Acc 212 Exam 3 Prep

Just In Thyme, Inc. has the following end of year equity balances: Common stock of $20,000; Additional paid-in capital of $30,000; and Retained earnings of $50,000. If Just In Thyme repurchases $10,000 of its stock, the total stockholders' equity balance would equal ______. a.) $110,000 b.) $40,000 c.) $90,000 d.) $60,000

$90,000 $20,000 + $30,000 + $50,000 - $10,000

Gross profit ratio formula

(net sales - cost of goods sold)/net sales

Liabilities that are payable within one year are commonly classified as _______ liabilities, while those payable more than one year from now are commonly classified as _______ liabilities.

Current, long-term

When a cash dividend is declared and paid in the same year, the total effects on the balance sheet include which of the following? (Select all that apply.) a.) Decrease net income. b.) Decrease assets. c.) Decrease stockholders' equity. d.) Increase liabilities.

Decrease assets. Decrease stockholders' equity.

Langlee Hardware provides a two-year warranty against defects on all major appliances sold. New appliance sales in December 2021 are $150,000. Langlee expects future warranty costs to be 2% of sales. For Langlee, the recognition of expected future warranty costs in December 2021 causes net income to: a.) increase by $3,000 b.) decrease by $150,000 c.) decrease by $3,000 d.) increase by $150,000

Decrease by $3,000 Expected future warranty costs are reported as warranty expense. Expenses reduce net income.

Albert's total assets are $250,000; its total liabilities are $100,000; its total equity is $150,000; its long-term assets are $80,000; and its property, plant, and equipment is $50,000. If the company prepares a common-size balance sheet, its property, plant, and equipment would be expressed as: a.) 20% b.) 30% c.) 62.5% d.) 50%

a.) 20% Reason: $50,000/$250,000

Linden has the following information: Sales $100,000; Cost of Goods Sold $60,000; Operating Expenses $10,000; Total Assets $700,000 and Accounts Receivable $30,000. Assuming that the company has no interest or tax expense, what is Linden's profit margin? a.) 30% b.) 14.3% c.) 40% d.) 70%

a.) 30% Net income is $100,000 - $60,000 - $10,000 = $30,000. Profit margin is $30,000/$100,000 = 30%.

Boswell Corp. has the following information in its financial statements: Earnings before Interest and Taxes $20,000; Common Stock $40,000; Tax Expense $4,000; Interest Expense $5,000; Additional Paid-in Capital $50,000; Retained Earnings $40,000 and Net Income $11,000. What is the times interest earned ratio? a.) 4.0 b.) 2.75 c.) 2.20 d.) 5.0

a.) 4.0

Profit margin formula

net income/net sales

Price earned ratio formula

stock price/earnings per share

An advantage to financing with debt is that a.) dividends are tax deductible b.) interest does not have to be paid until the maturity date c.) interest is tax deductible d.) dividends reduce retained earnings whereas interest expense does not reduce retained earnings

Interest is tax deductible

Debt is considered a lower cost method of financing than equity because

Interest on debt is tax deductible

An obligation to transfer assets or provide services in the future is a(n) _______

Liability

What is the formula to compute the return on assets?

Net income/average total assets.

Which of the following are long-term liabilities? (multiple) a.) note payable due in 3 years b.) note payable due in 3 months c.) salaries payable d.) 20-year mortgage payable e.) lease

Note payable due in 3 years 20-year mortgage payable lease

Which of the following are current liabilities? (multiple) a.) notes payable due in 3 months b.) accounts payable c.) notes payable due in 36 months d.) accounts receivable e.) salaries payable

Notes payable due in 3 months Accounts payable Salaries payable

Which of the following provides an indication of a higher quality of net income? a.) Operating cash flows that are highly correlated with net income b.) Investing cash flows that are highly correlated with net income c.) Financing cash flows that are highly correlated with net income

Operating cash flows that are highly correlated with net income

Which of the following are cash outflows from financing activities? (Select all that apply.) a.) Pay dividends b.) Issue common stock c.) Repay borrowing from bank d.) Receive interest e.) Purchase of supplies

Pay dividends Repay borrowing from bank

Which of the following are common financing activities? (Select all that apply.) a.) Receiving dividends from an investment in another company b.) Payment of cash dividends c.) Purchasing treasury stock d.) Issuing common stock

Payment of cash dividends Purchasing treasury stock Issuing common stock

During the year, Munster Inc. earned net income of $100,000. Average stockholders' equity was $700,000 and average stock price was $50. The company has 200,000 shares of common stock outstanding for the entire year. Munster's price-earnings ratio is: a.) 100 b.) 25 c.) 10 d.) 20

a.) 100 Reason: $50/($100,000/200,000) = 100

Which information regarding the receivables turnover ratio is true? (Select all that apply.) a.) It shows the number of times during a period that the average accounts receivable balance is collected. b.) It provides an indication of a company's efficiency in collecting receivables. c.) The lower the ratio, the better the company is performing. d.) It shows the number of days it takes to collect accounts receivable.

a.) It shows the number of times during a period that the average accounts receivable balance is collected. b.) It provides an indication of a company's efficiency in collecting receivables.

Which of the following ratios is used to measure the return to shareholders? (Select all that apply.) a.) Return on assets b.) Return on equity c.) Price-earnings ratio d.) Current ratio

a.) Return on assets b.) Return on equity

An analyst who wants to compare two companies based on their income statement information should prepare a ______ income statement. a.) common-size b.) single-step c.) multiple-step d.) contribution margin

a.) common-size

The three key components to the DuPont framework include: (multiple) a.) financial leverage. b.) asset efficiency. c.) profitability. d.) liquidity. e.) marketability.

a.) financial leverage. b.) asset efficiency. c.) profitability.

Common types of analysis that help assess a specific company's performance include comparisons: (multiple) a.) to the same industry b.) between companies c.) over time d.) to another industry

a.) to the same industry b.) between companies c.) over time

The ______ ______ ratio provides a more conservative measure of a company's ability to pay its current liabilities from current sources.

acid; test

Current ratio formula

current assets/current liabilities

The statement of cash flows classifies items as a.) operating and nonoperating. b.) recurring and nonrecurring. c.) current and noncurrent. d.) operating, investing, and financing.

operating, investing, and financing.

Which of the following shares are eligible to receive dividends? a.) Treasury shares b.) Issued shares c.) Outstanding shares d.) Authorized shares

outstanding shares

Kleister Company issues bonds for $100 million and repays a long-term notes payable of $10 million. The company also sells its own common shares for $12 million and pays cash dividends of $5 million. Which of the following are cash outflows from financing activities? (Select all that apply.) a.) issuance of bonds b.) payment of cash dividends c.) repayment of notes payable d.) sale of Kleister Company common shares

payment of cash dividends repayment of notes payable

Which of the following items are classified as cash outflows from operating activities on the statement of cash flows? (Select all that apply.) a.) payment of salaries b.) issuance of bonds c.) payment on account d.) purchase of building e.) purchase of supplies on account

payment of salaries payment on account

The _______ margin measures the income earned on each dollar of sales.

profit

Which of the following are cash outflows from investing activities? (Select all that apply.) a.) repayment of long-term debt b.) payment of income taxes c.) purchase of land d.) cash acquisition of another company e.) purchase of long-term investments

purchase of land cash acquisition of another company purchase of long-term investments

The purpose of the statement of stockholders' equity is to: a.) report the additional expenses of the company that were not accrued during the year. b.) reconcile the balance sheet with the statement of cash flows. c.) reconcile net income with taxable income and retained earnings. d.) report the changes and the sources of the changes in stockholder equity accounts.

report the changes and the sources of the changes in stockholder equity accounts.

the total net income earned by a corporation on behalf of its shareholders and not paid out as dividends is called ________

retained earnings

Which of the following are sources of shareholders' equity? a.) retained earnings b.) liabilities c.) assets d.) paid-in capital

retained earnings paid-in capital

Times interest earned ratio formula

(net income + income tax expense + interest expense)/interest expense

Which of the following are classified as cash inflows from investing activities? (Select all that apply.) a.) Purchase of an investment b.) Issuance of common stock c.) Sale of land d.) Sale of equipment e.) Sale of subsidiary

sale of land sale of equipment sale of subsidiary

A(n) ______ bond is backed by a lien on specified real estate owned by the issuer.

secured

In a statement of cash flows, the sum of cash inflows and outflows is equal to: a.) net income plus depreciation and amortization. b.) cash flows from operating activities. c.) the change in the cash balance.

the change in the cash balance

A common-size balance sheet presents each line item as a percentage of ______ ______

total; assets

If a corporation repurchases its own common stock, the stock is referred to as: a.) treasury stock b.) preferred stock c.) common stock d.) investment in common stock

treasury stock

The ______ method of reporting cash flows from operating activities begins with net income.

indirect

The two acceptable methods for U.S. GAAP for reporting cash flows from operating activities are the _______ method and the method _______.

indirect, direct

Jingle Company signs a 6-month, $20,000 note. The stated interest rate is 8% payable at the maturity date. Interest incurred on the note is _______

$800 $20,000 x 0.08 x 6/12

Roberts Inc. sells common stock for $10 million and pays dividends of $1 million. Net cash inflows from financing activities will be: a.) $9 million b.) $11 million c.) $10 million d.) $1 million

$9 million

Acid test ratio

(cash + current investments + accounts receivable)/current liabilities

When preparing the statement of cash flows using the indirect method, depreciation expense is ______ net income. a.) added to b.) subtracted from

added to

When reporting cash flows from operating activities using the indirect method, an increase in accounts payable is ______ net income because payments to suppliers are ______ than new purchases. a.) deducted from, more b.) added to, less c.) deducted from, less d.) added to, more

added to, less

When reporting cash flows from operating activities using the indirect method, an increase in accounts payable is ______ net income because payments to suppliers are ______ than new purchases. a.) deducted from, more b.) added to, more c.) deducted from, less d.) added to, less

added to, less

or most companies that issue par-value common stock, which account balance is typically the highest? a.) common stock b.) additional paid-in capital c.) both are approximately equal

additional paid-in capital

Shareholders' equity consists of which of the following items? (multiple) a.) amounts earned by the corporation b.) amounts of assets purchased by the corporation c.) amounts invested by shareholders d.) amounts borrowed by the corporation

amounts earned by the corporation amounts invested by shareholders

Dividends ______ paid on treasury shares. a.) are b.) are not

are not

When a business incorporates, it must file its Blank______ with the state in which it incorporates. a.) federal tax return b.) proxy statement c.) articles of incorporation d.) initial public offering

articles of incorporation

A business that incorporates must file a document with the state, which includes a description of the business activities, the shares to be issued, and the composition of the board of directors. Which of the following terms are used to describe this document? (Select all that apply.) a.) Corporate tax return b.) Corporate charter c.) Articles of incorporation d.) Corporate proxy

articles of incorporation corporate charter

How is treasury stock reported in the financial statements? a.) as a contra equity account. b.) as a direct reduction to retained earnings. c.) as a contra asset account. d.) as an expense for other comprehensive income.

as a contra equity account

financial leverage formula

average total assets/average total equity

On September 1, 2021, ABC Company borrowed $50,000 on a 6%, 9-month note payable to XYZ National Bank. By recognizing the interest owed on December 31, 2021, ABC's net income ______

decreases by $1,000 Interest expense for the 4 months in 2021 = $50,000 x 6% x 4/12 = $1,000, which decreases net income.

A corporate charter: a.) describes the business activities. b.) specifies the shares of stock to be issued. c.) names the board of directors. d.) is required only for publicly-traded corporations. e.) specifies the number of shares

describes the business activities. specifies the shares of stock to be issued. names the board of directors.

Under the indirect method of preparing the statement of cash flows, depreciation expense is added back to net income because it: (Select all that apply.) a.) increases the cash balance. b.) did not require an outflow of cash. c.) provides an inflow of cash. d.) was subtracted in calculating net income.

did not require an outflow of cash. was subtracted in calculating net income.

Using the _______ method of reporting cash flows from operating activities, we show cash received from customers and cash paid to employees.

direct

Trend analysis and time-series analysis refer to _______ analysis

horizontal

A(n) ______ in accrued liabilities, such as interest payable, will be added to net income when determining net cash flow from operating activities using the indirect method.

increase

The statement of cash flows provides summary information about cash ______ and cash ______ during the year.

inflow, outflow

Loans requiring periodic payments of interest and principle are referred to as _______ notes.

installment

The purchase and sale of long-term assets and current investments are classified as: a.) financing activities b.) investing activities c.) operating activities

investing activities

A(n) ________ is a contractual arrangement in which an owner provides a user the right to use an asset for a specified period of time. (Enter one word per blank)

lease

Improved cash flows is a common advantage of acquiring equipment through ________

leasing/lease

An increase in accounts receivable indicates that the company collected ______ cash than the amount of ______. a.) less; sales revenue b.) more; sales revenue

less, sales revenue

Amounts owed to employees that will be paid in a subsequent reporting period are reported by the company as a.) revenues on the income statement b.) assets on the balance sheet c.) liabilities on the balance sheet

liabilities on the balance sheet.

Receivables turnover ratio formula

net credit sales/average net accounts receivable

A positive balance in retained earnings indicates that: a.) net income has exceeded the dividends distributed to shareholders. b.) liabilities are less than shareholders' equity. c.) treasury stock was not purchased. d.) dividends were not declared during that year.

net income has exceeded the dividends distributed to shareholders.

Profitability formula

net income/net sales

Asset efficiency formula

net sales/average total assets

Asset turnover ratio formula

net sales/average total assets

Justin Corp. issues 10,000 shares of $1 par value common stock for $5 per share. For Justin, this results in: a.) an increase in net income of $5,000 b.) no change in net income. c.) a decrease in net income of $5,000 d.) a decrease in net income of $50,000 e.) an increase in net income of $50,000

no change in net income.

The ______ rate of interest is used to compute the cash interest paid to bondholders

nominal

_______ activities include cash receipts and cash payments for transactions relating to revenue and expense activities.

operating

Cash receipts and cash payments for transactions relating to revenue and expense activities are classified on the statement of cash flows as: a.) financing activities b.) investing activities c.) operating activities

operating activities

Munster Company negotiates a line of credit with its bank, under which the Company may borrow up to $500,000 at a 5% annual interest rate. Munster should increase Notes Payable when Munster a.) negotiates the terms of the line of credit. b.) receives cash under the line of credit. c.) pays off the line of credit.

receives cash under the line of credit

Changes to current assets and current liabilities require adjustment of net income under the indirect method because a.) related cash may be higher or lower than the accrued amount included in net income. b.) these changes increase or decrease cash flows related to debt and stockholders' equity. c.) these changes increase or decrease cash flows related to long-term assets.

related cash may be higher or lower than the accrued amount included in net income

The basic purpose of the statement of cash flows is to: a.) report the accrual-based activities during the year b.) report the activities that changed the cash balance during the year c.) show that the company was profitable d.) report every increase and decrease in non-cash accounts during the year

report the activities that changed the cash balance during the year

Amounts earned by the corporation and not paid out in dividends are referred to as a.) common stock. b.) paid-in capital. c.) retained earnings. d.) shareholders' equity

retained earnings

Who owns and controls a corporation? a.) board of directors b.) managers c.) stockholders d.) creditors

stockholders

Using the indirect method to report cash flows from operating activities, an increase in the prepaid rent account will be ______ net income to arrive at net cash flow provided by operating activities. a.) subtracted from b.) added back to

subtracted from

What are the two criteria used to determine whether a contingent liability is reported in the financial statements? (multiple) a.) the payment date b.) the percentage of the payment to total income c.) the likelihood of payment d.) the ability to estimate the amount of payment

the ability to estimate the amount of payment the likelihood of payment

A corporation will issue bonds when: a.) the interest rate on the bond is greater than the interest rate on a note payable. b.) they need to borrow money quickly. c.) the interest on the bond plus the bond issue cost is less than the interest payments for a bank loan. d.) they cannot issue stock because investors have not been paid recent dividends

the interest on the bond plus the bond issue cost is less than the interest payments for a bank loan

True or false: The board of directors is responsible for establishing corporate policies.

true The board of directors establishes company policies and appoints officers.

On December 31, Martin Corp. makes a payment on an installment note that increases Interest Expense by $3,000 and reduces Notes Payable by $8,000. What was Martin's installment payment? a.) $5,000 b.) $11,000 c.) $8,000

$11,000

Neue Inc. reports sales revenue of $200,000; in addition, its accounts receivable balance decreased by $15,000. Neue's cash flows from sales were: a.) $215,000 b.) $200,000 c.) $185,000

$215,000

True or false: current liabilities are always payable within one year

False In most cases, current liabilities are payable within one year. However, if the company's operating cycle exceeds one year, current liabilities may include obligations payable more than one year from the balance sheet date.

On March 5, ABC Airlines collects $300 for a round-trip ticket from Chicago to Los Angeles scheduled for April 10. On March 5, how does ABC Airlines report the $300 collected in advance? a.) decrease revenue and decrease cash b.) increase cash and increase deferred revenue c.) increase cash and increase revenue d.) decrease deferred revenue and decrease cash

Increase cash and increase deferred revenue

The financial statement effects of the issuance of a note payable include a(n): (multiple) a.) decrease in liabilities b.) increase in net income c.) decrease in assets d.) increase in liabilities e.) decrease in net income f.) increase in assets

Increase in assets Increase in liabilities

The issuance of a note payable results in a(n): (multiple) a.) decrease in Notes Payable b.) increase in Notes Payable c.) increase in Cash d.) decrease in Cash

Increase in notes payable Increase in cash

We report interest expense in the period in which we a.) pay it b.) incur it

Incur it

Which of the following methods for reporting cash flows from operating activities begins with net income and works backward to calculate net cash flow from operating activities? a.) Indirect method b.) Direct method c.) Accrual method d.) Matching method

Indirect method

_______ bonds require payment of the full principal amount of the bond at the end of the loan term.

Term

To calculate a year-to-year percentage change in any financial statement line item, you should take ______, then divide by the prior year's amount, and finally multiply the result by 100. a.) the prior year's financial statement amount minus the current year's amount b.) the current year's financial statement amount minus the prior year's amount c.) the average of the current year's financial statement amount and the prior year's amount

b.) the current year's financial statement amount minus the prior year's amount

A common-size balance sheet will list each line item as a percentage of: a.) total liabilities. b.) total assets. c.) total retained earnings. d.) total revenues.

b.) total assets.

On October 1, 2021, Logan Corporation signed a 6-month, 8% interest-bearing promissory note for $10,000. The journal entry required at December 31, 2021, would include which of the following? a.) debit interest expense $400 b.) credit cash $800 c.) credit interest payable $600 d.) debit interest expense $200

Debit interest expense $200 $10,000 x 8% (annual rate) x 3/12

The two types of financing are

Debt financing and equity financing

Financing with _____ requires borrowing, whereas financing with _____ requires issuing shares of stock.

Debt, equity

Debt to equity ratio formula

total interest bearing debt/stockholders' equity

The financial statement that provides information about cash receipts and cash disbursements for the period is the: a.) statement of retained earnings. b.) statement of cash flows. c.) balance sheet. d.) income statement.

statement of cash flows

Cash flows from ________ activities include both inflows and outflows of cash from the external funding of a business.

financing

Which of the following are current liabilities? (multiple) a.) notes payable due in 5 years b.) sales tax payable c.) deferred revenue d.) accounts payable

Sales tax payable Deferred revenue Accounts payable

_______ bonds are supported by a specific asset the issuer pledges as collateral.

Secured

Which of the following would result in a cash inflow from investing activities? a.) Sale of inventory in excess of cost. b.) Sale of a machine for cash. c.) Sale of the company's common stock for cash.

Sale of a machine for cash.

Cash inflows and outflows involving stockholders and creditors are classified on the statement of cash flows as _______ activities

financing

average days in inventory formula

365 days/inventory turnover

Average collection period formula

365 days/receivables turnover ratio

A(n) ______ payable is a short-term liability that occurs when a company purchases goods and does not immediately pay with cash.

Accounts

A(n) _______ payable results from an agreement with a supplier to pay within 30 to 60 days, whereas a(n) ______ payable is a signed contract that promises to pay a specific amount with interest at a specific maturity date.

Accounts, notes

How should cash dividends be reported on the statement of stockholders' equity? a.) As a reduction of retained earnings. b.) As a reduction of common stock. c.) As a reduction of treasury stock.

As a reduction of retained earnings.

______ payable reflects the amount owed, but not yet paid, to employees for their past work.

Salaries

Cash received by the company during the period

Cash inflow

Cash paid by the company during the period

Cash outflow

Which of the following items are classified as cash inflows from operating activities on the statement of cash flows? (Select all that apply.) a.) Borrowing from bank b.) Sale of building c.) Collection from customers d.) Issuance of common stock e.) Interest received on notes receivable

Collection from customers Interest received on notes receivable

The ______ portion of long-term debt is the amount that will be paid within the next year.

Current

What is the formula to compute return on stockholders' equity?

Net income/ average stockholders' equity

True or false: The full balance of a 10 year installment note payable that requires annual payments is reported as long-term debt.

True The note must be split into its current and long-term portions.

A contingent liability is an existing ________ situation that might result in a loss depending on the outcome of a future event.

Uncertain

For a manufacturer, the most commonly reported contingent liabilities relate to product ______

Warranty

Dragon Electronics provides a two-year warranty against defects on all television sets sold. New sales in December 20X1 are $120,000. Dragon expects future warranty costs to be 4% of sales. For Dragon, the journal entry for expected future warranty costs recorded in December 20X1 includes a debit to: a.) warranty liability for $4,800 b.) warranty expense for $4,800 c.) warranty liability for $120,000 d.) warranty expense for $120,000

Warranty expense for $4,800

When does a dividend become a liability to a corporation? a.) On the ex-dividend date b.) When it is declared by the board of directors c.) On the last day of the

When it is declared by the board of directors

A distribution of assets to stockholders is referred to as a(n) ______

dividends

Identify characteristics of notes payable that are NOT common to accounts payable. (multiple) a.) does not arise from past transaction b.) based on a promissory note c.) interest bearing d.) usually classified as a current liability

Based on a promissory note Interest bearing

Which of the following obligations is NOT commonly classified as a current liability? a.) deferred revenue b.) accounts payable c.) bonds payable d.) sales tax payable

Bonds payable

Which of the following are cash inflows from financing activities? (Select all that apply.) a.) Sale of land b.) Interest received c.) Borrowing from bank d.) Collection from customers e.) Issuance of common stock to investors

Borrowing from bank Issuance of common stock to investors

Rhodes borrowed $5,000 by signing a 5-year note with an interest rate of 8%. On the date the note is signed, Rhodes should: a.) credit notes expense $5,000. b.) credit notes payable $5,000. c.) debit notes receivable $5,000. d.) debit notes payable $5,000.

Credit notes payable $5,000

______ bonds are retired when the bondholder exchanges them for the issuing company's stock.

Convertible

Munster Company negotiates a line of credit with its bank, under which the Company may borrow up to $500,000 at a 5% annual interest rate. Munster should increase Notes Payable when Munster: a.) receives cash under the line of credit b.) negotiates the terms of the line of credit c.) pays off the line of credit

Receives cash under the line of credit

Which of the following is an important criteria used to determine the reporting of a contingent liability? a.) the classification of the related expense or loss b.) the potential effect on financial statement users c.) the likelihood of future payment or loss d.) the effect on key balance sheet ratios

The likelihood of future payment or loss

Thornton Corp. negotiates a line of credit with its bank. The agreement specifies that Thornton may borrow up to $100,000 at a 6% annual interest rate. The financial statement effects, if any, when Thornton signs the agreement with the bank include: a.) an increase in notes payable b.) there is no financial statement effect since no money has yet been borrowed c.) an increase in interest expense

There is no financial statement effect since no money has yet been borrowed

Which of the following are correct regarding bonds? (multiple) a.) They obligate the issuing company to pay a specific amount. b.) They obligate the issuing company to repay the bonds at a specific date. c.) They obligate the issuing company to repay the bonds when market interest rates decrease. d.) They obligate the issuing company to pay an estimated amount.

They obligate the issuing company to pay a specific amount. They obligate the issuing company to repay the bonds at a specific date.

Smith Company enters into a lease agreement with Rent-All Corp. At the beginning of the lease period, Smith Company reports: (multiple) a.) a lease expense b.) a note payable c.) interest expense d.) a lease asset e.) a lease payable

a lease asset a lease payable

At the beginning of a lease period, the lessee reports a.) a lease asset and lease payable for the market value of the lease. b.) lease expense for the current period payment amount. c.) a lease asset and lease payable for the present value of the lease payments. d.) lease expense for the full lease amount.

a lease asset and lease payable for the present value of the lease payments.

Periodic payments on installment notes typically include (Select all that apply.) a.) a portion that reduces the outstanding loan balance b.) an increase in stockholders' equity c.) a portion that reflects interest d.) installment fees

a portion that reduces the outstanding loan balance a portion that reflects interest

When treasury stock is purchased, the cost of treasury stock is reported as a.) a reduction of common stock b.) a reduction to retained earnings c.) a contra-asset account d.) a reduction in stockholders' equity

a reduction in stockholders' equity

Linton Company has the following financial statement information: Current assets $20,000; Noncurrent assets $80,000; Current liabilities $10,000; Interest-bearing debt $60,000; and Stockholders' equity $30,000. What is the debt to equity ratio? a.) 5.0 b.) 2.0 c.) 1.0 d.) 3.0

b.) 2.0 Reason: $60,000/$30,000 = 2.0

Compute the average days in inventory ratio using the following information: Net sales is $200,000 for the year, cost of goods sold are $80,000, last year's total assets were $900,000, and this year's total assets are $1,100,000. Receivables for both years are $40,000. Inventory changed from $30,000 last year to $10,000 this year. a.) 91.25 days b.) 73 days c.) 45.63 days d.) 20 days

b.) 73 days Reason: Inventory turnover is calculated as cost of goods sold/average inventory = $80,000/[($30,000 + 10,000)/2] = 4. Average days in inventory is 365/inventory turnover ratio = 365/4.

Company A has an accounts receivable turnover of 8.0. Company B has an accounts receivable turnover of 10.0. Which of the following is true? a.) Company B has more receivables than Company A. b.) Company B collects its receivables faster than Company A. c.) Company A makes more sales on account than Company B. d.) Company A collects its receivables faster than Company B. e.) Company B makes more sales on account than Company A.

b.) Company B collects its receivables faster than Company A.

The stockholders' equity section of the balance sheet presents the: a.) change in each revenue and expense account over time. b.) balance of each revenue and expense account at a point in time. c.) balance of each equity account at a point in time.

balance of each equity account at a point in time.

To perform a vertical analysis of an income statement, you would divide each line item on the statement by ______. a.) operating expenses b.) cost of goods sold c.) sales d.) net income e.) total assets

c.) sales

______ analysis is a technique that expresses each financial statement amount as a percentage of another amount on the same financial statement; also called common-size analysis. a.) ratio b.) horizontal c.) vertical

c.) vertical

Canton, Inc. issued 10,000 shares of $1 par value common stock at $10 per share. Mr. Smart, the bookkeeper, recorded this transaction with a $100,000 debit to Cash and a $100,000 credit to Common stock. As a result of this entry: (Select all that apply.) a.) total stockholders' equity will be overstated. b.) total assets will be overstated. c.) common stock will be overstated. d.) total stockholders' equity will be understated. e.) additional paid-in capital will be understated.

common stock will be overstated. additional paid-in capital will be understated.

The amount of money paid into a company by its owners is referred to as: a.) contributed capital b.) investment in common stock c.) owners' surplus d.) retained earnings

contributed capital

Inventory turnover ratio formula

cost of goods sold/average inventory

Black Company has net credit sales of $500,000, an asset turnover ratio of 3, an inventory turnover ratio of 5, and a receivables turnover ratio of 6. What is the average collection period? a.) 24.3 days b.) 50 days c.) 90 days d.) 60.8 days

d.) 60.8 days Reason: 365/receivable turnover = 365/6 = 60.8 days

Rauch Corporation estimated warranty expense in Year 1 of $10,000. In Year 2, Rauch performed warranty work of $8,000. The journal entry to record the performance of warranty work would include a: a.) credit to warranty liability. b.) debit to cash. c.) debit to warranty liability. d.) debit to warranty expense.

debit to warranty liability

When cash flows from operating activities are reported using the indirect method, a(n) ______ in accounts payable will be subtracted from net income.

decrease

Dragon Electronics provides a two-year warranty against defects on all television sets sold. New sales in December 2021 are $120,000. Dragon expected future warranty costs to be 4% of sales. In 2022, Dragon incurred actual warranty costs of $2,000. For Dragon, the financial statement effects of actual warranty costs incurred in 2022 include a(n): (multiple) a.) decrease in cash of $2,000 b.) increase in cash of $2,000 c.) increase in warranty expense of $2,000 d.) decrease in warranty liability of $2,000 e.) increase in warranty liability of $2,000

decrease in cash of $2,000 decrease in warranty liability of $2,000

Gosling Corp. has 100,000 shares of common stock authorized and 60,000 shares outstanding. Gosling declares a dividend of $0.10 per share on August 1, with payment to occur on October 1. For Gosling, the dividend payment on October 1 results in a: (Select all that apply.) a.) decrease dividends payable of $10,000 b.) decrease in cash of $10,000 c.) decrease in common stock of $10,000 d.) decrease in common stock of $6,000 e.) decrease in cash of $6,000 f.) decrease in dividends payable of $6,000

decrease in cash of $6,000 decrease in dividends payable of $6,000

Select the items that would be added to net income in order to prepare the operating activities section of a statement of cash flows using the indirect method. (Select all that apply.) a.) gain on sale of land b.) increase in current assets c.) decrease in current assets d.) depreciation expense e.) loss on sale of land

decrease in current asset depreciation expense loss on sale of land

When the indirect method is used to report cash flows from operating activities, a decrease in accrued liabilities, such as salaries payable, is subtracted from net income to include the effects of transactions that ______ cash, but ______ net income.

decrease, do not affect

Retained earnings represent: a.) invested capital b.) earned capital c.) contributed capital

earned capital

Formula for calculating interest

face amount x annual interest rate x fraction of the year

Select the items that would be subtracted from net income in order to prepare the operating activities section of a statement of cash flows using the indirect method. (Select all that apply.) a.) loss on sale of land b.) increase in current liability c.) depreciation expense d.) gain on sale of land e.) decrease in current liability

gain on sale of land decrease in current liability

Preferred stock is advantageous in that it: (Select all that apply.) a.) has priority over creditors at liquidation. b.) receives dividends before creditors are to receive any interest payments. c.) has priority over common stock when dividends are declared. d.) has priority over common stock at liquidation.

has priority over common stock when dividends are declared has priority over common stock at liquidation.

Investors who acquire preferred stock: (Select all that apply.) a.) will receive more dividends than common stockholders. b.) have preference as to dividends. c.) do not have voting rights. d.) have preference over creditors.

have preference as to dividends. do not have voting rights.

Stockit, Inc. sold 100,000 shares of the 1,000,000 shares it is allowed to sell. Stockit has repurchased 10,000 of its own shares. The number of authorized shares equals _______ shares. a.) 910,000 b.) 90,000 c.) 1,000,000 d.) 100,000 e.) 10,000

1,000,000 The number of authorized shares equals 1,000,000 which is the maximum shares the company is allowed to sell. Of the 1,000,000 shares, the company has sold 100,000 and bought back 10,000 leaving 90,000 shares outstanding.

In November 1, Year 1, ABC Corp. borrowed $100,000 cash on a 1-year, 6% note payable that requires ABC to pay both principal and interest on October 31, Year 2. The journal entry on November 1, Year 1 would include which of the following? (multiple) a.) credit to notes payable $100,000 b.) credit to notes payable $106,000 c.) debit to interest expense $6,000 d.) debit to cash $100,000

Credit to notes payable $100,000 Debit to cash $100,000

Historically, par value was considered to be a.) the maximum amount of money the company could borrow. b.) the value of the company's shares of stock. c.) the amount of cash that must be maintained in the corporation for contingencies. d.) the amount of retained earnings that must be appropriated for future dividends.

the value of the company's shares of stock.

Wyanot Company issued 1,000 shares of its $100 par value preferred stock for $110 cash per share. The journal entry to record this transaction includes: (multiple) a.) $10,000 credit to additional paid-in capital. b.) $100,000 debit to cash. c.) $5,000 credit to preferred stock. d.) $100,000 credit to preferred stock. e.) $110,000 debit to cash.

$10,000 credit to additional paid-in capital. $100,000 credit to preferred stock. $110,000 debit to cash.

Kleister Company issues bonds for $100 million and repays a long-term notes payable of $10 million. The company also sells its own shares for $12 million and pays cash dividends of $5 million. Cash inflows from financing activities will be: a.) $110 mil b.) $112 mil c.) $17 mil d.) $15 mil

$112 mil Reason: $100 mil + $12 mil

During the current period, Schmidt Corp. sold equipment for $1,000, purchased new equipment for $10,000, paid an accounts payable balance of $2,500, and sold an investment costing $2,000 for $2,800. Net cash from investing activities is (indicate the amount and whether it is a net inflow or outflow) a.) $6,200 net outflow b.) $6,200 net inflow c.) $8,700 net outflow d.) $7,000 net outflow

$6,200 net outflow Reason: 1,000 - 10,000 + 2,800

Western Inc.'s income statement showed net income of $60,000 and depreciation expense of $10,000. Accounts receivable decreased $3,000, Inventory increased $4,000, Supplies increased $1,000, and Accounts payable increased $3,000. Western's net cash flows from operating activities was ______. a.) $65,000 b.) $51,000 c.) $73,000 d.) $79,000 e.) $71,000

$71,000 Net cash flow from operating activities = $60,000 + 10,000 + 3,000 - 4,000 - 1,000 + 3,000

Preferred stockholders: a.) have the right to receive dividends only if there are enough dividends to pay the common stockholders too. b.) must receive more dividends per share than the common stockholders. c.) must receive dividends every year. d.) have the right to receive dividends only in the years the board of directors declares dividends.

have the right to receive dividends only in the years the board of directors declares dividends.

When a company issues a note payable, the balance sheet effects include a(n) a.) increase in assets and increase in stockholders' equity b.) increase in assets and increase in liabilities c.) decrease in assets and decrease in liabilities d.) decrease in assets and decrease in stockholders' equity

increase in assets and increase in liabilities

Mars Inc. issues 5,000 shares of no-par stock for $100,000. For Mars, the balance sheet effects of the issuance include a(n): (Select all that apply.) a.) increase in total stockholders' equity b.) decrease in total liabilities c.) decrease in total stockholders' equity d.) increase in total assets e.) decrease in total assets f.) increase in total liabilities

increase in total stockholders' equity increase in total assets

Retained earnings are: (Select all that apply.) a.) increased by net income. b.) decreased by purchases of land. c.) equal to cash. d.) decreased by dividends. e.) all of the company's earnings not distributed to stockholders.

increased by net income. decreased by dividends. all of the company's earnings not distributed to stockholders.

Issuing 1,000 shares of $100 par value preferred stock for $110 in cash per share affects the accounting equation by: (Select all that apply.) a.) increasing additional paid-in capital by $100,000 b.) increasing cash by $110,000 c.) increasing additional paid-in capital by $10,000 d.) increasing cash by $100,000 e.) increasing preferred stock by $10,000 f.) increasing preferred stock by $100,000

increasing cash by $110,000 increasing additional paid-in capital by $10,000 increasing preferred stock by $100,000