Accounting Exam #2
Shares that have been sold and are in the hands of stockholders are called:
Outstanding
A good system of internal control will include all of the following except: Preparing a pro-forma financial statement on a monthly basis. Reconciling bank statements with accounting records. Separating the handling of cash from the maintenance of accounting records. Making all major payments by check.
Preparing a pro-forma financial statement on a monthly basis.
True/False A capital expenditure is charged to owners' capital.
false
TRUE/FALSE Prior period adjustments are shown in the financial statements by adjusting the beginning balance of retained earnings in the statement of retained earnings.
TRUE
TRUE/FALSE: Incidental costs incurred in the purchase of land that are charged to Land Improvements will affect net income at some future time.
TRUE
The cost of a new windshield wiper on a delivery vehicle would be classified as:
A revenue expenditure.
Which of the following is not considered a cash equivalent? Money market funds U.S. Treasury bills High-grade commercial paper Accounts receivable
Accounts receivable
With a line of credit, a liability arises:
As soon as any money is borrowed.
Net income differs from net cash flows from operations because of all the following except: Non-cash expenses such as depreciation. Timing differences between recognizing revenue and expenses and their cash flows. Gains and losses included in net income but classified as investing or financings activities. Cash received in exchange for goods sold in the normal course of operations.
Cash received in exchange for goods sold in the normal course of operations.
All of the following are measures of liquidity except: Quick ratio. Debt ratio. Current ratio. Working capital.
Debt ratio.
The valuation principle of "fair value accounting" applied to investments classified as marketable equity securities:
Enhances usefulness of the balance sheet in evaluating the financial position of a business.
TRUE FALSE Dividends paid belong in the operating activities section of the statement of cash flows.
FALSE
A cash dividend paid to shareholders is reported on the:
Financing activities section of the statement of cash flows.
Earnings per share figures are shown in the income statement:
For income from continuing operations, discontinued operations, and net income.
Which of the following is not classified among the investing activities in a statement of cash flows? Purchase of marketable securities for cash. Collection of the principal amount of cash loans made to others. Investment of cash made in the business by the owners. Purchase of plant assets for cash.
Investment of cash made in the business by the owners.(financing)
An advocate of the just-in-time inventory system would advocate:
Maintaining a small inventory supply.
Which of the following best describes the book value of a share of stock?
Net assets divided by the number of shares outstanding.
Dividends become a liability of a corporation:
On the date the board of directors declares the dividend.
An accelerated depreciation method:
Recognizes more depreciation expense in the early years of an asset's useful life and less in the later years.
Which of the following methods of measuring the cost of goods sold most closely parallels the actual physical flow of the merchandise? FIFO LIFO Specific identification Average cost
Specific identification
The term cash equivalent refers to:
Very liquid short-term investments such as U.S. Treasury Bills and commercial paper.
An asset that costs $97,600 and has accumulated depreciation of $82,000 is sold for $18,000. What amount of gain or loss will be recognized when the asset is sold?
a gain of $2,400 (97600-82200) = 15400; 18000-15400= +2400
Capital expenditures are recorded as:
an asset
The primary purpose of an inventory flow assumption is to: a Increase inventory turnover. b Increase gross profit. c Determine which unit costs are assigned to inventory and which are assigned to the cost of goods sold. d Minimize taxable income during periods of rising prices.
c Determine which unit costs are assigned to inventory and which are assigned to the cost of goods sold
The current ratio will be _______________ the quick ratio. less than greater than or equal to the same as always different than
greater than or equal to
Short-term creditors are most likely to use the quick ratio instead of the current ratio in evaluating the solvency of a company with large, slow-moving:
inventories
On common size income statements, each component in the income statement is represented as a percentage of:
net sales
The measurement that best reflects investors' expectations about future earnings is:
price earnings ratio
Century Corporation issued 400,000 shares of $4 par value common stock at the time of its incorporation. The stock was issued for cash at a price of $16 per share. During the first year of operations, the company sustained a net loss of $100,000. The year-end balance sheet would show the balance of the Common Stock account to be:
$1,600,000 (400000*4)
On April 2, Year 1, Victor, Incorporated acquired a new piece of filtering equipment. The cost of the equipment was $160,000 with a residual value of $20,000 at the end of its estimated useful lifetime of 4 years. Victor uses a calendar year-end for financial reporting. If Victor uses straight-line depreciation with the half-year convention, the book value of the equipment at December 31, Year 2 will be:
$107,500
Cardinal Company's bank statement showed a balance at May 31 of $180,974. The only reconciling items consisted of a large number of outstanding checks totaling $51,847. At May 31, what balance should Cardinal's Cash account show?
$129,127.
Castle TV, Incorporated purchased 2,600 monitors on January 5 at a per-unit cost of $210, and another 2,600 units on January 31 at a per-unit cost of $294. In the period from February 1 through year-end, the company sold 4,500 units of this product. At year-end, 700 units remained in inventory. Assume that Castle TV, Incorporated uses the LIFO flow assumption. The cost of the 700 units in the year-end inventory is:
$147,000 (700*$210)
The Cash account in the records of Hensley, Incorporated showed a balance of $3,100 at June 30. The bank statement, however, showed a balance of $3,900 at the same date. The only reconciling items consisted of a $700 deposit in transit, a bank service charge of $7, and a large number of outstanding checks. What is the total amount of the outstanding checks at June 30? $1,500. $1,507. $1,486. $1,513.
$1507 (3900 + 700 (in transit) + 7 charge = 4607 - 3100 RECORDS = $1507 OUTSTANDING
At the end of last year, Games-2-Use had merchandise costing $140,000 in inventory. During January of the current year, the company purchased merchandise costing $102,000, and sold merchandise that it had purchased at a total cost of $84,000. Games-2-Use uses a perpetual inventory system. The balance in the Inventory account at January 31 was: $84,000. $140,000. $158,000. $242,000.
$158,000 (140,000+102,00-84000)
On April 2, Year 1, Victor, Incorporated acquired a new piece of filtering equipment. The cost of the equipment was $380,000 with a residual value of $30,000 at the end of its estimated useful lifetime of 10 years. Victor uses a calendar year-end for financial reporting. Assume that in its financial statements, Victor uses straight-line depreciation and the half-year convention. Depreciation recognized on this equipment in Year 1 and Year 2 will be:
$17,500 in Year 1 and $35,000 in Year 2.
Zeta Co. has outstanding 100,000 shares of $100 par value cumulative preferred stock, which has a dividend rate of 7 percent. The company has not declared any cash dividends on the preferred stock for the last three years. Calculate the amount of dividends in arrears for the last three years on Zeta's preferred stock.
$2,100,000 ($100*7%) = 7* (100,000) = 700,000 * 3 YEARS =2,100,00
Land is purchased for $256,000. Additional costs include a $15,300 fee to a broker, a survey fee of $2,400, $1,750 to construct a fence, and a legal fee of $8,500. What is the cost of the land?
$282,000 (256000+15300+2400+8500)
The Cash account in the records of Hensley, Incorporated showed a balance of $3,100 at June 30. The bank statement, however, showed a balance of $3,900 at the same date. The only reconciling items consisted of a $700 deposit in transit, a bank service charge of $7, and a large number of outstanding checks. What is the "adjusted cash balance" at June 30?
$3,093.
Land and a warehouse were acquired for $890,000. What amounts should be recorded in the accounting records for the land and for the warehouse if an appraisal showed the estimated values to be $400,000 for the land and $700,000 for the warehouse? (Round intermediate percentage calculations to 1 decimal place.)
$323,960 for land; $566,040 for warehouse
On March 2, Year 1, Glen Industries purchased a fleet of automobiles at a cost of $500,000. The cars are to be depreciated by the straight-line method over five years with no salvage value. Glen uses the half-year convention to compute depreciation for fractional periods. The book value of the fleet of automobiles at December 31, Year 2, will be:
$350,000
Castle TV, Incorporated purchased 1,000 monitors on January 5 at a per-unit cost of $185, and another 1,000 units on January 31 at a per-unit cost of $230. In the period from February 1 through year-end, the company sold 1,800 units of this product. At year-end, 200 units remained in inventory. Assume that Castle TV, Incorporated uses the LIFO flow assumption. The cost of the 200 units in the year-end inventory is:
$37,000 (200 * $185)
Castle TV, Incorporated purchased 1,000 monitors on January 5 at a per-unit cost of $185, and another 1,000 units on January 31 at a per-unit cost of $230. In the period from February 1 through year-end, the company sold 1,800 units of this product. At year-end, 200 units remained in inventory. Assume that Castle TV, Incorporated uses the LIFO flow assumption. The cost of the 200 units in the year-end inventory is $37,000. $46,000. $41,500. $83,000.
$37,000 (200*185)
On March 2, Year 1, Glen Industries purchased a fleet of automobiles at a cost of $550,000. The cars are to be depreciated by the straight-line method over five years with no salvage value. Glen uses the half-year convention to compute depreciation for fractional periods. The book value of the fleet of automobiles at December 31, Year 2, will be: $165,000. $330,000. $495,000. $385,000.
$385,000 Depreciation for Year 1 = $550,000 ÷ 5 years × ½ = $55,000 Depreciation for Year 2 = $550,000 ÷ 5 years = $110,000 Book value = $550,000 − $55,000 − $110,000 = $385,000
Castle TV, Incorporated purchased 2,300 monitors on January 5 at a per-unit cost of $189, and another 2,300 units on January 31 at a per-unit cost of $282. In the period from February 1 through year-end, the company sold 4,200 units of this product. At year-end, 400 units remained in inventory. Assume that Castle TV, Incorporated uses the LIFO flow assumption. The cost of the 400 units in the year-end inventory is:
$75,600 (400*$189)
Castle TV, Incorporated purchased 1,900 monitors on January 5 at a per-unit cost of $161, and another 1,900 units on January 31 at a per-unit cost of $266. In the period from February 1 through year-end, the company sold 3,500 units of this product. At year-end, 300 units remained in inventory. Assume that Castle TV, Incorporated uses the FIFO flow assumption. The cost of the 300 units in inventory at year-end is:
$79,800 (300*$266)
Zigma Corporation is authorized to issue 2,000,000 shares of $4 par value capital stock. The corporation issued half the stock for cash at $8 per share, earned $336,000 during the first three months of operation, and declared a cash dividend of $60,000. The total paid-in capital of Zigma Corporation after three months of operation is:
$8,000,000
Thurman Corporation issued 450,000 shares of $0.50 par value capital stock at its date of incorporation for cash at a price of $4 per share. During the first year of operations, the company earned $100,000 and declared a dividend of $40,000. At the end of this first year of operations, the balance of the Common Stock account is: $1,800,000. $1,860,000. $225,000. $1,820,000.
450,000 shares × $0.50 = $225,000
On October 12, Year 1, Neptune Corporation invested $700,000 in marketable equity securities. The market value of this investment was $730,000 at December 31, Year 1, but had slipped to $725,000 by December 31, Year 2. In financial statements prepared on December 31, Year 1, Neptune Corporation reports: A. Investments in Marketable Securities of $700,000 in assets on its balance sheet with footnote disclosure of the market value of $730,000. B. Investments in Marketable Securities at $730,000 in assets and a $30,000 Unrealized Holding Gain in stockholders' equity on its balance sheet. C. Investments in Marketable Securities at $730,000 in assets on its balance sheet and a $30,000 unrealized gain, which increases net income reported on its income statement. D. Investments in Marketable Securities at $700,000 in assets and a $30,000 Unrealized Holding Gain in stockholders' equity on its balance sheet.
C. Investments in Marketable Securities at $730,000 in assets on its balance sheet and a $30,000 unrealized gain, which increases net income reported on its income statement.
The unused portion of a line of credit: Can be used at any time by drawing a check on a special bank account. Is reported as a current liability in the balance sheet. Requires a compensating balance in order to keep the line of credit open. Decreases a company's liquidity.
Can be used at any time by drawing a check on a special bank account.
Which of the following is not an example of internal control over cash?
Combining the functions of signing checks with the approval of expenditures
A primary disadvantage of the corporate form of organization is:
Corporate earnings are subject to double taxation.
A company with a liquid inventory will have: Multiple Choice A low inventory turnover and a high average number of days to sell inventory. A high inventory turnover and a low average number of days to sell inventory. A low inventory turnover and a low average number of days to sell inventory. A high inventory turnover and a high average number of days to sell inventory.
A high inventory turnover and a low average number of days to sell inventory.
A high quality of earnings is indicated by: Earnings derived largely from newly introduced products. Declaration of both cash and stock dividends. Use of the FIFO method of inventory during sustained inflation. A history of increasing earnings and conservative accounting methods.
A history of increasing earnings and conservative accounting methods.
An Unrealized Holding Gain (or Loss) on Investments: A. Is reported in the current period income statement in that same manner as realized gains and losses from sales of marketable securities. B. Indicates the amount of cash a company would receive if the marketable securities were sold as of the balance sheet date. C. Is reported in the stockholders' equity section of the balance sheet, as either an increase or decrease in total stockholders' equity. D. Is reported in the asset section of the balance sheet, as an adjustment to the carrying value of the marketable securities.
A. Is reported in the current period income statement in that same manner as realized gains and losses from sales of marketable securities.
All of the following may be considered intangible assets except: Accounts receivable. Copyrights. Franchises. Goodwill.
Accounts receivable.
While preparing the bank reconciliation, an accountant discovered that a $426 check returned with the bank statement had been recorded erroneously in the depositor's accounting records as $462. In preparing the bank reconciliation the appropriate action to correct this error would be to:
Add $36 to the balance per the depositor's records.
The primary reason a physical inventory is taken is to: Adjust the perpetual inventory record for unrecorded shrinkage losses. Ensure the periodic inventory record is valued correctly. Both ensure the periodic inventory record is being stored securely and that it is valued correctly. Ensure the perpetual inventory record is being stored in a secure manner.
Adjust the perpetual inventory record for unrecorded shrinkage losses.
The purpose of the fair value adjustment for marketable equity securities is to:
Adjust the valuation of a company's investment in those securities to current market value.
Which of the following items is reported in neither the income statement nor the statement of cash flows? a Sale of marketable securities at a loss. b Sale of marketable securities at a gain. c Adjustment of available-for-sale marketable securities owned to current market value at balance sheet date. d Investment of excess cash in marketable securities.
Adjustment of available-for-sale marketable securities owned to current market value at balance sheet date.
Which of the following is not a capital expenditure? -Advertising expenditures to introduce a new product line -Sales tax paid in conjunction with the purchase of new machinery -Installation of elevators to replace escalators -An amount paid to acquire a patent with a remaining life of only three years
Advertising expenditures to introduce a new product line
At the beginning of the year, Robert Company's Allowance for Doubtful Accounts had a $3,200 credit balance. During January, a provision of 2% of sales was made for uncollectible accounts expense. During January, sales totaled $350,000, and $2,900 of accounts receivable were written off as worthless. No recoveries of accounts previously written off were made during the month. Robert's financial statements for January show: Allowance for Doubtful Accounts with a credit balance of $7,300. Uncollectible Accounts Expense of $9,900. Allowance for Doubtful Accounts with a credit balance of $10,200. Uncollectible Accounts Expense of $4,100.
Allowance for Doubtful Accounts with a credit balance of $7,300.
Cash equivalents: a Include amounts of cash available through an unused line of credit. b Are investments in the publicly traded stocks and bonds of large corporations. c Are usually included in the term "cash" in the balance sheet and the statement of cash flows. d Is another term for financial assets.
Are usually included in the term "cash" in the balance sheet and the statement of cash flows.
On June 1, Year 1, Jensen Company acquired an 4.2%, ten-month note receivable from a customer in settlement of an existing account receivable of $200,000. Interest and principal are due at maturity. Jensen's entry to record the collection of this note at maturity includes a: Credit to Interest Revenue of $4,900. Credit to Interest Receivable of $2,100. Credit to Notes Receivable of $208,400. Credit to Interest Receivable of $4,900.
Credit to Interest Receivable of $4,900. Debit Cash $207,000, Credit Interest Receivable $4,900, Credit Interest Revenue $2,100, and Credit Notes Receivable $200,000
In a statement of cash flows, the term "cash" includes:
Bank accounts, cash on hand, and cash equivalents.
Unusual and infrequent non-recurring items are found on the income statement:
Before discontinued operations.
Which of the following would have no effect on Retained Earnings? Declaration of a cash dividend Declaration of a stock dividend Declaration of a stock split A prior period adjustment
Declaration of a stock split
When preparing a bank reconciliation, outstanding checks will:
Decrease the balance per the bank statement.
The book value of equipment:
Decreases with the passage of time.
Enclosed with the bank statement received by Sydney Company at October 31 was an NSF check for $300. No entry has yet been made by the company to reflect the bank's action in charging back the NSF check. During preparation of the bank reconciliation, the NSF check should be:
Deducted from the balance per the depositor's records.
Which of the following items would cause cash per the bank statement to be smaller than the balance of cash shown in the accounting records? Interest earned on the average balance of the checking account Check number 824, in the amount of $620.30, is recorded by the bank as $602.30 Deposits in transit Outstanding checks
Deposits in transit
If the preferred stock of a corporation is cumulative:
Dividends in arrears must be paid on preferred stock before any dividend can be paid on common stock.
Which of the following would not be presented in the cash flows from operating activities section of the statement of cash flows when the direct method is used? Dividends paid. Dividends received. Neither dividends paid nor dividends received would be shown. Both dividends paid and dividends received would be shown.
Dividends paid.
Dorfman Industries has an accounts receivable turnover rate of 12. Which of the following statements is not true? Dorfman writes off accounts receivable as uncollectible if they are over 30 days old. Dorfman's net credit sales are about twelve times the amount of its average accounts receivable. Dorfman's accounts receivable are more liquid than those of a business whose accounts receivable turnover rate is 8. Dorfman waits approximately 30 days to make collections of its credit sales. (Use 365 days in a year.)
Dorfman writes off accounts receivable as uncollectible if they are over 30 days old.
TRUE FALSE For a company to survive in the long-run it must have positive cash flows from investing activities.
FALSE
TRUE FALSE In a periodic system, the only account with regard to inventory that is kept up-to-date is the Inventory account.
FALSE
TRUE FALSE Sales tax on equipment is not part of the acquisition cost and should not be capitalized.
FALSE
TRUE FALSE The higher a company's inventory turnover rate, the higher its gross profit.
FALSE
TRUE FALSE The maker of a note is the party to whom payment is to be made.
FALSE
TRUE FALSE The principal purpose of a statement of cash flows is to measure the profitability of a business that maintains its accounting records on the cash basis.
FALSE
TRUE/FALSE A corporation is a legal entity separate from its owners; it may sue and be sued, but it may not own property in its own name.
FALSE
TRUE/FALSE Discontinued operations should be shown on the statement of retained earnings net of taxes.
FALSE
TRUE/FALSE If a piece of equipment is dropped and damaged during installation, the cost of repairing the damage should be added to the cost of the equipment.
FALSE
TRUE/FALSE The number of shares a corporation may issue is specified in the articles of incorporation and approved by the Securities and Exchange Commission.
FALSE
TRUE/FALSE: Authorization of a stock issue creates an asset on the books of the issuing corporation.
FALSE
TRUE/FALSE: Cumulative preferred stock means the stock is entitled to its regular dividend plus an additional share of the total amount of declared dividends.
FALSE
TRUE/FALSE: When a corporation issues capital stock, most state laws require the corporation to credit Retained Earnings for the par value of shares of stock issued.
FALSE
True/False: An advantage of the average-cost method of accounting for inventory is that the inventory is valued in the balance sheet at current replacement costs.
FALSE
True/False: An advantage to the LIFO method of accounting for inventory is that it values the cost of goods sold at current replacement costs.
FALSE
True/False: Because of the consistency principle, inventory should never be written down below cost.
FALSE
Which of the following results in the inventory being stated at the most current acquisition costs?
FIFO
The principle of consistency states that:
If changes in accounting principles are made, the reasons for the change and the effects on the company's net income must be disclosed.
The specific identification method is more appropriate than a cost flow assumption method:
If each item in the inventory is unique.
Execucomp Corporation's financial statements in the current year show a loss from discontinued operations, a prior period adjustment, and an unusual and infrequent gain. If Execucomp's income statement is prepared according to generally accepted accounting principles (as illustrated in your text), which of the following four items would appear second in sequence in the income statement? Prior period adjustment Income from continuing operations Loss from discontinued operations Unusual and infrequent gain
Income from continuing operations
In a multiple-step income statement, income taxes are not classified as operating expenses because:
Income taxes do not contribute to the production of revenue.
The financial statements of Baxter Corporation include an Unrealized Holding Gain on Investments. This item: Reduces net income. Indicates that Baxter's marketable securities have a current market value higher than cost. Indicate that Baxter Corporation sold marketable securities during the period at a gain. Is reported in the statement of cash flows.
Indicates that Baxter's marketable securities have a current market value higher than cost.
The lower-of-cost-or-market rule may be applied by comparing the market value of the inventory to the cost of the inventory based on any of the following except: Multiple Choice Individual inventory items. Major inventory categories. Industry inventory standards. The entire inventory.
Industry inventory standards.
After preparing a bank reconciliation, a journal entry would be required for which of the following:
Interest earned on the company's checking account.
Each of these categories of assets is normally shown in the balance sheet at current value, except: -Inventories -Accounts receivable -Short-term investments in marketable securities -Cash
Inventories
Which of the following statements is not a characteristic of the LIFO method of pricing inventory?
Inventory is valued at relatively current costs.
Mark-to-market is the balance sheet valuation standard for: a Investments in all financial assets. b Investments in available-for-sale marketable securities. c Investments in capital stock of any corporation. d Stockholders' equity of any publicly traded corporation.
Investments in available-for-sale marketable securities.
Many companies state in their annual reports that inventory is shown at the lower of its cost or market value. This means that the inventory: Is valued at current replacement cost or historical cost, whichever is less. Has been written down to a carrying value below cost. Is obsolete. Is shown at the lesser of cost or sales value.
Is valued at current replacement cost or historical cost, whichever is less.
During a period of steadily falling prices, which of the following methods of measuring the cost of goods sold is likely to result in reporting the highest gross profit?
LIFO
During periods of inflation, which method will yield the smallest ending inventory and the largest cost of goods sold?
LIFO
Which of the following inventory approaches is not in accord with the physical flow of merchandise in most businesses?
LIFO
Which of the following assets is not subject to depreciation and does not decline in usefulness over time?
Land
Which of the following practices best illustrates efficient management of cash?
Management arranges for a loan to cover projected cash shortages during the production phase of the business cycle each year.
In a period of rising prices, a company is most likely to use the FIFO method of pricing inventory if: Multiple Choice Management wants the same unit cost assigned to items sold and items remaining in inventory. Management wants the company's income statement to indicate the highest possible amounts of gross profit and net income. Each item in the inventory is unique. Management's primary objective is to minimize income taxes.
Management wants the company's income statement to indicate the highest possible amounts of gross profit and net income.
During Year 2, Gillespie Corporation made a loan of $155,000 to a major customer. By the end of Year 2 the customer had paid back $60,000 of the loan plus interest of $12,000. In the statement of cash flows for Year 2, Gillespie Corporation would report: A. A net decrease in cash and cash equivalents of $72,000 for Year 2. B. $72,000 net cash used for investing activities. C. $95,000 net cash used for investing activities, and $12,000 cash provided from operating activities. D. $155,000 net cash used for investing activities, $60,000 net cash provided by financing activities, and $12,000 cash provided by operating activities.
Net cash used for investing activities = Cash outflow from loan to customer of $155,000 − Cash inflow from repayment by customer of $60,000 = $95,000 The cash inflow from the receipt of interest of $12,000 is reported as cash provided by operations.
In a perpetual inventory system, two entries are normally made to record each sales transaction. The purpose of these entries is best described as follows: One entry records the purchase of merchandise and the other records the sale. One entry recognizes the sales revenue and the other recognizes the cost of goods sold. One entry records the cost of goods sold and the other reduces the balance in the Inventory account. One entry updates the subsidiary ledger and the other updates the general ledger.
One entry recognizes the sales revenue and the other recognizes the cost of goods sold.
Which of the following is a measure of short-term liquidity? Quick ratio Return on assets Dividend yield Debt ratio
Quick Ratio
The choice of inventory valuation method can help achieve each of the following independent goals, except:
Reduce cost of merchandise acquired from suppliers.
Armstrong Company recently acquired a new computer system. Which of the following costs associated with the computer should not be debited to the Equipment account?
Replacement of several circuit boards damaged during installation
Uncollectible accounts expense: Is the amount a business must pay to a collection agency to recover amounts on overdue accounts receivable. Is the amount of cash a business must pay each time a credit customer fails to pay his or her account. Represents the loss in value of accounts receivable that are estimated to be uncollectible. Should not occur if the credit department properly investigates prospective customers who wish to purchase merchandise on credit.
Represents the loss in value of accounts receivable that are estimated to be uncollectible.
An example of a non-cash investing or financing activity that is disclosed in a supplementary schedule accompanying the statement of cash flows is: Recording depreciation expense for the current year. Declaring, but not paying, dividends on common stock. Selling land in exchange for a note receivable. Transferring cash from a checking account into a money market fund.
Selling land in exchange for a note receivable.
A 2-for-1 stock split: Is accounted for in the same way as a 100% stock dividend. Increases the number of outstanding shares of common stock, but par value per share remains the same as before the split. Is recorded by transferring the par value of additional shares from retained earnings to the common stock account. Should logically cause the market price per share to drop by approximately 50%.
Should logically cause the market price per share to drop by approximately 50%.
Which of the four inventory approaches is best suited to inventories of high-priced, low-volume items? LIFO FIFO Average cost Specific identification
Specific identification
Which of the following is not a characteristic of the corporate form of organization? -The owners of a corporation cannot lose more than the amount of their investment. -Shares of stock in a corporation are more readily transferable than is an interest in a partnership. -Stockholders have authority to decide by majority vote the amount of dividends to be paid. -The corporation is a very efficient vehicle for obtaining large amounts of capital required for large-scale production.
Stockholders have authority to decide by majority vote the amount of dividends to be paid.
TRUE FALSE Interest paid belongs in the operating activities section of the statement of cash flows.
TRUE
TRUE FALSE A company whose sales are growing at less than the rate of inflation may actually be selling less merchandise every year.
TRUE
TRUE FALSE Gains (or losses) on sales of marketable equity securities, as well as any unrealized holding gains (or losses) on investments in marketable equity securities, are reported in the income statement.
TRUE
TRUE FALSE The inventory method used by a company will affect profitability by affecting the amount of income tax a company owes.
TRUE
TRUE FALSE The inventory turnover rate indicates how quickly inventory sells.
TRUE
TRUE FALSE The specific identification method is acceptable only when the actual cost of individual units of merchandise can be determined from the accounting records.
TRUE
TRUE FALSE To "capitalize" an expenditure means to charge it to an asset account.
TRUE
TRUE FALSE: Any business that sells numerous units of identical products may determine its cost of goods sold using a cost flow assumption, rather than the specific identification method.
TRUE
TRUE/FALSE Earnings per share is equal to net income applicable to common stock, divided by the weighted number of common shares outstanding.
TRUE
TRUE/FALSE A stock dividend provides a stockholder with more shares of stock, but his or her percentage of ownership in the company is no larger than before.
TRUE
TRUE/FALSE A stock split changes the par value of a stock, whereas a stock dividend does not.
TRUE
TRUE/FALSE The operating activities section of the cash flow statement includes the cash effects of those transactions reported on the income statement.
TRUE
TRUE/FALSE While the price-earnings ratio is computed using historical earnings, it reflects investors' expectations of future earnings.
TRUE
TRUE/FALSE When no-par stock is issued, the entire proceeds are credited to Capital Stock and this amount is viewed as legal capital not subject to withdrawal.
TRUE
True/False: During periods of inflation, the LIFO cost flow assumption will yield a lower inventory value than FIFO.
TRUE
If a corporation has only common stock outstanding, which of the following constitutes legal capital at a particular date? The amount in the Common Stock account. The sum of the Common Stock account and any additional paid-in capital. The total amount of stockholders' equity. The sum of the Common Stock account and retained earnings.
The amount in the Common Stock account.
The primary advantage of a just-in-time inventory system is:
The amount of money tied up in inventory is minimized.
When a corporation issues capital stock at a price higher than the par value: The amount received over par value increases retained earnings. The entire issue price is credited to the Capital Stock account. The amount received in excess of par value constitutes profit to the issuing corporation. The amount received in excess of par value becomes part of paid-in capital.
The amount received in excess of par value becomes part of paid-in capital.
Effective internal control over accounts receivable ensures all of the following except: That cash collections from customers are promptly deposited. The availability of adequate cash for conducting business operations. The sale transaction is recorded for the correct dollar amount. All shipments of goods during the period are recorded.
The availability of adequate cash for conducting business operations.
A bank reconciliation explains the differences between:
The balance per bank statement and the cash balance per the accounting records of the depositor.
The gain on the disposal of equipment is recognized when:
The book value of the equipment is less than the value received.
When comparing the units-of-output method of depreciation with straight-line depreciation:
The depreciation expense in the first year may be greater than, equal to, or less under the units-of-output method.
Which of the following does not decrease the cash flow from operating activities? The prepayment of an expense. The purchase of operating equipment. The payment of interest. The prepayment of an expense, the purchase of operating equipment, and the payment of interest all decrease cash from operating activities.
The purchase of operating equipment.
Tomasa Company paid $450,000 to acquire a piece of real estate consisting of land and an office building with a parking lot. In this situation: The purchase price should be apportioned among the Land, Land Improvement, and Building accounts. The entire purchase price should be debited to the Land account only. Land, Land Improvement, and Building accounts should each be credited for the respective appraisal value of each item. Allocation of the entire $450,000 to Land results in an understatement of net income in the current and future accounting periods.
The purchase price should be apportioned among the Land, Land Improvement, and Building accounts.
In computing earnings per share, the number of shares used is:
The weighted average of shares outstanding for the year.
On January 1, Year 1, Juniper Corporation issued 60,000 shares of its total 200,000 authorized shares of $4 par value common stock for $8 per share. On December 31, Year 1, Juniper Corporation's common stock is trading at $12 per share. Assuming Juniper Corporation did not issue any more common stock in Year 1, how does the increase in value of its outstanding stock affect Juniper? Juniper should recognize additional net income for Year 1 of $4 per share, or $240,000. Paid-in capital at December 31, Year 1, is $720,000 (i.e., 60,000 shares times $12 per share). This increase in market value of outstanding stock is not recorded in the financial statements of Juniper Corporation. Each shareholder must pay an additional $4 per share to Juniper.
This increase in market value of outstanding stock is not recorded in the financial statements of Juniper Corporation.
When a bank reconciliation has been satisfactorily completed, the only related entries to be made in the depositor's records are:
To record items that explain the difference between the balance per the accounting records and the adjusted cash balance.
The debt ratio indicates the percentage of: Total liabilities classified as current. Total assets financed by long-term mortgages. Revenue consumed by interest expense. Total assets financed by creditors.
Total assets financed by creditors.
The term paid-in capital means:
Total stockholders' equity minus retained earnings.
A promissory note: Is a conditional promise in writing to pay on demand or at a future date a definite sum of money. Will be recorded on both the books of the payee and the maker. Is recorded by the maker by crediting Note Receivable. Is signed by the person promising to pay the note, called the payee.
Will be recorded on both the books of the payee and the maker.
Return on assets measures the efficiency with which management: a Generates earnings from the assets under its control, regardless of how these assets are financed. b Generates earnings from the assets under its control, giving consideration to any costs of financing these assets. c Generates cash from the assets under its control, regardless of accrual-based measures of profitability. d Converts its current assets into cash.
a Generates earnings from the assets under its control, regardless of how these assets are financed.
Which of the following most likely explains why a corporation's stock trades at a very high price-earnings ratio? a Investors expect the corporation to have higher earnings in the future. b The corporation pays a very low dividend on its stock. c The corporation has several classes of stock outstanding. d The corporation is large with very low risk.
a Investors expect the corporation to have higher earnings in the future.
In the long-run, it is most important for a business to generate an inflow of cash from its: a Operating activities. b Stockholders. c Investing activities. d Creditors.
a Operating activities.
Cage Corporation purchases Presley Company's entire business for $2,700,000. The fair market value of Presley's net identifiable assets is $2,400,000. a Presley should record goodwill of $300,000. b Cage paid $300,000 for goodwill generated by Presley. c Cage should charge the $300,000 excess paid for Presley Company directly to expense. d Presley should record amortization over a period not to exceed 40 years
b Cage paid $300,000 for goodwill generated by Presley.
The quick ratio is considered more useful than the current ratio for: a Evaluating the profitability of a business that sells inventory very quickly, such as a restaurant. b Evaluating the solvency of a business that turns inventory into cash very slowly, such as a shipbuilder. c Evaluating long-term credit risk. d Evaluating investors' expectations concerning future earnings.
b Evaluating the solvency of a business that turns inventory into cash very slowly, such as a shipbuilder.
During a period of steadily rising prices, which of the following inventory valuation methods is likely to result in the lowest cost of goods sold? a LIFO. b FIFO. c The retail method. d The gross profit method.
b FIFO.
The debt ratio is a measure of: a Net cash flows relating to financing activities. b Long-term credit risk. c Short-term solvency. d Profitability, independent of the manner in which assets are financed.
b Long-term credit risk.
The primary reason for the popularity of the LIFO flow assumption is that this method: a Is most appropriate when each item in inventory is unique. b Tends to minimize taxable income. c Causes inventory to be reported at or near its current replacement cost. d Reduces the amount of money "tied up" in inventory.
b Tends to minimize taxable income
Which of the following correctly describes a difference between the direct method and the indirect method of computing operating cash flow? a The direct method is used when accounting records are kept on a cash basis; the indirect method is used when accounting records are maintained on an accrual basis. b The direct method may be used only when a company maintains special journals for cash receipts and cash disbursements; the indirect method is used in all other situations. c Both the direct and the indirect methods result in the same net cash flow from operating activities, but the format of this section of the statement of cash flows is different under the alternative methods. d The direct method is used when all accounting records and bank statements are available; the indirect method is used when some accounting records or documents are missing or have been destroyed.
c Both the direct and the indirect methods result in the same net cash flow from operating activities, but the format of this section of the statement of cash flows is different under the alternative methods.
A transaction that will increase the quick ratio but cause the current ratio to decline is: a Short-term borrowing. b Investing cash in plant assets. c Sale of inventory at a price below cost. d Collection of an account receivable.
c Sale of inventory at a price below cost.
Which of the following is not a characteristic of most preferred stocks? a Preference as to dividends. b No voting power. c Convertible into common stock. d Preference as to assets in the event of liquidation of the company.
c. convertible into common stock
Throughout the current year, Calverton Company treated sales taxes paid on purchases of plant assets as revenue expenditures. As a result, the current year's: a Net income is overstated. b Revenue is overstated. c Depreciation expense is understated. d None of the above; payments of sales taxes should be treated as revenue expenditures.
d None of the above; payments of sales taxes should be treated as revenue expenditures.
In a periodic inventory system, the cost of goods sold is determined by: a Multiplying net sales for the period by a cost ratio. b Journal entries made at the time of each sales transaction. c Physically counting the quantities of merchandise sold each day, and determining the cost of these items at year-end. d Subtracting the cost assigned to the ending inventory from the cost of goods available for sale during the period.
d Subtracting the cost assigned to the ending inventory from the cost of goods available for sale during the period.
When a stock dividend is declared, total stockholders' equity will:
not change
In a corporation's organization chart, who has/have the highest position? Stockholders. Board of directors. CEO. President.
sotckholders
