Chapter 1-4 Review

Which are the financial statements most frequently provided to external users? (Select all that apply.)

-balance sheet -statement of cash flows -statement of shareholders' equity -income statement

Accounting Period in correct order

1. Prepare an unadjusted trial balance 2. record adjusting entries 3. prepare and adjusted trial balance 4. prepare financial statement 5. close the temporary accounts

Coral Company has the following financial statement information: Current assets 30,000 Noncurrent assets 70,000 Current liabilities 20,000 Noncurrent liabilities 40,000 Stockholders' equity 40,000 What is the debt to equity ratio?

1.5 40000+20000/40000

Skylark has the following information in its financial statements: Cash $1,000 Accounts receivable 4,000 Short-term investment in trading securities 3,000 Inventory 2,000 Accounts payable 5,000

1.6 Reason: (1,000 + 4,000 + 3,000)/5,000 = 1.6

Linden has the following information: Sales $100,000 Cost of goods sold 60,000 Operating Expenses 10,000 Total assets 700,000 Accounts receivable 30,000 Assuming that the company has no interest or tax expense, what is Linden's profit margin?

30%

vThe formula for average collection period is

365 divided by the receivable turnover ratio.

Boswell Corp. has the following information in its financial statements: Income 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 Net income 11,000 What is the times interest earned ratio?

4

Compute the receivables turnover ratio using the following information: Net credit sales is $200,000 for year 2. Total assets at the end of years 1 and 2 were $800,000 and $1,200,000, respectively. Accounts receivable at the end of years 1 and 2 were $40,000 and $60,000, respectively.

4\Reason:Net credit sales/average accounts receivable = $200,000/((40,000+60,000)/2) = 4

Quick assets divided by current liabilities is which ratio?

Acid test ratio

What type of ratios measure a company's efficiency in managing its assets?

Activity

accounting process

Analyzing, Recording, Classifying, Summarizing, Reporting and Interpreting.

The current versus noncurrent classification applies to what in the financial statements?

Assets and liabilities

Which of the following may provide useful information about a company's ability to continue to generate a high level of sales and collect its receivables in a timely manner? (Select all that apply.)

Average collection period Receivable turnover ratio

The financial statement that displays a firm's financial position on a particular date is the _____ ____

Balance Sheet

The financial statement that provides information about liquidity and long-term solvency is the

Balnace sheet

Cost of goods sold

Beginning inv + Inventory - Ending Inventory

Which of the following steps occurs only at the end of the year?

Close the temporary accounts to retained earnings

What is the formula for the inventory turnover ratio?

Cost of goods sold divided by average inventory.

Compute the inventory turnover ratio using the following information: Net sales is $100,000 for the year, costs of goods sold are $40,000, last year's assets in place were $900,000, and this year's assets in place are $1,100,000. Receivables for both years are $50,000. Inventory changed from $30,000 last year to $10,000 this year.

Cost of goods sold/average inventory = $40,000/[($30,000 + 10,000)/2] = 2

liabilities

Creditors Claim to Resources

Those liabilities that will be satisfied within 1 year or the operating cycle, whichever is longer, are referred to as ___ Liabilites

Current

_____ are those that are cash, will be converted into cash, or will be used up within 1 year or the operating cycle, whichever is longer.

Current assets

Prague Company has sales of $1,000,000 each year, but the average collection period has increased from 45 days to 65 days. What are the most likely reasons for the change in average collection period? (Select all that apply.)

Customers are not paying in a timely manner. The company has become more lax in its credit policies and is extending credit terms to maintain customers.

Which of the following is a ratio used to evaluate a company's solvency?

Debt to equity

The type of system that integrates the information of departments and functions of a company into a single computer system is called a(n)

Enterprise Resource Planning (ERP) system.

The outflows of resources incurred while generating revenue are referred to as

Expenses

The primary role of financial accounting is to provide useful financial information to users who are ______ to the business enterprise.

External

True or false: The primary function of financial accounting is to provide useful financial information to users who are internal to the business.

False

What are increases or decreases in equity from peripheral or incidental transactions?

Gains and Losses

Based on the DuPont model an equity multiplier greater than 1 will produce a return on equity that is higher than the return on assets. What is the trade-off to this effect?

Higher leverage results in higher probability of default.

Revenues, expenses, gains, and losses that will likely continue in future periods make up what?

Income from continuing operations

Janex Company manufactures refrigerators. Which of the following items would likely be included in the determination of nonoperating income on Janex's income statement?

Interest Expenses

Which information regarding the receivable turnover ratio is true? (Select all that apply.)

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

What information does the times interest earned ratio provide to investors or creditors?

It provides the creditor with an indication of the ability of the debtor to pay the interest on its debts.

Which statements about the inventory turnover ratio are correct? (Select all that apply.)

It shows the number of times the average inventory balance is sold during a reporting period. It indicates how quickly inventory is sold.

Which statements about the inventory turnover ratio are correct? (Select all that apply.)

It shows the number of times the average inventory balance is sold during a reporting period. It indicates how quickly inventory is sold.

Obligations to other entities are known as what?

Liabilities

The current ratio and the quick ratio are used to measure______ of a company indicating the ability to pay current

Liquidity

Which type of analysis is used to determine if the company can pay its short-term debts as they come due?

Liquidity analysis

What refers to the riskiness of a company with regard to the amount of liabilities in its capital structure?

Long-term solvency

The mathematical formula for working capital is current assets Blank______ current liabilities.

Minus

Which of the following best describes the formula for the times interest earned ratio?

Net income plus interest and tax expense divided by interest expense.

Compute the asset turnover ratio using the following information: net sales is $100,000 for the year, last year's assets in place were $900,000 and this year's assets in place are $1,100,000. Receivables for both years are $50,000.

Net sales/average total assets = $100,000/[($900,000 + $1,100,000)/2] = 10%

What does a liability represent?

Obligations owed to other entities

stockholders Equity

Owners Claim to Resources

profit margin on sales, return on assets, and return on shareholders' equity are commonly used ____ ratio

Profitability

Which of the following are examples of prepayments?

Purchasing supplies that will be used later

If a causal relationship cannot be established between revenues and expenses, which of the following occurs? (Select all that apply.)

Record the expense as incurred. Allocate the expense over several periods. Relate the expense to a particular period.

asset

Resources

Select the financial statement ratio that expresses income as a percentage of average total assets.

Return on Asset

An inflow of resources resulting from providing goods or services to customers is a(n)

Revenue

Current assets include which of the following? (Select all that apply.)

Short term investments Cash

Classifying items on the balance sheet as current and noncurrent assists financial statement users in assessing what aspects about a company?

Solvency and liquidity.

Which of the following is a financial statement provided to investors?

Statement of shareholders' equity

What does the inventory turnover ratio measure?

The average number of times inventory is sold during a period.

If a company has a current ratio of 1.2, which of the following is true?

The company has $1.20 in current assets for each dollar of current liabilities.

The objective of an Enterprise Resource Planning (ERP) system is to create a customized software program that integrates the information of departments and functions of a company into a single computer system.

True

True or false: The debt to equity ratio indicates the extent to which a company relies on creditors to provide resources for the company.

True

True or false: The objective of an Enterprise Resource Planning (ERP) system is to create a customized software program that integrates the information of departments and functions of a company into a single computer system.

True

Activity ratios measure

a company's efficiency in using its assets.

The purpose of the balance sheet is to report

a company's financial position on a specific date.

A high inventory turnover ratio could be caused by (Select all that apply.)

a superior sales force. low ending inventory levels.

Which of the following is an example of an estimate?

accounting for depreciation accounting for bad debts

The three key components to the DuPont framework include

activity. profitability. financial leverage.

When calculating the return on assets, analysts sometimes make the following adjustments to the numerator

add back interest expense, net of taxes

Recognition refers to the process of

admitting information in the basic financial statements.

A post-closing trial balance is prepared ___ the closing entries are posted to the ledger accounts.

after

accruals involve transactions where the cash outflow or inflow takes place in a period _____ expense or revenue recognition.

after

Accruals occur when cash flow comes: (Select all that apply.)

after revenue recognition after expense recognition

A probable future economic benefit obtained or controlled by a particular entity as a result of past transactions or events is a(n)

asset

Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events are referred to as

asset

The ratio that provides an indication of how efficiently a company utilizes all of its assets to generate revenue is referred to as the

asset

the return on assets expresses income as a percentage of the average total _____available to generate that income

asset

Profit margin multiplied by asset turnover equals return on _____. (Enter only one word.)

assets

Which of the following ratios are activity ratios?

average collection period inventory turnover asset turnover

Asset turnover ratio is net sales divided by

average total assets

Which of the following financial statements shows a firm's financial position on a particular date?

balance sheet

The ____ ____ _____ portrays the equality between the total economic resources of a company and the total claims to those resources by creditors and owners.

basic accounting equation

A company's assets minus its liabilities shown on the balance sheet is referred to as its Blank______ value.

book value

The purpose of the statement of cash flows is to summarize the transactions that ____ caused to change during the period.

cash

The financial statement that reports the changes in a company's cash balance during the period is the:

cash flow

The process in which temporary accounts are reduced to zero balances and transferred to retained earnings is the ____ Process

closing

The receivables turnover ratio offers an indication of how quickly a company is able to

collect its accounts receivable.

Deducting preferred stock from the denominator and preferred stock dividends from the numerator results in a return on equity that focuses on profits generated by

common stock

The journal entry required to close expenses will require a(n) ____ entry to each expense account.

credit

To close the dividend account, the journal entry would require a(n) Blank______ entry to the dividend account and a Blank______ entry to retained earnings.

credit; debit

A ratio used to measure liquidity is the

current ratio

Current assets divided by current liabilities is which ratio?

current ratio

The two classifications used for assets and liabilities on the balance sheet are Blank______ and Blank______.

current; noncurrent

Closing the sales revenue account requires a ___ to sales revenue

debit

To close the dividend account, the journal entry would require a(n) ____entry to retained earnings.

debit

Juergen is preparing the closing journal entries for the year. To close the revenue accounts, Juergen should (Select all that apply.)

debit revenue credit retained earnings

The following accounts are closed with a credit entry (Select all that apply.)

depreciation expense cost of goods sold salaries expense

The profit margin ratio indicates the amount of net income achieved for

each dollar of sales.

Shareholders' equity arises primarily from amounts invested by shareholders and amounts

earned by the corporation

The two sources of shareholders' equity are amounts

earned by the corporation paid in from shareholders

Favorable financial leverage occurs when a company

earns a return on borrowed funds that exceeds the cost of borrowing.

Measurement is the process of associating numerical amounts to the ____ reported in financial statements.

element

A situation that requires an adjusting entry that is not a prepayment or an accrual entry is

estimating bad debts.

Adjusting journal entries are needed to record

expense incurred, but not yet paid revenue earned, but not yet received

True or false: Working capital is a popular measure of a company's ability to satisfy its long-term obligations.

false

The income statement is considered most useful for predicting

future profitability.

Which of the following is an increase in equity from a peripheral or incidental transaction that is included in income from continuing operations?

gain

Which of the following items may be included in nonoperating income for a company that manufactures televisions? (Select all that apply.)

gain from sale of land interest income

Profitability, as measured by return on assets, can be achieved by (select all that apply)

high profit margin high asset turnover

The profit margin ratio measures the company's ability to withstand either ______ expenses or ______ revenues.

higher; lower

The statement used to predict future profitability and a company's future cash-generating ability is the

income statement.

Which of the following items are included in the numerator for the current ratio but are excluded from the numerator of the quick or acid-test ratio? (Select all that apply.)

inventory prepaid assets

A high inventory turnover ratio indicates that

inventory was sold frequently during the year.

Calculating and monitoring the average collection period over time can be useful because (select all that apply)

it can signal a future increase in bad debts. it highlights changes in how efficiently a company collects cash from customers

A company borrows funds for a project. If the interest rate charged for the borrowed funds is less than the rate of return on the project, this is referred to as favorable financia

leverage

The balance sheet provides useful information about a company's and ____ long-term solvency.

liquidity

The readiness of a company to pay its short-term debts as they come due is referred to as

liquidity

Which of the following is a decrease in equity due to an incidental transaction?

loss

The process of associating numerical amounts to the elements of the financial statements is referred to as

measure

The numerator on all profitability ratios is

net income

The statement of shareholders' equity discloses the changes in the shareholder equity accounts during the period from: (Select all that apply.)

net income investments by owners distributions to owners other comprehensive income

Profitability ratios are similar because the profit margin ratio, return on asset ratio, and return on shareholders' equity all use the same

net income in the numerator.

Revenue and expenses on the income statement are classified as: (Select all that apply.)

operating items non-operating items

shareholders' equity is composed of which of the following accounts? (Select all that apply.)

paid-in capital retained earnings

Times interest earned ratio measures a company's ability to ___ its interest charge

pay

To calculate the return on equity from resources provided by common shareholders, ____stock should be excluded from the denominator.

preferred

The DuPont framework shows that return on equity can be calculated by multiplying which ratios?

profit margin equity multiplier asset turnover

The formula for the acid-test or quick ratio is quick assets divided by

quick asset/Current liabilities

The Blank______ ratio provides a more rigorous indication of liquidity than does the Blank______ ratio

quick; current

The process of admitting information into the financial statements is referred to as ___

recognition

One of the purposes of adjusting entries is to

recognize all revenues earned during the period.

The first step in the closing process is to reduce the balances in the temporary accounts to zero. The second step is to transfer the effects of step 1 to which account?

retained earnings

The asset turnover ratio provides an indication of how efficiently a company uses all of its assets to generate

revenue

Identify which items on an income statement are included in calculating income from continuing operations. (Select all that apply.)

revenue income tax loss

Adjusting entries help a company accurately measure

revenues and expenses for the period. the company's financial performance.

Which of the following items are included in calculating operating income? (Select all that apply.)

revenues related to primary revenue-generating activities expenses related to primary revenue-generating activities

Which accounts should be closed at the end of the period? (Select all that apply.)

sales dividends salary expense

Which of the following serves to relay important information about a transaction to the accountant?

sales invoices bills from suppliers cash register tapes

Which of the following items are reported as components of operating income for most manufacturing and merchandising companies? (Select all that apply.)

selling expenses revenues administrative expenses

If a company has a large amount of long-term debt in its capital structure, this will affect the firm's

solvency

Sales invoices, bills from suppliers, and cash register tapes that relay information to the accountant are referred to as ____ documents

source

Which financial statement shows the sources of the changes in the various permanent equity accounts?

statement of shareholders' equity

When calculating profitability ratios, analysts often adjust net income by (Select all that apply.)

subtracting out one-time gains. adding in one-time losses. excluding transitory earnings effects.

The purpose of an income statement is to

summarize the profit-generating activities that occurred during a particular reporting period.

The average collection period is an estimate of

the number of days the average account receivable balance is outstanding.

The reason for adding back net of tax interest expense to the ROA numerator is that

total assets are financed with both debt and equity capital

Prepayments are:

transactions in which cash flow precedes expense recognition. transactions in which cash flow precedes revenue recognition.

Which account is a temporary account?

utility expense

The purpose of a post-closing trial balance is to

verify that closing entries were prepared and posted correctly.