FA - Chapter 5 (Flash Cards)

56. Utilize the paper test bank #56 question for the Income Statement. If the income statement were prepared in a multistep form, income from operations would be a. $48,750. b. $41,250. c. $51,250. d. $42,500.

a. $48,750. Answer: Net Income = $51,250 Less $2,500 (Dividend Income - Interest Expense) = $48,750

83. Use this balance sheet to answer the following question. Use ending balances whenever average balances are required for computing ratios (see the paper copy of the Chapter 5 test bank) The debt to equity ratio is a. 0.46. b. 0.67. c. 2.20. d. 0.33.

a. 0.46. Answer: Total Liabilities (170,000) / Total Equity (370,000) = 46%

78. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios (see the paper copy of the Chapter 5 test bank) The current ratio for Layton Novelties is a. 1.75. b. 0.57. c. 1.4. d. 2.0.

a. 1.75.

52. Which of the following is not considered a selling expense? a. Cost of goods sold b. Sales salaries expense c. Freight-out expense d. Insurance on the sales office

a. Cost of goods sold

50. Which of the following is an actual account on the books? a. Cost of goods sold b. Gross margin c. Net income d. Income from operations

a. Cost of goods sold All the other are 'sums' or a total line on the Income Statement.

71. Which of the following is not a measure of profitability? a. Current ratio b. Return on assets c. Return on equity d. Debt to equity ratio

a. Current ratio Answer: The only ration given as one of the multiple choice answers that does not have variable from the Income Statement is Current Radio. Debit to Equity is not the answer since Equity has retained earnings in the classifications.

76. Which of the following does not include net income in its computation? a. Debt to equity ratio b. Return on assets c. Return on equity d. Profit margin

a. Debt to equity ratio Answer: When the word 'return' is utilized...that is always means the numerator (top number) is Net Income. Return on Assets...Return on Equity and Profit Margin all have Net Income in their respective ratios.

33. Oil wells and coal mines used in the normal course of business would appear in which balance sheet section? a. Property, plant, and equipment b. Investments c. Current assets d. Intangible assets

a. Property, plant, and equipment Answer: See book answer image. Include tangible long-term assets used in day to day operations.

30. Which accounting term does not mean the same as the others? a. Retained earnings b. Net worth c. Capital d. Owner's equity

a. Retained earnings Answer: Retained Earnings is line item withn owner's equipment....the rest mean the same. See the book answer below.

75. Which of the following is expressed in terms of a percentage? a. Return on equity b. Current ratio c. Asset turnover d. Working capital

a. Return on equity Answer: Return on Equity is the only ratio that is a percentage (see below). All the rest of the ratios are 'times' numbers.

22. A corporation's stockholders' equity section of the balance sheet may contain all except a. T. McDonald, Capital b. Retained earnings c. Additional paid-in capital d. Common stock

a. T. McDonald, Capital Answer: The question is about a corporation...T. McDonald capital would be a 'sole proprietorship' ownership.

4. All the following are standards of accounting information except a. flexibility. b. reliability. c. understandability. d. relevance.

a. flexibility. Answer: Memorize the below matrix. Flexibility NEVER applies to financial statements and is not in the matrix.

40. A merchandiser will earn an operating income of exactly $0 when a. gross margin equals operating expenses. b. net sales equals cost of goods sold. c. cost of goods sold equals gross margin. d. operating expenses equal net sales.

a. gross margin equals operating expenses Answer: Gross Margin = Revenue - Cost of Goods Sold // Operating Income = Gross Margin - Operating Expenses. When Operating Expenses = Gross Margin // There is exactly $0 operating Income

39. Property, plant, and equipment could include all except a. intangible assets. b. fixed assets. c. plant assets. d. operating assets.

a. intangible assets. Answer: Intangible assets will never be considered Property, Plant, and Equipment

2. General-purpose external financial statements are not primarily intended for a. management. b. investors. c. suppliers of goods and services. d. lending institutions.

a. management. Answer: External Financial Statements is intened to 'external users' of the information. (see below) Management is an 'internal' uses of the information.

63. The asset turnover ratio equals a. net sales divided by average total assets. b. average total assets divided by net income. c. average total assets divided by total liabilities. d. net income divided by average total assets.

a. net sales divided by average total assets.

42. Positive operating income will result if gross margin exceeds a. operating expenses. b. purchases. c. cost of goods sold. d. cost of goods sold minus operating expenses.

a. operating expenses. Answer: If Gross Margin = $100,000 and Operating Expenses = $50,000 = Operating Income = $50,000....which is positive.

87. Working capital measures a. the excess of current assets over current liabilities—what is on hand to continue business operations. b. the ability to earn a satisfactory income. c. the amount of debt in the company. d. the profitability of the business.

a. the excess of current assets over current liabilities—what is on hand to continue business operations.

26. Utilize the paper test bank #26 question for the balance sheet The total dollar amount of assets to be classified as property, plant, and equipment is a. $320,000. b. $240,000. c. $190,000. d. $170,000.

d. $170,000. Answer: Land (90,000) and the Building Less the Accumulated Depcrecition (80,000) = $170,000

24. Utilize the paper test bank #24 balance sheet The total dollar amount of assets to be classified as current assets is a. $210,000. b. $290,000. c. $190,000. d. $240,000.

d. $240,000. Answer: Cash (80,000); S/T Investment (40,000); Note Receivable - due in 10 month is key (30,000); Accounts Receivable (20,000) and Merchandise Inventory (70,000) = $240,000

57. Utilize the paper test bank #57 question for the Income Statement. If the income statement were prepared in a multistep form, excess of other revenue over other expenses would be a. $12,750. b. $6,500. c. $19,000. d. $6,250.

d. $6,250. Answer: Other Revenue of Dividend Income (12,750) Less Other Expenses of Interest Income (6,250) = $6,500

25. Utilize the paper test bank #25 balance sheet The total dollar amount of assets to be classified as investments is a. $100,000. b. $180,000. c. $0. d. $80,000.

d. $80,000. Answer: Only the 'Land Held' for Use is an investment in the above balance sheet. Below is what is considered an Investment on the Balance Sheet. Securities or note receiveable have to be long term to be considered an investment

70. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios (see the paper copy of the Chapter 5 test bank) The asset turnover for Abner Systems is a. 1.00 times. b. 1.33 times. c. 0.83 times. d. 1.20 times.

d. 1.20 times. Answer: Revenues (24,000) / Average Total Assets (20,000) = 1.20 Time. Soo the book formula below

65. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios (see the paper copy of the Chapter 5 test bank) The current ratio for Abner Systems is a. 0.75. b. 1.00. c. 1.13. d. 2.22.

d. 2.22. Answer: Current Assets (8,874)/Current Liabilities (4,000) = 2.22. See book formula below.

67. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios (see the paper copy of the Chapter 5 test bank) The return on assets for Abner Systems is a. 30 percent. b. 150 percent. c. 33-1/3 percent. d. 24 percent.

d. 24 percent. Answer: Net Income (4,800) / Total Average Assets (20,000) = 24%. Use the ending balance since not prior year assets were provided. See formula from the book below.

79. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios (see the paper copy of the Chapter 5 test bank) The profit margin for Layton Novelties is a. 30 percent. b. 75 percent. c. 60 percent. d. 27 percent.

d. 27 percent. Answer: Profit Margin - Net Income (21,600) / Revenue or Net Sales (80,000) = 27%

68. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios (see the paper copy of the Chapter 5 test bank) The return on equity for Abner Systems is a. 40 percent. b. 67 percent. c. 47 percent. d. 32 percent.

d. 32 percent. Answer: Net Income (4,800) / Owners Equity (15,000) = 32%.

69. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios (see the paper copy of the Chapter 5 test bank) The debt to equity ratio for Abner Systems is a. 67 percent. b. 75 percent. c. 25 percent. d. 33-1/3 percent.

d. 33-1/3 percent. Answer: Total Liabilities (5,000) / Total Equity (15,000) 33.3%

31. Which of the following should not be classified as a current asset? a. A one-year installment receivable from the sale of a truck b. An investment expected to be needed for operations in the next year c. A one-year prepaid insurance policy d. A fund to be used to purchase land

d. A fund to be used to purchase land Answer: A fund to purchase land will not be consumed within 1 year...or it would be stated in the answer. See the below answer below

49. To which account is the cost of inventory transferred when a product is sold? a. Sales b. Operating expenses c. Inventory sold d. Cost of goods sold

d. Cost of goods sold

19. Which accounting convention requires a note to the financial statements explaining the company's method of revenue recognition? a. Comparability and consistency b. Materiality c. Conservatism d. Full disclosure

d. Full disclosure Answer: In the notes to the financial statements...the accountants are required to 'disclose' revenue recognition methods (the notes are the only place for disclosing details).

51. In which category would office salaries expense be included? a. Net sales b. Cost of goods sold c. Selling expenses d. General and administrative expenses

d. General and administrative expenses

60. Which of the following items is not shown on a single-step income statement? a. Cost of goods sold b. Interest expense c. Selling expenses d. Gross margin

d. Gross margin Answer: Gross Margin is not on a single step income statement.

32. Goodwill would appear in which balance sheet section? a. Investments b. Property, plant, and equipment c. Current assets d. Intangible assets

d. Intangible assets Answer: Goodwill is an Intangible Asset'.

44. Which of the following accounts is not classified as a selling expense on the income statement? a. Freight-out expense b. Advertising expense c. Sales salaries expense d. Interest expense

d. Interest expense Answer: Interest Expense is not a selling expense

28. Which of the following appears on the balance sheet? a. Interest income b. Income taxes c. Net sales d. Merchandise inventory

d. Merchandise inventory Answer: Merchandise Inventory is the only balance sheet item...the rest of the give choice are on the Income Statement.

5. According to the FASB, the usefulness of accounting is judged by which of the following two prime qualitative characteristics of accounting information? a. Comparability and neutrality b. Understandability and comparability c. Verifiability and timeliness d. Relevance and reliability (or faithful representation)

d. Relevance and reliability (or faithful representation) Answer: Relevance and Faithful Representation (or Reliability) are the 2 primary qualitative characteristics

21. Which of the following should be classified as an intangible asset? a. Land held for future use b. Accounts receivable c. Buildings d. Trademark

d. Trademark

29. Which of the following accounts is most likely to appear on the balance sheet as a current liability? a. Accumulated Depreciation b. Bonds Payable c. Mortgage Payable d. Wages Payable

d. Wages Payable Answer: See the book answer below for a current liability

11. The convention of consistency refers to consistent use of accounting principles a. among firms. b. within a given accounting period. c. within industries. d. among accounting periods.

d. among accounting periods. Answer: D is correct. A and C are not correct...consistency applies to the firms accounting principle...AND it applies across multiple accounting periods....not with a given accounting period only (B).

41. Gross margin equals the difference between net sales and a. net income. b. cost of goods sold plus operating expenses. c. operating expenses. d. cost of goods sold.

d. cost of goods sold. Answer: Gross Margin = Revenue - Cost of Goods Sold (so the difference)

15. To obtain a slightly more accurate measure of net income, Gabrielli Company has determined that it must hire two full-time accountants. However, if it decides against the hiring, it has followed the convention of a. full disclosure. b. materiality. c. comparability. d. cost-benefit.

d. cost-benefit. Answer: Answer in the 2nd column...bottom section (Enhancing Qualitative Characteristics). Accounting information is useful if it does not cost too much to produce the information.

59. The other revenues and expenses section of a multistep income statement could include all the following except a. interest expense. b. interest income. c. dividend income. d. insurance expense.

d. insurance expense. Answer: Insurance Expenses is an Operating Expense.

62. The profit margin equals a. net sales divided by net income. b. gross margin divided by net income. c. net income divided by gross margin. d. net income divided by net sales.

d. net income divided by net sale

45. Interest expense on a mortgage would be classified on a multistep income statement under the heading a. general and administrative expenses. b. selling expenses. c. cost of goods sold. d. other revenues and expenses.

d. other revenues and expenses.

3. Financial statements are audited by outside accountants a. because it is a requirement stated in the Internal Revenue Code. b. only when fraudulent financial reporting is suspected. c. who then report on whether or not the company is a good investment. d. to increase the users' confidence in the statements' reliability.

d. to increase the users' confidence in the statements' reliability. Answer: Outside auditors are required to eliminate conflict of interests that could exist with the internal accountants.

82. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios (see the paper copy of the Chapter 5 test bank) The debt to equity ratio for Layton Novelties is a. 16-2/3 percent. b. 20 percent. c. 80 percent. d. 83-1/3 percent.

b. 20 percent. Answer: Total Liabilities (20,000) / Average Owner's Equity (100,000) = 20%

81. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios (see the paper copy of the Chapter 5 test bank) The return on equity for Layton Novelties is a. 48 percent. b. 21.6 percent. c. 42 percent. d. 30 percent.

b. 21.6 percent. Answer: Net Income (21,600) / Average Owner's Equity (100,000) = 21.6%

16. Which of the following accounting conventions would an accountant most likely apply when facing major uncertainties? a. Full disclosure b. Conservatism c. Materiality d. Consistency

b. Conservatism Answer: Question is related to a convention...so go to the Accounting Convention is the 3rd column. When an accountant is in doubt...they should be conservative.

43. Which of the following is not considered an operating expense? a. General office expenses b. Cost of goods sold c. Freight-out expense d. Advertising expense

b. Cost of goods sold Answer: Cost of Goods Sold is not an operating expenses

34. The normal operating cycle helps define which of the following balance sheet sections? a. Intangible assets b. Current assets c. Property, plant, and equipment d. Owner's equity

b. Current assets Answer: The operating defines if an asset is Current or not current.

8. The user can depend on the accuracy of financial information when which of the following qualitative characteristics has been followed? a. Relevance b. Faithful representation c. Understandability d. Timeliness

b. Faithful representation Answer: Accuracy falls under 'Faithful Representation' since it needs to be 'Free From Material Error.

9. The Securities and Exchange Commission instituted rules requiring the chief executive officers and chief financial officers of all publicly traded companies to certify that, to their knowledge, the quarterly and annual statements that their companies file with the SEC are a. 100 percent accurate and contain no misstatements, errors, or mistakes. b. accurate and complete. c. subject to interpretation due to the many accounting rules and regulations. d. not to be used except by individuals working for the company.

b. accurate and complete. Answers: The goal is not 100% accuracy....not subject to interpretation...and anyone can use the information.

20. A company should classify land held for a planned manufacturing facility as a. an intangible asset. b. an investment. c. a current asset. d. property, plant, and equipment.

b. an investment.

14. The convention of consistency relates most closely to a. cost-benefit. b. comparability. c. materiality. d. full disclosure.

b. comparability. Answer: The accounting convention of 'consistency' is related to 'comparability' of results from accounting period to accounting periods

73. Current assets divided by current liabilities is known as the a. profit margin. b. current ratio. c. working capital. d. capital structure.

b. current ratio. Answers: See the Current Ratio book note/formula below.

1. All of the following must certify that a public company's financial statements are accurate, complete, and not misleading, except for the a. chief financial officer. b. director of human resources. c. chief executive officer. d. independent auditor.

b. director of human resources. Answer: The CEO, CFO, and external auditors must sing off on the financial statements....not the Director of Human Resources

13. The accounting convention that is most responsible for the increase in the number of notes to financial statements is a. materiality. b. full disclosure. c. consistency. d. conservatism.

b. full disclosure. Answer: The question is a Accounting Convention question....so go to the Accounting convention column and select the correct answer...which is full disclosure (providing more notes is disclosing information).

88. The asset turnover ratio measures a. how quickly the company uses assets to pay debt. b. how efficiently assets are used to produce sales. c. the income produced by selling inventory. d. how efficiently equity is used to produce revenue.

b. how efficiently assets are used to produce sales.

46. Income from operations is arrived after considering all except a. administrative salaries. b. interest income. c. the cost of sales. d. sales returns and allowances.

b. interest income. Interest income is a non-operating expense

54. An advantage of the single-step income statement over the multistep form is a. the amount of information it provides. b. its simplicity. c. its comprehensiveness. d. its use in computing ratios.

b. its simplicity.

53. Interest paid on debt would be entered on the multistep income statement in the category called a. selling expenses. b. other revenues and expenses. c. general and administrative expenses. d. operating expenses.

b. other revenues and expenses.

7. Accounting information should make a difference to the outcome of a decision, according to the qualitative characteristic of a. reliability. b. relevance. c. understandability. d. verifiability.

b. relevance. Answer: The 'Relevance' is financial statements enables an external party to make a decision. The 'predictive value' piece of relevance is very important. See below.

27. An investment is classified as short term or long term based on a. whether the investment can be sold immediately. b. the length of time the investor expects to hold it. c. the purpose for which it is held. d. the dollar amount of the investment.

b. the length of time the investor expects to hold it. Answer: Investments on the Balance Sheet are based of the length of time expected to be held.

6. The qualitative characteristic of faithful representation contains all the following features except a. complete. b. verifiability. c. neutral. d. free from material error.

b. verifiability. Answer: Verifiability. is not a faithful representation. See matrix below

37. Utilize the paper test bank #37 question for the balance sheet The total dollar amount of assets to be classified as investments is a. $168,000. b. $0. c. $112,000. d. $56,000.

c. $112,000. Answer: The 'Special Funding for Purchasing a Building is the only Investment = $112,000.

77. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios (see the paper copy of the Chapter 5 test bank) The total amount of working capital for Layton Novelties is a. $8,000. b. $28,000. c. $12,000. d. $4,000.

c. $12,000.

84. Use this balance sheet to answer the following question. Use ending balances whenever average balances are required for computing ratios (see the paper copy of the Chapter 5 test bank) The total amount of working capital is a. $370,000. b. $40,000. c. $140,000. d. $60,000.

c. $140,000. Answer: Working Capital = Current Assets ($220,000) Less Current Liabilities ($80,000) = $140,000 Current Assets = Cash + S/T Investments + Notes Receivable + Accounts Receivable + Merchandise Inventory = $220,000 Current Liabilities = Notes Payable + Accounts Payable + Salaries Payable = $80,000

64. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios (see the paper copy of the Chapter 5 test bank) The total amount of working capital for Abner Systems is a. $0. b. $6,000. c. $2,000. d. $10,000.

c. $2,000. Answer: Current Assets (6,000) - Current Liabilities (4,000) = $2,000. See book formula below.

36. Utilize the paper test bank #36 question for the balance sheet The total dollar amount of assets to be classified as current assets is a. $252,000. b. $238,000. c. $294,000. d. $244,000.

c. $294,000. Answer: Cash (70,000), Short Tem Investments (56,000); Accounts, Receivable (28,000), Note Receivable within a Year (42,000) Merchandise Inventory (98,000) = $294,000

55. Utilize the paper test bank #55 question for the Income Statement. If the income statement were prepared in a multistep form, gross margin from sales would be a. $75,750. b. $72,000. c. $67,000. d. $82,000.

c. $67,000. Answer: Revenue (100,000) less Cost of Goods Sold (33,000) = $67,000

85. Use this balance sheet to answer the following question. Use ending balances whenever average balances are required for computing ratios (see the paper copy of the Chapter 5 test bank) The debt to equity ratio is a. 0.48. b. 0.34. c. 0.52. d. 0.66.

c. 0.52. Answer: Debit (260,000) / Total Equity (500,000) = 52%

80. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios (see the paper copy of the Chapter 5 test bank) The return on assets for Layton Novelties is a. 40 percent. b. 70 percent. c. 18 percent. d. 66-2/3 percent.

c. 18 percent. Answer = Net Income (21,600)/Average Total Assets (120,000) = 18%

66. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios (see the paper copy of the Chapter 5 test bank) The profit margin for Abner Systems is a. 60 percent. b. 25 percent. c. 20 percent. d. 12 percent.

c. 20 percent. Answer: Net Income (4,800)/Net Sales (24,000) = 20%

48. Which type of account is cost of goods sold? a. An asset account b. A liability account c. An expense account d. An income account

c. An expense account Cost of goods is is subtracted from Revenue just as Operating expenses are.

17. Expensing a building in the year of purchase represents an abuse of which of the following accounting conventions? a. Full disclosure b. Cost-benefit c. Conservatism d. Consistency

c. Conservatism Answer: Buildings are material (very expensive) and should be an asset not an expense. The accountant is abusing the convention of conservatism.

10. The lower-of-cost-or-market method of accounting for inventories follows the convention of a. Full disclosure. b. Materiality. c. Conservatism. d. Cost-benefit.

c. Conservatism. Answer: The lower of cost or market is a accounting convention....and relates to conservatism. Mark it down to cost would be a conservative approach.

35. Liabilities have which of the following two major categories? a. Accounts payable and notes payable b. Contributed capital and retained earnings c. Current and long term d. Unearned revenues and other payables

c. Current and long term Answer: Liabilities are Current vs Long-Term....see image for a balance sheet example form the books.

74. Which of the following is not expressed in terms of a percentage? a. Return on equity b. Debt to equity ratio c. Current ratio d. Profit margin

c. Current ratio

18. Which accounting convention could cause an overload of information for the financial statement user? a. Consistency b. Conservatism c. Full disclosure d. Materiality

c. Full disclosure Answer: Full Disclosure is all about providing additional information. Full disclosure could be information overload.

47. Which of the following appears in different sections of the income statement when prepared on a single-step basis and when prepared on a multistep basis? a. Sales commissions b. Office salaries c. Interest income d. Sales

c. Interest income

72. Which of the following is a measure of liquidity? a. Return on equity b. Return on assets c. Working capital d. Profit margin

c. Working capital Answer: See the Working Captial book formula below.

12. A practical decision to expense small capital expenditures rather than record them as property, plant, and equipment and depreciate them probably is made on the basis of the convention of a. conservatism. b. consistency. c. materiality. d. full disclosure.

c. materiality. Answer: Since small capital expenditures are small (not material) they can be expenses versus capitalizing them. Falls under relevance.

23. On a corporate balance sheet, earned capital is also known as a. common stock. b. paid-in capital. c. retained earnings. d. contributed capital.

c. retained earnings. Answer: Remember...earned capital is Net Income that is transferred over from the Income Statement. So it is 'earned'. See book answer below.

61. The debt to equity ratio equals a. owner's equity divided by total liabilities. b. owner's equity divided by long-term liabilities. c. total liabilities divided by owner's equity. d. current liabilities divided by average owner's equity.

c. total liabilities divided by owner's equity

86. Use this balance sheet to answer the following question. Use ending balances whenever average balances are required for computing ratios (see the paper copy of the Chapter 5 test bank) The total amount of working capital is a. $70,000. b. $180,000. c. $124,000. d. $500,000.

b. $180,000. Answer: Working Capital = Current Assets (294,000) Less Current Liabilities (114,000) = $180,000

58. Utilize the paper test bank #58 question for the Income Statement. If the income statement were prepared in a multistep form, operating expenses would be a. $46,000. b. $16,000. c. $22,250. d. $40,000.

b. $16,000. Answer: Operating Expenses would be (1) Selling Expneses (10,000) + Gen Admin Expenses (6,000) = $16,000

38. Utilize the paper test bank #38 question for the balance sheet The total dollar amount of assets to be classified as property, plant, and equipment is a. $374,000. b. $262,000. c. $354,000. d. $122,000.

b. $262,000. Answer: Land (140000) + Building (150,000) Less Accumulated Depreciation (28,000) = $262,000