Accounting Exam 3

_______ ______on a classified balance sheet report the obligations that will be paid or met within the company's operating cycle or within 1 year, whichever is longer.

Current liabilities

The stated rate ______. a. remains the same throughout the life of the bonds b. fluctuates depending on the perceived risk of the bonds c. equals the present value of the future interest payments

a. remains the same throughout the life of the bonds

AnuU, Inc. sold 100,000 shares of the 1,000,000 shares it is allowed to sell. AnuU repurchased 10,000 of these shares. The number of shares issued equals ______ shares. a. 1,000,000 b. 100,000 c. 10,000 d. 90,000 e. 910,000

b. 100,000

Which form of financing has a tax advantage? a. working capital financing b. debt financing c. current asset financing d. equity financing

b. debt financing

ROE relates ______. a. total assets to the average common stockholders' equity b. average common stockholders' equity to the price per share c. net income to the price per share d. net income to the average common stockholders' equity e. EPS to the average common stockholders' equity

d. net income to the average common stockholders' equity

The formula for the fixed asset turnover ratio equals ______. a. net revenue/total assets b. net income/average total assets c. average net fixed assets/total assets d. net revenue/average net fixed assets

d. net revenue/average net fixed assets

The _____ rate on a bond is the rate used to determine the interest payments.

stated

Earnings per share (EPS) may be determined by ______. (Check all that apply.) a. dividing net income less preferred dividends by the average common shares outstanding b. dividing the stock price by the P/E ratio c. multiplying the stock price by the P/E ratio d. dividing the P/E ratio by the stock price

a. dividing net income less preferred dividends by the average common shares outstanding c. multiplying the stock price by the P/E ratio

The formula for the fixed asset turnover ratio equals ______. a. net revenue/average net fixed assets b. net revenue/total assets c. net income/average total assets d. average net fixed assets/total assets

a. net revenue/average net fixed assets

Preferred stockholders ______. a. receives dividends before common stockholders b. receives dividends before creditors are to receive any interest payments c. have priority over creditors at liquidation d. are last in line in the event of a liquidation

a. receives dividends before common stockholders

Daffy Duct, Inc. issued 10,000 shares of $1 par value common stock at $10 per share. The journal entry to record this transaction includes a ______. (Select all that apply.) a. $100,000 credit to Common Stock b. $100,000 debit to Cash c. $90,000 credit to Additional Paid-in Capital d. $10,000 debit to Cash e. $10,000 credit to Common Stock

b. $100,000 debit to Cash c. $90,000 credit to Additional Paid-in Capital e. $10,000 credit to Common Stock

True or false: When a corporation declares a dividend its Net Income on the income statement is reduced. a. True b. False

b. False Reason: All transactions between a company and its stockholders do not affect the income statement. Dividends do not affect Net Income.

Which type of note requires the borrower to pay interest and principal to the lender over the note's life to maturity with no balloon payment at maturity? a. Both interest-only notes and installment notes b. Installment notes c. Interest-only notes

b. Installment notes

Both Spam Am Airlines and TWB Airlines used straight-line depreciation for a $20 million jet. Spam Am used an estimated 35 year useful life and TWB Airlines used an estimated 25 year life for its planes but estimated similar residual values. As result of the differences in useful lives, which company will appear more profitable? a. TWB b. Spam Am c. Neither, the estimated useful lives will not affect their profitability.

b. Spam Am

Advantages of debt financing over equity financing are that ______. (Check all that apply.) a. more money is available b. interest payments on debt are tax deductible c. control is not diluted d. repayment of debt principal is optional

b. interest payments on debt are tax deductible c. control is not diluted

For investors, the ______ provide independent, easy-to-use measurements of relative credit risk. a. Sarbanes-Oxley b. Securities & Exchange Commission c. Financial Accounting Standards Board d. credit rating agencies

d. credit rating agencies

Rate on Equity (ROE)

Net Income/Shareholders Equity

units of production method

(Cost − Residual Value) × Actual/Estimated Total Production

The adjusting entry to record depreciation debits ______ ______ and credits ______ ______ . (Enter only one word per blank.)

Blank 1: Depreciation Blank 2: Expense Blank 3: Accumulated Blank 4: Depreciation

______ capital, also called paid-in capital, reports the amount of capital the company received from investors. a. Contributed b. Collected c. Claimed d. None of the above

a. Contributed

Which of the following financial statement totals are reduced by the adjusting entry to record amortization? (Check all that apply.) a. Total assets on the balance sheet b. Net income on the income statement c. Total liabilities on the balance sheet d. Total stockholders' equity on the balance sheet e. Cash from operating activities on the statement of cash flows

a. Total assets on the balance sheet b. Net income on the income statement c. Total stockholders' equity on the balance sheet

On-a-Roll, Inc. amortizes its patent of $20,000 over 20 years. The adjusting entry to record amortization results in a(n) ______. (Check all that apply.) a. decrease to net income on the income statement b. decrease to assets on the balance sheet c. increase to assets on the balance sheet d. increase to net income on the income statement e. increase to liabilities on the balance sheet

a. decrease to net income on the income statement b. decrease to assets on the balance sheet

The P/E ratio is calculated by ______. a. dividing the stock price by EPS b. dividing net income by average stockholders' equity c. dividing EPS by the stock price d. dividing stockholders' equity by net income

a. dividing the stock price by EPS

Accumulated Deficit ______. (Check all that apply.) a. indicates accumulated net losses b. means that Retained earnings has a credit balance c. is shown in parentheses on the balance sheet d. means that Retained earnings has a debit balance e. indicates that no dividends have been declared

a. indicates accumulated net losses c. is shown in parentheses on the balance sheet d. means that retained earnings has a debit balance

For an investor, bonds are attractive investments because ______. a. interest is higher than bank savings accounts b. they can be traded on established bond exchanges c. they are less risky than bank savings accounts d. the dividends are higher than stock dividends

a. interest is higher than bank savings accounts b. they can be traded on established bond exchanges

The number of shares issued represents the number of shares ______. a. sold b. sold less repurchased c. repurchased d. the company is allowed to sell

a. sold

When using the effective-interest method of bond amortization, Interest Expense ______ each payment if the bonds were issued at a premium. a. increases b. decreases c. stays the same

b. decreases

Dew Drop Inn, Inc. has a current ratio of 0.9 to 1.0 and $4 of debt for every $1 of equity. If Dew Drop Inn needs additional financing, it would best improve its financial situation with ______. a. the payment of a stock dividend b. equity financing c. the purchase of treasury stock d. debt financing

b. equity financing

The issue price of 1,000, 5%, $1,000 bonds issued at 100.00 equals ______. a. $1,050,000 b. $100,000,000 c. $1,000,000 d. $100,000

c. $1,000,000 (=1,000 x $1,000 x 100%).

Acme Enterprises began the new year owing its suppliers $3,000 for merchandise purchased last year. Acme then sold half of this merchandise for $5,000 on account. Two weeks later, Acme paid its suppliers $1,000 and bought another $4,000 of merchandise on account. Acme now has an Accounts Payable balance of ______. a. $4,500 b. $1,000 c. $6,000 d. $5,500 e. $11,000

c. $6,000

Investors who acquire preferred stock ______. (Check all that apply.) a. have preference over creditors b. will always receive more dividends than common stockholders c. have preference over common stockholders d. have preference as to dividends

c. have preference over common stockholders d. have preference as to dividends

Depreciation Expense is reported on the ______. a. balance sheet as an operating expense b. balance sheet netted against the related long-lived asset c. income statement as an operating expense d. income statement netted against the related long-lived asset

c. income statement as an operating expense

When the times interest earned ratio is less than 1.0, a company is ______. a. unlikely to experience financial distress b. generating enough income to cover its interest expense c. not generating enough income to cover its interest expense

c. not generating enough income to cover its interest expense

A company's past profits that are kept instead of being paid to stockholders are ______. a. reported as income for the current year b. dividends c. retained earnings d. cash

c. retained earnings

The money a corporation receives from investors by issuing stock is called ______. a. Treasury Stock b. Accumulated Other Comprehensive Income c. Retained Earnings d. Contributed Capital

d. Contributed Capital

During the year, a $1,000,000 lawsuit was filed against a US company for unsafe working conditions. Management and the attorneys feel that it is not likely that the company will lose the case. The plaintiff who filed the lawsuit has offered to settle for $600,000. Management estimates that lawsuits for unsafe working conditions are generally settled for $300,000. What amount of contingent liability would be recorded for this lawsuit on the current balance sheet? a. $0 b. $300,000 c. $600,000 d. $100,000 e. $500,000

$0

straight-line method

(cost - residual value) x (1/useful life) = depreciation expense cost - depreciation expense = book value

double declining balance method

Depreciation is recorded at twice the straight-line rate, but the balance is reduced each period. (Cost − Accumulated Depreciation) × 2/Useful Life

The entry to record the issuance of 100,000 shares of $0.10 par value common stock for $10 per share is debit ______. a. Cash for $1,000,000 and credit Common Stock for $10,000 and Additional Paid-in Capital for $990,000 b. Cash for $1,000,000 and credit Common Stock for $990,000 and Treasury Stock for $10,000 c. Cash and credit Common Stock for $1,000,000 d. Cash for $1,000,000 and credit Common Stock for $990,000 and Additional Paid-in Capital for $10,000 e. Cash and credit Common Stock for $10,000

a. Cash for $1,000,000 and credit Common Stock for $10,000 and Additional Paid-in Capital for $990,000

Which of the following may cause net income to differ among companies? (Check all that apply.) a. Estimated residual values b. Estimated useful lives c. Depreciation methods d. Cost principle

a. Estimated residual values b. Estimated useful lives c. Depreciation methods

Earnings per share (EPS) equals ______ divided by the average shares of common stock outstanding. (Assume no preferred stock has been issued.) a. Net Income b. Operating Income c. Retained Earnings d. Revenue

a. Net Income

Multiple Choice Question Sunny Sky paid $30,000 cash for piece of land to be used for a new corporate headquarters building. What is the effect of this transaction on the accounting equation? a. One asset increases, while another asset decreases. b. Total assets decrease and total liabilities decrease. c. Total assets increase and total liabilities increase. d. Total assets increase and total stockholders' equity increases.

a. One asset increases, while another asset decreases

_____stock carries priority over common stock with regard to dividends. a. Preferred b. Accumulated c. Prioritized d. None of the above

a. Preferred

Identify what is needed to calculate the Price/Earnings (P/E) ratio. (Check all that apply.) a. Stock price b. Common stock dividends declared c. Return on equity d. Earnings per share e. Average stockholders' equity

a. Stock price d. Earnings per share

Which of the following entries result in a decrease in total assets and stockholders' equity? a. The adjusting entry to record the depreciation of long-live assets b. The adjusting entry to record the interest owed on a note issued when purchasing a long-lived asset c. Payment of extraordinary repairs that significantly improves the effectiveness of a long-lived asset d. Recording a purchase as a capital expenditure

a. The adjusting entry to record the depreciation of long-live assets

Which of the following are long-term liabilities? (Check all that apply.) a. Common Stock b. Note Payable due in 3 months c. 20-year Mortgage Payable d. Wages Payable e. Note Payable due in 3 years

c. 20-year Mortgage Payable e. Note Payable due in 3 years

Which of the following accounts is used to record a small stock dividend on common stock but is not used to record a large stock dividend on common stock? a. Retained Earnings b. Cash c. Additional Paid-in Capital d. Common Stock

c. Additional Paid-in Capital

Which account is debited in an adjusting entry to record depreciation on machinery? a. Cash b. Machinery c. Depreciation Expense d. Accumulated Depreciation

c. Depreciation Expense

Which of the following reports net income relative to average common stockholders' equity? a. Debt/equity ratio b. P/E ratio c. ROE d. EPS e. ROA

c. ROE

Transactions between a company and its stockholders affect the company's _____ accounts only. a. income statement b. liability c. balance sheet d. asset

c. balance sheet

Dew Drop Inn had net revenue of $117,000 in 2020 and $100,000 in 2021. Its fixed assets were $400,000 at the end of 2019, $380,000 at the end of 2020, and $360,000 at the end of 2021. In which year was the fixed asset turnover ratio better? a. 2021, because the ratio was higher b. 2020, because the ratio was lower c. 2021, because the ratio was lower d. 2020, because the ratio was higher

d. 2020, because the ratio was higher

When a company capitalizes a cost, its ______ increase. a. liabilities b. revenues c. retained earnings d. long-lived assets e. expenses

d. long-lived assets

Daffy Duct, Inc. issued 10,000 shares of $1 par value common stock at $5 per share. The effect of this transaction on the accounting equation includes a ______. (Check all that apply.) a. $50,000 increase in total stockholders' equity. b. $10,000 increase in total assets. c. $50,000 increase in total liabilities. d. $10,000 increase in total stockholders' equity. e. $50,000 increase in total assets. f. $50,000 decrease in total stockholders' equity.

a. $50,000 increase in total stockholders' equity. e. $50,000 increase in total assets.

During the year, Lox, Stock and Bagel Inc.'s net income was $60,000. Its average stockholders' equity was $240,000, and it had 120,000 shares outstanding the entire year. Its stock was selling for $10 per share. Its P/E ratio equals ______. The company has no preferred stock. a. 20.00 b. 0.50 c. 40.00 d. 0.25

a. 20.00: $10 / ($60,000/120,000 shares)

The entry to record the purchase of $10,000 of equipment by signing an $8,000 note and paying the rest with cash is recorded with a ______. a. $6,000 debit to Equipment and $2,000 debit to Cash and $8,000 credit to Notes Payable b. $2,000 debit to Equipment and $2,000 credit to Cash c. $8,000 debit to Notes Payable and $8,000 credit to Equipment d. $10,000 debit to Equipment and $8,000 credit to Notes Payable and $2,000 credit to Cash

d. $10,000 debit to Equipment and $8,000 credit to Notes Payable and $2,000 credit to Cash

Why is Additional Paid-in Capital recorded for a small stock dividend? a. Because small stock dividends are recorded at par value. b. Because large stock dividends are recorded at market value. c. Because large stock dividends are recorded at par value. d. Because small stock dividends are recorded at market value.

d. Because small stock dividends are recorded at market value.

Which of the following would cause the balance sheet to appear stronger and income statement to appear more profitable than it should? a. Recording costs as Construction in Progress even though the asset is completed. b. Recording the costs of merchandise purchased on account. c. Expensing costs that should be capitalized. d. Capitalizing costs that should be expensed.

d. Capitalizing costs that should be expensed.

An accumulated deficit means a company has ______. a. Treasury Stock that it repurchased at a cost that was higher than the issuance price b. a contra-asset account due to losses c. dividends in arrears d. accumulated more net losses than net income

d. accumulated more net losses than net income

Accumulated Depreciation is reported on the ______. a. balance sheet as an operating expense b. income statement as an operating expense c. income statement netted against the related long-lived asset d. balance sheet netted against the related long-lived asset

d. balance sheet netted against the related long-lived asset

When a company records a debit to Bonds Payable and a credit to Cash, it is the bonds' ______. a. stated date b. market date c. maturity date d. issuance date

d. issuance date

A(n) _______ note requires the borrower to pay equal payments over the note's life to maturity with each payment consisting of interest and principal.

installment

Under US GAAP, a contingent liability should ______. a. be reported on the balance sheet if the loss may possibly occur and can be reasonably estimated b. not be reported if the loss is remote and unable to be estimated c. be reported on the balance sheet if the loss will probably occur and can be reasonably estimated d. be in the notes to the financial statements if the loss may possibly occur and can be reasonably estimated

b. not be reported if the loss is remote and unable to be estimated c. be reported on the balance sheet if the loss will probably occur and can be reasonably estimated d. be in the notes to the financial statements if the loss may possibly occur and can be reasonably estimated

Retained Earnings represents cumulative ______ by the business. (Check all that apply.) a. paid--in capital b. profits retained c. cash retained d. net income kept e. cash earned

b. profits retained d. net income kept

_______ Liabilities are potential liabilities that arise as a result of past transactions or events and are reported on the balance sheet if the loss will probably occur and can be reasonably estimated.

Contingent

Daffy Duct, Inc. issued 10,000 shares of $1 par value common stock at $10 per share. The journal entry to record this transaction includes a ______. (Select all that apply.) a. $10,000 credit to Common Stock b. $100,000 debit to Cash c. $100,000 credit to Common Stock d. $10,000 debit to Cash e. $90,000 credit to Additional Paid-in Capital

a. $10,000 credit to Common Stock b. $100,000 debit to Cash e. $90,000 credit to Additional Paid-in Capital

During the year, Squid Roe Inc.'s revenues were $200,000 and its net income was $60,000. It had not preferred shares, and its stockholders' equity and total assets were $380,000 and $780,000 at the beginning of the year and $420,000 and $900,000 at year-end, respectively. ROE (rounded to the nearest tenth of a percent) equals ______. a. 15.0% b. 6.7% c. 14.3% d. 50.0% e. 7.1%

a. 15%: (60,000)/((380,000+420,000)/2)

Which of the following statements are true? (Check all that apply.) a. Accumulated Depreciation on the balance sheet reports the amount of usefulness used since the long-lived asset was first put into use b. Depreciation Expense reports the amount of usefulness used since the long-lived asset was purchased c. Depreciation Expense on the income statement reports only the current period's usefulness used. d. Accumulated Depreciation is netted against the related long-lived asset on the balance sheet e. Depreciation Expense is an operating expense on the income statement

a. Accumulated Depreciation on the balance sheet reports the amount of usefulness used since the long-lived asset was first put into use c. Depreciation Expense on the income statement reports only the current period's usefulness used. d. Accumulated Depreciation is netted against the related long-lived asset on the balance sheet e. Depreciation Expense is an operating expense on the income statement

Daffy Duct Inc. declared a small stock dividend and issued 1,000 shares of $1 par value common stock when the price of the stock was $4 each. Identify all appropriate account titles that may be used to record this issuance of stock. (Check all that apply.) a. Additional Paid-in Capital b. Retained Earnings c. Common Stock d. Dividends

a. Additional Paid-in Capital b. Retained Earnings c. Common Stock

Given each of the following start-up companies are identical except for the depreciation methods and estimates used, which company would report the higher net income in the first year? a. Company B used straight-line and estimated useful lives of 5 years and $1,000 residual values. b. Company A used straight-line and estimated useful lives of 5 years and $0 residual value. c. Company C used double-declining balance and estimated useful lives of 5 years and $1,000 residual values.

a. Company B used straight-line and estimated useful lives of 5 years and $1,000 residual values.

Which of the following statements are true? (Check all that apply.) a. Depreciation Expense on the income statement reports only the current period's usefulness used. b. Accumulated Depreciation on the balance sheet reports the amount of usefulness used since the long-lived asset was first put into use c. Accumulated Depreciation is netted against the related long-lived asset on the balance sheet d. Depreciation Expense reports the amount of usefulness used since the long-lived asset was purchased e. Depreciation Expense is an operating expense on the income statement

a. Depreciation Expense on the income statement reports only the current period's usefulness used. b. Accumulated Depreciation on the balance sheet reports the amount of usefulness used since the long-lived asset was first put into use c. Accumulated Depreciation is netted against the related long-lived asset on the balance sheet e. Depreciation Expense is an operating expense on the income statement

Busy Beaver, Inc. signed a $315,000, 5-year note payable to buy a new $315,000 industrial veneer cutter. Busy Beaver paid $5,000 cash for transportation of the machine and $750 cash for installation costs. What is the overall effect of this transaction on the accounting equation? (Check all that apply.) a. Total liabilities increase $315,000. b. Total assets increase $315,000. c. Total assets increase $309,250. d. Machinery, an asset, increases $320,750. e. Total liabilities increase $320,750. f. Machinery, an asset, increases $315,000.

a. Total liabilities increase $315,000. b. Total assets increase $315,000. f. Machinery, an asset, increases $320,750.

The entry to record the payment of previous purchases made on account includes a ______. (Select all that apply.) a. debit to Accounts Payable b. credit to Accounts Payable c. credit to Cash

a. debit to Accounts Payable c. credit to Cash

A stock dividend ______. (Check all that apply.) a. distributes additional shares of stock to existing stockholders on a pro-rata basis. b. causes total stockholders' equity to decrease. c. increases a stockholders' percentage ownership in the corporation. d. causes retained earnings to decrease.

a. distributes additional shares of stock to existing stockholders on a pro-rata basis. d. causes retained earnings to decrease.

When a company has both common and preferred stock, its ROE must be adjusted by ______. (Select all that apply.) a. subtracting the preferred stock balance from total stockholders' equity b. subtracting preferred stock dividends from net income c. adding the preferred stock dividends to net income d. adding the preferred stock balance to total stockholders' equity

a. subtracting the preferred stock balance from total stockholders' equity b. subtracting preferred stock dividends from net income

AnuU, Inc. sold 100,000 shares of the 1,000,000 shares it is allowed to sell. AnuU repurchased 10,000 of these shares. The number of shares outstanding equals ______ shares. a. 100,000 b. 90,000 c. 1,000,000 d. 10,000 e. 910,000

b. 90,000

Which of the following line item amounts would be under the Retained Earnings column of a statement of stockholders' equity? (Select all that apply.) a. Treasury Stock b. Dividends: Common c. Net Income d. Dividends: Preferred e. Additional Paid-in Capital f. Stock Issuances

b. Dividends: Common c. Net Income d. Dividends: Preferred

If management was to unethically capitalize costs that should not have been, which of the following would be misstated? (Select all that apply.) a. Assets would be understated. b. Stockholders' equity would be overstated. c. Stockholders' equity would be understated. d. Liabilities would be understated. e. Liabilities would be overstated. f. Assets would be overstated.

b. Stockholders' equity would be overstated. f. Assets would be overstated.

A bond's stated interest rate is ______. (Check all that apply.) a. affected by the price investors pay for the bond b. always expressed as an annual interest rate c. increased when the market price of the bond falls d. used to calculate interest payments

b. always expressed as an annual interest rate d. used to calculate interest payments

On-a-Roll, Inc. amortizes its copyright of $20,000 over 20 years. Miss Hap, the bookkeeper, forgot to record the amortization in the current year. The effect of this mistake causes ______. (Check all that apply.) a. retained earnings to be understated b. assets to be overstated c. cash to be overstated d. liabilities to be understated e. net income to be overstated

b. assets to be overstated e. net income to be overstated

The number of shares outstanding equals the number of shares ______. a. authorized minus the number of shares issued b. issued minus the number of shares in treasury c. authorized plus the number of shares issued d. issued plus the number of shares in treasury

b. issued minus the number of shares in treasury

When the times interest earned ratio is less than 1.0, a company is ______. a. unlikely to experience financial distress b. not generating enough income to cover its interest expense c. generating enough income to cover its interest expense

b. not generating enough income to cover its interest expense

An accumulated deficit means a company has ______. a. dividends in arrears b. a contra-asset account due to losses c. accumulated more net losses than net income d. Treasury Stock that it repurchased at a cost that was higher than the issuance price

c. accumulated more net losses than net income

The accountant recorded the adjusting entry for the depreciation of its long-lived assets with a debit to Depreciation Expense and a credit to Accumulated Depreciation. As a result of this entry, assets and stockholders' equity will be ______. a. understated b. unaffected by the entry c. decreased d. overstated

c. decreased

Similar to a stock split, a stock ___________ also distributes additional shares of stock to existing stockholders on a pro rata basis at no cost to the stockholders. a. split b. account c. dividend d. share

c. dividend

Amortizing intangible assets affects the accounting equation by causing ______. (Check all that apply.) a. stockholders' equity to increase b. liabilities to increase c. stockholders' equity to decrease d. assets to decrease e. liabilities to decrease f. assets to increase

c. stockholders' equity to decrease d. assets to decrease

A bond's maturity date is ______. a. the date the bond was issued b. the date on which periodic interest payments are due c. the date on which the face value of the bond will be repaid in full

c. the date on which the face value of the bond will be repaid in full

Which of the following line items would be found on a statement of stockholders' equity that would not be on the statement of retained earnings? a. Dividends b. Net Income c. Dividends Payable d. Common Stock e. Additional Paid-in Capital f. Treasury Stock

d. Common Stock e. Additional Paid-in Capital f. Treasury Stock

The statement of _____ ______reports the changes in retained earnings as well as paid-in capital. (Enter one word per blank.)

stockholders' equity