Quiz Review (7-12)
The most obvious risk to bond investors is that a company will fail and be unable to pay its debts.
T
The use of the allowance method is an attempt by accountants to match bad debts as an expense with the revenue of the period in which a sale on credit takes place.
T
If a company is concerned about minimizing its income tax burden, it would use the straight-line depreciation method to accomplish this objective.
F
A company has $8,000 in cash, $9,250 in accounts receivable, and $19,500 in inventory. If current liabilities are $14,350, then the quick ratio would be a.2.0 to 1. b.2.6 to 1. c.1.2 to 1. d.5.0 to 1.
c.1.2 to 1.
A decreasing long-term liability account is presented on the statement of cash flows as a.an increase in cash in the Financing Activities category. b.an increase in cash in the Operating Activities category. c.a decrease in cash in the Financing Activities category. d.a decrease in cash in the Investing Activities category
c.a decrease in cash in the Financing Activities category.
Discount on Bonds Payable is classified as a current liability.
F
Which of the following is not an operating activity? a.Cash payments for dividends to stockholders b.Cash receipts for interest earned c.Cash payments for operating expenses d.Cash collections from credit customers
a.Cash payments for dividends to stockholders
When land and building are acquired for a lump sum, the purchase amount should be allocated on the basis of the market values of the two assets.
T
Bad Debts Expense is increased and Accounts Receivable is decreased at the end of the period to recognize bad debts under the allowance method.
F
A company has $200 in cash, $500 in accounts receivable, and $700 in inventory. If current liabilities are $400, then the quick ratio would be a.1.75 to 1. b.3.00 to 1. c.2.25 to 1. d.3.50 to 1.
a.1.75 to 1.
Cash interest is computed annually when a bond is issued for other than its face value. For a bond issued at a premium, how will this component change under the effective interest method as the bond approaches maturity? a.Decrease b.Remain constant c.Increase d.Not enough information given to decide
b.Remain constant
A change in estimate of an asset's residual value involves restating the income statements of past periods for the estimate change.
F
All the information needed to compute the cash flow adequacy ratio is found on the balance sheet.
F
Asset turnover is calculated as Net Income divided by Average Total Assets.
F
Bad Debts Expense is a contra account that is used to reduce accounts receivable to its net realizable value.
F
Compound interest is a repeated calculation of the interest only on the principal over certain periods of time.
F
Double-declining-balance depreciation is most commonly used by businesses for financial reporting purposes.
F
For the statement of cash flows, companies are required to classify their cash activities into three categories: operating, investing, and borrowing.
F
Net income was $61,000 for the year. The accumulated depreciation balance increased by $14,000 over the year. There were no sales of fixed assets or changes in noncash current assets or liabilities. Under the indirect method, the cash flow from operations is $47,000.
F
On the balance sheet, a company reports plant assets by subtracting residual value from the original cost of the plant asset.
F
Research and development costs should be presented as intangible assets.
F
Stock dividends reduce the par value of the stock.
F
The Treasury Stock account should be considered an asset account.
F
The cumulative feature of stock allows the firm to eliminate a class of stock by paying the stockholders a specified amount.
F
The excess of the face value of bonds over the issue price is known as a premium.
F
The percentage of net credit sales approach for recognizing bad debts considers any existing balance in Allowance for Doubtful Accounts.
F
The statement of cash flows emphasizes explanations for the change in net income.
F
To be classified as a cash equivalent, an item must be readily convertible to a known amount of cash and have an original maturity to the investor of three months or more.
F
A balance sheet of a sole proprietorship includes only the business assets and liabilities, not the personal assets of the owner.
T
A company may prepare a statement of retained earnings instead of a statement of stockholders' equity if the only changes in the stockholders' equity accounts that occurred during the year are earnings and dividends.
T
A contingent liability is recorded if it is probable and can be reasonably estimated.
T
A remotely possible loss from a lawsuit is not reported on the balance sheet as a current liability.
T
Accounts receivable are shown on the balance sheet at their net realizable value.
T
Acquisition cost should not include expenditures unrelated to the acquisition, like repair costs for damages incurred during installation, or costs incurred after the asset was installed and use begun.
T
All operating assets, except land, are subject to depreciation, amortization, or depletion.
T
An amount that has been incurred as an expense, but has not yet been paid should be considered an accrued liability.
T
Because the cash received from the sale of long-term assets is reported in the Investing Activities section of the statement of cash flows, any gain or loss is built into the cash received under the direct method.
T
Bonds are generally issued in denominations of $1,000.
T
Depreciation does not describe the increase or decrease in the market value of the asset.
T
Most investors would prefer to see equity rather than debt on the balance sheet.
T
None of the Stockholders' Equity accounts are affected by the stock split.
T
The accounts receivable turnover ratio is a measure of how well a company manages its receivables.
T
The current maturity of long-term debt is a current liability.
T
The face rate is also called the nominal or stated rate.
T
The reason the allowance method of recognizing bad debts is used is primarily because it recognizes the maximum amount of write-off in each period.
T
Under the allowance method of accounting for bad debts, the company estimates the amount of bad debts before those debts actually occur.
T
Warranty expenses are the result of the selling company's estimate of the number of units sold during the current year that may become defective and need repair or replacement during the warranty period.
T
When a note is discounted at a bank, it is normally done with recourse.
T
A company's weekly payroll amounts to $50,000 and payday for the week is every Friday. Employees work five days per week, Monday through Friday. The appropriate journal entry was recorded at the end of the accounting period, Monday, March 31, 2017. What amount is wages expense in April for the payday, Friday, April, 4, 2017? a.$40,000 b.$50,000 c.$10,000 d.$0
a.$40,000
If a company uses the allowance method to account for bad debts, when will the company's owners' equity decrease? a.At the end of the accounting period when an adjustment for bad debts is recorded b.When the accounts receivable amount becomes past due c.At the date a customer's account is determined to be uncollectible d.At the date a customer's account is written off
a.At the end of the accounting period when an adjustment for bad debts is recorded
Which one of the following is an accurate description of Allowance for Doubtful Accounts? a.Contra account b.Revenue account c.Liability account d.Expense account
a.Contra account
Which of the following accounts is not classified as a current liability? a.Note payable, due in three years b.Taxes payable c.Accounts payable d.Salaries payable
a.Note payable, due in three years
Which of the following would appear on the balance sheet as a current liability? a.Premium offers in cereal boxes b.The possible loss from a lawsuit c.Potential damages from possible explosions in a fireworks factory d.A loss from an anticipated strike by employees
a.Premium offers in cereal boxes
If a company borrows money from its bank and the bank deducts the interest in advance, the company would record the amount of the interest deduction as a.a discount. b.a loss. c.prepaid interest. d.an expense.
a.a discount.
When using the indirect method, how would the retirement of bonds payable at their maturity date be shown on the statement of cash flows? a.As a noncash investing and financing activity b.As a financing activity c.As an operating activity d.As an investing activity
b.As a financing activity
When using the direct method, how is the purchase of equipment for cash shown on the statement of cash flows? a.As a noncash investing and financing activity b.As an investing activity c.As a financing activity d.As an operating activity
b.As an investing activity
Which of the following costs related to the purchase of production equipment incurred by Newark Company during 2017 would be considered a revenue expenditure? a.Purchase price of the equipment less the cash discount b.Repair and maintenance costs during the equipment's first year of service c.Transportation charges to deliver the equipment to Newark Company d.Installation costs for equipment
b.Repair and maintenance costs during the equipment's first year of service
When a company declares a stock dividend, which of the following occurs? a.Stockholders' equity is decreased. b.Retained earnings is reduced. c.A liability is created. d.The Financing section of the statement of cash flows is decreased.
b.Retained earnings is reduced.
Where would you tell someone to find the information needed to compute the cash flow adequacy ratio? a.The balance sheet only b.The statement of cash flows and the notes to the statements c.The statement of cash flows only d.The income statement only
b.The statement of cash flows and the notes to the statements
When using the allowance method, what are the effects on the accounting equation when a company writes off a bad debt? a.Assets increase and stockholders' equity decreases. b.There is no effect on overall assets or equity. c.Assets and stockholders' equity increase. d.Assets and stockholders' equity decrease.
b.There is no effect on overall assets or equity.
If a company constructs an asset over a period of time and borrows money, the amount of interest incurred during construction on the borrowed money is a.amortized over the construction period. b.capitalized as part of the cost of the plant asset. c.reported as depletion on the income statement. d.reported as interest expense on the income statement.
b.capitalized as part of the cost of the plant asset.
The primary purpose of the statement of cash flows is to provide information about a.the financial position of the company. b.the cash inflows and outflows of the company. c.the investing and financing activities of the company. d.the profitability of the company.
b.the cash inflows and outflows of the company.
What are the effects on the accounting equation when a company makes the adjustment to record bad debts expense using the allowance method? a.Assets decrease and stockholders' equity increases. b.Assets increase and stockholders' equity decreases. c.Assets and stockholders' equity decrease. d.Assets and stockholders' equity increase.
c.Assets and stockholders' equity decrease.
Deferred income taxes is a balance sheet item for Iowa Products Company. How would it most likely be classified on the balance sheet? a.Owners' equity b.Expense c.Liability d.Contra liability
c.Liability
What is the distinguishing characteristic between accounts receivable and notes receivable? a.Accounts receivable require payment of interest if not paid within the usual credit terms. b.Notes receivable result from credit sale transactions for merchandising companies, while accounts receivable result from credit sale transactions for service companies. c.Notes receivable result from a written promise to pay within a specified amount of time. d.Accounts receivable are usually current assets, while notes receivable are usually long-term assets.
c.Notes receivable result from a written promise to pay within a specified amount of time.
When constructing assets, capitalized interest is based on a.the expenditures at the beginning of the period. b.the expenditures at the end of the of the period. c.the average accumulated expenditures. d.the amount allowed by the company's auditors.
c.the average accumulated expenditures.
A company purchased machinery by issuing 2,000 shares of $3 par value common stock. Since the company is new, there is no established market price for its stock. How would the company record the transaction? a.At the cost recorded by the previous owner of the machine b.In terms of the par value of the stock issued c.Recording the transaction would be postponed until a market price for the stock could be determined. d.At the fair market value of the machine
d.At the fair market value of the machine
Which of the following statements regarding contingencies is true? a.The accounting principle that determines whether a contingent asset is recorded is that of materiality. b.Contingencies that are not estimable should not be disclosed even if probable. c.Contingent assets, if probable and estimable, are treated in much the same way as contingent liabilities. d.Contingencies that are probable and estimable must be recorded before the outcome of future events.
d.Contingencies that are probable and estimable must be recorded before the outcome of future events.
Fall Corp. uses plant assets that are subject to rapid decreases in value due to obsolescence and physical deterioration. Which of the following depreciation methods is most appropriate to measure the decline in the usefulness of the company's assets? a.Straight-line b.Units-of-production c.Revenue expenditure method d.Double-declining-balance
d.Double-declining-balance
Which of the following statements is true regarding the two allowance methods used to account for bad debts? a.The percentage of net credit sales approach takes into account the existing balance in the Allowance for Doubtful Accounts account. b.The direct write-off method does a better job of matching revenues and expenses. c.The direct write-off method takes into account the existing balance in the Allowance for Doubtful Accounts account. d.The percentage of accounts receivable approach takes into account the existing balance in the Allowance for Doubtful Accounts account.
d.The percentage of accounts receivable approach takes into account the existing balance in the Allowance for Doubtful Accounts account.