaid Insurance $18,000, credit Insurance Expense $18,000.C. Debit Prepaid Insurance $18,000, credit Cash $18,000.D. Debit Cash $18,000, credit Prepaid Insurance $18,000.

96. Schooner Inc. purchased equipment by signing a note payable. This transaction would be recorded as: A. Debit Equipment, credit Cash.B. Debit Cash, credit Notes Payable.C. Debit Notes Payable, credit Equipment.D. Debit Equipment, credit Notes Payable.

97. When a company pays $2,500 dividends to its stockholders, the transaction should be recorded as:

A. Debit Cash; credit Dividends.B. Debit Retained Earnings; credit Dividends.C. Debit Dividends; credit Cash.D. Debit Dividends; credit Accounts Payable.

98. Daniel Dino Restaurant owes workers' salaries of $15,000. This would be recorded as:

A. Debit Salaries Expense, credit Cash.B. Debit Salaries Payable, credit Cash.C. Debit Salaries Expense, credit Salaries Payable.D. Debit Salaries Payable, credit Salaries Expense.

99. Jerome purchased a building for his business by signing a note to pay the amount due over the next ten

years. Which of the following correctly describes how to record this transaction? A. Debit assets, credit liabilities.B. Debit assets, credit stockholders' equity.C. Debit liabilities, credit assets.D. Debit expenses, credit liabilities.

100.Incurring an expense for advertising on account would be recorded by:

A. Debiting liabilities.B. Crediting assets.C. Debiting an expense.D. Debiting assets.

101.Tyler Incorporated receives $150,000 from investors for issuing them shares of its common stock. Tyler

Incorporated records this transaction with a: A. Debit to Investments.B. Credit to Retained Earnings.C. Credit to Common Stock.D. Credit to Service Revenue.

102.The owner of an office building should report rent collected in advance as a debit to Cash and a credit to:

A. A liability.B. An asset other than Cash.C. A revenue.D. An owners' equity.

103.Clement Company paid an account payable related to a previous utility bill of $1,000. This transaction should be recorded as follows on the payment date: A. Debit Accounts Payable $1,000, credit Cash $1,000.B. Debit Cash $1,000, credit Accounts Payable $1,000.C. Debit Utilities Expense $1,000, credit Cash $1,000.D. Debit Cash $1,000, credit Utilities Expense $1,000.

104.On July 7, 2012, Saints Inc. received $10,000 in cash from a customer for services to be provided on

October 10, 2012. Which of the following describes how the transaction should be recorded on July 7, 2012? A. Debit Cash $10,000, credit Service Revenue $10,000.B. Debit Accounts Receivable $10,000, credit Service Revenue $10,000.C. Debit Cash $10,000, credit Unearned Revenue $10,000.D. Debit Unearned Revenue $10,000, credit Cash $10,000.

105.On December 1, 2012, Bears Inc. signed a contract with a retailer to supply maintenance for the next

calendar year. How should this transaction be recorded on December 1, 2012? A. Debit Cash, credit Service Revenue.B. Debit Cash, credit Accounts Receivable.C. Debit Accounts Receivable, credit Service Revenue.D. No transaction should be recorded on December 1, 2012.

106.The Accounts Payable account has a beginning balance of $12,000 and the company purchased $50,000 of

supplies on account during the month. The ending balance was $10,000. How much did the company pay to creditors during the month? A. $50,000.B. $52,000.C. $60,000.D. $62,000.

107.On March 3, Cobra Inc. purchased a desk for $450 on account. On March 22, Cobra purchased another

desk for $500 also on account, and then on March 24, Cobra paid $400 on account. At the end of March, what amount should Cobra report for desks (assuming these two desks were the only desks they had)? A. $50.B. $450.C. $500.D. $950.

108.Below are the steps in the measurement process of external transactions. Arrange them from first (1) to last (6). _______ (a) Post the transaction to the T-accounts in the general ledger. _______ (b) Assess whether the impact of the transaction results in a debit or credit to the account balance. _______ (c) Use source documents to identify accounts affected by external transactions. _______ (d) Analyze the impact of the transaction on the accounting equation. _______ (e) Prepare a trial balance. _______ (f) Record transactions using debits and credits.

109.A company received a utility bill of $600 but did not pay it. Indicate the amount of increases and decreases

in the accounting equation.

110.A company purchases supplies on account for $1,700. Indicate the amount of increases and decreases in the

accounting equation.

111.A company provides services to customers on account for $2,400. Indicate the amount of increases and

decreases in the accounting equation.

112.A company pays $800 dividends to stockholders. Indicate the amount of increases and decreases in the accounting equation.

113.A company pays $1,300 on account for supplies previously purchased on account. Indicate the amount of

increases and decreases in the accounting equation.

114.The following transactions occur for the Hamilton Manufacturers.

(a) Provide services to customers on account for $4,500.(b) Purchase equipment by signing a note with the bank for $10,000.(c) Pay advertising of $1,500 for the current month.Analyze each transaction and indicate the amount of increases and decreases in the accounting equation.

115.Using the notion that the accounting equation (Assets = Liabilities + Stockholders' Equity) must remain in

balance, indicate whether each of the following transactions is possible.(a) Cash decreases; Accounts Payable decreases.(b) Salaries Expense increases; Salaries Payable decreases.(c) Accounts Receivable decreases; Service Revenue increases.

116.Suppose a company has the following balance sheet accounts:

Calculate the missing amounts assuming the company has total assets of $40,000.

117.For each of the following accounts, indicate whether a debit or credit is used to increase (+) or decrease (-)

the balance of the account.

118.For each of the following accounts, indicate whether we use a debit or a credit to increase the balance of the account.(a) Accounts Receivable(b) Accounts Payable(c) Salaries Expense(d) Service Revenue(e) Supplies(f) Common Stock(g) Advertising Expense(h) Dividends

119.For each of the following accounts, indicate whether we use a debit or a credit to decrease the balance of

the account.(a) Accounts Receivable(b) Accounts Payable(c) Salaries Expense(d) Service Revenue(e) Supplies(f) Common Stock(g) Advertising Expense(h) Dividends

120.A company sells common stock for $20,000 cash. Record the transaction.

121.A company purchases a building for $100,000, paying $20,000 cash and signing a note payable for the remainder. Record the transaction.

122.A company purchases machinery for $15,000 cash. Record the transaction.

123.A company purchases office supplies on account for $7,500. Record the transaction.

124.A company provides services to customers on account, $3,500. Record the transaction.

125.A company provides services to customers for $2,400 cash. Record the transaction.

126.A company incurs employee salaries of $4,200 but does not pay them. Record the transaction.

127.A company pays $2,000 dividends to its stockholders. Record the transaction.

128.A company collects $4,000 cash from customers for services previously provided on account. Record the

transaction.

129.A company receives $6,500 cash in advance from customers for services to be provided next year. Record

the transaction.

130.A company pays $5,400 for maintenance in the current period. Record the transaction.

131.A company pays $12,000 to purchase a one-year insurance policy. Record the transaction.

132.Record the following transactions for Acme Builders:

(a) Purchase office supplies on account, $1,200.(b) Provide services to customers for cash, $2,500.(c) Pay $1,100 in salaries for the current month.

133.Record the following transactions for the Stroud Music Store:

(a) Provide music lessons to students for $12,000 on account.(b) Purchase music supplies on account, $1,500.(c) Pay rent for the current month, $2,000.(d) Receive $10,000 cash from students in (a) above.

134.Rite Shoes was involved in the transactions described below. Record each transaction. If an entry is not

required, state "No Entry."(a) Purchased $8,200 of supplies on account.(b) Paid weekly salaries, $920.(c) Provide services to customers: Cash: $7,100; On account: $5,300. (d) Paid for supplies purchased in (a) above.(e) Placed an order for $6,200 of supplies.

135.Record the following transactions. If an entry is not required, state "No Entry."(a) Started business by issuing 10,000 shares of common stock for $20,000.(b) Hired Rebecca as an administrative assistant, promising to pay her $2,000 every two week.(c) Rented a building for three years at $500 per month and paid six months' rent in advance.(d) Purchased equipment for $5,400 cash.(e) Purchased $1,800 of supplies on account.(f) Provided services to customers for $7,800 cash.(g) Paid employee salaries, $5,200.(h) Paid for supplies purchased in item (e).(i) Paid $800 for current advertising in a local newspaper.(j) Paid utility bill of $1,300 for the current month.

136.Consider the following T-account for Accounts Payable.

1. Compute the balance of the Accounts Payable account.2. Give an example of a transaction that would have resulted in the $8,800 posting to the account.3. Give an example of a transaction that would have resulted in the $4,500 posting to the account.

137.Consider the following transactions for Mittel Corporation:a. Sell common stock for $10,000.b. Purchase equipment for $11,500 cash.c. Pay employee salaries of $3,700. e. Provides services to customers for $6,200 cash.1. Post these transactions to the Cash T-account. Assume the balance of Cash before these transactions is $4,200.2. Calculate the ending balance of the Cash account.

138.Use the following information to prepare a trial balance.

The following answers point out the key phrases that should appear in students' answers. They are not intended to be examples of complete student responses. It might be helpful to provide detailed instructions to students on how brief or in-depth you want their answers to be. 139.Describe the difference between external events and internal events and give two examples of each.

140.Describe the six steps in the measurement process of external transactions.

141.Explain what it means that external transactions have a dual effect.

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the best term by placing the letter designating the term in the space provided.a. Assetsb. Debitc. Journal entryd. Liabilitiese. Revenuesf. Expensesg. Credith. General ledgeri. Trial balancej. Dividends 142.____ Refers to the right side of an account.

Answer: g

143.____ Convention used to record transactions of a company.

Answer: c

144.____ Resources earned by providing goods and services to customers.

Answer: e

145.____ Resources owned by a company.

Answer: a

146.____ List of all accounts and their balances after external transactions are recorded.

Answer: i

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the best term by placing the letter designating the term in the space.a. Assetsb. Debitc. Journal entryd. Liabilitiese. Revenuesf. Expensesg. Credith. General ledgeri. Trial balancej. Dividends 147.____ Asset and expense accounts normally have this type of balance.

Answer: b

148.____ Contains all the accounts of a company.

Answer: h

149.____ Costs to generate revenues.

Answer: f

150.____ Resources owed by a company.

Answer: d

151.____ Payments to stockholders.

Answer: j

152.Posting is the process of:

A. Analyzing the impact of the transaction on the accounting equation.B. Obtaining information about external transactions from source documents.C. Transferring the debit and credit information from the journal to individual accounts in the general

ledger.D. Listing all accounts and their balances at a particular date.

153.A trial balance can best be explained as a list of:

A. The income statement accounts used to calculate net income.B. Revenue, expense, and dividend accounts used to show the balances of the components of retained

earnings.C. The balance sheet accounts used to show the equality of the accounting equation.D. All accounts and their balances at a particular date.

154.Consider the following transactions:Issued common stock for cash.Purchased equipment by signing a note payable.Provided services to customers on account.Collected cash from customers on account.How many of these four transactions increased the given company's total liabilities? A. One.B. Two.C. Three.D. Four.

155.Lithuanian Motors has the following balance sheet accounts:

Land $170,000Equipment 66,000Salaries Payable?Notes Payable 88,000Supplies 14,000Cash 26,000Common Stock 100,000Retained Earnings 40,000Accounts Payable?Prepaid Rent 12,000If the company has total assets of $288,000, what is the balance of the company's Salaries Payable account? A. $15,000.B. $25,000.C. $12,000.D. Cannot be determined given the information provided.

156.Finnish Motors has the following balance sheet accounts:"

Land $150,000Equipment 90,000Salaries Payable 12,000Notes Payable 99,000Supplies 10,000Cash 25,000Common Stock 40,000Retained Earnings 100,000Accounts Payable?Prepaid Rent?If the company has total liabilities and stockholders' equity of $290,000, what is the balance of the company's Prepaid Rent account? A. $15,000.B. $25,000.C. $12,000.D. $39,000.

157.Consider the following transactions:Issued common stock for cash.Purchased equipment by signing a note payable.Paid rent for the current month.Collected cash from customers on account.How many of these four transactions increased the given company's total assets? A. One.B. Two.C. Three.D. Four.

158.Assume that Sallisaw Sideboards, Inc. had a retained earnings balance of $10,000 on April 1, and that the

company had the following transactions during April.Issued common stock for cash, $5,000.Provided services to customers on account, $2,000.Provided services to customers in exchange for cash, $900.Purchased equipment and paid cash, $4,300.Paid April rent, $800.Paid workers salaries for April, $700.What was Sallisaw's retained earnings balance at the end of April? A. $11,400.B. $12,100.C. $16,400.D. Some other amount.

159.Consider the following list of accounts:

Cash Retained EarningsService Revenue Utilities ExpenseSalaries Expense Accounts ReceivableAccounts Payable Common StockEquipment DividendsHow many of these accounts have a normal debit balance? A. Four.B. Five.C. Six.D. Seven.

160.Consider the following list of accounts:Accounts PayableCashPrepaid RentCommon StockSalaries PayableEquipmentSuppliesRent ExpenseHow many of these accounts have a normal credit balance? A. Two.B. Three.C. Four.D. Five.

161.Consider the following accounts:

Utilities ExpenseAccounts PayableService RevenueCommon StockHow many of these accounts are increased with debits? A. One.B. Two.C. Three.D. Four.

162.Consider the following accounts:

DividendsInsurance ExpenseCashService RevenueHow many of these accounts are increased with credits? A. One.B. Two.C. Three.D. Four.

163.Following are transactions of Gotebo Tanners, Inc., a new company, during the month of January 2012:

1. Issued 10,000 shares of common stock for $15,000 cash.2. Purchased land for $12,000, signing a note payable for the full amount.3. Purchased office equipment for $1,200 cash.4. Received cash of $14,000 for services provided to customers during the month.5. Purchased $300 of office supplies on account.6. Paid employees $10,000 for their first month's salaries.What was the balance of Gotebo's Cash account following these six transactions? A. $29,800.B. $19,300.C. $17,800.D. $22,400.

164.Following are transactions of Gotebo Tanners, Inc., a new company, during the month of January 2012:1. Issued 10,000 shares of common stock for $15,000 cash.2. Purchased land for $12,000, signing a note payable for the full amount.3. Purchased office equipment for $1,200 cash.4. Received cash of $14,000 for services provided to customers during the month.5. Purchased $300 of office supplies on account.6. Paid employees $10,000 for their first month's salaries.What was the total amount of Gotebo's liabilities following these six transactions? A. $12,300.B. $27,300.C. $22,600.D. $15,500.


1. Issued 10,000 shares of common stock for $15,000 cash.2. Purchased land for $12,000, signing a note payable for the full amount.3. Purchased office equipment for $1,200 cash.4. Received cash of $14,000 for services provided to customers during the month.5. Purchased $300 of office supplies on account.6. Paid employees $10,000 for their first month's salaries.How many of these transactions decreased Gotebo's total assets? A. One.B. Two.C. Three.D. Four.


1. Issued 10,000 shares of common stock for $15,000 cash.2. Purchased land for $12,000, signing a note payable for the full amount.3. Purchased office equipment for $1,200 cash.4. Received cash of $14,000 for services provided to customers during the month.5. Purchased $300 of office supplies on account.6. Paid employees $10,000 for their first month's salaries.How many of these transactions increased Gotebo's liabilities? A. Four.B. Three.C. Two.D. One.

167.Which of the following transactions causes a decrease in stockholders' equity?

A. Pay dividends to stockholders.B. Obtain cash by borrowing from a local bank.C. Provide services to customers on account.D. Purchase office equipment for cash.

168.Accounts Receivable account has a beginning balance of $10,000 and the company provides services of $50,000 on account during the month. The ending balance was $12,000. How much did the company receive from customers during the month? A. $50,000.B. $52,000.C. $48,000.D. $62,000.

169.Posting transactions to the T-accounts involve:

A. Analyzing source documents to determine the effects of transactions on the company's accounts.B. Listing all accounts and their balances at a particular date to ensure that debits equal credits.C. Preparing a chronological record of all transactions affecting the company.D. Transferring debit and credit information from the journal to the accounts in the general ledger.

170.A trial balance represents the:

A. Source documents used to determine the effects of transactions on the company's accounts.B. List of all accounts and their balances at a particular date to ensure that debits equal credits.C. Chronological record of all transactions affecting the company.D. Process of transferring debit and credit information from the journal to the accounts in the general

ledger. 171.How many of the following events would require an expense to be recorded?

Ordering office suppliesHiring a receptionistPaying employee salaries for the current monthReceiving but not paying a current utility billPaying for insurance in advance A. One.B. Two.C. Three.D. Four.

172.On July 31, ALOE Inc. received $5,000 cash from a customer who previously purchased ALOE's products

on account. What should ALOE Inc. record at the time it receives cash? A. Debit Accounts Receivable, $5,000; credit Cash, $5,000.B. Debit Cash, $5,000; credit Accounts Receivable, $5,000.C. Debit Cash, $5,000; credit Accounts Payable, $5,000.D. Debit Cash, $5,000; credit Service Revenue, $5,000.

173.Which one of the following accounts will have a credit balance?

A. DividendsB. Salary ExpenseC. SuppliesD. Common Stock

174.On September 30, MFP Co. paid employee salaries $7,000, including $1,000 it owed to its employees last month. What are the effects of this transaction on the accounting equation?


175.Which of the following is NOT possible for a business transaction?

A. Increase assets and decrease revenue.B. Decrease assets and increase expense.C. Increase liabilities and increase expense.D. Decrease liabilities and increase revenue.

176.Which of the following transactions would cause a decrease in both assets and stockholders' equity?

A. Paying insurance premium for the next two years.B. Purchasing office equipment on account.C. Paying advertising for the current month.D. Providing installation services to customers.

177.When a company issues common stock for cash, what is the effect on the accounting equation for the

company? A. Assets increase and liabilities increase.B. Assets increase and stockholders' equity increases.C. Assets decrease and liabilities decrease.D. Liabilities decrease and stockholders' equity increases.

178.Tomlin & Company provides music for special occasions. On January 14, the Smith family hired Tomlin

for an upcoming family wedding for an agreed upon fee of $10,000. The wedding was scheduled for May 23. As part of the agreement, the Smiths paid Tomlin half of the fee at the end of April with the remaining amount due by the end of June. How would Tomlin record the receipt of the final payment in June? A. Credit to Accounts Receivable.B. Credit to Service Revenue.C. Credit to Cash.D. Debit to Unearned Revenue.

179.Bostel wanted to expand the size of its warehouse in order to generate more profits. The company decided

to purchase the building adjacent to its existing warehouse. The company pays for the building by borrowing from the bank. The purchase would be recorded as: A. Debit Cash; credit Notes Payable.B. Debit Buildings; credit Cash.C. Debit Buildings; Credit Notes Payable.D. Debit Cash and Buildings; Credit Notes Payable.

180.On July 5, Harris Company purchased supplies from the hardware store for $600 on account. On July 10, Harris receives a bill from the hardware store as a reminder about the account balance. On July 17, Harris pays the account in full. How does Harris record the transaction on July 17? A. Supplies 600

Accounts Payable 600B. Accounts Payable

600Supplies 600

C. Cash 600Accounts Payable 600

D. Accounts Payable 600Cash 600

181.Which of the following is possible for a particular business transaction?

A. Increase assets; Decrease liabilitiesB. Decrease assets; Increase assetsC. Decrease assets; Increase stockholders' equityD. Decrease liabilities; Increase expenses

182.Providing services to customers on account would affect the balances reported in which financial

statement(s)? A. Income statementB. Statement of stockholders' equityC. Balance sheetD. All of the financial statements would be affected

183.Which step in the process of measuring external transactions involves assessing the equality of total debits

and total credits? A. Use source documents to determine accounts affected by the transaction.B. Prepare a trial balance.C. Analyze the impact of the transaction on the accounting equation.D. Post the transaction to the T-account in the general ledger.

184.If the liabilities of a company increased by $55,000 during a month and the stockholders' equity decreased

by $21,000 during that same month, did assets increase or decrease and by how much? A. $34,000 increaseB. $55,000 increaseC. $34,000 decreaseD. $76,000 increase

Ch2 Key

1. TRUE 2. TRUE 3. FALSE 4. TRUE 5. TRUE 6. FALSE 7. TRUE 8. FALSE 9. TRUE 10. FALSE 11. TRUE 12. FALSE 13. TRUE 14. TRUE 15. FALSE 16. TRUE 17. FALSE 18. TRUE 19. FALSE 20. TRUE 21. TRUE 22. FALSE 23. TRUE 24. FALSE 25. TRUE 26. TRUE 27. FALSE 28. TRUE 29. FALSE 30. FALSE 31. FALSE 32. TRUE

33. TRUE 34. TRUE 35. FALSE 36. TRUE 37. FALSE 38. TRUE 39. FALSE 40. TRUE 41. FALSE 42. TRUE 43. FALSE 44. FALSE 45. C 46. C 47. A 48. B 49. A 50. A 51. B 52. C 53. C 54. D 55. A 56. C 57. B 58. D 59. B 60. C 61. D 62. A 63. C 64. C 65. A 66. D 67. C

68. B 69. B 70. D 71. C 72. A 73. A 74. C 75. D 76. A 77. B 78. C 79. D 80. A 81. D 82. A 83. B 84. B 85. B 86. D 87. D 88. C 89. B 90. A 91. D 92. C 93. B 94. B 95. C 96. D 97. C 98. C 99. A 100. C 101. C 102. A

103. A 104. C 105. D 106. B 107. D 108. (a) 5; (b) 3; (c) 1; (d) 2; (e) 6; (f) 4

109.

110.

111.

112.

113.

114. 115. (a) Yes; (b) No; (c) No 116. Building = $18,000; Common stock = $22,100. 117. (a) -,+; (b) -,+; (c) +,-; (d) -,+; (e) +,-; (f) -,+; (g) +,- 118. (a) debit; (b) credit; (c) debit; (d) credit; (e) debit; (f) credit; (g) debit; (h) debit 119. (a) credit; (b) debit; (c) credit; (d) debit; (e) credit; (f) debit; (g) credit; (h) credit

120.

121. 122. Equipment 15,000Cash 15,000 123. Office Supplies 7,500Accounts Payable 7,500

124.

125.

126.

127.

128.

129. 130. Repairs and Maintenance Expense 5,400Cash 5,400

131. 132. (a) Supplies 1,200Accounts Payable 1,200(b) Cash 2,500Service Revenue 2,500(c) Salaries Expense 1,100Cash 1,100 133. (a) Accounts Receivable 12,000Service Revenue 12,000(b) Supplies 1,500Accounts Payable 1,500(c) Rent Expense 2,000Cash 2,000(d) Cash 10,000Accounts Receivable 10,000

134.

135. 136. 1. $10,200 -$8,800 + $4,500 = $5,900.2. Postings on the left side (or debit side) of the Accounts Payable T-account represent decreases to accounts payable, such as making a payment on the account.3. Postings on the right side (or credit side) of the Accounts Payable T-account represent increases to accounts payable, such as purchasing office supplies on account.

137.

138. 139. External events involve an exchange between the company and a separate economic entity. Examples include purchasing office supplies on account or borrowing money from a bank. Internal events directly affect the financial position of the company but do not involve exchange transactions with another entity. Examples include depreciation of equipment or use of supplies. 140. The six steps include: (1) Use source documents to identify accounts affected by external transactions, (2) analyze the impact of the transaction on the accounting equation, (3) assess whether the impact of the transaction results in a debit or credit to the account balance, (4) record transactions using debits and credits, (5) post the transaction to the T-accounts in the general ledger, and (6) prepare a trial balance. 141. Dual effect refers to each transaction having at least two effects on the accounting equation. Either an economic event increases (decreases) one side of the equation and also increases (decreases) the other side of the equation by the same amount, or the economic event increases one element and decreases another element by an equal amount, both on the same side of the accounting equation. 142. 143.

144. 145. 146. 147. 148. 149. 150. 151. 152. C 153. D 154. A 155. D 156. A 157. B 158. A 159. C 160. B 161. A 162. A 163. C 164. A 165. A 166. C 167. A 168. C 169. D 170. B 171. B 172. B 173. D 174. B 175. A 176. C 177. B 178. A

179. C 180. D 181. B 182. D 183. B 184. A

Ch2 Summary


AACSB: Analytic 16




AICPA: Reporting 47

Blooms: Analysis 13




Difficulty: Easy 55

Difficulty: Hard 23


Learning Objective: 02-01 Identify the basic steps in measuring external transactions. 9

Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. 81

Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance.

38

Learning Objective: 02-04 Record transactions using debits and credits. 54

Learning Objective: 02-05 Post transactions to T-accounts in the general ledger. 14

Learning Objective: 02-06 Prepare a trial balance. 13


Ch3Student: ___________________________________________________________________________

1. Accrual-basis accounting involves recording revenues when earned and recording expenses with their related revenues. True False

2. The revenue recognition principle states that we record revenue in the period in which we collect cash.

True False

3. According to the revenue recognition principle, if a company provides services to a customer in the current

year but does not collect cash until the following year, the company should report the revenue in the current year. True False

4. Jones Corporation provides services to a customer on June 17, but the customer does not pay for the

services until August 12. According to the revenue recognition principle, Jones Corporation should record the revenue on August 12. True False

5. The matching principle states that we recognize expenses in the same period as the revenues they help to

generate. True False

6. According to the matching principle, if costs associated with producing revenue in the current year are not

paid in cash until the following year, the costs should be expensed in the current year. True False

7. Under cash-basis accounting, we record revenues at the time we receive cash and expenses at the time we

pay cash. True False

8. Under cash-basis accounting, the timing of cash inflows and outflows exactly matches the reporting of

revenues and expenses in the income statement. True False

9. Under cash-basis accounting, if a company provides services to a customer in the current year but does not

collect cash until the following year, the company should report the revenue in the current year. True False

10. Under cash-basis accounting, if costs associated with producing revenue in the current year are not paid in cash until the following year, the costs should be expensed in the following year. True False

11. Because cash-basis accounting violates both the revenue recognition principle and the matching principle,

it is generally not accepted in preparing financial statements. True False

12. Adjusting entries involve recording events that have occurred but that have not yet been recorded by the

end of the period. True False

13. Adjusting entries should be prepared after financial statements are prepared.

True False

14. Because adjusting entries allow the proper application of the revenue recognition principle or the matching

principle, they are a necessary part of cash-basis accounting. True False

15. Prepaid expenses involve payment of cash (or an obligation to pay cash) for the purchase of an asset before

the expense is incurred. True False

16. Unearned revenues occur when cash is received after the revenue is earned.

True False

17. Accrued expenses involve the payment of cash before recording an expense and a liability.

True False

18. Accrued revenues involve the receipt of cash after the revenue has been earned and an asset has been

recorded. True False

19. The adjusting entry for a prepaid expense always includes a debit to an expense account and a credit to a

liability account. True False

20. The adjusting entry for a prepaid expense has the effect of reducing total assets and reducing net income.

True False

21. The Supplies account is an example of an accrued expense.

True False

22. Suppose Simeon Company begins the year with $1,000 in supplies, purchases an additional $5,500 of supplies during the year, and ends the year with $700 in supplies. The year-end adjusting entry includes Supplies Expense of $7,200. True False

23. The adjusting entry for an unearned revenue always includes a debit to an asset account and a credit to a

revenue account. True False

24. The adjusting entry for an unearned revenue has the effects of reducing liabilities and increasing net

income. True False

25. On November 1, 2012, a company receives $1,800 for services to be provided evenly over the next six

months. The December 31, 2012, adjusting entry for the company would include a credit to Unearned Revenue for $600. True False

26. The adjusting entry for an accrued expense always includes a debit to an expense account and a credit to a

liability account. True False

27. The adjusting entry for an accrued expense has the effects of decreasing net income and decreasing


28. On December 31, 2012, employees who earn $500 per day have worked eight days and will be paid on

January 6, 2013. The adjusting entry on December 31, 2012, includes a debit to Salaries Expense for $4,000. True False

29. At December 31, 2012, a company has received, but not paid, a utility bill for $250. The amount of utility

expense for the current period equals $250. True False

30. The adjusting entry for an accrued revenue always includes a debit to a liability account and a credit to a

revenue account. True False

31. The adjusting entry for an accrued revenue has the effects of increasing assets and increasing net income.

True False

32. Adjusting entries are unnecessary for transactions that do not involve revenue or expense activities, such as selling common stock or paying dividends. True False

33. Adjusting entries are not necessary when cash is received at the same time revenues are earned.

True False

34. Adjusting entries are not necessary when cash is paid at the same time expenses are incurred.

True False

35. A post-closing trial balance is a list of all accounts and their balances after we have updated account

balances for adjusting entries. True False

36. Once the adjusted trial balance is complete, financial statements are prepared.

True False

37. A classified balance sheet separates assets into current and long-term, and separates liabilities into current

and long-term. True False

38. Current assets are assets that provide a benefit to a company over more than one year.

True False

39. Long-term assets are assets that provide a benefit to a company for more than one year.

True False

40. Current liabilities are liabilities due within one year.

True False

41. Long-term liabilities are liabilities due in more than one year.

True False

42. Long-term asset categories include investments; property, plant, and equipment; and intangible assets.

True False

43. The components of retained earnings include assets, expenses, and dividends.

True False

44. Closing entries transfer the balances of all temporary accounts (revenues, expenses, and dividends) to the

balance of the Common Stock account. True False

45. The closing entry for revenue accounts includes a debit to Retained Earnings and a credit to all revenue accounts. True False

46. The closing entry for expense accounts includes a debit to Retained Earnings and a credit to all expense

accounts. True False

47. The closing entry for dividends includes a debit to the Dividends account and a credit to Retained Earnings.

True False

48. If the beginning balance of Retained Earnings equals $10,000, net income for the year equals $6,000, and

dividends for the year equal $2,000, then the ending balance of Retained Earnings equals $18,000. True False

49. If the beginning balance of Retained Earnings equals $12,000, the ending balance of Retained Earnings

equals $15,000, and dividends for the year equal $1,000, then net income for the year equals $4,000. True False

50. After closing entries are prepared, all asset and liability accounts have a balance of zero.

True False

51. After closing entries are prepared, the balance of Retained Earnings is updated to reflect the activity in the

revenue, expense, and dividend accounts for the period. True False

52. The post-closing trial balance is a list of all accounts and their balances at a particular date after the account

balances have been updated for closing entries. True False

53. The post-closing trial balance does not include any assets or liabilities, because these accounts all have zero

balances after closing entries. True False

54. The revenue recognition principle states that:

A. Revenue should be recognized in the period the cash is received.B. Revenue should be recognized in the period earned.C. Revenue should be recognized in the balance sheet.D. Revenue is a component of common stock.

55. The matching principle is the principle that states: A. All costs that are used to generate revenue are recorded in the period the revenue is recognized.B. All transactions are recorded at the exchange price.C. The business is separate from its owners.D. The business will continue to operate indefinitely unless there is evidence to the contrary.

56. Which of the following accounting principles states that expenses are recognized in the same period as the

revenues they help to generate? A. Accounting equation.B. Revenue recognition.C. Matching principle.D. Conservatism.

57. The primary difference between accrual-basis and cash-basis accounting is:

A. The timing of when revenues and expenses are recorded.B. Cash-basis accounting is allowed for financial reporting purposes but not accrual-basis accounting.C. Accrual-basis accounting violates both the revenue recognition and matching principles.D. Adjusting entries are only a necessary part of cash-basis accounting.

58. When the amount of interest receivable decreases during an accounting period:

A. Accrual-basis revenues exceed cash collections from borrowers.B. Accrual-basis net income exceeds cash-basis net income.C. Accrual-basis revenues are less than cash collections from borrowers.D. Accrual-basis expenses are less than cash payments to borrowers.

59. When the balance of the Unearned Revenue account decreases during an accounting period:

A. Accrual-basis revenues exceed cash collections from customers.B. Accrual-basis expenses exceed cash collections from customers.C. Accrual-basis revenues are less than cash collections from customers.D. Accrual-basis net income is less than cash-basis net income.

60. Which transaction would not be recorded under cash-basis accounting?

A. Providing services to customers for cash.B. Purchasing one year of rent in advance.C. Paying salaries to employees.D. Purchasing supplies on account.

61. Which of the following statements are correct?For accrual-basis accounting:(1) record revenues when earned(2) record expenses when cash is paidFor cash-basis accounting:(3) record revenue when cash is received(4) record expenses when benefit is received A. (1) and (4)B. (2) and (3)C. (1) and (3)D. (2) and (4)

62. On July 1, 2012, Rents-A-Lot Inc. paid $72,000 for 36 months of advance rent on its warehouse. What

would be the amount of rent expense in the 2013 financial statements for Rents-A-Lot under both cash-basis and accrual-basis accounting? A. Cash-basis = $24,000; Accrual-basis = $24,000.B. Cash-basis = $72,000; Accrual-basis = $12,000.C. Cash-basis = $0; Accrual-basis = $24,000.D. Cash-basis = $0; Accrual-basis = $12,000.

63. The following information pertains to Sooner Company:

Assuming that Sooner Company uses cash-basis accounting, when would the company record the expense related to the supplies? A. May 2.B. May 8.C. May 15.D. May 20.

64. The following information pertains to Sooner Company:

Assuming that Sooner Company uses accrual-basis accounting, when would the company record the expense related to the supplies? A. May 2.B. May 8.C. May 15.D. May 20.

65. Consider the following events for Betterment Incorporated:

Under accrual-basis accounting, what is the appropriate day to record the revenues related to lawn services? A. January 1.B. January 7.C. January 9.D. January 12.


Under accrual-basis accounting, what is the appropriate day to record the expenses related to the gasoline? A. January 1.B. January 7.C. January 12.D. January 13.


Under cash-basis accounting, what is the appropriate day to record the expenses related to the gasoline? A. January 1.B. January 9.C. January 12.D. January 13.

68. Consider the following events for Sophia Incorporated:

Under accrual-basis accounting, what is the appropriate day to record the revenues from the sand volleyball camp? A. April 5.B. April 6.C. April 12.D. April 21.


Under accrual-basis accounting, what is the appropriate day to record the expenses related to the sand volleyball camp? A. April 5.B. April 12.C. April 21.D. April 23.


Under cash-basis accounting, what is the appropriate day to record the expenses related to the sand volleyball camp? A. April 5.B. April 12.C. April 21.D. April 23.


Under cash-basis accounting, what is the appropriate day to record the revenues related to the sand volleyball camp? A. April 5.B. April 12.C. April 21.D. April 23.

72. Which of the following is a possible adjusting journal entry?

A. Debit Cash, credit Accounts Payable.B. Debit Service Revenue, credit Cash.C. Debit Salaries Expense, credit Salaries Payable.D. Debit Utilities Expense, credit Retained Earnings.

73. Adjusting entries are primarily needed for:

A. Cash-basis accounting.B. Accrual-basis accounting.C. Current value accounting.D. Manual accounting systems.

74. Which of the following is true about adjusting entries? A. Entries are necessary due to the conservatism principle.B. Entries can be done at the beginning or end of the accounting period.C. They zero the balance of all income statement accounts.D. They are a necessary part of accrual-basis accounting.

75. Making insurance payments in advance is an example of:

A. An accrued revenue.B. An accrued expense.C. An unearned revenue.D. A prepaid expense.

76. When a magazine sells subscriptions to customers, it is an example of:

A. An accrued expense.B. An accrued revenue.C. A prepaid expense.D. An unearned revenue.

77. When a company makes an end-of-period adjusting entry which includes a credit to Prepaid Rent, the debit

is usually made to: A. Cash.B. Rent Expense.C. Rent Payable.D. Rent Receivable.

78. When a company makes an end-of-period adjusting entry which includes a debit to Supplies Expense, the

usual credit entry is made to: A. Accounts Payable.B. Supplies.C. Cash.D. Retained Earnings.

79. Prepayments occur when:

A. Cash payment (or an obligation to pay cash) occurs before the expense recognition.B. Sales are delayed pending credit approval.C. Customers are unable to pay the full amount due when goods are delivered.D. Cash payment occurs after the expense is incurred and liability is recorded.

80. An example of an adjusting entry would not include:

A. Recording the use of office supplies.B. Recording the expiration of prepaid insurance.C. Recording unpaid salaries.D. Paying salaries to company employees.

81. Which of the following would not typically be used as an adjusting entry?


82. The adjusting entry required when amounts previously recorded as unearned revenues are earned includes:

A. A debit to a liability.B. A debit to an asset.C. A credit to a liability.D. A credit to an asset.

83. Adjusting entries:

A. Often include the Cash account.B. Usually are recorded at the beginning of the accounting period.C. Always involve at least one income statement account and one balance sheet account.D. Adjust the balance of revenue and expense accounts to zero.

84. The adjusting entry required to record accrued expenses includes:

A. A credit to Cash.B. A debit to an asset.C. A credit to an asset.D. A credit to liability.

85. Yummy Foods purchased a one-year hazard insurance policy on August 1 and recorded the $4,200

premium to prepaid insurance. At its December 31 year-end, Yummy Foods would record which of the following adjusting entries?


86. The employees of Neat Clothes work Monday through Friday. Every other Friday the company issues payroll checks totaling $32,000. The current pay period ends on Friday, January 3. Neat Clothes is now preparing financial statements for the year ended December 31. What is the adjusting entry to record accrued salaries at the end of the year?


87. On April 1, a $4,800 premium on a one-year insurance policy on equipment was paid and charged to

Prepaid Insurance. At the end of the year, the financial statements would report: A. Insurance Expense, $4,800; Prepaid Insurance $0.B. Insurance Expense, $3,600; Prepaid Insurance $1,200.C. Insurance Expense, $3,650; Prepaid Insurance $4,800.D. Insurance Expense, $1,200; Prepaid Insurance $3,600.

88. On September 1, 2012, Gold Magazine sold 400 one-year subscriptions for $90 each. The total amount

received was credited to Unearned Revenue. What would be the required adjusting entry at December 31, 2012?


89. During the year, Cheng Company paid salaries of $24,000. In addition, $8,000 in salaries has accrued by

the end of the year but has not been paid. The year-end adjusting entry would include which one of the following? A. Debit to Salaries Expense for $32,000.B. Credit to Salaries Expense of $8,000.C. Debit to Salaries Payable for $24,000.D. Credit to Salaries Payable for $8,000.

90. At the beginning of December, Global Corporation had $2,000 in supplies on hand. During the month, supplies purchased amounted to $3,000, but by the end of the month the supplies balance was only $800. What is the appropriate month-end adjusting entry? A. Debit Cash $4,200, credit Supplies $4,200.B. Debit Supplies $4,200, credit Supplies Expense $4,200.C. Debit Supplies Expense $4,200, credit Supplies $4,200.D. Debit Cash $800, credit Supplies $800.

91. Eve's Apples opened for business on January 1, 2012, and paid for two insurance policies effective that

date. The liability policy was $36,000 for eighteen-months, and the crop damage policy was $12,000 for a two-year term. What was the balance in Eve's Prepaid Insurance account as of December 31, 2012? A. $9,000.B. $18,000.C. $30,000.D. $48,000.

92. A list of all accounts and their balances after updating account balances for adjusting entries is referred to

as: A. A trial balance.B. An adjusted trial balance.C. A post-closing trial balance.D. An accounting trial balance.

93. An adjusted trial balance:

A. Is a list of all accounts and their balances after adjusting entries.B. Is a list of all accounts and their balances before adjusting entries.C. Is a list of all accounts and their balances after closing entries.D. Is a trial balance adjusted for cash-basis accounting.

94. Resources owned by the company that will provide a benefit for more than one year are called:

A. Current assets.B. Current liabilities.C. Long-term assets.D. Revenues.

95. The following financial information is from Shovels Construction Company for 2012:

What is the amount of current assets, assuming the accounts above reflect normal activity? A. $20,000.B. $60,000.C. $140,000.D. $175,000.

96. Consider the following items:

LandAccounts ReceivableNotes Payable (due in three years)Accounts PayableRetained EarningsPrepaid RentUnearned RevenueBuildingsNotes Payable (due in six months)EquipmentHow many of the items listed above are generally long-term assets? A. 2B. 3C. 4D. 5

97. The following financial information is from Bronco Company. All debt is due within one year unless stated

otherwise.

What is the amount of current liabilities? A. $63,000.B. $28,000.C. $45,600.D. $22,000.

98. The following table contains financial information for Trumpeter Inc. before closing entries:

What is Trumpeter's net income? A. $3,500.B. $2,500.C. $5,000.D. $5,500.

99. The following table contains financial information for Trumpeter Inc. before closing entries:

What is the amount of Trumpeter's total assets? A. $81,500B. $82,500C. $68,500D. $83,500

100.The closing entry for expenses includes:

A. A debit to Dividends and a credit to all expense accounts.B. A debit to Retained Earnings and a credit to all expense accounts.C. A debit to Revenues and a credit to Retained Earnings.D. A debit to Revenues and a credit to all expense accounts.

101.The primary purpose of closing entries is to:

A. Prove the equality of the debit and credit entries in the general journal.B. Ensure that all assets and liabilities are recognized in the appropriate period.C. Update the balance of Retained Earnings and prepare revenue, expense, and dividend accounts for next

period's transactions.D. Assure that adjusting entries balance.

102.The following table contains financial information for Fisher Inc. for 2012 before closing entries:

How many of the above accounts are permanent? A. 3B. 4C. 5D. 6

103.Permanent accounts would not include:

A. Interest Expense.B. Salaries Payable.C. Prepaid Rent.D. Unearned Revenues.

104.The purpose of closing entries is to transfer:

A. Accounts Receivable to Retained Earnings when an account is fully paid.B. Balances in temporary accounts to a permanent account.C. Inventory to Cost of Goods Sold when merchandise is sold.D. Assets and liabilities when operations are discontinued.

105.Which of the following is a possible closing entry?

A. Debit Cash, credit Service Revenue.B. Debit Cash, credit Retained Earnings.C. Debit Service Revenue, credit Retained Earnings.D. Debit Dividends, credit Retained Earnings.

106.Permanent accounts would not include:

A. Accounts Payable.B. Office Supplies.C. Utilities Expense.D. Common Stock.

107.Temporary accounts would not include:

A. Salaries Payable.B. Advertising Expense.C. Supplies Expense.D. Dividends.

108.Of the following six accounts, which ones have temporary balances?(1) Service Revenue(2) Dividends(3) Salaries Expense(4) Common Stock(5) Retained Earnings(6) Cash A. (1), (2), and (3)B. (4), (5), and (6)C. (2), (4), and (5)D. (1), (3), and (5)

109.The ending Retained Earnings balance of Juan's Mexican Restaurant chain increased by $3.2 million from

the beginning of the year. The company declared a dividend of $1.3 million during the year. What was the net income earned during the year? A. $1.9 millionB. $3.2 millionC. $4.5 millionD. $1.3 million

110.The Retained Earnings account had a beginning credit balance of $26,000. During the period, the business

had a net loss $12,000, and the company paid dividends of $8,000. The ending balance in the Retained Earnings account is: A. $6,000B. $30,000C. $22,000D. $14,000

111.The closing process includes which of the following?

A. Closing the balance of the retained earnings account to zero.B. Closing the balance of only the dividends account to zero.C. Closing the balances of only revenue and expense accounts to zero.D. Closing the balances of revenue, expense and dividend accounts to zero.

112.Frosty Inc. has the following balances on December 31 prior to closing entries:

Based upon the balances above, what net adjustment would be made to Retained Earnings due to closing entries? A. Increase of $11,000.B. Increase of $13,000.C. Increase of $12,000.D. Increase of $14,000.

113.A list of all accounts and their balances after posting closing entries is referred to as: A. A trial balance.B. An adjusted trial balance.C. A post-closing trial balance.D. An accounting trial balance.

114.A post-closing trial balance:

A. Is a list of all accounts and their balances after adjusting entries.B. Is a list of all accounts and their balances before adjusting entries.C. Is a list of all accounts and their balances after closing entries.D. Is a trial balance adjusted for cash-basis accounting.

115.For each transaction below, calculate the amount of revenue to be recognized in the current period using

accrual-basis accounting:(a) Performed $24,000 of services during the month and received full cash payment from customers at the time of service.(b) Performed $9,000 of services during the month and billed customers. Customers are expected to pay next month.(c) Received $12,000 cash from customers for services to be provided next month.

116.For each transaction below, calculate the amount of expense to be recognized in the current period using

accrual-basis accounting(a) Paid $3,500 on account for supplies purchased last period. All supplies were used last month.(b) Paid $5,000 cash for advertising in the current period.(c) Employees worked in the current period but will not be paid until the following period, $4,500.

117.A company reports the following amounts: Assets = $6,000; Liabilities = $2,000; Stockholders' equity = $4,000; Dividends = $500; Revenues = $5,000; and Expenses = $3,000. What amount is reported for net income?

118.A company receives $2,500 cash from customers for services to be provided next month. Record the cash

receipt using (a) accrual-basis accounting and (b) cash-basis accounting.

119.A company performs $2,800 of services during the month and bills customers. The customers are expected

to pay next month. Record the customer billing using (a) accrual-basis accounting and (b) cash-basis accounting.

120.A company performs $4,200 of services during the month and receives full cash payment from customers

at the time of service. Record the cash receipt using (a) accrual-basis accounting and (b) cash-basis accounting.

121.A company pays $1,700 cash to employees for work performed during the month. Record the payment using (a) accrual-basis accounting and (b) cash-basis accounting.

122.A company receives a $700 utility bill for the current month but does not plan to pay the bill until early

next month. Record the receipt of the utility bill using (a) accrual-basis accounting and (b) cash-basis accounting.

123.A company pays $1,200 on account for supplies purchased last month. All supplies were used last month.

Record the payment using (a) accrual-basis accounting and (b) cash-basis accounting.

124.A company maintains its records using cash-basis accounting. During the year, the company received cash

from customers, $34,000, and paid cash for taxes, $24,000. At the beginning of the year, customers owe the company $3,000. By the end of the year, customers owe $5,000. At the beginning of the year, the company owes taxes of $4,000. At the end of the year, the company owes taxes of $5,000. Determine cash-basis net income and accrual-basis net income for the year.

125.The following data are taken from the cash-basis accounting records of Myerson Company for the year ended December 31, 2012:

Calculate the amount of revenues and expenses for 2012 under cash-basis accounting.

126.The following data are taken from the cash-basis accounting records of Myerson Company for the year

ended December 31, 2012:

Calculate the amount of revenues and expenses for 2012 under accrual-basis accounting.

127.At the beginning of the period, a company reports a balance in office supplies of $500. During the period,

the company purchases an additional $3,500 of office supplies for cash. By the end of the period, only $700 of office supplies remains. Record the period-end adjusting entry.

128.Suppose a company rents office space for one year, paying $12,000 ($1,000/month) in advance on September 1. Record the adjusting entry on December 31.

129.A company purchases one year of flood insurance in advance on May 1, paying $24,000 ($2,000/month).

Record the adjusting entry on December 31.

130.A company purchases new equipment for $24,000 cash on August 1, 2012. At the time of purchase, the

equipment is expected to be used in operations for four years (48 months) and have no resale or scrap value at the end. The company depreciates the equipment evenly over the 48 months ($500/month). Record the adjusting entry for depreciation on December 31, 2012.

131.Suppose a customer rents a vehicle for four months from Rent-A-Car on October 1, paying $4,000 ($1,000/

month). Record Rent-A-Car's adjusting entry on December 31.

132.A company pays its employees $5,600 every two weeks ($400/day). The current two-week pay period ends on December 26, 2012, and employees are paid $5,600. The next two-week pay period ends on January 9, 2013, and employees will be paid $5,600. Record the adjusting entry on December 31, 2012.

133.A company borrows $20,000 with 8% interest on October 1, 2012. This amount plus interest is due on

September 30, 2013. Record the adjusting entry on December 31, 2012.

134.A company lends $30,000 with 10% interest on May 1, 2012. This amount plus interest is due on April 30,

2013. Record the adjusting entry on December 31, 2012.

135.For each of the following accounts, indicate whether the account is shown in the income statement or the

balance sheet:

136.Prepare adjusting journal entries, as needed, for the following items.(a) The Supplies account shows a balance of $500, but a count of supplies reveals only $200 on hand at year-end.(b) The company initially records the payments of all insurance premiums as prepaid insurance. The unadjusted trial balance at year-end shows a balance of $500 in Prepaid Insurance. A review of insurance policies reveals that $100 of insurance is unexpired.(c) Employees work Monday through Friday, and salaries of $2,500 per week are paid each Friday. The company's year-end falls on Tuesday.(d) At year-end, the company received a utility bill for December's electricity usage of $200 that will be paid in early January.

137.The adjusted trial balance for China Tea Company at December 31, 2012, is presented below:

Prepare an income statement for China Tea Company for the year ended December 31, 2012:

138.The adjusted trial balance for China Tea Company at December 31, 2012, is presented below:

Prepare a classified balance sheet for China Tea Company as of December 31, 2012:

139.The December 31, 2012, post-closing trial balance for Strong Corporation is presented below:

Prepare a classified balance sheet for Strong Corporation at December 31, 2012.

140.The following is selected financial information for Osmond Dental Laboratories for 2012 and 2013:

Osmond issued 2,000 shares of additional capital stock in 2013 for $20,000. There were no other capital transactions. Prepare a statement of stockholders' equity for the year ended December 31, 2013.

141.The adjusted trial balance for Yondel Company at December 31, 2012 is presented below:

Prepare the closing entries for Yondel Company for the year ended December 31, 2012.

142.The adjusted trial balance for China Tea Company at December 31, 2012 is presented below:

Prepare the closing entries for China Tea Company for the year ended December 31, 2012.

143.The year-end adjusted trial balance included the following account balances: Cash, $5,000; Equipment, $25,000; Accounts payable, $7,000; Common stock, $15,000; Retained earnings, $6,000; Dividends, $1,000; Service revenue, $18,000; Salaries expense, $9,000; and Utilities expense, $6,000. Prepare the post-closing trial balance.

144.Describe what is meant by unearned revenues and give two examples.

145.Describe what is meant by prepaid expenses and give two examples.

146.What is an accrued expense?

147.What is the difference between permanent accounts and temporary accounts and why does an accounting system have both types of accounts?

148.What are the purposes of closing entries?

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term by placing the letter designating the term in the space provided.Terms:a. Accrued expensesb. Adjusted trial balancec. Adjusting entriesd. Depreciation expensee. Balance sheetf. Prepaid expensesg. Expensesh. Post-closing trial balancei. Income statementj. Trial balance 149.____ Financial statement showing that assets equal liabilities plus stockholders' equity.

Answer: e

150.____ Assets created before the expense is recognized.

Answer: f

151.____ A list of accounts and their balances used as the source data to prepare the financial statements.

Answer: b

152.____ Financial statement that provides a measure of net income.

Answer: i

153.____ A list of only permanent accounts and their balances prepared to prove that total debits equal total credits. Answer: h

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term by placing the letter designating the term in the space provided.Terms:a. Accrued expensesb. Adjusted trial balancec. Adjusting entriesd. Depreciation expensee. Balance sheetf. Prepaid expensesg. Expensesh. Post-closing trial balancei. Income statementj. Trial balance 154.____ A list of accounts and their balances prepared before adjusting entries are recorded.

Answer: j

155.____ Records events that have occurred but not previously recorded.

Answer: c

156.____ Represent outflows of resources incurred to generate revenues.

Answer: g

157.____ Liabilities created when expenses are recognized before cash flows.

Answer: a

158.____ An account that reflects an estimate.

Answer: d

159.Which of the following accounts is(are) listed in a post-closing trial balance?

A. Prepaid Rent.B. Accounts Payable.C. Salaries Expense.D. Two of these three accounts would be included in a post-closing trial balance.

160.Which of the following describes the purpose(s) of closing entries?

A. Adjust the balances of asset and liability accounts for unrecorded activity during the period.B. Transfer the balances of temporary accounts to common stock.C. Reduce the balances of the temporary accounts to zero to prepare them for measuring activity in the next

period.D. Both b and c.

161.A company provided $1,500 of services to customers during the month of May. The customers paid in June. What would the impact of these transactions be during May on each of the following three items? Cash Cash-basis Accrual-basisBalance Net Income Net Income A. No effect No effect IncreaseB. No effect No effect No EffectC. Increase Increase IncreaseD. Increase Increase No effect

162.A company purchased $400 of office supplies on account during May. All the supplies were used in May,

and the account was paid during June. What would the impact of these transactions being during May on each of the following three items? Cash Cash-basis Accrual-basisBalance Net Income Net Income A. No effect No effect DecreaseB. Decrease Decrease No EffectC. Decrease Decrease DecreaseD. Decrease No effect No effect

163.A company paid $900 to workers during May. Of this amount, $600 was for work performed in April,

while the other $300 was for work performed during May. What would the impact of this transaction be during May on each of the following three items? Cash Cash-basis Accrual-basisBalance Net Income Net Income A. No effect No effect DecreaseB. Decrease Decrease No EffectC. Decrease Decrease DecreaseD. Decrease No effect No effect

164.Air France collected cash on February 4 from the sale of a ticket to a customer on January 26.The flight

took place on April 5. According to the revenue recognition principle, in which month should Air France have recognized this revenue? A. January.B. February.C. April.D. Evenly in each of the three months.

165.A customer purchased a drill press on November 14 on account from Sears. The drill press was delivered

two weeks later. The customer paid for the drill press on December 5. When should Sears record the revenue for this transaction according to the revenue recognition principle? A. November.B. December.C. Evenly in each of the two months.D. One-third in November and two-thirds in December.

166.Which of the following is(are) true regarding the characteristics of adjusting entries? A. Adjusting entries reduce the balance of revenue, expense, and dividend accounts to zero.B. Adjusting entries allow for the proper application of the revenue recognition principle.C. Adjusting entries allow for the proper application of the matching principle.D. Both b and c are true.

167.Pawn Shops Unlimited recorded the following four transactions during April. Which of these transactions

would have the same income statement impact in April regardless of whether the company used accrual-basis or cash-basis accounting? A. Received $600 from customers for services to be provided in May.B. Paid $1,800 for a six-month insurance policy covering the period July 1—December 31.C. Paid $700 for an advertisement that appeared in the April 17 edition of the Las Vegas Sun newspaper.D. Received $300 from customers for services performed in March.

168.Pawn Shops Unlimited recorded the following four transactions during April. Which of these transactions

would have the same income statement impact in April regardless of whether the company used accrual-basis or cash-basis accounting? A. Purchased $500 of office supplies on account (supplies were used in May and paid for in May).B. Paid $1,800 for a six-month insurance policy covering the period July 1—December 31.C. Paid $700 for an advertisement that appeared in the May 17 edition of the Las Vegas Sun newspaper.D. Received $300 from customers for services performed in March.

169.Which accounting principle states that a company should "record revenues when they are earned"?

A. MatchingB. Revenue recognitionC. ConservatismD. Materiality

170.The following events pertain to Jasper Corporation:

May 1 Jasper purchased office supplies of $3,000 on account.May 5 The office supplies were shipped to Jasper.May 8 Jasper used these office supplies for a one-time event.May 9 Jasper paid $3,000 cash for the office supplies purchased on May 1.Using cash-basis accounting, on which date should Jasper record supplies expense? A. May 1.B. May 5.C. May 8.D. May 9.

171.On July 1, 2012, Charlie Co. paid $18,000 to Rent-An-Office for rent covering 18 months from July 2012 through December 2013. What adjusting entry should Charlie Co. record on December 31, 2012?


172.Which of the following is a permanent account?

A. DividendsB. Service RevenueC. Advertising ExpenseD. Retained Earnings

173.Which one of the following accounts would NOT have a balance after closing entries?

A. Unearned RevenueB. SuppliesC. Prepaid RentD. Dividends

174.The following events pertain to Bills Company:

December 28, 2012 - Bills was contacted by a customer for possible accounting and taxservices.December 30, 2012 - Bills signed a formal agreement with the customer to provideaccounting and tax services in 2013.January 4, 2013 - The customer paid $1,000 in advance for the services to be provided by Bills Company.January 11, 2013 - Bills provided accounting and tax services to the customer.Using cash-basis accounting, on which date should Bills Company record revenue for the accounting and tax services? A. December 30, 2012.B. December 31, 2012.C. January 4, 2013.D. January 11, 2013.

175.Which of the following accounts will NOT be involved in closing entries?

A. Prepaid Insurance.B. Service Revenue.C. Utilities Expense.D. Retained Earnings.

176.Which of the following regarding adjusting entries is correct? A. Adjusting entries are recorded for all external transactions.B. Adjusting entries are recorded to make sure all cash inflows and outflows are recorded in the current

period.C. Adjusting entries are needed because we use accrual-basis accounting.D. After adjusting entries, all temporary accounts should have a balance of zero.

177.The following events pertain to Bills Company:

December 28, 2012 - Bills was contacted by a customer for possible accounting and taxservices.December 30, 2012 - Bills signed a formal agreement with the customer to provideaccounting and tax services in 2013.January 4, 2013 - The customer paid $1,000 in advance for the services to be provided by Bills Company.January 11, 2013 - Bills provided accounting and tax services to the customer.Using accrual-basis accounting, on which date should Bills Company record revenue for the accounting and tax services? A. December 30, 2012.B. December 31, 2012.C. January 4, 2013.D. January 11, 2013.

178.When a company prepares closing entries, which one of the following is NOT a correct closing entry?

A. Debit Retained Earnings; credit Salaries Expense.B. Debit Dividends; credit Retained Earnings.C. Debit Service Revenue; credit Retained earnings.D. All of the above are correct.

179.In the first three years of operations, Lindsey Corporation earned net income/loss of -$150,000, $100,000,

and $250,000. At the end of the third year, Lindsey Corporation has a balance of $120,000 for its Retained Earnings account. What is the total amount of dividends Lindsey Corporation paid over the three years? A. $130,000.B. $120,000.C. $80,000.D. $380,000.

180.For the first three years of operations, the company reports net income of $1,000, $2,000, and $3,000, and

pays dividends of $500, $1,000, and $1,000. What is the balance of retained earnings at the end of the third year? A. $2,000.B. $2,500.C. $3,500.D. $6,000.

181.When a company provides services on account, which of the following would be recorded using cash-basis accounting? A. Debit to Cash.B. Debit to Service Revenue.C. Credit to Unearned Revenue.D. No entry would be recorded.

182.Which of the following is true concerning temporary and permanent accounts?

A. Cash is a temporary account.B. Permanent accounts represent activity over the entire life of the company.C. Permanent accounts must be closed at the end of every reporting period.D. Temporary accounts represent activity over the previous three years.

183.The following table contains financial information for Trumpter's Inc. before closing entries:

What is the amount of Trumpter's total liabilities? A. $5,000B. $78,500C. $68,500D. $83,500

Ch3 Key

1. TRUE 2. FALSE 3. TRUE 4. FALSE 5. TRUE 6. TRUE 7. TRUE 8. TRUE 9. FALSE 10. TRUE 11. TRUE 12. TRUE 13. FALSE 14. FALSE 15. TRUE 16. FALSE 17. FALSE 18. TRUE 19. FALSE 20. TRUE 21. FALSE 22. FALSE 23. FALSE 24. TRUE 25. FALSE 26. TRUE 27. FALSE 28. TRUE 29. TRUE 30. FALSE 31. TRUE 32. TRUE

33. TRUE 34. TRUE 35. FALSE 36. TRUE 37. TRUE 38. FALSE 39. TRUE 40. TRUE 41. TRUE 42. TRUE 43. FALSE 44. FALSE 45. FALSE 46. TRUE 47. FALSE 48. FALSE 49. TRUE 50. FALSE 51. TRUE 52. TRUE 53. FALSE 54. B 55. A 56. C 57. A 58. C 59. A 60. D 61. C 62. C 63. D 64. C 65. D 66. C 67. D

68. D 69. C 70. D 71. B 72. C 73. B 74. D 75. D 76. D 77. B 78. B 79. A 80. D 81. B 82. A 83. C 84. D 85. A 86. D 87. B 88. D 89. D 90. C 91. B 92. B 93. A 94. C 95. B 96. B 97. B 98. D 99. D 100. B 101. C 102. D

103. A 104. B 105. C 106. C 107. A 108. A 109. C 110. A 111. D 112. A 113. C 114. C 115. (a) $24,000; (b) $9,000; (c) $0. 116. (a) $0; (b) $5,000; (c) $4,500. 117. $2,000

118.

119.

120.

121.

122.

123.

124. 125. Cash-basis revenues = $20,000 + $300,000 = $320,000. 126. Accrual-basis revenues = $400,000.

127.

128.

129.

130.

131.

132.

133.

134.

135.

136.

137.

138.

139.

140.

141.

142.

143. *Ending Retained Earnings = Beginning Retained Earnings ($6,000) + Revenues ($18,000) - Expenses ($9,000 + $6,000) - Dividends ($1,000) = $8,000. 144. Unearned revenues are inflows of resources before the earnings process is complete. Examples include magazine subscription payments received in advance by a publishing firm or rent payments received in advance by a property leasing firm. A liability exists because of the obligation to provide the service. 145. Prepaid expenses are outflows of resources that create benefits that will last beyond the current reporting period. Examples include insurance or rent paid in advance of use. 146. An accrued expense results from an expense being incurred and a liability recorded prior to cash payment. Examples include interest payable and salaries payable. 147. Permanent accounts represent assets, liabilities, and stockholders' equity at a point in time. Temporary accounts represent changes in retained earnings caused by changes in dividend, revenue, and expense accounts. The temporary accounts are closed out annually to facilitate measuring income on an annual basis, but the permanent account balances are carried forward from period to period. 148. The closing process serves a dual purpose: (1) to reduce the balances of temporary accounts to zero so they are ready to measure activity in the next accounting period, and (2) to transfer the balances of these temporary accounts to the Retained Earnings account so it reflects the activity that has occurred in the temporary accounts during the period. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. D 160. C 161. A 162. A

163. C 164. C 165. A 166. D 167. C 168. A 169. B 170. D 171. D 172. D 173. D 174. C 175. A 176. C 177. D 178. B 179. C 180. C 181. D 182. B 183. A

Ch3 Summary


AACSB: Analytic 65




AICPA: Reporting 15

Blooms: Analysis 45




Blooms: Synthesis 5

Difficulty: Easy 41

Difficulty: Hard 19


Learning Objective: 03-01 Record revenues using the revenue recognition principle and expenses using the matching principle.

19

Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. 38

Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. 68

Learning Objective: 03-04 Post adjusting entries and prepare an adjusted trial balance. 13

Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. 25

Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. 29

Learning Objective: 03-07 Post closing entries and prepare a post-closing trial balance. 16


Ch4Student: ___________________________________________________________________________

1. Managers of the company act as stewards or caretakers of the company's assets. True False

2. Common types of financial statement fraud include creating fictitious revenues from a fake customer,

improperly valuing assets, and mismatching revenues and expenses. True False

3. In response to corporate accounting scandals and to public outrage over seemingly widespread unethical

behavior of top executives, Congress passed the Sarbanes-Oxley Act. True False

4. The Sarbanes-Oxley Act is also known as Generally Accepted Accounting Principles.

True False

5. The Public Company Accounting Oversight Board (PCAOB) has the authority to establish standards

dealing with auditing, quality control, ethics, independence, and other activities relating to the preparation of audited financial reports. True False

6. Auditors of public companies can perform the full range of audit and nonaudit consulting services for their

audit clients. True False

7. Section 404 of the Sarbanes-Oxley Act requires that a company's management document and assess the

effectiveness of all internal control processes that could affect financial reporting. True False

8. Internal control is a company's plan to (1) improve the accuracy and reliability of accounting information

and (2) safeguard the company's assets. True False

9. One benefit of internal control is greater reliance by investors on reported financial statements.

True False

10. A framework for designing an internal control system is provided by the Financial Accounting Standards

Board (FASB). True False

11. The control environment refers to the overall top-to-bottom attitude of the company with respect to internal controls. True False

12. Risk assessment procedures include periodic reviews of internal controls, assessing management's

oversight of the internal control, developing solutions to known cases of internal control failures, and determining whether each division or operation within a company is meeting its objectives. True False

13. Separation of duties refers to auditors not being allowed to perform both audit and nonaudit services for the

same client. True False

14. An example of separation of duties would be not allowing an employee who receives cash to also be

responsible for depositing that cash in the bank account. True False

15. The internal control component of information and communication relates to the effectiveness of accurately

measuring and communicating business transactions. True False

16. Management needs to monitor the internal control system, just like any other system. Any control

deficiencies spotted by employees should be reported immediately to management. True False

17. Separation of duties occurs when two or more people act in coordination to circumvent internal controls.

True False

18. Effective internal controls ensure a company's success and survival.

True False

19. The amount of cash reported in a company's balance sheet includes currency, coins, and balances in savings

and checking accounts, as well as items acceptable for deposit in these accounts, such as checks received from customers. True False

20. The amount of cash reported in a company's balance sheet includes items acceptable for deposit in bank

accounts, such as checks received from customers. True False

21. The amount of cash reported in a company's balance sheet includes the balance of accounts receivable if

cash collection is highly likely in the near future. True False

22. The amount of cash reported in a company's balance sheet does not include cash equivalents, defined as short-term investments that have a maturity date no longer than three months from the date of purchase. True False

23. Common examples of cash equivalents are money market funds, Treasury bills, and certificates of deposit.

True False

24. Recording all cash receipts as soon as possible is considered a good internal control.

True False

25. Opening mail and making a list of checks received once per week is considered a good internal control over

cash receipts. True False

26. Whether a customer uses cash, a check, or a debit card to make a purchase, the company records the

transaction as a cash sale. True False

27. When customers pay for services with a check, the company should debit Accounts Receivable and credit

Service Revenue. True False

28. When customers pay for services with a debit card, the company should debit Cash and credit Service

Revenue. True False

29. When a company pays for services received using a check, it should credit Accounts Payable until the

check is paid by the bank. True False

30. When a company pays for services received using a credit card, it should credit Accounts Payable.

True False

31. Allowing the employee who authorizes purchases to also prepare the check is an example of good internal

control. True False

32. Companies should set maximum purchase limits on debit cards and credit cards as part of internal controls.

True False

33. A bank reconciliation matches the balance of cash in the bank account with the balance of cash in the

company's own records. True False

34. Differences in the company's cash balance and the bank's cash balance occur because of either timing differences or errors. True False

35. An example of a bank error that causes the company's balance and bank's balance of cash to differ is the

purchase of supplies with a check. True False

36. Cash receipts of the company that have not been added to the bank's record of the company's balance are

referred to as checks outstanding. True False

37. Checks outstanding are checks the company has written that have not been subtracted from the bank's

record of the company's balance. True False

38. A deposit outstanding will cause the bank's cash balance to be higher than the company's cash balance.

True False

39. A check outstanding will cause the bank's cash balance to be higher than the company's cash balance.

True False

40. An NSF check is an example of a cash transaction that is initially recorded by the bank and later by the

company after notification. True False

41. Interest earned on a bank account is an example of a cash transaction recorded by the company and then

later by the bank after notification. True False

42. The final step in reconciling the bank's cash balance and the company's cash balance is to update the

company's cash balance for the items used to reconcile the bank's cash balance. True False

43. The petty cash fund represents cash on hand and is used to pay for minor purchases.

True False

44. The petty cash fund should have just enough cash to make minor expenditures over a reasonable period

(such as a week or a month). True False

45. A company's cash is reported in two financial statements - income statement and statement of cash flows.

True False

46. Cash is typically reported as a current asset in the balance sheet. True False

47. The statement of cash flows reports a company's cash inflows and cash outflows related to (1) operating

activities, (2) investing activities, and (3) financing activities. True False

48. Investing activities include cash transactions involving revenue and expense events during the period.

True False

49. Investing activities include cash investments in long-term assets and investment securities.

True False

50. Investing activities include transactions designed to raise cash or finance the business.

True False

51. Only transactions involving cash affect a company's cash flows.

True False

52. A company's operating cash inflows less operating cash outflows generally equals the reported amount of

net income in the income statement. True False

53. Earnings quality is the ability of net income to report the true underlying performance of the company.

True False

54. A company's free cash flows equal operating cash flows plus financing cash flows during the period.

True False

55. Generally, when a company's net income and free cash flows trend in the same direction over time,

earnings are believed to have higher quality. True False

56. What key piece of legislation was passed in response to corporate accounting scandals by Enron,

WorldCom, and others? A. Sarbanes-Oxley Act.B. 1933 Securities Act.C. 1934 Securities Exchange Act.D. Regulation Fair Disclosure.

57. Which of the following does not represent a major provision of the Sarbanes-Oxley Act? A. Nonaudit services.B. Quarterly financial statements.C. Auditor rotation.D. Corporate executive accountability.

58. Under the provisions of the Sarbanes-Oxley Act, corporate executives:

A. Have limited responsibility for financial statements.B. Must personally prepare the company's financial statements.C. Must personally certify the company's financial statements.D. Are not allowed to view the company's financial statements.

59. Under the provisions of the Sarbanes-Oxley Act, auditors must do which of the following?

A. Provide nonaudit services for their clients.B. Audit public companies whose chief executives worked for the audit firm in the preceding year.C. Be hired by company management.D. Maintain working papers for at least seven years following an audit.

60. Which of the following is NOT a design feature of effective internal controls?

A. Allow greater reliance by investors on reported financial statements.B. Prevent fraudulent or errant financial reporting.C. Ensure the company's price advantage over competitors.D. Prevent misuse of company funds by employees.

61. A framework for designing an internal control system is provided by the:

A. Committee of Sponsoring Organizations.B. Financial Accounting Standards Board.C. Securities and Exchange Commission.D. International Accounting Standards Board.

62. The components of internal control do not directly include:

A. Risk assessment.B. Inflation adjustment.C. Monitoring.D. Control activities.

63. Separation of duties refers to:

A. Making each manager personally responsible for his/her department.B. Keeping functions across different departments separate.C. Preventing top management and lower-level employees from interacting.D. Individuals who have physical responsibility for assets should not also have access to accounting

records.

64. Which employees have an impact on the operation and effectiveness of internal controls? A. Upper management.B. Mid-level managers.C. Lower-level employees.D. All employees.

65. Cash may not include:

A. Foreign currency.B. Money orders.C. Accounts receivable.D. Undeposited customer checks.

66. Common examples of cash equivalents include all of the following except:

A. Money market funds.B. Treasury bills.C. Certificates of deposit.D. Accounts receivable.

67. Which of the following would NOT represent good controls over cash receipts?

A. Record all cash receipts as soon as possible.B. The employee that receives cash and checks should also deposit them in the bank.C. Open mail each day and make a list of checks received with the amount and payer's name.D. Verify cash receipts by comparing the bank deposit slip with the accounting records.

68. Which of the following would NOT be recorded as a cash sale?

A. Customer who pays with a check.B. Customer who pays with a debit card.C. Customer who pays with a credit card.D. A customers who buys on account.

69. McGregor Company allows customers to pay with credit cards. The credit card company charges

McGregor 3% of the sale. When a customer uses a credit card to pay McGregor $200 for services provided, McGregor would: A. Debit Cash for $200.B. Credit Service Revenue for $194.C. Debit Service Fee Expense for $6.D. Credit Service Revenue for $206.

70. A customer purchased a $2,000 item at ApplianceWorld, paying with a credit card. ApplianceWorld is

charged a 2% fee by the credit card company. When recording this sale, ApplianceWorld would: A. Debit Accounts Receivable for $2,000.B. Credit Sales Revenue for $2,000.C. Credit Sales Revenue for $1,960.D. Credit Unearned Revenue for $2,000.

71. Which of the following would NOT represent good controls over cash disbursements? A. Make all disbursements, other than very small ones, by check, debit card, or credit card.B. Require only one signature for checks, especially larger ones.C. Authorize all expenditures before purchase and verify the accuracy of the purchase itself.D. The employee who authorizes payment should not also be the employee who prepares the check.

72. Which of the following would NOT represent good controls over cash disbursements?

A. Periodically check amounts shown in the debit card and credit card statements against purchase receipts.B.

The employee verifying the accuracy of the debit card and credit card statements should not also be the employee responsible for actual purchases.

C. Set maximum purchase limits on debit cards and credit cards.D. Employees responsible for making cash disbursements should also be in charge of cash receipts.

73. Which of the following would NOT need to be accounted for in a bank reconciliation?

A. Deposits outstanding recorded by the company but not the bank.B. Interest earned recorded by the bank but not the company.C. NSF checks recorded by the bank but not by the company.D. Checks written by the company and recorded by the bank.

74. On May 31, Money Corporation's Cash account showed a balance of $10,000 before the bank

reconciliation was prepared. After examining the May bank statement and items included with it, the company's accountant found the following items:

What is the amount of cash that should be reported in the company's balance sheet as of May 31? A. $9,860.B. $9,650.C. $10,130.D. $10,410.

75. Cash transactions recorded by the bank but not yet recorded by the company include all of the following

except A. Service fees.B. Interest earned.C. Checks outstanding.D. NSF checks.

76. The following information was taken from the bank reconciliation for Mooner Sooner Inc. at the end of 2012: Bank balance: $8,000Checks outstanding: $5,800Note collected by the bank: $1,500Service fee: $20Deposits outstanding: $4,000NSF check (bad check) returned for $300What is the correct cash balance that should be reported in Mooner Sooner's balance sheet at the end of 2012? A. $10,200.B. $7,400.C. $6,200.D. $6,160.

77. Cash transactions that have been recorded by the company but not the bank include:

A. NSF checks.B. Interest earned.C. Service fees.D. Deposits outstanding.

78. Which of the following is NOT a reason why a bank reconciliation is necessary?

A. The company has transactions that the bank has not recorded.B. Petty cash has a low balance.C. The bank has transactions that the company has not recorded.D. Reconciliations provide a control over cash.

79. Which of the following is correct with respect to a bank reconciliation?

A. Subtract interest earned from the bank's balance.B. Add service charge to the company's balance.C. Subtract NSF checks from the company's balance.D. Add deposits outstanding to the company's balance.

80. After preparing a bank reconciliation, the collection of a note by the bank on a company's behalf would be

recorded with: A. A credit to Notes Receivable.B. A credit to Cash.C. A debit to Notes Receivable.D. A credit to Accounts Receivable.

81. After preparing a bank reconciliation, the service fee charged by the bank would be recorded with:

A. A credit to Service Fees Expense.B. A debit to Cash.C. A credit to Service Fees Revenue.D. A debit to Service Fees Expense.

82. After preparing a bank reconciliation, a check outstanding for the payment of advertising would be recorded with: A. A debit to Advertising Expense.B. A debit to Cash.C. A credit to Advertising Expense.D. No entry is needed.

83. The following data were obtained from the bank statement and from the process of reconciling it:

Bank service charges = $20Deposit outstanding = $150Interest earned on the bank account = $10Checks outstanding = $400Which items should be deducted from and added to the bank balance in completing the reconciliation? A. Deduct checks outstanding; add service charges and deposit outstanding.B. Deduct interest earned; add deposit outstanding.C. Deduct checks outstanding; add deposit outstanding.D. Deduct deposit outstanding; add checks outstanding.

84. The balance in the Colt Company's Cash account on August 31 was $19,700, before the bank reconciliation

was prepared. After examining the August bank statement and items included with it, the company's accountant found:

What is the amount of cash that should be reported in the balance sheet as of August 31? A. $20,700.B. $17,200.C. $18,700.D. $22,200.

85. The balance shown in the August bank statement of Colt Company was $23,200. After examining the

August bank statement and items included with it, the company's accountant found:Checks outstanding $4,300NSF check 140Note collected by bank for the Colt Company 1,200Deposits outstanding 1,800Bank service fees 60What is the amount of cash that should be reported in the balance sheet as of August 31? A. $20,700.B. $17,200.C. $18,700.D. $22,200.

86. A minor amount of cash kept on hand to pay for small purchases is referred to as a: A. Petty cash fund.B. Cash receipts fund.C. Cash payments fund.D. Cookie jar fund.

87. Which of the following is NOT involved in the replenishment of the petty cash fund?

A. Transactions related to vouchers will be recorded.B. Management will verify that the total of all vouchers equals the amount of cash missing from the petty

cash fund.C. Weekly payroll checks will be recorded.D. Management will withdraw cash from the bank and place it in the petty cash fund.

88. At the time a $400 petty cash fund is being replenished, the company's accountant finds vouchers totaling

$350 and petty cash of $50. The vouchers include: postage, $100; business lunches, $150; delivery fees, $75; and office supplies, $25. Which of the following is not recorded when recognizing expenditures from the petty cash fund? A. Debit Postage Expense, $100.B. Debit Supplies, $25.C. Credit Petty Cash, $350.D. Debit Petty Cash, $350.

89. A company's cash balance is reported in which two financial statements?

A. Income statement and statement of cash flows.B. Balance sheet and statement of cash flows.C. Income statement and balance sheet.D. Balance sheet and statement of stockholders' equity.

90. The statement of cash flows reports cash flows from the activities of:

A. Operating, purchasing, and investing.B. Borrowing, paying, and investing.C. Financing, investing, and operating.D. Using, investing, and financing.

91. Operating cash flows would exclude:

A. Payment of employee salaries.B. Receipt of cash from customers.C. Payment of dividends.D. Payment for advertising.

92. Cash flows from investing do not include cash flows from:

A. Lending.B. The sale of equipment.C. Borrowing.D. The purchase of a building.

93. Cash flows from financing activities include: A. Lending.B. Salaries paid.C. The sale of land.D. Dividends paid.

94. Cash flows from investing activities do not include:

A. Borrowing.B. The purchase of equipment.C. The sale of land.D. The purchase of a building.

95. Terastar Corp. reports the following amounts for 2012 and 2013:

What is the amount of Terastar's free cash flows for 2013? A. $3,000.B. $13,000.C. $9,000.D. $7,000.

96. Terastar Corp. reports the following amounts for 2012 and 2013.

What is the trend in free cash flows relative to net income? A. Both are increasing.B. Net income is trending upward and free cash flows are trending downward.C. Both are decreasing.D. Net income is trending downward and free cash flows are trending upward.

97. A company had the following sales transactions:

1. Total debit card sales = $200,000.2. Total credit card sales = $400,000.3. Total cash sales = $800,000.4. Total check sales = $100,000.There is a charge of 2% on all credit card transactions. Calculate total sales revenue recorded for the year.

98. A company had the following transactions:1. Paid $150 for office supplies using a debit card.2. Purchased office equipment costing $700 using a credit card.3. Paid utilities bill of $400 by issuing a check.Record each transaction.

99. Indicate whether the firm should add or subtract each item below from its

balance of cash or the bank's balance of cash in preparing a bank reconciliation.

100.A company's general ledger shows a cash balance of $4,570. Comparing the company's cash records with

the monthly bank statement reveals several additional cash transactions such as checks outstanding of $2,840, bank service fees of $110, and interest earned of $15. Calculate the correct balance of cash.

101.A company's general ledger shows a cash balance of $2,380. Comparing the company's cash records with the monthly bank statement reveals several additional cash transactions such as deposits outstanding of $1,760, note collected by the bank on the company's behalf of $1,000, and interest earned of $20. The company also finds an error by the bank of an additional deposit of $100. Calculate the correct balance of cash.

102.A company's bank statement shows a cash balance of $4,230. Comparing the company's cash records with

the monthly bank statement reveals several additional cash transactions such as checks outstanding of $3,880, deposits outstanding of $1,230, NSF check of $300, and service fee of $50. Calculate the correct balance of cash.


the monthly bank statement reveals several additional cash transactions such as checks outstanding of $2,110, NSF check of $200, interest earned of $30, service fee of $40, and a check for $150 recorded twice by the company. Calculate the correct balance of cash.

104.A company's Cash account shows a balance of $3,450 at the end of the month. Comparing the company's

Cash account with the monthly bank statement reveals several additional cash transactions such as bank service fees ($50), an NSF check from a customer ($300), a customer's note receivable collected by the bank ($1,000), and interest earned ($100). Prepare the necessary entries to adjust the balance of cash.

105.A company's Cash account shows a balance of $5,680 at the end of the month. Comparing the company's Cash account with the monthly bank statement reveals several additional cash transactions such as deposits outstanding ($1,250), checks outstanding ($2,380), bank service fees ($40), an NSF check from a customer ($150), a customer's note receivable collected by the bank ($500), and interest earned ($60). Prepare the necessary entries to adjust the balance of cash.

106.Peterson Company's general ledger shows a cash balance of $7,850 on May 31, 2012. May cash receipts

of $1,250, included in the general ledger balance, are placed in the night depository at the bank on May 31 and processed by the bank on June 1. The bank statement dated May 31 shows an NSF check for $200 and a service fee of $50. The bank processes all checks written by the company by May 31 and lists them on the bank statement, except for one check totaling $1,640. The bank statement shows a balance of $7,990 on May 31. Prepare a bank reconciliation to calculate the correct ending balance of cash on May 31, 2012.

107.Madison Company's cash ledger reports the following for the month ending March 31, 2012.

Information from March's bank statement and company records reveals the following additional information:a. The ending cash balance recorded in the bank statement is $6,790.b. Cash receipts of $2,100 from 3/26-3/31 are outstanding.c. Checks 545 and 547 are outstanding.d. The deposit on 3/11 included a customer's check for $400 that did not clear the bank (NSFcheck).e. Check 543 was written for $2,800 for office supplies in March. The bank properly recorded the check for this amount.f. An automatic withdrawal for March rent was made on March 4 for $1,500.g. Madison's checking account earns interest based on the average daily balance. The amount of interest earned for March is $50.h. Last year, one of Madison's top executives borrowed $4,000 from Madison. On March 24, the executive paid $4,200 ($4,000 borrowed amount plus $200 interest) directly to the bank in payment for the borrowing.i. The bank charged the following service fees: $30 for NSF check, $10 for automatic withdrawal for rent payment, and $20 for collection of the loan amount from the executive.Prepare a bank reconciliation for March 31, 2012, and record the necessary cash adjustments.

108.A company establishes a petty cash fund for $400. By the end of the month, employees had made

the following expenditures from the fund: supplies, $150; fuel for deliveries, $120; postage, $75; miscellaneous, $35. Record the entry to recognize expenditures from the petty cash fund.

109.A company establishes a $300 petty cash fund on August 3 to pay for minor cash expenditures. The fund is replenished at the end of each month. At the end of August, the fund contains $40 in cash and the following receipts:

Record the establishment of the petty cash fund on August 3, the expenditures of the fund, and replenishment on August 31.

110.A company provides services on account during the current year totaling $400,000. By the end of the year,

$350,000 of this amount had been received. In addition, $75,000 was received on account from customers for services provided in the prior year. Determine the amount of operating cash flows the company will report as received from customers in the current year.

111.During the current year, a company provides services on account for $100,000. By the end of the year,

$60,000 of this amount had been received. In addition, cash payments for the year were employees' salaries, $50,000; office supplies, $10,000; and utilities $20,000. Determine the amount of operating cash flows the company will report in the current year.

112.During the current year, a company purchases equipment for $250,000, paying $50,000 immediately and promising to pay the remainder within 30 days after the end of the year. Determine the amount of investing cash flows the company will report in the current year.

113.At the beginning of the current year, a company issued stock for $100,000 and borrowed $50,000 from

the bank. By the end of the year, the company had provided services of $80,000 for cash, paid employee salaries of $30,000, and paid utilities of $10,000. Determine the amount of financing cash flows the company will report in the current year.

114.During the year, a company issues common stock for $50,000 and repays previously borrowed amounts

of $75,000. In addition, the company pays dividends of $5,000 to stockholders. Determine the amount of financing cash flows the company will report in the current year.

115.Consider the following transactions:1. Pay employees' salaries.2. Repay borrowing to the bank.3. Purchase equipment with note payable.4. Provide services to customers on account.5. Pay dividends to stockholders.6. Collect cash from customers for services provided.7. Purchase supplies on account.8. Pay for supplies purchased in transaction 7 above.For each transaction, indicate the type of cash flow involved based on the classifications in the statement of cash flows. If a transaction does not involve cash, write ‘No Cash.'

116.A company had the following transactions during the year:

1. Paid rent for the next two years, $8,000.2. Purchased office supplies on account, $2,400.3. Purchased equipment, paying $12,000 cash and issuing a note payable for $4,000.4. Borrowed from the bank, $6,000.5. Paid employee salaries, $7,200.6. Paid $2,000 on account related to transaction 2 above.7. Paid dividends to stockholders, $2,800.8. Sold land for $10,000 that was purchased in a prior year for $7,500.9. Collected cash from customers for services provided, $25,700.Calculate cash flows from operating activities, investing activities, and financing activities.

117.Below is a summary of all the transactions of Sampson Consulting for the month of April 2012.

Prepare a statement of cash flows for the month of April, properly classifying each of the transactions into operating, investing, and financing activities. The cash balance at the beginning of April is $14,800.

The following answers point out the key phrases that should appear in students' answers. They are not intended to be examples of complete student responses. It might be helpful to provide detailed instructions to students on how brief or in-depth you want their answers to be. 118.Discuss the events leading up to the passage of the Sarbanes-Oxley Act and its major provisions.

04-119

119.What is internal control? Briefly describe the five components of internal control outlined by the

Committee of Sponsoring Organizations (COSO). 04-119

120.A company uses the following process for its cash receipts. At the end of each day, the secretary places all cash and checks received from customers in a desk drawer. Each Monday, the secretary totals all amounts received, records this in the accounting records, and deposits the money in the bank account. Then, once every three months, the office manager requests information from the bank necessary to prepare a bank reconciliation. Discuss the company's internal control procedures related to cash receipts. 04-119

121.Describe the procedures used to reconcile a company's cash balance.

04-119

122.What is the purpose of the statement of cash flows? List the three major categories of cash flows and give

an example of a cash transaction for each category. 04-119

123.What is the link between the balance sheet and the statement of cash flows? Describe the operating,

investing, and financing sections of the statement of cash flows. 04-119

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the best term by placing the letter designating the term in the space provided.Terms:a. Monitoringb. Oversight boardc. Control activitiesd. Corporate executive accountabilitye. Nonaudit servicesf. Control environmentg. Internal controlh. Information and communicationi. Auditor rotationj. Risk assessment 124.____ Procedures for maintaining separation of duties.

Answer: c

125.____ PCAOB establishes standards related to the preparation of audited financial reports.

Answer: b

126.____ Formal policies to evaluate internal and external threats to achieving company objectives.

Answer: j

127.____ Audit firm cannot provide a variety of other services to its client, such as consulting.

Answer: e

128.____ Management must document the effectiveness of procedures that could affect financial reporting.

Answer: g

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the best term by placing the letter designating the term in the space provided.Terms:a. Monitoringb. Oversight boardc. Control activitiesd. Corporate executive accountabilitye. Nonaudit servicesf. Control environmentg. Internal controlh. Information and communicationi. Auditor rotationj. Risk assessment 129.____ Lead audit partners are required to change every five years.

Answer: i

130.____ Transfer of data from lower managers to top executives for accurate financial reporting. Answer: h

131.____ Executives must personally certify the financial statements.

Answer: d

132.____ Overall attitude of the company with respect to internal controls.

Answer: f

133.____ Routine activities that are meant to continually observe internal control activities.

Answer: a

Listed below are five terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the best term by placing the letter designating the term in the space provided.Terms:a. Cash equivalentb. Bank reconciliationc. Petty cashd. Debit carde. Credit card 134.____ Minor amount of cash kept on hand.

Answer: c

135.____ Short-term investments that have a maturity date no longer than three months from the date of

purchase. Answer: a

136.____ Matches the balance of cash in the bank account with the balance of cash in the company's own

records. Answer: b

137.____ Withdraws funds directly from the user's account at the time of use.

Answer: d

138.____ Allows users to purchase items without having to pay cash immediately.

Answer: e

139.____ Fees imposed by the bank to the company for providing routine services.

Answer: a04-139

140.____ Checks written to the company that are returned by the bank as not having adequate funds. Answer: d04-139

141.____ The company recorded a deposit twice.

Answer: e04-139

142.____ Checks written by the company but not yet recorded by the bank.

Answer: f04-139

143.____ Cash receipts received by the company but not yet recorded by the bank.

Answer: b04-139

144.____ Money earned on the average daily balance of the checking account.

Answer: c04-139

Listed below are six terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the best term by placing the letter designating the term in the space provided.Terms:a. Cash inflow from operating activitiesb. Cash outflow from financing activitiesc. Cash outflow from operating activitiesd. Cash inflow from investing activitiese. Cash inflow from financing activitiesf. Cash outflow from investing activities 145.____ Pay dividends to stockholders.

Answer: b

146.____ Pay salaries to employees.

Answer: c

147.____ Purchase equipment.

Answer: f

148.____ Receive payment from customers.

Answer: a

149.____ Issue common stock.

Answer: e

150.____ Sell office building. Answer: d

151.Consider the following cash flow items:

Pay amount owed to bank for previous borrowing.Pay utility costs.Purchase equipment to be used in operations.Purchase office supplies.Pay one year of rent in advance.Pay workers' salaries.Pay for research and development costs.Pay taxes to the IRS.Sell common stock to investors.How many of these cash flow items involve investing activities? A. Zero.B. One.C. Two.D. Three.


Pay amount owed to bank for previous borrowing.Pay utility costs.Purchase equipment to be used in operations.Purchase office supplies.Purchase one year of rent in advance.Pay workers' salaries.Pay for research and development costs. Pay taxes to the IRS.Sell common stock to investors.How many of these cash flow items involve financing activities? A. Zero.B. One.C. Two.D. Three.

153.Regarding a bank reconciliation, which one of the following is an item recorded by the company but not by

the bank? A. Checks outstanding.B. Interest earned.C. Service charges.D. NSF checks.

154.Which of the following is correct regarding a petty cash fund?

A. Petty cash fund represents cash on hand at the business for quick access.B. Petty cash fund is used for minor purposes.C. When cash from this fund is taken out, it should be replaced with a voucher.D. All of the above are correct.

155.The following information pertains to Sooner Company's cash balance and bank reconciliation as of August 31:

What is the correct cash balance for Sooner Company? A. Option aB. Option bC. Option cD. Option d

156.Which of the following best describes the goal of internal controls?

A. Ensuring the business is profitable.B. Enhancing the health of employees.C. Improving the accuracy and the reliability of financial information.D. Ensuring the compliance with tax regulations.

157.Which of the following is NOT correct regarding the reporting of cash?

A. Cash is reported in both the balance sheet and the statement of cash flows.B. Cash flows from buying and selling investments and long-term productive assets are called operating

cash flows.C. Cash flows from transactions with stockholders and creditors are called financing cash flows.D. Net cash flows reported in the statement of cash flows should equal the change in cash reported in the

balance sheet. 158.When preparing a bank reconciliation, a deposit outstanding would be:

A. Added to the company's cash balance.B. Added to the bank's cash balance.C. Subtracted from the company's cash balance.D. Subtracted from the bank's cash balance.

159.Fraudulent reporting by management could include:

A. Fictitious revenues from a fake customer.B. Improper asset valuation.C. Mismatching revenues and expenses.D. All of the above.

160.The Sarbanes-Oxley Act (SOX) mandates which of the following?

A. Increased regulations related to auditor-client relations.B. Increased regulations related to internal control.C. Increased regulations related to corporate executive accountability.D. All of the above.

161.Which of the following would not be considered good internal control for cash receipts? A. Allowing customers to pay with a debit card.B. Requiring the employee receiving cash from customers to also deposit the cash into the company's bank

account.C. Recording cash receipts as soon as they are recorded.D. Allowing customers to pay with a credit card.

162.Investing cash flows would include which of the following?

A. Payment of cash dividends to stockholders.B. Purchase of office supplies with cash.C. Purchase of a building with cash.D. Cash sales to customers.

163.What is the concept behind separation of duties in establishing internal controls?

A. The company's financial accountant should not share information with the company's tax accountant.B. Duties of middle-level managers should be clearly separated from those of top executives.C. Employee fraud is less likely to occur when access to assets and access to accounting records are

separated.D. The external auditors of the company should have no contact with managers while the audit is taking

place. 164.Which of the following is considered cash for financial reporting purposes?

A. Accounts receivable.B. Investments with maturity dates greater than three months.C. Checks received from customers.D. Accounts payable.

165.Payment of dividends to stockholders is considered a(n):

A. Operating cash flow.B. Investing cash flow.C. Financing cash flow.D. Not a cash flow.

166.Providing services to customers on account is considered a(n):


167.Issuing common stock for cash is considered a(n):


168.After preparing the bank reconciliation, an NSF check would result in which of the following when recording the adjustment to the company's cash balance? A. Debit to Service Fee Expense.B. Credit to Accounts Payable.C. Credit to Service Revenue.D. Debit to Accounts Receivable.

169.Which employees are the ones who must take final responsibility for the establishment and success of

internal controls? A. Top executives.B. Mid-level managers.C. Lower-level employees.D. All employees.

170.Occupational fraud:

A.

Is the use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization's resources.

B. Occurs in only a few organizations and generally involves minor amounts.C. Will be prevented when companies employ an auditor.D. Is committed only by lower-level employees.

171.The act of collusion refers to:

A. Top management and lower-level employees working together to share information necessary for

effective internal controls.B. Two or more people acting in coordination to circumvent internal controls.C. Management working with an auditor to prevent occupational fraud.D. Middle-level managers taking full responsibility for effective internal controls.

172.Which of the following is not an example of preventive controls?

A. Separation of duties.B. Physical controls.C. Proper authorization.D. Reconciliations.

173.Which of the following is an example of detective controls?


174.Keeping supplies in a locked room with access allowed only to authorized personnel is an example of

which preventive control? A. Separation of duties.B. Physical controls.C. Proper authorization.D. Employee management.

175.Giving only management the right to make purchases over a certain amount is an example of which preventive control? A. Separation of duties.B. Physical controls.C. Proper authorization.D. Employee management.

176.Providing employees with appropriate guidance to ensure they have the knowledge necessary to carry out

their job duties is an example of which preventive control? A. Separation of duties.B. Physical controls.C. Proper authorization.D. Employee management.

177.Having management periodically determine whether the amount of physical assets of the company match

the accounting records is an example of which detective control? A. Separation of duties.B. Reconciliations.C. Performance reviews.D. Employee management.

178.Checking actual outcome of individuals or processes against their expected outcome is an example of

which detective control? A. Separation of duties.B. Reconciliations.C. Performance reviews.D. Employee management.

179.Managers of the company act as stewards or caretakers of the company's assets.

True False

180.Common types of financial statement fraud include creating fictitious revenues from a fake customer,

improperly valuing assets, and mismatching revenues and expenses. True False

181.In response to corporate accounting scandals and to public outrage over seemingly widespread unethical

behavior of top executives, Congress passed the Sarbanes-Oxley Act. True False

182.The Sarbanes-Oxley Act is also known as Generally Accepted Accounting Principles.

True False

183.The Public Company Accounting Oversight Board (PCAOB) has the authority to establish standards

dealing with auditing, quality control, ethics, independence, and other activities relating to the preparation of audited financial reports. True False

184.Auditors of public companies can perform the full range of audit and nonaudit consulting services for their audit clients. True False

185.Section 404 of the Sarbanes-Oxley Act requires that a company's management document and assess the

effectiveness of all internal control processes that could affect financial reporting. True False

186.Internal control is a company's plan to (1) improve the accuracy and reliability of accounting information

and (2) safeguard the company's assets. True False

187.One benefit of internal control is greater reliance by investors on reported financial statements.

True False

188.A framework for designing an internal control system is provided by the Financial Accounting Standards

Board (FASB). True False

189.The control environment refers to the overall top-to-bottom attitude of the company with respect to internal

controls. True False

190.Risk assessment procedures include periodic reviews of internal controls, assessing management's

oversight of the internal control, developing solutions to known cases of internal control failures, and determining whether each division or operation within a company is meeting its objectives. True False

191.Separation of duties refers to auditors not being allowed to perform both audit and nonaudit services for the

same client. True False

192.An example of separation of duties would be not allowing an employee who receives cash to also be

responsible for depositing that cash in the bank account. True False

193.The internal control component of information and communication relates to the effectiveness of accurately

measuring and communicating business transactions. True False

194.Management needs to monitor the internal control system, just like any other system. Any control

deficiencies spotted by employees should be reported immediately to management. True False

195.Separation of duties occurs when two or more people act in coordination to circumvent internal controls. True False

196.Effective internal controls ensure a company's success and survival.

True False

197.The amount of cash reported in a company's balance sheet includes currency, coins, and balances in savings

and checking accounts, as well as items acceptable for deposit in these accounts, such as checks received from customers. True False

198.The amount of cash reported in a company's balance sheet includes items acceptable for deposit in bank

accounts, such as checks received from customers. True False

199.The amount of cash reported in a company's balance sheet includes the balance of accounts receivable if

cash collection is highly likely in the near future. True False

200.The amount of cash reported in a company's balance sheet does not include cash equivalents, defined as

short-term investments that have a maturity date no longer than three months from the date of purchase. True False

201.Common examples of cash equivalents are money market funds, Treasury bills, and certificates of deposit.

True False

202.Recording all cash receipts as soon as possible is considered a good internal control.

True False

203.Opening mail and making a list of checks received once per week is considered a good internal control over

cash receipts. True False

204.Whether a customer uses cash, a check, or a debit card to make a purchase, the company records the

transaction as a cash sale. True False

205.When customers pay for services with a check, the company should debit Accounts Receivable and credit

Service Revenue. True False

206.When customers pay for services with a debit card, the company should debit Cash and credit Service Revenue. True False

207.When a company pays for services received using a check, it should credit Accounts Payable until the

check is paid by the bank. True False

208.When a company pays for services received using a credit card, it should credit Accounts Payable.

True False

209.Allowing the employee who authorizes purchases to also prepare the check is an example of good internal

control. True False

210.Companies should set maximum purchase limits on debit cards and credit cards as part of internal controls.

True False

211.A bank reconciliation matches the balance of cash in the bank account with the balance of cash in the

company's own records. True False

212.Differences in the company's cash balance and the bank's cash balance occur because of either timing

differences or errors. True False

213.An example of a bank error that causes the company's balance and bank's balance of cash to differ is the

purchase of supplies with a check. True False

214.Cash receipts of the company that have not been added to the bank's record of the company's balance are

referred to as checks outstanding. True False

215.Checks outstanding are checks the company has written that have not been subtracted from the bank's

record of the company's balance. True False

216.A deposit outstanding will cause the bank's cash balance to be higher than the company's cash balance.

True False

217.A check outstanding will cause the bank's cash balance to be higher than the company's cash balance.

True False

218.An NSF check is an example of a cash transaction that is initially recorded by the bank and later by the company after notification. True False

219.Interest earned on a bank account is an example of a cash transaction recorded by the company and then

later by the bank after notification. True False

220.The final step in reconciling the bank's cash balance and the company's cash balance is to update the

company's cash balance for the items used to reconcile the bank's cash balance. True False

221.The petty cash fund represents cash on hand and is used to pay for minor purchases.

True False

222.The petty cash fund should have just enough cash to make minor expenditures over a reasonable period

(such as a week or a month). True False

223.A company's cash is reported in two financial statements - income statement and statement of cash flows.

True False

224.Cash is typically reported as a current asset in the balance sheet.

True False

225.The statement of cash flows reports a company's cash inflows and cash outflows related to (1) operating

activities, (2) investing activities, and (3) financing activities. True False

226.Investing activities include cash transactions involving revenue and expense events during the period.

True False

227.Investing activities include cash investments in long-term assets and investment securities.

True False

228.Investing activities include transactions designed to raise cash or finance the business.

True False

229.Only transactions involving cash affect a company's cash flows.

True False

230.A company's operating cash inflows less operating cash outflows generally equals the reported amount of net income in the income statement. True False

231.Earnings quality is the ability of net income to report the true underlying performance of the company.

True False

232.A company's free cash flows equal operating cash flows plus financing cash flows during the period.

True False

233.Generally, when a company's net income and free cash flows trend in the same direction over time,

earnings are believed to have higher quality. True False

234.What key piece of legislation was passed in response to corporate accounting scandals by Enron,

WorldCom, and others? A. Sarbanes-Oxley Act.B. 1933 Securities Act.C. 1934 Securities Exchange Act.D. Regulation Fair Disclosure.

235.Which of the following does not represent a major provision of the Sarbanes-Oxley Act?

A. Nonaudit services.B. Quarterly financial statements.C. Auditor rotation.D. Corporate executive accountability.

236.Under the provisions of the Sarbanes-Oxley Act, corporate executives:

A. Have limited responsibility for financial statements.B. Must personally prepare the company's financial statements.C. Must personally certify the company's financial statements.D. Are not allowed to view the company's financial statements.

237.Under the provisions of the Sarbanes-Oxley Act, auditors must do which of the following?

A. Provide nonaudit services for their clients.B. Audit public companies whose chief executives worked for the audit firm in the preceding year.C. Be hired by company management.D. Maintain working papers for at least seven years following an audit.

238.Which of the following is NOT a design feature of effective internal controls?

A. Allow greater reliance by investors on reported financial statements.B. Prevent fraudulent or errant financial reporting.C. Ensure the company's price advantage over competitors.D. Prevent misuse of company funds by employees.

239.A framework for designing an internal control system is provided by the: A. Committee of Sponsoring Organizations.B. Financial Accounting Standards Board.C. Securities and Exchange Commission.D. International Accounting Standards Board.

240.The components of internal control do not directly include:

A. Risk assessment.B. Inflation adjustment.C. Monitoring.D. Control activities.

241.Separation of duties refers to:

A. Making each manager personally responsible for his/her department.B. Keeping functions across different departments separate.C. Preventing top management and lower-level employees from interacting.D. Individuals who have physical responsibility for assets should not also have access to accounting

records. 242.Which employees have an impact on the operation and effectiveness of internal controls?

A. Upper management.B. Mid-level managers.C. Lower-level employees.D. All employees.

243.Cash may not include:

A. Foreign currency.B. Money orders.C. Accounts receivable.D. Undeposited customer checks.

244.Common examples of cash equivalents include all of the following except:

A. Money market funds.B. Treasury bills.C. Certificates of deposit.D. Accounts receivable.

245.Which of the following would NOT represent good controls over cash receipts?

A. Record all cash receipts as soon as possible.B. The employee that receives cash and checks should also deposit them in the bank.C. Open mail each day and make a list of checks received with the amount and payer's name.D. Verify cash receipts by comparing the bank deposit slip with the accounting records.

246.Which of the following would NOT be recorded as a cash sale? A. Customer who pays with a check.B. Customer who pays with a debit card.C. Customer who pays with a credit card.D. A customers who buys on account.

247.McGregor Company allows customers to pay with credit cards. The credit card company charges

McGregor 3% of the sale. When a customer uses a credit card to pay McGregor $200 for services provided, McGregor would: A. Debit Cash for $200.B. Credit Service Revenue for $194.C. Debit Service Fee Expense for $6.D. Credit Service Revenue for $206.

248.A customer purchased a $2,000 item at ApplianceWorld, paying with a credit card. ApplianceWorld is

charged a 2% fee by the credit card company. When recording this sale, ApplianceWorld would: A. Debit Accounts Receivable for $2,000.B. Credit Sales Revenue for $2,000.C. Credit Sales Revenue for $1,960.D. Credit Unearned Revenue for $2,000.

249.Which of the following would NOT represent good controls over cash disbursements?

A. Make all disbursements, other than very small ones, by check, debit card, or credit card.B. Require only one signature for checks, especially larger ones.C. Authorize all expenditures before purchase and verify the accuracy of the purchase itself.D. The employee who authorizes payment should not also be the employee who prepares the check.

250.Which of the following would NOT represent good controls over cash disbursements?

A. Periodically check amounts shown in the debit card and credit card statements against purchase receipts.B.

The employee verifying the accuracy of the debit card and credit card statements should not also be the employee responsible for actual purchases.

C. Set maximum purchase limits on debit cards and credit cards.D. Employees responsible for making cash disbursements should also be in charge of cash receipts.

251.Which of the following would NOT need to be accounted for in a bank reconciliation?

A. Deposits outstanding recorded by the company but not the bank.B. Interest earned recorded by the bank but not the company.C. NSF checks recorded by the bank but not by the company.D. Checks written by the company and recorded by the bank.

252.On May 31, Money Corporation's Cash account showed a balance of $10,000 before the bank reconciliation was prepared. After examining the May bank statement and items included with it, the company's accountant found the following items:

What is the amount of cash that should be reported in the company's balance sheet as of May 31? A. $9,860.B. $9,650.C. $10,130.D. $10,410.

253.Cash transactions recorded by the bank but not yet recorded by the company include all of the following

except A. Service fees.B. Interest earned.C. Checks outstanding.D. NSF checks.

254.The following information was taken from the bank reconciliation for Mooner Sooner Inc. at the end of

2012: Bank balance: $8,000Checks outstanding: $5,800Note collected by the bank: $1,500Service fee: $20Deposits outstanding: $4,000NSF check (bad check) returned for $300What is the correct cash balance that should be reported in Mooner Sooner's balance sheet at the end of 2012? A. $10,200.B. $7,400.C. $6,200.D. $6,160.

255.Cash transactions that have been recorded by the company but not the bank include:

A. NSF checks.B. Interest earned.C. Service fees.D. Deposits outstanding.

256.Which of the following is NOT a reason why a bank reconciliation is necessary?

A. The company has transactions that the bank has not recorded.B. Petty cash has a low balance.C. The bank has transactions that the company has not recorded.D. Reconciliations provide a control over cash.

257.Which of the following is correct with respect to a bank reconciliation? A. Subtract interest earned from the bank's balance.B. Add service charge to the company's balance.C. Subtract NSF checks from the company's balance.D. Add deposits outstanding to the company's balance.

258.After preparing a bank reconciliation, the collection of a note by the bank on a company's behalf would be

recorded with: A. A credit to Notes Receivable.B. A credit to Cash.C. A debit to Notes Receivable.D. A credit to Accounts Receivable.

259.After preparing a bank reconciliation, the service fee charged by the bank would be recorded with:

A. A credit to Service Fees Expense.B. A debit to Cash.C. A credit to Service Fees Revenue.D. A debit to Service Fees Expense.

260.After preparing a bank reconciliation, a check outstanding for the payment of advertising would be

recorded with: A. A debit to Advertising Expense.B. A debit to Cash.C. A credit to Advertising Expense.D. No entry is needed.

261.The following data were obtained from the bank statement and from the process of reconciling it:

Bank service charges = $20Deposit outstanding = $150Interest earned on the bank account = $10Checks outstanding = $400Which items should be deducted from and added to the bank balance in completing the reconciliation? A. Deduct checks outstanding; add service charges and deposit outstanding.B. Deduct interest earned; add deposit outstanding.C. Deduct checks outstanding; add deposit outstanding.D. Deduct deposit outstanding; add checks outstanding.

262.The balance in the Colt Company's Cash account on August 31 was $19,700, before the bank reconciliation was prepared. After examining the August bank statement and items included with it, the company's accountant found:

What is the amount of cash that should be reported in the balance sheet as of August 31? A. $20,700.B. $17,200.C. $18,700.D. $22,200.

263.The balance shown in the August bank statement of Colt Company was $23,200. After examining the

August bank statement and items included with it, the company's accountant found:Checks outstanding $4,300NSF check 140Note collected by bank for the Colt Company 1,200Deposits outstanding 1,800Bank service fees 60What is the amount of cash that should be reported in the balance sheet as of August 31? A. $20,700.B. $17,200.C. $18,700.D. $22,200.

264.A minor amount of cash kept on hand to pay for small purchases is referred to as a:

A. Petty cash fund.B. Cash receipts fund.C. Cash payments fund.D. Cookie jar fund.

265.Which of the following is NOT involved in the replenishment of the petty cash fund?

A. Transactions related to vouchers will be recorded.B. Management will verify that the total of all vouchers equals the amount of cash missing from the petty

cash fund.C. Weekly payroll checks will be recorded.D. Management will withdraw cash from the bank and place it in the petty cash fund.

266.At the time a $400 petty cash fund is being replenished, the company's accountant finds vouchers totaling

$350 and petty cash of $50. The vouchers include: postage, $100; business lunches, $150; delivery fees, $75; and office supplies, $25. Which of the following is not recorded when recognizing expenditures from the petty cash fund? A. Debit Postage Expense, $100.B. Debit Supplies, $25.C. Credit Petty Cash, $350.D. Debit Petty Cash, $350.

267.A company's cash balance is reported in which two financial statements? A. Income statement and statement of cash flows.B. Balance sheet and statement of cash flows.C. Income statement and balance sheet.D. Balance sheet and statement of stockholders' equity.

268.The statement of cash flows reports cash flows from the activities of:

A. Operating, purchasing, and investing.B. Borrowing, paying, and investing.C. Financing, investing, and operating.D. Using, investing, and financing.

269.Operating cash flows would exclude:

A. Payment of employee salaries.B. Receipt of cash from customers.C. Payment of dividends.D. Payment for advertising.

270.Cash flows from investing do not include cash flows from:

A. Lending.B. The sale of equipment.C. Borrowing.D. The purchase of a building.

271.Cash flows from financing activities include:

A. Lending.B. Salaries paid.C. The sale of land.D. Dividends paid.

272.Cash flows from investing activities do not include:

A. Borrowing.B. The purchase of equipment.C. The sale of land.D. The purchase of a building.

273.Terastar Corp. reports the following amounts for 2012 and 2013:

What is the amount of Terastar's free cash flows for 2013? A. $3,000.B. $13,000.C. $9,000.D. $7,000.

274.Terastar Corp. reports the following amounts for 2012 and 2013.

What is the trend in free cash flows relative to net income? A. Both are increasing.B. Net income is trending upward and free cash flows are trending downward.C. Both are decreasing.D. Net income is trending downward and free cash flows are trending upward.

275.A company had the following sales transactions:

1. Total debit card sales = $200,000.2. Total credit card sales = $400,000.3. Total cash sales = $800,000.4. Total check sales = $100,000.There is a charge of 2% on all credit card transactions. Calculate total sales revenue recorded for the year.

276.A company had the following transactions:

1. Paid $150 for office supplies using a debit card.2. Purchased office equipment costing $700 using a credit card.3. Paid utilities bill of $400 by issuing a check.Record each transaction.

277.Indicate whether the firm should add or subtract each item below from its balance of cash or the bank's balance of cash in preparing a bank reconciliation.


the monthly bank statement reveals several additional cash transactions such as checks outstanding of $2,840, bank service fees of $110, and interest earned of $15. Calculate the correct balance of cash.


the monthly bank statement reveals several additional cash transactions such as deposits outstanding of $1,760, note collected by the bank on the company's behalf of $1,000, and interest earned of $20. The company also finds an error by the bank of an additional deposit of $100. Calculate the correct balance of cash.

280.A company's bank statement shows a cash balance of $4,230. Comparing the company's cash records with the monthly bank statement reveals several additional cash transactions such as checks outstanding of $3,880, deposits outstanding of $1,230, NSF check of $300, and service fee of $50. Calculate the correct balance of cash.


the monthly bank statement reveals several additional cash transactions such as checks outstanding of $2,110, NSF check of $200, interest earned of $30, service fee of $40, and a check for $150 recorded twice by the company. Calculate the correct balance of cash.


Cash account with the monthly bank statement reveals several additional cash transactions such as bank service fees ($50), an NSF check from a customer ($300), a customer's note receivable collected by the bank ($1,000), and interest earned ($100). Prepare the necessary entries to adjust the balance of cash.


Cash account with the monthly bank statement reveals several additional cash transactions such as deposits outstanding ($1,250), checks outstanding ($2,380), bank service fees ($40), an NSF check from a customer ($150), a customer's note receivable collected by the bank ($500), and interest earned ($60). Prepare the necessary entries to adjust the balance of cash.

284.Peterson Company's general ledger shows a cash balance of $7,850 on May 31, 2012. May cash receipts of $1,250, included in the general ledger balance, are placed in the night depository at the bank on May 31 and processed by the bank on June 1. The bank statement dated May 31 shows an NSF check for $200 and a service fee of $50. The bank processes all checks written by the company by May 31 and lists them on the bank statement, except for one check totaling $1,640. The bank statement shows a balance of $7,990 on May 31. Prepare a bank reconciliation to calculate the correct ending balance of cash on May 31, 2012.

285.Madison Company's cash ledger reports the following for the month ending March 31, 2012.

Information from March's bank statement and company records reveals the following additional information:a. The ending cash balance recorded in the bank statement is $6,790.b. Cash receipts of $2,100 from 3/26-3/31 are outstanding.c. Checks 545 and 547 are outstanding.d. The deposit on 3/11 included a customer's check for $400 that did not clear the bank (NSFcheck).e. Check 543 was written for $2,800 for office supplies in March. The bank properly recorded the check for this amount.f. An automatic withdrawal for March rent was made on March 4 for $1,500.g. Madison's checking account earns interest based on the average daily balance. The amount of interest earned for March is $50.h. Last year, one of Madison's top executives borrowed $4,000 from Madison. On March 24, the executive paid $4,200 ($4,000 borrowed amount plus $200 interest) directly to the bank in payment for the borrowing.i. The bank charged the following service fees: $30 for NSF check, $10 for automatic withdrawal for rent payment, and $20 for collection of the loan amount from the executive.Prepare a bank reconciliation for March 31, 2012, and record the necessary cash adjustments.

286.A company establishes a petty cash fund for $400. By the end of the month, employees had made the following expenditures from the fund: supplies, $150; fuel for deliveries, $120; postage, $75; miscellaneous, $35. Record the entry to recognize expenditures from the petty cash fund.

287.A company establishes a $300 petty cash fund on August 3 to pay for minor cash expenditures. The fund is

replenished at the end of each month. At the end of August, the fund contains $40 in cash and the following receipts:

Record the establishment of the petty cash fund on August 3, the expenditures of the fund, and replenishment on August 31.

288.A company provides services on account during the current year totaling $400,000. By the end of the year,

$350,000 of this amount had been received. In addition, $75,000 was received on account from customers for services provided in the prior year. Determine the amount of operating cash flows the company will report as received from customers in the current year.

289.During the current year, a company provides services on account for $100,000. By the end of the year, $60,000 of this amount had been received. In addition, cash payments for the year were employees' salaries, $50,000; office supplies, $10,000; and utilities $20,000. Determine the amount of operating cash flows the company will report in the current year.

290.During the current year, a company purchases equipment for $250,000, paying $50,000 immediately and

promising to pay the remainder within 30 days after the end of the year. Determine the amount of investing cash flows the company will report in the current year.

291.At the beginning of the current year, a company issued stock for $100,000 and borrowed $50,000 from

the bank. By the end of the year, the company had provided services of $80,000 for cash, paid employee salaries of $30,000, and paid utilities of $10,000. Determine the amount of financing cash flows the company will report in the current year.

292.During the year, a company issues common stock for $50,000 and repays previously borrowed amounts

of $75,000. In addition, the company pays dividends of $5,000 to stockholders. Determine the amount of financing cash flows the company will report in the current year.

293.Consider the following transactions:1. Pay employees' salaries.2. Repay borrowing to the bank.3. Purchase equipment with note payable.4. Provide services to customers on account.5. Pay dividends to stockholders.6. Collect cash from customers for services provided.7. Purchase supplies on account.8. Pay for supplies purchased in transaction 7 above.For each transaction, indicate the type of cash flow involved based on the classifications in the statement of cash flows. If a transaction does not involve cash, write ‘No Cash.'

294.A company had the following transactions during the year:

1. Paid rent for the next two years, $8,000.2. Purchased office supplies on account, $2,400.3. Purchased equipment, paying $12,000 cash and issuing a note payable for $4,000.4. Borrowed from the bank, $6,000.5. Paid employee salaries, $7,200.6. Paid $2,000 on account related to transaction 2 above.7. Paid dividends to stockholders, $2,800.8. Sold land for $10,000 that was purchased in a prior year for $7,500.9. Collected cash from customers for services provided, $25,700.Calculate cash flows from operating activities, investing activities, and financing activities.

295.Below is a summary of all the transactions of Sampson Consulting for the month of April 2012.

Prepare a statement of cash flows for the month of April, properly classifying each of the transactions into operating, investing, and financing activities. The cash balance at the beginning of April is $14,800.

296.Discuss the events leading up to the passage of the Sarbanes-Oxley Act and its major provisions.

04-119

297.What is internal control? Briefly describe the five components of internal control outlined by the

Committee of Sponsoring Organizations (COSO). 04-119

298.A company uses the following process for its cash receipts. At the end of each day, the secretary places all cash and checks received from customers in a desk drawer. Each Monday, the secretary totals all amounts received, records this in the accounting records, and deposits the money in the bank account. Then, once every three months, the office manager requests information from the bank necessary to prepare a bank reconciliation. Discuss the company's internal control procedures related to cash receipts. 04-119

299.Describe the procedures used to reconcile a company's cash balance.

04-119

300.What is the purpose of the statement of cash flows? List the three major categories of cash flows and give

an example of a cash transaction for each category. 04-119

301.What is the link between the balance sheet and the statement of cash flows? Describe the operating,

investing, and financing sections of the statement of cash flows. 04-119

302.____ Procedures for maintaining separation of duties. Answer: c

303.____ PCAOB establishes standards related to the preparation of audited financial reports.

Answer: b

304.____ Formal policies to evaluate internal and external threats to achieving company objectives.

Answer: j

305.____ Audit firm cannot provide a variety of other services to its client, such as consulting.

Answer: e

306.____ Management must document the effectiveness of procedures that could affect financial reporting.

Answer: g

307.____ Lead audit partners are required to change every five years.

Answer: i

308.____ Transfer of data from lower managers to top executives for accurate financial reporting.

Answer: h

309.____ Executives must personally certify the financial statements.

Answer: d

310.____ Overall attitude of the company with respect to internal controls.

Answer: f

311.____ Routine activities that are meant to continually observe internal control activities.

Answer: a

312.____ Minor amount of cash kept on hand.

Answer: c

313.____ Short-term investments that have a maturity date no longer than three months from the date of

purchase. Answer: a

314.____ Matches the balance of cash in the bank account with the balance of cash in the company's own

records. Answer: b

315.____ Withdraws funds directly from the user's account at the time of use. Answer: d

316.____ Allows users to purchase items without having to pay cash immediately.

Answer: e

317.____ Fees imposed by the bank to the company for providing routine services.

Answer: a04-139

318.____ Checks written to the company that are returned by the bank as not having adequate funds.

Answer: d04-139

319.____ The company recorded a deposit twice.

Answer: e04-139

320.____ Checks written by the company but not yet recorded by the bank.

Answer: f04-139

321.____ Cash receipts received by the company but not yet recorded by the bank.

Answer: b04-139

322.____ Money earned on the average daily balance of the checking account.

Answer: c04-139

323.____ Pay dividends to stockholders.

Answer: b

324.____ Pay salaries to employees.

Answer: c

325.____ Purchase equipment.

Answer: f

326.____ Receive payment from customers.

Answer: a

327.____ Issue common stock. Answer: e

328.____ Sell office building.

Answer: d


Pay amount owed to bank for previous borrowing.Pay utility costs.Purchase equipment to be used in operations.Purchase office supplies.Pay one year of rent in advance.Pay workers' salaries.Pay for research and development costs.Pay taxes to the IRS.Sell common stock to investors.How many of these cash flow items involve investing activities? A. Zero.B. One.C. Two.D. Three.


Pay amount owed to bank for previous borrowing.Pay utility costs.Purchase equipment to be used in operations.Purchase office supplies.Purchase one year of rent in advance.Pay workers' salaries.Pay for research and development costs. Pay taxes to the IRS.Sell common stock to investors.How many of these cash flow items involve financing activities? A. Zero.B. One.C. Two.D. Three.

331.Regarding a bank reconciliation, which one of the following is an item recorded by the company but not by

the bank? A. Checks outstanding.B. Interest earned.C. Service charges.D. NSF checks.

332.Which of the following is correct regarding a petty cash fund? A. Petty cash fund represents cash on hand at the business for quick access.B. Petty cash fund is used for minor purposes.C. When cash from this fund is taken out, it should be replaced with a voucher.D. All of the above are correct.

333.The following information pertains to Sooner Company's cash balance and bank reconciliation as of August

31:

What is the correct cash balance for Sooner Company? A. Option aB. Option bC. Option cD. Option d

334.Which of the following best describes the goal of internal controls?

A. Ensuring the business is profitable.B. Enhancing the health of employees.C. Improving the accuracy and the reliability of financial information.D. Ensuring the compliance with tax regulations.

335.Which of the following is NOT correct regarding the reporting of cash?

A. Cash is reported in both the balance sheet and the statement of cash flows.B. Cash flows from buying and selling investments and long-term productive assets are called operating

cash flows.C. Cash flows from transactions with stockholders and creditors are called financing cash flows.D. Net cash flows reported in the statement of cash flows should equal the change in cash reported in the

balance sheet. 336.When preparing a bank reconciliation, a deposit outstanding would be:

A. Added to the company's cash balance.B. Added to the bank's cash balance.C. Subtracted from the company's cash balance.D. Subtracted from the bank's cash balance.

337.Fraudulent reporting by management could include:

A. Fictitious revenues from a fake customer.B. Improper asset valuation.C. Mismatching revenues and expenses.D. All of the above.

338.The Sarbanes-Oxley Act (SOX) mandates which of the following? A. Increased regulations related to auditor-client relations.B. Increased regulations related to internal control.C. Increased regulations related to corporate executive accountability.D. All of the above.

339.Which of the following would not be considered good internal control for cash receipts?

A. Allowing customers to pay with a debit card.B. Requiring the employee receiving cash from customers to also deposit the cash into the company's bank

account.C. Recording cash receipts as soon as they are recorded.D. Allowing customers to pay with a credit card.

340.Investing cash flows would include which of the following?

A. Payment of cash dividends to stockholders.B. Purchase of office supplies with cash.C. Purchase of a building with cash.D. Cash sales to customers.

341.What is the concept behind separation of duties in establishing internal controls?

A. The company's financial accountant should not share information with the company's tax accountant.B. Duties of middle-level managers should be clearly separated from those of top executives.C. Employee fraud is less likely to occur when access to assets and access to accounting records are

separated.D. The external auditors of the company should have no contact with managers while the audit is taking

place. 342.Which of the following is considered cash for financial reporting purposes?

A. Accounts receivable.B. Investments with maturity dates greater than three months.C. Checks received from customers.D. Accounts payable.

343.Payment of dividends to stockholders is considered a(n):


344.Providing services to customers on account is considered a(n):


345.Issuing common stock for cash is considered a(n): A. Operating cash flow.B. Investing cash flow.C. Financing cash flow.D. Not a cash flow.

346.After preparing the bank reconciliation, an NSF check would result in which of the following when

recording the adjustment to the company's cash balance? A. Debit to Service Fee Expense.B. Credit to Accounts Payable.C. Credit to Service Revenue.D. Debit to Accounts Receivable.

347.Which employees are the ones who must take final responsibility for the establishment and success of

internal controls? A. Top executives.B. Mid-level managers.C. Lower-level employees.D. All employees.

348.Occupational fraud:

A.

Is the use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization's resources.

B. Occurs in only a few organizations and generally involves minor amounts.C. Will be prevented when companies employ an auditor.D. Is committed only by lower-level employees.

349.The act of collusion refers to:

A. Top management and lower-level employees working together to share information necessary for

effective internal controls.B. Two or more people acting in coordination to circumvent internal controls.C. Management working with an auditor to prevent occupational fraud.D. Middle-level managers taking full responsibility for effective internal controls.

350.Which of the following is not an example of preventive controls?


351.Which of the following is an example of detective controls?


352.Keeping supplies in a locked room with access allowed only to authorized personnel is an example of which preventive control? A. Separation of duties.B. Physical controls.C. Proper authorization.D. Employee management.

353.Giving only management the right to make purchases over a certain amount is an example of which

preventive control? A. Separation of duties.B. Physical controls.C. Proper authorization.D. Employee management.

354.Providing employees with appropriate guidance to ensure they have the knowledge necessary to carry out

their job duties is an example of which preventive control? A. Separation of duties.B. Physical controls.C. Proper authorization.D. Employee management.

355.Having management periodically determine whether the amount of physical assets of the company match

the accounting records is an example of which detective control? A. Separation of duties.B. Reconciliations.C. Performance reviews.D. Employee management.

356.Checking actual outcome of individuals or processes against their expected outcome is an example of

which detective control? A. Separation of duties.B. Reconciliations.C. Performance reviews.D. Employee management.

Ch4 Key

1. TRUE 2. TRUE 3. TRUE 4. FALSE 5. TRUE 6. FALSE 7. TRUE 8. TRUE 9. TRUE 10. FALSE 11. TRUE 12. TRUE 13. FALSE 14. TRUE 15. TRUE 16. TRUE 17. FALSE 18. FALSE 19. TRUE 20. TRUE 21. FALSE 22. FALSE 23. TRUE 24. TRUE 25. FALSE 26. TRUE 27. FALSE 28. TRUE 29. FALSE 30. TRUE 31. FALSE 32. TRUE

33. TRUE 34. TRUE 35. FALSE 36. FALSE 37. TRUE 38. FALSE 39. TRUE 40. TRUE 41. FALSE 42. FALSE 43. TRUE 44. TRUE 45. FALSE 46. TRUE 47. TRUE 48. FALSE 49. TRUE 50. FALSE 51. TRUE 52. FALSE 53. TRUE 54. FALSE 55. TRUE 56. A 57. B 58. C 59. D 60. C 61. A 62. B 63. D 64. D 65. C 66. D 67. B

68. D 69. C 70. B 71. B 72. D 73. D 74. C 75. C 76. C 77. D 78. B 79. C 80. A 81. D 82. D 83. C 84. A 85. A 86. A 87. C 88. D 89. B 90. C 91. C 92. C 93. D 94. A 95. C 96. A 97. $1,500,000

98.

99. 100. $4,475 101. $3,400 102. $1,580 103. $2,060

104.

105.

106.

107.

108.

109. 110. $425,000 111. -$20,000 112. ($50,000) 113. $150,000 114. -$30,000

115. 1. Operating.2. Financing.3. No Cash.4. No Cash.5. Financing.6. Operating.7. No Cash.8. Operating. 116. Operating activities = $8,500; Investing activities = -$2,000; Financing activities = $3,200

117. 118. Two of the highest-profile cases (Enron and WorldCom) of fraudulent financial reporting in 2001 and 2002, as well as other fraudulent reporting by many others, led Congress to pass the Sarbanes-Oxley Act. Fraudulent financial reporting was associated with poor social consequences such as bankruptcy, employee termination, reduced salaries, increased workloads, and loss of employee retirement funds, stock options, and health benefits.The major provisions of the Sarbanes-Oxley Act include formation of the Public Company Accounting Oversight Board (PCAOB), corporate executive accountability, limitation on nonaudit services, retention of work papers, auditor rotation, restrictions related to conflicts of interest, audit committee hires the auditor, and documentation of internal control. 119. Internal control is a company's plan to (1) improve the accuracy and reliability of accounting information and (2) safeguard the company's assets.1. Control Environment - overall top-to-bottom attitude of the company with respect to internal controls.2. Risk Assessment - development of formal policies to assess the risk that internal or external sources are preventing a company from achieving its objectives.3. Control Activities - systems for approving cash payments, authorizing purchases, reviewing operating performance, and safeguarding assets.4. Monitoring - Continuous observation of the internal control system.5. Information and Communication - systems designed to ensure accurate measurement of business transactions and reliability of financial reports. 120. Cash should be recorded and deposited daily. The employee recording cash receipts should not also be the employee making the deposit. The bank reconciliation should be prepared monthly by a person with no other cash responsibilities.

121. For the bank's cash balance, deposits outstanding should be added and checks outstanding should be subtracted. For the company's cash balance, notes collected by the bank and interest earned should be added; service fees and NSF checks should be subtracted. As a final step in the reconciliation process, the company must record cash items used to reconcile the company's cash balance. 122. The purpose of the statement of cash flows is to summarize the transactions that caused cash to change during the reporting period. The statement of cash flows summarizes cash flows in three categories: operating, investing, and financing. Operating activities include cash flows related to transactions entering into the determination of net income, such as cash collections from customers, payments for operating expenses, and other receipts such as interest and dividends. Investing activities include purchasing and selling long-term assets or certain investment securities. Financing activities include borrowing or repaying loans, issuing stock, and payment of dividends. 123. The balance sheet reports the final balance of cash at the end of the reporting period. The statement of cash flows reports inflows and outflows of cash during the reporting period. The beginning balance of cash plus net cash flows reported in the statement of cash flows equals the ending balance of cash reported in the balance sheet. Operating activities include cash transactions involving revenue and expense events during the period. Investing activities include cash investments in long-term assets and investment securities. Financing activities include transactions designed to raise cash or finance the business. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150.

151. B 152. C 153. A 154. D 155. A 156. C 157. B 158. B 159. D 160. D 161. B 162. C 163. C 164. C 165. C 166. D 167. C 168. D 169. A 170. A 171. B 172. D 173. D 174. B 175. C 176. D 177. B 178. C 179. TRUE 180. TRUE 181. TRUE 182. FALSE 183. TRUE 184. FALSE 185. TRUE

186. TRUE 187. TRUE 188. FALSE 189. TRUE 190. TRUE 191. FALSE 192. TRUE 193. TRUE 194. TRUE 195. FALSE 196. FALSE 197. TRUE 198. TRUE 199. FALSE 200. FALSE 201. TRUE 202. TRUE 203. FALSE 204. TRUE 205. FALSE 206. TRUE 207. FALSE 208. TRUE 209. FALSE 210. TRUE 211. TRUE 212. TRUE 213. FALSE 214. FALSE 215. TRUE 216. FALSE 217. TRUE 218. TRUE 219. FALSE 220. FALSE

221. TRUE 222. TRUE 223. FALSE 224. TRUE 225. TRUE 226. FALSE 227. TRUE 228. FALSE 229. TRUE 230. FALSE 231. TRUE 232. FALSE 233. TRUE 234. A 235. B 236. C 237. D 238. C 239. A 240. B 241. D 242. D 243. C 244. D 245. B 246. D 247. C 248. B 249. B 250. D 251. D 252. C 253. C 254. C 255. D

256. B 257. C 258. A 259. D 260. D 261. C 262. A 263. A 264. A 265. C 266. D 267. B 268. C 269. C 270. C 271. D 272. A 273. C 274. A 275. $1,500,000

276.

277. 278. $4,475 279. $3,400 280. $1,580 281. $2,060

282.

283.

284.

285.

286.

287. 288. $425,000 289. -$20,000 290. ($50,000) 291. $150,000 292. -$30,000 293. 1. Operating.2. Financing.3. No Cash.4. No Cash.5. Financing.6. Operating.7. No Cash.8. Operating. 294. Operating activities = $8,500; Investing activities = -$2,000; Financing activities = $3,200

295. 296. Two of the highest-profile cases (Enron and WorldCom) of fraudulent financial reporting in 2001 and 2002, as well as other fraudulent reporting by many others, led Congress to pass the Sarbanes-Oxley Act. Fraudulent financial reporting was associated with poor social consequences such as bankruptcy, employee termination, reduced salaries, increased workloads, and loss of employee retirement funds, stock options, and health benefits.The major provisions of the Sarbanes-Oxley Act include formation of the Public Company Accounting Oversight Board (PCAOB), corporate executive accountability, limitation on nonaudit services, retention of work papers, auditor rotation, restrictions related to conflicts of interest, audit committee hires the auditor, and documentation of internal control. 297. Internal control is a company's plan to (1) improve the accuracy and reliability of accounting information and (2) safeguard the company's assets.1. Control Environment - overall top-to-bottom attitude of the company with respect to internal controls.2. Risk Assessment - development of formal policies to assess the risk that internal or external sources are preventing a company from achieving its objectives.3. Control Activities - systems for approving cash payments, authorizing purchases, reviewing operating performance, and safeguarding assets.4. Monitoring - Continuous observation of the internal control system.5. Information and Communication - systems designed to ensure accurate measurement of business transactions and reliability of financial reports. 298. Cash should be recorded and deposited daily. The employee recording cash receipts should not also be the employee making the deposit. The bank reconciliation should be prepared monthly by a person with no other cash responsibilities. 299. For the bank's cash balance, deposits outstanding should be added and checks outstanding should be subtracted. For the company's cash balance, notes collected by the bank and interest earned should be added; service fees and NSF checks should be subtracted. As a final step in the reconciliation process, the company must record cash items used to reconcile the company's cash balance. 300. The purpose of the statement of cash flows is to summarize the transactions that caused cash to change during the reporting period. The statement of cash flows summarizes cash flows in three categories: operating, investing, and financing. Operating activities include cash flows related to transactions entering into the determination of net income, such as cash collections from customers, payments for operating expenses, and other receipts such as interest and dividends. Investing activities include purchasing and selling long-term assets or certain investment securities. Financing activities include borrowing or repaying loans, issuing stock, and payment of dividends. 301. The balance sheet reports the final balance of cash at the end of the reporting period. The statement of cash flows reports inflows and outflows of cash during the reporting period. The beginning balance of cash plus net cash flows reported in the statement of cash flows equals the ending balance of cash reported in the balance sheet. Operating activities include cash transactions involving revenue and expense events during the period. Investing activities include cash investments in long-term assets and investment securities. Financing activities include transactions designed to raise cash or finance the business. 302.

303. 304. 305. 306. 307. 308. 309. 310. 311. 312. 313. 314. 315. 316. 317. 318. 319. 320. 321. 322. 323. 324. 325. 326. 327. 328. 329. B 330. C 331. A 332. D 333. A 334. C 335. B 336. B 337. D

338. D 339. B 340. C 341. C 342. C 343. C 344. D 345. C 346. D 347. A 348. A 349. B 350. D 351. D 352. B 353. C 354. D 355. B 356. C

Ch4 Summary


AACSB: Analytic 82

AACSB: Ethics 12





AICPA: Reporting 50

Blooms: Analysis 31

Blooms: Analysis 31





Blooms: Evaluation 4




Blooms: Synthesis 4

Blooms: Synthesis 4

Difficulty: Easy 110

Difficulty: Hard 64

Difficulty: Hard (or Medium??) Other similar questions are coded "Medium" (see Questions 101-105). 2


Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. 50

Learning Objective: 04-02 Identify the components; responsibilities; and limitations of internal control. 76

Learning Objective: 04-03 Define cash and cash equivalents. 26

Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. 48

Learning Objective: 04-05 Reconcile a bank statement. 96

Learning Objective: 04-06 Account for petty cash. 26

Learning Objective: 04-07 Identify the major inflows and outflows of cash. 72

Learning Objective: 04-08 Assess earnings quality by comparing net income and cash flows. 12


Ch5Student: ___________________________________________________________________________

1. Credit sales transfer products and services to a customer today while bearing the risk of collecting payment from that customer in the future. True False

2. At the time of a credit sale, a company would record an increase in assets and an increase in revenues.

True False

3. A sale on account is recorded as a debit to Service Revenue and a credit to Accounts Receivable.

True False

4. Accounts receivable represent the amount of cash owed to the company by its customers from the sale of

products or services on account. True False

5. Trade discounts represent a discount offered to the purchasers for quick payment.

True False

6. When a company sells a $100 service with a 20% trade discount, $80 of revenue is recognized.

True False

7. A sales discount represents a reduction, not in the selling price of a product or service, but in the amount to

be paid by a credit customer if payment is made within a specified period of time. True False

8. A sale on account for $1,000 offered with terms 2/10, n/30 means that the customers will get a $2 discount

if payment is made within 10 days; otherwise, full payment is due within 30 days. True False

9. The Sales Discounts account is an example of a contra revenue account.

True False

10. The Sales Discounts account is an expense account.

True False

11. Sales returns and allowances occur when the buyer returns the goods or the seller reduces the customer's

balance owed. True False

12. A sales allowance is recorded as a debit to Accounts Receivable and a credit to Sales Allowances. True False

13. The Sales Returns account is an expense account.

True False

14. If a company has total revenues of $100,000, sales discounts of $3,000, sales returns of $4,000, and sales

allowances of $2,000, the income statement will report net revenues of $91,000. True False

15. Accounts receivable are reported at their net realizable value.

True False

16. The net realizable value of accounts receivable is the full amount owed by customers.

True False

17. Customers' accounts that we no longer consider collectible are referred to as uncollectible accounts (or bad

debts). True False

18. The direct write-off method involves recording an adjustment at the end of each period to account for the

possibility of future uncollectible accounts. True False

19. The adjustment to account for future bad debts has the effect of (1) reducing assets and (2) increasing


20. The adjustment for uncollectible accounts involves a debit to Bad Debt Expense and a credit to the

Allowance for Uncollectible Accounts. True False

21. The Allowance for Uncollectible Accounts is a contra asset account representing the amount of accounts

receivable that we do not expect to collect. True False

22. Bad debt expense is the amount of the adjustment to the allowance for uncollectible accounts that

represents the cost of the estimated future bad debts. True False

23. One disadvantage of the allowance method (over the direct write-off method) for recording uncollectible

accounts is that it generally matches bad debt expense with the revenue it helped to generate. True False

24. If a company is owed $10,000 by its customers, but it expects that $1,000 will not be collected, accounts receivable in the balance sheet are reported at the net amount of $9,000. True False

25. Under the allowance method, when a company writes off an account receivable as an actual bad debt, it

reduces total assets. True False

26. Under the allowance method, when a company writes off an account receivable as an actual bad debt, it

records an expense. True False

27. Under the allowance method, the write-off of an actual bad debt is recorded with a debit to the Allowance

for Uncollectible Accounts and a credit to Accounts Receivable. True False

28. Under the allowance method, when a company collects cash from an account previously written off, total

assets increase. True False

29. A credit balance in the Allowance for Uncollectible Accounts before adjustment indicates that last year's

estimate of uncollectible accounts may have been too high. True False

30. A debit balance in the Allowance for Uncollectible Accounts before adjustment indicates that last year's

estimate of uncollectible accounts was too low. True False

31. The aging method for estimating uncollectible accounts considers that a higher percentage of "older"

accounts will not be collected compared to "newer" accounts. True False

32. A company expects 5% of its newer accounts receivable to be uncollectible and 20% of its older accounts

to be uncollectible. If the company has $40,000 of newer accounts and $5,000 of older accounts, the total estimate of uncollectible accounts is $2,000. True False

33. Under the direct write-off method, bad debt expense is recorded at the time accounts are known to be

uncollectible. True False

34. The direct write-off method is used for tax purposes but is generally not permitted for financial reporting.

True False

35. The direct write-off method violates the matching principle. True False

36. Under the direct write-off method, recording an estimate of future uncollectible accounts includes a debit to

Bad Debt Expense and a credit to the Allowance for Uncollectible Accounts. True False

37. Notes receivable are similar to accounts receivable but are more formal credit arrangements evidenced by a

written debt instrument, or note. True False

38. Notes receivable typically arise from sales to customers.

True False

39. Notes receivable are assets and are reported in the balance sheet.

True False

40. Interest on a note receivable is calculated as the face value of the note times the annual interest rate stated

on the note times the fraction of the year the note is outstanding. True False

41. A $10,000 note that has a stated interest rate of 10% and is due in six months would have interest of

$1,000. True False

42. Accrued interest on a note receivable is interest earned by the end of the year but not yet received.

True False

43. Accrued interest on a note receivable has the effects of increasing assets and increasing liabilities.

True False

44. Two important ratios that help in understanding the company's effectiveness in managing receivables are

the receivables turnover ratio and the average collection period. True False

45. The receivables turnover ratio shows the number of times during a year that the average accounts

receivable balance is collected (or "turns over"). True False

46. The receivables turnover ratio equals average accounts receivable divided by net credit sales.

True False

47. A lower receivables turnover ratio generally indicates more favorable management of accounts receivable by company managers. True False

48. The average collection period shows the approximate number of days the average accounts receivable

balance is outstanding. True False

49. The percentage-of-receivables method for estimating uncollectible accounts is commonly referred to as

the balance sheet method, because the estimate of bad debts is based on a balance sheet amount—accounts receivable. True False

50. The percentage-of-credit-sales method for estimating uncollectible accounts is commonly referred to as the

income statement method, because it always results in a higher amount of net income being reported in the income statement. True False

51. Even though the percentage-of-receivables method and the percentage-of-credit-sales method use different

accounts to estimate future uncollectible accounts, the amount of bad debt expense reported in the income statement will always be the same under the two methods. True False

52. From an income statement perspective, the percentage-of-credit-sales method is typically preferable

because it better matches the revenues (credit sales) with their related expenses (bad debts). True False

53. From a balance sheet perspective, the percentage-of-receivables method is typically preferable because

assets (net accounts receivable) are reported closer to their net realizable value. True False

54. The percentage-of-credit-sales method (income statement method) is allowed only if amounts do not differ

significantly from estimates using the percentage-of-receivables method. True False

55. Which of the following best describes credit sales?

A. Cash sales to customers that are new to the company.B. Sales to customers using credit cards.C. Sales to customers on account.D. Sales with a high risk that the customer will return the product.

56. Credits sales are recorded as: A. Debit Cash; credit Unearned Revenue.B. Debit Service Revenue, credit Accounts Receivable.C. Debit Cash; credit Service Revenue.D. Debit Accounts Receivable, credit Service Revenue.

57. Barton Health Services provided care to a patient worth $1,200. Because the patient was over the age of 65,

Barton granted the patient a 20% discount and the customer paid the correct amount in cash. How would Barton record the service transaction?


58. Gershwin Wallcovering Inc. shipped the wrong shade of paint to a customer. The customer agreed to keep

the paint upon being offered a 15% price reduction. Gershwin would record this reduction by crediting Accounts Receivable and debiting: A. Sales Revenue.B. Sales Discounts.C. Sales Returns.D. Sales Allowances.

59. Tom's Textiles shipped the wrong material to a customer, who refused to accept the order. Upon receipt of

the material, Tom's would credit Accounts Receivable and debit: A. Sales Revenue.B. Sales Discounts.C. Sales Returns.D. Sales Allowances.

60. When customers purchase products on account, Spitz Manufacturing offers them a 2% reduction in the

amount owed if they pay within 10 days. This is an example of a: A. Bad debt.B. Sales discount.C. Sales return.D. Sales allowances.

61. On November 10 of the current year, Flores Mills sold carpet to a customer for $8,000 with credit terms 2/10, n/30. How would Flores record the sale on November 10?


62. On November 10 of the current year, Flores Mills provides services to a customer for $8,000 with credit

terms 2/10, n/30. The customer made the correct payment on November 17. How would Flores record the collection of cash on November 17?


63. On November 10 of the current year, Flores Mills provides services to a customer for $8,000 with credit terms 2/10, n/30. The customer made the correct payment on December 5. How would Flores record the collection of cash on December 5?


64. Oswego Clay Pipe Company provides services of $46,000 to Southeast Water District #45 on April 12 of

the current year with terms 1/15, n/60. What would Oswego record on April 12?


65. Oswego Clay Pipe Company provides services of $46,000 to Southeast Water District #45 on April 12 of the current year with terms 1/15, n/60. What would Oswego record on April 23, assuming the customer made the correct payment on that date?


66. Oswego Clay Pipe Company provides services of $46,000 to Southeast Water District #45 on April 12 of

the current year with terms 1/15, n/60. What would Oswego record on June 10, assuming the customer made the correct payment on that date?


67. Which of the following is recorded upon receipt of a payment on April 7, 2012, by a customer who pays a

$900 invoice dated March 3, 2012, with terms 2/10, n/60? A. Debit Sales Discounts $18.B. Credit Purchase Discounts $18.C. Credit Accounts Receivable $882.D. Debit Cash $900.

68. Accounts receivable are normally reported at the: A. Present value of future cash receipts.B. Current value plus accrued interest.C. Expected amount to be received.D. Current value less expected collection costs.

69. Shupe Inc. estimates uncollectible accounts based on the percentage of accounts receivable. What effect

will recording the estimate of uncollectible accounts have on the accounting equation? A. Increase liabilities and decrease stockholders' equityB. Decrease assets and decrease liabilitiesC. Decrease assets and decrease stockholders' equityD. Increase assets and decrease stockholders' equity

70. Under the allowance method, which of the following does not change the balance in the

Accounts Receivable account? A. Returns on credit sales.B. Collections on customer accounts.C. Bad debt expense adjustment.D. Write-offs.

71. At December 31, Gill Co. reported accounts receivable of $238,000 and an allowance for uncollectible

accounts of $600 (credit). An analysis of accounts receivable suggests that the allowance for uncollectible accounts should be 3% of accounts receivable. The amount of the adjustment for uncollectible accounts would be: A. $6,540.B. $7,800.C. $7,140.D. $7,740.

72. At December 31, Gill Co. reported accounts receivable of $238,000 and an allowance for uncollectible

accounts of $600 (debit). An analysis of accounts receivable suggests that the allowance for uncollectible accounts should be 3% of accounts receivable. The amount of the adjustment for uncollectible accounts would be: A. $6,540.B. $7,800.C. $7,140.D. $7,740.

73. At December 31, Amy Jo's Appliances had account balances in Accounts Receivable of $311,000 and

$970 (credit) in Allowance for Uncollectible Accounts. An analysis of Amy Jo's December 31 accounts receivable suggests that the allowance for uncollectible accounts should be 2% of accounts receivable. Bad debt expense for the year should be: A. $6,220.B. $6,450.C. $5,250.D. $7,190.

74. At December 31, Amy Jo's Appliances had account balances in Accounts Receivable of $311,000 and $970 (debit) in Allowance for Uncollectible Accounts. An analysis of Amy Jo's December 31 accounts receivable suggests that the allowance for uncollectible accounts should be 2% of accounts receivable. Bad debt expense for the year should be: A. $6,220.B. $6,450.C. $5,250.D. $7,190.

75. A company's adjustment for uncollectible accounts at year-end would include a:

A. Debit to Bad Debt Expense.B. Credit to Accounts Receivable.C. Debit to Accounts Receivable.D. Debit to Allowance for Uncollectible Accounts.

76. Allowance for Uncollectible Accounts is:

A. An expense account.B. A contra asset account.C. A contra revenue account.D. A liability account.

77. Which of the following is recorded by a credit to Accounts Receivable?

A. Sale of inventory on account.B. Estimating the annual allowance for uncollectible accounts.C. Estimating annual sales returns.D. Write-offs of bad debts.

78. Collections of accounts receivable that previously have been written off are credited to:

A. A Gain account.B. Accounts Receivable.C. Bad Debt Expense.D. Retained Earnings.

79. Lail Inc. accounts for bad debts using the allowance method. On June 1, Lail Inc. wrote off Andrew Green's

$2,500 account. Based on Lail's estimation, Andrew Green will never pay any portion of the balance in his account. What effect will this write-off have on Lail Inc.'s balance sheet at the time of the write-off? A. An increase to stockholders' equity and a decrease to liabilities.B. No effect.C. An increase to assets and an increase to stockholders' equity.D. A decrease to assets and a decrease to stockholders' equity.

80. When $2,500 of accounts receivable are determined to be uncollectible, which of the following should the

company record to write off the accounts using the allowance method? A. A debit to Bad Debt Expense and a credit to Allowance for Uncollectible Accounts.B. A debit to Allowance for Uncollectible Accounts and a credit to Bad Debt Expense.C. A debit to Bad Debt Expense and a credit to Accounts Receivable.D. A debit to Allowance for Uncollectible Accounts and a credit to Accounts Receivable.

81. Using the allowance method, writing off an actual bad debts would include a: A. Debit to Bad Debt Expense.B. Credit to Accounts Receivable.C. Debit to Accounts Receivable.D. Credit to Allowance for Uncollectible Accounts.

82. On December 31, 2012, Coolwear Inc. had balances in Accounts Receivable and Allowance for

Uncollectible Accounts of $48,400 and $940, respectively. During 2013, Coolwear wrote off $820 in accounts receivable and determined that there should be an allowance for uncollectible accounts of $1,140 at December 31, 2013. Bad debt expense for 2013 would be: A. $320.B. $1,140.C. $820.D. $1,020.

83. On December 31, 2012, Larry's Used Cars had balances in Accounts Receivable and Allowance for

Uncollectible Accounts of $53,600 and $1,325, respectively. During 2013, Larry's wrote off $1,465 in accounts receivable and determined that there should be an allowance for uncollectible accounts of $1,280 at December 31, 2013. Bad debt expense for 2013 would be: A. $1,280.B. $1,465.C. $1,420.D. $1,140.

84. When using an aging method for estimating uncollectible accounts:

A. Older accounts are considered less likely to be collected.B. The number of days the account is past due is not considered.C. Older accounts are considered more likely to be collected.D. No estimate of uncollectible accounts is made.

85. Crimson Inc. recorded credit sales of $750,000, of which $600,000 is not yet due, $100,000 is past due for

up to 180 days, and $50,000 is past due for more than 180 days. Under the aging of receivables approach, Crimson Inc. expects it will not collect 1% of the amount not yet due, 10% of the amount past due for up to 180 days, and 20% of the amount past due for more than 180 days. The allowance account had a debit balance of $1,000 before adjustment. After adjusting for bad debt expense, what is the ending balance of the allowance account? A. $29,000.B. $28,000.C. $27,000.D. $26,000.

86. During 2012, Bears Inc. recorded credit sales of $500,000. Before adjustments at year-end, Bears has accounts receivable of $300,000, of which $50,000 is past due, and the allowance account had a credit balance of $2,500. Using the aging of receivables approach, what would be the adjustment assuming Bears expects it will not to collect 5% of the amount not yet past due and 20% of the amount past due?


87. The following information pertains to Lightning, Inc. at the end of December:

Lightning uses the aging method and estimates it will not collect 2% of accounts receivable not yet due, 10% of receivables less than 30 days past due, and 40% of receivables greater than 30 days past due. The accounts receivable balance of $7,000 consists of $3,500 not yet due, $2,000 less than 30 days past due, and $1,500 greater than 30 days past due. What is the appropriate amount of Bad Debt Expense? A. $400.B. $470.C. $870.D. $1,270.

88. Under the direct write-off method, what adjustment is made at the end of the year to account for possible

future bad debts? A. Debit Bad Debt Expense.B. Debit Allowance for Uncollectible Accounts.C. Credit Accounts Receivable.D. No adjustment is made.

89. Under the direct write-off method, what adjustment is made at the time an actual bad debt occurs?

A. Debit Bad Debt Expense, credit Allowance for Uncollectible Accounts.B. Debit Allowance for Uncollectible Accounts, credit Accounts Receivable.C. Debit Bad Debt Expense, credit Accounts Receivable.D. No adjustment is made.

90. Which accounting principle does the direct write-off method violate? A. Cost.B. Realization.C. Revenue recognition.D. Matching.

91. If the direct write-off method is used to account for uncollectible accounts, which of the following

statements is false? A. An allowance account is not used.B. No adjustment is made at the end of the year to estimate future uncollectible accounts.C. Accounts receivable will be reported at its net realizable value.D. Bad debt expense is recorded at the time an actual bad debt is written-off.

92. Which method is not allowed under Generally Accepted Accounting Principles for the purpose of

accounting for uncollectible accounts? A. Allowance method.B. Direct write-off method.C. Aging method.D. Percentage-of-receivables method.

93. The primary difference between a note receivable and an account receivable is:

A. A note receivable cannot be classified as a current asset.B. Borrowers have the option of not paying a note receivable.C. An account receivable is more likely to be collected.D. A note receivable is evidenced by a written debt instrument.

94. Hughes Aircraft sold a four-passenger airplane for $380,000, receiving a $50,000 down payment and a

12% note for the balance. This transaction would include a: A. Credit to Cash.B. Debit to Sales Discount.C. Debit to Notes Receivable.D. Credit to Notes Receivable.

95. lends cash and accepts a $1,000 note receivable that offers 12% interest and is due in six months. How

much interest revenue will Middleton Corp report during 2012? A. $120.B. $240.C. $100.D. $60.

96. On February 1, 2012, Middelton Corp. lends cash and accepts a $2,000 note receivable that offers 10% interest and is due in six months. What would Sango record on August 1, 2012, when the borrower pays Sanger the correct amount owed?


97. On February 1, 2012, Sanger Corp. lends cash and accepts a $1,000 note receivable that offers 12% interest

and is due in six months. How much interest revenue will Middleton Corp report during 2012? A. $20.B. $40.C. $30.D. $60.

98. On September 1, 2012, Middelton Corp. lends cash and accepts a $1,000 note receivable that offers 12%

interest and is due in six months. How would Turner record the year-end adjustment to accrue interest in 2012?


99. On August 1, 2012, Turner Manufacturing lends cash and accepts a $1,000 note receivable that offers 12%

interest and is due in six months. How much interest revenue will Middleton Corp report during 2013? A. $20.B. $40.C. $30.D. $60.

100.On September 1, 2012, Middelton Corp. lends cash and accepts a $1,000 note receivable that offers 12% interest and is due in six months. How would Herzog record the transaction on April 1, 2013, when the borrower pays Herzog the correct amount owed?


101.Sandburg Veterinarian reports the following information for the year:

What is Sandburg's receivables turnover ratio? A. 6.0.B. 5.0.C. 1.2.D. 0.2.

102.Beverage International reports net credit sales for the year of $240,000. The company's accounts receivable

balance at the beginning of the year equaled $20,000 and the balance at the end of the year equaled $30,000. What is Beverage International's receivables turnover ratio? A. 12.0.B. 9.6.C. 8.0.D. 1.5.

103.The amount of a company's receivables is influenced by several variables, including all of the following

except: A. The level of sales.B. The nature of the product or service sold.C. The credit and collection policies.D. Dividend payments to stockholders.

104.Toppleson Manufacturing reports a receivables turnover ratio of 14.5. The industry average is 10.7. What most likely is causing this difference? A. Toppleson is selling to high-risk customers.B. Toppleson has effective procedures related to selling goods on account.C. Toppleson provides superior products and services.D. Toppleson allows customers too long to pay.

105.The percentage-of-credit-sales method for estimating uncollectible accounts is sometimes described as:

A. The balance sheet method.B. The method most used by companies.C. The income statement method.D. The percentage-of-receivables method.

106.Which of the following statements is true with respect to the percentage-of-credit-sales method for

estimating uncollectible accounts? A. The amount recorded for bad debt expense does not depend on the balance of the allowance for

uncollectible accounts.B. This method is referred to as the balance sheet approach.C. This method does not allow for future uncollectible accounts.D. Under this method, bad debt expense is recorded at the time of an actual bad debt.

107.The following information pertains to Lindsey Corp. at the at the end of the year:

Lindsey Corp. uses the percentage-of-credit-sales method and estimates that 2% of the credit sales are uncollectible. After the year-end adjustment, what amount of bad debt expense would Lindsey report for the year? A. $1,200.B. $2,200.C. $3,000.D. $3,800.

108.The following information pertains to Lightning, Inc. at the end of the year:

Lightning uses the percentage-of-credit-sales method and estimates 1% of sales are uncollectible. What is the ending balance of the allowance account after the year-end adjustment? A. $600.B. $1,000.C. $200.D. $1,200.

109.A company offers a 20% trade discount when providing services of $5,000 or more to its customers. Record the transaction when the company provides services of $8,000 (not including the trade discount) on account.

110.On February 23, a company provides services on account to a customer for $4,500. The customer pays in

full for those services on March 4. Record the transactions for the company when the services are provided on February 23 and when the cash is collected on March 4.

111.Suppose Casey Title Company normally charges $500 for services related to selling a house. As part of

a summer special, Casey offers customer's a trade discount of 20%. On July 9, Linda Holmes uses the services of Casey and pays cash equal to the discounted price. Record the revenue earned by Casey on July 9.

112.A company reports the following amounts at the end of the year: Total sales = $500,000; sales discounts =

$10,000; sales returns = $30,000; sales allowances = $20,000. Compute net sales.

113.A company reports the following amounts at the end of the year: Total sales = $400,000; cash = $35,000; sales discounts = $10,000; accounts receivable = $20,000; sales returns = $15,000; operating expenses = $70,000; sales allowances = $25,000. Compute net sales.

114.On September 8, a company provides services on account to a customer for $1,500, terms 2/10, n/30. The

customer pays for those services on September 15. Record the transactions for the company when the services are provided on September 8 and when the cash is collected on September 15.

115.On October 22, a company provides services on account to a customer for $1,800, terms 3/15, n/30. The

customer pays for those services on December 19. Record the transactions for the company when the services are provided on October 22 and when cash is collected on December 19.

116.On August 12, a company provides services on account to a customer for $3,000. However, on August

16, the customer is not completely satisfied with the service and the company grants an allowance on the amount owed of $400. On August 20, the customer makes full payment of the balance owed, excluding the allowance. Record the services provided on August 12, the sales allowance on August 16, and the cash collection on August 20.

117.At the end of the year, a company has a balance in Allowance for Uncollectible Accounts of $200 (credit) before any year-end adjustment. The balance of Accounts Receivable is $15,000. The company estimates that 10% of accounts receivable will not be collected over the next year. Record the adjustment for uncollectible accounts.

118.At the end of the year, a company has a balance in Allowance for Uncollectible Accounts of $2,000

(credit) before any year-end adjustment. The balance of Accounts Receivable is $180,000. The company estimates that 5% of accounts receivable will not be collected over the next year. Record the adjustment for uncollectible accounts.


(debit) before any year-end adjustment. The balance of Accounts Receivable is $180,000. The company estimates that 5% of accounts receivable will not be collected over the next year. Record the adjustment for uncollectible accounts.

120.During 2012, its first year of operations, a company provides services on account of $250,000. By the end

of 2012, cash collections on these accounts total $130,000. The company estimates that 10% of accounts receivable will be uncollectible. Record the adjustment for uncollectible accounts on December 31, 2012.

121.A company has the following balances on December 31, 2012, after year-end adjustments: Accounts Receivable = $62,000; Allowance for Uncollectible Accounts = $6,000. Calculate the net realizable value of accounts receivable.

122.A company has the following balances on December 31, 2012, after year-end adjustments: Accounts

Receivable = $75,000; Service Revenue = $400,000; Allowance for Uncollectible Accounts = $5,000; Cash = $20,000. Calculate the net realizable value of accounts receivable.

123.A company uses the allowance method to account for uncollectible accounts. During the year, the company

has actual bad debts of $25,000. Record the write-off of the uncollectible accounts.

124.At the beginning of the year, a company had an Allowance for Uncollectible Accounts of $22,000. By the

end of the year, actual bad debts total $24,000. What is the balance of the Allowance for Uncollectible Accounts after the write-offs (before any year-end adjustment)?

125.On March 13, a company writes off a customer's account of $3,800. On June 3, the customer unexpectedly pays the $3,800 balance. Using the allowance method, record the write-off on March 13 and the cash collection on June 3.

126.A company has the following accounts receivable and estimates of uncollectible accounts:

Compute the total estimated uncollectible accounts.

127.At the end of the year, a company has the following accounts receivable and estimates of uncollectible

accounts:

Record the year-end adjustment for uncollectible accounts, assuming the current balance of the Allowance for Uncollectible Accounts is $900 (credit).

128.At the end of the year, a company has the following accounts receivable and estimates of uncollectible accounts:

Record the year-end adjustment for uncollectible accounts, assuming the current balance of the Allowance for Uncollectible Accounts is $1,200 (debit).

129.A company has the following balances on December 31, 2012, before any year-end adjustments: Accounts

Receivable = $80,000; Allowance for Uncollectible Accounts = $1,100 (credit). The company estimates uncollectible accounts based on an aging of accounts receivable as shown below:

Record the adjustment for uncollectible accounts on December 31, 2012.

130.Calculate the missing amount for each of the following notes receivable.

131.On February 1, 2012, a company loans one of its employees $20,000 and accepts a nine-month, 8% note receivable. Calculate the amount of interest revenue the company will recognize in 2012.

132.On July 1, 2012, a company loans one of its employees $20,000 and accepts a nine-month, 8% note

receivable. Calculate the amount of interest revenue the company will recognize in 2012 and 2013.

133.On April 1, 2012, a company loans one of its suppliers $50,000 and accepts a 24-month, 12% note

receivable. Calculate the amount of interest revenue the company will recognize in 2012, 2013, and 2014.

134.On April 14, a company lends $10,000 cash to one of its employees and accepts a six-month, 12% note in

return. Record the acceptance of the note receivable.

135.On April 1, a company provides services to one of its customers for $12,000. As payment for the services, the company accepts a six-month, 10% note from the customer. Record the acceptance of the note receivable on April 1 and the cash collection on October 1.

136.On May 1, 2012, a company lends $100,000 to one of its main suppliers and accepts a 12-month, 6% note.

Record the acceptance of the note on May 1, 2012, the adjustment on December 31, 2012, and the cash collection on May 1, 2013.

137.Below are amounts for two companies:

For each company, calculate the receivables turnover ratio. Which company appears more efficient in collecting cash from sales?

138.At the end of the year, a company reports a balance in its Allowance for Uncollectible Accounts of $1,400 (credit) before any year-end adjustment. The company estimates future uncollectible accounts to be 3% of credit sales for the year. Credit sales for the year total $280,000. Record the adjustment for the allowance for uncollectible accounts using the percentage-of-credit-sales method.

139.At the end of the year, a company reports a balance in its Allowance for Uncollectible Accounts of $1,400

(debit) before any year-end adjustment. The company estimates future uncollectible accounts to be 3% of credit sales for the year. Credit sales for the year total $280,000. Record the adjustment for the allowance for uncollectible accounts using the percentage-of-credit-sales method.

140.A company reports the following amounts at the end of the year (before any year-end adjustment).

Record the adjustment for uncollectible accounts (1) using the percentage-of-receivables method, assuming the company estimates 10% of receivables will not be collected, and (2) using the percentage-of-credit-sales method, assuming the company estimates 2% of credit sales will not be collected.

The following answers point out the key phrases that should appear in students' answers. They are not intended to be examples of complete student responses. It might be helpful to provide detailed instructions to students on how brief or in-depth you want their answers to be.

141.Give three examples of contra revenue accounts and the transactions with which they are associated.

142.Explain how companies account for uncollectible accounts receivable (bad debts).

143.What does it mean to report accounts receivable at their net realizable value.

144.Discuss the differences between the allowance method and the direct write-off method for recording

uncollectible accounts. Which of the two is acceptable under financial accounting rules?

145.How is the receivables turnover ratio measured? What does this ratio indicate? Is a higher or lower

receivables turnover preferable?

146.Explain why the percentage-of-receivables method is referred to as the balance sheet method and the percentage-of-credit-sales method is referred to as the income statement method. Which method is typically used in practice? Why?

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the best term placing the letter designating the term in the space provided.Terms:a. Accounts receivableb. Allowance methodc. No effectd. Direct write-off methode. Net realizable valuef. Aging methodg. Bad debt expenseh. Receivables written offi. Decrease assets and increase expensesj. Allowance for uncollectible accounts 147._____ Contra asset that represents the estimated amount of future bad debts.

Answer: j

148._____ Actual bad debts.

Answer: h

149._____ The effect of estimating future bad debts.

Answer: i

150._____ The procedure using an adjustment for future uncollectible accounts.

Answer: b

151._____ The total amount owed to a company from credit sales to customers.

Answer: a

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the best term placing the letter designating the term in the space provided.Terms:a. Accounts receivableb. Allowance methodc. No effectd. Direct write-off methode. Net realizable valuef. A0ging methodg. Bad debt expenseh. Receivables written offi. Decrease assets and increase expensesj. Allowance for uncollectible accounts 152._____ Accounts receivable less allowance for uncollectible accounts.

Answer: e

153._____ Considers that the longer past due the account receivable is, the less likely it is to be collected.

Answer: f

154._____ Recognizes bad debts when accounts become uncollectible.

Answer: d

155._____ The amount of the adjustment to the allowance for uncollectible accounts during the period.

Answer: g

156._____ The effect of writing off an account receivable as a bad debt under the allowance method.

Answer: c

Listed below are five terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the best term by placing the letter designating the term in the space provided.Terms:a. Credit salesb. Sales returnsc. Sales allowancesd. Sales discountse. Trade discounts 157._____ When a customer returns a product.

Answer: b

158._____ Deducted from list price.

Answer: e

159._____ Sale on account to customers.

Answer: a

160._____ Offered to induce prompt payment. Answer: d

161._____ Refund because of some deficiency in the company's product or service.

Answer: cRefer To: 05-161

162.On January 1, 2012, Alice & Co. lends $5,000 to an employee and accepts a 24-month, 10% note. At

the end of 2012, what effect will the adjustment for accrued interest revenue have on the Alice & Co.'s financial statements? A. Decreases assets.B. Decreases revenue.C. Increases expense.D. Increases stockholders' equity.

163.On July 8, Ray Inc. sold 100 printers to Office Rental Company at $600 each and offered a 2% discount for

payment within 10 days. On July 15, Office Rental Company paid the full amount in cash. What should Ray Inc. record on July 15?


164.On December 31, 2012, Andy Inc. has a debit balance of $1,500 for the Allowance for Uncollectible

Accounts before any year-end adjustment. Andy Inc. also has the following information for its accounts receivable and the estimated percentages of bad debts for different past-due amounts:

What is the amount of bad debt expense to be reported on Andy Inc.'s financial statements for 2012? A. $6,500B. $1,500C. $5,000D. $8,000

165.Eric Company has the following information:

What is the amount of net revenues for Eric Company? A. $330,000.B. $230,000.C. $680,000.D. $780,000.

166.Richard LLC accounts for possible bad debts using the allowance method. When an actual bad debt occurs,

what effect does it have on the accounting equation? A. Increases assets and increases stockholders' equity.B. Decreases assets and decreases stockholders' equity.C. Decreases assets and decreases liabilities.D. No effect on the accounting equation.

167.On December 31, 2012, Mark Inc. estimates future bad debts to be $6,500. The Allowance for

Uncollectible Accounts has a credit balance of $2,500 before any year-end adjustment. What adjustment should Mark Inc. record for the estimated bad debts on December 31, 2012? A. Debit Bad Debt Expense, $6,500; credit Allowance for Uncollectible Accounts, $6,500.B. Debit Bad Debt Expense, $4,000; credit Allowance for Uncollectible Accounts $4,000.C. Debit Allowance for Uncollectible Accounts, $9,000; credit Bad Debt Expense, $6,500.D. Debit Bad Debt Expense, $9,000; credit Allowance for Uncollectible Accounts, $9,000.

168.On March 17, Jackal Lumber sold building materials to Fredo Limited for $15,000 with terms of 3/10, net

20. What amount did Jackal record as revenue on March 25 when Fredo paid for the building materials? A. $15,000.B. $14,550.C. $15,450.D. $0.

169.The direct write-off method is generally not permitted for financial reporting purposes because:

A. Compared to the allowance method, it would allow greater flexibility to managers in manipulating

reported net income?B. This method is primarily used for tax purposes.C. It is too difficult to accurately estimate future bad debts.D. Expenses (bad debts) are not properly matched with the revenues (credit sales) that they help to

generate.

170.At the beginning of the year, Vici Ventures had accounts receivable of $220,000. At the end of the year, the company had accounts receivable of $340,000. During the year, Vici had total sales of $1,000,000, 70% of which were credit sales What was Vici's receivables turnover ratio for the year? A. 2.50B. 3.57C. 2.94D. 146 days

171.Suppose that the balance of a company's Allowance for Uncollectible Accounts was $6,200 (credit) at the

end of 2012, prior to any adjustments. The company estimated that the total of uncollectible accounts in its accounts receivable was $44,300 at the end of 2012. Total accounts receivable were $150,000 on December 31, 2012, and total credit sales for 2012 were $330,000. What amount of bad debt expense would appear in the company's 2012 income statement, assuming the company uses the percentage-of-receivables method? A. $38,100.B. $105,700.C. $33,000.D. $50,500.

172.Garber Plumbers offers a 20% trade discount when providing $2,000 or more of plumbing services to its

customers. In March 2012, Garber provided $4,000 of plumbing services to Red Oak, Inc. and $1,500 of services to Cyril, Inc. Each of these customers was granted credit terms of 2/10, net 30. If both customers paid for the plumbing services within the discount period, what was the net sales figure for these two transactions? A. $5,500.B. $4,312.C. $4,486.D. $4,606.

173.Boynton Jewelers reported the following amounts at the end of the year: total sales = $550,000; sales

discounts = $12,000; sales returns = $44,000; sales allowances = $17,000. What was the company's net sales for the year? A. $489,000.B. $485,000.C. $477,000.D. $499,000.

174.At the end of 2012, Murray State Lenders had a balance in its Allowance for Uncollectible Accounts of

$4,500 (credit) before any adjustment. The company estimated its future uncollectible accounts to be $12,000 using the percentage-of-receivables method. Murray State's adjustment on December 31, 2012, to record its estimated uncollectible accounts included a: A. Credit to Allowance for Uncollectible Accounts of $12,000.B. Debit to Bad Debt Expense of $7,500.C. Credit to Allowance for Uncollectible Accounts of $7,500.D. Both b and c.

175.At the end of 2012, Murray State Lenders had a balance in its Allowance for Uncollectible Accounts of $4,500 (debit) before any adjustment. The company estimated its future uncollectible accounts to be $12,000 using the percentage-of-receivables method. Murray State's adjustment on December 31, 2012, to record its estimated uncollectible accounts included a: A. Credit to Allowance for Uncollectible Accounts of $12,000.B. Debit to Bad Debt Expense of $16,500.C. Credit to Allowance for Uncollectible Accounts of $16,500.D. Both b and c.

176.McConnell's Bakeries had the following balances on December 31, 2012, before any adjustment: Accounts

Receivable = $100,000; Allowance for Uncollectible Accounts = $4,100 (credit). McConnell's estimates uncollectible accounts based on an aging of accounts receivable as shown below:

What amount of bad debt expense did McConnell's record in its December 31, 2012, adjustment to the allowance account? A. $10,200.B. $12,800.C. $15,300.D. $6,100.

177.At the beginning of 2012, the balance in Jackson Enterprises' Allowance for Uncollectible Accounts was

$31,800. During 2012, the company wrote off $38,000 of accounts receivable. Writing off the individual bad debts would include a: A. Debit to Bad Debt Expense.B. Credit to Accounts Receivable.C. Credit to the Allowance for Uncollectible Accounts.D. Both a and c.

178.A company provides services on account. Indicate how this transaction would affect the following five

financial statement items:


179.A company collects an account receivable previously written off. Indicate how this transaction would affect the following five financial statement items:


180.A company collects a customer's account within the discount period. Indicate how this transaction would

affect the following five financial statement items:


181.A company records a sales return from a credit customer. Indicate how this transaction would affect the

following five financial statement items.


182.Gershwin Wallcovering Inc. shipped the wrong shade of paint to a customer. The customer agreed to keep

the paint upon being offered a 15% price reduction. The price reduction is an example of a: A. Sales revenue.B. Sales discount.C. Sales return.D. Sales allowance.

183.Tom's Textiles shipped the wrong material to a customer, who refused to accept the order. This is an example of a: A. Sales Revenue.B. Sales discount.C. Sales return.D. Sales allowance.

184.Credit sales transfer products and services to a customer today while bearing the risk of collecting payment

from that customer in the future. True False

185.At the time of a credit sale, a company would record an increase in assets and an increase in revenues.

True False

186.A sale on account is recorded as a debit to Service Revenue and a credit to Accounts Receivable.

True False

187.Accounts receivable represent the amount of cash owed to the company by its customers from the sale of

products or services on account. True False

188.Trade discounts represent a discount offered to the purchasers for quick payment.

True False

189.When a company sells a $100 service with a 20% trade discount, $80 of revenue is recognized.

True False

190.A sales discount represents a reduction, not in the selling price of a product or service, but in the amount to

be paid by a credit customer if payment is made within a specified period of time. True False

191.A sale on account for $1,000 offered with terms 2/10, n/30 means that the customers will get a $2 discount

if payment is made within 10 days; otherwise, full payment is due within 30 days. True False

192.The Sales Discounts account is an example of a contra revenue account.

True False

193.The Sales Discounts account is an expense account.

True False

194.Sales returns and allowances occur when the buyer returns the goods or the seller reduces the customer's balance owed. True False

195.A sales allowance is recorded as a debit to Accounts Receivable and a credit to Sales Allowances.

True False

196.The Sales Returns account is an expense account.

True False

197.If a company has total revenues of $100,000, sales discounts of $3,000, sales returns of $4,000, and sales

allowances of $2,000, the income statement will report net revenues of $91,000. True False

198.Accounts receivable are reported at their net realizable value.

True False

199.The net realizable value of accounts receivable is the full amount owed by customers.

True False

200.Customers' accounts that we no longer consider collectible are referred to as uncollectible accounts (or bad

debts). True False

201.The direct write-off method involves recording an adjustment at the end of each period to account for the

possibility of future uncollectible accounts. True False

202.The adjustment to account for future bad debts has the effect of (1) reducing assets and (2) increasing


203.The adjustment for uncollectible accounts involves a debit to Bad Debt Expense and a credit to the

Allowance for Uncollectible Accounts. True False

204.The Allowance for Uncollectible Accounts is a contra asset account representing the amount of accounts

receivable that we do not expect to collect. True False

205.Bad debt expense is the amount of the adjustment to the allowance for uncollectible accounts that

represents the cost of the estimated future bad debts. True False

206.One disadvantage of the allowance method (over the direct write-off method) for recording uncollectible accounts is that it generally matches bad debt expense with the revenue it helped to generate. True False

207.If a company is owed $10,000 by its customers, but it expects that $1,000 will not be collected, accounts

receivable in the balance sheet are reported at the net amount of $9,000. True False

208.Under the allowance method, when a company writes off an account receivable as an actual bad debt, it

reduces total assets. True False

209.Under the allowance method, when a company writes off an account receivable as an actual bad debt, it

records an expense. True False

210.Under the allowance method, the write-off of an actual bad debt is recorded with a debit to the Allowance

for Uncollectible Accounts and a credit to Accounts Receivable. True False

211.Under the allowance method, when a company collects cash from an account previously written off, total

assets increase. True False

212.A credit balance in the Allowance for Uncollectible Accounts before adjustment indicates that last year's

estimate of uncollectible accounts may have been too high. True False

213.A debit balance in the Allowance for Uncollectible Accounts before adjustment indicates that last year's

estimate of uncollectible accounts was too low. True False

214.The aging method for estimating uncollectible accounts considers that a higher percentage of "older"

accounts will not be collected compared to "newer" accounts. True False

215.A company expects 5% of its newer accounts receivable to be uncollectible and 20% of its older accounts

to be uncollectible. If the company has $40,000 of newer accounts and $5,000 of older accounts, the total estimate of uncollectible accounts is $2,000. True False

216.Under the direct write-off method, bad debt expense is recorded at the time accounts are known to be

uncollectible. True False

217.The direct write-off method is used for tax purposes but is generally not permitted for financial reporting. True False

218.The direct write-off method violates the matching principle.

True False

219.Under the direct write-off method, recording an estimate of future uncollectible accounts includes a debit to

Bad Debt Expense and a credit to the Allowance for Uncollectible Accounts. True False

220.Notes receivable are similar to accounts receivable but are more formal credit arrangements evidenced by a

written debt instrument, or note. True False

221.Notes receivable typically arise from sales to customers.

True False

222.Notes receivable are assets and are reported in the balance sheet.

True False

223.Interest on a note receivable is calculated as the face value of the note times the annual interest rate stated

on the note times the fraction of the year the note is outstanding. True False

224.A $10,000 note that has a stated interest rate of 10% and is due in six months would have interest of

$1,000. True False

225.Accrued interest on a note receivable is interest earned by the end of the year but not yet received.

True False

226.Accrued interest on a note receivable has the effects of increasing assets and increasing liabilities.

True False

227.Two important ratios that help in understanding the company's effectiveness in managing receivables are

the receivables turnover ratio and the average collection period. True False

228.The receivables turnover ratio shows the number of times during a year that the average accounts

receivable balance is collected (or "turns over"). True False

229.The receivables turnover ratio equals average accounts receivable divided by net credit sales. True False

230.A lower receivables turnover ratio generally indicates more favorable management of accounts receivable

by company managers. True False

231.The average collection period shows the approximate number of days the average accounts receivable

balance is outstanding. True False

232.The percentage-of-receivables method for estimating uncollectible accounts is commonly referred to as

the balance sheet method, because the estimate of bad debts is based on a balance sheet amount—accounts receivable. True False

233.The percentage-of-credit-sales method for estimating uncollectible accounts is commonly referred to as the

income statement method, because it always results in a higher amount of net income being reported in the income statement. True False

234.Even though the percentage-of-receivables method and the percentage-of-credit-sales method use different

accounts to estimate future uncollectible accounts, the amount of bad debt expense reported in the income statement will always be the same under the two methods. True False

235.From an income statement perspective, the percentage-of-credit-sales method is typically preferable

because it better matches the revenues (credit sales) with their related expenses (bad debts). True False

236.From a balance sheet perspective, the percentage-of-receivables method is typically preferable because

assets (net accounts receivable) are reported closer to their net realizable value. True False

237.The percentage-of-credit-sales method (income statement method) is allowed only if amounts do not differ

significantly from estimates using the percentage-of-receivables method. True False

238.Which of the following best describes credit sales?

A. Cash sales to customers that are new to the company.B. Sales to customers using credit cards.C. Sales to customers on account.D. Sales with a high risk that the customer will return the product.

239.Credits sales are recorded as: A. Debit Cash; credit Unearned Revenue.B. Debit Service Revenue, credit Accounts Receivable.C. Debit Cash; credit Service Revenue.D. Debit Accounts Receivable, credit Service Revenue.

240.Barton Health Services provided care to a patient worth $1,200. Because the patient was over the age of 65,

Barton granted the patient a 20% discount and the customer paid the correct amount in cash. How would Barton record the service transaction?


241.Gershwin Wallcovering Inc. shipped the wrong shade of paint to a customer. The customer agreed to keep

the paint upon being offered a 15% price reduction. Gershwin would record this reduction by crediting Accounts Receivable and debiting: A. Sales Revenue.B. Sales Discounts.C. Sales Returns.D. Sales Allowances.

242.Tom's Textiles shipped the wrong material to a customer, who refused to accept the order. Upon receipt of

the material, Tom's would credit Accounts Receivable and debit: A. Sales Revenue.B. Sales Discounts.C. Sales Returns.D. Sales Allowances.

243.When customers purchase products on account, Spitz Manufacturing offers them a 2% reduction in the

amount owed if they pay within 10 days. This is an example of a: A. Bad debt.B. Sales discount.C. Sales return.D. Sales allowances.

244.On November 10 of the current year, Flores Mills sold carpet to a customer for $8,000 with credit terms 2/10, n/30. How would Flores record the sale on November 10?


245.On November 10 of the current year, Flores Mills provides services to a customer for $8,000 with credit

terms 2/10, n/30. The customer made the correct payment on November 17. How would Flores record the collection of cash on November 17?


246.On November 10 of the current year, Flores Mills provides services to a customer for $8,000 with credit terms 2/10, n/30. The customer made the correct payment on December 5. How would Flores record the collection of cash on December 5?


247.Oswego Clay Pipe Company provides services of $46,000 to Southeast Water District #45 on April 12 of

the current year with terms 1/15, n/60. What would Oswego record on April 12?


248.Oswego Clay Pipe Company provides services of $46,000 to Southeast Water District #45 on April 12 of the current year with terms 1/15, n/60. What would Oswego record on April 23, assuming the customer made the correct payment on that date?


249.Oswego Clay Pipe Company provides services of $46,000 to Southeast Water District #45 on April 12 of

the current year with terms 1/15, n/60. What would Oswego record on June 10, assuming the customer made the correct payment on that date?


250.Which of the following is recorded upon receipt of a payment on April 7, 2012, by a customer who pays a

$900 invoice dated March 3, 2012, with terms 2/10, n/60? A. Debit Sales Discounts $18.B. Credit Purchase Discounts $18.C. Credit Accounts Receivable $882.D. Debit Cash $900.

251.Accounts receivable are normally reported at the: A. Present value of future cash receipts.B. Current value plus accrued interest.C. Expected amount to be received.D. Current value less expected collection costs.

252.Shupe Inc. estimates uncollectible accounts based on the percentage of accounts receivable. What effect

will recording the estimate of uncollectible accounts have on the accounting equation? A. Increase liabilities and decrease stockholders' equityB. Decrease assets and decrease liabilitiesC. Decrease assets and decrease stockholders' equityD. Increase assets and decrease stockholders' equity

253.Under the allowance method, which of the following does not change the balance in the

Accounts Receivable account? A. Returns on credit sales.B. Collections on customer accounts.C. Bad debt expense adjustment.D. Write-offs.

254.At December 31, Gill Co. reported accounts receivable of $238,000 and an allowance for uncollectible

accounts of $600 (credit). An analysis of accounts receivable suggests that the allowance for uncollectible accounts should be 3% of accounts receivable. The amount of the adjustment for uncollectible accounts would be: A. $6,540.B. $7,800.C. $7,140.D. $7,740.

255.At December 31, Gill Co. reported accounts receivable of $238,000 and an allowance for uncollectible

accounts of $600 (debit). An analysis of accounts receivable suggests that the allowance for uncollectible accounts should be 3% of accounts receivable. The amount of the adjustment for uncollectible accounts would be: A. $6,540.B. $7,800.C. $7,140.D. $7,740.

256.At December 31, Amy Jo's Appliances had account balances in Accounts Receivable of $311,000 and

$970 (credit) in Allowance for Uncollectible Accounts. An analysis of Amy Jo's December 31 accounts receivable suggests that the allowance for uncollectible accounts should be 2% of accounts receivable. Bad debt expense for the year should be: A. $6,220.B. $6,450.C. $5,250.D. $7,190.

257.At December 31, Amy Jo's Appliances had account balances in Accounts Receivable of $311,000 and $970 (debit) in Allowance for Uncollectible Accounts. An analysis of Amy Jo's December 31 accounts receivable suggests that the allowance for uncollectible accounts should be 2% of accounts receivable. Bad debt expense for the year should be: A. $6,220.B. $6,450.C. $5,250.D. $7,190.

258.A company's adjustment for uncollectible accounts at year-end would include a:

A. Debit to Bad Debt Expense.B. Credit to Accounts Receivable.C. Debit to Accounts Receivable.D. Debit to Allowance for Uncollectible Accounts.

259.Allowance for Uncollectible Accounts is:

A. An expense account.B. A contra asset account.C. A contra revenue account.D. A liability account.

260.Which of the following is recorded by a credit to Accounts Receivable?

A. Sale of inventory on account.B. Estimating the annual allowance for uncollectible accounts.C. Estimating annual sales returns.D. Write-offs of bad debts.

261.Collections of accounts receivable that previously have been written off are credited to:

A. A Gain account.B. Accounts Receivable.C. Bad Debt Expense.D. Retained Earnings.

262.Lail Inc. accounts for bad debts using the allowance method. On June 1, Lail Inc. wrote off Andrew Green's

$2,500 account. Based on Lail's estimation, Andrew Green will never pay any portion of the balance in his account. What effect will this write-off have on Lail Inc.'s balance sheet at the time of the write-off? A. An increase to stockholders' equity and a decrease to liabilities.B. No effect.C. An increase to assets and an increase to stockholders' equity.D. A decrease to assets and a decrease to stockholders' equity.

263.When $2,500 of accounts receivable are determined to be uncollectible, which of the following should the

company record to write off the accounts using the allowance method? A. A debit to Bad Debt Expense and a credit to Allowance for Uncollectible Accounts.B. A debit to Allowance for Uncollectible Accounts and a credit to Bad Debt Expense.C. A debit to Bad Debt Expense and a credit to Accounts Receivable.D. A debit to Allowance for Uncollectible Accounts and a credit to Accounts Receivable.

264.Using the allowance method, writing off an actual bad debts would include a: A. Debit to Bad Debt Expense.B. Credit to Accounts Receivable.C. Debit to Accounts Receivable.D. Credit to Allowance for Uncollectible Accounts.

265.On December 31, 2012, Coolwear Inc. had balances in Accounts Receivable and Allowance for

Uncollectible Accounts of $48,400 and $940, respectively. During 2013, Coolwear wrote off $820 in accounts receivable and determined that there should be an allowance for uncollectible accounts of $1,140 at December 31, 2013. Bad debt expense for 2013 would be: A. $320.B. $1,140.C. $820.D. $1,020.

266.On December 31, 2012, Larry's Used Cars had balances in Accounts Receivable and Allowance for

Uncollectible Accounts of $53,600 and $1,325, respectively. During 2013, Larry's wrote off $1,465 in accounts receivable and determined that there should be an allowance for uncollectible accounts of $1,280 at December 31, 2013. Bad debt expense for 2013 would be: A. $1,280.B. $1,465.C. $1,420.D. $1,140.

267.When using an aging method for estimating uncollectible accounts:

A. Older accounts are considered less likely to be collected.B. The number of days the account is past due is not considered.C. Older accounts are considered more likely to be collected.D. No estimate of uncollectible accounts is made.

268.Crimson Inc. recorded credit sales of $750,000, of which $600,000 is not yet due, $100,000 is past due for

up to 180 days, and $50,000 is past due for more than 180 days. Under the aging of receivables approach, Crimson Inc. expects it will not collect 1% of the amount not yet due, 10% of the amount past due for up to 180 days, and 20% of the amount past due for more than 180 days. The allowance account had a debit balance of $1,000 before adjustment. After adjusting for bad debt expense, what is the ending balance of the allowance account? A. $29,000.B. $28,000.C. $27,000.D. $26,000.

269.During 2012, Bears Inc. recorded credit sales of $500,000. Before adjustments at year-end, Bears has accounts receivable of $300,000, of which $50,000 is past due, and the allowance account had a credit balance of $2,500. Using the aging of receivables approach, what would be the adjustment assuming Bears expects it will not to collect 5% of the amount not yet past due and 20% of the amount past due?


270.The following information pertains to Lightning, Inc. at the end of December:

Lightning uses the aging method and estimates it will not collect 2% of accounts receivable not yet due, 10% of receivables less than 30 days past due, and 40% of receivables greater than 30 days past due. The accounts receivable balance of $7,000 consists of $3,500 not yet due, $2,000 less than 30 days past due, and $1,500 greater than 30 days past due. What is the appropriate amount of Bad Debt Expense? A. $400.B. $470.C. $870.D. $1,270.

271.Under the direct write-off method, what adjustment is made at the end of the year to account for possible

future bad debts? A. Debit Bad Debt Expense.B. Debit Allowance for Uncollectible Accounts.C. Credit Accounts Receivable.D. No adjustment is made.

272.Under the direct write-off method, what adjustment is made at the time an actual bad debt occurs?

A. Debit Bad Debt Expense, credit Allowance for Uncollectible Accounts.B. Debit Allowance for Uncollectible Accounts, credit Accounts Receivable.C. Debit Bad Debt Expense, credit Accounts Receivable.D. No adjustment is made.

273.Which accounting principle does the direct write-off method violate? A. Cost.B. Realization.C. Revenue recognition.D. Matching.

274.If the direct write-off method is used to account for uncollectible accounts, which of the following

statements is false? A. An allowance account is not used.B. No adjustment is made at the end of the year to estimate future uncollectible accounts.C. Accounts receivable will be reported at its net realizable value.D. Bad debt expense is recorded at the time an actual bad debt is written-off.

275.Which method is not allowed under Generally Accepted Accounting Principles for the purpose of

accounting for uncollectible accounts? A. Allowance method.B. Direct write-off method.C. Aging method.D. Percentage-of-receivables method.

276.The primary difference between a note receivable and an account receivable is:

A. A note receivable cannot be classified as a current asset.B. Borrowers have the option of not paying a note receivable.C. An account receivable is more likely to be collected.D. A note receivable is evidenced by a written debt instrument.

277.Hughes Aircraft sold a four-passenger airplane for $380,000, receiving a $50,000 down payment and a

12% note for the balance. This transaction would include a: A. Credit to Cash.B. Debit to Sales Discount.C. Debit to Notes Receivable.D. Credit to Notes Receivable.

278.lends cash and accepts a $1,000 note receivable that offers 12% interest and is due in six months. How

much interest revenue will Middleton Corp report during 2012? A. $120.B. $240.C. $100.D. $60.

279.On February 1, 2012, Middelton Corp. lends cash and accepts a $2,000 note receivable that offers 10% interest and is due in six months. What would Sango record on August 1, 2012, when the borrower pays Sanger the correct amount owed?


280.On February 1, 2012, Sanger Corp. lends cash and accepts a $1,000 note receivable that offers 12% interest

and is due in six months. How much interest revenue will Middleton Corp report during 2012? A. $20.B. $40.C. $30.D. $60.

281.On September 1, 2012, Middelton Corp. lends cash and accepts a $1,000 note receivable that offers 12%

interest and is due in six months. How would Turner record the year-end adjustment to accrue interest in 2012?


282.On August 1, 2012, Turner Manufacturing lends cash and accepts a $1,000 note receivable that offers 12%

interest and is due in six months. How much interest revenue will Middleton Corp report during 2013? A. $20.B. $40.C. $30.D. $60.

283.On September 1, 2012, Middelton Corp. lends cash and accepts a $1,000 note receivable that offers 12% interest and is due in six months. How would Herzog record the transaction on April 1, 2013, when the borrower pays Herzog the correct amount owed?


284.Sandburg Veterinarian reports the following information for the year:

What is Sandburg's receivables turnover ratio? A. 6.0.B. 5.0.C. 1.2.D. 0.2.

285.Beverage International reports net credit sales for the year of $240,000. The company's accounts receivable

balance at the beginning of the year equaled $20,000 and the balance at the end of the year equaled $30,000. What is Beverage International's receivables turnover ratio? A. 12.0.B. 9.6.C. 8.0.D. 1.5.

286.The amount of a company's receivables is influenced by several variables, including all of the following

except: A. The level of sales.B. The nature of the product or service sold.C. The credit and collection policies.D. Dividend payments to stockholders.

287.Toppleson Manufacturing reports a receivables turnover ratio of 14.5. The industry average is 10.7. What most likely is causing this difference? A. Toppleson is selling to high-risk customers.B. Toppleson has effective procedures related to selling goods on account.C. Toppleson provides superior products and services.D. Toppleson allows customers too long to pay.

288.The percentage-of-credit-sales method for estimating uncollectible accounts is sometimes described as:

A. The balance sheet method.B. The method most used by companies.C. The income statement method.D. The percentage-of-receivables method.

289.Which of the following statements is true with respect to the percentage-of-credit-sales method for

estimating uncollectible accounts? A. The amount recorded for bad debt expense does not depend on the balance of the allowance for

uncollectible accounts.B. This method is referred to as the balance sheet approach.C. This method does not allow for future uncollectible accounts.D. Under this method, bad debt expense is recorded at the time of an actual bad debt.

290.The following information pertains to Lindsey Corp. at the at the end of the year:

Lindsey Corp. uses the percentage-of-credit-sales method and estimates that 2% of the credit sales are uncollectible. After the year-end adjustment, what amount of bad debt expense would Lindsey report for the year? A. $1,200.B. $2,200.C. $3,000.D. $3,800.

291.The following information pertains to Lightning, Inc. at the end of the year:

Lightning uses the percentage-of-credit-sales method and estimates 1% of sales are uncollectible. What is the ending balance of the allowance account after the year-end adjustment? A. $600.B. $1,000.C. $200.D. $1,200.

292.A company offers a 20% trade discount when providing services of $5,000 or more to its customers. Record the transaction when the company provides services of $8,000 (not including the trade discount) on account.

293.On February 23, a company provides services on account to a customer for $4,500. The customer pays in

full for those services on March 4. Record the transactions for the company when the services are provided on February 23 and when the cash is collected on March 4.

294.Suppose Casey Title Company normally charges $500 for services related to selling a house. As part of

a summer special, Casey offers customer's a trade discount of 20%. On July 9, Linda Holmes uses the services of Casey and pays cash equal to the discounted price. Record the revenue earned by Casey on July 9.

295.A company reports the following amounts at the end of the year: Total sales = $500,000; sales discounts =

$10,000; sales returns = $30,000; sales allowances = $20,000. Compute net sales.

296.A company reports the following amounts at the end of the year: Total sales = $400,000; cash = $35,000; sales discounts = $10,000; accounts receivable = $20,000; sales returns = $15,000; operating expenses = $70,000; sales allowances = $25,000. Compute net sales.

297.On September 8, a company provides services on account to a customer for $1,500, terms 2/10, n/30. The

customer pays for those services on September 15. Record the transactions for the company when the services are provided on September 8 and when the cash is collected on September 15.

298.On October 22, a company provides services on account to a customer for $1,800, terms 3/15, n/30. The

customer pays for those services on December 19. Record the transactions for the company when the services are provided on October 22 and when cash is collected on December 19.

299.On August 12, a company provides services on account to a customer for $3,000. However, on August

16, the customer is not completely satisfied with the service and the company grants an allowance on the amount owed of $400. On August 20, the customer makes full payment of the balance owed, excluding the allowance. Record the services provided on August 12, the sales allowance on August 16, and the cash collection on August 20.

300.At the end of the year, a company has a balance in Allowance for Uncollectible Accounts of $200 (credit) before any year-end adjustment. The balance of Accounts Receivable is $15,000. The company estimates that 10% of accounts receivable will not be collected over the next year. Record the adjustment for uncollectible accounts.


(credit) before any year-end adjustment. The balance of Accounts Receivable is $180,000. The company estimates that 5% of accounts receivable will not be collected over the next year. Record the adjustment for uncollectible accounts.


(debit) before any year-end adjustment. The balance of Accounts Receivable is $180,000. The company estimates that 5% of accounts receivable will not be collected over the next year. Record the adjustment for uncollectible accounts.

303.During 2012, its first year of operations, a company provides services on account of $250,000. By the end

of 2012, cash collections on these accounts total $130,000. The company estimates that 10% of accounts receivable will be uncollectible. Record the adjustment for uncollectible accounts on December 31, 2012.

304.A company has the following balances on December 31, 2012, after year-end adjustments: Accounts Receivable = $62,000; Allowance for Uncollectible Accounts = $6,000. Calculate the net realizable value of accounts receivable.

305.A company has the following balances on December 31, 2012, after year-end adjustments: Accounts

Receivable = $75,000; Service Revenue = $400,000; Allowance for Uncollectible Accounts = $5,000; Cash = $20,000. Calculate the net realizable value of accounts receivable.

306.A company uses the allowance method to account for uncollectible accounts. During the year, the company

has actual bad debts of $25,000. Record the write-off of the uncollectible accounts.

307.At the beginning of the year, a company had an Allowance for Uncollectible Accounts of $22,000. By the

end of the year, actual bad debts total $24,000. What is the balance of the Allowance for Uncollectible Accounts after the write-offs (before any year-end adjustment)?

308.On March 13, a company writes off a customer's account of $3,800. On June 3, the customer unexpectedly pays the $3,800 balance. Using the allowance method, record the write-off on March 13 and the cash collection on June 3.

309.A company has the following accounts receivable and estimates of uncollectible accounts:

Compute the total estimated uncollectible accounts.

310.At the end of the year, a company has the following accounts receivable and estimates of uncollectible

accounts:

Record the year-end adjustment for uncollectible accounts, assuming the current balance of the Allowance for Uncollectible Accounts is $900 (credit).

311.At the end of the year, a company has the following accounts receivable and estimates of uncollectible accounts:

Record the year-end adjustment for uncollectible accounts, assuming the current balance of the Allowance for Uncollectible Accounts is $1,200 (debit).

312.A company has the following balances on December 31, 2012, before any year-end adjustments: Accounts

Receivable = $80,000; Allowance for Uncollectible Accounts = $1,100 (credit). The company estimates uncollectible accounts based on an aging of accounts receivable as shown below:

Record the adjustment for uncollectible accounts on December 31, 2012.

313.Calculate the missing amount for each of the following notes receivable.

314.On February 1, 2012, a company loans one of its employees $20,000 and accepts a nine-month, 8% note receivable. Calculate the amount of interest revenue the company will recognize in 2012.

315.On July 1, 2012, a company loans one of its employees $20,000 and accepts a nine-month, 8% note

receivable. Calculate the amount of interest revenue the company will recognize in 2012 and 2013.

316.On April 1, 2012, a company loans one of its suppliers $50,000 and accepts a 24-month, 12% note

receivable. Calculate the amount of interest revenue the company will recognize in 2012, 2013, and 2014.

317.On April 14, a company lends $10,000 cash to one of its employees and accepts a six-month, 12% note in

return. Record the acceptance of the note receivable.

318.On April 1, a company provides services to one of its customers for $12,000. As payment for the services, the company accepts a six-month, 10% note from the customer. Record the acceptance of the note receivable on April 1 and the cash collection on October 1.

319.On May 1, 2012, a company lends $100,000 to one of its main suppliers and accepts a 12-month, 6% note.

Record the acceptance of the note on May 1, 2012, the adjustment on December 31, 2012, and the cash collection on May 1, 2013.

320.Below are amounts for two companies:

For each company, calculate the receivables turnover ratio. Which company appears more efficient in collecting cash from sales?

321.At the end of the year, a company reports a balance in its Allowance for Uncollectible Accounts of $1,400 (credit) before any year-end adjustment. The company estimates future uncollectible accounts to be 3% of credit sales for the year. Credit sales for the year total $280,000. Record the adjustment for the allowance for uncollectible accounts using the percentage-of-credit-sales method.

322.At the end of the year, a company reports a balance in its Allowance for Uncollectible Accounts of $1,400

(debit) before any year-end adjustment. The company estimates future uncollectible accounts to be 3% of credit sales for the year. Credit sales for the year total $280,000. Record the adjustment for the allowance for uncollectible accounts using the percentage-of-credit-sales method.

323.A company reports the following amounts at the end of the year (before any year-end adjustment).

Record the adjustment for uncollectible accounts (1) using the percentage-of-receivables method, assuming the company estimates 10% of receivables will not be collected, and (2) using the percentage-of-credit-sales method, assuming the company estimates 2% of credit sales will not be collected.

324.Give three examples of contra revenue accounts and the transactions with which they are associated.

325.Explain how companies account for uncollectible accounts receivable (bad debts).

326.What does it mean to report accounts receivable at their net realizable value.

327.Discuss the differences between the allowance method and the direct write-off method for recording

uncollectible accounts. Which of the two is acceptable under financial accounting rules?

328.How is the receivables turnover ratio measured? What does this ratio indicate? Is a higher or lower

receivables turnover preferable?

329.Explain why the percentage-of-receivables method is referred to as the balance sheet method and the percentage-of-credit-sales method is referred to as the income statement method. Which method is typically used in practice? Why?

330._____ Contra asset that represents the estimated amount of future bad debts.

Answer: j

331._____ Actual bad debts.

Answer: h

332._____ The effect of estimating future bad debts.

Answer: i

333._____ The procedure using an adjustment for future uncollectible accounts.

Answer: b

334._____ The total amount owed to a company from credit sales to customers.

Answer: a

335._____ Accounts receivable less allowance for uncollectible accounts.

Answer: e

336._____ Considers that the longer past due the account receivable is, the less likely it is to be collected.

Answer: f

337._____ Recognizes bad debts when accounts become uncollectible.

Answer: d

338._____ The amount of the adjustment to the allowance for uncollectible accounts during the period.

Answer: g

339._____ The effect of writing off an account receivable as a bad debt under the allowance method.

Answer: c

340._____ When a customer returns a product.

Answer: b

341._____ Deducted from list price. Answer: e

342._____ Sale on account to customers.

Answer: a

343._____ Offered to induce prompt payment.

Answer: d

344._____ Refund because of some deficiency in the company's product or service.

Answer: cRefer To: 05-161

345.On January 1, 2012, Alice & Co. lends $5,000 to an employee and accepts a 24-month, 10% note. At

the end of 2012, what effect will the adjustment for accrued interest revenue have on the Alice & Co.'s financial statements? A. Decreases assets.B. Decreases revenue.C. Increases expense.D. Increases stockholders' equity.

346.On July 8, Ray Inc. sold 100 printers to Office Rental Company at $600 each and offered a 2% discount for

payment within 10 days. On July 15, Office Rental Company paid the full amount in cash. What should Ray Inc. record on July 15?


347.On December 31, 2012, Andy Inc. has a debit balance of $1,500 for the Allowance for Uncollectible Accounts before any year-end adjustment. Andy Inc. also has the following information for its accounts receivable and the estimated percentages of bad debts for different past-due amounts:

What is the amount of bad debt expense to be reported on Andy Inc.'s financial statements for 2012? A. $6,500B. $1,500C. $5,000D. $8,000

348.Eric Company has the following information:

What is the amount of net revenues for Eric Company? A. $330,000.B. $230,000.C. $680,000.D. $780,000.

349.Richard LLC accounts for possible bad debts using the allowance method. When an actual bad debt occurs,

what effect does it have on the accounting equation? A. Increases assets and increases stockholders' equity.B. Decreases assets and decreases stockholders' equity.C. Decreases assets and decreases liabilities.D. No effect on the accounting equation.

350.On December 31, 2012, Mark Inc. estimates future bad debts to be $6,500. The Allowance for

Uncollectible Accounts has a credit balance of $2,500 before any year-end adjustment. What adjustment should Mark Inc. record for the estimated bad debts on December 31, 2012? A. Debit Bad Debt Expense, $6,500; credit Allowance for Uncollectible Accounts, $6,500.B. Debit Bad Debt Expense, $4,000; credit Allowance for Uncollectible Accounts $4,000.C. Debit Allowance for Uncollectible Accounts, $9,000; credit Bad Debt Expense, $6,500.D. Debit Bad Debt Expense, $9,000; credit Allowance for Uncollectible Accounts, $9,000.

351.On March 17, Jackal Lumber sold building materials to Fredo Limited for $15,000 with terms of 3/10, net

20. What amount did Jackal record as revenue on March 25 when Fredo paid for the building materials? A. $15,000.B. $14,550.C. $15,450.D. $0.

352.The direct write-off method is generally not permitted for financial reporting purposes because: A. Compared to the allowance method, it would allow greater flexibility to managers in manipulating

reported net income?B. This method is primarily used for tax purposes.C. It is too difficult to accurately estimate future bad debts.D. Expenses (bad debts) are not properly matched with the revenues (credit sales) that they help to

generate. 353.At the beginning of the year, Vici Ventures had accounts receivable of $220,000. At the end of the year, the

company had accounts receivable of $340,000. During the year, Vici had total sales of $1,000,000, 70% of which were credit sales What was Vici's receivables turnover ratio for the year? A. 2.50B. 3.57C. 2.94D. 146 days

354.Suppose that the balance of a company's Allowance for Uncollectible Accounts was $6,200 (credit) at the

end of 2012, prior to any adjustments. The company estimated that the total of uncollectible accounts in its accounts receivable was $44,300 at the end of 2012. Total accounts receivable were $150,000 on December 31, 2012, and total credit sales for 2012 were $330,000. What amount of bad debt expense would appear in the company's 2012 income statement, assuming the company uses the percentage-of-receivables method? A. $38,100.B. $105,700.C. $33,000.D. $50,500.

355.Garber Plumbers offers a 20% trade discount when providing $2,000 or more of plumbing services to its

customers. In March 2012, Garber provided $4,000 of plumbing services to Red Oak, Inc. and $1,500 of services to Cyril, Inc. Each of these customers was granted credit terms of 2/10, net 30. If both customers paid for the plumbing services within the discount period, what was the net sales figure for these two transactions? A. $5,500.B. $4,312.C. $4,486.D. $4,606.

356.Boynton Jewelers reported the following amounts at the end of the year: total sales = $550,000; sales

discounts = $12,000; sales returns = $44,000; sales allowances = $17,000. What was the company's net sales for the year? A. $489,000.B. $485,000.C. $477,000.D. $499,000.

357.At the end of 2012, Murray State Lenders had a balance in its Allowance for Uncollectible Accounts of $4,500 (credit) before any adjustment. The company estimated its future uncollectible accounts to be $12,000 using the percentage-of-receivables method. Murray State's adjustment on December 31, 2012, to record its estimated uncollectible accounts included a: A. Credit to Allowance for Uncollectible Accounts of $12,000.B. Debit to Bad Debt Expense of $7,500.C. Credit to Allowance for Uncollectible Accounts of $7,500.D. Both b and c.

358.At the end of 2012, Murray State Lenders had a balance in its Allowance for Uncollectible Accounts

of $4,500 (debit) before any adjustment. The company estimated its future uncollectible accounts to be $12,000 using the percentage-of-receivables method. Murray State's adjustment on December 31, 2012, to record its estimated uncollectible accounts included a: A. Credit to Allowance for Uncollectible Accounts of $12,000.B. Debit to Bad Debt Expense of $16,500.C. Credit to Allowance for Uncollectible Accounts of $16,500.D. Both b and c.

359.McConnell's Bakeries had the following balances on December 31, 2012, before any adjustment: Accounts

Receivable = $100,000; Allowance for Uncollectible Accounts = $4,100 (credit). McConnell's estimates uncollectible accounts based on an aging of accounts receivable as shown below:

What amount of bad debt expense did McConnell's record in its December 31, 2012, adjustment to the allowance account? A. $10,200.B. $12,800.C. $15,300.D. $6,100.

360.At the beginning of 2012, the balance in Jackson Enterprises' Allowance for Uncollectible Accounts was

$31,800. During 2012, the company wrote off $38,000 of accounts receivable. Writing off the individual bad debts would include a: A. Debit to Bad Debt Expense.B. Credit to Accounts Receivable.C. Credit to the Allowance for Uncollectible Accounts.D. Both a and c.

361.A company provides services on account. Indicate how this transaction would affect the following five financial statement items:


362.A company collects an account receivable previously written off. Indicate how this transaction would affect

the following five financial statement items:


363.A company collects a customer's account within the discount period. Indicate how this transaction would

affect the following five financial statement items:


364.A company records a sales return from a credit customer. Indicate how this transaction would affect the

following five financial statement items.


365.Gershwin Wallcovering Inc. shipped the wrong shade of paint to a customer. The customer agreed to keep the paint upon being offered a 15% price reduction. The price reduction is an example of a: A. Sales revenue.B. Sales discount.C. Sales return.D. Sales allowance.

366.Tom's Textiles shipped the wrong material to a customer, who refused to accept the order. This is an

example of a: A. Sales Revenue.B. Sales discount.C. Sales return.D. Sales allowance.

Ch5 Key

1. TRUE 2. TRUE 3. FALSE 4. TRUE 5. FALSE 6. TRUE 7. TRUE 8. FALSE 9. TRUE 10. FALSE 11. TRUE 12. FALSE 13. FALSE 14. TRUE 15. TRUE 16. FALSE 17. TRUE 18. FALSE 19. FALSE 20. TRUE 21. TRUE 22. TRUE 23. FALSE 24. TRUE 25. FALSE 26. FALSE 27. TRUE 28. FALSE 29. TRUE 30. TRUE 31. TRUE 32. FALSE

33. TRUE 34. TRUE 35. TRUE 36. FALSE 37. TRUE 38. FALSE 39. TRUE 40. TRUE 41. FALSE 42. TRUE 43. FALSE 44. TRUE 45. TRUE 46. FALSE 47. FALSE 48. TRUE 49. TRUE 50. FALSE 51. FALSE 52. TRUE 53. TRUE 54. TRUE 55. C 56. D 57. A 58. D 59. C 60. B 61. B 62. B 63. D 64. A 65. C 66. C 67. D

68. C 69. C 70. C 71. A 72. D 73. C 74. D 75. A 76. B 77. D 78. B 79. B 80. D 81. B 82. D 83. C 84. A 85. D 86. C 87. B 88. D 89. C 90. D 91. C 92. B 93. D 94. C 95. D 96. C 97. B 98. D 99. A 100. B 101. A 102. B

103. D 104. B 105. C 106. A 107. C 108. B

109.

110.

111. 112. $440,000 113. $350,000

114.

115.

116.

117.

118.

119.

120. 121. $56,000 122. $70,000

123. 124. -$2,000 (or $2,000 debit)

125. 126. $10,800

127.

128.

129. 130. (a) $400; (b) 3 months; (c) 5%; (d) $20,000 131. $1,200 132. 2012 = $800; 2013 = $400 133. 2012 = $4,500; 2013 = $6,000; 2012 = $1,500

134.

135.

136. 137. Company 1 = 22; Company 2 = 25; Company 2 is more efficient.

138.

139.

140. 141. A sales discount represents a reduction, not in the selling price of a product or service, but in the amount to be paid by a credit customer if paid within a specified period of time. Sales returns occur when a customer returns a product. Sales allowances occur when the seller reduces the customer's balance owed or provides at least a partial refund because of some deficiency in the company's product or service. 142. Companies should account for uncollectible accounts receivable using the allowance method. Under this method, a company estimates future bad debts and records those estimates as an expense and a contra asset in the current period. 143. Net realizable value is the amount of cash a company expects to collect from its accounts receivable, and it is calculated as total accounts receivable minus an allowance for uncollectible accounts. The net realizable value of accounts receivable is the amount reported in the balance sheet. 144. The allowance method requires companies to estimate future bad debts and record those estimates in the current period as a reduction in accounts receivable (using a contra asset account) and an increase in bad debt expense. The direct write-off method makes no attempt to estimate future bad debts. Instead, the reduction in accounts receivable and increase in expense associated with bad debts is recorded only when the bad debt actually occurs. Only the allowance method is allowed for financial reporting purposes. 145. The receivables turnover ratio equals net sales divided by average accounts receivable. The ratio shows the number of times during a year that the average accounts receivable balance is collected (or "turns over"). Typically, a higher ratio is a good indicator of a company's effectiveness in managing receivables. 146. The percentage-of-receivables method estimates future bad debts based on a balance sheet amount - accounts receivable. The percentage-of-credit-sales method estimates future bad debts based on an income statement amount - credit sales. The current emphasis on better measurement of assets (balance sheet focus) outweighs the emphasis on better measurement of net income (income statement focus). This is why the percentage-of-receivables method (balance sheet method) is the preferable method and most commonly used in practice, while the percentage-of-credit-sales method (income statement method) is allowed only if amounts do not differ significantly from estimates using the percentage-of-receivables method. 147. 148. 149. 150. 151.

152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. D 163. C 164. D 165. D 166. D 167. B 168. D 169. D 170. A 171. A 172. D 173. C 174. D 175. D 176. D 177. B 178. C 179. D 180. A 181. A 182. D 183. C 184. TRUE 185. TRUE 186. FALSE

187. TRUE 188. FALSE 189. TRUE 190. TRUE 191. FALSE 192. TRUE 193. FALSE 194. TRUE 195. FALSE 196. FALSE 197. TRUE 198. TRUE 199. FALSE 200. TRUE 201. FALSE 202. FALSE 203. TRUE 204. TRUE 205. TRUE 206. FALSE 207. TRUE 208. FALSE 209. FALSE 210. TRUE 211. FALSE 212. TRUE 213. TRUE 214. TRUE 215. FALSE 216. TRUE 217. TRUE 218. TRUE 219. FALSE 220. TRUE 221. FALSE

222. TRUE 223. TRUE 224. FALSE 225. TRUE 226. FALSE 227. TRUE 228. TRUE 229. FALSE 230. FALSE 231. TRUE 232. TRUE 233. FALSE 234. FALSE 235. TRUE 236. TRUE 237. TRUE 238. C 239. D 240. A 241. D 242. C 243. B 244. B 245. B 246. D 247. A 248. C 249. C 250. D 251. C 252. C 253. C 254. A 255. D 256. C

257. D 258. A 259. B 260. D 261. B 262. B 263. D 264. B 265. D 266. C 267. A 268. D 269. C 270. B 271. D 272. C 273. D 274. C 275. B 276. D 277. C 278. D 279. C 280. B 281. D 282. A 283. B 284. A 285. B 286. D 287. B 288. C 289. A 290. C 291. B

292.

293.

294. 295. $440,000 296. $350,000

297.

298.

299.

300.

301.

302.

303. 304. $56,000 305. $70,000

306. 307. -$2,000 (or $2,000 debit)

308. 309. $10,800

310.

311.

312. 313. (a) $400; (b) 3 months; (c) 5%; (d) $20,000 314. $1,200 315. 2012 = $800; 2013 = $400 316. 2012 = $4,500; 2013 = $6,000; 2012 = $1,500

317.

318.

319. 320. Company 1 = 22; Company 2 = 25; Company 2 is more efficient.

321.

322.

323. 324. A sales discount represents a reduction, not in the selling price of a product or service, but in the amount to be paid by a credit customer if paid within a specified period of time. Sales returns occur when a customer returns a product. Sales allowances occur when the seller reduces the customer's balance owed or provides at least a partial refund because of some deficiency in the company's product or service. 325. Companies should account for uncollectible accounts receivable using the allowance method. Under this method, a company estimates future bad debts and records those estimates as an expense and a contra asset in the current period. 326. Net realizable value is the amount of cash a company expects to collect from its accounts receivable, and it is calculated as total accounts receivable minus an allowance for uncollectible accounts. The net realizable value of accounts receivable is the amount reported in the balance sheet. 327. The allowance method requires companies to estimate future bad debts and record those estimates in the current period as a reduction in accounts receivable (using a contra asset account) and an increase in bad debt expense. The direct write-off method makes no attempt to estimate future bad debts. Instead, the reduction in accounts receivable and increase in expense associated with bad debts is recorded only when the bad debt actually occurs. Only the allowance method is allowed for financial reporting purposes. 328. The receivables turnover ratio equals net sales divided by average accounts receivable. The ratio shows the number of times during a year that the average accounts receivable balance is collected (or "turns over"). Typically, a higher ratio is a good indicator of a company's effectiveness in managing receivables. 329. The percentage-of-receivables method estimates future bad debts based on a balance sheet amount - accounts receivable. The percentage-of-credit-sales method estimates future bad debts based on an income statement amount - credit sales. The current emphasis on better measurement of assets (balance sheet focus) outweighs the emphasis on better measurement of net income (income statement focus). This is why the percentage-of-receivables method (balance sheet method) is the preferable method and most commonly used in practice, while the percentage-of-credit-sales method (income statement method) is allowed only if amounts do not differ significantly from estimates using the percentage-of-receivables method. 330. 331. 332. 333. 334. 335. 336. 337. 338. 339. 340. 341. 342. 343. 344.

345. D 346. C 347. D 348. D 349. D 350. B 351. D 352. D 353. A 354. A 355. D 356. C 357. D 358. D 359. D 360. B 361. C 362. D 363. A 364. A 365. D 366. C

Ch5 Summary


AACSB: Analytic 180





AICPA: Reporting 28

Blooms: Analysis 80

Blooms: Analysis 80









Blooms: Synthesis 3

Blooms: Synthesis 3

Difficulty: Easy 94

Difficulty: Hard 118


Learning Objective: 05-01 Recognize accounts receivable. 40

Learning Objective: 05-02 Calculate net revenues using discounts; returns; and allowances. 82

Learning Objective: 05-03 Record an allowance for future uncollectible accounts. 88

Learning Objective: 05-04 Apply the procedure to write off accounts receivable as uncollectible. 56

Learning Objective: 05-05 Use the aging method to estimate future uncollectible accounts. 34

Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.

8

Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.-off method when accounting for uncollectible accounts.

34

Learning Objective: 05-07 Apply the procedure to account for notes receivable; including interest calculation. 46

Learning Objective: 05-08 Calculate key ratios investors use to monitor a companys effectiveness in managing receivables.

12

Learning Objective: 05-08 Calculate key ratios investors use to monitor a companys effectiveness in managing receivables.

12

Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method. 28


Ch6Student: ___________________________________________________________________________

1. Inventory is usually reported as a long-term asset in the balance sheet. True False

2. Cost of goods sold is an asset reported in the balance sheet and inventory is an expense reported in the

income statement. True False

3. Merchandising companies purchase inventories that are primarily in finished form for resale to customers.

True False

4. Cost of goods sold is an expense reported in the income statement and represents the cost of inventory sold

during the period. True False

5. If a company has beginning inventory of $15,000, purchases during the year of $75,000, and ending

inventory of $20,000, cost of goods sold equals $70,000. True False

6. If a company has ending inventory of $25,000, purchases during the year of $95,000, and beginning

inventory of $30,000, cost of goods sold equals $90,000. True False

7. Companies are not allowed to report inventory costs by assuming which units of inventory are sold and

which units still remain on hand. True False

8. Using the first-in, first-out method (FIFO), the first units purchased are assumed to be the first ones sold.

True False

9. Using the weighted-average cost method, the average cost of inventory is calculated as the average unit

cost of inventory purchased during the year. True False

10. Companies are free to choose FIFO, LIFO, or weighted-average cost to report inventory and cost of goods

sold. True False

11. For most companies, actual physical flow of their inventory follows LIFO. True False

12. During periods of rising costs, FIFO generally results in a higher ending inventory balance.

True False

13. During periods of rising costs, FIFO generally results in a higher cost of goods sold.

True False

14. During periods of rising costs, LIFO generally results in a higher cost of goods sold.

True False

15. During periods of rising costs, LIFO generally results in a higher ending inventory balance.

True False

16. Accountants often call FIFO the balance sheet approach because the amount it reports for ending inventory

better approximates the current cost of inventory. True False

17. One of the primary benefits of using FIFO when inventory costs are rising is that it results in greater tax

savings. True False

18. The LIFO conformity rule requires a company that uses LIFO for tax reporting to use FIFO for financial

reporting. True False

19. The LIFO reserve is the additional amount of inventory a company would report if it used FIFO instead of

LIFO. True False

20. Using a perpetual inventory system, the purchase of inventory is recorded with a debit to the Purchases

account, which is a temporary account closed to cost of goods sold at the end of the period. True False

21. For inventory that is shipped FOB destination, title transfers from the seller to the buyer once the seller

ships the inventory. True False

22. For inventory that is shipped FOB shipping point, title transfers from the seller to the buyer once the seller

ships the inventory. True False

23. Freight-in is included in the cost of inventory. True False

24. At the time inventory is sold, cost of goods sold is recorded under the perpetual inventory system.

True False

25. A multiple-step income statement reports multiple levels of profitability, such as gross profit, operating

income, income before income taxes, and net income. True False

26. Gross profit equals net sales of inventory less cost of goods sold.

True False

27. Sales revenue minus cost of goods sold is referred to as operating income.

True False

28. Income before income taxes equals operating income plus nonoperating revenues less nonoperating

expenses. True False

29. When the value of inventory falls below its cost, companies have the option of recording the inventory at

cost or the lower market value. True False

30. When the market value of inventory falls below its cost, no adjustment to the accounting records is needed.

True False

31. The adjustment to write down inventory from cost to its lower market value includes a debit to Cost of

Goods Sold and a credit to Inventory. True False

32. The use of the lower-of-cost-or-market method to report inventory is an example of conservatism in

financial reporting. True False

33. The inventory turnover ratio equals cost of goods sold divided by average inventory.

True False

34. Generally, a higher inventory turnover ratio reflects positively on a company's ability to manage its

inventory. True False

35. A company that has average inventory of $500 and cost of goods sold of $2,000 would have an inventory turnover ratio of 0.25. True False

36. The gross profit ratio measures the amount by which the sale price of inventory exceeds its cost per dollar

of sales. True False

37. Generally, a lower gross profit ratio reflects positively on a company's ability to manage its inventory.

True False

38. Using LIFO, the amount reported for ending inventory does not differ depending on whether a company

uses a periodic system or a perpetual system. True False

39. A periodic inventory system does not continually modify inventory amounts, but instead adjusts for

purchases and sales of inventory at the end of the reporting period based on a physical count of inventory on hand. True False

40. Overstating ending inventory in the current year causes net income in the current year to be overstated.

True False

41. Understating ending inventory in the current year causes cost of goods sold in the current year to be

understated. True False

42. Inventory does not include:

A. Materials used in the production of goods to be sold.B. Assets intended to be sold in the normal course of business.C. Equipment used in the manufacturing of assets for sale.D. Assets currently in production for normal sales.

43. The largest expense on a retailer's income statement is typically:

A. Salaries.B. Cost of goods sold.C. Income tax expense.D. Depreciation expense.

44. Cost of Goods Sold is:

A. An asset account.B. A revenue account.C. An expense account.D. A permanent equity account.

45. Cost of goods sold equals: A. Beginning inventory - net purchases + ending inventory.B. Beginning inventory + accounts payable - net purchases.C. Net purchases + ending inventory - beginning inventory.D. Beginning inventory + net purchases - ending inventory.

46. Baker Fine Foods has beginning inventory for the year of $12,000. During the year, Baker purchases

inventory for $150,000 and ends the year with $20,000 of inventory. Baker will report cost of goods sold equal to: A. $150,000.B. $158,000.C. $142,000.D. $170,000.

47. Tyler Toys has beginning inventory for the year of $18,000. During the year, Tyler purchases inventory for

$230,000 and has cost of goods sold equal to $233,000. Tyler's ending inventory equals: A. $15,000.B. $18,000.C. $21,000.D. $19,000.

48. Inventory records for Dunbar Incorporated revealed the following:

Dunbar sold 700 units of inventory during the month. Ending inventory assuming LIFO would be: A. $500.B. $490.C. $470.D. $480.


Dunbar sold 700 units of inventory during the month. Cost of goods sold assuming LIFO would be: A. $1,730.B. $1,700.C. $1,720.D. $1,710.


Dunbar sold 700 units of inventory during the month. Ending inventory assuming FIFO would be: A. $500.B. $490.C. $470.D. $480.


Dunbar sold 700 units of inventory during the month. Cost of goods sold assuming FIFO would be: A. $1,730.B. $1,700.C. $1,720.D. $1,710.


Dunbar sold 700 units of inventory during the month. Ending inventory assuming weighted-average cost would be (round weighted-average unit cost to four decimals if necessary): A. $502.B. $490.C. $489.D. $480.


Dunbar sold 700 units of inventory during the month. Cost of goods sold assuming weighted-average cost would be (round weighted-average unit cost to four decimals if necessary): A. $1,711.B. $1,700.C. $1,720.D. $1,708.

54. Inventory records for Marvin Company revealed the following:

Marvin sold 2,300 units of inventory during the month. Ending inventory assuming LIFO would be: A. $5,040.B. $5,055.C. $5,075.D. $5,135.


Marvin sold 2,300 units of inventory during the month. Ending inventory assuming FIFO would be: A. $5,140.B. $5,080.C. $5,060.D. $5,050.


Marvin sold 2,300 units of inventory during the month. Ending inventory assuming weighted-average cost would be (round weighted-average unit cost to four decimals if necessary): A. $5,087.B. $5,107.C. $5,077.D. $5,005.


Marvin sold 2,300 units of inventory during the month. Cost of goods sold assuming LIFO would be: A. $16,800.B. $16,760.C. $16,540.D. $16,660.


Marvin sold 2,300 units of inventory during the month. Cost of goods sold assuming FIFO would be: A. $16,800.B. $16,760.C. $16,540.D. $16,660.


Marvin sold 2,300 units of inventory during the month. Cost of goods sold assuming weighted-average cost would be (round weighted-average unit cost to four decimals if necessary): A. $16,733.B. $17,408.C. $16,713.D. $16,089.

60. The following information pertains to Julia & Company:

March 1 Beginning inventory = 30 units @ $5March 3 Purchased 15 units @ $4March 9 Sold 25 units @ $8What is the cost of goods sold for Julia & Company assuming it uses LIFO? A. $125.B. $100.C. $110.D. $85.

61. The following information pertains to Julia & Company: March 1 Beginning inventory = 30 units @ $5March 3 Purchased 15 units @ $4March 9 Sold 25 units @ $8What's the ending balance of inventory for Julia & Company assuming that it uses FIFO? A. $125B. $100C. $110D. $85

62. Consider the following inventory transactions for September:

Beginning inventory 15 units @ $3.00Purchase on September 12 20 units @ $3.50Purchased on September 23 10 units @ $4.00For the month of September, the company sold 35 units. What is the cost of good sold under the weighted-average cost method (round the weighted-average unit cost to four decimals if necessary)? A. $121.B. $116.C. $124.D. $131.

63. In a period when inventory costs are rising, the inventory method that most likely results in the highest

ending inventory is: A. Lower-of-cost-or-market method.B. Weighted-average cost.C. FIFO.D. LIFO.

64. In a period when inventory costs are falling, the lowest taxable income is most likely reported by using the

inventory method of: A. Weighted average.B. LIFO.C. Moving average.D. FIFO.

65. Which of the following is true regarding LIFO and FIFO?

A. In a period of decreasing costs, LIFO results in lower total assets than FIFO.B. In a period of decreasing costs, LIFO results in lower net income than FIFO.C. In a period of rising costs, LIFO results in lower net income than FIFO.D. The amount reported for COGS is based on market value of inventory if LIFO is used.

66. During periods when inventory costs are rising, cost of goods sold will most likely be:

A. Higher under FIFO than LIFO.B. Higher under FIFO than average cost.C. Lower under average cost than LIFO.D. Lower under LIFO than FIFO.

67. In a period of rising prices, which inventory valuation method would a company likely choose if they want to have the highest possible balance of inventory on the balance sheet? A. Average cost.B. FIFO.C. LIFO.D. Periodic.

68. During periods when inventory costs are rising, ending inventory will most likely be:

A. Greater under LIFO than FIFO.B. Less under average cost than LIFO.C. Greater under average cost than FIFO.D. Greater under FIFO than LIFO.

69. The LIFO conformity rule states that if LIFO is used for:

A. One class of inventory, it must be used for all classes of inventory.B. Tax purposes, it must be used for financial reporting.C. One company in an affiliated group, it must be used by all companies in an affiliated group.D. Domestic companies, it must be used by foreign partners.

70. The primary reason for the popularity of LIFO is that it gives:

A. Better matching of physical flow and cost flow.B. A lower income tax obligation.C. Simplified recordkeeping.D. A simpler method to apply.

71. Which inventory method is better described as having an income statement focus and why is it considered

as such? A. FIFO; better approximates the value of ending inventory.B. LIFO; better approximates the value of ending inventory.C. LIFO; better approximates inventory cost necessary to generate revenue.D. FIFO; better approximates inventory cost necessary to generate revenue.

72. Which inventory method is better described as having a balance sheet focus and why is it considered as

such? A. FIFO; better approximates the value of ending inventory.B. LIFO; better approximates the value of ending inventory.C. LIFO; better approximates inventory cost necessary to generate revenue.D. FIFO; better approximates inventory cost necessary to generate revenue.

73. In a perpetual inventory system, the purchase of inventory is debited to:

A. Purchases.B. Cost of Goods Sold.C. Inventory.D. Accounts Payable.

74. In a perpetual inventory system, at the time of a sale the cost of inventory sold is: A. Debited to Accounts Receivable.B. Credited to Cost of Goods Sold.C. Debited to Cost of Goods Sold.D. Not recorded at the time.

75. Good, Inc. sold inventory for $1,200 that was purchased for $700. Good records which of the following

when it sells inventory using a perpetual inventory system? A. No entry is required for cost of goods sold and inventory.B. Debit Cost of Goods Sold $700; credit Inventory $700.C. Debit Cost of Goods Sold $1,200; credit Inventory $1,200.D. Debit Inventory $700; credit Cost of Goods Sold $700.

76. Davis Hardware Company uses a perpetual inventory system. How should Davis record the sale of

inventory costing $620 for $960 on account?


77. Ace Bonding Company purchased inventory on account. The inventory costs $2,000 and is expected to sell for $3,000. How should Ace record the purchase using a perpetual inventory system?


78. Merchandise sold FOB destination indicates that:

A. The seller holds title until the merchandise is received at the buyer's location.B. The merchandise has not yet been shipped.C. The merchandise will not be shipped until payment has been received.D. The seller transfers title to the buyer once the merchandise is shipped.

79. Merchandise sold FOB shipping point indicates that:

A. The seller holds title until the merchandise is received at the buyer's location.B. The merchandise has not yet been shipped.C. The merchandise will not be shipped until payment has been received.D. The seller transfers title to the buyer once the merchandise is shipped.

80. If A sells to B, and B obtains title while goods are in transit, the goods were shipped. If C sells to D, and C

maintains title until the goods arrive at D's door then the goods were shipped. A. FOB shipping point, FOB destination.B. FOB destination, FOB shipping point.C. FOB destination, FOB destination.D. FOB shipping point, FOB shipping point.

81. Ending inventory is equal to the cost of items on hand plus:

A. Items in transit sold FOB shipping point.B. Sales discounts.C. Items in transit sold FOB destination.D. Advertising expense.

82. Suppose Company A places an order with Company B on May 12. On May 14, Company B ships the ordered goods to Company A with terms FOB destination. The goods arrive at Company A on May 17. Company A begins selling the goods to customers on May 19 and pays Company B on May 20. When would Company B record the sale of goods to Company A? A. May 12B. May 14C. May 19D. May 17

83. The distinction between operating and nonoperating income relates to:

A. Continuity of income.B. Principal activities of the reporting entity.C. Consistency of income stream.D. Reliability of measurements.

84. Given the information below, what is the gross profit?

A. $250,000B. $70,000C. $220,000D. $50,000

85. Consider the following year-end information for Spitzer Corporation:

What amount will Spitzer report for operating income?

A. $200,000B. $210,000C. $380,000D. $120,000

86. Niva Company has the following information for their inventories A, B, C, and D:The necessary adjustment associated with the lower-of-cost-or-market method would be:


87. On April 1, Robert LLC purchased two units of inventory, A and B. The cost of unit A was $650, and the

cost of unit B was $625. On April 30, Robert LLC had not sold the inventory. The market value of unit A was now $685 while the market value of unit B was $550. The adjustment associated with the lower-of-

cost-or-market method on April 30 will be: A. Option aB. Option bC. Option cD. Option d

88. Consider the following information pertaining to OldWest's inventory:

At what amount should OldWest report its inventory? A. $3,213.B. $3,386.C. $2,996.D. $2,906.

89. Company A is identical to Company B in every regard except that Company A uses FIFO and Company B uses LIFO. In an extended period of rising inventory costs, Company A's gross profit and inventory turnover, compared to Company B's, would be:


90. Nu Company reported the following data for its first year of operations:

What is Nu's gross profit ratio? A. 80%.B. 49%.C. 40%.D. 5%.

91. Anthony Corporation reported the following amounts for the year:

Net sales $296,000Cost of goods sold 138,000Average inventory 50,000Anthony's inventory turnover ratio is: A. 2.42.B. 2.76.C. 3.21.D. 2.14.

92. Anthony Corporation reported the following amounts for the year:

Net sales $296,000Cost of goods sold 138,000Average inventory 50,000Anthony's average days in inventory is: A. 170 days.B. 114 days.C. 132 days.D. 151 days.

93. Anthony Corporation reported the following amounts for the year:Net sales $296,000Cost of goods sold 138,000Average inventory 50,000Anthony's gross profit ratio is: A. 53.4%.B. 51.9%.C. 50.3%.D. 46.6%.

94. In a periodic inventory system, the purchase of inventory is debited to:

A. Purchases.B. Cost of goods sold.C. Inventory.D. Accounts payable.

95. Northwest Fur Co. started the year with $94,000 of merchandise inventory on hand. During the year,

$400,000 in merchandise was purchased on account with credit terms of 1/15 ,n/45. All discounts were taken. Northwest paid freight-in charges of $7,500. Merchandise with an invoice amount of $5,000 was returned for credit. Cost of goods sold for the year was $380,000. What is ending inventory? A. $112,490.B. $112,550.C. $116,500.D. $120,300.

96. The inventory method that will always produce the same amount for cost of goods sold in a periodic

inventory system as in a perpetual inventory system would be: A. FIFO.B. LIFO.C. Weighted average.D. Each method always produces a different amount.

97. If a company overstates its ending balance of inventory in year 1 and it records inventory correctly in year

2, which one of the following is true? A. Net income is overstated in year 2.B. Cost of goods sold is overstated in year 1.C. Net income is understated in year 1.D. Retained earnings is overstated in year 1.

98. If a company understates its ending balance of inventory in year 1 and it records inventory correctly in year

2, which one of the following is true? A. Net income is overstated in year 1.B. Cost of goods sold is overstated in year 2.C. Net income is understated in year 2.D. Retained earnings is understated in year 2.

99. If a company understates its count of ending inventory in Year 1, which of the following is true? A. Costs of good sold is understated at the end of Year 1.B. Profit is correct in Year 2.C. The balance of retained earnings is overstated at the end of Year 1.D. The balance of retained earnings is correct at the end of Year 2.

100.At the beginning of 2012, Calston Incorporated reports inventory of $9,000. During 2012, the company

purchases additional inventory for $25,000. At the end of 2012, the cost of inventory remaining is $8,000. Calculate cost of goods sold for 2012.

101.During 2012, a company sells 20 units of inventory. The company has the following inventory purchase

transactions for 2012:

Calculate ending inventory and cost of goods sold for 2012 assuming the company uses FIFO with a periodic inventory system.

102.During 2012, a company sells 20 units of inventory. The company has the following inventory purchase transactions for 2012:

Calculate ending inventory and cost of goods sold for 2012 assuming the company uses LIFO with a periodic inventory system.

103.During 2012, a company sells 20 units of inventory. The company has the following inventory purchase

transactions for 2012:

Calculate ending inventory and cost of goods sold for 2012 assuming the company uses weighted-average cost with a periodic inventory system.

104.During 2012, a company sells 300 units of inventory for $85 each. The company has the following inventory purchase transactions for 2012:

Calculate ending inventory and cost of goods sold for 2012 assuming the company uses FIFO with a periodic inventory system.

105.During 2012, a company sells 400 units of inventory for $85 each. The company has the following

inventory purchase transactions for 2012: Calculate ending inventory and cost of goods sold for 2012 assuming the company uses LIFO with a periodic inventory system.

106.During 2012, a company sells 500 units of inventory for $90 each. The company has the following inventory purchase transactions for 2012:

Calculate cost of goods sold and ending inventory for 2012 assuming the company uses weighted-average cost with a periodic inventory system (round weighted-average unit cost to four decimals if necessary).

107.During 2012, a company sells 200 units of inventory for $50 each. The company has the following

inventory purchase transactions for 2012:

Actual sales by the company include its entire beginning inventory, 80 units of inventory from the May 5 purchase, and 70 units from the November 3 purchase. Calculate cost of goods sold and ending inventory for 2012 assuming the company uses specific identification.

108.For each item below, indicate whether FIFO or LIFO will generally result in a higher reported amount when inventory costs are rising versus falling.

109.A company begins the year with inventory of $50,000 and ends the year with inventory of $55,000. During

the year, the following amounts are recorded:

Calculate cost of goods sold for the year.

110.When inventory costs are rising, __________ generally results in a higher amount of reported net income.

________________________________________

111.When inventory costs are declining, __________ generally results in a lower amount of reported cost of

goods sold. ________________________________________

112.When inventory costs are declining, __________ generally results in a lower amount of reported inventory.

________________________________________

113.When inventory costs are rising, __________ generally results in a lower amount of reported cost of goods

sold. ________________________________________

114.When inventory costs are declining, __________ generally results in a higher amount of reported net

income. ________________________________________

115.__________ is commonly referred to as the balance sheet approach. ________________________________________

116.__________ is commonly referred to as the income statement approach.

________________________________________

117.When inventory costs are rising, __________ generally results in a lower income tax obligation.

________________________________________

118.A company uses a perpetual system to record inventory transactions. The company purchases inventory on

account on February 9, 2012, for $50,000 and then sells this inventory on account on March 7, 2012, for $70,000. Record the transactions for the purchase and sale of the inventory.

119.A company has the following transactions during March:

March 3 Purchases inventory on account for $3,500, terms 2/10, n/30.March 5 Pays freight costs of $200 on inventory purchased on March 3.March 6 Returns inventory with a cost of $500.March 12 Pays the full amount due on March 3 purchase.March 29 Sells all inventory purchased on March 3 (less those returned on March 6) for $5,000 on account.Record all transactions, assuming the company uses a perpetual inventory system.

120.For each company, calculate the missing amount.

121.Below are some of the items found in a multiple-step income statement:

a. Sales revenueb. Net incomec. Operating incomed. Income before income taxese. Gross profitPlace these items in the order they would appear from first to last.

122.Beasley, Inc. reports the following amounts in its December 31, 2012, income statement.

Sales revenue $300,000 Income tax expense $38,000Interest expense 12,000 Cost of goods sold 125,000Salaries expense 35,000 Advertising expense 24,000Utilities expense 41,000Prepare a multiple-step income statement.

123.A company reports inventory using lower-of-cost-or-market. Below is information related to its year-end inventory. Calculate the amount to be reported for ending inventory.

Answer:

124.A company reports inventory using the lower-of-cost-or-market method. Below is information related to its

year-end inventory:

Calculate ending inventory under lower-of-cost-or-market and record any necessary adjustment to inventory.

125.A company reports inventory using lower-of-cost-or-market. Below is information related to its year-end

inventory:

Calculate ending inventory under lower-of-cost-or-market and record any necessary adjustment to inventory.

126.A company reports the following amounts for 2012:

Calculate cost of goods sold, the inventory turnover ratio, and the average days in inventory for 2012.

127.A company reports the following amounts at the end of the year:

Sales revenue $300,000Cost of goods sold 225,000Net income 50,000Compute the company's gross profit ratio.

128.A company uses a periodic system to record inventory transactions. The company purchases inventory on

account on February 9, 2012, for $50,000 and then sells this inventory on account on March 7, 2012, for $70,000. Record the transactions for the purchase and sale of the inventory.

129.A company has the following transactions during March:March 3 Purchases inventory on account for $3,500, terms 2/10, n/30.March 5 Pays freight costs of $200 on inventory purchased on March 3.March 6 Returns inventory with a cost of $500.March 12 Pays the full amount due on March 3 purchase.March 29 Sells all inventory purchased on March 3 (less those returned on March 6) for $5,000 on account.Record all transactions, including the month-end adjustment to cost of goods sold, assuming the company uses a periodic inventory system and has no beginning inventory.

130.A company understated its ending inventory balance by $8,000 in 2012. What impact will this error have

on cost of goods sold and gross profit in 2012 and 2013?

131.A company overstated its ending inventory balance by $6,000 in 2012. What impact will this error have on

cost of goods sold and gross profit in 2012 and 2013?

132.A company understated its ending inventory balance by $5,000 in 2012. What impact will this error have

on total assets and retained earnings in 2012 and 2013 (ignoring tax effects)?

133.A company overstated its ending inventory balance by $9,000 in 2012. What impact will this error have on total assets and retained earnings in 2012 and 2013 (ignoring tax effects)?

134.What does the balance of cost of goods sold in the income statement represent? What does the balance of

inventory in the balance sheet represent?

135.What are the three primary cost flow assumptions? How does the specific identification method differ from

these three primary cost flow assumptions?

136.What does it mean that FIFO has a balance sheet focus and LIFO has an income statement focus?

137.What is a multiple-step income statement? What information does it provide beyond "bottom-line" net income?

138.What is meant by the assertion that the lower-of-cost-or-market method is an example of conservatism in

accounting?

Listed below are five terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the best term placing the letter designating the term in the space provided.Terms:a. Work-in-process inventoryb. Merchandising companiesc. Finished goodsd. Raw materialse. Manufacturing companies 139._____ Products that have started the production process but are not yet complete at the end of the period.

Answer: a

140._____ Inventory items for which the manufacturing process is complete.

Answer: c

141._____ Companies that produce the inventories they sell, rather than buying them from suppliers in finished

form. Answer: e

142._____ Companies that purchase inventories that are primarily in finished form for resale to customers.

Answer: b

143._____ Cost of components that will become part of the finished product but have not yet been used in

production. Answer: d

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the best term placing the letter designating the term in the space provided.Terms:a. Ending inventoryb. Freight-inc. Cost of goods soldd. LIFO conformity rulee. LIFOf. Freight-outg. LIFO reserveh. Specific identificationi. FIFOj. Average cost 144._____ Inventory costing method that matches each unit of inventory with its actual cost.

Answer: h

145._____ Cost of inventory sold during the period.

Answer: c

146._____ Additional amount of inventory a company would report if it used FIFO instead of LIFO.

Answer: g

147._____ Cost of freight included in inventory.

Answer: b

148._____ Cost flow assumption that assumes last units purchased are sold first.

Answer: e

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the best term placing the letter designating the term in the space provided.Terms:a. Ending inventoryb. Freight-inc. Cost of goods soldd. LIFO conformity rulee. LIFOf. Freight-outg. LIFO reserveh. Specific identificationi. FIFOj. Average cost 149._____ Cost of inventory not sold by the end of the period.

Answer: a

150._____ Cost flow assumption that assumes first units purchased are sold first. Answer: i

151._____ Inventory costing method that assumes both cost of goods sold and ending inventory consist of a

random mixture of all the goods available for sale. Answer: j

152._____ LIFO must be used for financial reporting if elected for taxes.

Answer: d

153._____ Cost of freight not included in inventory.

Answer: f

Listed below are four terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the best term placing the letter designating the term in the space provided.Terms:a. FOB shipping pointb. FOB destinationc. Periodic inventory systemd. Perpetual inventory system 154._____ Requires a debit to cost of goods sold when inventory is sold.

Answer: d

155._____ Indicates that title to inventory transfers from the seller to the buyer at the point it is shipped.

Answer: a

156._____ Requires a year-end adjustment for inventory.

Answer: c

157._____ Indicates that title to inventory transfers from the seller to the buyer once it reaches the buyer.

Answer: b

Listed below are five terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the best term placing the letter designating the term in the space provided.Terms:a. Gross profitb. Net incomec. Inventory turnover ratiod. Operating incomee. Income before income taxes 158._____ Equals operating income plus nonoperating revenues less nonoperating expenses.

Answer: e

159._____ Equals income before income taxes less income taxes. Answer: b

160._____ Equals sales revenue minus cost of goods sold.

Answer: a

161._____ Equals gross profit less operating expenses.

Answer: d

162._____ Equals cost of goods sold divided by average inventory.

Answer: c

163.Given the information in the table below, what is the company's gross profit?

a. $280,000.b. $170,000.c. $50,000.d. $100,000.Answer: d

164.What effect would an adjustment to record inventory at the lower-of-cost-or-market have on the company's

financial statements? a. An increase to assets.b. An increase to stockholders' equity.c. A decrease to revenue.d. An increase to expense.Answer: d

165.Bill Inc.'s correct ending balance for the inventory account at the end of 2012 should be $5,000, but the

company incorrectly stated it as $3,000. In 2013, Bill correctly recorded its ending balance of the inventory account. Which one of the following is true? a. Gross profit is overstated by $2,000 in 2012.b. Retained earnings are understated by $2,000 in 2013.c. Gross profit is overstated by $2,000 in 2013.d. Cost of goods sold is understated by $2,000 in 2012.Answer: c

166.The practice of using the lower-of-cost-or-market to evaluate inventory reflects which of the following accounting principles? a. Matching principle.b. Revenue recognition.c. Conservatism.d. Materiality.Answer: c

167.Which inventory cost flow assumption generally results in the highest reported amount for cost of goods

sold when inventory costs are falling? a. FIFO.b. LIFO.c. Weighted-average cost.d. Straight-line.Answer: a

168.The primary difference between the periodic and perpetual inventory systems is:

a. The reported amount of ending inventory is higher under the periodic system.b. The perpetual system maintains a continual record of inventory transactions, whereas the periodic system records these transactions only at the end of the period.c. The reported amount of sales revenue is higher under the periodic inventory system.d. The reported amount of cost of goods sold is higher under the perpetual inventory system.Answer: b

169.At the end of a reporting period, Gamble Corporation determines that its ending inventory has a cost of

$300,000 and a market value of $230,000. What would be the effect(s) of the adjustment to write down inventory to market value? a. Decrease total assets.b. Decrease net income.c. Increase retained earnings.d. a and b.Answer: d

170.Suppose that Hastings Corporation overstates its ending inventory for 2012. What effect will this have on

the reported amount of cost of goods sold for 2012? a. Overstate cost of goods sold.b. Understate cost of goods sold.c. Have no effect on cost of goods sold.d. Cannot be determined given the information provided.Answer: b

171.LeGrand Corporation reported the following amounts in its income statement:Sales revenue$440,000Advertising expense 60,000Interest expense 10,000Salaries expense 55,000Utilities expense 25,000Income tax expense 45,000Cost of goods sold 180,000What was LeGrand's gross profit? a. $260,000.b. $180,000.c. $220,000.d. $120,000.Answer: a

172.LeGrand Corporation reported the following amounts in its income statement:

Sales revenue$440,000Advertising expense 60,000Interest expense 10,000Salaries expense 55,000Utilities expense 25,000Income tax expense 45,000Cost of goods sold 180,000What was LeGrand's operating income? a. $120,000.b. $260,000.c. $110,000.d. $65,000.Answer: a

173.LeGrand Corporation reported the following amounts in its income statement:

Sales revenue$440,000Advertising expense 60,000Interest expense 10,000Salaries expense 55,000Utilities expense 25,000Income tax expense 45,000Cost of goods sold 180,000What was LeGrand's net income? a. $120,000.b. $60,000.c. $110,000.d. $65,000.Answer: d

174.Using the information below, determine the ending inventory value applying the lower-of-cost-or-market method.Inventory ItemQuantityCostMarketCutlets200 $12 $14Chops400$16 $14Shanks300 $15 $12 a. $13,300.b. $12,000.c. $11,600.d. $13,700.Answer: c

175.After applying the lower-of-cost-or-market method, the accountant prepares a year-end adjustment. That

adjustment would: a. Decrease the company's cost of goods sold.b. Reduce the company's stockholders' equity.c. Increase the company's inventory.d. Increase the company's total assets.Answer: b

176.Consider the following inventory data for two companies:

Nichols, Inc.Winters, Inc.Beginning inventory$120,000 $150,000Ending inventory 80,000 100,000Purchases 240,000 310,000Which of these companies had the higher inventory turnover ratio? a. Nichols.b. Winters.c. The ratios are the same for both companies.d. Cannot determine with the information given.Answer: b

177.Consider the following inventory data:

Beginning inventory$150,000Ending inventory 100,000Purchases 310,000What is the average days in inventory for the year? a. 126.7 days.b. 101.4 days.c. 152.0 days.d. 111.7 days.Answer: a

178.The following information relates to inventory for Shoeless Joe Inc.

At what amount would Shoeless report gross profit using LIFO cost flow assumptions? a. $105.b. $80.c. $175.d. $120.Answer: b


At what amount would Shoeless report ending inventory using FIFO cost flow assumptions? a. $55.b. $170.c. $110.d. $70.Answer: c

180.Wildwood, an outdoors clothing store, reports the following information for June:

What is Wildwood's gross profit for June? a. $18,000.b. $39,000.c. $104,00.d. $17,000.Answer: b

181.Which of the following is true concerning inventory cost flow assumptions?

a. LIFO produces higher net income than FIFO in a period of rising prices.b. FIFO is an income statement focus.c. LIFO is a balance sheet focus.d. None of the above are true.Answer: d


At what amount would Shoeless report cost of goods sold using the weighted-average cost flow assumption? (Round your answer to the nearest dollar) a. $110.b. $73.c. $70.d. $105.Answer: d

183.Northern Town Equipment has four types of products in its inventory. Northern applies the rules under

lower-of-cost or market (LCM) to its inventory at the end of each year as shown below:

The year-end adjustment based upon the information above would include a: a. Debit to Cost of Goods Sold $65.b. Credit to Inventory $50.c. Debit to Inventory $65.d. Debit to Cost of Goods Sold $50.Answer: a

184.Davis Hardware Company uses a perpetual inventory system. How should Davis record the return of

inventory previously purchased on account for $200?

a. Option ab. Option bc. Option cd. Option dAnswer: b

185.Davis Hardware Company uses a periodic inventory system. How should Davis record the return of inventory previously purchased on account for $200?

a. Option ab. Option bc. Option cd. Option dAnswer: d

186.In a periodic inventory system, at the time of a sale the cost of inventory sold is:

a. Debited to Accounts Receivable.b. Credited to Cost of Goods Sold.c. Debited to Cost of Goods Sold.d. Not recorded at this time.Answer: d

187.Good, Inc. sold inventory for $1,200 that was purchased for $700. Good records which of the following

when it sells inventory using a periodic inventory system? a. No entry is required for cost of goods sold and inventory.b. Debit Cost of Goods Sold $700; credit Inventory $700.c. Debit Cost of Goods Sold $1,200; credit Inventory $1,200.d. Debit Inventory $700; credit Cost of Goods Sold $700.Answer: a

188.Davis Hardware Company uses a periodic inventory system. How should Davis record the sale of inventory costing $620 for $960 on account?

a. Option ab. Option bc. Option cd. Option dAnswer: b

189.Ace Bonding Company purchased inventory on account. The inventory costs $2,000 and is expected to sell

for $3,000. How should Ace record the purchase using a periodic inventory system?

a. Option ab. Option bc. Option cd. Option dAnswer: a

190.On May 1, Ace Bonding Company purchased inventory costing $2,000 on account with terms 2/10, n/30. On May 8, Ace pays for this inventory and records which of the following using a perpetual inventory system?

a. Option ab. Option bc. Option cd. Option dAnswer: c

191.On May 1, Ace Bonding Company purchased inventory costing $2,000 on account with terms 2/10, n/

30. On May 8, Ace pays for this inventory and records which of the following using a periodic inventory system?

a. Option ab. Option bc. Option cd. Option dAnswer: c

192.On May 1, Ace Bonding Company purchased inventory costing $2,000 on account with terms 2/10, n/30. On May 18, Ace pays for this inventory and records which of the following using a perpetual inventory system?


193.On May 1, Ace Bonding Company purchased inventory costing $2,000 on account with terms 2/10, n/

30. On May 18, Ace pays for this inventory and records which of the following using a periodic inventory system?


Ch6 Key

1. FALSE 2. FALSE 3. TRUE 4. TRUE 5. TRUE 6. FALSE 7. FALSE 8. TRUE 9. FALSE 10. TRUE 11. FALSE 12. TRUE 13. FALSE 14. TRUE 15. FALSE 16. TRUE 17. FALSE 18. FALSE 19. TRUE 20. FALSE 21. FALSE 22. TRUE 23. TRUE 24. TRUE 25. TRUE 26. TRUE 27. FALSE 28. TRUE 29. FALSE 30. FALSE 31. TRUE 32. TRUE

33. TRUE 34. TRUE 35. FALSE 36. TRUE 37. FALSE 38. FALSE 39. TRUE 40. TRUE 41. FALSE 42. C 43. B 44. C 45. D 46. C 47. A 48. D 49. C 50. A 51. B 52. C 53. A 54. A 55. A 56. A 57. B 58. D 59. C 60. C 61. D 62. A 63. C 64. D 65. C 66. C 67. B

68. D 69. B 70. B 71. C 72. A 73. C 74. C 75. B 76. B 77. A 78. A 79. D 80. A 81. C 82. D 83. B 84. D 85. B 86. D 87. C 88. C 89. C 90. C 91. B 92. C 93. A 94. A 95. B 96. A 97. D 98. B 99. D

100. 101. Ending inventory = $310; Cost of goods sold = $1,210

Feedback: 102. Ending inventory = $300; Cost of goods sold = $1,220

Feedback: 103. Ending inventory = $304; cost of goods sold = $1,216 104. Ending inventory = $8,140; Cost of goods sold = $21,680

Feedback:

105. Ending inventory = $2,100; Cost of goods sold = $29,310

Feedback: 106. Ending inventory = $3,222 (rounded); cost of goods sold = $40,278. 107. Ending inventory = $1,130; Cost of goods sold = $7,580

Feedback:

108.

109. 110. FIFO 111. LIFO 112. FIFO 113. FIFO 114. LIFO 115. FIFO

116. LIFO 117. LIFO

118.

119.

120. a. Gross profit = Sales revenue - Cost of goods soldb. Net income = Gross profit - Operating expenses 121. a, e, c, d, b

122. 123. 124. Ending inventory = $3,500.

Feedback: Ending inventory = (100 × $25) + (50 × $20) = $3,500.Feedback: Write-down = $4,000 (total cost) - $3,500 (LCM) = $500. 125. Ending inventory = $1,551

Feedback: Ending inventory = (10 × $30) + (18 × $40) + (12 × $23) + (15× $17) = $1,551.Feedback: Write-down = $1,620 (total cost)- $1,551 (LCM) = $69. 126. Cost of goods sold = $140,000; inventory turnover ratio = 5.6 times; average days in inventory = 65.2 days 127. 25%

128.

129. 130. 2012Cost of goods sold is overstated by $8,000.Gross profit is understated by $8,000.2013Cost of goods sold is understated by $8,000.Gross profit is overstated by $8,000. 131. 2012Cost of goods sold is understated by $6,000.Gross profit is overstated by $6,000.2013Cost of goods sold is overstated by $6,000.Gross profit is understated by $6,000. 132. 2012Total assets are understated by $5,000.Retained earnings is understated by $5,000.2013Total assets are stated correctly.Retained earnings is stated correctly. 133. 2012Total assets are overstated by $9,000.Retained earnings is overstated by $9,000.2013Total assets are stated correctly.Retained earnings is stated correctly.

134. The balance of cost of goods sold in the income statement represents the cost of inventory sold during the period. Cost of goods sold is an expense. The balance of inventory in the balance sheet represents the cost of inventory not sold by the end of the reporting period. Inventory is an asset. 135. The three most common inventory cost flow assumptions are FIFO (first-in, first-out), LIFO (last-in, first-out), and average cost. These methods provide assumptions as to which inventory units are sold, whereas the specific identification method matches or identifies each unit of inventory with its actual cost. 136. Since FIFO assumes the first purchases sell first, the amount it reports for ending inventory (in the balance sheet) better approximates the current cost of inventory. LIFO assumes the last purchases are sold first, reporting the most recent inventory cost in cost of goods sold (in the income statement). Thus, LIFO more realistically matches the current costs of inventory needed to produce current revenues. 137. A multiple-step income statement reports multiple levels of profitability. Gross profit equals sales revenue minus cost of goods sold. Operating income equals gross profit minus operating expenses. Income before income taxes equals operating income plus non-operating revenues and minus non-operating expenses. Net income equals all revenues minus all expenses. 138. Firms are required to report the falling value of inventory but not allowed to report the increasing value of inventory. Conservative accounting implies that there is more potential harm to users of financial statements if estimated gains turn out to be wrong than if estimated losses turn out to be wrong. Therefore, companies typically do not report estimated gains. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163.

164. 165. 166. 167. 168. 169. 170. 171. 172. 173. 174. 175. 176. 177. 178. 179. 180. 181. 182. 183. 184. 185. 186. 187. 188. 189. 190. 191. 192. 193.

Ch6 Summary


AACSB: Analytic 73





AICPA: Reporting 62

Blooms: Analysis 72




Blooms: Synthesis 2

Difficulty: Easy 33

Difficulty: Hard 47


Learning Objective: 06-01 Trace the flow of inventory costs from manufacturing companies to merchandising companies.

27

Learning Objective: 06-02 Calculate cost of goods sold. 19

Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods.

39

Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost flow assumptions. 37

Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. 34

Learning Objective: 06-06 Prepare a multiple-step income statement. 20

Learning Objective: 06-07 Apply the lower-of-cost-or-market method for inventories. 17

Learning Objective: 06-08 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. 15

Learning Objective: 06-09 Record inventory transactions using a periodic inventory system. 17


Ch7Student: ___________________________________________________________________________

1. The CEO, as head of the company, is ultimately responsible for the firm's accounting. True False

2. We record a long-term asset at its cost less all expenditures necessary to get the asset ready for use.

True False

3. We use the term capitalize to describe recording an expenditure as an expense.

True False

4. Cash received from the sale of salvaged materials increases the total cost of land.

True False

5. Land improvements are recorded separately from the land itself because, unlike land, these assets are

subject to depreciation. True False

6. Capitalized interest refers to interest costs we add to the asset account rather than recording as interest

expense. True False

7. Many intangible assets are not recorded on the balance sheet at their estimated market values.

True False

8. We record purchased intangible assets at their original cost plus all other costs necessary to get the asset

ready for use. True False

9. Most of the costs associated with internally developed intangible assets are recorded as intangible assets on

the balance sheet. True False

10. Research and development costs incurred in developing a patent internally are not recorded as an intangible

asset in the balance sheet, but rather are expensed directly in the income statement. True False

11. International accounting standards allow firms to record development costs that benefit future periods as an

intangible asset. True False

12. Advertising costs that increase the value of trademarks are recorded to the asset account entitled Trademarks. True False

13. We expense internally generated intangible assets, such as research and development and advertising costs,

as we incur them. True False

14. A patent is an exclusive right to a published work such as a song, film, or painting.

True False

15. A copyright is an exclusive right of protection given to the creator of a published work such as a song, film,

painting, photograph, book, or computer software. True False

16. A trademark is a word, slogan, or symbol that distinctively identifies a company, product, or service.

True False

17. When a firm develops a trademark internally through advertising, it does not record the advertising costs as

an intangible asset, but rather expenses them in the income statement. True False

18. The franchisee's initial fee is recorded as an expense on the income statement.

True False

19. We record goodwill as an intangible asset in the balance sheet only when we purchase it as part of the

acquisition of another company. True False

20. The acquiring company records goodwill equal to the purchase price less the book value of the net assets

acquired. True False

21. We capitalize repairs and maintenance expenditures because they maintain a given level of benefits.

True False

22. If a firm successfully defends an intangible right, it should expense the litigation costs as incurred.

True False

23. If the defense of an intangible right is unsuccessful, then the firm should expense the litigation costs as

incurred because they provide no future benefit. True False

24. Depreciation in accounting is the process of allocating to expense the cost of an asset over its service life. True False

25. Depreciation in accounting records the decrease in value of an asset.

True False

26. Accumulated Depreciation is a liability account that is increased by credits.

True False

27. Book value is equal to the original cost of the asset minus the current balance in Accumulated

Depreciation. True False

28. The Accumulated Depreciation account allows us to reduce the carrying value of assets through

depreciation, while maintaining the original cost of each asset in the accounting records. True False

29. The service life of an asset is always equal to the full life of the asset.

True False

30. Residual value, also referred to as salvage value, is the amount the company expects to receive from selling

the asset at the end of its service life. True False

31. With the straight-line depreciation method, we allocate an equal amount of the depreciable cost to each

year of the asset's service life. True False

32. When a change in estimate is required, the company changes depreciation in prior, current and future years.

True False

33. Straight-line depreciation assumes that the benefits we derive from the use of an asset are the same each

year. True False

34. Declining-balance depreciation will be lower than straight-line depreciation in earlier years, but higher in

later years. True False

35. In an activity-based depreciation method, we allocate an asset's cost based on its use.

True False

36. We allocate natural resources to expense through a process known as "depletion." True False

37. Straight-line produces a lower net income than accelerated methods in the earlier years of an asset's life.

True False

38. Straight-line, declining-balance, and activity-based depreciation all are acceptable depreciation methods for

both financial reporting and tax reporting. True False

39. Most companies use straight-line amortization for intangibles and credit the amount of amortization to the

intangible asset account itself rather than to Accumulated Amortization. True False

40. Goodwill is amortized over its estimated useful life.

True False

41. Intangible assets with an indefinite useful life (goodwill and most trademarks) are not amortized.

True False

42. We record a gain if we sell an asset for less than book value.

True False

43. We record a loss if we sell an asset for less than book value.

True False

44. A more comparable measure of profitability than income is return on assets, which equals net income

divided by average total assets. True False

45. Profit margin is net income divided by net sales.

True False

46. Asset turnover is net sales divided by ending total assets.

True False

47. Management must review long-term assets for impairment when events or changes in circumstances

indicate that book value might not be recoverable. True False

48. Impairment occurs when the future cash flows generated for a long-term asset fall below its fair value.

True False

49. An impairment loss is equal to the amount by which book value exceeds the fair value of a long-term asset. True False

50. Taking a "big bath" is recording all losses in one year to make a bad year even worse.

True False

51. Real Angus Steakhouse purchased land for $75,000 cash. They also incurred commissions of $4,500,

property taxes of $5,000, and title insurance of $800. The $5,000 in property taxes includes $4,000 in back taxes paid by Real Angus on behalf of the seller and $1,000 due for the current year after the purchase date. For what amount should Real Angus Steakhouse record the land?


52. Which of the following would be recorded as land improvements?

A. Property taxes.B. Title insurance.C. Real estate commissions.D. Adding a parking lot.

53. Bad Brads BBQ purchased a piece of equipment by paying $5,000 cash. They also incurred a shipping cost

of $400 to get the equipment to its factory. The fair value of this equipment is $7,000. For what amount should Bad Brads BBQ record the equipment?


54. Wiley Company purchased new equipment for $60,000. Wiley paid cash for the equipment. Other costs

associated with the equipment were: transportation costs, $1,000; sales tax paid $3,000; and installation cost, $2,500. The cost recorded for the equipment was:


55. Cowboy Development incurred the following costs associated with the purchase of a piece of land that it will use to re-build an office building:

What amount should be recorded for the purchase of the land?


56. Bahama Catering purchased a commercial dishwasher by paying cash of $5,000. The dishwasher's fair

value on the date of the purchase was $5,600. The company incurred $400 in transportation costs, $300 installation fees, and paid a $200 fine for illegal parking while the dishwasher was being delivered. For what amount will Bahama record the dishwasher?


57. The following financial information is from Cook Company:

What is the amount of long-term assets assuming the accounts above reflect normal activity?


58. Capital Construction purchased a 3-acre tract of land for a building site for $350,000. The company demolished the old building at a cost of $12,000, but was able to sell scrap from the building for $1,500. The cost of title insurance was $900 and attorney fees for reviewing the contract was $500. Property taxes paid were $3,000, of which $250 covered the period after the purchase date. The capitalized cost of the land is: A. $366,400.B. $366,150.C. $364,650.D. $231,150.

59. On July 1, 2012, Landon Co. purchased a $500,000 tract of land that is intended to be the site of a new

office complex. Landon incurred additional costs and realized salvage proceeds during 2012 as follows:

What would be the capitalized cost of the land? A. $500,000.B. $575,000.C. $580,000.D. $590,000.

60. Fruitasia purchased land, a building, and equipment for $800,000. The estimated fair values of the land,

building, and equipment are $100,000, $700,000, and $200,000, respectively. At what amount would the company record the land? A. $80,000.B. $90,000.C. $100,000.D. $800,000.

61. Productive assets that are physically used up, or depleted are:

A. Equipment.B. Land.C. Land improvements.D. Natural resources.

62. The legal life of a patent is:

A. Forty years.B. Twenty years.C. Life of the inventor plus fifty years.D. Indefinite.

63. An exclusive 20-year right to manufacture a product or to use a process is a:

A. Patent.B. Copyright.C. Trademark.D. Franchise.

64. The exclusive right to benefit from a creative work, such as a film, is a: A. Patent.B. Copyright.C. Trademark.D. Franchise.

65. A word, slogan, or symbol that distinctively identifies a company, product, or service is a:

A. Patent.B. Copyright.C. Trademark.D. Franchise.

66. Research and development costs should be:

A. Expensed in the period incurred.B. Expensed in the period they are determined to be unsuccessful.C. Deferred pending determination of success.D. Expensed if unsuccessful, capitalized if successful.

67. Morgan Pharmaceutical spends $50,000 this year in research and development for a new drug to cure liver

damage. By the end of the year, management feels confident that the new drug will gain FDA approval and lead to higher future sales. What impact will the $50,000 spending have on this year's financial statements?


68. Aspen, Inc. developed a new horse transport device and incurred research and development costs of

$250,000. Rather than continue with their own research, Aspen decided to purchase a patent for a similar design from Vail, Inc. for $350,000. What are the total assets and expenses for these developments?


69. Research and development costs should be capitalized when the:


70. Bio-Lab Pharmaceuticals carried on a project to develop a new drug that dramatically shortened the

recovery period for flu infection. The project cost the company $150,000 before Bio-Lab abandoned the project due to the slim possibility to gain FDA approval. Bio-Lab then spent $300,000 on another project developing a kind of shot that achieves the same goal for flu recovery, and the company is confident in gaining FDA approval for the new shot and in making profits out of the shot. What amount would be expensed?


71. Goodwill is:

a. Amortized over the greater of its estimated life or forty years. b. Only recorded by the seller of a business.c. The excess of the fair value of a business as a whole over the fair value of all net identifiable assets.d. Recorded when created internally through advertising expense.Answer: c

72. In accounting, goodwill


73. In accounting, goodwill


74. The balance sheet of Cattleman's Steakhouse shows assets of $86,400 and liabilities of $15,000. The fair

value of the assets is $90,000 and the fair value of its liabilities is $15,000. Longhorn paid Cattleman's $95,000 to acquire it. Longhorn should record goodwill on this purchase of:


75. Northern purchased the entire business of Southern including all its assets and liabilities for $600,000.

Below is information related to the two companies:

How much goodwill did Northern pay for acquiring Southern? A. Option aB. Option bC. Option cD. Option d

76. Lake Incorporated purchased all of the outstanding stock of Huron Company paying $850,000 cash. Lake assumed all of the liabilities. Book values and fair values of acquired assets and liabilities were:

Lake would record goodwill of:a. $0. b. $150,000.c. $345,000.d. $850,000.Answer: b

77. Which of the following subsequent expenditures would be capitalized?


78. Which of the following subsequent expenditures would be capitalized?


79. The purchase of a new cooling system for $150,000 to upgrade an office building owned by the company

would be accounted for as:


80. Woods Company made an ordinary repair to a delivery truck at a cost of $500. Woods' accountant debited the asset account, Equipment. Was this treatment an error, and if so, what will be the effect on the financial statements of Woods?


81. The replacement of a major component increased the productive capacity of equipment from 10 units per

hour to 18 units per hour. The expenditure for the replacement component should be debited to: A. Repairs Expense.B. Maintenance Expense.C. Equipment.D. Gain from Repairs.

82. Which one of the following regarding the book value of an asset is correct?


83. Which of the following is considered a "contra" account?


84. The factors used to compute depreciation expense are an asset's:

A. Cost, residual value, and physical life.B. Cost, residual value, and service life.C. Fair market value, residual value, and economic life.D. Cost, replacement value, and service life.

85. The depreciable cost used in calculating depreciation expense is: A. Its service life.B. The amount allowable under tax depreciation methods.C. The difference between its replacement value and cost.D. The asset's cost minus its estimated residual value.

Use the following information for the next 6 questions:Kansas Enterprises purchased equipment for $60,000 on January 1, 2012. The equipment is expected to have a five-year life, with a residual value of $5,000 at the end of five years. 86. Using the straight-line method, depreciation expense for 2012 would be:

A. $12,000.B. $11,000.C. $60,000.D. None of the other answers are correct.

87. Using the straight-line method, the book value at December 31, 2012 would be:

A. $44,000.B. $49,000.C. $55,000.D. $60,000.

88. Using the straight-line method, depreciation expense for 2013 and the book value at December 31, 2013

would be: A. $12,000 and $36,000.B. $12,000 and $31,000.C. $11,000 and $33,000.D. $11,000 and $38,000.

89. Using the double-declining balance method, depreciation expense for 2012 would be:

A. $24,000.B. $22,000.C. $19,000.D. $20,000.

90. Using the double-declining balance method, depreciation expense for 2013 would be:

A. $22,000.B. $13,200.C. $14,400.D. $24,000.

91. Using the double-declining balance method, the book value at December 31, 2013 would be:

A. $21,600.B. $24,800.C. $36,000.D. $45,600.

92. A machine has a cost of $15,000, an estimated residual value of $3,000, and an estimated useful life of four years. The machine is being depreciated on a straight-line basis. At the end of the second year, what amount will be reported for accumulated depreciation?


93. A building was purchased for $50,000. The asset has an expected useful life of 6 years and depreciation

expense each year is $8,000 using the straight-line method. What is the residual value of the building?


94. Bricker Enterprises purchased a machine for $100,000 on October 1, 2012. The estimated service life is

ten years with a $10,000 residual value. Bricker records partial-year depreciation based on the number of months in service. Depreciation expense for 2012, using straight-line, is: A. $1,500.B. $7,500.C. $2,250.D. $2,500.

95. Schager Company purchased a computer system on January 1, 2012, at a cost of $40,000. The estimated

useful life is 10 years, and the estimated residual value is $5,000. Assuming the company will use the double-declining-balance method, what is the depreciation expense for the second year?


96. Shasta Exploring purchases a piece of equipment on January 1, 2012, for $50,000 and the equipment has an expected useful life of five years. Its residual value is estimated to be $4,000. Assuming Shasta uses the double-declining balance depreciation method, what is the depreciation expense for the equipment for 2013?


97. During 2012 and 2013, Supplies, Inc. drove the truck 15,000 and 22,000 miles, respectively, to deliver

merchandise to its customers. The company originally purchased the truck at the beginning of 2012 for $175,000. If the truck has an estimated life of 10 years and 300,000 miles, with an estimated residual value of $25,000, what amount of deprecation expense should Supplies, Inc. record in 2013 using the activity method?


98. Crestview Estates purchased a tractor on January 1, 2012, for $65,000. The tractor's useful life is estimated

to be 30,000 miles and has a residual value of $5,000. If Crestview used the tractor 5,000 miles in 2012 and 3,000 miles in 2013, what is the balance for accumulated depreciation at the end of 2013 using the activity method?


99. Nanki Corporation purchased equipment at the beginning of 2012 for $650,000. In 2012 and 2013, Nanki

depreciated the asset on a straight-line basis with an estimated useful life of 8 years and a $10,000 residual value. In 2014, due to changes in technology, Nanki revised the useful life to a total of six years (four more years) with zero residual value. What depreciation expense would Nanki record for the year 2014 on this equipment? A. $108,333.B. $106,667.C. $122,500.D. $81,667.

100.Which of the following intangible assets is not amortized? A. Patents.B. Copyrights.C. Franchises.D. Goodwill.

101.Which of the following statements is true regarding the amortization of intangible assets?

A. The expected residual value of most intangible assets is zero.B. The service life of an intangible asset is always equal to its legal life.C. Intangible assets with a limited useful life are not amortized.D. In recording amortization, an accumulated amortization account is always used.

102.Bricktown Exchange purchases a copyright on January 1, 2012, for $50,000. The copyright has a remaining

legal life of 25 years, but only an expected useful life of five years with no residual value. Assuming the company uses the straight-line method, what is the amortization expense for the year ended December 31, 2012?


103.Berry Co. purchases a patent on January 1, 2012, for $40,000 and the patent has an expected useful

life of five years with no residual value. Assuming Berry Co. uses the straight-line method, what is the amortization expense for the year ended December 31, 2013?


104.Berry Co. purchases a patent on January 1, 2012, for $40,000 and the patent has an expected useful life of

five years with no residual value. Assuming Berry Co. uses the straight-line method, what is the carrying value of the patent on December 31, 2013?


105.Gains on the sale of fixed assets for cash: A. Are the excess of the book value over the cash received.B. Are recorded as a debit.C. Are reported on a net-of-tax basis if material.D. Are the excess of the cash received over the book value.

106.Abbott Company purchased a computer that cost $10,000. It had an estimated useful life of 5 years and no

residual value. The computer was depreciated by the straight-line method and was sold at the end of the fourth year of use for $3,000 cash. Abbott should record:


107.On January 1, 2010, Jacob Inc. purchased a commercial truck for $48,000 and uses the straight-line

depreciation method. The truck has a useful life of eight years and an estimated residual value of $8,000. On December 31, 2012, Jacob Inc. sold the truck for $30,000. What amount of gain or loss should Jacob Inc. record on December 31, 2012?


108.Alliance Products purchased equipment that cost $120,000. It had an estimated useful life of four years and

no residual value. The equipment was depreciated by the straight-line method and was sold at the end of the third year of use for $25,000 cash. Abbott should record:


109.Career Services, Incorporated sold some office equipment for $52,000 on December 31, 2012. The journal entry to record the sale would include which of the following if the original cost of the equipment was $80,000 with a residual value of $5,000 and a useful life of 10 years? Assume the machine was purchased on January 1, 2009 and depreciated using the straight-line method.


110.ABO purchased a truck at the beginning of 2012 for $140,000. They sold the truck at the end of 2013 for

$95,000. If the expected life of the truck was six years with a residual value of $20,000 and ABO uses straight-line depreciation, which of the following is true regarding the entry to record the sale of the truck?


111.Oregon Adventures purchased equipment at the beginning of 2012 for $80,000. They sold the equipment at

the end of 2014 for $45,000. If the expected life of the equipment was seven years with a residual value of $10,000, and they use straight-line depreciation, which of the following is true regarding the entry to record the sale of the equipment?


112.The return on assets is calculated as:

A. Net Income divided by total assets.B. Net Income divided by average total assets.C. Net Income divided by ending total assets.D. Ending total assets divided by net income.

113.The return on assets is equal to the:

A. Profit margin plus asset turnover.B. Profit margin minus asset turnover.C. Profit margin times asset turnover.D. Profit margin divided by asset turnover.

114.The balance sheet of Hidden Valley Farms reports total assets of $450,000 and $550,000 at the beginning and end of the year, respectively. Net income and sales for the year are $100,000 and $800,000, respectively. What is Hidden Valley's return on assets?


115.The balance sheet of Hidden Valley Farms reports total assets of $450,000 and $550,000 at the beginning

and end of the year, respectively. Net income and sales for the year are $100,000 and $800,000, respectively. What is Hidden Valley's profit margin?



and end of the year, respectively. Net income and sales for the year are $100,000 and $800,000, respectively. What is Hidden Valley's asset turnover?



and end of the year, respectively. The return on assets for the year is 10%. What is Hidden Valley's net income for the year?


118.Recognition of impairment for long-term assets is required if book value exceeds: A. Original cost.B. Fair value.C. Future cash flows.D. Accumulated depreciation.

119.The amount of impairment loss is the excess of book value over:

A. Carrying value.B. Future cash flows.C. Fair value.D. Future revenues.

120.Accounting for impairment losses:

A. Involves a two-step process for recoverability and measurement.B. Applies only to depreciable, operational assets.C. Applies only to assets with finite lives.D. All of the other answers are correct.

121.In testing for recoverability of an operational asset, an impairment loss is required if the:

A. Asset's book value exceeds the present value of its expected future cash flows.B. Expected future cash flows exceeds the asset's book value.C. Present value of expected future cash flows exceeds its carrying value.D. Asset's book value exceeds the expected future cash flows.

122.Wilson Inc. owns equipment for which it paid $70 million. At the end of 2012, it had accumulated

depreciation on the equipment of $12 million. Due to adverse economic conditions, Wilson's management determined that it should assess whether an impairment should be recognized for the equipment. The estimated future cash flows to be provided by the equipment total $60 million, and its fair value at that point totals $50 million. Under these circumstances, Wilson: A. Would record no impairment loss on the equipment.B. Would record an $8 million impairment loss on the equipment.C. Would record a $20 million impairment loss on the equipment.D. Would record a $2 million impairment loss on the equipment.

123.Leonard's Jewelry owns a patent with a carrying value of $50 million at the end of 2012. Due to adverse

economic conditions, Leonard's management determined that it should assess whether an impairment should be recognized for the patent. The estimated future cash flows to be provided by the patent total $43 million, and its fair value at that point totals $35 million. Under these circumstances, Leonard: A. Would record no impairment loss on the patent.B. Would record a $7 million impairment loss on the patent.C. Would record a $15 million impairment loss on the patent.D. Would record a $31 million impairment loss on the patent.

124.C-Stop reports the following information at year-end:

Based on the above information, what is the total amount of impairment loss that C-Stop should record at

year end? A. Option aB. Option bC. Option cD. Option d

125.Maple Inc. has the following information regarding its assets:

What amount of loss should be recorded due to asset impairments? A. Option aB. Option bC. Option cD. Option d

126.Soccer Wholesale purchased land and a warehouse for $800,000. In addition to the purchase price, Soccer

Wholesale makes the following expenditures related to the acquisition: broker's commission, $48,000; title insurance, $3,000; and miscellaneous closing costs, $8,000. The warehouse is immediately demolished at a cost of $80,000 in anticipation of building a new warehouse. Determine the amount Soccer Wholesale should record as the cost of the land.

127.Holiday Laboratories purchased a high speed industrial centrifuge at a cost of $420,000. Shipping costs totaled $15,000. Foundation work to house the centrifuge cost $8,000. An additional water line had to be run to the equipment at a cost of $3,000. Labor and testing costs totaled $6,000. Materials used up in testing cost $3,000. What is the total cost of the equipment? How much of this amount should be expensed immediately?

128.In 2012, Sam's Salads had the following expenditures related to developing its trademark.

During your year-end review of the accounts related to intangibles, you discover that the company has capitalized all the above as costs of the trademark. Management contends that all of the costs increase the value of the trademark; therefore, all the costs should be capitalized.Which of the above costs should Sam's capitalize to the Trademark account in the balance sheet?Which of the above costs should Sam's report as expense in the income statement?

129.On March 31, 2012, the New Harvest Bakery acquired all the outstanding common stock of Red Rock Bakery for $68,000 in cash. The book values and market values of Red Rock's assets and liabilities were as follows:

Calculate the amount paid for goodwill.

130.Western Wholesale Foods incurs the following expenditures during the current fiscal year: (1) Salaries for

the repair technicians, $155,000; (2) remodeling of the executive offices, $84,000; (3) annual maintenance costs related to its machinery, $72,900; (4) improvement of the production line resulting in an increase in productivity, $38,000; and (5) addition of a sprinkler system to the manufacturing facility to reduce the risk of fire damage, $35,000. How should Western account for each of these expenditures?

131.Little King Sandwiches made the following expenditures related to its restaurant:

1. Replaced the heating and air conditioning system at a cost of $15,000.2. Remodeled the restaurant building. The total cost of the project was $150,000.3. Performed annual building maintenance at a cost of $47,000.4. Paid annual insurance premium on the property for the coming year, $7,700.5. Purchased a new delivery truck, $22,500.6. Landscaped the property and added outdoor lights, $9,000.Little King credits cash for each of these expenditures. Indicate the account to be debited for each expenditure.

132.Taco Hut purchased equipment on May 1, 2012, for $15,000. Residual value at the end of an estimated 8 year service life is expected to be $3,000. Calculate depreciation expense using the straight-line method for 2012 and 2013, assuming a December 31 year-end.

133.China Dragon purchased new restaurant equipment on September 1, 2012, for $8,000. Residual value at the

end of an estimated 5 year service life is expected to be $2,000. Calculate depreciation expense using the straight-line method for 2012 and 2013, assuming a December 31 year-end.

134.Stephan's Resorts purchased equipment for $40,000. Residual value at the end of an estimated four-

year service life is expected to be $8,000. The machine operated for 2,200 hours in the first year and the company expects the machine to operate for a total of 10,000 hours over its four year life. Calculate depreciation expense for the first year using each of the following depreciation methods: (1) straight-line, (2) double-declining-balance, and (3) activity-based.

135.Chubbyville purchases a delivery van for $23,500. Chubbyville estimates that at the end of its four-year service life, the van will be worth $2,500. During the four-year period, the company expects to drive the van 105,000 miles. Calculate annual depreciation for the four-year life of the van using each of the following methods. Round all amounts to the nearest dollar.1. Straight line.2. Double-declining-balance.3. Activity-based. Actual miles driven each year were 24,000 miles in Year 1; 26,000 miles in Year 2; 22,000 miles in Year 3; and 25,000 miles in Year 4. Note that actual total miles of 97,000 fall short of expectations by 8,000 miles.

136.Burger Chef acquired a delivery truck on March 1, 2012 for $26,000. The company estimates a residual

value of $2,000 and a 6-year service life. It expects to drive the truck 80,000 miles. Actual mileage was 12,000 miles in 2012 and 16,000 miles in 2013. Calculate depreciation expense using the activity-based method for 2012 and 2013, assuming a December 31 year-end.

137.At the beginning of the year, Big Time Tires acquired 100% of the common stock of Discount Tires. The

purchase price allocation included the following items: $800,000, patent; $300,000, trademark considered to have an indefinite useful life; and $2 million, goodwill. Big Time Tire's policy is to amortize intangible assets with finite useful lives using the straight-line method, no residual value, and a five-year service life. What is the total amount of amortization expense that would appear in Big Time Tire's income statement for the first year related to these items?

138.On January 1, 2012, The Donut Stop purchased a patent for $80,000. The remaining legal life is 20 years, but the company estimates the patent will be useful for only five more years. In January 2013, the company incurred legal fees of $25,000 in successfully defending a patent infringement suit. The successful defense did not change the company's estimate of useful life. The Donut Stop's year end is December 31st. Record the purchase and amortization in 2012 and the legal fees and amortization in 2013. What is the balance in the Patents account at the end of 2013?

139.The Bomb Pop Corporation sold ice cream equipment for $16,000. They originally purchased the

equipment for $40,000, and depreciation through the date of sale totaled $25,000. What was the gain or loss on the sale of the equipment? Record the sale of the equipment.

140.Strawberry Fields purchased a tractor at a cost of $38,000 and sold it two years later for $25,000.

Strawberry Fields recorded depreciation using the straight-line method, a five-year service life, and an $8,000 residual value. What was the gain or loss on the sale? Record the sale.

141.Nate's Hot Dogs exchanges long-term assets with Lizzy's Lemonade. Nate receives a delivery truck and

gives up a piece of machinery. The fair value and book value of the machinery were $27,000 and $25,000 (original cost of $35,000 less accumulated depreciation of $10,000), respectively. Since the delivery truck was worth $32,000, Nate paid an additional $5,000 in cash to Lizzy. Record the exchange for Nate's Hot Dogs.

142.New World Deli exchanged land for a more suitable parcel of land to be used for a new restaurant. New World Deli reported the old land at its original cost of $85,000. According to an independent appraisal, the old land currently is worth $110,000. New World Deli paid $15,000 in cash to complete the transaction. Record the exchange.

143.Allied Construction and Axis Construction reported the following information in their annual financial

statements ($ in millions):

Required:1. Calculate Allied Construction's return on assets, profit margin, and asset turnover ratio for 2012.2. Calculate Axis Construction's return on assets, profit margin, and asset turnover ratio for 2012.3. Which company has the better profit margin and which company has the better asset turnover?

144.ACME Drilling is evaluating an off-shore oil drilling platform for possible impairment. They estimate the

following: book value, $18.5 million; fair value, $12 million; sum of estimated future cash flows generated from the oil drilling platform, $16 million. What amount of impairment loss, if any, should they record?

145.Northwest Catering owns and operates several restaurant services in Oregon, Washington, and Idaho. One restaurant chain has experienced sharply declining profits. The company's management has decided to test the operational assets of the restaurants for possible impairment. The relevant information for these assets is presented below:

Determine the amount of the impairment loss, if any.

146.If a company initially records an expense incorrectly as an asset, explain how this mistake affects the

income statement and the balance sheet.

147.Why don't we depreciate land? What are land improvements? Why do we record land and land

improvements separately?

148.Explain how the accounting treatment differs between purchased and internally developed intangible assets.

149.Contrast the effects of the straight-line, declining-balance, and activity-based depreciation methods on annual depreciation expense.

150.Which depreciation method is most common for financial reporting? Which depreciation method is most

common for tax reporting? Why do companies choose these methods?

151.Listed below are five terms followed by a list of phrases that describe or characterize the terms. Match each

phrase with the best term placing the letter designating the term in the space provided. 1. Franchise

An exclusive right of protection given to the creator of a published work such as a song, film, painting, photograph, book, or computer

software.

____

2. Trademark

Payment for the exclusive right to use the company's name and to sell its products within a specified geographical area.

____

3. Patent

The purchase price of a company less the fair value of the net assets acquired.

____

4. Goodwill An exclusive right to manufacture a product or to use a process.

____

5. Copyright

A word, slogan, or symbol that distinctively identifies a company, product, or service.

____

152.Listed below are five terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the best term placing the letter designating the term in the space provided.

1. Capitalize Occurs when we add a new major component to

an existing asset.

____

2. Improvement The cost of replacing a major component of an

asset.

____

3. Addition Large enough to influence an investor or creditor's

decision.

____

4. Repairs and maintenance Recording an expenditure as an asset.

____

5. Materiality Expenses after acquisition that maintain a given

level of benefits.

____


phrase with the best term placing the letter designating the term in the space provided. Answer: d; c; b; a; e

1. Depreciation

Also referred to as salvage value, is the amount the company expects to receive from selling the asset at the end of

its service life.

____

2. Service life Allocating the cost of a tangible asset over its service life.

____

3. Accumulated depreciation

Equal to the original cost of the asset minus the current balance in accumulated depreciation.

____

4. Book value A contra-asset account representing the total depreciation

taken to date.

____

5. Residual value

How long the company expects to receive benefits from the asset before disposing of it.

____

154.Listed below are five terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the best term placing the letter designating the term in the space provided. 1. Declining-balance method The process of recording expense for natural resources.

____

2. Amortization Allocates an asset's cost based on its use.

____

3. Activity-based method

An accelerated depreciation method that records more depreciation in earlier years and less depreciation in later

years.

____

4. Straight-line method

Allocating the cost of an intangible asset over its service life.

____

5. Depletion Allocates an equal amount of depreciation to each year of

the asset's service life.

____



1. Asset turnover

Net sales divided by average total assets; which measures the sales per dollar of assets invested.

____

2. Return on assets

Net income divided by net sales; indicates the earnings per dollar of sales.

____

3. Profit margin

Net income divided by average total assets; measures the amount of net income generated for each dollar invested in assets.

____

4. Big bath Recording all losses in one year to make a bad year even worse.

____

5. Impairment

Occurs when the future cash flows (future benefits) generated for a long-term asset fall below its book value (cost minus accumulated

depreciation).

____

Ch7 Key

1. TRUE 2. FALSE 3. FALSE 4. FALSE 5. TRUE 6. TRUE 7. TRUE 8. TRUE 9. FALSE 10. TRUE 11. TRUE 12. FALSE 13. TRUE 14. FALSE 15. TRUE 16. TRUE 17. TRUE 18. FALSE 19. TRUE 20. FALSE 21. FALSE 22. FALSE 23. TRUE 24. TRUE 25. FALSE 26. FALSE 27. TRUE 28. TRUE 29. FALSE 30. TRUE 31. TRUE 32. FALSE

33. TRUE 34. FALSE 35. TRUE 36. TRUE 37. FALSE 38. FALSE 39. TRUE 40. FALSE 41. TRUE 42. FALSE 43. TRUE 44. TRUE 45. TRUE 46. FALSE 47. TRUE 48. FALSE 49. TRUE 50. TRUE 51. B 52. D 53. B 54. D 55. B 56. B 57. B 58. C 59. C 60. A 61. D 62. B 63. A 64. B 65. C 66. A 67. C

68. C 69. D 70. D 71. no correct answer 72. C 73. D 74. C 75. A 76. no correct answer 77. B 78. D 79. B 80. B 81. C 82. B 83. C 84. B 85. D 86. B 87. B 88. D 89. A 90. C 91. A 92. B 93. B 94. C 95. D 96. C 97. A 98. C 99. C 100. D 101. A 102. D

103. B 104. C 105. D 106. A 107. D 108. B 109. A 110. B 111. A 112. B 113. C 114. B 115. B 116. A 117. D 118. C 119. C 120. A 121. D 122. A 123. C 124. A 125. D

126.

127.

128.

129. 130. (1) Expense in the period incurred.(2) Capitalize and depreciate over the useful life of the asset.(3) Expense in the period incurred.(4) Capitalize and depreciate over the useful life of the asset.(5) Capitalize and depreciate over the useful life of the asset.

131.

132.

133. 134. (1) ($40,000 - $8,000) 4 = $8,000.(2) $40,000 x 2/4 = $20,000.(3) ($40,000 - $8,000) 10,000 hours = $3.20 per hour x 2,200 hours = $7,040.

135.

136.

137. The patent would have amortization expense of $160,000 ($800,000 5 years). The trademark and goodwill would not be amortized because they have an indefinite life.

138.

139.

140. * ($38,000 - $8,000) 5 years = $6,000 per year x 2 years = $12,000.

141.

142.

143. Allied Construction:

Axis Construction:

Allied has a slightly better (higher) profit margin and a slightly better (higher) asset turnover resulting in a higher return on assets. 144. Step 1: Test for ImpairmentThe long-term asset is impaired since future cash flows ($16 million) are less than book value ($18.5 million).Step 2: If Impaired, Record LossThe impairment loss is $6.5 million calculated as the amount by which book value ($18.5 million) exceeds fair market value ($12 million). 145. Step 1: Test for ImpairmentThe long-term asset is not impaired since future cash flows ($5.0 million) exceed book value ($4.5 million).Step 2: If Impaired, Record LossSince the asset does not meet the first test for impairment, no impairment loss is recorded. 146. This mistake will overstate net income on the income statement and overstate assets and retained earnings on the balance sheet. If a company initially records an expense incorrectly as an asset, expenses are understated or too small. Since expenses are subtracted from revenues in arriving at net income, understating expenses will overstate net income reported on the income statement. Similarly, recording an expense as an asset will overstate assets on the balance sheet. Retained earnings on the balance sheet will also be overstated due to the overstatement of net income. 147. We don't depreciate land because its service life never ends. Land improvements are additional amounts spent to improve the land such as a parking lot, paving, temporary landscaping, lighting systems, fences, sprinkler systems, and similar additions. We record land improvements separately from land because, unlike land, these assets are subject to depreciation. 148. We value purchased intangible assets at their original cost plus all other costs, such as legal and filing fees, necessary to get the asset ready for use. Reporting intangible assets developed internally is quite different. Rather than recording these as an intangible asset on the balance sheet, we expense most of the costs for internally developed intangible assets to the income statement as we incur them. 149. Straight-line creates an equal amount of depreciation each year. Double-declining-balance creates more depreciation in earlier years and less depreciation in later years. Activity-based depreciation varies depending on the use of the asset each year.

150. Most companies use the straight-line method for financial reporting and the Internal Revenue Service's prescribed accelerated method (called MACRS) for income tax purposes. Companies choose straight-line for financial reporting for several reasons. Many probably believe they realize benefits from their plant assets approximately evenly over these assets' useful lives. Another contributing factor is that straight-line is the easiest method to understand and apply. One more important motivation is the positive effect on reported income. Straight-line produces a higher net income than accelerated methods in the earlier years of an asset's life. Most companies choose MACRS for tax reporting to reduce taxable income. MACRS combines declining-balance methods in earlier years with straight-line in later years to allow for a more advantageous tax depreciation deduction. 151. Copyright :: An exclusive right of protection given to the creator of a published work such as a song, film, painting, photograph, book, or computer software. and Franchise :: Payment for the exclusive right to use the company's name and to sell its products within a specified geographical area. and Goodwill :: The purchase price of a company less the fair value of the net assets acquired. and Patent :: An exclusive right to manufacture a product or to use a process. and Trademark :: A word, slogan, or symbol that distinctively identifies a company, product, or service. 152. Addition :: Occurs when we add a new major component to an existing asset. and Improvement :: The cost of replacing a major component of an asset. and Materiality :: Large enough to influence an investor or creditor's decision. and Capitalize :: Recording an expenditure as an asset. and Repairs and maintenance :: Expenses after acquisition that maintain a given level of benefits. 153. Residual value :: Also referred to as salvage value, is the amount the company expects to receive from selling the asset at the end of its service life. and Depreciation :: Allocating the cost of a tangible asset over its service life. and Book value :: Equal to the original cost of the asset minus the current balance in accumulated depreciation. and Accumulated depreciation :: A contra-asset account representing the total depreciation taken to date. and Service life :: How long the company expects to receive benefits from the asset before disposing of it. 154. Depletion :: The process of recording expense for natural resources. and Activity-based method :: Allocates an asset's cost based on its use. and Declining-balance method :: An accelerated depreciation method that records more depreciation in earlier years and less depreciation in later years. and Amortization :: Allocating the cost of an intangible asset over its service life. and Straight-line method :: Allocates an equal amount of depreciation to each year of the asset's service life. 155. Asset turnover :: Net sales divided by average total assets; which measures the sales per dollar of assets invested. and Profit margin :: Net income divided by net sales; indicates the earnings per dollar of sales. and Return on assets :: Net income divided by average total assets; measures the amount of net income generated for each dollar invested in assets. and Big bath :: Recording all losses in one year to make a bad year even worse. and Impairment :: Occurs when the future cash flows (future benefits) generated for a long-term asset fall below its book value (cost minus accumulated depreciation).

Ch7 Summary


AACSB: Analytic 66

AACSB: Reflective 3




AICPA: Reporting 23

Blooms: Analysis 64




Blooms: Synthesis 1

Difficulty: Easy 47

Difficulty: Hard 23


Learning Objective: 07-01 Identify and record the major types of property; plant; and equipment. 21

Learning Objective: 07-02 Identify and record the major types of intangible assets. 34

Learning Objective: 07-03 Discuss the accounting treatment of expenditures after acquisition. 11

Learning Objective: 07-04 Calculate depreciation of property; plant; and equipment. 42

Learning Objective: 07-05 Calculate amortization of intangible assets. 11

Learning Objective: 07-06 Account for the disposal of long-term assets. 13

Learning Objective: 07-07 Describe the relationship among return on assets; profit margin; and asset turnover. 11

Learning Objective: 07-08 Identify impairment situations and describe the two-step impairment process. 15


Ch8Student: ___________________________________________________________________________

1. Delta, Northwest, and United Airlines have all, at one time, filed for bankruptcy. True False

2. In a classified balance sheet, we categorize all liabilities as current.

True False

3. Commonly, current liabilities are payable within one year, and long-term liabilities are payable more than

one year from now. True False

4. Given a choice, most companies would prefer to report a liability as current rather than long-term, because

doing so may cause the firm to appear less risky. True False

5. When a company borrows cash from a bank promising to repay the amount borrowed plus interest, the

borrower reports its liability as notes payable. True False

6. Interest is stated in terms of a percentage rate to be applied to the face value of the loan.

True False

7. We record interest expense in the period in which we pay it, rather than in the period we incur it.

True False

8. A line of credit is an informal agreement that permits a company to borrow up to a prearranged limit

without having to follow formal loan procedures and paperwork. True False

9. If a company borrows from another company rather than from a bank, the note is referred to as commercial

paper. True False

10. Accounts payable are amounts the company owes to suppliers of merchandise or services that it has bought

on credit. True False

11. Deductions from employee salaries in determining the amount of payroll checks include withholdings for federal and state income taxes, FICA taxes, and the employee portion of insurance and retirement contributions. True False

12. All states impose a state income tax.

True False

13. Companies are required by law to withhold federal and state income taxes from employees' paychecks and

remit these taxes to the government. True False

14. The employer records amounts deducted from employee payroll as liabilities until it pays them to the

appropriate organizations. True False

15. FICA taxes are paid only by the employee.

True False

16. The employer is required to match the amount of FICA taxes withheld for each employee, effectively

doubling the amount paid into Social Security. True False

17. Additional employee benefits paid for by the employer are often referred to as fringe benefits.

True False

18. When a company receives cash in advance, it debits Cash and credits a revenue account called Unearned

Revenue. True False

19. Airlines do not record revenue when a ticket is sold, but wait to record revenue until the actual flight

occurs. True False

20. All states impose a general state sales tax, and many areas include an additional local sales tax.

True False

21. Companies selling products subject to sales taxes are responsible for collecting the sales tax directly from

customers and periodically remitting the sales taxes collected to the state and local governments. True False

22. When a company collects sales taxes, the debit is to Cash and the credit is to Sales Tax Payable.

True False

23. Sales taxes collected from customers by the seller are not an expense, instead they represent current liabilities payable to the government. True False

24. Long-term obligations such as notes, mortgages, and bonds are reported as long-term liabilities when they

become payable within the upcoming year. True False

25. Net income in the income statement is the same amount as taxable income reported to the Internal Revenue

Service (IRS). True False

26. Differences between financial accounting and tax accounting result in a company being permitted to defer

paying some of its income tax expense, in which case it will report a deferred tax liability. True False

27. A contingent liability is an existing, uncertain situation that might result in a loss.

True False

28. We record a contingent liability when the likelihood of the loss occurring is reasonably possible and the

amount can be reasonably estimated. True False

29. The journal entry to record a contingent liability requires a debit to a loss (or expense) account and a credit

to a liability. True False

30. Regarding a contingent liability, when no amount within a range of potential losses appears more likely

than others, we record the maximum amount in the range. True False

31. If the likelihood of a loss is reasonably possible rather than probable, we record no entry, but make full

disclosure in a footnote to the financial statements to describe the contingency. True False

32. If the likelihood of loss is remote, disclosure usually is not required.

True False

33. A contingent liability is recorded only if a loss is at least reasonably possible and the amount can be

reasonably estimated. True False

34. The balance in the Warranty Liability account is always equal to Warranty Expense. True False

35. A gain contingency is an existing uncertain situation that might result in a gain, which often is the flip side

of loss contingencies. True False

36. We record gain contingencies when the gain is probable and can be reasonably estimated.

True False

37. A company is said to be liquid if it has sufficient cash to pay currently maturing debts.

True False

38. The current ratio is calculated by dividing current liabilities by current assets.

True False

39. The acid-test ratio, or quick ratio, is similar to the current ratio but is based on a more conservative measure

of current assets available to pay current liabilities. True False

40. Quick assets include only cash, short-term investments, and accounts receivable.

True False

41. A lower current ratio or acid-test ratio generally indicates a greater ability to pay current liabilities on a

timely basis. True False

42. Which of the following is not a reason why a company might prefer to report a liability as long-term rather

than current? A. It may cause the firm to appear less risky to investors and creditors.B. It may increase interest rates on borrowing.C. It may cause the company to appear more stable commanding a higher stock price for new stock listings.D. It may reduce interest rates on borrowing.

43. Given a choice, most companies would prefer to report a liability as long-term rather than current because:

A. It may cause the firm to appear less risky to investors and creditors.B. It may reduce interest rates on borrowing.C. It may cause the company to appear more stable commanding a higher stock price for new stock listings.D. All of the other answers are true.

44. Which of the following is not a current liability? A. Accounts payable.B. A note payable due in 2 years.C. Current portion of long-term debt.D. Sales tax payable.

45. Which of the following is not a characteristic of a liability?

A. It represents a probable, future sacrifice of economic benefits.B. It must be payable in cash.C. It arises from present obligations to other entities.D. It results from past transactions or events.

46. Which of the following is not a liability?

A. Notes payable.B. Current portion of long-term debt.C. An unused line of credit.D. Unearned revenue.

47. Liabilities are defined as:


48. Brian Inc. borrowed $8,000 from First Bank and signed a promissory note. What entry should Brian Inc.

record?


49. Brian Inc. borrowed $8,000 from First Bank and signed a promissory note. What entry should First Bank

record?


50. On November 1, 2012, The Bagel Factory signed a $100,000, 6%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 2013. The Bagel Factory should report interest payable at December 31, 2012, in the amount of: A. $0.B. $1,000.C. $2,000.D. $3,000.

51. On November 1, 2012, The Bagel Factory signed a $100,000, 6%, six-month note payable with the amount

borrowed plus accrued interest due six months later on May 1, 2013. The Bagel Factory records the appropriate adjusting entry for the note on December 31, 2012. In recording the payment of the note plus accrued interest at maturity on May 1, 2013, The Bagel Factory would A. Debit Interest Expense, $2,000.B. Debit Interest Expense, $1,000.C. Debit Interest Payable, $2,000.D. Debit Interest Expense, $3,000.

52. On September 1, 2012, Daylight Donuts signed a $100,000, 9%, six-month note payable with the amount

borrowed plus accrued interest due six months later on March 1, 2013. Daylight Donuts should report interest payable at December 31, 2012, in the amount of: A. $0.B. $1,500.C. $3,000.D. $4,500.

53. On September 1, 2012, Daylight Donuts signed a $100,000, 9%, six-month note payable with the amount

borrowed plus accrued interest due six months later on March 1, 2013. Daylight Donuts records the appropriate adjusting entry for the note on December 31, 2012. In recording the payment of the note plus accrued interest at maturity on March 1, 2013, Daylight Donuts would A. Debit Interest Expense, $3,000.B. Debit Interest Expense, $1,500.C. Debit Interest Payable, $1,500.D. Debit Interest Expense, $4,500.

54. On December 1, 2012, Old World Deli signed a $300,000, 5%, six-month note payable with the amount

borrowed plus accrued interest due six months later on June 1, 2013. Old World Deli should record which of the following adjusting entries at December 31, 2012? A. Debit Interest Expense and credit Interest Payable, $7,500.B. Debit Interest Expense and credit Cash, $7,500.C. Debit Interest Expense and credit Interest Payable, $1,250.D. Debit Interest Expense and credit Cash, $1,250.

55. On December 1, 2012, Old World Deli signed a $300,000, 5%, six-month note payable with the amount borrowed plus accrued interest due six months later on June 1, 2013. Old World Deli records the appropriate adjusting entry for the note on December 31, 2012. What amount of cash will be needed to pay back the note payable plus any accrued interest on June 1, 2013? A. $300,000.B. $301,250.C. $306,250.D. $307,500.

56. On November 1, 2012, New Morning Bakery signed a $200,000, 6%, six-month note payable with the

amount borrowed plus accrued interest due six months later on May 1, 2013. New Morning Bakery should record which of the following adjusting entries at December 31, 2012? A. Debit Interest Expense and credit Interest Payable, $2,000.B. Debit Interest Expense and credit Cash, $2,000.C. Debit Interest Expense and credit Interest Payable, $6,000.D. Debit Interest Expense and credit Cash, $6,000.

57. On November 1, 2012, New Morning Bakery signed a $200,000, 6%, six-month note payable with the

amount borrowed plus accrued interest due six months later on May 1, 2013. New Morning Bakery records the appropriate adjusting entry for the note on December 31, 2012. What amount of cash will be needed to pay back the note payable plus any accrued interest on May 1, 2013? A. $200,000.B. $202,000.C. $204,000.D. $206,000.

58. The Pita Pit borrowed $100,000 on November 1, 2012, and signed a six-month note bearing interest at

12%. Principal and interest are payable in full at maturity on May 1, 2013. In connection with this note, The Pita Pit should report interest expense at December 31, 2012, in the amount of: A. $0.B. $1,000.C. $2,000.D. $6,000.

59. The Pita Pit borrowed $100,000 on November 1, 2012, and signed a six-month note bearing interest at

12%. Principal and interest are payable in full at maturity on May 1, 2013. In connection with this note, The Pita Pit should report interest expense in 2013 for the amount of: A. $0.B. $4,000.C. $2,000.D. $6,000.

60. Universal Travel, Inc. borrowed $500,000 on November 1, 2012, and signed a twelve-month note bearing interest at 6%. Principal and interest are payable in full at maturity on October 31, 2013. In connection with this note, Universal Travel, Inc. should report interest payable at December 31, 2012, in the amount of: A. $8,000.B. $30,000.C. $5,000.D. $25,000.

61. Universal Travel, Inc. borrowed $500,000 on November 1, 2012, and signed a twelve-month note bearing

interest at 6%. Principal and interest are payable in full at maturity on October 31, 2013. In connection with this note, Universal Travel, Inc. should record interest expense in 2013 in the amount of: A. $8,000.B. $30,000.C. $5,000.D. $25,000.

62. Large, highly-rated firms sometimes sell commercial paper

A. To borrow funds at a lower rate than through a bank.B. To borrow funds when they cannot obtain a loan from a bank.C. Because they can't borrow anywhere else.D. To improve their credit rating.

63. Which of the following is not an employer payroll cost?

A. FICA taxes.B. Federal and state unemployment taxes.C. Federal and state income taxes.D. Employer contributions to a retirement plan.

64. Which of the following is not withheld from an employee's salary?

A. FICA taxes.B. Federal and state unemployment taxes.C. Federal and state income taxes.D. Employee portion of health insurance.

65. Which of the following is true regarding FICA taxes?

A. FICA taxes are paid only by the employee.B. FICA taxes are paid only by the employer.C. FICA taxes are paid in equal amounts by the employee and the employer.D. FICA taxes are paid in different amounts by the employee and the employer.

66. Which of the following are not included in an employer's payroll tax expense?

A. Employer portion of FICA taxes.B. Federal unemployment taxes.C. State unemployment taxes.D. State income taxes.

67. Which of the following are included in an employer's payroll tax expense? A. Employer portion of FICA taxes.B. Federal unemployment taxes.C. State unemployment taxes.D. All of the other answers are correct

68. Mike Gundy is a college football coach making a salary of $2,400,000 a year ($200,000 per month).

Employers are required to withhold a 6.2% Social Security tax up to a maximum base amount and a 1.45% Medicare tax with no maximum. Assuming the FICA maximum base amount is $106,800, how much will be withheld during the year for the coach's Social Security and Medicare. A. $34,800.B. $41,422.C. $183,600.D. None of these amounts is correct

69. Mike Gundy is a college football coach making a salary of $2,400,000 a year ($200,000 per month).

Employers are required to withhold a 6.2% Social Security tax up to a maximum base amount and a 1.45% Medicare tax with no maximum. Assuming the FICA maximum base amount is $106,800, through what month will Social Security be withheld? A. Social Security will be withheld only in January.B. Social Security will be withheld through the entire year.C. Social Security will be withheld through the month of March.D. Social Security will be withheld through the month of June.

70. Action Travel has 10 employees each working 40 hours per week and earning $20 an hour. Federal income

taxes are withheld at 15% and state income taxes at 6%. FICA taxes are 7.65% and unemployment taxes are 3.8% of the first $7,000 earned per employee. What is the actual direct deposit of payroll for the first week of January? A. $5,404.B. $5,708.C. $4,792.D. $8,000.

71. Action Travel has 10 employees each working 40 hours per week and earning $20 an hour. Federal income

taxes are withheld at 15% and state income taxes at 6%. FICA taxes are 7.65% and unemployment taxes are 3.8% of the first $7,000 earned per employee. What is the total payroll tax expense for the first week of January? A. $612.B. $1,224.C. $916.D. $304.

72. In December, 2011, Quebecor Printing received magazine subscriptions for 2012 from a customer, who paid $500 in cash. What would be the appropriate journal entry for this event?


73. At times, businesses require advance payments from customers that will be applied to the purchase price

when goods are delivered or services provided. These customer advances represent: A. Liabilities until the product or service is provided.B. A component of stockholders' equity.C. Long-term assets until the product or service is provided.D. Revenue upon receipt of the advance payment.

74. The sale of gift cards by a company is a direct example of:

A. Unearned revenues.B. Sales tax payable.C. Current portion of long-term debt.D. Deferred taxes.

75. When a company delivers a product or service for which a customer has previously paid, the company

records the following: A. A debit to a revenue account and a credit to a liability account.B. A debit to a revenue account and a credit to an asset account.C. A debit to an asset account and a credit to a revenue account.D. A debit to a liability account and a credit to a revenue account.

76. Sales taxes collected by a company on behalf of the state and local government are recorded by:

A. A debit to an expense account.B. A credit to a revenue account.C. A debit to a revenue account.D. A credit to a liability account.

77. When a company collects sales tax from a customer, the event is recorded by:

A. A debit to Sales Tax Expense and a credit to Sales Tax Payable.B. A debit to Cash and a credit to Sales Tax Payable.C. A debit to Sales Tax Payable and a credit to Sales Tax Expense.D. A debit to Sales Tax Payable and a credit to Cash.

78. Suppose you buy lunch for $8.39 that includes a 5% sales tax. How much did the restaurant charge you for the lunch (excluding any tax) and how much do they owe for sales tax? A. $8.39 for lunch and $0.42 for sales tax.B. $8.39 for lunch and no sales tax.C. $8.81 for lunch and $0.42 for sales tax.D. $7.99 for lunch and $0.40 for sales tax.

79. Union Apparel has sales including sales taxes for the month of $551,200. If the sales tax rate is 6%, what

are Union Apparel's sales for the month? A. $500,000.B. $518,128.C. $520,000.D. $551,200.

80. The current portion of long-term debt should be

A. Reported as a current liability on the balance sheet.B. Reported as a long-term liability on the balance sheet.C. Combined with the rest of the long-term debt on the balance sheet.D. Paid immediately.

81. Region Jet has a $50 million liability at December 31, 2012, of which $10 million is payable in 2013. In its

December 31, 2012 balance sheet, the company reports the $50 million debt as A. A $50 million current liability on the balance sheet.B. A $50 million long-term liability on the balance sheet.C. A $10 million current liability and a $40 million long-term liability on the balance sheet.D. A $40 million current liability and a $10 million long-term liability on the balance sheet.

82. United Supply has a $5 million liability at December 31, 2012, of which $1 million is payable in each of

the next five years. United Supply reports the liability on the balance sheet as: A. a $5 million current liability.B. a $5 million long-term liability.C. a $1 million current liability and a $4 million long-term liability.D. a $4 million current liability and a $1 million long-term liability.

83. Which of the following is true regarding the relationship between net income reported in the income

statement and taxable income reported to the Internal Revenue Service (IRS)? A. Net income and taxable income are always the same amount.B. Net income and taxable income are rarely the same amount.C. Net income is always larger than taxable income.D. Taxable income is always larger than net income.

84. If management can estimate the amount of loss that will occur due to litigation against the company, and

the likelihood of the loss is reasonably possible, a contingent liability should be A. Disclosed, but not reported as a liability.B. Disclosed and reported as a liability.C. Neither disclosed nor reported as a liability.D. Reported as a liability, but not disclosed.

85. If management can estimate the amount of loss that will occur due to litigation against the company, and the likelihood of the loss is probable, a contingent liability should be A. Disclosed, but not reported as a liability.B. Disclosed and reported as a liability.C. Neither disclosed nor reported as a liability.D. Reported as a liability, but not disclosed.

86. Reeves Co. filed suit against Higgins, Inc., seeking damages for copyright violations. Higgins' legal

counsel believes it is probable that Higgins will settle the lawsuit for an estimated amount in the range of $100,000 to $200,000, with all amounts in the range considered equally likely. How should Higgins report this litigation? A. As a liability for $100,000 with disclosure of the range.B. As a liability for $150,000 with disclosure of the range.C. As a liability for $200,000 with disclosure of the range.D. As a disclosure only. No liability is reported.

87. Away Travel filed suit against West Coast Travel seeking damages for copyright violations. West Coast

Travel's legal counsel believes it is reasonably possible that West Coast Travel will settle the lawsuit for an estimated amount in the range of $100,000 to $200,000, with all amounts in the range considered equally likely. How should West Coast Travel report this litigation? A. As a liability for $100,000 with disclosure of the range.B. As a liability for $150,000 with disclosure of the range.C. As a liability for $200,000 with disclosure of the range.D. As a disclosure only. No liability is reported.

88. Away Travel filed suit against West Coast Travel seeking damages for copyright violations. Away Travel's

legal counsel believes it is probable (but not certain) that Away Travel will win the lawsuit for an estimated amount in the range of $100,000 to $200,000, with all amounts in the range considered equally likely. How should Away Travel report this litigation? A. As a receivable for $100,000 with disclosure of the range.B. As a receivable for $150,000 with disclosure of the range.C. As a receivable for $200,000 with disclosure of the range.D. As a disclosure only. No receivable is reported.

89. Young Company is involved in a lawsuit. The liability which could arise as a result of this lawsuit should

be recorded on the books if the probability of Young owing money as a result of the lawsuit is:


90. Ogden Motors, Inc. is involved in a lawsuit. It is reasonably possible that the jury will find in favor of the plaintiff and Ogden will owe ten million dollars. What is the appropriate reporting of this lawsuit and what is the effect on the balance sheet?


91. Amplify, Inc. was sued by Sound City for $50,000. Sound City feels very confident that it will win the

case and will be awarded the full amount. Amplify, Inc. feels it is probable that it will lose the case and pay Sound City the full amount. Which of the following is correct?


92. At the beginning of 2012, Angel Corporation began offering a 1-year warranty on its products. The

warranty program was expected to cost Angel 4% of net sales. Net sales made under warranty in 2012 were $180 million. Five percent of the units sold were returned in 2012 and repaired or replaced at a cost of $5.3 million. The amount of warranty expense on Angel's 2012 income statement is: A. $5.3 million.B. $7.2 million.C. $9.0 million.D. $27.0 million.

93. Strikers, Inc. sells soccer goals to customers over the Internet. History has shown that 2% of Strikers' goals

are faulty and will need repair under the warranty program. For the year, Strikers has sold 4,000 goals and 45 have been repaired. If the estimated cost to repair a goal is $200, what would be the Warranty Liability at the end of the year?


94. Bears Inc. sells football helmets to local schools and warrants all of its products for one year. While no helmets sold in 2012 have been returned to them yet, based upon previous years, Bears Inc. estimates that 3% of its products will need repairs or be replaced within the next year. What effect would this warranty have on assets, liabilities, and stockholders' equity in 2012?


95. Talks-A-Lot, Inc. sells cell phones to customers and expects that 10% of phones sold will be returned for

repair under its warranty program. The average repair cost is $75 per phone. For 2012, Talks-A-Lot has sold 750 cell phones and has repaired 30 of them as of December 31, 2012. What amount of warranty liability should be reported at December 31, 2012?


96. Carpenter Inc. estimates warranty expense at 2% of sales. Sales during the year were $4 million and

warranty expenditures were $44,000. What was the balance in the Warranty Liability account at the end of the year? A. $44,000.B. $80,000.C. $36,000.D. $480,000.

97. Footnote disclosure is required for material potential losses when the loss is at least reasonably possible:

A. Only if the amount is known.B. Only if the amount is known or reasonably estimable.C. Unless the amount is not reasonably estimable.D. Even if the amount is not reasonably estimable.

98. Gain contingencies usually are recognized in a company's income statement when:

A. The gain is certain.B. The amount can be reasonably estimated.C. The gain is reasonably possible and the amount can be reasonable estimated.D. The gain is probable and the amount can be reasonably estimated.

99. A contingent liability should be accrued on a company's financial statements only if the likelihood of a loss occurring is: A. At least remotely possible and the amount of the loss is known.B. At least reasonably possible and the amount of the loss is known.C. At least reasonably possible and the amount of the loss can be reasonably estimated.D. Probable and the amount of the loss can be reasonably estimated.

100.When a gain contingency is probable and the amount of gain can be reasonably estimated, the gain should

be: A. Reported in the income statement and disclosed.B. Offset against stockholders' equity.C. Disclosed, but not recognized in the income statement.D. Reported in the income statement, but not disclosed.

101.A contingent liability should be disclosed in a note to the financial statements rather than being recorded if:

A. The likelihood of a loss is remote.B. The incurrence of a loss is reasonably possible.C. The incurrence of a loss is probable.D. The likelihood of a loss is eighty percent.

102.Volt Electronics sells equipment that includes a three-year warranty. Repairs under the warranty are

performed by an independent service company under a contract with Volt. Based on prior experience, warranty costs are estimated to be $25 per item sold. Volt should recognize these warranty costs: A. When the equipment is sold.B. When the repairs are performed.C. When payments are made to the service firm.D. Evenly over the life of the warranty.

103.Which of the following is a contingency that should be recorded?

A. The company is being sued and a loss is reasonably possible and reasonably estimable.B. The company deducts life insurance premiums from employees' paychecks.C. The company offers a two-year warranty and the expenses can be reasonably estimated.D. It is probable that the company will receive $100,000 in settlement of a lawsuit.

104.Skypt Co. is involved in a lawsuit and sued by Quart Co. for $500,000. Skypt feels it is probable that it will

lose the lawsuit. What should Skypt Co. and Quart Co. record or disclose concerning the lawsuit?


105.Which of the following statements regarding liquidity ratios is false? A. A high current ratio generally indicates the ability to pay current liabilities on a timely basis.B. A high acid-test ratio generally indicates the ability to pay current liabilities on a timely basis.C. All current assets are due within one year and therefore have essentially equal liquidity.D. As a rule of thumb, a current ratio of 1 or higher often reflects an acceptable level of liquidity.

106.Which of the following statements regarding liquidity ratios is true?

A. A low current ratio generally indicates the ability to pay current liabilities on a timely basis.B. A low acid-test ratio generally indicates the ability to pay current liabilities on a timely basis.C. All current assets are due within one year and therefore have essentially equal liquidity.D. A high working capital generally indicates the ability to pay current liabilities on a timely basis.

107.Which of the following is true regarding the relationship between the current ratio and the acid-test ratio?

A. The current ratio will always be equal to or larger than the acid-test ratio for a specific company.B. The acid-test ratio will always be equal to or larger than the current ratio for a specific company.C. Either the current ratio or the acid-test ratio could be larger for a specific company.D. One ratio will always exceed 1.0, while the other will always be less than 1.0.

108.A company's liquidity refers to its:


109.Working capital is

A. Current assets divided by current liabilities.B. Current assets minus current liabilities.C. Cash, short-term investments, and accounts receivable divided by current liabilities.D. Cash, short-term investments, and accounts receivable minus current liabilities.

110.The current ratio is

A. Current assets divided by current liabilities.B. Cash and short-term investments divided by current liabilities.C. Cash, short-term investments, and accounts receivable divided by current liabilities.D. Cash, short-term investments, accounts receivable, and inventory divided by current liabilities.

111.The acid-test ratio is

A. Current assets divided by current liabilities.B. Cash and short-term investments divided by current liabilities.C. Cash, short-term investments, and accounts receivable divided by current liabilities.D. Cash, short-term investments, accounts receivable, and inventory divided by current liabilities.

112.Which of the following measures of liquidity does not control for the relative size of the company? A. Working capital.B. Current ratio.C. Acid-test ratio.D. They all control for the relative size of the company.

113.Assuming a current ratio of 1.2 and an acid-test ratio of 0.80, how will the purchase of inventory with cash

affect each ratio? A. Increase the current ratio and increase the acid-test ratio.B. No change to the current ratio and decrease the acid-test ratio.C. Decrease the current ratio and decrease the acid-test ratio.D. Decrease the current ratio and increase the acid-test ratio.

114.Assuming a current ratio of 1.0 and an acid-test ratio of 0.80, how will the borrowing of cash by issuing a

six-month note payable affect each ratio? A. Increase the current ratio and increase the acid-test ratio.B. No change to the current ratio and increase the acid-test ratio.C. Decrease the current ratio and decrease the acid-test ratio.D. Decrease the current ratio and increase the acid-test ratio.

115.On November 1, Vacation Desinations borrows $1.5 million and issues a six-month, 8% note payable.

Interest is payable at maturity. Record the issuance of the note and the appropriate adjusting entry for interest expense at December 31, the end of the reporting period.

116.On September 1, 2012, Allied Moving Corp. borrows $100,000 cash from First National Bank. Allied signs

a six-month, 6% note payable. Interest is payable at maturity. Allied's year-end is December 31.1. Record the note payable by Allied Moving Corp.2. Record the appropriate adjusting entry for the note by Allied Moving Corp. on December 31, 2012.3. Record the payment of the note at maturity.

117.On November 1, 2012, Dual Systems borrows $200,000 to expand operations. Dual Systems signs a six-month, 9% promissory note. Interest is payable at maturity. Dual System's year-end is December 31.1. Record the issuance of the note by Dual Systems.2. Record the appropriate adjusting entry for the note by Dual Systems on December 31, 2012.3. Record the payment of the note by Dual Systems at maturity on April 30, 2013.

118.Assume that on July 1, 2012, Togo's issues a $2 million, one-year note. Interest is payable at maturity.

Determine the amount of interest expense that should be recorded in a year-end adjusting entry under each of the following independent assumptions:Interest Rate Fiscal Year-End1. 8% December 312. 9% September 303. 6% October 314. 7% January 31

119.The following selected transactions relate to liabilities of Deco Emporium whose fiscal year ends on

December 31.Jan. 26 Negotiated a line of credit with City Bank that can be renewed annually upon bank approval. The amount available under the line of credit is $1 million at the bank's prime rate.March 1 Arranged a six-month bank loan of $400,000 with City Bank under the line of credit agreement. Interest at the prime rate of 8% is payable at maturity.September 1Paid the 8% note at maturity.Record the appropriate entries, if any, on January 26, March 1, and September 1.

120.Mike Smith is a college football coach making a base salary of $960,000 a year ($80,000 per month). Employers are required to withhold a 6.2% Social Security tax up to a maximum base amount and a 1.45% Medicare tax with no maximum. Assuming the FICA base amount is $106,800, compute how much will be withheld during the year for Coach Smith's Social Security and Medicare. Through what month will Social Security be withheld? What additional amount will the employer need to contribute?

Answer: Social Security will be withheld through February as $80,000 per month reaches the $106,800 maximum in the second month. The employer will contribute an additional (matching) contribution of $20,542.

121.Accurate Reports has 50 employees each working 40 hours per week and earning $25 an hour. Federal

income taxes are withheld at 15% and state income taxes at 6%. FICA taxes are 7.65% of the first $106,800 earned per employee and 1.45% thereafter. Unemployment taxes are 3.8% of the first $7,000 earned per employee.1. Compute the total salaries expense, the total withholdings from employee salaries, and the actual direct deposit of payroll for the first week of January.2. Compute the total payroll tax expense Accurate Reports will pay for the first week of January.

122.During January, Deluxe Printing pays employee salaries of $1 million. Withholdings in January are

$76,500 for the employee portion of FICA, $210,000 for federal and state income tax, and $40,000 for the employee portion of health insurance (payable to Blue Cross/Blue Shield). The company incurs an additional $38,000 for federal and state unemployment tax and $30,000 for the employer portion of health insurance.1. Record the employee salary expense, withholdings, and salaries payable.2. Record the employer-provided fringe benefits.3. Record the employer payroll taxes.

123.Midwest Shipping pays employees at the end of each month. Payroll information is listed below for January, the first month of the fiscal year. Assume that none of the employees exceeds the Federal unemployment tax maximum salary of $7,000 in January.Salaries $800,000Federal and state income taxes withheld 160,000Federal unemployment tax rate 0.80%State unemployment tax rate (after FUTA deduction) 3.00%Social Security (FICA) tax rate 7.65%Record salaries expense and payroll tax expense for the January pay period.

124.On July 8, Compusoft receives $250,000 from a customer toward a cash sale of $1 million for customized

computer equipment to be completed on August 1. The remaining $750,000 payment is received upon delivery of the product on August 1. The equipment had a total production cost of $700,000. What journal entries should Compusoft record on July 8 and August 1? Assume Compusoft uses the perpetual inventory system.

125.T. Boone Pickens football stadium at Oklahoma State University has a seating capacity of about 60,000.

Assume the stadium sells out all six home games before the season begins and the athletic department collects $30.6 million in ticket sales.1. What was the average price per season ticket and average price per individual game ticket sold?2. Record the advance collection of $30.6 million in ticket sales.3. Record the revenue earned after the first home game was completed.

126.During November, Wireless, Inc. makes a $1,600 credit sale. The state sales tax rate is 5% and the local sales tax rate is 1.5%. Record sales revenue and sales tax payable.

127.Two competing advertising agencies provide similar services, but record sales using different methods.

1. Diversified Advertising records sales and sales taxes in separate accounts. For the month of March, sales total $10,000 and sales taxes are $600.2. Centralized Advertising records sales and sales taxes together. For the month of March, sales total $5,300, including a 6% sales tax.Record sales revenue and the related sales tax payable for (1) Diversified Advertising and (2) Centralized Advertising.

128.On April 1, 2012, the Electronic Superstore borrows $22 million of which $4 million is due in 2013. Show

how the company would report the $22 million debt on its December 31, 2012 balance sheet.

129.Consultants notify management of Generic Drug that a prescription medication poses a potential health

risk. Legal counsel indicates that a product recall is probable and is estimated to cost the company between $5 and $8 million. How will this affect the company's income statement and balance sheet this period?

130.Decorative Concrete produces a concrete overlay for residential and commercial concrete flooring. Customers have complained that one of the products results in excessive cracking. The likelihood the company will incur a loss on this product is probable and the amount of the loss is estimated to be somewhere between $1.5 and $3 million.1. Should this contingent liability be reported, disclosed in a note only, or both? Explain.2. What loss, if any, should Decorative Concrete report in its income statement?3. What liability, if any, should Decorative Concrete report in its balance sheet?4. What entry, if any, should be recorded?

131.Panama Shirt Designs is a defendant in litigation involving an employee accident in its manufacturing

plant.For each of the following scenarios, determine the appropriate way to report the situation. Explain your reasoning and record any necessary entry.1. The likelihood of a loss occurring is probable and the estimated loss is $650,000.2. The likelihood of a loss occurring is probable and the loss is estimated to be in the range of $500,000 to $800,000.3. The likelihood of a loss occurring is reasonably possible and the estimated loss is $650,000.4. The likelihood of a loss occurring is remote, while the estimated potential loss is $650,000.

132.Rotary Tools sells power tools and backs each product it sells with a one-year warranty against defects.

Based on previous experience, the company expects warranty costs to be approximately 5% of sales. By the end of the first year, sales and actual warranty expenditures are $800,000 and $13,000, respectively.1. Does this situation represent a contingent liability? Why or why not?2. Record warranty expense and warranty liability for the year based on 5% of sales.3. Record the reduction in warranty liability and the reduction in cash of $13,000 incurred during the year.4. What is the balance in the Warranty Liability account after the entries in parts 2 and 3?

133.The Copper Grill has the following current assets: cash, $12 million; receivables, $50 million; inventory, $44 million; and other current assets $4 million. The Copper Grill has the following liabilities: accounts payable, $38 million; current portion of long-term debt, $7 million; and long-term debt, $12 million. Based on these amounts, calculate the current ratio and the acid-test ratio for The Copper Grill.

134.Selected financial data regarding current assets and current liabilities for two competing companies, Simon

and Garfunkel, are provided as follows:

1. Calculate the current ratio for Simon. Then calculate the current ratio for Garfunkel. Which of the two companies has the best current ratio?2. Calculate the acid-test (quick) ratio for Simon. Then calculate the acid-test (quick) ratio for Garfunkel. Which of the two companies has the best acid-test ratio?

135.Why is it important to distinguish between current and long-term liabilities?

136.Explain why we record interest in the period in which we incur it rather than in the period we pay it.

137.Name as many items as you can that are withheld from employee payroll checks. Which employee

deductions are required by law and which are voluntary? Name as many items as you can that are employer payroll costs in addition to the employee's salary. Which employer costs are required by law and which are voluntary?

138.Retailers like McDonalds, American Eagle, and Apple Computer sell a large number of gift cards. Explain

how these companies account for the sale of gift cards.

139.Define a contingent liability. Provide three common examples. Under what circumstances should a firm

report a contingent liability?

140.Match (by letter) the correct reporting method for each of the items listed below. Answer: Reporting MethodC. Current liabilityL. Long-term liabilityD. Disclosure note only

N. Not reported Answer: C; C; D; C; C

141.Match (by letter) the correct reporting method for each of the items listed below.

Answer: Reporting MethodC. Current liabilityL. Long-term liabilityD. Disclosure note only

N. Not reported Answer: L; C; C; D; D

142.Listed below are several terms and phrases associated with current liabilities. Pair each item from List A

(by letter) with the item from List B that is most appropriately associated with it.

Answer: e; d; a; c; b

143.Listed below are several terms and phrases associated with current liabilities. Pair each item from List A (by letter) with the item from List B that is most appropriately associated with it.

Answer: e; a; b; c; d

144.Listed below are several terms and phrases associated with current liabilities. Pair each item from List A

(by letter) with the item from List B that is most appropriately associated with it.

Answer: i; a; h; g; d; j; b; c; e; f;

Ch8 Key

1. TRUE 2. FALSE 3. TRUE 4. FALSE 5. TRUE 6. TRUE 7. FALSE 8. TRUE 9. TRUE 10. TRUE 11. TRUE 12. FALSE 13. TRUE 14. TRUE 15. FALSE 16. TRUE 17. TRUE 18. FALSE 19. TRUE 20. FALSE 21. TRUE 22. TRUE 23. TRUE 24. FALSE 25. FALSE 26. TRUE 27. TRUE 28. FALSE 29. TRUE 30. FALSE 31. TRUE 32. TRUE

33. FALSE 34. FALSE 35. TRUE 36. FALSE 37. TRUE 38. FALSE 39. TRUE 40. TRUE 41. FALSE 42. B 43. D 44. B 45. B 46. C 47. A 48. C 49. B 50. B 51. A 52. C 53. B 54. C 55. D 56. A 57. D 58. C 59. B 60. C 61. D 62. A 63. C 64. B 65. C 66. D 67. D

68. B 69. A 70. B 71. C 72. B 73. A 74. A 75. D 76. D 77. B 78. D 79. C 80. A 81. C 82. C 83. B 84. A 85. B 86. A 87. D 88. D 89. B 90. C 91. D 92. B 93. C 94. D 95. B 96. C 97. D 98. A 99. D 100. C 101. B 102. A

103. C 104. B 105. C 106. D 107. A 108. D 109. B 110. A 111. C 112. A 113. B 114. B

115.

116.

117.

118.

119. 120.

121.

122.

123.

124.

125.

126.

127.

128. 129. The contingent liability is probable and reasonably estimable, so a loss and a liability for the minimum amount of the range ($5 million) must be recorded. The entry will reduce income before taxes on the income statement and increase total liabilities on the balance sheet by $5 million. 130. 1. The contingent liability is probable and reasonably estimable, so it must be reported. The details of the contingent liability should also be provided in a note to the financial statements.2. When the loss is estimated within a range, the minimum amount of the loss, $1.5 million, should be reported in its 2012 income statement.3. Similarly, a $1.5 million liability should be reported in its 2012 balance sheet.4. The journal entry is as follows:Loss 1,500,000Contingent Liability 1,500,000(Record a contingent liability) 131. 1. The contingent liability is probable and reasonably estimable, so it must be recorded as follows:Loss 650,000; Contingent Liability 650,000(Entry to record the contingent liability)2. Panama Shirt Designs should record a loss and a liability for the minimum amount ($500,000)and disclose the range between $500,000 and $800,000 in the footnotes to the financial statements. The journal entry is as follows:Loss 500,000Contingent Liability 500,000(Entry to record the contingent liability)3. If the likelihood of loss is reasonably possible rather than probable, we record no entry, butmake full disclosure in a footnote to the financial statements to describe the contingency.4. If the likelihood of loss is remote, disclosure is usually not required.

132. 1. Yes, it's probable that costs for warranties will be incurred and based on previous experience the company can reasonably estimate the amount.2. Warranty Expense ($800,000 x 5%) 40,000Warranty Liability 40,000(Record liability for warranties)3. Warranty Liability 13,000Cash 13,000(Record actual warranty expenditures)

133. ($in millions)

134. 1. Garfunkel has a slightly better current ratio.

2. Garfunkel also has a slightly better acid-test ratio.

135. Distinguishing between current and long-term liabilities is important in helping investors and creditors assess the riskiness of a business' obligations. Given a choice, most companies would prefer to report a liability as long-term rather than current because it may cause the firm to appear less risky. In turn, less risky firms may enjoy lower interest rates on borrowing and command higher stock prices for new stock listings. 136. Accrual-basis accounting requires expenses to be recorded when incurred; cash-basis requires expenses to be recorded when the cash is paid. Generally Accepted Accounting Principles (GAAP) requires the use of accrual-basis accounting in preparing financial statements because it best reflects the timing of the expense, consistent with the matching principle. 137. Items commonly withheld from employee payroll checks include federal and state income taxes, Social Security and Medicare, health, dental, disability, and life insurance premiums, and employee investments to retirement or savings plans. Federal and state income taxes, Social Security and Medicare are required by law. The rest are voluntary.Common employer payroll costs, in additional to the employee's salary, include federal and state unemployment taxes, the employer portion of Social Security and Medicare, employer contributions for health, dental, disability, and life insurance, and employer contributions to retirement or savings plans. Federal and state unemployment taxes and the employer portion of Social Security and Medicare are required by law. The rest are voluntary benefits paid by a company on behalf of its employees. 138. When a company receives cash in advance through the sale of gift cards, it debits Cash and credits a current liability account called Unearned Revenue. When it earns the revenue through the sale of goods or services, the company debits Unearned Revenue and credits Sales Revenue. 139. A contingent liability is an existing, uncertain situation that might result in a loss. Examples include lawsuits, product warranties, environmental problems, and premium offers. A contingent liability is recorded only if a loss is probable and the amount can be reasonably estimated. 140.

141. 142. 143. 144.

Ch8 Summary


AACSB: Analytic 54





AICPA: Reporting 42

Blooms: Analysis 51




Blooms: Synthesis 5

Difficulty: Easy 41

Difficulty: Hard 19


Learning Objective: 08-01 Distinguish between current and long-term liabilities. 14

Learning Objective: 08-02 Account for notes payable and interest expense. 32

Learning Objective: 08-03 Account for employee and employer payroll liabilities. 23

Learning Objective: 08-04 Demonstrate the accounting for other current liabilities. 33

Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. 38

Learning Objective: 08-06 Assess liquidity using current liability ratios. 18


Ch9Student: ___________________________________________________________________________

1. The mixture of liabilities and stockholders' equity a business uses is called its capital structure. True False

2. Interest expense incurred when borrowing money, as well as dividends paid to stockholders, are tax-

deductible. True False

3. As a company's level of debt increases, bankruptcy risk increases.

True False

4. Companies that are believed to have high bankruptcy risk generally receive higher credit ratings and pay a

lower interest rate for borrowing. True False

5. Bonds are the most common form of corporate debt.

True False

6. A private placement is when a company chooses to sell the debt securities directly to a single investor.

True False

7. Secured bonds are backed by the federal government.

True False

8. Unsecured bonds are not backed by a specific asset.

True False

9. Term bonds require payments in installments over a series of years.

True False

10. Serial bonds require payment of the full principal amount of the bond at a single maturity date.

True False

11. A callable bond allows the borrower to repay the bonds before their scheduled maturity date at a specified

call price. True False

12. Convertible bonds allow the investor to convert each bond into a specified number of shares of common stock. True False

13. We can calculate the issue price of a bond as the face amount plus the total periodic interest payments.

True False

14. The market interest rate represents the true interest rate used by investors to value a company's bond issue.

True False

15. The stated interest rate is the rate quoted in the bond contract used to calculate the cash payments for

interest. True False

16. The market interest rate does not change over time.

True False

17. The stated interest rate does not change over time.

True False

18. As a company's default risk increases, investors demand a higher market interest rate on their bond

investments. True False

19. The lower the market interest rate, the lower the bond issue price will be.

True False

20. Bonds issued below face amount are said to be issued at a discount.

True False

21. A premium occurs when the issue price of a bond is above its face amount.

True False

22. The amount reported on the balance sheet for bonds payable is equal to the carrying value at the balance

sheet date. True False

23. When bonds are issued at a discount (below face amount), the carrying value and the corresponding interest

expense increase over time. True False

24. When bonds are issued at a premium (above face amount), the carrying value and the corresponding interest expense increase over time. True False

25. Interest expense is calculated as the carrying value times the market rate.

True False

26. The cash payment each period is calculated as the carrying value times the market rate.

True False

27. An amortization schedule provides a summary of the cash interest payments, interest expense, and changes

in carrying value for each period. True False

28. For bonds issued at a premium, the difference between interest expense and the cash paid increases the

carrying value of the bonds. True False

29. At the maturity date, the carrying value will equal the face amount of the bond.

True False

30. The market value of bonds moves in the opposite direction of interest rates.

True False

31. When an issuer retires debt of any type before its scheduled maturity date, the transaction is an early

extinguishment of debt. True False

32. Losses/gains on the early extinguishment of debt are reported as part of operating income in the income

statement. True False

33. Losses have the effect of reducing net income, while gains increase net income.

True False

34. A gain or loss is recorded on bonds retired at maturity.

True False

35. Monthly installment payments on a note payable include both an amount that represents interest and an

amount that represents a reduction of the outstanding loan balance. True False

36. A lease is a contractual arrangement by which the lessor provides the lessee the right to use an asset for a specified period of time. True False

37. Operating leases are contractual agreements where the lessor owns the asset and the lessee simply uses the

asset temporarily. True False

38. Operating leases occur when the lessee essentially buys an asset and borrows the money through a lease to

pay for the asset. True False

39. The debt to equity ratio measures a company's risk and is calculated as total liabilities divided by

stockholders' equity. True False

40. Leverage enables a company to earn a higher return using debt than without debt.

True False

41. Return on assets is calculated as net income divided by the ending balance for total assets.

True False

42. Return on equity is calculated as net income divided by average stockholders' equity.

True False

43. The times interest earned ratio compares interest expense with income available to pay interest charges.

True False

44. Which of the following is not a primary sourceof corporate debt financing?

A. Bonds Payable.B. Common Stock.C. Leases.D. Notes Payable.

45. The mixture of liabilities and stockholders' equity a business uses is called its:

A. Bond contract.B. Indenture agreement.C. Capital structure.D. Accounting equation.

46. Which of the following is not a true statement? A.

Companies that are believed to have high bankruptcy risk generally receive low credit ratings and must pay a higher interest rate for borrowing.

B. As a company's level of debt increases, the risk of bankruptcy increases.C. Interest expense incurred when borrowing money, as well as dividends paid to stockholders, are both

tax-deductible.D. The mixture of liabilities and stockholders' equity a business uses is called its capital structure.

47. Samson Enterprises issued a ten-year, $20 million bond with a 10% interest rate for $19,500,000. The entry

to record the bond issuance would have what effect on the financial statements?


48. Megginson, Inc. issued a five-year corporate bond of $300,000 with a 5% interest rate for $330,000. What

effect would the bond issuance have on Megginson, Inc.'s accounting equation?


49. The advantages of obtaining long-term funds by issuing bonds, rather than issuing additional common

stock, include which of the following?


50. The advantages of obtaining long-term funds by issuing bonds, rather than issuing additional common stock, include which of the following?


51. Which of the following definitions describes a term bond?

A. Matures on a single date.B. Secured only by the "full faith and credit" of the issuing corporation.C. Matures in installments.D. Supported by specific assets pledged as collateral by the issuer.

52. Which of the following definitions describes a serial bond?


53. Which of the following definitions describes a secured bond?


54. Term bonds are:

A. bonds issued below the face amount.B. bonds that mature in installments.C. bonds that mature all at once.D. bonds issued below the face amount.

55. Serial bonds are:

A. bonds backed by collateral.B. bonds that mature in installments.C. bonds with greater risk.D. bonds issued below the face amount.

56. Bonds can be secured or unsecured. Likewise, bonds can be term or serial bonds. Which is more common?

A. Secured and term.B. Secured and serial.C. Unsecured and term.D. Unsecured and serial.

57. A home loan with fixed monthly payments and the house as collateral most closely represents which of the following bond characteristics? A. Secured and term.B. Secured and serial.C. Unsecured and term.D. Unsecured and serial.

58. Which of the following is not true regarding callable bonds?

A. This feature allows the borrower to repay the bonds before their scheduled maturity date.B. This feature helps protect the borrower against future decreases in interest rates.C. Callable bonds benefit the bond investor.D. A bond can be both callable and convertible.

59. Convertible bonds:

A. provide potential benefits only to the issuer.B. provide potential benefits only to the investor.C. provide potential benefits to both the issuer and the investor.D. provide no potential benefits.

60. The price of a bond is equal to:

A. the future value of the face amount only.B. the present value of the interest only.C. the present value of the face amount plus the present value of the stated interest payments.D. the future value of the face amount plus the future value of the stated interest payments.

61. A bond issue with a face amount of $500,000 bears interest at the rate of 10%. The current market rate of

interest is also 10%. These bonds will sell at a price that is: A. Equal to $500,000.B. More than $500,000.C. Less than $500,000.D. The answer cannot be determined from the information provided.


interest is 8%. These bonds will sell at a price that is: A. Equal to $500,000.B. More than $500,000.C. Less than $500,000.D. The answer cannot be determined from the information provided.


interest is 6%. These bonds will sell at a price that is: A. Equal to $500,000.B. More than $500,000.C. Less than $500,000.D. The answer cannot be determined from the information provided.

64. Ordinarily, the proceeds from the sale of a bond issue will be equal to: A. The face amount of the bond.B. The total of the face amount plus all interest payments.C. The present value of the face amount plus the present value of the stream of interest payments.D. The face amount of the bond plus the present value of the stream of interest payments.

65. Bonds usually sell at their:

A. Maturity value.B. Present value.C. Face value.D. Call Price.

66. A $500,000 bond issue sold for $510,000. Therefore, the bonds:

A. Sold at a premium because the stated interest rate was higher than the market rate.B. Sold for the $500,000 face amount plus $10,000 of accrued interest.C. Sold at a discount because the stated interest rate was higher than the market rate.D. Sold at a premium because the market interest rate was higher than the stated rate.

67. A $500,000 bond issue sold for $490,000. Therefore, the bonds:

A. Sold at a discount because the stated interest rate was higher than the market rate.B. Sold for the $500,000 face amount less $10,000 of accrued interest.C. Sold at a premium because the stated interest rate was higher than the market rate.D. Sold at a discount because the market interest rate was higher than the stated rate.

68. For a bond issue that sells for more than the bond face amount, the stated interest rate is:

A. The actual yield rate.B. The prime rate.C. More than the market rate.D. Less than the market rate.

69. For a bond issue that sells for less than the bond face amount, the stated interest rate is:

A. The actual yield rate.B. The prime rate.C. More than the market rate.D. Less than the market rate.

70. Bond X and Bond Y are both issued by the same company. Each of the bonds has a face value of $100,000

and each matures in 10 years. Bond X pays 8% interest while Bond Y pays 7% interest. The current market rate of interest is 7%. Which of the following is correct? A. Both bonds will sell for the same amount.B. Bond X will sell for more than Bond Y.C. Bond Y will sell for more than Bond X.D. Both bonds will sell at a premium.

71. Bond X and Bond Y are both issued by the same company. Each of the bonds has a face value of $100,000 and each matures in 10 years. Bond X pays 8% interest while Bond Y pays 9% interest. The current market rate of interest is 8%. Which of the following is correct? A. Both bonds will sell for the same amount.B. Bond X will sell for more than Bond Y.C. Bond Y will sell for more than Bond X.D. Both bonds will sell at a discount.

72. Raiders Company issues a bond with a stated interest rate of 10%, face value of $50,000, and due in 5

years. Interest payments are made semi-annually. The market rate for this type of bond is 12%. What is the issue price of the bond?


73. Raiders Company issues a bond with a stated interest rate of 10%, face value of $50,000, and due in 5

years. Interest payments are made semi-annually. The market rate for this type of bond is 8%. What is the issue price of the bond?


74. Given the information below, which bond(s) will be issued at a discount?


75. Given the information below, which bond(s) will be issued at a premium?


76. Given the information below, which bond(s) will be issued at a discount?


77. Given the information below, which bond(s) will be issued at a premium?


78. The rate quoted in the bond contract used to calculate the cash payments for interest is called the:

A. Face rate.B. Yield rate.C. Market rate.D. Stated rate.

79. The rate of interest expense incurred on a bond payable for bonds of similar risk is called the: A. Face rate.B. Yield rate.C. Market rate.D. Stated rate.

80. Which of the following is true for bonds issued at a discount?

A. The stated interest rate is greater than the market interest rate.B. The market interest rate is greater than the stated interest rate.C. The stated interest rate and the market interest rate are equal.D. The stated interest rate and the market interest rate are unrelated.

81. Which of the following is true for bonds issued at a premium?

A. The stated interest rate is less than the market interest rate.B. The market interest rate is less than the stated interest rate.C. The stated interest rate and the market interest rate are equal.D. The stated interest rate and the market interest rate are unrelated.

82. The cash interest payment each period is calculated as the:

A. Face amount times the stated interest rate.B. Face amount times the market interest rate.C. Carrying value times the market interest rate.D. Carrying value times the stated interest rate.

83. Interest expense on bonds payable is calculated as the:

A. Face amount times the stated interest rate.B. Face amount times the market interest rate.C. Carrying value times the market interest rate.D. Carrying value times the stated interest rate.

84. When bonds are issued at a discount, what happens to the carrying value and interest expense over the life

of the bonds? A. Carrying value and interest expense increase.B. Carrying value and interest expense decrease.C. Carrying value decreases and interest expense increases.D. Carrying value increases and interest expense decreases.

85. When bonds are issued at a premium, what happens to the carrying value and interest expense over the life

of the bonds? A. Carrying value and interest expense increase.B. Carrying value and interest expense decrease.C. Carrying value decreases and interest expense increases.D. Carrying value increases and interest expense decreases.

86. Bonds payable should be reported as a long-term liability in the balance sheet at: A. Face Value.B. Current bond market price.C. Carrying value.D. Face value less accrued interest since the last interest payment date.

87. A bond issued at a discount indicates that at the date of issue:

A. Option aB. Option bC. Option c

88. A bond issued at a premium indicates that at the date of issue:


89. How would the carrying value of bonds payable change over time for bonds issued at a


90. For the issuer of 20-year bonds, the carrying value using the effective interest method would decrease each year if the bonds were sold at a:


91. When bonds are issued at a discount and the effective interest method is used for amortization, at each

subsequent interest payment date, the cash paid is: A. Less than the interest expense.B. Equal to the interest expense.C. Greater than the interest expense.D. More than if the bonds had been sold at a premium.

92. When bonds are issued at a premium and the effective interest method is used for amortization, at each

subsequent interest payment date, the cash paid is: A. Less than the interest expense.B. Equal to the interest expense.C. Greater than the interest expense.D. More than if the bonds had been sold at a discount.

93. When bonds are issued at a discount and the effective interest method is used for amortization, at each

interest payment date, the interest expense: A. Increases.B. Decreases.C. Remains the same.D. Is equal to the change in book value.

94. When bonds are issued at a premium and the effective interest method is used for amortization, at each

interest payment date, the interest expense: A. Increases.B. Decreases.C. Remains the same.D. Is equal to the change in book value.

95. An amortization schedule for a bond issued at a discount:

A. Has a carrying value that decreases over time.B. Is contained in the balance sheet.C. Is a schedule that reflects the changes in bonds payable over its term to maturity.D. All of the other answers are correct.

96. An amortization schedule for a bond issued at a premium: A. Has a carrying value that increases over time.B. Is contained in the balance sheet.C. Is a schedule that reflects the changes in bonds payable over its term to maturity.D. All of the other answers are correct.

Discount-Mart issues $10 million in bonds on January 1, 2012. The bonds have a ten-year term and pay interest semiannually on June 30 and December 31 each year. Below is a partial bond amortization schedule for the bonds:

97. What is the stated annual rate of interest on the bonds? (Hint: Be sure to provide the annual rate rather than

the six month rate.) A. 3%.B. 4%.C. 6%.D. 8%.

98. What is the market annual rate of interest on the bonds? (Hint: Be sure to provide the annual rate rather

than the six month rate.) A. 3%.B. 4%.C. 6%.D. 8%.

99. What is the interest expense on the bonds in 2012?

A. $693,103.B. $600,000.C. $345,639.D. $347,464.

100.What is the carrying value of the bonds as of December 31, 2013?

A. $8,834,770.B. $8,686,606.C. $8,734,070.D. $8,783,433.

Tony Hawk's Adventure (THA) issued callable bonds on January 1, 2012. THA's accountant has projected the following amortization schedule from issuance until maturity:

101.THA issued the bonds:

A. At par.B. At a premium.C. At a discount.D. Cannot be determined from the given information.

102.THA issued the bonds for:

A. $200,000.B. $194,758.C. $242,000.D. Cannot be determined from the given information.

103.The THA bonds have a life of:

A. 2 years.B. 3 years.C. 6 years.D. Cannot be determined from the given information.

104.What is the annual stated interest rate on the bonds? (Hint: Be sure to provide the annual rate rather than

the six month rate.) A. 3%.B. 3.5%.C. 6%.D. 7%.

105.What is the annual market interest rate on the bonds? (Hint: Be sure to provide the annual rate rather than

the six month rate.) A. 4%.B. 3.5%.C. 7%.D. 8%.

106.THA buys back the bonds for $196,000 immediately after the interest payment on 12/31/12 and retires them. What gain or loss, if any, would THA record on this date? A. No gain or loss.B. $370 gain.C. $4,000 gain.D. $1,242 loss.

X2 issued callable bonds on January 1, 2012. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity:

107.X2 issued the bonds:

A. At par.B. At a premium.C. At a discount.D. Cannot be determined from the given information.

108.X2 issued the bonds for:

A. $100,000.B. $107,000.C. $104,212.D. Cannot be determined from the given information.

109.The X2 bonds have a life of:

A. 3 years.B. 4 years.C. 5 years.D. Cannot be determined from the given information.

110.What is the annual stated interest rate on the bonds?

A. 3%.B. 3.5%.C. 6%.D. 7%.

111.What is the annual market interest rate on the bonds?

A. 3%.B. 3.5%.C. 6%.D. 7%.

112.X2 buys back the bonds for $103,000 immediately after the interest payment on 12/31/12 and retires them. What gain or loss, if any, would X2 record on this date? A. No gain or loss.B. $3,000 gain.C. $1,202 loss.D. $327 loss.

113.When bonds are retired before their maturity date:

A. GAAP has been violated.B. The issuing company will always report a non-operating gain.C. The issuing company will always report a non-operating loss.D. The issuing company will report a non-operating gain or loss.

114.The Viper retires a $40 million bond issue when the carrying value of the bonds is $42 million, but the

market value of the bonds is $36 million. The entry to record the retirement will include: A. A credit of $6 million to a gain account.B. A debit of $6 million to a loss account.C. No gain or loss on retirement.D. A debit to cash for $42 million.

115.The Titan retires a $20 million bond issue when the carrying value of the bonds is $18 million, but the

market value of the bonds is $23 million. The entry to record the retirement will include: A. A debit of $5 million to a loss account.B. A credit of $5 million to a gain account.C. No gain or loss on retirement.D. A debit to cash for $18 million.

116.Which of the following statements is correct?


117.In each succeeding payment on an installment note:

A. The amount of interest expense increases.B. The amount of interest expense decreases.C. The amount of interest expense is unchanged.D. The amounts paid for both interest and principal increase proportionately.

118.The entry to record a monthly payment on an installment note such as a car loan: A. Increases expense, decreases liabilities, and decreases assets.B. Increases expense, increases liabilities, and increases assets.C. Increases expense, decreases liabilities, and increases assets.D. Increases expense, increases liabilities, and decreases assets.

119.How does the amortization schedule for an installment note such as a car loan differ from an amortization

schedule for bonds? A. The final carrying value is zero in an amortization schedule for an installment note.B. The final carrying value is zero in an amortization schedule for bonds.C. The final carrying value is zero in both amortization schedules.D. The final carrying value is not zero in either amortization schedule.

120.Which of the following leases is just like a rental?

A. An operating lease.B. A capital lease.C. Both an operating and a capital lease.D. Neither an operating lease nor a capital lease.

121.Which of the following leases is essentially the purchase of an asset with debt financing?

A. an operating lease.B. a capital lease.C. both an operating and a capital lease.D. neither an operating lease nor a capital lease.

122.Which of the following is not a reason why some companies lease rather than buy?

A. Leasing may allow you to borrow with little or no down payment.B. Leasing can improve the balance sheet by reducing long-term debt.C. Leasing can lower income taxes.D. Leasing transfers the title to the lessee at the beginning of the lease.

123.Financial leverage is best measured by which of the following ratios?

A. The debt to equity ratio.B. The return on equity ratio.C. The times interest earned ratio.D. The return on assets ratio.

124.Which of the following is true regarding a company assuming more debt?

A. Assuming more debt is always bad for the company.B. Assuming more debt is always good for the company.C. Assuming more debt can be good for the company as long as they earn a return in excess of the rate

charged on the borrowed funds.D. Assuming more debt reduces leverage.

125.Which of the following is not a true statement? A. The debt to equity ratio measures a company's risk and is calculated as total liabilities divided by

stockholders' equity.B. Leverage enables a company to earn a higher return using debt than without debt.C. Return on assets is calculated as net income divided by the ending balance for total assets.D. The times interest earned ratio compares interest expense with income available to pay interest charges.

126.The times interest earned ratio is calculated as

A. Interest expense/Net income.B. Net income/Interest expense.C. (Net income + interest expense + tax expense)/Interest expense.D. Interest expense/(Net income + interest expense + tax expense).

127.Selected financial data for Home Depot is provided below:

What is the times interest earned ratio for Home Depot? A. 6.9 times.B. 3.9 times.C. 0.3 times.D. 97.9 times.

128.Selected financial data for Lowes is provided below:

What is the times interest earned ratio for Lowes? A. 6.2 times.B. 10.8 times.C. 0.2 times.D. 164.5 times.

129.Frontier City is trying to decide between the following two alternatives to finance its new $10 million roller coaster:a. Issue $10 million of 6% bonds at face amount.b. Issue one million shares of common stock for $10 per share.

Assuming bonds or shares of stock are issued at the beginning of the year, complete the income statement listed above for each alternative. Which alternative results in the highest earnings per share?

130.Valentino's Pizza issues $40 million of 3% convertible bonds that mature in ten years. Each $1,000 bond is

convertible into twenty-five shares of common stock. The current market price of Valentino's stock is $35 per share.1. Explain why Valentino's might choose to issue convertible bonds.2. Explain why investors might choose Valentino's convertible bonds.

131.Stealth Fitness Center issues 7%, 10-year bonds with a face amount of $200,000. The market interest rate

for bonds of similar risk and maturity is 8%. Interest is paid semiannually. At what price will the bonds be issued?

132.Stealth Fitness Center issues 7%, 15-year bonds with a face amount of $200,000. The market interest rate for bonds of similar risk and maturity is 6%. Interest is paid semiannually. At what price will the bonds be issued?

133.On January 1, 2012, Water Wonderland issues $20 million of 8% bonds, due in ten years, with interest

payable semiannually on June 30 and December 31 each year.1. If the market rate is 7%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price.2. If the market rate is 8%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price.3. If the market rate is 9%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price.

134.Pizza Pier issues 7%, 10-year bonds with a face amount of $80,000 on January 1, 2012. The market

interest rate for bonds of similar risk and maturity is also 7%. Interest is paid semiannually on June 30 and December 31.1. Record the bond issue.2. Record the first interest payment on June 30, 2012.

135.Pizza Pier issues 7%, 10-year bonds with a face amount of $80,000 for $74,564 on January 1, 2012. The market interest rate for bonds of similar risk and maturity is 8%. Interest is paid semiannually on June 30 and December 31.1. Record the bond issue.2. Record the first interest payment on June 30, 2012.

136.Pizza Pier issues 7%, 10-year bonds with a face amount of $80,000 for $85,951 on January 1, 2012. The

market interest rate for bonds of similar risk and maturity is 6%. Interest is paid semiannually on June 30 and December 31.1. Record the bond issue.2. Record the first interest payment on June 30, 2012.

137.Presented below is a partial amortization schedule for Discount Foods:

1. Record the bond issue.2. Record the first interest payment.

138.Presented below is a partial amortization schedule for Premium Foods:

1. Record the bond issue.2. Record the first interest payment.

139.On January 1, 2012, Ripstick Park issues $800,000 of 8% bonds, due in ten years, with interest payable

semiannually on June 30 and December 31 each year. Assuming the market interest rate on the issue date is 8%, the bonds will issue at $800,000. Record the bond issue on January 1, 2012, and the first two semiannual interest payments on June 30, 2012, and December 31, 2012.

140.On January 1, 2012, Ripstick Park issues $800,000 of 8% bonds, due in ten years, with interest payable semiannually on June 30 and December 31 each year. Assuming the market interest rate on the issue date is 9%, the bonds will issue at $747,968.

|

Answer:

141.On January 1, 2012, Ripstick Park issues $800,000 of 8% bonds, due in ten years, with interest payable

semiannually on June 30 and December 31 each year. Assuming the market interest rate on the issue date is 7%, the bonds will issue at $856,850.

142.Sun City issues bonds on January 1, 2012 that pay interest semiannually on June 30 and December 31. Portions of the bond amortization schedule appear below:

Required:1. Were the bonds issued at face amount, a discount, or a premium?2. What is the original issue price of the bonds?3. What is the face amount of the bonds?4. What is the term to maturity in years?5. What is the stated annual interest rate?6. What is the market annual interest rate?7. What is the total cash interest paid over the term to maturity?

143.Pizza Pier retires its 7% bonds for $70,000 before their scheduled maturity. At the time, the bonds have a

carrying value of $74,937. Record the early retirement of the bonds.

144.Magic Mountain retires its 8% bonds for $125,000 before their scheduled maturity. At the time, the bonds

have a carrying value of $118,000. Record the early retirement of the bonds.

145.On January 1, 2012, Julee Enterprises borrows $30,000 to purchase a new Toyota Highlander by agreeing to a 6%, 4-year note with the bank. Payments of $704.55 are due at the end of each month with the first installment due on January 31, 2012. Record the issuance of the note payable and the first two monthly payments.

146.Western World has the following selected data ($in millions):

Based on these amounts, calculate the following ratios for Western World in 2012:

147.Two leading home improvement chains in the United States are Home Depot and Lowes. Selected financial data for these two close competitors are as follows:

1. Calculate the debt to equity ratio for Home Depot and Lowes. Which company has the higher ratio?2. Calculate the times interest earned ratio for Home Depot and Lowes. Which company is better able to meet interest payments as they become due?

148.What is capital structure? Why would a company choose to borrow money rather than issue additional

stock?

149.Why do some companies issue bonds rather than borrow money directly from a bank?

150.Contrast the following types of bonds:(a) Secured and unsecured.(b) Term and serial.(c) Callable and convertible.

151.Explain how each of the columns in an amortization schedule is calculated, assuming the bonds are issued

at a discount. How is the amortization schedule different if bonds are issued at a premium?

152.What are the potential risks and rewards of carrying additional debt? How does additional debt affect a

company's return to investors?

153.Listed below are five terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the best term placing the letter designating the term in the space provided.

1. Stated interest rate

The true interest rate used by investors to value a bond.

____

2. Market interest rate

The stated interest rate is more than the market interest rate.

____

3. Bonds issued at a premium

The stated interest rate equals the market interest rate.

____

4. Bonds issued at a discount

The stated interest rate is less than the market interest rate.

____

5. Bonds issued at face value

The rate quoted in the bond contract used to calculate the cash payments for interest.

____

154.Listed below are ten terms followed by a list of phrases that describe or characterize the terms. Match each


1. Debt to equity ratio

The rate quoted in the bond contract used to calculate the cash payments for interest.

____

2. Market interest rate

The lessor owns the asset and the lessee simply uses the asset temporarily.

____

3. Operating lease

Total liabilities divided by total stockholders' equity; measure a company's risk.

____

4. Premium The true interest rate used by investors to value a bond.

____

5. Amortization schedule The issue price is below its face amount.

____

6. Capital lease Provides a summary of the cash interest payments, interest

expense, and changes in carrying value for debt instruments.

____

7. Stated interest rate

The lessee essentially buys an asset and borrows the money through a lease to pay for the asset.

____

8. Sinking fund The issue price is above its face amount.

____

9. Times interest earned ratio

Ratio that compares interest expense with income available to pay those charges.

____

10. Discount An investment fund used to set aside money to be used to

pay debts as they come due.

____

155.Listed below are four bond terms followed by a list of definitions. Match (by letter) the bond terms with their definitions. Each letter is used only once.

1. Matures in installments. Serial bond.

____

2. Matures on a single date. Term bond.

____

3. Supported by specific assets pledged as collateral by the issuer Secured bond.

____

4. Secured only by the "full faith and credit" of the issuing corporation.

Unsecured bond.

____

156.Listed below are four bond terms followed by a list of definitions. Match (by letter) the bond terms with

their definitions. Each letter is used only once.

1. A contract between the issuer and the investor Callable bond.

____

2. Allows the investor to transfer each bond into shares of common stock

Convertible bond.

____

3. Allows the issuer to pay off the bonds early at a fixed price

Bond issue costs.

____

4. Includes underwriting, legal, accounting, registration, and printing fees

Bond indenture.

____

157.Listed below are eight bond terms followed by a list of definitions. Match (by letter) the bond terms with their definitions. Each letter is used only once.

1. Allows the issuer to pay off the bonds early at a fixed price Serial bond.

____

2. Matures on a single date Callable bond.

____

3. Supported by specific assets pledged as collateral by the issuer

Convertible bond.

____

4. Allows the investor to transfer each bond into shares of common stock

Bond issue costs.

____

5. A contract between the issuer and the investor Bond

indenture.

____

6. Secured only by the "full faith and credit" of the issuing corporation Secured bond.

____

7. Includes underwriting, legal, accounting, registration, and printing fees

Unsecured bond.

____

8. Matures in installments Term bond.

____

Ch9 Key

1. TRUE 2. FALSE 3. TRUE 4. FALSE 5. TRUE 6. TRUE 7. FALSE 8. TRUE 9. FALSE 10. FALSE 11. TRUE 12. TRUE 13. FALSE 14. TRUE 15. TRUE 16. FALSE 17. TRUE 18. TRUE 19. FALSE 20. TRUE 21. TRUE 22. TRUE 23. TRUE 24. FALSE 25. TRUE 26. FALSE 27. TRUE 28. FALSE 29. TRUE 30. TRUE 31. TRUE 32. FALSE

33. TRUE 34. FALSE 35. TRUE 36. TRUE 37. TRUE 38. FALSE 39. TRUE 40. TRUE 41. FALSE 42. TRUE 43. TRUE 44. B 45. C 46. C 47. D 48. A 49. D 50. D 51. A 52. C 53. D 54. C 55. B 56. C 57. B 58. C 59. C 60. C 61. A 62. C 63. B 64. C 65. B 66. A 67. D

68. C 69. D 70. B 71. C 72. B 73. C 74. D 75. D 76. D 77. B 78. D 79. C 80. B 81. B 82. A 83. C 84. A 85. B 86. C 87. A 88. B 89. C 90. B 91. A 92. C 93. A 94. B 95. C 96. C 97. C 98. D 99. A 100. A 101. C 102. B

103. B 104. D 105. D 106. B 107. B 108. C 109. C 110. D 111. C 112. D 113. D 114. A 115. A 116. D 117. B 118. A 119. A 120. A 121. B 122. D 123. A 124. C 125. C 126. C 127. A 128. B

129. Issuing bonds results in earnings per share of $1.03 compared with earnings per share of $0.88 for issuing stock.

130. 1. Convertible bonds sell at a higher price and require a lower interest rate than bonds without a conversion feature.2. Investors would benefit if the market price of the common stock goes above $40 per share ($1,000/25 shares = $40 per share) assuming the current market price of the bond is $1,000. Example: If the company's stock price goes to $50 per share, the convertible bondholder could trade a $1,000 bond for 25 shares of stock worth $50 per share (or $1,250). Prior to conversion the bondholder still receives interest on the convertible bond. 131. If the market rate is 8%, the bonds will be issued at $186,410 (a discount).

132. If the market rate is 6%, the bonds will be issued at $219,600 (a premium).

133. 1. Premium. The issue price is $21,421,240.

2. Face amount. The issue price is $20,000,000.

3. Discount. The issue price is $18,699,206.

134.

135.

136.

137.

138.

139. 140.

141.

142. 1. Premium.2. $55,338,768.3. $50,000,000.4. 20 years.5. 8%. [($2,000,000 cash paid ÷ $50,000,000 face value) x 2]6. 7%. [($1,936,857 interest expense ÷ $55,338,768 carrying value) x 2]7. $80,000,000. ($2,000,000 x 40 payments)

143.

144.

145.

146.

*($2,511 + $2,315)/2

*($826 + $790)/2

147. Home Depot has a higher debt to equity ratio than Lowes. Lowes, with a lower debt to equity ratio is considered to be less risky.

Lowes, with a times interest earned ratio of 10.8 times is better able to meet interest payments as they become due than Home Depot with a ratio of 6.9 times. 148. Capital structure is the mixture of liabilities and stockholders' equity a business uses. One of the primary reasons a company chooses to borrow money relates to taxes. Interest expense incurred when borrowing money is tax deductible, while dividends paid to stockholders is not tax deductible. Due to tax considerations, debt can be a less costly form of financing. A second reason relates to control. If a company issues additional shares to investors, control in the company is shared with the new shareholders. If a company borrows funds, voting control in the company is retained. 149. A company that borrows by issuing bonds is effectively by-passing the bank and borrowing directly from the investing public, usually at a lower interest rate than in a bank loan. However, issuing bonds entails significant bond issue costs that often exceed 5% of the amount borrowed. For smaller loans, the additional bond issue costs exceed the savings from a lower interest rate, making it more economical to borrow from a bank. For loans of $20 million or more, the interest rate savings often exceed the additional bond issuance costs, making a bond issue more attractive. 150. (a) Secured bonds are supported by assets pledged as collateral. Unsecured bonds, also referred to as debentures, are not backed by a specific asset. (b) Term bonds require payment of the full principal amount of the bond at a single maturity date. Serial bonds require payments in installments over a series of years. (c) Callable bonds allow the issuer to repay the bonds before their scheduled maturity date at a specified call price. Convertible bonds allow the investor to convert each bond into a specified number of shares of common stock. 151. Cash paid is calculated as the face amount of the bonds times the stated interest rate. Interest expense is the carrying value times the market rate. The difference between interest expense and the cash paid increases the carrying value of the bonds. At the maturity date, the carrying value will equal the face amount.The amortization schedule is similar when bonds are issued at a premium, except that the difference between interest expense and the cash paid decreases, rather than increases, the carrying value of the bonds over time. 152. Additional debt increases risk. Failure to repay debt, or the interest associated with the debt, on a timely basis may result in default and perhaps even bankruptcy. Other things being equal, the higher the debt, the higher the risk of bankruptcy. Additional debt also offers potential rewards. If a company earns a return in excess of the cost of borrowing the funds, stockholders are provided with a total return greater than what could have been earned with equity funds alone. Unfortunately, borrowing is not always favorable. Sometimes the cost of borrowing the funds exceeds the returns they generate.If a company has returns in excess of the rate charged on borrowed funds, assuming additional debt will result in a higher return to investors. However, if returns should fall below the rate charged on borrowed funds, assuming additional debt will result in lower overall returns to investors. 153. Market interest rate :: The true interest rate used by investors to value a bond. and Bonds issued at a premium :: The stated interest rate is more than the market interest rate. and Bonds issued at face value :: The stated interest rate equals the market interest rate. and Bonds issued at a discount :: The stated interest rate is less than the market interest rate. and Stated interest rate :: The rate quoted in the bond contract used to calculate the cash payments for interest. 154. Stated interest rate :: The rate quoted in the bond contract used to calculate the cash payments for interest. and Operating lease :: The lessor owns the asset and the lessee simply uses the asset temporarily. and Debt to equity ratio :: Total liabilities divided by total stockholders' equity; measure a company's risk. and Market interest rate :: The true interest rate used by investors to value a bond. and Discount :: The issue price is below its face amount. and Amortization schedule :: Provides a summary of the cash interest payments, interest expense, and changes in carrying value for debt instruments. and Capital lease :: The lessee essentially buys an asset and borrows the money through a lease to pay for the asset. and Premium :: The issue price is above its face amount. and Times interest earned ratio :: Ratio that compares interest expense with income available to pay those charges. and Sinking fund :: An investment fund used to set aside money to be used to pay debts as they come due. 155. Matures in installments. :: Serial bond. and Matures on a single date. :: Term bond. and Supported by specific assets pledged as collateral by the issuer :: Secured bond. and Secured only by the "full faith and credit" of the issuing corporation. :: Unsecured bond. 156. Allows the issuer to pay off the bonds early at a fixed price :: Callable bond. and Allows the investor to transfer each bond into shares of common stock :: Convertible bond. and Includes underwriting, legal, accounting, registration, and printing fees :: Bond issue costs. and A contract between the issuer and the investor :: Bond indenture.

157. Matures in installments :: Serial bond. and Allows the issuer to pay off the bonds early at a fixed price :: Callable bond. and Allows the investor to transfer each bond into shares of common stock :: Convertible bond. and Includes underwriting, legal, accounting, registration, and printing fees :: Bond issue costs. and A contract between the issuer and the investor :: Bond indenture. and Supported by specific assets pledged as collateral by the issuer :: Secured bond. and Secured only by the "full faith and credit" of the issuing corporation :: Unsecured bond. and Matures on a single date :: Term bond.

Ch9 Summary


AACSB: Analytic 43

AACSB: Reflective 2





AICPA: Reporting 6

Blooms: Analysis 33




Blooms: Synthesis 2

Difficulty: Easy 41

Difficulty: Hard 16


Learning Objective: 09-01 Explain financing alternatives. 16

Learning Objective: 09-02 Identify the characteristics of bonds. 21

Learning Objective: 09-03 Determine the price of a bond issue. 31

Learning Objective: 09-04 Account for the issuance of bonds. 59

Learning Objective: 09-05 Record the retirement of bonds. 13

Learning Objective: 09-06 Identify other major long-term liabilities. 12

Learning Objective: 09-07 Make financial decisions using long-term liability ratios. 15


Ch10Student: ___________________________________________________________________________

1. Assets plus liabilities equal stockholders' equity. True False

2. Paid-in Capital is the amount stockholders have invested in the company.

True False

3. Retained Earnings is the amount stockholders have invested in the company.

True False

4. Angel investors are investors that focus on companies at or near bankruptcy.

True False

5. All publicly held corporations are regulated by the Securities and Exchange Commission.

True False

6. Limited liability means that even in the event of bankruptcy, stockholders in a corporation can lose no more

than the amount they invested in the company. True False

7. Owners in a sole proprietorship or a partnership can be held personally liable for debts the company has

incurred, over and beyond the investment they have made. True False

8. A corporation has lower taxes and less paperwork relative to sole-proprietorships and partnerships.

True False

9. An S Corporation allows a company to enjoy limited liability as a corporation, but tax treatment as a

partnership. True False

10. Authorized stock is the number of shares that have been sold to investors.

True False

11. Par value is the legal capital per share of stock that's assigned when the corporation is first established.

True False

12. Par value has a direct relationship to the market value of the common stock. True False

13. A company credits Additional Paid-in Capital for the portion of the cash proceeds above par value received

for the issuance of stock. True False

14. In the event a corporation is dissolved, common stockholders receive preference over preferred

stockholders in the distribution of assets. True False

15. Convertible preferred stock allows the stockholder to exchange shares of preferred stock for common stock

at a specified conversion ratio. True False

16. Cumulative preferred stock means that dividends accumulate interest during the year.

True False

17. We usually record preferred stock as equity and report it in the stockholders' equity section of the balance

sheet just above common stock. True False

18. Treasury stock is the repurchase of a company's own issued stock.

True False

19. If a company purchases shares of another company, it records this transaction as treasury stock.

True False

20. Stock repurchases reduce the number of shares outstanding, thereby increasing earnings per share.

True False

21. We record treasury stock at the cost of the shares reacquired.

True False

22. Treasury stock is a contra-equity account since treasury stock increases total stockholders' equity.

True False

23. When we reissue treasury stock, we report the difference between its cost and the cash received as an

increase/decrease in additional paid-in capital. True False

24. Retained earnings represent the earnings retained in the corporation - earnings not paid out as dividends to stockholders. True False

25. The amount of retained earnings equals net income minus dividends for the current year.

True False

26. If a company has expenses that are more than revenues, the net loss decreases retained earnings.

True False

27. Dividends are paid on all shares issued by the company including treasury stock.

True False

28. Total assets, total liabilities, and total stockholders' equity do not change as a result of a stock dividend.

True False

29. Small stock dividends are recorded by debiting Retained Earnings for the par value per share.

True False

30. No journal entry is made to record a stock split.

True False

31. A stock split has no effect on the total of any account in stockholders' equity.

True False

32. Common stock is listed before preferred stock in the balance sheet.

True False

33. The number of shares outstanding is equal to the number of shares issued minus the number of shares

bought back. True False

34. We can estimate the average purchase cost of treasury stock per share by dividing the treasury stock

balance by the number of shares repurchased. True False

35. The statement of stockholders' equity shows how each equity account changed during the year.

True False

36. The stockholders' equity section of the balance sheet shows how each equity account changed during the

year. True False

37. The return on equity measures the ability of company management to generate earnings from the resources that owners provide. True False

38. We compute the return on equity ratio by dividing net income by ending stockholders' equity.

True False

39. Earnings per share (EPS) measures the net income earned per share of common stock outstanding.

True False

40. We calculate earnings per share as net income divided by the average shares outstanding during the period.

True False

41. Earnings per share is useful in comparing earnings performance across companies.

True False

42. We calculate the PE ratio as the stock price divided by earnings per share so that both stock price and

earnings are expressed on a per share basis. True False

43. Which of the following accounts is not reported in the stockholders' equity section of the balance sheet?

A. Treasury Stock.B. Common Stock.C. Sales Revenue.D. Retained Earnings.

44. Which of the following stages of equity financing comes last in the traditional order of progression?

A. Investment by friends and family of the founders.B. Investment by the founders of the business.C. Initial public offering (IPO).D. Outside investment by "angel" investors and venture capital firms.

45. In terms of total sales, assets, and earnings, the dominant form of business organization is the:

A. Sole proprietorship.B. Partnership.C. Corporation.D. Limited liability company (LLC).

46. Common stockholders usually have all of the following rights except:

A. To receive dividends when declared.B. To share in the distribution of assets.C. To elect board of directors.D. To participate in the day-to-day operations.

47. Which of the following is a reason that a corporation would prefer to issue stock instead of bonds?


48. Advantages of the corporate form that have led to the growth of this form of business ownership include all

of the following except: A. Ease of raising capital.B. Low government regulation.C. Limited liability.D. Lack of mutual agency.

49. Advantages of the corporate form of business include which of the following?

I. Double taxationII. Ability to raise capitalIII. Lack of mutual agencyIV. More paperworkV. Limited liability


50. Which of the following statements regarding the corporate form of business is correct?


51. The disadvantages of the corporate form of business include:

A. Lack of mutual agency.B. Additional taxes.C. Limited liability.D. Ability to raise capital.

52. The correct order from the smallest number of shares to the largest number of shares is: A. Authorized, issued, and outstanding.B. Outstanding, issued, and authorized.C. Issued, outstanding, and authorized.D. Issued, authorized, and outstanding.

53. Outstanding common stock refers to the total number of shares:

A. Issued.B. Issued plus treasury stock.C. Issued less treasury stock.D. Authorized.

54. Authorized common stock refers to the total number of shares:

A. Outstanding.B. Issued.C. Issued and outstanding.D. That can be issued.

55. Outstanding common stock is:

A. Stock that is performing well on the New York Stock Exchange.B. Stock that has been authorized by the state for issue.C. Stock issued plus treasury stock.D. Stock in the hands of stockholders.

56. Issued stock refers to the number of shares:

A. Outstanding plus treasury shares.B. Authorized.C. In the hand of stockholders.D. That may be issued under state law.

57. The par value of shares issued is normally recorded in the:

A. Additional Paid-in Capital account.B. Common Stock account.C. Retained Earnings account.D. Treasury Stock account.

58. The par value of common stock represents:

A. The legal capital per share of stock assigned when the corporation was first established.B. The liquidation value of a share.C. The market value of a share of stock.D. The amount received when the stock was issued.

59. If a company issues 1,000 shares of 1 par value common stock for $30 per share, what would be the effect on the accounting equation?


60. When a company issues 25,000 shares of $1 par value common stock for $10 per share, the journal entry

for this issuance would include:


61. Jade Jewelers issued 15,000 shares of $1 par value stock for $20 per share. What is true about the journal

entry to record the issuance?


62. South Beach Apparel issued 10,000 shares of $1 par value stock for $5 per share. What is true about the

journal entry to record the issuance?


63. Hayes Corporation issues 100 shares of its $1 par value common stock for $15 per share. The entry to record the issuance will not include a:


64. Preferred stock is called preferred because it usually has two preferences over common stock. These

preferences relate to: A. Dividends and voting rights.B. Par value and dividends.C. The preemptive right and voting rights.D. Dividends and distribution of assets if the corporation is dissolved.

65. Preferred stock:

A. is always recorded as a liability.B. is always recorded as part of stockholders' equity.C. can have features of both liabilities and stockholders' equity.D. is not included in either liabilities or stockholders' equity.

66. Which of the following financing alternatives has the highest preference of payment in a case where the

company liquidates its assets? A. Common Stock.B. Preferred Stock.C. Bonds.D. They have equal preference.

67. Which of the following is not a potential feature of preferred stock?

A. Convertible.B. Redeemable.C. Cumulative.D. They all are potential features of preferred stock.

68. Which of the following has the highest expected return to the investor?

A. Common Stock.B. Preferred Stock.C. Bonds.D. They all have similar expected returns.

69. A company issued 1,000 shares of $1 par value preferred stock for $5 per share. What is true about the journal entry to record the issuance?


70. The Surf's Up issues 1,000 shares of 6%, $100 par value preferred stock at the beginning of 2011. All

remaining shares are common stock. The company was not able to pay dividends in 2011, but plans to pay dividends of $18,000 in 2012. Assuming the preferred stock is cumulative, how much of the $18,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2012?


71. The Surf's Up issues 1,000 shares of 6%, $100 par value preferred stock at the beginning of 2011. All

remaining shares are common stock. The company was not able to pay dividends in 2011, but plans to pay dividends of $18,000 in 2012. Assuming the preferred stock is noncumulative, how much of the $18,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2012?


72. California Adventures issues 5,000 shares of 8%, $100 par value preferred stock at the beginning of 2011. All remaining shares are common stock. The company was not able to pay dividends in 2011, but plans to pay dividends of $100,000 in 2012. Assuming the preferred stock is cumulative, how much of the $100,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2012?


73. California Adventures issues 5,000 shares of 8%, $100 par value preferred stock at the beginning of

2011. All remaining shares are common stock. The company was not able to pay dividends in 2011, but plans to pay dividends of $100,000 in 2012. Assuming the preferred stock is noncumulative, how much of the $100,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2012?


74. Treasury Stock is normally reported as:

A. A reduction of total stockholders' equity.B. An asset account.C. A liability account.D. An expense account.

75. When treasury stock is resold at a price above cost:

A. A gain account is credited.B. A loss is reported.C. A revenue account is credited.D. Additional Paid-in Capital is increased.

76. When treasury stock is resold at a price below cost:

A. Additional Paid-in Capital is decreased.B. Additional Paid-in Capital is increased.C. A gain is reported on the income statement.D. A loss is reported on the income statement.

77. When treasury stock is purchased, what is the effect on assets and stockholders' equity? A. Assets and stockholders' equity increase.B. Assets and stockholders' equity decrease.C. Assets increase and stockholders' equity decrease.D. Assets decrease and stockholders' equity increase.

78. When treasury stock is purchased, what is the effect on total stockholders' equity?

A. Decrease.B. Increase.C. No effect.D. Cannot tell from the given information.

79. Treasury Stock:

A. has a normal credit balance.B. decreases stockholders' equity.C. is recorded as an investment.D. increases stockholders' equity.

80. Which of the following statements about treasury stock transactions is true?


81. Which of the following is TRUE regarding the accounting for treasury stock?


82. What would be the impact on the accounting equation when a company purchases treasury stock?


83. The corporation's own stock that has been issued and then repurchased by the company is referred to as:


84. When treasury stock is resold at a gain, the difference between its cost and the cash received when resold:


85. Crossroads Mall had 100,000 outstanding shares of common stock. On June 16, 2012, Crossroads

repurchased 20,000 shares of its own stock at $30 per share. On July 23, 2012, Crossroads resold 10,000 shares at $28 per share. What net effect did the repurchase and the resell of common stock have on the accounting equation?


86. On December 2, Coley Corp. reacquired 1,000 shares of its $2 par value common stock for $27 each. On

December 20, Coley Corp. reissued 400 shares for $15 each. Which of the following is correct regarding the journal entry for the reissued shares?


87. On November 6, Coleman Corp. reacquired 1,000 shares of its $2 par value common stock for $27 each. On November 20, Coleman Corp. reissued 400 shares for $30 each. Which of the following is correct regarding the effect of the journal entry for the reissued shares?


88. On February 22, Brett Corporation reacquired 200 shares of its $5 par value common stock for $25 each.

On March 15, the company reissued 70 shares for $30 each. What is true of the journal entry for reissuing their shares?


89. Retained Earnings represent a company's:

A. Net income less dividends since the company first started.B. Undistributed net assets.C. Extra paid-in capital.D. Undistributed cash.

90. The Retained Earnings balance reported on the balance sheet typically is not affected by:

A. Net income.B. Net loss.C. Dividends paid.D. Stock splits.

91. The balance of Retained Earning at the end of the year represents:


92. Retained Earnings: A. has a normal debit balance.B. decreases stockholders' equity.C. is equal to the balance in cash.D. increases stockholders' equity.

93. Journal entries to record cash dividends are made on the:

A. declaration date, record date, and payment date.B. record date and payment date.C. delaration date and payment date.D. delaration date and record date.

94. The board of directors of Capstone Inc. declared a $0.60 per share cash dividend on its $1 par common

stock. On the date of declaration, there were 50,000 shares authorized, 20,000 shares issued, and 5,000 shares held as treasury stock. What is the entry for the dividend declaration?


95. The ending Retained Earnings balance of Lambert Inc. increased by $1.5 million from the beginning of the

year. The company's net income earned during the year is $3.5 million. What is the amount of dividends Lambert Inc. declared and paid?


96. Over the first four years of the company's life, it earned the following net income (loss): $6,000; $3,000;

$6,000, and ($2,000). If the company's ending retained earnings is $10,000 after year 4, what is the average amount of dividends paid per year?


97. Rugby Rocks, Inc. had a Retained Earnings balance of $12,000 at December 31, 2012. The company had an average income of $7,500 over the next 3 years, and an ending Retained Earnings balance of $15,000 at December 31, 2013. What was the total amount of dividends paid over the last three years?


98. Both cash dividends and stock dividends:

A. reduce total assets.B. reduce total liabilities.C. reduce total stockholders' equity.D. reduce retained earnings.

99. The declaration and issuance of a stock dividend:

A. Does not change total assets, liabilities, or total stockholders' equity.B. Decreases total stockholders' equity and increases common stock.C. Decreases assets and decreases total stockholders' equity.D. Does not change retained earnings or paid-in capital.

100.The issuer of a 100% common stock dividend (large stock dividend) to common stockholders should debit

stock dividends for an amount equal to the


101.The issuer of a 5% common stock dividend (small stock dividend) to common stockholders should debit

stock dividends for an amount equal to the


102.A feature common to both stock splits and stock dividends is


103.Large stock dividends and stock splits are issued primarily to:

A. Lower the trading price of the stock per share.B. Increase the number of authorized shares.C. Increase legal capital.D. Increase the number of outstanding shares.

104.The Common Stock account on a company's balance sheet is measured as:

A. The number of common shares outstanding x the stock's par value per share.B. The number of common shares outstanding x the stock's current market value per share.C. The number of common shares issued x the stock's par value per share.D. The number of common shares issued x the stock's current market value per share.

105.The statement of stockholders' equity shows

A. Only the ending balance in each stockholders' equity account.B. How each equity account changed over time.C. Only the beginning balance in each stockholders' equity account.D. Less information than the stockholders' equity section in the balance sheet.

106.How does the stockholders' equity section in the balance sheet differ from the statement of stockholders'

equity? A. The stockholders' equity section is more detailed than the statement of stockholders' equity.B.

The stockholders' equity section shows balances at a point in time, whereas the statement of stockholders' equity shows activity over a period of time.

C. The stockholders' equity section shows activity over a period of time, whereas the statement of stockholders' equity is at a point time.

D. There are no differences between them.

107.Panhandle Corporation was organized on January 3, 2012. The firm was authorized to issue 100,000 shares of $5 par value common stock. During 2012, Panhandle had the following transactions relating to shareholders' equity:Issued 30,000 shares of common stock at $7 per share.Issued 20,000 shares of common stock at $8 per share.Reported a net income of $100,000.Paid dividends of $50,000.What is total paid-in capital at the end of 2012? A. $420,000.B. $370,000.C. $470,000.D. $320,000.

108.Roberto Corporation was organized on January 1, 2012. The firm was authorized to issue 100,000 shares of

$5 par value common stock. During 2012, Roberto had the following transactions relating to stockholders' equity:Issued 10,000 shares of common stock at $7 per share.Issued 20,000 shares of common stock at $8 per share.Reported a net income of $100,000.Paid dividends of $50,000.Purchased 3,000 shares of treasury stock at $10 (part of the 20,000 shares issued at $8).What is total stockholders' equity at the end of 2012? A. $270,000.B. $300,000.C. $250,000.D. $200,000.

109.Return on equity is calculated as:

A. Net income divided by average stockholders' equity.B. Net income divided by ending stockholders' equity.C. Net income divided by average market value of equity.D. Net income divided by ending market value of equity.

110.Why doesn't stockholders' equity equal the market value of equity?

A. Stockholders' equity usually does equal the market value of equity.B. Investors tend to incorrectly price the market value of equity.C.

It's related to the use of historical cost to report many long-term assets and the expensing of value generating costs such as research and development and advertising.

D. It's due to incorrect entries prepared by accountants. 111.Earnings per share (EPS)

A. is useful in comparing earnings performance across companies.B. is useful in comparing earnings performance for the same company over time.C.

is useful in both comparing earnings performance across companies and in comparing earnings performance for the same company over time.

D.

is not useful in comparing earnings performance across companies or in comparing earnings performance for the same company over time.

112.Which of the following statements is not true regarding earnings per share? A. Earnings per share is useful in comparing earnings performance across companies at the same point in

time.B. Earnings per share is useful in comparing earnings performance for the same company over time.C.

Earnings per share is calculated as net income minus dividends on preferred stock all divided by the average number of common shares outstanding.

D. Earnings per share is forecasted by financial analysts. 113.Financial information for Retro Designs includes the following selected data:

What is the company's earnings per share? A. $0.60.B. $0.71.C. $0.50.D. $0.05.

114.Financial information for Retro Designs includes the following selected data:

What is the company's price-earnings ratio? A. 20.0.B. 15.0.C. 6.9.D. 0.05.

115.The PE ratio:

A. tends to be higher for growth stocks.B. tends to be higher for value stocks.C. indicates how a stock is trading in relation to cumulative earnings over the life of the company.D. typically is less than 1.

116.Hamilton International issues 5,000 shares of its $1 par value common stock to provide funds for further

expansion. If the issue price is $15 per share, what is the entry to record the issuance of the stock?

117.Environmental Designs issues 10,000 shares of its $1 par value common stock at $25 per share. (1) Record the issuance of the stock. (2) Record the issuance of the stock assuming it is no-par value stock.

118.Northwest Clothing Supply has the following transactions during the year related to stockholders' equity:

January 1 Issues 3,000 shares of no-par value common stock for $20 per share.March 15 Issues 800 shares of $20 par value preferred stock for $22 per share.December 1 Declares a cash dividend of $1 per share to all stockholders of record (both common and preferred) on October 15.December 15 Date of record.December 31 Pays the cash dividend declared on October 1.Record each of these transactions.

119.Tropical Rainwear issues 1,000 shares of its $20 par value preferred stock for cash at $22 per share. Record

the issuance of the preferred shares.

120.Diane's Designs has two classes of stock authorized: 8%, $10 par preferred and $1 par value common. The following transactions affect stockholders' equity during 2012, its first year of operations:January 1 Issue 200,000 shares of common stock for $15 per share.February 6 Issue 1,000 shares of preferred stock for $11 per share.October 10 Repurchase 10,000 shares of its own common stock for $18 per share.November 12 Reissue 5,000 shares of treasury stock at $20 per share.Record each of these transactions.

121.Oregon Outfitters issues 1,000 shares of $1 par value common stock at $20 per share. Later in the year,

the company decides to repurchase 200 shares at a cost of $22 per share. (1) Record the original issue of the 1,000 shares, (2) Record the repurchase of 200 shares, and (3) Record the entry if Oregon Outfitters reissues the 200 shares of treasury stock at $25 per share.

122.Desert Apparel has 5,000 shares of common stock outstanding. On April 1, the company declares a $2

per share dividend to stockholders of record on April 15. The dividend is paid on April 30. Record all necessary entries on the appropriate dates for cash dividends.

123.On May 15 Canadian Falcon declares a quarterly cash dividend of $0.15 per share payable on June 10 to

all stockholders of record on May 31. Record Canadian Falcon's declaration and payment of cash dividends for its 200,000 shares of common stock.

124.On March 31, the board of directors of Shoeboxes, Inc. declares a 100% stock dividend on its 100,000, $0.01 par, common shares. The market price of Shoeboxes common stock is $30 on March 31. Record the stock dividend.

125.Court Casuals has 100,000 shares of common stock outstanding as of the beginning of 2012 and has the

following transactions affecting stockholders' equity in 2012.May 18 Issues 25,000 additional shares of $1 par value common stock for $40 per share.May 31 Repurchases 5,000 shares of treasury stock for $45 per share.July 1 Declares a cash dividend of $1 per share to all stockholders of record on July 15. Hint: Dividends are not paid on treasury stock.July 31 Pays the cash dividend declared on July 1.August 10 Reissues 2,500 shares of treasury stock purchased on May 31 for $46 per share.Record each of these transactions.

126.Indicate whether each of the following transactions increases (+), decreases (-), or has no effect (NE) on

total assets, total liabilities, and total stockholders' equity.

127.Indicate whether each of the following transactions increases (+), decreases (-), or has no effect (NE) on total assets, total liabilities, and total stockholders' equity.

128.Prom Night Formal Wear has the following stockholders' equity accounts at December 31, 2012: Common

Stock, $1 par value, 2,000,000 shares; Additional Paid-in Capital, $22 million; Retained Earnings, $15 million; and Treasury Stock, 50,000 shares, $1.25 million. Prepare the stockholders' equity section of the balance sheet.

129.Donnie Hilfiger has the following balances in its stockholders' equity accounts on December 31, 2012:

Treasury Stock, $375,000; Common Stock, $350,000; Preferred Stock, $1,200,000; Retained Earnings, $1,675,000; and Additional Paid-in Capital, $3,150,000. Prepare the stockholders' equity section of the balance sheet for Donnie Hilfiger as of December 31, 2012.

130.Court Casuals has the following beginning balances in its stockholders' equity accounts on January 1, 2012: Common Stock, $100,000; Additional Paid-in Capital, $4,100,000; and Retained Earnings, $3,000,000. Net income for the year ended December 31, 2012, is $800,000. Court Casuals has the following transactions affecting stockholders' equity in 2012:May 18 Issues 25,000 additional shares of $1 par value common stock for $40 per share.May 31 Repurchases 5,000 shares of treasury stock for $45 per share.July 1 Declares a cash dividend of $1 per share to all stockholders of record on July 15. Hint: Dividends are not paid on treasury stock.July 31 Pays the cash dividend declared on July 1.August 10 Reissues 2,500 shares of treasury stock purchased on May 31 for $48 per share.Taking into consideration all the entries described above, prepare the statement of stockholders' equity for the year ended December 31, 2012, using the format provided.

131.The financial statements of Heatwave Athletic Wear include the following selected data ($in millions):

Sales, $22,502; Net income $875; Beginning stockholders' equity $3,567; Ending stockholders' equity, $4,102. Calculate the return on equity.

132.The financial statements of Trail Apparel include the following selected data (in millions):

1. Calculate the return on equity for 2013.2. Calculate the return on the market value of equity for 2013.3. Calculate the price-earnings ratio for 2013.

133.Corporations typically do not start raising capital by issuing stock to the general public. What are the

common stages of equity financing leading to an initial public offering (IPO)?

134.Describe the primary advantages and disadvantages of a corporation in comparison to a sole-proprietorship

or partnership.

135.Explain the difference between authorized, issued, and outstanding shares.

136.Explain why preferred stock often is said to have a mixture of attributes somewhere between common stock and bonds.

137.Contrast the effects of a cash dividend and a stock dividend on total assets, total liabilities, and total

stockholders' equity.

138.Listed below are ten terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the best term placing the letter designating the term in the space provided.

1. Dividends Provide additional financing, often in the

millions, for a percentage ownership in the company.

____

2. Statement of stockholders' equity

A mixture of attributes somewhere between common stock and bonds payable.

____

3. Stock split Summarizes the changes in the balance in each stockholders' equity account over a period of time.

____

4. Preferred stock Traces the line of authority for a typical corporation.

____

5. Venture capital firms The portion of the cash proceeds above par value.

____

6. Organization chart

A large stock dividend that includes a reduction in the par or stated value per share.

____

7. Articles of incorporation

Represents all net income, less all dividends, since the company began.

____

8. Retained earnings Distributions by a corporation to its stockholders.

____

9. Additional paid-in capital

Additional shares of the companies' own stock given to stockholders.

____

10. Stock dividends

Describes the nature of the firm's business activities, the shares to be issued, and the composition of the initial board

of directors.

____

139.Match (by letter) the following terms with their definitions. Each letter is used only once.

1. Like an S corporation, but there are no limitations on the number of owners as in an S corporation.

Mutual agency

____

2. Designed to serve as a guide to states in the development of their corporate statutes S Corporation.

____

3. Describe (a) the nature of the firm's business activities, (b) the shares to be issued, and (c) the composition of the initial board of directors

Limited liability

company.

____

4. Allows for legal treatment as a corporation, but tax treatment as a partnership

Model Business

Corporation Act.

____

5. Has stock traded on a stock exchange such as the New York Stock Exchange (NYSE)

Publicly held corporation.

____

6. Individual partners in a partnership have the power to bind the business to a contract.

Double taxation.

____

7. Stockholders can lose no more than the amount they invest in the company

Articles of Incorporation.

____

8. Corporate earnings are taxed twice - at the corporate level and individual stockholder level

Limited liability.

____

140.Match (by letter) the following terms with their definitions. Each letter is used only once.

1. Shares available to sell Angel investors.

____

2. The corporation's own stock that it reacquired Paid-in

capital.

____

3. Shares can be returned to the corporation at a predetermined price

Issued stock.

____

4. Shares actually sold

Authorized stock.

____

5. Wealthy individuals in the business community willing to risk investment funds on a promising business venture

Redeemable.

____

6. The amount invested by stockholders

Cumulative.

____

7. Shares receive priority for future dividends, if dividends are not paid in a given year

Retained earnings.

____

8. Shares held by investors Limited

liability.

____

9. Shareholders can lose no more than the amount they invested in the company

Treasury stock.

____

10. The earnings not paid out in dividends

Outstand

ing stock.

____

141.Match each of the following preferred stock features with its description.

Preferred Stock Features 1. Shares can be exchanged for common stock Convertible. ____ 2. Shares can be sold at a predetermined price Redeemable. ____ 3. Shares receive dividend priority, if dividend not paid Cumulative. ____

142.Match (by letter) the following terms with their definitions. Each letter is used only once. 1. Measures the ability of company management to generate earnings from the resources that owners provide

Statement of stockholders' equity.

____

2. Effectively the same as a 2-for-1 stock split Treasury stock.

____

3. The earnings not paid out in dividends Value stocks.

____

4. A debit balance in retained earnings Retained earnings.

____

5. The stock price divided by earnings per share PE ratio.

____

6. The corporation's own stock that it reacquired

Stockholders' equity section of the balance

sheet.

____

7. Priced low in relation to current earnings Return on equity.

____

8. Summarizes the changes in the balance in each stockholders' equity account over a period of time Growth stocks.

____

9. Priced high in relation to current earnings as investors expect future earnings to be higher 100% stock dividend.

____

10. Shows the balance in each equity account at a point in time Accumulated deficit.

____

Ch10 Key

1. FALSE 2. TRUE 3. FALSE 4. FALSE 5. TRUE 6. TRUE 7. TRUE 8. FALSE 9. TRUE 10. FALSE 11. TRUE 12. FALSE 13. TRUE 14. FALSE 15. TRUE 16. FALSE 17. TRUE 18. TRUE 19. FALSE 20. TRUE 21. TRUE 22. FALSE 23. TRUE 24. TRUE 25. FALSE 26. TRUE 27. FALSE 28. TRUE 29. FALSE 30. TRUE 31. TRUE 32. FALSE

33. TRUE 34. TRUE 35. TRUE 36. FALSE 37. TRUE 38. FALSE 39. TRUE 40. TRUE 41. FALSE 42. TRUE 43. C 44. C 45. C 46. D 47. C 48. B 49. B 50. B 51. B 52. B 53. C 54. D 55. D 56. A 57. B 58. A 59. C 60. D 61. C 62. D 63. D 64. D 65. C 66. C 67. D

68. A 69. D 70. C 71. A 72. B 73. A 74. A 75. D 76. A 77. B 78. A 79. B 80. C 81. D 82. C 83. C 84. B 85. D 86. B 87. D 88. B 89. A 90. D 91. B 92. D 93. C 94. A 95. C 96. D 97. C 98. D 99. A 100. B 101. C 102. A

103. A 104. C 105. B 106. B 107. B 108. C 109. A 110. C 111. B 112. A 113. C 114. A 115. A

116.

117.

118.

119.

120.

121.

122.

123.

124.

125.

126.

127.

128.

129.

130.

131.

132.

133. Most corporations first raise money by selling stock to the founders of the business and their friends and family. As the equity financing needs of the corporation grow, companies prepare a business plan and seek outside investment from "angel" investors and venture capital firms. Angel investors are wealthy individuals in the business community willing to risk investment funds on a promising business venture. Venture capital firms provide additional financing, often in the millions, for a percentage ownership in the company. Many venture capital firms look to invest in promising companies to which they can add value through business contacts, financial expertise, or marketing channels. Most corporations do not consider issuing stock to the general public (going public) until their equity financing needs exceed $20 million. 134. A corporation offers three primary advantages over sole-proprietorships and partnerships. These are (1) limited liability, (2) ability to raise capital, and (3) lack of mutual agency. Because of limited liability, even in the event of bankruptcy, stockholders in a corporation can lose no more than the amount they invested in the company. Because corporations sell ownership interest in the form of shares of stock, ownership rights are easily transferred. An investor can sell his or her ownership interest (shares of stock) at any time and without affecting the structure of the corporation or its operations. Finally, a lack of mutual agency means that individual stockholders cannot legally bind the corporation to a contract.A corporation has two primary disadvantages relative to sole-proprietorships and partnerships. These are (1) additional taxes and (2) more paperwork. Corporations have double taxation. Corporate income is taxed once on earnings at the corporate level, and again on dividends at the individual level. Corporations also have more paperwork as federal and state governments impose extensive reporting requirements on the company. 135. Authorized stock is the total number of shares available to sell, stated in the company's articles of incorporation. Issued stock is the number of shares that have been sold to investors. A company usually does not issue all its authorized stock. Outstanding stock is the number of shares held by investors. Issued and outstanding are the same amounts as long as the corporation has not repurchased any of its shares. Repurchased shares, called treasury stock, are included as part of shares issued, but excluded from shares outstanding. 136. Investors in common stock are the owners of the corporation because they have voting rights. Investors in bonds are creditors who have loaned money to the corporation. Preferred stock fits somewhere between common stock and bonds. There are other factors where preferred stock falls in the middle between common stock and bonds. For example, the risk and expected return are greatest for investments in common stock followed by preferred stock and then bonds. In contrast, preference for payments of interest and dividends are given first to bonds, then preferred stock, and then common stock. 137. Declaration and payment of a cash dividend reduces total assets and total stockholders' equity. Declaration and payment of a stock dividend has no effect on total assets, total liabilities, and total stockholders' equity. 138. Venture capital firms :: Provide additional financing, often in the millions, for a percentage ownership in the company. and Preferred stock :: A mixture of attributes somewhere between common stock and bonds payable. and Statement of stockholders' equity :: Summarizes the changes in the balance in each stockholders' equity account over a period of time. and Organization chart :: Traces the line of authority for a typical corporation. and Additional paid-in capital :: The portion of the cash proceeds above par value. and Stock split :: A large stock dividend that includes a reduction in the par or stated value per share. and Retained earnings :: Represents all net income, less all dividends, since the company began. and Dividends :: Distributions by a corporation to its stockholders. and Stock dividends :: Additional shares of the companies' own stock given to stockholders. and Articles of incorporation :: Describes the nature of the firm's business activities, the shares to be issued, and the composition of the initial board of directors. 139. Individual partners in a partnership have the power to bind the business to a contract. :: Mutual agency and Allows for legal treatment as a corporation, but tax treatment as a partnership :: S Corporation. and Like an S corporation, but there are no limitations on the number of owners as in an S corporation. :: Limited liability company. and Designed to serve as a guide to states in the development of their corporate statutes :: Model Business Corporation Act. and Has stock traded on a stock exchange such as the New York Stock Exchange (NYSE) :: Publicly held corporation. and Corporate earnings are taxed twice - at the corporate level and individual stockholder level :: Double taxation. and Describe (a) the nature of the firm's business activities, (b) the shares to be issued, and (c) the composition of the initial board of directors :: Articles of Incorporation. and Stockholders can lose no more than the amount they invest in the company :: Limited liability. 140. Wealthy individuals in the business community willing to risk investment funds on a promising business venture :: Angel investors. and The amount invested by stockholders :: Paid-in capital. and Shares actually sold :: Issued stock. and Shares available to sell :: Authorized stock. and Shares can be returned to the corporation at a predetermined price :: Redeemable. and Shares receive priority for future dividends, if dividends are not paid in a given year :: Cumulative. and The earnings not paid out in dividends :: Retained earnings. and Shareholders can lose no more than the amount they invested in the company :: Limited liability. and The corporation's own stock that it reacquired :: Treasury stock. and Shares held by investors :: Outstanding stock.

141. Shares can be exchanged for common stock :: Convertible. and Shares can be sold at a predetermined price :: Redeemable. and Shares receive dividend priority, if dividend not paid :: Cumulative. 142. Summarizes the changes in the balance in each stockholders' equity account over a period of time :: Statement of stockholders' equity. and The corporation's own stock that it reacquired :: Treasury stock. and Priced low in relation to current earnings :: Value stocks. and The earnings not paid out in dividends :: Retained earnings. and The stock price divided by earnings per share :: PE ratio. and Shows the balance in each equity account at a point in time :: Stockholders' equity section of the balance sheet. and Measures the ability of company management to generate earnings from the resources that owners provide :: Return on equity. and Priced high in relation to current earnings as investors expect future earnings to be higher :: Growth stocks. and Effectively the same as a 2-for-1 stock split :: 100% stock dividend. and A debit balance in retained earnings :: Accumulated deficit.

Ch10 Summary


AACSB: Analytic 39





AICPA: Reporting 32

Blooms: Analysis 34




Difficulty: Easy 38

Difficulty: Hard 20


Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. 23

Learning Objective: 10-02 Record the issuance of common stock. 25

Learning Objective: 10-03 Contrast preferred stock with common stock and bonds payable. 21

Learning Objective: 10-04 Account for treasury stock. 26

Learning Objective: 10-05 Describe retained earnings and record cash dividends. 22

Learning Objective: 10-06 Explain the effect of stock dividends and stock splits. 14

Learning Objective: 10-07 Prepare and analyze the stockholders equity section of a balance sheet and the statement of stockholders equity.

18

Learning Objective: 10-08 Evaluate company performance using information on stockholders equity. 16


Ch11Student: ___________________________________________________________________________

1. A statement of cash flows provides a summary of cash inflows and cash outflows during the reporting period. True False

2. The three primary categories of cash flows are cash flows from operating activities, cash flows from

investing activities, and cash flows from financing activities. True False

3. Financing activities include cash receipts and cash payments for transactions relating to revenue and

expense activities. True False

4. Investing activities include cash transactions involving the purchase and sale of long-term assets and

current investments. True False

5. Operating activities are both inflows and outflows of cash resulting from the external financing of a

business. True False

6. We report interest and dividends received from investments with investing activities.

True False

7. We report interest paid on bonds or notes payable with operating activities rather than financing activities.

True False

8. We record dividends received as a financing activity.

True False

9. We record dividends paid as a financing activity.

True False

10. Transactions that don't increase or decrease cash, but that result in significant investing and financing

activities, are reported either directly after the cash flow statement or in a separate note to the financial statements as noncash activities. True False

11. The purchase of long-term assets by issuing debt is recorded as both an investing activity and a financing activity. True False

12. The total net cash flows from operating activities differ between the direct and indirect methods.

True False

13. Using the indirect method, we begin with net income and then list adjustments to net income in order to

arrive at operating cash flows. True False

14. Using the direct method we adjust the items on the income statement to directly show the cash inflows and

outflows from operations. True False

15. Since depreciation expense reduces net income, companies will add depreciation expense back to net

income as a step in arriving at net cash flows from operations under the indirect method. True False

16. We need to add back to net income any loss on sale of long-term assets in the operating section of the

statement of cash flows in order to eliminate the noncash component of net income. True False

17. A gain on the sale of long-term assets is added to net income to arrive at net cash flows from operating

activities under the indirect method. True False

18. Under the indirect method, a decrease in accounts receivable is added to net income to arrive at net cash

flows from operating activities. True False

19. Under the indirect method, an increase in prepaid rent is added to net income to arrive at net cash flows

from operating activities. True False

20. Under the indirect method, an increase in inventory is added to net income and a decrease in inventory is

subtracted from net income to arrive at net cash flows from operating activities. True False

21. When preparing a statement of cash flows using the indirect method, a decrease in accounts payable is

subtracted from net income. True False

22. Under the indirect method, an increase in accounts payable is added to net income to arrive at net cash flows from operating activities. True False

23. Under the indirect method, a decrease in accounts payable is added to net income to arrive at net cash flows

from operating activities. True False

24. The long-term assets section of the balance sheet is the place to look for investing activities.

True False

25. The sale of land is reported in the operating section of the statement of cash flows.

True False

26. We report the purchase of stock in another corporation as a cash outflow from investing activities.

True False

27. We report the actual amount of cash proceeds received from the sale of land as a cash inflow from

investing activities. True False

28. If no cash was exchanged in the purchase of equipment financed entirely with a note payable, we represent

this as both an investing activity and a financing activity in the statement of cash flows. True False

29. We can find most financing activities by examining changes in long-term liabilities and stockholders'

equity accounts. True False

30. The inflow of cash received from issuing common stock is reported as an investing activity.

True False

31. The balance in Retained Earnings is increased by net income and is decreased by dividends.

True False

32. We report the payment of cash dividends as a cash outflow from investing activities.

True False

33. The total of the cash flows from operating, investing, and financing activities equals the net increase or

decrease in cash for the year. True False

34. We calculate cash return on assets as the change in cash divided by average total assets. True False

35. Cash return on assets indicates the amount of operating cash flow generated for each dollar invested in

assets. True False

36. To maximize cash flow from operations, a company strives to increase both cash flows per dollar of sales

and sales per dollar of assets invested. True False

37. Cash return on assets can be separated to examine two important business strategies: cash flow to sales and

asset turnover. True False

38. Income statement items that have no cash effect are still reported under the direct method.

True False

39. If accounts receivable decreases, this indicates that revenues exceed cash receipts from customers.

True False

40. When accounts payable decrease, cash paid to suppliers must have been more than purchases.

True False

41. If there are no current assets or liabilities associated with operating expenses, the amounts we report for

these expenses in the income statement must equal the amount of cash we paid for these items. True False

42. Depreciation expense is not reported on the statement of cash flows under the direct method.

True False

43. We add an increase in interest payable to interest expense in arriving at cash paid for interest under the

direct method. True False

44. We add a decrease in income tax payable to income tax expense to calculate cash paid for income taxes.

True False

45. The indirect method begins with net income, while the direct method considers each of the individual

accounts that make up net income. True False

46. The Statement of Cash Flows:


47. The purchase of landis classified in the statement of cash flows as a(n):

A. Operating activity.B. Investing activity.C. Financing activity.D. Noncash activity.

48. The issuance of notes payable for borrowing is classified in the statement of cash flows as a(n):


49. The purchase of treasury stock is classified in the statement of cash flows as a(n):


50. Operating cash flows exclude:

A. Interest received.B. Interest paid.C. Dividends received.D. Dividends paid.

51. The statement of cash flows reports cash flows from the activities of:

A. Operating, purchasing, and investing.B. Borrowing, paying, and investing.C. Operating, investing, and financing.D. Using, investing, and financing.

52. Which one of the following is correct about the statement of cash flows?


53. Which of the following is correct about the statement of cash flows?


54. All classifications on the Balance Sheet have a general relationship with sections identified on the

Statement of Cash Flows. Indicate which relationships are correctly identified in the table below.


55. Under what section of the Statement of Cash Flows would you classify dividends paid on common stock?


56. Under what section of the Statement of Cash Flows would you classify the purchase of equipment by issuing a long-term note payable?


57. Which of the following transactions would not create a cash flow?


58. Which of the following is an example of a noncash activity?

A. Sale of land for less than its cost.B. Purchase of land by issuing debt.C. Sale of land for more than its cost.D. Purchase of land using cash proceeds from issuance of common stock.

59. Which of the following is not true regarding cash flows?


60. Dividends received from an investment is classified as a(an) __________ cash flow, and paying dividends

on stock issued is classified as a(an) ____________ cash flow on the Statement of Cash Flows.


61. The collection of cash from customers would be classified as which type of cash flow on the Statement of Cash Flows?


62. The indirect and direct methods:

A. are used by companies about equally in actual practice.B. affect the presentations of operating, investing, and financing activities.C. arrive at different amounts for net cash flows from operating activities.D. are two allowable methods to present operating activities in the statement of cash flows.

63. In the operating activities section of the statement of cash flows, we start with net income when using:

A. the direct method.B. the indirect method.C. both the direct and the indirect method.D. neither the direct nor the indirect method.

64. Arrow Printers paid $2,000 interest on short-term notes payable, $10,000 interest on long-term bonds, and

$6,000 in dividends on its common stock. Arrow would report cash outflows from activities, as follows: A. Operating, $2,000; Financing $16,000.B. Operating, $0; Financing $18,000.C. Operating, $12,000; Financing $6,000.D. Operating, $18,000; Financing $0.

Bad Brad's BBQ had cash flows for the year as follows ($ in millions):

65. Bad Brad's would report net cash inflows (outflows) from operating activities in the amount of: A. $(80).B. $120.C. $200.D. $420.

66. Bad Brad's would report net cash inflows (outflows) from investing activities in the amount of:

A. $(4,000).B. $100.C. $(3,900).D. $(1,900).

67. Bad Brad's would report net cash inflows (outflows) from financing activities in the amount of:

A. $1,100.B. $(1,100).C. $820.D. $900.

68. We can identify operating activities from income statement information and changes in

A. Long-term asset accounts.B. Long-term liability accounts.C. Current asset and current liability accounts.D. Stockholders' equity accounts.

69. In preparing a statement of cash flows under the indirect method, a decrease in accounts receivable would

be reported or included as a(n): A. Option aB. Option bC. Option cD. Option d

70. In preparing a statement of cash flows under the indirect method, an increase in accounts payable would be

reported as a(n):


71. Which of the following is NOT a correct practice when adjusting net income to net operating cash flows?


72. Which of the following is added to net income as an adjustment under the indirect method of preparing the

statement of cash flows? A. Salaries payable increase.B. Gain on the sale of land.C. Inventory increase.D. Accounts receivable increase.

73. Which of the following is deducted from net income as an adjustment under the indirect method of

preparing the statement of cash flows? A. Salaries payable decrease.B. Inventory decrease.C. Depreciation expense.D. Accounts receivable decrease.

74. Given the items below, which of the following is a subtraction from net income to arrive at Operating Cash

Flows using the indirect method?


75. Rachel's Recordings reported net income of $200,000. Beginning balances in Accounts Receivable and

Accounts Payable were $15,000 and $20,000, respectively. Ending balances in these accounts were $12,000 and $22,000, respectively. Assuming that all relevant information has been presented, Rachel's cash flows from operating activities would be: A. $200,000.B. $195,000.C. $205,000.D. $199,000.

76. Mary's Music Store reported net income of $135,000. Beginning balances in Accounts Receivable and Accounts Payable were $29,000 and $26,000, respectively. Ending balances in these accounts were $30,000 and $24,000, respectively. Assuming that all relevant information has been presented, Mary's cash flows from operating activities would be: A. $132,000.B. $134,000.C. $136,000.D. $138,000.

77. Kela Corporation reports net income of $450,000 that includes depreciation expense of $70,000. Also, cash

of $50,000 was borrowed on a 5-year note payable. Based on this data, total cash inflows from operating

activities are: A. Option aB. Option bC. Option cD. Option d

78. Assume net income was $100,000, depreciation expense was $8,000, accounts receivable decreased by

$7,500, and accounts payable decreased by $2,500. The amount of cash flows from operating activities is:


79. Nevada Boot Co. reported net income of $205,000 Beginning and ending Inventory balances were $40,000

and $45,000, respectively. Accounts Payable balances at the beginning and end of the year were $35,000 and $33,000, respectively. Assuming that all relevant information has been presented, Nevada Boot would report operating cash flows of: A. $202,000.B. $198,000.C. $212,000.D. $205,000.

80. Lense Laboratories' net income was $250,000. Given the account information below, what is the net operating cash flows for Lense Laboratories?


81. Allen Company's income statement reported total revenues, $850,000 and total expenses (including

$40,000 depreciation) of $720,000. The balance sheet reported the following: Accounts Receivable—beginning balance, $50,000 and ending balance, $60,000; Accounts Payable—beginning balance, $22,000 and ending balance, $28,000. Therefore, based only on this information, the net cash inflows from

operating activities were: A. Option aB. Option bC. Option cD. Option d

82. Assuming Net Income for the year is $115,000, what is the Operating Cash Flows given the following

information:


83. Which of the following statements is true?


84. Which of the following is an example of a cash outflow from an investing activity? A. Payment of cash for treasury stock.B. Payment of cash for the purchase of land.C. Payment of cash for inventory.D. Payment on a long-term note payable.

85. Which of the following is an example of a cash inflow from a financing activity?

A. Issuance of bonds.B. Sale of an intangible asset.C. Receipt of cash dividends.D. Purchase of land.

86. _________ is an investing cash flow and ________ is a financing cash flow, as reported on the Statement

of Cash Flows.


87. Cash flows from investing activities do not include cash flows from:

A. Lending.B. The sale of equipment.C. Borrowing.D. The purchase of land and buildings.

88. Cash flows from financing activities include:

A. Interest received.B. Interest paid.C. Dividends received.D. Dividends paid.

89. Cash flows from investing activities do not include:

A. Proceeds from the sale of land.B. Proceeds from the issuance of common stock.C. Proceeds from the sale of marketable securities.D. Cash outflows from acquiring land.

90. Shively Mfg. Co. sold land costing $10,000 for $12,000. Shively would report:

A. Operating cash inflows of $12,000.B. Investing cash inflows of $12,000.C. Financing cash inflows of $12,000.D. Financing cash inflows of $2,000.

91. During 2012, Smithson Corp. had the following cash flows: receipt from customers, $10,000; receipt from the bank for long-term borrowing, $6,000; payment to suppliers, $5,000; payment of dividends, $1,000, payment to workers, $2,000; and payment for machinery, $8,000. What amount would be reported for

investing cash flows on the Statement of Cash Flows? A. Option aB. Option bC. Option cD. Option d

92. During 2012, Smithson Corp. had the following cash flows: receipt from customers, $10,000; receipt from

the bank for long-term borrowing, $6,000; payment to suppliers, $5,000; payment of dividends, $1,000, payment to workers, $2,000; and payment for machinery, $8,000. What amount would be reported for financing cash flows on the Statement of Cash Flows?


93. Cash paid for financing activities would include cash paid for:


94. Cash received from issuing common stock would be classified in which section of the Statement of Cash

Flows?


95. Which of the following would be classified as an investing cash flow?


96. During 2012, Victoria Group: (1) received cash of $5,000 billed to a customer in 2011; (2) earned $20,000

of net income; (3) paid interest of $6,000 on a corporate bond issued; (4) paid dividends of $8,000 to its stockholders; (5) borrowed $40,000 from a local bank; and (6) purchased its own shares of common stock

for $10,000. What is Victoria Group's cash flow from financing activities in 2012? A. Option aB. Option bC. Option cD. Option d

97. The following information pertains to Alpha Computing at the end of 2012:

Alpha Computing's Retained Earnings account had a zero balance at the beginning of 2012.

What amount of dividends did the company pay in 2012? A. Option aB. Option bC. Option cD. Option d

98. The balance sheet of Sound Designs reports total assets of $750,000 and $800,000 at the beginning and end

of the year, respectively. Sales revenues are $1.5 million ($1.2 million in the previous year), net income is $150,000, and net cash flows from operating activities are $175,000. What is Sound Designs' cash return on assets?


99. The balance sheet of Sound Designs reports total assets of $750,000 and $800,000 at the beginning and end of the year, respectively. Sales revenues are $1.5 million ($1.2 million in the previous year), net income is $150,000, and net cash flows from operating activities are $175,000. What is Sound Designs' cash flow to sales?


100.The balance sheet of Sound Designs reports total assets of $750,000 and $800,000 at the beginning and end

of the year, respectively. Sales revenues are $1.5 million ($1.2 million in the previous year), net income is $150,000, and net cash flows from operating activities are $175,000. What is Sound Designs' asset turnover?


101.The balance sheet of Tech Track reports total assets of $400,000 and $500,000 at the beginning and end

of the year, respectively. Sales revenues are $1.1 million ($0.8 million in the previous year), net income is $40,000, and net cash flows from operating activities are $50,000. How does Tech Track's cash return on

assets compare to the industry average of 10%? A. Option aB. Option bC. Option cD. Option d

102.The balance sheet of Tech Track reports total assets of $400,000 and $500,000 at the beginning and end of the year, respectively. Sales revenues are $1.1 million ($0.8 million in the previous year), net income is $40,000, and net cash flows from operating activities are $50,000. How does Tech Track's cash flow to sales ratio compare to the industry average of 5%?


103.The balance sheet of Tech Track reports total assets of $400,000 and $500,000 at the beginning and end

of the year, respectively. Sales revenues are $1.1 million ($0.8 million in the previous year), net income is $40,000, and net cash flows from operating activities are $50,000. How does Tech Track's asset turnover compare to the industry average of 2.4 times?


104.We can separate cash return on assets into:

A. Cash flow to sales and return on assets.B. Cash flow to sales and asset turnover.C. Cash flow to sales and profit margin.D. Profit margin and asset turnover.

105.We calculate cash return on assets as

A. The change in cash divided by average total assets.B. Net cash flows from operating activities divided by average total assets.C. The change in cash divided by ending total assets.D. Met cash flows from operating activities divided by ending total assets.

106.Which of the following statements is not true relating to cash flow analysis?

A. Cash return on assets indicates the amount of operating cash flow generated for each dollar invested in

assets.B.

To maximize cash flow from operations, a company strives to increase both cash flow per dollar of sales and sales per dollar of assets invested.

C. Cash return on assets can be separated to examine two important business strategies: cash flow to sales and asset turnover.

D. Positive cash flow from operations is not important to a company's survival in the long-run.

107.The balance sheet of Storage Solutions reports total assets of $300,000 and $350,000 at the beginning and end of the year, respectively. The cash return on assets for the year is 10%. What is Storage Solutions' net cash flows from operating activities for the year?


108.In 2012, Hope Company incurred sales on account of $100,000. The company also has the following

information:

What is the amount of cash received from customers for Hope Company in 2012? A. Option aB. Option bC. Option cD. Option d

109.Wireless Technologies reports sales of $50 million. Accounts receivable at the beginning and end of the

year are $5 million and $7 million, respectively. What is the amount of cash received from customers? A. $50 million.B. $52 million.C. $48 million.D. $55 million.

110.Wireless Technologies reports cost of goods sold of $40 million. Inventory at the beginning and end of the

year are $4 million and $3 million, respectively. Accounts payable at the beginning and end of the year are $3 million and $6 million, respectively. What is the amount of cash paid to suppliers? A. $40 million.B. $36 million.C. $44 million.D. $42 million.

111.Wireless Technologies reports operating expenses of $2 million. Operating expenses include rent expense.

Prepaid rent at the beginning and end of the year are $20,000 and $70,000, respectively. All other operating expenses were paid in cash as incurred. What is the amount of cash paid for operating expenses? A. $2,000,000.B. $2,070,000.C. $1,950,000.D. $2,050,000.

112.Wireless Technologies reports income tax expense of $800,000. Income tax payable at the beginning and end of the year are $50,000 and $70,000, respectively. What is the amount of cash paid for income taxes? A. $780,000.B. $800,000.C. $820,000.D. $870,000.

113.Data Solutions reports sales of $100 million. Accounts receivable at the beginning and end of the year are

$6 million and $9 million, respectively. What is the amount of cash received from customers? A. $100 million.B. $103 million.C. $97 million.D. $109 million.

114.Data Solutions reports cost of goods sold of $75 million. Inventory at the beginning and end of the year

are $8 million and $9 million, respectively. Accounts payable at the beginning and end of the year are $5 million and $3 million, respectively. What is the amount of cash paid to suppliers? A. $78 million.B. $72 million.C. $75 million.D. $76 million.

115.Data Solutions reports operating expenses of $5 million. Operating expenses include rent expense. Prepaid

rent at the beginning and end of the year are $120,000 and $80,000, respectively. All other operating expenses were paid in cash as incurred. What is the amount of cash paid for operating expenses? A. $5,000,000.B. $5,040,000.C. $4,960,000.D. $5,080,000.

116.Data Solutions reports income tax expense of $1,700,000. Income taxes payable at the beginning and end

of the year are $250,000 and $370,000, respectively. What is the amount of cash paid for income taxes? A. $1,700,000.B. $1,820,000.C. $2,070,000.D. $1,580,000.

117.Schneider Inc. purchases its inventory from suppliers on account. During the year, its Inventory account

increased by $10 million and its accounts payable to suppliers decreased by $3 million. Cost of goods sold was $440 million, its cash outflows to inventory suppliers totaled: A. $453 million.B. $447 million.C. $433 million.D. $427 million.

118.A company's Income Tax Payable account decreased from $14 million to $12 million during the year. If its income tax expense was $80 million, what would be shown as cash paid for income taxes under the direct method? A. A cash outflow of $12 million.B. A cash outflow of $78 million.C. A cash outflow of $80 million.D. A cash outflow of $82 million.

119.Which of the following items is not reported in the operating section of the statement of cash flows using

the direct method? A. Depreciation expense.B. Cash paid to suppliers.C. Cash received from customers.D. Cash paid for income taxes.

120.Which of the following items is reported in the statement of cash flows using the direct method?

A. Depreciation expense.B. Gain on sale of an asset.C. Cash received from customers.D. Loss on sale of an asset.

121.Classify each of the following items as an operating, investing, or financing activity.

1. Dividends paid.2. Sale of goods or services for cash.3. Sale of equipment.4. Purchase of inventory.5. Repayment of notes payable.

122.Classify each of the following items as an operating, investing, or financing activity.

1. Payment of income taxes.2. Sale of investments.3. Receipt of interest.4. Issuance of common stock.5. Purchase of intangibles.

123.The following selected transactions occur during the first year of operations. Determine how each should be reported in the statement of cash flows. State whether it is a cash inflow or a cash outflow and whether it is an operating, investing, or financing activity.1. Issued a million shares of common stock at $20 per share.2. Purchased land and a building for $3 million.3. Received $200,000 from a cash sale of merchandise to customers.4. Paid a dividend of $1 per share to common stockholders.5. Loaned $50,000 to an employee and accepted a note receivable.

124.Analysis of an income statement, balance sheets, and additional information from the accounting records of

Gaming Strategies reveal the following items:1. Collection of notes receivable.2. Purchase of equipment.3. Exchange of long-term assets.4. Decrease in accounts payable.5. Payment of dividends.6. Purchase of a patent.7. Depreciation expense.8. Decrease in accounts receivable.9. Issuance of note payable.10. Increase in inventory.Indicate in which section of the statement of cash flows each of these items would be reported: operating activities (indirect method), investing activities, financing activities, or noncash activities.

125.Place the following items in the correct order as they would appear in the statement of cash flows:1. Beginning cash balance2. Ending cash balance3. Investing activities4. Financing activities5. Net increase (decrease) in cash6. Operating activities

126.Electronic Wonders reports net income of $95,000. The accounting records reveal Depreciation Expense

of $50,000 as well as increases in Prepaid Rent, Accounts Payable, and Income Tax Payable of $40,000, $23,000, and $20,000, respectively. Prepare the operating activities section of Electronic Wonders' statement of cash flows using the indirect method.

127.Micro Manufacturing reports net income of $850,000. Depreciation Expense is $60,000, Accounts

Receivable increases $30,000 and Accounts Payable decreases $10,000. Calculate net cash flows from operating activities using the indirect method.

128.Fidelity Systems reports net income of $80 million. Included in that number is depreciation expense of $8 million, and a gain on the sale of equipment of $1 million. Records reveal increases in Accounts Receivable, Inventory, and Accounts Payable of $4 million, $3 million, and $2 million, respectively. Calculate Fidelity's net cash flows from operating activities.

129.Alpha Computers reports net income of $44 million. Included in that number are depreciation expense of

$7 million and a loss on the sale of land of $2 million. Records reveal decreases in Accounts Receivable, Inventory, and Accounts Payable of $4 million, $3 million, and $2 million, respectively. Calculate Alpha Computers' net cash flows from operating activities.

130.Portions of the financial statements for Horizon Telecom are provided below.

Prepare the operating activities section of the statement of cash flows for Horizon Telecom using the indirect method.

131.Mobile Video Systems sold land, investments, and issued their own common stock for $10 million, $15

million, and $20 million, respectively. Mobile Video also purchased treasury stock, equipment, and a patent for $2 million, $4 million, and $6 million, respectively. What amount should the company report as net cash flows from investing activities? What amount should the company report as net cash flows from financing activities?

132.Nathan Herrmann has completed the basic format to be used in preparing the statement of cash flows (indirect method) for CEO Consultants.

Listed below in random order are line items to be included in the statement of cash flows.Purchase of equipment $220,000Increase in inventory 30,000Increase in prepaid rent 10,000Payment of dividends 40,000Depreciation expense 20,000Increase in accounts receivable 60,000Increase in accounts payable 10,000Loss on sale of land 7,000Net income 70,000Repayment of notes payable 50,000Cash received from the sale of land 3,000Issuance of common stock 250,000Prepare the statement of cash flows for CEO Consultants using the indirect method.

133.Lowes and Home Depot report the following information in their 2010 annual financial statements ($in

millions):

Calculate Lowe's and Home Depot's cash return on assets, cash flow to sales ratio, and asset turnover ratio for 2010. Which company has the better cash flow to sales ratio and which company has the better asset turnover ratio?

134.The balance sheet of Integrated Systems reports total assets of $890,000 and $950,000 at the beginning and

end of the year, respectively. Sales revenues are $1.6 million, net income is $185,000, and net cash flows from operating activities are $155,000. Calculate the cash return on assets, cash flow to sales, and asset turnover for Integrated Systems.

135.The balance sheet of The Computer Doctor reports total assets of $160,000 and $220,000 at the beginning

and end of the year, respectively. The cash return on assets for the year is 10%. Calculate The Computer Doctor's net cash flows from operating activities for the year.

136.Discount Computers' accounts receivable increases during the year by $3 million. What is the amount of cash received from customers during the reporting period if its sales are $47 million?

137.Laser Solutions' inventory decreases during the year by $8 million and its accounts payable to suppliers

increases by $6 million during the same period. What is the amount of cash paid to suppliers of merchandise during the reporting period if its cost of goods sold is $81 million?

138.Freedom Wireless reports operating expenses of $255,000. Operating expenses include both rent expense

and salaries expense. Prepaid rent decreases during the year by $10,000 and salaries payable increases by $25,000. What is the cash paid for operating expenses during the year?

139.Wilson Electric reports income tax expense of $150,000. Income tax payable at the beginning and end of

the year are $20,000 and $25,000, respectively. What is the cash paid for income taxes during the year?

140.Portions of the financial statements for Horizon Telecom are provided below.

Prepare the operating activities section of the statement of cash flows for Horizon Telecom using the direct method.

141.Identify and briefly describe the three categories of cash flows reported in the statement of cash flows.

142.Distinguish between the indirect method and the direct method for reporting net cash flows from operating activities. Which method is more common in practice? Which method provides a more logical presentation of cash flows?

143.Highland Park Homes reports net income of $300,000, and yet its net cash flow from operating activities is

a negative $200,000 during the same period. Is this possible? Explain.

144.A $10,000 investment on the books of the company is sold for $11,000. How does this transaction affect

operating, investing, and financing activities under the indirect method?

145.Explain the difference in the calculation of return on assets and cash return on assets. How can cash-based

ratios supplement the analysis of ratios based on income statement and balance sheet information?

146.Listed below are ten terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the best term placing the letter designating the term in the space provided.

1. Indirect method

Begins with net income and then list adjustments to net income in order to arrive at operating cash flows.

____

2. Investing activities

Significant investing and financing activities that do not affect cash.

____

3. Statement of cash flows

Sales revenue divided by average total assets; measures the sales revenue generated per dollar of assets.

____

4. Noncash activities

Includes cash receipts and cash payments for transactions relating to revenue and expense activities.

____

5. Financing activities

Net cash flows from operating activities divided by average total assets; measures the operating cash flow generated per dollar

of assets.

____

6. Cash return on assets

A summary of cash inflows and cash outflows during the reporting period sorted by operating, investing, and financing

activities.

____

7. Direct method

Net cash flows from operating activities divided by sales revenue; measures the operating cash flow generated per dollar of

sales.

____

8. Operating activities

Includes cash transactions resulting from the external financing of a business.

____

9. Cash flow to sales

Includes cash transactions involving the purchase and sale of long-term assets and current investments.

____

10. Asset turnover

Adjusts the items on the income statement to show items such as cash received from customers, and cash paid for inventory,

salaries, rent, interest and taxes.

____

147.For each of the following ten transactions, indicate by letter whether the cash effect of each transaction is reported in a statement of cash flows as an operating (O), investing (I), financing (F), or noncash (NC) activity. Also, indicate whether the transaction is a cash inflow (CI), cash outflow (CO), or no effect on cash (NE). The first answer is provided as an example.

Answer:

148.For each of the following five transactions, indicate by letter whether the cash effect of each transaction

is reported in a statement of cash flows as an operating (O), investing (I), financing (F), or noncash (NC) activity.

Answer:

149.For each of the following five transactions, indicate by letter whether the cash effect of each transaction is reported in a statement of cash flows as an operating (O), investing (I), financing (F), or noncash (NC) activity.

Answer:

150.For each of the following five transactions, indicate by letter whether the cash effect of each transaction

is reported in a statement of cash flows as an operating (O), investing (I), financing (F), or noncash (NC) activity.

Answer:

Ch11 Key

1. TRUE 2. TRUE 3. FALSE 4. TRUE 5. FALSE 6. FALSE 7. TRUE 8. FALSE 9. TRUE 10. TRUE 11. FALSE 12. FALSE 13. TRUE 14. TRUE 15. TRUE 16. TRUE 17. FALSE 18. TRUE 19. FALSE 20. FALSE 21. TRUE 22. TRUE 23. FALSE 24. TRUE 25. FALSE 26. TRUE 27. TRUE 28. FALSE 29. TRUE 30. FALSE 31. TRUE 32. FALSE

33. TRUE 34. FALSE 35. TRUE 36. TRUE 37. TRUE 38. FALSE 39. FALSE 40. TRUE 41. TRUE 42. TRUE 43. FALSE 44. TRUE 45. TRUE 46. C 47. B 48. C 49. C 50. D 51. C 52. C 53. C 54. C 55. C 56. D 57. B 58. B 59. A 60. B 61. C 62. D 63. B 64. C 65. B 66. C 67. D

68. C 69. A 70. A 71. A 72. A 73. A 74. A 75. C 76. A 77. C 78. D 79. B 80. C 81. B 82. B 83. C 84. B 85. A 86. B 87. C 88. D 89. B 90. B 91. D 92. A 93. D 94. C 95. C 96. C 97. C 98. C 99. B 100. D 101. A 102. B

103. C 104. B 105. B 106. D 107. C 108. C 109. C 110. B 111. D 112. A 113. C 114. A 115. C 116. D 117. A 118. D 119. A 120. C 121. 1. Financing Activity.2. Operating Activity.3. Investing Activity.4. Operating Activity.5. Financing Activity. 122. 1. Operating Activity.2. Investing Activity.3. Operating Activity.4. Financing Activity.5. Investing Activity. 123. 1. Cash inflow, Financing activity.2. Cash outflow, Investing activity.3. Cash inflow, Operating activity.4. Cash outflow, Financing activity.5. Cash outflow, Investing activity.

124. 1. Investing activities.2. Investing activities.3. Noncash activities.4. Operating activities.5. Financing activities.6. Investing activities.7. Operating activities.8. Operating activities.9. Financing activities.10. Operating activities. 125. Operating activitiesInvesting activitiesFinancing activitiesNet increase (decrease) in cashBeginning cash balanceEnding cash balance

126.

127.

128.

129.

130.

131.

132.

133.

Lowes has a better (higher) cash flow to sales ratio, while Home Depot has a better (higher) asset turnover.

134.

135. Operating Cash Flow = .10 * [($160,000 + $220,000) ¸ 2] = $19,000.

136.

137.

138.

139.

140.

141. The three categories of cash flows are operating activities, investing activities, and financing activities. Operating activities include cash receipts and cash payments for transactions relating to revenue and expense activities, essentially the very same activities reported on the income statement. Investing activities include cash transactions involving the purchase and sale of long-term assets and current investments. Financing activities are cash flows resulting from the external financing of a business such as long-term liabilities and stockholders' equity. 142. Using the indirect method, we begin with net income and then list adjustments to net income in order to arrive at operating cash flows. Using the direct method, we adjust the items on the income statement to directly show the cash inflows and outflows from operations such as cash received from customers, and cash paid for inventory, salaries, rent, interest and taxes. The indirect method is more common in practice, while the direct method provides a more logical presentation of cash flows. 143. It is possible to report net income and negative operating cash flows at the same time. Increases in current assets and decreases in current liabilities both result in net income that is higher than operating cash flows. As one specific example, an increase in accounts receivable of $500,000 would result in net income exceeding operating cash flows by $500,000. 144. The $1,000 gain on sale of the investment is subtracted from net income in arriving at net operating cash flows. The sale of the investment is also reported as an $11,000 increase to cash flows from investing activities. This transaction has no effect on financing activities. 145. Return on assets has net income in the numerator while cash return on assets has cash flows from operations in the numerator. Both ratios divide by average total assets. Analysts often supplement their investigation of income statement and balance sheet amounts with cash flow ratios. Some cash flow ratios are derived by substituting net cash flows from operating activities in place of net income. Cash flow ratios offer additional insight in the evaluation of a company's profitability and financial strength. 146. Indirect method :: Begins with net income and then list adjustments to net income in order to arrive at operating cash flows. and Noncash activities :: Significant investing and financing activities that do not affect cash. and Asset turnover :: Sales revenue divided by average total assets; measures the sales revenue generated per dollar of assets. and Operating activities :: Includes cash receipts and cash payments for transactions relating to revenue and expense activities. and Cash return on assets :: Net cash flows from operating activities divided by average total assets; measures the operating cash flow generated per dollar of assets. and Statement of cash flows :: A summary of cash inflows and cash outflows during the reporting period sorted by operating, investing, and financing activities. and Cash flow to sales :: Net cash flows from operating activities divided by sales revenue; measures the operating cash flow generated per dollar of sales. and Financing activities :: Includes cash transactions resulting from the external financing of a business. and Investing activities :: Includes cash transactions involving the purchase and sale of long-term assets and current investments. and Direct method :: Adjusts the items on the income statement to show items such as cash received from customers, and cash paid for inventory, salaries, rent, interest and taxes. 147.

148. 149. 150.

Ch11 Summary


AACSB: Analytic 50





AICPA: Reporting 110

Blooms: Analysis 50




Difficulty: Easy 27

Difficulty: Hard 19


Learning Objective: 11-01 Classify cash transactions as operating; investing; or financing activities. 48

Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method.

33

Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows.

28

Learning Objective: 11-04 Perform financial analysis using the statement of cash flows. 19

Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct method.

27


Ch12Student: ___________________________________________________________________________

1. We can use ratios to help evaluate a firm's performance and financial position. True False

2. Vertical analysis expresses each item in a financial statement as a percentage of the same base amount.

True False

3. Vertical analysis calculates the amount and percentage change of an account over time.

True False

4. We use vertical analysis for income statement accounts, but not balance sheet accounts.

True False

5. We use vertical analysis to express each income statement item as a percentage of sales.

True False

6. For vertical analysis, we express each balance sheet item as a percentage of sales.

True False

7. Horizontal analysis analyzes trends in financial statement data for a single company over time.

True False

8. If the base-year amount is zero, we can't calculate a percentage change under horizontal analysis.

True False

9. Using horizontal analysis, if the base year is negative and the following year is positive, the percentage

change is just as useful as if the base year and the following year were both positive. True False

10. We use horizontal analysis to analyze trends in financial statement data, such as the dollar amount of

change and the percentage change, for one company over time. True False

11. We measure income statement accounts at a point in time and balance sheet accounts over a period of time.

True False

12. Ratios that compare an income statement account with a balance sheet account should express the balance sheet account as an average of the beginning and ending balances. True False

13. Every liquidity ratio is calculated using one or more current asset accounts.

True False

14. Solvency refers to a company's ability to pay its current liabilities while liquidity refers to a company's

ability to pay its long-term liabilities. True False

15. The receivables turnover ratio measures how many times, on average, a company collects its receivables

during the year. True False

16. A low receivables turnover ratio is a positive sign that a company can quickly turn its receivables into cash.

True False

17. The average collection period converts the receivables turnover ratio into days.

True False

18. A low inventory turnover ratio usually is a positive sign and indicates that inventory is selling quickly.

True False

19. An extremely high inventory turnover ratio may be a signal that the company is losing sales due to

inventory shortages. True False

20. The average days in inventory converts the inventory turnover ratio into days.

True False

21. A low current ratio indicates that a company has sufficient current assets to pay current liabilities as they

become due. True False

22. The acid-test ratio is always smaller than the current ratio.

True False

23. Other things being equal, the higher the debt to equity ratio, the higher the risk of bankruptcy.

True False

24. We use the times interest earned ratio to compare interest payments with a company's income available to pay those charges. True False

25. We calculate the times interest earned ratio by dividing net income by interest expense.

True False

26. The gross profit ratio is calculated as gross profit divided by net sales.

True False

27. Return on assets is calculated as net income divided by ending total assets.

True False

28. Profit margin measures the income earned on each dollar of sales, and is calculated by dividing net income

by net sales. True False

29. Asset turnover measures sales volume in relation to the investment in assets, and is calculated as net sales

divided by average total assets. True False

30. Return on equity is calculated by dividing the stock return by average stockholders' equity.

True False

31. The price-earnings (PE) ratio compares a company's share price with its earnings per share.

True False

32. Growth stocks have high expectations of future earnings growth, and therefore, usually trade at higher PE

ratios. True False

33. Value stocks have lower share prices in relationship to their fundamental ratios, and therefore, trade at

lower PE ratios. True False

34. A discontinued operation is the sale or disposal of any long-term asset.

True False

35. We report any profits or losses on discontinued operations in the current year, separately from profits and

losses on the portion of the business that will continue. True False

36. To be an extraordinary item, an event that produces a gain or loss must be either unusual in nature or infrequent in occurrence. True False

37. We report extraordinary items separately, net of taxes, near the bottom of the income statement just below

discontinued operations. True False

38. If an item meets one but not both criteria for extraordinary item treatment, it is correctly excluded from

extraordinary items and included with other revenue and expenses. True False

39. The location where a loss is reported in the income statement does not really matter as long as the loss is

reported. True False

40. When using a company's current earnings to estimate future earnings performance, investors normally

should exclude discontinued operations and extraordinary items. True False

41. Conservative accounting practices are those that result in reporting higher income, higher assets, and lower


42. Conservative accounting practices are those that result in reporting lower income, lower assets, and higher


43. A larger estimation of the allowance for uncollectible accounts, the write-down of overvalued inventory

and the use of a shorter useful life for depreciation are all examples of conservative accounting. True False

44. Aggressive accounting practices result in reporting higher income, higher assets, and lower liabilities.

True False

45. Changes in accounting estimates usually have no effect on a company's underlying cash flows.

True False

46. Which of the following is not a common type of comparison in accounting?

A. Comparisons of sales growth between companies.B. Comparisons of earnings per share between companies.C. Comparisons over time.D. Comparisons to industry.

47. When using vertical analysis,we express income statement accounts as a percentage of A. Net income.B. Gross profit.C. Sales.D. Total assets.

48. When using vertical analysis, we express balance sheet accounts as a percentage of

A. Sales.B. Total assets.C. Total liabilities.D. Total stockholders' equity.

49. Which of the following is an example of verticalanalysis?

A. Comparing gross profit across companies.B. Comparing income statement items as a percentage of sales.C. Comparing debt with industry averages.D. Comparing the change in sales over time.

50. Comparing operating expenses as a percentage of sales is an example of:

A. Vertical analysis.B. Horizontal analysis.C. Diagonal analysis.D. Both vertical and horizontal analysis.

51. The following is an example of:


52. The following is an example of:


53. Horizontal analysis examines trends in a company

A. Over time.B. Between income statement accounts in the same year.C. Between balance sheet accounts in the same year.D. Between income statement and balance sheet accounts in the same year.

54. Which of the following is an example of horizontal analysis?

A. Comparing COGS with sales.B. Comparing net income across companies.C. Comparing debt with equity.D. Comparing the growth in sales over time.

55. Which of the following is an example of horizontal analysis?

A. Comparing gross profit across companies.B. Comparing gross profit with operating expenses.C. Comparing assets with equity.D. Comparing the change in sales over time.

56. Comparing changes in net income for one company over time is an example of:


57. Which of the following is correct?


58. Which of the following ratios is most useful in evaluating liquidity? A. Return on assets.B. Return on equity.C. Debt to equity ratio.D. Current ratio.

59. Which of the following ratios is most useful in evaluating solvency?

A. Debt to equity ratio.B. Current ratio.C. Receivables turnover ratio.D. Inventory turnover ratio.

60. Which of the following is a sign that a company can quickly turn its receivables into cash?

A. A low receivables turnover ratio.B. A high receivables turnover ratio.C. A high average collection period.D. Both a low receivables turnover ratio and a high average collection period.

61. Which of the following is a sign that a company cannot quickly turn its receivables into cash?

A. A high receivables turnover ratio.B. A low receivables turnover ratio.C. A low average collection period.D. Both a high receivables turnover ratio and a low average collection period.

62. Which of the following is a negative sign that a company is not selling its inventory quickly?

A. A low inventory turnover ratio.B. A high inventory turnover ratio.C. A low average days in inventory.D. Both a high inventory turnover ratio and a low average days in inventory.

63. Which of the following is a positive sign that a company is selling its inventory quickly?

A. A low inventory turnover ratio.B. A high inventory turnover ratio.C. A low average days in inventory.D. Both a high inventory turnover ratio and a low average days in inventory.

64. The current ratio is calculated as:

A. Current assets divided by noncurrent assets.B. Current assets divided by current liabilities.C. Current liabilities divided by noncurrent liabilities.D. Current liabilities divided by current assets.

65. The acid-test ratio is most similar to the: A. Current ratio.B. Debt to equity ratio.C. Times interest earned ratio.D. Inventory turnover ratio.

66. The acid-test ratio is:

A. The liquidity ratio divided by the equity ratio.B. Current assets minus inventory divided by current liabilities minus accounts payable.C. Cash, net receivables, and current investments divided by current liabilities.D. Cash divided by accounts payable.

67. Which of the following is not a solvency ratio?

A. Time interest earned ratio.B. The debt to equity ratio.C. The current ratio.D. All of the other options are solvency ratios.

68. When a company pays a bill from a plumber for previous services on account:

A. Its debt to equity ratio decreases.B. Its acid-test ratio always remains unchanged.C. Its current ratio always remains unchanged.D. All of the other options are correct.

69. Assuming a current ratio of 1.0, how will the purchase of inventory with cash affect the ratio?

A. Increase the current ratio.B. No change to the current ratio.C. Decrease the current ratio.D. Could either increase or decrease the current ratio.

70. Assuming an acid-test ratio of 1.0, how will the purchase of inventory with cash affect the ratio?

A. Increase the acid-test ratio.B. No change to the acid-test ratio.C. Decrease the acid-test ratio.D. Could either increase or decrease the acid-test ratio.

71. Assuming a current ratio of 1.0 and an acid-test ratio of 0.75, how will the purchase of inventory with cash

affect each ratio? A. Increase the current ratio and increase the acid-test ratio.B. No change to the current ratio and decrease the acid-test ratio.C. Decrease the current ratio and decrease the acid-test ratio.D. Increase the current ratio and decrease the acid-test ratio.

72. When a company sells land for cash and makes a $25,000 gain: A. Its acid-test ratio decreases.B. Its current ratio decreases.C. Its debt to equity ratio decreases.D. Cannot determine from the given information.

73. Assume a company's current ratio and acid-test ratio are less than 1.0 before it purchases inventory on

credit. When it makes the purchase. A. Its current ratio decreases.B. Its acid-test ratio decreases.C. Its current ratio remains unchanged.D. Its acid-test ratio remains unchanged.

A partial balance sheet ($s in thousands) for Captain D's Seafood Inc. is shown below.

74. The current ratio is:

A. 1.98.B. 1.58.C. 1.17.D. 0.66.

75. The acid-test ratio is:

A. 0.25.B. 0.88.C. 1.17.D. 1.58.

76. The debt to equity ratio is:

A. 0.33.B. 0.77.C. 1.17.D. 1.30.

Recent financial statement data for Harmony Health Foods (HHF) Inc. is shown below.

77. HHF's debt to equity ratio is:

A. 0.75.B. 1.13.C. 0.38.D. 1.80.

78. HHF's times interest earned ratio is:

A. 3.47.B. 1.72.C. 2.47.D. 10.0.

Excerpts from Stealth Company's December 31, 2013 and 2012, financial statements are presented below:

79. Stealth Company's 2013 receivables turnover ratio is:

A. 2.85.B. 4.70.C. 5.00.D. 10.63.

80. Stealth Company's 2013 average collection period is:

A. 73 days.B. 104 days.C. 109 days.D. 128 days.

81. Stealth Company's 2013 inventory turnover is:

A. 3.62 times.B. 3.96 times.C. 4.07 times.D. 6.03 times.

82. Stealth Company's 2013 average days in inventory is: A. 60.5 days.B. 92.2 days.C. 100.8 days.D. 89.7 days.

83. Stealth Company's 2013 debt to equity ratio is:

A. 77.1%.B. 80.0%.C. 40.0%.D. 60.0%.

84. Stealth Company's 2013 gross profit ratio is:

A. 77.1%.B. 80.0%.C. 40.0%.D. 60.0%.

85. Stealth Company's 2013 return on assets is:

A. 7.1%.B. 7.8%.C. 13.5%.D. 44.7%.

86. Stealth Company's 2013 profit margin is:

A. 17.1%.B. 13.5%.C. 7.6%.D. 4.5%.

87. Stealth Company's 2013 asset turnover is:


88. Stealth Company's 2013 return on equity is:

A. 17.1%.B. 14.0%.C. 12.6%.D. 7.1%.

Excerpts from TPX Company's December 31, 2013 and 2012, financial statements are presented below:

89. TPX Company's 2013 receivables turnover ratio is:


90. TPX Company's 2013 average collection period is:

A. 69 days.B. 65 days.C. 73 days.D. 1,825 days.

91. TPX Company's 2013 inventory turnover is:


92. TPX Company's 2013 average days in inventory is:

A. 121.7 days.B. 70.2 days.C. 110.6 days.D. 101.4 days.

93. TPX Company's 2013 debt to equity ratio is:

A. 50.0%.B. 60.0%.C. 70.0%.D. 80.0%.

94. TPX Company's 2013 gross profit ratio is:

A. 57.5%.B. 36.5%.C. 63.5%.D. 60.0%.

95. TPX Company's 2013 return on assets is: A. 48.2%.B. 9.3%.C. 8.8%.D. 9.0%.

96. TPX Company's 2013 profit margin is:

A. 18.8%.B. 9.0%.C. 19.4%.D. 15.1%.

97. TPX Company's 2013 asset turnover is:


98. TPX Company's 2013 return on equity is:

A. 16.7%.B. 15.0%.C. 15.8%.D. 21.4%.

99. Given the information below, what is the company's gross profit?


100.Return on assets equals:

A. Gross profit ratio x Inventory turnover.B. Profit margin x Inventory turnover.C. Gross profit ratio x Asset turnover.D. Profit margin x Asset turnover.

101.Nerf Mania reports net income of $500,000, net sales of $4,000,000, and average assets of $2,000,000. The

return on assets is: A. 200%.B. 25%.C. 50%.D. 12.5%.

102.Nerf Mania reports net income of $500,000, net sales of $4,000,000, and average assets of $2,000,000. The profit margin is: A. 12.5%.B. 25%.C. 50%.D. 8 times.

103.Nerf Mania reports net income of $500,000, net sales of $4,000,000, and average assets of $2,000,000. The

asset turnover is: A. 0.25 times.B. 0.5 times.C. 2 times.D. 8 times.

104.Richard's Sporting Goods reports net income of $100,000, net sales of $500,000, and average assets of

$1,000,000. The return on assets is: A. 10%.B. 20%.C. 50%.D. 5 times.


$1,000,000. The profit margin is: A. 10%.B. 20%.C. 50%.D. 5 times.


$1,000,000. The asset turnover is: A. 0.1 times.B. 0.5 times.C. 2 times.D. 5 times.

107.The sale or disposal of a significant component of a company's operations is referred to as:

A. A discontinued operation.B. An extraordinary item.C. Other revenues and expenses.D. Gain or loss on sale of assets.

108.A discontinued operation refers to:

A. The sale or disposal of a significant component of a company's operations.B. Discontinued inventory items.C. Inventory items that have been completed and sold.D. The sale of most long-term assets.

109.An extraordinary item must meet which of the following criteria? A. Unusual in nature.B. Infrequent in occurrence.C. Unusual in nature and infrequent in occurrence.D. Unusual in nature or infrequent in occurrence.

110.Extraordinary items:


111.Which of the following items is most likely to be reported as an extraordinary loss?


112.What is the correct order to present the following items on the income statement?


113.Popson Inc. incurred a material loss which was not unusual in character, but was clearly an infrequent

occurrence. This loss should be reported as: A. An extraordinary loss.B. A loss from discontinued operations.C. Other revenues and expenses.D. A separate line item in retained earnings.

114.The financial statements of a firm that uses more aggressive accounting practices would be likely to report:


115.Which of the following is NOT an example of applying conservatism in accounting?


116.Which of the following is a conservative accounting practice?

A. The use of a longer service life for depreciation.B. Waiting to record a litigation loss.C. Adjust the allowance for uncollectible accounts to a smaller amount.D. The write-down of overvalued inventory.

117.Which of the following is an aggressive accounting practice?

A. The use of a shorter service life for depreciation.B. Waiting to record a litigation loss.C. Adjust the allowance for uncollectible accounts to a larger amount.D. The write-down of overvalued inventory.

118.Which of the following is a conservative accounting practice?

A. Change from double-declining balance to straight-line depreciation.B. Record sales revenue before it is actually earned.C. Adjust the allowance for uncollectible accounts to a larger amount.D. Record inventory at market rather than lower of cost or market.

119.Which of the following is an aggressive accounting practice?

A. Change from straight-line to double-declining balance depreciation.B. Record sales revenue before it is actually earned.C. Adjust the allowance for uncollectible accounts to a larger amount.D. Record inventory at lower of cost or market rather than at cost.

120.Perform a vertical analysis on the following information:

121.Perform a horizontal analysis on the following information providing both the dollar amount and

percentage change:

122.Assume a company's sales are $1.6 million in 2011, $1.8 million in 2012, and $1.7 million in 2013. What

is the percentage change from 2011 to 2012? What is the percentage change from 2012 to 2013? Be sure to indicate whether the percentage change is an increase or a decrease.

123.If a company's sales are $648,000 in 2012, and this represents an 8% increase over sales in 2011, what were sales in 2011?

124.United Products began the year with an Accounts Receivable balance of $250,000, and had a year-

end balance of $280,000. Credit sales of $800,000 generated a gross profit of $150,000. Calculate the receivables turnover ratio for the year.

125.United Products began the year with an Inventory balance of $180,000, and had a year-end balance of

$200,000. Sales of $800,000 generated a gross profit of $150,000. Calculate the inventory turnover ratio for the year.

126.BC Training reports sales revenue of $2,200,000. Average inventory during the year was $200,000. The

inventory turnover ratio for the year is 8.0. What amount of gross profit would the company report in its income statement?

127.LeBron's Kids Camps has a current ratio of 0.75 to 1, based on current assets of $3 million and current liabilities of $4 million. How, if at all, will a $500,000 cash purchase of inventory affect the current ratio? How, if at all, will a $500,000 purchase of inventory on account affect the current ratio?

128.The following income statement and balance sheets for Laser World are provided:

Assuming that all sales were on account, calculate the following risk ratios for 2012:

129.The following income statement and balance sheets for Laser World are provided:

Earnings per share for the year-ended December 31, 2012, is $1.90. The closing stock price on December 31, 2012, is $30.40.Calculate the following profitability ratios for 2012:

130.Barry's BBQ had sales revenue for the year of $200 million and net income of $20 million. Total assets were $70 million at the beginning of the year, and $80 million at the end of the year. Calculate Barry's return on assets, profit margin, and asset turnover ratios.

131.Paul Pierce Enterprises reports net income of $800,000, average total assets of $2,400,000, and average

total liabilities of $400,000. Calculate the return on asset and return on equity ratios.

132.Phillip's Fun Center has go-karts, miniature golf, bumper boats, paintball, and laser tag. Determine whether

the company should report each of the following items as discontinued operations, extraordinary items, or other expenses:1. Uninsured losses of $200,000 were incurred due to a hurricane that swept through the area for the first time in 50 years.2. The company sold its old go-karts at a loss of $25,000 and replaced them with all new go-karts.3. The company sold its laser tag center at a loss of $10,000 to focus on the other more profitable segments. Laser tag is considered to be a separate business segment.4. The company restructured its business at a cost of $75,000, replacing some employee positions with automated equipment.

133.Classify each of the following accounting practices as conservative or aggressive:1. Increase the allowance for uncollectible accounts.2. When costs are rising, change from FIFO to LIFO.3. Increase the estimated useful life of equipment.

134.Classify each of the following accounting practices as conservative or aggressive.

1. Choosing a shorter life for calculating depreciation.2. The write-down of inventory.3. Decrease the allowance for uncollectible accounts.4. Recording revenues sooner.

135.Explain the difference between vertical and horizontal analysis.

136.Explain why ratios that compare an income statement account with a balance sheet account should express

the balance sheet account as an average of the beginning and ending balances.

137.Sideline Sports Products reports a return on assets of 6%, and a return on equity of 10%. Why do these two ratios differ?

138.Define earnings persistence. How does earnings persistence relate to the reporting of discontinued

operations and extraordinary items?

139.Explain the difference between conservative and aggressive accounting practices. Provide an example of a

conservative accounting practice and explain why this practice is conservative. Provide an example of an aggressive accounting practice and explain why this practice is aggressive.

140.Listed below are eight risk ratios followed by a list of phrases that describe or characterize the ratios. Match each phrase with the correct ratio placing the letter designating the ratio in the space provided.

1. Average collection period

Cost of goods sold divided by average inventory; the number of times the firm sells its average inventory balance during a

reporting period.

____

2. Times interest earned ratio

Total liabilities divided by total stockholders' equity; measure a company's solvency risk.

____

3. Current ratio Approximate number of days the average inventory is held.

____

4. Acid-test ratio

Ratio that compares interest expense with income available to pay those charges.

____

5. Receivables turnover ratio

Net sales divided by average accounts receivable; the number of times during a year that the average accounts receivable

balance is collected.

____

6. Inventory turnover ratio

Cash, short-term investments, and accounts receivable divided by current liabilities; measures the availability of liquid current

assets to pay current liabilities.

____

7. Debt to equity ratio

Current assets divided by current liabilities; measures the availability of current assets to pay current liabilities.

____

8. Average days in inventory

Approximate number of days the average accounts receivable balance is outstanding.

____

141.Listed below are six profitability ratios followed by a list of phrases that describe or characterize the ratios. Match each phrase with the correct ratio placing the letter designating the ratio in the space provided.

1. Return on assets

Net income divided by average total assets; measures the amount of net income generated for each dollar invested in

assets.

____

2. Profit margin

Compares a company's share price with its earnings per share.

____

3. Price-earnings (PE) ratio

Net income divided by average stockholders' equity; measures the income generated per dollar of equity.

____

4. Gross profit ratio

Gross profit divided by net sales; measures the amount by which the sale price of inventory exceeds its cost per dollar of

sales.

____

5. Asset turnover

Net sales divided by average total assets; which measures the sales per dollar of assets invested.

____

6. Return on equity

Net income divided by net sales; indicates the earnings per dollar of sales.

____

142.Listed below are seven terms followed by a list of phrases that describe or characterize the terms. Match

each phrase with the best term placing the letter designating the term in the space provided. Learning Objectives: 1, 2, 3, 4

1. Liquidity Analyzes trends in financial statement data for a single

company over time.

____

2. Growth stocks

Have lower share prices in relationship to their fundamental ratios and therefore trade at lower PE ratios.

____

3. Vertical analysis

Expresses each item in a financial statement as a percentage of the same base amount.

____

4. Horizontal analysis Refers to a company's ability to pay its current liabilities.

____

5. Solvency Refers to a company's ability to pay its long-term liabilities.

____

6. Value Stocks

Have high expectations of future earnings and therefore usually trade at higher P/E ratios.

____

7. Profitability ratios

Measure the earnings or operating effectiveness of a company.

____

143.Listed below are five terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the best term placing the letter designating the term in the space provided. Learning Objectives: 5, 6

1. Conservative accounting practices

An event that is (1) unusual in nature and (2) infrequent in occurrence.

____

2. Quality of earnings

The sale or disposal of a significant component of a company's operations.

____

3. Discontinued operation

Refers to the ability of reported earnings to reflect the company's true earnings, as well as the usefulness of reported

earnings to predict future earnings.

____

4. Aggressive accounting practices

Practices that result in reporting lower income, lower assets, and higher liabilities.

____

5. Extraordinary item

Practices that result in reporting higher income, higher assets, and lower liabilities.

____

144.Listed below are eight terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the best term placing the letter designating the term in the space provided. Learning Objectives: 1, 2, 3, 4, 5, 6

1. Aggressive accounting practices A company's ability to pay its current liabilities.

____

2. Horizontal analysis Accounting choices that result in reporting

lower income, lower assets, and higher liabilities.

____

3. Solvency A profit or loss unusual in nature and infrequent in

occurrence.

____

4. Discontinued operation

Accounting choices that result in reporting higher income, higher assets, and lower liabilities.

____

5. Vertical analysis A tool to analyze trends in financial statement data

for a single company over time.

____

6. Liquidity The sale or disposal of a significant component of a

company's operations.

____

7. Conservative accounting practices

A means to express each item in a financial statement as a percentage of a base amount.

____

8. Extraordinary item A company's ability to pay its long-term liabilities.

____

Ch12 Key

1. TRUE 2. TRUE 3. FALSE 4. FALSE 5. TRUE 6. FALSE 7. TRUE 8. TRUE 9. FALSE 10. TRUE 11. FALSE 12. TRUE 13. TRUE 14. FALSE 15. TRUE 16. FALSE 17. TRUE 18. FALSE 19. TRUE 20. TRUE 21. FALSE 22. TRUE 23. TRUE 24. TRUE 25. FALSE 26. TRUE 27. FALSE 28. TRUE 29. TRUE 30. FALSE 31. TRUE 32. TRUE

33. TRUE 34. FALSE 35. TRUE 36. FALSE 37. TRUE 38. TRUE 39. FALSE 40. TRUE 41. FALSE 42. TRUE 43. TRUE 44. TRUE 45. TRUE 46. B 47. C 48. B 49. B 50. A 51. A 52. B 53. A 54. D 55. D 56. B 57. D 58. D 59. A 60. B 61. B 62. A 63. D 64. B 65. A 66. C 67. C

68. A 69. B 70. C 71. B 72. C 73. B 74. B 75. B 76. D 77. B 78. A 79. C 80. A 81. A 82. C 83. A 84. C 85. B 86. A 87. D 88. B 89. A 90. A 91. C 92. C 93. C 94. B 95. D 96. A 97. D 98. C 99. D 100. D 101. B 102. A

103. C 104. A 105. B 106. B 107. A 108. A 109. C 110. B 111. D 112. A 113. C 114. A 115. D 116. D 117. B 118. C 119. B

120.

121. 122. % change from 2011 to 2012 = ($1.8 million - $1.6 million) / $1.6 million = 12.5% increase.% change from 2012 to 2013 = ($1.7 million - $1.8 million) / $1.8 million = 5.6% decrease. 123. $648,000 / 1.08 = $600,000.

124.

125.

126. Feedback: *COGS = $200,000 x 8.0 = $1,600,000.Given sales of $2,200,000 and calculating COGS of $1,600,000, gross profit is $600,000.

127. A cash purchase of inventory will not affect the current ratio, but a purchase of inventory on account will increase the current ratio as shown below:

128.

129.

130.

131. 132. 1. Extraordinary items.2. Other expenses.3. Discontinued operations.4. Other expenses.

133.

134. 135. For vertical analysis, we express each item as a percentage of the same base amount, such as a percentage of sales in the income statement or as a percentage of total assets in the balance sheet. We use horizontal analysis to analyze trends in financial statement data, such as the dollar amount of change and the percentage change, for one company over time. 136. We measure income statement accounts over a period of time (like a video), while we measure balance sheet accounts at a point in time (like a photograph). Therefore, ratios that compare an income statement account with a balance sheet account should express the balance sheet account as an average of the beginning and ending balances. 137. The return on assets and the return on equity differ due to financial leverage - the amount of debt a company carries. If a company earns a return on investment above the interest cost of borrowing, then the additional debt will benefit investors in the company. The result, as is the case for Sideline Sports Products, is that the return on equity will exceed the return on assets.

138. Earnings persistence is the ability of current earnings to continue or persist into future years. Certain items are part of net income in the current year but are not expected to persist. We refer to these as one-time income items. The two primary examples are discontinued operations and extraordinary items. 139. Conservative accounting practices are those that result in reporting lower income, lower assets, and higher liabilities. In contrast, aggressive accounting practices result in reporting higher income, higher assets, and lower liabilities.A larger estimation of the allowance for uncollectible accounts, the write-down of overvalued inventory, the use of a shorter useful life for depreciation, and the recording of a contingent litigation loss are all examples of conservative accounting. They are conservative because all of these practices report lower net income.A lower estimation of the allowance for uncollectible accounts, waiting to report an inventory write-down, choosing a longer useful life for depreciation, and waiting to record a litigation loss all are examples of more aggressive accounting. They are aggressive because all of these practices report higher net income. 140. Inventory turnover ratio :: Cost of goods sold divided by average inventory; the number of times the firm sells its average inventory balance during a reporting period. and Debt to equity ratio :: Total liabilities divided by total stockholders' equity; measure a company's solvency risk. and Average days in inventory :: Approximate number of days the average inventory is held. and Times interest earned ratio :: Ratio that compares interest expense with income available to pay those charges. and Receivables turnover ratio :: Net sales divided by average accounts receivable; the number of times during a year that the average accounts receivable balance is collected. and Acid-test ratio :: Cash, short-term investments, and accounts receivable divided by current liabilities; measures the availability of liquid current assets to pay current liabilities. and Current ratio :: Current assets divided by current liabilities; measures the availability of current assets to pay current liabilities. and Average collection period :: Approximate number of days the average accounts receivable balance is outstanding. 141. Return on assets :: Net income divided by average total assets; measures the amount of net income generated for each dollar invested in assets. and Price-earnings (PE) ratio :: Compares a company's share price with its earnings per share. and Return on equity :: Net income divided by average stockholders' equity; measures the income generated per dollar of equity. and Gross profit ratio :: Gross profit divided by net sales; measures the amount by which the sale price of inventory exceeds its cost per dollar of sales. and Asset turnover :: Net sales divided by average total assets; which measures the sales per dollar of assets invested. and Profit margin :: Net income divided by net sales; indicates the earnings per dollar of sales. 142. Horizontal analysis :: Analyzes trends in financial statement data for a single company over time. and Value Stocks :: Have lower share prices in relationship to their fundamental ratios and therefore trade at lower PE ratios. and Vertical analysis :: Expresses each item in a financial statement as a percentage of the same base amount. and Liquidity :: Refers to a company's ability to pay its current liabilities. and Solvency :: Refers to a company's ability to pay its long-term liabilities. and Growth stocks :: Have high expectations of future earnings and therefore usually trade at higher P/E ratios. and Profitability ratios :: Measure the earnings or operating effectiveness of a company. 143. Extraordinary item :: An event that is (1) unusual in nature and (2) infrequent in occurrence. and Discontinued operation :: The sale or disposal of a significant component of a company's operations. and Quality of earnings :: Refers to the ability of reported earnings to reflect the company's true earnings, as well as the usefulness of reported earnings to predict future earnings. and Conservative accounting practices :: Practices that result in reporting lower income, lower assets, and higher liabilities. and Aggressive accounting practices :: Practices that result in reporting higher income, higher assets, and lower liabilities. 144. Liquidity :: A company's ability to pay its current liabilities. and Conservative accounting practices :: Accounting choices that result in reporting lower income, lower assets, and higher liabilities. and Extraordinary item :: A profit or loss unusual in nature and infrequent in occurrence. and Aggressive accounting practices :: Accounting choices that result in reporting higher income, higher assets, and lower liabilities. and Horizontal analysis :: A tool to analyze trends in financial statement data for a single company over time. and Discontinued operation :: The sale or disposal of a significant component of a company's operations. and Vertical analysis :: A means to express each item in a financial statement as a percentage of a base amount. and Solvency :: A company's ability to pay its long-term liabilities.

Ch12 Summary


AACSB: Analytic 44





AICPA: Reporting 24

Blooms: Analysis 44




Blooms: Synthesis 11

Difficulty: Easy 39

Difficulty: Hard 20


Learning Objective: 12-01 Perform vertical analysis. 14

Learning Objective: 12-02 Perform horizontal analysis. 15

Learning Objective: 12-03 Use ratios to analyze a companys risk. 52

Learning Objective: 12-04 Use ratios to analyze a companys profitability. 32

Learning Objective: 12-05 Distinguish persistent earnings from one-time items. 16

Learning Objective: 12-06 Explain quality of earnings and distinguish between conservative and aggressive accounting practices.

14


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