Ormiston CH 2 Self Test

Define: Allowance for doubtful accounts

estimation of uncollectible accounts receivable.

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Define: Capital lease.

An agreement to use assets that is in substance a purchase

How would you classify: Additional paid-in capital. (1) Current assets. (2) Property, plant, and equipment. (3) Intangible assets. (4) Other assets. (5) Current liabilities. (6) Deferred federal income taxes. (7) Long-term debt. (8) Stockholders' equity.

(8) Stockholders' equity.

How would you classify: Allowance for doubtful accounts. (1) Current assets. (2) Property, plant, and equipment. (3) Intangible assets. (4) Other assets. (5) Current liabilities. (6) Deferred federal income taxes. (7) Long-term debt. (8) Stockholders' equity.

(1) Current assets.

How would you classify: Accumulated depreciation (1) Current assets. (2) Property, plant, and equipment. (3) Intangible assets. (4) Other assets. (5) Current liabilities. (6) Deferred federal income taxes. (7) Long-term debt. (8) Stockholders' equity.

(2) Property, plant, and equipment.

How would you classify: Buildings used in business. ((1) Current assets. (2) Property, plant, and equipment. (3) Intangible assets. (4) Other assets. (5) Current liabilities. (6) Deferred federal income taxes. (7) Long-term debt. (8) Stockholders' equity.

(2) Property, plant, and equipment.

How would you classify: Land on which warehouse is located. (1) Current assets. (2) Property, plant, and equipment. (3) Intangible assets. (4) Other assets. (5) Current liabilities. (6) Deferred federal income taxes. (7) Long-term debt. (8) Stockholders' equity.

(2) Property, plant, and equipment.

How would you classify: Patents. (1) Current assets. (2) Property, plant, and equipment. (3) Intangible assets. (4) Other assets. (5) Current liabilities. (6) Deferred federal income taxes. (7) Long-term debt. (8) Stockholders' equity.

(3) Intangible assets.

How would you classify: Land held for speculation (1) Current assets. (2) Property, plant, and equipment. (3) Intangible assets. (4) Other assets. (5) Current liabilities. (6) Deferred federal income taxes. (7) Long-term debt. (8) Stockholders' equity.

(4) Other assets.

How would you classify: Accrued payroll. (1) Current assets. (2) Property, plant, and equipment. (3) Intangible assets. (4) Other assets. (5) Current liabilities. (6) Deferred federal income taxes. (7) Long-term debt. (8) Stockholders' equity.

(5) Current liabilities.

How would you classify: Current maturities on mortgage. (1) Current assets. (2) Property, plant, and equipment. (3) Intangible assets. (4) Other assets. (5) Current liabilities. (6) Deferred federal income taxes. (7) Long-term debt. (8) Stockholders' equity.

(5) Current liabilities.

How would you classify: Debt outstanding from credit extended by suppliers. (1) Current assets. (2) Property, plant, and equipment. (3) Intangible assets. (4) Other assets. (5) Current liabilities. (6) Deferred federal income taxes. (7) Long-term debt. (8) Stockholders' equity.

(5) Current liabilities.

How would you classify: Liability due to difference in taxes paid and taxes reported. (1) Current assets. (2) Property, plant, and equipment. (3) Intangible assets. (4) Other assets. (5) Current liabilities. (6) Deferred federal income taxes. (7) Long-term debt. (8) Stockholders' equity.

(6) Deferred federal income taxes.

How would you classify: Mortgage payable. (1) Current assets. (2) Property, plant, and equipment. (3) Intangible assets. (4) Other assets. (5) Current liabilities. (6) Deferred federal income taxes. (7) Long-term debt. (8) Stockholders' equity.

(7) Long-term debt.

How would you classify: Common stock. ((1) Current assets. (2) Property, plant, and equipment. (3) Intangible assets. (4) Other assets. (5) Current liabilities. (6) Deferred federal income taxes. (7) Long-term debt. (8) Stockholders' equity.

(8) Stockholders' equity.

2. What is the balancing equation for the balance sheet? (a) Assets = Liabilities + Stockholders' equity. (b) Assets + Stockholders' equity = Liabilities. (c) Assets + Liabilities = Stockholders' equity. (d) Revenues - Expenses = Net income.

(a) Assets = Liabilities + Stockholders' equity.

12. What type of firm generally has the highest proportion of fixed assets to total assets? (a) Manufacturers. (b) Retailers. (c) Wholesalers. (d) Retailers and wholesalers.

(a) Manufacturers.

6. What type of firm generally has the highest proportion of inventory to total assets? (a) Retailers. (b) Wholesalers. (c) Manufacturers. (d) Service-oriented firms.

(a) Retailers.

18. Which statement is false? (a) Deferred taxes are the product of temporary differences in the recognition of revenue and expense for taxable income relative to reported income. (b) Deferred taxes arise from the use of the same method of depreciation for tax and reporting purposes. (c) Deferred taxes arise when taxes actually paid are less than tax expense reported in the financial statements. (d) Temporary differences causing the recognition of deferred taxes may arise from the methods used to account for items such as depreciation, installment sales, leases, and pensions.

(b) Deferred taxes arise from the use of the same method of depreciation for tax and reporting purposes.

1. What does the balance sheet summarize for a business enterprise? (a) Operating results for a period. (b) Financial position at a point in time. (c) Financing and investment activities for a period. (d) Profit or loss at a point in time.

(b) Financial position at a point in time.

19. Which of the following would be classified as long-term debt? (a) Mortgages, current maturities of long-term debt, bonds. (b) Mortgages, long-term notes payable, bonds due in 10 years. (c) Accounts payable, bonds, obligations under leases. (d) Accounts payable, long-term notes payable, long-term warranties

(b) Mortgages, long-term notes payable, bonds due in 10 years.

9. Assuming a period of inflation, which statement is true? (a) The FIFO method understates balance sheet inventory. (b) The FIFO method understates cost of goods sold on the income statement. (c) The LIFO method overstates balance sheet inventory. (d) The LIFO method understates cost of goods sold on the income statement.

(b) The FIFO method understates cost of goods sold on the income statement.

5. What items should be calculated when analyzing the accounts receivable and allowance for doubtful accounts? (a) The growth rates of sales and inventories. (b) The growth rates of sales, accounts receivable, and the allowance for doubtful accounts, as well as the percentage of the allowance account relative to the total or gross accounts receivable. (c) The common-size balance sheet. (d) The growth rates of all assets and liabilities.

(b) The growth rates of sales, accounts receivable, and the allowance for doubtful accounts, as well as the percentage of the allowance account relative to the total or gross accounts receivable.

3. What is a common-size balance sheet? (a) A statement that expresses each account on the balance sheet as a percentage of net income. (b) A statement that is common to an industry. (c) A statement that expresses each account on the balance sheet as a percentage of total assets. (d) A statement that expresses each asset account on the balance sheet as a percentage of total assets and each liability account on the balance sheet as a percentage of total liabilities.

(c) A statement that expresses each account on the balance sheet as a percentage of total assets.

21. What does the retained earnings account measure? (a) Cash held by the company since its inception. (b) Payments made to shareholders in the form of cash or stock dividends. (c) All undistributed earnings. (d) Financial resources currently available to satisfy financial obligations.

(c) All undistributed earnings.

13. How is goodwill evaluated? (a) Goodwill must be amortized over a 40-year period. (b) Goodwill should be written up each year. (c) Companies should determine whether goodwill has lost value, and if so, the loss in value should be written off as an impairment expense. (d) Goodwill is to be written off at the end of the tenth year.

(c) Companies should determine whether goodwill has lost value, and if so, the loss in value should be written off as an impairment expense.

10. Why would a company switch to the LIFO method of inventory valuation? (a) By switching to LIFO, reported earnings will be higher. (b) A new tax law requires companies using LIFO for reporting purposes also to use LIFO for figuring taxable income. (c) LIFO produces the largest cost of goods sold expense in a period of inflation and thereby lowers taxable income and taxes. (d) A survey by Accounting Trends and Techniques revealed that the switch to LIFO is a current accounting "fad."

(c) LIFO produces the largest cost of goods sold expense in a period of inflation and thereby lowers taxable income and taxes.

8. What are three major cost flow assumptions used by U.S. companies in valuing inventory? (a) LIFO, FIFO, average market. (b) LIFO, FIFO, actual cost. (c) LIFO, FIFO, average cost. (d) LIFO, FIFO, double-declining balance.

(c) LIFO, FIFO, average cost.

17. Which of the following items could cause the recognition of accrued liabilities? (a) Sales, interest expense, rent. (b) Sales, taxes, interest income. (c) Salaries, rent, insurance. (d) Salaries, interest expense, interest income.

(c) Salaries, rent, insurance.

19. What accounts are most likely to be found in the stockholders' equity section of the balance sheet? (a) Common stock, long-term debt, preferred stock. (b) Common stock, additional paid-in capital, liabilities. (c) Common stock, retained earnings, dividends payable. (d) Common stock, additional paid-in capital, retained earnings.

(d) Common stock, additional paid-in capital, retained earnings.

11. Where can one most typically find the cost flow assumption used for inventory valuation for a specific company? (a) In The Risk Management Association, Annual Statement Studies. (b) In the statement of retained earnings. (c) On the face of the balance sheet with the total current asset amount. (d) In the notes to the financial statements.

(d) In the notes to the financial statements.

20. What does the additional paid-in capital account represent? (a) The difference between the par and the stated value of common stock. (b) The price changes that result for stock trading subsequent to its original issue. (c) The market price of all common stock issued. (d) The amount by which the original sales price of stock exceeds the par value.

(d) The amount by which the original sales price of stock exceeds the par value.

7. Why is the method of valuing inventory important? (a) Inventory valuation is based on the actual flow of goods. (b) Inventories always account for more than 50% of total assets and therefore have a considerable impact on a company's financial position. (c) Companies desire to use the inventory valuation method that minimizes the cost of goods sold expense. (d) The inventory valuation method chosen determines the value of inventory on the balance sheet and the cost of goods sold expense on the income statement, two items having considerable impact on the financial position of a company.

(d) The inventory valuation method chosen determines the value of inventory on the balance sheet and the cost of goods sold expense on the income statement, two items having considerable impact on the financial position of a company.

How would you classify: Preferred stock. (1) Current assets. (2) Property, plant, and equipment. (3) Intangible assets. (4) Other assets. (5) Current liabilities. (6) Deferred federal income taxes. (7) Long-term debt. (8) Stockholders' equity.

8) Stockholders' equity.

Define: Current assets.

Used up within one year or operating cycle, whichever is longer.

Define: Consolidated financial statements

Combined statements of parent company and controlled subsidiary companies.

Define: Depreciation

Cost allocation of fixed assets other than land

Define: Deferred taxes.

Difference in taxes reported and taxes paid

Define: Accrued expense.

Expenses incurred prior to cash outflow.

Define: Prepaid expenses.

Expenses paid in advance

Define: Current maturities

Portion of debt to be repaid during the upcoming year

Define: Market value of stock

Price at which stock trades

15. What do current liabilities and current assets have in common? (a) Current assets are claims against current liabilities. (b) If current assets increase, then there will be a corresponding increase in current liabilities. (c) Current liabilities and current assets are converted into cash. (d) Current liabilities and current assets are those items that will be satisfied and converted into cash, respectively, in one year or one operating cycle, whichever is longer.

d) Current liabilities and current assets are those items that will be satisfied and converted into cash, respectively, in one year or one operating cycle, whichever is longer.