ACCT 5312 - Quiz 2 Study Guide

Alternative names used to describe the income statement include all of the following except the:

Statement of financial position

Which of the following is a CURRENT asset?

Cash

If total liabilities are equal to $8,000 and total stockholders' equity is equal to 4,000 then:

Total assets are equal to $12,000

In the DuPoint model for analyzing ROI, turnover is calculated as _____ divided by the average total _____.

Sales Assets

Which of the following are names for the income statement?

Statement of Earnings Statement of Operations Profit and loss statement

The balance sheet is sometimes called the

Statement of Financial Position

What do you need to know to calculate the amount of interest earned on an investment?

The principal amount invested The interest rate per year The length of time the funds are invested

A corporation's annual report contains the reporting firm's financial statements and each of the following key components, EXCEPT:

The reporting firm's operating budget for the next fiscal year

With a semilogarithmic graph, the ___ scale is logarithmic.

vertical

Calculate working capital, assuming that cash = $6,000, land = $105,000, accounts receivable = $19,000, merchandise inventory = $20,000, accounts payable = $15,000, long-term debt = $80,000, and retained earnings = $55,000.

$30,000 ($6,000 + $19,000 + $20,000 - $15,000 = $30,000)

The current ratio is calculated as current assets ____ current liabilities

/ (divided)

Calculate the acid-ratio, assuming that cash = $6,000, land = $105,000, accounts receivable = $19,000, merchandise inventory = $20,000, accounts payable = $15,000, long-term debt = $80,000, and retained earnings = $55,000.

1.7 ($6,000 +$19,000) / $15,000

If margin is 9 percent and turnover rate is 2.0 times per year, then ROI is ____.

18

The annual return on a six-month investment of $1,000 that earns a return of $100 is ____.

20%

Calculate the current ratio, assuming that cash = $6,000, land = $105,000, accounts receivable = $19,000, merchandise inventory = $20,000, accounts payable = $15,000, long-term debt = $80,000, and retained earnings = $55,000.

3.0 ($6,000 + $19,000 + $20,000)/$15,000

Which statement is true regarding a balance sheet?

A balance sheet is generally prepared at the end of a fiscal reporting period.

The two main components of paid-in capital are common stock and:

Additional paid-in capital

Which of the following are included in assets?

Equipment Cash Accounts Receivable Merchandise Inventory

With a semilogarithmic graph, the ___ scale is arithmetic.

Horizontal

Which of the following is NOT one of the three principal forms of business organization?

LLC

Income from operations:

is a subtotal on the income statement that is not affected by the firm's tax rate or by amount of interest expense incurred

A firm's liquidity refers to ___.

its ability to meet its current obligations as they become due

Which of the following would represent a correct calculation of interest earned on a six month, $100 Investment?

$100 principal x 10% rate x 6/12 = $5 interest

Working capital is calculated as current assets ____ current liabilities

- (minus)

Rearrange the following accounts or captions in the order in which they appear on the income statement. 1. Income before taxes 2. Net sales 3. Income from operations 4. Gross profit

2,4,3,1

Calculate the acid-ratio, assuming that cash + accounts receivable = $50,000, merchandise inventory = $10,000, non-current assets = $40,000, current liabilities = $20,000, non-current liabilities = $50,000, and stockholders' equity = $30,000.

2.5 ($50,000/$20,000 = 2.5)

If net income =$20,000 and average stockholders' equity = $80,000, then ROE = ____ percent.

25

Which of the following items are normally included as key components of a corporation's annual report?

A five-year (or longer) summary of key financial data The notes to the financial statement The report of the external auditor's examination of the financial statements

_____ _____ refers to the entity for which the financial statements are being prepared

Accounting Entity

The rate of return on an investment was 10 percent ____.

And $500 was invested for one year, then the return on the investment would have been $50

CURRENT liabilities:

Are those liabilities that are likely to be paid with cash within one year of the balance sheet date

The balance sheet:

As of the end of one period is the balance sheet at the beginning of the next period

The income statement reports all of the following EXCEPT:

Assets

If net income = $10,000, ROE = 20 percent, and stockholders' equity at the end of the year = $55,000, then which of the following is true?

Average stockholders' equity = $50,000 and stockholders' equity at the beginning of the year = $45,000.

Which of the following is NOT true regarding cash?

Cash minus current liabilities is equal to net assets

Which of the following statements are true regarding the statement of cash flows

Cash received from the sale of long-term debt is a financing activity, and the activity is a source of cash Depreciation expense is added back to the net income in the operating activities section The increase of accounts payable for the year is a source of cash and is shown as an operating activity Cash received from the sale of buildings or equipment is an investing activity, and the activity is a source of cash If a current liability amount increases the the year, this will show up as a source of cash in the operating activities section Payment of cash dividends on common stock is a financing activity, and the activity use of cash The net increase in cash for the year is equal to the sum of the net cash provided or used by operating, investing, and financing activities Cash paid for the purchase of buildings or equipment is an investing activity, and the activity is a use of cash Cash received from the sale of common stock is a financing activity, and the activity is a source of cash Net income from the income statement is the starting point for determining cash provided or used by operating activities

The two main components of paid-in capital are ____ ____ and ____ paid-in capital

Common Stock Additional

Financial statements that show a column for the current year and the prior year are known as _____ financial statements

Comparative

What are three principal forms of business organization?

Corporation Proprietorship Partnership

Most assets are not recorded at their current market values because of the limitations imposed by the ____ principle.

Cost

Retained earnings represents the ____ net income of the entity that has been retained for use in the business.

Cumulative

Working capital refers to the excess of a firm's ____.

Current assets over current liabilities

The matching concept means that:

Expenses incurred to generate revenues must be matched to revenues earned for any given period

What information do the current generally accepted accounting principles and auditing standards require the financial statements of an entity to show for the reporting period?

Financial position at the end of the period Investments by and distribution owners (i.e., stockholders) during the period Cash Flows during the period Earnings for the period

The _____ _____ requires that the financial statements and notes include all necessary information to prevent a reasonably astute user of the financial statements from being misled

Full Disclosure

Which of the following accounts are reported on the income statement?

Gains Expenses Revenues Losses

Which statements about margins are correct?

In the context of the DuPoint model of ROI, it refers to the firm's net profit margin, not its gross margin It emphasizes that for a firm to be profitable, some portion of every sales dollar must work its way to the bottom line (net income) It is calculated by dividing net income by sales

An entity's earnings for a reporting period are reported on the:

Income Statement

Revenue, expenses, gains, and losses are reported on the ____ ____.

Income Statement

The balance sheet:

Is like a snapshot of the organization's financial position, frozen at a specific point in time.

Which of the following statements are true regarding the balance sheet equation?

It can be expressed as A=L +SE It is another term for accounting equation It must remain in balance after each transaction is recorded

Which statement about trend analysis is correct?

It generally leads to a more meaningful analysis when conducted over several years that does the observation of a single year's ratio result

Which statement is true regarding the income statement?

It is a link between the balance sheets at the beginning and end of the year

Which of the following statements are true regarding income from operations?

It is a subtotal on the income statement that is not affected by the firm's tax rate or by the amount of interest expense incurred It is frequently called earnings from operations It is frequently called operating income

Which statements about turnover are correct?

It is calculated by dividing sales by average total assets It relates to the efficiency with which a firm's assets are used in the revenue generating process

Which statements are true regarding stockholders' equity?

It is equal to assets minus liabilities It is sometimes referred to as net assets it is sometimes referred to as net worth

Which statement correctly describes liquidity?

It is measured by relating current assets and current liabilities as reported on the balance sheet It is a firm's ability to meet its current obligations as they become due

Which of the following statements are true regarding cost of goods sold?

It is normally shown as a separate expense because of its significance It represents the total cost of merchandise sold to customers It is frequently called cost of sales or cost of products sold

Which of the following statements are true regarding stockholders' equity?

It is sometimes referred to as owners' equity It is sometimes referred to as net worth It is sometimes referred to as net assets It is the equity in the assets that remain after subtracting the liabilities

Most assets are reported on the balance sheet based on their:

Original (historical) cost

The two main components reported on the statement of changes in the stockholders' equity are:

Paid-in capital and retained earnings

How is the interest earned on an investment calculated?

Principal ($) x Rate (%) x Time (in years)

Assets are _____ future economic benefits obtained or controlled by a particular entity as a result of _____

Probable Past

If sales = $500,000, turnover = 1.5, and net income = $75,000, then:

ROI = 22.5% and margin = 15%

Accrual accounting results in:

Recognition of revenues when they are earned (at the point of sale) and recognition of expenses when they are incurred

Which of the following statement are true regarding the current ratio?

Rent payable is included in the denominator Merchandise inventory is included in the numerator The current ratio is calculated as current assets divided by current liabilities

CURRENT assets include cash and other assets:

That are likely to be converted into cash or used to benefit the entity within one year

If total assets are equal to $10,000 and total stockholders' equity is equal to $3,000, then:

Total liabilities are equal to $7,000

Which concept/principle support the notion that for companies reporting their financial statements in the United States dollars, no adjustments are made for the effects of inflation?

Unit of measurement

The three concepts/principles that relate to transactions are:

Unit of measurement, cost principle, and objectivity

Stockholders' equity is the ownership right of the stockholders in the ____ that remain after subtracting the ____ of the corporation.

Assets Liabilities

If margin = 5 percent, average total assets = $600,000, and ROI = 25 percent, then ______.

Net income = $150,000, turnover = 5.0 and sales = $3,000,000

Net sales:

Represent the amount of sales of merchandise to customers, less any sales returns

Cost of goods sold:

Represents the total cost of merchandise sold to customers

Which of the following statements is NOT correct regarding retained earnings?

Retained earnings is increased each year by the entity's net income and dividends

In the horizontal model representation of the financial statements:

The arrow going from net income to stockholders' equity means that net income affects the retained earnings

The annual rate of return on a two-year investment of $1,000 that earns a total return of $100 is _____.

5%

If turnover is 1.5 times per year and ROI is 9 percent, then margin is _____ percent.

6

Davy Ltd. borrows money from a bank that has to be repaid within 3 months. For this transaction, Davy Ltd. debited the cash amount and credited the short-term debt account in its book of accounts. Therefore, the short-term debt account is an example of _______.

A NON-CURRENT liability

The concept that refers to the presumption that the entity will continue to operate in the future is known as the:

Going concern concept

The three concepts/principles that relate to the entire model are:

Accounting equation, accounting entity, and going concern

Which of the following statements are true about liabilities of a firm?

Accounts payable is an example of liabilities Liabilities are probable future sacrifices of economic benefit

Stockholders' equity is the ownership right of the stockholders' in the _____ that remain after subtracting the _____ of the corporation.

Assets Liabilities

Which of the following statements are true about the assets of a firm?

Assets represent the amount of resources controlled by the firm The economic benefits associated with assets must be obtained or controlled by the firm Assets result from past transactions or events of the firm Assets are probable future economic benefits to the firm

Which of the following are true regarding the working capital calculation?

Cash is part of current assets Merchandise inventory is part of current assets

Which of the following statements are true regarding the relationship between the current ratio and the acid-test ratio?

For any given company, the current ratio will generally be higher than the acid-test ratio The acid-test ratio demonstrates the extent to which a firm can meet its current obligations even if none of its inventory can be sold

Which of the following calculations are made on the income statement?

Income before income taxes minus income taxes equals net income Gross profit minus selling, general, and administrative expenses equals income from operations Net sales minus the cost of goods sold equals gross profit Income from operations minus interest expense equals income before taxes

The link between last year's balance sheet and this year's balance sheet is this year's:

Income statement

Trend analysis of ratios:

Is a meaningful comparison despite the use of different financial accounting alternatives to develop the data used in ration

Net worth:

Is a misleading term because assets and liabilities are not generally "worth" the amounts reported on the balance sheet

Which statements about working capital are correct?

It is the excess of a firm's current assets over its current liabilities It is expressed as a dollar amount, rather than as a fractional ratio

Which of the following statements are true about liabilities of a firm?

Liabilities are amounts owned by other entities Liabilities are present obligations to transfer assets or provide services to other organizations Liabilities are claims against the firm by its creditors

Which of the following statements are true about liabilities of a firm?

Liabilities are claims against a firm by its creditors Liabilities are amounts owed to other entities Liabilities are present obligations to transfer assets or provide services to other organizations

Which of the following statements are true about liabilities of a firm?

Liabilities are probable future sacrifices of economic benefits Accounts payable is an example of liabilities

Which of the following is true regarding the balance sheet components?

Liabilities are the obligations of the organizations

_____ means that absolute exactness is not necessary in the amounts shown in the financial statements

Materiality

The numerator of the acid-test includes most current assets but specifically excludes ____ ____.

Merchandise Inventory

If sales = $100,000, turnover 2.0, and ROI = 10 percent, then _____.

Net income = $5,000 and margin = 5%

Which of the following are reported in the statement of changes in stockholders' equity?

Net income for the year Common stock issued during the year Dividends for the year Total stockholders' equity at the end of the year Year-end balance of retained earnings

Which of the following statements are NOT true about net sales?

Net sales represent the difference between gross profit and cost of goods sold Net sales include only credit sales, not cash sales

_____ refers to accountants' desire to have a given transaction recorded in the same way in all situations

Objectivity

In the horizontal model representation of the financial statements, the arrow going from net income to stockholders' equity means that net income affects the _____ _____ account within stockholders' equity

Retained Earnings

Which of the following statements are true regarding the acid-test ratio?

The acid-test ratio sometimes called the quick ratio Temporary cash investments are included in the numerator of the acid-test ratio The acid-test ratio can be calculated as (cash (including temporary cash investments) + accounts receivable) divided by current liabilities The acid-test ratio uses the same denominator as does the current ratio The acid-test ratio is a mire conservative measure of liquidity than the current ratio The acid-test ratio excludes merchandise inventory from the numerator

A firm prepares the comparative financial statement so that _____.

The users of the data can easily spot changes in the firm's financial position and in its results of operations