WileyPlus Practice Quiz 2

(LO 2) For 2022, Spanos Corporation reported net income $26,000, net sales $400,000, and weighted-average common shares outstanding 4,000. There were preferred dividends of $2,000. What was the 2022 earnings per share? (a)$6.00. (b)$6.50. (c)$99.50. (d)$100.00.

(a) $6.00. Earnings per share = Net income ($26,000) less Preferred dividends ($2,000) divided by Weighted-average common shares outstanding (4,000) = $6.00/share, not (b) $6.50, (c) $99.50, or (d) $100.00.

(LO 3) What organization issues U.S. accounting standards? (a)Financial Accounting Standards Board. (b)International Accounting Standards Committee. (c)International Auditing Standards Committee. (d)None of the above.

(a) Financial Accounting Standards Board. The Financial Accounting Standards Board (FASB) is the organization that issues U.S. accounting standards, not the (b) International Accounting Standards Committee or (c) International Auditing Standards Committee. Choice (d) is wrong as there is a correct answer.

(LO 3) Generally accepted accounting principles are: (a)a set of standards and rules that are recognized as a general guide for financial reporting. (b)usually established by the Internal Revenue Service. (c)the guidelines used to resolve ethical dilemmas. (d)fundamental truths that can be derived from the laws of nature.

(a) a set of standards and rules that are recognized as a general guide for financial reporting. All U.S. companies get guidance from a set of rules and practices that have authoritative support, referred to as generally accepted accounting principles (GAAP). Standard-setting bodies, in consultation with the accounting profession and the business community, determine these accounting standards. The other choices are incorrect because GAAP is (b) not established by the Internal Revenue Service, (c) not intended to provide guidance in resolving ethical dilemmas, or (d) created by people and can evolve over time, unlike laws of nature, such as those in physics and chemistry.

(LO 1) Current assets are listed: (a)by order of expected conversion to cash. (b)by importance. (c)by longevity. (d)alphabetically.

(a) by order of expected conversion to cash. Current assets should be listed by order of expected conversion to cash (liquidity), not (b) by importance, (c) by longevity, or (d) alphabetically.

(LO 2) Which of these measures is an evaluation of a company's ability to pay current liabilities? (a)Earnings per share. (b)Current ratio. (c)Both (a) and (b). (d)None of the above.

(b) Current ratio. The current ratio measures liquidity. Higher current ratios indicate higher liquidity. The other choices are incorrect because (a) earnings per share is a measure of a firm's profitability, not its ability to pay its current liabilities; (c) one of these answers is incorrect; and (d) there is a correct answer.

(LO 2) Which is an indicator of profitability? (a)Current ratio. (b)Earnings per share. (c)Debt to assets ratio. (d)Free cash flow.

(b) Earnings per share. Earnings per share is a measure of profitability. The other choices are incorrect because (a) the current ratio is a measure of liquidity, (c) the debt to assets ratio is a measure of solvency, and (d) free cash flow is a measure of solvency.

(LO 3) The characteristic of information that evaluates whether it is large enough to impact a decision. (a)Comparability. (b)Materiality. (c)Cost. (d)Consistency.

(b) Materiality. Materiality evaluates whether information is large enough to impact a decision, not (a) comparability, (c) cost, or (d) consistency.

(LO 3) What is the primary criterion by which accounting information can be judged? (a)Consistency. (b)Predictive value. (c)Usefulness for decision-making. (d)Comparability.

(c) Usefulness for decision-making. Usefulness for decision-making is the primary criterion by which accounting information can be judged. The other choices are incorrect because (a) consistency, (b) predictive value, and (d) comparability all help to make accounting information more useful but are not the primary criterion by which accounting information is judged.

(LO 1) A company has purchased a tract of land. It expects to build a production plant on the land in approximately 5 years. During the 5 years before construction, the land will be idle. The land should be reported as: (a)property, plant, and equipment. (b)land expense. (c)a long-term investment. (d)an intangible asset.

(c) a long-term investment. Land or buildings that are currently not used in operations are considered to be long-term investments. The other choices are incorrect because (a) this classification is for property, plant, and equipment used in operations; (b) land is never expensed; and (d) intangible assets have no physical existence and are used in the production of income.

(LO 3) Neutrality is an ingredient of: (a)Faithful Representation: Yes Relevance: Yes (b)Faithful Representation: No Relevance: No (c)Faithful Representation: Yes Relevance: No (d)Faithful Representation: No Relevance: Yes

(c)Faithful Representation: Yes Relevance: No Neutrality is an ingredient of faithful representation but not relevance. The other choices are therefore incorrect.

(LO 1) The correct order of presentation in a classified balance sheet for the following current assets is: (a)accounts receivable, cash, prepaid insurance, inventory. (b)cash, inventory, accounts receivable, prepaid insurance. (c)cash, accounts receivable, inventory, prepaid insurance. (d)inventory, cash, accounts receivable, prepaid insurance.

(c)cash, accounts receivable, inventory, prepaid insurance. The correct order of presentation for current assets is cash, accounts receivable, inventory, and then prepaid insurance. The other choices are therefore incorrect.

(LO 1) The balance in retained earnings is not affected by: (a)net income. (b)net loss. (c)issuance of common stock. (d)dividends.

(c)issuance of common stock. Issuance of common stock has no impact on retained earnings. The other choices are incorrect because (a) net income increases retained earnings, (b) net loss decreases retained earnings, and (d) dividends decrease retained earnings.

(LO 2) Companies can use free cash flow to: (a)pay additional dividends. (b)acquire more property, plant, and equipment. (c)pay off debts. (d)All of the above.

(d) All of the above. Free cash flow can be used to pay dividends; acquire more property, plant, and equipment; and pay off debts. Although choices (a), (b), and (c) are correct, choice (d) is the better answer.

(LO 1) In a classified balance sheet, assets are usually classified as: (a)current assets; long-term assets; property, plant, and equipment; and intangible assets. (b)current assets; long-term investments; property, plant, and equipment; and common stock. (c)current assets; long-term investments; tangible assets; and intangible assets. (d)current assets; long-term investments; property, plant, and equipment; and intangible assets.

(d) current assets; long-term investments; property, plant, and equipment; and intangible assets. Assets are classified as current assets; long-term investments; property, plant and equipment; and intangible assets. The other choices are incorrect because (a) long-term assets includes long-term investments; property, plant, and equipment; and intangible assets; (b) common stock refers to the equity of the firm and is not an asset; and (c) while tangible assets describes property, plant, and equipment, it is better to use the more common terminology of property, plant, and equipment.

(LO 2) The following ratios are available for Reilly Inc. and O'Hare Inc. Current RatioDebt to Assets RatioEarnings per ShareReilly Inc.2:175%$3.50O'Hare Inc.1.5:140%$2.75Compared to O'Hare Inc., Reilly Inc. has: (a)higher liquidity, higher solvency, and higher profitability. (b)lower liquidity, higher solvency, and higher profitability. (c)higher liquidity, lower solvency, and higher profitability. (d)higher liquidity and lower solvency, but profitability cannot be compared based on information provided

(d) higher liquidity and lower solvency, but profitability cannot be compared based on information provided. Reilly Inc. has higher liquidity as it has a higher current ratio, and lower solvency due to its higher debt to assets ratio. However, profitability cannot be compared across companies using earnings per share because of the wide variations in the number of shares of common stock of different companies. The other choices are therefore incorrect.

Acme Auto Supplies Balance Sheet December 31, 2007 Assets Cash - $60,000 Prepaid Insurance - $40,000 Accounts Receivable - $50,000 Inventory - $70,000 Land held for investment - $80,000 Land - $95,000 Building - $100,000 Less: Accumulated Depreciation - ($30,000) Trademark - $70,000 Total Assets - $535,000 Liabilities Accounts Payable - $65,000 Salaries Payable - $10,000 Mortgage Payable - $90,000 Total Liabilities - $165,000 Stockholders' Equity Common Stock - $120,000 Retained Earnings - $250,000 Total Stockholders' Equity - $370,000 Total Liabilities and Stockholders' Equity - $535,000 The current ratio is: 1.86:1 2.00:1 3.38:1 2.93:1

2.93 : 1 Current ratio = Current assets/Current liabilities = $485,000/$165,000 = 2.939 Current Assets: Cash - $60,000 Prepaid Insurance - $40,000 Inventory - $70,000 Land held for investment - $80,000 Land - $95,000 Building - $100,000 Less: Accumulated Depreciation - (-$30,000) Trademark - $70,000 Total - $485,000 Current Liabilities: Accounts Payable - $65,000 Salaries Payable - $10,000 Mortgage Payable - $90,000 Total - $165,000

2.1 Prepare the current assets section of a balance sheet. (LO 1) A list of financial statement items for Miguel Company includes the following: Accounts Receivable $25,000, Prepaid Insurance $7,000, Cash $8,000, Supplies $11,000, and Stock Investments (short-term) $14,000. Prepare the current assets section of the balance sheet, listing the accounts in proper sequence.

Solution 1. Current assets: Cash $8,000 Stock investments 14,000 Accounts receivable 25,000 Supplies 11,000 Prepaid insurance 7,000 Total current assets $65,000

2.2 Classify accounts on balance sheet. (LO 1) The following are the major balance sheet classifications: Current assets (CA) Current liabilities (CL) Long-term investments (LTI) Long-term liabilities (LTL) Property, plant, and equipment (PPE) Common stock (CS) Intangible assets (IA) Retained earnings (RE) Match each of the following accounts to its proper balance sheet classification. ________ Prepaid insurance ________ Unearned service revenue ________ Notes payable (short-term) ________ Debt investments (short-term) ________ Equipment ________ Accumulated depreciation—equipment ________ Mortgage payable ________ Stock investments ________ Copyrights ________ Salaries and wages payable

Solution 2. __CA__ Prepaid insurance __CL__ Unearned service revenue __CL__ Notes payable (short-term) __CA__ Debt investments (short-term) __PPE__ Equipment __PPE__ Accumulated depreciation—equipment __LTL__ Mortgage payable __LTI__ Stock investments (long-term) __IA__ Copyrights __CL__ Salaries and wages payable

2.3 Calculate liquidity and solvency ratios.(LO 2) Maison Inc. reported the following selected information at December 31. 2022 Total current assets $45,584 Total assets 278,000 Total current liabilities 32,560 Total liabilities 189,040 Net cash provided by operating activities 48,500 Calculate (a) the current ratio, (b) the debt to assets ratio, and (c) free cash flow for December 31, 2022. The company paid dividends of $7,250 and spent $14,400 on capital expenditures.

Solution 3. (a) Current ratio = Current assets/Current liabilities = 45,584/32,560 = 1.40 : 1 (b) Debt to assets ratio = Total Liabilities/Total assets = 189,040/278,000 = 68.0% (c) Free cash flow = Net cash provided by = 48,500 - 14,400 - 7,250 = 26,850 operating activities -Capital expenditures -Dividends paid

The writing down of inventory to market follows the monetary unit assumption. economic entity assumption. time period assumption. conservatism constraint.

conservatism constraint.

Valuing property, plant, and equipment at market value rather than at cost is inconsistent with the: monetary unit assumption. cost principle. economic entity assumption. time period assumption.

cost principle.