Chapter 12 videos

Which of the following statements describe a contingent liability?

A potential liability that arises as a result of past transactions or events Ultimate resolution depends on a future event

Which of the following describe the factors that determine the amounts reported for a liability?

The company increases liabilities whenever additional obligations arise. The company decreases liabilities whenever the company makes a payment or provides services to the creditor. Initially, the company records each liability at the amount of cash a creditor would accept to settle the liability immediately after a transaction or event creates the liability.

Which of the following is included in the adjusting entry to accrue interest on a short-term note payable?

Debit to Interest Expense and a credit to Interest Payable

Burlington Corporation issued 1,000 shares of $1 par value preferred stock for $10 per share.Prepare the appropriate journal entry to record the stock issuance.

cash debited 10,000 preferred stock credited 1,000 additional paid-in capital-preferred credited 9,000

Which of the following statements about the differences between common stock and preferred stock are true

Dividends on preferred stock, if any, may be paid at a fixed rate. If the corporation goes out of business, common stockholders are paid last from whatever assets remain after paying preferred stockholders.

Which of the following statements about dividends are true?

Dividends reduce Retained Earnings A corporations board of directors chooses whether or not to declare dividends.A corporation is legally obligated to distribute dividends once they are declared.

Which of the following are advantages of equity financing?

Equity does not have to be repaid.Dividends are optional.

Which of the following statements about a current liability is true?

It will be paid in cash or fulfilled within one year or the current operating cycle, whichever is longer

Which of the following statements about liabilities are true?

Liabilities are created when a company buys goods and services on credit. Liabilities are created when a company obtains short-term loans to cover gaps in cash flows. Liabilities are created when a company issues long-term debt to obtain money for expanding into new regions and markets.

Nieto Company reported net income of $22,000 for the current year. During the year, Inventory decreased by $7,000, Accounts Payable decreased by $8,000, Accounts Receivable increased by $6,000, and Depreciation Expense was $10,000. If the indirect method is used, what is the net cash provided by operating activities?

Net cash: $25,000 net income 22,000 depreciation 10,000 accounts receivable (6,000) inventory 7,000 accounts payable (8,000) =25,000

The books of Silver Fox Company included the following information for the current year: Collected $9,000 cash on account from customers Issued common stock in exchange for cash of $10,000 Received $5,000 cash in advance of providing services to customers Paid $3,000 cash to purchase equipment Paid $3,000 cash to employees for wages and salaries Using the direct method, what is the net cash provided by operating activities?

Net cash: 11,000 Net cash provided by operating activities = Cash collections on account of $9,000 + Cash received in advance of providing services of $5,000 − Cash paid to employees of $3,000 = $11,000 The issuance of common stock is a financing activity and the purchase of equipment is an investing activity.

How is the times interest earned ratio computed?

Net income + Interest expense + Income tax expense) ÷ Interest expense

Rambling Company's debt-to-assets ratio is 75% and its competitors have debt-to-asset ratios near 60%. Which of the following statements is true?

Rambling Company has adopted a riskier financing strategy than its competitors

Previously, Feinberg Corporation repurchased 1,000 shares of its $0.05 par value common stock for $25 per share. Today, the company reissues 500 shares of its treasury stock for $26 per share.Prepare the appropriate journal entry to record the reissuance of the shares.

cash debited 13000 treasury stock credited 12500 addition credited 500

In order to retain their ownership percentages, existing stockholders may be given the first chance to buy newly issued stock before it is offered to others. What term is used to describe this right?

preemptive rights

During the current year, Armstrong Corporation reported net income of $18 million and EPS of $5.00 per share. The average number of common shares outstanding during the year was 3.6 million. The price of a share of its common stock was $2.50 at the beginning of the year and $5.00 at the end of the year. What is the company's price/earnings (P/E) ratio at the end of the year?

price/earnings (P/E) ratio 1.00 Price/earnings (P/E) ratio = Current stock price ÷ Earnings per share Price/earnings (P/E) ratio = $5.00 ÷ $5.00 = 1.00

a company has net income of $14,600,000. Stockholders' equity was $47,550,000 at the beginning of the year and $68,150,000 at the end of the year. The company does not have any preferred stock outstanding. What is the company's return on equity (ROE) during the year?

return on equity 0.25 ROE = (Net income − Preferred dividends) ÷ Average common stockholders' equity ROE = ($14,600,000 − $0) ÷ [($47,550,000 + $68,150,000) ÷ 2] = $14,600,000 ÷ $57,850,000 = 0.25

Which of the following are reasons that corporations can raise large amounts of money?

shares of stock can be purchased in small amounts stockholders are not liable for corporation's debts

Which of the following financial statements shows the major types of business activities that caused a company's cash to increase or decrease during the accounting period?

statement of cash flows

Which of the following statements about the two alternative methods that may be used when preparing the statement of cash flows are true?

the net change in cash is always the same under both methods the two alternative methods only relate to the operating activities section

Previously, Milad Corporation issued 5,000 shares of $0.05 par value common stock for $10 per share. Today, the company repurchased 1,000 shares of its stock for $25 per share.Prepare the appropriate journal entry to record the repurchase of the shares

treasury stock debited 25000 cash credited 25000

Which of the following statements about preferred dividends is true?

A preferred stock dividend can be expressed in either a percentage of par value or a dollar amount. If a company issues 10% preferred stock with a par value of $10 per share, the annual per-share dividend, if declared will equal $1. Dividends on preferred stock, if any, may be paid at a fixed rate.

Which of the following describes what is reported first within the statement of cash flows?

operating activities section

Which of the following are examples of cash flows relating to operating activities?

paying rent receiving dividends receiving interest

On September 1, Year 1, the Central Illinois University ticket office sold $1,800,000 worth of season basketball tickets. Ten home games will be played: four games will be played during Year 1 and six games will be played during Year 2. What is the adjusted balance in Deferred Revenue account at December 31, Year 1?

$1,080,000 Ticket revenue recorded per game = Cash in advance of $1,800,000 ÷ 10 games = $180,000 Balance in Deferred Revenue at end of Year 1 = beginning balance in Deferred Revenue of $0 + Cash received in advance of $1,800,000 − Revenue reported during Year 1 of $720,000 (or $180,000 × 4 games) = $1,080,000 Alternatively:Balance in Deferred Revenue at end of Year 1 = Games to be played during Year 2 of 6 × $180,000 per game = $1,080,000

During the year, Martin Corporation sold an investment in bonds issued by another company for $21,000. Those bonds had a cost of $20,000. Martin also purchased the common stock of another company for $10,000. Which of the following is the net cash provided by (used in) investing activities?

$11,000 Net cash provided by investing activities = Cash from sale of investment in bonds of $21,000 − Cash used to purchase stock of $10,000 = $11,000

During the year, Cameron Corporation issued shares of its common stock for cash of $800,000 and paid $300,000 in cash dividends. In addition, Cameron issued $100,000 of bonds at face value. Which of the following is the net cash provided by (used in) financing activities?

$600,000 Net cash provided by financing activities = Cash from sale of stock of $800,000 − Cash used to pay dividends of $300,000 + Cash from issuance of bonds of $100,000 = $600,000

Match each item with the action that will be taken with regards to the related liability account.

1. Purchase office supplies on credit ---- credit the related liability account 2. Issue a note due in 60 days ---- credit the related liability account 3. Adjustment for interest incurred but not paid ---- credit the related liability account 4. Paid salaries and wages that were accrued during the prior accounting period ---- debit the related liability account

Using the indirect method, various amounts are added and subtracted to convert that net income number into cash flows from operating activities. Indicate how each of the following items are reported on a schedule of operating activities. 1. depreciation 2. decreases in current assets 3. decreases in current liabilities 4. increases in current assets 5. increases in current liabilities

1. added 2. added 3. subtracted 4. subtracted 5. added

Indicate how each of the following items are reported in the financing activities section of the statement of cash flows. 1. cash received from stockholders for issuance of new stock 2. cash payment of interest on long-term notes 3. payment of cash dividends

1. financing cash inflow 2. not a financing activity 3. financing cash outflow

Indicate how each of the following items are reported in the investing activities section of the statement of cash flows. 1. purchase of a patent for cash 2. receipt of cash dividend 3. sale of equipment for cash

1. investing cash outflow 2. not an investing activity 3. investing cash inflow

match the term and the definition 1. issued shares 2. outstanding shares 3. authorized shares

1. shares of stock that have been distributed by the corporation 2. shares that are currently held by stockholders (not the corporation itself) 3. the maximum number of shares of capital stock of a corporation that can be issued

match the term and the definition 1. date of declaration 2. payment date 3. date of record

1. the date on which the board of directors officially approves a dividend 2. the date on which a cash dividend is paid to the stockholders of record 3. the date on which the corporation prepares the list of current stockholders

Which of the following statements about preferred dividends is true?

A cumulative dividend preference guarantees dividends owed from prior years will be paid to preferred stockholders before dividends are paid to common stockholders.

Which of the following statements about financing cash flows are true?

A healthy company that is growing rapidly would be expected to report financing cash inflows to fund its expansion. New loans would result in positive net cash flows from financing activities.

Which of the following statements about the times interest earned ratio are true?

A high times interest earned ratio indicates an extra margin of protection should the company's profitability decline in the future. In general, a high times interest earned ratio is viewed more favorably than a low one. It measures whether sufficient resources are generated from operations to cover interest costs.

Which of the following statements about the statement of retained earnings and the statement of stockholders' equity are true?

A statement of retained earnings shows how net income increased and dividends decreased the retained earnings balance during the period. Public companies report a more comprehensive version of the statement of retained earnings called the statement of stockholders equity to show the causes of changes in all stockholders equity accounts. checked The statement of stockholders equity has a column for each stockholders equity account and shows the increases and decreases in each account balance during the period.

Which of the following statements about accrued liabilities are true?

Accrued payroll includes payroll deductions and employer payroll taxes. Employer payroll taxes include FICA taxes, federal unemployment taxes, and state unemployment taxes. Payroll deductions are amounts the employer has withheld from the employee's paycheck on behalf of another entity.

Which of the following describes the reporting of a contingent liability that is probable but cannot be reasonably estimated?

Any potential liability and related loss are described in a note to the financial statements

Which of the following are withheld from an employee's paycheck?

Charitable contributions Federal and state income taxes Medicare tax social security tax

Which of the following statements about long-term liabilities are true?

Common long-term liabilities include long-term notes payable, deferred income taxes, and bonds payable. Noncurrent liabilities include all liabilities other than those classified as current.

Which of the following statements about the direct method are true?

Credits to the company's Cash account would represent cash outflows. Debits to the company's Cash account would represent cash inflows. The direct method reports the total cash inflow or outflow from each main type of transaction relating to the company's operating activities.

Which of the following is the starting point when the indirect method is used to compute cash flows from operating activities?

net income

On January 1, Year 1, a company borrows $50,000 with the promise to repay the amount plus interest in two years (on January 1, Year 3). Which of the following statements about this loan are true

The company reports only the accrued interest on the loan as a current liability in the balance sheet prepared as of December 31, Year 1. The Long-Term Debt account balance will equal $50,000 at December 31, Year 1

Which of the following statements about the direct method are true?

The direct method is prepared by adjusting each expense on the income statement from the accrual basis to the cash basis. The direct method is prepared by adjusting each revenue on the income statement from the accrual basis to the cash basis.

How is the debt-to-assets ratio computed?

Total liabilities divided by total assets

On January 1, Duffy Enterprises issued $100,000 in bonds that mature in 10 years. The bonds were issued at face value. The bonds have a stated interest rate of 8% and pay interest once per year on December 31. Prepare the appropriate journal entry to record the issuance of the bonds.

Transaction A: General Journal Cash debited 100,000 bonds payable credited 100,000

On January 1, Duffy Enterprises issued $100,000 in bonds that mature in 10 years. The bonds were issued at 103. The bonds have a stated interest rate of 8%. The bonds pay interest once per year on December 31. Prepare the appropriate journal entry to record the issuance of the bonds.

Transaction A: General Journal Cash debited 103,000 bonds payable credited 100,000 premium on bonds payable 3,000

Marianne's Grocery sold groceries for $100 cash plus 10 percent sales tax.

Transaction A: General Journal Cash debited 110sales tax payable credited 10sales revenue credited 100

On January 1, Duffy Enterprises issued $100,000 in bonds that mature in 10 years. The bonds were issued at 95. The bonds have a stated interest rate of 8%. The bonds pay interest once per year on December 31. Prepare the appropriate journal entry to record the issuance of the bonds.

Transaction A: General Journal Cash debited 95,000 discount on bonds payable debited 5,000 bonds payable credited 100,000

Which of the following statements about bond amortization are true?

When bonds are issued at a discount, bond amortization causes the Interest Expense to be greater than the interest payment and, at the same time, causes Discount on Bonds Payable to decrease each period. When bonds are issued at a premium, bond amortization causes the Interest Expense to be less than the interest payment and, at the same time, causes Premium on Bonds Payable to decrease each period.

Match the term and the definition. a. Contributed Capital b. Retained Earnings c. Treasury Stock d. Comprehensive Other Comprehensive Income (Loss)

a. amount of capital the company received from investors' contributions b. cumulative amount of net income earned less cumulative amount of dividends declared c. shares previously issued to and owned by stockholders that have been required d. unrealized gains and losses

Which of the following items are used to compute return on equity (ROE)?

average common stockholders equity preferred dividends net income

Which of the following items are used to compute earnings per share (EPS)

average number of common shares outstanding net income preferred dividends

Which of the following are examples of cash flows relating to financing activities?

borrowing from lenders through formal debt contracts repaying principal to lenders

On January 1, Duffy Enterprises issued $100,000 in bonds that mature in 10 years. The bonds were issued at 104. The bonds have a stated interest rate of 8%. The bonds pay interest once per year on December 31. What is the carrying value of the bonds on the date of issue?

carrying value: 104,000 Balance in premium account at date of issue = Issue price − Face value Balance in premium account at date of issue = ($100,000 × 1.04) − $100,000 = $4,000 Carrying value = Face value + Balance in Premium account (or − Balance in Discount account) Carrying value = $100,000 + $4,000 = $104,000

Sales Revenue for the period totaled $17,200. The beginning and ending Accounts Receivable balances for the period were $2,920 and $7,500, respectively. What was the amount of cash collected from customers during the period?

cash collected from customers: $12,620 Increase in Accounts Receivable = Ending balance of $7,500 − Beginning balance of $2,920 = $4,580 Cash collected from customers = Sales revenue of $17,200 − Increase in Accounts Receivable of $4,580 = $12,620

Salaries and Wages Expense totaled $450,600 for the period. The beginning and ending balances of Salaries and Wages Payable for the period were $18,300 and $16,800, respectively. What was the amount of cash paid to employees during the period?

cash paid to employees: 452,100 Increase (decrease in salaries and wages payable = Ending balance of $16,800 − Beginning balance of $18,300 = ($1,500) Cash paid to employees = Salaries and wages expense of $450,600 + Decrease in salaries and wages payable of $1,500 = $452,100

Cost of goods sold was $159,400 for the period. The beginning and ending Inventory balances for the period were $18,700 and $13,700, respectively. The beginning and ending Accounts Payable balances for the period were $22,500 and $8,200, respectively. What was the amount of the cash paid to suppliers during the period?

cash paid to suppliers: 168,700 Increase (decrease) in inventory = Ending balance of $13,700 − Beginning balance of $18,700 = ($5,000) Increase (decrease) in accounts payable = Ending balance of $8,200 − Beginning balance of $22,500 = $14,300 Cash paid to suppliers = Cost of goods sold of $159,400 − Decrease in inventory of $5,000 + Decrease in accounts payable of $14,300 = $168,700

Byrd Corporation issued 5,000 shares of $0.05 par value common stock for $10 per share.Prepare the appropriate journal entry to record the stock issuance.

cash would be debited 50,000 common stock credited 250 additional paid-in capital 49750

Which of the following are causes of deviations in cash flows from operating activities?

changes in working capital management corporate life cycle seasonality

Which of the following items are used to compute the price/earnings (P/E) ratio?

current stock price earnings per share

Which of the following are examples of cash flows relating to investing activities?

disposal of equipment maturity of investments in securities purchase of investments in securities

On April 22, the board of directors for Cosmic Candy, Incorporated declared a cash dividend of $1 per share payable to stockholders of record on May 15. The dividends are paid on June 8. The company has 1,000 shares of stock outstanding.Prepare the appropriate journal entry that will be recorded on June 8.

dividends payable debited 1000 cash credited 1000

Which of the following describes the effect of a stock dividend?

does not affect total stockholders' equity

A company reported net income of $9,660,000 for the year. There were 4.1 million shares of common stock outstanding at the beginning of the year and 4.3 million shares outstanding at the end of the year. No dividends were declared during the year. What is the company's earnings per share (EPS) for the year?

earnings per share $2.30 per share EPS = (Net income − Preferred dividends) ÷ Average number of common shares outstanding EPS = ($9,660,000 − $0) ÷ [(4,100,000 + 4,300,000) ÷ 2] = $9,660,000 ÷ 4,200,000 = $2.30 per share

Which of the following terms describe the payment that is made when the bond matures?

face value

Which of the following is the term used to describe the excess of cash flows from operations over the amount of cash outflows used to replace property, plant, and equipment and to fund financing outflows of cash for dividends to stockholders?

free cash flow

On January 1, Year 1, Duffy Enterprises issued $100,000 in bonds that mature in 10 years. The bonds were issue at face value. The bonds have a stated interest rate of 8% and pay interest once per year on December 31. What is the amount of interest expense recorded on December 31, Year 1?

interest expense= 8,000 For bonds issued at face value: Annual interest expense = Face value × Stated interest rate Annual interest = $100,000 × 8% = $8,000

Which of the following terms describe a bond that is issued for more than its face value?

issued at a premium

Which of the following will often be reported by healthy companies?

negative cash flows from investing activities