ACG CHAPTER 2 EXAM REVIEW

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? A) $195,000 B) $185,000 C) $180,000 D) $40,000

B) $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.

Which of the following would not be reported among property, plant, and equipment on a classified balance sheet? A) Delivery vehicles B) Cash C) Equipment D) Accumulated depreciation E) Land

B) Cash

What group is considered to be the primary accounting standard-setting body in the United States? A) Public Company Accounting Oversight Board (PCAOB) B) Financial Accounting Standards Board C) American Institute of Certificed Public Accountants D) International Accounting Standards Board E) Securities and Exchange Commission

B) Financial Accounting Standards Board

A company purchased common stock of another corporation. The company expects to hold the other corporation's stock for more than one year. On its classified balance sheet, the company should report the common stock as A) property, plant, and equipment. B) a long-term investment. C) an intangible asset. D) a current asset. E) stockholders' equity.

B) a long-term investment.

The economic entity assumption states that economic events A) of different entities can be combined if all the entities are corporations. B) of every entity can be separately identified and accounted for. C) of a sole proprietorship are not to be distinguished from the personal economic events of its owners. D) must be reported to the Securities and Exchange Commission. E) transactions can be expressed in terms of money.

B) of every entity can be separately identified and accounted for.

Which of the following statements is true?#1. The Financial Accounting Standards Board is the organization that makes many of the accounting standards or rules in the United States.#2. Generally Accepted Accounting Principles are rules and practices that are recognized as a general guide for financial reporting purposes in the United States. Statement #1 is false but statement #2 is true Both statements are true Statement #1 is true but statement #2 is false Neither statement #1 nor #2 is true

Both statements are true

Based on the following accounts and year-end account balances for a certain corporation, determine the amount of intangible assets to be reported on its classified balance sheet. Accounts payable$ 60,000 Goodwill 140,000 Accounts receivable 100,000 Inventory 110,000 Accumulated depreciation 40,000 Land 180,000Buildings 210,000 Prepaid insurance 60,000 Cash 130,000 Retained earnings 230,000 Common stock 600,000 The land is used as a parking lot. A) $390,000 B) $40,000 C) $140,000 D) $830,000 E) $180,000

C) $140,000 SOLUTION: Intangible: Goodwill = 140,000

A corporation reports the following balances and amounts:Accounts payable, $60,000 Cash provided by operations, $150,000 Accounts receivable, $25,000 Net income, $50,000 Average number of common shares, 12,000 Salaries and wages payable, $45,000 Average current liabilities, $220,000 Stockholders' equity, $200,000 Average total assets, $500,000 Current assets, $200,000 Average total liabilities, $320,000 Current liabilities, $150,000 Dividends paid to preferred shareholders, $2,000 Determine its earnings per share? A) $1.20 B) $1.80 C) $4.00 D) $1.50 E) $2.33

C) $4.00 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 = ($50,000 - 2,000)/12,000 shares = $4.00/share.

Based on the following accounts and year-end account balances for a certain corporation, determine the amount of current assets to be reported on its classified balance sheet. The land is used as a parking lot. A) $560,000 B) $290,000 C) $400,000 D) $540,000 E) $340,000

C) $400,000 Solution: Current assets include accounts receivable, cash, inventory, prepaid insurance = 100,000 + 130,000 + 110,000 + 60,000 = 400,000

Which of the following is typically not a current liability? A) Notes Payable (due in 10 months) B) Salaries and Wages Payable (due in 7 days) C) Bonds Payable (due in 10 years) D) Accounts Payable (due in 30 days) E) All of these are always current liabilities

C) Bonds Payable (due in 10 years)

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

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

C) Paying the next month's rent one month in advance. SOLUTION: 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.

Ratios that measure the income or operating success of a company for a given period of time are A) liquidity ratios. B) solvency ratios. C) profitability ratios. D) trending ratios. E) current ratios.

C) profitability ratios.

During the current year, a company reported the following: Issued common stock, $49,000 Declared and paid dividends, $17,000 Net income, $201,000 At the end of the current year, the company's retained earnings is $1,292,000. What was its retained earnings balance at the beginning of the current year? A) $1,476,000. B) $1,157,000. C) $1,427,000. D) $1,108,000. E) $1,142,000.

D) $1,108,000. Solution: Ending retained earnings = Beginning retained earnings + Net income - Dividends Beginning retained earnings = Ending retained earnings - Net income + Dividends Beginning retained earnings = $1,292,000 - 201,000 + 17,000 = $1,108,000

A company has assets of $2,400,000, common stock of $620,000, and retained earnings of $380,000. It has liabilities of A) $3,400,000. B) $2,160,000. C) $2,640,000. D) $1,400,000. E) $1,000,000.

D) $1,400,000. 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 = 620,000 + 380,000 = 1,000,000 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 = 2,400,000 - 1,000,000 Liabilities = 1,400,000

A company has liabilities of $750,000, common stock of $435,000, and retained earnings of $380,000. It has assets of A) $1,935,000. B) $2,644,000. C) $815,000. D) $1,565,000. E) $2,370,000

D) $1,565,000. 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 = 435,000 + 380,000 = 815,000 Fill-in assets and equity into the accounting equation and solve for liabilities. Assets = Liabilities + Equity = $750,000 + 815,000 Assets = 1,565,000

The following information is available for a certain corporation: Based on this information, what is the company's earnings per share (rounded to two decimals) for 2022? A) $2.38 B) $2.67 C) $2.30 D) $2.42 E) $2.56

D) $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

A company has liabilities of $2,300,000, common stock of $550,000, and retained earnings of $1,250,000. It has assets of A) $1,750,000. B) $1,900,000. C) $2,800,000. D) $4,100,000. E) $500,000.

D) $4,100,000. 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 = 550,000 + 1,250,000 = 1,800,000 Fill-in assets and equity into the accounting equation and solve for liabilities. Assets = Liabilities + Equity = 2,300,000 + 1,800,000 Assets = $4,100,000

A corporation reports the following balances and amounts:Accounts payable, $60,000 Cash provided by operations, $150,000 Accounts receivable, $25,000 Net income, $50,000 Average number of common shares, 12,000 Salaries and wages payable, $45,000 Average current liabilities, $220,000 Stockholders' equity, $200,000 Average total assets, $500,000 Current assets, $200,000 Average total liabilities, $320,000 Current liabilities, $150,000 Dividends paid to preferred shareholders, $2,000 Determine its earnings per share? A) $2.33 B) $1.80 C) $1.20 D) $4.00 E) $1.50

D) $4.00 SOLUTION: Earnings per share = ($50,000 - 2,000)/12,000 shares = $4.00/share.

How is earnings per share computed? a) Net income/Average common shares outstanding B) Gross profit/Average common shares outstanding C) Net income/Ending common shares outstanding D) (Net income - preferred dividends)/Average common shares outstanding E) (Net sales - preferred dividends)/Average common shares outstanding

D) (Net income - preferred dividends)/Average common shares outstanding

Which of the following is not an example of an intangible asset? A) Trademarks B) Goodwill C) Patents D) Accounts receivable E) Copyrights

D) Accounts receivable

The primary objective of financial reporting is to provide financial information that is useful. According to the FASB, useful information should possess certain fundamental qualities. One such quality is faithful representation. Which of the following is a characteristic of faithful representation? A) Comparability B) Going concern C) Costless D) Free from error E) Predictive value

D) Free from error

Which of the following is considered property, plant, and equipment on a classified balance sheet? A) Accounts receivable C) Depreciation D) Land E) Copyrights F) Investments in another company's stock

D) Land

Which financial statement is used by most corporations to compute year-end retained earnings? A) Statement of cash flows B) None of these C) Balance sheet D) Statement of stockholders' equity E) Statement of sources and uses

D) Statement of stockholders' equity

Which of the following would decrease the company's current ratio? A) Buying supplies, such as office supplies, in exchange for cash. B) Selling services to customers on account. C) Issue common stock in exchange for cash. D) Using excess cash to buy long-term investments. E) Selling machinery previously used in operating the business in exchange for cash.

D) Using excess cash to buy long-term investments. Solution: Current ratio = current assets divided by current liabilities Buying a long-term investment in exchange for cash decreases cash and increases long-term investments. The decrease in cash lowers total current assets and lowers the current ratio. An increase in long-term investments does not affect current assets of current liabilities.

On a classified balance sheet, companies usually list current assets A) in alphabetical order. B) with the largest dollar amounts first. C) in the order of acquisition. D) in the order in which they are expected to be converted into cash or used by the business. E) in order of their age.

D) in the order in which they are expected to be converted into cash or used by the business.

Issuing new shares of common stock will A) increase liabilities. B) increase retained earnings. C) decrease retained earnings. D) increase common stock. E) decrease common stock.

D) increase common stock.

The periodicity assumption states A) only events that can be expressed in monetary terms are included in the accounting records. B) every economic entity can be separately identified and accounted for. C) the business will use the same accounting procedures and methods in each period. D) the life of a business can be divided into artificial time periods for financial reporting purposes. E) the business will remain in operation for at least one more period.

D) the life of a business can be divided into artificial time periods for financial reporting purposes.

Working capital is calculated by taking current assets minus current liabilities. current assets divided by current liabilities. current liabilities plus assets. current assets times current liabilities. current liabilities divided by current assets.

current assets minus current liabilities.

Which of the following a measure of profitability? earnings per share. working capital. current ratio. All of these debt to assets ratio.

earnings per share.

The following ratios are available for Alpha Inc. and Omega Inc. Alpha Inc. Omega Inc. Current ratio 2.0 1.5 Earnings per share $1/share $1.5/share Compared to Omega Inc., Alpha Inc. has higher liquidity. lower profitability. lower liquidity. higher solvency. lower solvency.

higher liquidity.

Working capital is a measure of equity. consistency. profitability. solvency. liquidity.

liquidity.

The assumption that requires only those things that can be expressed in money are included in the accounting records is the going concern assumption. monetary unit assumption. periodicity assumption. economic entity assumption. dollar assumption.

monetary unit assumption.

Long-term creditors are usually most interested in evaluating solvency. liquidity. profitability. consistency. comparability.

solvency.

Long-term creditors are usually most interested in evaluating liquidity. comparability. profitability. solvency. consistency.

solvency.

During the year, a corporation reported the following: Issued common stock, $98,000 Declared and paid dividends, $34,000 Net income, $402,000 At the end of the current year, the company's retained earnings is $2,384,000. What was its retained earnings balance at the beginning of the current year? $2,752,000. $2,016,000. $2,820,000. $2,114,000. $2,654,000.

$2,016,000. Solution: Ending retained earnings = Beginning retained earnings + Net income - Dividends Beginning retained earnings = Ending retained earnings - Net income + Dividends Beginning retained earnings = $2,384,000 - 402,000 + 34,000 = $2,016,000

Based on the following data (in dollars), what is the working capital? $322,000 $274,000 $316,000 $348,000 $360,000

$274,000

The land is used as a parking lot. The bonds are expected to be held long-term. What are its current assets? $400,000 $910,000 $530,000 $410,000 $550,000

$410,000 Solution: Current assets include its cash, accounts receivable, inventory, and prepaid insurance. Current assets = $100,000 + 100,000 + 200,000 + 10,000 = $410,000

For the current year, a company reported a net cash inflow from operating activities of $170,000. It also reported the following: It issued $40,000 of common stock It paid $60,000 for equipment It paid 40,000 as dividends It paid a $15,000 note payable What is the company's free cash flow? $105,000 $55,000 $70,000 $110,000 $170,000

$70,000 Solution: Free cash flow = net cash from operating activities minus capital expenditures minus cash dividends paid Free cash flow = $170,000 - 60,000 - 40,000 = $70,000

A corporation has current assets of $3,750,000, current liabilities of $2,050,000, total assets of $10,000,000 and total liabilities of $6,000,000. If it pays $500,000 of its accounts payable what will the current ratio be? (rounded) 2.10 2.51 2.42 1.51 1.80

2.10

The following information is available for a certain corporation: (in millions) Based on this information, what is the company's earnings per share (rounded to two decimals) for 2022? A) $2.67 B) $2.40 C) $3.00 D) $2.50 E) $2.78

A) $2.67 Solution: Average common shares outstanding = (Beginning common shares outstanding + ending common shares outstanding)/2 Average common shares outstanding = (160 shares + 200 shares)/2 = 180 shares Earnings per share = (Net income - preferred dividends)/average common shares outstanding Earnings per share = ($500 - $20)/180 shares = $2.67 per share

A certain corporation reports the following balances and amounts. The following information is presented in random order (amounts are in dollars). How much is its working capital? A) $333,000 B) $389,000 C) $331,000 D) $341,000 E) $322,000

A) $333,000 Solution: Working capital is current assets minus current liabilities. Current assets = $140,000 + 100,000 + 200,000 + 2,000 + 80,000 = $522,000 Current liabilities = $125,000 + 56,000 + 8,000 = $189,000 Working capital = $522,000 - $189,000 = $333,000

A company purchased a plot 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) A long-term investment B) Land expense C) An intangible asset D) Property, plant, and equipment

A) A long-term investment

A corporation used four different accounting methods to compute depreciation in four consecutive years. Which of the following qualities of useful information has the company most likely violated? A) Consistency B) Faithful representation C) Comparability D) Relevance E) Economic entity assumption

A) Consistency

Which one of the following does not affect retained earnings? A) Issuing of common stock to stockholders B) Renting a warehouse to store the company's inventory C) Incurring a net loss D) Declaring and paying a dividend E) Recognizing revenue from a sale to a customer

A) Issuing of common stock to stockholders Solution: Retained earnings increases by net income, so it increases when revenue is recognized and it decreases when expenses are recognized, Retained earnings also decreases by dividends.

Which of the following is not classified as a current asset? A) Patents B) Accounts receivable C) Inventory D) Cash E) Prepaid expenses

A) Patents

Declaring and paying a cash dividend will A) decrease retained earnings. B) increase retained earnings. C) increase common stock. D) decrease common stock. E) decrease both retained earnings and common stock.

A) 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.

A company reported $200,000 cash provided by operating activities. Additional data for the current year shows the following: It paid $20,000 for machinery It paid $5,000 in dividends It paid a $25,000 note payable Shortly before year-end, it received $10,000 by issuing additional shares of its stock. What is the company's free cash flow? A)$175,000 B) $195,000 C) $155,000 D) $180,000 E) $150,000

A)$175,000 SOLUTION: Free cash flow = $200,000 - 20,000 - 5,000 = $175,000

A corporation has current assets of $3,010,000, current liabilities of $2,150,000, total assets of $10,000,000 and total liabilities of $6,000,000. If it pays $200,000 of its accounts payable what will its current ratio be? (rounded) A) 1.54 B) 1.51 C) 1.40 D) 2.27 E) 1.44

E) 1.44 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 = ($3,010,000 - $200,000) / ($2,150,000 - $200,000) Current ratio = 1.44 (i.e., 1.44 to 1 or 1.44:1)

Which of the following is a financial ratio classification that measures short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash? A) Financial ratios B) Analysis ratios C) Profitability ratios D) Solvency ratios E) Liquidity ratios

E) Liquidity ratios

Generally Accepted Accounting Principles (GAAP) A) are sound in theory but rarely used in real life. B) are the rules used to evaluate the performance of auditing firms. C) are accounting rules formulated by the Internal Revenue Service. D) have eliminated all errors in accounting. E) are accounting rules that are recognized as a general guide for financial reporting.

E) are accounting rules that are recognized as a general guide for financial reporting.

A short-term creditor is primarily interested in the __________ of the borrower. A) solvency B) consistency C) profitability D) comparability E) liquidity

E) liquidity

Which of the following describes a company's ability to pay its obligations that are expected to become due within the next year or operating cycle whichever is longer? Liquidity Solvency Economy Working capital Profitability

Liquidity

Which of the following would increase a company's current ratio? None of these Pay a dividend to shareholders. Negotiate with a creditor to reclassify a note payable in 3 months into a note payable due in 2 years. Collect outstanding accounts receivable. Use cash to buy new equipment.

Negotiate with a creditor to reclassify a note payable in 3 months into a note payable due in 2 years. Solution: 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.