ch2 quiz

A company has liabilities of $750,000, common stock of $435,000, and retained earnings of $380,000. It has assets of

$1,565,000.

Based on the following accounts and year-end account balances for a certain corporation, determine the amount of property, plant, and equipment to be reported on its classified balance sheet. Accounts payable$120,000 Inventory 110,000 Accounts receivable 100,000 Land 180,000 Accumulated depreciation 40,000 Prepaid insurance 60,000 Buildings 210,000 Retained earnings 170,000 Cash 130,000 Trademarks 140,000 Common stock 600,000 The land is used as a parking lot.

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

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?

$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.

A corporation has the following information available for the current year: Issued common stock 45 Repurchase of common stock 65 Paid dividends 75 Net income 130 Beginning Common Stock balance 475 Beginning Retained Earnings balance 625 Based in this information, what is its retained earnings (in $ millions) at the end of the current year?

$680 Solution: Ending retained earnings = Beginning retained earnings + net income - dividends Ending retained earnings = $625 + 130 - 75 = $680

Which of the following statements is false? Comparability means using the same accounting principles from year to year within a company. Faithful representation is the quality of information that gives assurance that it is free of error. Accounting information has relevance if it would make a difference in a business decision. The primary objective of financial reporting is to provide financial information that is useful to investors and creditors for making decisions. All of these are false.

Comparability means using the same accounting principles from year to year within a company.

Which of the following is an indicator of profitability? All of these Working capital Earnings per share Current ratio Debt to total assets ratio

Earnings per share Solution: The earnings per share ratio is a measure of profitability. The others are measures of solvency or liquidity.

Which of the following would not be reported among property, plant, and equipment on a classified balance sheet? Land Inventory Buildings Equipment Accumulated depreciation

Inventory

Which of the following would increase a company's current ratio? 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. Use cash to buy new equipment. Collect outstanding accounts receivable. None of these

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

Issuing new shares of common stock will

increase common stock.

For the current year, a company reported a net cash inflow from operating activities of $140,000. It also reported the following: It issued $10,000 of common stock It paid a $5,000 note payable It paid $25,000 for equipment It paid $15,000 as dividends What is the company's free cash flow?

$100,000 Solution: Free cash flow = net cash from operating activities minus capital expenditures minus cash dividends paid Free cash flow = $140,000 - 25,000 - 15,000 = $100,000

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. Accounts payable $160,000 Inventory 110,000 Accounts receivable 100,000 Land 180,000 Accumulated depreciation 40,000 Prepaid insurance 60,000 Buildings 210,000 Retained earnings 130,000 Cash 130,000 Trademarks 140,000 Common stock 600,000 The land is used as a parking lot.

$400,000

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?

$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 $3,210,000, current liabilities of $2,350,000, 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)

1.40 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 = ($3,210,000 - $200,000) / ($2,350,000 - $200,000) Current ratio = 1.40 (i.e., 1.40 to 1 or 1.40:1)

A corporation has current assets of $3,150,000, current liabilities of $2,250,000, total assets of $10,000,000 and total liabilities of $6,000,000. If it pays $500,000 of its accounts payable what will its current ratio be? (rounded)

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)

Based on the following data (in dollars), what is the current ratio? Accounts payable $55,000 Investments in bonds $90,000 Accounts receivable $50,000 Land $95,000 Accumulated depreciation $30,000 Notes payable (due in 9 months) $10,000 Buildings $115,000 Prepaid insurance $40,000 Cash $35,000 Salaries and wages payable $10,000 Common stock $210,000 Trademarks $70,000 Inventory $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) + Salaries & wages payable Current liabilities = 55,000 + 10,000 + 10,000 = 75,000 Current ratio = 195,000/75,000 = 2.60

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

A ratio summarizes the relation between selected items. Financial statement analysis (i.e., ratio analysis) focuses on the relation between certain financial statement data, such as earnings and the number of shares of common stock (i.e., earnings per share or EPS). A ratio by itself is not particularly useful. Rather, ratios tend to be compared to standards. Which of the following is a comparison facilitated by ratios when conducting a financial statement analysis (i.e., ratio analysis)? Industry-average comparisons such as comparing a company's ratio to an industry average. All of these Intracompany comparisons such as comparing two years' ratios for the same company. Intercompany comparisons such as comparing a company's ratio to the ratio of a competitor in the same industry. None of these

All of these

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

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 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 Solution: Liquidity is the ability to pay short-term obligations. Notice that the question asks about obligations being paid within a very short period of time. Solvency refers to an ability to pay obligations over a long period of time such as more than one year.

Which of the following ratios measures the ability of the company to survive over a long period of time?

Solvency ratios

What is the primary criterion by which accounting information is judged? Consistency Usefulness for decision making Cost Predictive value Comparability

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.

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

Using excess cash to buy long-term investments.

A company purchased bonds issued by another corporation. The company expects to hold the bonds for more than one year. On its classified balance sheet, the company should report the bonds as

a long-term investment.

Generally Accepted Accounting Principles (GAAP)

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

The current ratio is important in evaluating a company's

liquidity. 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. An example of a liquidity ratio is the current ratio.

The notion that the life of a business can be divided into artificial time periods for financial reporting purposes is known as

the periodicity assumption.

Information is _________ if independent observers, using the same methods, obtain similar results. For example, certified public accountants (CPAs) perform audits of financial statements to confirm or double-check their accuracy.

verifiable Solution Information is verifiable if independent observers, using the same methods, obtain similar results.