ACG 2021 Paterson FSU Ch.2 Quiz

Issuing new shares of common stock will

increase common stock The issuance of common stock increases the common stock account; it does not affect retained earnings.

Vista Corporation has assets of $3,000,000, common stock of $780,000, and retained earnings of $475,000. What are the company's liabilities?

$1,745,000 Solution: The basic accounting equation is: *Assets = Liabilities + Equity* This equation must always balance, meaning total assets must equal total liabilities plus total stockholders' equity. Equity equals paid-in capital (i.e., common stock) plus retained earnings. Equity = 780,000 + 475,000 = 1,255,000 Re-arranging the accounting equation to solve for liabilities yields the following: Liabilities = Assets - Equity Fill-in assets and equity into the accounting equation and solve for liabilities. Liabilities = Assets - Equity = 3,000,000 - 1,255,000 Liabilities = 1,745,000

Riverview Inc. reports the following balances and amounts. The following information is presented in random order. Accounts payable, $35,000 Cash provided by operations, 90,000 Accounts receivable, 37,500 Net income, 36,000 Average common shares, 20,000 Salaries and wages payable, 8,000 Average current liabilities, 110,000 Stockholders' equity, 240,000 Average total assets, 600,000 Current assets, 300,000 Average total liabilities, 320,000 Current liabilities, 120,000 Dividends paid to preferred shareholders, 10,000 How much is earnings per share?

$1.30 Earnings per share equals net income earned on each share of common stock. *Earnings per share equals net income minus preferred dividends divided by the average number of shares outstanding.* This company has no preferred dividends. Earnings per share = ($36,000 - 10,000)/20,000 shares = $1.30/share.

Koehler Corporation reported net income of $28,000; net sales $400,000; beginning common shares outstanding of 12,000 and ending common shares outstanding of 20,000. There were no preferred dividends. What is its earnings per share (rounded to two decimal places)?

$1.75 Earnings per share = (Net income less dividends to preferred shareholders)/Average number of outstanding shares of common stock Earnings per share = ($28,000 - 0)/[(12,000 share + 20,000 share)/2] Earnings per share = $28,000/16,000 share = $1.75 per share

Jose Inc. reports the following balances and amounts. The following information is presented in random order (amounts are in dollars). Accounts payable, 35,000 Cash provided by operations, 90,000 Accounts receivable, 37,500 Net income, 36,000 Average common shares, 20,000 Salaries and wages payable, 8,000 Average current liabilities, 110,000 Stockholders' equity, 240,000 Average and total assets, 600,000 Total current assets, 300,000 Average total liabilities, 320,000 Total current liabilities, 120,000 Cash, 100,000 How much is its working capital?

$180,000 *Working capital is current assets minus current liabilities.* Working capital = $300,000 - $120,000 = $180,000

The net cash inflow from operating activities is $250,000; cash received from issuing stock is $150,000; cash paid for capital expenditures is $55,000; cash paid for bonds held as an investment is $5,000; and dividends paid are $10,000. How much is free cash flow?

$185,000 Solution: Free cash flow is cash provided by operating activities minus cash paid for capital expenditures and dividends paid. Free cash flow = $250,000 - 55,000 - 10,000 = $185,000.

At the end of the year, Green Company had retained earnings of $2,640,000. During the year, the company issued stock for $120,000 and paid dividends of $25,000. Net income for the year was $412,000. How much was the retained earnings balance at the beginning of the same year?

$2,253,000 Ending retained earnings equals beginning retained earnings plus net income minus dividends. $2,640,000 = X + $412,000 - $25,000 Solve for X: Beginning retained earnings = $2,253,000.

Riverview Inc. reports the following balances and amounts. The following information is presented in random order. Accounts payable, $50,000 Cash provided by operations, 100,000 Accounts receivable, 35,000 Net income, 40,000 Average common shares, 15,000 Salaries and wages payable, 40,000 Average current liabilities, 225,000 Stockholders' equity, 200,000 Average total assets, 600,000 Current assets, 300,000 Average total liabilities, 320,000 Current liabilities, 250,000 Dividends paid to preferred shareholders, 5,000 How much is earnings per share?

$2.33 Earnings per share equals net income earned on each share of common stock. *Earnings per share equals net income minus preferred dividends divided by the average number of shares outstanding.* This company has no preferred dividends. Earnings per share = ($40,000 - 5,000)/15,000 shares = $2.33/share.

The following information is available for Hopper Corporation: (in millions) Hopper Corporation 2018 2017 Preferred dividends 20 10 Net income 480 500 Shares outstanding at the end of the year 200 180 Shares outstanding at the beginning of the year 180 160 Based on this information, what is the amount of Hopper's earnings per share (rounded to two decimals) for 2018?

$2.42 Solution: *Average common shares outstanding = (Beginning common shares outstanding + ending common shares outstanding)/2* Average common shares outstanding = (180 shares + 200 shares)/2 = 190 shares *Earnings per share = (Net income - preferred dividends)/average common shares outstanding* Earnings per share = ($480 - $20)/190 shares = $2.42 per share

Stonebrook Corporation reported net income of $32,000, net sales of $500,000, and average common shares outstanding of 12,000. There were $2,000 of preferred stock dividends. How much was its earnings per share?

$2.50 Solution: Earnings per share equals net income earned on each share of common stock. *Earnings per share equals net income minus preferred dividends divided by the average number of shares outstanding.* This company has no preferred dividends. Earnings per share = ($32,000 - $2,000)/12,000 shares = $2.50/share.

Stonebrook Corporation reported net income of $24,000, net sales of $400,000, and average common shares outstanding of 6,000. There were $8,000 of preferred stock dividends. How much was its earnings per share?

$2.67 Earnings per share equals net income earned on each share of common stock. *Earnings per share equals net income minus preferred dividends divided by the average number of shares outstanding*. This company has no preferred dividends. Earnings per share = ($24,000 - $8,000)/6,000 shares = $2.67/share.

Based on the following accounts and year-end account balances for Saile Corporation, determine the amount of property, plant, and equipment to be reported on Saile's classified balance sheet. Accounts payable................................ $ 70,000 Accounts receivable............................. 50,000 Accumulated depreciation................. 30,000 Buildings................................................. 150,000 Cash........................................................ 35,000 Common stock..................................... 325,000 Inventory................................................ 70,000 Land......................................................... 100,000 Prepaid insurance................................. 40,000 Stock investments................................. 90,000 Trademarks............................................. 70,000

$220,000 Solution: *Property, plant, and equipment includes equipment plus buildings minus accumulated depreciation plus land* = 150,000 - 30,000 + 100,000 = 220,000

Based on the following data, what is the amount of working capital? Accounts payable................................ $ 64,000 Accounts receivable........................... 114,000 Cash...................................................... 60,000 Intangible assets................................. 100,000 Inventory.............................................. 138,000 Equipment....................................... 300,000 Long-term investments..................... 160,000 Short-term investments...................... 80,000 Notes payable (due in 2 years).......... 200,000 Notes payable (due in 6 months)....... 56,000 Prepaid insurance................................. 2,000

$274,000 Solution: *Working capital = current assets - current liabilities* Current assets = cash and assets expected to be converted into cash or consumed in one year or operating cycle, whichever is longer. *Current assets = Cash + Accounts receivable + inventory + short-term investments + prepaid insurance* Current assets = 60,000 + 114,000 + 138,000 + 80,000 + 2,000 = 394,000 Current liabilities = liabilities to be paid in one year or operating cycle, whichever is longer. *Current liabilities = Accounts payable + Notes payable (short-term)* Current liabilities = 64,000 + 56,000 = 120,000 Working capital = 394,000 - 120,000 = 274,000

Twilight Corporation has liabilities of $3,000,000, common stock of $780,000, and retained earnings of $475,000. What are the company's assets?

$4,255,000 The basic accounting equation is: *Assets = Liabilities + Equity* This equation must always balance, meaning total assets must equal total liabilities plus total stockholders' equity. *Equity equals paid-in capital (i.e., common stock) plus retained earnings.* Equity = 780,000 + 475,000 = 1,255,000 Fill-in assets and equity into the accounting equation and solve for liabilities. Assets = Liabilities + Equity = 3,000,000 + 1,255,000 Assets = 4,255,000

Pilgrim Corporation reports the following on its financial statements. Cash paid for new equipment, $30,000 Cash collected from customers, $100,000 Paid a note payable, $5,000 Cash collected in exchange for issuing additional shares of Pilgrim stock to stockholders, $15,000 Cash dividends paid, $25,000 The company reports $75,000 of net income for the year and it has $90,000 of cash at year-end. What is the company's free cash flow?

$45,000 *Free cash flow is computed by subtracting capital expenditures and cash dividends from cash provided by operations.* The company has only one cash inflow or outflow from *operating activities (i.e., cash collected from customers)* and it has only one *capital expenditure (cash paid for new equipment).* Free cash flow = $100,000 - $30,000 - $25,000 = $45,000. The payment of the note payable is not an operating activity cash flow. It is a financing activity cash flow, and it is neither a capital expenditure nor a payment of a dividend so it is not used to compute free cash flow. Similarly, the cash collected from stockholders who paid for additional shares of stock is a financing activity inflow for the company, but it does not affect free cash flow.

Twilight Corporation has assets of $2,300,000, common stock of $550,000, and retained earnings of $1,250,000. What are the company's liabilities?

$500,000 The basic accounting equation is: *Assets = Liabilities + Equity* This equation must always balance, meaning total assets must equal total liabilities plus total stockholders' equity. *Equity equals paid-in capital (i.e., common stock) plus retained earnings.* Equity = 550,000 + 1,250,000 = 1,800,000 Re-arranging the accounting equation to solve for liabilities yields the following: Liabilities = Assets - Equity Fill-in assets and equity into the accounting equation and solve for liabilities. Liabilities = Assets - Equity = 2,300,000 - 1,800,000 Liabilities = 500,000

Suppose that Maroney Corporation produced and sold 4,800 laptop computers during the year. It reported $140,000 cash provided by operating activities. In order to maintain production at 4,800 laptops, Maroney paid $35,000 for equipment. Maroney paid $10,000 in dividends and it paid a $25,000 note payable. Shortly before year-end, Maroney received $20,000 by issuing additional shares of its stock. What is Maroney's free cash flow?

$95,000 Solution: *Free cash flow equals cash provided by operations minus cash paid for capital expenditures (e.g., buildings, equipment, etc.) and cash dividends.* The company has only one cash inflow or out-flow from operating activities (i.e., cash collected from customers) and it has only one capital expenditure (cash paid for new equipment). Free cash flow = $140,000 - 35,000 - 10,000 = $95,000

Rose Company has the following accounts and balances: Accounts payable............................. $ 40,000 Accounts receivable............................. 70,000 Accumulated depreciation.................. 50,000 Buildings................................................. 500,000 Cash........................................................ 100,000 Common stock..................................... 690,000 Equipment......................................... 120,000 Inventory................................................ 200,000 Investments in securities (long-term). 20,000 Land......................................................... 150,000 Notes payable..................................... 300,000 Patents................................................ 10,000 Prepaid insurance................................. 20,000 Retained earnings................................. 150,000 Trademarks........................................... 40,000 What is Rose Company's (i) current assets and (ii) property, plant & equipment?

(i) $390,000 and (ii) $720,000 Classified balance sheets partition a company's assets into four categories: (i) current assets (e.g., cash, accounts receivable, inventory), (ii) long-term investments (e.g., investments in securities other companies, such as stocks and bonds, expected to be held more than one year), (iii) property, plant, and equipment (e.g., buildings, land, equipment, delivery vehicles, and furniture minus accumulated depreciation)), and (iv) intangibles (e.g., goodwill, patents, copyrights, trademarks). Rose's *current assets include accounts receivable, cash, inventory, and prepaid insurance.* Current assets = 70,000 + 100,000 + 200,000 + 20,000 = 390,000 Rose's *property, plant, and equipment includes buildings, equipment and land minus accumulated depreciation.* Property, plant and equipment = 500,000 + 120,000 + 150,000 - 50,000 = 720,000

Clawson Corporation has current assets of $3,010,000 and current liabilities of $2,150,000. If Clawson Corporation pays $200,000 of its accounts payable what will its new current ratio be?

1.44 *Current ratio equals current assets divided by current liabilities.* Accounts payable is a current liability. Paying accounts payable reduces cash (i.e., current assets) and reduces accounts payable (i.e., current liabilities). Current ratio = ($3,010,000 - $200,000) / ($2,150,000 - $200,000) Current ratio = 1.44 (i.e., 1.44 to 1 or 1.44:1)

Use the following data to calculate the current ratio. Accounts payable................................. $ 55,000 Accounts receivable............................. 50,000 Accumulated depreciation.................. 30,000 Buildings................................................. 115,000 Cash........................................................ 35,000 Common stock...................................... 210,000 Inventory................................................ 70,000 Land......................................................... 95,000 Long-term stock investments............. 90,000 Notes payable (due in 9 months)....... 10,000 Prepaid insurance................................. 40,000 Salaries and wages payable................. 10,000 Trademarks.............................................. 70,000

2.60 Solution: *Current ratio = current assets/current liabilities* Current assets = cash and assets expected to be converted into cash or consumed in one year or operating cycle, whichever is longer. *Current assets = Cash + Accounts receivable + inventory + prepaid insurance* Current assets = 35,000 + 50,000 + 70,000 + 40,000 = 195,000 Current liabilities = liabilities to be paid in one year or operating cycle, whichever is longer. *Current liabilities = Accounts payable + Notes payable (short-term)* Current liabilities = 55,000 + 10,000 + 10,000 = 75,000 Current ratio = 195,000/75,000 = 2.60

Based on the following data, what is the current ratio? Accounts payable................................ $ 64,000 Accounts receivable........................... 114,000 Accumulated depreciation.............. 160,000 Cash...................................................... 60,000 Equipment......................................... 1,500,000 Inventory.............................................. 138,000 Long-term investments..................... 160,000 Notes payable (due in 3 months)...... 56,000 Notes payable (due in 2 years)......... 200,000 Patents................................................ 100,000 Prepaid insurance................................. 2,000 Short-term investments...................... 80,000

3.28 Solution: Current ratio = current assets/current liabilities Current assets = cash and assets expected to be converted into cash or consumed in one year or operating cycle, whichever is longer. *Current assets = Cash + Accounts receivable + inventory + short-term investments + prepaid insurance* Current assets = 60,000 + 114,000 + 138,000 + 80,000 + 2,000 = 394,000 Current liabilities = liabilities to be paid in one year or operating cycle, whichever is longer. *Current liabilities = Accounts payable + Notes payable (short-term)* Current liabilities = 64,000 + 56,000 = 120,000 Current ratio = 394,000/120,000 = 3.28

What are generally accepted accounting principles?

A set of accounting rules and practices that have authoritative support All U.S. companies get guidance from a set of rules and practices that have authoritative support, referred to as generally accepted accounting principles (GAAP). Standard-setting bodies, in consultation with the accounting profession and the business community, determine these accounting standards.

Which of these measures is an evaluation of a company's ability to pay current liabilities? A. both the current ratio and working capital B. current ratio C. both earnings per share and current ratio D. earnings per share E. working capital

A. both the current ratio and working capital Solution: *The current ratio measures liquidity as current assets divided by current liabilities. Higher current ratios indicate higher liquidity. Working capital measures liquidity as current assets minus current liabilities. Higher working capital indicates higher liquidity.*

Which of the following is considered property, plant, and equipment on a classified balance sheet? A. land B. accounts receivable C. investments in another company's stock D. depreciation E. copyrights

A. land Land is classified as property, plant, and equipment on a classified balance sheet. *Be careful because occasionally a company buys land with the intention of using it but the land sits idle. During the time it sits idle before being used, land would be classified as a long-term investment. *Only land described as sitting idle or held as an investment should be classified as an investment. Otherwise, classify it as property, plant, and equipment. If land or other real estate is held for investment or sits idle, the account name should reflect it (e.g., Land held for investment, Investment in real estate).

Which of the following is NOT a fundamental quality of useful accounting information? A. neutrality B. relevance C. verifiability D. faithful representation E. all of these are fundamental qualities of useful accounting information

C. verifiability Solution: *Verifiability refers to the process or capability of being able to prove or verify that the data is free from error. This is one of the enhancing qualities of useful information.* Relevance is accounting information that would make a difference in a business decision It is one of the fundamental qualities of useful information. To be a faithful representation, financial information must be neutral. It cannot be biased or presented with the intent to influence the decision towards a predetermined goal. If information is a faithful representation or factual, then it depicts what really happened. Faithful representation is one of the fundamental qualities of useful information.

Which of the following is NOT an example of an intangible asset? A. trademarks B. goodwill C. patents D. copyrights E. accounts receivable

E. accounts receivable Most assets have physical substance (e.g., cash, inventory, equipment). Others do not, and certain *assets that lack physical substance* are classified as intangible assets. Be careful because accounts receivable can be described as lacking physical substance but *accounts receivable are classified as current assets* probably because of their liquidity whereas intangible assets tend to be less liquid and more likely to be held long-term.

Which of the following are constraints that allow a company to modify generally accepted accounting principles without jeopardizing the usefulness of the financial statements? A. timeliness and neutrality B. calendar constraint C. consistency and comparability D. relevance and faithful representation E. cost constraint

E. cost constraint Solution: *The cost constraint states that the cost that companies incur to provide information should be weighed against the benefit that financial statement users will gain from having the information available.* Consistency and comparability must be maintained to comply with GAAP. These features allow comparisons from year-to-year and within the industry. Relevance and faithful representation must be maintained to comply with GAAP. These factors insure the financial information is factual, neutral, and timely for the decision makers. Timeliness and neutrality must be maintained for GAAP. These features preclude expired information or biased information from being provided to decision makers.

On a classified balance sheet, short-term investments are classified as

a current asset On a classified balance sheet assets are partitioned into four subcategories, including (i) current assets, (ii) long-term investments, (iii) property, plant, and equipment, (iv) and intangible assets. Current assets are *assets that a company expects to convert to cash or use up within one year or its operating cycle* whichever is longer. *Cash, accounts receivable, inventory, short-term investments are examples of current assets.*

A company purchased a tract of land on which it expects to build a factory in approximately five years. During the five years before construction, the land will be idle. In what classification should the land be reported?

a long-term investment Solution: *Land or a building which is currently not used in operation is considered to be a long-term investment. Land being used in a business would be listed among property, plant, and equipment. Only land described as sitting idle or held as an investment should be classified as an investment.* Otherwise, classify it as property, plant, and equipment. If land or other real estate is held for investment or sits idle, the account name should reflect it (e.g., Land held for investment, Investment in real estate).

Hans Company purchased bonds of Zimmer Corporation. Hans Company expects to hold the Zimmer Corporation bonds for more than one year. On its classified balance sheet, Hans Company should report the Zimmer Corporation bonds as

a long-term investment Classified balance sheets partition a company's assets into four categories: (i) current assets (e.g., cash, accounts receivable, inventory), (ii) *long-term investments (e.g., investments in other companies' stocks and bonds expected to be held more than one year and assets [such as land and buildings] not currently being used in its operating activities)*, (iii) property, plant, and equipment (e.g., buildings, land, equipment, accumulated depreciation)), and (iv) intangibles (e.g., goodwill, patents, copyrights, trademarks)

Evans Company purchased stocks of Stone Corporation. Evans Company expects to hold the Stone Corporation stock for more than one year. On its classified balance sheet, Evans Company should report the Stone Corporation stock as

a long-term investment Solution: Classified balance sheets partition a company's assets into four categories: (i) current assets (e.g., cash, accounts receivable, inventory), *(ii) long-term investments (e.g., investments in other companies' stocks and bonds expected to be held more than one year and assets [such as land and buildings] not currently being used in its operating activities)*, (iii) property, plant, and equipment (e.g., buildings, land, equipment, accumulated depreciation)), and (iv) intangibles (e.g., goodwill, patents, copyrights, trademarks)

Generally Accepted Accounting Principles (GAAP)

are accounting rules that are recognized as a general guide for financial reporting. Solution: Generally Accepted Accounting Principles (GAAP) is the set of accounting standards (i.e., rules) that have authoritative support for determining the content of financial statements, including assets, liabilities, equity, revenues, and expenses. For example, GAAP determines when revenue is to be recognized by companies providing services and merchandise to customers.

In a classified balance sheet, which assets are usually listed first?

current assets *Assets are classified and listed in the following order: current assets; long-term investments; property, plant and equipment; and intangible assets.*

Which of the following best identifies a company's ability to pay its obligations that will become due within the next year or operating cycle.

current assets divided by current liabilities Solution: Financial accounting ratios are commonly categorized into three categories, including profitability ratios, liquidity ratios, and solvency ratios. *Liquidity ratios measure the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash. Short-term refers to one year or operating cycle (whichever is less).* An example of a liquidity ratio is the current ratio. The current ratio is computed current assets divided by current liabilities.

Working capital is calculated by taking

current assets minus current liabilities Solution: Liquidity refers to a company's short-term ability to pay its maturing obligations and to meet unexpected needs for cash. Examples of measures of liquidity include the current ratio and working capital. *Working capital is computed as current assets minus current liabilities.*

Declaring and paying a cash dividend will

decrease retained earnings Solution: Dividends are payments from corporations to their stockholders. Dividends are declared by the corporation's board of directors; they are not expenses. Dividends decrease the corporation's retained earnings.

Accounting information is relevant to business decisions because it

has predictive value Solution: To be useful for decision-making, accounting information needs to possess certain fundamental qualities: (i) relevance and (ii) faithful representation. Information is considered to be relevant if it provides information that has predictive value, that is, it helps provide accurate expectations about he future, and has confirmatory value (i.e., it confirms or corrects prior expectations). Materiality is another aspect of relevance. An item of information is material if its size makes it likely to influence decision-making. Faithful representation means information accurately depicts what actually happened. To provide a faithful representation, information must be complete (i.e., nothing important omitted), neutral (i.e., the information s not biased toward one position of another), and free from error. In addition to qualities of useful information, there are several enhancing qualities of useful information. These include comparability, consistency, verifiability, timeliness, and understandability.

Relevant accounting information

is information that is capable of making a difference in a business decision. Solution: To be useful for decision-making, accounting information needs to possess certain fundamental qualities: (i) relevance and (ii) faithful representation. Information is considered to be relevant if it provides information that has predictive value, that is, it helps provide accurate expectations about he future, and has confirmatory value (i.e., it confirms or corrects prior expectations). Materiality is another aspect of relevance. An item of information is material if its size makes it likely to influence decision-making. Faithful representation means information accurately depicts what actually happened. To provide a faithful representation, information must be complete (i.e., nothing important omitted), neutral (i.e., the information s not biased toward one position of another), and free from error. In addition to qualities of useful information, there are several enhancing qualities of useful information. These include comparability, consistency, verifiability, timeliness, and understandability.

The following ratios are available for Rock Inc. and Pebble Inc. Rock Inc. Pebble Inc. Current Ratio 1.8 1.6 Compared to Rock Inc., Pebble Inc. has ___________ ____________

lower liquidity The current ratio is computed as current assets divided by current liabilities. The current ratio measures liquidity. Higher current ratios mean the company is more liquid (i.e., better able to pay is short-term liabilities), and lower current ratios mean the company is less liquid.

Free cash flow is computed as net cash provided by operating activities

minus capital expenditures and minus cash dividends. Solution: *Free cash flow equals cash provided by operations minus cash paid for capital expenditures (e.g., buildings, equipment, etc.) and cash dividends.*

Earnings per share is computed by dividing

net income less preferred stock dividends by the average common shares outstanding. Solution: Earnings per share is determined by dividing net income less preferred stock dividends by the average common shares outstanding. It represents the amount a company earned for each common share of stock outstanding.

The three most common financial ratio classifications used by businesses include

profitability ratios, liquidity ratios, and solvency ratios

Long-term creditors are usually most interested in evaluating

solvency *Solvency refers to a company's ability to survive over a long period of time*. Long-term creditors of a company tend to be most interested in a company's solvency. An example of a measure of solvency is a company's debt to assets ratio. The debt to assets ratio is computed by dividing total liabilities (including both current liabilities and long-term liabilities) by total assets.

The periodicity assumption states

the life of a business can be divided into artificial time periods for financial reporting purposes. (such as a calendar or fiscal year or a quarter or a month) and that useful reports covering those periods can be prepared for the business.

What is the primary criterion by which accounting information can be judged?

usefulness for decision making Solution: Information provided must be useful to enable users to make decisions. Consistency, or the use of the same accounting principles from period to period by the same firm, helps make accounting information more useful, but it is not the primary criterion by which accounting information is judged. Predictive value, or the ability of information to help in predicting future results, helps make accounting information more useful, but it is not the primary criterion by which accounting information is judged. Comparability, or the use of the same accounting principles by two firms in the same period, helps make accounting information more useful, but it is not the primary criterion by which accounting information is judged.

What is measured by current assets minus current liabilities?

working capital Solution: By definition, working capital is the difference between current assets and current liabilities. It is a measure of liquidity.

McKinney Corporation had beginning retained earnings of $2,242,000 and ending retained earnings of $2,499,000. During the year, it issued common stock totaling $141,000 and paid dividends of $40,000. What was its net income for the year?

$297,000 Solution: ending retained earnings = beginning retained earning + net income - dividends 2,499,000 = 2,242,000 + net income - 40,000

Based on the following accounts and year-end account balances for Sail Corporation, determine the amount of property, plant, and equipment to be reported on Sail's classified balance sheet. Accounts payable................................ $120,000 Accounts receivable............................. 100,000 Accumulated depreciation.................. 40,000 Buildings................................................. 210,000 Cash........................................................ 130,000 Common stock..................................... 600,000 Inventory................................................ 110,000 Land......................................................... 180,000 Prepaid insurance................................. 60,000 Retained earnings................................. 170,000 Trademarks.............................................. 140,000

$350,000 Property, plant, and equipment includes *equipment plus buildings minus accumulated depreciation plus land* = 210,000 - 40,000 + 180,000 = 350,000

Vista Corporation has assets of $4,300,000, common stock of $2,450,000, and liabilities of $1,250,000. What are the company's retained earnings?

$600,000 Solution: The basic accounting equation is: Assets = Liabilities + Equity This equation must always balance, meaning total assets must equal total liabilities plus total stockholders' equity. Re-arranging the accounting equation to solve for equity yields the following: *Equity = Assets - Liabilities* Equity = $4,300,000 - 1,250,000 Equity = $3,050,000 By definition, equity equals paid-in capital (i.e., common stock) plus retained earnings. Solving this relation for retained earnings: *Retained earnings = Equity - Common stock* Retained earnings = $3,050,000 - 2,450,000 Retained earnings = $600,000

Clawson Corporation has current assets of $3,150,000 and current liabilities of $2,250,000. If Clawson Corporation pays $500,000 of its accounts payable what will its new current ratio be?

1.51 Solution: *Current ratio equals current assets divided by current liabilities.* Accounts payable is a current liability. Paying accounts payable reduces cash (i.e., current assets) and reduces accounts payable (i.e., current liabilities). Current ratio = ($3,150,000 − $500,000) ÷ ($2,250,000 − $500,000) Current ratio = 1.514 (i.e., 1.51 to 1 or 1.51:1)

Clawson Corporation has current assets of $3,750,000 and current liabilities of $2,050,000. If Clawson Corporation pays $500,000 of its accounts payable what will the new current ratio be?

2.10 Solution: *Current ratio equals current assets divided by current liabilities*. Accounts payable is a current liability. Paying accounts payable reduces cash (i.e., current assets) and reduces accounts payable (i.e., current liabilities). Current ratio = ($3,750,000 − $500,000) ÷ ($2,050,000 − $500,000) Current ratio = 2.0967 (i.e., 2.10 to 1 or 2.10:1)

Which of the following does NOT affect the company's current ratio? A. Paying the next month's rent one month in advance. B. Use excess cash to buy long-term investments. C. Pay a dividend to shareholders. D. Sell services to customers in exchange for cash. E. Issue a short-term note in exchange for cash.

A. Paying the next month's rent one month in advance *Current ratio = current assets divided by current liabilities* Paying next month's rent one month in advance decreases cash and increase prepaid rent. Both cash and prepaid rent are current assets. *Increasing one and decreasing the other does not affect total current assets or the current ratio.*

Which of the following is an example of an intangible asset? A. trademarks B. property, plant, and equipment C. prepaid expenses D. cash E. accounts receivable

A. trademarks Solution: Trademarks like the Nike swoosh package design are intangible assets. The trademark makes it easier for customers to recognize Nike swoosh products.

Which of the following would not be reported among property, plant, and equipment on a classified balance sheet? A. buildings B. delivery vehicles C. inventory D. accumulated depreciation E. land

C. inventory

Which one of the following does not affect retained earnings? A. net income B. all of these affect retained earnings C. issuance of common stock D. dividends E. net loss

C. issuance of common stock Solution: *Net income causes an increase in retained earnings, while a net losses and dividends cause decreases. Issuances of common stock have no impact on retained earnings.*

Which of the following would increase a company's current ratio? A. use cash to buy new equipment B. pay a dividend to shareholders C. negotiate with a creditor to reclassify a note payable in 3 months into a note payable due in 2 years. D. none of these E. collect outstanding accounts receivable

C. negotiate with a creditor to reclassify a note payable in 3 months into a note payable due in 2 years. Current ratio = current assets divided by current liabilities *Changing a current liability (e.g., a note due in 3 months) into a long-term liability (i.e., a note payable due in 2 years) lowers total current liabilities. This increases the current ratio.*

Which of the following is not classified as a current asset? A. cash B. accounts receivable C. patents D. inventory E. prepaid expenses

C. patents Since patents have lives as long as 20 years, they are not usually classified as current assets.

Which of the following would not be reported among property, plant, and equipment on a classified balance sheet? A. land B. equipment C. accumulated depreciation D. cash E. delivery vehicles

D. cash Classified balance sheets partition a company's assets into four categories: (i) current assets (e.g., inventory), (ii) long-term investments, *(iii) property, plant, and equipment (e.g., buildings, land, equipment, and accumulated depreciation which is the total amount of depreciation that the company has expensed thus far on its property, plant and equipment)*, and (iv) intangibles. If land or other real estate is held for investment or sits idle, the account name should reflect it (e.g., Land held for investment, Investment in real estate).