Chapter 01 A Framework for Financial Accounting True / False Questions 1. Accounting is a system of maintaining records of a company's operations and communicating that information to decision makers. True False 2. Accounting information is used by investors to decide whether to invest in a company's stock. True False 3. Accounting information is used by creditors to decide whether to invest in a company's stock. True False 4. The primary functions of financial accounting are to measure business activities of a company and to communicate those measurements to internal parties for decision-making purposes. True False 5. Financing activities are transactions involving externals sources of funding. True False 6. Investing activities include the purchase and sale of long-term resources. True False 1-1
7. Operating activities include transactions that relate to the primary operations of the company. True
False
8. A corporation is an entity that is legally separate from its owners. True
False
9. Cash, inventory, supplies, and buildings are examples of liabilities. True
False
10. Amounts owed to suppliers, employees, the government in the form of taxes, and utility companies are examples of liabilities. True
False
11. If total assets of a company equal $12,000 and total stockholders' equity equals $4,000, then total liabilities equal $8,000. True
False
12. If total liabilities of a company equal $16,000 and total stockholders' equity equals $9,000, then total assets equal $7,000. True
False
13. The accounting equation shows that a company's resources equal creditors' and owners' claims to those resources. True
False
14. The costs related to rent, utilities, and salaries in the current reporting period are examples of liabilities. True
False
1-2 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15. The difference between revenues and expenses is referred to as net income or net loss. True
False
16. If a company reports revenues of $17,000 and expenses of $12,000, then net income equals $5,000. True
False
17. Expenses are regular cash payments by a corporation to its stockholders. True
False
18. Dividends represent a return of the company's profits to its owners, the stockholders. True
False
19. One of the differences between a partnership and a corporation is that owners of a partnership have limited liability. True
False
20. Limited liability means the stockholders are not held personally responsible for the financial obligations of the corporation. True
False
21. One advantage of the corporate form of business is double taxation. True
False
22. Double taxation refers to a corporation's income being taxed twice—first when the company pays corporate income taxes on income it earns, and then again when stockholders pay personal income taxes when the company distributes that income as dividends to them. True
False
1-3 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
23. Financial statements are periodic reports published by the company for the purpose of providing information to managers. True
False
24. The balance sheet is a financial statement that reports the company's revenues and expenses over an interval of time. True
False
25. The statement of stockholders' equity is a financial statement that summarizes the changes in stockholders' equity over an interval of time. True
False
26. The two primary components of stockholders' equity include common stock and revenue. True
False
27. Common stock represents an external source of stockholders' equity, whereas retained earnings represents an internal source. True
False
28. Retained earnings represents the cumulative amount of net income, over the life of the company, that has not been distributed to stockholders as dividends. True
False
29. Dividends are considered an expense in running the business and reported in the income statement. True
False
30. All cash transactions reported in the statement of cash flows are classified as (1) operating activities, (2) investing activities, or (3) financing activities. True
False
1-4 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
31. Investing cash flows generally include cash receipts and cash payments for transactions involving revenue and expense activities during the period. True
False
32. Operating cash flows generally include cash transactions for the purchase and sale of investments and long-term assets. True
False
33. Financing cash flows include cash transactions with lenders, such as borrowing money and repaying debt, and with stockholders, such as issuing stock and paying dividends. True
False
34. Any transaction that affects the income statement ultimately affects the balance sheet through the balance of retained earnings. True
False
35. Financial accounting has an impact on everyday business decisions as well as wide-ranging economic consequences. True
False
36. Investors and creditors rely heavily on financial accounting information in making investment and lending decisions. True
False
37. In general, if a company's net income is increasing, so will its stock price. True
False
38. The rules of financial accounting are called Generally Accepted Accounting Principles (GAAP). True
False
1-5 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
39. Financial accounting and reporting standards in the United States are established primarily by the Financial Accounting Standards Board (FASB). True
False
40. The 1933 Securities Act and the 1934 Securities Exchange Act were designed to restore investor confidence in financial accounting following the stock market crash in 1929. True
False
41. The 1934 Securities Exchange Act gives the Securities and Exchange Commission (SEC) the power to require companies that publicly trade their stock to prepare periodic financial statements for distribution to investors and creditors. True
False
42. The role of independent auditors is to help ensure that management has in fact appropriately applied Generally Accepted Accounting Principles (GAAP) in preparing the company's financial statements. True
False
43. Auditors are trained individuals hired by a company as an independent party to express a professional opinion of the fairness of that company's financial statements. True
False
44. The primary objective of financial accounting is to provide useful information to managers in making decisions. True
False
45. Public accounting firms are professional service firms that traditionally have focused on three areas: auditing, tax preparation/planning, and business consulting. True
False
1-6 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
46. The Financial Accounting Standards Board's conceptual framework does not prescribe Generally Accepted Accounting Principles. It provides an underlying foundation for the development of accounting standards and interpretation of accounting information. True
False
Multiple Choice Questions
47. What is the primary purpose of financial accounting?
A. Determine the amount of tax liability owed to the government. B. Communicate business activities to internal management. C. Measure business activities and communicate those measures to external users to make decisions. D. Measure the profitability of the company in order to assist employees with making decisions. 48. The primary purpose(s) of financial accounting is(are) to:
A. Measure and record business transactions. B. Prepare federal and state tax returns. C. Communicate financial results to investors and creditors. D. Both measure and communicate financial information to external parties. 49. Which definition below best describes financial accounting?
A. Process of measuring income taxes owed to the government. B. System of maintaining communication with a company's customers and suppliers. C. Procedures designed to enhance the company's image to potential investors. D. Measuring business activities and communicating them to external parties.
1-7 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
50. Financial accounting does not deal with which of the following?
A. Measuring a company's economic activity. B. Providing information to internal users. C. Preparing financial reports. D. Communicating financial results to investors. 51. Financial accounting:
A. Provides information primarily for external decision makers. B. Provides information primarily for a company's employees. C. Provides information primarily for the use of managers of the company. D. Is primarily used to compute a company's tax obligation. 52. The primary focus for financial accounting information is to provide information useful for: Investing decisions
Credit decisions
a.
Yes
Yes
b.
Yes
No
c.
No
Yes
d.
No
No
A. Investment decisions and credit decisions. B. Investment decisions but not credit decisions. C. Credit decisions but not investment decisions. D. Neither investment decisions nor credit decisions
1-8 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
53. Which of the following groups is not among the external users for whom financial statements are prepared?
A. Creditors. B. Regulators. C. Investors. D. Managers. 54. The form of business organization that is legally separate from its owners is a:
A. Partnership. B. Sole proprietorship. C. Corporation. D. Separation entity. 55. Which business form has the advantage of limited liability?
A. Corporation. B. Sole proprietorship. C. Partnership. D. All business forms share equal limited liability. 56. Limited liability means:
A. Stockholders of a corporation are not obligated to pay the corporation's debts out of their own pocket. B. Liabilities of a company cannot exceed its assets. C. Companies are not allowed to borrow unless they are profitable. D. Companies are less likely to be sued if they are formed as a corporation.
1-9 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
57. One disadvantage of the corporate form of business is:
A. Limited liability. B. Access to more capital. C. Smaller in size. D. Double taxation. 58. Which of the following is an operating activity?
A. Issuing common stock. B. Paying dividends. C. Borrowing cash from a bank to acquire a factory. D. Paying electricity bills for the month. 59. How many of the following transactions are operating activities? Borrowed $50,000 from the bank Purchased $12,000 in supplies Provide services to customers for $27,000 Paid the utility bill of $750 Purchased a delivery truck for $12,000 Received $25,000 from issuing common stock
A. One. B. Two. C. Three. D. Four.
1-10 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
60. Transactions related to the primary business activities of the company, such as selling goods and services to customers, are referred to as:
A. Investing activities. B. Operating activities. C. Management activities. D. Financing activities. 61. Stimpleton Company engages in the following cash payments: Purchase equipment
$2,000
Pay rent
500
Repay loan to the bank
5,000
Pay worker's salaries
1,000
What is the total amount of cash paid for operating activities?
A. $6,000. B. $2,000. C. $7,000. D. $1,500. 62. Accountants are responsible for measuring various operating, investing and financing activities. Which of the following correctly matches the activity with its type?
A. Investing - paying utilities for the month. B. Investing - purchasing land. C. Operating - paying dividends to stockholders. D. Financing - selling equipment for cash.
1-11 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
63. Transactions of a company that include the purchase and sale of long-term assets are referred to as:
A. Investing activities. B. Financing activities. C. Expenditure activities. D. Operating activities. 64. McGill purchases additional office equipment to better serves its customers. This purchase is classified as what type of activity?
A. Company activity. B. Financing activity. C. Investing activity. D. Operating activity. 65. Transactions of a company involving external sources of funding are referred to as:
A. Investing activities. B. Financing activities. C. External activities. D. Operating activities. 66. Financing activities include:
A. Primary operations such as selling goods to customers. B. Transactions with company employees. C. Transactions involving external sources of funding. D. The purchase and sale of long-term assets.
1-12 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
67. Financing activities include:
A. The purchase of a building. B. Issuing common stock to stockholders. C. Transactions with company employees. D. Selling goods or services to customers. 68. The accounting equation is defined as:
A. Assets = Liabilities + Stockholders' Equity. B. Assets = Liabilities - Stockholders' Equity. C. Net Income = Revenues - Expenses. D. Liabilities + Revenues = Assets. 69. Which statement below best describes the accounting equation?
A. The change in retained earnings equals net income less dividends. B. Equality of revenue and expense transactions over time. C. Resources of the company equal creditors' and owners' claims to those resources. D. Financing activities equal investing and operating activities. 70. If a company has stockholders' equity of $60,000 at the end of the year, which of the following statements must be true?
A. The company's assets exceed liabilities by $60,000. B. The company has issued $60,000 of common stock. C. Net income for the year equals $60,000. D. Total revenues during the year equal $60,000.
1-13 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
71. Emmitt had the following final balances after the first year of operations: assets, $55,000; stockholders' equity, $25,000; dividends, $3,000; and net income, $10,000. What is the amount of Emmitt's liabilities?
A. $55,000. B. $30,000. C. $13,000. D. $7,000. 72. An alternative form of the accounting equation is:
A. Net Income = Revenues - Expenses. B. Stockholders' Equity = Assets + Liabilities. C. Assets = Liabilities - Stockholders' Equity. D. Assets - Liabilities = Stockholders' Equity. 73. The accounts that represent the resources of the company are called:
A. Liabilities. B. Revenues. C. Expenses. D. Assets. 74. The assets of a company represent:
A. Amounts owed to creditors. B. Sales of goods or services to customers. C. Resources that will be used to benefit the company. D. Investments by stockholders.
1-14 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
75. Which of the following accounts represents a resource of the company?
A. Common stock. B. Service revenue. C. Accounts receivable. D. Salaries expense. 76. Which of the following does not represent an asset of a company?
A. Supplies held by the company. B. Amounts owed to suppliers. C. Equipment owned and used for operations. D. Amounts receivable from customers. 77. Creditors' claims to a corporation's resources are referred to as:
A. Dividends. B. Assets. C. Liabilities. D. Stockholders' equity. 78. Liabilities are best defined as:
A. Amounts the company expects to collect in the future from customers. B. Debts or obligations the company owes resulting from past transactions. C. The amounts that owners have invested in the business. D. Payments to stockholders.
1-15 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
79. Amounts owed to suppliers for supplies purchased on account are defined as a(n):
A. Revenue. B. Asset. C. Liability. D. Expense. 80. Which of the following does not represent a liability of a company?
A. Salaries owed to employees. B. Taxes owed to the government. C. Amounts owed to suppliers. D. All of the other answers are liabilities. 81. The accounts that represent resources owed to creditors are called:
A. Assets. B. Liabilities. C. Dividends. D. Stockholders' equity. 82. Liabilities can be best described as:
A. The amount of expenses over the past year. B. The amount expected to be distributed to stockholders. C. The amount owed to creditors. D. The amount of services provided to customers during the year.
1-16 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
83. The stockholders' interest in a corporation is called:
A. Dividends. B. Assets. C. Liabilities. D. Stockholders' equity. 84. Stockholders' claims to the company's resources are referred to as:
A. Stockholders' equity. B. Revenues. C. Assets. D. Liabilities. 85. Using the information below from the accounting records of Thomas Corporation, stockholders' claims to the company's resources amount to: Assets
$1,200,000
Liabilities
$800,000
Net income
$100,000
Retained earnings
$250,000
A. $1,200,000. B. $800,000. C. $250,000. D. $400,000.
1-17 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
86. Which of the following best describes revenue?
A. Resources of a company. B. Sales of goods and services to a customer. C. Cash received from a customer. D. Dividends paid to stockholders. 87. The costs of providing goods and services to customers are referred to as:
A. Assets. B. Expenses. C. Liabilities. D. Revenues. 88. The costs associated with producing revenues are referred to as:
A. Dividends. B. Assets. C. Liabilities. D. Expenses. 89. Net income can best be described as:
A. Net cash received by a company during the year. B. Revenues minus expenses. C. The amount of profits retained in a company for the year. D. Resources of a company.
1-18 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
90. Use the following appropriate amounts to calculate net income: Revenues, $12,000; Liabilities, $5,000; Expenses, $4,000; Assets, $19,000; Dividends, $4,000.
A. $6,000. B. $8,000. C. $4,000. D. $14,000. 91. The account type that represents payments to stockholders is called:
A. Liabilities. B. Assets. C. Stockholders' equity. D. Dividends. 92. Dividends represent:
A. Resources of the company. B. Cash payments to stockholders. C. Amounts owed to creditors. D. Expenses of operating the company. 93. The equation best describing the income statement is:
A. Revenues - Expenses = Net Income. B. Assets = Revenues - Expenses. C. Assets = Liabilities + Stockholders' Equity. D. Revenues + Expenses = Net Income.
1-19 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
94. Expenses are shown in which of the following statements?
A. Income statement. B. Statement of cash flows. C. Balance sheet. D. Statement of stockholders' equity. 95. Which of the following items would not appear in an income statement?
A. Salaries expense. B. Advertising expense. C. Service revenue. D. Cash. 96. Which of the following items would not appear in an income statement?
A. Delivery Expense. B. Accounts Payable. C. Service Revenue. D. Utilities Expense.
1-20 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
97. Consider the following account balances of the Shattuck Law Firm at the end of the year: Accounts Payable
$4,400
Salaries Expense
12,800
Cash
1,700
Common Stock
2,400
Service Revenue
8,300
Supplies
4,300
Retained Earnings
1,100
Utilities Expense
5,000
How many of these accounts would appear in Shattuck's year-end income statement?
A. Five. B. Four. C. Three. D. Two. 98. Net income (loss) appears in which two financial statements?
A. Balance sheet and income statement. B. Income statement and statement of stockholders' equity. C. Statement of stockholders' equity and balance sheet. D. Net income appears in only one financial statement. 99. Which of the following items is reported in the statement of stockholders' equity?
A. Total assets. B. Total expenses. C. Net income. D. Operating cash flows.
1-21 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
100.Which of the following accounts appears in the statement of stockholders' equity?
A. Accounts Payable. B. Accounts Receivable. C. Common Stock. D. Supplies. 101.Which of the following accounts appears in the statement of stockholders' equity?
A. Supplies. B. Cash. C. Salaries Payable. D. Retained Earnings. 102.Which one of the following statements regarding financial reports is correct?
A. The balance sheet classifies all assets according to operating, investing, and financing activities. B. The income statement is used to show that a company's resources equal claims to those resources. C. The statement of stockholders' equity updates the balances of common stock and retained earnings for related transactions during the year. D. The statement of cash flows shows cash inflows and outflows from operating activities only. 103.Which of the following best explains the meaning of total stockholders' equity?
A. The difference between total revenues and total expenses, less dividends for the year. B. The amount of common stock less dividends over the life of the company. C. All revenues, expenses, and dividends over the life of the company. D. The amount of capital invested by stockholders plus profits retained over the life of the company.
1-22 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
104.Which of the following statements regarding financial reports is not correct?
A. A balance sheet contains assets, liabilities, and stockholders' equity information. B. An income statement shows revenues and expenses. C. A statement of stockholders' equity reports revenues, net income, and dividends information. D. A statement of cash flows shows cash inflows and outflows from operating, investing, and financing activities. 105.Retained earnings at the end of the year is calculated using:
A. Beginning retained earnings, net income, and dividends. B. Common stock and dividends. C. Stockholders' equity, net income, and dividends. D. Net income and dividends. 106.DW has an ending Retained Earnings balance of $51,100. If during the year DW paid dividends of $4,300 and had net income of $22,500, then what was the beginning Retained Earnings balance?
A. $24,300. B. $32,900. C. $300. D. $69,300. 107.The ending Retained Earnings balance of Boomer Inc. decreased by $1.0 million from the beginning of the year. The company declared a dividend of $5.4 million during the year. What was the net income for the year?
A. $7.5 million. B. $6.4 million. C. $4.4 million. D. $1.0 million.
1-23 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
108.Given the information below about Thomas Corporation, what was the amount of dividends the company paid in the current period? Beginning retained earnings
$54,000
Ending retained earnings
$110,000
Decrease in cash
$10,000
Net income
$84,000
Change in stockholders’ equity
$15,000
A. $13,000. B. $110,000. C. $28,000. D. $18,000. 109.Given the information below about David Corporation, what was the amount of dividends the company paid in the current period?
A. $140,000. B. $0. C. $30,000. D. $20,000.
1-24 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
110.For the past five years, Mookie Consulting Services reported the following annual net income and dividend amounts: Year
Net Income
Dividends
1
$22,000
$2,000
2
17,000
2,000
3
9,000
1,000
4
14,000
3,000
5
25,000
4,000
If Mookie had Retained Earnings of $88,000 at the end of year 5, what was the company's Retained Earnings at the beginning of Year 1?
A. $13,000. B. $25,000. C. $7,000. D. $1,000. 111.Sooner Company had a net income of $8,000, $5,000, $12,000, and $10,000 over the first four years of the company's existence. If the average annual amount of dividends paid over the last four years is $3,000, what is the ending retained earnings balance?
A. $47,000. B. $35,000. C. $23,000. D. $7,000.
1-25 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
112.Nina Corp. had the following net income (loss) the first three years of operation: $7,100, ($1,600), and $3,600. If the Retained Earnings balance at the end of year three is $1,100, what was the total amount of dividends paid over these three years?
A. $500. B. $0. C. $9,100. D. $8,000. 113.Aikman Company has paid dividends of $2,410, $0, $1,570 and $1,060 over the first four years of the company's existence. If Retained Earnings after year four has an ending balance of $9,700, what is the average annual amount of net income (loss) over the past four years for Aikman?
A. $3,685. B. $14,740. C. $840. D. $1,260. 114.On January 1, Gucci Brothers Inc. started the year with a $492,000 balance in Retained Earnings and a $605,000 balance in Common Stock. During the year, the company reported net income of $92,000, paid a dividend of $15,200, and issued more common stock for $27,500. What is total stockholders' equity at the end of the year?
A. $1,231,700. B. $1,097,000. C. $1,201,300. D. $1,588,300.
1-26 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
115.The financial statement that represents the accounting equation is the:
A. Income statement. B. Statement of cash flows. C. Balance sheet. D. Statement of stockholders' equity. 116.The equation best describing the balance sheet is:
A. Assets = Liabilities + Stockholders' Equity. B. Revenues - Expenses = Net Income. C. Ending Retained Earnings + Dividends = Net Income. D. Revenues + Expenses = Net Income. 117.The financial statement that represents activity over the entire life of the company is the:
A. Income statement. B. Balance sheet. C. Statement of financial accounting. D. Statement of cash flows. 118.Liabilities are shown in which of the following statements?
A. Income statement. B. Statement of cash flows. C. Balance sheet. D. Statement of stockholders' equity.
1-27 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
119.Consider the following account balances of the Shattuck Law Firm at the end of the year: Accounts Payable
$4,400
Salaries Expense
12,800
Cash
1,700
Common Stock
2,400
Service Revenue
8,300
Supplies
4,300
Retained Earnings
1,100
Utilities Expense
5,000
How many of these accounts would appear in Shattuck's year-end balance sheet?
A. Five. B. Four. C. Three. D. Two. 120.The two categories of stockholders' equity usually found in the balance sheet of a corporation are:
A. Common stock and liabilities. B. Assets and liabilities. C. Common stock and retained earnings. D. Revenues and expenses. 121.Which of the following is not a balance sheet item?
A. Assets. B. Retained Earnings. C. Expenses. D. Liabilities.
1-28 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
122.Which of the following is a balance sheet item?
A. Net Income. B. Dividends. C. Utilities Expense. D. Cash. 123.Which of the following statements is NOT correct about the financial statements?
A. An income statement reports revenues, expenses, and net income information. B. The statement of stockholders' equity presents common stock, dividends, and retained earnings information. C. A balance sheet reports assets, liabilities, revenues, and expenses. D. The statement of cash flows shows cash inflows and outflows from operating, financing, and investing activities. 124.The balance sheet depicts which of the following equations?
A. Net income = revenue - expenses. B. Ending retained earnings = beginning retained earnings + net income - dividends. C. Assets = liabilities + stockholders' equity. D. Net cash flows = total cash inflows - total cash outflows. 125.Which of the following financial statements reports a company's retained earnings?
A. Income statement. B. Balance sheet. C. Statement of cash flows. D. All of the other answers are statements that report retained earnings.
1-29 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
126.Which of the following is not a balance sheet item?
A. Assets. B. Common stock. C. Retained earnings. D. Revenues. 127.Which of the following is not a major section in the statement of cash flows?
A. Cash flows from operating activities. B. Cash flows from customers. C. Cash flows from financing activities. D. Cash flows from investing activities. 128.Cash paid for which of the following activities would affect the amount reported for operating cash flows in the statement of cash flows?
A. Issuing common stock. B. Paying dividends. C. Paying electricity bill for the month. D. Borrowing cash from a bank to acquire a factory.
1-30 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
129.How many of the following transactions would affect operating cash flows reported in the statement of cash flows (all transaction involve cash)? Borrowed $50,000 from the bank Purchased $12,000 in supplies Provide services to customers for $27,000 Paid the utility bill of $750 Purchased a delivery truck for $12,000 Received $25,000 from issuing common stock
A. One. B. Two. C. Three. D. Four. 130.Investing cash flows in the statement of cash flows would include which of the following?
A. Paying salaries for the month. B. Purchase of land. C. Paying dividends to stockholders. D. Selling goods or services to customers. 131.FlintCo purchases additional office equipment to better serves its customers. This cash purchase is reported in the statement of cash flows as what type of activity?
A. Company activity. B. Investing activity. C. Financing activity. D. Operating activity.
1-31 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
132.Financing cash flows in the statement of cash flows would include which of the following?
A. Paying salaries for the month. B. Purchase of land. C. Paying dividends to stockholders. D. Selling goods or services to customers. 133.Cash received from bank borrowing would be reported in the statement of cash flows as what type of activity?
A. Investing. B. Organizing. C. Operating. D. Financing. 134.If total change in cash = $44,000, net operating cash flows = $22,000, and net investing cash flows = ($13,000); then net financing cash flows =
A. $15,000. B. $35,000. C. $25,000. D. $45,000. 135.The financial statement(s) that record activity over an interval of time include the:
A. Income statement. B. Balance sheet. C. Balance sheet and income statement. D. Income statement and statement of cash flows.
1-32 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
136.Which of the following is the correct order for preparing the financial statements listed?
A. Balance sheet, statement of stockholders' equity, and income statement. B. Balance sheet, income statement, and statement of stockholders' equity. C. Statement of stockholders' equity, income statement, and balance sheet. D. Income statement, statement of stockholders' equity, and balance sheet. 137.In what order are the following financial statements prepared: (1) balance sheet, (2) income statement, and (3) statement of stockholders' equity?
A. 1, 2, 3. B. 3, 2, 1. C. 1, 3, 2. D. 2, 3, 1. 138.Which financial statement is typically prepared first?
A. Balance sheet. B. Income statement. C. Statement of stockholders' equity. D. Statement of cash flows. 139.Which of the following best represents value created for stockholders during the current period?
A. Retained earnings. B. Total assets. C. Net income. D. Stockholders' equity.
1-33 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
140.Which of the following has the single greatest impact on stock prices?
A. Total dividends. B. Total assets. C. Total revenues. D. Net income. 141.Which financial accounting number impacts stock prices more than any other single piece of information?
A. Retained earnings. B. Net income. C. Common stock. D. Total assets. 142.Which financial statement best reveals to investors and creditors information about a company's debt?
A. Income statement. B. Balance sheet. C. Statement of cash flows. D. Statement of stockholders' equity. 143.GAAP is an abbreviation for:
A. Generally authorized accounting procedures. B. Generally applied accounting procedures. C. Generally accepted auditing practices. D. Generally accepted accounting principles.
1-34 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
144.Generally Accepted Accounting Principles (GAAP) are best defined as:
A. Standards or methods for presenting financial accounting information. B. Government-mandated rules that companies must follow. C. Rules that best estimate profitability for a company. D. The group of individuals that create and enforce all accounting rules. 145.The body of rules and procedures that guide the measurement and communication of financial accounting information in the United States is known as:
A. Standards of Professional Compliance (SPC). B. Generally Accepted Accounting Principles (GAAP). C. Generally Accepted Auditing Standards (GAAS). D. Rules of Financial Reporting (RFR). 146.The independent, private-sector group that is primarily responsible for setting financial reporting standards in the United States is the:
A. FASB. B. IASB. C. SEC. D. IRS. 147.Financial accounting and reporting standards in the United States are established primarily by the:
A. Securities and Exchange Commission. B. Financial Accounting Standards Board. C. International Accounting Standards Board. D. U.S. Congress.
1-35 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
148.The private sector organization that is currently responsible for setting accounting standards in the United States is the:
A. Financial Accounting Standards Board. B. Accounting Principles Board. C. Securities and Exchange Commission. D. American Institute of Certified Public Accountants. 149.The legal authority to set accounting standards lies with the:
A. Financial Accounting Standards Board. B. Accounting Principles Board. C. Securities and Exchange Commission. D. American Institute of Certified Public Accountants. 150.The International Accounting Standards Board:
A. Is governed by the U.S. Securities and Exchange Commission. B. Can overrule the FASB when their policies disagree. C. Promotes the use of high-quality, understandable global accounting standards. D. Is the primary standard-setting body in the United States. 151.Financial accounting objectives do not include providing information:
A. Useful to investors and creditors in making decisions. B. To determine market values, assess profit potential, and evaluate management. C. Helpful to investors in predicting cash flows. D. That tells about a company's economic resources and claims to those resources.
1-36 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
152.Which statement below best describes the objectives of financial accounting?
A. Provide information that helps predict cash flows. B. Provide information about the economic resources, claims to resources and changes in resources and claims. C. Provide information that is useful in making decisions. D. All of the other answers are objectives of financial accounting. 153.Of the following, the most important objective for financial accounting is to provide information useful for:
A. Predicting cash flows. B. Determining taxable income. C. Providing accountability. D. Increasing future profits. 154.Independent auditors express an opinion on the:
A. Fairness of financial statements. B. Amount of income taxes a company owes to the government. C. Quality of the company's products. D. Quality of a company's workforce. 155.The term "cooking the books" refers to:
A. Purposely providing misleading financial information to investors and creditors. B. Hiring an auditor to provide independent verification of the fairness of financial statements. C. Filing all tax-related statements by the required deadline. D. Preparing internal budgets to plan for expenditures in the following year.
1-37 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
156.Fundamental qualitative characteristics of accounting information are:
A. Relevance and comparability. B. Comparability and consistency. C. Faithful representation and relevance. D. Faithful representation and consistency. 157.The qualitative characteristic that says accounting information can influence users' decisions by allowing them to assess past performance is:
A. Timeliness. B. Neutrality. C. Confirmatory value. D. Predictive value. 158.Accounting information that does not provide measurement bias in favor of a particular set of companies has the characteristic of:
A. Relevance. B. Consistency. C. Materiality. D. Neutrality. 159.If accounting information is considered to have faithful representation, then which of the following is true?
A. The information represents to users what it claims to represent. B. The information follows conservatism principles and is also material. C. The information is considered pertinent to or affects decisions. D. The information will have predictive value, feedback value, and is timely.
1-38 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
160.For accounting information to be relevant, it should possess which of the following characteristics?
A. Predictive value, confirmatory value, and/or materiality. B. Large in amount and timely. C. Comparability or consistency. D. Verifiability. 161.Materiality is based upon which factor(s)?
A. Timeliness of an item. B. Amount and nature of an item. C. Consistency of an item. D. Relevance of an item. 162.The conceptual framework's qualitative characteristic of relevance includes:
A. Predictive value. B. Verifiability. C. Completeness. D. Neutrality. 163.The conceptual framework's qualitative characteristic of faithful representation includes:
A. Predictive value. B. Neutrality. C. Confirmatory value. D. Comparability.
1-39 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
164.Constraints on qualitative characteristics of accounting information include:
A. Freedom from material error. B. Going concern. C. Neutrality. D. Cost effectiveness. 165.Enhancing qualitative characteristics of accounting information include:
A. Relevance and comparability. B. Comparability and consistency. C. Faithful representation and relevance. D. Cost effectiveness and materiality. 166.The major underlying assumptions of accounting include all of the following except:
A. Economic entity. B. Monetary unit. C. Legal liability. D. Going concern. 167.If a company has gone bankrupt, its financial statements likely violate the:
A. Periodicity assumption. B. Monetary unit assumption. C. Going concern assumption. D. Economic entity assumption.
1-40 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
168.The assumption that a business will continue to operate into the future is the:
A. Monetary unit assumption. B. Periodicity assumption. C. Economic entity assumption. D. Going concern assumption. 169.The assumption that the assets and liabilities of the business are accounted for on the books of the company but not included in the records of the owner is the:
A. Monetary unit assumption. B. Economic entity assumption. C. Going concern assumption. D. Periodicity assumption. 170.The assumption that the life of the business can be divided into time intervals for reporting purposes is the:
A. Monetary unit assumption. B. Periodicity assumption. C. Economic entity assumption. D. Going concern assumption. 171.The assumption that amounts are reported using a common scale (such as the dollar in the United States) is the:
A. Monetary unit assumption. B. Periodicity assumption. C. Economic entity assumption. D. Going concern assumption.
1-41 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Matching Questions
172.Match each account classification with its example.
1. Liabilities
Land owned by a company. ____
2. Revenues
Amounts owed to the bank. ____
3. Dividends
Common stock issued to investors. ____
4. Stockholders' equity
Payments made to stockholders. ____
5. Assets
Cleaning services provided to customers. ____
6. Expenses
Workers' salaries for the current period. ____
173.Match each business activity with its example.
1. Operating
Receive investments from stockholders. ____
2. Financing
Purchase office building. ____
3. Investing
Pay utilities. ____
174.Match each financial statement with the accounts reported in it.
1. Income statement 2. Statement of stockholders' equity 3. Balance sheet
Revenues and expenses.
____
Dividends.
____
Assets and liabilities.
____
1-42 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
175.Match each organization to its role.
Independent, private-sector group that is primarily 1. Financial Accounting
responsible for setting financial reporting rules in the
Standards Board
United States. ____
2. Public Company
Enforce proper application of financial reporting rules
Accounting Oversight Board
for companies whose securities are publicly traded. ____
3. International Accounting
Develop a single set of high-quality, understandable
Standards Committee 4. Securities and Exchange
global accounting standards. ____ Ensure that auditors follow strict guidelines when
Commission
conducting their audits. ____
176.Match each qualitative characteristic with its definition.
1. Predictive value
Information provides feedback on past activities.
____
All information necessary to describe an item is reported. 2. Confirmatory value
____ Information is presented in time to make useful
3. Verifiability
decisions.
____
Measurements that independent parties would agree 4. Timeliness
upon.
____
5. Neutrality
Information that does not bias the decision maker.
____
Information is useful in helping to forecast future 6. Completeness
outcomes.
____
Essay Questions
1-43 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
177.For each transaction, indicate whether a company would classify the related account as an asset, liability, stockholders' equity, dividend, revenue, or expense. Transactions
Related Accounts
1.
Receive cash from investors.
Common Stock
2.
Pay rent for the current period.
Rent Expense
3.
Purchase office equipment.
Supplies
4.
Pay cash to stockholders.
Dividends
5.
Provide services to customers.
Service Revenue
1-44 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
178.Account classifications include assets, liabilities, stockholders' equity, dividends, revenues, and expenses. Indicate the account classification for each account name. Account Classifications
Accounts
Related Transactions
1.
__________
Common Stock
Sell common stock to investors.
2.
__________
Cash
Receive cash from customers.
3.
__________
Salaries Payable
Incur amounts owed to employees.
4.
__________
Service Revenue
Sell services to customers.
5.
__________
Utilities Expense
Incur cost of utilities.
6.
__________
Supplies
Purchase of office supplies.
7.
__________
Advertising Expense
Pay for cost of advertising.
8.
__________
Buildings
Purchase factory for operations.
9.
__________
Accounts Payable
Purchase supplies on credit.
10.
__________
Dividends
Distribute cash to stockholders.
1-45 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
179.Indicate whether a company would classify the transaction as financing, investing, or operating. Transactions 1.
Receive cash from investors.
2.
Pay rent for the current period.
3.
Purchase office equipment.
4.
Pay cash to stockholders.
5.
Provide services to customers.
1-46 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
180.Below are typical transactions for a company. Indicate whether each transaction is classified as a financing, investing, or operating activity. Type of Business Activity
Transactions
1.
__________
Purchase office building
2.
__________
Pay building maintenance fees
3.
__________
Pay sales taxes to the local government
4.
__________
Provide services to customers
5.
__________
Borrow from the bank
6.
__________
Pay workers’ salaries
7.
__________
Sell equipment used in operations
8.
__________
Sell common stock to investors
1-47 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
181.Below are typical transactions for a company. Indicate whether each transaction is classified as a financing, investing, or operating activity. Type of Business
Related
Activity
Transactions
1.
__________
Sell common stock to investors.
2.
__________
Receive cash from customers.
3.
__________
Incur amounts owed to employees.
4.
__________
Sell services to customers.
5.
__________
Incur cost of utilities.
6.
__________
Purchase rent one year in advance.
7.
__________
Pay for cost of advertising.
8.
__________
Purchase factory for operations.
9.
__________
Purchase supplies on credit.
10.
__________
Distribute cash to stockholders.
1-48 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
182.At the end of the current period, Maltese, Inc. reports the following amounts: Assets = $50,000; Liabilities = $28,000; Dividends = $4,000; Revenues = $22,000; Expenses = $16,000. Calculate net income and stockholders' equity at the end of the period.
183.At the end of the current period, Rogers Company reports the following amounts: Assets = $25,000; Liabilities = $15,000; Dividends = $3,000; Revenues = $20,000; Expenses = $13,000. Calculate net income and stockholders' equity at the end of the period.
1-49 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
184.Below are the account balances for Huffman Corporation at the end of December. Use only the appropriate accounts to prepare an income statement. Accounts
Balances
Cash
$5,200
Salaries expense
2,300
Retained earnings
2,500
Advertising expense
1,200
Equipment
12,400
Service revenue
9,400
Common stock
8,000
Accounts payable
2,200
185.At the beginning of the year (January 1), Maurice and Sons has $12,000 of common stock outstanding and retained earnings of $4,200. During the year, the company reports net income of $3,200 and pays dividends of $1,200. In addition, the company issues additional common stock for $5,000. Prepare the statement of stockholders' equity at the end of the year (December 31).
1-50 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
186.Klein Interiors has the following account balances at the end of the year. Use only the appropriate accounts to prepare a balance sheet. Accounts
Balances
Equipment
$78,000
Accounts Payable
12,000
Common Stock
20,000
Service Revenue
62,000
Cash
8,000
Retained Earnings
?
Salaries Expense
38,000
Notes Payable
25,000
1-51 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
187.Thomason Financial has the following cash transactions for the year. Assume cash at the beginning of the period is $6,000. Prepare a statement of cash flows. Accounts
Amounts
Cash received for sale of services to customers
$42,000
Cash received from issuance of common stock
33,000
Cash paid to purchase office equipment
(49,000)
Cash paid to building maintenance
(7,000)
Cash paid for advertisement
(8,000)
Cash paid to workers
(18,000)
Cash paid for dividends to stockholders
(3,000)
Cash received from sale of land
7,000
Cash received from borrowing
14,000
1-52 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
188.Each of the following independent situations represents amounts shown on the four basic financial statements. Fill in the missing blanks using your knowledge of amounts that appear on the financial statements. 1. Revenues = $27,000; Expenses = $18,000; Net income = __________. 2. Increase in stockholders' equity = $20,000; Issuance of common stock = $12,000; Dividends = $5,000; Net income = __________. 3. Assets = $25,000; Liabilities = $13,000; Stockholders' equity = __________. 4. Total change in cash = +$28,000; Net operating cash flows = +$30,000; Net financing cash flows = +$18,000; Net investing cash flows = __________.
1-53 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
189.During its first five years of operations, Della Manufacturing reports net income and pays dividends as follows. Calculate the balance of retained earnings at the end of each year. Note that retained earnings will always equal $0 at the beginning of year 1. Net
Retained
Year
Income
Dividends
Earnings
1
$1,700
$1,000
___________
2
2,700
1,000
___________
3
3,200
2,000
___________
4
5,400
2,000
___________
5
7,600
3,000
___________
1-54 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
190.Below is information related to retained earnings for five independent situations. Calculate the answer to each. 1. A company reports an increase in retained earnings of $3,200 and net income of $4,800. What is the amount of dividends? 2. A company reports beginning retained earnings of $1,800, net income of $1,200, and $200 dividends. What is the amount of ending retained earnings? 3. A company reports an increase in retained earnings of $2,500 and dividends of $1,500. What is the amount of net income? 4. A company reports ending retained earnings of $2,700, net income of $900, and dividends of $500. What is the amount of beginning retained earnings? 5. A company reports an increase in retained earnings of $500 and net income of $1,200. What is the amount of dividends?
1-55 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
191.Below is balance sheet information for five independent situations. Calculate the answer to each. 1. A company reports total assets of $2,000 and total liabilities of $900. What is the amount of stockholders' equity? 2. A company reports total liabilities of $2,400 and stockholders' equity of $1,100. What is the amount of total assets? 3. A company reports total assets of $2,700 and total stockholders' equity of $700. What is the amount of total liabilities? 4. A company reports an increase in assets of $1,700 and an increase in liabilities of $400. What is the amount of the change in stockholders' equity? 5. A company reports an increase in liabilities of $300 and a decrease in stockholders' equity of $800. What is the amount of the change in total assets?
1-56 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
192.Below is cash flow information for five independent situations. Calculate the answer to each. 1. A company reports operating cash flows of $3,200, investing cash flows of $700, and financing cash flows of -$400. What is the amount of the change in total cash? 2. A company reports operating cash flows of $1,800, investing cash flows of -$400, and financing cash flows of -$1,100. If the beginning cash amount is $500, what is the ending cash amount? 3. A company reports operating cash flows of $700, investing cash flows of $300, and a change in total cash of $100. What is the amount of cash flows from financing activities? 4. A company reports operating cash flows of $600, financing cash flows of $400, and a change in total cash of $100. What is the amount of cash flows from investing activities? 5. A company reports investing cash flows of -$1,400, financing cash flows of $900, and a change in total cash of $200. What is the amount of cash flows from operating activities?
1-57 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
193.Riley Incorporated reports the following amounts at the end of the year: Cash
$3,200 Service Revenue
$92,500
Buildings
60,000 Salaries Expense
72,800
Accounts Payable
8,500 Equipment
72,000
Interest Expense
4,000 Supplies
6,400
Advertising Expense
11,300 Notes payable
40,000
In addition, the company had common stock of $65,000 at the beginning of the year and issued an additional $5,000 during the year. The company also had retained earnings of $20,700 at the beginning of the year and paid dividends of $2,000 during the year. Prepare the income statement, statement of stockholders' equity, and balance sheet.
1-58 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
194.Below are incomplete financial statements for Beasley, Incorporated. Calculate the missing amounts. Income Statement
Statement of Stockholders’ Equity Common Stock
Retained Earnings
Revenues
$(a)
Expenses:
Beginning
$25,000
Salaries
8,000 Issuances
(c)
Delivery
7,000 Net income
5,000
Utilities
5,000 Dividends
(d)
Net income
(b) Ending
$30,000
$12,000
$15,000
Balance Sheet Assets: Cash Supplies
Liabilities: $15,000 Accounts payable 7,000
15,000
Stockholders’ Equity:
Prepaid rent
(e) Common stock
(g)
Equipment
35,000 Retained earnings
(h)
Total liabilities and stockholders’ Total assets
(f) equity
(i)
1-59 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
195.Use the following information available to prepare an income statement and balance sheet on December 31 for Goldie Company. Fees for services performed during the year, $120,000 Accounts payable, $18,500 Accounts receivable, $17,300 Miscellaneous costs for the year, $8,700 Supplies on hand, $2,700 Notes payable outstanding, $30,000 Interest cost on the note for the year, $3,000 Equipment, $84,400 Cash on hand, $11,200 Salaries cost for the year, $71,500 Supplies cost for the year, $9,400 Rent cost for the year, $12,000 Common stock that has been issued, $60,000 Retained earnings at the end of the year, $7,100
1-60 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
196.Below are typical transactions for a company. Type of Business Activity
Transactions
1.
__________
Issue common stock.
2.
__________
Collect cash from a bank loan.
3.
__________
Sell products to customers.
4.
__________
Pay employees’ wages.
5.
__________
Purchase equipment for manufacturing.
6.
__________
Pay dividends to stockholders.
7.
__________
Sell factory.
8.
__________
Purchase office supplies.
9.
__________
Pay utilities.
10.
__________
Pay for maintenance on delivery vehicles.
Required: Indicate whether each transaction is classified as a financing, investing, or operating activity.
1-61 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
197.Account classifications include assets, liabilities, stockholders' equity, dividends, revenues, and expenses. Account Classifications Accounts
Related Transactions
1.
__________
Accounts Receivable
Provide services on account.
2.
__________
Land
Purchase land for operations.
3.
__________
Prepaid Rent
Purchase rent in advance.
4.
__________
Salaries Expense
Pay for cost of salaries.
5.
__________
Utilities Expense
Pay for cost of utilities.
6.
__________
Service Revenue
Provide services to customers.
7.
__________
Accounts Payable
Purchase materials on account.
8.
__________
Notes Payable
Borrow from the bank.
9.
__________
Dividends
Distribute cash to stockholders.
10.
__________
Common Stock
Issue stock to stockholders.
Required: Indicate the account classification for each account name.
1-62 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
198.Tiffany's provides financial services related to investment selections, retirement planning, and general insurance needs. For the current year, the company reports the following amounts: Advertising
$31,200 Service Revenue
$129,300
Buildings
108,000 Interest Expense
3,500
Salaries Expense
67,800 Utilities Expense
14,500
Accounts Payable
6,300 Equipment
25,700
Cash
6,400 Notes Payable
30,000
Expense
In addition, the company had common stock of $60,000 at the beginning of the year and issued an additional $15,000 during the year. The company also had retained earnings of $20,000 at the beginning of the year and paid dividends of $3,500. Required: Prepare the income statement, statement of stockholders' equity, and balance sheet for Tiffany's for the year ended December 31.
1-63 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
199 Below are incomplete financial statements. . Income Statement
Revenues
Statement of Stockholders’ Equity Common
Retained
Stock
Earnings
(a)
Expenses: Salaries
Beginning
$15,000
$11,000 Issuances
(c)
$8,000
Rent
5,000 Net income
3,000
Advertising
7,000 Dividends
(d)
Net income
(b) Ending
$18,000
$9,000
Balance Sheet Assets: Cash Supplies
Liabilities: $6,000 Accounts payable (e)
$5,000
Stockholders’ Equity:
Land
7,000 Common Stock
(g)
Buildings
14,000 Retained Earnings
(h)
Total assets
(f) Total liabilities and stockholders’ equity
(i)
Required: Calculate the missing amounts.
1-64 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
200.Simplex Corporation provides the following information at the end of the year. Salaries payable to workers at the end of the year
$3,500
Advertising expense for the year
8,700
Building that has been purchased
70,000
Supplies at the end of the year
7,500
Retained earnings
38,000
Utilities expense for the year
4,200
Note payable to the bank
21,500
Service revenue earned during the year
67,800
Salary expense for the year
24,200
Accounts payable to suppliers
6,700
Dividends paid to shareholder during the year Common stock that has been issued, including $8,000 that was issued this year
? 30,000
Cash remaining
5,500
Interest expense for the year
1,800
Accounts receivable from customers
16,700
Required: Prepare the income statement, statement of stockholders' equity, and balance sheet for Simplex Corporation on December 31. The balance of retained earnings at the beginning of the year equals $24,500.
1-65 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
201.The four underlying assumptions of generally accepted accounting principles are economic entity, monetary unit, periodicity, and going concern. Consider the following four independent situations. 1. Masterson provides music cassettes for the past 30 years. Because of the advance in electronic musical devices, customer demand has dwindled over the years to almost nothing in the current year and the company can no longer pay its debts. For the most recent year, the company reports its assets in the balance sheet at historical (original) cost. 2. Phillips Flooring specializes in the installation of wood flooring. The company has the usual business expenses: salaries, supplies, utilities, advertising, and taxes. Mr. Phillips took his wife and two sons to Six Flags. Mr. Phillips reported the airfare and hotel expenses in the income statement of Phillips Flooring. 3. Mama's Restaurant has over 200 stores throughout the Southeast. Approximately 100,000 customers visit its stores each day. Because of the continual nature of dining, the company does not publish an income statement. The company feels that it has an indefinite life and a periodic report would mislead investors. 4. Indian Packaging delivers packages between the United States and India. During the current year, the company delivered 2,000 packages for its American customers totaling $75,000 in revenue. For its Indian customers, the company delivered 1,000 packages totaling 1,500,000 Indian Rupee. The company's income statement indicates that total revenue equals 3,000 packages delivered with no corresponding amount in the income statement. Required: For each situation, indicate which of the underlying assumptions of GAAP is violated.
1-66 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
202.Listed below are several terms and definitions associated with the FASB's conceptual framework. Terms
Definitions
1. ____ Verifiability
a. Requires the consideration of the costs and value of information.
2. ____ Relevance
b. Recording transaction only for the company. c. The indefinite life of a company can be broken into definite
3. ____ Timeliness
periods.
Cost 4. ____ effectiveness
d. Accounting should be useful in making decisions.
Decision 5. ____ usefulness
e. Agreement between a measure and the phenomenon it represents.
Faithful 6. ____ representation
f. Information arrives prior to the decision.
7. ____ Materiality
g. Information is related to the decision at hand.
Economic entity 8.
____
assumption
h. Implies consensus among different measures.
Periodicity 9.
____
assumption
i. Concerns the relative size of an item and its effect on decisions.
Required: Pair each term with its related definition.
1-67 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
203.Define accounting. Describe the two primary functions of financial accounting and its role in our society.
204.Describe the three fundamental business activities that accountants measure. What account classifications are typically associated with each type of business activity?
205.List and describe the four financial statements most frequently provided to external users.
1-68 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
206.How does the value of an audit affect financial statements?
207.Define the four basic assumptions underlying Generally Accepted Accounting Principles: (a) economic entity, (b) going concern, (c) periodicity, (d) monetary unit.
1-69 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 01 A Framework for Financial Accounting Answer Key
True / False Questions
1.
Accounting is a system of maintaining records of a company's operations and communicating that information to decision makers. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-01 Describe the two primary functions of financial accounting. Topic: Defining Accounting
2.
Accounting information is used by investors to decide whether to invest in a company's stock. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-01 Describe the two primary functions of financial accounting. Topic: Defining Accounting
3.
Accounting information is used by creditors to decide whether to invest in a company's stock. FALSE Creditors lend money to a company.
AACSB: Reflective Thinking AICPA: BB Critical Thinking 1-70 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-01 Describe the two primary functions of financial accounting. Topic: Defining Accounting
4.
The primary functions of financial accounting are to measure business activities of a company and to communicate those measurements to internal parties for decision-making purposes. FALSE Financial accounting primarily serves to provide information to external parties.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-01 Describe the two primary functions of financial accounting. Topic: Defining Accounting
5.
Financing activities are transactions involving externals sources of funding. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
6.
Investing activities include the purchase and sale of long-term resources. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy
1-71 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
7.
Operating activities include transactions that relate to the primary operations of the company. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
8.
A corporation is an entity that is legally separate from its owners. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
9.
Cash, inventory, supplies, and buildings are examples of liabilities. FALSE These are examples of assets.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
1-72 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
10.
Amounts owed to suppliers, employees, the government in the form of taxes, and utility companies are examples of liabilities. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
11.
If total assets of a company equal $12,000 and total stockholders' equity equals $4,000, then total liabilities equal $8,000. TRUE AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
12.
If total liabilities of a company equal $16,000 and total stockholders' equity equals $9,000, then total assets equal $7,000. FALSE Total assets = Total liabilities ($16,000) + Total stockholders' equity ($9,000) = $25,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
1-73 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
13.
The accounting equation shows that a company's resources equal creditors' and owners' claims to those resources. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
14.
The costs related to rent, utilities, and salaries in the current reporting period are examples of liabilities. FALSE These are examples of expenses.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
15.
The difference between revenues and expenses is referred to as net income or net loss. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
1-74 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
16.
If a company reports revenues of $17,000 and expenses of $12,000, then net income equals $5,000. TRUE AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
17.
Expenses are regular cash payments by a corporation to its stockholders. FALSE Dividends are payments to stockholders.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
18.
Dividends represent a return of the company's profits to its owners, the stockholders. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
1-75 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
19.
One of the differences between a partnership and a corporation is that owners of a partnership have limited liability. FALSE Stockholders of a corporation have limited liability.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
20.
Limited liability means the stockholders are not held personally responsible for the financial obligations of the corporation. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
21.
One advantage of the corporate form of business is double taxation. FALSE Double taxation is a disadvantage of the corporate form of business.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
1-76 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
22.
Double taxation refers to a corporation's income being taxed twice—first when the company pays corporate income taxes on income it earns, and then again when stockholders pay personal income taxes when the company distributes that income as dividends to them. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
23.
Financial statements are periodic reports published by the company for the purpose of providing information to managers. FALSE Financial statements are designed to provide information to external users.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
24.
The balance sheet is a financial statement that reports the company's revenues and expenses over an interval of time. FALSE The income statement reports revenues and expenses.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation
1-77 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
25.
The statement of stockholders' equity is a financial statement that summarizes the changes in stockholders' equity over an interval of time. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
26.
The two primary components of stockholders' equity include common stock and revenue. FALSE The two components of stockholders' equity include common stock and retained earnings.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
27.
Common stock represents an external source of stockholders' equity, whereas retained earnings represents an internal source. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation
1-78 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
28.
Retained earnings represents the cumulative amount of net income, over the life of the company, that has not been distributed to stockholders as dividends. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
29.
Dividends are considered an expense in running the business and reported in the income statement. FALSE Dividends are a distribution of resources to owners and not considered a cost in running the business to produce revenues. Dividends are reported in the statement of stockholders' equity.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
1-79 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
30.
All cash transactions reported in the statement of cash flows are classified as (1) operating activities, (2) investing activities, or (3) financing activities. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
31.
Investing cash flows generally include cash receipts and cash payments for transactions involving revenue and expense activities during the period. FALSE These are operating activities.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
32.
Operating cash flows generally include cash transactions for the purchase and sale of investments and long-term assets. FALSE These are investing activities.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium 1-80 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
33.
Financing cash flows include cash transactions with lenders, such as borrowing money and repaying debt, and with stockholders, such as issuing stock and paying dividends. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
34.
Any transaction that affects the income statement ultimately affects the balance sheet through the balance of retained earnings. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
35.
Financial accounting has an impact on everyday business decisions as well as wideranging economic consequences. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-04 Describe the role that financial accounting plays in the decision-making process. Topic: Making Decisions with Accounting Information
1-81 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
36.
Investors and creditors rely heavily on financial accounting information in making investment and lending decisions. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-04 Describe the role that financial accounting plays in the decision-making process. Topic: Making Decisions with Accounting Information
37.
In general, if a company's net income is increasing, so will its stock price. TRUE AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 01-04 Describe the role that financial accounting plays in the decision-making process. Topic: Making Decisions with Accounting Information
38.
The rules of financial accounting are called Generally Accepted Accounting Principles (GAAP). TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Topic: Financial Accounting Standards
1-82 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
39.
Financial accounting and reporting standards in the United States are established primarily by the Financial Accounting Standards Board (FASB). TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Topic: Financial Accounting Standards
40.
The 1933 Securities Act and the 1934 Securities Exchange Act were designed to restore investor confidence in financial accounting following the stock market crash in 1929. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Topic: Financial Accounting Standards
41.
The 1934 Securities Exchange Act gives the Securities and Exchange Commission (SEC) the power to require companies that publicly trade their stock to prepare periodic financial statements for distribution to investors and creditors. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Topic: Financial Accounting Standards
1-83 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
42.
The role of independent auditors is to help ensure that management has in fact appropriately applied Generally Accepted Accounting Principles (GAAP) in preparing the company's financial statements. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Topic: Financial Accounting Standards
43.
Auditors are trained individuals hired by a company as an independent party to express a professional opinion of the fairness of that company's financial statements. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Topic: Financial Accounting Standards
44.
The primary objective of financial accounting is to provide useful information to managers in making decisions. FALSE Financial accounting is intended primarily to provide information to investors and creditors.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of 1-84 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
GAAP in financial accounting. Topic: Financial Accounting Standards
45.
Public accounting firms are professional service firms that traditionally have focused on three areas: auditing, tax preparation/planning, and business consulting. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-06 Identify career opportunities in accounting. Topic: Career Options in Accounting
46.
The Financial Accounting Standards Board's conceptual framework does not prescribe Generally Accepted Accounting Principles. It provides an underlying foundation for the development of accounting standards and interpretation of accounting information. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium
Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Topic: Conceptual Framework
Multiple Choice Questions
1-85 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
47.
What is the primary purpose of financial accounting?
A. Determine the amount of tax liability owed to the government. B. Communicate business activities to internal management. C. Measure business activities and communicate those measures to external users to make decisions. D. Measure the profitability of the company in order to assist employees with making decisions. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-01 Describe the two primary functions of financial accounting. Topic: Defining Accounting
48.
The primary purpose(s) of financial accounting is(are) to:
A. Measure and record business transactions. B. Prepare federal and state tax returns. C. Communicate financial results to investors and creditors. D. Both measure and communicate financial information to external parties. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-01 Describe the two primary functions of financial accounting. Topic: Defining Accounting
1-86 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
49.
Which definition below best describes financial accounting?
A. Process of measuring income taxes owed to the government. B. System of maintaining communication with a company's customers and suppliers. C. Procedures designed to enhance the company's image to potential investors. D. Measuring business activities and communicating them to external parties. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-01 Describe the two primary functions of financial accounting. Topic: Defining Accounting
50.
Financial accounting does not deal with which of the following?
A. Measuring a company's economic activity. B. Providing information to internal users. C. Preparing financial reports. D. Communicating financial results to investors. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-01 Describe the two primary functions of financial accounting. Topic: Defining Accounting
51.
Financial accounting:
A. Provides information primarily for external decision makers. B. Provides information primarily for a company's employees. C. Provides information primarily for the use of managers of the company. D. Is primarily used to compute a company's tax obligation. AACSB: Reflective Thinking AICPA: BB Critical Thinking 1-87 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-01 Describe the two primary functions of financial accounting. Topic: Defining Accounting
52.
The primary focus for financial accounting information is to provide information useful for: Investing decisions
Credit decisions
a.
Yes
Yes
b.
Yes
No
c.
No
Yes
d.
No
No
A. Investment decisions and credit decisions. B. Investment decisions but not credit decisions. C. Credit decisions but not investment decisions. D. Neither investment decisions nor credit decisions AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-01 Describe the two primary functions of financial accounting. Topic: Defining Accounting
53.
Which of the following groups is not among the external users for whom financial statements are prepared?
A. Creditors. B. Regulators. C. Investors. D. Managers. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember
1-88 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 1 Easy Learning Objective: 01-01 Describe the two primary functions of financial accounting. Topic: Defining Accounting
54.
The form of business organization that is legally separate from its owners is a:
A. Partnership. B. Sole proprietorship. C. Corporation. D. Separation entity. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
55.
Which business form has the advantage of limited liability?
A. Corporation. B. Sole proprietorship. C. Partnership. D. All business forms share equal limited liability. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
1-89 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
56.
Limited liability means:
A. Stockholders of a corporation are not obligated to pay the corporation's debts out of their own pocket. B. Liabilities of a company cannot exceed its assets. C. Companies are not allowed to borrow unless they are profitable. D. Companies are less likely to be sued if they are formed as a corporation. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
57.
One disadvantage of the corporate form of business is:
A. Limited liability. B. Access to more capital. C. Smaller in size. D. Double taxation. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
58.
Which of the following is an operating activity?
A. Issuing common stock. B. Paying dividends. C. Borrowing cash from a bank to acquire a factory. D. Paying electricity bills for the month. AACSB: Reflective Thinking 1-90 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
59.
How many of the following transactions are operating activities? Borrowed $50,000 from the bank Purchased $12,000 in supplies Provide services to customers for $27,000 Paid the utility bill of $750 Purchased a delivery truck for $12,000 Received $25,000 from issuing common stock
A. One. B. Two. C. Three. D. Four. (1) Purchased supplies, (2) Provided services to customers, and (3) Paid utility bill.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
1-91 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
60.
Transactions related to the primary business activities of the company, such as selling goods and services to customers, are referred to as:
A. Investing activities. B. Operating activities. C. Management activities. D. Financing activities. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
61.
Stimpleton Company engages in the following cash payments: Purchase equipment Pay rent
$2,000 500
Repay loan to the bank
5,000
Pay worker's salaries
1,000
What is the total amount of cash paid for operating activities?
A. $6,000. B. $2,000. C. $7,000. D. $1,500. $500 + $1,000 = $1,500.
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
1-92 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
62.
Accountants are responsible for measuring various operating, investing and financing activities. Which of the following correctly matches the activity with its type?
A. Investing - paying utilities for the month. B. Investing - purchasing land. C. Operating - paying dividends to stockholders. D. Financing - selling equipment for cash. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
63.
Transactions of a company that include the purchase and sale of long-term assets are referred to as:
A. Investing activities. B. Financing activities. C. Expenditure activities. D. Operating activities. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
1-93 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
64.
McGill purchases additional office equipment to better serves its customers. This purchase is classified as what type of activity?
A. Company activity. B. Financing activity. C. Investing activity. D. Operating activity. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
65.
Transactions of a company involving external sources of funding are referred to as:
A. Investing activities. B. Financing activities. C. External activities. D. Operating activities. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
66.
Financing activities include:
A. Primary operations such as selling goods to customers. B. Transactions with company employees. C. Transactions involving external sources of funding. D. The purchase and sale of long-term assets. AACSB: Reflective Thinking 1-94 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
67.
Financing activities include:
A. The purchase of a building. B. Issuing common stock to stockholders. C. Transactions with company employees. D. Selling goods or services to customers. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
68.
The accounting equation is defined as:
A. Assets = Liabilities + Stockholders' Equity. B. Assets = Liabilities - Stockholders' Equity. C. Net Income = Revenues - Expenses. D. Liabilities + Revenues = Assets. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
1-95 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
69.
Which statement below best describes the accounting equation?
A. The change in retained earnings equals net income less dividends. B. Equality of revenue and expense transactions over time. C. Resources of the company equal creditors' and owners' claims to those resources. D. Financing activities equal investing and operating activities. Assets = Liabilities + Stockholders' Equity.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
70.
If a company has stockholders' equity of $60,000 at the end of the year, which of the following statements must be true?
A. The company's assets exceed liabilities by $60,000. B. The company has issued $60,000 of common stock. C. Net income for the year equals $60,000. D. Total revenues during the year equal $60,000. Assets - Liabilities = Stockholders' Equity.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
1-96 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
71.
Emmitt had the following final balances after the first year of operations: assets, $55,000; stockholders' equity, $25,000; dividends, $3,000; and net income, $10,000. What is the amount of Emmitt's liabilities?
A. $55,000. B. $30,000. C. $13,000. D. $7,000. Assets ($55,000) = Liabilities + Stockholders' Equity ($25,000).
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
72.
An alternative form of the accounting equation is:
A. Net Income = Revenues - Expenses. B. Stockholders' Equity = Assets + Liabilities. C. Assets = Liabilities - Stockholders' Equity. D. Assets - Liabilities = Stockholders' Equity. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
1-97 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
73.
The accounts that represent the resources of the company are called:
A. Liabilities. B. Revenues. C. Expenses. D. Assets. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
74.
The assets of a company represent:
A. Amounts owed to creditors. B. Sales of goods or services to customers. C. Resources that will be used to benefit the company. D. Investments by stockholders. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
75.
Which of the following accounts represents a resource of the company?
A. Common stock. B. Service revenue. C. Accounts receivable. D. Salaries expense. AACSB: Reflective Thinking AICPA: FN Measurement 1-98 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
76.
Which of the following does not represent an asset of a company?
A. Supplies held by the company. B. Amounts owed to suppliers. C. Equipment owned and used for operations. D. Amounts receivable from customers. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
77.
Creditors' claims to a corporation's resources are referred to as:
A. Dividends. B. Assets. C. Liabilities. D. Stockholders' equity. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
1-99 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
78.
Liabilities are best defined as:
A. Amounts the company expects to collect in the future from customers. B. Debts or obligations the company owes resulting from past transactions. C. The amounts that owners have invested in the business. D. Payments to stockholders. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
79.
Amounts owed to suppliers for supplies purchased on account are defined as a(n):
A. Revenue. B. Asset. C. Liability. D. Expense. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
80.
Which of the following does not represent a liability of a company?
A. Salaries owed to employees. B. Taxes owed to the government. C. Amounts owed to suppliers. D. All of the other answers are liabilities. AACSB: Reflective Thinking AICPA: FN Measurement 1-100 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
81.
The accounts that represent resources owed to creditors are called:
A. Assets. B. Liabilities. C. Dividends. D. Stockholders' equity. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
82.
Liabilities can be best described as:
A. The amount of expenses over the past year. B. The amount expected to be distributed to stockholders. C. The amount owed to creditors. D. The amount of services provided to customers during the year. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
1-101 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
83.
The stockholders' interest in a corporation is called:
A. Dividends. B. Assets. C. Liabilities. D. Stockholders' equity. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
84.
Stockholders' claims to the company's resources are referred to as:
A. Stockholders' equity. B. Revenues. C. Assets. D. Liabilities. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
1-102 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
85.
Using the information below from the accounting records of Thomas Corporation, stockholders' claims to the company's resources amount to: Assets
$1,200,000
Liabilities
$800,000
Net income
$100,000
Retained earnings
$250,000
A. $1,200,000. B. $800,000. C. $250,000. D. $400,000. Stockholders' claims (Stockholders' Equity) = Assets ($1,200,000) - Liabilities ($800,000)
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
86.
Which of the following best describes revenue?
A. Resources of a company. B. Sales of goods and services to a customer. C. Cash received from a customer. D. Dividends paid to stockholders. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
1-103 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
87.
The costs of providing goods and services to customers are referred to as:
A. Assets. B. Expenses. C. Liabilities. D. Revenues. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
88.
The costs associated with producing revenues are referred to as:
A. Dividends. B. Assets. C. Liabilities. D. Expenses. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
89.
Net income can best be described as:
A. Net cash received by a company during the year. B. Revenues minus expenses. C. The amount of profits retained in a company for the year. D. Resources of a company. AACSB: Reflective Thinking AICPA: BB Critical Thinking 1-104 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
90.
Use the following appropriate amounts to calculate net income: Revenues, $12,000; Liabilities, $5,000; Expenses, $4,000; Assets, $19,000; Dividends, $4,000.
A. $6,000. B. $8,000. C. $4,000. D. $14,000. Revenues ($12,000) - Expenses ($4,000) = Net Income.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
91.
The account type that represents payments to stockholders is called:
A. Liabilities. B. Assets. C. Stockholders' equity. D. Dividends. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
1-105 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
92.
Dividends represent:
A. Resources of the company. B. Cash payments to stockholders. C. Amounts owed to creditors. D. Expenses of operating the company. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
93.
The equation best describing the income statement is:
A. Revenues - Expenses = Net Income. B. Assets = Revenues - Expenses. C. Assets = Liabilities + Stockholders' Equity. D. Revenues + Expenses = Net Income. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
94.
Expenses are shown in which of the following statements?
A. Income statement. B. Statement of cash flows. C. Balance sheet. D. Statement of stockholders' equity. AACSB: Reflective Thinking 1-106 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
95.
Which of the following items would not appear in an income statement?
A. Salaries expense. B. Advertising expense. C. Service revenue. D. Cash. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
96.
Which of the following items would not appear in an income statement?
A. Delivery Expense. B. Accounts Payable. C. Service Revenue. D. Utilities Expense. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
1-107 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
97.
Consider the following account balances of the Shattuck Law Firm at the end of the year: Accounts Payable
$4,400
Salaries Expense
12,800
Cash
1,700
Common Stock
2,400
Service Revenue
8,300
Supplies
4,300
Retained Earnings
1,100
Utilities Expense
5,000
How many of these accounts would appear in Shattuck's year-end income statement?
A. Five. B. Four. C. Three. D. Two. Salaries Expense, Service Revenue, and Utilities Expense.
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Apply Difficulty: 3 Hard Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
98.
Net income (loss) appears in which two financial statements?
A. Balance sheet and income statement. B. Income statement and statement of stockholders' equity. C. Statement of stockholders' equity and balance sheet. D. Net income appears in only one financial statement. AACSB: Reflective Thinking AICPA: FN Reporting 1-108 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
99.
Which of the following items is reported in the statement of stockholders' equity?
A. Total assets. B. Total expenses. C. Net income. D. Operating cash flows. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
100.
Which of the following accounts appears in the statement of stockholders' equity?
A. Accounts Payable. B. Accounts Receivable. C. Common Stock. D. Supplies. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
1-109 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
101.
Which of the following accounts appears in the statement of stockholders' equity?
A. Supplies. B. Cash. C. Salaries Payable. D. Retained Earnings. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
102.
Which one of the following statements regarding financial reports is correct?
A. The balance sheet classifies all assets according to operating, investing, and financing activities. B. The income statement is used to show that a company's resources equal claims to those resources. C. The statement of stockholders' equity updates the balances of common stock and retained earnings for related transactions during the year. D. The statement of cash flows shows cash inflows and outflows from operating activities only. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
1-110 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
103.
Which of the following best explains the meaning of total stockholders' equity?
A. The difference between total revenues and total expenses, less dividends for the year. B. The amount of common stock less dividends over the life of the company. C. All revenues, expenses, and dividends over the life of the company. D. The amount of capital invested by stockholders plus profits retained over the life of the company. Total stockholders' equity equals the amount of common stock plus retained earnings. Common stock is the amount of capital invested by stockholders, and retained earnings are profits retained over the life of the company.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
104.
Which of the following statements regarding financial reports is not correct?
A. A balance sheet contains assets, liabilities, and stockholders' equity information. B. An income statement shows revenues and expenses. C. A statement of stockholders' equity reports revenues, net income, and dividends information. D. A statement of cash flows shows cash inflows and outflows from operating, investing, and financing activities. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
1-111 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
105.
Retained earnings at the end of the year is calculated using:
A. Beginning retained earnings, net income, and dividends. B. Common stock and dividends. C. Stockholders' equity, net income, and dividends. D. Net income and dividends. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
106.
DW has an ending Retained Earnings balance of $51,100. If during the year DW paid dividends of $4,300 and had net income of $22,500, then what was the beginning Retained Earnings balance?
A. $24,300. B. $32,900. C. $300. D. $69,300. Beginning Retained Earnings + Net Income ($22,500) - Dividends ($4,300) = Ending Retained Earnings ($51,100).
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
1-112 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
107.
The ending Retained Earnings balance of Boomer Inc. decreased by $1.0 million from the beginning of the year. The company declared a dividend of $5.4 million during the year. What was the net income for the year?
A. $7.5 million. B. $6.4 million. C. $4.4 million. D. $1.0 million. Beginning Retained Earnings ($0) + Net Income - Dividends ($5.4) = Ending Retained Earnings ($-1.0).
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
1-113 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
108.
Given the information below about Thomas Corporation, what was the amount of dividends the company paid in the current period? Beginning retained earnings
$54,000
Ending retained earnings
$110,000
Decrease in cash
$10,000
Net income
$84,000
Change in stockholders’ equity
$15,000
A. $13,000. B. $110,000. C. $28,000. D. $18,000. Beginning Retained Earnings ($54,000) + Net Income ($84,000) - Dividends = Ending Retained Earnings ($110,000).
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
1-114 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
109.
Given the information below about David Corporation, what was the amount of dividends the company paid in the current period?
A. $140,000. B. $0. C. $30,000. D. $20,000. Beginning Retained Earnings ($35,000) + Net Income ($85,000) - Dividends = Ending Retained Earnings ($90,000).
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
1-115 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
110.
For the past five years, Mookie Consulting Services reported the following annual net income and dividend amounts: Year
Net Income
Dividends
1
$22,000
$2,000
2
17,000
2,000
3
9,000
1,000
4
14,000
3,000
5
25,000
4,000
If Mookie had Retained Earnings of $88,000 at the end of year 5, what was the company's Retained Earnings at the beginning of Year 1?
A. $13,000. B. $25,000. C. $7,000. D. $1,000. Beginning retained earnings = ending retained earnings ($88,000) - total net income ($87,000) + total dividends ($12,000).
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
1-116 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
111.
Sooner Company had a net income of $8,000, $5,000, $12,000, and $10,000 over the first four years of the company's existence. If the average annual amount of dividends paid over the last four years is $3,000, what is the ending retained earnings balance?
A. $47,000. B. $35,000. C. $23,000. D. $7,000. Beginning Retained Earnings ($0) + Net Income ($8,000 + $5,000 + $12,000 + $10,000) Dividends ($3,000 * 4) = Ending Retained Earnings.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
112.
Nina Corp. had the following net income (loss) the first three years of operation: $7,100, ($1,600), and $3,600. If the Retained Earnings balance at the end of year three is $1,100, what was the total amount of dividends paid over these three years?
A. $500. B. $0. C. $9,100. D. $8,000. Beginning Retained Earnings ($0) + Net Income ($7,100 - $1,600 + $3,600) - Dividends = Ending Retained Earnings ($1,100).
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard 1-117 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
113.
Aikman Company has paid dividends of $2,410, $0, $1,570 and $1,060 over the first four years of the company's existence. If Retained Earnings after year four has an ending balance of $9,700, what is the average annual amount of net income (loss) over the past four years for Aikman?
A. $3,685. B. $14,740. C. $840. D. $1,260. Beginning Retained Earnings ($0) + Net Income - Dividends ($2,410 + $0 + $1,570 + $1,060) = Ending Retained Earnings ($9,700). Divide net income amount by 4 to get average.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
1-118 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
114.
On January 1, Gucci Brothers Inc. started the year with a $492,000 balance in Retained Earnings and a $605,000 balance in Common Stock. During the year, the company reported net income of $92,000, paid a dividend of $15,200, and issued more common stock for $27,500. What is total stockholders' equity at the end of the year?
A. $1,231,700. B. $1,097,000. C. $1,201,300. D. $1,588,300. Stockholders Equity = Common Stock ($605,000 + $27,500) + Retained Earnings ($492,000 + $92,000 - $15,200).
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
115.
The financial statement that represents the accounting equation is the:
A. Income statement. B. Statement of cash flows. C. Balance sheet. D. Statement of stockholders' equity. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
1-119 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
116.
The equation best describing the balance sheet is:
A. Assets = Liabilities + Stockholders' Equity. B. Revenues - Expenses = Net Income. C. Ending Retained Earnings + Dividends = Net Income. D. Revenues + Expenses = Net Income. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
117.
The financial statement that represents activity over the entire life of the company is the:
A. Income statement. B. Balance sheet. C. Statement of financial accounting. D. Statement of cash flows. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
1-120 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
118.
Liabilities are shown in which of the following statements?
A. Income statement. B. Statement of cash flows. C. Balance sheet. D. Statement of stockholders' equity. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
119.
Consider the following account balances of the Shattuck Law Firm at the end of the year: Accounts Payable
$4,400
Salaries Expense
12,800
Cash
1,700
Common Stock
2,400
Service Revenue
8,300
Supplies
4,300
Retained Earnings
1,100
Utilities Expense
5,000
How many of these accounts would appear in Shattuck's year-end balance sheet?
A. Five. B. Four. C. Three. D. Two. Accounts Payable, Cash, Common Stock, Supplies, and Retained Earnings.
AACSB: Reflective Thinking 1-121 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Reporting Blooms: Apply Difficulty: 3 Hard Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
120.
The two categories of stockholders' equity usually found in the balance sheet of a corporation are:
A. Common stock and liabilities. B. Assets and liabilities. C. Common stock and retained earnings. D. Revenues and expenses. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
121.
Which of the following is not a balance sheet item?
A. Assets. B. Retained Earnings. C. Expenses. D. Liabilities. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
1-122 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
122.
Which of the following is a balance sheet item?
A. Net Income. B. Dividends. C. Utilities Expense. D. Cash. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
123.
Which of the following statements is NOT correct about the financial statements?
A. An income statement reports revenues, expenses, and net income information. B. The statement of stockholders' equity presents common stock, dividends, and retained earnings information. C. A balance sheet reports assets, liabilities, revenues, and expenses. D. The statement of cash flows shows cash inflows and outflows from operating, financing, and investing activities. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
1-123 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
124.
The balance sheet depicts which of the following equations?
A. Net income = revenue - expenses. B. Ending retained earnings = beginning retained earnings + net income - dividends. C. Assets = liabilities + stockholders' equity. D. Net cash flows = total cash inflows - total cash outflows. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
125.
Which of the following financial statements reports a company's retained earnings?
A. Income statement. B. Balance sheet. C. Statement of cash flows. D. All of the other answers are statements that report retained earnings. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
1-124 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
126.
Which of the following is not a balance sheet item?
A. Assets. B. Common stock. C. Retained earnings. D. Revenues. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
127.
Which of the following is not a major section in the statement of cash flows?
A. Cash flows from operating activities. B. Cash flows from customers. C. Cash flows from financing activities. D. Cash flows from investing activities. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
1-125 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
128.
Cash paid for which of the following activities would affect the amount reported for operating cash flows in the statement of cash flows?
A. Issuing common stock. B. Paying dividends. C. Paying electricity bill for the month. D. Borrowing cash from a bank to acquire a factory. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
129.
How many of the following transactions would affect operating cash flows reported in the statement of cash flows (all transaction involve cash)? Borrowed $50,000 from the bank Purchased $12,000 in supplies Provide services to customers for $27,000 Paid the utility bill of $750 Purchased a delivery truck for $12,000 Received $25,000 from issuing common stock
A. One. B. Two. C. Three. D. Four. (1) Purchased supplies, (2) Provided services to customers, and (3) Paid utility bill.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard 1-126 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
130.
Investing cash flows in the statement of cash flows would include which of the following?
A. Paying salaries for the month. B. Purchase of land. C. Paying dividends to stockholders. D. Selling goods or services to customers. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
131.
FlintCo purchases additional office equipment to better serves its customers. This cash purchase is reported in the statement of cash flows as what type of activity?
A. Company activity. B. Investing activity. C. Financing activity. D. Operating activity. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
1-127 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
132.
Financing cash flows in the statement of cash flows would include which of the following?
A. Paying salaries for the month. B. Purchase of land. C. Paying dividends to stockholders. D. Selling goods or services to customers. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
133.
Cash received from bank borrowing would be reported in the statement of cash flows as what type of activity?
A. Investing. B. Organizing. C. Operating. D. Financing. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
1-128 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
134.
If total change in cash = $44,000, net operating cash flows = $22,000, and net investing cash flows = ($13,000); then net financing cash flows =
A. $15,000. B. $35,000. C. $25,000. D. $45,000. Total change in cash = net operating cash flows + net investing cash flows + net financing cash flows.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
135.
The financial statement(s) that record activity over an interval of time include the:
A. Income statement. B. Balance sheet. C. Balance sheet and income statement. D. Income statement and statement of cash flows. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
1-129 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
136.
Which of the following is the correct order for preparing the financial statements listed?
A. Balance sheet, statement of stockholders' equity, and income statement. B. Balance sheet, income statement, and statement of stockholders' equity. C. Statement of stockholders' equity, income statement, and balance sheet. D. Income statement, statement of stockholders' equity, and balance sheet. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
137.
In what order are the following financial statements prepared: (1) balance sheet, (2) income statement, and (3) statement of stockholders' equity?
A. 1, 2, 3. B. 3, 2, 1. C. 1, 3, 2. D. 2, 3, 1. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
1-130 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
138.
Which financial statement is typically prepared first?
A. Balance sheet. B. Income statement. C. Statement of stockholders' equity. D. Statement of cash flows. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
139.
Which of the following best represents value created for stockholders during the current period?
A. Retained earnings. B. Total assets. C. Net income. D. Stockholders' equity. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-04 Describe the role that financial accounting plays in the decision-making process. Topic: Making Decisions with Accounting Information
1-131 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
140.
Which of the following has the single greatest impact on stock prices?
A. Total dividends. B. Total assets. C. Total revenues. D. Net income. AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-04 Describe the role that financial accounting plays in the decision-making process. Topic: Making Decisions with Accounting Information
141.
Which financial accounting number impacts stock prices more than any other single piece of information?
A. Retained earnings. B. Net income. C. Common stock. D. Total assets. AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-04 Describe the role that financial accounting plays in the decision-making process. Topic: Making Decisions with Accounting Information
1-132 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
142.
Which financial statement best reveals to investors and creditors information about a company's debt?
A. Income statement. B. Balance sheet. C. Statement of cash flows. D. Statement of stockholders' equity. AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-04 Describe the role that financial accounting plays in the decision-making process. Topic: Making Decisions with Accounting Information
143.
GAAP is an abbreviation for:
A. Generally authorized accounting procedures. B. Generally applied accounting procedures. C. Generally accepted auditing practices. D. Generally accepted accounting principles. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Topic: Financial Accounting Standards
1-133 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
144.
Generally Accepted Accounting Principles (GAAP) are best defined as:
A. Standards or methods for presenting financial accounting information. B. Government-mandated rules that companies must follow. C. Rules that best estimate profitability for a company. D. The group of individuals that create and enforce all accounting rules. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Topic: Financial Accounting Standards
145.
The body of rules and procedures that guide the measurement and communication of financial accounting information in the United States is known as:
A. Standards of Professional Compliance (SPC). B. Generally Accepted Accounting Principles (GAAP). C. Generally Accepted Auditing Standards (GAAS). D. Rules of Financial Reporting (RFR). AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Topic: Financial Accounting Standards
1-134 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
146.
The independent, private-sector group that is primarily responsible for setting financial reporting standards in the United States is the:
A. FASB. B. IASB. C. SEC. D. IRS. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Topic: Financial Accounting Standards
147.
Financial accounting and reporting standards in the United States are established primarily by the:
A. Securities and Exchange Commission. B. Financial Accounting Standards Board. C. International Accounting Standards Board. D. U.S. Congress. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Topic: Financial Accounting Standards
1-135 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
148.
The private sector organization that is currently responsible for setting accounting standards in the United States is the:
A. Financial Accounting Standards Board. B. Accounting Principles Board. C. Securities and Exchange Commission. D. American Institute of Certified Public Accountants. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Topic: Financial Accounting Standards
149.
The legal authority to set accounting standards lies with the:
A. Financial Accounting Standards Board. B. Accounting Principles Board. C. Securities and Exchange Commission. D. American Institute of Certified Public Accountants. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Topic: Financial Accounting Standards
1-136 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
150.
The International Accounting Standards Board:
A. Is governed by the U.S. Securities and Exchange Commission. B. Can overrule the FASB when their policies disagree. C. Promotes the use of high-quality, understandable global accounting standards. D. Is the primary standard-setting body in the United States. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Topic: Financial Accounting Standards
151.
Financial accounting objectives do not include providing information:
A. Useful to investors and creditors in making decisions. B. To determine market values, assess profit potential, and evaluate management. C. Helpful to investors in predicting cash flows. D. That tells about a company's economic resources and claims to those resources. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Topic: Financial Accounting Standards
1-137 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
152.
Which statement below best describes the objectives of financial accounting?
A. Provide information that helps predict cash flows. B. Provide information about the economic resources, claims to resources and changes in resources and claims. C. Provide information that is useful in making decisions. D. All of the other answers are objectives of financial accounting. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Topic: Financial Accounting Standards
153.
Of the following, the most important objective for financial accounting is to provide information useful for:
A. Predicting cash flows. B. Determining taxable income. C. Providing accountability. D. Increasing future profits. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Topic: Financial Accounting Standards
1-138 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
154.
Independent auditors express an opinion on the:
A. Fairness of financial statements. B. Amount of income taxes a company owes to the government. C. Quality of the company's products. D. Quality of a company's workforce. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Topic: Financial Accounting Standards
155.
The term "cooking the books" refers to:
A. Purposely providing misleading financial information to investors and creditors. B. Hiring an auditor to provide independent verification of the fairness of financial statements. C. Filing all tax-related statements by the required deadline. D. Preparing internal budgets to plan for expenditures in the following year. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Topic: Financial Accounting Standards
1-139 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
156.
Fundamental qualitative characteristics of accounting information are:
A. Relevance and comparability. B. Comparability and consistency. C. Faithful representation and relevance. D. Faithful representation and consistency. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Topic: Conceptual Framework
157.
The qualitative characteristic that says accounting information can influence users' decisions by allowing them to assess past performance is:
A. Timeliness. B. Neutrality. C. Confirmatory value. D. Predictive value. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Topic: Conceptual Framework
1-140 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
158.
Accounting information that does not provide measurement bias in favor of a particular set of companies has the characteristic of:
A. Relevance. B. Consistency. C. Materiality. D. Neutrality. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Topic: Conceptual Framework
159.
If accounting information is considered to have faithful representation, then which of the following is true?
A. The information represents to users what it claims to represent. B. The information follows conservatism principles and is also material. C. The information is considered pertinent to or affects decisions. D. The information will have predictive value, feedback value, and is timely. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Topic: Conceptual Framework
1-141 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
160.
For accounting information to be relevant, it should possess which of the following characteristics?
A. Predictive value, confirmatory value, and/or materiality. B. Large in amount and timely. C. Comparability or consistency. D. Verifiability. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Topic: Conceptual Framework
161.
Materiality is based upon which factor(s)?
A. Timeliness of an item. B. Amount and nature of an item. C. Consistency of an item. D. Relevance of an item. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Topic: Conceptual Framework
1-142 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
162.
The conceptual framework's qualitative characteristic of relevance includes:
A. Predictive value. B. Verifiability. C. Completeness. D. Neutrality. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Topic: Conceptual Framework
163.
The conceptual framework's qualitative characteristic of faithful representation includes:
A. Predictive value. B. Neutrality. C. Confirmatory value. D. Comparability. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Topic: Conceptual Framework
1-143 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
164.
Constraints on qualitative characteristics of accounting information include:
A. Freedom from material error. B. Going concern. C. Neutrality. D. Cost effectiveness. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Topic: Conceptual Framework
165.
Enhancing qualitative characteristics of accounting information include:
A. Relevance and comparability. B. Comparability and consistency. C. Faithful representation and relevance. D. Cost effectiveness and materiality. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Topic: Conceptual Framework
1-144 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
166.
The major underlying assumptions of accounting include all of the following except:
A. Economic entity. B. Monetary unit. C. Legal liability. D. Going concern. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Topic: Conceptual Framework
167.
If a company has gone bankrupt, its financial statements likely violate the:
A. Periodicity assumption. B. Monetary unit assumption. C. Going concern assumption. D. Economic entity assumption. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Topic: Conceptual Framework
1-145 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
168.
The assumption that a business will continue to operate into the future is the:
A. Monetary unit assumption. B. Periodicity assumption. C. Economic entity assumption. D. Going concern assumption. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Topic: Conceptual Framework
169.
The assumption that the assets and liabilities of the business are accounted for on the books of the company but not included in the records of the owner is the:
A. Monetary unit assumption. B. Economic entity assumption. C. Going concern assumption. D. Periodicity assumption. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Topic: Conceptual Framework
1-146 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
170.
The assumption that the life of the business can be divided into time intervals for reporting purposes is the:
A. Monetary unit assumption. B. Periodicity assumption. C. Economic entity assumption. D. Going concern assumption. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Topic: Conceptual Framework
171.
The assumption that amounts are reported using a common scale (such as the dollar in the United States) is the:
A. Monetary unit assumption. B. Periodicity assumption. C. Economic entity assumption. D. Going concern assumption. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Topic: Conceptual Framework
Matching Questions
1-147 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
172.
Match each account classification with its example.
1. Liabilities
Land owned by a company. 5
2. Revenues
Amounts owed to the bank. 1
3. Dividends
Common stock issued to investors. 4
4. Stockholders' equity
Payments made to stockholders. 3
5. Assets
Cleaning services provided to customers. 2
6. Expenses
Workers' salaries for the current period. 6 AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
173.
Match each business activity with its example.
1. Operating
Receive investments from stockholders.
2
2. Financing
Purchase office building. 3
3. Investing
Pay utilities. 1 AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
174.
Match each financial statement with the accounts reported in it.
1. Income statement
Revenues and expenses.
1
Dividends.
2
Assets and liabilities.
3
2. Statement of stockholders' equity 3. Balance sheet
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Understand Difficulty: 2 Medium 1-148 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
175.
Match each organization to its role.
Independent, private-sector group that is primarily 1. Financial Accounting
responsible for setting financial reporting rules in the
Standards Board
United States. 1 Enforce proper application of financial reporting
2. Public Company Accounting
rules for companies whose securities are publicly
Oversight Board
traded. 4
3. International Accounting Standards Committee
Develop a single set of high-quality, understandable global accounting standards. 3
4. Securities and Exchange
Ensure that auditors follow strict guidelines when
Commission
conducting their audits. 2 AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium
Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Topic: Financial Accounting Standards
176.
Match each qualitative characteristic with its definition.
1. Predictive value
Information provides feedback on past activities.
2
value
All information necessary to describe an item is reported.
6
3. Verifiability
Information is presented in time to make useful decisions.
4
4. Timeliness
Measurements that independent parties would agree upon.
3
5. Neutrality
Information that does not bias the decision maker.
5
Information is useful in helping to forecast future outcomes.
1
2. Confirmatory
6. Completeness
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting
1-149 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
principles. Topic: Conceptual Framework
Essay Questions
177.
For each transaction, indicate whether a company would classify the related account as an asset, liability, stockholders' equity, dividend, revenue, or expense. Transactions
Related Accounts
1.
Receive cash from investors.
Common Stock
2.
Pay rent for the current period.
Rent Expense
3.
Purchase office equipment.
Supplies
4.
Pay cash to stockholders.
Dividends
5.
Provide services to customers.
Service Revenue
1. Stockholders' equity; 2. Expense; 3. Asset; 4. Dividend; 5. Revenue.
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
1-150 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
178.
Account classifications include assets, liabilities, stockholders' equity, dividends, revenues, and expenses. Indicate the account classification for each account name. Account Classifications
Accounts
Related Transactions
1.
__________
Common Stock
Sell common stock to investors.
2.
__________
Cash
Receive cash from customers.
3.
__________
Salaries Payable
Incur amounts owed to employees.
4.
__________
Service Revenue
Sell services to customers.
5.
__________
Utilities Expense
Incur cost of utilities.
6.
__________
Supplies
Purchase of office supplies.
7.
__________
Advertising Expense
Pay for cost of advertising.
8.
__________
Buildings
Purchase factory for operations.
9.
__________
Accounts Payable
Purchase supplies on credit.
10.
__________
Dividends
Distribute cash to stockholders.
1. Stockholders' equity; 2. Asset; 3. Liability; 4. Revenue; 5. Expense; 6. Asset; 7. Expense; 8. Asset; 9. Liability; 10. Dividend.
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
1-151 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
179.
Indicate whether a company would classify the transaction as financing, investing, or operating. Transactions 1.
Receive cash from investors.
2.
Pay rent for the current period.
3.
Purchase office equipment.
4.
Pay cash to stockholders.
5.
Provide services to customers.
1. Financing; 2. Operating; 3. Investing; 4. Financing; 5. Operating.
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
1-152 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
180.
Below are typical transactions for a company. Indicate whether each transaction is classified as a financing, investing, or operating activity. Type of Business Activity
Transactions
1.
__________
Purchase office building
2.
__________
Pay building maintenance fees
3.
__________
Pay sales taxes to the local government
4.
__________
Provide services to customers
5.
__________
Borrow from the bank
6.
__________
Pay workers’ salaries
7.
__________
Sell equipment used in operations
8.
__________
Sell common stock to investors
1. Investing; 2. Operating; 3. Operating; 4. Operating; 5. Financing; 6. Operating; 7. Investing; 8. Financing.
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
1-153 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
181.
Below are typical transactions for a company. Indicate whether each transaction is classified as a financing, investing, or operating activity. Type of Business
Related
Activity
Transactions
1.
__________
Sell common stock to investors.
2.
__________
Receive cash from customers.
3.
__________
Incur amounts owed to employees.
4.
__________
Sell services to customers.
5.
__________
Incur cost of utilities.
6.
__________
Purchase rent one year in advance.
7.
__________
Pay for cost of advertising.
8.
__________
Purchase factory for operations.
9.
__________
Purchase supplies on credit.
10.
__________
Distribute cash to stockholders.
1. Financing; 2. Operating; 3. Operating; 4. Operating; 5. Operating; 6. Operating; 7. Operating; 8. Investing; 9. Operating; 10. Financing.
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
1-154 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
182.
At the end of the current period, Maltese, Inc. reports the following amounts: Assets = $50,000; Liabilities = $28,000; Dividends = $4,000; Revenues = $22,000; Expenses = $16,000. Calculate net income and stockholders' equity at the end of the period.
Revenues
-
Expenses
=
Net Income
$22,000
-
$16,000
=
$6,000
Assets
=
Liabilities
+
Stockholder's equity
$50,000
=
$28,000
+
$X
$50,000
-
$28,000
=
$22,000
AACSB: Analytical Thinking AICPA: FN Reporting Difficulty: 3 Hard Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
183.
At the end of the current period, Rogers Company reports the following amounts: Assets = $25,000; Liabilities = $15,000; Dividends = $3,000; Revenues = $20,000; Expenses = $13,000. Calculate net income and stockholders' equity at the end of the period.
Revenues
-
Expenses
=
Net Income
$20,000
-
$13,000
=
$7,000
Assets
=
Liabilities
+
Stockholder's equity
$25,000
=
$15,000
+
$X
$25,000
-
$15,000
=
$10,000
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Apply Difficulty: 3 Hard 1-155 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
184.
Below are the account balances for Huffman Corporation at the end of December. Use only the appropriate accounts to prepare an income statement. Accounts
Balances
Cash
$5,200
Salaries expense
2,300
Retained earnings
2,500
Advertising expense
1,200
Equipment
12,400
Service revenue
9,400
Common stock
8,000
Accounts payable
2,200
Huffman Corporation Income Statement For the year ended December 31 Service revenue
$9,400
Expenses: Salaries
$2,300
Advertising
1,200
Total expenses Net income
3,500 $5,900
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. 1-156 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Communicating through Financial Statements
185.
At the beginning of the year (January 1), Maurice and Sons has $12,000 of common stock outstanding and retained earnings of $4,200. During the year, the company reports net income of $3,200 and pays dividends of $1,200. In addition, the company issues additional common stock for $5,000. Prepare the statement of stockholders' equity at the end of the year (December 31).
Maurice and Sons Statement of Stockholders’ Equity For the year ended December 31 Common
Retained
Total
Stock
Earnings
Stockholders’ Equity
Balance at January 1 Issuance of common stock
$12,000 5,000
Add: Net income for the year Less: Dividends Balance at December 31
$4,200
$17,000
$16,200 5,000
3,200
3,200
(1,200)
(1,200)
$6,200
$23,200
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Apply Difficulty: 3 Hard Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
1-157 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
186.
Klein Interiors has the following account balances at the end of the year. Use only the appropriate accounts to prepare a balance sheet. Accounts
Balances
Equipment
$78,000
Accounts Payable
12,000
Common Stock
20,000
Service Revenue
62,000
Cash
8,000
Retained Earnings
?
Salaries Expense
38,000
Notes Payable
25,000
Klein Interiors Balance Sheet December 31 Assets
Liabilities
Cash
$8,000 Accounts payable
$12,000
Equipment
78,000 Notes payable
25,000
Total liabilities
37,000 Stockholders’ Equity
Total assets
Common stock
20,000
Retained earnings
29,000 *
Total stockholders’ equity
49,000
$86,000 Total liabilities and stockholders’ equity
* Assets = Liabilities +
$86,000
Stockholders’ equity
$86,000 =
$37,000
+ ($20,000 + Retained earnings)
1-158 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
$86,000 -
$37,000
- $20,000 = Retained earnings $29,000 = Retained earnings
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
1-159 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
187.
Thomason Financial has the following cash transactions for the year. Assume cash at the beginning of the period is $6,000. Prepare a statement of cash flows. Accounts
Amounts
Cash received for sale of services to customers
$42,000
Cash received from issuance of common stock
33,000
Cash paid to purchase office equipment
(49,000)
Cash paid to building maintenance
(7,000)
Cash paid for advertisement
(8,000)
Cash paid to workers
(18,000)
Cash paid for dividends to stockholders
(3,000)
Cash received from sale of land
7,000
Cash received from borrowing
14,000
Thomason Financial Statement of Cash Flows For the year ended December 31 Cash Flows from Operating Activities Cash inflows: From sale of services to customers
$42,000
Cash outflows: For building maintenance
(7,000)
For advertisement
(8,000)
For workers
(18,000)
Net cash flows from operating activities
$9,000
Cash Flows from Investing Activities Purchase office equipment Sale of land Net cash flows from investing activities
(49,000) 7,000 (42,000)
1-160 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Cash Flows from Financing Activities Issue common stock
33,000
Borrow from bank
14,000
Pay dividends
(3,000)
Net cash flows from financing activities
44,000
Net increase in cash
11,000
Cash at the beginning of the year
6,000
Cash at the end of the year
$17,000
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
1-161 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
188.
Each of the following independent situations represents amounts shown on the four basic financial statements. Fill in the missing blanks using your knowledge of amounts that appear on the financial statements. 1. Revenues = $27,000; Expenses = $18,000; Net income = __________. 2. Increase in stockholders' equity = $20,000; Issuance of common stock = $12,000; Dividends = $5,000; Net income = __________. 3. Assets = $25,000; Liabilities = $13,000; Stockholders' equity = __________. 4. Total change in cash = +$28,000; Net operating cash flows = +$30,000; Net financing cash flows = +$18,000; Net investing cash flows = __________.
1.
2.
Revenues
- Expenses = Net Income
$27,000
-
$18,000 =
Change in
Issue
stockholders'
common
$9,000
Net
equity
=
stock
-
Dividends
+ Income
$20,000
= $12,000
-
$5,000
+
$20,000
-
$12,000 +
$5,000
= $13,000
Assets
= Liabilities +
equity
$25,000
= $13,000 +
$X
$25,000
-
$X
Stockholders' 3.
Total change
$12,000
Operating
in 4.
$13,000 =
Investing
cash
cash
=
$28,000 $28,000
flows
Financing
cash
cash flows
+
flows
= $30,000 +
$18,000
+
$X
-
$18,000
= ($20,000)
$30,000
+
-
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
1-162 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
189.
During its first five years of operations, Della Manufacturing reports net income and pays dividends as follows. Calculate the balance of retained earnings at the end of each year. Note that retained earnings will always equal $0 at the beginning of year 1. Net
Retained
Year
Income
Dividends
Earnings
1
$1,700
$1,000
___________
2
2,700
1,000
___________
3
3,200
2,000
___________
4
5,400
2,000
___________
5
7,600
3,000
___________
Net
Retained
Year
Income
Dividends
Earnings*
1
$1,700
$1,000
$700
2
2,700
1,000
2,400
3
3,200
2,000
3,600
4
5,400
2,000
7,000
5
7,600
3,000
11,600
* Retained earnings = beginning retained earnings + net income dividends AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
1-163 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
190.
Below is information related to retained earnings for five independent situations. Calculate the answer to each. 1. A company reports an increase in retained earnings of $3,200 and net income of $4,800. What is the amount of dividends? 2. A company reports beginning retained earnings of $1,800, net income of $1,200, and $200 dividends. What is the amount of ending retained earnings? 3. A company reports an increase in retained earnings of $2,500 and dividends of $1,500. What is the amount of net income? 4. A company reports ending retained earnings of $2,700, net income of $900, and dividends of $500. What is the amount of beginning retained earnings? 5. A company reports an increase in retained earnings of $500 and net income of $1,200. What is the amount of dividends?
Change in
=
Retained
Net
-
Dividends
Income
Earnings 1.
2.
$3,200
=
$4,800
-
$X
$3,200
=
$4,800
-
$1,600
[$X - $1,800] =
$1,200
-
$200
$X = $2,800 = 3.
4.
-
$2,500
=
$X
-
$1,500
$2,500
=
$4,000
-
$1,500
[$2,700 - $X] =
$900
-
$500
$X = $2,300 = 5.
-
$500
=
$1,200
-
$X
$500
=
$1,200
-
$700
1-164 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
1-165 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
191.
Below is balance sheet information for five independent situations. Calculate the answer to each. 1. A company reports total assets of $2,000 and total liabilities of $900. What is the amount of stockholders' equity? 2. A company reports total liabilities of $2,400 and stockholders' equity of $1,100. What is the amount of total assets? 3. A company reports total assets of $2,700 and total stockholders' equity of $700. What is the amount of total liabilities? 4. A company reports an increase in assets of $1,700 and an increase in liabilities of $400. What is the amount of the change in stockholders' equity? 5. A company reports an increase in liabilities of $300 and a decrease in stockholders' equity of $800. What is the amount of the change in total assets?
Stockholders' 1.
Assets
= Liabilities +
equity
$2,000
=
$900
+
$X
$2,000
=
$900
+
$1,100 Stockholders'
2.
Assets
= Liabilities +
equity
$X
=
$2,400
+
$1,100
$3,500
=
$2,400
+
$1,100 Stockholders'
3.
Assets
= Liabilities +
equity
$2,700
=
$X
+
$700
$2,700
=
$2,000
+
$700
Change 4.
Change in
in
= Change in +
stockholders'
Assets
liabilities
equity
$1,700
=
$400
+
$X
$1,700
=
$400
+
$1,300
Change 5.
Change in
in
= Change in +
stockholders'
Assets
liabilities
equity
1-166 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
$X
=
$300
+
($800)
($500)
=
$300
+
($800)
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
1-167 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
192.
Below is cash flow information for five independent situations. Calculate the answer to each. 1. A company reports operating cash flows of $3,200, investing cash flows of $700, and financing cash flows of -$400. What is the amount of the change in total cash? 2. A company reports operating cash flows of $1,800, investing cash flows of -$400, and financing cash flows of -$1,100. If the beginning cash amount is $500, what is the ending cash amount? 3. A company reports operating cash flows of $700, investing cash flows of $300, and a change in total cash of $100. What is the amount of cash flows from financing activities? 4. A company reports operating cash flows of $600, financing cash flows of $400, and a change in total cash of $100. What is the amount of cash flows from investing activities? 5. A company reports investing cash flows of -$1,400, financing cash flows of $900, and a change in total cash of $200. What is the amount of cash flows from operating activities?
Total change in cash Total change in 1.
cash $3,500 Total change in
2.
cash ($X - $500)
=
= = = =
Operating cash flows Operating cash flows $3,200 Operating cash flows $1,800
+
+ + + +
Investing cash flows Investing cash flows $700 Investing cash flows ($400)
+
+ + + +
Financing cash flows Financing cash flows ($400) Financing cash flows ($1,100)
$X = $800 Total change in 3.
cash $100 Total change in
4.
cash
= = =
Operating cash flows $700 Operating cash flows
+ + +
Investing cash flows $300 Investing cash flows
+ + +
Financing cash flows ($900) Financing cash flows
1-168 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
$100 Total change in 5.
cash $200
= = =
$600 Operating cash flows $700
+ + +
($900) Investing cash flows ($1,400)
+ + +
$400 Financing cash flows $900
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
1-169 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
193.
Riley Incorporated reports the following amounts at the end of the year: Cash
$3,200 Service Revenue
$92,500
Buildings
60,000 Salaries Expense
72,800
Accounts Payable
8,500 Equipment
72,000
Interest Expense
4,000 Supplies
6,400
Advertising
11,300 Notes payable
40,000
Expense
In addition, the company had common stock of $65,000 at the beginning of the year and issued an additional $5,000 during the year. The company also had retained earnings of $20,700 at the beginning of the year and paid dividends of $2,000 during the year. Prepare the income statement, statement of stockholders' equity, and balance sheet.
Riley Incorporated Income Statement For the year ended December 31 Service revenue
$92,500
Expenses: Salaries
$72,800
Advertising
11,300
Interest
4,000
Total expenses
88,100
Net income
$4,400
Riley Incorporated Statement of Stockholders’ Equity For the year ended December 31 Common
Retained
Total
Stock
Earnings
Stockholders’ Equity
1-170 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Balance at beginning of the year
$65,000
Issuance of common stock
$20,700
5,000
5,000
Add: Net income for the year Less: Dividends Balance at end of the year
$85,700
$70,000
4,400
4,400
(2,000)
(2,000)
$23,100
$93,100
Riley Incorporated Balance Sheet December 31 Assets
Liabilities
Cash
$3,200 Accounts payable
$8,500
Supplies
6,400 Notes payable
40,000
Equipment
72,000 Total liabilities
48,500
Building
60,000 Stockholders’ Equity
Total assets
Common stock
70,000
Retained earnings
23,100
Total stockholders’ equity
93,100
$141,600 Total liabilities and stockholders’ equity
$141,600
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Apply Difficulty: 3 Hard Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
1-171 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
194.
Below are incomplete financial statements for Beasley, Incorporated. Calculate the missing amounts. Income Statement
Statement of Stockholders’ Equity Common Stock
Retained Earnings
Revenues
$(a)
Expenses:
Beginning
$25,000
Salaries
8,000 Issuances
(c)
Delivery
7,000 Net income
5,000
Utilities
5,000 Dividends
(d)
Net income
(b) Ending
$30,000
$12,000
$15,000
Balance Sheet Assets: Cash Supplies
Liabilities: $15,000 Accounts payable 7,000
15,000
Stockholders’ Equity:
Prepaid rent
(e) Common stock
(g)
Equipment
35,000 Retained earnings
(h)
Total liabilities and stockholders’ Total assets
(f) equity
(i)
In the income statement, (b) = $5,000 (in the statement of stockholders' equity) In the income statement, (a) $20,000 = $5,000 (a) = $25,000 In the statement of stockholders' equity, $25,000 + (c) = $30,000 (c) = $5,000 In the statement of stockholders' equity, $12,000 + 5,000 (d) = $15,000 (d) = $2,000 In the balance sheet, (g) = $30,000 and (h) $15,000 (in the statement of stockholders' equity)
1-172 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
(i) = $15,000 + $30,000 (g) + $15,000 (h) (i) = $60,000 (f) = $60,000 (i) (e) = $60,000 (f) $15,000 $7,000 $35,000 (e) = $3,000
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
1-173 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
195.
Use the following information available to prepare an income statement and balance sheet on December 31 for Goldie Company. Fees for services performed during the year, $120,000 Accounts payable, $18,500 Accounts receivable, $17,300 Miscellaneous costs for the year, $8,700 Supplies on hand, $2,700 Notes payable outstanding, $30,000 Interest cost on the note for the year, $3,000 Equipment, $84,400 Cash on hand, $11,200 Salaries cost for the year, $71,500 Supplies cost for the year, $9,400 Rent cost for the year, $12,000 Common stock that has been issued, $60,000 Retained earnings at the end of the year, $7,100
Goldie Company Income Statement For the period ended December 31 Service revenue
$120,000
Expenses: Salaries
71,500
Rent
12,000
Supplies
9,400
Interest
3,000
Miscellaneous
8,700
Total expenses
104,600
Net income
$15,400
Goldie Company Balance Sheet 1-174 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
December 31 Assets
Liabilities
Cash
$11,200 Accounts payable
$18,500
Accounts
17,300 Notes payable
30,000
Supplies
2,700 Total liabilities
48,500
Equipment
84,400
Receivable
Stockholders’ Equity
Total assets
Common stock
60,000
Retained earnings
7,100
Total stockholders’ equity
67,100
$115,600 Total liabilities and stockholders’ equity
$115,600
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
1-175 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
196.
Below are typical transactions for a company. Type of Business Activity
Transactions
1.
__________
Issue common stock.
2.
__________
Collect cash from a bank loan.
3.
__________
Sell products to customers.
4.
__________
Pay employees’ wages.
5.
__________
Purchase equipment for manufacturing.
6.
__________
Pay dividends to stockholders.
7.
__________
Sell factory.
8.
__________
Purchase office supplies.
9.
__________
Pay utilities.
10.
__________
Pay for maintenance on delivery vehicles.
Required: Indicate whether each transaction is classified as a financing, investing, or operating activity.
Type of business activity
Transactions
1.
Financing
Issue common stock.
2.
Financing
Collect cash from a bank loan.
3.
Operating
Sell products to customers.
4.
Operating
Pay employees’ wages.
5.
Investing
Purchase equipment for manufacturing.
6.
Financing
Pay dividends to stockholders.
7.
Investing
Sell factory.
8.
Operating
Purchase office supplies.
9.
Operating
Pay utilities.
10. Operating
Pay for maintenance on delivery vehicles.
AACSB: Reflective Thinking 1-176 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
1-177 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
197.
Account classifications include assets, liabilities, stockholders' equity, dividends, revenues, and expenses. Account Classifications Accounts
Related Transactions
1.
__________
Accounts Receivable
Provide services on account.
2.
__________
Land
Purchase land for operations.
3.
__________
Prepaid Rent
Purchase rent in advance.
4.
__________
Salaries Expense
Pay for cost of salaries.
5.
__________
Utilities Expense
Pay for cost of utilities.
6.
__________
Service Revenue
Provide services to customers.
7.
__________
Accounts Payable
Purchase materials on account.
8.
__________
Notes Payable
Borrow from the bank.
9.
__________
Dividends
Distribute cash to stockholders.
10.
__________
Common Stock
Issue stock to stockholders.
Required: Indicate the account classification for each account name.
Account Classifications
Account Names
1.
Asset
Accounts Receivable
2.
Asset
Land
3.
Asset
Prepaid Rent
4.
Expense
Salaries Expense
5.
Expense
Utilities Expense
6.
Revenue
Service Revenue
7.
Liability
Accounts Payable
8.
Liability
Notes Payable
9.
Dividends
Dividends
10.
Stockholders’ Equity
Common Stock
AACSB: Reflective Thinking 1-178 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
1-179 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
198.
Tiffany's provides financial services related to investment selections, retirement planning, and general insurance needs. For the current year, the company reports the following amounts: Advertising Expense
$31,200 Service Revenue
$129,300
Buildings
108,000 Interest Expense
3,500
Salaries Expense
67,800 Utilities Expense
14,500
Accounts Payable
6,300 Equipment
25,700
Cash
6,400 Notes Payable
30,000
In addition, the company had common stock of $60,000 at the beginning of the year and issued an additional $15,000 during the year. The company also had retained earnings of $20,000 at the beginning of the year and paid dividends of $3,500. Required: Prepare the income statement, statement of stockholders' equity, and balance sheet for Tiffany's for the year ended December 31.
Tiffany’s Income Statement For the year ended December 31 Service revenue
$129,300
Expenses: Advertising
31,200
Salaries
67,800
Utilities
14,500
Interest
3,500
Total expenses
117,000
Net income
$12,300
1-180 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Tiffany’s Statement of Stockholders’ Equity For the year ended December 31 Common
Retained
Stock Balance at beginning of the year
$60,000
Issuance of common stock
15,000
Total
Earnings Stockholders’ Equity $20,000
$80,000 15,000
Add: Net income for the year
12,300
12,300
Less: Dividends
(3,500)
(3,500)
$28,800
$103,800
Balance at end of the year
$75,000
Tiffany’s Balance Sheet December 31 Assets
Liabilities
Cash
$6,400 Accounts payable
$6,300
Equipment
25,700 Notes payable
30,000
Buildings
108,000 Total liabilities
36,300 Stockholders’ Equity
Total assets
Common stock
75,000
Retained earnings
28,800
Total stockholders’ equity
103,800
$140,100 Total liabilities and stockholders’ equity
$140,100
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Apply Difficulty: 3 Hard Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
1-181 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
199 Below are incomplete financial statements. . Income Statement
Revenues
Statement of Stockholders’ Equity Common
Retained
Stock
Earnings
(a)
Expenses: Salaries
Beginning
$15,000
$11,000 Issuances
(c)
$8,000
Rent
5,000 Net income
3,000
Advertising
7,000 Dividends
(d)
Net income
(b) Ending
$18,000
$9,000
Balance Sheet Assets: Cash Supplies
Liabilities: $6,000 Accounts payable (e)
$5,000
Stockholders’ Equity:
Land
7,000 Common Stock
(g)
Buildings
14,000 Retained Earnings
(h)
Total assets
(f) Total liabilities and stockholders’ equity
(i)
Required: Calculate the missing amounts.
(Suggested order of calculation) On the statement of stockholders' equity, $15,000 + (c) = $18,000 (c) = $3,000 $8,000 + $3,000 - (d) = $9,000 (d) = $2,000 (b) = $3,000 From (b), (a) - $11,000 - $5,000 - $7,000 = $3,000 (b)
1-182 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
(a) = $26,000 From the statement of stockholders' equity, (g) = $18,000 (h) = $9,000 From (g) and (h), $5,000 + $18,000 (g) + $9,000 (h) = (i) (i) = $32,000 From total liabilities and stockholders' equity, (f) = $32,000 From (f), $6,000 + (e) + $7,000 + $14,000 = $32,000 (f) (e) = $5,000
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
1-183 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
200.
Simplex Corporation provides the following information at the end of the year. Salaries payable to workers at the end of the year
$3,500
Advertising expense for the year
8,700
Building that has been purchased
70,000
Supplies at the end of the year
7,500
Retained earnings
38,000
Utilities expense for the year
4,200
Note payable to the bank
21,500
Service revenue earned during the year
67,800
Salary expense for the year
24,200
Accounts payable to suppliers
6,700
Dividends paid to shareholder during the year Common stock that has been issued, including $8,000 that was issued this year
? 30,000
Cash remaining
5,500
Interest expense for the year
1,800
Accounts receivable from customers
16,700
Required: Prepare the income statement, statement of stockholders' equity, and balance sheet for Simplex Corporation on December 31. The balance of retained earnings at the beginning of the year equals $24,500.
Simplex Corporation Income Statement For the year ended December 31 Service revenue
$67,800
Expenses: Advertising
8,700
1-184 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Utilities
4,200
Salaries
24,200
Interest
1,800
Total expenses
38,900
Net income
$28,900
Simplex Corporation Statement of Stockholders’ Equity For the year ended December 31 Common
Retained
Total
Stock
Earnings
Stockholders Equity’
Balance at January 1 Issuance of common stock
$22,000
Less: Dividends $30,000
* Beginning retained earnings
$24,500
+ Net income
28,900
- Dividends
$46,500
8,000
Net income for the year
Balance at December 31
$24,500
8,000 28,900
28,900
(15,400)*
(15,400)
$38,000
$68,000
?
= Ending retained earnings
$38,000
Simplex Corporation Balance Sheet December 31, 2018 Assets
Liabilities
Cash
$5,500 Accounts payable
$6,700
Accounts receivable
16,700 Salaries payable
3,500
Supplies
7,500 Notes payable
21,500
Buildings
70,000 Total liabilities
31,700 Stockholders’ Equity
Common stock
30,000
1-185 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Total assets
Retained earnings
38,000
Total stockholders’ equity
68,000
$99,700 Total liabilities and stockholders’ equity
$99,700
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Apply Difficulty: 3 Hard Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
1-186 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
201.
The four underlying assumptions of generally accepted accounting principles are economic entity, monetary unit, periodicity, and going concern. Consider the following four independent situations. 1. Masterson provides music cassettes for the past 30 years. Because of the advance in electronic musical devices, customer demand has dwindled over the years to almost nothing in the current year and the company can no longer pay its debts. For the most recent year, the company reports its assets in the balance sheet at historical (original) cost. 2. Phillips Flooring specializes in the installation of wood flooring. The company has the usual business expenses: salaries, supplies, utilities, advertising, and taxes. Mr. Phillips took his wife and two sons to Six Flags. Mr. Phillips reported the airfare and hotel expenses in the income statement of Phillips Flooring. 3. Mama's Restaurant has over 200 stores throughout the Southeast. Approximately 100,000 customers visit its stores each day. Because of the continual nature of dining, the company does not publish an income statement. The company feels that it has an indefinite life and a periodic report would mislead investors. 4. Indian Packaging delivers packages between the United States and India. During the current year, the company delivered 2,000 packages for its American customers totaling $75,000 in revenue. For its Indian customers, the company delivered 1,000 packages totaling 1,500,000 Indian Rupee. The company's income statement indicates that total revenue equals 3,000 packages delivered with no corresponding amount in the income statement. Required: For each situation, indicate which of the underlying assumptions of GAAP is violated.
Assumption violated 1.
Going concern
2.
Economic entity
3.
Periodicity
4.
Monetary unit
AACSB: Reflective Thinking AICPA: BB Critical Thinking 1-187 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Topic: Conceptual Framework
1-188 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
202.
Listed below are several terms and definitions associated with the FASB's conceptual framework. Terms
Definitions a. Requires the consideration of the costs and value of
1. ____ Verifiability
information.
2. ____ Relevance
b. Recording transaction only for the company. c. The indefinite life of a company can be broken into
3. ____ Timeliness
definite periods.
4. ____ Cost effectiveness
d. Accounting should be useful in making decisions. e. Agreement between a measure and the phenomenon
5. ____ Decision usefulness
it represents.
6. ____ Faithful representation
f. Information arrives prior to the decision.
7. ____ Materiality
g. Information is related to the decision at hand.
8. ____ Economic entity assumption
h. Implies consensus among different measures.
Periodicity assumption 9.
____
i. Concerns the relative size of an item and its effect on decisions.
Required: Pair each term with its related definition.
1.
h.
2.
g.
3.
f.
4.
a.
5.
d.
6.
e.
7.
i.
8.
b.
9.
c.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium 1-189 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Topic: Conceptual Framework
203.
Define accounting. Describe the two primary functions of financial accounting and its role in our society.
Accounting is "the language of business." The functions of financial accounting are to measure the business activities of a company and to communicate those measurements to external parties for decision-making purposes. A large number of people, including investors and creditors, rely on financial accounting information to make informed, and presumably, better decisions about companies.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-01 Describe the two primary functions of financial accounting. Topic: Defining Accounting
204.
Describe the three fundamental business activities that accountants measure. What account classifications are typically associated with each type of business activity?
Financing activities are transactions involving external sources of funding. There are two basic sources of this external funding—the owners of the company who invest their own funds in the business, and creditors who lend money to the company. Investing activities include the purchase and sale of (1) long-term resources such as land, buildings, equipment, and machinery; and (2) any resources not directly related to a company's normal operations. Operating activities include transactions that relate to the primary operations of the company, such as providing products and services to customers and the associated costs of doing so, like utilities, taxes, advertising, wages, rent, and maintenance. In general, financing activities are associated with long-term liabilities and stockholders' equity (including dividends), investing activities are associated with longterm assets, and operating activities are associated with revenues and expenses.
AACSB: Reflective Thinking 1-190 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Understand the business activities that financial accounting measures. Topic: Measuring Business Activities
205.
List and describe the four financial statements most frequently provided to external users.
The income statement presents revenues and expenses over an interval of time. The statement of shareholders' equity summarizes the changes in stockholders' equity (common stock and retained earnings) over an interval of time. The balance sheet presents the assets, liabilities, and stockholders' equity at a point in time. The statement of cash flows presents the cash receipts and cash payments over an interval of time for operating, investing, & financing activities.
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Determine how financial accounting information is communicated through financial statements. Topic: Communicating through Financial Statements
206.
How does the value of an audit affect financial statements?
Outside auditors add credibility to financial statements, increasing the confidence of capital market participants who rely on financial statements in making investment and credit decisions and recommendations.
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-05 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Topic: Financial Accounting Standards
1-191 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
207.
Define the four basic assumptions underlying Generally Accepted Accounting Principles: (a) economic entity, (b) going concern, (c) periodicity, (d) monetary unit.
Economic entity - All economic events can be identified with a particular economic entity. Going concern - In the absence of information to the contrary, it is anticipated that a business entity will continue to operate indefinitely. Periodicity - The life of a company can be divided into artificial time periods to provide timely information to external users. Monetary unit - In the U.S., financial statement elements should be measured in terms of the U.S. dollar. It assumes that the value of a dollar is stable over time.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-07 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Topic: Conceptual Framework
1-192 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 02 The Accounting Cycle: During the Period
True / False Questions
1. External transactions are transactions the firm conducts with a separate economic entity, such as selling products to a customer, purchasing supplies from a vendor, paying salaries to an employee, and borrowing money from a bank. True
False
2. Internal transactions are events that affect the financial position of the company but do not include an exchange with a separate economic entity. Examples are using supplies on hand and earning revenues after having received cash in advance from a customer. True
False
3. A list of all account names used to record transactions of a company is referred to as a Taccount. True
False
4. After recording each transaction, total assets must equal total liabilities plus stockholders' equity. True
False
5. If a transaction causes total assets of the company to increase by $2,000, then liabilities plus stockholders' equity also increases by $2,000. True
False
2-1 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
6. If a transaction causes total assets of the company to increase by $5,000 and total liabilities to increase by $3,000, then stockholders' equity increases by $8,000. True
False
7. Borrowing cash from the bank causes assets to increase and liabilities to increase. True
False
8. Purchasing equipment using cash causes assets to increase. True
False
9. Providing services to customers for cash causes stockholders' equity to increase. True
False
10. Paying employees' salaries for the current month causes no change to stockholders' equity. True
False
11. Paying dividends to its stockholders causes a company's stockholders' equity to decrease. True
False
12. Selling common stock for cash causes assets to increase and stockholders' equity to decrease. True
False
13. Purchasing office supplies on account causes assets to increase and liabilities to increase. True
False
14. Providing services to customers on account causes assets to increase and stockholders' equity to increase. True
False
2-2 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15. Receiving cash in advance from a customer for services to be provided in the future causes assets to increase and stockholders' equity to increase. True
False
16. Paying for one year of rent in advance does not affect the accounting equation. True
False
17. Purchasing supplies on account increases the balance of the Accounts Receivable account. True
False
18. Amounts owed from customers are recorded in the Accounts Receivable account. True
False
19. The two components of stockholders' equity are Debits and Credits. True
False
20. Revenues have the effect of increasing retained earnings. True
False
21. Expenses have the effect of decreasing retained earnings. True
False
22. Receiving cash in advance from customers increases the Service Revenue account. True
False
23. Deferred Revenue is a liability account. True
False
2-3 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
24. Liability accounts increase with a debit and decrease with a credit. True
False
25. Liability accounts increase with a credit and decrease with a debit. True
False
26. Common Stock increases with a credit and decreases with a debit. True
False
27. Revenue accounts increase with a debit and decrease with a credit. True
False
28. Expense accounts increase with a debit and decrease with a credit. True
False
29. The Dividends account increases with a credit and decreases with a debit. True
False
30. A debit to an account balance always results in the balance increasing. True
False
31. A credit to an account balance always results in the balance decreasing. True
False
32. A journal provides a chronological record of all transactions affecting a firm. True
False
2-4 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
33. For each transaction, there must be at least one debit amount and one credit amount. True
False
34. For each transaction, the total debit amounts must equal the total credit amounts. True
False
35. Selling common stock for cash is recorded with a debit to common stock. True
False
36. Borrowing cash from the bank is recorded with a debit to cash. True
False
37. Purchasing office supplies is recorded with a credit to office supplies. True
False
38. Paying employees' salaries for the current period is recorded with a debit to Salaries Expense. True
False
39. Providing services to customers is recorded with a debit to Service Revenue. True
False
40. The general ledger includes all accounts used to record the company's transactions. True
False
41. The process of transferring the debit and credit information from the journal to individual accounts in the general ledger is called journalizing. True
False
2-5 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
42. After posting transactions to the general ledger accounts, the sum of the accounts with debit balances should equal the sum of the accounts with credit balances. True
False
43. A trial balance is a list of all accounts and their balances at a particular date, showing that assets equal liabilities. True
False
44. If total debits equal total credits in the trial balance, then all balances are correct. True
False
Multiple Choice Questions
45. Which of the following is not part of measuring external transactions?
A. Using source documents to analyze accounts affected. B. Recording transactions. C. Making payments on all amounts owed. D. Analyzing transactions for their effect on the accounting equation. 46. External events include all of the following except:
A. Paying rent. B. Purchasing equipment. C. Using office supplies. D. Collecting an account receivable.
2-6 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
47. The full set of procedures used to accomplish the measurement/communication process of financial accounting is referred to as the:
A. Trial balance B. Accounting cycle C. Chart of accounts D. General ledger 48. Which step in the process of measuring external transactions involves assessing the equality of total debits and total credits for the period?
A. Use source documents to determine accounts affected by the transaction. B. Prepare a trial balance. C. Analyze the impact of the transaction on the accounting equation. D. Post the transaction to the T-account in the general ledger. 49. A(n) _______________ summarizes all transactions related to a particular item over a period of time.
A. Debit B. Account C. Chart of accounts D. Source document 50. A list of all account names used to record transactions of a company is referred to as the:
A. Chart of Accounts B. Income statement C. General journal D. Balance sheet
2-7 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
51. For each transaction recorded in an accounting system, the basic equation that must be maintained at all times is:
A. Assets = Liabilities + Stockholders' Equity. B. Cash Increases = Cash Decreases. C. Revenues = Expenses + Dividends. D. Assets = Liabilities. 52. The following amounts are reported in the ledger of Mariah Company: Assets
$80,000
Liabilities
36,000
Retained Earnings
12,000
What is the balance in the Common Stock account?
A. $44,000. B. $32,000. C. $48,000. D. $42,000. 53. When a company pays employees' salaries for the current period, how will the basic accounting equation be affected?
A. Stockholders' equity decreases. B. Revenues decrease. C. Expenses decrease. D. Liabilities decrease.
2-8 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
54. When cash payments are made to stockholders, what is the effect on the company's accounts?
A. Cash decreases and dividends increase. B. Cash increases and dividends decrease. C. Cash decreases and common stock decreases. D. Cash increases and common stock increases. 55. Receiving cash from customers before services are performed results in:
A. Prepaid Assets. B. Service Revenue. C. Deferred Revenues. D. Accounts Receivable. 56. When the company pays stockholders a dividend, what is the effect on the accounting equation for that company?
A. Decrease stockholders' equity and increase assets. B. Increase liabilities and increase assets. C. Decrease assets and decrease liabilities. D. Decrease assets and decrease stockholders' equity. 57. Pumpkin Inc. sold $500 in pumpkins to a customer on account on January 1. On January 11 Pumpkin collected the cash from that customer. What is the impact on Pumpkin's accounting equation from the collection of cash?
A. No net effect to the accounting equation. B. Decrease assets and increase liabilities. C. Increase assets and increase liabilities. D. Decrease assets and decrease liabilities.
2-9 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
58. A company receives a $50,000 cash deposit from a customer on October 15 but will not provide services until November 20. Which of the following statements is true?
A. The company records service revenue on October 15. B. The company records cash collection on November 20. C. The company records deferred revenue on October 15. D. The company records nothing on October 15. 59. Which of the following would increase assets and increase liabilities?
A. Provide services to customers on account. B. Purchase office supplies on account. C. Pay dividends to stockholders. D. Receive a utility bill but do not pay it immediately. 60. Receiving cash from an account receivable:
A. Increases revenue and decreases an asset. B. Decreases a liability and increases an asset. C. Increases an asset and increases revenue. D. Increases one asset and decreases another asset. 61. An expense has what effect on the accounting equation?
A. Decrease liabilities. B. Decrease stockholders' equity. C. Increase assets. D. No effect.
2-10 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
62. Revenues have what effect on the accounting equation?
A. Increase liabilities. B. Decrease assets. C. Increase stockholders' equity. D. No effect. 63. Investments by stockholders have what effect on the accounting equation?
A. Assets increase and liabilities increase. B. Expenses increase and liabilities increase. C. Assets increase and revenues increase. D. Assets increase and stockholders' equity increases. 64. Which of the following is not possible when recording a transaction?
A. Liabilities increase and assets decrease. B. Stockholders' equity increases and assets increase. C. One asset increases and another asset decreases. D. Stockholders' equity decreases and assets decrease. 65. Purchasing office supplies on account will:
A. Not change assets. B. Increase assets and decrease liabilities. C. Increase assets and increase liabilities. D. Increase assets and increase stockholders' equity.
2-11 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
66. Providing services and receiving cash will:
A. Increase assets and increase stockholders' equity. B. Increase assets and increase liabilities. C. Decrease assets and increase liabilities. D. Decrease liabilities and increase stockholders' equity. 67. When a company provides services on account, the accounting equation would be affected as follows:
A. Assets increase. B. Revenues increase. C. Assets increase and liabilities decrease. D. Assets increase and stockholders' equity increases. 68. If a company provides services on account, which of the following is true?
A. Expenses increase. B. Liabilities increase. C. Stockholders' equity increases. D. Assets decrease. 69. When a payment is made on an account payable:
A. Assets and stockholders' equity decrease. B. Assets and liabilities decrease. C. Liabilities and revenues decrease. D. Assets and expenses decrease.
2-12 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
70. Purchasing office equipment on account has what impact on the accounting equation?
A. Stockholders' equity decreases and assets increase. B. Liabilities increase and assets increase. C. Assets decrease and liabilities decrease. D. Assets increase and stockholders' equity increases. 71. Purchasing supplies for cash has what effect on the accounting equation?
A. Increase assets. B. Decrease stockholders' equity. C. Decrease liabilities. D. No effect. 72. On January 1, Brad Inc. sold $30,000 in products to a customer on account. Then on January 10, Brad collected the cash on that account. What is the impact on Brad's accounting equation from the collection of cash on January 10?
A. No net effect on the accounting equation. B. Assets increase and liabilities decrease. C. Assets decrease and liabilities decrease. D. Assets increase and stockholders' equity increases. 73. On September 30, MFP Co. paid employee salaries of $7,000, including $1,000 it owed to its employees last month. What are the effects of this transaction on the accounting equation?
A. Expenses increased, liabilities increased, and assets increased. B. Assets decreased, liabilities decreased, and expenses increased. C. Assets decreased, expenses decreased, and liabilities increased. D. Expenses decreased, liabilities decreased, and assets decreased. E. Assets increased, expenses increased, and liabilities decreased.
2-13 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
74. Following are transactions of Gotebo Tanners, Inc., a new company, during the month of January: 1. Issued 10,000 shares of common stock for $15,000 cash. 2. Purchased land for $12,000, signing a note payable for the full amount. 3. Purchased office equipment for $1,200 cash. 4. Received cash of $14,000 for services provided to customers during the month. 5. Purchased $300 of office supplies on account. 6. Paid employees $10,000 for their first month's salaries. What was the total amount of Gotebo's liabilities following these six transactions?
A. $12,300. B. $27,300. C. $22,600. D. $15,500. 75. Consider the following transactions: Issued common stock for cash. Purchased equipment by signing a note payable. Paid rent for the current month. Collected cash from customers on account. How many of these four transactions increased the given company's total assets?
A. One. B. Two. C. Three. D. Four.
2-14 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
76. Assume that Sallisaw Sideboards, Inc. had a retained earnings balance of $10,000 on April 1, and that the company had the following transactions during April. Issued common stock for cash, $5,000. Provided services to customers on account, $2,000. Provided services to customers in exchange for cash, $900. Purchased equipment and paid cash, $4,300. Paid April rent, $800. Paid employees' salaries for April, $700. What was Sallisaw's retained earnings balance at the end of April?
A. $11,400. B. $12,100. C. $16,400. D. Some other amount. 77. Consider the following transactions: Issued common stock for cash. Purchased equipment by signing a note payable. Provided services to customers on account. Collected cash from customers on account. How many of these four transactions increased the given company's total liabilities?
A. One. B. Two. C. Three. D. Four.
2-15 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
78. Following are transactions of Gotebo Tanners, Inc., a new company, during the month of January: 1. Issued 10,000 shares of common stock for $15,000 cash. 2. Purchased land for $12,000, signing a note payable for the full amount. 3. Purchased office equipment for $1,200 cash. 4. Received cash of $14,000 for services provided to customers during the month. 5. Purchased $300 of office supplies on account. 6. Paid employees $10,000 for their first month's salaries. How many of these transactions decreased Gotebo's total assets?
A. One. B. Two. C. Three. D. Four. 79. Following are transactions of Gotebo Tanners, Inc., a new company, during the month of January: 1. Issued 10,000 shares of common stock for $15,000 cash. 2. Purchased land for $12,000, signing a note payable for the full amount. 3. Purchased office equipment for $1,200 cash. 4. Received cash of $14,000 for services provided to customers during the month. 5. Purchased $300 of office supplies on account. 6. Paid employees $10,000 for their first month's salaries. How many of these transactions increased Gotebo's liabilities?
A. Four. B. Three. C. Two. D. One.
2-16 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
80. Which of the following transactions causes a decrease in stockholders' equity?
A. Pay dividends to stockholders. B. Obtain cash by borrowing from a local bank. C. Provide services to customers on account. D. Purchase office equipment for cash. 81. How many of the following events would require an expense to be recorded? Ordering office supplies Hiring a receptionist Paying employees' salaries for the current month Receiving but not paying a current utility bill Paying for insurance in advance
A. One. B. Two. C. Three. D. Four. 82. Which of the following is NOT possible for a business transaction?
A. Increase assets and decrease revenue. B. Decrease assets and increase expense. C. Increase liabilities and increase expense. D. Decrease liabilities and increase revenue. 83. Which of the following transactions would cause a decrease in both assets and stockholders' equity?
A. Paying insurance premium for the next two years. B. Purchasing office equipment on account. C. Paying advertising for the current month. D. Providing installation services to customers.
2-17 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
84. When a company issues common stock for cash, what is the effect on the accounting equation for the company?
A. Assets increase and liabilities increase. B. Assets increase and stockholders' equity increases. C. Assets decrease and liabilities decrease. D. Liabilities decrease and stockholders' equity increases. 85. If the liabilities of a company increased by $55,000 during a month and the stockholders' equity decreased by $21,000 during that same month, did assets increase or decrease and by how much?
A. $34,000 increase. B. $55,000 increase. C. $34,000 decrease. D. $76,000 increase. 86. Which of the following transactions would cause an increase in both the assets and liabilities of a company?
A. Paying for the current month's rent. B. Pay for inventory purchased 90 days ago. C. Purchase of a building by issuing a note payable. D. Services received on account. 87. When a company pays cash for equipment, what is the effect on the accounting equation for that company?
A. Increase assets and increase liabilities. B. Decrease assets and decrease liabilities. C. No change. D. Increase assets and increase stockholders' equity.
2-18 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
88. "Record revenue when goods or services are provided to customers" is the definition of which principle in accounting?
A. Trial balance. B. Debits and credits. C. Revenue recognition. D. Accounting equation. 89. Which of the following is possible for a particular business transaction?
A. Increase assets; Decrease liabilities B. Decrease assets; Increase assets C. Decrease assets; Increase stockholders' equity D. Decrease liabilities; Increase expenses 90. Which of the accounts are decreased on the debit side and increased on the credit side?
A. Liabilities, stockholders' equity, and revenues. B. Dividends, liabilities, and assets. C. Expenses, dividends, and stockholders' equity. D. Assets, dividends, and expenses. 91. Which of the following is true about a "debit"? I. It is part of the double-entry procedure that keeps the accounting equation in balance. II. It represents an increase to assets. III. It represents a decrease to liabilities. IV. It is on the right side of a T-account.
A. I and II. B. IV only. C. I, II, and III. D. I, II, III, and IV.
2-19 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
92. Which of the following is true about a "credit"? I. It is part of the double-entry procedure that keeps the accounting equation in balance. II. It represents a decrease to assets. III. It represents an increase to liabilities. IV. It is on the right side of a T-account.
A. I and II. B. IV only. C. I, II, and III. D. I, II, III, and IV. 93. Assets normally carry a _______ balance and are shown in the ______________.
A. Debit; Statement of stockholders' equity B. Debit; Income statement C. Credit; Balance sheet D. Debit; Balance sheet 94. Revenues normally carry a _______ balance and are shown in the ______________.
A. Debit; Statement of stockholders' equity B. Credit; Income statement C. Credit; Balance sheet D. Debit; Balance sheet 95. Dividends normally carry a _______ balance and are shown in the ______________.
A. Debit; Statement of stockholders' equity B. Debit; Income statement C. Credit; Balance sheet D. Debit; Balance sheet
2-20 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
96. Expenses normally carry a _______ balance and are shown in the ______________.
A. Debit; Statement of stockholders' equity B. Debit; Income statement C. Credit; Balance sheet D. Debit; Balance sheet 97. Liabilities normally carry a _______ balance and are shown in the ______________.
A. Debit; Statement of stockholders' equity B. Debit; Income statement C. Credit; Balance sheet D. Debit; Balance sheet 98. Which of the following accounts has a debit balance?
A. Accounts Payable. B. Deferred Revenue. C. Service Revenue. D. Salaries Expense. 99. Which of the following accounts would normally have a credit balance?
A. Accounts Payable, Service Revenue, Common Stock. B. Salaries Payable, Deferred Revenue, Delivery Expense. C. Income Tax Payable, Service Revenue, Dividends. D. Cash, Repairs and Maintenance Expense, Dividends.
2-21 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
100.Which of the following accounts would normally have a debit balance?
A. Accounts Payable, Service Revenue, Common Stock. B. Salaries Payable, Deferred Revenue, Utilities Expense. C. Income Tax Payable, Service Revenue, Dividends. D. Cash, Delivery expense, Dividends. 101.Which of the following accounts would normally have a debit balance and appear in the balance sheet?
A. Accounts Receivable. B. Deferred Revenue. C. Salaries Expense. D. Dividends. 102.Which of the following accounts has a credit balance?
A. Salaries Expense. B. Income Tax Payable. C. Land. D. Prepaid Rent. 103.An increase to an asset account is shown with a ______________. An increase to a liability account is shown with a ______________.
A. Debit; Debit B. Credit; Debit C. Debit; Credit D. Credit; Credit
2-22 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
104.An increase to an expense account is shown with a ______________. An increase to a revenue account is shown with a ______________.
A. Debit; Debit B. Debit; Credit C. Credit; Debit D. Credit; Credit 105.An increase to an asset account is shown with a ______________. A decrease to an asset account is shown with a ______________.
A. Debit; Debit B. Credit; Debit C. Debit; Credit D. Credit; Credit 106.Which of the accounts are increased with a debit and decreased with a credit?
A. Liabilities, stockholders' equity, and revenues. B. Dividends, liabilities, and assets. C. Expenses, dividends, and stockholders' equity. D. Assets, dividends, and expenses.
2-23 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
107.Consider the following list of accounts: Cash
Retained Earnings
Service Revenue
Utilities Expense
Salaries Expense
Accounts Receivable
Accounts Payable
Common Stock
Equipment
Dividends
How many of these accounts have a normal debit balance?
A. Four. B. Five. C. Six. D. Seven. 108.Consider the following list of accounts: Accounts Payable Cash Prepaid Rent Common Stock Salaries Payable Equipment Supplies Rent Expense How many of these accounts have a normal credit balance?
A. Two. B. Three. C. Four. D. Five.
2-24 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
109.Consider the following accounts: Utilities Expense Accounts Payable Service Revenue Common Stock How many of these accounts are increased with debits?
A. One. B. Two. C. Three. D. Four. 110.Which one of the following accounts will have a credit balance?
A. Dividends B. Salary Expense C. Supplies D. Common Stock 111.Consider the following accounts: Dividends Insurance Expense Cash Service Revenue How many of these accounts are increased with credits?
A. One. B. Two. C. Three. D. Four.
2-25 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
112.The term commonly used in accounting to describe the format for recording a transaction is:
A. Chart of accounts B. Trial balance C. General ledger D. Journal entry 113.Which of the following is the appropriate debit/credit format for recording a business transaction? A.
Credit Name Debit Name
B.
Debit Name Credit Name
C.
Debit Name Credit Name
D.
Credit Name Debit Name
Credit Amount Debit Amount Debit Amount Credit Amount Debit Amount Credit Amount Credit Amount Debit Amount
A. Option A B. Option B C. Option C D. Option D
2-26 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
114.The following statements pertain to recording transactions. Which of them are true? I. Total debits should equal total credits. II. It is possible to have multiple debits or credits in one journal entry. III. Assets are always listed first in journal entries. IV. Some journal entries will have debits only.
A. I only. B. I and II. C. I, II, and IV. D. II, III, and IV. 115.Which of the following is not a possible journal entry?
A. Credit assets; Debit expenses. B. Debit assets; Debit stockholders' equity. C. Credit revenues; Debit assets. D. Debit expenses; Credit liabilities. 116.Providing services on account would be recorded with a:
A. Debit to Service Revenue. B. Credit to Accounts Receivable. C. Credit to Accounts Payable. D. Debit to Accounts Receivable. 117.Xenon Corporation borrows $75,000 from First Bank. Xenon Corporation records this transaction with a:
A. Debit to Investments. B. Credit to Retained Earnings. C. Credit to Notes Payable. D. Credit to Interest Expense.
2-27 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
118.Childers Service Company provides services to customers totaling $3,000, for which it billed the customers. How would the transaction be recorded?
A. Debit Cash $3,000, credit Service Revenue $3,000. B. Debit Accounts Receivable $3,000, credit Service Revenue $3,000. C. Debit Accounts Receivable $3,000, credit Cash $3,000. D. Debit Service Revenue $3,000, credit Accounts Receivable $3,000. 119.A company received a bill for newspaper advertising services, $400. The bill will be paid in 10 days. How would the transaction be recorded today?
A. Debit Advertising Expense $400, credit Accounts Payable $400. B. Debit Accounts Payable $400, credit Advertising Expense $400. C. Debit Accounts Payable $400, credit Cash $400. D. Debit Advertising Expense $400, credit Cash $400. 120.When a company pays utilities of $1,800 in cash, the transaction is recorded as:
A. Debit Utilities Expense $1,800, credit Utilities Payable $1,800. B. Debit Utilities Payable $1,800, credit Cash $1,800. C. Debit Cash $1,800, credit Utilities Expense $1,800. D. Debit Utilities Expense $1,800, credit Cash $1,800. 121.Assume that cash is paid for rent to cover the next year. The appropriate debit and credit are:
A. Debit Rent Expense, credit Cash. B. Debit Prepaid Rent, credit Rent Expense. C. Debit Prepaid Rent, credit Cash. D. Debit Cash, credit Prepaid Rent.
2-28 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
122.Summer Leasing received $12,000 for 24months rent in advance. How should Summer record this transaction?
A. Debit Prepaid Rent; credit Rent Expense. B. Debit Cash; credit Deferred Revenue. C. Debit Cash; credit Service Revenue. D. Debit Rent Expense; credit Cash. 123.Styleson Inc. performed cleaning services for its customers for cash. These transactions would be recorded as:
A. Debit Service Revenue, credit Cash. B. Debit Cash, credit Service Revenue. C. Debit Cash, credit Accounts Receivable. D. Debit Accounts Receivable, credit Service Revenue. 124.Assume that $18,000 cash is paid for insurance to cover the next year. The appropriate debit and credit are:
A. Debit Insurance Expense $18,000, credit Prepaid Insurance $18,000. B. Debit Prepaid Insurance $18,000, credit Insurance Expense $18,000. C. Debit Prepaid Insurance $18,000, credit Cash $18,000. D. Debit Cash $18,000, credit Prepaid Insurance $18,000. 125.Schooner Inc. purchased equipment by signing a note payable. This transaction would be recorded as:
A. Debit Equipment, credit Cash. B. Debit Cash, credit Notes Payable. C. Debit Notes Payable, credit Equipment. D. Debit Equipment, credit Notes Payable.
2-29 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
126.When a company pays $2,500 dividends to its stockholders, the transaction should be recorded as:
A. Debit Cash; credit Dividends. B. Debit Retained Earnings; credit Dividends. C. Debit Dividends; credit Cash. D. Debit Dividends; credit Accounts Payable. 127.Daniel Dino Restaurant owes employees' salaries of $15,000. This would be recorded as:
A. Debit Salaries Expense, credit Cash. B. Debit Salaries Payable, credit Cash. C. Debit Salaries Expense, credit Salaries Payable. D. Debit Salaries Payable, credit Salaries Expense. 128.Jerome purchased a building for his business by signing a note to be repaid over the next ten years. Which of the following correctly describes how to record this transaction?
A. Debit assets, credit liabilities. B. Debit assets, credit stockholders' equity. C. Debit liabilities, credit assets. D. Debit expenses, credit liabilities. 129.Incurring an expense for advertising on account would be recorded by:
A. Debiting liabilities. B. Crediting assets. C. Debiting an expense. D. Debiting assets.
2-30 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
130.Tyler Incorporated receives $150,000 from investors in exchange for shares of its common stock. Tyler Incorporated records this transaction with a:
A. Debit to Investments. B. Credit to Retained Earnings. C. Credit to Common Stock. D. Credit to Service Revenue. 131.The owner of an office building should report rent collected in advance as a debit to Cash and a credit to:
A. A liability. B. An asset other than Cash. C. Revenue. D. Stockholders' equity. 132.Clement Company paid an account payable related to a previous utility bill of $1,000. This transaction should be recorded as follows on the payment date:
A. Debit Accounts Payable $1,000, credit Cash $1,000. B. Debit Cash $1,000, credit Accounts Payable $1,000. C. Debit Utilities Expense $1,000, credit Cash $1,000. D. Debit Cash $1,000, credit Utilities Expense $1,000. 133.On July 7, Saints Inc. received $10,000 in cash from a customer for services to be provided on October 10. Which of the following describes how the transaction should be recorded on July 7?
A. Debit Cash $10,000, credit Service Revenue $10,000. B. Debit Accounts Receivable $10,000, credit Service Revenue $10,000. C. Debit Cash $10,000, credit Deferred Revenue $10,000. D. Debit Deferred Revenue $10,000, credit Cash $10,000.
2-31 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
134.On December 1, Bears Inc. signed a contract with a retailer to supply maintenance for the next calendar year. How should this transaction be recorded on December 1?
A. Debit Cash, credit Service Revenue. B. Debit Cash, credit Accounts Receivable. C. Debit Accounts Receivable, credit Service Revenue. D. No transaction should be recorded on December 1. 135.Sooner purchased office supplies on account. The transaction would be recorded as:
A. Debit Supplies, Credit Cash B. Debit Cash, Credit Accounts Payable C. Debit Accounts Payable, Credit Supplies D. Debit Supplies, Credit Accounts Payable 136.Tomlin & Company provides music for special occasions. On January 14, the Smith family hired Tomlin for an upcoming family wedding for an agreed upon fee of $10,000. The wedding was scheduled for May 23. As part of the agreement, the Smiths paid Tomlin half of the fee at the end of April with the remaining amount due by the end of June. How would Tomlin record the receipt of the final payment in June?
A. Credit to Accounts Receivable. B. Credit to Service Revenue. C. Credit to Cash. D. Debit to Deferred Revenue. 137.Bostel wanted to expand the size of its warehouse in order to generate more profits. The company decided to purchase the building adjacent to its existing warehouse. The company pays for the building by borrowing from the bank. The purchase would be recorded as:
A. Debit Cash; credit Notes Payable. B. Debit Buildings; credit Cash. C. Debit Buildings; credit Notes Payable. D. Debit Cash and Buildings; credit Notes Payable.
2-32 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
138.On July 5, Harris Company purchased supplies from the hardware store for $600 on account. On July 10, Harris receives a bill from the hardware store as a reminder about the account balance. On July 17, Harris pays the account in full. How does Harris record the transaction on July 17? A. Supplies
600
Accounts Payable B. Accounts Payable
600 600
Supplies C. Cash
600 600
Accounts Payable D. Accounts Payable Cash
600 600 600
A. Option A B. Option B C. Option C D. Option D 139.On July 31, ALOE Inc. received $5,000 cash from a customer who previously purchased ALOE's products on account. What entry should ALOE Inc. record at the time it receives cash?
A. Debit Accounts Receivable, $5,000; credit Cash, $5,000. B. Debit Cash, $5,000; credit Accounts Receivable, $5,000. C. Debit Cash, $5,000; credit Accounts Payable, $5,000. D. Debit Cash, $5,000; credit Service Revenue, $5,000.
2-33 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
140.A transaction is initially recorded in the general ______, and then subsequently posted to the general ______.
A. Debit; Credit B. Statement; Account C. Journal; Ledger D. Chart; Statement 141.Posting is the process of:
A. Analyzing the impact of the transaction on the accounting equation. B. Obtaining information about external transactions from source documents. C. Transferring the debit and credit information from the journal to individual accounts in the general ledger. D. Listing all accounts and their balances at a particular date. 142.A debit in a journal entry is always posted to the general ledger as a(n):
A. Increase. B. Credit. C. Decrease. D. Debit. 143.Posting transactions to T-accounts involves:
A. Analyzing source documents to determine the effects of transactions on the company's accounts. B. Listing all accounts and their balances at a particular date to ensure that debits equal credits. C. Preparing a chronological record of all transactions affecting the company. D. Transferring debit and credit information from the journal to the accounts in the general ledger.
2-34 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
144.Below is the company's Cash T-account. Cash Beg.
1,200 5,200 3,100
End.
3,300
The $3,100 amount could represent which of the following?
A. Purchase of supplies on account. B. Ending balance of cash. C. Payment for salaries. D. Collection from customers. 145.Below is the company's Cash T-account. Cash Beg.
1,200 5,200 3,100
End.
3,300
The $5,200 amount could represent which of the following?
A. Purchase of supplies on account. B. Ending balance of cash. C. Payment for salaries. D. Collection from customers.
2-35 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
146.The figure below is a depiction of a T-account. Account 1,700 Beg. 1,200 800 3,300 End.
Which of the following statements is correct?
A. The account is a liability account. B. During the period, a journal entry was recorded that included a credit to the account for $800. C. The amount reported to stockholders at the end of the period for this account is $3,300. D. All of the other answers provide a correct statement. 147.Following are transactions of Gotebo Tanners, Inc., a new company, during the month of January: 1. Issued 10,000 shares of common stock for $15,000 cash. 2. Purchased land for $12,000, signing a note payable for the full amount. 3. Purchased office equipment for $1,200 cash. 4. Received cash of $14,000 for services provided to customers during the month. 5. Purchased $300 of office supplies on account. 6. Paid employees $10,000 for their first month's salaries. What was the balance of Gotebo's Cash account following these six transactions?
A. $29,800. B. $19,300. C. $17,800. D. $22,400.
2-36 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
148.The Accounts Payable account has a beginning balance of $12,000 and the company purchased $50,000 of supplies on account during the month. The ending balance was $10,000. How much did the company pay to creditors during the month?
A. $50,000. B. $52,000. C. $60,000. D. $62,000. 149.On March 3, Cobra Inc. purchased a desk for $450 on account. On March 22, Cobra purchased another desk for $500 also on account, and then on March 24, Cobra paid $400 on account. At the end of March, what amount should Cobra report for desks (assuming these two desks were the only desks they had)?
A. $50. B. $450. C. $500. D. $950. 150.The Accounts Receivable account has a beginning balance of $10,000 and the company provides services of $50,000 on account during the month. The ending balance was $12,000. How much did the company receive from customers during the month?
A. $50,000. B. $52,000. C. $48,000. D. $62,000.
2-37 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
151.A trial balance can best be explained as a list of:
A. The income statement accounts used to calculate net income. B. Revenue, expense, and dividend accounts used to show the balances of the components of retained earnings. C. The balance sheet accounts used to show the equality of the accounting equation. D. All accounts and their balances at a particular date. 152.A trial balance represents the:
A. Source documents used to determine the effects of transactions on the company's accounts. B. List of all accounts and their balances at a particular date to ensure that debits equal credits. C. Chronological record of all transactions affecting the company. D. Process of transferring debit and credit information from the journal to the accounts in the general ledger.
2-38 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
153.Lithuanian Motors has the following balance sheet accounts: Land Equipment Salaries Payable
$170,000 66,000 ?
Notes Payable
88,000
Supplies
14,000
Cash
26,000
Common Stock
100,000
Retained Earnings
40,000
Accounts Payable
?
Prepaid Rent
12,000
If the company has total assets of $288,000, what is the balance of the company's Salaries Payable account?
A. $15,000. B. $25,000. C. $12,000. D. Cannot be determined given the information provided.
2-39 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
154.Finnish Motors has the following balance sheet accounts: Land
$150,000
Equipment
90,000
Salaries Payable
12,000
Notes Payable
99,000
Supplies
10,000
Cash
25,000
Common Stock
40,000
Retained Earnings
100,000
Accounts Payable
?
Prepaid Rent
?
If the company has total liabilities and stockholders' equity of $290,000, what is the balance of the company's Prepaid Rent account?
A. $15,000. B. $25,000. C. $12,000. D. $39,000.
Matching Questions
2-40 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
155.Match each step of the measurement process with its description.
Use source documents to identify accounts affected by an external 1. Step 6
transaction.
____
2. Step 3
Analyze the impact of the transaction on the accounting equation.
____
Assess whether the transaction results in a debit or credit to the 3. Step 5
account balance.
____
4. Step 2
Record transactions in a journal using debits and credits.
____
5. Step 4
Post transactions to the general ledger.
____
6. Step 1
Prepare a trial balance.
____
156.Match each term with its definition.
1. Chart of accounts 2. Internal transactions 3. Accounting cycle 4. External transactions
Full set of procedures used to accomplish the measurement/communication process of financial accounting. ____ Activities of the company conducted with separate economic entities. ____ Events that affect the financial position of the company but do not include an exchange with a separate economic entity. ____ A summary of the effects of all transactions related to a particular item over a period of time. ____ A list of all account names used to record transactions of a
5. Accounts
company. ____
157.Match each term with how related transactions affect the accounting equation.
1. Assets
Transactions that affect the left side of the accounting equation. ____ Transactions that affect the right side of the accounting equation not
2. Revenues
related to stockholders' equity. ____
3. Liabilities
Transactions that increase stockholders' equity. ____ Transactions that decrease stockholders' equity related to cost of
4. Dividends
generating of generating revenues. ____ Transactions that decrease stockholders' equity related to distributions
5. Expenses
to stockholders. ____
2-41 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
158.Match each term with its description.
1. Debit
Convention used to record transactions of a company. ____
2. Journal entry
Left side of an account. ____
3. Journal
Right side of an account. ____
4. Credit
Chronological record of all transactions.
____
List of all accounts and their balances showing that debits equal 5. Trial balance 6. T-account
credits. ____ Simplified form of a general ledger account.
____
Essay Questions
159.Below are the steps in the measurement process of external transactions. Arrange them from first (1) to last (6). (a) Post the transaction to the T-accounts in the general ledger. (b) Assess whether the impact of the transaction results in a debit or credit to the account balance. (c) Use source documents to identify accounts affected by external transactions. (d) Analyze the impact of the transaction on the accounting equation. (e) Prepare a trial balance. (f) Record transactions using debits and credits.
2-42 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
160.A company received a utility bill of $600 but did not pay it. Indicate the amount of increases and decreases in the accounting equation.
161.A company purchases supplies on account for $1,700. Indicate the amount of increases and decreases in the accounting equation.
162.A company provides services to customers on account for $2,400. Indicate the amount of increases and decreases in the accounting equation.
2-43 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
163.A company pays $800 dividends to stockholders. Indicate the amount of increases and decreases in the accounting equation.
164.A company pays $1,300 on account for supplies previously purchased on account. Indicate the amount of increases and decreases in the accounting equation.
2-44 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
165.The following transactions occur for the Hamilton Manufacturers. (a) Provide services to customers on account for $4,500. (b) Purchase equipment by signing a note with the bank for $10,000. (c) Pay advertising of $1,500 for the current month. Analyze each transaction and indicate the amount of increases and decreases in the accounting equation.
166.Using the notion that the accounting equation (Assets = Liabilities + Stockholders' Equity) must remain in balance, indicate whether each of the following transactions is possible. (a) Cash decreases; Accounts Payable decreases. (b) Salaries Expense increases; Salaries Payable decreases. (c) Accounts Receivable decreases; Service Revenue increases.
2-45 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
167.Suppose a company has the following balance sheet accounts: Accounts Land Building Salaries payable Common stock
Balances $9,000 ? 3,700 ?
Accounts payable
2,600
Cash
5,300
Retained earnings
11,600
Supplies
3,200
Equipment
4,500
Calculate the missing amounts assuming the company has total assets of $40,000.
2-46 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
168.For each of the following accounts, indicate whether a debit or credit is used to increase (+) or decrease (-) the balance of the account. Account
Debit
Credit
(a) Common Stock (b) Liability (c) Asset (d) Revenue (e) Dividend (f) Retained Earnings (g) Expense
2-47 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
169.For each of the following accounts, indicate whether we use a debit or a credit to increase the balance of the account. (a) Accounts Receivable (b) Accounts Payable (c) Salaries Expense (d) Service Revenue (e) Supplies (f) Common Stock (g) Advertising Expense (h) Dividends
2-48 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
170.For each of the following accounts, indicate whether we use a debit or a credit to decrease the balance of the account. (a) Accounts Receivable (b) Accounts Payable (c) Salaries Expense (d) Service Revenue (e) Supplies (f) Common Stock (g) Advertising Expense (h) Dividends
171.A company sells common stock for $20,000 cash. Record the transaction.
2-49 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
172.A company purchases a building for $100,000, paying $20,000 cash and signing a note payable for the remainder. Record the transaction.
173.A company purchases machinery for $15,000 cash. Record the transaction.
174.A company purchases office supplies on account for $7,500. Record the transaction.
2-50 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
175.A company provides services to customers on account, $3,500. Record the transaction.
176.A company provides services to customers for $2,400 cash. Record the transaction.
177.A company pays employees' salaries of $4,200 for the current period. Record the transaction.
2-51 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
178.A company pays $2,000 dividends to its stockholders. Record the transaction.
179.A company collects $4,000 cash from customers for services previously provided on account. Record the transaction.
180.A company receives $6,500 cash in advance from customers for services to be provided next year. Record the transaction.
2-52 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
181.A company pays $5,400 for maintenance in the current period. Record the transaction.
182.A company pays $12,000 to purchase a one-year insurance policy. Record the transaction.
183.Record the following transactions for Acme Builders: (a) Purchase office supplies on account, $1,200. (b) Provide services to customers for cash, $2,500. (c) Pay $1,100 in salaries for the current month.
2-53 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
184.Record the following transactions for the Stroud Music Store: (a) Provide music lessons to students for $12,000 on account. (b) Purchase music supplies on account, $1,500. (c) Pay rent for the current month, $2,000. (d) Receive $10,000 cash from students in (a) above.
185.Rite Shoes was involved in the transactions described below. Record each transaction. If an entry is not required, state "No Entry." (a) Purchased $8,200 of supplies on account. (b) Paid weekly salaries, $920. (c) Provide services to customers: Cash: $7,100; On account: $5,300. (d) Paid for supplies purchased in (a) above. (e) Placed an order for $6,200 of supplies.
2-54 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
186.Record the following transactions. If an entry is not required, state "No Entry." (a) Started business by issuing 10,000 shares of common stock for $20,000. (b) Hired Rebecca as an administrative assistant, promising to pay her $2,000 every two weeks. (c) Rented a building for three years at $500 per month and paid six months' rent in advance. (d) Purchased equipment for $5,400 cash. (e) Purchased $1,800 of supplies on account. (f) Provided services to customers for $7,800 cash. (g) Paid employees' salaries, $5,200. (h) Paid for supplies purchased in item (e). (i) Paid $800 for current advertising in a local newspaper. (j) Paid utility bill of $1,300 for the current month.
2-55 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
187.Consider the following T-account for Accounts Payable. Accounts Payable 10,200 8,800 4,500
1. Compute the balance of the Accounts Payable account. 2. Give an example of a transaction that would have resulted in the $8,800 posting to the account. 3. Give an example of a transaction that would have resulted in the $4,500 posting to the account.
2-56 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
188.Consider the following transactions for Mittel Corporation: a. Sell common stock for $10,000. b. Purchase equipment for $11,500 cash. c. Pay employees' salaries of $3,700. e. Provide services to customers for $6,200 cash. 1. Post these transactions to the Cash T-account. Assume the balance of Cash before these transactions is $4,200. 2. Calculate the ending balance of the Cash account.
189.Use the following information to prepare a trial balance. Cash
$6,200 Dividends
$1,200
Deferred revenue
1,200 Salaries expense
2,200
Prepaid insurance
1,200 Accounts receivable
3,400
Accounts payable
1,900 Common stock
6,200
Retained earnings
1,600 Service revenue
7,100
Maintenance Utilities expense
3,000 expense
800
2-57 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
190.Below is a list of activities. Transaction
Assets
=
Liabilities
+
Stockholders’ Equity
1. Obtain a loan at the bank
Increase
=
Increase
+
No Effect
2. Issue common stock to stockholders for cash. 3. Purchase equipment for cash. 4. Pay cash for insurance in advance. 5. Pay cash for workers’ employees’ salaries in the current period. 6. Pay accounts payable. 7. Purchase office supplies on account. 8. Provide services to customers for cash. 9. Provide services to customers on account. 10. Pay cash dividends to stockholders. 11. Pay cash for utilities in the current period.
Required: For each activity, indicate whether the transaction increases, decreases, or has no effect on assets, liabilities, and/or stockholders' equity.
2-58 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
191.Below is a list of activities. Transaction 1. Issue common stock in exchange for cash, $15,000
Assets
=
Liabilities
+$15,000
=
$0
+ Stockholders’ Equity +
+$15,000
2. Purchase equipment for cash, 20,000. 3. Pay cash for insurance in advance, $2,400. 4. Pay cash for workers’ employees’ salaries in the current period, $17,200. 5. Pay accounts payable, $1,000. 6. Purchase office supplies on account, $3,750. 7. Provide services to customers for cash, $6,800. 8. Provide services to customers on account, $12,300. 9. Pay cash dividends to stockholders, $2,500. 10. Pay cash for utilities in the current period, $1,200. Totals
Required: For each activity, indicate the impact on the accounting equation. After doing all the transactions, ensure that the accounting equation remains in balance.
2-59 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
192.Reed owns a consulting company, while Sophie operates a maintenance shop. For the month of June, the following transactions occurred. June 2
Sophie decides that she would like consulting at the end of the month and pays Reed $300 in advance.
June 5
Sophie provides maintenance to Reed on account, $175.
June 7
Reed borrows $500 from Sophie by signing a note.
June 14
Sophie purchases maintenance supplies from Tap Corporation, paying cash of $250.
June 19
Reed pays $225 to Sophie for maintenance provided on June 5.
June 25
Reed pays the utility bill for the month of June, $200.
June 28
Sophie receives consulting from Reed equaling the amount paid on June 2.
June 30
Reed pays $500 to Sophie for money borrowed on June 7.
Required: Record each transaction for Reed. Keep in mind that Reed may not need to record all transactions.
2-60 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
193.Reed owns a consulting company, while Sophie operates a maintenance shop. For the month of June, the following transactions occurred. June 2
Sophie decides that she would like consulting at the end of the month and pays Reed $300 in advance.
June 5
Sophie provides maintenance to Reed on account, $175.
June 7
Reed borrows $500 from Sophie by signing a note.
June 14
Sophie purchases maintenance supplies from Tap Corporation, paying cash of $250.
June 19
Reed pays $225 to Sophie for maintenance provided on June 5.
June 25
Reed pays the utility bill for the month of June, $200.
June 28
Sophie receives consulting from Reed equaling the amount paid on June 2.
June 30
Reed pays $500 to Sophie for money borrowed on June 7.
Reed Assets
Liabilities + =
June 2
Sophie Stockholders’
Assets
Equity
Liabilities
+
=
Stockholders’ Equity
+$300 +$300 =
+$300 +
$0
=
$0 +
$0
-$300 5 7 14 19 25 28 30
Required: 1. Record transactions for Sophie. Keep in mind that Sophie may not need to record all transactions. 2. Using the format shown above, indicate the impact of each transaction on the accounting equation for each company.
2-61 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
2-62 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
194.Below is a list of typical accounts. Accounts
Type of Account
Normal Balance (Debit or Credit)
1. Service Revenue 2. Common Stock 3. Dividends 4. Salaries Expense 5. Accounts Payable 6. Buildings 7. Interest Revenue 8. Accounts Receivable 9. Retained Earnings 10. Accounts Payable 11. Utilities Expense 12. Advertising Expense
Required: For each account, (1) indicate the type of account and (2) whether the normal account balance is a debit or credit. For type of account, choose from asset, liability, stockholders' equity, dividend, revenue, or expense.
2-63 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
195.Below are the transactions for Racer, Inc. for April, the first month of operations. April 1
Obtain a loan of $50,000 from the bank.
April 2
Issue common stock in exchange for cash of $20,000.
April 7
Purchase equipment for $40,000 cash.
April 10 Purchase cleaning supplies of $4,000 on account. April 12 Provide services of $5,000 for cash. April 16 Pay employees $1,200 for work performed. April 19 Pay for advertising in a local newspaper, costing $500. April 23 Provide services of $7,000 on account. April 29 Pay employees $1,500 for work performed. April 30 A utility bill of $1,200 for the current month is paid. April 30 Pay dividends of $700 to stockholders.
Required: 1. Record each transaction. 2. Post each transaction to the appropriate T-accounts. 3. Calculate the balance of each account. 4. Prepare a trial balance for June. Racer uses the following accounts: Cash, Accounts Receivable, Supplies, Equipment, Accounts Payable, Notes Payable, Common Stock, Dividends, Service Revenue, Salaries Expense, Advertising Expense, and Utilities Expense.
2-64 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
196.Wolverine Incorporated had the following trial balance at the beginning of April. Account Title
Debits
Cash
$2,800
Accounts receivable
Credits
900
Supplies
3,600
Equipment
9,100
Accounts payable
$2,200
Notes payable
3,600
Common stock
9,000
Retained earnings
1,600
The following transactions occur in April: April 1
Issue common stock in exchange for $15,000 cash. Purchase equipment with a long-term note for $4,500 from Hoosier
April 2
Corporation.
April 4
Purchase supplies for $1,500 on account.
April 10 Provide services to customers on account for $9,000. April 15 Pay creditors on account, $1,200. April 20 Pay employees $2,300 for the first half of the month. April 22 Provide services to customers for $11,500 cash. April 24 Pay $1,300 on the note from Hoosier Corporation. April 26 Collect $7,100 on account from customers. April 28 Pay $1,700 to the local utility company for April gas and electricity. April 30 Pay $3,200 rent for the April.
Required: 1. Record each transaction. 2. Post each transaction to the appropriate T-accounts. 3. Calculate the balance of each account at April 30. (Hint: Be sure to include the balance at the beginning of April in each T-account.) 4. Prepare a trial balance as of April 30.
2-65 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
2-66 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
197.Baker Incorporated specializes in training and veterinary services to for household pets, such as dogs, birds, lizards, fish, and of course, cats. After the first 11 months of operations in 2018, Baker has the following account balances. Account Title
Debits
Cash
$13,300
Supplies
2,600
Prepaid rent
4,800
Equipment
82,100
Buildings
200,000
Credits
Accounts payable
$9,500
Deferred revenue
3,400
Common stock
145,000
Retained earnings
50,200
Dividends
9,000
Service revenue
250,000
Salaries expense
100,000
Advertising expense
15,600
Utilities expense
30,700
Totals
458,100
$458,100
The following transactions occur during December 2018: December 1-31
Throughout the month, Baker provides services to customers for cash, $25,400. (Hint: Record the entire month’s services in a single entry.)
December 4
Purchase pet supplies on account, $2,700.
December 8
Pay for fliers to be distributed to local residences to advertise the company’s services, $3,100.
December 9
Pay for supplies purchased on December 4.
December 12
Issue additional shares of common stock for cash, $6,000.
December 16
Pay cash on accounts payable, $6,600.
December 19
Purchase equipment with cash, $7,800.
December 22
Pay utilities for December, $4,400.
December 24
Receive cash from customers for services to be provided
2-67 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
next January, $2,500. December 27
One of Baker’s trainers takes a part-time job at the zoo and earns a salary of $1,300. The zoo and Baker are separate companies.
December 30
Pay employees’ salaries for the current month, $10,000.
December 31
Pay dividends to stockholders, $3,000.
Required: 1. Record each transaction. 2. Post each transaction to the appropriate T-accounts. 3. Calculate the balance of each account at December 31. (Hint: Be sure to include the balance at the beginning of December in each T-account.) 4. Prepare a trial balance as of December 31.
2-68 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
198.Below are the account balances of Heron Company at the end of November. Accounts Cash Accounts Receivable
Balances $12,000 ?
Rent Expense
1,000
Supplies
5,000
Equipment, net
19,000
Accounts Payable
7,000
Service Revenue
40,000
Utilities Payable
1,000
Deferred Revenue
6,000
Common Stock
19,000
Utilities Expense
2,000
Retained Earnings
15,000
Salaries Payable
2,000
Salaries Expense
9,000
Insurance Expense
6,000
Advertising Expense
1,000
Supplies Expense
10,000
Dividends
3,000
Prepaid Insurance
4,000
Legal Fees Expense
6,000
Required: Prepare a trial balance by placing amounts in the appropriate debit or credit column and determining the balance of the Accounts Receivable account.
2-69 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
199.Describe the difference between external events and internal events and give two examples of each.
200.Describe the six steps in the measurement process of external transactions.
201.Explain what it means that external transactions have a dual effect.
2-70 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 02 The Accounting Cycle: During the Period Answer Key
True / False Questions
1.
External transactions are transactions the firm conducts with a separate economic entity, such as selling products to a customer, purchasing supplies from a vendor, paying salaries to an employee, and borrowing money from a bank. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Topic: External Transactions
2.
Internal transactions are events that affect the financial position of the company but do not include an exchange with a separate economic entity. Examples are using supplies on hand and earning revenues after having received cash in advance from a customer. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Topic: External Transactions
2-71 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3.
A list of all account names used to record transactions of a company is referred to as a Taccount. FALSE This is referred to as a chart of accounts.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Topic: External Transactions
4.
After recording each transaction, total assets must equal total liabilities plus stockholders' equity. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
5.
If a transaction causes total assets of the company to increase by $2,000, then liabilities plus stockholders' equity also increases by $2,000. TRUE AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
2-72 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
6.
If a transaction causes total assets of the company to increase by $5,000 and total liabilities to increase by $3,000, then stockholders' equity increases by $8,000. TRUE AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
7.
Borrowing cash from the bank causes assets to increase and liabilities to increase. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
8.
Purchasing equipment using cash causes assets to increase. FALSE One asset goes up; another asset goes down. There is no change to total assets.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
2-73 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
9.
Providing services to customers for cash causes stockholders' equity to increase. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
10.
Paying employees' salaries for the current month causes no change to stockholders' equity. FALSE Salaries expense would reduce stockholders' equity.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
11.
Paying dividends to its stockholders causes a company's stockholders' equity to decrease. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
2-74 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12.
Selling common stock for cash causes assets to increase and stockholders' equity to decrease. FALSE Stockholders' equity increases.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
13.
Purchasing office supplies on account causes assets to increase and liabilities to increase. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
14.
Providing services to customers on account causes assets to increase and stockholders' equity to increase. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
2-75 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15.
Receiving cash in advance from a customer for services to be provided in the future causes assets to increase and stockholders' equity to increase. FALSE Assets increase and liabilities increase.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
16.
Paying for one year of rent in advance does not affect the accounting equation. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
17.
Purchasing supplies on account increases the balance of the Accounts Receivable account. FALSE The balance of Accounts Payable increases.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
2-76 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
18.
Amounts owed from customers are recorded in the Accounts Receivable account. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
19.
The two components of stockholders' equity are Debits and Credits. FALSE The two components of stockholders' equity are Common Stock and Retained Earnings.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
20.
Revenues have the effect of increasing retained earnings. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
21.
Expenses have the effect of decreasing retained earnings. TRUE AACSB: Reflective Thinking 2-77 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
22.
Receiving cash in advance from customers increases the Service Revenue account. FALSE Receiving cash in advance from customers increases the Deferred Revenue account.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
23.
Deferred Revenue is a liability account. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
24.
Liability accounts increase with a debit and decrease with a credit. FALSE Liability accounts increase with a credit and decrease with a debit.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand 2-78 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 2 Medium Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Topic: Effects on Account Balances in the Basic Accounting Equation
25.
Liability accounts increase with a credit and decrease with a debit. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium
Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Topic: Effects on Account Balances in the Basic Accounting Equation
26.
Common Stock increases with a credit and decreases with a debit. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium
Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Topic: Effects on Account Balances in the Basic Accounting Equation
27.
Revenue accounts increase with a debit and decrease with a credit. FALSE Revenue accounts increase with a credit and decrease with a debit.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. 2-79 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Effects on Account Balances in the Basic Accounting Equation
28.
Expense accounts increase with a debit and decrease with a credit. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium
Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Topic: Effects on Account Balances in the Basic Accounting Equation
29.
The Dividends account increases with a credit and decreases with a debit. FALSE The Dividends account increases with a debit and decreases with a credit.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Topic: Effects on Account Balances in the Basic Accounting Equation
30.
A debit to an account balance always results in the balance increasing. FALSE A debit increases assets, dividends, and expenses, but decreases liabilities, stockholders' equity, and revenues.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium
2-80 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Topic: Effects on Account Balances in the Basic Accounting Equation
31.
A credit to an account balance always results in the balance decreasing. FALSE A credit decreases assets, dividends, and expenses, but increases liabilities, stockholders' equity, and revenues.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Topic: Effects on Account Balances in the Basic Accounting Equation
32.
A journal provides a chronological record of all transactions affecting a firm. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
33.
For each transaction, there must be at least one debit amount and one credit amount. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
2-81 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
34.
For each transaction, the total debit amounts must equal the total credit amounts. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
35.
Selling common stock for cash is recorded with a debit to common stock. FALSE Selling common stock for cash is recorded with a credit to common stock.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
36.
Borrowing cash from the bank is recorded with a debit to cash. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
2-82 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
37.
Purchasing office supplies is recorded with a credit to office supplies. FALSE Purchasing office supplies is recorded with a debit to office supplies.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
38.
Paying employees' salaries for the current period is recorded with a debit to Salaries Expense. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
39.
Providing services to customers is recorded with a debit to Service Revenue. FALSE Providing services to customers is recorded with a credit to Service Revenue.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
2-83 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
40.
The general ledger includes all accounts used to record the company's transactions. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-05 Post transactions to the general ledger. Topic: Posting to the General Ledger
41.
The process of transferring the debit and credit information from the journal to individual accounts in the general ledger is called journalizing. FALSE The process is called posting.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-05 Post transactions to the general ledger. Topic: Posting to the General Ledger
42.
After posting transactions to the general ledger accounts, the sum of the accounts with debit balances should equal the sum of the accounts with credit balances. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-06 Prepare a trial balance. Topic: Trial Balance
2-84 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
43.
A trial balance is a list of all accounts and their balances at a particular date, showing that assets equal liabilities. FALSE The trial balance shows that total debits equal total credits.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-06 Prepare a trial balance. Topic: Trial Balance
44.
If total debits equal total credits in the trial balance, then all balances are correct. FALSE A trial balance could contain offsetting errors where the balance of one account is misstated in one direction but the balance of another account (with the same type of debit or credit balance) is misstated in the other direction.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-06 Prepare a trial balance. Topic: Trial Balance
Multiple Choice Questions
2-85 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
45.
Which of the following is not part of measuring external transactions?
A. Using source documents to analyze accounts affected. B. Recording transactions. C. Making payments on all amounts owed. D. Analyzing transactions for their effect on the accounting equation. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Topic: External Transactions
46.
External events include all of the following except:
A. Paying rent. B. Purchasing equipment. C. Using office supplies. D. Collecting an account receivable. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Topic: External Transactions
47.
The full set of procedures used to accomplish the measurement/communication process of financial accounting is referred to as the:
A. Trial balance B. Accounting cycle C. Chart of accounts D. General ledger AACSB: Reflective Thinking 2-86 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Topic: External Transactions
48.
Which step in the process of measuring external transactions involves assessing the equality of total debits and total credits for the period?
A. Use source documents to determine accounts affected by the transaction. B. Prepare a trial balance. C. Analyze the impact of the transaction on the accounting equation. D. Post the transaction to the T-account in the general ledger. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Topic: External Transactions
49.
A(n) _______________ summarizes all transactions related to a particular item over a period of time.
A. Debit B. Account C. Chart of accounts D. Source document AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Topic: External Transactions
2-87 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
50.
A list of all account names used to record transactions of a company is referred to as the:
A. Chart of Accounts B. Income statement C. General journal D. Balance sheet AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Topic: External Transactions
51.
For each transaction recorded in an accounting system, the basic equation that must be maintained at all times is:
A. Assets = Liabilities + Stockholders' Equity. B. Cash Increases = Cash Decreases. C. Revenues = Expenses + Dividends. D. Assets = Liabilities. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
2-88 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
52.
The following amounts are reported in the ledger of Mariah Company: Assets
$80,000
Liabilities
36,000
Retained Earnings
12,000
What is the balance in the Common Stock account?
A. $44,000. B. $32,000. C. $48,000. D. $42,000. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
53.
When a company pays employees' salaries for the current period, how will the basic accounting equation be affected?
A. Stockholders' equity decreases. B. Revenues decrease. C. Expenses decrease. D. Liabilities decrease. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
2-89 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
54.
When cash payments are made to stockholders, what is the effect on the company's accounts?
A. Cash decreases and dividends increase. B. Cash increases and dividends decrease. C. Cash decreases and common stock decreases. D. Cash increases and common stock increases. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
55.
Receiving cash from customers before services are performed results in:
A. Prepaid Assets. B. Service Revenue. C. Deferred Revenues. D. Accounts Receivable. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
2-90 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
56.
When the company pays stockholders a dividend, what is the effect on the accounting equation for that company?
A. Decrease stockholders' equity and increase assets. B. Increase liabilities and increase assets. C. Decrease assets and decrease liabilities. D. Decrease assets and decrease stockholders' equity. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
57.
Pumpkin Inc. sold $500 in pumpkins to a customer on account on January 1. On January 11 Pumpkin collected the cash from that customer. What is the impact on Pumpkin's accounting equation from the collection of cash?
A. No net effect to the accounting equation. B. Decrease assets and increase liabilities. C. Increase assets and increase liabilities. D. Decrease assets and decrease liabilities. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
2-91 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
58.
A company receives a $50,000 cash deposit from a customer on October 15 but will not provide services until November 20. Which of the following statements is true?
A. The company records service revenue on October 15. B. The company records cash collection on November 20. C. The company records deferred revenue on October 15. D. The company records nothing on October 15. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
59.
Which of the following would increase assets and increase liabilities?
A. Provide services to customers on account. B. Purchase office supplies on account. C. Pay dividends to stockholders. D. Receive a utility bill but do not pay it immediately. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
60.
Receiving cash from an account receivable:
A. Increases revenue and decreases an asset. B. Decreases a liability and increases an asset. C. Increases an asset and increases revenue. D. Increases one asset and decreases another asset. AACSB: Reflective Thinking 2-92 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
61.
An expense has what effect on the accounting equation?
A. Decrease liabilities. B. Decrease stockholders' equity. C. Increase assets. D. No effect. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
62.
Revenues have what effect on the accounting equation?
A. Increase liabilities. B. Decrease assets. C. Increase stockholders' equity. D. No effect. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
2-93 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
63.
Investments by stockholders have what effect on the accounting equation?
A. Assets increase and liabilities increase. B. Expenses increase and liabilities increase. C. Assets increase and revenues increase. D. Assets increase and stockholders' equity increases. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
64.
Which of the following is not possible when recording a transaction?
A. Liabilities increase and assets decrease. B. Stockholders' equity increases and assets increase. C. One asset increases and another asset decreases. D. Stockholders' equity decreases and assets decrease. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Blooms: Understand Difficulty: 3 Hard Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
65.
Purchasing office supplies on account will:
A. Not change assets. B. Increase assets and decrease liabilities. C. Increase assets and increase liabilities. D. Increase assets and increase stockholders' equity. AACSB: Reflective Thinking 2-94 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
66.
Providing services and receiving cash will:
A. Increase assets and increase stockholders' equity. B. Increase assets and increase liabilities. C. Decrease assets and increase liabilities. D. Decrease liabilities and increase stockholders' equity. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
67.
When a company provides services on account, the accounting equation would be affected as follows:
A. Assets increase. B. Revenues increase. C. Assets increase and liabilities decrease. D. Assets increase and stockholders' equity increases. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
2-95 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
68.
If a company provides services on account, which of the following is true?
A. Expenses increase. B. Liabilities increase. C. Stockholders' equity increases. D. Assets decrease. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
69.
When a payment is made on an account payable:
A. Assets and stockholders' equity decrease. B. Assets and liabilities decrease. C. Liabilities and revenues decrease. D. Assets and expenses decrease. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
70.
Purchasing office equipment on account has what impact on the accounting equation?
A. Stockholders' equity decreases and assets increase. B. Liabilities increase and assets increase. C. Assets decrease and liabilities decrease. D. Assets increase and stockholders' equity increases. AACSB: Reflective Thinking AICPA: FN Measurement 2-96 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
71.
Purchasing supplies for cash has what effect on the accounting equation?
A. Increase assets. B. Decrease stockholders' equity. C. Decrease liabilities. D. No effect. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
72.
On January 1, Brad Inc. sold $30,000 in products to a customer on account. Then on January 10, Brad collected the cash on that account. What is the impact on Brad's accounting equation from the collection of cash on January 10?
A. No net effect on the accounting equation. B. Assets increase and liabilities decrease. C. Assets decrease and liabilities decrease. D. Assets increase and stockholders' equity increases. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
2-97 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
73.
On September 30, MFP Co. paid employee salaries of $7,000, including $1,000 it owed to its employees last month. What are the effects of this transaction on the accounting equation?
A. Expenses increased, liabilities increased, and assets increased. B. Assets decreased, liabilities decreased, and expenses increased. C. Assets decreased, expenses decreased, and liabilities increased. D. Expenses decreased, liabilities decreased, and assets decreased. E. Assets increased, expenses increased, and liabilities decreased. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
74.
Following are transactions of Gotebo Tanners, Inc., a new company, during the month of January: 1. Issued 10,000 shares of common stock for $15,000 cash. 2. Purchased land for $12,000, signing a note payable for the full amount. 3. Purchased office equipment for $1,200 cash. 4. Received cash of $14,000 for services provided to customers during the month. 5. Purchased $300 of office supplies on account. 6. Paid employees $10,000 for their first month's salaries. What was the total amount of Gotebo's liabilities following these six transactions?
A. $12,300. B. $27,300. C. $22,600. D. $15,500. Liabilities = ($12,000 + $300) = $12,300.
AACSB: Analytical Thinking
2-98 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Blooms: Understand Difficulty: 3 Hard Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
75.
Consider the following transactions: Issued common stock for cash. Purchased equipment by signing a note payable. Paid rent for the current month. Collected cash from customers on account. How many of these four transactions increased the given company's total assets?
A. One. B. Two. C. Three. D. Four. (1) Issued common stock for cash and (2) purchased equipment by signing a note payable.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
2-99 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
76.
Assume that Sallisaw Sideboards, Inc. had a retained earnings balance of $10,000 on April 1, and that the company had the following transactions during April. Issued common stock for cash, $5,000. Provided services to customers on account, $2,000. Provided services to customers in exchange for cash, $900. Purchased equipment and paid cash, $4,300. Paid April rent, $800. Paid employees' salaries for April, $700. What was Sallisaw's retained earnings balance at the end of April?
A. $11,400. B. $12,100. C. $16,400. D. Some other amount. Beginning retained earnings $10,000 + Net income $1,400 - Dividends $0 = Ending retained earnings $11,400. Net Income = Revenue ($2,000 + $900) - Expenses ($800 + $700) = $1,400.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Blooms: Understand Difficulty: 3 Hard Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
2-100 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
77.
Consider the following transactions: Issued common stock for cash. Purchased equipment by signing a note payable. Provided services to customers on account. Collected cash from customers on account. How many of these four transactions increased the given company's total liabilities?
A. One. B. Two. C. Three. D. Four. Purchased equipment by signing a note payable.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
2-101 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
78.
Following are transactions of Gotebo Tanners, Inc., a new company, during the month of January: 1. Issued 10,000 shares of common stock for $15,000 cash. 2. Purchased land for $12,000, signing a note payable for the full amount. 3. Purchased office equipment for $1,200 cash. 4. Received cash of $14,000 for services provided to customers during the month. 5. Purchased $300 of office supplies on account. 6. Paid employees $10,000 for their first month's salaries. How many of these transactions decreased Gotebo's total assets?
A. One. B. Two. C. Three. D. Four. Transaction #6.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
2-102 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
79.
Following are transactions of Gotebo Tanners, Inc., a new company, during the month of January: 1. Issued 10,000 shares of common stock for $15,000 cash. 2. Purchased land for $12,000, signing a note payable for the full amount. 3. Purchased office equipment for $1,200 cash. 4. Received cash of $14,000 for services provided to customers during the month. 5. Purchased $300 of office supplies on account. 6. Paid employees $10,000 for their first month's salaries. How many of these transactions increased Gotebo's liabilities?
A. Four. B. Three. C. Two. D. One. Transactions #2 and #5.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
80.
Which of the following transactions causes a decrease in stockholders' equity?
A. Pay dividends to stockholders. B. Obtain cash by borrowing from a local bank. C. Provide services to customers on account. D. Purchase office equipment for cash. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium 2-103 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
81.
How many of the following events would require an expense to be recorded? Ordering office supplies Hiring a receptionist Paying employees' salaries for the current month Receiving but not paying a current utility bill Paying for insurance in advance
A. One. B. Two. C. Three. D. Four. (1) Paying employee salaries for the current month and (2) Receiving but not paying a current utility bill.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
82.
Which of the following is NOT possible for a business transaction?
A. Increase assets and decrease revenue. B. Decrease assets and increase expense. C. Increase liabilities and increase expense. D. Decrease liabilities and increase revenue. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard
2-104 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
83.
Which of the following transactions would cause a decrease in both assets and stockholders' equity?
A. Paying insurance premium for the next two years. B. Purchasing office equipment on account. C. Paying advertising for the current month. D. Providing installation services to customers. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
84.
When a company issues common stock for cash, what is the effect on the accounting equation for the company?
A. Assets increase and liabilities increase. B. Assets increase and stockholders' equity increases. C. Assets decrease and liabilities decrease. D. Liabilities decrease and stockholders' equity increases. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
2-105 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
85.
If the liabilities of a company increased by $55,000 during a month and the stockholders' equity decreased by $21,000 during that same month, did assets increase or decrease and by how much?
A. $34,000 increase. B. $55,000 increase. C. $34,000 decrease. D. $76,000 increase. Increase in Liabilities ($55,000) - Decrease in Stockholders' Equity ($21,000) = Increase in Assets ($34,000).
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
86.
Which of the following transactions would cause an increase in both the assets and liabilities of a company?
A. Paying for the current month's rent. B. Pay for inventory purchased 90 days ago. C. Purchase of a building by issuing a note payable. D. Services received on account. One asset (building) and one liability (note payable) increases.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
2-106 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
87.
When a company pays cash for equipment, what is the effect on the accounting equation for that company?
A. Increase assets and increase liabilities. B. Decrease assets and decrease liabilities. C. No change. D. Increase assets and increase stockholders' equity. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
88.
"Record revenue when goods or services are provided to customers" is the definition of which principle in accounting?
A. Trial balance. B. Debits and credits. C. Revenue recognition. D. Accounting equation. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
2-107 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
89.
Which of the following is possible for a particular business transaction?
A. Increase assets; Decrease liabilities B. Decrease assets; Increase assets C. Decrease assets; Increase stockholders' equity D. Decrease liabilities; Increase expenses AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Effects of Transactions on the Basic Accounting Equation Topic: Recording Transactions in a Journal
90.
Which of the accounts are decreased on the debit side and increased on the credit side?
A. Liabilities, stockholders' equity, and revenues. B. Dividends, liabilities, and assets. C. Expenses, dividends, and stockholders' equity. D. Assets, dividends, and expenses. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Topic: Effects on Account Balances in the Basic Accounting Equation
2-108 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
91.
Which of the following is true about a "debit"? I. It is part of the double-entry procedure that keeps the accounting equation in balance. II. It represents an increase to assets. III. It represents a decrease to liabilities. IV. It is on the right side of a T-account.
A. I and II. B. IV only. C. I, II, and III. D. I, II, III, and IV. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Topic: Effects on Account Balances in the Basic Accounting Equation
92.
Which of the following is true about a "credit"? I. It is part of the double-entry procedure that keeps the accounting equation in balance. II. It represents a decrease to assets. III. It represents an increase to liabilities. IV. It is on the right side of a T-account.
A. I and II. B. IV only. C. I, II, and III. D. I, II, III, and IV. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance.
2-109 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Effects on Account Balances in the Basic Accounting Equation
93.
Assets normally carry a _______ balance and are shown in the ______________.
A. Debit; Statement of stockholders' equity B. Debit; Income statement C. Credit; Balance sheet D. Debit; Balance sheet AACSB: Reflective Thinking AICPA: FN Measurement AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Topic: Effects on Account Balances in the Basic Accounting Equation
94.
Revenues normally carry a _______ balance and are shown in the ______________.
A. Debit; Statement of stockholders' equity B. Credit; Income statement C. Credit; Balance sheet D. Debit; Balance sheet AACSB: Reflective Thinking AICPA: FN Measurement AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Topic: Effects on Account Balances in the Basic Accounting Equation
2-110 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
95.
Dividends normally carry a _______ balance and are shown in the ______________.
A. Debit; Statement of stockholders' equity B. Debit; Income statement C. Credit; Balance sheet D. Debit; Balance sheet AACSB: Reflective Thinking AICPA: FN Measurement AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Topic: Effects on Account Balances in the Basic Accounting Equation
96.
Expenses normally carry a _______ balance and are shown in the ______________.
A. Debit; Statement of stockholders' equity B. Debit; Income statement C. Credit; Balance sheet D. Debit; Balance sheet AACSB: Reflective Thinking AICPA: FN Measurement AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Topic: Effects on Account Balances in the Basic Accounting Equation
2-111 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
97.
Liabilities normally carry a _______ balance and are shown in the ______________.
A. Debit; Statement of stockholders' equity B. Debit; Income statement C. Credit; Balance sheet D. Debit; Balance sheet AACSB: Reflective Thinking AICPA: FN Measurement AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Topic: Effects on Account Balances in the Basic Accounting Equation
98.
Which of the following accounts has a debit balance?
A. Accounts Payable. B. Deferred Revenue. C. Service Revenue. D. Salaries Expense. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Topic: Effects on Account Balances in the Basic Accounting Equation
2-112 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
99.
Which of the following accounts would normally have a credit balance?
A. Accounts Payable, Service Revenue, Common Stock. B. Salaries Payable, Deferred Revenue, Delivery Expense. C. Income Tax Payable, Service Revenue, Dividends. D. Cash, Repairs and Maintenance Expense, Dividends. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Topic: Effects on Account Balances in the Basic Accounting Equation
100.
Which of the following accounts would normally have a debit balance?
A. Accounts Payable, Service Revenue, Common Stock. B. Salaries Payable, Deferred Revenue, Utilities Expense. C. Income Tax Payable, Service Revenue, Dividends. D. Cash, Delivery expense, Dividends. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Topic: Effects on Account Balances in the Basic Accounting Equation
2-113 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
101.
Which of the following accounts would normally have a debit balance and appear in the balance sheet?
A. Accounts Receivable. B. Deferred Revenue. C. Salaries Expense. D. Dividends. AACSB: Reflective Thinking AICPA: FN Measurement AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Topic: Effects on Account Balances in the Basic Accounting Equation
102.
Which of the following accounts has a credit balance?
A. Salaries Expense. B. Income Tax Payable. C. Land. D. Prepaid Rent. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Topic: Effects on Account Balances in the Basic Accounting Equation
2-114 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
103.
An increase to an asset account is shown with a ______________. An increase to a liability account is shown with a ______________.
A. Debit; Debit B. Credit; Debit C. Debit; Credit D. Credit; Credit AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Topic: Effects on Account Balances in the Basic Accounting Equation
104.
An increase to an expense account is shown with a ______________. An increase to a revenue account is shown with a ______________.
A. Debit; Debit B. Debit; Credit C. Credit; Debit D. Credit; Credit AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Topic: Effects on Account Balances in the Basic Accounting Equation
2-115 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
105.
An increase to an asset account is shown with a ______________. A decrease to an asset account is shown with a ______________.
A. Debit; Debit B. Credit; Debit C. Debit; Credit D. Credit; Credit AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Topic: Effects on Account Balances in the Basic Accounting Equation
106.
Which of the accounts are increased with a debit and decreased with a credit?
A. Liabilities, stockholders' equity, and revenues. B. Dividends, liabilities, and assets. C. Expenses, dividends, and stockholders' equity. D. Assets, dividends, and expenses. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Topic: Effects on Account Balances in the Basic Accounting Equation
2-116 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
107.
Consider the following list of accounts: Cash
Retained Earnings
Service Revenue
Utilities Expense
Salaries Expense
Accounts Receivable
Accounts Payable
Common Stock
Equipment
Dividends
How many of these accounts have a normal debit balance?
A. Four. B. Five. C. Six. D. Seven. Cash, Salaries Expense, Equipment, Utilities Expense, Accounts Receivable, Dividends.
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Topic: Effects on Account Balances in the Basic Accounting Equation
2-117 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
108.
Consider the following list of accounts: Accounts Payable Cash Prepaid Rent Common Stock Salaries Payable Equipment Supplies Rent Expense How many of these accounts have a normal credit balance?
A. Two. B. Three. C. Four. D. Five. Accounts Payable, Common Stock, Salaries Payable.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Topic: Effects on Account Balances in the Basic Accounting Equation
2-118 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
109.
Consider the following accounts: Utilities Expense Accounts Payable Service Revenue Common Stock How many of these accounts are increased with debits?
A. One. B. Two. C. Three. D. Four. Utilities Expense.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Topic: Effects on Account Balances in the Basic Accounting Equation
110.
Which one of the following accounts will have a credit balance?
A. Dividends B. Salary Expense C. Supplies D. Common Stock AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Topic: Effects on Account Balances in the Basic Accounting Equation 2-119 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
111.
Consider the following accounts: Dividends Insurance Expense Cash Service Revenue How many of these accounts are increased with credits?
A. One. B. Two. C. Three. D. Four. Service Revenue.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Topic: Effects on Account Balances in the Basic Accounting Equation
112.
The term commonly used in accounting to describe the format for recording a transaction is:
A. Chart of accounts B. Trial balance C. General ledger D. Journal entry AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy
2-120 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
113.
Which of the following is the appropriate debit/credit format for recording a business transaction? A.
Credit Name Debit Name
B.
Debit Name Credit Name
C.
Debit Name Credit Name
D.
Credit Name Debit Name
Credit Amount Debit Amount Debit Amount Credit Amount Debit Amount Credit Amount Credit Amount Debit Amount
A. Option A B. Option B C. Option C D. Option D AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
2-121 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
114.
The following statements pertain to recording transactions. Which of them are true? I. Total debits should equal total credits. II. It is possible to have multiple debits or credits in one journal entry. III. Assets are always listed first in journal entries. IV. Some journal entries will have debits only.
A. I only. B. I and II. C. I, II, and IV. D. II, III, and IV. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 3 Hard Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
115.
Which of the following is not a possible journal entry?
A. Credit assets; Debit expenses. B. Debit assets; Debit stockholders' equity. C. Credit revenues; Debit assets. D. Debit expenses; Credit liabilities. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
2-122 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
116.
Providing services on account would be recorded with a:
A. Debit to Service Revenue. B. Credit to Accounts Receivable. C. Credit to Accounts Payable. D. Debit to Accounts Receivable. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
117.
Xenon Corporation borrows $75,000 from First Bank. Xenon Corporation records this transaction with a:
A. Debit to Investments. B. Credit to Retained Earnings. C. Credit to Notes Payable. D. Credit to Interest Expense. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
2-123 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
118.
Childers Service Company provides services to customers totaling $3,000, for which it billed the customers. How would the transaction be recorded?
A. Debit Cash $3,000, credit Service Revenue $3,000. B. Debit Accounts Receivable $3,000, credit Service Revenue $3,000. C. Debit Accounts Receivable $3,000, credit Cash $3,000. D. Debit Service Revenue $3,000, credit Accounts Receivable $3,000. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
119.
A company received a bill for newspaper advertising services, $400. The bill will be paid in 10 days. How would the transaction be recorded today?
A. Debit Advertising Expense $400, credit Accounts Payable $400. B. Debit Accounts Payable $400, credit Advertising Expense $400. C. Debit Accounts Payable $400, credit Cash $400. D. Debit Advertising Expense $400, credit Cash $400. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
2-124 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
120.
When a company pays utilities of $1,800 in cash, the transaction is recorded as:
A. Debit Utilities Expense $1,800, credit Utilities Payable $1,800. B. Debit Utilities Payable $1,800, credit Cash $1,800. C. Debit Cash $1,800, credit Utilities Expense $1,800. D. Debit Utilities Expense $1,800, credit Cash $1,800. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
121.
Assume that cash is paid for rent to cover the next year. The appropriate debit and credit are:
A. Debit Rent Expense, credit Cash. B. Debit Prepaid Rent, credit Rent Expense. C. Debit Prepaid Rent, credit Cash. D. Debit Cash, credit Prepaid Rent. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
2-125 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
122.
Summer Leasing received $12,000 for 24months rent in advance. How should Summer record this transaction?
A. Debit Prepaid Rent; credit Rent Expense. B. Debit Cash; credit Deferred Revenue. C. Debit Cash; credit Service Revenue. D. Debit Rent Expense; credit Cash. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
123.
Styleson Inc. performed cleaning services for its customers for cash. These transactions would be recorded as:
A. Debit Service Revenue, credit Cash. B. Debit Cash, credit Service Revenue. C. Debit Cash, credit Accounts Receivable. D. Debit Accounts Receivable, credit Service Revenue. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
2-126 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
124.
Assume that $18,000 cash is paid for insurance to cover the next year. The appropriate debit and credit are:
A. Debit Insurance Expense $18,000, credit Prepaid Insurance $18,000. B. Debit Prepaid Insurance $18,000, credit Insurance Expense $18,000. C. Debit Prepaid Insurance $18,000, credit Cash $18,000. D. Debit Cash $18,000, credit Prepaid Insurance $18,000. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
125.
Schooner Inc. purchased equipment by signing a note payable. This transaction would be recorded as:
A. Debit Equipment, credit Cash. B. Debit Cash, credit Notes Payable. C. Debit Notes Payable, credit Equipment. D. Debit Equipment, credit Notes Payable. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
2-127 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
126.
When a company pays $2,500 dividends to its stockholders, the transaction should be recorded as:
A. Debit Cash; credit Dividends. B. Debit Retained Earnings; credit Dividends. C. Debit Dividends; credit Cash. D. Debit Dividends; credit Accounts Payable. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
127.
Daniel Dino Restaurant owes employees' salaries of $15,000. This would be recorded as:
A. Debit Salaries Expense, credit Cash. B. Debit Salaries Payable, credit Cash. C. Debit Salaries Expense, credit Salaries Payable. D. Debit Salaries Payable, credit Salaries Expense. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
2-128 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
128.
Jerome purchased a building for his business by signing a note to be repaid over the next ten years. Which of the following correctly describes how to record this transaction?
A. Debit assets, credit liabilities. B. Debit assets, credit stockholders' equity. C. Debit liabilities, credit assets. D. Debit expenses, credit liabilities. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
129.
Incurring an expense for advertising on account would be recorded by:
A. Debiting liabilities. B. Crediting assets. C. Debiting an expense. D. Debiting assets. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
2-129 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
130.
Tyler Incorporated receives $150,000 from investors in exchange for shares of its common stock. Tyler Incorporated records this transaction with a:
A. Debit to Investments. B. Credit to Retained Earnings. C. Credit to Common Stock. D. Credit to Service Revenue. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
131.
The owner of an office building should report rent collected in advance as a debit to Cash and a credit to:
A. A liability. B. An asset other than Cash. C. Revenue. D. Stockholders' equity. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
2-130 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
132.
Clement Company paid an account payable related to a previous utility bill of $1,000. This transaction should be recorded as follows on the payment date:
A. Debit Accounts Payable $1,000, credit Cash $1,000. B. Debit Cash $1,000, credit Accounts Payable $1,000. C. Debit Utilities Expense $1,000, credit Cash $1,000. D. Debit Cash $1,000, credit Utilities Expense $1,000. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
133.
On July 7, Saints Inc. received $10,000 in cash from a customer for services to be provided on October 10. Which of the following describes how the transaction should be recorded on July 7?
A. Debit Cash $10,000, credit Service Revenue $10,000. B. Debit Accounts Receivable $10,000, credit Service Revenue $10,000. C. Debit Cash $10,000, credit Deferred Revenue $10,000. D. Debit Deferred Revenue $10,000, credit Cash $10,000. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
2-131 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
134.
On December 1, Bears Inc. signed a contract with a retailer to supply maintenance for the next calendar year. How should this transaction be recorded on December 1?
A. Debit Cash, credit Service Revenue. B. Debit Cash, credit Accounts Receivable. C. Debit Accounts Receivable, credit Service Revenue. D. No transaction should be recorded on December 1. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
135.
Sooner purchased office supplies on account. The transaction would be recorded as:
A. Debit Supplies, Credit Cash B. Debit Cash, Credit Accounts Payable C. Debit Accounts Payable, Credit Supplies D. Debit Supplies, Credit Accounts Payable AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
2-132 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
136.
Tomlin & Company provides music for special occasions. On January 14, the Smith family hired Tomlin for an upcoming family wedding for an agreed upon fee of $10,000. The wedding was scheduled for May 23. As part of the agreement, the Smiths paid Tomlin half of the fee at the end of April with the remaining amount due by the end of June. How would Tomlin record the receipt of the final payment in June?
A. Credit to Accounts Receivable. B. Credit to Service Revenue. C. Credit to Cash. D. Debit to Deferred Revenue. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Blooms: Understand Difficulty: 3 Hard Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
137.
Bostel wanted to expand the size of its warehouse in order to generate more profits. The company decided to purchase the building adjacent to its existing warehouse. The company pays for the building by borrowing from the bank. The purchase would be recorded as:
A. Debit Cash; credit Notes Payable. B. Debit Buildings; credit Cash. C. Debit Buildings; credit Notes Payable. D. Debit Cash and Buildings; credit Notes Payable. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
2-133 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
138.
On July 5, Harris Company purchased supplies from the hardware store for $600 on account. On July 10, Harris receives a bill from the hardware store as a reminder about the account balance. On July 17, Harris pays the account in full. How does Harris record the transaction on July 17? A. Supplies
600
Accounts Payable B. Accounts Payable
600 600
Supplies C. Cash
600 600
Accounts Payable D. Accounts Payable Cash
600 600 600
A. Option A B. Option B C. Option C D. Option D AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
139.
On July 31, ALOE Inc. received $5,000 cash from a customer who previously purchased ALOE's products on account. What entry should ALOE Inc. record at the time it receives cash?
A. Debit Accounts Receivable, $5,000; credit Cash, $5,000. B. Debit Cash, $5,000; credit Accounts Receivable, $5,000. C. Debit Cash, $5,000; credit Accounts Payable, $5,000. D. Debit Cash, $5,000; credit Service Revenue, $5,000. AACSB: Reflective Thinking 2-134 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
140.
A transaction is initially recorded in the general ______, and then subsequently posted to the general ______.
A. Debit; Credit B. Statement; Account C. Journal; Ledger D. Chart; Statement AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Learning Objective: 02-05 Post transactions to the general ledger. Topic: Posting to the General Ledger Topic: Recording Transactions in a Journal
141.
Posting is the process of:
A. Analyzing the impact of the transaction on the accounting equation. B. Obtaining information about external transactions from source documents. C. Transferring the debit and credit information from the journal to individual accounts in the general ledger. D. Listing all accounts and their balances at a particular date. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-05 Post transactions to the general ledger. Topic: Posting to the General Ledger
2-135 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
142.
A debit in a journal entry is always posted to the general ledger as a(n):
A. Increase. B. Credit. C. Decrease. D. Debit. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-05 Post transactions to the general ledger. Topic: Posting to the General Ledger
143.
Posting transactions to T-accounts involves:
A. Analyzing source documents to determine the effects of transactions on the company's accounts. B. Listing all accounts and their balances at a particular date to ensure that debits equal credits. C. Preparing a chronological record of all transactions affecting the company. D. Transferring debit and credit information from the journal to the accounts in the general ledger. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-05 Post transactions to the general ledger. Topic: Posting to the General Ledger
2-136 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
144.
Below is the company's Cash T-account. Cash Beg.
1,200 5,200 3,100
End.
3,300
The $3,100 amount could represent which of the following?
A. Purchase of supplies on account. B. Ending balance of cash. C. Payment for salaries. D. Collection from customers. AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-05 Post transactions to the general ledger. Topic: Posting to the General Ledger
2-137 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
145.
Below is the company's Cash T-account. Cash Beg.
1,200 5,200 3,100
End.
3,300
The $5,200 amount could represent which of the following?
A. Purchase of supplies on account. B. Ending balance of cash. C. Payment for salaries. D. Collection from customers. AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-05 Post transactions to the general ledger. Topic: Posting to the General Ledger
2-138 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
146.
The figure below is a depiction of a T-account. Account 1,700 Beg. 1,200 800 3,300 End.
Which of the following statements is correct?
A. The account is a liability account. B. During the period, a journal entry was recorded that included a credit to the account for $800. C. The amount reported to stockholders at the end of the period for this account is $3,300. D. All of the other answers provide a correct statement. AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-05 Post transactions to the general ledger. Topic: Posting to the General Ledger
2-139 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
147.
Following are transactions of Gotebo Tanners, Inc., a new company, during the month of January: 1. Issued 10,000 shares of common stock for $15,000 cash. 2. Purchased land for $12,000, signing a note payable for the full amount. 3. Purchased office equipment for $1,200 cash. 4. Received cash of $14,000 for services provided to customers during the month. 5. Purchased $300 of office supplies on account. 6. Paid employees $10,000 for their first month's salaries. What was the balance of Gotebo's Cash account following these six transactions?
A. $29,800. B. $19,300. C. $17,800. D. $22,400. Cash = ($15,000 - $1,200 + $14,000 - $10,000) = $17,800.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-05 Post transactions to the general ledger. Topic: Posting to the General Ledger
2-140 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
148.
The Accounts Payable account has a beginning balance of $12,000 and the company purchased $50,000 of supplies on account during the month. The ending balance was $10,000. How much did the company pay to creditors during the month?
A. $50,000. B. $52,000. C. $60,000. D. $62,000. $12,000 + $50,000 - $10,000 = $52,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-05 Post transactions to the general ledger. Topic: Posting to the General Ledger
149.
On March 3, Cobra Inc. purchased a desk for $450 on account. On March 22, Cobra purchased another desk for $500 also on account, and then on March 24, Cobra paid $400 on account. At the end of March, what amount should Cobra report for desks (assuming these two desks were the only desks they had)?
A. $50. B. $450. C. $500. D. $950. $450 + $550 = $950
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Blooms: Understand
2-141 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 3 Hard Learning Objective: 02-05 Post transactions to the general ledger. Topic: Posting to the General Ledger
150.
The Accounts Receivable account has a beginning balance of $10,000 and the company provides services of $50,000 on account during the month. The ending balance was $12,000. How much did the company receive from customers during the month?
A. $50,000. B. $52,000. C. $48,000. D. $62,000. $10,000 + $50,000 - $12,000 = $48,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-05 Post transactions to the general ledger. Topic: Posting to the General Ledger
151.
A trial balance can best be explained as a list of:
A. The income statement accounts used to calculate net income. B. Revenue, expense, and dividend accounts used to show the balances of the components of retained earnings. C. The balance sheet accounts used to show the equality of the accounting equation. D. All accounts and their balances at a particular date. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-06 Prepare a trial balance. Topic: Trial Balance 2-142 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
152.
A trial balance represents the:
A. Source documents used to determine the effects of transactions on the company's accounts. B. List of all accounts and their balances at a particular date to ensure that debits equal credits. C. Chronological record of all transactions affecting the company. D. Process of transferring debit and credit information from the journal to the accounts in the general ledger. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-06 Prepare a trial balance. Topic: Trial Balance
2-143 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
153.
Lithuanian Motors has the following balance sheet accounts: Land Equipment Salaries Payable
$170,000 66,000 ?
Notes Payable
88,000
Supplies
14,000
Cash
26,000
Common Stock
100,000
Retained Earnings
40,000
Accounts Payable
?
Prepaid Rent
12,000
If the company has total assets of $288,000, what is the balance of the company's Salaries Payable account?
A. $15,000. B. $25,000. C. $12,000. D. Cannot be determined given the information provided. Total liabilities + Stockholders' equity = ($288,000) = Accounts Payable (?) + Salaries Payable (?) + Notes Payable ($88,000) + Common Stock ($100,000) + Retained Earnings ($40,000); therefore, with two unknowns there is not enough information to solve the problem.
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 02-06 Prepare a trial balance. Topic: Trial Balance
2-144 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
154.
Finnish Motors has the following balance sheet accounts: Land
$150,000
Equipment
90,000
Salaries Payable
12,000
Notes Payable
99,000
Supplies
10,000
Cash
25,000
Common Stock
40,000
Retained Earnings
100,000
Accounts Payable
?
Prepaid Rent
?
If the company has total liabilities and stockholders' equity of $290,000, what is the balance of the company's Prepaid Rent account?
A. $15,000. B. $25,000. C. $12,000. D. $39,000. Total assets ($290,000) = Land ($150,000) + Equipment ($90,000) + Supplies ($10,000) + Cash ($25,000) + Prepaid Rent (?); therefore, Prepaid Rent = $15,000.
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 02-06 Prepare a trial balance. Topic: Trial Balance
Matching Questions
2-145 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
155.
Match each step of the measurement process with its description.
Use source documents to identify accounts affected by an external 1. Step 6
transaction.
6
2. Step 3
Analyze the impact of the transaction on the accounting equation.
4
Assess whether the transaction results in a debit or credit to the 3. Step 5
account balance.
2
4. Step 2
Record transactions in a journal using debits and credits.
5
5. Step 4
Post transactions to the general ledger.
3
6. Step 1
Prepare a trial balance.
1
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 3 Hard Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Topic: External Transactions
156.
Match each term with its definition.
Full set of procedures used to accomplish the measurement/communication process of financial 1. Chart of accounts 2. Internal transactions
accounting. 3 Activities of the company conducted with separate economic entities. 4 Events that affect the financial position of the company but do not include an exchange with a separate economic
3. Accounting cycle 4. External transactions
entity. 2 A summary of the effects of all transactions related to a particular item over a period of time. 5 A list of all account names used to record transactions of
5. Accounts
a company. 1 AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Topic: External Transactions
2-146 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
157.
Match each term with how related transactions affect the accounting equation.
1. Assets
Transactions that affect the left side of the accounting equation.
1
Transactions that affect the right side of the accounting equation 2. Revenues
not related to stockholders' equity.
3
3. Liabilities
Transactions that increase stockholders' equity.
2
Transactions that decrease stockholders' equity related to cost of 4. Dividends
generating of generating revenues.
5
Transactions that decrease stockholders' equity related to 5. Expenses
distributions to stockholders.
4
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
158.
Match each term with its description.
1. Debit
Convention used to record transactions of a company. 2
2. Journal entry
Left side of an account. 1
3. Journal
Right side of an account. 4
4. Credit
Chronological record of all transactions.
3
List of all accounts and their balances showing that debits 5. Trial balance 6. T-account
equal credits. 5 Simplified form of a general ledger account.
6
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Learning Objective: 02-05 Post transactions to the general ledger. Learning Objective: 02-06 Prepare a trial balance. Topic: Posting to the General Ledger Topic: Recording Transactions in a Journal Topic: Trial Balance
2-147 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Essay Questions
159.
Below are the steps in the measurement process of external transactions. Arrange them from first (1) to last (6). (a) Post the transaction to the T-accounts in the general ledger. (b) Assess whether the impact of the transaction results in a debit or credit to the account balance. (c) Use source documents to identify accounts affected by external transactions. (d) Analyze the impact of the transaction on the accounting equation. (e) Prepare a trial balance. (f) Record transactions using debits and credits.
(a) 5; (b) 3; (c) 1; (d) 2; (e) 6; (f) 4
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Topic: External Transactions
160.
A company received a utility bill of $600 but did not pay it. Indicate the amount of increases and decreases in the accounting equation.
Stockholders' Assets
=
Liabilities
+
Equity
$0
=
$600
+
-$600
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. 2-148 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Effects of Transactions on the Basic Accounting Equation
161.
A company purchases supplies on account for $1,700. Indicate the amount of increases and decreases in the accounting equation.
Stockholders' Assets
=
Liabilities
+
Equity
$1,700
=
$1,700
+
$0
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
162.
A company provides services to customers on account for $2,400. Indicate the amount of increases and decreases in the accounting equation.
Stockholders' Assets
=
Liabilities
+
Equity
$2,400
=
$0
+
$2,400
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
2-149 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
163.
A company pays $800 dividends to stockholders. Indicate the amount of increases and decreases in the accounting equation.
Stockholders' Assets
=
Liabilities
+
Equity
-$800
=
$0
+
-$800
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
164.
A company pays $1,300 on account for supplies previously purchased on account. Indicate the amount of increases and decreases in the accounting equation.
Stockholders' Assets
=
Liabilities
+
Equity
-$1,300 =
-$1,300
+
$0
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
2-150 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
165.
The following transactions occur for the Hamilton Manufacturers. (a) Provide services to customers on account for $4,500. (b) Purchase equipment by signing a note with the bank for $10,000. (c) Pay advertising of $1,500 for the current month. Analyze each transaction and indicate the amount of increases and decreases in the accounting equation.
Stockholders' Assets = Liabilities + (a)
Equity
+$4,500 =
$0 +
+$4,500
(b) +$10,000 =
+$10,000 +
$0
$0 +
-$1,500
(c)
-$1,500 =
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
166.
Using the notion that the accounting equation (Assets = Liabilities + Stockholders' Equity) must remain in balance, indicate whether each of the following transactions is possible. (a) Cash decreases; Accounts Payable decreases. (b) Salaries Expense increases; Salaries Payable decreases. (c) Accounts Receivable decreases; Service Revenue increases.
(a) Yes; (b) No; (c) No
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. 2-151 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Effects of Transactions on the Basic Accounting Equation
167.
Suppose a company has the following balance sheet accounts: Accounts
Balances
Land
$9,000
Building
?
Salaries payable Common stock
3,700 ?
Accounts payable
2,600
Cash
5,300
Retained earnings
11,600
Supplies
3,200
Equipment
4,500
Calculate the missing amounts assuming the company has total assets of $40,000.
Building = $18,000; Common stock = $22,100. Feedback: $40,000 = Land ($9,000) + Building (?) + Cash ($5,300) + Supplies ($3,200) + Equipment ($4,500); therefore, Building = $18,000. $40,000 = Salaries Payable ($3,700) + Common Stock (?) + Accounts Payable ($2,600) + Retained Earnings ($11,600); therefore, Common Stock = $22,100.
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
2-152 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
168.
For each of the following accounts, indicate whether a debit or credit is used to increase (+) or decrease (-) the balance of the account. Account
Debit
Credit
(a) Common Stock (b) Liability (c) Asset (d) Revenue (e) Dividend (f) Retained Earnings (g) Expense
(a) -,+; (b) -,+; (c) +,-; (d) -,+; (e) +,-; (f) -,+; (g) +,-
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Topic: Effects on Account Balances in the Basic Accounting Equation
2-153 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
169.
For each of the following accounts, indicate whether we use a debit or a credit to increase the balance of the account. (a) Accounts Receivable (b) Accounts Payable (c) Salaries Expense (d) Service Revenue (e) Supplies (f) Common Stock (g) Advertising Expense (h) Dividends
(a) debit; (b) credit; (c) debit; (d) credit; (e) debit; (f) credit; (g) debit; (h) debit
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Topic: Effects on Account Balances in the Basic Accounting Equation
2-154 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
170.
For each of the following accounts, indicate whether we use a debit or a credit to decrease the balance of the account. (a) Accounts Receivable (b) Accounts Payable (c) Salaries Expense (d) Service Revenue (e) Supplies (f) Common Stock (g) Advertising Expense (h) Dividends
(a) credit; (b) debit; (c) credit; (d) debit; (e) credit; (f) debit; (g) credit; (h) credit
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Topic: Effects on Account Balances in the Basic Accounting Equation
171.
A company sells common stock for $20,000 cash. Record the transaction.
Cash Common Stock
20,000 20,000
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
2-155 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
172.
A company purchases a building for $100,000, paying $20,000 cash and signing a note payable for the remainder. Record the transaction.
Building
100,000
Cash
20,000
Notes Payable
80,000
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
173.
A company purchases machinery for $15,000 cash. Record the transaction.
Equipment Cash
15,000 15,000
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
2-156 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
174.
A company purchases office supplies on account for $7,500. Record the transaction.
Office Supplies
7,500
Accounts Payable
7,500
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
175.
A company provides services to customers on account, $3,500. Record the transaction.
Accounts Receivable
3,500
Service Revenue
3,500
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
176.
A company provides services to customers for $2,400 cash. Record the transaction.
Cash Service Revenue
2,400 2,400
AACSB: Reflective Thinking AICPA: FN Measurement 2-157 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
177.
A company pays employees' salaries of $4,200 for the current period. Record the transaction.
Salaries Expense
4,200
Cash
4,200
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
178.
A company pays $2,000 dividends to its stockholders. Record the transaction.
Dividends Cash
2,000 2,000
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
2-158 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
179.
A company collects $4,000 cash from customers for services previously provided on account. Record the transaction.
Cash
4,000
Accounts Receivable
4,000
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
180.
A company receives $6,500 cash in advance from customers for services to be provided next year. Record the transaction.
Cash
6,500
Deferred Revenue
6,500
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
2-159 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
181.
A company pays $5,400 for maintenance in the current period. Record the transaction.
Repairs and Maintenance Expense
5,400
Cash
5,400
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
182.
A company pays $12,000 to purchase a one-year insurance policy. Record the transaction.
Prepaid Insurance Cash
12,000 12,000
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
2-160 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
183.
Record the following transactions for Acme Builders: (a) Purchase office supplies on account, $1,200. (b) Provide services to customers for cash, $2,500. (c) Pay $1,100 in salaries for the current month.
(a) Supplies
1,200
Accounts Payable (b) Cash
1,200 2,500
Service Revenue (c)
Salaries Expense Cash
2,500 1,100 1,100
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
2-161 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
184.
Record the following transactions for the Stroud Music Store: (a) Provide music lessons to students for $12,000 on account. (b) Purchase music supplies on account, $1,500. (c) Pay rent for the current month, $2,000. (d) Receive $10,000 cash from students in (a) above.
(a) Accounts Receivable
12,000
Service Revenue
12,000
(b) Supplies
1,500
Accounts Payable (c)
1,500
Rent Expense
2,000
Cash
2,000
(d) Cash
10,000
Accounts Receivable
10,000
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
2-162 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
185.
Rite Shoes was involved in the transactions described below. Record each transaction. If an entry is not required, state "No Entry." (a) Purchased $8,200 of supplies on account. (b) Paid weekly salaries, $920. (c) Provide services to customers: Cash: $7,100; On account: $5,300. (d) Paid for supplies purchased in (a) above. (e) Placed an order for $6,200 of supplies.
(a)
Supplies
8,200
Accounts Payable (b)
Salaries expense
8,200 920
Cash (c)
920
Cash
7,100
Accounts Receivable
5,300
Service Revenue (d)
Accounts Payable Cash
(e)
12,400 8,200 8,200
No Entry.
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
2-163 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
186.
Record the following transactions. If an entry is not required, state "No Entry." (a) Started business by issuing 10,000 shares of common stock for $20,000. (b) Hired Rebecca as an administrative assistant, promising to pay her $2,000 every two weeks. (c) Rented a building for three years at $500 per month and paid six months' rent in advance. (d) Purchased equipment for $5,400 cash. (e) Purchased $1,800 of supplies on account. (f) Provided services to customers for $7,800 cash. (g) Paid employees' salaries, $5,200. (h) Paid for supplies purchased in item (e). (i) Paid $800 for current advertising in a local newspaper. (j) Paid utility bill of $1,300 for the current month.
(a)
Cash
20,000
Common Stock (b)
No Entry.
(c)
Prepaid Rent
20,000
3,000
Cash (d)
Equipment
3,000 5,400
Cash (e)
Supplies
5,400 1,800
Accounts Payable (f)
Cash
1,800 7,800
Service Revenue (g)
Salaries expense
7,800 5,200
Cash (h)
Accounts Payable
5,200 1,800
Cash (i)
Advertising Expense
1,800 800
Cash (j)
Utilities Expense
800 1,300
2-164 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Cash
1,300
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Recording Transactions in a Journal
187.
Consider the following T-account for Accounts Payable. Accounts Payable 10,200 8,800 4,500
1. Compute the balance of the Accounts Payable account. 2. Give an example of a transaction that would have resulted in the $8,800 posting to the account. 3. Give an example of a transaction that would have resulted in the $4,500 posting to the account.
1. $10,200 $8,800 + $4,500 = $5,900. 2. Postings on the left side (or debit side) of the Accounts Payable T-account represent decreases to accounts payable, such as making a payment on the account. 3. Postings on the right side (or credit side) of the Accounts Payable T-account represent increases to accounts payable, such as purchasing office supplies on account.
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 02-05 Post transactions to the general ledger. Topic: Posting to the General Ledger
2-165 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
188.
Consider the following transactions for Mittel Corporation: a. Sell common stock for $10,000. b. Purchase equipment for $11,500 cash. c. Pay employees' salaries of $3,700. e. Provide services to customers for $6,200 cash. 1. Post these transactions to the Cash T-account. Assume the balance of Cash before these transactions is $4,200. 2. Calculate the ending balance of the Cash account.
Cash 4,200 10,000
11,500
6,200
3,700
5,200
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 02-05 Post transactions to the general ledger. Topic: Posting to the General Ledger
2-166 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
189.
Use the following information to prepare a trial balance. Cash
$6,200 Dividends
$1,200
revenue
1,200 Salaries expense
2,200
Prepaid
Accounts
Deferred
insurance
1,200 receivable
3,400
1,900 Common stock
6,200
1,600 Service revenue
7,100
Accounts payable Retained earnings Utilities expense
Maintenance 3,000 expense
800
Trial Balance Debit Cash
$6,200
Accounts Receivable
3,400
Prepaid insurance
1,200
Credit
Accounts payable
$1,900
Deferred revenue
1,200
Common stock
6,200
Retained earnings
1,600
Dividends
1,200
Service revenue
7,100
Salaries expense
2,200
Utilities expense
3,000
Maintenance expense Totals
800 $18,000
$18,000
AACSB: Analytical Thinking AICPA: FN Measurement
2-167 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Blooms: Analyze Difficulty: 3 Hard Learning Objective: 02-06 Prepare a trial balance. Topic: Trial Balance
2-168 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
190.
Below is a list of activities. Transaction
Assets
=
Liabilities
+
Stockholders’ Equity
1. Obtain a loan at the bank
Increase
=
Increase
+
No Effect
2. Issue common stock to stockholders for cash. 3. Purchase equipment for cash. 4. Pay cash for insurance in advance. 5. Pay cash for workers’ employees’ salaries in the current period. 6. Pay accounts payable. 7. Purchase office supplies on account. 8. Provide services to customers for cash. 9. Provide services to customers on account. 10. Pay cash dividends to stockholders. 11. Pay cash for utilities in the current period.
Required: For each activity, indicate whether the transaction increases, decreases, or has no effect on assets, liabilities, and/or stockholders' equity.
Transaction Assets
=
Liabilities
+
Stockholders’ Equity
1. Obtain a loan at the bank.
Increase
=
Increase
+
No effect
2-169 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
2. Issue common stock to stockholders for cash. 3. Purchase equipment for cash. 4. Pay cash for insurance in advance.
Increase
=
No effect
+
Increase
No effect*
=
No effect
+
No effect
No effect*
=
No effect
+
No effect
Decrease
=
No effect
+
Decrease
Decrease
=
Decrease
+
No effect
Increase
=
Increase
+
No effect
Increase
=
No effect
+
Increase
Increase
=
No effect
+
Increase
Decrease
=
No effect
+
Decrease
Decrease
=
No effect
+
Decrease
5. Pay cash for workers’ employees’ salaries in the current period. 6. Pay accounts payable. 7. Purchase office supplies on account. 8. Provide services to customers for cash. 9. Provide services to customers on account. 10. Pay cash dividends to stockholders. 11. Pay cash for utilities in the current period.
*One asset increases and another asset decreases AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Apply Blooms: Understand Difficulty: 3 Hard Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
2-170 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
191.
Below is a list of activities. Transaction
Assets
=
Liabilities
+
Stockholders’ Equity
1. Issue common stock in exchange for cash, $15,000
+$15,000
=
$0
+
+$15,000
2. Purchase equipment for cash, 20,000. 3. Pay cash for insurance in advance, $2,400. 4. Pay cash for workers’ employees’ salaries in the current period, $17,200. 5. Pay accounts payable, $1,000. 6. Purchase office supplies on account, $3,750. 7. Provide services to customers for cash, $6,800. 8. Provide services to customers on account, $12,300. 9. Pay cash dividends to stockholders, $2,500. 10. Pay cash for utilities in the current period, $1,200. Totals
Required: For each activity, indicate the impact on the accounting equation. After doing all the transactions, ensure that the accounting equation remains in balance.
Transaction Assets =
Liabilities + Stockholders’ Equity
2-171 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
1. Issue common stock in exchange for
+$15,000 =
cash, $15,000.
$0 +
+$15,000
=
$0 +
$0
=
$0 +
$0
-$17,200 =
$0 +
-$17,200
-$1,000 =
-$1,000 +
$0
$+$3,750 =
$+$3,750 +
$0
+$6,800 =
$0 +
+$6,800
+$12,300 =
$0 +
+$12,300
-$2,500 =
$0 +
-$2,500
-$1,200 =
$0 +
-$1,200
+$15,950 =
+$2,750 +
+$13,200
2. Purchase equipment for cash, 20,000. +$20,000 -$20,000 3. Pay cash for insurance in advance, +$2,400
$2,400.
-$2,400 4. Pay cash for workers’ salaries in the current period, $7,200. 5. Pay accounts payable, $1,000. 6. Purchase office supplies on account, $3,750. 7. Provide services to customers for cash, $6,800. 8. Provide services to customers on account, $12,300. 9. Pay cash dividends to stockholders, $2,500. 10. Pay cash for utilities in the current period, $1,200. Totals
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Apply Blooms: Understand Difficulty: 3 Hard Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
2-172 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
192.
Reed owns a consulting company, while Sophie operates a maintenance shop. For the month of June, the following transactions occurred. June 2
Sophie decides that she would like consulting at the end of the month and pays Reed $300 in advance.
June 5
Sophie provides maintenance to Reed on account, $175.
June 7
Reed borrows $500 from Sophie by signing a note.
June 14
Sophie purchases maintenance supplies from Tap Corporation, paying cash of $250.
June 19
Reed pays $225 to Sophie for maintenance provided on June 5.
June 25
Reed pays the utility bill for the month of June, $200.
June 28
Sophie receives consulting from Reed equaling the amount paid on June 2.
June 30
Reed pays $500 to Sophie for money borrowed on June 7.
Required: Record each transaction for Reed. Keep in mind that Reed may not need to record all transactions.
Transactions for Reed Debit June 2
Cash
Credit
300
Deferred Revenue
300
(Receive cash in advance from customer) June 5
Repairs and Maintenance Expense
175
Accounts Payable
175
(Receive maintenance on account) June 7
Cash Notes Payable
500 500
(Receive cash and sign note payable) June 14
No entry for Reed.
2-173 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
June 19
Accounts Payable
225
Cash
225
(Pay cash on account) June 25
Utilities Expense
200
Cash
200
(Pay utilities for the current month) June 28
Deferred Revenue
300
Service Revenue
300
(Provide service previously paid) June 30
Notes Payable
500
Cash
500
(Pay cash on note payable)
AACSB: Analytical Thinking AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Analyze Blooms: Understand Difficulty: 3 Hard Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Effects of Transactions on the Basic Accounting Equation Topic: Effects on Account Balances in the Basic Accounting Equation Topic: Recording Transactions in a Journal
2-174 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
193.
Reed owns a consulting company, while Sophie operates a maintenance shop. For the month of June, the following transactions occurred. June 2
Sophie decides that she would like consulting at the end of the month and pays Reed $300 in advance.
June 5
Sophie provides maintenance to Reed on account, $175.
June 7
Reed borrows $500 from Sophie by signing a note.
June 14
Sophie purchases maintenance supplies from Tap Corporation, paying cash of $250.
June 19
Reed pays $225 to Sophie for maintenance provided on June 5.
June 25
Reed pays the utility bill for the month of June, $200.
June 28
Sophie receives consulting from Reed equaling the amount paid on June 2.
June 30
Reed pays $500 to Sophie for money borrowed on June 7.
Reed Assets
Liabilities + Stockholders’ Assets =
June 2
Sophie
Equity
Liabilities + Stockholders’ =
Equity
+$300 +$300 =
+$300 +
$0
=
$0 +
$0
-$300 5 7 14 19 25 28 30
Required: 1. Record transactions for Sophie. Keep in mind that Sophie may not need to record all transactions. 2. Using the format shown above, indicate the impact of each transaction on the accounting equation for each company.
2-175 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Requirement 1
Transactions for Sophie June 2
Prepaid Consulting
Debit
Credit 300
Cash
300
(Pay for consulting in advance) June 5
Accounts Receivable
175
Service Revenue
175
(Provide services on account) June 7
Notes Receivable
500
Cash
500
(Loan cash and accept note receivable) June 14
Supplies
250
Cash
250
(Purchase maintenance supplies with cash) June 19
Cash
225
Accounts Receivable
225
(Receive cash on account) June 25
No entry for Sophie.
June 28
Consulting Expense
300
Prepaid Consulting
300
(Received services paid in advance) June 30
Cash
500
Notes Receivable
500
(Receive cash on note receivable)
Requirement 2 Services Reed
Services Sophie
2-176 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Stockholders' Assets = Liabilities +
Equity
Stockholders' Assets = Liabilities +
Equity
+$300 June 2
+$300 =
+$300 +
$0
=
$0 +
$0
+$175 =
$0 +
+$175
=
$0 +
$0
=
$0 +
$0
=
$0 +
$0
-$300 5
$0 =
+$175 +
-$175
7
+$500 =
+$500 +
$0
14
$0 =
$0 +
$0
19
-$225 =
-$225 +
$0
25
-$200 =
$0 +
-$200
$0 =
$0 +
$0
28
$0 =
-$300 +
+$300
-$300 =
$0 +
-$300
30
-$500 =
-$500 +
$0
$0 +
$0
+$500 -$500 +$250 -$250 +$225 -$225
+$500 -$500
=
AACSB: Analytical Thinking AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Analyze Blooms: Understand Difficulty: 3 Hard Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Learning Objective: 02-04 Record transactions in a journal using debits and credits. Topic: Effects of Transactions on the Basic Accounting Equation Topic: Effects on Account Balances in the Basic Accounting Equation Topic: Recording Transactions in a Journal
2-177 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
194.
Below is a list of typical accounts. Accounts
Type of Account
Normal Balance (Debit or Credit)
1. Service Revenue 2. Common Stock 3. Dividends 4. Salaries Expense 5. Accounts Payable 6. Buildings 7. Interest Revenue 8. Accounts Receivable 9. Retained Earnings 10. Accounts Payable 11. Utilities Expense 12. Advertising Expense
Required: For each account, (1) indicate the type of account and (2) whether the normal account balance is a debit or credit. For type of account, choose from asset, liability, stockholders' equity, dividend, revenue, or expense.
Normal Balance Type of Account
(Debit or Credit)
1. Service Revenue
Revenue
Credit
2. Common Stock
Stockholders’ equity
Credit
3. Dividends
Dividends
Debit
4. Salaries Expense
Expense
Debit
5. Accounts Payable
Liability
Credit
6. Building
Asset
Debit
Account Title
2-178 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
7. Interest Revenue
Revenue
Credit
8. Accounts Receivable
Asset
Debit
9. Retained Earnings
Stockholders’ equity
Credit
10. Accounts Payable
Liability
Credit
11. Utilities Expense
Expense
Debit
12. Advertising Expense
Expense
Debit
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance. Topic: Effects on Account Balances in the Basic Accounting Equation
2-179 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
195 Below are the transactions for Racer, Inc. for April, the first month of operations. . April 1
Obtain a loan of $50,000 from the bank.
April 2
Issue common stock in exchange for cash of $20,000.
April 7
Purchase equipment for $40,000 cash.
April 10 Purchase cleaning supplies of $4,000 on account. April 12 Provide services of $5,000 for cash. April 16 Pay employees $1,200 for work performed. April 19 Pay for advertising in a local newspaper, costing $500. April 23 Provide services of $7,000 on account. April 29 Pay employees $1,500 for work performed. April 30 A utility bill of $1,200 for the current month is paid. April 30 Pay dividends of $700 to stockholders.
Required: 1. Record each transaction. 2. Post each transaction to the appropriate T-accounts. 3. Calculate the balance of each account. 4. Prepare a trial balance for June. Racer uses the following accounts: Cash, Accounts Receivable, Supplies, Equipment, Accounts Payable, Notes Payable, Common Stock, Dividends, Service Revenue, Salaries Expense, Advertising Expense, and Utilities Expense.
Requirement 1
Debit April 1
Cash
Credit
50,000
Notes Payable
50,000
(Obtain loan from bank)
April 2
Cash Common Stock
20,000 20,000
2-180 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
(Issue common stock) April 7
Equipment
40,000
Cash
40,000
(Purchase equipment) April 10
Supplies
4,000
Accounts Payable
4,000
(Purchase cleaning supplies on account) April 12
Cash
5,000
Service Revenue
5,000
(Provide services for cash) April 16
Salaries Expense
1,200
Cash
1,200
(Pay employees’ salaries) April 19
Advertising Expense
500
Cash
500
(Pay for current advertising) April 23
Accounts Receivable
7,000
Service Revenue
7,000
(Provide services on account)
April 29
Salaries Expense
1,500
Cash
1,500
(Pay employees’ salaries) April 30
Utilities Expense
1,200
Cash
1,200
(Pay current utility bill) April 30
Dividends
700
Cash
700
(Pay dividends to stockholders)
Requirements 2 and 3 Cash
Accounts Receivable
Supplies
2-181 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
50,000
40,000
7,000
4,000
20,000
1,200
7,000
4,000
5,000
500 1,500
Equipment
Accounts Payable
1,200
40,000
4,000
29,900
40,000
4,000
Notes Payable
Common Stock
700
Dividends
50,000
20,000
700
50,000
20,000
700
Service Revenue
Salaries Expense 5,000
1,200
7,000
1,500
12,000
2,700
Advertising Expense 500
500
Utilities Expense 1,200 1,200
Requirement 4 Cleaning Racer Inc. Trial Balance June 30 Account Title Cash
Debit
Credit
$29,900
Accounts Receivable
7,000
Supplies
4,000
Equipment
40,000
Accounts Payable
$4,000
Notes Payable
50,000
Common Stock
20,000
Dividends
700
Service Revenue Salaries Expense
12,000 2,700
2-182 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Advertising Expense Utilities Expense Totals
500 1,200 $86,000
$86,000
AACSB: Analytical Thinking AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 02-04 Record transactions in a journal using debits and credits. Learning Objective: 02-05 Post transactions to the general ledger. Learning Objective: 02-06 Prepare a trial balance. Topic: Posting to the General Ledger Topic: Recording Transactions in a Journal Topic: Trial Balance
2-183 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
196. Wolverine Incorporated had the following trial balance at the beginning of April. Account Title
Debits
Cash
$2,800
Accounts receivable
Credits
900
Supplies
3,600
Equipment
9,100
Accounts payable
$2,200
Notes payable
3,600
Common stock
9,000
Retained earnings
1,600
The following transactions occur in April: April 1
Issue common stock in exchange for $15,000 cash.
April 2
Purchase equipment with a long-term note for $4,500 from Hoosier Corporation.
April 4
Purchase supplies for $1,500 on account.
April 10
Provide services to customers on account for $9,000.
April 15
Pay creditors on account, $1,200.
April 20
Pay employees $2,300 for the first half of the month.
April 22
Provide services to customers for $11,500 cash.
April 24
Pay $1,300 on the note from Hoosier Corporation.
April 26
Collect $7,100 on account from customers.
April 28
Pay $1,700 to the local utility company for April gas and electricity.
April 30
Pay $3,200 rent for the April.
Required: 1. Record each transaction. 2. Post each transaction to the appropriate T-accounts. 3. Calculate the balance of each account at April 30. (Hint: Be sure to include the balance at the beginning of April in each T-account.) 4. Prepare a trial balance as of April 30.
Requirement 1 2-184 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Debit April 1
Cash
Credit 15,000
Common Stock
15,000
(Issue common stock) April 2
Equipment
4,500
Notes Payable
4,500
(Purchase equipment with note payable) April 4
Supplies
1,500
Accounts Payable
1,500
(Purchase supplies on account) April 10
Accounts Receivable
9,000
Service Revenue
9,000
(Provide services on account) April 15
Accounts Payable
1,200
Cash
1,200
(Pay cash on account) April 20
Salaries Expense
2,300
Cash
2,300
(Pay current salaries) April 22
Cash
11,500
Service Revenue
11,500
(Provide services for cash) April 24
Notes Payable
1,300
Cash
1,300
(Pay on note payable) April 26
Cash
7,100
Accounts receivable
7,100
(Receive cash on account) April 28
Utilities Expense Cash
1,700 1,700
(Pay utilities for current month)
2-185 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
April 30
Rent Expense
3,200
Cash
3,200
(Pay rent for current month)
Requirements 2 and 3 Cash
Accounts Receivable
Supplies
2,800
1,200
900
7,100
3,600
15,000
2,300
9,000
1,500
11,500
1,300
7,100
1,700
2,800
5,100
3,200 26,700
Accounts Payable
Equipment 9,100
1,200
Notes Payable 2,200
1,300
3,600
4,500
1,500
4,500
13,600
2,500
6,800
Common Stock
Retained Earnings 9,000
Service Revenue 1,600
9,000
15,000
11,500
24,000
1,600
Salaries Expense
Utilities Expense
20,500 Rent Expense
2,300
1,700
3,200
2,300
1,700
3,200
Requirement 4 Wolverine Incorporated Trial Balance April 30 Account Title Cash
Debit
Credit
$26,700
Accounts Receivable
2,800
Supplies
5,100
2-186 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Equipment
13,600
Accounts Payable
$2,500
Notes Payable
6,800
Common Stock
24,000
Retained Earnings
1,600
Service Revenue
20,500
Salaries Expense
2,300
Utilities Expense
1,700
Rent Expense
3,200
Totals
$55,400
$55,400
AACSB: Analytical Thinking AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Analyze Blooms: Understand Difficulty: 3 Hard Learning Objective: 02-04 Record transactions in a journal using debits and credits. Learning Objective: 02-05 Post transactions to the general ledger. Learning Objective: 02-06 Prepare a trial balance. Topic: Posting to the General Ledger Topic: Recording Transactions in a Journal Topic: Trial Balance
2-187 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
197.
Baker Incorporated specializes in training and veterinary services to for household pets, such as dogs, birds, lizards, fish, and of course, cats. After the first 11 months of operations in 2018, Baker has the following account balances. Account Title
Debits
Cash
$13,300
Supplies
2,600
Prepaid rent
4,800
Equipment
82,100
Buildings
200,000
Credits
Accounts payable
$9,500
Deferred revenue
3,400
Common stock
145,000
Retained earnings
50,200
Dividends
9,000
Service revenue
250,000
Salaries expense
100,000
Advertising expense
15,600
Utilities expense
30,700
Totals
458,100
$458,100
The following transactions occur during December 2018: December 1-31
Throughout the month, Baker provides services to customers for cash, $25,400. (Hint: Record the entire month’s services in a single entry.)
December 4
Purchase pet supplies on account, $2,700.
December 8
Pay for fliers to be distributed to local residences to advertise the company’s services, $3,100.
December 9
Pay for supplies purchased on December 4.
December 12
Issue additional shares of common stock for cash, $6,000.
December 16
Pay cash on accounts payable, $6,600.
December 19
Purchase equipment with cash, $7,800.
December 22
Pay utilities for December, $4,400.
2-188 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
December 24
Receive cash from customers for services to be provided next January, $2,500.
December 27
One of Baker’s trainers takes a part-time job at the zoo and earns a salary of $1,300. The zoo and Baker are separate companies.
December 30
Pay employees’ salaries for the current month, $10,000.
December 31
Pay dividends to stockholders, $3,000.
Required: 1. Record each transaction. 2. Post each transaction to the appropriate T-accounts. 3. Calculate the balance of each account at December 31. (Hint: Be sure to include the balance at the beginning of December in each T-account.) 4. Prepare a trial balance as of December 31.
Requirement 1 Entries are numbered for posting.
Debit (1) December 1-31
Cash
Credit
25,400
Service Revenue
25,400
(Provide services for cash) (2) December 4
Supplies
2,700
Accounts Payable
2,700
(Purchase supplies on account) (3) December 8
Advertising Expense
3,100
Cash
3,100
(Purchase advertising for December) (4) December 9
Accounts Payable
2,700
Cash
2,700
(Pay cash on account) (5) December 12
Cash Common Stock
6,000 6,000
2-189 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
(Issue shares of common stock) (6) December 16
Accounts Payable
6,600
Cash
6,600
(Pay cash on account) (7) December 19
Equipment
7,800
Cash
7,800
(Purchase equipment) (8) December 22
Utilities Expense
4,400
Cash
4,400
(Pay utilities for current month) (9) December 24
Cash
2,500
Deferred Revenue
2,500
(Receive cash in advance from customers)
December 27
No journal entry is required
(10) December 30
Salaries Expense
10,000
Cash
10,000
(Pay salaries for December) (11) December 31
Dividends
3,000
Cash
3,000
(Pay dividends);
Requirements 2 and 3 Cash
Supplies
Prepaid Rent
Bal. 3,100 13,300 (3)
Bal.
Bal.
2,600
4,800
2,700 (1) (4)
(2)
25,400 6,600
2,700
(5) 6,000 (9)
(6) 7,800 (7) 4,400 (8)
2-190 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
2,500 10,000 (10) 3,000 (11);
9,600
5,300
4,800
Buildings
Accounts Payable
Equipment Bal.
Bal.
82,100
200,000
(4); 9,500 2,700
(7)
Bal.
(6); 2,700
7,800
6,600
89,900
(2)
200,000
2,900
Deferred
Common
Retained
Revenue
Stock
Earnings
3,400
145,000
50,200
Bal.
Bal.
Bal.
2,500
6,000
(9)
(5)
5,900
151,000
Dividends
Bal. 9,000
50,200
Service
Salaries
Revenue
Expense
250,000
Bal.
Bal. 100,000 25,400
(11)
(1)
(10)
3,000
10,000
12,000
275,400 110,000
Advertising
Utilities
Expense
Expense
2-191 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Bal.
Bal.
15,600
30,700
(3)
(8)
3,100
4,400
18,700
35,100
Requirement 4 Baker Incorporated Trial Balance December 31 Accounts
Debit
Cash
$9,600
Supplies
5,300
Prepaid Rent
4,800
Equipment
89,900
Buildings
200,000
Credit
Accounts Payable
$2,900
Deferred Revenue
5,900
Common Stock
151,000
Retained Earnings
50,200
Dividends
12,000
Service Revenue
275,400
Salaries Expense
110,000
Advertising Expense
18,700
Utilities Expense
35,100
Totals
$485,400
$485,400
AACSB: Analytical Thinking AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Analyze Blooms: Understand Difficulty: 3 Hard Learning Objective: 02-04 Record transactions in a journal using debits and credits. Learning Objective: 02-05 Post transactions to the general ledger. Learning Objective: 02-06 Prepare a trial balance. 2-192 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Posting to the General Ledger Topic: Recording Transactions in a Journal Topic: Trial Balance
2-193 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
198.
Below are the account balances of Heron Company at the end of November. Accounts
Balances
Cash
$12,000
Accounts Receivable
?
Rent Expense
1,000
Supplies
5,000
Equipment, net
19,000
Accounts Payable
7,000
Service Revenue
40,000
Utilities Payable
1,000
Deferred Revenue
6,000
Common Stock
19,000
Utilities Expense
2,000
Retained Earnings
15,000
Salaries Payable
2,000
Salaries Expense
9,000
Insurance Expense
6,000
Advertising Expense
1,000
Supplies Expense
10,000
Dividends
3,000
Prepaid Insurance
4,000
Legal Fees Expense
6,000
Required: Prepare a trial balance by placing amounts in the appropriate debit or credit column and determining the balance of the Accounts Receivable account.
Accounts
Debits
Cash
$12,000
Accounts Receivable
12,000
Credits
2-194 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Supplies
5,000
Prepaid Insurance
4,000
Equipment, net
19,000
Accounts Payable
$7,000
Utilities Payable
1,000
Salaries Payable
2,000
Deferred Revenue
6,000
Common Stock
19,000
Retained Earnings
15,000
Dividends
3,000
Service Revenue
40,000
Rent Expense
1,000
Utilities Expense
2,000
Salaries Expense
9,000
Insurance Expense
6,000
Advertising Expense
1,000
Supplies Expense
10,000
Legal Fees Expense
6,000 $90,000
$90,000
AACSB: Analytical Thinking AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Analyze Blooms: Understand Difficulty: 3 Hard Learning Objective: 02-06 Prepare a trial balance. Topic: Trial Balance
2-195 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
199.
Describe the difference between external events and internal events and give two examples of each.
External events involve an exchange between the company and a separate economic entity. Examples include purchasing office supplies on account or borrowing money from a bank. Internal events directly affect the financial position of the company but do not involve exchange transactions with another entity. Examples include depreciation of equipment or use of supplies.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Topic: External Transactions
200.
Describe the six steps in the measurement process of external transactions.
The six steps include: (1) Use source documents to identify accounts affected by external transactions, (2) analyze the impact of the transaction on the accounting equation, (3) assess whether the impact of the transaction results in a debit or credit to the account balance, (4) record transactions using debits and credits, (5) post the transaction to the Taccounts in the general ledger, and (6) prepare a trial balance.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-01 Identify the basic steps in measuring external transactions. Topic: External Transactions
2-196 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
201.
Explain what it means that external transactions have a dual effect.
Dual effect refers to each transaction having at least two effects on the accounting equation. Either an economic event increases (decreases) one side of the equation and also increases (decreases) the other side of the equation by the same amount, or the economic event increases one element and decreases another element by an equal amount, both on the same side of the accounting equation.
AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation. Topic: Effects of Transactions on the Basic Accounting Equation
2-197 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 03 The Accounting Cycle: End of the Period
True / False Questions
1. Accrual-basis accounting involves recording revenues when earned and recording expenses with their related revenues. True
False
2. The revenue recognition principle states that we record revenue in the period in which we collect cash. True
False
3. According to the revenue recognition principle, if a company provides services to a customer in the current year but does not collect cash until the following year, the company should report the revenue in the current year. True
False
4. Jones Corporation provides services to a customer on June 17, but the customer does not pay for the services until August 12. According to the revenue recognition principle, Jones Corporation should record the revenue on August 12. True
False
5. The matching principle states that we recognize expenses in the same period as the revenues they help to generate. True
False
3-1 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
6. According to the concept of expense recognition under accrual-basis accounting, if costs associated with producing revenue in the current year are not paid in cash until the following year, the costs should be expensed in the current year. True
False
7. Under cash-basis accounting, we record revenues at the time we receive cash and expenses at the time we pay cash. True
False
8. Under cash-basis accounting, the timing of cash inflows and outflows exactly matches the reporting of revenues and expenses in the income statement. True
False
9. Under cash-basis accounting, if a company provides services to a customer in the current year but does not collect cash until the following year, the company should report the revenue in the current year. True
False
10. Under cash-basis accounting, if costs associated with producing revenue in the current year are not paid in cash until the following year, the costs should be expensed in the following year. True
False
11. Because cash-basis accounting violates both the revenue recognition principle and the matching principle, it is generally not accepted in preparing financial statements. True
False
12. Adjusting entries involve recording events that have occurred but that have not yet been recorded by the end of the period. True
False
3-2 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
13. Adjusting entries should be prepared after financial statements are prepared. True
False
14. Because adjusting entries allow the proper application of the revenue recognition principle or the matching principle, they are a necessary part of cash-basis accounting. True
False
15. Prepaid expenses involve payment of cash (or an obligation to pay cash) for the purchase of an asset before the expense is incurred. True
False
16. Deferred revenues occur when cash is received after the revenue is earned. True
False
17. Accrued expenses involve the payment of cash before recording an expense and a liability. True
False
18. Accrued revenues involve the receipt of cash after the revenue has been earned and an asset has been recorded. True
False
19. The adjusting entry for a prepaid expense always includes a debit to an expense account and a credit to a liability account. True
False
20. The adjusting entry for a prepaid expense has the effect of reducing total assets and reducing net income. True
False
3-3 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
21. The Supplies account is an example of an accrued expense. True
False
22. Suppose Simeon Company begins the year with $1,000 in supplies, purchases an additional $5,500 of supplies during the year, and ends the year with $700 in supplies. The year-end adjusting entry includes Supplies Expense of $7,200. True
False
23. The adjusting entry for a deferred revenue always includes a debit to an asset account and a credit to a revenue account. True
False
24. The adjusting entry for a deferred revenue has the effects of reducing liabilities and increasing net income. True
False
25. On November 1, 2018, a company receives $1,800 for services to be provided evenly over the next six months. The December 31, 2018, adjusting entry for the company would include a credit to Deferred Revenue for $600. True
False
26. The adjusting entry for an accrued expense always includes a debit to an expense account and a credit to a liability account. True
False
27. The adjusting entry for an accrued expense has the effects of decreasing net income and decreasing liabilities. True
False
3-4 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
28. On December 31, 2018, employees who earn $500 per day have worked eight days and will be paid on January 6, 2019. The adjusting entry on December 31, 2018, includes a debit to Salaries Expense for $4,000. True
False
29. At December 31, 2018, a company has received, but not paid, a utility bill for $250. The amount of utility expense for 2018 equals $250. True
False
30. The adjusting entry for an accrued revenue always includes a debit to a liability account and a credit to a revenue account. True
False
31. The adjusting entry for an accrued revenue has the effects of increasing assets and increasing net income. True
False
32. Adjusting entries are unnecessary for transactions that do not involve revenue or expense activities, such as selling common stock or paying dividends. True
False
33. Adjusting entries are not necessary when cash is received at the same time revenues are earned. True
False
34. Adjusting entries are not necessary when cash is paid at the same time expenses are incurred. True
False
3-5 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
35. A post-closing trial balance is a list of all accounts and their balances after we have updated account balances for adjusting entries. True
False
36. Once the adjusted trial balance is complete, financial statements are prepared. True
False
37. A classified balance sheet separates assets into current and long-term, and separates liabilities into current and long-term. True
False
38. Current assets are assets that provide a benefit to a company over more than one year. True
False
39. Long-term assets are assets that provide a benefit to a company for more than one year. True
False
40. Current liabilities are liabilities due within one year. True
False
41. Long-term liabilities are liabilities due in more than one year. True
False
42. Long-term asset categories include investments; property, plant, and equipment; and intangible assets. True
False
43. The components of retained earnings include assets, expenses, and dividends. True
False
3-6 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
44. Closing entries transfer the balances of all temporary accounts (revenues, expenses, and dividends) to the Common Stock account. True
False
45. The closing entry for revenue accounts includes a debit to Retained Earnings and a credit to all revenue accounts. True
False
46. The closing entry for expense accounts includes a debit to Retained Earnings and a credit to all expense accounts. True
False
47. The closing entry for dividends includes a debit to the Dividends account and a credit to Retained Earnings. True
False
48. If the beginning balance of Retained Earnings equals $10,000, net income for the year equals $6,000, and dividends for the year equal $2,000, then the ending balance of Retained Earnings equals $18,000. True
False
49. If the beginning balance of Retained Earnings equals $12,000, the ending balance of Retained Earnings equals $15,000, and dividends for the year equal $1,000, then net income for the year equals $4,000. True
False
50. After closing entries are posted to the accounts in the general ledger, all asset and liability accounts have a balance of zero. True
False
3-7 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
51. After closing entries are prepared, the balance of Retained Earnings is updated to reflect the activity in the revenue, expense, and dividend accounts for the period. True
False
52. The post-closing trial balance is a list of all accounts and their balances at a particular date after the account balances have been updated for closing entries. True
False
53. The post-closing trial balance does not include any assets or liabilities, because these accounts all have zero balances after closing entries. True
False
Multiple Choice Questions
54. The accounting basis that helps to measure and report revenues and expenses in a way that clearly reflects the ability of a company to generate value for its owners is referred to as:
A. Cash-basis. B. Accrual-basis. C. Matching-basis. D. Reporting-basis. 55. The accounting basis that records revenues when goods or services are provided to customers and expenses with related revenues is referred to as:
A. Cash-basis. B. Matching-basis. C. Accrual-basis. D. Reporting-basis.
3-8 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
56. The revenue recognition principle states that:
A. Revenue should be recognized in the period the cash is received. B. Revenue should be recognized in the period goods and services are provided. C. Revenue should be recognized in the balance sheet. D. Revenue is a component of common stock. 57. Which accounting principle states that a company should "record revenues when they provide goods and services to customers?"
A. Matching. B. Revenue recognition. C. Conservatism. D. Materiality. 58. The concept of matching in accounting refers to:
A. All costs that are used to generate revenue are recorded in the period the revenue is recognized. B. All transactions are recorded at the exchange price. C. The business is separate from its owners. D. The business will continue to operate indefinitely unless there is evidence to the contrary. 59. Which of the following concepts suggests that expenses should be recognized in the same period as the revenues they help to generate?
A. Accounting equation. B. Revenue recognition. C. Matching. D. Conservatism.
3-9 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
60. Air France collected cash on February 4 from the sale of a ticket to a customer on January 26. The flight took place on April 5. According to the revenue recognition principle, in which month should Air France have recognized this revenue?
A. January. B. February. C. April. D. Evenly in each of the three months. 61. A customer purchased a drill press on November 14 on account from Sears. The drill press was delivered two weeks later. The customer paid for the drill press on December 5. When should Sears record the revenue for this transaction according to the revenue recognition principle?
A. November. B. December. C. Evenly in each of the two months. D. One-third in November and two-thirds in December. 62. A company received an order from a customer in June for services to be provided. Those services were provided in July, and the customer paid the full amount in August. According to the revenue recognition principle, in which month should the company record revenue?
A. June. B. July. C. August. D. Evenly over the three months.
3-10 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
63. A company orders office supplies in June. Those supplies are received and paid for in July. The supplies are used in August. In which month should the company record supplies expense?
A. June. B. July. C. August. D. Evenly over the three months. 64. A company orders office supplies in June. Those supplies are received and used in July. The supplies are paid for in August. In which month should the company record supplies expense?
A. June. B. July. C. August. D. Evenly over the three months. 65. In November, a company hires three temporary employees that are scheduled to work only the month of December. Those employees work during December, and they are then paid their full salaries in January. In which month should the company record supplies expense?
A. November. B. December. C. January. D. Evenly over the three months. 66. The accounting basis that records revenues when cash is received and expenses when cash is paid is referred to as:
A. Cash-basis. B. Accrual-basis. C. Matching-basis. D. Reporting-basis.
3-11 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
67. The following events pertain to Jasper Corporation: May 1 Jasper purchased office supplies of $3,000 on account. May 5 The office supplies were shipped to Jasper. May 8 Jasper used these office supplies for a one-time event. May 9 Jasper paid $3,000 cash for the office supplies purchased on May 1. Using cash-basis accounting, on which date should Jasper record supplies expense?
A. May 1. B. May 5. C. May 8. D. May 9. 68. A company provided $1,500 of services to customers during the month of May. The customers paid in June. What would the impact of these transactions be during May on (1) the balance of cash, (2) cash-basis net income, and (3) accrual basis net income?
A. (1) No effect, (2) No effect, (3) Increase. B. (1) No effect, (2) No effect, (3) No effect. C. (1) Increase, (2) Increase, (3) Increase. D. (1) Increase, (2) Increase, (3) No effect. 69. A company purchased $400 of office supplies on account during May. All the supplies were used in May, and the account was paid during June. What would the impact of these transactions be during May on (1) the balance of cash, (2) cash-basis net income, and (3) accrual-basis net income?
A. (1) No effect, (2) No effect, (3) Decrease. B. (1) Decrease, (2) Decrease, (3) No effect. C. (1) Decrease, (2) Decrease, (3) Decrease. D. (1) Decrease, (2) No effect, (3) No effect.
3-12 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
70. A company paid $900 to workers during May. Of this amount, $600 was for work performed in April, while the other $300 was for work performed during May. What would the impact of this transaction be during May on (1) the balance of cash, (2) cash-basis net income, and (3) accrual-basis net income?
A. (1) No effect, (2) No effect, (3) Decrease. B. (1) Decrease, (2) Decrease, (3) No effect. C. (1) Decrease, (2) Decrease, (3) Decrease. D. (1) Decrease, (2) No effect, (3) No effect. 71. Pawn Shops Unlimited recorded the following four transactions during April. Which of these transactions would have the same income statement impact in April regardless of whether the company used accrual-basis or cash-basis accounting?
A. Received $600 from customers for services to be provided in May. B. Paid $1,800 for a six-month insurance policy covering the period July 1—December 31. C. Paid $700 for an advertisement that appeared in the April 17 edition of the Las Vegas Sun newspaper. D. Received $300 from customers for services performed in March. 72. Pawn Shops Unlimited recorded the following four transactions during April. Which of these transactions would have the same income statement impact in April regardless of whether the company used accrual-basis or cash-basis accounting?
A. Purchased $500 of office supplies on account (supplies were used in May and paid for in May). B. Paid $1,800 for a six-month insurance policy covering the period July 1—December 31. C. Paid $700 for an advertisement that appeared in the May 17 edition of the Las Vegas Sun newspaper. D. Received $300 from customers for services performed in March.
3-13 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
73. The following events pertain to Bills Company: December 28, 2018
Bills was contacted by a customer for possible accounting and tax services.
December 30, 2018
Bills signed a formal agreement with the customer to provide accounting and tax services in 2019.
January 4, 2019
The customer paid $1,000 in advance for the services to be provided by Bills Company.
January 11, 2019
Bills provided accounting and tax services to the customer.
Using cash-basis accounting, on which date should Bills Company record revenue for the accounting and tax services?
A. December 30, 2018. B. December 31, 2018. C. January 4, 2019. D. January 11, 2019. 74. When a company provides services on account, which of the following would be recorded using cash-basis accounting?
A. Debit to Cash. B. Debit to Service Revenue. C. Credit to Deferred Revenue. D. No entry would be recorded.
3-14 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
75. The following events pertain to Bills Company: December 28, 2018
Bills was contacted by a customer for possible accounting and tax services.
December 30, 2018
Bills signed a formal agreement with the customer to provide accounting and tax services in 2019.
January 4, 2019
The customer paid $1,000 in advance for the services to be provided by Bills Company.
January 11, 2019
Bills provided accounting and tax services to the customer.
Using accrual-basis accounting, on which date should Bills Company record revenue for the accounting and tax services?
A. December 30, 2018. B. December 31, 2018. C. January 4, 2019. D. January 11, 2019. 76. Consider the following transactions: 1. The company uses supplies purchased in the previous period, $1,500. 2. The company pays cash for rent in advance, $6,000. 3. The company repays a loan to the bank, $10,000 (ignore any interest cost). The amount of accrual-basis expense is _____ while the amount of cash-basis expense is _____.
A. $6,000; 11,500 B. $6,000; $16,000 C. $1,500; 16,000 D. $1,500; $6,000
3-15 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
77. A company has the following three events in December: 1. December 1 - Pay last month's rent (November), $500. 2. December 15 - Pay rent for the current month (December), $500. 3. December 31 - Pay rent for the following year, $6,000. How much would be recorded as Rent Expense for the month of December using accrualbasis accounting?
A. $6,500. B. $7,000. C. $1,000. D. $500. 78. A company has the following transactions: 1. Pay employees' salaries for the current period. 2. Pay rent in advance. 3. Pay dividends to stockholders in the current period. 4. Receive (but do not pay) a utility bill. 5. Use supplies previously purchased. How many of these transactions result in an expense being reported in the current period using accrual-basis accounting?
A. 1. B. 2. C. 3. D. 4.
3-16 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
79. A company has the following transactions: 1. Pay employees' salaries for the current period. 2. Pay rent in advance. 3. Pay dividends to stockholders in the current period. 4. Receive (but do not pay) a utility bill. 5. Use supplies previously purchased. How many of these transactions result in an expense being reported in the current period using cash-basis accounting?
A. 1. B. 2. C. 3. D. 4. 80. The primary difference between accrual-basis and cash-basis accounting is:
A. The timing of when revenues and expenses are recorded. B. Cash-basis accounting is allowed for financial reporting purposes but not accrual-basis accounting. C. Accrual-basis accounting violates both the revenue recognition and matching principles. D. Adjusting entries are only a necessary part of cash-basis accounting. 81. When the amount of interest receivable decreases during an accounting period:
A. Accrual-basis revenues exceed cash collections from borrowers. B. Accrual-basis net income exceeds cash-basis net income. C. Accrual-basis revenues are less than cash collections from borrowers. D. Accrual-basis expenses are less than cash payments to borrowers.
3-17 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
82. When the balance of the Deferred Revenue account decreases during an accounting period:
A. Accrual-basis revenues exceed cash collections from customers. B. Accrual-basis expenses exceed cash collections from customers. C. Accrual-basis revenues are less than cash collections from customers. D. Accrual-basis net income is less than cash-basis net income. 83. Which transaction would not be recorded under cash-basis accounting?
A. Providing services to customers for cash. B. Paying one year of rent in advance. C. Paying salaries to employees. D. Purchasing supplies on account. 84. Which of the following statements are correct? For accrual-basis accounting: (1) record revenues when earned. (2) record expenses when cash is paid. For cash-basis accounting: (3) record revenue when cash is received. (4) record expenses when benefit is received.
A. (1) and (4). B. (2) and (3). C. (1) and (3). D. (2) and (4).
3-18 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
85. On July 1, 2018, Rents-A-Lot Inc. paid $72,000 for 36 months of advance rent on its warehouse. What would be the amount of rent expense in the 2019 financial statements for Rents-A-Lot under both cash-basis and accrual-basis accounting?
A. Cash-basis = $24,000; Accrual-basis = $24,000. B. Cash-basis = $72,000; Accrual-basis = $12,000. C. Cash-basis = $0; Accrual-basis = $24,000. D. Cash-basis = $0; Accrual-basis = $12,000. 86. The following information pertains to Sooner Company: May 1
Customer ordered an installation service to be done by Sooner Company on May 15.
May 2
Customer paid cash for the installation job to be done on May 15.
May 8
The Sooner Company purchased installation supplies on account for the job.
May 15
The installation job was started and completed.
May 20
Amount owed for supplies purchased on May 8 is paid.
Assuming that Sooner Company uses cash-basis accounting, when would the company record the expense related to the supplies?
A. May 2. B. May 8. C. May 15. D. May 20.
3-19 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
87. The following information pertains to Sooner Company: May 1
Customer ordered an installation service to be done by Sooner Company on May 15.
May 2
Customer paid cash for the installation job to be done on May 15.
May 8
The Sooner Company purchased installation supplies on account for the job.
May 15
The installation job was started and completed.
May 20
Amount owed for supplies purchased on May 8 is paid.
Assuming that Sooner Company uses accrual-basis accounting, when would the company record the expense related to the supplies?
A. May 2. B. May 8. C. May 15. D. May 20. 88. Consider the following events for Betterment Incorporated: January 1
Betterment purchases gasoline for $200 on account.
January 7
Betterment advertises lawn mowing services for $100 per lawn.
January 9
Betterment signs up 8 customers who pay a total of $800 cash.
January 12
Betterment mows the lawns of the 8 customers and all gasoline purchased on January 1 is used.
January 13
Betterment pays for the gasoline purchased on January 1.
Under accrual-basis accounting, what is the appropriate day to record the revenues related to lawn services?
A. January 1. B. January 7. C. January 9. D. January 12.
3-20 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
89. Consider the following events for Betterment Incorporated: January 1
Betterment purchases gasoline for $200 on account.
January 7
Betterment advertises lawn mowing services for $100 per lawn.
January 9
Betterment signs up 8 customers who pay a total of $800 cash.
January 12
Betterment mows the lawns of the 8 customers and all gasoline purchased on January 1 is used.
January 13
Betterment pays for the gasoline purchased on January 1.
Under accrual-basis accounting, what is the appropriate day to record the expenses related to the gasoline?
A. January 1. B. January 7. C. January 12. D. January 13. 90. Consider the following events for Betterment Incorporated: January 1
Betterment purchases gasoline for $200 on account.
January 7
Betterment advertises lawn mowing services for $100 per lawn.
January 9
Betterment signs up 8 customers who pay a total of $800 cash.
January 12
Betterment mows the lawns of the 8 customers and all gasoline purchased on January 1 is used.
January 13
Betterment pays for the gasoline purchased on January 1.
Under cash-basis accounting, what is the appropriate day to record the expenses related to the gasoline?
A. January 1. B. January 9. C. January 12. D. January 13.
3-21 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
91. Consider the following events for Sophia Incorporated: April 5
Sophia purchases volleyballs for $200 on account.
April 6
Sophia advertises a sand volleyball camp for $20 a person.
April 12
Thirty people sign up for the camp paying a total of $600.
April 21
Sophia hosts the sand volleyball camp.
April 23
Sophia pays for the volleyballs purchased on April 5.
Under accrual-basis accounting, what is the appropriate day to record the revenues from the sand volleyball camp?
A. April 5. B. April 6. C. April 12. D. April 21. 92. Consider the following events for Sophia Incorporated: April 5
Sophia purchases volleyballs for $200 on account.
April 6
Sophia advertises a sand volleyball camp for $20 a person.
April 12
Thirty people sign up for the camp paying a total of $600.
April 21
Sophia hosts the sand volleyball camp.
April 23
Sophia pays for the volleyballs purchased on April 5.
Under accrual-basis accounting, what is the appropriate day to record the expenses related to the sand volleyball camp?
A. April 5. B. April 12. C. April 21. D. April 23.
3-22 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
93. Consider the following events for Sophia Incorporated: April 5
Sophia purchases volleyballs for $200 on account.
April 6
Sophia advertises a sand volleyball camp for $20 a person.
April 12
Thirty people sign up for the camp paying a total of $600.
April 21
Sophia hosts the sand volleyball camp.
April 23
Sophia pays for the volleyballs purchased on April 5.
Under cash-basis accounting, what is the appropriate day to record the expenses related to the sand volleyball camp?
A. April 5. B. April 12. C. April 21. D. April 23. 94. Consider the following events for Sophia Incorporated: April 5
Sophia purchases volleyballs for $200 on account.
April 6
Sophia advertises a sand volleyball camp for $20 a person.
April 12
Thirty people sign up for the camp paying a total of $600.
April 21
Sophia hosts the sand volleyball camp.
April 23
Sophia pays for the volleyballs purchased on April 5.
Under cash-basis accounting, what is the appropriate day to record the revenues related to the sand volleyball camp?
A. April 5. B. April 12. C. April 21. D. April 23.
3-23 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
95. Which one of the following best describes the characteristics of adjusting entries?
A. Adjusting entries reduce the balance of revenue, expense, and dividend accounts to zero. B. Adjusting entries allow for the proper recognition of cash flows. C. Adjusting entries allow for the proper recognition of investments from and distributions to stockholders. D. Adjusting entries allow for the proper recognition of revenue and expenses. 96. Which of the following regarding adjusting entries is correct?
A. Adjusting entries are recorded for all external transactions. B. Adjusting entries are recorded to make sure all cash inflows and outflows are recorded in the current period. C. Adjusting entries are needed because we use accrual-basis accounting. D. After adjusting entries, all temporary accounts should have a balance of zero. 97. Adjusting entries are primarily needed for:
A. Cash-basis accounting. B. Accrual-basis accounting. C. Current value accounting. D. Manual accounting systems. 98. Which of the following is true about adjusting entries?
A. Entries are necessary due to the conservatism principle. B. Entries can be done at the beginning or end of the accounting period. C. They zero the balance of all income statement accounts. D. They are a necessary part of accrual-basis accounting.
3-24 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
99. Prepayments occur when:
A. Cash payment (or an obligation to pay cash) occurs before the expense recognition. B. Sales are delayed pending credit approval. C. Customers are unable to pay the full amount due when goods are delivered. D. Cash payment occurs after the expense is incurred and liability is recorded. 100.Deferred revenues refer to:
A. Customers paying cash in advance of the good or service to be provided. B. Revenue being recorded prior to cash collection from the customer. C. Revenue being recorded at the same time the cash is collected from the customer. D. Cash being collected from the customer after the revenue is recorded. 101.An accrued expense occurs when:
A. Cash payment (or an obligation to pay cash) occurs before the expense recognition. B. An expense is recorded at the same time as the cash payment. C. Cash payment occurs after the expense is recognized and a liability is recorded. D. Cash is paid but an expense is never recorded. 102.An accrued revenue represents:
A. Customers paying cash in advance of the good or service to be provided. B. Revenue being recorded prior to cash collection from the customer. C. Revenue being recorded at the same time the cash is collected from the customer. D. Cash being collected from the customer prior to the revenue being recorded.
3-25 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
103.Making insurance payments in advance is an example of a(n):
A. Accrued revenue. B. Accrued expense. C. Deferred revenue. D. Prepaid expense. 104.When a magazine sells one-year subscriptions to customers but receives the full amount of cash immediately, it is an example of a(n):
A. Accrued expense. B. Accrued revenue. C. Prepaid expense. D. Deferred revenue. 105.Receiving a utility bill for costs in the current period but delaying payment until the following period is an example of a(n):
A. Accrued expense. B. Accrued revenue. C. Prepaid expense. D. Deferred revenue. 106.Providing goods or services to customers on account is an example of a(n):
A. Accrued expense. B. Accrued revenue. C. Prepaid expense. D. Deferred revenue.
3-26 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
107.An example of an adjusting entry would not include:
A. Recording the use of office supplies. B. Recording the expiration of prepaid insurance. C. Recording unpaid salaries. D. Paying salaries to company employees. 108.The adjusting entry required when amounts previously recorded as deferred revenues are earned by providing goods or services to customers includes:
A. A debit to a liability. B. A debit to an asset. C. A credit to a liability. D. A credit to an asset. 109.The adjusting entry required to record accrued expenses includes:
A. A credit to Cash. B. A debit to an asset. C. A credit to an asset. D. A credit to liability. 110.Adjusting entries:
A. Often include the Cash account. B. Usually are recorded at the beginning of the accounting period. C. Always involve at least one income statement account and one balance sheet account. D. Adjust the balance of revenue and expense accounts to zero.
3-27 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
111.On July 1, 2018, Charlie Co. paid $18,000 to Rent-An-Office for rent covering 18 months from July 2018 through December 2019. What adjusting entry should Charlie Co. record on December 31, 2018? A.
Rent Expense
18,000
Cash B.
Rent Expense
18,000 18,000
Prepaid Rent C.
Prepaid Rent
18,000 6,000
Rent Expense D.
Rent Expense Prepaid Rent
6,000 6,000 6,000
A. Option A B. Option B C. Option C D. Option D 112.Allen Inc. took out a 1-year, 8%, $100,000 loan on March 31, 2018. Interest is due upon maturity of the loan. The loan and interest must be paid back on March 31, 2019. As of December 31, 2018, what amount, if any, should Allen Inc. report for interest payable?
A. $6,000. B. $2,000. C. $0. D. $8,000.
3-28 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
113.Which of the following is a possible adjusting journal entry?
A. Debit Cash, credit Accounts Payable. B. Debit Service Revenue, credit Cash. C. Debit Salaries Expense, credit Salaries Payable. D. Debit Utilities Expense, credit Retained Earnings. 114.When a company makes an end-of-period adjusting entry that includes a credit to Prepaid Rent, the debit is usually made to:
A. Cash. B. Rent Expense. C. Rent Payable. D. Rent Receivable. 115.When a company makes an end-of-period adjusting entry, which includes a debit to Supplies Expense, the usual credit entry is made to:
A. Accounts Payable. B. Supplies. C. Cash. D. Retained Earnings.
3-29 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
116.Which of the following would not typically be used as an adjusting entry? A.
Rent Expense Prepaid Rent
B.
Cash Deferred Revenue
C.
Interest Expense Interest Payable
D.
Deferred Revenue Service Revenue
A. Option A B. Option B C. Option C D. Option D
3-30 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
117.Yummy Foods purchased a one-year hazard insurance policy on August 1 and recorded the $4,200 premium to prepaid insurance. At its December 31 year-end, Yummy Foods would record which of the following adjusting entries? A.
Insurance Expense
1,750
Prepaid Insurance B.
Prepaid Insurance
1,750 1,750
Insurance Expense C.
1,750
Insurance Expense
1,750
Prepaid Insurance
2,450
Accounts Payable D.
Insurance Expense Prepaid Insurance
4,200 2,450 2,450
A. Option A B. Option B C. Option C D. Option D
3-31 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
118.The employees of Neat Clothes work Monday through Friday. Every other Friday the company issues payroll checks totaling $32,000 (or $3,200 per weekday). The current pay period ends on Friday, January 3. Neat Clothes is now preparing financial statements for the year ended December 31. What is the adjusting entry to record accrued salaries at the end of the year? A.
Salaries Payable
22,400
Salaries Expense B.
Salaries Expense
22,400 6,400
Salaries Payable C.
Salaries Expense
6,400 9,600
Salaries Payable D.
Salaries Expense
9,600 22,400
Salaries Payable
22,400
A. Option A B. Option B C. Option C D. Option D 119.On April 1, a $4,800 premium on a one-year insurance policy on equipment was paid and charged to Prepaid Insurance. At the end of the year, the financial statements would report:
A. Insurance Expense, $4,800; Prepaid Insurance $0. B. Insurance Expense, $3,600; Prepaid Insurance $1,200. C. Insurance Expense, $3,650; Prepaid Insurance $4,800. D. Insurance Expense, $1,200; Prepaid Insurance $3,600.
3-32 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
120.On September 1, 2018, Gold Magazine sold 400 one-year subscriptions for $90 each. The total amount received was credited to Deferred Revenue. What would be the required adjusting entry at December 31, 2018? A.
Deferred Revenue
36,000
Service Revenue B.
Service Revenue
36,000 24,000
Deferred Revenue C.
Deferred Revenue
24,000 24,000
Service Revenue D.
Deferred Revenue Service Revenue
24,000 12,000 12,000
A. Option A B. Option B C. Option C D. Option D 121.During the year, Cheng Company paid salaries of $24,000. In addition, $8,000 in salaries has accrued by the end of the year but has not been paid. The year-end adjusting entry would include which one of the following?
A. Debit to Salaries Expense for $32,000. B. Credit to Salaries Expense of $8,000. C. Debit to Salaries Payable for $24,000. D. Credit to Salaries Payable for $8,000.
3-33 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
122.At the beginning of December, Global Corporation had $2,000 in supplies on hand. During the month, supplies purchased amounted to $3,000, but by the end of the month the supplies balance was only $800. What is the appropriate month-end adjusting entry?
A. Debit Cash $4,200, credit Supplies $4,200. B. Debit Supplies $4,200, credit Supplies Expense $4,200. C. Debit Supplies Expense $4,200, credit Supplies $4,200. D. Debit Cash $800, credit Supplies $800. 123.Eve's Apples opened for business on January 1, 2018, and paid for two insurance policies effective that date. The liability policy was $36,000 for 18 months, and the crop damage policy was $12,000 for a two-year term. What was the balance in Eve's Prepaid Insurance account as of December 31, 2018?
A. $9,000. B. $18,000. C. $30,000. D. $48,000. 124.A list of all accounts and their balances after updating account balances for adjusting entries is referred to as:
A. A trial balance. B. An adjusted trial balance. C. A post-closing trial balance. D. An accounting trial balance. 125.An adjusted trial balance:
A. Is a list of all accounts and their balances after adjusting entries. B. Is a list of all accounts and their balances before adjusting entries. C. Is a list of all accounts and their balances after closing entries. D. Is a trial balance adjusted for cash-basis accounting.
3-34 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
126.Consider the adjustment process at the end of the accounting period. 1. Record the adjusting entries in the journal. 2. Prepare an adjusted trial balance to check the equality of the debits and credits. 3. Determine the accounts requiring adjustment, using the unadjusted trial balance. 4. Post the adjusting entries to the general ledger. Place the items in the proper order.
A. 1, 4, 3, 2. B. 1, 2, 4, 3. C. 3, 4, 2, 1. D. 3, 1, 4, 2. 127.The adjusted trial balance should be prepared ______ the financial statements are prepared in order to prove the ______ of the debits and credits.
A. after; equality B. before; accuracy C. before; equality D. after; accuracy 128.Which of the following trial balances shows account balances that incorporate current year deferrals and accruals?
A. Adjusted trial balance. B. Final trial balance. C. Unadjusted trial balance. D. Accrual-basis trial balance.
3-35 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
129.Which of the following is true about an income statement?
A. It reports activity for a period of time. B. It does not include dividends paid. C. It reports revenues and expenses. D. All of the other answers are true. 130.Which of the following best describes the information reported in the income statement?
A. The portion of profits paid in cash to stockholders. B. The current resources available to pay current obligations. C. The amount earned from customers compared to the cost of doing so. D. The extent to which cash inflows exceed cash outflows.
3-36 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
131.The following table contains financial information for Trumpeter Inc. before closing entries: Cash
$12,000
Supplies
4,500
Prepaid Rent
2,000
Salary Expense
4,500
Equipment
65,000
Service Revenue
30,000
Miscellaneous Expenses
20,000
Dividends
3,000
Accounts Payable
5,000
Common Stock
68,000
Retained Earnings
8,000
What is Trumpeter's net income?
A. $3,500. B. $2,500. C. $5,000. D. $5,500. 132.If a company incorrectly records a payment as an expense instead of an asset, how will this error affect net income in the current period?
A. Net income will be too low. B. Net income will be correct. C. Net income will be too high. D. Not possible to determine.
3-37 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
133.If a company records cash received for services to be provided in the future with a debit to Cash and a credit to Service Revenue, how will this error affect net income for the current period?
A. Net income will be too low. B. Net income will be correct. C. Net income will be too high. D. Not possible to determine. 134.The statement of stockholders' equity includes which of the following for the period?
A. Details of a company's profitability that represents stockholders' claims. B. Changes in stockholders' equity accounts. C. Inflows and outflows of cash that benefit stockholders. D. Current assets available to pay current liabilities to reduce risk to stockholders. 135.The statement of stockholders' equity includes:
A. Net income from the income statement. B. The amount of stock issued in the current period. C. Dividends declared to stockholders in the current period. D. All of the other answers are correct. 136.In the statement of stockholders' equity, Retained Earnings had a beginning balance of $25,000. During the period, the company reports a net income of $10,000 and a dividend of $4,000. The ending balance in the Retained Earnings account is:
A. $10,000. B. $35,000. C. $39,000. D. $31,000.
3-38 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
137.In the statement of stockholders' equity, Retained Earnings had a beginning balance of $60,000. During the period, the company reports a net loss of $10,000 and net cash outflows of $15,000. The ending balance in the Retained Earnings account is:
A. $60,000. B. $35,000. C. $50,000. D. $45,000. 138.In the statement of stockholders' equity, the balance of Retained Earnings increased by $32,000. The company declared a dividend of $10,000 during the year. What was the net income for the year?
A. $10,000. B. $32,000. C. $42,000. D. $22,000. 139.A classified balance sheet ______.
A. Shows only current assets and current liabilities B. Shows changes in assets, liabilities, revenues and expenses C. Contains confidential information D. Shows subtotals for current assets and current liabilities 140.Which financial statement provides information for a point in time only?
A. Statement of cash flows. B. Income statement. C. Statement of stockholders' equity. D. Balance sheet.
3-39 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
141.Current assets include:
A. Assets that must be paid for within 12 months. B. Assets that will be used up or converted to cash within 12 months. C. Assets that will be used for many years. D. Any assets that were purchased for cash. 142.With respect to current assets, liquidity refers to:
A. How quickly the asset can be converted to cash. B. The magnitude of the asset's account balance. C. Whether cash was paid for the asset at the time of acquisition. D. The accuracy of the balance being reported. 143.The following financial information is from Shovels Construction Company: Accounts Payable
$15,000
Buildings
80,000
Cash
10,500
Accounts Receivable
9,500
Sales Tax Payable
4,500
Retained Earnings
47,500
Supplies
40,000
Notes Payable (due in 18 months)
35,000
Interest Payable
3,000
Common Stock
35,000
What is the amount of current assets, assuming the accounts above reflect normal activity?
A. $20,000. B. $60,000. C. $140,000. D. $175,000.
3-40 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
144.Consider the following items: Land Accounts Receivable Notes Payable (due in three years) Accounts Payable Retained Earnings Prepaid Rent Deferred Revenue Buildings Notes Payable (due in six months) Equipment How many of the items listed above are generally long-term assets?
A. Two. B. Three. C. Four. D. Five. 145.Resources owned by the company that will provide a benefit for more than one year are called:
A. Current assets. B. Current liabilities. C. Long-term assets. D. Revenues. 146.Long-term productive assets used in the normal course of business are typically classified as:
A. Current assets. B. Investments. C. Intangible assets. D. Property, plant, and equipment.
3-41 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
147.Patents, copyrights, franchises, and trademarks are examples of:
A. Current assets. B. Investments. C. Intangible assets. D. Property, plant, and equipment. 148.A current liability is defined as:
A. An amount borrowed less than one year ago. B. An amount due to an employee. C. An amount due within one year. D. A small amount due. 149.An advantage of a classified balance sheet is that it is easy to see:
A. If the company is likely to be profitable in future periods. B. If the company is profitable in the current period. C. If current assets are large enough to pay current liabilities. D. If dividends have been paid to stockholders. 150.Which of the following current liabilities does not involve the future payment of cash?
A. Interest Payable. B. Deferred Revenue. C. Accounts Payable. D. Salaries Payable.
3-42 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
151.The Deferred Revenue account is shown in which statement?
A. Income statement. B. Statement of cash flows. C. Balance sheet. D. Statement of stockholders' equity. 152.The following financial information is from Bronco Company. All debt is due within one year unless stated otherwise. Retained Earnings
$52,000
Supplies
37,000
Equipment
72,000
Accounts Receivable
8,600
Deferred Revenue
6,000
Accounts Payable
15,000
Common Stock
25,000
Notes Payable (due in 18 months)
35,000
Interest Payable
7,000
Cash
22,400
What is the amount of current liabilities?
A. $63,000. B. $28,000. C. $45,600. D. $22,000.
3-43 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
153.Which of the following are reported as stockholders' equity in a classified balance sheet?
A. Debits and Credits. B. Revenues and Expenses. C. Common Stock and Retained Earnings. D. Assets and Liabilities. 154.The following table contains financial information for Trumpeter Inc. before closing entries: Cash
$12,000
Supplies
4,500
Prepaid Rent
2,000
Salaries Expense
4,500
Equipment
65,000
Service Revenue
30,000
Miscellaneous Expenses
20,000
Dividends
3,000
Accounts Payable
5,000
Common Stock
68,000
Retained Earnings
8,000
What is the amount of Trumpeter's total assets?
A. $81,500. B. $82,500. C. $68,500. D. $83,500.
3-44 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
155.The following table contains financial information for Trumpeter's Inc. before closing entries: Cash
$12,000
Supplies
4,500
Prepaid Rent
2,000
Salaries Expense
4,500
Equipment
65,000
Service Revenue
30,000
Miscellaneous Expense
20,000
Dividends
3,000
Accounts Payable
5,000
Common Stock
68,000
Retained Earnings
8,000
What is the amount of Trumpeter's total liabilities?
A. $5,000. B. $78,500. C. $68,500. D. $83,500.
3-45 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
156.The following table contains financial information for Trumpeter's Inc. before closing entries: Cash
$12,000
Supplies
4,500
Prepaid Rent
2,000
Salaries Expense
4,500
Equipment
65,000
Service Revenue
30,000
Miscellaneous Expense
20,000
Dividends
3,000
Accounts Payable
5,000
Common Stock
68,000
Retained Earnings
8,000
What is the amount of Trumpeter's total stockholders' equity?
A. $5,000. B. $78,500. C. $68,500. D. $83,500. 157.If a company records cash received for services to be provided in the future with a debit to Cash and a credit to Service Revenue, how will this error affect total assets for the current period?
A. Total assets will be too low. B. Total assets will be correct. C. Total assets will be too high. D. Not possible to determine.
3-46 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
158.Providing services to customers on account would affect the balances reported in which financial statement(s)?
A. Income statement. B. Statement of stockholders' equity. C. Balance sheet. D. All of the financial statements in the other answers would be affected. 159.If a company incorrectly records Service Revenue too high, which of the following is true?
A. Net income in the income statement is overstated. B. Retained earnings in the statement of stockholders' equity is overstated. C. Total stockholders' equity in the balance sheet is overstated. D. All of the other answers are correct. 160.When a company owes employee salaries at the end of the period but fails to make an adjusting entry for that amount owed, which of the following is true?
A. Net income in the income statement is overstated. B. Retained earnings in the statement of stockholders' equity is overstated. C. Total stockholders' equity in the balance sheet is overstated. D. All of the other answers are correct. 161.Which of the following describes the purpose(s) of closing entries?
A. Adjust the balances of asset and liability accounts for unrecorded activity during the period. B. Transfer the balances of temporary accounts to common stock. C. Reduce the balances of the temporary accounts to zero to prepare them for measuring activity in the next period. D. Transfer the balances of temporary accounts to common stock; reduce the balances of the temporary accounts to zero to prepare them for measuring activity in the next period.
3-47 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
162.The primary purpose of closing entries is to:
A. Prove the equality of the debit and credit entries in the general journal. B. Ensure that all assets and liabilities are recognized in the appropriate period. C. Update the balance of Retained Earnings and prepare revenue, expense, and dividend accounts for next period's transactions. D. Assure that adjusting entries balance. 163.The closing process includes which of the following?
A. Closing the balance of the retained earnings account to zero. B. Closing the balance of only the dividends account to zero. C. Closing the balances of only revenue and expense accounts to zero. D. Closing the balances of revenue, expense and dividend accounts to zero. 164.The purpose of closing entries is to transfer:
A. Accounts Receivable to Retained Earnings when an account is fully paid. B. Balances in temporary accounts to a permanent account. C. Inventory to Cost of Goods Sold when merchandise is sold. D. Assets and liabilities when operations are discontinued. 165.Which of the following is a permanent account?
A. Dividends. B. Service Revenue. C. Advertising Expense. D. Retained Earnings.
3-48 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
166.Which of the following is true concerning temporary and permanent accounts?
A. Cash is a temporary account. B. Permanent accounts represent activity over the entire life of the company. C. Permanent accounts must be closed at the end of every reporting period. D. Temporary accounts represent activity over the previous three years. 167.The following table contains financial information for Fisher Inc. before closing entries: Cash
$23,000
Common Stock
34,000
Supplies
4,000
Advertising Expense
2,000
Accounts Payable
20,000
Service Revenue
30,000
Salaries Expense
3,000
Prepaid Rent
4,000
Dividends
3,000
Equipment
45,000
How many of the above accounts are permanent?
A. Three. B. Four. C. Five. D. Six. 168.Permanent accounts would not include:
A. Interest Expense. B. Salaries Payable. C. Prepaid Rent. D. Deferred Revenues.
3-49 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
169.Permanent accounts would not include:
A. Accounts Payable. B. Office Supplies. C. Utilities Expense. D. Common Stock. 170.Temporary accounts would not include:
A. Salaries Payable. B. Advertising Expense. C. Supplies Expense. D. Dividends. 171.Of the following six accounts, which ones have temporary balances: (1) Service Revenue (2) Dividends (3) Salaries Expense (4) Common Stock (5) Retained Earnings (6) Cash
A. (1), (2), and (3). B. (4), (5), and (6). C. (2), (4), and (5). D. (1), (3), and (5). 172.Which of the following accounts will NOT be involved in closing entries?
A. Prepaid Insurance. B. Service Revenue. C. Utilities Expense. D. Retained Earnings.
3-50 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
173.When a company prepares closing entries, which one of the following is NOT a correct closing entry?
A. Debit Retained Earnings; credit Salaries Expense. B. Debit Dividends; credit Retained Earnings. C. Debit Service Revenue; credit Retained Earnings. D. All of the other answers are not correct. 174.The ending balance of Retained Earnings can best be described as:
A. The amount of cash received from stockholders over the life of the company. B. The amount of net income over the life of the company not paid to owners in the form of dividends. C. The amount of dividends paid over the life of the company. D. The amount of net income over the life of the company. 175.The ending Retained Earnings balance of Juan's Mexican Restaurant chain increased by $3.2 million from the beginning of the year. The company declared a dividend of $1.3 million during the year. What was the net income earned during the year?
A. $1.9 million. B. $3.2 million. C. $4.5 million. D. $1.3 million. 176.The Retained Earnings account had a beginning credit balance of $26,000. During the period, the business had a net loss $12,000, and the company paid dividends of $8,000. The ending balance in the Retained Earnings account is:
A. $6,000. B. $30,000. C. $22,000. D. $14,000.
3-51 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
177.In the first three years of operations, Lindsey Corporation earned net income/loss of $150,000, $100,000, and $250,000. At the end of the third year, Lindsey Corporation has a balance of $120,000 in its Retained Earnings account. What is the total amount of dividends Lindsey Corporation paid over the three years?
A. $130,000. B. $120,000. C. $80,000. D. $380,000. 178.For the first three years of operations, the company reports net income of $1,000, $2,000, and $3,000, and pays dividends of $500, $1,000, and $1,000. What is the balance of retained earnings at the end of the third year?
A. $2,000. B. $2,500. C. $3,500. D. $6,000. 179.The closing entry for expenses includes:
A. A debit to Dividends and a credit to all expense accounts. B. A debit to Retained Earnings and a credit to all expense accounts. C. A debit to Revenues and a credit to Retained Earnings. D. A debit to Revenues and a credit to all expense accounts. 180.Which of the following is a possible closing entry?
A. Debit Cash, credit Service Revenue. B. Debit Cash, credit Retained Earnings. C. Debit Service Revenue, credit Retained Earnings. D. Debit Dividends, credit Retained Earnings.
3-52 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
181.Frosty Inc. has the following balances on December 31 prior to closing entries: Revenues
$35,000
Retained Earnings, Jan. 1
10,000
Cash
7,000
Expenses
23,000
Accounts Payable
4,000
Dividends
1,000
Supplies
18,000
Based upon the balances above, what net adjustment would be made to Retained Earnings due to closing entries?
A. Increase of $11,000. B. Increase of $13,000. C. Increase of $12,000. D. Increase of $14,000. 182.A list of all accounts and their balances after posting closing entries is referred to as:
A. A trial balance. B. An adjusted trial balance. C. A post-closing trial balance. D. An accounting trial balance. 183.A post-closing trial balance:
A. Is a list of all accounts and their balances after adjusting entries. B. Is a list of all accounts and their balances before adjusting entries. C. Is a list of all accounts and their balances after closing entries. D. Is a trial balance adjusted for cash-basis accounting.
3-53 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
184.Which one of the following accounts would NOT have a balance after closing entries?
A. Deferred Revenue. B. Supplies. C. Prepaid Rent. D. Dividends. 185.Which of the following accounts is(are) listed in a post-closing trial balance?
A. Prepaid Rent. B. Accounts Payable. C. Salaries Expense. D. Two of these three accounts would be included in a post-closing trial balance. 186.Which of the following statements is true regarding the post-closing trial balance?
A. The post-closing trial balance will be distributed to investors and other stakeholders along with the financial statements. B. The post-closing trial balance is a report prepared before the adjustments and the financial statements to prove that debits equal credits. C. The post-closing trial balance is an internal report prepared as the last step in the accounting cycle. D. The post-closing trial balance proves that all entries have been made correctly and accurately during the accounting period.
Matching Questions
3-54 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
187.Match each term associated with accrual-basis and cash-basis accounting with its most appropriate description.
A company receives cash from customers in May and performs services in June. The revenue 1. Cash-basis expense
is recorded in June. ____ Formal concept which states that sales of products or services are recorded in the period
2. Accrual-basis expense
they are provided to customers. ____ A company pays cash for supplies in May and uses those supplies in June. The expense is
3. Matching principle
recorded in May. ____ Informal concept in accounting which states that expenses are recorded in the same period as
4. Accrual-basis revenue
the revenues they help to generate. ____ A company pays cash for supplies in May and
5. Revenue recognition
uses those supplies in June. The expense is
principle
recorded in June. ____ A company receives cash from customers in May and performs services in June. The revenue
6. Cash basis revenue
is recorded in May. ____
188.Match each type of adjusting entry with its definition.
Pay cash (or have an obligation to pay cash) in the current period that will be recorded as an 1. Deferred revenue
expense in a future period. ____ Record an expense in the current period that
2. Accrued expenses
will be paid in cash in a future period. ____ Receive cash in the current period that will be
3. Accrued revenue
recorded as a revenue in a future period. ____ Record a revenue in the current period that will
4. Prepaid expenses
be collected in cash in a future period. ____
3-55 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
189.Match each term related to financial statements with its description.
1. Statement of stockholders
A list of accounts showing total revenues minus total expenses equal net income. ____ A statement showing the change in the balance of
2. Adjusted trial balance
common stock and retained earnings for the period. ____ A list of accounts showing total assets equal total
3. Classified
liabilities plus total stockholders' equity. ____ A list of all accounts and their balances after adjusting
4. Balance sheet
entries have been prepared. ____ The distinction between current and long-term
5. Income statement
activities. ____
190.Match each term related to closing entries with its description.
1. Temporary accounts
Transfer of temporary balances to retained earnings.
____
Assets, liabilities, and stockholders' equity.
____
Revenues, expenses, and dividends.
____
2. Post-closing trial balance 3. Closing entries
List of permanent and temporary accounts and their 4. Adjusted trial balance
balances.
____
5. Permanent accounts
List of permanent accounts and their balances.
____
Essay Questions
3-56 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
191.For each transaction below, calculate the amount of revenue to be recognized in the current period using accrual-basis accounting: (a) Performed $24,000 of services during the month and received full cash payment from customers at the time of service. (b) Performed $9,000 of services during the month and billed customers. Customers are expected to pay next month. (c) Received $12,000 cash from customers for services to be provided next month.
192.For each transaction below, calculate the amount of expense to be recognized in the current period using accrual-basis accounting: (a) Paid $3,500 on account for supplies purchased last period. All supplies were used last month. (b) Paid $5,000 cash for advertising in the current period. (c) Employees worked in the current period but will not be paid until the following period, $4,500.
3-57 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
193.A company receives $2,500 cash from customers for services to be provided next month. Record the cash receipt using (a) accrual-basis accounting and (b) cash-basis accounting.
194.A company performs $2,800 of services during the month and bills customers. The customers are expected to pay next month. Record the customer billing using (a) accrual-basis accounting and (b) cash-basis accounting.
195.A company performs $4,200 of services during the month and receives full cash payment from customers at the time of service. Record the cash receipt using (a) accrual-basis accounting and (b) cash-basis accounting.
3-58 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
196.A company pays $1,700 cash to employees for work performed during the month. Record the payment using (a) accrual-basis accounting and (b) cash-basis accounting.
197.A company receives a $700 utility bill for the current month but does not plan to pay the bill until early next month. Record the receipt of the utility bill using (a) accrual-basis accounting and (b) cash-basis accounting.
198.A company pays $1,200 on account for supplies purchased last month. All supplies were used last month. Record the payment using (a) accrual-basis accounting and (b) cash-basis accounting.
3-59 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
199.A company maintains its records using cash-basis accounting. During the year, the company received cash from customers, $34,000, and paid cash for taxes, $24,000. At the beginning of the year, customers owe the company $3,000. By the end of the year, customers owe $5,000. At the beginning of the year, the company owes taxes of $4,000. At the end of the year, the company owes taxes of $5,000. Determine cash-basis net income and accrual-basis net income for the year.
3-60 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
200.The following data are taken from the cash-basis accounting records of Myerson Company for the year ended December 31, 2018:
Selected Data as of December 31, 2018
Customers billed in 2018 for services provided
$400,000
Cash collections in 2018 for accounts billed in 2017
20,000
Cash collections in 2018 for accounts billed in 2018
300,000
Cash paid for supplies purchased in 2018
12,000
Supplies remaining at the end of 2018
2,000
Cash paid for salaries in 2018
10,000
Cash paid for annual rent on March 1, 2018
18,000
Calculate the amount of revenues and expenses for 2018 under cash-basis accounting.
3-61 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
201.The following data are taken from the cash-basis accounting records of Myerson Company for the year ended December 31, 2018: Selected Data as of December 31, 2018
Customers billed in 2018 for services provided
$400,000
Cash collections in 2018 for accounts billed in 2017
20,000
Cash collections in 2018 for accounts billed in 2018
300,000
Cash paid for supplies purchased in 2018
12,000
Supplies remaining at the end of 2018
2,000
Cash paid for salaries in 2018
10,000
Cash paid for annual rent on March 1, 2018
18,000
Calculate the amount of revenues and expenses for 2018 under accrual-basis accounting.
202.At the beginning of the period, a company reports a balance in office supplies of $500. During the period, the company purchases an additional $3,500 of office supplies for cash. By the end of the period, only $700 of office supplies remains. Record the period-end adjusting entry.
3-62 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
203.Suppose a company rents office space for one year, paying $12,000 ($1,000/month) in advance on September 1. Record the adjusting entry on December 31.
204.A company purchases one year of flood insurance in advance on May 1, paying $24,000 ($2,000/month). Record the adjusting entry on December 31.
205.A company purchases new equipment for $24,000 cash on August 1, 2018. At the time of purchase, the equipment is expected to be used in operations for four years (48 months) and have no resale or scrap value at the end. The company depreciates the equipment evenly over the 48 months ($500/month). Record the adjusting entry for depreciation on December 31, 2018.
3-63 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
206.Suppose a customer rents a vehicle for four months from Rent-A-Car on October 1, paying $4,000 ($1,000/month). Record Rent-A-Car's adjusting entry on December 31.
207.A company pays its employees $5,600 every two weeks ($400/day). The current two-week pay period ends on December 26, 2018, and employees are paid $5,600. The next two-week pay period ends on January 9, 2019, and employees will be paid $5,600. Record the adjusting entry on December 31, 2018.
208.A company borrows $20,000 with 8% interest on October 1, 2018. This amount plus interest is due on September 30, 2019. Record the adjusting entry on December 31, 2018.
3-64 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
209.A company lends $30,000 with 10% interest on May 1, 2018. This amount plus interest is due on April 30, 2019. Record the adjusting entry on December 31, 2018.
210.Prepare adjusting journal entries, as needed, for the following items. (a) The Supplies account shows a balance of $500, but a count of supplies reveals only $200 on hand at year-end. (b) The company initially records the payments of all insurance premiums as prepaid insurance. The unadjusted trial balance at year-end shows a balance of $500 in Prepaid Insurance. A review of insurance policies reveals that $100 of insurance is unexpired. (c) Employees work Monday through Friday, and salaries of $2,500 per week are paid each Friday. The company's year-end falls on Tuesday. (d) At year-end, the company received a utility bill for December's electricity usage of $200 that will be paid in early January.
3-65 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
211.A company reports the following amounts: Assets = $6,000; Liabilities = $2,000; Stockholders' equity = $4,000; Dividends = $500; Revenues = $5,000; and Expenses = $3,000. What amount is reported for net income?
212.For each of the following accounts, indicate whether the account is shown in the income statement or the balance sheet: Accounts
Financial Statement
1. Rent Expense 2. Accounts Payable 3. Service Revenue 4. Common Stock 5. Accounts Receivable 6. Retained Earnings
3-66 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
213.The adjusted trial balance for China Tea Company at December 31, 2018, is presented below: Debit Cash
$11,000
Accounts Receivable
150,000
Prepaid Rent
5,000
Supplies
25,000
Equipment
300,000
Accumulated
Credit
$135,000
Depreciation Accounts Payable
20,000
Salaries Payable
4,000
Interest Payable
1,000
Notes Payable (due in two
30,000
years) Common Stock
200,000
Retained Earnings
50,000
Dividends
20,000
Service Revenue
400,000
Salaries Expense
180,000
Advertising Expense
70,000
Rent Expense
15,000
Depreciation Expense
30,000
Interest Expense
2,000
Utilities Expense
32,000
_______
$840,000
$840,000
Totals
Prepare an income statement for China Tea Company for the year ended December 31, 2018:
3-67 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
214.The adjusted trial balance for China Tea Company at December 31, 2018, is presented below: Debit Cash
$11,000
Accounts Receivable
150,000
Prepaid Rent
5,000
Supplies
25,000
Equipment
300,000
Accumulated
Credit
$135,000
Depreciation Accounts Payable
20,000
Salaries Payable
4,000
Interest Payable
1,000
Notes Payable (due in two
30,000
years) Common Stock
200,000
Retained Earnings
50,000
Dividends
20,000
Service Revenue
400,000
Salaries Expense
180,000
Advertising Expense
70,000
Rent Expense
15,000
Depreciation Expense
30,000
Interest Expense
2,000
Utilities Expense
32,000
_______
$840,000
$840,000
Totals
Prepare a classified balance sheet for China Tea Company as of December 31, 2018:
3-68 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
215.The December 31, 2018, post-closing trial balance for Strong Corporation is presented below: Debits Cash
$18,500
Long-Term Investments
55,000
Accounts Receivable
26,500
Prepaid Insurance
4,500
Supplies
100,000
Land
45,000
Buildings
277,500
Accumulated
Credits
80,000
Depreciation Accounts Payable
37,500
Notes Payable, due 2019
65,000
Interest Payable
10,000
Notes Payable, due 2028
120,000
Common Stock
150,000
Retained Earnings
64,500
Totals
$527,000
$527,000
Prepare a classified balance sheet for Strong Corporation at December 31, 2018.
3-69 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
216.The following account balances appear in the 2018 adjusted trial balance of Diamond Corporation: Common Stock, $21,000; Retained Earnings, $8,000; Dividends, $2,000; Service Revenue, $30,000; Salaries Expense, $13,000; and Utilities Expense, $7,000. No common stock was issued during the year. Prepare the statement of stockholders' equity for the year ended December 31, 2018.
217.The following is selected financial information for Osmond Dental Laboratories for 2018 and 2019: 2018
2019
Retained earnings, January 1
$53,000
?
Net income
37,000
42,000
Dividends declared and paid
15,000
18,000
Common stock
70,000
?
Osmond issued 2,000 shares of additional capital stock in 2019 for $20,000. There were no other capital transactions. Prepare a statement of stockholders' equity for the year ended December 31, 2019.
3-70 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
218.The adjusted trial balance for Yondel Company at December 31, 2018 is presented below: Debit Cash
$8,000
Prepaid Rent
18,000
Land
415,000
Credit
Accounts Payable
$10,000
Salaries Payable
14,000
Common Stock
250,000
Retained Earnings
64,000
Dividends
10,000
Service Revenue
350,000
Salaries Expense
190,000
Rent Expense
21,000
Utilities Expense
26,000
_______
$688,000
$688,000
Totals
Prepare the closing entries for Yondel Company for the year ended December 31, 2018.
3-71 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
219.The adjusted trial balance for China Tea Company at December 31, 2018 is presented below: Debit Cash
$11,000
Accounts Receivable
150,000
Prepaid Rent
5,000
Supplies
25,000
Equipment
300,000
Accumulated
Credit
$135,000
Depreciation Accounts Payable
20,000
Salaries Payable
4,000
Interest Payable
1,000
Notes Payable – due in
30,000
two years Common Stock
200,000
Retained Earnings
50,000
Dividends
20,000
Service Revenue
400,000
Salaries Expense
180,000
Advertising Expense
70,000
Rent Expense
15,000
Depreciation Expense
30,000
Interest Expense
2,000
Utilities Expense
32,000
_______
$840,000
$840,000
Totals
Prepare the closing entries for China Tea Company for the year ended December 31, 2018.
3-72 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
220.The year-end adjusted trial balance included the following account balances: Cash, $5,000; Equipment, $25,000; Accounts payable, $7,000; Common stock, $15,000; Retained earnings, $6,000; Dividends, $1,000; Service revenue, $18,000; Salaries expense, $9,000; and Utilities expense, $6,000. Prepare the post-closing trial balance.
3-73 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
221.Consider the following transactions. Accrual-Basis Transaction
Revenue
Expense
Cash-Basis Revenue
Expense
1. Record employees' salaries incurred but not yet paid, $800. 2. Pay advertising for the current month, $700. 3. Pay utilities for the previous month, $750. 4. Receive cash from customers in advance, $1,500. 5. Purchase office supplies on account, $400. 6. Pay dividends to stockholders, $200. 7. Pay for supplies previously purchased on account, $400. 8. Pay for insurance one year in advance, $3,600. 9. Receive cash from customers for services performed in the current period, $1,800. 10. Provide services to customers on account, $2,100.
Required: For each transaction, determine the amount of revenue or expense, if any, that is recorded under accrual-basis accounting and under cash-basis accounting.
3-74 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
222.Follette's Accessories maintains its books using cash-basis accounting. However, the company recently borrowed $50,000 from a local bank and the bank requires Follette's to provide annual financial statements prepared using accrual-basis accounting as part of the credit worthiness verification. During 2018, the following cash flows were recorded: Cash collected from
$60,000
customers Cash paid for: Salaries
$25,000
Supplies
6,000
Maintenance
5,000
Insurance
7,000
Advertising
4,000
Net cash flows
47,000 $13,000
You are able to determine the following information: January 1, 2018
December 31, 2018
$15,000
$18,000
1,800
4,100
800
-0-
2,200
2,000
Accounts receivable Prepaid insurance Supplies Salaries payable
Required: Prepare an accrual-basis income statement for December 31, 2018, by calculating accrualbasis revenues and expenses.
3-75 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
223.The information necessary for preparing the 2018 year-end adjusting entries for Winter Storage appears below. Winter's fiscal year-end is December 31. a. Depreciation on the equipment for the year is $7,000. b. Salaries earned (but not paid) from December 16 through December 31, 2018, are $3,400. c. On March 1, 2018, Winter lends an employee $12,000 and a note is signed requiring principal and interest at 6% to be paid on February 28, 2019. d. On April 1, 2018, Winter pays an insurance company $15,000 for a one-year fire insurance policy. The entire $15,000 is debited to prepaid insurance at the time of the purchase. e. $1,500 of supplies are used in 2018. f. A customer pays Winter $4,200 on October 31, 2018, for six months of storage to begin November 1, 2018. Winter credits deferred revenue at the time of cash receipt. g. On December 1, 2018, $4,000 advertising is paid to a local newspaper. The payment represents advertising for December 2018 through March 2019, at $1,000 per month. Prepaid advertising is debited at the time of the payment. Required: Record the necessary adjusting entries at December 31, 2018. No prior adjustments have been made during 2018.
3-76 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
224.David's Services provides general home maintenance to customers. The company's fiscal year-end is December 31. The December 31, 2018, trial balance (before any adjusting entries) appears below. Accounts
Debits
Cash
$18,100
Accounts Receivable
16,200
Supplies
20,400
Prepaid Insurance
15,000
Equipment
95,000
Credits
Accumulated Depreciation
$27,200
Accounts Payable
10,500
Salaries Payable
-0-
Utilities Payable
-0-
Interest Payable
-0-
Notes Payable
40,000
Common Stock
24,000
Retained Earnings
10,500
Dividends
2,500
Service Revenue Salaries Expense
224,900 158,500
Depreciation Expense
-0-
Insurance Expense
-0-
Supplies Expense
-0-
Utilities Expense
11,400
Interest Expense
-0-
________
$337,100
$337,100
Totals
Information necessary to prepare the year-end adjusting entries appears below. a. Depreciation on the equipment for the year is $13,600. b. Employees' salaries are paid every two weeks. The last pay period ended on December 23. Salaries earned from December 24 through December 31, 2018, are $4,200. c. On August 1, 2018, David's borrows $40,000 from a local bank and signs a note. The note requires interest to be paid annually on August 31 at 12%. The principal is due in four years. d. On April 1, 2018, the company purchases insurance for $15,000 for a one-year policy to 3-77 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
cover possible injury to workers. The entire $15,000 was debited to Prepaid Insurance at the time of the purchase. e. $3,000 of supplies remains on hand at December 31, 2018. f. On December 30, Mike's receives a utility bill of $1,900 for the month. The bill will not be paid until early January, 2019, and no entry was recorded when the bill was received. Required: Prepare the necessary adjusting entries on December 31, 2018.
3-78 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
225.The general ledger of the Advanced Health at January 1, 2018, includes the following account balances: Accounts
Debits
Cash
$4,500
Accounts Receivable
8,300
Supplies
3,700
Equipment
26,400
Credits
Accumulated Depreciation
$5,800
Accounts Payable
4,200
Utilities Payable
5,500
Deferred Revenue
-0-
Common Stock
19,000
Retained Earnings
8,400
Totals
$42,900
$42,900
The following is a summary of the transactions for the year: a. Provide health services for cash, $18,000, and on account, $62,000. b. Collect on accounts receivable, $45,000. c. Issue shares of common stock in exchange for $12,000 cash. d. Pay salaries for the current year, $36,000. e. Pay for utilities expense, $13,000, of which $5,500 represents costs for 2017. f. Receive cash in advance from customers, $7,000. g. Pay $3,000 cash dividends to stockholders. Required: 1. Set up the necessary T-accounts and enter the beginning balances from the trial balance. In addition to the accounts shown, the company has accounts for Dividends, Service Revenue, Salaries Expense, Utilities Expense, Supplies Expense, and Depreciation Expense. 2. Record each of the summary transactions listed above. 3. Post the transactions to the accounts. 4. Prepare an unadjusted trial balance. 5. Record adjusting entries. Depreciation for the year on the machinery is $2,900. Medical supplies remaining on hand at the end of the year equal $1,200. Of the $7,000 paid in advance by customers, $4,000 of the work has been completed by the end of the year. 6. Post adjusting entries. 3-79 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
7. Prepare an adjusted trial balance. 8. Prepare an income statement for 2018 and a classified balance sheet as of December 31, 2018. 9. Record closing entries. 10. Post closing entries 11. Prepare a post-closing trial balance.
3-80 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
226.The general ledger of FastTrack Racing at January 1, 2018, includes the following account balances: Accounts
Debits
Cash
$42,500
Accounts Receivable
25,800
Land
115,800
Credits
Accounts Payable
15,100
Notes Payable
30,500
Common Stock
100,000
Retained Earnings
38,500
Totals
$184,100
$184,100
The following is a summary of the transactions for the year: a. Provide services to customers on account, $63,400. b. Provide services to customers for cash, $75,800. c. Collect on accounts receivable, $45,600. d. Issue shares of common stock in exchange for $32,000 cash. e. Purchase supplies on account, $12,700. f. Pay on accounts payable, $11,500. g. Pay salaries for employee work in the current year, $66,200. h. Pay advertising for the current year, $21,500. i. Pay $2,800 cash dividends to stockholders. Required: 1. Set up the necessary T-accounts and enter the beginning balances from the trial balance. In addition to the accounts shown, the company also has accounts for Supplies, Salaries Payable, Interest Payable, Dividends, Service Revenue, Salaries Expense, Advertising Expense, Interest Expense, and Supplies Expense. 2. Record each of the summary transactions listed above. 3. Post the transactions to the accounts. 4. Prepare an unadjusted trial balance. 5. Record adjusting entries. Accrued interest on the notes payable at year-end amounted to $2,800. Accrued salaries at year-end amounted to $2,500. Supplies remaining on hand at the end of the year equal $2,600. 6. Post adjusting entries.
3-81 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
7. Prepare an adjusted trial balance. 8. Prepare an income statement for 2018 and a classified balance sheet as of December 31, 2018. 9. Record closing entries. 10. Post closing entries 11. Prepare a post-closing trial balance.
3-82 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
227.Randy’s Services provides general home repairs to customers. The company’s fiscal year-end is December 31. The December 31, 2018, adjusted trial balance appears below.
Adjusted Trial Balance
Account Title
Debit
Cash
$18,100
Accounts Receivable
16,200
Supplies
3,000
Prepaid Insurance
3,750
Equipment
95,000
Accumulated
Credit
$40,800
Depreciation
Accounts Payable
10,500
Salaries Payable
4,200
Utilities Payable
1,900
Interest Payable
2,000
Notes Payable
40,000
3-83 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Common Stock
24,000
Retained Earnings
10,500
Dividends
2,500
Service Revenue
224,900
Salaries Expense
162,700
Depreciation Expense
13,600
Insurance Expense
11,250
Supplies Expense
17,400
Utilities Expense
13,300
Interest Expense
2,000
Total
$358,800
$358,800
Required:
3-84 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Complete the following steps: 1. Using the adjusted trial balance, prepare an income statement and a statement of shareholders’ equity for the year ended December 31, 2018, and a classified balance sheet as of December 31, 2018. Assume that no common stock is issued during the year. 2. Record closing entries. 3. Calculate account balances after closing entries and prepare a post-closing trial balance.
3-85 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
228.Russell Engineering provides consulting services related to land development. Below is the year-end adjusted trial balance of Russell Engineering. Russell Engineering Adjusted Trial Balance December 31, 2018 Accounts
Debits
Cash
$5,500
Accounts Receivable
4,200
Supplies
2,300
Prepaid Rent
6,100
Equipment
114,000
Accumulated Depreciation
Credits
$25,000
Accounts Payable
3,600
Salaries Payable
3,500
Utilities Payable
1,500
Notes Payable
20,000
Common Stock
44,800
Retained Earnings
20,200
Service Revenue
118,500
Salaries Expense
45,000
Rent Expense
17,600
Depreciation Expense
6,000
Supplies Expense
9,400
Advertising Expense
15,000
Utilities Expense
10,800
Interest Expense
1,200
Totals
$237,100
$237,100
Required:
3-86 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Prepare an income statement, statement of stockholders' equity, and classified balance sheet. In preparing the statement of stockholders' equity, note that additional common stock was issued during the year for $8,000. This amount is included in the amount for Common Stock in the adjusted trial balance.
3-87 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
229 The year-end financial statements are provided below. . Income Statement Service revenue
Statement Of Stockholders’ Equity $87,500
Expenses:
Common
Retained
Stock
Earnings
Salaries
$47,100
January 1
$70,000
Supplies
9,600
Issue stock
12,000
Rent
7,700
Net income
Delivery
5,200 69,600
Dividends December 31
Net
$17,900
$34,500
Total $104,500 12,000
17,900
17,900
_______
(5,000)
(5,000)
$82,000
$47,400
$129,400
income
Balance Sheet Assets:
Liabilities:
Cash
$7,500 Accounts payable
Accounts
8,300 Stockholders’ Equity:
$9,800
receivable Land
123,400 Common stock Retained earnings
Total
$139,200 Total liabilities and equity
$82,000 47,400
129,400 $139,200
assets
Required: 1. Record year-end closing entries. 2. Prepare a post-closing trial balance (Hint: the balance of retained earnings will be the amount shown in the balance sheet).
3-88 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
230.Describe what is meant by deferred revenues and give two examples.
231.Describe what is meant by prepaid expenses and give two examples.
232.What is an accrued expense?
3-89 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
233.What is the difference between permanent accounts and temporary accounts and why does an accounting system have both types of accounts?
234.What are the purposes of closing entries?
3-90 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 03 The Accounting Cycle: End of the Period Answer Key
True / False Questions
1.
Accrual-basis accounting involves recording revenues when earned and recording expenses with their related revenues. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-01 Understand when revenues and expenses are recorded. Topic: Revenue and Expense Reporting
2.
The revenue recognition principle states that we record revenue in the period in which we collect cash. FALSE The revenue recognition principle states that we record revenue in the period in which we earn it.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-01 Understand when revenues and expenses are recorded. Topic: Revenue and Expense Reporting
3-91 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3.
According to the revenue recognition principle, if a company provides services to a customer in the current year but does not collect cash until the following year, the company should report the revenue in the current year. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-01 Understand when revenues and expenses are recorded. Topic: Revenue and Expense Reporting
4.
Jones Corporation provides services to a customer on June 17, but the customer does not pay for the services until August 12. According to the revenue recognition principle, Jones Corporation should record the revenue on August 12. FALSE The revenue recognition principle requires that revenue be recorded when earned (June 17).
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-01 Understand when revenues and expenses are recorded. Topic: Revenue and Expense Reporting
5.
The matching principle states that we recognize expenses in the same period as the revenues they help to generate. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-01 Understand when revenues and expenses are recorded.
3-92 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Revenue and Expense Reporting
6.
According to the concept of expense recognition under accrual-basis accounting, if costs associated with producing revenue in the current year are not paid in cash until the following year, the costs should be expensed in the current year. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-01 Understand when revenues and expenses are recorded. Topic: Revenue and Expense Reporting
7.
Under cash-basis accounting, we record revenues at the time we receive cash and expenses at the time we pay cash. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
8.
Under cash-basis accounting, the timing of cash inflows and outflows exactly matches the reporting of revenues and expenses in the income statement. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
3-93 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
9.
Under cash-basis accounting, if a company provides services to a customer in the current year but does not collect cash until the following year, the company should report the revenue in the current year. FALSE Under cash-basis accounting, revenues are recorded at the time cash is collected.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
10.
Under cash-basis accounting, if costs associated with producing revenue in the current year are not paid in cash until the following year, the costs should be expensed in the following year. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
11.
Because cash-basis accounting violates both the revenue recognition principle and the matching principle, it is generally not accepted in preparing financial statements. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
3-94 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12.
Adjusting entries involve recording events that have occurred but that have not yet been recorded by the end of the period. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
13.
Adjusting entries should be prepared after financial statements are prepared. TRUE Adjusting entries should be prepared before financial statements are prepared.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
14.
Because adjusting entries allow the proper application of the revenue recognition principle or the matching principle, they are a necessary part of cash-basis accounting. FALSE Adjusting entries are a necessary part of accrual-basis accounting.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
3-95 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15.
Prepaid expenses involve payment of cash (or an obligation to pay cash) for the purchase of an asset before the expense is incurred. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
16.
Deferred revenues occur when cash is received after the revenue is earned. FALSE Deferred revenues occur when cash is received before the revenue is earned.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
17.
Accrued expenses involve the payment of cash before recording an expense and a liability. FALSE Accrued expenses involve the payment of cash after recording an expense and a liability.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
3-96 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
18.
Accrued revenues involve the receipt of cash after the revenue has been earned and an asset has been recorded. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
19.
The adjusting entry for a prepaid expense always includes a debit to an expense account and a credit to a liability account. TRUE The credit is to an asset account.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
20.
The adjusting entry for a prepaid expense has the effect of reducing total assets and reducing net income. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
3-97 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
21.
The Supplies account is an example of an accrued expense. FALSE The Supplies account is an example of a prepaid expense.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
22.
Suppose Simeon Company begins the year with $1,000 in supplies, purchases an additional $5,500 of supplies during the year, and ends the year with $700 in supplies. The year-end adjusting entry includes Supplies Expense of $7,200. FALSE Supplies Expense = beginning ($1,000) + purchases ($5,500) - ending ($700).
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
23.
The adjusting entry for a deferred revenue always includes a debit to an asset account and a credit to a revenue account. FALSE The debit is to a liability account.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand 3-98 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 2 Medium Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
24.
The adjusting entry for a deferred revenue has the effects of reducing liabilities and increasing net income. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
25.
On November 1, 2018, a company receives $1,800 for services to be provided evenly over the next six months. The December 31, 2018, adjusting entry for the company would include a credit to Deferred Revenue for $600. FALSE The adjusting entry would involve a debit to Deferred Revenue and a credit to Service Revenue for $600.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
26.
The adjusting entry for an accrued expense always includes a debit to an expense account and a credit to a liability account. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand 3-99 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 2 Medium Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
27.
The adjusting entry for an accrued expense has the effects of decreasing net income and decreasing liabilities. FALSE The adjusting entry has the effect of increasing liabilities.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
28.
On December 31, 2018, employees who earn $500 per day have worked eight days and will be paid on January 6, 2019. The adjusting entry on December 31, 2018, includes a debit to Salaries Expense for $4,000. TRUE AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
29.
At December 31, 2018, a company has received, but not paid, a utility bill for $250. The amount of utility expense for 2018 equals $250. TRUE AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium 3-100 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
30.
The adjusting entry for an accrued revenue always includes a debit to a liability account and a credit to a revenue account. FALSE The debit is to an asset account.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
31.
The adjusting entry for an accrued revenue has the effects of increasing assets and increasing net income. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
32.
Adjusting entries are unnecessary for transactions that do not involve revenue or expense activities, such as selling common stock or paying dividends. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries 3-101 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
33.
Adjusting entries are not necessary when cash is received at the same time revenues are earned. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
34.
Adjusting entries are not necessary when cash is paid at the same time expenses are incurred. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
35.
A post-closing trial balance is a list of all accounts and their balances after we have updated account balances for adjusting entries. FALSE This is an adjusted trial balance.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-04 Post adjusting entries and prepare an adjusted trial balance. Topic: Adjusted Trial Balance
3-102 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
36.
Once the adjusted trial balance is complete, financial statements are prepared. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
37.
A classified balance sheet separates assets into current and long-term, and separates liabilities into current and long-term. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
38.
Current assets are assets that provide a benefit to a company over more than one year. FALSE Current assets provide a benefit to a company over the next year only.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
3-103 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
39.
Long-term assets are assets that provide a benefit to a company for more than one year. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
40.
Current liabilities are liabilities due within one year. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
41.
Long-term liabilities are liabilities due in more than one year. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
42.
Long-term asset categories include investments; property, plant, and equipment; and intangible assets. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation 3-104 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
43.
The components of retained earnings include assets, expenses, and dividends. FALSE The components of retained earnings include revenues, expenses, and dividends.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Topic: The Closing Process
44.
Closing entries transfer the balances of all temporary accounts (revenues, expenses, and dividends) to the Common Stock account. FALSE Balances of temporary accounts are transferred to Retained Earnings.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Topic: The Closing Process
3-105 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
45.
The closing entry for revenue accounts includes a debit to Retained Earnings and a credit to all revenue accounts. FALSE The closing entry for revenue accounts includes a debit to all revenue accounts and a credit to Retained Earnings.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Topic: The Closing Process
46.
The closing entry for expense accounts includes a debit to Retained Earnings and a credit to all expense accounts. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Topic: The Closing Process
47.
The closing entry for dividends includes a debit to the Dividends account and a credit to Retained Earnings. FALSE The closing entry for dividends includes a debit to Retained Earnings and a credit to the Dividends account.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand
3-106 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 2 Medium Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Topic: The Closing Process
48.
If the beginning balance of Retained Earnings equals $10,000, net income for the year equals $6,000, and dividends for the year equal $2,000, then the ending balance of Retained Earnings equals $18,000. FALSE Ending Retained Earnings = beginning Retained Earnings ($10,000) + net income ($6,000) - dividends ($2,000) = $14,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Topic: The Closing Process
49.
If the beginning balance of Retained Earnings equals $12,000, the ending balance of Retained Earnings equals $15,000, and dividends for the year equal $1,000, then net income for the year equals $4,000. FALSE AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Topic: The Closing Process
3-107 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
50.
After closing entries are posted to the accounts in the general ledger, all asset and liability accounts have a balance of zero. FALSE After closing entries are prepared, all revenue, expense, and dividend accounts have a balance of zero.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-07 Post closing entries and prepare a post-closing trial balance. Topic: Post-Closing Trial Balance
51.
After closing entries are prepared, the balance of Retained Earnings is updated to reflect the activity in the revenue, expense, and dividend accounts for the period. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-07 Post closing entries and prepare a post-closing trial balance. Topic: Post-Closing Trial Balance
52.
The post-closing trial balance is a list of all accounts and their balances at a particular date after the account balances have been updated for closing entries. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-07 Post closing entries and prepare a post-closing trial balance. Topic: Post-Closing Trial Balance
3-108 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
53.
The post-closing trial balance does not include any assets or liabilities, because these accounts all have zero balances after closing entries. FALSE The post-closing trial balance does not include any revenues, expenses, or dividends, because these accounts all have zero balances after closing entries.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-07 Post closing entries and prepare a post-closing trial balance. Topic: Post-Closing Trial Balance
Multiple Choice Questions
54.
The accounting basis that helps to measure and report revenues and expenses in a way that clearly reflects the ability of a company to generate value for its owners is referred to as:
A. Cash-basis. B. Accrual-basis. C. Matching-basis. D. Reporting-basis. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-01 Understand when revenues and expenses are recorded. Topic: Revenue and Expense Reporting
3-109 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
55.
The accounting basis that records revenues when goods or services are provided to customers and expenses with related revenues is referred to as:
A. Cash-basis. B. Matching-basis. C. Accrual-basis. D. Reporting-basis. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-01 Understand when revenues and expenses are recorded. Topic: Revenue and Expense Reporting
56.
The revenue recognition principle states that:
A. Revenue should be recognized in the period the cash is received. B. Revenue should be recognized in the period goods and services are provided. C. Revenue should be recognized in the balance sheet. D. Revenue is a component of common stock. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-01 Understand when revenues and expenses are recorded. Topic: Revenue and Expense Reporting
3-110 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
57.
Which accounting principle states that a company should "record revenues when they provide goods and services to customers?"
A. Matching. B. Revenue recognition. C. Conservatism. D. Materiality. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-01 Understand when revenues and expenses are recorded. Topic: Revenue and Expense Reporting
58.
The concept of matching in accounting refers to:
A. All costs that are used to generate revenue are recorded in the period the revenue is recognized. B. All transactions are recorded at the exchange price. C. The business is separate from its owners. D. The business will continue to operate indefinitely unless there is evidence to the contrary. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-01 Understand when revenues and expenses are recorded. Topic: Revenue and Expense Reporting
3-111 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
59.
Which of the following concepts suggests that expenses should be recognized in the same period as the revenues they help to generate?
A. Accounting equation. B. Revenue recognition. C. Matching. D. Conservatism. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-01 Understand when revenues and expenses are recorded. Topic: Revenue and Expense Reporting
60.
Air France collected cash on February 4 from the sale of a ticket to a customer on January 26. The flight took place on April 5. According to the revenue recognition principle, in which month should Air France have recognized this revenue?
A. January. B. February. C. April. D. Evenly in each of the three months. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-01 Understand when revenues and expenses are recorded. Topic: Revenue and Expense Reporting
3-112 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
61.
A customer purchased a drill press on November 14 on account from Sears. The drill press was delivered two weeks later. The customer paid for the drill press on December 5. When should Sears record the revenue for this transaction according to the revenue recognition principle?
A. November. B. December. C. Evenly in each of the two months. D. One-third in November and two-thirds in December. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-01 Understand when revenues and expenses are recorded. Topic: Revenue and Expense Reporting
62.
A company received an order from a customer in June for services to be provided. Those services were provided in July, and the customer paid the full amount in August. According to the revenue recognition principle, in which month should the company record revenue?
A. June. B. July. C. August. D. Evenly over the three months. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-01 Understand when revenues and expenses are recorded. Topic: Revenue and Expense Reporting
3-113 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
63.
A company orders office supplies in June. Those supplies are received and paid for in July. The supplies are used in August. In which month should the company record supplies expense?
A. June. B. July. C. August. D. Evenly over the three months. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-01 Understand when revenues and expenses are recorded. Topic: Revenue and Expense Reporting
64.
A company orders office supplies in June. Those supplies are received and used in July. The supplies are paid for in August. In which month should the company record supplies expense?
A. June. B. July. C. August. D. Evenly over the three months. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-01 Understand when revenues and expenses are recorded. Topic: Revenue and Expense Reporting
3-114 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
65.
In November, a company hires three temporary employees that are scheduled to work only the month of December. Those employees work during December, and they are then paid their full salaries in January. In which month should the company record supplies expense?
A. November. B. December. C. January. D. Evenly over the three months. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-01 Understand when revenues and expenses are recorded. Topic: Revenue and Expense Reporting
66.
The accounting basis that records revenues when cash is received and expenses when cash is paid is referred to as:
A. Cash-basis. B. Accrual-basis. C. Matching-basis. D. Reporting-basis. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
3-115 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
67.
The following events pertain to Jasper Corporation: May 1 Jasper purchased office supplies of $3,000 on account. May 5 The office supplies were shipped to Jasper. May 8 Jasper used these office supplies for a one-time event. May 9 Jasper paid $3,000 cash for the office supplies purchased on May 1. Using cash-basis accounting, on which date should Jasper record supplies expense?
A. May 1. B. May 5. C. May 8. D. May 9. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
68.
A company provided $1,500 of services to customers during the month of May. The customers paid in June. What would the impact of these transactions be during May on (1) the balance of cash, (2) cash-basis net income, and (3) accrual basis net income?
A. (1) No effect, (2) No effect, (3) Increase. B. (1) No effect, (2) No effect, (3) No effect. C. (1) Increase, (2) Increase, (3) Increase. D. (1) Increase, (2) Increase, (3) No effect. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
3-116 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
69.
A company purchased $400 of office supplies on account during May. All the supplies were used in May, and the account was paid during June. What would the impact of these transactions be during May on (1) the balance of cash, (2) cash-basis net income, and (3) accrual-basis net income?
A. (1) No effect, (2) No effect, (3) Decrease. B. (1) Decrease, (2) Decrease, (3) No effect. C. (1) Decrease, (2) Decrease, (3) Decrease. D. (1) Decrease, (2) No effect, (3) No effect. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
70.
A company paid $900 to workers during May. Of this amount, $600 was for work performed in April, while the other $300 was for work performed during May. What would the impact of this transaction be during May on (1) the balance of cash, (2) cash-basis net income, and (3) accrual-basis net income?
A. (1) No effect, (2) No effect, (3) Decrease. B. (1) Decrease, (2) Decrease, (3) No effect. C. (1) Decrease, (2) Decrease, (3) Decrease. D. (1) Decrease, (2) No effect, (3) No effect. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
3-117 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
71.
Pawn Shops Unlimited recorded the following four transactions during April. Which of these transactions would have the same income statement impact in April regardless of whether the company used accrual-basis or cash-basis accounting?
A. Received $600 from customers for services to be provided in May. B. Paid $1,800 for a six-month insurance policy covering the period July 1—December 31. C. Paid $700 for an advertisement that appeared in the April 17 edition of the Las Vegas
Sun newspaper. D. Received $300 from customers for services performed in March. AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
72.
Pawn Shops Unlimited recorded the following four transactions during April. Which of these transactions would have the same income statement impact in April regardless of whether the company used accrual-basis or cash-basis accounting?
A. Purchased $500 of office supplies on account (supplies were used in May and paid for in May). B. Paid $1,800 for a six-month insurance policy covering the period July 1—December 31. C. Paid $700 for an advertisement that appeared in the May 17 edition of the Las Vegas
Sun newspaper. D. Received $300 from customers for services performed in March. AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
3-118 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
73.
The following events pertain to Bills Company: December 28, 2018
Bills was contacted by a customer for possible accounting and tax services.
December 30, 2018
Bills signed a formal agreement with the customer to provide accounting and tax services in 2019.
January 4, 2019
The customer paid $1,000 in advance for the services to be provided by Bills Company.
January 11, 2019
Bills provided accounting and tax services to the customer.
Using cash-basis accounting, on which date should Bills Company record revenue for the accounting and tax services?
A. December 30, 2018. B. December 31, 2018. C. January 4, 2019. D. January 11, 2019. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
74.
When a company provides services on account, which of the following would be recorded using cash-basis accounting?
A. Debit to Cash. B. Debit to Service Revenue. C. Credit to Deferred Revenue. D. No entry would be recorded. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium
3-119 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
75.
The following events pertain to Bills Company: December 28, 2018
Bills was contacted by a customer for possible accounting and tax services.
December 30, 2018
Bills signed a formal agreement with the customer to provide accounting and tax services in 2019.
January 4, 2019
The customer paid $1,000 in advance for the services to be provided by Bills Company.
January 11, 2019
Bills provided accounting and tax services to the customer.
Using accrual-basis accounting, on which date should Bills Company record revenue for the accounting and tax services?
A. December 30, 2018. B. December 31, 2018. C. January 4, 2019. D. January 11, 2019. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
3-120 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
76.
Consider the following transactions: 1. The company uses supplies purchased in the previous period, $1,500. 2. The company pays cash for rent in advance, $6,000. 3. The company repays a loan to the bank, $10,000 (ignore any interest cost). The amount of accrual-basis expense is _____ while the amount of cash-basis expense is _____.
A. $6,000; 11,500 B. $6,000; $16,000 C. $1,500; 16,000 D. $1,500; $6,000 AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
77.
A company has the following three events in December: 1. December 1 - Pay last month's rent (November), $500. 2. December 15 - Pay rent for the current month (December), $500. 3. December 31 - Pay rent for the following year, $6,000. How much would be recorded as Rent Expense for the month of December using accrualbasis accounting?
A. $6,500. B. $7,000. C. $1,000. D. $500. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply 3-121 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 3 Hard Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
78.
A company has the following transactions: 1. Pay employees' salaries for the current period. 2. Pay rent in advance. 3. Pay dividends to stockholders in the current period. 4. Receive (but do not pay) a utility bill. 5. Use supplies previously purchased. How many of these transactions result in an expense being reported in the current period using accrual-basis accounting?
A. 1. B. 2. C. 3. D. 4. The three accrual-basis expenses include paying employees' salaries for the current period, receiving a utility bill, and using supplies previously purchased.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
3-122 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
79.
A company has the following transactions: 1. Pay employees' salaries for the current period. 2. Pay rent in advance. 3. Pay dividends to stockholders in the current period. 4. Receive (but do not pay) a utility bill. 5. Use supplies previously purchased. How many of these transactions result in an expense being reported in the current period using cash-basis accounting?
A. 1. B. 2. C. 3. D. 4. The two cash-basis expenses are paying employees' salaries for the current period and paying rent in advance.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
80.
The primary difference between accrual-basis and cash-basis accounting is:
A. The timing of when revenues and expenses are recorded. B. Cash-basis accounting is allowed for financial reporting purposes but not accrual-basis accounting. C. Accrual-basis accounting violates both the revenue recognition and matching principles. D. Adjusting entries are only a necessary part of cash-basis accounting. AACSB: Reflective Thinking AICPA: BB Critical Thinking
3-123 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
81.
When the amount of interest receivable decreases during an accounting period:
A. Accrual-basis revenues exceed cash collections from borrowers. B. Accrual-basis net income exceeds cash-basis net income. C. Accrual-basis revenues are less than cash collections from borrowers. D. Accrual-basis expenses are less than cash payments to borrowers. A decrease in interest receivable indicates cash was collected without a related revenue recorded, making cash received greater than revenues earned.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
82.
When the balance of the Deferred Revenue account decreases during an accounting period:
A. Accrual-basis revenues exceed cash collections from customers. B. Accrual-basis expenses exceed cash collections from customers. C. Accrual-basis revenues are less than cash collections from customers. D. Accrual-basis net income is less than cash-basis net income. A decrease in revenue collected in advance (Deferred Revenue) means that services were provided without a related cash collection, making revenues earned greater than cash collected.
AACSB: Reflective Thinking AICPA: FN Measurement
3-124 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
83.
Which transaction would not be recorded under cash-basis accounting?
A. Providing services to customers for cash. B. Paying one year of rent in advance. C. Paying salaries to employees. D. Purchasing supplies on account. Purchasing supplies on account does not involve a cash flow.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
3-125 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
84.
Which of the following statements are correct? For accrual-basis accounting: (1) record revenues when earned. (2) record expenses when cash is paid. For cash-basis accounting: (3) record revenue when cash is received. (4) record expenses when benefit is received.
A. (1) and (4). B. (2) and (3). C. (1) and (3). D. (2) and (4). AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
85.
On July 1, 2018, Rents-A-Lot Inc. paid $72,000 for 36 months of advance rent on its warehouse. What would be the amount of rent expense in the 2019 financial statements for Rents-A-Lot under both cash-basis and accrual-basis accounting?
A. Cash-basis = $24,000; Accrual-basis = $24,000. B. Cash-basis = $72,000; Accrual-basis = $12,000. C. Cash-basis = $0; Accrual-basis = $24,000. D. Cash-basis = $0; Accrual-basis = $12,000. No cash is paid in 2019, so cash-basis rent expense equals $0. The monthly rent costs equal $2,000 ($72,000/36 months) per month, so the accrual-basis rent expense for 2019 equals $24,000 ($2000 * 12 months).
AACSB: Analytical Thinking 3-126 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
86.
The following information pertains to Sooner Company: May 1
Customer ordered an installation service to be done by Sooner Company on May 15.
May 2
Customer paid cash for the installation job to be done on May 15.
May 8
The Sooner Company purchased installation supplies on account for the job.
May 15
The installation job was started and completed.
May 20
Amount owed for supplies purchased on May 8 is paid.
Assuming that Sooner Company uses cash-basis accounting, when would the company record the expense related to the supplies?
A. May 2. B. May 8. C. May 15. D. May 20. Cash-basis expenses are recorded at the time cash is paid.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
3-127 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
87.
The following information pertains to Sooner Company: May 1
Customer ordered an installation service to be done by Sooner Company on May 15.
May 2
Customer paid cash for the installation job to be done on May 15.
May 8
The Sooner Company purchased installation supplies on account for the job.
May 15
The installation job was started and completed.
May 20
Amount owed for supplies purchased on May 8 is paid.
Assuming that Sooner Company uses accrual-basis accounting, when would the company record the expense related to the supplies?
A. May 2. B. May 8. C. May 15. D. May 20. Accrual-basis expenses are recorded at the time they help to produce revenue.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
3-128 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
88.
Consider the following events for Betterment Incorporated: January 1
Betterment purchases gasoline for $200 on account.
January 7
Betterment advertises lawn mowing services for $100 per lawn.
January 9
Betterment signs up 8 customers who pay a total of $800 cash.
January 12
Betterment mows the lawns of the 8 customers and all gasoline purchased on January 1 is used.
January 13
Betterment pays for the gasoline purchased on January 1.
Under accrual-basis accounting, what is the appropriate day to record the revenues related to lawn services?
A. January 1. B. January 7. C. January 9. D. January 12. Accrual-basis revenues are recorded when services are provided.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
3-129 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
89.
Consider the following events for Betterment Incorporated: January 1
Betterment purchases gasoline for $200 on account.
January 7
Betterment advertises lawn mowing services for $100 per lawn.
January 9
Betterment signs up 8 customers who pay a total of $800 cash.
January 12
Betterment mows the lawns of the 8 customers and all gasoline purchased on January 1 is used.
January 13
Betterment pays for the gasoline purchased on January 1.
Under accrual-basis accounting, what is the appropriate day to record the expenses related to the gasoline?
A. January 1. B. January 7. C. January 12. D. January 13. Accrual-basis expenses are recorded at the time they help to produce revenue.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
3-130 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
90.
Consider the following events for Betterment Incorporated: January 1
Betterment purchases gasoline for $200 on account.
January 7
Betterment advertises lawn mowing services for $100 per lawn.
January 9
Betterment signs up 8 customers who pay a total of $800 cash.
January 12
Betterment mows the lawns of the 8 customers and all gasoline purchased on January 1 is used.
January 13
Betterment pays for the gasoline purchased on January 1.
Under cash-basis accounting, what is the appropriate day to record the expenses related to the gasoline?
A. January 1. B. January 9. C. January 12. D. January 13. Cash-basis expenses are recorded at the time cash is paid.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
3-131 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
91.
Consider the following events for Sophia Incorporated: April 5
Sophia purchases volleyballs for $200 on account.
April 6
Sophia advertises a sand volleyball camp for $20 a person.
April 12
Thirty people sign up for the camp paying a total of $600.
April 21
Sophia hosts the sand volleyball camp.
April 23
Sophia pays for the volleyballs purchased on April 5.
Under accrual-basis accounting, what is the appropriate day to record the revenues from the sand volleyball camp?
A. April 5. B. April 6. C. April 12. D. April 21. Accrual-basis revenues are recorded when services are provided.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
3-132 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
92.
Consider the following events for Sophia Incorporated: April 5
Sophia purchases volleyballs for $200 on account.
April 6
Sophia advertises a sand volleyball camp for $20 a person.
April 12
Thirty people sign up for the camp paying a total of $600.
April 21
Sophia hosts the sand volleyball camp.
April 23
Sophia pays for the volleyballs purchased on April 5.
Under accrual-basis accounting, what is the appropriate day to record the expenses related to the sand volleyball camp?
A. April 5. B. April 12. C. April 21. D. April 23. Accrual-basis expenses are recorded at the time they help to produce revenue.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
3-133 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
93.
Consider the following events for Sophia Incorporated: April 5
Sophia purchases volleyballs for $200 on account.
April 6
Sophia advertises a sand volleyball camp for $20 a person.
April 12
Thirty people sign up for the camp paying a total of $600.
April 21
Sophia hosts the sand volleyball camp.
April 23
Sophia pays for the volleyballs purchased on April 5.
Under cash-basis accounting, what is the appropriate day to record the expenses related to the sand volleyball camp?
A. April 5. B. April 12. C. April 21. D. April 23. Cash-basis expenses are recorded at the time cash is paid.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
3-134 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
94.
Consider the following events for Sophia Incorporated: April 5
Sophia purchases volleyballs for $200 on account.
April 6
Sophia advertises a sand volleyball camp for $20 a person.
April 12
Thirty people sign up for the camp paying a total of $600.
April 21
Sophia hosts the sand volleyball camp.
April 23
Sophia pays for the volleyballs purchased on April 5.
Under cash-basis accounting, what is the appropriate day to record the revenues related to the sand volleyball camp?
A. April 5. B. April 12. C. April 21. D. April 23. Cash-basis revenues are recorded at the time cash is received.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
95.
Which one of the following best describes the characteristics of adjusting entries?
A. Adjusting entries reduce the balance of revenue, expense, and dividend accounts to zero. B. Adjusting entries allow for the proper recognition of cash flows. C. Adjusting entries allow for the proper recognition of investments from and distributions to stockholders. D. Adjusting entries allow for the proper recognition of revenue and expenses. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation 3-135 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
96.
Which of the following regarding adjusting entries is correct?
A. Adjusting entries are recorded for all external transactions. B. Adjusting entries are recorded to make sure all cash inflows and outflows are recorded in the current period. C. Adjusting entries are needed because we use accrual-basis accounting. D. After adjusting entries, all temporary accounts should have a balance of zero. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
97.
Adjusting entries are primarily needed for:
A. Cash-basis accounting. B. Accrual-basis accounting. C. Current value accounting. D. Manual accounting systems. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
3-136 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
98.
Which of the following is true about adjusting entries?
A. Entries are necessary due to the conservatism principle. B. Entries can be done at the beginning or end of the accounting period. C. They zero the balance of all income statement accounts. D. They are a necessary part of accrual-basis accounting. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
99.
Prepayments occur when:
A. Cash payment (or an obligation to pay cash) occurs before the expense recognition. B. Sales are delayed pending credit approval. C. Customers are unable to pay the full amount due when goods are delivered. D. Cash payment occurs after the expense is incurred and liability is recorded. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
100.
Deferred revenues refer to:
A. Customers paying cash in advance of the good or service to be provided. B. Revenue being recorded prior to cash collection from the customer. C. Revenue being recorded at the same time the cash is collected from the customer. D. Cash being collected from the customer after the revenue is recorded. AACSB: Reflective Thinking AICPA: BB Critical Thinking 3-137 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
101.
An accrued expense occurs when:
A. Cash payment (or an obligation to pay cash) occurs before the expense recognition. B. An expense is recorded at the same time as the cash payment. C. Cash payment occurs after the expense is recognized and a liability is recorded. D. Cash is paid but an expense is never recorded. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
102.
An accrued revenue represents:
A. Customers paying cash in advance of the good or service to be provided. B. Revenue being recorded prior to cash collection from the customer. C. Revenue being recorded at the same time the cash is collected from the customer. D. Cash being collected from the customer prior to the revenue being recorded. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
3-138 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
103.
Making insurance payments in advance is an example of a(n):
A. Accrued revenue. B. Accrued expense. C. Deferred revenue. D. Prepaid expense. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
104.
When a magazine sells one-year subscriptions to customers but receives the full amount of cash immediately, it is an example of a(n):
A. Accrued expense. B. Accrued revenue. C. Prepaid expense. D. Deferred revenue. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
3-139 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
105.
Receiving a utility bill for costs in the current period but delaying payment until the following period is an example of a(n):
A. Accrued expense. B. Accrued revenue. C. Prepaid expense. D. Deferred revenue. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
106.
Providing goods or services to customers on account is an example of a(n):
A. Accrued expense. B. Accrued revenue. C. Prepaid expense. D. Deferred revenue. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
107.
An example of an adjusting entry would not include:
A. Recording the use of office supplies. B. Recording the expiration of prepaid insurance. C. Recording unpaid salaries. D. Paying salaries to company employees. AACSB: Reflective Thinking 3-140 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
108.
The adjusting entry required when amounts previously recorded as deferred revenues are earned by providing goods or services to customers includes:
A. A debit to a liability. B. A debit to an asset. C. A credit to a liability. D. A credit to an asset. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
109.
The adjusting entry required to record accrued expenses includes:
A. A credit to Cash. B. A debit to an asset. C. A credit to an asset. D. A credit to liability. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
3-141 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
110.
Adjusting entries:
A. Often include the Cash account. B. Usually are recorded at the beginning of the accounting period. C. Always involve at least one income statement account and one balance sheet account. D. Adjust the balance of revenue and expense accounts to zero. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
3-142 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
111.
On July 1, 2018, Charlie Co. paid $18,000 to Rent-An-Office for rent covering 18 months from July 2018 through December 2019. What adjusting entry should Charlie Co. record on December 31, 2018? A.
Rent Expense
18,000
Cash B.
Rent Expense
18,000 18,000
Prepaid Rent C.
Prepaid Rent
18,000 6,000
Rent Expense D.
Rent Expense Prepaid Rent
6,000 6,000 6,000
A. Option A B. Option B C. Option C D. Option D 2018 Rent Expense = ($18,000/18 months) × 6 months = $6,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
3-143 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
112.
Allen Inc. took out a 1-year, 8%, $100,000 loan on March 31, 2018. Interest is due upon maturity of the loan. The loan and interest must be paid back on March 31, 2019. As of December 31, 2018, what amount, if any, should Allen Inc. report for interest payable?
A. $6,000. B. $2,000. C. $0. D. $8,000. $100,000 × 8% × 9/12 = $6,000.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
113.
Which of the following is a possible adjusting journal entry?
A. Debit Cash, credit Accounts Payable. B. Debit Service Revenue, credit Cash. C. Debit Salaries Expense, credit Salaries Payable. D. Debit Utilities Expense, credit Retained Earnings. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
3-144 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
114.
When a company makes an end-of-period adjusting entry that includes a credit to Prepaid Rent, the debit is usually made to:
A. Cash. B. Rent Expense. C. Rent Payable. D. Rent Receivable. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
115.
When a company makes an end-of-period adjusting entry, which includes a debit to Supplies Expense, the usual credit entry is made to:
A. Accounts Payable. B. Supplies. C. Cash. D. Retained Earnings. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
3-145 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
116.
Which of the following would not typically be used as an adjusting entry? A.
Rent Expense Prepaid Rent
B.
Cash Deferred Revenue
C.
Interest Expense Interest Payable
D.
Deferred Revenue Service Revenue
A. Option A B. Option B C. Option C D. Option D AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
3-146 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
117.
Yummy Foods purchased a one-year hazard insurance policy on August 1 and recorded the $4,200 premium to prepaid insurance. At its December 31 year-end, Yummy Foods would record which of the following adjusting entries? A.
Insurance Expense
1,750
Prepaid Insurance B.
Prepaid Insurance
1,750 1,750
Insurance Expense C.
1,750
Insurance Expense
1,750
Prepaid Insurance
2,450
Accounts Payable D.
Insurance Expense Prepaid Insurance
4,200 2,450 2,450
A. Option A B. Option B C. Option C D. Option D $4,200/12 months = $350 per month. $350 × 5 months = $1,750.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
3-147 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
118.
The employees of Neat Clothes work Monday through Friday. Every other Friday the company issues payroll checks totaling $32,000 (or $3,200 per weekday). The current pay period ends on Friday, January 3. Neat Clothes is now preparing financial statements for the year ended December 31. What is the adjusting entry to record accrued salaries at the end of the year? A.
Salaries Payable
22,400
Salaries Expense B.
Salaries Expense
22,400 6,400
Salaries Payable C.
Salaries Expense
6,400 9,600
Salaries Payable D.
Salaries Expense Salaries Payable
9,600 22,400 22,400
A. Option A B. Option B C. Option C D. Option D $3,200 × 7 days = $22,400.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
3-148 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
119.
On April 1, a $4,800 premium on a one-year insurance policy on equipment was paid and charged to Prepaid Insurance. At the end of the year, the financial statements would report:
A. Insurance Expense, $4,800; Prepaid Insurance $0. B. Insurance Expense, $3,600; Prepaid Insurance $1,200. C. Insurance Expense, $3,650; Prepaid Insurance $4,800. D. Insurance Expense, $1,200; Prepaid Insurance $3,600. $4,800/12 months = $400 per month. $400 × 9 months = $3,600 (Insurance Expense). Three months ($1,200 = $400 × 3 months) of Prepaid Insurance remain.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
3-149 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
120.
On September 1, 2018, Gold Magazine sold 400 one-year subscriptions for $90 each. The total amount received was credited to Deferred Revenue. What would be the required adjusting entry at December 31, 2018? A.
Deferred Revenue
36,000
Service Revenue B.
Service Revenue
36,000 24,000
Deferred Revenue C.
Deferred Revenue
24,000 24,000
Service Revenue D.
Deferred Revenue Service Revenue
24,000 12,000 12,000
A. Option A B. Option B C. Option C D. Option D $90/12 months = $7.50 per month. $7.50 × 4 months × 400 subscriptions = $12,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
3-150 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
121.
During the year, Cheng Company paid salaries of $24,000. In addition, $8,000 in salaries has accrued by the end of the year but has not been paid. The year-end adjusting entry would include which one of the following?
A. Debit to Salaries Expense for $32,000. B. Credit to Salaries Expense of $8,000. C. Debit to Salaries Payable for $24,000. D. Credit to Salaries Payable for $8,000. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
122.
At the beginning of December, Global Corporation had $2,000 in supplies on hand. During the month, supplies purchased amounted to $3,000, but by the end of the month the supplies balance was only $800. What is the appropriate month-end adjusting entry?
A. Debit Cash $4,200, credit Supplies $4,200. B. Debit Supplies $4,200, credit Supplies Expense $4,200. C. Debit Supplies Expense $4,200, credit Supplies $4,200. D. Debit Cash $800, credit Supplies $800. Beginning supplies ($2,000) + purchases ($3,000) - ending supplies ($800) = $4,200.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
3-151 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
123.
Eve's Apples opened for business on January 1, 2018, and paid for two insurance policies effective that date. The liability policy was $36,000 for 18 months, and the crop damage policy was $12,000 for a two-year term. What was the balance in Eve's Prepaid Insurance account as of December 31, 2018?
A. $9,000. B. $18,000. C. $30,000. D. $48,000. Prepaid liability insurance: $36,000 × 6/18 = $12,000. Prepaid crop insurance: $12,000 × 12/24 = $6,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
124.
A list of all accounts and their balances after updating account balances for adjusting entries is referred to as:
A. A trial balance. B. An adjusted trial balance. C. A post-closing trial balance. D. An accounting trial balance. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-04 Post adjusting entries and prepare an adjusted trial balance. Topic: Adjusted Trial Balance
3-152 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
125.
An adjusted trial balance:
A. Is a list of all accounts and their balances after adjusting entries. B. Is a list of all accounts and their balances before adjusting entries. C. Is a list of all accounts and their balances after closing entries. D. Is a trial balance adjusted for cash-basis accounting. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-04 Post adjusting entries and prepare an adjusted trial balance. Topic: Adjusted Trial Balance
126.
Consider the adjustment process at the end of the accounting period. 1. Record the adjusting entries in the journal. 2. Prepare an adjusted trial balance to check the equality of the debits and credits. 3. Determine the accounts requiring adjustment, using the unadjusted trial balance. 4. Post the adjusting entries to the general ledger. Place the items in the proper order.
A. 1, 4, 3, 2. B. 1, 2, 4, 3. C. 3, 4, 2, 1. D. 3, 1, 4, 2. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-04 Post adjusting entries and prepare an adjusted trial balance. Topic: Adjusted Trial Balance
3-153 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
127.
The adjusted trial balance should be prepared ______ the financial statements are prepared in order to prove the ______ of the debits and credits.
A. after; equality B. before; accuracy C. before; equality D. after; accuracy AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-04 Post adjusting entries and prepare an adjusted trial balance. Topic: Adjusted Trial Balance
128.
Which of the following trial balances shows account balances that incorporate current year deferrals and accruals?
A. Adjusted trial balance. B. Final trial balance. C. Unadjusted trial balance. D. Accrual-basis trial balance. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-04 Post adjusting entries and prepare an adjusted trial balance. Topic: Adjusted Trial Balance
3-154 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
129.
Which of the following is true about an income statement?
A. It reports activity for a period of time. B. It does not include dividends paid. C. It reports revenues and expenses. D. All of the other answers are true. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
130.
Which of the following best describes the information reported in the income statement?
A. The portion of profits paid in cash to stockholders. B. The current resources available to pay current obligations. C. The amount earned from customers compared to the cost of doing so. D. The extent to which cash inflows exceed cash outflows. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
3-155 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
131.
The following table contains financial information for Trumpeter Inc. before closing entries: Cash
$12,000
Supplies
4,500
Prepaid Rent
2,000
Salary Expense
4,500
Equipment
65,000
Service Revenue
30,000
Miscellaneous Expenses
20,000
Dividends
3,000
Accounts Payable
5,000
Common Stock
68,000
Retained Earnings
8,000
What is Trumpeter's net income?
A. $3,500. B. $2,500. C. $5,000. D. $5,500. Revenues ($30,000) - Expenses ($4,500 + $20,000) = $5,500.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
3-156 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
132.
If a company incorrectly records a payment as an expense instead of an asset, how will this error affect net income in the current period?
A. Net income will be too low. B. Net income will be correct. C. Net income will be too high. D. Not possible to determine. AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
133.
If a company records cash received for services to be provided in the future with a debit to Cash and a credit to Service Revenue, how will this error affect net income for the current period?
A. Net income will be too low. B. Net income will be correct. C. Net income will be too high. D. Not possible to determine. AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
3-157 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
134.
The statement of stockholders' equity includes which of the following for the period?
A. Details of a company's profitability that represents stockholders' claims. B. Changes in stockholders' equity accounts. C. Inflows and outflows of cash that benefit stockholders. D. Current assets available to pay current liabilities to reduce risk to stockholders. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
135.
The statement of stockholders' equity includes:
A. Net income from the income statement. B. The amount of stock issued in the current period. C. Dividends declared to stockholders in the current period. D. All of the other answers are correct. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
3-158 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
136.
In the statement of stockholders' equity, Retained Earnings had a beginning balance of $25,000. During the period, the company reports a net income of $10,000 and a dividend of $4,000. The ending balance in the Retained Earnings account is:
A. $10,000. B. $35,000. C. $39,000. D. $31,000. Beginning Retained Earnings ($25,000) + Net Income ($10,000) - Dividends ($4,000) = Ending Retained Earnings.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
137.
In the statement of stockholders' equity, Retained Earnings had a beginning balance of $60,000. During the period, the company reports a net loss of $10,000 and net cash outflows of $15,000. The ending balance in the Retained Earnings account is:
A. $60,000. B. $35,000. C. $50,000. D. $45,000. Beginning Retained Earnings ($25,000) - Net Loss ($10,000) = Ending Retained Earnings.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
3-159 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
138.
In the statement of stockholders' equity, the balance of Retained Earnings increased by $32,000. The company declared a dividend of $10,000 during the year. What was the net income for the year?
A. $10,000. B. $32,000. C. $42,000. D. $22,000. Increase in Retained Earnings ($32,000) = Net Income - Dividends ($10,000).
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
139.
A classified balance sheet ______.
A. Shows only current assets and current liabilities B. Shows changes in assets, liabilities, revenues and expenses C. Contains confidential information D. Shows subtotals for current assets and current liabilities AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
3-160 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
140.
Which financial statement provides information for a point in time only?
A. Statement of cash flows. B. Income statement. C. Statement of stockholders' equity. D. Balance sheet. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
141.
Current assets include:
A. Assets that must be paid for within 12 months. B. Assets that will be used up or converted to cash within 12 months. C. Assets that will be used for many years. D. Any assets that were purchased for cash. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
142.
With respect to current assets, liquidity refers to:
A. How quickly the asset can be converted to cash. B. The magnitude of the asset's account balance. C. Whether cash was paid for the asset at the time of acquisition. D. The accuracy of the balance being reported. AACSB: Reflective Thinking AICPA: FN Reporting 3-161 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
143.
The following financial information is from Shovels Construction Company: Accounts Payable
$15,000
Buildings
80,000
Cash
10,500
Accounts Receivable
9,500
Sales Tax Payable
4,500
Retained Earnings
47,500
Supplies
40,000
Notes Payable (due in 18 months)
35,000
Interest Payable
3,000
Common Stock
35,000
What is the amount of current assets, assuming the accounts above reflect normal activity?
A. $20,000. B. $60,000. C. $140,000. D. $175,000. Cash ($10,500), Accounts Receivable ($9,500), and Supplies ($40,000) are normally current assets.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
3-162 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
144.
Consider the following items: Land Accounts Receivable Notes Payable (due in three years) Accounts Payable Retained Earnings Prepaid Rent Deferred Revenue Buildings Notes Payable (due in six months) Equipment How many of the items listed above are generally long-term assets?
A. Two. B. Three. C. Four. D. Five. Long-term assets include Land, Buildings, and Equipment.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
3-163 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
145.
Resources owned by the company that will provide a benefit for more than one year are called:
A. Current assets. B. Current liabilities. C. Long-term assets. D. Revenues. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
146.
Long-term productive assets used in the normal course of business are typically classified as:
A. Current assets. B. Investments. C. Intangible assets. D. Property, plant, and equipment. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
3-164 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
147.
Patents, copyrights, franchises, and trademarks are examples of:
A. Current assets. B. Investments. C. Intangible assets. D. Property, plant, and equipment. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
148.
A current liability is defined as:
A. An amount borrowed less than one year ago. B. An amount due to an employee. C. An amount due within one year. D. A small amount due. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
149.
An advantage of a classified balance sheet is that it is easy to see:
A. If the company is likely to be profitable in future periods. B. If the company is profitable in the current period. C. If current assets are large enough to pay current liabilities. D. If dividends have been paid to stockholders. AACSB: Reflective Thinking AICPA: FN Reporting 3-165 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
150.
Which of the following current liabilities does not involve the future payment of cash?
A. Interest Payable. B. Deferred Revenue. C. Accounts Payable. D. Salaries Payable. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
151.
The Deferred Revenue account is shown in which statement?
A. Income statement. B. Statement of cash flows. C. Balance sheet. D. Statement of stockholders' equity. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
3-166 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
152.
The following financial information is from Bronco Company. All debt is due within one year unless stated otherwise. Retained Earnings
$52,000
Supplies
37,000
Equipment
72,000
Accounts Receivable
8,600
Deferred Revenue
6,000
Accounts Payable
15,000
Common Stock
25,000
Notes Payable (due in 18 months)
35,000
Interest Payable
7,000
Cash
22,400
What is the amount of current liabilities?
A. $63,000. B. $28,000. C. $45,600. D. $22,000. Deferred Revenue ($6,000), Accounts Payable ($15,000), and Interest Payable ($7,000) are normally current liabilities.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
3-167 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
153.
Which of the following are reported as stockholders' equity in a classified balance sheet?
A. Debits and Credits. B. Revenues and Expenses. C. Common Stock and Retained Earnings. D. Assets and Liabilities. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
3-168 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
154.
The following table contains financial information for Trumpeter Inc. before closing entries: Cash
$12,000
Supplies
4,500
Prepaid Rent
2,000
Salaries Expense
4,500
Equipment
65,000
Service Revenue
30,000
Miscellaneous Expenses
20,000
Dividends
3,000
Accounts Payable
5,000
Common Stock
68,000
Retained Earnings
8,000
What is the amount of Trumpeter's total assets?
A. $81,500. B. $82,500. C. $68,500. D. $83,500. Assets include Cash ($12,000), Supplies ($4,500), Prepaid Rent ($2,000), and Equipment ($65,000).
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
3-169 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
155.
The following table contains financial information for Trumpeter's Inc. before closing entries: Cash
$12,000
Supplies
4,500
Prepaid Rent
2,000
Salaries Expense
4,500
Equipment
65,000
Service Revenue
30,000
Miscellaneous Expense
20,000
Dividends
3,000
Accounts Payable
5,000
Common Stock
68,000
Retained Earnings
8,000
What is the amount of Trumpeter's total liabilities?
A. $5,000. B. $78,500. C. $68,500. D. $83,500. Liabilities include Accounts Payable ($5,000).
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
3-170 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
156.
The following table contains financial information for Trumpeter's Inc. before closing entries: Cash
$12,000
Supplies
4,500
Prepaid Rent
2,000
Salaries Expense
4,500
Equipment
65,000
Service Revenue
30,000
Miscellaneous Expense
20,000
Dividends
3,000
Accounts Payable
5,000
Common Stock
68,000
Retained Earnings
8,000
What is the amount of Trumpeter's total stockholders' equity?
A. $5,000. B. $78,500. C. $68,500. D. $83,500. Total stockholders' equity includes common stock plus (ending) retained earnings. Common stock is $68,000. Ending retained earnings = beginning retained earnings ($8,000) plus revenues ($30,000) less expenses ($24,500) less dividends ($3,000) = $10,500. Total stockholders' equity = $68,000 + $10,500 = $78,500.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
3-171 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
157.
If a company records cash received for services to be provided in the future with a debit to Cash and a credit to Service Revenue, how will this error affect total assets for the current period?
A. Total assets will be too low. B. Total assets will be correct. C. Total assets will be too high. D. Not possible to determine. AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
158.
Providing services to customers on account would affect the balances reported in which financial statement(s)?
A. Income statement. B. Statement of stockholders' equity. C. Balance sheet. D. All of the financial statements in the other answers would be affected. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
3-172 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
159.
If a company incorrectly records Service Revenue too high, which of the following is true?
A. Net income in the income statement is overstated. B. Retained earnings in the statement of stockholders' equity is overstated. C. Total stockholders' equity in the balance sheet is overstated. D. All of the other answers are correct. AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
160.
When a company owes employee salaries at the end of the period but fails to make an adjusting entry for that amount owed, which of the following is true?
A. Net income in the income statement is overstated. B. Retained earnings in the statement of stockholders' equity is overstated. C. Total stockholders' equity in the balance sheet is overstated. D. All of the other answers are correct. AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
3-173 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
161.
Which of the following describes the purpose(s) of closing entries?
A. Adjust the balances of asset and liability accounts for unrecorded activity during the period. B. Transfer the balances of temporary accounts to common stock. C. Reduce the balances of the temporary accounts to zero to prepare them for measuring activity in the next period. D. Transfer the balances of temporary accounts to common stock; reduce the balances of the temporary accounts to zero to prepare them for measuring activity in the next period. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Topic: The Closing Process
162.
The primary purpose of closing entries is to:
A. Prove the equality of the debit and credit entries in the general journal. B. Ensure that all assets and liabilities are recognized in the appropriate period. C. Update the balance of Retained Earnings and prepare revenue, expense, and dividend accounts for next period's transactions. D. Assure that adjusting entries balance. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Topic: The Closing Process
3-174 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
163.
The closing process includes which of the following?
A. Closing the balance of the retained earnings account to zero. B. Closing the balance of only the dividends account to zero. C. Closing the balances of only revenue and expense accounts to zero. D. Closing the balances of revenue, expense and dividend accounts to zero. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Topic: The Closing Process
164.
The purpose of closing entries is to transfer:
A. Accounts Receivable to Retained Earnings when an account is fully paid. B. Balances in temporary accounts to a permanent account. C. Inventory to Cost of Goods Sold when merchandise is sold. D. Assets and liabilities when operations are discontinued. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Topic: The Closing Process
165.
Which of the following is a permanent account?
A. Dividends. B. Service Revenue. C. Advertising Expense. D. Retained Earnings. AACSB: Reflective Thinking AICPA: FN Measurement 3-175 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Topic: The Closing Process
166.
Which of the following is true concerning temporary and permanent accounts?
A. Cash is a temporary account. B. Permanent accounts represent activity over the entire life of the company. C. Permanent accounts must be closed at the end of every reporting period. D. Temporary accounts represent activity over the previous three years. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Topic: The Closing Process
3-176 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
167.
The following table contains financial information for Fisher Inc. before closing entries: Cash
$23,000
Common Stock
34,000
Supplies
4,000
Advertising Expense
2,000
Accounts Payable
20,000
Service Revenue
30,000
Salaries Expense
3,000
Prepaid Rent
4,000
Dividends
3,000
Equipment
45,000
How many of the above accounts are permanent?
A. Three. B. Four. C. Five. D. Six. Permanent accounts include Cash, Common Stock, Supplies, Accounts Payable, Prepaid Rent, and Equipment.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Topic: The Closing Process
3-177 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
168.
Permanent accounts would not include:
A. Interest Expense. B. Salaries Payable. C. Prepaid Rent. D. Deferred Revenues. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Topic: The Closing Process
169.
Permanent accounts would not include:
A. Accounts Payable. B. Office Supplies. C. Utilities Expense. D. Common Stock. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Topic: The Closing Process
170.
Temporary accounts would not include:
A. Salaries Payable. B. Advertising Expense. C. Supplies Expense. D. Dividends. AACSB: Reflective Thinking AICPA: FN Measurement 3-178 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Topic: The Closing Process
171.
Of the following six accounts, which ones have temporary balances: (1) Service Revenue (2) Dividends (3) Salaries Expense (4) Common Stock (5) Retained Earnings (6) Cash
A. (1), (2), and (3). B. (4), (5), and (6). C. (2), (4), and (5). D. (1), (3), and (5). AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Topic: The Closing Process
172.
Which of the following accounts will NOT be involved in closing entries?
A. Prepaid Insurance. B. Service Revenue. C. Utilities Expense. D. Retained Earnings. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. 3-179 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: The Closing Process
173.
When a company prepares closing entries, which one of the following is NOT a correct closing entry?
A. Debit Retained Earnings; credit Salaries Expense. B. Debit Dividends; credit Retained Earnings. C. Debit Service Revenue; credit Retained Earnings. D. All of the other answers are not correct. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Topic: The Closing Process
174.
The ending balance of Retained Earnings can best be described as:
A. The amount of cash received from stockholders over the life of the company. B. The amount of net income over the life of the company not paid to owners in the form of dividends. C. The amount of dividends paid over the life of the company. D. The amount of net income over the life of the company. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Topic: The Closing Process
3-180 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
175.
The ending Retained Earnings balance of Juan's Mexican Restaurant chain increased by $3.2 million from the beginning of the year. The company declared a dividend of $1.3 million during the year. What was the net income earned during the year?
A. $1.9 million. B. $3.2 million. C. $4.5 million. D. $1.3 million. Increase in Retained Earnings ($3.2) = Net Income - Dividends ($1.3).
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Topic: The Closing Process
176.
The Retained Earnings account had a beginning credit balance of $26,000. During the period, the business had a net loss $12,000, and the company paid dividends of $8,000. The ending balance in the Retained Earnings account is:
A. $6,000. B. $30,000. C. $22,000. D. $14,000. Beginning Retained Earnings ($26,000) - Net Loss ($12,000) - Dividends ($8,000) = Ending Retained Earnings.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Topic: The Closing Process
3-181 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
177.
In the first three years of operations, Lindsey Corporation earned net income/loss of $150,000, $100,000, and $250,000. At the end of the third year, Lindsey Corporation has a balance of $120,000 in its Retained Earnings account. What is the total amount of dividends Lindsey Corporation paid over the three years?
A. $130,000. B. $120,000. C. $80,000. D. $380,000. Beginning Retained Earnings ($0) + Net Income/Loss (-$150,000 + $100,000 + $250,000) - Ending Retained Earnings ($120,000) = Dividends ($80,000).
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Topic: The Closing Process
178.
For the first three years of operations, the company reports net income of $1,000, $2,000, and $3,000, and pays dividends of $500, $1,000, and $1,000. What is the balance of retained earnings at the end of the third year?
A. $2,000. B. $2,500. C. $3,500. D. $6,000. Beginning Retained Earnings ($0) + Net Income ($1,000 + $2,000 + $3,000) - Dividends ($500 + $1,000 + $1,000) = Ending Retained Earnings ($3,500).
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze 3-182 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 3 Hard Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Topic: The Closing Process
179.
The closing entry for expenses includes:
A. A debit to Dividends and a credit to all expense accounts. B. A debit to Retained Earnings and a credit to all expense accounts. C. A debit to Revenues and a credit to Retained Earnings. D. A debit to Revenues and a credit to all expense accounts. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Topic: The Closing Process
180.
Which of the following is a possible closing entry?
A. Debit Cash, credit Service Revenue. B. Debit Cash, credit Retained Earnings. C. Debit Service Revenue, credit Retained Earnings. D. Debit Dividends, credit Retained Earnings. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Topic: The Closing Process
3-183 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
181.
Frosty Inc. has the following balances on December 31 prior to closing entries: Revenues
$35,000
Retained Earnings, Jan. 1
10,000
Cash
7,000
Expenses
23,000
Accounts Payable
4,000
Dividends
1,000
Supplies
18,000
Based upon the balances above, what net adjustment would be made to Retained Earnings due to closing entries?
A. Increase of $11,000. B. Increase of $13,000. C. Increase of $12,000. D. Increase of $14,000. Revenues ($35,000) - Expenses ($23,000) - Dividends ($1,000).
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Learning Objective: 03-07 Post closing entries and prepare a post-closing trial balance. Topic: Post-Closing Trial Balance Topic: The Closing Process
3-184 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
182.
A list of all accounts and their balances after posting closing entries is referred to as:
A. A trial balance. B. An adjusted trial balance. C. A post-closing trial balance. D. An accounting trial balance. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-07 Post closing entries and prepare a post-closing trial balance. Topic: Post-Closing Trial Balance
183.
A post-closing trial balance:
A. Is a list of all accounts and their balances after adjusting entries. B. Is a list of all accounts and their balances before adjusting entries. C. Is a list of all accounts and their balances after closing entries. D. Is a trial balance adjusted for cash-basis accounting. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-07 Post closing entries and prepare a post-closing trial balance. Topic: Post-Closing Trial Balance
184.
Which one of the following accounts would NOT have a balance after closing entries?
A. Deferred Revenue. B. Supplies. C. Prepaid Rent. D. Dividends. AACSB: Reflective Thinking AICPA: FN Measurement 3-185 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-07 Post closing entries and prepare a post-closing trial balance. Topic: Post-Closing Trial Balance
185.
Which of the following accounts is(are) listed in a post-closing trial balance?
A. Prepaid Rent. B. Accounts Payable. C. Salaries Expense. D. Two of these three accounts would be included in a post-closing trial balance. Prepaid Rent and Accounts Payable.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-07 Post closing entries and prepare a post-closing trial balance. Topic: Post-Closing Trial Balance
186.
Which of the following statements is true regarding the post-closing trial balance?
A. The post-closing trial balance will be distributed to investors and other stakeholders along with the financial statements. B. The post-closing trial balance is a report prepared before the adjustments and the financial statements to prove that debits equal credits. C. The post-closing trial balance is an internal report prepared as the last step in the accounting cycle. D. The post-closing trial balance proves that all entries have been made correctly and accurately during the accounting period. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-07 Post closing entries and prepare a post-closing trial balance. 3-186 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Post-Closing Trial Balance
Matching Questions
187.
Match each term associated with accrual-basis and cash-basis accounting with its most appropriate description.
A company receives cash from customers in May and 1. Cash-basis expense
performs services in June. The revenue is recorded in June.
4
Formal concept which states that sales of products or 2. Accrual-basis
services are recorded in the period they are provided to
expense
customers. 5 A company pays cash for supplies in May and uses those
3. Matching principle
supplies in June. The expense is recorded in May.
1
Informal concept in accounting which states that 4. Accrual-basis
expenses are recorded in the same period as the revenues
revenue
they help to generate. 3
5. Revenue recognition principle
A company pays cash for supplies in May and uses those supplies in June. The expense is recorded in June. 2 A company receives cash from customers in May and
6. Cash basis revenue
performs services in June. The revenue is recorded in May. 6 AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-01 Understand when revenues and expenses are recorded.
Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting Topic: Revenue and Expense Reporting
3-187 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
188.
Match each type of adjusting entry with its definition.
Pay cash (or have an obligation to pay cash) in the current 1. Deferred revenue
period that will be recorded as an expense in a future period. 4 Record an expense in the current period that will be paid
2. Accrued expenses
in cash in a future period. 2 Receive cash in the current period that will be recorded as
3. Accrued revenue
a revenue in a future period. 1 Record a revenue in the current period that will be
4. Prepaid expenses
collected in cash in a future period. 3 AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
189.
Match each term related to financial statements with its description.
1. Statement of
A list of accounts showing total revenues minus total
stockholders
expenses equal net income. 5
2. Adjusted trial
A statement showing the change in the balance of
balance
common stock and retained earnings for the period. 1 A list of accounts showing total assets equal total
3. Classified
liabilities plus total stockholders' equity.
4
A list of all accounts and their balances after adjusting 4. Balance sheet
entries have been prepared. 2
5. Income statement
The distinction between current and long-term activities. 3 AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium
Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
3-188 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
190.
Match each term related to closing entries with its description.
1. Temporary accounts
Transfer of temporary balances to retained earnings.
3
Assets, liabilities, and stockholders' equity.
5
Revenues, expenses, and dividends.
1
2. Post-closing trial balance 3. Closing entries
List of permanent and temporary accounts and their 4. Adjusted trial balance
balances.
4
5. Permanent accounts
List of permanent accounts and their balances.
2
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Learning Objective: 03-07 Post closing entries and prepare a post-closing trial balance. Topic: Post-Closing Trial Balance Topic: The Closing Process
Essay Questions
191.
For each transaction below, calculate the amount of revenue to be recognized in the current period using accrual-basis accounting: (a) Performed $24,000 of services during the month and received full cash payment from customers at the time of service. (b) Performed $9,000 of services during the month and billed customers. Customers are expected to pay next month. (c) Received $12,000 cash from customers for services to be provided next month.
(a) $24,000; (b) $9,000; (c) $0. Feedback: Transaction (c) represents a liability, since revenue has not yet been earned.
AACSB: Analytical Thinking 3-189 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-01 Understand when revenues and expenses are recorded. Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting Topic: Revenue and Expense Reporting
192.
For each transaction below, calculate the amount of expense to be recognized in the current period using accrual-basis accounting: (a) Paid $3,500 on account for supplies purchased last period. All supplies were used last month. (b) Paid $5,000 cash for advertising in the current period. (c) Employees worked in the current period but will not be paid until the following period, $4,500.
(a) $0; (b) $5,000; (c) $4,500. Feedback: Transaction (a) represents the payment of a liability for expenses incurred in a previous period.
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-01 Understand when revenues and expenses are recorded. Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting Topic: Revenue and Expense Reporting
3-190 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
193.
A company receives $2,500 cash from customers for services to be provided next month. Record the cash receipt using (a) accrual-basis accounting and (b) cash-basis accounting.
(a)
Cash
2,500
Deferred Revenue (b)
2,500
Cash
2,500
Service Revenue
2,500
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
194.
A company performs $2,800 of services during the month and bills customers. The customers are expected to pay next month. Record the customer billing using (a) accrualbasis accounting and (b) cash-basis accounting.
(a)
Accounts Receivable Service Revenue
(b)
2,800 2,800
No Entry
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
3-191 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
195.
A company performs $4,200 of services during the month and receives full cash payment from customers at the time of service. Record the cash receipt using (a) accrual-basis accounting and (b) cash-basis accounting.
(a)
Cash
4,200
Service Revenue (b)
Cash
4,200 4,200
Service Revenue
4,200
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
196.
A company pays $1,700 cash to employees for work performed during the month. Record the payment using (a) accrual-basis accounting and (b) cash-basis accounting.
(a)
Salaries Expense
1,700
Cash (b)
1,700
Salaries Expense Cash
1,700 1,700
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
3-192 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
197.
A company receives a $700 utility bill for the current month but does not plan to pay the bill until early next month. Record the receipt of the utility bill using (a) accrual-basis accounting and (b) cash-basis accounting.
(a)
Utilities Expense
36,000
Utilities Payable (b)
36,000
No Entry
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
198.
A company pays $1,200 on account for supplies purchased last month. All supplies were used last month. Record the payment using (a) accrual-basis accounting and (b) cashbasis accounting.
(a)
Accounts Payable
700
Cash (b)
700
Supplies Expense Cash
700 700
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
3-193 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
199.
A company maintains its records using cash-basis accounting. During the year, the company received cash from customers, $34,000, and paid cash for taxes, $24,000. At the beginning of the year, customers owe the company $3,000. By the end of the year, customers owe $5,000. At the beginning of the year, the company owes taxes of $4,000. At the end of the year, the company owes taxes of $5,000. Determine cash-basis net income and accrual-basis net income for the year.
Accrual
Accrual-
basis net adjustment
Cash-
basis net
income
income
Revenues
$34,000
+$2,000
$36,000
Expenses
24,000
+1,000
25,000
10,000
$11,000
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
3-194 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
200.
The following data are taken from the cash-basis accounting records of Myerson Company for the year ended December 31, 2018:
Selected Data as of December 31, 2018
Customers billed in 2018 for services provided
$400,000
Cash collections in 2018 for accounts billed in 2017
20,000
Cash collections in 2018 for accounts billed in 2018
300,000
Cash paid for supplies purchased in 2018
12,000
Supplies remaining at the end of 2018
2,000
Cash paid for salaries in 2018
10,000
Cash paid for annual rent on March 1, 2018
18,000
Calculate the amount of revenues and expenses for 2018 under cash-basis accounting.
Cash-basis revenues = $20,000 + $300,000 = $320,000. Cash-basis expenses = $12,000 + $10,000 + $18,000 = $40,000.
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
3-195 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
201.
The following data are taken from the cash-basis accounting records of Myerson Company for the year ended December 31, 2018: Selected Data as of December 31, 2018
Customers billed in 2018 for services provided
$400,000
Cash collections in 2018 for accounts billed in 2017
20,000
Cash collections in 2018 for accounts billed in 2018
300,000
Cash paid for supplies purchased in 2018
12,000
Supplies remaining at the end of 2018
2,000
Cash paid for salaries in 2018
10,000
Cash paid for annual rent on March 1, 2018
18,000
Calculate the amount of revenues and expenses for 2018 under accrual-basis accounting.
Accrual-basis revenues = $400,000. Accrual-basis expenses = ($12,000 - $2,000) + $10,000 + [($18,000/12 months) = $1,500 × 10 months] = $35,000.
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting
3-196 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
202.
At the beginning of the period, a company reports a balance in office supplies of $500. During the period, the company purchases an additional $3,500 of office supplies for cash. By the end of the period, only $700 of office supplies remains. Record the period-end adjusting entry.
Supplies Expense
3,300
Supplies
3,300
Feedback: Supplies expense = $500 + $3,500 - $700. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
203.
Suppose a company rents office space for one year, paying $12,000 ($1,000/month) in advance on September 1. Record the adjusting entry on December 31.
Rent Expense Prepaid Rent
4,000 4,000
Feedback: Rent expense = $1,000 × 4 months = $4,000. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
3-197 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
204.
A company purchases one year of flood insurance in advance on May 1, paying $24,000 ($2,000/month). Record the adjusting entry on December 31.
Insurance Expense
16,000
Prepaid Insurance
16,000
Feedback: Insurance expense = $2,000 × 8 months = $16,000. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
205.
A company purchases new equipment for $24,000 cash on August 1, 2018. At the time of purchase, the equipment is expected to be used in operations for four years (48 months) and have no resale or scrap value at the end. The company depreciates the equipment evenly over the 48 months ($500/month). Record the adjusting entry for depreciation on December 31, 2018.
Depreciation Expense
2,500
Accumulated Depreciation
2,500
Feedback: Depreciation expense = $500 × 5 months = $2,500. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
3-198 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
206.
Suppose a customer rents a vehicle for four months from Rent-A-Car on October 1, paying $4,000 ($1,000/month). Record Rent-A-Car's adjusting entry on December 31.
Deferred Revenue
3,000
Service Revenue
3,000
Feedback: Service revenue = $1,000 × 3 months = $3,000. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
207.
A company pays its employees $5,600 every two weeks ($400/day). The current two-week pay period ends on December 26, 2018, and employees are paid $5,600. The next twoweek pay period ends on January 9, 2019, and employees will be paid $5,600. Record the adjusting entry on December 31, 2018.
Salaries Expense Salaries Payable
2,000 2,000
Feedback: Salaries expense = $400 × 5 days = $2,000. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
3-199 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
208.
A company borrows $20,000 with 8% interest on October 1, 2018. This amount plus interest is due on September 30, 2019. Record the adjusting entry on December 31, 2018.
Interest Expense
400
Interest Payable
400
Feedback: Interest expense = $20,000 × 8% × 3/12 = $400. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
209.
A company lends $30,000 with 10% interest on May 1, 2018. This amount plus interest is due on April 30, 2019. Record the adjusting entry on December 31, 2018.
Interest Receivable Interest Revenue
2,000 2,000
Feedback: Interest revenue = $30,000 × 10% × 8/12 = $2,000. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
3-200 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
210.
Prepare adjusting journal entries, as needed, for the following items. (a) The Supplies account shows a balance of $500, but a count of supplies reveals only $200 on hand at year-end. (b) The company initially records the payments of all insurance premiums as prepaid insurance. The unadjusted trial balance at year-end shows a balance of $500 in Prepaid Insurance. A review of insurance policies reveals that $100 of insurance is unexpired. (c) Employees work Monday through Friday, and salaries of $2,500 per week are paid each Friday. The company's year-end falls on Tuesday. (d) At year-end, the company received a utility bill for December's electricity usage of $200 that will be paid in early January.
(a)
Supplies Expense
300
Supplies (b)
300
Insurance Expense
400
Prepaid Insurance (c)
Salaries Expense
400 1,000
Salaries Payable (d)
Utilities Expense Utilities Payable
1,000 200 200
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
3-201 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
211.
A company reports the following amounts: Assets = $6,000; Liabilities = $2,000; Stockholders' equity = $4,000; Dividends = $500; Revenues = $5,000; and Expenses = $3,000. What amount is reported for net income?
$2,000 Feedback: Net income = revenues ($5,000) - expenses ($3,000) = $2,000.
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
3-202 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
212.
For each of the following accounts, indicate whether the account is shown in the income statement or the balance sheet: Accounts
Financial Statement
1. Rent Expense 2. Accounts Payable 3. Service Revenue 4. Common Stock 5. Accounts Receivable 6. Retained Earnings
Accounts
Financial Statement
1. Rent Expense
Income Statement
2. Accounts Payable
Balance Sheet
3. Service Revenue
Income Statement
4. Common Stock
Balance Sheet
5. Accounts Receivable
Balance Sheet
6. Retained Earnings
Balance Sheet
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
3-203 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
213.
The adjusted trial balance for China Tea Company at December 31, 2018, is presented below: Debit Cash
$11,000
Accounts Receivable
150,000
Prepaid Rent
5,000
Supplies
25,000
Equipment
300,000
Accumulated
Credit
$135,000
Depreciation Accounts Payable
20,000
Salaries Payable
4,000
Interest Payable
1,000
Notes Payable (due in
30,000
two years) Common Stock
200,000
Retained Earnings
50,000
Dividends
20,000
Service Revenue
400,000
Salaries Expense
180,000
Advertising Expense
70,000
Rent Expense
15,000
Depreciation Expense
30,000
Interest Expense
2,000
Utilities Expense
32,000
_______
$840,000
$840,000
Totals
Prepare an income statement for China Tea Company for the year ended December 31, 2018:
3-204 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
China Tea Company Income Statement For the year ended December 31, 2018 Service revenue
$400,000
Salaries expense
180,000
Advertising expense
70,000
Rent expense
15,000
Depreciation expense
30,000
Interest expense
2,000
Utilities expense
32,000 329,000
Net income
$71,000
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
3-205 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
214.
The adjusted trial balance for China Tea Company at December 31, 2018, is presented below: Debit Cash
$11,000
Accounts Receivable
150,000
Prepaid Rent
5,000
Supplies
25,000
Equipment
300,000
Accumulated
Credit
$135,000
Depreciation Accounts Payable
20,000
Salaries Payable
4,000
Interest Payable
1,000
Notes Payable (due in
30,000
two years) Common Stock
200,000
Retained Earnings
50,000
Dividends
20,000
Service Revenue
400,000
Salaries Expense
180,000
Advertising Expense
70,000
Rent Expense
15,000
Depreciation Expense
30,000
Interest Expense
2,000
Utilities Expense
32,000
_______
$840,000
$840,000
Totals
Prepare a classified balance sheet for China Tea Company as of December 31, 2018:
3-206 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
China Tea Company Balance Sheet As of December 31, 2018 Current assets: Cash
$11,000
Accounts receivable
150,000
Prepaid rent
5,000
Supplies
25,000
Total current assets
$191,000
Property and equipment: Equipment
300,000
Less: Accumulated
135,000
depreciation 165,000 Total assets
$356,000
Liabilities and Stockholder’ Equity Current liabilities: Accounts payable
20,000
Salaries payable
4,000
Interest payable
1,000
Total current liabilities
25,000
Notes payable
30,000
Total liabilities
55,000
Shareholders' equity: Common stock
200,000
Retained earnings (1)
101,000
Total shareholders' equity
301,000
Total liabilities and
$356,000
stockholders’ equity
(1) Beginning RE ($50,000) + NI ($71,000) - Dividends ($20,000). AACSB: Analytical Thinking
3-207 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
3-208 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
215.
The December 31, 2018, post-closing trial balance for Strong Corporation is presented below: Debits Cash
$18,500
Long-Term Investments
55,000
Accounts Receivable
26,500
Prepaid Insurance
4,500
Supplies
100,000
Land
45,000
Buildings
277,500
Accumulated
Credits
80,000
Depreciation Accounts Payable
37,500
Notes Payable, due 2019
65,000
Interest Payable
10,000
Notes Payable, due 2028
120,000
Common Stock
150,000
Retained Earnings
64,500
Totals
$527,000
$527,000
Prepare a classified balance sheet for Strong Corporation at December 31, 2018.
Strong Corporation Balance Sheet At December 31, 2018 Assets Cash
$18,500
Accounts receivable
26,500
Supplies
100,000
Prepaid insurance
4,500
3-209 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Total current assets
$149,500
Investments
55,000
Property, plant, and equipment: Land
45,000
Buildings
277,500
Less: Accumulated
(80,000)
depreciation Net property, plant, and
242,500
equipment Total assets
$447,000
Liabilities and Shareholders' Equity
Current liabilities: Accounts payable
$37,500
Notes payable, due 2019
65,000
Interest payable
10,000
Total current liabilities
112,500
Long-term liabilities: Notes payable, due 2028
120,000
Shareholders' equity: Common stock
150,000
Retained earnings
64,500
Total shareholders’ equity
214,500
Total liabilities and
$447,000
shareholders' equity
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
3-210 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
216.
The following account balances appear in the 2018 adjusted trial balance of Diamond Corporation: Common Stock, $21,000; Retained Earnings, $8,000; Dividends, $2,000; Service Revenue, $30,000; Salaries Expense, $13,000; and Utilities Expense, $7,000. No common stock was issued during the year. Prepare the statement of stockholders' equity for the year ended December 31, 2018.
Diamond Corporation Statement of Stockholders’ Equity For the Year Ended December 31, 2018 Common Retained
Total
Stock Earnings Stockholders’ Equity Balance,
$21,000
$8,000
$29,000
January 1, 2018 Issuance of
0
0
common stock Net income
10,000
10,000
_______
(2,000)
(2,000)
$21,000
$16,000
$37,000
for 2018 Less: Dividends Balance, December 31, 2018
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
3-211 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
217.
The following is selected financial information for Osmond Dental Laboratories for 2018 and 2019: 2018
2019
$53,000
?
Net income
37,000
42,000
Dividends declared and
15,000
18,000
70,000
?
Retained earnings, January 1
paid Common stock
Osmond issued 2,000 shares of additional capital stock in 2019 for $20,000. There were no other capital transactions. Prepare a statement of stockholders' equity for the year ended December 31, 2019.
Osmond Dental Laboratories Statement of Stockholders’ Equity For the Year Ended December 31, 2019 Common Retained
Total
Stock Earnings Stockholders’ Equity Balance,
$70,000 *$75,000
$145,000
January 1, 2019 Issuance of
20,000
20,000
common stock Net income
42,000
42,000
_______
(18,000)
(18,000)
$90,000
$99,000
$189,000
for 2019 Less: Dividends Balance, December 31, 2019 3-212 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
*$53,000 + 37,000 - 15,000 = $75,000 AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Topic: The Reporting Process: Financial Statements
3-213 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
218.
The adjusted trial balance for Yondel Company at December 31, 2018 is presented below: Debit Cash
$8,000
Prepaid Rent
18,000
Land
415,000
Credit
Accounts Payable
$10,000
Salaries Payable
14,000
Common Stock
250,000
Retained Earnings
64,000
Dividends
10,000
Service Revenue
350,000
Salaries Expense
190,000
Rent Expense
21,000
Utilities Expense
26,000
_______
$688,000
$688,000
Totals
Prepare the closing entries for Yondel Company for the year ended December 31, 2018.
(a)
Service Revenue
350,000
Retained Earnings (b)
(c)
Retained Earnings
350,000 237,000
Salaries Expense
190,000
Rent Expense
21,000
Utilities Expense
26,000
Retained Earnings Dividends
10,000 10,000
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries.
3-214 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: The Closing Process
3-215 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
219.
The adjusted trial balance for China Tea Company at December 31, 2018 is presented below: Debit Cash
$11,000
Accounts Receivable
150,000
Prepaid Rent
5,000
Supplies
25,000
Equipment
300,000
Accumulated
Credit
$135,000
Depreciation Accounts Payable
20,000
Salaries Payable
4,000
Interest Payable
1,000
Notes Payable – due in
30,000
two years Common Stock
200,000
Retained Earnings
50,000
Dividends
20,000
Service Revenue
400,000
Salaries Expense
180,000
Advertising Expense
70,000
Rent Expense
15,000
Depreciation Expense
30,000
Interest Expense
2,000
Utilities Expense
32,000
_______
$840,000
$840,000
Totals
Prepare the closing entries for China Tea Company for the year ended December 31, 2018.
(a) Service Revenue
400,000
3-216 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Retained Earnings (b) Retained Earnings
400,000 329,000
Salaries Expense
180,000
Advertising
70,000
Expense Rent Expense
15,000
Depreciation
30,000
Expense
(c)
Interest Expense
2,000
Utilities Expense
32,000
Retained Earnings Dividends
20,000 20,000
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Topic: The Closing Process
3-217 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
220.
The year-end adjusted trial balance included the following account balances: Cash, $5,000; Equipment, $25,000; Accounts payable, $7,000; Common stock, $15,000; Retained earnings, $6,000; Dividends, $1,000; Service revenue, $18,000; Salaries expense, $9,000; and Utilities expense, $6,000. Prepare the post-closing trial balance.
Debit Cash
$5,000
Equipment
25,000
Credit
Accounts payable
7,000
Common stock
15,000
Retained earnings
8,000
Totals
$30,000
$30,000
*Ending Retained Earnings = Beginning Retained Earnings ($6,000) + Revenues ($18,000) - Expenses ($9,000 + $6,000) - Dividends ($1,000) = $8,000. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-07 Post closing entries and prepare a post-closing trial balance. Topic: Post-Closing Trial Balance
3-218 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
221.
Consider the following transactions. Accrual-Basis Transaction
Revenue
Cash-Basis
Expense
Revenue
Expense
1. Record employees' salaries incurred but not yet paid, $800. 2. Pay advertising for the current month, $700. 3. Pay utilities for the previous month, $750. 4. Receive cash from customers in advance, $1,500. 5. Purchase office supplies on account, $400. 6. Pay dividends to stockholders, $200. 7. Pay for supplies previously purchased on account, $400. 8. Pay for insurance one year in advance, $3,600. 9. Receive cash from customers for services performed in the current period, $1,800. 10. Provide services to customers on account, $2,100.
Required: For each transaction, determine the amount of revenue or expense, if any, that is recorded under accrual-basis accounting and under cash-basis accounting.
Accrual-Basis Transaction
Cash-Basis
Revenue
Expense
Revenue
Expense
$0
$800
$0
$0
1. Record employees’ salaries incurred but not yet paid, $800.
3-219 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
2. Pay advertising for the current month, $700.
$0
$700
$0
$700
$0
$0
$0
$750
$0
$0
$1,500
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$400
$0
$0
$0
$3,600
$1,800
$0
$1,800
$0
$2,100
$0
$0
$0
3. Pay utilities for the previous month, $750. 4. Receive cash from customers in advance, $1,500. 5. Purchase office supplies on account, $400. 6. Pay dividends to stockholders, $200. 7. Pay for supplies previously purchased on account, $400. 8. Pay for insurance one year in advance, $3,600. 9. Receive cash from customers for services performed in the current period, $1,800. 10. Provide services to customers on account, $2,100.
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-01 Understand when revenues and expenses are recorded. Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting Topic: Revenue and Expense Reporting
3-220 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
222.
Follette's Accessories maintains its books using cash-basis accounting. However, the company recently borrowed $50,000 from a local bank and the bank requires Follette's to provide annual financial statements prepared using accrual-basis accounting as part of the credit worthiness verification. During 2018, the following cash flows were recorded: Cash collected from
$60,000
customers Cash paid for: Salaries
$25,000
Supplies
6,000
Maintenance
5,000
Insurance
7,000
Advertising
4,000
Net cash flows
47,000 $13,000
You are able to determine the following information:
Accounts
January 1,
December 31,
2018
2018
$15,000
$18,000
1,800
4,100
800
-0-
2,200
2,000
receivable Prepaid insurance Supplies Salaries payable
Required: Prepare an accrual-basis income statement for December 31, 2018, by calculating accrual-basis revenues and expenses.
3-221 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Follette’s Accessories Income Statement For the year ended December 31, 2018 $63,000a
Service revenue Expenses: Salaries
24,800b
Supplies
6,800c
Repairs and Maintenance
5,000d
Insurance
4,700e
Advertising
4,000f
Depreciation
5,500
Total expenses
50,800
Net income
$12,200
a
$60,000 (cash from customers) + $3,000 (increase in accounts receivable) = $63,000
b
$25,000 (cash paid for salaries) - $200 (decrease in salaries payable) = $24,800
c
$6,000 (cash paid for supplies) + $800 (decrease in supplies) = $6,800
d
$5,000 (cash paid for maintenance) +/- $0 (increase/decrease in maintenance payable)
= $5,000 e
$7,000 (cash paid for insurance) - $2,300 (increase in prepaid insurance) = $4,700
f
$4,000 (cash paid for advertising) +/- $0 (decrease/increase in prepaid advertising) =
$4,000 AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-01 Understand when revenues and expenses are recorded. Learning Objective: 03-02 Distinguish between accrual-basis and cash-basis accounting. Topic: Accrual-Basis Compared with Cash-Basis Accounting Topic: Revenue and Expense Reporting
3-222 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
223.
The information necessary for preparing the 2018 year-end adjusting entries for Winter Storage appears below. Winter's fiscal year-end is December 31. a. Depreciation on the equipment for the year is $7,000. b. Salaries earned (but not paid) from December 16 through December 31, 2018, are $3,400. c. On March 1, 2018, Winter lends an employee $12,000 and a note is signed requiring principal and interest at 6% to be paid on February 28, 2019. d. On April 1, 2018, Winter pays an insurance company $15,000 for a one-year fire insurance policy. The entire $15,000 is debited to prepaid insurance at the time of the purchase. e. $1,500 of supplies are used in 2018. f. A customer pays Winter $4,200 on October 31, 2018, for six months of storage to begin November 1, 2018. Winter credits deferred revenue at the time of cash receipt. g. On December 1, 2018, $4,000 advertising is paid to a local newspaper. The payment represents advertising for December 2018 through March 2019, at $1,000 per month. Prepaid advertising is debited at the time of the payment. Required: Record the necessary adjusting entries at December 31, 2018. No prior adjustments have been made during 2018.
(a)
Debit
Depreciation Expense
7,000
Accumulated Depreciation
Credit
7,000
(Adjust accumulated depreciation) (b)
Debit
Salaries Expense
3,400
Salaries Payable
Credit
3,400
(Adjust salaries payable) (c) Interest Expense Interest Payable
Debit
Credit
600 600
3-223 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
(Adjust interest payable) (d)
Debit
Insurance Expense
11,250
Prepaid Insurance
Credit
11,250
(Adjust prepaid insurance) (e)
Debit
Supplies Expense
1,500
Supplies
Credit
1,500
(Adjust supplies) (f)
Debit
Deferred Revenue
1,400
Service Revenue
Credit
1,400
(Adjust deferred revenue) (g)
Debit
Advertising Expense
1,000
Prepaid Advertising
Credit
1,000
(Adjust prepaid advertising)
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
3-224 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
224.
David's Services provides general home maintenance to customers. The company's fiscal year-end is December 31. The December 31, 2018, trial balance (before any adjusting entries) appears below. Accounts
Debits
Cash
$18,100
Accounts Receivable
16,200
Supplies
20,400
Prepaid Insurance
15,000
Equipment
95,000
Credits
Accumulated Depreciation
$27,200
Accounts Payable
10,500
Salaries Payable
-0-
Utilities Payable
-0-
Interest Payable
-0-
Notes Payable
40,000
Common Stock
24,000
Retained Earnings
10,500
Dividends
2,500
Service Revenue Salaries Expense
224,900 158,500
Depreciation Expense
-0-
Insurance Expense
-0-
Supplies Expense
-0-
Utilities Expense
11,400
Interest Expense
-0-
________
$337,100
$337,100
Totals
Information necessary to prepare the year-end adjusting entries appears below. a. Depreciation on the equipment for the year is $13,600. b. Employees' salaries are paid every two weeks. The last pay period ended on December 23. Salaries earned from December 24 through December 31, 2018, are $4,200. c. On August 1, 2018, David's borrows $40,000 from a local bank and signs a note. The note requires interest to be paid annually on August 31 at 12%. The principal is due in four years. 3-225 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
d. On April 1, 2018, the company purchases insurance for $15,000 for a one-year policy to cover possible injury to workers. The entire $15,000 was debited to Prepaid Insurance at the time of the purchase. e. $3,000 of supplies remains on hand at December 31, 2018. f. On December 30, Mike's receives a utility bill of $1,900 for the month. The bill will not be paid until early January, 2019, and no entry was recorded when the bill was received. Required: Prepare the necessary adjusting entries on December 31, 2018.
(a)
Debit
Depreciation Expense
13,600
Accumulated Depreciation
Credit
13,600
(Adjust accumulated depreciation) (b)
Debit
Salaries Expense
4,200
Salaries Payable
Credit
4,200
(Adjust salaries payable) (c)
Debit
Interest Expense
2,000
Interest Payable
Credit
2,000
(Adjust interest payable) (d)
Debit
Insurance Expense
11,250
Prepaid Insurance
Credit
11,250
(Adjust prepaid insurance) (e)
Debit
Supplies Expense
17,400
Supplies
Credit
17,400
(Adjust supplies) (f)
Debit
Credit
3-226 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Utilities Expense
1,900
Utilities Payable
1,900
(Adjust utilities payable)
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
3-227 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
225.
The general ledger of the Advanced Health at January 1, 2018, includes the following account balances: Accounts
Debits
Cash
$4,500
Accounts Receivable
8,300
Supplies
3,700
Equipment
26,400
Credits
Accumulated Depreciation
$5,800
Accounts Payable
4,200
Utilities Payable
5,500
Deferred Revenue
-0-
Common Stock
19,000
Retained Earnings
8,400
Totals
$42,900
$42,900
The following is a summary of the transactions for the year: a. Provide health services for cash, $18,000, and on account, $62,000. b. Collect on accounts receivable, $45,000. c. Issue shares of common stock in exchange for $12,000 cash. d. Pay salaries for the current year, $36,000. e. Pay for utilities expense, $13,000, of which $5,500 represents costs for 2017. f. Receive cash in advance from customers, $7,000. g. Pay $3,000 cash dividends to stockholders. Required: 1. Set up the necessary T-accounts and enter the beginning balances from the trial balance. In addition to the accounts shown, the company has accounts for Dividends, Service Revenue, Salaries Expense, Utilities Expense, Supplies Expense, and Depreciation Expense. 2. Record each of the summary transactions listed above. 3. Post the transactions to the accounts. 4. Prepare an unadjusted trial balance. 5. Record adjusting entries. Depreciation for the year on the machinery is $2,900. Medical supplies remaining on hand at the end of the year equal $1,200. Of the $7,000 paid in advance by customers, $4,000 of the work has been completed by the end of the year. 3-228 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
6. Post adjusting entries. 7. Prepare an adjusted trial balance. 8. Prepare an income statement for 2018 and a classified balance sheet as of December 31, 2018. 9. Record closing entries. 10. Post closing entries 11. Prepare a post-closing trial balance.
Requirement 1
Cash
Accounts Receivable
Supplies
4,500
8,300
3,700
4,500
8,300
3,700
Equipment
Accumulated Depr.
Accounts Payable
26,400
5,800
4,200
26,400
5,800
4,200
Utilities Payable
Deferred Revenue
Common Stock
5,500
0
19,000
5,500
0
19,000
Retained Earnings
Dividends
Service Revenue
8,400
0
0
8,400
0
0
Salaries Expense
Utilities Expense
Supplies Expense
0
0
0
0
0
0
Depr. Expense 0 0
Requirement 2 (a)
Debit
Accounts Receivable
62,000
Credit
3-229 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Cash
18,000
Service Revenue
80,000
(Provide service on account and for
cash) (b)
Debit
Cash
45,000
Accounts Receivable
Credit
45,000
(Collect on account) (c)
Debit
Cash
12,000
Common Stock
Credit
12,000
(Issue common stock) (d)
Debit
Salaries Expense
36,000
Cash
Credit
36,000
(Pay current salaries) (e)
Debit
Utilities Payable
5,500
Utilities Expense
Credit
7,500
Cash
13,000
(Pay for past and current utilities) (f)
Debit
Cash
7,000
Deferred Revenue
Credit
7,000
(Receive cash in advance) (g)
Debit
Dividends
3,000
Cash
Credit
3,000
(Pay dividends)
Requirement 3 (entries posted in red) Cash
Accounts Receivable
Supplies
3-230 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3,700 4,500
8,300
18,000
36,000
45,000
13,000
12,000
3,000
62,000
45,000
7,000 34,500
25,300
Equipment
3,700
Accumulated Depr.
Accounts Payable
26,400
5,800
4,200
26,400
5,800
4,200
Utilities Payable
Deferred Revenue
5,500 5,500
0 Retained Earnings
Dividends
Common Stock 0
19,000
7,000
12,000
7,000
31,000 Service Revenue
8,400
8,400 Salaries Expense
0
0
3,000
80,000
3,000
80,000
Misc. Expense
Supplies Expense 0
0
0
36,000
7,500
36,000
7,500
0
Depr. Expense 0 0
Requirement 4 3-231 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Unadjusted Trial Balance Account Title
Debit
Cash
$34,500
Accounts Receivable
25,300
Supplies
3,700
Equipment
26,400
Accumulated
Credit
$5,800
Depreciation Accounts Payable
4,200
Utilities Payable
0
Deferred Revenue
7,000
Common Stock
31,000
Retained Earnings
8,400
Dividends
3,000
Service Revenue
80,000
Salaries Expense
36,000
Utilities Expense
7,500
Supplies Expense
0
Depreciation Expense
0
Total
$136,400
$136,400
Requirement 5 Debit Depreciation Expense
Credit
2,900
Accumulated Depreciation
2,900
(Adjust accumulated depreciation) Supplies Expense
2,500
Supplies
2,500
(Adjust medical supplies) Deferred Revenue Service Revenue
4,000 4,000
(Adjust deferred revenue)
3-232 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Requirement 6 (adjusted entries posted in red) Cash
Accounts
Supplies
Receivable 3,700 4,500
8,300
18,000
36,000 62,000 45,000
45,000
13,000
12,000
3,000
2,500
7,000 34,500
25,300
1,200
Equipment
Accumulated
Accounts
Depr.
Payable
26,400
4,200 5,800 2,900
26,400
8,700
4,200
Utilities
Deferred
Common
Payable
Revenue
Stock
5,500 5,500
4,000
0 Retained
0
19,000
7,000
12,000
3,000
31,000
Dividends
Earnings
Service Revenue
8,400 0
0
3,000
80,000 4,000
8,400
3,000
84,000
3-233 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Salaries
Utilities
Supplies
Expense
Expense
Expense
0
0
0
36,000
7,500
2,500
36,000
7,500
2,500
Depr. Expense 0 2,900 2,900
Requirement 7 Adjusted Trial Balance Account Title
Debit
Cash
$34,500
Accounts Receivable
25,300
Supplies
1,200
Equipment
26,400
Accumulated
Credit
$8,700
Depreciation Accounts Payable
4,200
Utilities Payable
0
Deferred Revenue
3,000
Common Stock
31,000
Retained Earnings
8,400
Dividends
3,000
Service Revenue
84,000
Salaries Expense
36,000
Utilities Expense
7,500
Supplies Expense
2,500
Depreciation Expense
2,900
________
3-234 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Total
$139,300
$139,300
Requirement 8
Advanced Health Income Statement For the year ended December 31, 2018 Service revenue
$84,000
Expenses: Salaries
36,000
Utilities
7,500
Supplies
2,500
Depreciation
2,900
Total expenses
48,900
Net income
$35,100
Advanced Health Balance Sheet December 31, 2018 Assets Cash
Liabilities
$34,500 Accounts
$4,200
Payable Accts.
25,300 Deferred
Receivable
Revenue
Supplies
1,200 Total current
3,000
7,200
liabilities Total
61,000
current assets Stockholders’ Equity Equipment
26,400 Common Stock
31,000
Accum.
(8,700) Retained
40,500*
depr.
Earnings _______ Total
71,500
3-235 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
stockholders’ equity Total liabilities and stockholders’ Total assets $78,700 equity
$78,700
* Retained earnings = beginning retained earnings + net income - dividends = $8,400 + $35,100 - $3,000 = $40,500
Requirement 9 December 31,
Debit
Credit
2018 Service Revenue
84,000
Retained Earnings
84,000
(Close revenue accounts) Retained Earnings
48,900
Salaries Expense
36,000
Utilities Expense
7,500
Supplies Expense
2,500
Depreciation Expense
2,900
(Close expense accounts) Retained Earnings
3,000
Dividends
3,000
(Close dividends account)
Requirement 10 (closing entries posted in red) Cash
Accounts
Supplies
Receivable 3,700 4,500
8,300
18,000 36,000 62,000 45,000
2,500
45,000 13,000
3-236 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12,000
3,000
7,000 34,500
25,300
1,200
Equipment
Accumulated
Accounts
Depr.
Payable
26,400
4,200 5,800 2,900
26,400
8,700
4,200
Utilities
Deferred
Common
Payable
Revenue
Stock
5,500 5,500
4,000
0
Retained
0
19,000
7,000
12,000
3,000
31,000
Dividends
Earnings
Service Revenue
8,400
0
48,900 84,000
3,000
0 3,000
80,000 84,000
3,000
40,500
Salaries
0
0
Misc. Expense
Expense 0 36,000 36,000
4,000
Supplies Expense
0 7,500
0 7,500
2,500
2,500
3-237 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
0
0
0
Depr. Expense 0 2,900
2,900
0
Requirement 11 Post-Closing Trial Balance Account Title
Debit
Cash
$34,500
Accounts Receivable
25,300
Supplies
1,200
Equipment
26,400
Credit
Accumulated Depreciation
$8,700
Accounts Payable
4,200
Utilities Payable
0
Deferred Revenue
3,000
Common Stock
31,000
Retained Earnings Total
_____
40,500
$87,400 $87,400
AACSB: Reflective Thinking AICPA: FN Measurement AICPA: FN Reporting Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Learning Objective: 03-07 Post closing entries and prepare a post-closing trial balance. Topic: Post-Closing Trial Balance Topic: The Closing Process Topic: The Reporting Process: Financial Statements
3-238 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
226.
The general ledger of FastTrack Racing at January 1, 2018, includes the following account balances: Accounts
Debits
Cash
$42,500
Accounts Receivable
25,800
Land
115,800
Credits
Accounts Payable
15,100
Notes Payable
30,500
Common Stock
100,000
Retained Earnings
38,500
Totals
$184,100
$184,100
The following is a summary of the transactions for the year: a. Provide services to customers on account, $63,400. b. Provide services to customers for cash, $75,800. c. Collect on accounts receivable, $45,600. d. Issue shares of common stock in exchange for $32,000 cash. e. Purchase supplies on account, $12,700. f. Pay on accounts payable, $11,500. g. Pay salaries for employee work in the current year, $66,200. h. Pay advertising for the current year, $21,500. i. Pay $2,800 cash dividends to stockholders. Required: 1. Set up the necessary T-accounts and enter the beginning balances from the trial balance. In addition to the accounts shown, the company also has accounts for Supplies, Salaries Payable, Interest Payable, Dividends, Service Revenue, Salaries Expense, Advertising Expense, Interest Expense, and Supplies Expense. 2. Record each of the summary transactions listed above. 3. Post the transactions to the accounts. 4. Prepare an unadjusted trial balance. 5. Record adjusting entries. Accrued interest on the notes payable at year-end amounted to $2,800. Accrued salaries at year-end amounted to $2,500. Supplies remaining on hand at the end of the year equal $2,600. 6. Post adjusting entries.
3-239 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
7. Prepare an adjusted trial balance. 8. Prepare an income statement for 2018 and a classified balance sheet as of December 31, 2018. 9. Record closing entries. 10. Post closing entries 11. Prepare a post-closing trial balance.
Requirement 1
Cash
Accounts
Supplies
Receivable 42,500
25,800
0
42,500
25,800
0
Land
Accounts
Salaries
Payable
Payable
115,800
15,100
0
115,800
15,100
0
Interest Payable Notes Payable
Common Stock
0
30,500
100,000
0
30,500
100,000
Retained
Dividends
Earnings
Service Revenue
38,500
0
0
38,500
0
0
Salaries Expense
Advertising
Interest
Expense
Expense
0
0
0
0
0
0
Supplies Expense 0 0
3-240 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Requirement 2 (a)
Debit
Accounts Receivable
63,400
Service Revenue
Credit
63,400
(Provide services on account) (b)
Debit
Cash
75,800
Service Revenue
Credit
75,800
(Provide services for cash) (c)
Debit
Cash
45,600
Accounts Receivable
Credit
45,600
(Receive cash on account) (d)
Debit
Cash
32,000
Common Stock
Credit
32,000
(Issue common stock) (e)
Debit
Supplies
12,700
Accounts Payable
Credit
12,700
(Purchase supplies on account) (f)
Debit
Accounts Payable
11,500
Cash
Credit
11,500
(Pay cash on account) (g)
Debit
Salaries Expense
66,200
Cash
Credit
66,200
(Pay salaries for work in the current
period) (h)
Debit
Advertising Expense
21,500
Cash
Credit
21,500
3-241 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
(Pay advertising for the current period) (h)
Debit
Dividends
2,800
Credit
Cash
2,800
(Pay dividends)
Requirement 3 (entries posted in red) Cash
Accounts
Supplies
Receivable 42,500 11,500
25,800
0
75,800 66,200
63,400 45,600
12,700
43,600
12,700
45,600 21,500 32,000 2,800 93,900 Land
Accounts
Salaries
Payable
Payable
115,800
0 15,100 11,500 12,700
115,800
16,300
0
Interest
Notes
Common
Payable
Payable
Stock
0
30,500 100,000 32,000
0 Retained Earnings
30,500 Dividends
132,000 Service Revenue
3-242 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
38,500 0
0
2,800
63,400 75,800
38,500
2,800
139,200
Salaries
Advertising
Interest
Expense
Expense
Expense
0
0
66,200
21,500
66,200
21,500
0
0
Supplies Expense 0 0
Requirement 4 FastTrack Racing Unadjusted Trial Balance December 31, 2018 Accounts
Debit
Cash
$93,900
Accounts Receivable
43,600
Supplies
12,700
Land
115,800
Credit
Accounts Payable
$16,300
Salaries Payable
0
Interest Payable
0
Notes Payable
30,500
Common Stock
132,000
Retained Earnings
38,500
Dividends
2,800
3-243 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Service Revenue
139,200
Salaries Expense
66,200
Advertising Expense
21,500
Interest Expense
0
Supplies Expense
0
_______
$356,500
$356,500
Total
Requirement 5 Debit Interest Expense
Credit
2,800
Interest Payable
2,800
(Accrue interest on notes payable)
Salaries Expense
2,500
Salaries Payable
2,500
(Accrue salaries for current year)
Supplies Expense
10,100
Supplies
10,100
(Adjust supplies) ($0 + $12,700 $2,600)
Requirement 6 (adjusted entries posted in red) Cash
Accounts
Supplies
Receivable 42,500 11,500 25,800
0
75,800 66,200 63,400 45,600 12,700 10,100
45,600 21,500 32,000 93,900 Land
2,800 43,600 Accounts
2,600 Salaries
3-244 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Payable
Payable
115,800 15,100
0
11,500 12,700
2,500
16,300
2,500
115,800 Interest
Notes
Payable
Payable
Common Stock
30,500 0
100,000
2,800
32,000
2,800 Retained
30,500 Dividends
Earnings
132,000 Service Revenue
38,500 0
0
2,800
63,400 75,800
38,500
2,800
139,200
Salaries
Advertising
Interest
Expense
Expense
Expense
0
0
0
66,200
21,500
2,800
21,500
2,800
2,500 68,700 Supplies Expense 0 10,100
3-245 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
10,100
Requirement 7 Fast Track Racing Adjusted Trial Balance December 31, 2018 Accounts
Debit
Cash
$93,900
Accounts Receivable
43,600
Supplies
2,600
Land
Credit
115,800
Accounts Payable
$16,300
Salaries Payable
2,500
Interest Payable
2,800
Notes Payable
30,500
Common Stock
132,000
Retained Earnings
38,500
Dividends
2,800
Service Revenue
139,200
Salaries Expense
68,700
Advertising Expense
21,500
Interest Expense
2,800
Supplies Expense
10,100
________
$361,800
$361,800
Total
Requirement 8
Fast Track Racing Income Statement For the year ended December 31, 2018 Service revenue
$139,200
Expenses: Salaries
68,700
3-246 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Advertising
21,500
Interest
2,800
Supplies
10,100
Total expenses
103,100
Net income
$36,100
Fast Track Racing Balance Sheet December 31, 2018 Assets Cash
Liabilities
$93,900 Accounts
$16,300
Payable Accounts Receivable Supplies
43,600 Salaries
2,500
Payable 2,600 Interest
2,800
Payable _______ Total current
21,600
liabilities Total
140,100 Notes Payable
30,500
Total liabilities
52,100
current assets
Stockholders’ Equity Common stock Land
115,800 Retained
132,000 71,800*
earnings _______ Total stockholders’ equity
203,800
Total liabilities and Total assets
stockholders’ $255,900 equity
$255,900
* Retained earnings = Beginning retained earnings + Net income - Dividends = $38,500 + $36,100 - $2,800 = $71,800
3-247 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Requirement 9 December 31,
Debit
Credit
2018 Service Revenue
139,200
Retained Earnings
139,200
(Close revenue accounts)
Retained Earnings
103,100
Salaries Expense
68,700
Advertising Expense
21,500
Interest Expense
2,800
Supplies Expense
10,100
(Close expense accounts)
Retained Earnings
2,800
Dividends
2,800
(Close dividends account)
Requirement 10 (closing entries posted in red) Cash
Accounts
Supplies
Receivable 42,500
11,500 25,800
75,800
66,200 63,400 45,600 12,700
45,600
21,500
32,000
2,800
93,900 Land
0
10,100
43,600
2,600
Accounts
Salaries
Payable
Payable
115,800 15,100
0
3-248 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
11,500 12,700
2,500
16,300
2,500
115,800 Interest
Notes
Payable
Payable
Common Stock
30,500 0
100,000
2,800
32,000
2,800
30,500
Retained
Dividends
Earnings
132,000 Service Revenue
38,500
0
0
103,100 139,200
2,800
63,400 2,800 139,200 75,800
2,800
71,800
0
0
Salaries
Advertising
Interest
Expense
Expense
Expense
0
0
0
66,200
21,500
2,800
2,500
68,700
0
21,500
0
2,800
0
Supplies Expense 0 10,100
10,100
0
Requirement 11
3-249 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Fast Track Racing Post-Closing Trial Balance December 31, 2018 Accounts
Debit
Cash
$93,900
Accounts Receivable
43,600
Supplies
2,600
Land
Credit
115,800
Accounts Payable
$16,300
Salaries Payable
2,500
Interest Payable
2,800
Notes Payable
30,500
Common Stock
132,000
Retained Earnings
_______
71,800
Total
$255,900
$255,900
AACSB: Reflective Thinking AICPA: FN Measurement AICPA: FN Reporting Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Learning Objective: 03-04 Post adjusting entries and prepare an adjusted trial balance. Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Learning Objective: 03-07 Post closing entries and prepare a post-closing trial balance. Topic: Adjusted Trial Balance Topic: Adjusting Entries Topic: Post-Closing Trial Balance Topic: The Closing Process Topic: The Reporting Process: Financial Statements
3-250 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
227.
Randy’s Services provides general home repairs to customers. The company’s fiscal yearend is December 31. The December 31, 2018, adjusted trial balance appears below.
Adjusted Trial Balance
Account Title
Debit
Cash
$18,100
Accounts Receivable
16,200
Supplies
3,000
Prepaid Insurance
3,750
Equipment
95,000
Accumulated
Credit
$40,800
Depreciation
Accounts Payable
10,500
Salaries Payable
4,200
Utilities Payable
1,900
Interest Payable
2,000
Notes Payable
40,000
3-251 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Common Stock
24,000
Retained Earnings
10,500
Dividends
2,500
Service Revenue
224,900
Salaries Expense
162,700
Depreciation Expense
13,600
Insurance Expense
11,250
Supplies Expense
17,400
Utilities Expense
13,300
Interest Expense
2,000
Total
$358,800
$358,800
Required: Complete the following steps: 1. Using the adjusted trial balance, prepare an income statement and a statement of shareholders’ equity for the year ended December 31, 2018, and a classified balance sheet as of December 31, 2018. Assume that no common stock is issued during the year. 2. Record closing entries. 3. Calculate account balances after closing entries and prepare a post-closing trial balance. 3-252 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Requirement 1
Randy’s Services Income Statement For the year ended December 31, 2018 Service revenue
$224,900
Expenses: Salaries
162,700
Depreciation
13,600
Insurance
11,250
Supplies
17,400
Utilities
13,300
Interest
2,000
Total expenses
220,250
Net income
$4,650
Randy’s Services Statement of Stockholders’ Equity For the year ended December 31, 2018 Common Retained
Total
Stock Earnings Stockholders’ Equity Balance at January 1
$24,000
$10,500
$34,500
Issuance of common
0
0
stock Net income for 2018 Less: Dividends Balance at December
$24,000
4,650
4,650
(2,500)
(2,500)
$12,650
$36,650
3-253 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
31
Randy’s Services Balance Sheet December 31, 2018 Assets
Liabilities
Cash
$18,100 Accounts payable
$10,500
Accts. receivable
16,200 Salaries payable
4,200
Supplies
3,000 Utilities payable
1,900
Prepaid insurance
3,750 Interest payable
2,000
Total current assets
41,050 Total current liabilities
18,600
Notes payable
40,000
Equipment Accum. depr.
95,000 (40,800) Stockholders’ Equity Common stock
24,000
Retained earnings
12,650
Total stockholders’ equity
36,650
Total liabilities and Total assets
$95,250 stockholders’ equity
$95,250
Requirement 2 December 31, 2018 Service Revenue
Debit
Credit
224,900
Retained Earnings
224,900
(Close revenue accounts) Retained Earnings
220,250
Salaries expense
162,700
Depreciation expense
13,600
Insurance expense
11,250
Supplies expense
17,400
Utilities expense
13,300
Interest expense
2,000
(Close expense accounts)
3-254 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Retained Earnings
2,500
Dividends
2,500
(Close dividends account)
Requirement 3 (closing entries posted in red) Retained
Dividends
Service
Earnings
Revenue
10,500 220,250
2,500
224,900
224,900
2,500
2,500 224,900 12,650
0
0
Salaries
Depreciation
Insurance
Expense
Expense
Expense
158,500
0
0
4,200
11,250 162,700
13,600
11,250
13,600
0
0
0
Supplies
Utilities
Interest
Expense
Expense
Expense
0 17,400
11,400
0
1,900
2,000
17,400
2,000
13,300 0
0
0
Post-Closing Trial Balance Account Title
Debit
Cash
$18,100
Accounts Receivable
16,200
Supplies
3,000
Prepaid Insurance
3,750
Equipment
95,000
Accumulated
Credit
$40,800
Depreciation Accounts Payable
10,500
Salaries Payable
4,200
3-255 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Utilities Payable
1,900
Interest Payable
2,000
Notes Payable
40,000
Common Stock
24,000
Retained Earnings
12,650
Total
$136,050
$136,050
AACSB: Reflective Thinking AICPA: FN Measurement AICPA: FN Reporting Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-04 Post adjusting entries and prepare an adjusted trial balance. Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Learning Objective: 03-07 Post closing entries and prepare a post-closing trial balance. Topic: Adjusted Trial Balance Topic: Post-Closing Trial Balance Topic: The Closing Process Topic: The Reporting Process: Financial Statements
3-256 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
228.
Russell Engineering provides consulting services related to land development. Below is the year-end adjusted trial balance of Russell Engineering. Russell Engineering Adjusted Trial Balance December 31, 2018 Accounts
Debits
Cash
$5,500
Accounts Receivable
4,200
Supplies
2,300
Prepaid Rent
6,100
Equipment
114,000
Accumulated
Credits
$25,000
Depreciation Accounts Payable
3,600
Salaries Payable
3,500
Utilities Payable
1,500
Notes Payable
20,000
Common Stock
44,800
Retained Earnings
20,200
Service Revenue
118,500
Salaries Expense
45,000
Rent Expense
17,600
Depreciation Expense
6,000
Supplies Expense
9,400
Advertising Expense
15,000
Utilities Expense
10,800
Interest Expense
1,200
Totals
$237,100
$237,100
Required: Prepare an income statement, statement of stockholders' equity, and classified balance sheet. In preparing the statement of stockholders' equity, note that additional common stock was issued during the year for $8,000. This amount is included in the amount for Common Stock in the adjusted trial balance. 3-257 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Russell Engineering Income Statement For the year ended December 31, 2018 Service revenue
$118,500
Expenses: Salaries
45,000
Rent
17,600
Depreciation
6,000
Supplies
9,400
Advertising
15,000
Utilities
10,800
Interest
1,200
Total expenses
105,000
Net income
$13,500
Russell Engineering Statement of Stockholders’ Equity For the year ended December 31, 2018 Common Retained
Total
Stock Earnings Stockholders’ Equity
Balance at January 1
$36,800
$20,200
$57,000
Issuance of common
8,000
8,000
stock Net income for 2018
13,500
13,500
3-258 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Less:
(0)
(0)
$33,700
$78,500
Dividends Balance at December
$44,800
31
Russell Engineering Balance Sheet December 31, 2018 Assets Cash
Liabilities $5,500 Accounts
$3,600
Payable Accts.
4,200 Salaries
Receivable Supplies
3,500
Payable 2,300 Utilities
1,500
Payable Prepaid
6,100 Total current
Rent
liabilities
Total
18,100 Notes Payable
8,600
20,000
current assets
Equipment
114,000
Accum.
(25,000) Common
Depr.
Stockholders’ Equity 44,800
Stock Retained
33,700
Earnings Total stockholders’ equity
78,500
Total liabilities Total assets
$107,100 and stockholders’ equity
$107,100
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-05 Prepare financial statements using the adjusted trial balance. 3-259 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: The Reporting Process: Financial Statements
3-260 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
229.
The year-end financial statements are provided below. Income Statement Service revenue
Statement Of Stockholders’ Equity
$87,500 Common Retained
Expenses:
Stock
Salaries
$47,100
Supplies
9,600
Earnings
Total
January 1
$70,000
$34,500 $104,500
Issue
12,000
12,000
stock Rent
7,700
Net
17,900
17,900
(5,000)
income Delivery
5,200 69,600
Net
Dividends
_______
(5,000)
$17,900 December
$82,000
$47,400 $129,400
income
31
Balance Sheet Assets:
Liabilities:
Cash
$7,500 Accounts
$9,800
payable Accounts
8,300 Stockholders’ Equity:
receivable Land
123,400 Common
$82,000
stock Retained
47,400
129,400
earnings Total
$139,200 Total liabilities
assets
$139,200
and equity
Required: 1. Record year-end closing entries. 2. Prepare a post-closing trial balance (Hint: the balance of retained earnings will be the amount shown in the balance sheet).
3-261 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
December 31,
Debit
Credit
2018 Service Revenue
87,500
Retained Earnings
87,500
(Close revenue accounts) Retained Earnings
69,600
Salaries Expense
47,100
Supplies Expense
9,600
Rent Expense
7,700
Delivery Expense
5,200
(Close expense accounts) Retained Earnings
5,000
Dividends
5,000
(Close dividends account)
Post-Closing Trial Balance Account Title
Debit
Cash
$7,500
Accounts Receivable
8,300
Land
Credit
123,400
Accounts Payable
$9,800
Common Stock
82,000
Retained Earnings
_______
47,400
Totals
$139,200
$139,200
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Learning Objective: 03-07 Post closing entries and prepare a post-closing trial balance. Topic: Post-Closing Trial Balance Topic: The Closing Process
3-262 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
230.
Describe what is meant by deferred revenues and give two examples.
Deferred revenues are inflows of resources before the earnings process is complete. Examples include magazine subscription payments received in advance by a publishing firm or rent payments received in advance by a property leasing firm. A liability exists because of the obligation to provide the service.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
231.
Describe what is meant by prepaid expenses and give two examples.
Prepaid expenses are outflows of resources that create benefits that will last beyond the current reporting period. Examples include insurance or rent paid in advance of use.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
232.
What is an accrued expense?
An accrued expense results from an expense being incurred and a liability recorded prior to cash payment. Examples include interest payable and salaries payable.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium 3-263 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 03-03 Demonstrate the purposes and recording of adjusting entries. Topic: Adjusting Entries
233.
What is the difference between permanent accounts and temporary accounts and why does an accounting system have both types of accounts?
Permanent accounts represent assets, liabilities, and stockholders' equity at a point in time. Temporary accounts represent changes in retained earnings caused by changes in dividend, revenue and expense accounts. The temporary accounts are closed out annually to facilitate measuring income on an annual basis, but the permanent account balances are carried forward from period to period.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Topic: The Closing Process
234.
What are the purposes of closing entries?
The closing process serves a dual purpose: (1) to reduce the balances of temporary accounts to zero so they are ready to measure activity in the next accounting period, and (2) to transfer the balances of these temporary accounts to the Retained Earnings account so it reflects the activity that has occurred in the temporary accounts during the period.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand
3-264 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 2 Medium Learning Objective: 03-06 Demonstrate the purposes and recording of closing entries. Topic: The Closing Process
3-265 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 04 Cash and Internal Controls
True / False Questions
1. Managers of the company act as stewards or caretakers of the company's assets. True
False
2. Common types of financial statement fraud include creating fictitious revenues from a fake customer, improperly valuing assets, and mismatching revenues and expenses. True
False
3. In response to corporate accounting scandals and to public outrage over seemingly widespread unethical behavior of top executives, Congress passed the Sarbanes-Oxley Act. True
False
4. The Sarbanes-Oxley Act is also known as Generally Accepted Accounting Principles. True
False
5. The Public Company Accounting Oversight Board (PCAOB) has the authority to establish standards dealing with auditing, quality control, ethics, independence, and other activities relating to the preparation of audited financial reports. True
False
6. Auditors of public companies can perform the full range of audit and nonaudit consulting services for their audit clients. True
False
4-1 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
7. Section 404 of the Sarbanes-Oxley Act requires that a company's management document and assess the effectiveness of all internal control processes that could affect financial reporting. True
False
8. Internal control is a company's plan to (1) improve the accuracy and reliability of accounting information and (2) safeguard the company's assets. True
False
9. One benefit of internal control is greater reliance by investors on reported financial statements. True
False
10. A framework for designing an internal control system is provided by the Financial Accounting Standards Board (FASB). True
False
11. The control environment refers to the overall top-to-bottom attitude of the company with respect to internal controls. True
False
12. Risk assessment procedures include periodic reviews of internal controls, assessing management's oversight of the internal control, developing solutions to known cases of internal control failures, and determining whether each division or operation within a company is meeting its objectives. True
False
13. Separation of duties refers to auditors not being allowed to perform both audit and nonaudit services for the same client. True
False
4-2 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
14. An example of separation of duties would be not allowing an employee who receives cash to also be responsible for depositing that cash in the bank account. True
False
15. The internal control component of information and communication relates to the effectiveness of accurately measuring and communicating business transactions. True
False
16. Management needs to monitor the internal control system, just like any other system. Any control deficiencies spotted by employees should be reported immediately to management. True
False
17. Separation of duties occurs when two or more people act in coordination to circumvent internal controls. True
False
18. Effective internal controls ensure a company's success and survival. True
False
19. The amount of cash reported in a company's balance sheet includes currency, coins, and balances in savings and checking accounts, as well as items acceptable for deposit in these accounts, such as checks received from customers. True
False
20. The amount of cash reported in a company's balance sheet includes items acceptable for deposit in bank accounts, such as checks received from customers. True
False
4-3 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
21. The amount of cash reported in a company's balance sheet includes the balance of accounts receivable if cash collection is highly likely in the near future. True
False
22. The amount of cash reported in a company's balance sheet does not include cash equivalents, defined as short-term investments that have a maturity date no longer than three months from the date of purchase. True
False
23. Common examples of cash equivalents are money market funds, Treasury bills, and certificates of deposit. True
False
24. Recording all cash receipts as soon as possible is considered a good internal control. True
False
25. Opening mail and making a list of checks received once per week is considered a good internal control over cash receipts. True
False
26. Whether a customer uses cash, a check, or a debit card to make a purchase, the company records the transaction as a cash sale. True
False
27. When customers pay for services with a check, the company should debit Accounts Receivable and credit Service Revenue. True
False
4-4 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
28. When customers pay for services with a debit card, the company should debit Cash and credit Service Revenue. True
False
29. When a company pays for services received using a check, it should credit Accounts Payable until the check is paid by the bank. True
False
30. When a company pays for services received using a credit card, it should credit Accounts Payable. True
False
31. Allowing the employee who authorizes purchases to also prepare the check is an example of good internal control. True
False
32. Companies should set maximum purchase limits on debit cards and credit cards as part of internal controls. True
False
33. A bank reconciliation matches the balance of cash in the bank account with the balance of cash in the company's own records. True
False
34. Differences in the company's cash balance and the bank's cash balance occur because of either timing differences or errors. True
False
4-5 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
35. An example of a bank error that causes the company's balance and bank's balance of cash to differ is the purchase of supplies with a check. True
False
36. Cash receipts of the company that have not been added to the bank's record of the company's balance are referred to as checks outstanding. True
False
37. Checks outstanding are checks the company has written that have not been subtracted from the bank's record of the company's balance. True
False
38. A deposit outstanding will cause the bank's cash balance to be higher than the company's cash balance. True
False
39. A check outstanding will cause the bank's cash balance to be higher than the company's cash balance. True
False
40. An NSF check is an example of a cash transaction that is initially recorded by the bank and later by the company after notification. True
False
41. Interest earned on a bank account is an example of a cash transaction recorded by the company and then later by the bank after notification. True
False
4-6 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
42. The final step in reconciling the bank's cash balance and the company's cash balance is to update the company's cash balance for the items used to reconcile the bank's cash balance. True
False
43. The petty cash fund represents cash on hand and is used to pay for minor purchases. True
False
44. The petty cash fund should have just enough cash to make minor expenditures over a reasonable period (such as a week or a month). True
False
45. A company's cash is reported in two financial statements-income statement and statement of cash flows. True
False
46. Cash is typically reported as a current asset in the balance sheet. True
False
47. The statement of cash flows reports a company's cash inflows and cash outflows related to (1) operating activities, (2) investing activities, and (3) financing activities. True
False
48. Investing activities include cash transactions involving revenue and expense events during the period. True
False
49. Investing activities include cash investments in long-term assets and investment securities. True
False
4-7 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
50. Investing activities include transactions designed to raise cash or finance the business. True
False
51. Only transactions involving cash affect a company's cash flows. True
False
52. A company's ratio of cash to noncash assets is calculated as the total cash balance divided by all noncash assets. True
False
53. Companies often have a high ratio of cash to noncash assets when they consistently pay dividends. True
False
54. Typically, the more volatile the company's trend in operating cash flows, the higher the operating risk of the company. True
False
55. An advantage of a high ratio of cash to noncash assets is that the company has funds to pay obligations as they become due. True
False
Multiple Choice Questions
4-8 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
56. Occupational fraud:
A. Is the use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization's resources. B. Occurs in only a few organizations and generally involves minor amounts. C. Will be prevented when companies employ an auditor. D. Is committed only by lower-level employees. 57. The phrase "cooking the books" is commonly used to refer to:
A. The company's accounting records being thoroughly audited at the end of the year. B. The company's financial statements being presented in a deceptive form. C. The company's ability to provide timely financial information under operating pressure. D. The inclusion of a variety of information in the financial statements. 58. The three elements of the fraud triangle are:
A. Motive. B. Rationalization. C. Opportunity. D. All of the other answers are elements of the fraud triangle. 59. The three elements present in every fraud are commonly referred to as the ___________.
A. Triple threat B. Three-way manipulation C. Fraud triangle D. Three-alarm fire
4-9 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
60. Which element of the fraud triangle do companies have the greatest ability to eliminate?
A. Motive. B. Rationalization. C. Opportunity. D. Intelligence. 61. Fraudulent reporting by management could include:
A. Fictitious revenues from a fake customer. B. Improper asset valuation. C. Mismatching revenues and expenses. D. All of the other answers could include fraudulent reporting. 62. A company's plans to minimize theft and enhance the accuracy of accounting information are referred to as:
A. Corporate controls. B. Security controls. C. Internal controls. D. General controls. 63. What key piece of legislation was passed in response to corporate accounting scandals by Enron, WorldCom, and others?
A. Sarbanes-Oxley Act. B. 1933 Securities Act. C. 1934 Securities Exchange Act. D. Regulation Fair Disclosure.
4-10 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
64. The Sarbanes-Oxley Act requires that companies must:
A. Conduct customer surveys each year to ensure satisfaction with products and services. B. Document internal controls and assess their adequacy each year. C. Pay taxes owed to the Internal Revenue Service by the tax filing date. D. Devise a budget each year to ensure cash outflows are not greater than cash inflows. 65. Under the Sarbanes-Oxley Act, management is responsible for:
A. Analysts' having positive comments about the company's operations. B. The reliability of financial statements. C. Increasing the company's stock price. D. All of the other answers represent management responsibilities under the Sarbanes-Oxley Act. 66. Which of the following does not represent a major provision of the Sarbanes-Oxley Act?
A. Nonaudit services. B. Quarterly financial statements. C. Auditor rotation. D. Corporate executive accountability. 67. Under the provisions of the Sarbanes-Oxley Act, corporate executives:
A. Have limited responsibility for financial statements. B. Must personally prepare the company's financial statements. C. Must personally certify the company's financial statements. D. Are not allowed to view the company's financial statements.
4-11 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
68. Under the provisions of the Sarbanes-Oxley Act, auditors must do which of the following?
A. Provide nonaudit services for their clients. B. Audit public companies whose chief executives worked for the audit firm in the preceding year. C. Be hired by company management. D. Maintain working papers for at least seven years following an audit. 69. The Sarbanes-Oxley Act (SOX) mandates which of the following?
A. Increased regulations related to auditor-client relations. B. Increased regulations related to internal control. C. Increased regulations related to corporate executive accountability. D. All of the other answers represent mandates of the Sarbanes-Oxley Act. 70. Which of the following best describes the goal of internal controls?
A. Ensuring the business is profitable. B. Enhancing the health of employees. C. Improving the accuracy and the reliability of financial information. D. Ensuring the compliance with tax regulations. 71. Which of the following is NOT a design feature of effective internal controls?
A. Allow greater reliance by investors on reported financial statements. B. Prevent fraudulent or errant financial reporting. C. Ensure the company's price advantage over competitors. D. Prevent misuse of company funds by employees.
4-12 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
72. A framework for designing an internal control system is provided by the:
A. Committee of Sponsoring Organizations. B. Financial Accounting Standards Board. C. Securities and Exchange Commission. D. International Accounting Standards Board. 73. The component of internal control that includes the policies and procedures that help ensure that management's directives are being carried out is:
A. Monitoring. B. Information and communication. C. Risk assessment. D. Control activities. 74. The component of internal control that identifies internal and external factors that could prevent a company's objectives from being achieved is:
A. Monitoring. B. Information and communication. C. Risk assessment. D. Control activities. 75. The component of internal control that includes the formal procedures for reporting control deficiencies is:
A. Monitoring. B. Information and communication. C. Risk assessment. D. Control activities.
4-13 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
76. The components of internal control do not directly include:
A. Risk assessment. B. Inflation adjustment. C. Monitoring. D. Control activities. 77. Separation of duties refers to:
A. Making each manager personally responsible for his/her department. B. Keeping functions across different departments separate. C. Preventing top management and lower-level employees from interacting. D. Individuals who have physical responsibility for assets should not also have access to accounting records. 78. What is the concept behind separation of duties in establishing internal controls?
A. The company's financial accountant should not share information with the company's tax accountant. B. Duties of middle-level managers should be clearly separated from those of top executives. C. Employee fraud is less likely to occur when access to assets and access to accounting records are separated. D. The external auditors of the company should have no contact with managers while the audit is taking place. 79. Which of the following is not an example of preventive controls?
A. Separation of duties. B. Physical controls. C. Proper authorization. D. Reconciliations.
4-14 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
80. Which of the following is an example of detective controls?
A. Separation of duties. B. Physical controls. C. Proper authorization. D. Reconciliations. 81. Keeping supplies in a locked room with access allowed only to authorized personnel is an example of which preventive control?
A. Separation of duties. B. Physical controls. C. Proper authorization. D. Employee management. 82. Giving only management the right to make purchases over a certain amount is an example of which preventive control?
A. Separation of duties. B. Physical controls. C. Proper authorization. D. Employee management. 83. Providing employees with appropriate guidance to ensure they have the knowledge necessary to carry out their job duties is an example of which preventive control?
A. Separation of duties. B. Physical controls. C. Proper authorization. D. Employee management.
4-15 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
84. Allowing only certain individuals to have passwords to conduct online purchases is an example of which preventive control?
A. Separation of duties. B. Physical controls. C. E-commerce controls. D. Employee management. 85. Having management periodically determine whether the amount of physical assets of the company match the accounting records is an example of which detective control?
A. Separation of duties. B. Reconciliations. C. Performance reviews. D. Employee management. 86. Checking actual outcome of individuals or processes against their expected outcome is an example of which detective control?
A. Separation of duties. B. Reconciliations. C. Performance reviews. D. Employee management. 87. Having an independent party assess each year the adequacy of the company's internal control procedures is an example of which detective control?
A. Separation of duties. B. Reconciliations. C. Performance reviews. D. Audits.
4-16 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
88. Which employees are the ones who must take final responsibility for the establishment and success of internal controls?
A. Top executives. B. Mid-level managers. C. Lower-level employees. D. All employees. 89. Which employees have an impact on the operation and effectiveness of internal controls?
A. Upper management. B. Mid-level managers. C. Lower-level employees. D. All employees. 90. The act of collusion refers to:
A. Top management and lower-level employees working together to share information necessary for effective internal controls. B. Two or more people acting in coordination to circumvent internal controls. C. Management working with an auditor to prevent occupational fraud. D. Middle-level managers taking full responsibility for effective internal controls. 91. The asset most susceptible to theft is:
A. Equipment. B. Accounts receivable. C. Building. D. Cash.
4-17 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
92. Which of the following is considered cash for financial reporting purposes?
A. Accounts receivable. B. Investments with maturity dates greater than three months. C. Checks received from customers. D. Accounts payable. 93. Cash may not include:
A. Foreign currency. B. Money orders. C. Accounts receivable. D. Undeposited customer checks. 94. The balance of cash reported in the balance sheet would include which of the following?
A. Balance of savings account. B. Credit card sales. C. Currency. D. All of the other answers would be reported in the balance of cash. 95. The term commonly used to refer to short-term investments that have a maturity date no longer than three months from the date of purchase is:
A. Accounts receivable. B. Cash equivalents. C. Accounts payable. D. Short-term investments.
4-18 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
96. Cash equivalents refer to:
A. Short-term investments that have a maturity date no longer than three months from the date of purchase. B. Amounts receivable from customers that have a very high probability of collection. C. Short-term investments that have increased in value since the date of purchase, and therefore have generated additional cash for the company. D. The total amount of cash a company would have if all assets were sold. 97. Common examples of cash equivalents include all of the following except:
A. Money market funds. B. Treasury bills. C. Certificates of deposit. D. Accounts receivable. 98. Which of the following sales would typically be reported as a cash sale?
A. Sale in exchange for office supplies received. B. Sale in exchange for equipment received. C. Sale on account. D. Sale with credit card. 99. Which of the following would NOT be recorded as a cash sale?
A. Customer who pays with a check. B. Customer who pays with a debit card. C. Customer who pays with a credit card. D. A customers who buys on account.
4-19 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
100.Which of the following would NOT represent good controls over cash receipts?
A. Record all cash receipts as soon as possible. B. The employee that receives cash and checks should also deposit them in the bank. C. Open mail each day and make a list of checks received with the amount and payer's name. D. Verify cash receipts by comparing the bank deposit slip with the accounting records. 101.Which of the following would not be considered good internal control for cash receipts?
A. Allowing customers to pay with a debit card. B. Requiring the employee receiving cash from customers to also deposit the cash into the company's bank account. C. Recording cash receipts as soon as they are recorded. D. Allowing customers to pay with a credit card. 102.When a sale is made to a customer who pays with a check, the company records:
A. A debit to Cash. B. A debit to Accounts Payable. C. A debit to Accounts Receivable. D. No entry until the check clears the bank. 103.When a sale is made to a customer who pays with a debit card, the company records:
A. A debit to Accounts Payable. B. A debit to Accounts Receivable. C. A debit to Cash. D. No entry until the debit card transaction clears the bank.
4-20 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
104.The amount of revenue recorded at the time of a sale will be greatest when the customer pays with a:
A. Check. B. Cash. C. Credit card. D. The revenue will be the same amount for each of the payment methods. 105.McGregor Company allows customers to pay with credit cards. The credit card company charges McGregor 3% of the sale. When a customer uses a credit card to pay McGregor $200 for services provided, McGregor would:
A. Debit Cash for $200. B. Credit Service Revenue for $194. C. Debit Service Fee Expense for $6. D. Credit Service Revenue for $206. 106.A customer purchased a $2,000 item at ApplianceWorld, paying with a credit card. ApplianceWorld is charged a 2% fee by the credit card company. When recording this sale, ApplianceWorld would:
A. Debit Accounts Receivable for $2,000. B. Credit Sales Revenue for $2,000. C. Credit Sales Revenue for $1,960. D. Credit Deferred Revenue for $2,000. 107.Which of the following would NOT represent good controls over cash disbursements?
A. Make all disbursements, other than very small ones, by check, debit card, or credit card. B. Require only one signature for checks, especially larger ones. C. Authorize all expenditures before purchase and verify the accuracy of the purchase itself. D. The employee who authorizes payment should not also be the employee who prepares the check.
4-21 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
108.Which of the following would NOT represent good controls over cash disbursements?
A. Periodically check amounts shown in the debit card and credit card statements against purchase receipts. B. The employee verifying the accuracy of the debit card and credit card statements should not also be the employee responsible for actual purchases. C. Set maximum purchase limits on debit cards and credit cards. D. Employees responsible for making cash disbursements should also be in charge of cash receipts. 109.A bank reconciliation reconciles the bank statement with the company's:
A. Cash from operating activities. B. Net cash flow in the statement of cash flows. C. Cash account in the balance sheet. D. Net income in the income statement. 110.What is the primary purpose of a bank reconciliation?
A. To ensure that for all cash transactions debits equal credits. B. To ensure that customers are paying amounts owed on a timely basis. C. To ensure the bank balance per reconciliation is equal to the company balance per reconciliation. D. To ensure cash receipts are greater than cash disbursements. 111.Which of the following items would cause the balance of cash in the bank statement not to equal the balance of cash in the accounting records?
A. Interest earned on the bank balance that the company has not recorded. B. Checks written by the company that have not cleared the bank. C. Cash receipts by the company that have not been deposited in the bank. D. All of the other answers would cause cash balances to differ.
4-22 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
112.Which of the following items would cause the balance of cash in the bank statement not to equal the balance of cash in the accounting records?
A. The company purchased supplies using a debit card. B. The company has cash receipts that have been deposited in the bank. C. The company deposited a customer check that was found by the bank to have insufficient funds. D. The company wrote checks that have cleared the bank. 113.Which of the following items would cause the balance of cash in the bank statement to be greater than the balance of cash in the accounting records?
A. The company wrote checks that have not cleared the bank. B. The company purchased supplies using a debit card. C. The company has cash receipts that have not been deposited in the bank. D. The company deposited a customer check that was found by the bank to have insufficient funds. 114.Which of the following is NOT a reason why a bank reconciliation is necessary?
A. The company has transactions that the bank has not recorded. B. Petty cash has a low balance. C. The bank has transactions that the company has not recorded. D. Reconciliations provide a control over cash. 115.A good internal control system would require that the employee who handles cash must not be involved in:
A. Reconciling the bank statement. B. The accounts payable function. C. Hiring decisions. D. Daily operations of the company.
4-23 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
116.Which of the following is correct with respect to a bank reconciliation?
A. Subtract interest earned from the bank's balance. B. Add service charge to the company's balance. C. Subtract NSF checks from the company's balance. D. Add deposits outstanding to the company's balance. 117.After preparing the bank reconciliation, an NSF check would result in which of the following when recording the adjustment to the company's cash balance?
A. Debit to Service Fee Expense. B. Credit to Accounts Payable. C. Credit to Service Revenue. D. Debit to Accounts Receivable. 118.The following information pertains to Sooner Company's cash balance and bank reconciliation as of August 31: Company balance before reconciliation
$5,000
Checks outstanding
$2,500
Notes collected by the bank
$2,200
Service fee Deposits outstanding
$50 $2,000
What is the correct cash balance for Sooner Company?
A. $7,150. B. $5,150. C. $7,650. D. $7,250.
4-24 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
119.When preparing a bank reconciliation, a deposit outstanding would be:
A. Added to the company's cash balance. B. Added to the bank's cash balance. C. Subtracted from the company's cash balance. D. Subtracted from the bank's cash balance. 120.Regarding a bank reconciliation, which one of the following is an item recorded by the company but not by the bank?
A. Checks outstanding. B. Interest earned. C. Service charges. D. NSF checks. 121.Which of the following would NOT need to be accounted for in a bank reconciliation?
A. Deposits outstanding recorded by the company but not the bank. B. Interest earned recorded by the bank but not the company. C. NSF checks recorded by the bank but not by the company. D. Checks written by the company and recorded by the bank.
4-25 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
122.On May 31, Money Corporation's Cash account showed a balance of $10,000 before the bank reconciliation was prepared. After examining the May bank statement and items included with it, the company's accountant found the following items: Checks outstanding
$2,250
Deposits outstanding
1,900
NSF check
100
Service fees
40
Error: Money Corp. wrote a check for $30 but recorded it incorrectly for $300. What is the amount of cash that should be reported in the company's balance sheet as of May 31?
A. $9,860. B. $9,650. C. $10,130. D. $10,410. 123.Cash transactions recorded by the bank but not yet recorded by the company include all of the following except
A. Service fees. B. Interest earned. C. Checks outstanding. D. NSF checks.
4-26 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
124.The following information was taken from the bank reconciliation for Mooner Sooner Inc. at the end of the year: Bank balance: $8,000 Checks outstanding: $5,800 Note collected by the bank: $1,500 Service fee: $20 Deposits outstanding: $4,000 NSF check (bad check) returned for $300 What is the correct cash balance that should be reported in Mooner Sooner's balance sheet at the end of the year?
A. $10,200. B. $7,400. C. $6,200. D. $6,160. 125.Cash transactions that have been recorded by the company but not the bank include:
A. NSF checks. B. Interest earned. C. Service fees. D. Deposits outstanding. 126.After preparing a bank reconciliation, the collection of a note by the bank on a company's behalf would be recorded with a:
A. Credit to Notes Receivable. B. Credit to Cash. C. Debit to Notes Receivable. D. Credit to Accounts Receivable.
4-27 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
127.After preparing a bank reconciliation, the service fee charged by the bank would be recorded with a:
A. Credit to Service Fees Expense. B. Debit to Cash. C. Credit to Service Fees Revenue. D. Debit to Service Fees Expense. 128.After preparing a bank reconciliation, a check outstanding for the payment of advertising would be recorded with a:
A. Debit to Advertising Expense. B. Debit to Cash. C. Credit to Advertising Expense. D. No entry is needed. 129.The following data were obtained from the bank statement and from the process of reconciling it: Bank service charges = $20 Deposit outstanding = $150 Interest earned on the bank account = $10 Checks outstanding = $400 Which items should be deducted from and added to the bank balance in completing the reconciliation?
A. Deduct checks outstanding; add service charges and deposit outstanding. B. Deduct interest earned; add deposit outstanding. C. Deduct checks outstanding; add deposit outstanding. D. Deduct deposit outstanding; add checks outstanding.
4-28 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
130.The balance in the Colt Company's Cash account on August 31 was $19,700, before the bank reconciliation was prepared. After examining the August bank statement and items included with it, the company's accountant found: Checks outstanding NSF check
$4,300 140
Note collected by bank for the Colt Company
1,200
Deposits outstanding
1,800
Bank service fees
60
What is the amount of cash that should be reported in the balance sheet as of August 31?
A. $20,700. B. $17,200. C. $18,700. D. $22,200. 131.The balance shown in the August bank statement of Colt Company was $23,200. After examining the August bank statement and items included with it, the company's accountant found: Checks outstanding NSF check
$4,300 140
Note collected by bank for the Colt Company
1,200
Deposits outstanding
1,800
Bank service fees
60
What is the amount of cash that should be reported in the balance sheet as of August 31?
A. $20,700. B. $17,200. C. $18,700. D. $22,200.
4-29 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
132.A company-issued debit card or credit card is often referred to as a:
A. Budget care. B. Allowance card. C. Purchase card. D. Receipt card. 133.A minor amount of cash kept on hand to pay for small purchases is referred to as a:
A. Petty cash fund. B. Cash receipts fund. C. Cash payments fund. D. Cookie jar fund. 134.At the end of the month, employees have made the following expenditures from the petty cash fund and with company-issued credit cards. None of these transactions has been recorded previously. Supplies (petty cash) = $50 Delivery (petty cash) = $75 Advertising (credit card) = $1,100 Equipment (credit card) = $4,200
Accounting for these employee purchases would include a:
A. Credit to Petty Cash for $125. B. Debit to Accounts Payable for $5,300. C. Credit to Cash for $1,225. D. Credit to Accounts Payable for $5,425.
4-30 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
135.At the end of the month, employees have made the following expenditures from the petty cash fund and with company-issued credit cards. None of these transactions has been recorded previously. Supplies (petty cash) = $50 Delivery (petty cash) = $75 Advertising (credit card) = $1,100 Equipment (credit card) = $4,200
Accounting for these employee purchases would include a:
A. Credit to Petty Cash for $5,425. B. Credit to Accounts Payable for $5,300. C. Credit to Equipment for $4,200. D. Debit to Accounts Receivable for $5,300. 136.Which of the following is NOT involved in the replenishment of the petty cash fund?
A. Transactions related to vouchers will be recorded. B. Management will verify that the total of all vouchers equals the amount of cash missing from the petty cash fund. C. Weekly payroll checks will be recorded. D. Management will withdraw cash from the bank and place it in the petty cash fund. 137.At the time a $400 petty cash fund is being replenished, the company's accountant finds vouchers totaling $350 and petty cash of $50. The vouchers include: postage, $100; business lunches, $150; delivery fees, $75; and office supplies, $25. Which of the following is not recorded when recognizing expenditures from the petty cash fund?
A. Debit Postage Expense, $100. B. Debit Supplies, $25. C. Credit Petty Cash, $350. D. Debit Petty Cash, $350.
4-31 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
138.Which of the following is correct regarding a petty cash fund?
A. Petty cash fund represents cash on hand at the business for quick access. B. Petty cash fund is used for minor purposes. C. When cash from this fund is taken out, it should be replaced with a voucher. D. All of the answers are correct regarding a petty cash fund. 139.When accounting for employee purchases, effective internal controls could include which of the following?
A. Credit card receipts are reconciled to credit card statements. B. Employees should be required to provide receipts and justification for those receipts on a timely basis. C. A separate employee reviews receipts and supporting documents to ensure all expenditures are made appropriately. D. All of the other answers represent effective internal controls. 140.A company's cash balance is reported in which two financial statements?
A. Income statement and statement of cash flows. B. Balance sheet and statement of cash flows. C. Income statement and balance sheet. D. Balance sheet and statement of stockholders' equity. 141.Which of the following best describes restricted cash?
A. Cash to be collected from customers from sales on account. B. Cash that is not available to be used for current operations. C. Cash that has been lent by creditors with a high interest rate. D. Dividends that are expected to be paid to common stockholders in the following year.
4-32 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
142.A common example of restricted cash includes cash set aside by the company for the specific purpose of:
A. Repaying debt in the future. B. Purchasing equipment in the future. C. Making investments in the future. D. All of the other answers represent examples of restricted cash. 143.The statement of cash flows reports cash flows from the activities of:
A. Operating, purchasing, and investing. B. Borrowing, paying, and investing. C. Financing, investing, and operating. D. Using, investing, and financing. 144.Operating cash flows would exclude:
A. Payment of employee salaries. B. Receipt of cash from customers. C. Payment of dividends. D. Payment for advertising. 145.Cash flows from investing do not include cash flows from:
A. Lending. B. The sale of equipment. C. Borrowing. D. The purchase of a building.
4-33 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
146.Which of the following is NOT correct regarding the reporting of cash?
A. Cash is reported in both the balance sheet and the statement of cash flows. B. Cash flows from buying and selling investments and long-term productive assets are called operating cash flows. C. Cash flows from transactions with stockholders and creditors are called financing cash flows. D. Net cash flows reported in the statement of cash flows should equal the change in cash reported in the balance sheet. 147.Consider the following cash flow items: Pay amount owed to bank for previous borrowing. Pay utility costs. Purchase equipment to be used in operations. Purchase office supplies. Pay one year of rent in advance. Pay workers' salaries. Pay for research and development costs. Pay taxes to the IRS. Sell common stock to investors. How many of these cash flow items involve investing activities?
A. Zero. B. One. C. Two. D. Three. 148.Investing cash flows would include which of the following?
A. Payment of cash dividends to stockholders. B. Purchase of office supplies with cash. C. Purchase of a building with cash. D. Cash sales to customers.
4-34 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
149.Cash flows from investing activities do not include:
A. Borrowing. B. The purchase of equipment. C. The sale of land. D. The purchase of a building. 150.Consider the following cash flow items: Pay amount owed to bank for previous borrowing. Pay utility costs. Purchase equipment to be used in operations. Purchase office supplies. Purchase one year of rent in advance. Pay workers' salaries. Pay for research and development costs. Pay taxes to the IRS. Sell common stock to investors. How many of these cash flow items involve financing activities?
A. Zero. B. One. C. Two. D. Three. 151.Payment of dividends to stockholders is considered a(n):
A. Operating cash flow. B. Investing cash flow. C. Financing cash flow. D. Not a cash flow.
4-35 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
152.Issuing common stock for cash is considered a(n):
A. Operating cash flow. B. Investing cash flow. C. Financing cash flow. D. Not a cash flow. 153.Cash flows from financing activities include:
A. Lending. B. Salaries paid. C. The sale of land. D. Dividends paid. 154.Providing services to customers on account is considered a(n):
A. Operating cash flow. B. Investing cash flow. C. Financing cash flow. D. Not a cash flow. 155.A company might hold a large amount of cash relative to noncash assets for which of the following reasons?
A. Part of its operations includes low-tax foreign jurisdictions. B. Operating risks are high. C. Dividends are not typically paid to shareholders. D. All of the other answers represent reasons for large cash holdings.
4-36 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
156.The company's ratio of cash to noncash assets increased in the current year from 20% to 30%? Which of the following represents the most likely reason for this increase?
A. The company maintained operations only in the United States. B. The company declared a large dividend in the current year. C. Management forecasts additional operating volatility in future periods. D. The company acquired additional equipment and buildings for expansion of operations. 157.A potential risk of a company with a high ratio of cash to noncash assets is:
A. Creditors are less likely to lend money to the company. B. Management may not foresee any growth opportunities. C. The company likely will not be able to pay dividends in the near future. D. The company likely is paying higher taxes than it should be. 158.A company's lower ratio of cash to noncash assets most likely represents which characteristic of management?
A. Greater willingness to take risk. B. Lower ability to find profitable investment projects. C. Greater caution to ensure funds are available to pay debt as it becomes due. D. Greater willingness to be compensated with company stock than cash.
4-37 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
159.Terastar Corp. reports the following amounts: Total Assets
Total Liabilities
$50,000
$35,000
Cash $10,000
What is the ratio of cash to noncash assets?
A. 75%. B. 20%. C. 25%. D. 67%. 160.Below are trends in operation cash flows for three companies. Year 1
Year 2
Company $100,000 $150,000
Year 3
Total
50,000 $300,000
1 Company
100,000
100,000 100,000
300,000
90,000
100,000 110,000
300,000
2 Company 3
Based on an analysis of operating risk, which company's management is likely motivated to have the largest ratio of cash to noncash Company 1 Company 2 Company 3 assets?
A. Company 1. B. Company 2. C. Company 3. D. All companies are expected to have the same ratio.
Matching Questions
4-38 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
161.Match each provision of the Sarbanes-Oxley Act with its description.
1. Corporate executive
Management must document the effectiveness of
accountability
procedures that could affect financial reporting. ____ Lead audit partners are required to change every five
2. Auditor rotation
years. ____ PCAOB establishes standards related to the preparation
3. Oversight board
of audited financial reports. ____ Company management must personally certify the
4. Nonaudit services
financial statements. ____ Audit firm cannot provide a variety of other services to its
5. Internal control
client, such as consulting. ____
162.Match each term associated with components of internal control with its definition.
Routine activities that are meant to continually observe 1. Risk assessment
internal control activities. ____
2. Control activities
Procedures for maintaining separation of duties. ____
3. Information and communication
Formal policies to evaluate internal and external threats to achieving company objectives. ____ Overall attitude of the company with respect to internal
4. Control environment
controls. ____ Transfer of data from lower managers to top executives
5. Monitoring
for accurate financial reporting. ____
4-39 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
163.Match each term associated with cash and cash controls with its definition.
Short-term investments that have a maturity date no 1. Credit card
longer than three months from the date of purchase. ____ Matches the balance of cash in the bank account with
2. Bank reconciliation
the balance of cash in the company's own records. ____
3. Cash equivalent
Minor amount of cash kept on hand. ____ Withdraws funds directly from the user's account at the
4. Debit card
time of use. ____ Allows users to purchase items without having to pay
5. Petty cash
cash immediately. ____
164.Match each term related to bank reconciliations with its description.
Charges imposed by the bank to the company for 1. Checks outstanding
providing routine services.
____
Cash receipts received by the company but not yet 2. NSF checks
recorded by the bank.
____
Money earned on the average daily balance of the 3. Company error 4. Deposits outstanding
checking account.
____
Checks written to the company that are returned by the
5. Bank service fees
bank as not having adequate funds.
____
The company recorded a deposit twice.
____
Checks written by the company but not yet recorded by 6. Interest revenue
the bank.
____
165.Match each type of cash flow with its description.
1. Cash outflow from financing activities
Receive payment from customers. ____
2. Cash outflow from investing activities
Pay dividends to stockholders. ____
3. Cash inflow from investing activities
Pay salaries to employees. ____
4. Cash inflow from financing activities
Sell office building. ____
5. Cash outflow from operating activities
Issue common stock. ____
6. Cash inflow from operating activities
Purchase equipment. ____
4-40 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Essay Questions
166.A company had the following sales transactions: 1. Total debit card sales = $200,000. 2. Total credit card sales = $400,000. 3. Total cash sales = $800,000. 4. Total check sales = $100,000. There is a charge of 2% on all credit card transactions. Calculate total sales revenue recorded for the year.
167.A company had the following transactions: 1. Paid $150 for office supplies using a debit card. 2. Purchased office equipment costing $700 using a credit card. 3. Paid utilities bill of $400 by issuing a check. Record each transaction.
4-41 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
168.Indicate whether the firm should add or subtract each item below from its balance of cash or the bank's balance of cash in preparing a bank reconciliation. Reconciliation Items
Bank
Company
Balance
Balance
1. Checks outstanding 2. NSF checks 3. Deposit recorded twice by company 4. Interest earned 5. Deposits outstanding 6. Bank service fees
169.A company's general ledger shows a cash balance of $4,570. Comparing the company's cash records with the monthly bank statement reveals several additional cash transactions such as checks outstanding of $2,840, bank service fees of $110, and interest earned of $15. Calculate the correct balance of cash.
4-42 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
170.A company's general ledger shows a cash balance of $2,380. Comparing the company's cash records with the monthly bank statement reveals several additional cash transactions such as deposits outstanding of $1,760, note collected by the bank on the company's behalf of $1,000, and interest earned of $20. The company also finds an error by the bank of an additional deposit of $100. Calculate the correct balance of cash.
171.A company's bank statement shows a cash balance of $4,230. Comparing the company's cash records with the monthly bank statement reveals several additional cash transactions such as checks outstanding of $3,880, deposits outstanding of $1,230, NSF check of $300, and service fee of $50. Calculate the correct balance of cash.
4-43 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
172.A company's bank statement shows a cash balance of $4,170. Comparing the company's cash records with the monthly bank statement reveals several additional cash transactions such as checks outstanding of $2,110, NSF check of $200, interest earned of $30, service fee of $40, and a check for $150 recorded twice by the company. Calculate the correct balance of cash.
173.A company's Cash account shows a balance of $3,450 at the end of the month. Comparing the company's Cash account with the monthly bank statement reveals several additional cash transactions such as bank service fees ($50), an NSF check from a customer ($300), a customer's note receivable collected by the bank ($1,000), and interest earned ($100). Prepare the necessary entries to adjust the balance of cash.
4-44 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
174.A company's Cash account shows a balance of $5,680 at the end of the month. Comparing the company's Cash account with the monthly bank statement reveals several additional cash transactions such as deposits outstanding ($1,250), checks outstanding ($2,380), bank service fees ($40), an NSF check from a customer ($150), a customer's note receivable collected by the bank ($500), and interest earned ($60). Prepare the necessary entries to adjust the balance of cash.
175.Peterson Company's general ledger shows a cash balance of $7,850 on May 31. May cash receipts of $1,250, included in the general ledger balance, are placed in the night depository at the bank on May 31 and processed by the bank on June 1. The bank statement dated May 31 shows an NSF check for $200 and a service fee of $50. The bank processes all checks written by the company by May 31 and lists them on the bank statement, except for one check totaling $1,640. The bank statement shows a balance of $7,990 on May 31. Prepare a bank reconciliation to calculate the correct ending balance of cash on May 31.
4-45 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
176.Madison Company's cash ledger reports the following for the month ending March 31.
Deposits:
Date
Amount
No.
Date
Amount
3/4
$1,200
541
3/2
$5,100
3/11
1,200
542
3/8
800
3/18
3,700
543
3/12
2,200
3/25
3,400
544
3/19
1,100
2,100
545
3/27
200
$11,600
546
3/28
600
547
3/30
1,300
Checks:
3/26Cash receipts
3/31
Balance on March 1
$5,400
Receipts
11,600
Disbursements
$11,300
(11,300)
Balance on March 31
$5,700
Information from March's bank statement and company records reveals the following additional information: a. The ending cash balance recorded in the bank statement is $6,790. b. Cash receipts of $2,100 from 3/26 - 3/31 are outstanding. c. Checks 545 and 547 are outstanding. d. The deposit on 3/11 included a customer's check for $400 that did not clear the bank (NSF check). e. Check 543 was written for $2,800 for office supplies in March. The bank properly recorded the check for this amount. f. An automatic withdrawal for March rent was made on March 4 for $1,500. g. Madison's checking account earns interest based on the average daily balance. The amount of interest earned for March is $50. h. Last year, one of Madison's top executives borrowed $4,000 from Madison. On March 24, the executive paid $4,200 ($4,000 borrowed amount plus $200 interest) directly to the bank in payment for the borrowing. i. The bank charged the following service fees: $30 for NSF check, $10 for automatic withdrawal for rent payment, and $20 for collection of the loan amount from the executive. Prepare a bank reconciliation for March 31, and record the necessary cash adjustments. 4-46 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
177.A company establishes a petty cash fund for $400. By the end of the month, employees had made the following expenditures from the fund: supplies, $150; fuel for deliveries, $120; postage, $75; miscellaneous, $35. Record the entry to recognize expenditures from the petty cash fund.
4-47 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
178.A company establishes a $300 petty cash fund on August 3 to pay for minor cash expenditures. The fund is replenished at the end of each month. In addition, the company has issued credit cards for more substantial employee purchases. These credit cards are issued to authorized managers. At the end of August, the following employee purchases have been made: Petty Cash Fund Delivery fees
Credit Card
$100 Equipment
$1,400
70 Advertising
750
Postage
40 Supplies
360
Flowers for the
50
Plumbing maintenance
office $260
$2,510
Record the establishment of the petty cash fund on August 3, all employee expenditures, and replenishment of the fund on August 31.
4-48 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
179.A company provides services on account during the current year totaling $400,000. By the end of the year, $350,000 of this amount had been received. In addition, $75,000 was received on account from customers for services provided in the prior year. Determine the amount of operating cash flows the company will report as received from customers in the current year.
180.During the current year, a company provides services on account for $100,000. By the end of the year, $60,000 of this amount had been received. In addition, cash payments for the year were employees' salaries, $50,000; office supplies, $10,000; and utilities $20,000. Determine the amount of operating cash flows the company will report in the current year.
4-49 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
181.During the current year, a company purchases equipment for $250,000, paying $50,000 immediately and promising to pay the remainder within 30 days after the end of the year. Determine the amount of investing cash flows the company will report in the current year.
182.At the beginning of the current year, a company issued stock for $100,000 and borrowed $50,000 from the bank. By the end of the year, the company had provided services of $80,000 for cash, paid employee salaries of $30,000, and paid utilities of $10,000. Determine the amount of financing cash flows the company will report in the current year.
4-50 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
183.During the year, a company issues common stock for $50,000 and repays previously borrowed amounts of $75,000. In addition, the company pays dividends of $5,000 to stockholders. Determine the amount of financing cash flows the company will report in the current year.
184.Consider the following transactions: 1. Pay employees' salaries. 2. Repay borrowing to the bank. 3. Purchase equipment with note payable. 4. Provide services to customers on account. 5. Pay dividends to stockholders. 6. Collect cash from customers for services provided. 7. Purchase supplies on account. 8. Pay for supplies purchased in transaction 7 above. For each transaction, indicate the type of cash flow involved based on the classifications in the statement of cash flows. If a transaction does not involve cash, write ‘No Cash.'
4-51 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
185.A company had the following transactions during the year: 1. Paid rent for the next two years, $8,000. 2. Purchased office supplies on account, $2,400. 3. Purchased equipment, paying $12,000 cash and issuing a note payable for $4,000. 4. Borrowed from the bank, $6,000. 5. Paid employee salaries, $7,200. 6. Paid $2,000 on account related to transaction 2 above. 7. Paid dividends to stockholders, $2,800. 8. Sold land for $10,000 that was purchased in a prior year for $7,500. 9. Collected cash from customers for services provided, $25,700. Calculate cash flows from operating activities, investing activities, and financing activities.
4-52 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
186.Below is a summary of all the transactions of Sampson Consulting for the month of April 2018. Cash Transactions Cash collections from: Customers
$52,600
Sale of unused office furniture
11,300
Borrowing from the bank
60,000
Cash payments for: Employee salaries
(22,500)
Office building
(74,600)
Utilities expense
(2,600)
Office supplies
(1,800)
Dividends to stockholders
(4,000)
Advertising expense
(9,800)
Noncash Transactions Services to customers on account
11,800
Purchase supplies on account
5,800
Issue note payable for equipment
23,700
Prepare a statement of cash flows for the month of April, properly classifying each of the transactions into operating, investing, and financing activities. The cash balance at the beginning of April is $14,800.
4-53 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
187.At the end of March, Weber Productions' accounting records reveal a balance for cash equal to $21,861. However, the balance of cash in the bank at the end of March is only $4,576. Weber is concerned and asks the company's accountant to reconcile the two balances. Examination of the bank statement and company records at the end of March reveals the following information: NSF checks
$6,783 Service fees
Deposits
Checks
outstanding
7,348 outstanding
$195
541
In addition, Weber owes one of its suppliers $200. During March, the company's accountant mistakenly wrote the check for $1,200. The check was recorded in the company's records for $200 but processed by the bank for $1,200. Weber has contacted the supplier who has agreed to send a $1,000 refund in April directly to the bank. Finally, a petty cash fund of $2,500 was established during March. This amount was withdrawn from the checking account but not recorded. Required: 1. Calculate the correct ending balance of cash at the end of March. 2. Discuss any problems you see with the company's cash procedures.
4-54 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
188.On October 31, 2018, the bank statement for the checking account of Hollybuster Video shows a balance of $11,570, while the company's records show a balance of $10,858. Information that might be useful in preparing a bank reconciliation is as follows: a. Outstanding checks are $1,120. b. The October 31 cash receipts of $575 are not deposited in the bank until November 2. c. One check written in payment of utilities for $115 is correctly recorded by the bank but is recorded by Hollybuster as a disbursement of $155. d. In accordance with prior authorization, the bank withdraws $500 directly from the checking account as payment on a note payable. The interest portion of that payment is $50 and the principal portion is $450. Hollybuster has not recorded the direct withdrawal. e. Bank service fees of $50 are listed on the bank statement. f. A deposit of $782 is recorded by the bank on October 13, but it did not belong to Hollybuster. The deposit should have been made to the checking account of Videos Unlimited, a separate company. g. The bank statement includes a fee of $105 for an NSF check. The check is returned with the bank statement and the company will seek payment from the customer. Required: 1. Prepare a bank reconciliation for the Hollybuster checking account on October 31, 2018. 2. Record the necessary cash adjustments.
4-55 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
189.The cash records and bank statement for the month of July for Jim Incorporated are shown below. Jim Incorporated Cash Account Records July 1, 2018 to July 31, 2018 Cash
Cash
Balance
Balance
July 1,
July 31,
2018
Deposits
Checks
2018
$7,250
$9,370
$8,950
$7,670
Deposits
Checks
Date Desc. Amount Date No. Desc. 7/9
Sales
$2,610 7/7
Amount
531 Rent
$1,400
7/21 Sales
3,340 7/12 532 Salaries
1,950
7/31 Sales
3,420 7/19 533 Equipment
3,800
7/22 534 Utilities
600
7/30 535 Advertising $9,370
1,200 $8,950
Reliable Union
P.O. Box 123878
Member FDIC
You Can Bank On Us
Watonga, OK 73772 (580) 377-OKIE
Account
Jim
Account
Holder:
Incorporated
Number:
519 Main Street
2252790471
July 31, 2018
Watonga, OK
Statement
73772
Date:
Beginning
Deposits and
Withdraws and
Ending
Balance
Credits
Debits
Balance
July 1, 2018
No.
Total
No.
Total
July 31, 2018
4-56 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
$7,750
3
Deposits and
$6,010
7
$8,625
$5,135
Withdraws and Debits
Daily Balance
Date Amount Desc.
Date No. Amount Desc.
Date Amount
7/10
$2,610 DEP
7/2
530
$500 CHK
7/2
$7,250
7/22
3,340 DEP
7/10 531
1,400 CHK
7/10
8,460
7/31
60 INT
7/14 532
1,950 CHK
7/14
6,510
300 NSF
7/18
6,210
4,000 CHK
7/22
5,550
7/26
400 EFT
7/26
5,150
7/30
75 SF
7/30
5,075
7/31
$5,135
Credits
7/18 7/22 533
$6,010
Desc. DEP Customer deposit
$8,625
INT Interest
SF Service fees
earned
NOTE Note collected CHK Customer check
NSF Non-sufficient funds
EFT Electronic funds transfer
Additional information: a. The difference in the beginning balances in the company's records and the bank statement relates to check #530, which is outstanding as of June 30, 2018. b. Check #533 is correctly processed by the bank. c. The EFT on July 26 relates to the purchase of office supplies.
4-57 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Required: 1. Prepare a bank reconciliation for Jim Incorporated's checking account on July 31, 2018. 2. Record the necessary cash adjustments.
4-58 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
190.Below is a summary of all transactions of Mason Furniture for the month of August 2018. Cash Transactions Cash collections from: Customers
$82,300
Sale of unused land
11,500
Issuance of common stock
25,000
Interest earned on savings account
400
Cash payments for: Employee salaries
(42,400)
Delivery truck
(30,000)
Advertising expense
(5,400)
Office supplies
(2,200)
Repayment of borrowing
(8,500)
Fabric
(6,300) Noncash Transactions
Sales to customers on account
12,500
Purchase of fabric on account
6,200
Exchange common stock for building
80,000
Required: Prepare a statement of cash flows for the month of August, properly classifying each of the transactions into operating, investing, and financing activities. The cash balance at the beginning of August is $6,900.
4-59 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
191.For the month of June, Thomson Services has the following transactions: June 2
Obtain cash by borrowing $22,000 from the bank.
June 3
Pay rent for the current month, $1,800.
June 7
Provide services to customers, $6,500 for cash and $2,900 on account.
June 11
Purchase equipment necessary for operations, $18,500 cash.
June 17
Pay employees' salaries for the first half of the month, $5,200.
June 22
Pay dividends to stockholders, $2,300.
June 25
Receive cash in advance from customers, $2,800.
June 28
Pay utilities for the month, $1,900.
June 30
Record salaries earned by employees for the second half of the month, $5,200. Payment will be made on July 2.
Required: 1. Record each transaction. 2. Identify the transactions involving cash. 3. Assuming the balance of cash at the beginning of June is $12,500, post each cash transaction to the Cash T-account and compute the ending cash balance. 4. Prepare a statement of cash flows for the month of June, properly classifying each of the cash transactions into operating, investing, and financing activities. 5. Verify that the net cash flows reported in the statement of cash flows equal the change in the cash balance for the month.
4-60 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
192.Discuss the events leading up to the passage of the Sarbanes-Oxley Act and its major provisions.
193.What is internal control? Briefly describe the five components of internal control outlined by the Committee of Sponsoring Organizations (COSO).
194.A company uses the following process for its cash receipts. At the end of each day, the secretary places all cash and checks received from customers in a desk drawer. Each Monday, the secretary totals all amounts received, records this in the accounting records, and deposits the money in the bank account. Then, once every three months, the office manager requests information from the bank necessary to prepare a bank reconciliation. Discuss the company's internal control procedures related to cash receipts.
4-61 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
195.Describe the procedures used to reconcile a company's cash balance.
196.What is the purpose of the statement of cash flows? List the three major categories of cash flows and give an example of a cash transaction for each category.
197.What is the link between the balance sheet and the statement of cash flows? Describe the operating, investing, and financing sections of the statement of cash flows.
4-62 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 04 Cash and Internal Controls Answer Key
True / False Questions
1.
Managers of the company act as stewards or caretakers of the company's assets. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Topic: Accounting Scandals and Response by Congress
2.
Common types of financial statement fraud include creating fictitious revenues from a fake customer, improperly valuing assets, and mismatching revenues and expenses. TRUE AACSB: Ethics AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Topic: Accounting Scandals and Response by Congress
3.
In response to corporate accounting scandals and to public outrage over seemingly widespread unethical behavior of top executives, Congress passed the Sarbanes-Oxley
Act. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy
4-63 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Topic: Accounting Scandals and Response by Congress
4.
The Sarbanes-Oxley Act is also known as Generally Accepted Accounting Principles. FALSE The Sarbanes-Oxley Act is also known as the Public Company Accounting Reform and Investor Protection Act of 2002 and commonly referred to as SOX.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Topic: Accounting Scandals and Response by Congress
5.
The Public Company Accounting Oversight Board (PCAOB) has the authority to establish standards dealing with auditing, quality control, ethics, independence, and other activities relating to the preparation of audited financial reports. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Topic: Accounting Scandals and Response by Congress
6.
Auditors of public companies can perform the full range of audit and nonaudit consulting services for their audit clients. FALSE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. 4-64 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Accounting Scandals and Response by Congress
7.
Section 404 of the Sarbanes-Oxley Act requires that a company's management document and assess the effectiveness of all internal control processes that could affect financial reporting. TRUE Auditors are prohibited from providing most nonaudit services, such as consulting, to their clients by the Sarbanes-Oxley Act.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Topic: Accounting Scandals and Response by Congress
8.
Internal control is a company's plan to (1) improve the accuracy and reliability of accounting information and (2) safeguard the company's assets. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Topic: Framework for Internal Control
9.
One benefit of internal control is greater reliance by investors on reported financial statements. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. 4-65 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Framework for Internal Control
10.
A framework for designing an internal control system is provided by the Financial Accounting Standards Board (FASB). FALSE A framework for designing an internal control system is provided by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Topic: Framework for Internal Control
11.
The control environment refers to the overall top-to-bottom attitude of the company with respect to internal controls. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Topic: Framework for Internal Control
12.
Risk assessment procedures include periodic reviews of internal controls, assessing management's oversight of the internal control, developing solutions to known cases of internal control failures, and determining whether each division or operation within a company is meeting its objectives. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand
4-66 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 2 Medium Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Topic: Framework for Internal Control
13.
Separation of duties refers to auditors not being allowed to perform both audit and nonaudit services for the same client. FALSE Separation of duties is where individuals who have physical responsibility for assets should not also have access to accounting records.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Topic: Framework for Internal Control
14.
An example of separation of duties would be not allowing an employee who receives cash to also be responsible for depositing that cash in the bank account. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Topic: Framework for Internal Control
15.
The internal control component of information and communication relates to the effectiveness of accurately measuring and communicating business transactions. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy 4-67 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Topic: Framework for Internal Control
16.
Management needs to monitor the internal control system, just like any other system. Any control deficiencies spotted by employees should be reported immediately to management. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Topic: Framework for Internal Control
17.
Separation of duties occurs when two or more people act in coordination to circumvent internal controls. FALSE This is the act of collusion.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Topic: Framework for Internal Control
18.
Effective internal controls ensure a company's success and survival. FALSE Effective internal controls improve the company's likelihood of success and survival, but do not provide a guarantee.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation 4-68 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Topic: Framework for Internal Control
19.
The amount of cash reported in a company's balance sheet includes currency, coins, and balances in savings and checking accounts, as well as items acceptable for deposit in these accounts, such as checks received from customers. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-03 Define cash and cash equivalents. Topic: Cash and Cash Equivalents
20.
The amount of cash reported in a company's balance sheet includes items acceptable for deposit in bank accounts, such as checks received from customers. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-03 Define cash and cash equivalents. Topic: Cash and Cash Equivalents
21.
The amount of cash reported in a company's balance sheet includes the balance of accounts receivable if cash collection is highly likely in the near future. FALSE Accounts receivable is a separately reported asset from cash.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand 4-69 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 2 Medium Learning Objective: 04-03 Define cash and cash equivalents. Topic: Cash and Cash Equivalents
22.
The amount of cash reported in a company's balance sheet does not include cash equivalents, defined as short-term investments that have a maturity date no longer than three months from the date of purchase. FALSE Cash equivalents are included in the cash balance.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-03 Define cash and cash equivalents. Topic: Cash and Cash Equivalents
23.
Common examples of cash equivalents are money market funds, Treasury bills, and certificates of deposit. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-03 Define cash and cash equivalents. Topic: Cash and Cash Equivalents
24.
Recording all cash receipts as soon as possible is considered a good internal control. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. 4-70 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Cash Controls
25.
Opening mail and making a list of checks received once per week is considered a good internal control over cash receipts. FALSE These tasks should be performed each day.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Topic: Cash Controls
26.
Whether a customer uses cash, a check, or a debit card to make a purchase, the company records the transaction as a cash sale. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Topic: Cash Controls
27.
When customers pay for services with a check, the company should debit Accounts Receivable and credit Service Revenue. FALSE The debit should be to Cash.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium 4-71 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Topic: Cash Controls
28.
When customers pay for services with a debit card, the company should debit Cash and credit Service Revenue. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Topic: Cash Controls
29.
When a company pays for services received using a check, it should credit Accounts Payable until the check is paid by the bank. FALSE The credit is to the Cash account.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Topic: Cash Controls
30.
When a company pays for services received using a credit card, it should credit Accounts Payable. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Topic: Cash Controls 4-72 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
31.
Allowing the employee who authorizes purchases to also prepare the check is an example of good internal control. FALSE A single employee should not perform both of these tasks.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Topic: Cash Controls
32.
Companies should set maximum purchase limits on debit cards and credit cards as part of internal controls. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Topic: Cash Controls
33.
A bank reconciliation matches the balance of cash in the bank account with the balance of cash in the company's own records. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
4-73 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
34.
Differences in the company's cash balance and the bank's cash balance occur because of either timing differences or errors. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
35.
An example of a bank error that causes the company's balance and bank's balance of cash to differ is the purchase of supplies with a check. FALSE This is an example of a timing difference.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
36.
Cash receipts of the company that have not been added to the bank's record of the company's balance are referred to as checks outstanding. FALSE These are referred to as deposits outstanding.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation 4-74 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
37.
Checks outstanding are checks the company has written that have not been subtracted from the bank's record of the company's balance. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
38.
A deposit outstanding will cause the bank's cash balance to be higher than the company's cash balance. FALSE The company's balance will be higher.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
39.
A check outstanding will cause the bank's cash balance to be higher than the company's cash balance. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
4-75 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
40.
An NSF check is an example of a cash transaction that is initially recorded by the bank and later by the company after notification. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
41.
Interest earned on a bank account is an example of a cash transaction recorded by the company and then later by the bank after notification. FALSE Interest earned is initially recorded by the bank.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
42.
The final step in reconciling the bank's cash balance and the company's cash balance is to update the company's cash balance for the items used to reconcile the bank's cash balance. FALSE The cash balance needs to be updated for items used to reconcile the company's cash balance.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand
4-76 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 2 Medium Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
43.
The petty cash fund represents cash on hand and is used to pay for minor purchases. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-06 Account for employee purchases. Topic: Employee Purchases
44.
The petty cash fund should have just enough cash to make minor expenditures over a reasonable period (such as a week or a month). TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-06 Account for employee purchases. Topic: Employee Purchases
45.
A company's cash is reported in two financial statements-income statement and statement of cash flows. FALSE Cash is reported in the balance sheet and in the statement of cash flows.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-07 Identify the major inflows and outflows of cash. Topic: Statement of Cash Flows
4-77 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
46.
Cash is typically reported as a current asset in the balance sheet. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-07 Identify the major inflows and outflows of cash. Topic: Statement of Cash Flows
47.
The statement of cash flows reports a company's cash inflows and cash outflows related to (1) operating activities, (2) investing activities, and (3) financing activities. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-07 Identify the major inflows and outflows of cash. Topic: Statement of Cash Flows
48.
Investing activities include cash transactions involving revenue and expense events during the period. FALSE These are operating activities.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-07 Identify the major inflows and outflows of cash. Topic: Statement of Cash Flows
4-78 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
49.
Investing activities include cash investments in long-term assets and investment securities. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-07 Identify the major inflows and outflows of cash. Topic: Statement of Cash Flows
50.
Investing activities include transactions designed to raise cash or finance the business. FALSE These are financing activities.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-07 Identify the major inflows and outflows of cash. Topic: Statement of Cash Flows
51.
Only transactions involving cash affect a company's cash flows. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-07 Identify the major inflows and outflows of cash. Topic: Statement of Cash Flows
4-79 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
52.
A company's ratio of cash to noncash assets is calculated as the total cash balance divided by all noncash assets. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-08 Assess cash holdings by comparing cash to noncash assets. Topic: Regal Entertainment vs. Cinemark
53.
Companies often have a high ratio of cash to noncash assets when they consistently pay dividends. FALSE Dividends represent the return of cash to stockholders and therefore reduce the balance of cash.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 04-08 Assess cash holdings by comparing cash to noncash assets. Topic: Regal Entertainment vs. Cinemark
54.
Typically, the more volatile the company's trend in operating cash flows, the higher the operating risk of the company. TRUE AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 04-08 Assess cash holdings by comparing cash to noncash assets. Topic: Regal Entertainment vs. Cinemark
4-80 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
55.
An advantage of a high ratio of cash to noncash assets is that the company has funds to pay obligations as they become due. TRUE AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 04-08 Assess cash holdings by comparing cash to noncash assets. Topic: Regal Entertainment vs. Cinemark
Multiple Choice Questions
56.
Occupational fraud:
A. Is the use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization's resources. B. Occurs in only a few organizations and generally involves minor amounts. C. Will be prevented when companies employ an auditor. D. Is committed only by lower-level employees. AACSB: Ethics AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Topic: Accounting Scandals and Response by Congress
4-81 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
57.
The phrase "cooking the books" is commonly used to refer to:
A. The company's accounting records being thoroughly audited at the end of the year. B. The company's financial statements being presented in a deceptive form. C. The company's ability to provide timely financial information under operating pressure. D. The inclusion of a variety of information in the financial statements. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Topic: Accounting Scandals and Response by Congress
58.
The three elements of the fraud triangle are:
A. Motive. B. Rationalization. C. Opportunity. D. All of the other answers are elements of the fraud triangle. AACSB: Ethics AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Topic: Accounting Scandals and Response by Congress
59.
The three elements present in every fraud are commonly referred to as the ___________.
A. Triple threat B. Three-way manipulation C. Fraud triangle D. Three-alarm fire AACSB: Ethics AICPA: BB Critical Thinking 4-82 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Topic: Accounting Scandals and Response by Congress
60.
Which element of the fraud triangle do companies have the greatest ability to eliminate?
A. Motive. B. Rationalization. C. Opportunity. D. Intelligence. AACSB: Ethics AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Topic: Accounting Scandals and Response by Congress
61.
Fraudulent reporting by management could include:
A. Fictitious revenues from a fake customer. B. Improper asset valuation. C. Mismatching revenues and expenses. D. All of the other answers could include fraudulent reporting. AACSB: Ethics AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Topic: Accounting Scandals and Response by Congress
4-83 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
62.
A company's plans to minimize theft and enhance the accuracy of accounting information are referred to as:
A. Corporate controls. B. Security controls. C. Internal controls. D. General controls. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Topic: Accounting Scandals and Response by Congress
63.
What key piece of legislation was passed in response to corporate accounting scandals by Enron, WorldCom, and others?
A. Sarbanes-Oxley Act. B. 1933 Securities Act. C. 1934 Securities Exchange Act. D. Regulation Fair Disclosure. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Topic: Accounting Scandals and Response by Congress
4-84 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
64.
The Sarbanes-Oxley Act requires that companies must:
A. Conduct customer surveys each year to ensure satisfaction with products and services. B. Document internal controls and assess their adequacy each year. C. Pay taxes owed to the Internal Revenue Service by the tax filing date. D. Devise a budget each year to ensure cash outflows are not greater than cash inflows. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Topic: Accounting Scandals and Response by Congress
65.
Under the Sarbanes-Oxley Act, management is responsible for:
A. Analysts' having positive comments about the company's operations. B. The reliability of financial statements. C. Increasing the company's stock price. D. All of the other answers represent management responsibilities under the SarbanesOxley Act. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Topic: Accounting Scandals and Response by Congress
66.
Which of the following does not represent a major provision of the Sarbanes-Oxley Act?
A. Nonaudit services. B. Quarterly financial statements. C. Auditor rotation. D. Corporate executive accountability. AACSB: Reflective Thinking 4-85 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Topic: Accounting Scandals and Response by Congress
67.
Under the provisions of the Sarbanes-Oxley Act, corporate executives:
A. Have limited responsibility for financial statements. B. Must personally prepare the company's financial statements. C. Must personally certify the company's financial statements. D. Are not allowed to view the company's financial statements. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Topic: Accounting Scandals and Response by Congress
68.
Under the provisions of the Sarbanes-Oxley Act, auditors must do which of the following?
A. Provide nonaudit services for their clients. B. Audit public companies whose chief executives worked for the audit firm in the preceding year. C. Be hired by company management. D. Maintain working papers for at least seven years following an audit. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Topic: Accounting Scandals and Response by Congress
4-86 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
69.
The Sarbanes-Oxley Act (SOX) mandates which of the following?
A. Increased regulations related to auditor-client relations. B. Increased regulations related to internal control. C. Increased regulations related to corporate executive accountability. D. All of the other answers represent mandates of the Sarbanes-Oxley Act. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Topic: Accounting Scandals and Response by Congress
70.
Which of the following best describes the goal of internal controls?
A. Ensuring the business is profitable. B. Enhancing the health of employees. C. Improving the accuracy and the reliability of financial information. D. Ensuring the compliance with tax regulations. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Topic: Framework for Internal Control
71.
Which of the following is NOT a design feature of effective internal controls?
A. Allow greater reliance by investors on reported financial statements. B. Prevent fraudulent or errant financial reporting. C. Ensure the company's price advantage over competitors. D. Prevent misuse of company funds by employees. AICPA: FN Measurement Accessibility: Keyboard Navigation 4-87 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Topic: Framework for Internal Control
72.
A framework for designing an internal control system is provided by the:
A. Committee of Sponsoring Organizations. B. Financial Accounting Standards Board. C. Securities and Exchange Commission. D. International Accounting Standards Board. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Topic: Framework for Internal Control
73.
The component of internal control that includes the policies and procedures that help ensure that management's directives are being carried out is:
A. Monitoring. B. Information and communication. C. Risk assessment. D. Control activities. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Topic: Framework for Internal Control
4-88 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
74.
The component of internal control that identifies internal and external factors that could prevent a company's objectives from being achieved is:
A. Monitoring. B. Information and communication. C. Risk assessment. D. Control activities. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Topic: Framework for Internal Control
75.
The component of internal control that includes the formal procedures for reporting control deficiencies is:
A. Monitoring. B. Information and communication. C. Risk assessment. D. Control activities. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Topic: Framework for Internal Control
4-89 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
76.
The components of internal control do not directly include:
A. Risk assessment. B. Inflation adjustment. C. Monitoring. D. Control activities. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Topic: Framework for Internal Control
77.
Separation of duties refers to:
A. Making each manager personally responsible for his/her department. B. Keeping functions across different departments separate. C. Preventing top management and lower-level employees from interacting. D. Individuals who have physical responsibility for assets should not also have access to accounting records. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Topic: Framework for Internal Control
4-90 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
78.
What is the concept behind separation of duties in establishing internal controls?
A. The company's financial accountant should not share information with the company's tax accountant. B. Duties of middle-level managers should be clearly separated from those of top executives. C. Employee fraud is less likely to occur when access to assets and access to accounting records are separated. D. The external auditors of the company should have no contact with managers while the audit is taking place. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Topic: Framework for Internal Control
79.
Which of the following is not an example of preventive controls?
A. Separation of duties. B. Physical controls. C. Proper authorization. D. Reconciliations. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Topic: Framework for Internal Control
4-91 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
80.
Which of the following is an example of detective controls?
A. Separation of duties. B. Physical controls. C. Proper authorization. D. Reconciliations. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Topic: Framework for Internal Control
81.
Keeping supplies in a locked room with access allowed only to authorized personnel is an example of which preventive control?
A. Separation of duties. B. Physical controls. C. Proper authorization. D. Employee management. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Topic: Framework for Internal Control
4-92 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
82.
Giving only management the right to make purchases over a certain amount is an example of which preventive control?
A. Separation of duties. B. Physical controls. C. Proper authorization. D. Employee management. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Topic: Framework for Internal Control
83.
Providing employees with appropriate guidance to ensure they have the knowledge necessary to carry out their job duties is an example of which preventive control?
A. Separation of duties. B. Physical controls. C. Proper authorization. D. Employee management. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Topic: Framework for Internal Control
4-93 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
84.
Allowing only certain individuals to have passwords to conduct online purchases is an example of which preventive control?
A. Separation of duties. B. Physical controls. C. E-commerce controls. D. Employee management. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Topic: Framework for Internal Control
85.
Having management periodically determine whether the amount of physical assets of the company match the accounting records is an example of which detective control?
A. Separation of duties. B. Reconciliations. C. Performance reviews. D. Employee management. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Topic: Framework for Internal Control
4-94 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
86.
Checking actual outcome of individuals or processes against their expected outcome is an example of which detective control?
A. Separation of duties. B. Reconciliations. C. Performance reviews. D. Employee management. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Topic: Framework for Internal Control
87.
Having an independent party assess each year the adequacy of the company's internal control procedures is an example of which detective control?
A. Separation of duties. B. Reconciliations. C. Performance reviews. D. Audits. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Topic: Framework for Internal Control
4-95 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
88.
Which employees are the ones who must take final responsibility for the establishment and success of internal controls?
A. Top executives. B. Mid-level managers. C. Lower-level employees. D. All employees. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Topic: Framework for Internal Control
89.
Which employees have an impact on the operation and effectiveness of internal controls?
A. Upper management. B. Mid-level managers. C. Lower-level employees. D. All employees. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Topic: Framework for Internal Control
4-96 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
90.
The act of collusion refers to:
A. Top management and lower-level employees working together to share information necessary for effective internal controls. B. Two or more people acting in coordination to circumvent internal controls. C. Management working with an auditor to prevent occupational fraud. D. Middle-level managers taking full responsibility for effective internal controls. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Topic: Framework for Internal Control
91.
The asset most susceptible to theft is:
A. Equipment. B. Accounts receivable. C. Building. D. Cash. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-03 Define cash and cash equivalents. Topic: Cash and Cash Equivalents
92.
Which of the following is considered cash for financial reporting purposes?
A. Accounts receivable. B. Investments with maturity dates greater than three months. C. Checks received from customers. D. Accounts payable. AACSB: Reflective Thinking 4-97 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-03 Define cash and cash equivalents. Topic: Cash and Cash Equivalents
93.
Cash may not include:
A. Foreign currency. B. Money orders. C. Accounts receivable. D. Undeposited customer checks. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-03 Define cash and cash equivalents. Topic: Cash and Cash Equivalents
94.
The balance of cash reported in the balance sheet would include which of the following?
A. Balance of savings account. B. Credit card sales. C. Currency. D. All of the other answers would be reported in the balance of cash. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-03 Define cash and cash equivalents. Topic: Cash and Cash Equivalents
4-98 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
95.
The term commonly used to refer to short-term investments that have a maturity date no longer than three months from the date of purchase is:
A. Accounts receivable. B. Cash equivalents. C. Accounts payable. D. Short-term investments. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-03 Define cash and cash equivalents. Topic: Cash and Cash Equivalents
96.
Cash equivalents refer to:
A. Short-term investments that have a maturity date no longer than three months from the date of purchase. B. Amounts receivable from customers that have a very high probability of collection. C. Short-term investments that have increased in value since the date of purchase, and therefore have generated additional cash for the company. D. The total amount of cash a company would have if all assets were sold. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-03 Define cash and cash equivalents. Topic: Cash and Cash Equivalents
4-99 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
97.
Common examples of cash equivalents include all of the following except:
A. Money market funds. B. Treasury bills. C. Certificates of deposit. D. Accounts receivable. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-03 Define cash and cash equivalents. Topic: Cash and Cash Equivalents
98.
Which of the following sales would typically be reported as a cash sale?
A. Sale in exchange for office supplies received. B. Sale in exchange for equipment received. C. Sale on account. D. Sale with credit card. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-03 Define cash and cash equivalents. Topic: Cash and Cash Equivalents
99.
Which of the following would NOT be recorded as a cash sale?
A. Customer who pays with a check. B. Customer who pays with a debit card. C. Customer who pays with a credit card. D. A customers who buys on account. AACSB: Reflective Thinking AICPA: FN Measurement 4-100 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-03 Define cash and cash equivalents. Topic: Cash and Cash Equivalents
100.
Which of the following would NOT represent good controls over cash receipts?
A. Record all cash receipts as soon as possible. B. The employee that receives cash and checks should also deposit them in the bank. C. Open mail each day and make a list of checks received with the amount and payer's name. D. Verify cash receipts by comparing the bank deposit slip with the accounting records. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Topic: Cash Controls
101.
Which of the following would not be considered good internal control for cash receipts?
A. Allowing customers to pay with a debit card. B. Requiring the employee receiving cash from customers to also deposit the cash into the company's bank account. C. Recording cash receipts as soon as they are recorded. D. Allowing customers to pay with a credit card. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Topic: Cash Controls
4-101 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
102.
When a sale is made to a customer who pays with a check, the company records:
A. A debit to Cash. B. A debit to Accounts Payable. C. A debit to Accounts Receivable. D. No entry until the check clears the bank. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Topic: Cash Controls
103.
When a sale is made to a customer who pays with a debit card, the company records:
A. A debit to Accounts Payable. B. A debit to Accounts Receivable. C. A debit to Cash. D. No entry until the debit card transaction clears the bank. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Topic: Cash Controls
104.
The amount of revenue recorded at the time of a sale will be greatest when the customer pays with a:
A. Check. B. Cash. C. Credit card. D. The revenue will be the same amount for each of the payment methods. AACSB: Reflective Thinking 4-102 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Topic: Cash Controls
105.
McGregor Company allows customers to pay with credit cards. The credit card company charges McGregor 3% of the sale. When a customer uses a credit card to pay McGregor $200 for services provided, McGregor would:
A. Debit Cash for $200. B. Credit Service Revenue for $194. C. Debit Service Fee Expense for $6. D. Credit Service Revenue for $206. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Topic: Cash Controls
106.
A customer purchased a $2,000 item at ApplianceWorld, paying with a credit card. ApplianceWorld is charged a 2% fee by the credit card company. When recording this sale, ApplianceWorld would:
A. Debit Accounts Receivable for $2,000. B. Credit Sales Revenue for $2,000. C. Credit Sales Revenue for $1,960. D. Credit Deferred Revenue for $2,000. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Topic: Cash Controls
4-103 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
107.
Which of the following would NOT represent good controls over cash disbursements?
A. Make all disbursements, other than very small ones, by check, debit card, or credit card. B. Require only one signature for checks, especially larger ones. C. Authorize all expenditures before purchase and verify the accuracy of the purchase itself. D. The employee who authorizes payment should not also be the employee who prepares the check. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Topic: Cash Controls
108.
Which of the following would NOT represent good controls over cash disbursements?
A. Periodically check amounts shown in the debit card and credit card statements against purchase receipts. B. The employee verifying the accuracy of the debit card and credit card statements should not also be the employee responsible for actual purchases. C. Set maximum purchase limits on debit cards and credit cards. D. Employees responsible for making cash disbursements should also be in charge of cash receipts. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Topic: Cash Controls
4-104 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
109.
A bank reconciliation reconciles the bank statement with the company's:
A. Cash from operating activities. B. Net cash flow in the statement of cash flows. C. Cash account in the balance sheet. D. Net income in the income statement. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
110.
What is the primary purpose of a bank reconciliation?
A. To ensure that for all cash transactions debits equal credits. B. To ensure that customers are paying amounts owed on a timely basis. C. To ensure the bank balance per reconciliation is equal to the company balance per reconciliation. D. To ensure cash receipts are greater than cash disbursements. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
4-105 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
111.
Which of the following items would cause the balance of cash in the bank statement not to equal the balance of cash in the accounting records?
A. Interest earned on the bank balance that the company has not recorded. B. Checks written by the company that have not cleared the bank. C. Cash receipts by the company that have not been deposited in the bank. D. All of the other answers would cause cash balances to differ. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
112.
Which of the following items would cause the balance of cash in the bank statement not to equal the balance of cash in the accounting records?
A. The company purchased supplies using a debit card. B. The company has cash receipts that have been deposited in the bank. C. The company deposited a customer check that was found by the bank to have insufficient funds. D. The company wrote checks that have cleared the bank. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
4-106 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
113.
Which of the following items would cause the balance of cash in the bank statement to be greater than the balance of cash in the accounting records?
A. The company wrote checks that have not cleared the bank. B. The company purchased supplies using a debit card. C. The company has cash receipts that have not been deposited in the bank. D. The company deposited a customer check that was found by the bank to have insufficient funds. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
114.
Which of the following is NOT a reason why a bank reconciliation is necessary?
A. The company has transactions that the bank has not recorded. B. Petty cash has a low balance. C. The bank has transactions that the company has not recorded. D. Reconciliations provide a control over cash. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
4-107 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
115.
A good internal control system would require that the employee who handles cash must not be involved in:
A. Reconciling the bank statement. B. The accounts payable function. C. Hiring decisions. D. Daily operations of the company. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
116.
Which of the following is correct with respect to a bank reconciliation?
A. Subtract interest earned from the bank's balance. B. Add service charge to the company's balance. C. Subtract NSF checks from the company's balance. D. Add deposits outstanding to the company's balance. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
4-108 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
117.
After preparing the bank reconciliation, an NSF check would result in which of the following when recording the adjustment to the company's cash balance?
A. Debit to Service Fee Expense. B. Credit to Accounts Payable. C. Credit to Service Revenue. D. Debit to Accounts Receivable. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
118.
The following information pertains to Sooner Company's cash balance and bank reconciliation as of August 31: Company balance before
$5,000
reconciliation Checks outstanding
$2,500
Notes collected by the bank
$2,200
Service fee Deposits outstanding
$50 $2,000
What is the correct cash balance for Sooner Company?
A. $7,150. B. $5,150. C. $7,650. D. $7,250. Cash = $5,000 + $2,200 - $50 = $7,150.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation 4-109 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Blooms: Analyze Difficulty: 3 Hard Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
119.
When preparing a bank reconciliation, a deposit outstanding would be:
A. Added to the company's cash balance. B. Added to the bank's cash balance. C. Subtracted from the company's cash balance. D. Subtracted from the bank's cash balance. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
120.
Regarding a bank reconciliation, which one of the following is an item recorded by the company but not by the bank?
A. Checks outstanding. B. Interest earned. C. Service charges. D. NSF checks. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
4-110 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
121.
Which of the following would NOT need to be accounted for in a bank reconciliation?
A. Deposits outstanding recorded by the company but not the bank. B. Interest earned recorded by the bank but not the company. C. NSF checks recorded by the bank but not by the company. D. Checks written by the company and recorded by the bank. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
122.
On May 31, Money Corporation's Cash account showed a balance of $10,000 before the bank reconciliation was prepared. After examining the May bank statement and items included with it, the company's accountant found the following items: Checks outstanding
$2,250
Deposits outstanding
1,900
NSF check
100
Service fees
40
Error: Money Corp. wrote a check for $30 but recorded it incorrectly for $300. What is the amount of cash that should be reported in the company's balance sheet as of May 31?
A. $9,860. B. $9,650. C. $10,130. D. $10,410. Cash balance = $10,000 - $100 - $40 + $270 = $10,130.
AACSB: Analytical Thinking AICPA: FN Reporting 4-111 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
123.
Cash transactions recorded by the bank but not yet recorded by the company include all of the following except
A. Service fees. B. Interest earned. C. Checks outstanding. D. NSF checks. AACSB: Analytical Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
4-112 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
124.
The following information was taken from the bank reconciliation for Mooner Sooner Inc. at the end of the year: Bank balance: $8,000 Checks outstanding: $5,800 Note collected by the bank: $1,500 Service fee: $20 Deposits outstanding: $4,000 NSF check (bad check) returned for $300 What is the correct cash balance that should be reported in Mooner Sooner's balance sheet at the end of the year?
A. $10,200. B. $7,400. C. $6,200. D. $6,160. Bank balance ($8,000) + deposits outstanding ($4,000) - checks outstanding ($5,800) = $6,200.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
125.
Cash transactions that have been recorded by the company but not the bank include:
A. NSF checks. B. Interest earned. C. Service fees. D. Deposits outstanding. AACSB: Analytical Thinking AICPA: BB Critical Thinking
4-113 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
126.
After preparing a bank reconciliation, the collection of a note by the bank on a company's behalf would be recorded with a:
A. Credit to Notes Receivable. B. Credit to Cash. C. Debit to Notes Receivable. D. Credit to Accounts Receivable. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
127.
After preparing a bank reconciliation, the service fee charged by the bank would be recorded with a:
A. Credit to Service Fees Expense. B. Debit to Cash. C. Credit to Service Fees Revenue. D. Debit to Service Fees Expense. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
4-114 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
128.
After preparing a bank reconciliation, a check outstanding for the payment of advertising would be recorded with a:
A. Debit to Advertising Expense. B. Debit to Cash. C. Credit to Advertising Expense. D. No entry is needed. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
129.
The following data were obtained from the bank statement and from the process of reconciling it: Bank service charges = $20 Deposit outstanding = $150 Interest earned on the bank account = $10 Checks outstanding = $400 Which items should be deducted from and added to the bank balance in completing the reconciliation?
A. Deduct checks outstanding; add service charges and deposit outstanding. B. Deduct interest earned; add deposit outstanding. C. Deduct checks outstanding; add deposit outstanding. D. Deduct deposit outstanding; add checks outstanding. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
4-115 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
130.
The balance in the Colt Company's Cash account on August 31 was $19,700, before the bank reconciliation was prepared. After examining the August bank statement and items included with it, the company's accountant found: Checks outstanding NSF check
$4,300 140
Note collected by bank for the Colt Company
1,200
Deposits outstanding
1,800
Bank service fees
60
What is the amount of cash that should be reported in the balance sheet as of August 31?
A. $20,700. B. $17,200. C. $18,700. D. $22,200. Book balance ($19,700) - bank service fees ($60) - NSF check ($140) + note collected ($1,200) = $20,700.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
4-116 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
131.
The balance shown in the August bank statement of Colt Company was $23,200. After examining the August bank statement and items included with it, the company's accountant found: Checks outstanding NSF check
$4,300 140
Note collected by bank for the Colt Company
1,200
Deposits outstanding
1,800
Bank service fees
60
What is the amount of cash that should be reported in the balance sheet as of August 31?
A. $20,700. B. $17,200. C. $18,700. D. $22,200. Bank balance ($23,200) + deposits outstanding ($1,800) - checks outstanding ($4,300) = $20,700.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
4-117 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
132.
A company-issued debit card or credit card is often referred to as a:
A. Budget care. B. Allowance card. C. Purchase card. D. Receipt card. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-06 Account for employee purchases. Topic: Employee Purchases
133.
A minor amount of cash kept on hand to pay for small purchases is referred to as a:
A. Petty cash fund. B. Cash receipts fund. C. Cash payments fund. D. Cookie jar fund. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-06 Account for employee purchases. Topic: Employee Purchases
4-118 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
134.
At the end of the month, employees have made the following expenditures from the petty cash fund and with company-issued credit cards. None of these transactions has been recorded previously. Supplies (petty cash) = $50 Delivery (petty cash) = $75 Advertising (credit card) = $1,100 Equipment (credit card) = $4,200
Accounting for these employee purchases would include a:
A. Credit to Petty Cash for $125. B. Debit to Accounts Payable for $5,300. C. Credit to Cash for $1,225. D. Credit to Accounts Payable for $5,425. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 04-06 Account for employee purchases. Topic: Employee Purchases
4-119 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
135.
At the end of the month, employees have made the following expenditures from the petty cash fund and with company-issued credit cards. None of these transactions has been recorded previously. Supplies (petty cash) = $50 Delivery (petty cash) = $75 Advertising (credit card) = $1,100 Equipment (credit card) = $4,200
Accounting for these employee purchases would include a:
A. Credit to Petty Cash for $5,425. B. Credit to Accounts Payable for $5,300. C. Credit to Equipment for $4,200. D. Debit to Accounts Receivable for $5,300. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 04-06 Account for employee purchases. Topic: Employee Purchases
136.
Which of the following is NOT involved in the replenishment of the petty cash fund?
A. Transactions related to vouchers will be recorded. B. Management will verify that the total of all vouchers equals the amount of cash missing from the petty cash fund. C. Weekly payroll checks will be recorded. D. Management will withdraw cash from the bank and place it in the petty cash fund. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-06 Account for employee purchases. Topic: Employee Purchases
4-120 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
137.
At the time a $400 petty cash fund is being replenished, the company's accountant finds vouchers totaling $350 and petty cash of $50. The vouchers include: postage, $100; business lunches, $150; delivery fees, $75; and office supplies, $25. Which of the following is not recorded when recognizing expenditures from the petty cash fund?
A. Debit Postage Expense, $100. B. Debit Supplies, $25. C. Credit Petty Cash, $350. D. Debit Petty Cash, $350. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 04-06 Account for employee purchases. Topic: Employee Purchases
138.
Which of the following is correct regarding a petty cash fund?
A. Petty cash fund represents cash on hand at the business for quick access. B. Petty cash fund is used for minor purposes. C. When cash from this fund is taken out, it should be replaced with a voucher. D. All of the answers are correct regarding a petty cash fund. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-06 Account for employee purchases. Topic: Employee Purchases
4-121 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
139.
When accounting for employee purchases, effective internal controls could include which of the following?
A. Credit card receipts are reconciled to credit card statements. B. Employees should be required to provide receipts and justification for those receipts on a timely basis. C. A separate employee reviews receipts and supporting documents to ensure all expenditures are made appropriately. D. All of the other answers represent effective internal controls. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-06 Account for employee purchases. Topic: Employee Purchases
140.
A company's cash balance is reported in which two financial statements?
A. Income statement and statement of cash flows. B. Balance sheet and statement of cash flows. C. Income statement and balance sheet. D. Balance sheet and statement of stockholders' equity. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-07 Identify the major inflows and outflows of cash. Topic: Statement of Cash Flows
4-122 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
141.
Which of the following best describes restricted cash?
A. Cash to be collected from customers from sales on account. B. Cash that is not available to be used for current operations. C. Cash that has been lent by creditors with a high interest rate. D. Dividends that are expected to be paid to common stockholders in the following year. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-07 Identify the major inflows and outflows of cash. Topic: Statement of Cash Flows
142.
A common example of restricted cash includes cash set aside by the company for the specific purpose of:
A. Repaying debt in the future. B. Purchasing equipment in the future. C. Making investments in the future. D. All of the other answers represent examples of restricted cash. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-07 Identify the major inflows and outflows of cash. Topic: Statement of Cash Flows
4-123 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
143.
The statement of cash flows reports cash flows from the activities of:
A. Operating, purchasing, and investing. B. Borrowing, paying, and investing. C. Financing, investing, and operating. D. Using, investing, and financing. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-07 Identify the major inflows and outflows of cash. Topic: Statement of Cash Flows
144.
Operating cash flows would exclude:
A. Payment of employee salaries. B. Receipt of cash from customers. C. Payment of dividends. D. Payment for advertising. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-07 Identify the major inflows and outflows of cash. Topic: Statement of Cash Flows
145.
Cash flows from investing do not include cash flows from:
A. Lending. B. The sale of equipment. C. Borrowing. D. The purchase of a building. AACSB: Reflective Thinking AICPA: FN Reporting 4-124 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-07 Identify the major inflows and outflows of cash. Topic: Statement of Cash Flows
146.
Which of the following is NOT correct regarding the reporting of cash?
A. Cash is reported in both the balance sheet and the statement of cash flows. B. Cash flows from buying and selling investments and long-term productive assets are called operating cash flows. C. Cash flows from transactions with stockholders and creditors are called financing cash flows. D. Net cash flows reported in the statement of cash flows should equal the change in cash reported in the balance sheet. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-07 Identify the major inflows and outflows of cash. Topic: Statement of Cash Flows
4-125 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
147.
Consider the following cash flow items: Pay amount owed to bank for previous borrowing. Pay utility costs. Purchase equipment to be used in operations. Purchase office supplies. Pay one year of rent in advance. Pay workers' salaries. Pay for research and development costs. Pay taxes to the IRS. Sell common stock to investors. How many of these cash flow items involve investing activities?
A. Zero. B. One. C. Two. D. Three. Purchase equipment to be used in operations.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 04-07 Identify the major inflows and outflows of cash. Topic: Statement of Cash Flows
148.
Investing cash flows would include which of the following?
A. Payment of cash dividends to stockholders. B. Purchase of office supplies with cash. C. Purchase of a building with cash. D. Cash sales to customers. AACSB: Reflective Thinking AICPA: FN Reporting
4-126 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-07 Identify the major inflows and outflows of cash. Topic: Statement of Cash Flows
149.
Cash flows from investing activities do not include:
A. Borrowing. B. The purchase of equipment. C. The sale of land. D. The purchase of a building. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-07 Identify the major inflows and outflows of cash. Topic: Statement of Cash Flows
4-127 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
150.
Consider the following cash flow items: Pay amount owed to bank for previous borrowing. Pay utility costs. Purchase equipment to be used in operations. Purchase office supplies. Purchase one year of rent in advance. Pay workers' salaries. Pay for research and development costs. Pay taxes to the IRS. Sell common stock to investors. How many of these cash flow items involve financing activities?
A. Zero. B. One. C. Two. D. Three. (1) Pay amount owed to bank for previous borrowing and (2) Sell common stock to investors.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 04-07 Identify the major inflows and outflows of cash. Topic: Statement of Cash Flows
151.
Payment of dividends to stockholders is considered a(n):
A. Operating cash flow. B. Investing cash flow. C. Financing cash flow. D. Not a cash flow. AACSB: Reflective Thinking
4-128 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-07 Identify the major inflows and outflows of cash. Topic: Statement of Cash Flows
152.
Issuing common stock for cash is considered a(n):
A. Operating cash flow. B. Investing cash flow. C. Financing cash flow. D. Not a cash flow. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-07 Identify the major inflows and outflows of cash. Topic: Statement of Cash Flows
153.
Cash flows from financing activities include:
A. Lending. B. Salaries paid. C. The sale of land. D. Dividends paid. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-07 Identify the major inflows and outflows of cash. Topic: Statement of Cash Flows
4-129 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
154.
Providing services to customers on account is considered a(n):
A. Operating cash flow. B. Investing cash flow. C. Financing cash flow. D. Not a cash flow. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-07 Identify the major inflows and outflows of cash. Topic: Statement of Cash Flows
155.
A company might hold a large amount of cash relative to noncash assets for which of the following reasons?
A. Part of its operations includes low-tax foreign jurisdictions. B. Operating risks are high. C. Dividends are not typically paid to shareholders. D. All of the other answers represent reasons for large cash holdings. AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-08 Assess cash holdings by comparing cash to noncash assets. Topic: Regal Entertainment vs. Cinemark
4-130 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
156.
The company's ratio of cash to noncash assets increased in the current year from 20% to 30%? Which of the following represents the most likely reason for this increase?
A. The company maintained operations only in the United States. B. The company declared a large dividend in the current year. C. Management forecasts additional operating volatility in future periods. D. The company acquired additional equipment and buildings for expansion of operations. AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 04-08 Assess cash holdings by comparing cash to noncash assets. Topic: Regal Entertainment vs. Cinemark
157.
A potential risk of a company with a high ratio of cash to noncash assets is:
A. Creditors are less likely to lend money to the company. B. Management may not foresee any growth opportunities. C. The company likely will not be able to pay dividends in the near future. D. The company likely is paying higher taxes than it should be. AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 04-08 Assess cash holdings by comparing cash to noncash assets. Topic: Regal Entertainment vs. Cinemark
4-131 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
158.
A company's lower ratio of cash to noncash assets most likely represents which characteristic of management?
A. Greater willingness to take risk. B. Lower ability to find profitable investment projects. C. Greater caution to ensure funds are available to pay debt as it becomes due. D. Greater willingness to be compensated with company stock than cash. AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 04-08 Assess cash holdings by comparing cash to noncash assets. Topic: Regal Entertainment vs. Cinemark
159.
Terastar Corp. reports the following amounts: Total Assets
Total Liabilities
$50,000
$35,000
Cash $10,000
What is the ratio of cash to noncash assets?
A. 75%. B. 20%. C. 25%. D. 67%. $10,000/($50,000 - $10,000) = 25%
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 04-08 Assess cash holdings by comparing cash to noncash assets. Topic: Regal Entertainment vs. Cinemark
4-132 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
160.
Below are trends in operation cash flows for three companies. Year 1
Year 2
Year 3
Total
Company 1
$100,000
$150,000
50,000
$300,000
Company 2
100,000
100,000
100,000
300,000
Company 3
90,000
100,000
110,000
300,000
Based on an analysis of operating risk, which company's management is likely motivated to have the largest ratio of cash to noncash Company 1 Company 2 Company 3 assets?
A. Company 1. B. Company 2. C. Company 3. D. All companies are expected to have the same ratio. AACSB: Analytical Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 04-08 Assess cash holdings by comparing cash to noncash assets. Topic: Regal Entertainment vs. Cinemark
Matching Questions
4-133 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
161.
Match each provision of the Sarbanes-Oxley Act with its description.
1. Corporate executive
Management must document the effectiveness of
accountability
procedures that could affect financial reporting. 5 Lead audit partners are required to change every
2. Auditor rotation
five years. 2 PCAOB establishes standards related to the
3. Oversight board
preparation of audited financial reports. 3 Company management must personally certify the
4. Nonaudit services
financial statements. 1 Audit firm cannot provide a variety of other services
5. Internal control
to its client, such as consulting. 4 AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium
Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Topic: Accounting Scandals and Response by Congress
162.
Match each term associated with components of internal control with its definition.
Routine activities that are meant to continually observe 1. Risk assessment
internal control activities. 5
2. Control activities
Procedures for maintaining separation of duties. 2
3. Information and communication
Formal policies to evaluate internal and external threats to achieving company objectives. 1 Overall attitude of the company with respect to internal
4. Control environment
controls. 4 Transfer of data from lower managers to top executives
5. Monitoring
for accurate financial reporting. 3 AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium
Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Topic: Framework for Internal Control
4-134 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
163.
Match each term associated with cash and cash controls with its definition.
Short-term investments that have a maturity date no 1. Credit card
longer than three months from the date of purchase. 3 Matches the balance of cash in the bank account with
2. Bank reconciliation 3. Cash equivalent
the balance of cash in the company's own records. 2 Minor amount of cash kept on hand. 5 Withdraws funds directly from the user's account at the
4. Debit card
time of use. 4 Allows users to purchase items without having to pay
5. Petty cash
cash immediately. 1 AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-03 Define cash and cash equivalents. Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Topic: Cash Controls Topic: Cash and Cash Equivalents
164.
Match each term related to bank reconciliations with its description.
Charges imposed by the bank to the company for 1. Checks outstanding
providing routine services.
5
Cash receipts received by the company but not yet 2. NSF checks
recorded by the bank.
4
Money earned on the average daily balance of the 3. Company error
checking account.
6
Checks written to the company that are returned by the 4. Deposits outstanding 5. Bank service fees
bank as not having adequate funds.
2
The company recorded a deposit twice.
3
Checks written by the company but not yet recorded by 6. Interest revenue
the bank.
1
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium
4-135 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
165.
Match each type of cash flow with its description.
1. Cash outflow from financing activities
Receive payment from customers. 6
2. Cash outflow from investing activities
Pay dividends to stockholders. 1
3. Cash inflow from investing activities
Pay salaries to employees. 5
4. Cash inflow from financing activities
Sell office building. 3
5. Cash outflow from operating activities
Issue common stock. 4
6. Cash inflow from operating activities
Purchase equipment. 2 AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium
Learning Objective: 04-07 Identify the major inflows and outflows of cash. Topic: Statement of Cash Flows
Essay Questions
4-136 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
166.
A company had the following sales transactions: 1. Total debit card sales = $200,000. 2. Total credit card sales = $400,000. 3. Total cash sales = $800,000. 4. Total check sales = $100,000. There is a charge of 2% on all credit card transactions. Calculate total sales revenue recorded for the year.
$1,500,000 Feedback: $200,000 + $400,000 + $800,000 + $100,000 = $1,500,000.
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Topic: Cash Controls
4-137 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
167.
A company had the following transactions: 1. Paid $150 for office supplies using a debit card. 2. Purchased office equipment costing $700 using a credit card. 3. Paid utilities bill of $400 by issuing a check. Record each transaction.
1.
Supplies
150
Cash 2.
150
Equipment
700
Accounts Payable 3.
Utilities Expense Cash
700 400 400
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Topic: Cash Controls
4-138 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
168.
Indicate whether the firm should add or subtract each item below from its balance of cash or the bank's balance of cash in preparing a bank reconciliation. Reconciliation Items
Bank
Company
Balance
Balance
1. Checks outstanding 2. NSF checks 3. Deposit recorded twice by company 4. Interest earned 5. Deposits outstanding 6. Bank service fees
Reconciliation Items
Bank Balance
1. Checks outstanding
Subtract
Company Balance
2. NSF checks
Subtract
3. Deposit recorded twice by company
Subtract
4. Interest earned 5. Deposits outstanding 6. Bank service fees
Add Add Subtract
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
4-139 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
169.
A company's general ledger shows a cash balance of $4,570. Comparing the company's cash records with the monthly bank statement reveals several additional cash transactions such as checks outstanding of $2,840, bank service fees of $110, and interest earned of $15. Calculate the correct balance of cash.
$4,475 Feedback: $4,570 - $110 + $15 = $4,475
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
170.
A company's general ledger shows a cash balance of $2,380. Comparing the company's cash records with the monthly bank statement reveals several additional cash transactions such as deposits outstanding of $1,760, note collected by the bank on the company's behalf of $1,000, and interest earned of $20. The company also finds an error by the bank of an additional deposit of $100. Calculate the correct balance of cash.
$3,400 Feedback: $2,380 + $1,000 + $20 = $3,400
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
4-140 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
171.
A company's bank statement shows a cash balance of $4,230. Comparing the company's cash records with the monthly bank statement reveals several additional cash transactions such as checks outstanding of $3,880, deposits outstanding of $1,230, NSF check of $300, and service fee of $50. Calculate the correct balance of cash.
$1,580 Feedback: $4,230 - $3,880 + $1,230 = $1,580
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
172.
A company's bank statement shows a cash balance of $4,170. Comparing the company's cash records with the monthly bank statement reveals several additional cash transactions such as checks outstanding of $2,110, NSF check of $200, interest earned of $30, service fee of $40, and a check for $150 recorded twice by the company. Calculate the correct balance of cash.
$2,060 Feedback: $4,170 - $2,110 = $2,060
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
4-141 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
173.
A company's Cash account shows a balance of $3,450 at the end of the month. Comparing the company's Cash account with the monthly bank statement reveals several additional cash transactions such as bank service fees ($50), an NSF check from a customer ($300), a customer's note receivable collected by the bank ($1,000), and interest earned ($100). Prepare the necessary entries to adjust the balance of cash.
Cash
1,100
Notes Receivable
1,000
Interest Revenue
100
Service Fee Expense
50
Accounts Receivable
300
Cash
350
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
4-142 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
174.
A company's Cash account shows a balance of $5,680 at the end of the month. Comparing the company's Cash account with the monthly bank statement reveals several additional cash transactions such as deposits outstanding ($1,250), checks outstanding ($2,380), bank service fees ($40), an NSF check from a customer ($150), a customer's note receivable collected by the bank ($500), and interest earned ($60). Prepare the necessary entries to adjust the balance of cash.
Cash
560
Notes Receivable
500
Interest Revenue
60
Service Fees Expense
40
Accounts Receivable
150
Cash
190
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
4-143 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
175.
Peterson Company's general ledger shows a cash balance of $7,850 on May 31. May cash receipts of $1,250, included in the general ledger balance, are placed in the night depository at the bank on May 31 and processed by the bank on June 1. The bank statement dated May 31 shows an NSF check for $200 and a service fee of $50. The bank processes all checks written by the company by May 31 and lists them on the bank statement, except for one check totaling $1,640. The bank statement shows a balance of $7,990 on May 31. Prepare a bank reconciliation to calculate the correct ending balance of cash on May 31.
Peterson Company Bank Reconciliation May 31 Bank’s Cash Balance Per bank
Company’s Cash Balance
$7,990 Per general ledger
$7,850
statement Deposits
+1,250 Service charge
-50
outstanding Checks
NSF Check
-200
outstanding
-1,640
Bank balance
$7,600 Company balance
$7,600
per
per reconciliation
reconciliation
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
4-144 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
176.
Madison Company's cash ledger reports the following for the month ending March 31. Date Deposits:
Amount
No.
Date
Amount
3/4
$1,200 Checks:
541
3/2
$5,100
3/11
1,200
542
3/8
800
3/18
3,700
543
3/12
2,200
3/25
3,400
544
3/19
1,100
2,100
545
3/27
200
$11,600
546
3/28
600
547
3/30
1,300
3/26Cash receipts
3/31
Balance on March 1
$5,400
Receipts
11,600
Disbursements
$11,300
(11,300)
Balance on March 31
$5,700
Information from March's bank statement and company records reveals the following additional information: a. The ending cash balance recorded in the bank statement is $6,790. b. Cash receipts of $2,100 from 3/26 - 3/31 are outstanding. c. Checks 545 and 547 are outstanding. d. The deposit on 3/11 included a customer's check for $400 that did not clear the bank (NSF check). e. Check 543 was written for $2,800 for office supplies in March. The bank properly recorded the check for this amount. f. An automatic withdrawal for March rent was made on March 4 for $1,500. g. Madison's checking account earns interest based on the average daily balance. The amount of interest earned for March is $50. h. Last year, one of Madison's top executives borrowed $4,000 from Madison. On March 24, the executive paid $4,200 ($4,000 borrowed amount plus $200 interest) directly to the bank in payment for the borrowing. i. The bank charged the following service fees: $30 for NSF check, $10 for automatic withdrawal for rent payment, and $20 for collection of the loan amount from the executive. Prepare a bank reconciliation for March 31, and record the necessary cash adjustments. 4-145 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Madison Company Bank Reconciliation March 31 Bank’s Cash Balance
Company’s Cash Balance
Per bank statement
$6,790 Per general ledger
$5,700
Deposits
+2,100 NSF check
-400
-1,500 Company error
-600
outstanding Checks outstanding
EFT for rent
-1,500
Interest on account Note collected
+4,000
Interest on note
+200
Service fees Bank balance per reconciliation
Cash
4,250
Interest Revenue
250
Accounts Receivable
400
Supplies
600
Cash
$7,390
reconciliation
4,000
Service Fees Expense
-60
$7,390 Company balance per
Notes Receivable
Rent Expense
+50
1,500 60 2,560
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation 4-146 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
177.
A company establishes a petty cash fund for $400. By the end of the month, employees had made the following expenditures from the fund: supplies, $150; fuel for deliveries, $120; postage, $75; miscellaneous, $35. Record the entry to recognize expenditures from the petty cash fund.
Supplies
150
Delivery Expense
120
Postage Expense
75
Miscellaneous Expense
35
Petty Cash
380
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 04-06 Account for employee purchases. Topic: Employee Purchases
4-147 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
178.
A company establishes a $300 petty cash fund on August 3 to pay for minor cash expenditures. The fund is replenished at the end of each month. In addition, the company has issued credit cards for more substantial employee purchases. These credit cards are issued to authorized managers. At the end of August, the following employee purchases have been made: Petty Cash Fund Delivery fees
Credit Card $100 Equipment
$1,400
Plumbing maintenance
70 Advertising
750
Postage
40 Supplies
360
Flowers for the office
50
$260
$2,510
Record the establishment of the petty cash fund on August 3, all employee expenditures, and replenishment of the fund on August 31.
August 3 Petty Cash
300
Cash
300
August 31 Delivery Expense
100
Repairs and Maintenance
70
Expense Postage Expense
40
Miscellaneous Expense
50
Equipment
1,400
Advertising Expense
750
Supplies
360
Petty Cash
260
4-148 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accounts Payable (credit
2,510
card)
August 31 Petty Cash
260
Cash
260
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 04-06 Account for employee purchases. Topic: Employee Purchases
179.
A company provides services on account during the current year totaling $400,000. By the end of the year, $350,000 of this amount had been received. In addition, $75,000 was received on account from customers for services provided in the prior year. Determine the amount of operating cash flows the company will report as received from customers in the current year.
$425,000 Feedback: $350,000 + $75,000 = $425,000.
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 04-07 Identify the major inflows and outflows of cash. Topic: Statement of Cash Flows
4-149 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
180.
During the current year, a company provides services on account for $100,000. By the end of the year, $60,000 of this amount had been received. In addition, cash payments for the year were employees' salaries, $50,000; office supplies, $10,000; and utilities $20,000. Determine the amount of operating cash flows the company will report in the current year.
-$20,000 Feedback: $60,000 - $50,000 - $10,000 - $20,000 = -$20,000.
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 04-07 Identify the major inflows and outflows of cash. Topic: Statement of Cash Flows
181.
During the current year, a company purchases equipment for $250,000, paying $50,000 immediately and promising to pay the remainder within 30 days after the end of the year. Determine the amount of investing cash flows the company will report in the current year.
-$50,000
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 04-07 Identify the major inflows and outflows of cash. Topic: Statement of Cash Flows
4-150 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
182.
At the beginning of the current year, a company issued stock for $100,000 and borrowed $50,000 from the bank. By the end of the year, the company had provided services of $80,000 for cash, paid employee salaries of $30,000, and paid utilities of $10,000. Determine the amount of financing cash flows the company will report in the current year.
$150,000 Feedback: $100,000 + $50,000 = $150,000
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 04-07 Identify the major inflows and outflows of cash. Topic: Statement of Cash Flows
183.
During the year, a company issues common stock for $50,000 and repays previously borrowed amounts of $75,000. In addition, the company pays dividends of $5,000 to stockholders. Determine the amount of financing cash flows the company will report in the current year.
-$30,000 Feedback: $50,000 - $75,000 - $5,000 = -$30,000.
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 04-07 Identify the major inflows and outflows of cash. Topic: Statement of Cash Flows
4-151 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
184.
Consider the following transactions: 1. Pay employees' salaries. 2. Repay borrowing to the bank. 3. Purchase equipment with note payable. 4. Provide services to customers on account. 5. Pay dividends to stockholders. 6. Collect cash from customers for services provided. 7. Purchase supplies on account. 8. Pay for supplies purchased in transaction 7 above. For each transaction, indicate the type of cash flow involved based on the classifications in the statement of cash flows. If a transaction does not involve cash, write ‘No Cash.'
1. Operating. 2. Financing. 3. No Cash. 4. No Cash. 5. Financing. 6. Operating. 7. No Cash. 8. Operating.
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-07 Identify the major inflows and outflows of cash. Topic: Statement of Cash Flows
4-152 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
185.
A company had the following transactions during the year: 1. Paid rent for the next two years, $8,000. 2. Purchased office supplies on account, $2,400. 3. Purchased equipment, paying $12,000 cash and issuing a note payable for $4,000. 4. Borrowed from the bank, $6,000. 5. Paid employee salaries, $7,200. 6. Paid $2,000 on account related to transaction 2 above. 7. Paid dividends to stockholders, $2,800. 8. Sold land for $10,000 that was purchased in a prior year for $7,500. 9. Collected cash from customers for services provided, $25,700. Calculate cash flows from operating activities, investing activities, and financing activities.
Operating activities = $8,500; Investing activities = -$2,000; Financing activities = $3,200 Investing cash flows = $10,000 - $12,000 = -$2,000. Financing cash flows = $6,000 - $2,800 = $3,200. Feedback: Operating cash flows = $25,700 - $8,000 - $7,200 - $2,000 = $8,500.
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 04-07 Identify the major inflows and outflows of cash. Topic: Statement of Cash Flows
4-153 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
186.
Below is a summary of all the transactions of Sampson Consulting for the month of April 2018. Cash Transactions Cash collections from: Customers
$52,600
Sale of unused office furniture
11,300
Borrowing from the bank
60,000
Cash payments for: Employee salaries
(22,500)
Office building
(74,600)
Utilities expense
(2,600)
Office supplies
(1,800)
Dividends to stockholders
(4,000)
Advertising expense
(9,800)
Noncash Transactions Services to customers on account
11,800
Purchase supplies on account
5,800
Issue note payable for equipment
23,700
Prepare a statement of cash flows for the month of April, properly classifying each of the transactions into operating, investing, and financing activities. The cash balance at the beginning of April is $14,800.
Sampson Consulting Statement of Cash Flows For the month ended April 30, 2018 Cash Flows from Operating Activities Cash inflows: From customers
$52,600
Cash outflows:
4-154 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
For salaries
(22,500)
For advertising
(9,800)
For office supplies
(1,800)
For utilities
(2,600)
Net cash flows
$15,900
from operating activities Cash Flows from Investing Activities Sale of unused office
11,300
furniture Purchase of office
(74,600)
building Net cash flows
(63,300)
from investing activities Cash Flows from Financing Activities Borrowing from the
60,000
bank Payment of dividends Net cash flows
(4,000) 56,000
from financing activities Net increase in cash
8,600
Cash at the beginning of
14,800
the month Cash at the end of the
$23,400
month
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 04-07 Identify the major inflows and outflows of cash. Topic: Statement of Cash Flows
4-155 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
187.
At the end of March, Weber Productions' accounting records reveal a balance for cash equal to $21,861. However, the balance of cash in the bank at the end of March is only $4,576. Weber is concerned and asks the company's accountant to reconcile the two balances. Examination of the bank statement and company records at the end of March reveals the following information: NSF checks
$6,783 Service fees
Deposits
Checks
outstanding
7,348 outstanding
$195
541
In addition, Weber owes one of its suppliers $200. During March, the company's accountant mistakenly wrote the check for $1,200. The check was recorded in the company's records for $200 but processed by the bank for $1,200. Weber has contacted the supplier who has agreed to send a $1,000 refund in April directly to the bank. Finally, a petty cash fund of $2,500 was established during March. This amount was withdrawn from the checking account but not recorded. Required: 1. Calculate the correct ending balance of cash at the end of March. 2. Discuss any problems you see with the company's cash procedures.
Requirement 1
Weber Productions Bank Reconciliation March 31 Bank’s Cash Balance
Company’s Cash Balance
Per bank
$4,576 Per general
statement
ledger
Deposits
$21,861
+7,348 NSF check
-6,783
Service fees
-195
outstanding Checks outstanding
-541
4-156 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Expected refund
+1,000 Petty cash fund
-2,500
Per
$12,383 Per
$12,383
reconciliation
reconciliation
Requirement 2 The company has a large amount of NSF checks. This indicates that the company's procedures related to acceptance of customers' checks is not reliable. The company should tighten controls over the allowance of payment by check. Deposits outstanding are relatively high. The company should more frequently deposit cash to avoid theft or loss of cash. The amount established for the petty cash fund may be too high. Petty cash provides cash on hand for minor purchases. Having too much cash on hand creates the likelihood that a material amount of cash will be mishandled. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation Topic: Cash Controls
4-157 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
188.
On October 31, 2018, the bank statement for the checking account of Hollybuster Video shows a balance of $11,570, while the company's records show a balance of $10,858. Information that might be useful in preparing a bank reconciliation is as follows: a. Outstanding checks are $1,120. b. The October 31 cash receipts of $575 are not deposited in the bank until November 2. c. One check written in payment of utilities for $115 is correctly recorded by the bank but is recorded by Hollybuster as a disbursement of $155. d. In accordance with prior authorization, the bank withdraws $500 directly from the checking account as payment on a note payable. The interest portion of that payment is $50 and the principal portion is $450. Hollybuster has not recorded the direct withdrawal. e. Bank service fees of $50 are listed on the bank statement. f. A deposit of $782 is recorded by the bank on October 13, but it did not belong to Hollybuster. The deposit should have been made to the checking account of Videos Unlimited, a separate company. g. The bank statement includes a fee of $105 for an NSF check. The check is returned with the bank statement and the company will seek payment from the customer. Required: 1. Prepare a bank reconciliation for the Hollybuster checking account on October 31, 2018. 2. Record the necessary cash adjustments.
Requirement 1
Hollybuster Video Bank Reconciliation October 31, 2018 Bank’s Cash Balance
Company’s Cash Balance
Per bank
$11,570 Per general
statement Deposits
$10,858
ledger +575
Company
+40
4-158 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
outstanding
error
Checks
EFT for
outstanding
-500
-1,120 note
Bank error
Service
-50
-782 fees NSF check Per
$10,243 Per
reconciliation
-105 $10,243
reconciliation
Requirement 2 Debit Cash
Credit
40
Utilities Expense
40
(Reconcile cash increases) Notes Payable
450
Interest Expense
50
Service Fees Expense
40
Accounts Receivable
105
Cash
645
(Reconcile cash decreases)
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
4-159 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
189.
The cash records and bank statement for the month of July for Jim Incorporated are shown below. Jim Incorporated Cash Account Records July 1, 2018 to July 31, 2018 Cash
Cash
Balance
Balance
July 1,
July 31,
2018
Deposits
Checks
2018
$7,250
$9,370
$8,950
$7,670
Deposits
Checks
Date Desc. Amount Date No. Desc. 7/9
Sales
$2,610 7/7
Amount
531 Rent
$1,400
7/21 Sales
3,340 7/12 532 Salaries
1,950
7/31 Sales
3,420 7/19 533 Equipment
3,800
7/22 534 Utilities
600
7/30 535 Advertising $9,370
1,200 $8,950
Reliable Union
P.O. Box 123878
Member FDIC
You Can Bank On Us
Watonga, OK 73772 (580) 377-OKIE
Account
Jim
Account
Holder:
Incorporated
Number:
519 Main Street
2252790471
July 31, 2018
Watonga, OK
Statement
73772
Date:
Beginning
Deposits and
Withdraws and
Ending
Balance
Credits
Debits
Balance
July 1, 2018
No.
Total
No.
Total
July 31, 2018
4-160 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
$7,750
3
Deposits and
$6,010
7
$8,625
$5,135
Withdraws and Debits
Daily Balance
Date Amount Desc.
Date No. Amount Desc.
Date Amount
7/10
$2,610 DEP
7/2
530
$500 CHK
7/2
$7,250
7/22
3,340 DEP
7/10 531
1,400 CHK
7/10
8,460
7/31
60 INT
7/14 532
1,950 CHK
7/14
6,510
300 NSF
7/18
6,210
4,000 CHK
7/22
5,550
7/26
400 EFT
7/26
5,150
7/30
75 SF
7/30
5,075
7/31
$5,135
Credits
7/18 7/22 533
$6,010
Desc. DEP Customer deposit
$8,625
INT Interest
SF Service fees
earned
NOTE Note collected CHK Customer check
NSF Non-sufficient funds
EFT Electronic funds transfer
Additional information: a. The difference in the beginning balances in the company's records and the bank statement relates to check #530, which is outstanding as of June 30, 2018. b. Check #533 is correctly processed by the bank. c. The EFT on July 26 relates to the purchase of office supplies. Required: 1. Prepare a bank reconciliation for Jim Incorporated's checking account on July 31, 2018. 2. Record the necessary cash adjustments.
Requirement 1
4-161 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Jim Incorporated Bank Reconciliation July 31, 2018 Bank’s Cash Balance
Company’s Cash Balance
Per bank
$5,135 Per general
statement
ledger
$7,670
Deposits
+3,420 Company error
-200
Interest earned
+60
NSF check
-300
Service fees
-75
Office supplies
- 400
outstanding Checks outstanding
-1,800
(#534 and #535)
Per
$6,755 Per
reconciliation
$6,755
reconciliation
Requirement 2 Debit Cash
Credit
60
Interest Revenue
60
(Reconcile cash increases)
Equipment
200
Accounts Receivable
300
Service Fees Expense
75
Supplies
400
Cash
975
(Reconcile cash decreases)
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze
4-162 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 3 Hard Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
4-163 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
190.
Below is a summary of all transactions of Mason Furniture for the month of August 2018. Cash Transactions Cash collections from: Customers
$82,300
Sale of unused land
11,500
Issuance of common stock
25,000
Interest earned on savings
400
account Cash payments for: Employee salaries
(42,400)
Delivery truck
(30,000)
Advertising expense
(5,400)
Office supplies
(2,200)
Repayment of borrowing
(8,500)
Fabric
(6,300)
Noncash Transactions Sales to customers on account
12,500
Purchase of fabric on account
6,200
Exchange common stock for
80,000
building
Required: Prepare a statement of cash flows for the month of August, properly classifying each of the transactions into operating, investing, and financing activities. The cash balance at the beginning of August is $6,900.
Mason Furniture Statement of Cash Flows For the month ended August 31, 2018
Cash Flows from Operating Activities
4-164 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Cash inflows: From customers
$82,300
From interest
400
Cash outflows: For salaries
(42,400)
For advertising
(5,400)
For office supplies
(2,200)
For fabric
(6,300)
Net cash flows from operating activities
$26,400
Cash Flows from Investing Activities Sale of unused land
11,500
Purchase of delivery truck
(30,000)
Net cash flows from investing activities
(18,500)
Cash Flows from Financing Activities Issuance of common stock
25,000
Repayment of borrowing
(8,500)
Net cash flows from financing activities
16,500
Net increase in cash
24,400
Cash at the beginning of the month
6,900
Cash at the end of the month
$31,300
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 04-07 Identify the major inflows and outflows of cash. Topic: Statement of Cash Flows
4-165 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
191.
For the month of June, Thomson Services has the following transactions: June 2
Obtain cash by borrowing $22,000 from the bank.
June 3
Pay rent for the current month, $1,800.
June 7
Provide services to customers, $6,500 for cash and $2,900 on account.
June 11
Purchase equipment necessary for operations, $18,500 cash.
June 17
Pay employees' salaries for the first half of the month, $5,200.
June 22
Pay dividends to stockholders, $2,300.
June 25
Receive cash in advance from customers, $2,800.
June 28
Pay utilities for the month, $1,900.
June 30
Record salaries earned by employees for the second half of the month, $5,200. Payment will be made on July 2.
Required: 1. Record each transaction. 2. Identify the transactions involving cash. 3. Assuming the balance of cash at the beginning of June is $12,500, post each cash transaction to the Cash T-account and compute the ending cash balance. 4. Prepare a statement of cash flows for the month of June, properly classifying each of the cash transactions into operating, investing, and financing activities. 5. Verify that the net cash flows reported in the statement of cash flows equal the change in the cash balance for the month.
Requirement 1
June 2
Debit
Cash
22,000
Notes Payable
Credit
22,000
(Borrow from the bank) June 3
Debit
Rent Expense
1,800
Cash
Credit
1,800
(Pay current month rent) 4-166 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
June 7
Debit
Cash
6,500
Accounts Receivable
2,900
Service Revenue
Credit
9,400
(Provide services for cash and on account) June 11
Debit
Equipment
18,500
Cash
Credit
18,500
(Purchase equipment) June 17
Debit
Salaries Expense
5,200
Cash
Credit
5,200
(Pay salaries) June 22
Debit
Dividends
2,300
Cash
Credit
2,300
(Pay dividends)
June 25
Debit
Cash
2,800
Deferred Revenue
Credit
2,800
(Receive cash in advance) June 28
Debit
Utilities Expense
1,900
Cash
Credit
1,900
(Pay current month utilities bill) June 30
Debit
Salaries Expense
5,200
Salaries Payable
Credit
5,200
(Owe current month salaries)
Requirement 2 All transactions involve cash except for the salaries payable transaction on June 30. 4-167 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Requirement 3 Cash Debits
Credits
June 1
12,500
1,800
June 3
June 2
22,000
18,500
June 11
June 7
6,500
5,200
June 17
June 25
2,800
2,300
June 22
1,900
June 28
14,100
Requirement 4 Thomson Services Statement of Cash Flows For the month ended June 30 Cash Flows from Operating Activities Cash inflows: From customers
$9,300
Cash outflows: For rent
(1,800)
For salaries
(5,200)
For utilities
(1,900)
Net cash flows from operating activities
$400
Cash Flows from Investing Activities Purchase equipment
(18,500)
Net cash flows from investing activities
(18,500)
Cash Flows from Financing Activities Borrow from bank
22,000
Pay dividends
(2,300)
Net cash flows from financing activities
19,700
Net increase in cash
1,600
Cash at the beginning of the month
12,500
Cash at the end of the month
$14,100
4-168 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Requirement 5 Net cash flows on statement of cash flows = $1,600 Change in cash balance for the month = $14,100 (ending) - $12,500 (beginning) = $1,600 AACSB: Reflective Thinking AICPA: FN Measurement AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 04-07 Identify the major inflows and outflows of cash. Topic: Statement of Cash Flows
192.
Discuss the events leading up to the passage of the Sarbanes-Oxley Act and its major provisions.
Two of the highest-profile cases (Enron and WorldCom) of fraudulent financial reporting in 2001 and 2002, as well as other fraudulent reporting by many others, led Congress to pass the Sarbanes-Oxley Act. Fraudulent financial reporting was associated with poor social consequences such as bankruptcy, employee termination, reduced salaries, increased workloads, and loss of employee retirement funds, stock options, and health benefits. The major provisions of the Sarbanes-Oxley Act include formation of the Public Company Accounting Oversight Board (PCAOB), corporate executive accountability, limitation on nonaudit services, retention of work papers, auditor rotation, restrictions related to conflicts of interest, audit committee hires the auditor, and documentation of internal control.
AACSB: Ethics AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act. Topic: Accounting Scandals and Response by Congress
4-169 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
193.
What is internal control? Briefly describe the five components of internal control outlined by the Committee of Sponsoring Organizations (COSO).
Internal control is a company's plan to (1) improve the accuracy and reliability of accounting information and (2) safeguard the company's assets. 1. Control Environment - overall top-to-bottom attitude of the company with respect to internal controls. 2. Risk Assessment - development of formal policies to assess the risk that internal or external sources are preventing a company from achieving its objectives. 3. Control Activities - systems for approving cash payments, authorizing purchases, reviewing operating performance, and safeguarding assets. 4. Monitoring - Continuous observation of the internal control system. 5. Information and Communication - systems designed to ensure accurate measurement of business transactions and reliability of financial reports.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control. Topic: Framework for Internal Control
194.
A company uses the following process for its cash receipts. At the end of each day, the secretary places all cash and checks received from customers in a desk drawer. Each Monday, the secretary totals all amounts received, records this in the accounting records, and deposits the money in the bank account. Then, once every three months, the office manager requests information from the bank necessary to prepare a bank reconciliation. Discuss the company's internal control procedures related to cash receipts.
Cash should be recorded and deposited daily. The employee recording cash receipts should not also be the employee making the deposit. The bank reconciliation should be prepared monthly by a person with no other cash responsibilities.
AACSB: Reflective Thinking AICPA: FN Measurement 4-170 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements. Topic: Cash Controls
195.
Describe the procedures used to reconcile a company's cash balance.
For the bank's cash balance, deposits outstanding should be added and checks outstanding should be subtracted. For the company's cash balance, notes collected by the bank and interest earned should be added; service fees and NSF checks should be subtracted. As a final step in the reconciliation process, the company must record cash items used to reconcile the company's cash balance.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-05 Reconcile a bank statement. Topic: Bank Reconciliation
196.
What is the purpose of the statement of cash flows? List the three major categories of cash flows and give an example of a cash transaction for each category.
The purpose of the statement of cash flows is to summarize the transactions that caused cash to change during the reporting period. The statement of cash flows summarizes cash flows in three categories: operating, investing, and financing. Operating activities include cash flows related to transactions entering into the determination of net income, such as cash collections from customers, payments for operating expenses, and other receipts such as interest and dividends. Investing activities include purchasing and selling longterm assets or certain investment securities. Financing activities include borrowing or repaying loans, issuing stock, and payment of dividends.
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-07 Identify the major inflows and outflows of cash. 4-171 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Statement of Cash Flows
197.
What is the link between the balance sheet and the statement of cash flows? Describe the operating, investing, and financing sections of the statement of cash flows.
The balance sheet reports the final balance of cash at the end of the reporting period. The statement of cash flows reports inflows and outflows of cash during the reporting period. The beginning balance of cash plus net cash flows reported in the statement of cash flows equals the ending balance of cash reported in the balance sheet. Operating activities include cash transactions involving revenue and expense events during the period. Investing activities include cash investments in long-term assets and investment securities. Financing activities include transactions designed to raise cash or finance the business.
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-07 Identify the major inflows and outflows of cash. Topic: Statement of Cash Flows
4-172 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 05 Receivables and Sales
True / False Questions
1. Credit sales transfer products and services to a customer today while bearing the risk of collecting payment from that customer in the future. True
False
2. At the time of a credit sale, a company would record an increase in assets and an increase in revenues. True
False
3. A sale on account is recorded as a debit to Service Revenue and a credit to Accounts Receivable. True
False
4. Accounts receivable represent the amount of cash owed to the company by its customers from the sale of products or services on account. True
False
5. Trade discounts represent a discount offered to the purchasers for quick payment. True
False
6. When a company sells a $100 service with a 20% trade discount, $80 of revenue is recognized. True
False
5-1 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
7. A sales discount represents a reduction, not in the selling price of a product or service, but in the amount to be paid by a credit customer if payment is made within a specified period of time. True
False
8. A sale on account for $1,000 offered with terms 2/10, n/30 means that the customers will get a $2 discount if payment is made within 10 days; otherwise, full payment is due within 30 days. True
False
9. The Sales Discounts account is an example of a contra revenue account. True
False
10. The Sales Discounts account is an expense account. True
False
11. Sales returns and allowances occur when the buyer returns the goods or the seller reduces the customer's balance owed. True
False
12. A sales allowance is recorded as a debit to Accounts Receivable and a credit to Sales Allowances. True
False
13. The Sales Returns account is an expense account. True
False
5-2 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
14. If a company has total revenues of $100,000, sales discounts of $3,000, sales returns of $4,000, and sales allowances of $2,000, the income statement will report net revenues of $91,000. True
False
15. Accounts receivable are reported at their net realizable value. True
False
16. The net realizable value of accounts receivable is the full amount owed by customers. True
False
17. Customers' accounts that we no longer consider collectible are referred to as uncollectible accounts (or bad debts). True
False
18. The adjustment to account for future bad debts has the effect of (1) reducing assets and (2) increasing liabilities. True
False
19. The adjustment for uncollectible accounts involves a debit to Bad Debt Expense and a credit to the Allowance for Uncollectible Accounts. True
False
20. The Allowance for Uncollectible Accounts is a contra asset account representing the amount of accounts receivable that we do not expect to collect. True
False
21. Bad debt expense is the amount of the adjustment to the allowance for uncollectible accounts that represents the cost of the estimated future bad debts. True
False
5-3 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
22. If a company is owed $10,000 by its customers, but it expects that $1,000 will not be collected, accounts receivable in the balance sheet are reported at the net amount of $9,000. True
False
23. One disadvantage of the allowance method (over the direct write-off method) for recording uncollectible accounts is that it generally matches bad debt expense with the revenue it helped to generate. True
False
24. The direct write-off method involves recording an adjustment at the end of each period to account for the possibility of future uncollectible accounts. True
False
25. The percentage-of-receivables method for estimating uncollectible accounts is commonly referred to as the balance sheet method, because the estimate of bad debts is based on a balance sheet amount—accounts receivable. True
False
26. The aging method for estimating uncollectible accounts considers that a higher percentage of "older" accounts will not be collected compared to "newer" accounts. True
False
27. A company expects 5% of its newer accounts receivable to be uncollectible and 20% of its older accounts to be uncollectible. If the company has $40,000 of newer accounts and $5,000 of older accounts, the total estimate of uncollectible accounts is $2,000. True
False
28. Under the allowance method, when a company writes off an account receivable as an actual bad debt, it reduces total assets. True
False
5-4 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
29. Under the allowance method, when a company writes off an account receivable as an actual bad debt, it records an expense. True
False
30. Under the allowance method, the write-off of an actual bad debt is recorded with a debit to the Allowance for Uncollectible Accounts and a credit to Accounts Receivable. True
False
31. Under the allowance method, when a company collects cash from an account previously written off, total assets increase. True
False
32. A credit balance in the Allowance for Uncollectible Accounts before adjustment indicates that last year's estimate of uncollectible accounts may have been too high. True
False
33. A debit balance in the Allowance for Uncollectible Accounts before adjustment indicates that last year's estimate of uncollectible accounts was too low. True
False
34. Under the direct write-off method, bad debt expense is recorded at the time accounts are known to be uncollectible. True
False
35. The direct write-off method is used for tax purposes but is generally not permitted for financial reporting. True
False
36. The direct write-off method violates the matching principle. True
False
5-5 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
37. Under the direct write-off method, recording an estimate of future uncollectible accounts includes a debit to Bad Debt Expense and a credit to the Allowance for Uncollectible Accounts. True
False
38. Notes receivable are similar to accounts receivable but are more formal credit arrangements evidenced by a written debt instrument, or note. True
False
39. Notes receivable typically arise from sales to customers. True
False
40. Notes receivable are assets and are reported in the balance sheet. True
False
41. Interest on a note receivable is calculated as the face value of the note times the annual interest rate stated on the note times the fraction of the year the note is outstanding. True
False
42. A $10,000 note that has a stated interest rate of 10% and is due in six months would have interest of $1,000. True
False
43. Accrued interest on a note receivable is interest earned by the end of the year but not yet received. True
False
44. Accrued interest on a note receivable has the effects of increasing assets and increasing liabilities. True
False
5-6 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
45. Two important ratios that help in understanding the company's effectiveness in managing receivables are the receivables turnover ratio and the average collection period. True
False
46. The receivables turnover ratio shows the number of times during a year that the average accounts receivable balance is collected (or "turns over"). True
False
47. The receivables turnover ratio equals average accounts receivable divided by net credit sales. True
False
48. A lower receivables turnover ratio generally indicates more favorable management of accounts receivable by company managers. True
False
49. The average collection period shows the approximate number of days the average accounts receivable balance is outstanding. True
False
50. The percentage-of-credit-sales method for estimating uncollectible accounts is commonly referred to as the income statement method, because it always results in a higher amount of net income being reported in the income statement. True
False
51. Even though the percentage-of-receivables method and the percentage-of-credit-sales method use different accounts to estimate future uncollectible accounts, the amount of bad debt expense reported in the income statement will always be the same under the two methods. True
False
5-7 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
52. From an income statement perspective, the percentage-of-credit-sales method is typically preferable because it better matches the revenues (credit sales) with their related expenses (bad debts). True
False
53. From a balance sheet perspective, the percentage-of-receivables method is typically preferable because assets (net accounts receivable) are reported closer to their net realizable value. True
False
54. The percentage-of-credit-sales method (income statement method) is allowed only if amounts do not differ significantly from estimates using the percentage-of-receivables method. True
False
Multiple Choice Questions
55. Which of the following best describes credit sales?
A. Cash sales to customers that are new to the company. B. Sales to customers using credit cards. C. Sales to customers on account. D. Sales with a high risk that the customer will return the product. 56. Credit sales are recorded as:
A. Debit Cash, credit Deferred Revenue. B. Debit Service Revenue, credit Accounts Receivable. C. Debit Cash, credit Service Revenue. D. Debit Accounts Receivable, credit Service Revenue.
5-8 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
57. A company provides services on account. Indicate how this transaction would affect (1) assets, (2) stockholders' equity, and (3) revenues.
A. (1) Increase, (2) No effect (3) Increase B. (1) No effect, (2) Increase (3) Increase C. (1) Increase, (2) Increase (3) Increase D. (1) No effect, (2) No effect (3) No effect 58. Which of the following best describes accounts receivable?
A. The amount of cash owed by a company to its vendors for purchases of products or services on account. B. The amount of cash collected by a company from its customers from the sale of products or services on account. C. The amount of cash owed to a company by its customers from the sale of products or services on account. D. The amount of cash not expected to be collected by a company from its customers from the sale of products or services on account (bad debts). 59. The amount of cash owed to a company by its customers from the sale of products or services on account is commonly referred to as:
A. Cash. B. Accounts receivable. C. Revenue. D. Accounts payable. 60. Identify the likely disadvantage(s) of extending credit to customers.
A. Delay or failure to collect cash. B. Lower profitability. C. Lower revenues. D. All of the other answers are disadvantages of extending credit to customers.
5-9 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
61. Identify the likely advantage(s) of extending credit to customers.
A. Reduce accounts receivable. B. Increase sales. C. Reduce amounts owed to creditors. D. Increase employees' salaries. 62. Identify the condition(s) that must exist for a sale and the related receivable to be recognized.
A. Collection of cash is probable. B. The company must have collected cash from at least one previous sale to the customer. C. Goods or services have been provided to the customer. D. Two of the other answers are conditions that must exist. 63. Fleming Corp. provided services on account. The transaction would be recorded with a debit to:
A. Retained Earnings. B. Service Revenue. C. Accounts Receivable. D. Cash. 64. Fleming Corp. provided services on account. The transaction would be recorded with a credit to:
A. Accounts Payable. B. Service Revenue. C. Accounts Receivable. D. Cash.
5-10 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
65. Which of the following items are classified as receivables?
A. Tax refund claims. B. Amounts owed by customers. C. Amounts loaned and expected to be collected. D. All of the other answers are classified as receivables. 66. A trade discount results in:
A. A contra revenue account being recorded. B. A contra asset being recorded. C. Customers delaying cash payment. D. Revenue being recorded for the discounted price.
5-11 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
67. Barton Health Services provided care to a patient worth $1,200. Because the patient was over the age of 65, Barton granted the patient a 20% discount and the customer paid the correct amount in cash. How would Barton record the service transaction? A.
Cash
960
Service Revenue B.
960
Cash
960
Trade Discount
240
Service Revenue C.
Cash
1,200 1,200
Service Revenue D.
Cash
1,200 1,200
Trade Discount
240
Service Revenue
960
A. Option A B. Option B C. Option C D. Option D 68. When customers purchase products on account, Spitz Manufacturing offers them a 2% reduction in the amount owed if they pay within 10 days. This is an example of a:
A. Bad debt. B. Sales discount. C. Sales return. D. Sales allowances.
5-12 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
69. Garber Plumbers offers a 20% trade discount when providing $2,000 or more of plumbing services to its customers. In March 2018, Garber provided $4,000 of plumbing services to Red Oak Inc., and $1,500 of services to Cyril Inc., Each of these customers was granted credit terms of 2/10, net 30. If both customers paid for the plumbing services within the discount period, what was the net revenues amount for these two transactions?
A. $5,500. B. $4,312. C. $4,486. D. $4,606. 70. On July 8, Ray Inc. sold 100 printers to Office Rental Company at $600 each and offered a 2% discount for payment within 10 days. On July 15, Office Rental Company paid the full amount in cash. What should Ray Inc. record on July 15? A.
Cash
60,000
Accounts Receivable B.
Cash
60,000 58,800
Accounts Receivable C.
58,800
Cash
58,800
Sales Discounts
1,200
Accounts Receivable D.
Cash
60,000 60,000
Sales Discounts
1,200
Sales Revenue
58,800
A. Option A B. Option B C. Option C D. Option D
5-13 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
71. On March 17, Jackal Lumber sold building materials to Fredo Limited for $15,000 with terms of 3/10, net 20. What amount did Jackal record as revenue on March 25 when Fredo paid for the building materials?
A. $15,000. B. $14,550. C. $15,450. D. $0. 72. A company collects a customer's account within the discount period. Indicate how this transaction would affect (1) assets, (2) stockholders' equity, and (3) revenues.
A. (1) Decrease, (2) Decrease, (3) Decrease B. (1) Increase, (2) Increase, (3) Increase C. (1) Increase, (2) Increase, (3) No effect D. (1) No effect, (2) No effect, (3) No effect
5-14 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
73. On November 10 of the current year, Flores Mills sold carpet to a customer for $8,000 with credit terms 2/10, n/30. How would Flores record the sale on November 10? A. Accounts Receivable
7,840
Sales Revenue B. Accounts Receivable
7,840 8,000
Sales Revenue
8,000
C. Accounts Receivable
7,840
Cash Discounts
160
Sales Revenue D. Accounts Receivable
8,000 8,000
Cash Discounts
160
Sales Revenue
7,840
A. Option A B. Option B C. Option C D. Option D
5-15 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
74. On November 10 of the current year, Flores Mills provides services to a customer for $8,000 with credit terms 2/10, n/30. The customer made the correct payment on November 17. How would Flores record the collection of cash on November 17? A. Cash
7,840
Accounts Receivable B. Cash Sales Discounts
7,840 7,840 160
Accounts Receivable C. Cash Sales Revenue
8,000 7,840 160
Accounts Receivable D. Cash Accounts Receivable
8,000 8,000 8,000
A. Option A B. Option B C. Option C D. Option D
5-16 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
75. On November 10 of the current year, Flores Mills provides services to a customer for $8,000 with credit terms 2/10, n/30. The customer made the correct payment on December 5. How would Flores record the collection of cash on December 5? A. Cash
7,840
Accounts Receivable B. Cash Sales Discounts
7,840 7,840 160
Accounts Receivable C. Cash Sales Revenue
8,000 7,840 160
Accounts Receivable D. Cash Accounts Receivable
8,000 8,000 8,000
A. Option A B. Option B C. Option C D. Option D
5-17 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
76. Oswego Clay Pipe Company provides services of $46,000 to Southeast Water District #45 on April 12 of the current year with terms 1/15, n/60. What would Oswego record on April 12? A. Accounts Receivable
46,000
Sales Revenue B. Accounts Receivable
46,000 46,000
Sales Revenue
45,540
Sales Discounts
460
C. Accounts Receivable
45,540
Sales Revenue
45,540
D. Accounts Receivable
45,540
Sales Discounts
460
Sales Revenue
46,000
A. Option A B. Option B C. Option C D. Option D
5-18 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
77. Oswego Clay Pipe Company provides services of $46,000 to Southeast Water District #45 on April 12 of the current year with terms 1/15, n/60. What would Oswego record on April 23, assuming the customer made the correct payment on that date? A. Cash Sales Revenue
45,540 460
Accounts Receivable B. Cash Sales Discounts
46,000 46,000 460
Accounts Receivable
46,000
Interest Revenue C. Cash Sales Discounts
460 45,540 460
Accounts Receivable D. Cash Accounts Receivable Sales Revenue
46,000 46,000 45,540 460
A. Option A B. Option B C. Option C D. Option D
5-19 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
78. Oswego Clay Pipe Company provides services of $46,000 to Southeast Water District #45 on April 12 of the current year with terms 1/15, n/60. What would Oswego record on June 10, assuming the customer made the correct payment on that date? A. Cash
46,000
Accounts Receivable
45,540
Discounts Receivable
460
B. Cash
46,000
Accounts Receivable
45,540
Interest Revenue C. Cash
460 46,000
Accounts Receivable D. Cash Accounts Receivable Interest Revenue
46,000 46,460 46,000 460
A. Option A B. Option B C. Option C D. Option D 79. Which of the following is recorded upon receipt of a payment on April 7, 2018, by a customer who pays a $900 invoice dated March 3, 2018, with terms 2/10, n/60?
A. Debit Sales Discounts $18. B. Credit Purchase Discounts $18. C. Credit Accounts Receivable $882. D. Debit Cash $900.
5-20 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
80. Gershwin Wallcovering Inc. shipped the wrong shade of paint to a customer. The customer agreed to keep the paint upon being offered a 15% price reduction. The price reduction is an example of a:
A. Sales revenue. B. Sales discount. C. Sales return. D. Sales allowance. 81. Gershwin Wallcovering Inc. shipped the wrong shade of paint to a customer. The customer agreed to keep the paint upon being offered a 15% price reduction. Gershwin would record this reduction by crediting Accounts Receivable and debiting:
A. Sales Revenue. B. Sales Discounts. C. Sales Returns. D. Sales Allowances. 82. Tom's Textiles shipped the wrong material to a customer, who refused to accept the order. This is an example of a:
A. Sales revenue. B. Sales discount. C. Sales return. D. Sales allowance. 83. Tom's Textiles shipped the wrong material to a customer, who refused to accept the order. Upon receipt of the material, Tom's would credit Accounts Receivable and debit:
A. Sales Revenue. B. Sales Discounts. C. Sales Returns. D. Sales Allowances.
5-21 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
84. A company records a sales return from a credit customer. Indicate how this transaction would affect (1) assets, (2) stockholders' equity, and (3) revenues.
A. (1) Decrease, (2) Decrease, (3) Decrease B. (1) Decrease, (2) No effect, (3) Decrease C. (1) Decrease, (2) Decrease, (3) No effect D. (1) No effect, (2) No effect, (3) No effect 85. Lewis Inc. had the following information taken from various accounts at the end of the year: Sales discounts
$41,000
Deferred revenues
$32,000
Total sales
$459,000
Purchase discounts
$15,000
Sales allowances
$35,000
Accounts receivable
$205,000
What was Lewis Inc.'s net revenues for the year?
A. $368,000. B. $434,000. C. $383,000. D. $437,000.
5-22 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
86. Eric Company has the following information: Total revenues
$860,000
Sales returns and allowances
$50,000
Sales discounts
$30,000
Ending inventory
$100,000
What is the amount of net revenues for Eric Company?
A. $330,000. B. $230,000. C. $680,000. D. $780,000. 87. Boynton Jewelers reported the following amounts at the end of the year: total sales = $550,000; sales discounts = $12,000; sales returns = $44,000; sales allowances = $17,000. What was the company's net revenues for the year?
A. $489,000. B. $485,000. C. $477,000. D. $499,000. 88. Ryerson Co. provides goods and services to customers during the year totaling $100,000. Also during the year, customers are granted discounts, returns, and allowance of $20,000. At the end of the year, Ryerson estimates that an additional $5,000 in discounts, returns, and allowances will occur next year as a result of sales transactions this year. What is the amount of net revenues Ryerson will report in its current-year income statement?
A. $85,000. B. $75,000. C. $100,000. D. $80,000.
5-23 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
89. Accounts receivable are normally reported at the:
A. Present value of future cash receipts. B. Current value plus accrued interest. C. Expected amount to be received. D. Current value less expected collection costs. 90. The amount of cash that is actually expected to be collected on accounts receivable is referred to as:
A. Net realizable value. B. Allowance for uncollectible accounts. C. Net income. D. Net revenue. 91. The percentage-of-receivables method for estimating uncollectible accounts is sometimes described as:
A. The balance sheet method. B. The sales method. C. The income statement method. D. The aging method. 92. The percentage-of-receivables method for accounting for uncollectible accounts focuses on the:
A. Total credit sales for the year. B. Ratio of accounts receivable to sales. C. Net realizable value of accounts receivable. D. Cash flows from sales.
5-24 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
93. The first step in using a balance sheet approach to estimate bad debts is to calculate the desired ending balance in which account?
A. Accounts receivable. B. Allowance for uncollectible accounts. C. Bad debt expense. D. Credit sales. 94. The purpose of recording an allowance for uncollectible accounts is to:
A. Record the sales returns and allowances. B. Report net sales conservatively. C. Report accounts receivable at net realizable value. D. Report accounts receivable for the total amount of sales in the period. 95. A company's adjustment for uncollectible accounts at year-end would include a:
A. Debit to Bad Debt Expense. B. Credit to Accounts Receivable. C. Debit to Accounts Receivable. D. Debit to Allowance for Uncollectible Accounts. 96. One advantage of the allowance method for accounting for uncollectible accounts is that the company reports:
A. Bad debt expense in the same period as the credit sale. B. Greater total sales to customers. C. Fewer returns by customers. D. Greater total cash collected from customers.
5-25 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
97. The account "Allowance for Uncollectible Accounts" is classified as a(n):
A. Liability account in the balance sheet. B. Contra revenue to credit sales in the income statement. C. Expense in the income statement. D. Contra asset to accounts receivable in the balance sheet. 98. Allowance for Uncollectible Accounts is:
A. An expense account. B. A contra asset account. C. A contra revenue account. D. A liability account. 99. The normal balance of the account "Allowance for Uncollectible Accounts" is a _______ because _______.
A. Debit; it is a contra account to Revenue (a credit account) B. Credit; it is a contra account to Accounts Receivable (a debit account) C. Debit; it is an expense in the income statement D. Credit; it is a contra account to Bad Debt Expense (a debit account) 100.Shupe Inc. estimates uncollectible accounts based on the percentage of accounts receivable. What effect will recording the estimate of uncollectible accounts have on the accounting equation?
A. Increase liabilities and decrease stockholders' equity. B. Decrease assets and decrease liabilities. C. Decrease assets and decrease stockholders' equity. D. Increase assets and decrease stockholders' equity.
5-26 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
101.Under the allowance method, which of the following does not change the balance in the Accounts Receivable account?
A. Returns on credit sales. B. Collections on customer accounts. C. Bad debt expense adjustment. D. Write-offs. 102.At December 31, Gill Co. reported accounts receivable of $238,000 and an allowance for uncollectible accounts of $600 (credit) before any adjustments. An analysis of accounts receivable suggests that the allowance for uncollectible accounts should be 3% of accounts receivable. The amount of the adjustment for uncollectible accounts would be:
A. $6,540. B. $7,800. C. $7,140. D. $7,740. 103.At December 31, Gill Co. reported accounts receivable of $238,000 and an allowance for uncollectible accounts of $600 (debit) before any adjustments. An analysis of accounts receivable suggests that the allowance for uncollectible accounts should be 3% of accounts receivable. The amount of the adjustment for uncollectible accounts would be:
A. $6,540. B. $7,800. C. $7,140. D. $7,740.
5-27 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
104.At December 31, Amy Jo's Appliances had account balances in Accounts Receivable of $311,000 and in Allowance for Uncollectible Accounts of $970 (credit) before any adjustments. An analysis of Amy Jo's December 31 accounts receivable suggests that the allowance for uncollectible accounts should be 2% of accounts receivable. Bad debt expense for the year should be:
A. $6,220. B. $6,450. C. $5,250. D. $7,190. 105.At December 31, Amy Jo's Appliances had account balances in Accounts Receivable of $311,000 and in Allowance for Uncollectible Accounts of $970 (debit) before any adjustments. An analysis of Amy Jo's December 31 accounts receivable suggests that the allowance for uncollectible accounts should be 2% of accounts receivable. Bad debt expense for the year should be:
A. $6,220. B. $6,450. C. $5,250. D. $7,190. 106.At the end of 2018, Murray State Lenders had a balance in its Allowance for Uncollectible Accounts of $4,500 (credit) before any adjustment. The company estimated its future uncollectible accounts to be $12,000 using the percentage-of-receivables method. Murray State's adjustment on December 31, 2018, to record its estimated uncollectible accounts included a:
A. Credit to Allowance for Uncollectible Accounts of $12,000. B. Debit to Bad Debt Expense of $7,500. C. Credit to Allowance for Uncollectible Accounts of $7,500. D. Debit to Bad Debt Expense of $7,500; credit to Allowance for Uncollectible Accounts of $7,500.
5-28 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
107.At the end of 2018, Murray State Lenders had a balance in its Allowance for Uncollectible Accounts of $4,500 (debit) before any adjustment. The company estimated its future uncollectible accounts to be $12,000 using the percentage-of-receivables method. Murray State's adjustment on December 31, 2018, to record its estimated uncollectible accounts included a:
A. Credit to Allowance for Uncollectible Accounts of $12,000. B. Debit to Bad Debt Expense of $16,500. C. Credit to Allowance for Uncollectible Accounts of $16,500. D. Debit to Bad Debt Expense of $16,500; credit to Allowance for Uncollectible Accounts of $16,500. 108.At December 31, Tremble Music had account balances in Accounts Receivable of $300,000 and in Allowance for Uncollectible Accounts of $1,000 (debit) before any adjustments. An analysis of Tremble's December 31 accounts receivable suggests that 5% of the account balances are not expected to be collected. The balance of Allowance for Uncollectible Accounts after adjustment will be:
A. $1,000. B. $16,000. C. $14,000. D. $15,000. 109.At December 31, Tremble Music had account balances in Accounts Receivable of $300,000 and in Allowance for Uncollectible Accounts of $1,000 (credit) before any adjustments. An analysis of Tremble's December 31 accounts receivable suggests that 5% of the account balances are not expected to be collected. The balance of Allowance for Uncollectible Accounts after adjustment will be:
A. $1,000. B. $15,000. C. $16,000. D. $14,000.
5-29 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
110.At the end of the year, Mark Inc. estimates future bad debts to be $6,500. The Allowance for Uncollectible Accounts has a credit balance of $2,500 before any year-end adjustment. What adjustment should Mark Inc. record for the estimated bad debts at the end of the year?
A. Debit Bad Debt Expense, $6,500; credit Allowance for Uncollectible Accounts, $6,500. B. Debit Bad Debt Expense, $4,000; credit Allowance for Uncollectible Accounts $4,000. C. Debit Allowance for Uncollectible Accounts, $9,000; credit Bad Debt Expense, $9,000. D. Debit Bad Debt Expense, $9,000; credit Allowance for Uncollectible Accounts, $9,000. 111.Suppose that the balance of a company's Allowance for Uncollectible Accounts was $6,200 (credit) at the end of the year, prior to any adjustments. The company estimated that the total of uncollectible accounts in its accounts receivable was $44,300 at the end of the year. What amount of bad debt expense would appear in the company's year-end income statement?
A. $38,100. B. $105,700. C. $33,000. D. $50,500. 112.Prior to year-end adjusting entries, what would explain the Allowance for Uncollectible Accounts having a debit balance?
A. The amount of cash collections from customers in the current year was less the amount of cash collections from customers in the prior year. B. The amount of actual uncollectible accounts in the current year was less than the estimate of uncollectible accounts made at the end of the prior year. C. The amount of credit sales in the current year was greater than the amount of credit sales made in the prior year. D. The amount of actual uncollectible accounts in the current year was greater than the estimate of uncollectible accounts made at the end of the prior year.
5-30 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
113.Suppose at the end of the year before any adjusting entries, a company has a balance in Allowance for Uncollectible Accounts of $5,000 (debit). During the year, the company reported the following amounts: Credit sales to customers = $550,000 Cash collections from customers = $540,000 Actual bad debts = $20,000 What was the balance of Allowance for Uncollectible Accounts at the beginning of the year?
A. $10,000. B. $20,000. C. $15,000. D. $25,000. 114.If the estimate of uncollectible accounts at the end of the current year is too high, which of the following is true in the following year?
A. Cash collections from customers will be greater than expected. B. The balance of Allowance for Uncollectible Accounts will be a credit prior to its year-end adjustment. C. The amount reported for Bad Debt Expense will be less than the ending balance of Allowance for Uncollectible Accounts after its year-end adjustment. D. All of the other answers are true in the following year.
5-31 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
115.On December 31, 2018, Coolwear Inc. had balances in Accounts Receivable and Allowance for Uncollectible Accounts of $48,400 and $940, respectively. During 2019, Coolwear wrote off $820 in accounts receivable and determined that there should be an allowance for uncollectible accounts of $1,140 at December 31, 2019. Bad debt expense for 2019 would be:
A. $320. B. $1,140. C. $820. D. $1,020. 116.On December 31, 2018, Larry's Used Cars had balances in Accounts Receivable and Allowance for Uncollectible Accounts of $53,600 and $1,325, respectively. During 2019, Larry's wrote off $1,465 in accounts receivable and determined that there should be an allowance for uncollectible accounts of $1,280 at December 31, 2019. Bad debt expense for 2019 would be:
A. $1,280. B. $1,465. C. $1,420. D. $1,140. 117.For accounts receivable, the longer an account is outstanding, the:
A. Better the customer. B. More likely it will prove uncollectible. C. More likely the customer will return. D. Higher probability of it being collected.
5-32 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
118.The method of estimating uncollectible accounts based on the length of time the amount is owed by the customer is referred to as the:
A. Activity method. B. Realization method. C. Direct write-off method. D. Aging method. 119.When using an aging method for estimating uncollectible accounts:
A. Older accounts are considered less likely to be collected. B. The number of days the account is past due is not considered. C. Older accounts are considered more likely to be collected. D. No estimate of uncollectible accounts is made. 120.Compared to other methods of estimating uncollectible accounts, the aging of accounts receivables method tends to:
A. Be more accurate. B. Result in the highest net income. C. Result in the lowest net income. D. Recognize bad debts earlier.
5-33 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
121.On December 31, 2018, Andy Inc. has a debit balance of $1,500 for the Allowance for Uncollectible Accounts before any year-end adjustment. Andy Inc. also has the following information for its accounts receivable and the estimated percentages of bad debts for different past-due amounts:
Age Group (days past
Accounts Estimated Percent Receivable
Uncollectible
due) 0-30
$50,000
5%
31-60
$20,000
10%
61-90
$10,000
20%
What is the amount of bad debt expense to be reported on Andy Inc.'s financial statements for 2018 using the aging method?
A. $6,500. B. $1,500. C. $5,000. D. $8,000.
5-34 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
122.McConnell's Bakeries had the following balances on December 31, 2018, before any adjustment: Accounts Receivable = $100,000; Allowance for Uncollectible Accounts = $4,100 (credit). McConnell's estimates uncollectible accounts based on an aging of accounts receivable as shown below:
Age
Accounts
Group(days
Receivable
past due)
Estimated Percent Uncollectible
Not yet due
$50,000
4%
0-30
$20,000
8%
31-60
$18,000
10%
More than 60
$12,000
40%
What amount of bad debt expense did McConnell's record in its December 31, 2018, adjustment to the allowance account?
A. $10,200. B. $12,800. C. $15,300. D. $6,100.
5-35 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
123.Timkin creates the following accounts receivable aging report at the end of the year: Age
Amount
Estimated uncollectible
Less than 30
$6,000
5%
31-60 days
$4,000
10%
61+ days
$2,000
25%
days
Prior to adjusting entries, the Allowance for Uncollectible Accounts has a debit balance of $500. The year-end adjustment would include a:
A. Credit to Allowance for Uncollectible Accounts for $1,200. B. Debit to Bad Debt Expense for $700. C. Debit to Bad Debt Expense for $1,700. D. Debit to Bad Debt Expense for $1,200. 124.Crimson Inc. recorded credit sales of $750,000, of which $600,000 is not yet due, $100,000 is past due for up to 180 days, and $50,000 is past due for more than 180 days. Under the aging of receivables approach, Crimson Inc. expects it will not collect 1% of the amount not yet due, 10% of the amount past due for up to 180 days, and 20% of the amount past due for more than 180 days. The allowance account had a debit balance of $1,000 before adjustment. After adjusting for bad debt expense, what is the ending balance of the allowance account?
A. $29,000. B. $28,000. C. $27,000. D. $26,000.
5-36 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
125.During the year, Bears Inc. recorded credit sales of $500,000. Before adjustments at yearend, Bears has accounts receivable of $300,000, of which $50,000 is past due, and the allowance account had a credit balance of $2,500. Using the aging of receivables approach, what would be the adjustment assuming Bears expects it will not to collect 5% of the amount not yet past due and 20% of the amount past due? A. Bad Debt Expense
22,500
Allowance for Uncollectible Accounts B. Bad Debt Expense
22,500 25,000
Allowance for Uncollectible Accounts C. Bad Debt Expense
25,000 20,000
Allowance for Uncollectible Accounts
20,000
Allowance for Uncollectible D. Accounts Bad Debt Expense
20,000 20,000
A. Option A B. Option B C. Option C D. Option D
5-37 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
126.The following information pertains to Lightning Inc., at the end of December: Credit Sales
$60,000
Accounts Payable
10,000
Accounts Receivable
7,000
Allowance for Uncollectible
$400 credit
Accounts Cash Sales
20,000
Lightning uses the aging method and estimates it will not collect 2% of accounts receivable not yet due, 10% of receivables less than 30 days past due, and 40% of receivables greater than 30 days past due. The accounts receivable balance of $7,000 consists of $3,500 not yet due, $2,000 less than 30 days past due, and $1,500 greater than 30 days past due. What is the appropriate amount of Bad Debt Expense?
A. $400. B. $470. C. $870. D. $1,270. 127.When $2,500 of accounts receivable are determined to be uncollectible, which of the following should the company record to write off the accounts using the allowance method?
A. A debit to Bad Debt Expense and a credit to Allowance for Uncollectible Accounts. B. A debit to Allowance for Uncollectible Accounts and a credit to Bad Debt Expense. C. A debit to Bad Debt Expense and a credit to Accounts Receivable. D. A debit to Allowance for Uncollectible Accounts and a credit to Accounts Receivable. 128.Using the allowance method, writing off an actual bad debt would include a:
A. Debit to Bad Debt Expense. B. Credit to Accounts Receivable. C. Debit to Accounts Receivable. D. Credit to Allowance for Uncollectible Accounts.
5-38 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
129.Richard LLC accounts for possible bad debts using the allowance method. When an actual bad debt occurs, what effect does it have on the accounting equation?
A. Increases assets and increases stockholders' equity. B. Decreases assets and decreases stockholders' equity. C. Decreases assets and decreases liabilities. D. No effect on the accounting equation. 130.Which of the following is recorded by a credit to Accounts Receivable?
A. Sale of inventory on account. B. Estimating the annual allowance for uncollectible accounts. C. Estimating annual sales returns. D. Write-offs of bad debts. 131.Lail Inc. accounts for bad debts using the allowance method. On June 1, Lail Inc. wrote off Andrew Green's $2,500 account. Based on Lail's estimation, Andrew Green will never pay any portion of the balance in his account. What effect will this write-off have on Lail Inc.'s balance sheet at the time of the write-off?
A. An increase to stockholders' equity and a decrease to liabilities. B. No effect. C. An increase to assets and an increase to stockholders' equity. D. A decrease to assets and a decrease to stockholders' equity. 132.At the beginning of 2018, the balance in Jackson Enterprises' Allowance for Uncollectible Accounts was $31,800. During 2018, the company wrote off $38,000 of accounts receivable. Writing off the individual bad debts would include a:
A. Debit to Bad Debt Expense. B. Credit to Accounts Receivable. C. Credit to the Allowance for Uncollectible Accounts. D. Debit to Bad Debt Expense; credit to the Allowance for Uncollectible Accounts.
5-39 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
133.The current year's beginning and ending balances for Allowance for Uncollectible Accounts is $23,000 and $27,000, respectively. If the amount of Bad Debt Expense for the year is $18,000, what is the amount of actual bad debts for the year?
A. $14,000. B. $10,000. C. $18,000. D. $22,000. 134.Collections of accounts receivable that previously have been written off are credited to:
A. A Gain account. B. Accounts Receivable. C. Bad Debt Expense. D. Retained Earnings. 135.A company collects an account receivable previously written off. Indicate how this transaction would affect (1) assets, (2) stockholders' equity, and (3) revenues.
A. Increase, (2) Increase, (3) Decrease B. Increase, (2) Increase, (3) Increase C. Increase, (2) Increase, (3) Increase D. No effect, (2) No effect, (3) No effect 136.The direct write-off method is used when:
A. Uncollectible accounts are not anticipated or are immaterial. B. A company elects to use this method as one of several alternatives. C. A company has greater cash outflows than cash inflows. D. A company expects excessive sales returns.
5-40 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
137.Which method is not allowed under Generally Accepted Accounting Principles for the purpose of accounting for uncollectible accounts?
A. Allowance method. B. Direct write-off method. C. Aging method. D. Percentage-of-receivables method. 138.The direct write-off method is not normally an acceptable method for GAAP because it fails to report:
A. Revenue from the sale of goods or services to customers. B. Cash collected from customers. C. Accounts receivable for their net realizable value. D. The amounts receivable from customers. 139.The direct write-off method is generally not permitted for financial reporting purposes because:
A. Compared to the allowance method, it would allow greater flexibility to managers in manipulating reported net income. B. This method is primarily used for tax purposes. C. It is too difficult to accurately estimate future bad debts. D. Expenses (bad debts) are not properly matched with the revenues (credit sales) that they help to generate. 140.Which accounting concept does the direct write-off method violate?
A. Total assets equal total liabilities plus total stockholders' equity. B. Recording amount owed within one year as current liabilities. C. Recognizing revenue when goods or services are provided to customers. D. An attempt to match revenues and their related expenses.
5-41 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
141.If the direct write-off method is used to account for uncollectible accounts, which of the following statements is false?
A. An allowance account is not used. B. No adjustment is made at the end of the year to estimate future uncollectible accounts. C. Accounts receivable will be reported at their net realizable value. D. Bad debt expense is recorded at the time an actual bad debt is written-off. 142.Under the direct write-off method, what adjustment is made at the end of the year to account for possible future bad debts?
A. Debit Bad Debt Expense. B. Debit Allowance for Uncollectible Accounts. C. Credit Accounts Receivable. D. No adjustment is made. 143.Under the direct write-off method, what adjustment is made at the time an actual bad debt occurs?
A. Debit Bad Debt Expense, credit Allowance for Uncollectible Accounts. B. Debit Allowance for Uncollectible Accounts, credit Accounts Receivable. C. Debit Bad Debt Expense, credit Accounts Receivable. D. No adjustment is made. 144.The distinction between the direct write-off method and the allowance method is:
A. The year in which cash is collected from customers. B. The cumulative amount of bad debt expense reported across years. C. The customers to which goods or services are provided. D. The amount of bad debt expense reported in each year.
5-42 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
145.The direct write-off method is an acceptable method for what purpose?
A. Issuing financial statements to stockholders. B. Tax reporting. C. Compliance with Generally Accepted Accounting Principles. D. Financial reporting. 146.The primary difference between a note receivable and an account receivable is:
A. A note receivable cannot be classified as a current asset. B. Borrowers have the option of not paying a note receivable. C. An account receivable is more likely to be collected. D. A note receivable is evidenced by a written debt instrument. 147.A(n) ______ receivable is an informal credit arrangement with trade customers, whereas a(n) ______ receivable is a formal signed credit arrangement between a creditor and a debtor.
A. Account; Note B. Revenue; Note C. Note; Account D. Allowance; Stock 148.A note receivable is reported in the balance sheet:
A. Always as a current asset. B. Always as a long-term asset. C. As either a current asset or long-term asset depending on the expected collection date. D. As a contra asset.
5-43 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
149.Suppose a customer is unable to pay its account on time, so the company accepts a sixmonth interest-bearing note receivable to replace the customer's account receivable. What effect will accepting the note receivable have on the company's financial statements at the time of acceptance?
A. Total assets increase. B. Total assets decrease. C. No change in total assets. D. Total revenues increase. 150.Suppose a customer is unable to pay its account on time, so the company accepts a sixmonth interest-bearing note receivable to replace the customer's account receivable. Over the next six months, what effect will accepting the note receivable have on the company's financial statements?
A. Total assets increase. B. Total revenues increase. C. Net income increases. D. All of the other answers are financial statements effects that will occur. 151.Hughes Aircraft sold a four-passenger airplane for $380,000, receiving a $50,000 down payment and a 12% note for the balance. This transaction would include a:
A. Credit to Cash. B. Debit to Sales Discount. C. Debit to Notes Receivable. D. Credit to Notes Receivable.
5-44 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
152.On February 1, 2018, Middleton Corp. lends cash and accepts a $1,000 note receivable that offers 12% interest and is due in six months. How much interest revenue will Middleton Corp. report during 2018?
A. $120. B. $240. C. $100. D. $60. 153.On February 1, 2018, Sanger Corp. lends cash and accepts a $2,000 note receivable that offers 10% interest and is due in six months. What would Sanger record on August 1, 2018, when the borrower pays Sanger the correct amount owed? A. Cash Interest Revenue
2,000 100
Notes Receivable B. Cash
2,100 2,100
Notes Receivable C. Cash
2,100 2,100
Interest Revenue
100
Notes Receivable
2,000
D. Cash Notes Receivable
2,200 2,200
A. Option A B. Option B C. Option C D. Option D
5-45 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
154.On September 1, 2018, Middleton Corp. lends cash and accepts a $1,000 note receivable that offers 12% interest and is due in six months. How much interest revenue will Middleton Corp. report during 2018?
A. $20. B. $40. C. $30. D. $60. 155.On August 1, 2018, Turner Manufacturing lends cash and accepts a $6,000 note receivable that offers 8% interest and is due in nine months. How would Turner record the year-end adjustment to accrue interest in 2018? A. Interest Revenue
360
Interest Receivable B. Interest Receivable
360 480
Interest Revenue C. Interest Receivable
480 360
Interest Revenue D. Interest Receivable Interest Revenue
360 200 200
A. Option A B. Option B C. Option C D. Option D
5-46 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
156.On September 1, 2018, Middleton Corp. lends cash and accepts a $1,000 note receivable that offers 12% interest and is due in six months. How much interest revenue will Middleton Corp. report during 2019?
A. $20. B. $40. C. $30. D. $60. 157.On July 1, 2018, Herzog Mining lends cash and accepts a $9,000 note receivable that offers 10% interest and is due in nine months. How would Herzog record the transaction on April 1, 2019, when the borrower pays Herzog the correct amount owed? A. Cash
9,675
Notes Receivable
9,000
Interest Revenue
675
B. Cash
9,675
Notes Receivable
9,000
Interest Revenue
225
Interest Receivable
450
C. Cash
9,675
Notes Receivable
9,000
Interest Receivable
675
D. Cash Notes Receivable
9,675 9,675
A. Option A B. Option B C. Option C D. Option D
5-47 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
158.On January 1, 2018, Alice & Co. lends $5,000 to an employee and accepts a 24-month, 10% note. At the end of 2018, what effect will the adjustment for accrued interest revenue have on the Alice & Co.'s financial statements?
A. Decreases assets. B. Decreases revenue. C. Increases expense. D. Increases stockholders' equity. 159.On October 1, 2018, Stripes Inc. lends $100,000 to another company and accepts a 24-month, 6% note. What is the amount of interest revenue Stripes will report in its 2018 income statement?
A. $750. B. $1,500. C. $4,500. D. $6,000. 160.On October 1, 2018, Stripes Inc. lends $100,000 to another company and accepts a 24-month, 6% note. What is the amount of interest revenue Stripes will report in its 2019 income statement?
A. $0. B. $1,500. C. $4,500. D. $6,000.
5-48 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
161.On October 1, 2018, Stripes Inc. lends $100,000 to another company and accepts a 24-month, 6% note. What is the amount of interest revenue Stripes will report in its 2020 income statement?
A. $0. B. $4,500. C. $6,000. D. $12,000. 162.On September 1, 2018, Heartford Construction lends $50,000 to a customer with 10% interest. The note and interest are due in twelve months. The note receivable is recorded for $50,000 on September 1, but no other adjustments are made in 2018. At the end of 2018, which of the following is true?
A. Assets are overstated. B. Revenues are understated. C. Expenses are understated. D. All amounts are accurately stated. 163.On September 1, 2018, Heartford Construction lends $50,000 to a customer with 9% interest. The note and interest are due in twelve months. The note receivable is recorded for $50,000 on September 1, and the following year-end adjusting entry is made on December 31, 2018: Interest Receivable Interest Revenue
4,500 4,500
At the end of 2018, which of the following is true?
A. Revenues are understated. B. Liabilities are understated. C. Assets are overstated. D. All amounts are accurately stated.
5-49 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
164.The amount of a company's receivables is influenced by several variables, including all of the following except:
A. The level of sales. B. The nature of the product or service sold. C. The credit and collection policies. D. Dividend payments to stockholders. 165.The formula for the receivables turnover ratio is:
A. Average accounts receivable divided by average total assets. B. Net credit sales divided by average accounts receivable. C. Net credit sales divided by average total assets. D. Average accounts receivable divided by net credit sales. 166.The receivables turnover ratio indicates:
A. How efficient the company is at managing sales and inventory. B. The relationship between sales and cost of goods sold. C. The number of times during a year that the average accounts receivables were collected. D. The relationship between cash sales and credit sales. 167.An increase in a company's receivables turnover ratio typically means the company is:
A. Having trouble paying debts as they become due. B. Less profitable. C. More effectively granting and collecting credit to customers. D. Losing customers to its competitors.
5-50 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
168.At the beginning of the year, Vici Ventures had accounts receivable of $220,000. At the end of the year, the company had accounts receivable of $340,000. During the year, Vici had total sales of $1,000,000, 70% of which were credit sales. What was Vici's receivables turnover ratio for the year?
A. 2.50. B. 3.57. C. 2.94. D. 146 days. 169.Sandburg Veterinarian reports the following information for the year: Net credit sales
$120,000
Average accounts receivable
20,000
Cash collections on credit sales
100,000
What is Sandburg's receivables turnover ratio?
A. 6.0. B. 5.0. C. 1.2. D. 0.2. 170.Beverage International reports net credit sales for the year of $240,000. The company's accounts receivable balance at the beginning of the year equaled $20,000 and the balance at the end of the year equaled $30,000. What is Beverage International's receivables turnover ratio?
A. 12.0. B. 9.6. C. 8.0. D. 1.5.
5-51 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
171.Toppleson Manufacturing reports a receivables turnover ratio of 14.5. The industry average is 10.7. What most likely is causing this difference?
A. Toppleson is selling to high-risk customers. B. Toppleson has effective procedures related to selling goods on account. C. Toppleson provides superior products and services. D. Toppleson allows customers too long to pay. 172.A company's ratio of net sales (cash and credit sales) to average accounts receivable can be interpreted as management's ability to:
A. Collect cash from all sales to customers. B. Effectively market its products and services. C. Generate profits for investors. D. Reduce costs of selling products and services to customers. 173.The formula for average collection period is:
A. 365 days divided by the receivable turnover ratio. B. 365 days divided by net credit sales. C. 365 days divided by average accounts receivable. D. Net credit sales divided by average accounts receivable. 174.What is the most likely reason for a company to have an increase in average collection period?
A. The company has incurred additional marketing expenses to attract customers. B. Customers are paying in a timelier manner. C. The company has tightened its credit policies for its customers. D. The company has become more lenient in its credit policies and is extending credit terms to maintain customers.
5-52 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
175.Red Company has the following information: Net credit sales = $400,000 Net income = $100,000 Average total assets = $80,000 Average accounts receivable = $20,000 What is Red's average collection period (rounded to the nearest whole day)?
A. 73 days. B. 18 days. C. 9 days. D. 5 days. 176.The percentage-of-credit-sales method for estimating uncollectible accounts is sometimes described as:
A. The balance sheet method. B. The method most used by companies. C. The income statement method. D. The percentage-of-receivables method. 177.The income statement approach for estimating bad debts uses a percentage of
A. Credit sales. B. Accounts receivable. C. Allowance for uncollectible accounts. D. Bad debt expense.
5-53 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
178.Which of the following statements is true with respect to the percentage-of-credit-sales method for estimating uncollectible accounts?
A. The amount recorded for bad debt expense does not depend on the balance of the allowance for uncollectible accounts. B. This method is referred to as the balance sheet approach. C. This method does not allow for future uncollectible accounts. D. Under this method, bad debt expense is recorded at the time of an actual bad debt. 179.Which of the following provides an accurate match?
A. Percentage-of-receivables method ~ Assets are reported closer to their net realizable value. B. Allowance method ~ Receivables are reported net of estimated uncollectible accounts. C. Percentage-of-credit-sales method ~ Revenues and expenses are better matched. D. All of the other answers provide an accurate match. 180.The following information pertains to Lindsey Corp. at the end of the year: Credit Sales
$150,000
Accounts Payable
20,000
Accounts Receivable
30,000
Allowance for Uncollectible
800 debit
Accounts Cash Sales
5,500
Lindsey Corp. uses the percentage-of-credit-sales method and estimates that 2% of the credit sales are uncollectible. After the year-end adjustment, what amount of bad debt expense would Lindsey report for the year?
A. $1,200. B. $2,200. C. $3,000. D. $3,800.
5-54 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
181.The following information pertains to Lightning Inc., at the end of the year: Credit Sales
$60,000
Accounts Payable
10,000
Accounts Receivable
7,000
Allowance for Uncollectible
400 credit
Accounts Cash Sales
20,000
Lightning uses the percentage-of-credit-sales method and estimates 1% of sales are uncollectible. What is the ending balance of the allowance account after the year-end adjustment?
A. $600. B. $1,000. C. $200. D. $1,200. 182.Using the income statement approach for accounting for uncollectible accounts, a company estimates that 2.5% of credit sales will eventually become uncollectible. If credit sales during the year are $400,000 and accounts receivable at the end of the year are $80,000, the adjustment for estimated uncollectible accounts will require a:
A. Credit to Accounts Receivable for $2,000. B. Debit to Bad Debt Expense for $10,000. C. Debit to Allowance for Uncollectible Accounts for $10,000. D. Credit to Bad Debt Expense for $8,000.
Matching Questions
5-55 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
183.Match each term related to net revenues with its description.
1. Net revenues
Total revenues less contra revenues. ____ Reduction in revenue because the product or service is
2. Sales returns
sold below the listed price. ____ Reduction in revenue because the customer brings back
3. Contra revenues
products to the company after the original purchase. ____ Reduction in revenue because of some deficiency in the
4. Sales discounts
company's product or service. ____ Reduction in revenue when the customer pays within a
5. Trade discounts
specified period. ____
6. Sales allowances
Accounts with balances opposite of revenue. ____
184.Match each term related to the allowance method for uncollectible accounts with its description.
The account used to record sales on account to 1. Bad debt expense
customers. ____ The procedure required for financial reporting
2. No effect
purposes to account for uncollectible accounts. ____ The difference between total accounts receivable and
3. Allowance method
the estimate of future bad debts. ____ The effect on total assets when estimating future bad
4. Net realizable value
debts. ____ The account to credit when estimating future bad
5. Decrease
debts. ____ The effect on total expenses when estimating future
6. Accounts receivable
bad debts. ____ The account to debit when estimating future bad
7. Increase 8. Allowance for Uncollectible Accounts
debts. ____ The effect on total liabilities when estimating future bad debts. ____
5-56 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
185.Match each term related to the comparison between the allowance method and direct writeoff method for uncollectible accounts with its description.
The procedure commonly used for financial reporting purposes to account for uncollectible 1. Direct write-off method
accounts. ____ The procedure commonly used for tax reporting
2. Increase
purposes to account for uncollectible accounts.
____
The account to credit when writing off an actual 3. Bad debt expense
bad debt under the allowance method.
____
The account to debit when writing off an actual 4. Decrease
bad debt under the direct write-off method. ____ The account to debit when writing off an actual
5. Accounts receivable
bad debt under the allowance method.
____
The effect on total expenses when writing off an 6. No effect
actual bad debt under the direct write-off method. ____
7. Allowance for Uncollectible
The effect on total assets when estimating future
Accounts
bad debts under the allowance method. ____ The effect on total expenses when estimating
8. Allowance method
future bad debts under the direct write-off method. ____
186.Match each account with its description.
1. Accounts receivable
Informal credit arrangements with trade customers. ____ Account to debit when interest accrues at the end of
2. Interest revenue
the year. ____ Account to credit when interest accruals at the end
3. Notes receivable
of the year. ____ Formal signed credit arrangements between a
4. Interest receivable
creditor and a debtor. ____ Account to debit when receivables and interest are
5. Cash
collected. ____
5-57 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
187.Match each term related to receivables analysis with its description.
The approximate number of days the average 1. Less
accounts receivable balance is outstanding.
____
An increase in the receivables turnover ratio generally indicates the company manages its receivables _____ 2. Decrease
efficiently. ____ Reducing the length of time in which customers are
3. Average collection
required to pay will typically _____ the receivables
period
turnover ratio. ____ The number of times during a year that the average
4. More 5. Receivables turnover ratio
accounts receivable balance is collected.
____
An increase in the average collection period indicates the company manages its receivables _____ efficiently.
____
Allowing riskier customers to purchase goods or services on account will typically _____ the receivables 6. Increase
turnover ratio. ____
Short Answer Questions
188.A company offers a 20% trade discount when providing services of $5,000 or more to its customers. Record the transaction when the company provides services of $8,000 (not including the trade discount) on account.
5-58 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
189.On February 23, a company provides services on account to a customer for $4,500. The customer pays in full for those services on March 4. Record the transactions for the company when the services are provided on February 23 and when the cash is collected on March 4.
190.Suppose Casey Title Company normally charges $500 for services related to selling a house. As part of a summer special, Casey offers customers a trade discount of 20%. On July 9, Linda Holmes uses the services of Casey and pays cash equal to the discounted price. Record the revenue earned by Casey on July 9.
5-59 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
191.On September 8, a company provides services on account to a customer for $1,500, terms 2/10, n/30. The customer pays for those services on September 15. Record the transactions for the company when the services are provided on September 8 and when the cash is collected on September 15.
192.On October 22, a company provides services on account to a customer for $1,800, terms 3/15, n/30. The customer pays for those services on December 19. Record the transactions for the company when the services are provided on October 22 and when cash is collected on December 19.
5-60 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
193.On August 12, a company provides services on account to a customer for $3,000. However, on August 16, the customer is not completely satisfied with the service and the company grants an allowance on the amount owed of $400. On August 20, the customer makes full payment of the balance owed, excluding the allowance. Record the services provided on August 12, the sales allowance on August 16, and the cash collection on August 20.
194.A company reports the following amounts at the end of the year: Total sales = $500,000; sales discounts = $10,000; sales returns = $30,000; sales allowances = $20,000. Compute net revenues.
5-61 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
195.A company reports the following amounts at the end of the year: Total sales = $400,000; cash = $35,000; sales discounts = $10,000; accounts receivable = $20,000; sales returns = $15,000; operating expenses = $70,000; sales allowances = $25,000. Compute net revenues.
196.At the end of the year, a company has a balance in Allowance for Uncollectible Accounts of $200 (credit) before any year-end adjustment. The balance of Accounts Receivable is $15,000. The company estimates that 10% of accounts receivable will not be collected over the next year. Record the adjustment for uncollectible accounts.
5-62 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
197.At the end of the year, a company has a balance in Allowance for Uncollectible Accounts of $2,000 (credit) before any year-end adjustment. The balance of Accounts Receivable is $180,000. The company estimates that 5% of accounts receivable will not be collected over the next year. Record the adjustment for uncollectible accounts.
198.At the end of the year, a company has a balance in Allowance for Uncollectible Accounts of $2,000 (debit) before any year-end adjustment. The balance of Accounts Receivable is $180,000. The company estimates that 5% of accounts receivable will not be collected over the next year. Record the adjustment for uncollectible accounts.
5-63 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
199.During 2018, its first year of operations, a company provides services on account of $250,000. By the end of 2018, cash collections on these accounts total $130,000. The company estimates that 10% of accounts receivable will be uncollectible. Record the adjustment for uncollectible accounts on December 31, 2018.
200.A company has the following balances on December 31, 2018, after year-end adjustments: Accounts Receivable = $62,000; Allowance for Uncollectible Accounts = $6,000. Calculate the net realizable value of accounts receivable.
5-64 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
201.A company has the following balances on December 31, 2018, after year-end adjustments: Accounts Receivable = $75,000; Service Revenue = $400,000; Allowance for Uncollectible Accounts = $5,000; Cash = $20,000. Calculate the net realizable value of accounts receivable.
202.A company reports the following amounts at the end of the year (before any year-end adjustment). Credit sales for the year
$120,000
Accounts receivable
36,000
Allowance for uncollectible
1,500 (credit)
accounts
Record the adjustment for uncollectible accounts (1) using the percentage-of-receivables method, assuming the company estimates 10% of receivables will not be collected, and (2) using the percentage-of-credit-sales method, assuming the company estimates 2% of credit sales will not be collected.
5-65 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
203.A company has the following accounts receivable and estimates of uncollectible accounts: 1. Accounts not yet due = $60,000; estimated uncollectible = 3%. 2. Accounts 1-30 days past due = $20,000; estimated uncollectible = 20%. 3. Accounts more than 30 days past due = $10,000; estimated uncollectible = 50%. Compute the total estimated uncollectible accounts.
204.At the end of the year, a company has the following accounts receivable and estimates of uncollectible accounts: 1. Accounts not yet due = $80,000; estimated uncollectible = 2%. 2. Accounts 1-30 days past due = $20,000; estimated uncollectible = 25%. 3. Accounts more than 30 days past due = $4,000; estimated uncollectible = 60%. Record the year-end adjustment for uncollectible accounts, assuming the current balance of the Allowance for Uncollectible Accounts is $900 (credit).
5-66 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
205.At the end of the year, a company has the following accounts receivable and estimates of uncollectible accounts: 1. Accounts not yet due = $70,000; estimated uncollectible = 4%. 2. Accounts 1-30 days past due = $30,000; estimated uncollectible = 15%. 3. Accounts more than 30 days past due = $5,000; estimated uncollectible = 40%. Record the year-end adjustment for uncollectible accounts, assuming the current balance of the Allowance for Uncollectible Accounts is $1,200 (debit).
5-67 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
206.A company has the following balances on December 31, 2018, before any year-end adjustments: Accounts Receivable = $80,000; Allowance for Uncollectible Accounts = $1,100 (credit). The company estimates uncollectible accounts based on an aging of accounts receivable as shown below: Estimated Amount
Percent
Receivable
Uncollectible
Not yet due
$48,000
5%
0–30 days past
18,000
15%
10,000
40%
4,000
80%
Age Group
due 31–90 days past due More than 90 days past due Total
$80,000
Record the adjustment for uncollectible accounts on December 31, 2018.
5-68 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
207.A company uses the allowance method to account for uncollectible accounts. During the year, the company has actual bad debts of $25,000. Record the write-off of the uncollectible accounts.
208.At the beginning of the year, a company had an Allowance for Uncollectible Accounts of $22,000. By the end of the year, actual bad debts total $24,000. What is the balance of the Allowance for Uncollectible Accounts after the write-offs (before any year-end adjustment)?
209.On March 13, a company writes off a customer's account of $3,800. On June 3, the customer unexpectedly pays the $3,800 balance. Using the allowance method, record the write-off on March 13 and the cash collection on June 3.
5-69 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
210.Calculate the missing amount for each of the following notes receivable. Annual Interest
Fraction of
Face Value
rate
the Year
Interest
$15,000
4%
8 months
(a)
$25,000
8%
(b)
$500
$30,000
(c)
4 months
$500
(d)
6%
6 months
$600
211.On February 1, 2018, a company loans one of its employees $20,000 and accepts a ninemonth, 8% note receivable. Calculate the amount of interest revenue the company will recognize in 2018.
5-70 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
212.On July 1, 2018, a company loans one of its employees $20,000 and accepts a nine-month, 8% note receivable. Calculate the amount of interest revenue the company will recognize in 2018 and 2019.
213.On April 1, 2018, a company loans one of its suppliers $50,000 and accepts a 24-month, 12% note receivable. Calculate the amount of interest revenue the company will recognize in 2018, 2019, and 2020.
214.On April 14, a company lends $10,000 cash to one of its employees and accepts a six-month, 12% note in return. Record the acceptance of the note receivable.
5-71 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
215.On April 1, a company provides services to one of its customers for $12,000. As payment for the services, the company accepts a six-month, 10% note from the customer. Record the acceptance of the note receivable on April 1 and the cash collection on October 1.
216.On May 1, 2018, a company lends $100,000 to one of its main suppliers and accepts a 12month, 6% note. Record the acceptance of the note on May 1, 2018, the adjustment on December 31, 2018, and the cash collection on May 1, 2019.
5-72 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
217.Below are amounts for two companies: Beginning
Ending
Accounts
Accounts
Receivable
Receivable
Net
(net)
(net)
Sales
Company 1
$1,500
$1,200 $29,700
Company 2
3,100
3,300
80,000
For each company, calculate the receivables turnover ratio. Which company appears more efficient in collecting cash from sales?
218.At the end of the year, a company reports a balance in its Allowance for Uncollectible Accounts of $1,400 (credit) before any year-end adjustment. The company estimates future uncollectible accounts to be 3% of credit sales for the year. Credit sales for the year total $280,000. Record the adjustment for the allowance for uncollectible accounts using the percentage-of-credit-sales method.
5-73 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
219.At the end of the year, a company reports a balance in its Allowance for Uncollectible Accounts of $1,400 (debit) before any year-end adjustment. The company estimates future uncollectible accounts to be 3% of credit sales for the year. Credit sales for the year total $280,000. Record the adjustment for the allowance for uncollectible accounts using the percentage-of-credit-sales method.
220.Assume the following scenarios. Scenario 1. During 2018, Makers Consulting provides services of $100,000. The company receives an initial payment of $75,000 with the balance to be received the following year. Scenario 2. People-R-Us typically charges $75 for a one-year subscription. On January 1, 2018, Georgette, age 72, purchases a one-year subscription to the magazine and receives a 20% senior citizen discount. Scenario 3. During 2018, Waste Control provides services on account for $15,000. The customer pays for those services in 2019. Scenario 4. During 2018, Tasty Foods sells grocery items to one of its customers for $125,000 on account. Cash collections on those sales are $80,000 in 2018 and $30,000 in 2019. The remaining $15,000 is written off as uncollectible in 2019. Required: For each scenario, calculate the amount of revenue to be recognized in 2018.
5-74 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
221.Recovery Experts (RE) specializes in data recovery from crashed hard drives. The price charged varies based on the extent of damage and the amount of data being recovered. RE offers a 10% discount to students and faculty at educational institutions. Consider the following transactions during the month of June. June 10
Luke’s hard drive crashes and he sends it to RE.
June 12
After initial evaluation, RE e-mails Luke to let him know that full data recovery will cost $1,600.
June 13
Luke informs RE that he would like them to recover the data and that he is a student at USC, qualifying him for a 10% educational discount and reducing the cost by $160 ($1,600 × 10%).
June 16
RE performs the work and claims to be successful in recovering all data. RE asks Luke to pay within 30 days of today’s date, offering a 5% discount for payment within 10 days.
June 19
When Luke receives the hard drive, he notices that RE did not successfully recover all data. Approximately 25% of the data has not been recovered and he informs RE.
June 20
RE reduces the amount Luke owes by 25%.
June 30
Luke pays the amount owed.
Required: 1. Record the necessary transactions(s) for Recovery Experts on each date. 2. Calculate net revenues. 3. Show how net revenues would be presented in the income statement. 4. Calculate net revenues if Luke had paid his bill on June 25.
5-75 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
222.Tatsuo is the CEO of Ginjo Gallery. At the end of the year, the company's accountant provides Tatsuo with the following information, before any adjusting entries. Accounts receivable
$1,000,000
Estimated percentage
5%
uncollectible Allowance for uncollectible
$10,000 (credit)
accounts Operating income
$240,000
Tatsuo has significant stock ownership in the company and therefore would like to keep the stock price high. Analysts on Wall Street expect the company to have operating income of $170,000. The fact that actual operating income is well-above this amount will make investors happy and help maintain a high stock price. Meeting analysts' expectations will also help Tatsuo keep his job. Required: 1. Record the adjustment for uncollectible accounts using the accountant's estimate of 5% of accounts receivable. 2. After the adjustment is recorded in Requirement 1, what is the revised amount of operating income? Will Ginjo Gallery still meet analysts' expectations? 3. Tatsuo instructs the accountant to instead record $70,000 as bad debt expense so that operating income will exactly meet analysts' expectations. By how much would total assets and operating income be misstated if the accountant records this amount? 4. Why would Wanda be motivated to manage operating income in this way?
5-76 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
223.The following events occur for Wortham Landscape Design during 2018 and 2019, its first two years of operations. February 2, 2018
Provide services to customers on account for $26,000.
July 23, 2018
Receive $20,000 from customers on account.
December 31, 2018
Estimate that 10% of uncollected accounts will not be received.
April 12, 2019
Provide services to customers on account for $40,000.
June 28, 2019
Receive $5,000 from customers for services provided in 2018. Write off the remaining amounts owed from services provided in
September 13, 2019
2018.
October 5, 2019
Receive $33,000 from customers for services provided in 2019.
December 31, 2019
Estimate that 10% of uncollected accounts will not be received.
Required: 1. Record transactions for each date. 2. Post transactions to the following accounts: Cash, Accounts Receivable, and Allowance for Uncollectible Accounts. 3. Calculate the net realizable value of accounts receivable at the end of 2018 and 2019.
5-77 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
224.By the end of its first year of operations, Gallen Corporation has credit sales of $580,000 and accounts receivable of $200,000. Given it's the first year of operations, Gallen's management is unsure how much allowance for uncollectible accounts it should establish. One of the company's competitors, which has been in the same industry for an extended period, estimates uncollectible accounts to be 3% of ending accounts receivable, so Gallen decides to use that same amount. However, actual write-offs in the following year were 10% of the $200,000 ($20,000). Gallen's inexperience in the industry led to making sales to high credit risk customers. Required: 1. Record the adjustment for uncollectible accounts at the end of the first year of operations using the 3% estimate of accounts receivable. 2. By the end of the second year, Gallen has the benefit of hindsight to know that estimates of uncollectible accounts in the first year were too low. By how much did Gallen underestimate uncollectible accounts in the first year? How did this underestimation affect the reported amounts of total assets and expenses at the end of the first year? Ignore tax effects. 3. Should Gallen prepare new financial statements for the first year of operations to show the correct amount of uncollectible accounts? Explain.
5-78 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
225.Power Corporation engages in the manufacture and sale of equipment related to alternative sources of energy. During the past year, operating revenues remained relatively flat compared to the prior year but management notices a big increase in accounts receivable. The increase in receivables is largely due to the recent economic slowdown in the commodities market. Many of the company's customers are having financial difficulty, lengthening the period of time it takes to collect on account. Below are year-end amounts. Accounts Age
Operating
Accounts Average
Group
Revenue Receivable
Written
Age
Off
$2,300,000
$80,000 13 days
$10,000
3,100,000
100,000 11 days
15,000
Current 3,000,000
350,000 27 days
0
Two years ago Last year
year
Peter, the CEO of Power, notices that accounts written off over the past three years have been minimal and therefore suggests that no allowance for uncollectible accounts be established in the current year. Any account proving uncollectible can be charged to next year's financial statements (the direct write-off method). Required: 1. Do you agree with Peter's reasoning? Explain. 2. Suppose that other companies in these industries had similar increasing trends in accounts receivable aging. These companies also had very successful collections in the past but now estimate uncollectible accounts to be 30% because of the significant downturn in the industries. If Power uses the allowance method estimated at 30% of accounts receivable, what should be the balance of the allowance for uncollectible accounts at the end of the current year? 3. Based on your answer in Requirement 2, for what amount will total assets and expenses be misstated in the current year if Power uses the direct write-off method? Ignore tax effects.
5-79 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
226.Gable Incorporated provides legal services. During 2018, the company provides services of $500,000 on account. Of this amount, $70,000 remains uncollected at the end of the year. An aging schedule as of December 31, 2018, is provided below. Estimated Amount
Percent
Receivable
Uncollectible
Not yet due
$40,000
5%
0–30 days past
19,000
10%
9,000
20%
6,000
40%
Age Group
due 31–60 days past due More than 60 days past due Total
$74,000
Required: 1. Calculate the allowance for uncollectible accounts. 2. Record the December 31, 2018 adjustment, assuming the balance of Allowance for Uncollectible Accounts before adjustment is $500 ( debit). 3. On April 3, 2019, a customer's account balance of $600 is written off as uncollectible. Record the write-off. 4. On July 17, 2019, the customer whose account was written off in Requirement 3 unexpectedly pays $200 of the amount but does not expect to pay any additional amounts. Record the cash collection.
5-80 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
227.On June 1, 2018, Demer Consulting provides services to a customer for $150,000. To pay for the services, the customer signs a three-year, 12% note. The face amount is due at the end of the third year, while annual interest is due each June 1. Required: 1. Record the acceptance of the note on June 1, 2018. 2. Record the interest collected on June 1 for 2019 and 2020, and the adjustment for interest revenue on December 31, 2018, 2019, and 2020. 3. Record the cash collection on June 1, 2020.
5-81 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
228.Selected financial data for Strong Health Group and Sturdy Medical Corporation, two companies in the health-care industry, are as follows: Beginning
Ending
Net
Accounts
Accounts
millions)
Sales
Receivable
Receivable
Strong
$1,850
$200
$230
2,100
400
380
($ in
Health Sturdy Medical
Required: 1. Calculate the receivables turnover ratio and average collection period for Strong Health and Sturdy Medical. Round your answers to one decimal place. Compare your calculations with those for Tenet Healthcare and LifePoint Hospitals reported in the chapter text. Which of the four companies maintains a higher receivables turnover? 2. How does the receivables turnover ratio reflect the efficiency of management? Discuss factors that affect the receivables turnover ratio.
Essay Questions
5-82 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
229.Give three examples of contra revenue accounts and the transactions with which they are associated.
230.Explain how companies account for uncollectible accounts receivable (bad debts) for financial reporting purposes.
231.What does it mean to report accounts receivable at their net realizable value.
5-83 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
232.Discuss the differences between the allowance method and the direct write-off method for recording uncollectible accounts. Which of the two is acceptable for financial reporting purposes?
233.Explain why the percentage-of-receivables method is referred to as the balance sheet
method and the percentage-of-credit-sales method is referred to as the income statement method. Which method is typically used in practice? Why?
234.How is the receivables turnover ratio measured? What does this ratio indicate? Is a higher or lower receivables turnover preferable?
5-84 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 05 Receivables and Sales Answer Key
True / False Questions
1.
Credit sales transfer products and services to a customer today while bearing the risk of collecting payment from that customer in the future. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-01 Recognize accounts receivable. Topic: Credit Sales and Accounts Receivable
2.
At the time of a credit sale, a company would record an increase in assets and an increase in revenues. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-01 Recognize accounts receivable. Topic: Credit Sales and Accounts Receivable
3.
A sale on account is recorded as a debit to Service Revenue and a credit to Accounts Receivable. FALSE A sale on account is recorded as a debit to Accounts Receivable and a credit to Service Revenue.
AACSB: Reflective Thinking 5-85 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-01 Recognize accounts receivable. Topic: Credit Sales and Accounts Receivable
4.
Accounts receivable represent the amount of cash owed to the company by its customers from the sale of products or services on account. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-01 Recognize accounts receivable. Topic: Credit Sales and Accounts Receivable
5.
Trade discounts represent a discount offered to the purchasers for quick payment. FALSE Trade discounts represent a reduction in the listed price of a product or service.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
6.
When a company sells a $100 service with a 20% trade discount, $80 of revenue is recognized. TRUE AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply
5-86 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 3 Hard Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
7.
A sales discount represents a reduction, not in the selling price of a product or service, but in the amount to be paid by a credit customer if payment is made within a specified period of time. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
8.
A sale on account for $1,000 offered with terms 2/10, n/30 means that the customers will get a $2 discount if payment is made within 10 days; otherwise, full payment is due within 30 days. FALSE 2/10 indicates a 2% discount (or $20 in this example) if payment is made within 10 days.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
9.
The Sales Discounts account is an example of a contra revenue account. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium 5-87 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
10.
The Sales Discounts account is an expense account. FALSE Sales Discounts is a contra revenue account.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
11.
Sales returns and allowances occur when the buyer returns the goods or the seller reduces the customer's balance owed. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
12.
A sales allowance is recorded as a debit to Accounts Receivable and a credit to Sales Allowances. FALSE A sales allowance is recorded as a debit to Sales Allowances and a credit to Accounts Receivable.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand 5-88 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 2 Medium Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
13.
The Sales Returns account is an expense account. FALSE Sales Returns is a contra revenue account.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
14.
If a company has total revenues of $100,000, sales discounts of $3,000, sales returns of $4,000, and sales allowances of $2,000, the income statement will report net revenues of $91,000. TRUE AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
15.
Accounts receivable are reported at their net realizable value. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
5-89 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
16.
The net realizable value of accounts receivable is the full amount owed by customers. FALSE Net realizable value is the net amount of cash we expect to collect.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
17.
Customers' accounts that we no longer consider collectible are referred to as uncollectible accounts (or bad debts). TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
18.
The adjustment to account for future bad debts has the effect of (1) reducing assets and (2) increasing liabilities. FALSE The adjustment has the effect of (1) reducing assets and (2) increasing expenses. An increase in expenses reduces net income and retained earnings.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-03 Record an allowance for future uncollectible accounts. 5-90 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Allowance Method
19.
The adjustment for uncollectible accounts involves a debit to Bad Debt Expense and a credit to the Allowance for Uncollectible Accounts. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
20.
The Allowance for Uncollectible Accounts is a contra asset account representing the amount of accounts receivable that we do not expect to collect. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
21.
Bad debt expense is the amount of the adjustment to the allowance for uncollectible accounts that represents the cost of the estimated future bad debts. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
5-91 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
22.
If a company is owed $10,000 by its customers, but it expects that $1,000 will not be collected, accounts receivable in the balance sheet are reported at the net amount of $9,000. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
23.
One disadvantage of the allowance method (over the direct write-off method) for recording uncollectible accounts is that it generally matches bad debt expense with the revenue it helped to generate. FALSE This is generally an advantage of the allowance method.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Topic: Allowance Method Topic: Direct Write-Off Method
24.
The direct write-off method involves recording an adjustment at the end of each period to account for the possibility of future uncollectible accounts. FALSE The allowance method records an adjustment for future uncollectible accounts.
AACSB: Reflective Thinking
5-92 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Topic: Allowance Method Topic: Direct Write-Off Method
25.
The percentage-of-receivables method for estimating uncollectible accounts is commonly referred to as the balance sheet method, because the estimate of bad debts is based on a balance sheet amount—accounts receivable. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method. Topic: Allowance Method Topic: Percentage-of-Credit-Sales Method
26.
The aging method for estimating uncollectible accounts considers that a higher percentage of "older" accounts will not be collected compared to "newer" accounts. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-04 Use the aging method to estimate future uncollectible accounts. Topic: Aging of Accounts Receivable
5-93 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
27.
A company expects 5% of its newer accounts receivable to be uncollectible and 20% of its older accounts to be uncollectible. If the company has $40,000 of newer accounts and $5,000 of older accounts, the total estimate of uncollectible accounts is $2,000. FALSE Estimated uncollectible accounts = ($40,000 × 5%) + ($5,000 × 20%) = $3,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-04 Use the aging method to estimate future uncollectible accounts. Topic: Aging of Accounts Receivable
28.
Under the allowance method, when a company writes off an account receivable as an actual bad debt, it reduces total assets. FALSE Writing off an account receivable has no effect on total assets.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-05 Apply the procedure to write off accounts receivable as uncollectible. Topic: Writing Off Accounts Receivable
29.
Under the allowance method, when a company writes off an account receivable as an actual bad debt, it records an expense. FALSE Writing off an account receivable has no effect on expenses.
AACSB: Reflective Thinking AICPA: FN Measurement
5-94 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-05 Apply the procedure to write off accounts receivable as uncollectible. Topic: Writing Off Accounts Receivable
30.
Under the allowance method, the write-off of an actual bad debt is recorded with a debit to the Allowance for Uncollectible Accounts and a credit to Accounts Receivable. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-05 Apply the procedure to write off accounts receivable as uncollectible. Topic: Writing Off Accounts Receivable
31.
Under the allowance method, when a company collects cash from an account previously written off, total assets increase. FALSE Collecting cash from an account previously written off has no effect on total assets.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-05 Apply the procedure to write off accounts receivable as uncollectible. Topic: Writing Off Accounts Receivable
32.
A credit balance in the Allowance for Uncollectible Accounts before adjustment indicates that last year's estimate of uncollectible accounts may have been too high. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand 5-95 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 2 Medium Learning Objective: 05-05 Apply the procedure to write off accounts receivable as uncollectible. Topic: Writing Off Accounts Receivable
33.
A debit balance in the Allowance for Uncollectible Accounts before adjustment indicates that last year's estimate of uncollectible accounts was too low. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-05 Apply the procedure to write off accounts receivable as uncollectible. Topic: Writing Off Accounts Receivable
34.
Under the direct write-off method, bad debt expense is recorded at the time accounts are known to be uncollectible. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy
Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Topic: Direct Write-Off Method
35.
The direct write-off method is used for tax purposes but is generally not permitted for financial reporting. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy
Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Topic: Direct Write-Off Method
5-96 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
36.
The direct write-off method violates the matching principle. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy
Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Topic: Direct Write-Off Method
37.
Under the direct write-off method, recording an estimate of future uncollectible accounts includes a debit to Bad Debt Expense and a credit to the Allowance for Uncollectible Accounts. FALSE Under the direct write-off method, future uncollectible accounts are not estimated.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Topic: Direct Write-Off Method
38.
Notes receivable are similar to accounts receivable but are more formal credit arrangements evidenced by a written debt instrument, or note. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-07 Account for notes receivable and interest revenue. Topic: Accounting for Notes Receivable 5-97 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
39.
Notes receivable typically arise from sales to customers. FALSE Notes receivable typically arise from loans to other entities including affiliated companies; loans to stockholders and employees; and only occasionally from the sale of merchandise or services.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-07 Account for notes receivable and interest revenue. Topic: Accounting for Notes Receivable
40.
Notes receivable are assets and are reported in the balance sheet. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-07 Account for notes receivable and interest revenue. Topic: Accounting for Notes Receivable
41.
Interest on a note receivable is calculated as the face value of the note times the annual interest rate stated on the note times the fraction of the year the note is outstanding. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-07 Account for notes receivable and interest revenue. Topic: Accounting for Notes Receivable
5-98 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
42.
A $10,000 note that has a stated interest rate of 10% and is due in six months would have interest of $1,000. FALSE Interest = face value ($10,000) × annual interest rate (10%) × fraction of year (6/12) = $500.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-07 Account for notes receivable and interest revenue. Topic: Accounting for Notes Receivable
43.
Accrued interest on a note receivable is interest earned by the end of the year but not yet received. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-07 Account for notes receivable and interest revenue. Topic: Accounting for Notes Receivable
44.
Accrued interest on a note receivable has the effects of increasing assets and increasing liabilities. FALSE Accrued interest increases assets and increases revenues.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-07 Account for notes receivable and interest revenue. 5-99 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Accounting for Notes Receivable
45.
Two important ratios that help in understanding the company's effectiveness in managing receivables are the receivables turnover ratio and the average collection period. TRUE AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Topic: Receivables Turnover Ratio
46.
The receivables turnover ratio shows the number of times during a year that the average accounts receivable balance is collected (or "turns over"). TRUE AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Topic: Receivables Turnover Ratio
47.
The receivables turnover ratio equals average accounts receivable divided by net credit sales. FALSE The receivables turnover ratio equals net credit sales divided by average accounts receivable.
AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy 5-100 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Topic: Receivables Turnover Ratio
48.
A lower receivables turnover ratio generally indicates more favorable management of accounts receivable by company managers. FALSE A higher receivables turnover ratio generally indicates more favorable management of accounts receivable.
AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Topic: Receivables Turnover Ratio
49.
The average collection period shows the approximate number of days the average accounts receivable balance is outstanding. TRUE AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Topic: Receivables Turnover Ratio
5-101 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
50.
The percentage-of-credit-sales method for estimating uncollectible accounts is commonly referred to as the income statement method, because it always results in a higher amount of net income being reported in the income statement. FALSE This method is referred to as the income statement method because the estimate of bad debts is based on an income statement amount—credit sales.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method. Topic: Percentage-of-Credit-Sales Method
51.
Even though the percentage-of-receivables method and the percentage-of-credit-sales method use different accounts to estimate future uncollectible accounts, the amount of bad debt expense reported in the income statement will always be the same under the two methods. FALSE Bad debt expense will typically differ between the two methods.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method. Topic: Percentage-of-Credit-Sales Method
52.
From an income statement perspective, the percentage-of-credit-sales method is typically preferable because it better matches the revenues (credit sales) with their related expenses (bad debts). TRUE AACSB: Reflective Thinking 5-102 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method. Topic: Percentage-of-Credit-Sales Method
53.
From a balance sheet perspective, the percentage-of-receivables method is typically preferable because assets (net accounts receivable) are reported closer to their net realizable value. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method. Topic: Percentage-of-Credit-Sales Method
54.
The percentage-of-credit-sales method (income statement method) is allowed only if amounts do not differ significantly from estimates using the percentage-of-receivables method. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method. Topic: Percentage-of-Credit-Sales Method
Multiple Choice Questions
5-103 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
55.
Which of the following best describes credit sales?
A. Cash sales to customers that are new to the company. B. Sales to customers using credit cards. C. Sales to customers on account. D. Sales with a high risk that the customer will return the product. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-01 Recognize accounts receivable. Topic: Credit Sales and Accounts Receivable
56.
Credit sales are recorded as:
A. Debit Cash, credit Deferred Revenue. B. Debit Service Revenue, credit Accounts Receivable. C. Debit Cash, credit Service Revenue. D. Debit Accounts Receivable, credit Service Revenue. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-01 Recognize accounts receivable. Topic: Credit Sales and Accounts Receivable
57.
A company provides services on account. Indicate how this transaction would affect (1) assets, (2) stockholders' equity, and (3) revenues.
A. (1) Increase, (2) No effect (3) Increase B. (1) No effect, (2) Increase (3) Increase C. (1) Increase, (2) Increase (3) Increase D. (1) No effect, (2) No effect (3) No effect AACSB: Reflective Thinking 5-104 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-01 Recognize accounts receivable. Topic: Credit Sales and Accounts Receivable
58.
Which of the following best describes accounts receivable?
A. The amount of cash owed by a company to its vendors for purchases of products or services on account. B. The amount of cash collected by a company from its customers from the sale of products or services on account. C. The amount of cash owed to a company by its customers from the sale of products or services on account. D. The amount of cash not expected to be collected by a company from its customers from the sale of products or services on account (bad debts). AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-01 Recognize accounts receivable. Topic: Credit Sales and Accounts Receivable
59.
The amount of cash owed to a company by its customers from the sale of products or services on account is commonly referred to as:
A. Cash. B. Accounts receivable. C. Revenue. D. Accounts payable. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-01 Recognize accounts receivable. Topic: Credit Sales and Accounts Receivable 5-105 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
60.
Identify the likely disadvantage(s) of extending credit to customers.
A. Delay or failure to collect cash. B. Lower profitability. C. Lower revenues. D. All of the other answers are disadvantages of extending credit to customers. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-01 Recognize accounts receivable. Topic: Credit Sales and Accounts Receivable
61.
Identify the likely advantage(s) of extending credit to customers.
A. Reduce accounts receivable. B. Increase sales. C. Reduce amounts owed to creditors. D. Increase employees' salaries. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-01 Recognize accounts receivable. Topic: Credit Sales and Accounts Receivable
5-106 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
62.
Identify the condition(s) that must exist for a sale and the related receivable to be recognized.
A. Collection of cash is probable. B. The company must have collected cash from at least one previous sale to the customer. C. Goods or services have been provided to the customer. D. Two of the other answers are conditions that must exist. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-01 Recognize accounts receivable. Topic: Credit Sales and Accounts Receivable
63.
Fleming Corp. provided services on account. The transaction would be recorded with a debit to:
A. Retained Earnings. B. Service Revenue. C. Accounts Receivable. D. Cash. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-01 Recognize accounts receivable. Topic: Credit Sales and Accounts Receivable
5-107 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
64.
Fleming Corp. provided services on account. The transaction would be recorded with a credit to:
A. Accounts Payable. B. Service Revenue. C. Accounts Receivable. D. Cash. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-01 Recognize accounts receivable. Topic: Credit Sales and Accounts Receivable
65.
Which of the following items are classified as receivables?
A. Tax refund claims. B. Amounts owed by customers. C. Amounts loaned and expected to be collected. D. All of the other answers are classified as receivables. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-01 Recognize accounts receivable. Topic: Credit Sales and Accounts Receivable
66.
A trade discount results in:
A. A contra revenue account being recorded. B. A contra asset being recorded. C. Customers delaying cash payment. D. Revenue being recorded for the discounted price. AACSB: Reflective Thinking 5-108 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
67.
Barton Health Services provided care to a patient worth $1,200. Because the patient was over the age of 65, Barton granted the patient a 20% discount and the customer paid the correct amount in cash. How would Barton record the service transaction? A. Cash
960
Service Revenue B. Cash
960 960
Trade Discount
240
Service Revenue C. Cash
1,200 1,200
Service Revenue D. Cash
1,200 1,200
Trade Discount
240
Service Revenue
960
A. Option A B. Option B C. Option C D. Option D AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
5-109 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
68.
When customers purchase products on account, Spitz Manufacturing offers them a 2% reduction in the amount owed if they pay within 10 days. This is an example of a:
A. Bad debt. B. Sales discount. C. Sales return. D. Sales allowances. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
69.
Garber Plumbers offers a 20% trade discount when providing $2,000 or more of plumbing services to its customers. In March 2018, Garber provided $4,000 of plumbing services to Red Oak Inc., and $1,500 of services to Cyril Inc., Each of these customers was granted credit terms of 2/10, net 30. If both customers paid for the plumbing services within the discount period, what was the net revenues amount for these two transactions?
A. $5,500. B. $4,312. C. $4,486. D. $4,606. Trade discount = $4,000 × 20% = $800. Sales revenue = ($4,000 - $800) + $1,500 = $4,700. Sales discount = $4,700 × 2% = $94. Net revenues = $4,700 - $94 = $4,606.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
5-110 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
70.
On July 8, Ray Inc. sold 100 printers to Office Rental Company at $600 each and offered a 2% discount for payment within 10 days. On July 15, Office Rental Company paid the full amount in cash. What should Ray Inc. record on July 15? A. Cash
60,000
Accounts Receivable B. Cash
60,000 58,800
Accounts Receivable C. Cash
58,800 58,800
Sales Discounts
1,200
Accounts Receivable D. Cash
60,000 60,000
Sales Discounts
1,200
Sales Revenue
58,800
A. Option A B. Option B C. Option C D. Option D Sales discount = $600 × 100 printers × 2% = $1,200.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
5-111 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
71.
On March 17, Jackal Lumber sold building materials to Fredo Limited for $15,000 with terms of 3/10, net 20. What amount did Jackal record as revenue on March 25 when Fredo paid for the building materials?
A. $15,000. B. $14,550. C. $15,450. D. $0. No revenue recorded on March 25. The revenue would have been recorded on March 17.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
72.
A company collects a customer's account within the discount period. Indicate how this transaction would affect (1) assets, (2) stockholders' equity, and (3) revenues.
A. (1) Decrease, (2) Decrease, (3) Decrease B. (1) Increase, (2) Increase, (3) Increase C. (1) Increase, (2) Increase, (3) No effect D. (1) No effect, (2) No effect, (3) No effect AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
5-112 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
73.
On November 10 of the current year, Flores Mills sold carpet to a customer for $8,000 with credit terms 2/10, n/30. How would Flores record the sale on November 10? A. Accounts Receivable
7,840
Sales Revenue B. Accounts Receivable
7,840 8,000
Sales Revenue
8,000
C. Accounts Receivable
7,840
Cash Discounts
160
Sales Revenue D. Accounts Receivable
8,000 8,000
Cash Discounts
160
Sales Revenue
7,840
A. Option A B. Option B C. Option C D. Option D AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
5-113 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
74.
On November 10 of the current year, Flores Mills provides services to a customer for $8,000 with credit terms 2/10, n/30. The customer made the correct payment on November 17. How would Flores record the collection of cash on November 17? A. Cash
7,840
Accounts Receivable B. Cash
7,840 7,840
Sales Discounts
160
Accounts Receivable C. Cash
8,000 7,840
Sales Revenue
160
Accounts Receivable D. Cash
8,000 8,000
Accounts Receivable
8,000
A. Option A B. Option B C. Option C D. Option D Sales discount = $8,000 × 2% = 160.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
5-114 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
75.
On November 10 of the current year, Flores Mills provides services to a customer for $8,000 with credit terms 2/10, n/30. The customer made the correct payment on December 5. How would Flores record the collection of cash on December 5? A. Cash
7,840
Accounts Receivable B. Cash
7,840 7,840
Sales Discounts
160
Accounts Receivable C. Cash
8,000 7,840
Sales Revenue
160
Accounts Receivable D. Cash
8,000 8,000
Accounts Receivable
8,000
A. Option A B. Option B C. Option C D. Option D No sales discount is awarded because payment is not received within 10 days.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
5-115 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
76.
Oswego Clay Pipe Company provides services of $46,000 to Southeast Water District #45 on April 12 of the current year with terms 1/15, n/60. What would Oswego record on April 12? A. Accounts Receivable
46,000
Sales Revenue B. Accounts Receivable
46,000 46,000
Sales Revenue
45,540
Sales Discounts
460
C. Accounts Receivable
45,540
Sales Revenue
45,540
D. Accounts Receivable
45,540
Sales Discounts
460
Sales Revenue
46,000
A. Option A B. Option B C. Option C D. Option D AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
5-116 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
77.
Oswego Clay Pipe Company provides services of $46,000 to Southeast Water District #45 on April 12 of the current year with terms 1/15, n/60. What would Oswego record on April 23, assuming the customer made the correct payment on that date? A. Cash
45,540
Sales Revenue
460
Accounts Receivable B. Cash
46,000 46,000
Sales Discounts
460
Accounts Receivable
46,000
Interest Revenue C. Cash
460 45,540
Sales Discounts
460
Accounts Receivable D. Cash
46,000 46,000
Accounts Receivable Sales Revenue
45,540 460
A. Option A B. Option B C. Option C D. Option D $46,000 × 1% = 460; $46,000 - 460 = $45,540.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
5-117 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
78.
Oswego Clay Pipe Company provides services of $46,000 to Southeast Water District #45 on April 12 of the current year with terms 1/15, n/60. What would Oswego record on June 10, assuming the customer made the correct payment on that date? A. Cash
46,000
Accounts Receivable
45,540
Discounts Receivable
460
B. Cash
46,000
Accounts Receivable
45,540
Interest Revenue C. Cash
460 46,000
Accounts Receivable D. Cash
46,000 46,460
Accounts Receivable Interest Revenue
46,000 460
A. Option A B. Option B C. Option C D. Option D No discount is recorded because payment is made after 15 days.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
5-118 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
79.
Which of the following is recorded upon receipt of a payment on April 7, 2018, by a customer who pays a $900 invoice dated March 3, 2018, with terms 2/10, n/60?
A. Debit Sales Discounts $18. B. Credit Purchase Discounts $18. C. Credit Accounts Receivable $882. D. Debit Cash $900. No discount is recorded because payment is made after 10 days.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
80.
Gershwin Wallcovering Inc. shipped the wrong shade of paint to a customer. The customer agreed to keep the paint upon being offered a 15% price reduction. The price reduction is an example of a:
A. Sales revenue. B. Sales discount. C. Sales return. D. Sales allowance. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
5-119 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
81.
Gershwin Wallcovering Inc. shipped the wrong shade of paint to a customer. The customer agreed to keep the paint upon being offered a 15% price reduction. Gershwin would record this reduction by crediting Accounts Receivable and debiting:
A. Sales Revenue. B. Sales Discounts. C. Sales Returns. D. Sales Allowances. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
82.
Tom's Textiles shipped the wrong material to a customer, who refused to accept the order. This is an example of a:
A. Sales revenue. B. Sales discount. C. Sales return. D. Sales allowance. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
5-120 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
83.
Tom's Textiles shipped the wrong material to a customer, who refused to accept the order. Upon receipt of the material, Tom's would credit Accounts Receivable and debit:
A. Sales Revenue. B. Sales Discounts. C. Sales Returns. D. Sales Allowances. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
84.
A company records a sales return from a credit customer. Indicate how this transaction would affect (1) assets, (2) stockholders' equity, and (3) revenues.
A. (1) Decrease, (2) Decrease, (3) Decrease B. (1) Decrease, (2) No effect, (3) Decrease C. (1) Decrease, (2) Decrease, (3) No effect D. (1) No effect, (2) No effect, (3) No effect AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
5-121 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
85.
Lewis Inc. had the following information taken from various accounts at the end of the year: Sales discounts
$41,000
Deferred revenues
$32,000
Total sales
$459,000
Purchase discounts
$15,000
Sales allowances
$35,000
Accounts receivable
$205,000
What was Lewis Inc.'s net revenues for the year?
A. $368,000. B. $434,000. C. $383,000. D. $437,000. Net revenues = $459,000 - $41,000 - $35,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
5-122 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
86.
Eric Company has the following information: Total revenues
$860,000
Sales returns and allowances
$50,000
Sales discounts
$30,000
Ending inventory
$100,000
What is the amount of net revenues for Eric Company?
A. $330,000. B. $230,000. C. $680,000. D. $780,000. Net revenues = $860,000 - $50,000 - $30,000 = $780,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
87.
Boynton Jewelers reported the following amounts at the end of the year: total sales = $550,000; sales discounts = $12,000; sales returns = $44,000; sales allowances = $17,000. What was the company's net revenues for the year?
A. $489,000. B. $485,000. C. $477,000. D. $499,000. Net revenues = $550,000 - $12,000 - $44,000 - $17,000 = $477,000.
AACSB: Analytical Thinking AICPA: FN Measurement 5-123 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
88.
Ryerson Co. provides goods and services to customers during the year totaling $100,000. Also during the year, customers are granted discounts, returns, and allowance of $20,000. At the end of the year, Ryerson estimates that an additional $5,000 in discounts, returns, and allowances will occur next year as a result of sales transactions this year. What is the amount of net revenues Ryerson will report in its current-year income statement?
A. $85,000. B. $75,000. C. $100,000. D. $80,000. Net revenues = $100,000 - $20,000 - $5,000 = $75,000.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
89.
Accounts receivable are normally reported at the:
A. Present value of future cash receipts. B. Current value plus accrued interest. C. Expected amount to be received. D. Current value less expected collection costs. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-03 Record an allowance for future uncollectible accounts. 5-124 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Allowance Method
90.
The amount of cash that is actually expected to be collected on accounts receivable is referred to as:
A. Net realizable value. B. Allowance for uncollectible accounts. C. Net income. D. Net revenue. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
91.
The percentage-of-receivables method for estimating uncollectible accounts is sometimes described as:
A. The balance sheet method. B. The sales method. C. The income statement method. D. The aging method. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
5-125 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
92.
The percentage-of-receivables method for accounting for uncollectible accounts focuses on the:
A. Total credit sales for the year. B. Ratio of accounts receivable to sales. C. Net realizable value of accounts receivable. D. Cash flows from sales. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
93.
The first step in using a balance sheet approach to estimate bad debts is to calculate the desired ending balance in which account?
A. Accounts receivable. B. Allowance for uncollectible accounts. C. Bad debt expense. D. Credit sales. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
5-126 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
94.
The purpose of recording an allowance for uncollectible accounts is to:
A. Record the sales returns and allowances. B. Report net sales conservatively. C. Report accounts receivable at net realizable value. D. Report accounts receivable for the total amount of sales in the period. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
95.
A company's adjustment for uncollectible accounts at year-end would include a:
A. Debit to Bad Debt Expense. B. Credit to Accounts Receivable. C. Debit to Accounts Receivable. D. Debit to Allowance for Uncollectible Accounts. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
96.
One advantage of the allowance method for accounting for uncollectible accounts is that the company reports:
A. Bad debt expense in the same period as the credit sale. B. Greater total sales to customers. C. Fewer returns by customers. D. Greater total cash collected from customers. AACSB: Reflective Thinking 5-127 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
97.
The account "Allowance for Uncollectible Accounts" is classified as a(n):
A. Liability account in the balance sheet. B. Contra revenue to credit sales in the income statement. C. Expense in the income statement. D. Contra asset to accounts receivable in the balance sheet. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
98.
Allowance for Uncollectible Accounts is:
A. An expense account. B. A contra asset account. C. A contra revenue account. D. A liability account. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
5-128 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
99.
The normal balance of the account "Allowance for Uncollectible Accounts" is a _______ because _______.
A. Debit; it is a contra account to Revenue (a credit account) B. Credit; it is a contra account to Accounts Receivable (a debit account) C. Debit; it is an expense in the income statement D. Credit; it is a contra account to Bad Debt Expense (a debit account) AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
100.
Shupe Inc. estimates uncollectible accounts based on the percentage of accounts receivable. What effect will recording the estimate of uncollectible accounts have on the accounting equation?
A. Increase liabilities and decrease stockholders' equity. B. Decrease assets and decrease liabilities. C. Decrease assets and decrease stockholders' equity. D. Increase assets and decrease stockholders' equity. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
5-129 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
101.
Under the allowance method, which of the following does not change the balance in the Accounts Receivable account?
A. Returns on credit sales. B. Collections on customer accounts. C. Bad debt expense adjustment. D. Write-offs. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
102.
At December 31, Gill Co. reported accounts receivable of $238,000 and an allowance for uncollectible accounts of $600 (credit) before any adjustments. An analysis of accounts receivable suggests that the allowance for uncollectible accounts should be 3% of accounts receivable. The amount of the adjustment for uncollectible accounts would be:
A. $6,540. B. $7,800. C. $7,140. D. $7,740. ($238,000 × 3%) - $600 = $6,540.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
5-130 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
103.
At December 31, Gill Co. reported accounts receivable of $238,000 and an allowance for uncollectible accounts of $600 (debit) before any adjustments. An analysis of accounts receivable suggests that the allowance for uncollectible accounts should be 3% of accounts receivable. The amount of the adjustment for uncollectible accounts would be:
A. $6,540. B. $7,800. C. $7,140. D. $7,740. ($238,000 × 3%) + $600 = $7,740.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
104.
At December 31, Amy Jo's Appliances had account balances in Accounts Receivable of $311,000 and in Allowance for Uncollectible Accounts of $970 (credit) before any adjustments. An analysis of Amy Jo's December 31 accounts receivable suggests that the allowance for uncollectible accounts should be 2% of accounts receivable. Bad debt expense for the year should be:
A. $6,220. B. $6,450. C. $5,250. D. $7,190. ($311,000 × 2%) - $970 = $5,250.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard 5-131 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
105.
At December 31, Amy Jo's Appliances had account balances in Accounts Receivable of $311,000 and in Allowance for Uncollectible Accounts of $970 (debit) before any adjustments. An analysis of Amy Jo's December 31 accounts receivable suggests that the allowance for uncollectible accounts should be 2% of accounts receivable. Bad debt expense for the year should be:
A. $6,220. B. $6,450. C. $5,250. D. $7,190. ($311,000 × 2%) + $970 = $7,190.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
5-132 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
106.
At the end of 2018, Murray State Lenders had a balance in its Allowance for Uncollectible Accounts of $4,500 (credit) before any adjustment. The company estimated its future uncollectible accounts to be $12,000 using the percentage-of-receivables method. Murray State's adjustment on December 31, 2018, to record its estimated uncollectible accounts included a:
A. Credit to Allowance for Uncollectible Accounts of $12,000. B. Debit to Bad Debt Expense of $7,500. C. Credit to Allowance for Uncollectible Accounts of $7,500. D. Debit to Bad Debt Expense of $7,500; credit to Allowance for Uncollectible Accounts of $7,500. Bad Debt Expense = $12,000 - $4,500 = $7,500.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
107.
At the end of 2018, Murray State Lenders had a balance in its Allowance for Uncollectible Accounts of $4,500 (debit) before any adjustment. The company estimated its future uncollectible accounts to be $12,000 using the percentage-of-receivables method. Murray State's adjustment on December 31, 2018, to record its estimated uncollectible accounts included a:
A. Credit to Allowance for Uncollectible Accounts of $12,000. B. Debit to Bad Debt Expense of $16,500. C. Credit to Allowance for Uncollectible Accounts of $16,500. D. Debit to Bad Debt Expense of $16,500; credit to Allowance for Uncollectible Accounts of $16,500. Bad Debt Expense = $12,000 + $4,500 = $16,500.
AACSB: Analytical Thinking 5-133 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
108.
At December 31, Tremble Music had account balances in Accounts Receivable of $300,000 and in Allowance for Uncollectible Accounts of $1,000 (debit) before any adjustments. An analysis of Tremble's December 31 accounts receivable suggests that 5% of the account balances are not expected to be collected. The balance of Allowance for Uncollectible Accounts after adjustment will be:
A. $1,000. B. $16,000. C. $14,000. D. $15,000. ($300,000 × 5%) = $15,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
5-134 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
109.
At December 31, Tremble Music had account balances in Accounts Receivable of $300,000 and in Allowance for Uncollectible Accounts of $1,000 (credit) before any adjustments. An analysis of Tremble's December 31 accounts receivable suggests that 5% of the account balances are not expected to be collected. The balance of Allowance for Uncollectible Accounts after adjustment will be:
A. $1,000. B. $15,000. C. $16,000. D. $14,000. ($300,000 × 5%) = $15,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
110.
At the end of the year, Mark Inc. estimates future bad debts to be $6,500. The Allowance for Uncollectible Accounts has a credit balance of $2,500 before any year-end adjustment. What adjustment should Mark Inc. record for the estimated bad debts at the end of the year?
A. Debit Bad Debt Expense, $6,500; credit Allowance for Uncollectible Accounts, $6,500. B. Debit Bad Debt Expense, $4,000; credit Allowance for Uncollectible Accounts $4,000. C. Debit Allowance for Uncollectible Accounts, $9,000; credit Bad Debt Expense, $9,000. D. Debit Bad Debt Expense, $9,000; credit Allowance for Uncollectible Accounts, $9,000. Bad Debt Expense = $6,500 - $2,500 = $4,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard 5-135 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
111.
Suppose that the balance of a company's Allowance for Uncollectible Accounts was $6,200 (credit) at the end of the year, prior to any adjustments. The company estimated that the total of uncollectible accounts in its accounts receivable was $44,300 at the end of the year. What amount of bad debt expense would appear in the company's year-end income statement?
A. $38,100. B. $105,700. C. $33,000. D. $50,500. Bad Debt Expense = $44,300 - $6,200 = $38,100.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
112.
Prior to year-end adjusting entries, what would explain the Allowance for Uncollectible Accounts having a debit balance?
A. The amount of cash collections from customers in the current year was less the amount of cash collections from customers in the prior year. B. The amount of actual uncollectible accounts in the current year was less than the estimate of uncollectible accounts made at the end of the prior year. C. The amount of credit sales in the current year was greater than the amount of credit sales made in the prior year. D. The amount of actual uncollectible accounts in the current year was greater than the estimate of uncollectible accounts made at the end of the prior year. AACSB: Reflective Thinking AICPA: FN Measurement
5-136 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
113.
Suppose at the end of the year before any adjusting entries, a company has a balance in Allowance for Uncollectible Accounts of $5,000 (debit). During the year, the company reported the following amounts: Credit sales to customers = $550,000 Cash collections from customers = $540,000 Actual bad debts = $20,000 What was the balance of Allowance for Uncollectible Accounts at the beginning of the year?
A. $10,000. B. $20,000. C. $15,000. D. $25,000. Beginning ($15,000) = Ending before adjustment ($-5,000) + Actual ($20,000)
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
5-137 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
114.
If the estimate of uncollectible accounts at the end of the current year is too high, which of the following is true in the following year?
A. Cash collections from customers will be greater than expected. B. The balance of Allowance for Uncollectible Accounts will be a credit prior to its yearend adjustment. C. The amount reported for Bad Debt Expense will be less than the ending balance of Allowance for Uncollectible Accounts after its year-end adjustment. D. All of the other answers are true in the following year. AACSB: Reflective Thinking AICPA: FN Measurement AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
115.
On December 31, 2018, Coolwear Inc. had balances in Accounts Receivable and Allowance for Uncollectible Accounts of $48,400 and $940, respectively. During 2019, Coolwear wrote off $820 in accounts receivable and determined that there should be an allowance for uncollectible accounts of $1,140 at December 31, 2019. Bad debt expense for 2019 would be:
A. $320. B. $1,140. C. $820. D. $1,020. Bad debt expense = $1,140 - ($940 - $820) = $1,020.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Learning Objective: 05-05 Apply the procedure to write off accounts receivable as uncollectible. 5-138 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Allowance Method Topic: Writing Off Accounts Receivable
116.
On December 31, 2018, Larry's Used Cars had balances in Accounts Receivable and Allowance for Uncollectible Accounts of $53,600 and $1,325, respectively. During 2019, Larry's wrote off $1,465 in accounts receivable and determined that there should be an allowance for uncollectible accounts of $1,280 at December 31, 2019. Bad debt expense for 2019 would be:
A. $1,280. B. $1,465. C. $1,420. D. $1,140. Bad debt expense = $1,280 - ($1,325 - $1,465) = $1,420.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Learning Objective: 05-05 Apply the procedure to write off accounts receivable as uncollectible. Topic: Allowance Method Topic: Writing Off Accounts Receivable
117.
For accounts receivable, the longer an account is outstanding, the:
A. Better the customer. B. More likely it will prove uncollectible. C. More likely the customer will return. D. Higher probability of it being collected. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 05-04 Use the aging method to estimate future uncollectible accounts. Topic: Aging of Accounts Receivable 5-139 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
118.
The method of estimating uncollectible accounts based on the length of time the amount is owed by the customer is referred to as the:
A. Activity method. B. Realization method. C. Direct write-off method. D. Aging method. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-04 Use the aging method to estimate future uncollectible accounts. Topic: Aging of Accounts Receivable
119.
When using an aging method for estimating uncollectible accounts:
A. Older accounts are considered less likely to be collected. B. The number of days the account is past due is not considered. C. Older accounts are considered more likely to be collected. D. No estimate of uncollectible accounts is made. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-04 Use the aging method to estimate future uncollectible accounts. Topic: Aging of Accounts Receivable
5-140 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
120.
Compared to other methods of estimating uncollectible accounts, the aging of accounts receivables method tends to:
A. Be more accurate. B. Result in the highest net income. C. Result in the lowest net income. D. Recognize bad debts earlier. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-04 Use the aging method to estimate future uncollectible accounts. Topic: Aging of Accounts Receivable
5-141 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
121.
On December 31, 2018, Andy Inc. has a debit balance of $1,500 for the Allowance for Uncollectible Accounts before any year-end adjustment. Andy Inc. also has the following information for its accounts receivable and the estimated percentages of bad debts for different past-due amounts:
Age Group (days past
Accounts Estimated Percent Receivable
Uncollectible
due) 0-30
$50,000
5%
31-60
$20,000
10%
61-90
$10,000
20%
What is the amount of bad debt expense to be reported on Andy Inc.'s financial statements for 2018 using the aging method?
A. $6,500. B. $1,500. C. $5,000. D. $8,000. Estimated uncollectible = ($50,000 × 5%) + ($20,000 × 10%) + ($10,000 × 20%) = $6,500. Bad Debt Expense = $6,500 + $1,500 = $8,000.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-04 Use the aging method to estimate future uncollectible accounts. Topic: Aging of Accounts Receivable
5-142 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
122.
McConnell's Bakeries had the following balances on December 31, 2018, before any adjustment: Accounts Receivable = $100,000; Allowance for Uncollectible Accounts = $4,100 (credit). McConnell's estimates uncollectible accounts based on an aging of accounts receivable as shown below:
Age
Accounts
Estimated
Group(days
Receivable
Percent
past due)
Uncollectible
Not yet due
$50,000
4%
0-30
$20,000
8%
31-60
$18,000
10%
More than 60
$12,000
40%
What amount of bad debt expense did McConnell's record in its December 31, 2018, adjustment to the allowance account?
A. $10,200. B. $12,800. C. $15,300. D. $6,100. Estimated uncollectible = ($50,000 × 4%) + ($20,000 × 8%) + ($18,000 × 10%) + ($12,000 × 40%) = $10,200. Bad debt expense = $10,200 - $4,100 = $6,100.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-04 Use the aging method to estimate future uncollectible accounts. Topic: Aging of Accounts Receivable
5-143 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
123.
Timkin creates the following accounts receivable aging report at the end of the year: Age
Amount
Estimated uncollectible
Less than
$6,000
5%
31-60 days
$4,000
10%
61+ days
$2,000
25%
30 days
Prior to adjusting entries, the Allowance for Uncollectible Accounts has a debit balance of $500. The year-end adjustment would include a:
A. Credit to Allowance for Uncollectible Accounts for $1,200. B. Debit to Bad Debt Expense for $700. C. Debit to Bad Debt Expense for $1,700. D. Debit to Bad Debt Expense for $1,200. Estimated uncollectible = ($6,000 × 5%) + ($4,000 × 10%) + ($2,000 × 25%) = $1,200. Adjustment to Bad Debt Expense = $1,200 + $500 = $1,700.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-04 Use the aging method to estimate future uncollectible accounts. Topic: Aging of Accounts Receivable
5-144 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
124.
Crimson Inc. recorded credit sales of $750,000, of which $600,000 is not yet due, $100,000 is past due for up to 180 days, and $50,000 is past due for more than 180 days. Under the aging of receivables approach, Crimson Inc. expects it will not collect 1% of the amount not yet due, 10% of the amount past due for up to 180 days, and 20% of the amount past due for more than 180 days. The allowance account had a debit balance of $1,000 before adjustment. After adjusting for bad debt expense, what is the ending balance of the allowance account?
A. $29,000. B. $28,000. C. $27,000. D. $26,000. ($600,000 × 1%) + ($100,000 × 10%) + ($50,000 × 20%) = $26,000.
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-04 Use the aging method to estimate future uncollectible accounts. Topic: Aging of Accounts Receivable
5-145 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
125.
During the year, Bears Inc. recorded credit sales of $500,000. Before adjustments at yearend, Bears has accounts receivable of $300,000, of which $50,000 is past due, and the allowance account had a credit balance of $2,500. Using the aging of receivables approach, what would be the adjustment assuming Bears expects it will not to collect 5% of the amount not yet past due and 20% of the amount past due? A. Bad Debt Expense
22,500
Allowance for Uncollectible Accounts B. Bad Debt Expense
22,500 25,000
Allowance for Uncollectible Accounts C. Bad Debt Expense
25,000 20,000
Allowance for Uncollectible Accounts D. Allowance for Uncollectible Accounts
20,000 20,000
Bad Debt Expense
20,000
A. Option A B. Option B C. Option C D. Option D ($250,000 × 5%) + ($50,000 × 20%) - $2,500 = $20,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-04 Use the aging method to estimate future uncollectible accounts. Topic: Aging of Accounts Receivable
5-146 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
126.
The following information pertains to Lightning Inc., at the end of December: Credit Sales
$60,000
Accounts Payable
10,000
Accounts Receivable
7,000
Allowance for Uncollectible
$400 credit
Accounts Cash Sales
20,000
Lightning uses the aging method and estimates it will not collect 2% of accounts receivable not yet due, 10% of receivables less than 30 days past due, and 40% of receivables greater than 30 days past due. The accounts receivable balance of $7,000 consists of $3,500 not yet due, $2,000 less than 30 days past due, and $1,500 greater than 30 days past due. What is the appropriate amount of Bad Debt Expense?
A. $400. B. $470. C. $870. D. $1,270. Bad Debt Expense = ($3,500 × 2%) + ($2,000 × 10%) + ($1,500 × 40%) - $400 = $470.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-04 Use the aging method to estimate future uncollectible accounts. Topic: Aging of Accounts Receivable
5-147 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
127.
When $2,500 of accounts receivable are determined to be uncollectible, which of the following should the company record to write off the accounts using the allowance method?
A. A debit to Bad Debt Expense and a credit to Allowance for Uncollectible Accounts. B. A debit to Allowance for Uncollectible Accounts and a credit to Bad Debt Expense. C. A debit to Bad Debt Expense and a credit to Accounts Receivable. D. A debit to Allowance for Uncollectible Accounts and a credit to Accounts Receivable. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-05 Apply the procedure to write off accounts receivable as uncollectible. Topic: Writing Off Accounts Receivable
128.
Using the allowance method, writing off an actual bad debt would include a:
A. Debit to Bad Debt Expense. B. Credit to Accounts Receivable. C. Debit to Accounts Receivable. D. Credit to Allowance for Uncollectible Accounts. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-05 Apply the procedure to write off accounts receivable as uncollectible. Topic: Writing Off Accounts Receivable
5-148 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
129.
Richard LLC accounts for possible bad debts using the allowance method. When an actual bad debt occurs, what effect does it have on the accounting equation?
A. Increases assets and increases stockholders' equity. B. Decreases assets and decreases stockholders' equity. C. Decreases assets and decreases liabilities. D. No effect on the accounting equation. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-05 Apply the procedure to write off accounts receivable as uncollectible. Topic: Writing Off Accounts Receivable
130.
Which of the following is recorded by a credit to Accounts Receivable?
A. Sale of inventory on account. B. Estimating the annual allowance for uncollectible accounts. C. Estimating annual sales returns. D. Write-offs of bad debts. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-05 Apply the procedure to write off accounts receivable as uncollectible. Topic: Writing Off Accounts Receivable
5-149 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
131.
Lail Inc. accounts for bad debts using the allowance method. On June 1, Lail Inc. wrote off Andrew Green's $2,500 account. Based on Lail's estimation, Andrew Green will never pay any portion of the balance in his account. What effect will this write-off have on Lail Inc.'s balance sheet at the time of the write-off?
A. An increase to stockholders' equity and a decrease to liabilities. B. No effect. C. An increase to assets and an increase to stockholders' equity. D. A decrease to assets and a decrease to stockholders' equity. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-05 Apply the procedure to write off accounts receivable as uncollectible. Topic: Writing Off Accounts Receivable
132.
At the beginning of 2018, the balance in Jackson Enterprises' Allowance for Uncollectible Accounts was $31,800. During 2018, the company wrote off $38,000 of accounts receivable. Writing off the individual bad debts would include a:
A. Debit to Bad Debt Expense. B. Credit to Accounts Receivable. C. Credit to the Allowance for Uncollectible Accounts. D. Debit to Bad Debt Expense; credit to the Allowance for Uncollectible Accounts. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-05 Apply the procedure to write off accounts receivable as uncollectible. Topic: Writing Off Accounts Receivable
5-150 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
133.
The current year's beginning and ending balances for Allowance for Uncollectible Accounts is $23,000 and $27,000, respectively. If the amount of Bad Debt Expense for the year is $18,000, what is the amount of actual bad debts for the year?
A. $14,000. B. $10,000. C. $18,000. D. $22,000. Beginning balance ($23,000) + Bad Debt Expense ($18,000) - Ending balance ($27,000) = Actual write-offs ($14,000).
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-05 Apply the procedure to write off accounts receivable as uncollectible. Topic: Writing Off Accounts Receivable
134.
Collections of accounts receivable that previously have been written off are credited to:
A. A Gain account. B. Accounts Receivable. C. Bad Debt Expense. D. Retained Earnings. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-05 Apply the procedure to write off accounts receivable as uncollectible. Topic: Writing Off Accounts Receivable
5-151 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
135.
A company collects an account receivable previously written off. Indicate how this transaction would affect (1) assets, (2) stockholders' equity, and (3) revenues.
A. Increase, (2) Increase, (3) Decrease B. Increase, (2) Increase, (3) Increase C. Increase, (2) Increase, (3) Increase D. No effect, (2) No effect, (3) No effect AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-05 Apply the procedure to write off accounts receivable as uncollectible. Topic: Writing Off Accounts Receivable
136.
The direct write-off method is used when:
A. Uncollectible accounts are not anticipated or are immaterial. B. A company elects to use this method as one of several alternatives. C. A company has greater cash outflows than cash inflows. D. A company expects excessive sales returns. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Topic: Direct Write-Off Method
5-152 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
137.
Which method is not allowed under Generally Accepted Accounting Principles for the purpose of accounting for uncollectible accounts?
A. Allowance method. B. Direct write-off method. C. Aging method. D. Percentage-of-receivables method. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Topic: Direct Write-Off Method
138.
The direct write-off method is not normally an acceptable method for GAAP because it fails to report:
A. Revenue from the sale of goods or services to customers. B. Cash collected from customers. C. Accounts receivable for their net realizable value. D. The amounts receivable from customers. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Topic: Direct Write-Off Method
5-153 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
139.
The direct write-off method is generally not permitted for financial reporting purposes because:
A. Compared to the allowance method, it would allow greater flexibility to managers in manipulating reported net income. B. This method is primarily used for tax purposes. C. It is too difficult to accurately estimate future bad debts. D. Expenses (bad debts) are not properly matched with the revenues (credit sales) that they help to generate. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Topic: Direct Write-Off Method
140.
Which accounting concept does the direct write-off method violate?
A. Total assets equal total liabilities plus total stockholders' equity. B. Recording amount owed within one year as current liabilities. C. Recognizing revenue when goods or services are provided to customers. D. An attempt to match revenues and their related expenses. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Topic: Direct Write-Off Method
5-154 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
141.
If the direct write-off method is used to account for uncollectible accounts, which of the following statements is false?
A. An allowance account is not used. B. No adjustment is made at the end of the year to estimate future uncollectible accounts. C. Accounts receivable will be reported at their net realizable value. D. Bad debt expense is recorded at the time an actual bad debt is written-off. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Topic: Direct Write-Off Method
142.
Under the direct write-off method, what adjustment is made at the end of the year to account for possible future bad debts?
A. Debit Bad Debt Expense. B. Debit Allowance for Uncollectible Accounts. C. Credit Accounts Receivable. D. No adjustment is made. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Topic: Direct Write-Off Method
5-155 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
143.
Under the direct write-off method, what adjustment is made at the time an actual bad debt occurs?
A. Debit Bad Debt Expense, credit Allowance for Uncollectible Accounts. B. Debit Allowance for Uncollectible Accounts, credit Accounts Receivable. C. Debit Bad Debt Expense, credit Accounts Receivable. D. No adjustment is made. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Topic: Direct Write-Off Method
144.
The distinction between the direct write-off method and the allowance method is:
A. The year in which cash is collected from customers. B. The cumulative amount of bad debt expense reported across years. C. The customers to which goods or services are provided. D. The amount of bad debt expense reported in each year. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Topic: Direct Write-Off Method
5-156 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
145.
The direct write-off method is an acceptable method for what purpose?
A. Issuing financial statements to stockholders. B. Tax reporting. C. Compliance with Generally Accepted Accounting Principles. D. Financial reporting. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Topic: Direct Write-Off Method
146.
The primary difference between a note receivable and an account receivable is:
A. A note receivable cannot be classified as a current asset. B. Borrowers have the option of not paying a note receivable. C. An account receivable is more likely to be collected. D. A note receivable is evidenced by a written debt instrument. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-07 Account for notes receivable and interest revenue. Topic: Accounting for Notes Receivable
5-157 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
147.
A(n) ______ receivable is an informal credit arrangement with trade customers, whereas a(n) ______ receivable is a formal signed credit arrangement between a creditor and a debtor.
A. Account; Note B. Revenue; Note C. Note; Account D. Allowance; Stock AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-07 Account for notes receivable and interest revenue. Topic: Accounting for Notes Receivable
148.
A note receivable is reported in the balance sheet:
A. Always as a current asset. B. Always as a long-term asset. C. As either a current asset or long-term asset depending on the expected collection date. D. As a contra asset. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-07 Account for notes receivable and interest revenue. Topic: Accounting for Notes Receivable
5-158 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
149.
Suppose a customer is unable to pay its account on time, so the company accepts a sixmonth interest-bearing note receivable to replace the customer's account receivable. What effect will accepting the note receivable have on the company's financial statements at the time of acceptance?
A. Total assets increase. B. Total assets decrease. C. No change in total assets. D. Total revenues increase. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-07 Account for notes receivable and interest revenue. Topic: Accounting for Notes Receivable
150.
Suppose a customer is unable to pay its account on time, so the company accepts a sixmonth interest-bearing note receivable to replace the customer's account receivable. Over the next six months, what effect will accepting the note receivable have on the company's financial statements?
A. Total assets increase. B. Total revenues increase. C. Net income increases. D. All of the other answers are financial statements effects that will occur. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-07 Account for notes receivable and interest revenue. Topic: Accounting for Notes Receivable
5-159 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
151.
Hughes Aircraft sold a four-passenger airplane for $380,000, receiving a $50,000 down payment and a 12% note for the balance. This transaction would include a:
A. Credit to Cash. B. Debit to Sales Discount. C. Debit to Notes Receivable. D. Credit to Notes Receivable. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-07 Account for notes receivable and interest revenue. Topic: Accounting for Notes Receivable
152.
On February 1, 2018, Middleton Corp. lends cash and accepts a $1,000 note receivable that offers 12% interest and is due in six months. How much interest revenue will Middleton Corp. report during 2018?
A. $120. B. $240. C. $100. D. $60. Interest revenue = $1,000 × 12% × 6/12 = $60.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-07 Account for notes receivable and interest revenue. Topic: Accounting for Notes Receivable
5-160 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
153.
On February 1, 2018, Sanger Corp. lends cash and accepts a $2,000 note receivable that offers 10% interest and is due in six months. What would Sanger record on August 1, 2018, when the borrower pays Sanger the correct amount owed? A. Cash Interest Revenue
2,000 100
Notes Receivable B. Cash
2,100 2,100
Notes Receivable C. Cash
2,100 2,100
Interest Revenue
100
Notes Receivable
2,000
D. Cash
2,200
Notes Receivable
2,200
A. Option A B. Option B C. Option C D. Option D Interest revenue = $2,000 × 10% × 6/12 = $100.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-07 Account for notes receivable and interest revenue. Topic: Accounting for Notes Receivable
5-161 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
154.
On September 1, 2018, Middleton Corp. lends cash and accepts a $1,000 note receivable that offers 12% interest and is due in six months. How much interest revenue will Middleton Corp. report during 2018?
A. $20. B. $40. C. $30. D. $60. Interest revenue = $1,000 × 12% × 4/12 = $40.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-07 Account for notes receivable and interest revenue. Topic: Accounting for Notes Receivable
5-162 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
155.
On August 1, 2018, Turner Manufacturing lends cash and accepts a $6,000 note receivable that offers 8% interest and is due in nine months. How would Turner record the year-end adjustment to accrue interest in 2018? A. Interest Revenue
360
Interest Receivable B. Interest Receivable
360 480
Interest Revenue C. Interest Receivable
480 360
Interest Revenue D. Interest Receivable
360 200
Interest Revenue
200
A. Option A B. Option B C. Option C D. Option D Interest revenue = $6,000 × 8% × 5/12 = $200.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-07 Account for notes receivable and interest revenue. Topic: Accounting for Notes Receivable
5-163 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
156.
On September 1, 2018, Middleton Corp. lends cash and accepts a $1,000 note receivable that offers 12% interest and is due in six months. How much interest revenue will Middleton Corp. report during 2019?
A. $20. B. $40. C. $30. D. $60. Interest revenue = $1,000 × 12% × 2/12 = $20.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-07 Account for notes receivable and interest revenue. Topic: Accounting for Notes Receivable
5-164 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
157.
On July 1, 2018, Herzog Mining lends cash and accepts a $9,000 note receivable that offers 10% interest and is due in nine months. How would Herzog record the transaction on April 1, 2019, when the borrower pays Herzog the correct amount owed? A. Cash
9,675
Notes Receivable
9,000
Interest Revenue
675
B. Cash
9,675
Notes Receivable
9,000
Interest Revenue
225
Interest Receivable
450
C. Cash
9,675
Notes Receivable
9,000
Interest Receivable
675
D. Cash Notes Receivable
9,675 9,675
A. Option A B. Option B C. Option C D. Option D Interest revenue = $9,000 × 10% × 3/12 = $225. Interest receivable = $9,000 × 10% × 6/12 = $450.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-07 Account for notes receivable and interest revenue. Topic: Accounting for Notes Receivable
5-165 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
158.
On January 1, 2018, Alice & Co. lends $5,000 to an employee and accepts a 24-month, 10% note. At the end of 2018, what effect will the adjustment for accrued interest revenue have on the Alice & Co.'s financial statements?
A. Decreases assets. B. Decreases revenue. C. Increases expense. D. Increases stockholders' equity. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-07 Account for notes receivable and interest revenue. Topic: Accounting for Notes Receivable
159.
On October 1, 2018, Stripes Inc. lends $100,000 to another company and accepts a 24month, 6% note. What is the amount of interest revenue Stripes will report in its 2018 income statement?
A. $750. B. $1,500. C. $4,500. D. $6,000. $100,000 × 6% × 3/12 = $1,500
AACSB: Analytical Thinking AICPA: FN Measurement AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-07 Account for notes receivable and interest revenue. Topic: Accounting for Notes Receivable
5-166 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
160.
On October 1, 2018, Stripes Inc. lends $100,000 to another company and accepts a 24month, 6% note. What is the amount of interest revenue Stripes will report in its 2019 income statement?
A. $0. B. $1,500. C. $4,500. D. $6,000. $100,000 × 6% × 12/12 = $6,000
AACSB: Analytical Thinking AICPA: FN Measurement AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-07 Account for notes receivable and interest revenue. Topic: Accounting for Notes Receivable
161.
On October 1, 2018, Stripes Inc. lends $100,000 to another company and accepts a 24month, 6% note. What is the amount of interest revenue Stripes will report in its 2020 income statement?
A. $0. B. $4,500. C. $6,000. D. $12,000. $100,000 × 6% × 9/12 = $4,500
AACSB: Analytical Thinking AICPA: FN Measurement AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-07 Account for notes receivable and interest revenue.
5-167 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Accounting for Notes Receivable
162.
On September 1, 2018, Heartford Construction lends $50,000 to a customer with 10% interest. The note and interest are due in twelve months. The note receivable is recorded for $50,000 on September 1, but no other adjustments are made in 2018. At the end of 2018, which of the following is true?
A. Assets are overstated. B. Revenues are understated. C. Expenses are understated. D. All amounts are accurately stated. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-07 Account for notes receivable and interest revenue. Topic: Accounting for Notes Receivable
163.
On September 1, 2018, Heartford Construction lends $50,000 to a customer with 9% interest. The note and interest are due in twelve months. The note receivable is recorded for $50,000 on September 1, and the following year-end adjusting entry is made on December 31, 2018: Interest Receivable
4,500
Interest Revenue
4,500
At the end of 2018, which of the following is true?
A. Revenues are understated. B. Liabilities are understated. C. Assets are overstated. D. All amounts are accurately stated. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze
5-168 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 3 Hard Learning Objective: 05-07 Account for notes receivable and interest revenue. Topic: Accounting for Notes Receivable
164.
The amount of a company's receivables is influenced by several variables, including all of the following except:
A. The level of sales. B. The nature of the product or service sold. C. The credit and collection policies. D. Dividend payments to stockholders. AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Topic: Receivables Turnover Ratio
165.
The formula for the receivables turnover ratio is:
A. Average accounts receivable divided by average total assets. B. Net credit sales divided by average accounts receivable. C. Net credit sales divided by average total assets. D. Average accounts receivable divided by net credit sales. AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Topic: Receivables Turnover Ratio
5-169 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
166.
The receivables turnover ratio indicates:
A. How efficient the company is at managing sales and inventory. B. The relationship between sales and cost of goods sold. C. The number of times during a year that the average accounts receivables were collected. D. The relationship between cash sales and credit sales. AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Topic: Receivables Turnover Ratio
167.
An increase in a company's receivables turnover ratio typically means the company is:
A. Having trouble paying debts as they become due. B. Less profitable. C. More effectively granting and collecting credit to customers. D. Losing customers to its competitors. AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Topic: Receivables Turnover Ratio
5-170 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
168.
At the beginning of the year, Vici Ventures had accounts receivable of $220,000. At the end of the year, the company had accounts receivable of $340,000. During the year, Vici had total sales of $1,000,000, 70% of which were credit sales. What was Vici's receivables turnover ratio for the year?
A. 2.50. B. 3.57. C. 2.94. D. 146 days. [($1,000,000 × .70)/($220,000 + $340,000)/2] = 2.50.
AACSB: Analytical Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Topic: Receivables Turnover Ratio
5-171 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
169.
Sandburg Veterinarian reports the following information for the year: Net credit sales
$120,000
Average accounts receivable
20,000
Cash collections on credit sales
100,000
What is Sandburg's receivables turnover ratio?
A. 6.0. B. 5.0. C. 1.2. D. 0.2. Receivables turnover ratio = net credits sales ($120,000)/average accounts receivable ($20,000) = 6.0.
AACSB: Analytical Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Topic: Receivables Turnover Ratio
5-172 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
170.
Beverage International reports net credit sales for the year of $240,000. The company's accounts receivable balance at the beginning of the year equaled $20,000 and the balance at the end of the year equaled $30,000. What is Beverage International's receivables turnover ratio?
A. 12.0. B. 9.6. C. 8.0. D. 1.5. Receivables turnover ratio = net credit sales ($240,000)/average accounts receivable [($20,000 + $30,000)/2] = 9.6.
AACSB: Analytical Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Topic: Receivables Turnover Ratio
171.
Toppleson Manufacturing reports a receivables turnover ratio of 14.5. The industry average is 10.7. What most likely is causing this difference?
A. Toppleson is selling to high-risk customers. B. Toppleson has effective procedures related to selling goods on account. C. Toppleson provides superior products and services. D. Toppleson allows customers too long to pay. AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Topic: Receivables Turnover Ratio
5-173 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
172.
A company's ratio of net sales (cash and credit sales) to average accounts receivable can be interpreted as management's ability to:
A. Collect cash from all sales to customers. B. Effectively market its products and services. C. Generate profits for investors. D. Reduce costs of selling products and services to customers. AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Topic: Receivables Turnover Ratio
173.
The formula for average collection period is:
A. 365 days divided by the receivable turnover ratio. B. 365 days divided by net credit sales. C. 365 days divided by average accounts receivable. D. Net credit sales divided by average accounts receivable. AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Topic: Receivables Turnover Ratio
5-174 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
174.
What is the most likely reason for a company to have an increase in average collection period?
A. The company has incurred additional marketing expenses to attract customers. B. Customers are paying in a timelier manner. C. The company has tightened its credit policies for its customers. D. The company has become more lenient in its credit policies and is extending credit terms to maintain customers. AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Topic: Receivables Turnover Ratio
175.
Red Company has the following information: Net credit sales = $400,000 Net income = $100,000 Average total assets = $80,000 Average accounts receivable = $20,000 What is Red's average collection period (rounded to the nearest whole day)?
A. 73 days. B. 18 days. C. 9 days. D. 5 days. Turnover ratio = $400,000/$20,000 = 20 Collection period = 365 days/20 = 18 days (rounded)
AACSB: Analytical Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Analyze 5-175 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 3 Hard Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Topic: Receivables Turnover Ratio
176.
The percentage-of-credit-sales method for estimating uncollectible accounts is sometimes described as:
A. The balance sheet method. B. The method most used by companies. C. The income statement method. D. The percentage-of-receivables method. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method. Topic: Percentage-of-Credit-Sales Method
177.
The income statement approach for estimating bad debts uses a percentage of
A. Credit sales. B. Accounts receivable. C. Allowance for uncollectible accounts. D. Bad debt expense. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method. Topic: Percentage-of-Credit-Sales Method
5-176 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
178.
Which of the following statements is true with respect to the percentage-of-credit-sales method for estimating uncollectible accounts?
A. The amount recorded for bad debt expense does not depend on the balance of the allowance for uncollectible accounts. B. This method is referred to as the balance sheet approach. C. This method does not allow for future uncollectible accounts. D. Under this method, bad debt expense is recorded at the time of an actual bad debt. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method. Topic: Percentage-of-Credit-Sales Method
179.
Which of the following provides an accurate match?
A. Percentage-of-receivables method ~ Assets are reported closer to their net realizable value. B. Allowance method ~ Receivables are reported net of estimated uncollectible accounts. C. Percentage-of-credit-sales method ~ Revenues and expenses are better matched. D. All of the other answers provide an accurate match. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method. Topic: Percentage-of-Credit-Sales Method
5-177 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
180.
The following information pertains to Lindsey Corp. at the end of the year: Credit Sales
$150,000
Accounts Payable
20,000
Accounts Receivable
30,000
Allowance for Uncollectible
800 debit
Accounts Cash Sales
5,500
Lindsey Corp. uses the percentage-of-credit-sales method and estimates that 2% of the credit sales are uncollectible. After the year-end adjustment, what amount of bad debt expense would Lindsey report for the year?
A. $1,200. B. $2,200. C. $3,000. D. $3,800. Bad debt expense = $150,000 × 2% = $3,000.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method. Topic: Percentage-of-Credit-Sales Method
5-178 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
181.
The following information pertains to Lightning Inc., at the end of the year: Credit Sales
$60,000
Accounts Payable
10,000
Accounts Receivable
7,000
Allowance for Uncollectible
400 credit
Accounts Cash Sales
20,000
Lightning uses the percentage-of-credit-sales method and estimates 1% of sales are uncollectible. What is the ending balance of the allowance account after the year-end adjustment?
A. $600. B. $1,000. C. $200. D. $1,200. Allowance for Uncollectible Accounts = $400 + ($60,000 × 1%) = $1,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method. Topic: Percentage-of-Credit-Sales Method
5-179 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
182.
Using the income statement approach for accounting for uncollectible accounts, a company estimates that 2.5% of credit sales will eventually become uncollectible. If credit sales during the year are $400,000 and accounts receivable at the end of the year are $80,000, the adjustment for estimated uncollectible accounts will require a:
A. Credit to Accounts Receivable for $2,000. B. Debit to Bad Debt Expense for $10,000. C. Debit to Allowance for Uncollectible Accounts for $10,000. D. Credit to Bad Debt Expense for $8,000. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method. Topic: Percentage-of-Credit-Sales Method
Matching Questions
183.
Match each term related to net revenues with its description.
1. Net revenues
Total revenues less contra revenues. 1 Reduction in revenue because the product or service is
2. Sales returns
sold below the listed price. 5 Reduction in revenue because the customer brings back
3. Contra revenues
products to the company after the original purchase. 2 Reduction in revenue because of some deficiency in the
4. Sales discounts
company's product or service. 6 Reduction in revenue when the customer pays within a
5. Trade discounts
specified period. 4
6. Sales allowances
Accounts with balances opposite of revenue. 3 AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand
5-180 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 2 Medium Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
184.
Match each term related to the allowance method for uncollectible accounts with its description.
The account used to record sales on account to 1. Bad debt expense
customers. 6 The procedure required for financial reporting purposes
2. No effect
to account for uncollectible accounts. 3 The difference between total accounts receivable and
3. Allowance method
the estimate of future bad debts. 4 The effect on total assets when estimating future bad
4. Net realizable value 5. Decrease
debts. 5 The account to credit when estimating future bad debts. 8 The effect on total expenses when estimating future bad
6. Accounts receivable
debts. 7
7. Increase
The account to debit when estimating future bad debts. 1
8. Allowance for
The effect on total liabilities when estimating future bad
Uncollectible Accounts
debts. 2 AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
5-181 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
185.
Match each term related to the comparison between the allowance method and direct write-off method for uncollectible accounts with its description.
The procedure commonly used for financial reporting 1. Direct write-off method
purposes to account for uncollectible accounts. 8 The procedure commonly used for tax reporting
2. Increase
purposes to account for uncollectible accounts. 1 The account to credit when writing off an actual bad
3. Bad debt expense
debt under the allowance method. 5 The account to debit when writing off an actual bad
4. Decrease
debt under the direct write-off method. 3 The account to debit when writing off an actual bad
5. Accounts receivable
debt under the allowance method. 7 The effect on total expenses when writing off an actual
6. No effect 7. Allowance for Uncollectible Accounts
bad debt under the direct write-off method. 2 The effect on total assets when estimating future bad debts under the allowance method. 4 The effect on total expenses when estimating future
8. Allowance method
bad debts under the direct write-off method. 6 AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Apply Difficulty: 3 Hard
Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Topic: Direct Write-Off Method
5-182 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
186.
Match each account with its description.
1. Accounts receivable
Informal credit arrangements with trade customers.
1
Account to debit when interest accrues at the end of the 2. Interest revenue
year. 4 Account to credit when interest accruals at the end of the
3. Notes receivable
year. 2 Formal signed credit arrangements between a creditor
4. Interest receivable
and a debtor. 3 Account to debit when receivables and interest are
5. Cash
collected. 5 AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-07 Account for notes receivable and interest revenue. Topic: Accounting for Notes Receivable
187.
Match each term related to receivables analysis with its description.
The approximate number of days the average accounts 1. Less
receivable balance is outstanding. 3 An increase in the receivables turnover ratio generally indicates the company manages its receivables _____
2. Decrease
efficiently. 4 Reducing the length of time in which customers are
3. Average collection period
required to pay will typically _____ the receivables turnover ratio. 6 The number of times during a year that the average
4. More 5. Receivables turnover ratio
accounts receivable balance is collected. 5 An increase in the average collection period indicates the company manages its receivables _____ efficiently.
1
Allowing riskier customers to purchase goods or services on account will typically _____ the receivables turnover 6. Increase
ratio. 2 AACSB: Reflective Thinking
5-183 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: BB Critical Thinking Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Topic: Receivables Turnover Ratio
Short Answer Questions
188.
A company offers a 20% trade discount when providing services of $5,000 or more to its customers. Record the transaction when the company provides services of $8,000 (not including the trade discount) on account.
Accounts Receivable Service Revenue
6,400 6,400
Feedback: Trade discount = $8,000 × 20% = $1,600. Sale price = $8,000 - $1,600 = $6,400. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-01 Recognize accounts receivable. Topic: Credit Sales and Accounts Receivable
5-184 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
189.
On February 23, a company provides services on account to a customer for $4,500. The customer pays in full for those services on March 4. Record the transactions for the company when the services are provided on February 23 and when the cash is collected on March 4.
February 23 Accounts Receivable
4,500
Service Revenue
4,500
March 4 Cash
4,500
Accounts Receivable
4,500
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-01 Recognize accounts receivable. Topic: Credit Sales and Accounts Receivable
190.
Suppose Casey Title Company normally charges $500 for services related to selling a house. As part of a summer special, Casey offers customers a trade discount of 20%. On July 9, Linda Holmes uses the services of Casey and pays cash equal to the discounted price. Record the revenue earned by Casey on July 9.
July 9 Cash Service Revenue
400 400
Feedback: Trade discount = $500 × 20% = $100. Sale price = $500 - $100 = $400. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze 5-185 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 3 Hard Learning Objective: 05-01 Recognize accounts receivable. Topic: Credit Sales and Accounts Receivable
191.
On September 8, a company provides services on account to a customer for $1,500, terms 2/10, n/30. The customer pays for those services on September 15. Record the transactions for the company when the services are provided on September 8 and when the cash is collected on September 15.
September 8 Accounts Receivable
1,500
Service Revenue
1,500
September 15 Cash Sales Discounts
1,470 30
Accounts Receivable
1,500
Feedback: Sales discounts = $1,500 × 2% = $30. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-01 Recognize accounts receivable. Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Credit Sales and Accounts Receivable Topic: Net Revenues
5-186 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
192.
On October 22, a company provides services on account to a customer for $1,800, terms 3/15, n/30. The customer pays for those services on December 19. Record the transactions for the company when the services are provided on October 22 and when cash is collected on December 19.
October 22 Accounts Receivable
1,800
Service Revenue
1,800
December 19 Cash
1,800
Accounts Receivable
1,800
Feedback: No sales discount of 3% is awarded because the customer did not pay within 15 days as set forth by the terms of the service agreement. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-01 Recognize accounts receivable. Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Credit Sales and Accounts Receivable Topic: Net Revenues
5-187 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
193.
On August 12, a company provides services on account to a customer for $3,000. However, on August 16, the customer is not completely satisfied with the service and the company grants an allowance on the amount owed of $400. On August 20, the customer makes full payment of the balance owed, excluding the allowance. Record the services provided on August 12, the sales allowance on August 16, and the cash collection on August 20.
August 12 Accounts Receivable
3,000
Service Revenue
3,000
August 16 Sales Allowances
400
Accounts Receivable
400
August 20 Cash
2,600
Accounts Receivable
2,600
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-01 Recognize accounts receivable. Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Credit Sales and Accounts Receivable Topic: Net Revenues
5-188 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
194.
A company reports the following amounts at the end of the year: Total sales = $500,000; sales discounts = $10,000; sales returns = $30,000; sales allowances = $20,000. Compute net revenues.
$440,000 Feedback: Net revenues = $500,000 - $10,000 - $30,000 - $20,000 = $440,000.
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
195.
A company reports the following amounts at the end of the year: Total sales = $400,000; cash = $35,000; sales discounts = $10,000; accounts receivable = $20,000; sales returns = $15,000; operating expenses = $70,000; sales allowances = $25,000. Compute net revenues.
$350,000 Feedback: Net revenues = $400,000 - $10,000 - $15,000 - $25,000 = $350,000.
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
5-189 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
196.
At the end of the year, a company has a balance in Allowance for Uncollectible Accounts of $200 (credit) before any year-end adjustment. The balance of Accounts Receivable is $15,000. The company estimates that 10% of accounts receivable will not be collected over the next year. Record the adjustment for uncollectible accounts.
Bad Debt Expense
1,300
Allowance for Uncollectible Accounts
1,300
Feedback: Adjustment = ($15,000 × 10%) - $200 = $1,300. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
197.
At the end of the year, a company has a balance in Allowance for Uncollectible Accounts of $2,000 (credit) before any year-end adjustment. The balance of Accounts Receivable is $180,000. The company estimates that 5% of accounts receivable will not be collected over the next year. Record the adjustment for uncollectible accounts.
Bad Debt Expense
7,000
Allowance for Uncollectible Accounts
7,000
Feedback: Adjustment = ($180,000 × 5%) - $2,000 = $7,000. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method 5-190 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
198.
At the end of the year, a company has a balance in Allowance for Uncollectible Accounts of $2,000 (debit) before any year-end adjustment. The balance of Accounts Receivable is $180,000. The company estimates that 5% of accounts receivable will not be collected over the next year. Record the adjustment for uncollectible accounts.
Bad Debt Expense
11,000
Allowance for Uncollectible Accounts
11,000
Feedback: Adjustment = ($180,000 × 5%) + $2,000 = $11,000. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
199.
During 2018, its first year of operations, a company provides services on account of $250,000. By the end of 2018, cash collections on these accounts total $130,000. The company estimates that 10% of accounts receivable will be uncollectible. Record the adjustment for uncollectible accounts on December 31, 2018.
Bad Debt Expense
12,000
Allowance for Uncollectible Accounts
12,000
Feedback: Adjustment = ($250,000 - $130,000) × 10% = $12,000. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-03 Record an allowance for future uncollectible accounts. 5-191 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Allowance Method
200.
A company has the following balances on December 31, 2018, after year-end adjustments: Accounts Receivable = $62,000; Allowance for Uncollectible Accounts = $6,000. Calculate the net realizable value of accounts receivable.
$56,000 Feedback: Net realizable value = $62,000 - $6,000 = $56,000.
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
201.
A company has the following balances on December 31, 2018, after year-end adjustments: Accounts Receivable = $75,000; Service Revenue = $400,000; Allowance for Uncollectible Accounts = $5,000; Cash = $20,000. Calculate the net realizable value of accounts receivable.
$70,000 Feedback: Net realizable value = $75,000 - $5,000 = $70,000.
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
5-192 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
202.
A company reports the following amounts at the end of the year (before any year-end adjustment). Credit sales for the year
$120,000
Accounts receivable
36,000
Allowance for uncollectible
1,500 (credit)
accounts
Record the adjustment for uncollectible accounts (1) using the percentage-of-receivables method, assuming the company estimates 10% of receivables will not be collected, and (2) using the percentage-of-credit-sales method, assuming the company estimates 2% of credit sales will not be collected.
(1) Bad Debt Expense
2,100
Allowance for Uncollectible Accounts
2,100
(2) Bad Debt Expense
2,400
Allowance for Uncollectible Accounts
2,400
Feedback: (1) Adjustment = ($36,000 × 10%) - $1,500 = $2,100. (2) Adjustment = $120,000 × 2% = $2,400. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method. Topic: Allowance Method Topic: Percentage-of-Credit-Sales Method
5-193 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
203.
A company has the following accounts receivable and estimates of uncollectible accounts: 1. Accounts not yet due = $60,000; estimated uncollectible = 3%. 2. Accounts 1-30 days past due = $20,000; estimated uncollectible = 20%. 3. Accounts more than 30 days past due = $10,000; estimated uncollectible = 50%. Compute the total estimated uncollectible accounts.
$10,800 Feedback: Estimate = ($60,000 × 3%) + ($20,000 × 20%) + ($10,000 × 50%) = $10,800.
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-04 Use the aging method to estimate future uncollectible accounts. Topic: Aging of Accounts Receivable
204.
At the end of the year, a company has the following accounts receivable and estimates of uncollectible accounts: 1. Accounts not yet due = $80,000; estimated uncollectible = 2%. 2. Accounts 1-30 days past due = $20,000; estimated uncollectible = 25%. 3. Accounts more than 30 days past due = $4,000; estimated uncollectible = 60%. Record the year-end adjustment for uncollectible accounts, assuming the current balance of the Allowance for Uncollectible Accounts is $900 (credit).
Bad Debt Expense Allowance for Uncollectible Accounts
8,100 8,100
Feedback: Adjustment = ($80,000 × 2%) + ($20,000 × 25%) + ($4,000 × 60%) - $900 = $8,100. AACSB: Analytical Thinking 5-194 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-04 Use the aging method to estimate future uncollectible accounts. Topic: Aging of Accounts Receivable
205.
At the end of the year, a company has the following accounts receivable and estimates of uncollectible accounts: 1. Accounts not yet due = $70,000; estimated uncollectible = 4%. 2. Accounts 1-30 days past due = $30,000; estimated uncollectible = 15%. 3. Accounts more than 30 days past due = $5,000; estimated uncollectible = 40%. Record the year-end adjustment for uncollectible accounts, assuming the current balance of the Allowance for Uncollectible Accounts is $1,200 (debit).
Bad Debt Expense
10,500
Allowance for Uncollectible Accounts
10,500
Feedback: Adjustment = ($70,000 × 4%) + ($30,000 × 15%) + ($5,000 × 40%) + $1,200 = $10,500. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-04 Use the aging method to estimate future uncollectible accounts. Topic: Aging of Accounts Receivable
5-195 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
206.
A company has the following balances on December 31, 2018, before any year-end adjustments: Accounts Receivable = $80,000; Allowance for Uncollectible Accounts = $1,100 (credit). The company estimates uncollectible accounts based on an aging of accounts receivable as shown below: Estimated Amount
Percent
Receivable
Uncollectible
Not yet due
$48,000
5%
0–30 days past
18,000
15%
10,000
40%
4,000
80%
Age Group
due 31–90 days past due More than 90 days past due Total
$80,000
Record the adjustment for uncollectible accounts on December 31, 2018.
Bad Debt Expense
11,200
Allowance for Uncollectible Accounts
11,200
Feedback: Adjustment = ($48,000 × 5%) + ($18,000 × 15%) + ($10,000 × 40%) + ($4,000 × 80%) - $1,100 = 11,200. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-04 Use the aging method to estimate future uncollectible accounts. Topic: Aging of Accounts Receivable
5-196 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
207.
A company uses the allowance method to account for uncollectible accounts. During the year, the company has actual bad debts of $25,000. Record the write-off of the uncollectible accounts.
Allowance for Uncollectible Accounts
25,000
Accounts Receivable
25,000
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-05 Apply the procedure to write off accounts receivable as uncollectible. Topic: Writing Off Accounts Receivable
208.
At the beginning of the year, a company had an Allowance for Uncollectible Accounts of $22,000. By the end of the year, actual bad debts total $24,000. What is the balance of the Allowance for Uncollectible Accounts after the write-offs (before any year-end adjustment)?
-$2,000 (or $2,000 debit)
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-05 Apply the procedure to write off accounts receivable as uncollectible. Topic: Writing Off Accounts Receivable
5-197 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
209.
On March 13, a company writes off a customer's account of $3,800. On June 3, the customer unexpectedly pays the $3,800 balance. Using the allowance method, record the write-off on March 13 and the cash collection on June 3.
March 13 Allowance for Uncollectible Accounts
3,800
Accounts Receivable
3,800
June 3 Accounts Receivable
3,800
Allowance for Uncollectible Accounts
3,800
Cash
3,800
Accounts Receivable
3,800
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-05 Apply the procedure to write off accounts receivable as uncollectible. Topic: Writing Off Accounts Receivable
5-198 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
210.
Calculate the missing amount for each of the following notes receivable. Annual Face
Interest
Fraction of
Value
rate
the Year
Interest
$15,000
4%
8 months
(a)
$25,000
8%
(b)
$500
$30,000
(c)
4 months
$500
(d)
6%
6 months
$600
(a) $400; (b) 3 months; (c) 5%; (d) $20,000 Feedback: $15,000 × 4% × 8/12 = (a) $400. $25,000 × 8% × (b) 3/12 = $500. $30,000 × (c) 5% × 4/12 = $500. (d) $20,000 × 6% × 6/12 = $600.
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-07 Account for notes receivable and interest revenue. Topic: Accounting for Notes Receivable
211.
On February 1, 2018, a company loans one of its employees $20,000 and accepts a ninemonth, 8% note receivable. Calculate the amount of interest revenue the company will recognize in 2018.
$1,200 Feedback: $20,000 × 8% × 9/12 = $1,200.
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze 5-199 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 3 Hard Learning Objective: 05-07 Account for notes receivable and interest revenue. Topic: Accounting for Notes Receivable
212.
On July 1, 2018, a company loans one of its employees $20,000 and accepts a nine-month, 8% note receivable. Calculate the amount of interest revenue the company will recognize in 2018 and 2019.
2018 = $800; 2019 = $400 Feedback: 2018: $20,000 × 8% × 6/12 = $800. 2019: $20,000 × 8% × 3/12 = $400.
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-07 Account for notes receivable and interest revenue. Topic: Accounting for Notes Receivable
213.
On April 1, 2018, a company loans one of its suppliers $50,000 and accepts a 24-month, 12% note receivable. Calculate the amount of interest revenue the company will recognize in 2018, 2019, and 2020.
2018 = $4,500; 2019 = $6,000; 2020 = $1,500 Feedback: 2018: $50,000 × 12% × 9/12 = $4,500. 2019: $50,000 × 12% × 12/12 = $6,000. 2020: $50,000 × 12% × 3/12 = $1,500.
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-07 Account for notes receivable and interest revenue. Topic: Accounting for Notes Receivable
5-200 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
214.
On April 14, a company lends $10,000 cash to one of its employees and accepts a sixmonth, 12% note in return. Record the acceptance of the note receivable.
Notes Receivable Cash
10,000 10,000
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-07 Account for notes receivable and interest revenue. Topic: Accounting for Notes Receivable
215.
On April 1, a company provides services to one of its customers for $12,000. As payment for the services, the company accepts a six-month, 10% note from the customer. Record the acceptance of the note receivable on April 1 and the cash collection on October 1.
April 1 Notes Receivable
12,000
Service Revenue
12,000
October 1 Cash
12,600
Notes Receivable
12,000
Interest Revenue
600
Feedback: Interest revenue = $12,000 × 10% × 6/12 = $600. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-07 Account for notes receivable and interest revenue. Topic: Accounting for Notes Receivable
5-201 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
216.
On May 1, 2018, a company lends $100,000 to one of its main suppliers and accepts a 12month, 6% note. Record the acceptance of the note on May 1, 2018, the adjustment on December 31, 2018, and the cash collection on May 1, 2019.
May 1, 2018 Notes Receivable
100,000
Cash
100,000
December 31, 2018 Interest Receivable
4,000
Interest Revenue
4,000
May 1, 2019 Cash
106,000
Notes Receivable
100,000
Interest Receivable
4,000
Interest Revenue
2,000
Feedback: Interest revenue 2018 = $100,000 × 6% × 8/12 = $4,000. Interest revenue 2019 = $100,000 × 6% × 4/12 = $2,000. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-07 Account for notes receivable and interest revenue. Topic: Accounting for Notes Receivable
5-202 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
217.
Below are amounts for two companies: Beginning
Ending
Accounts
Accounts
Receivable
Receivable
Net
(net)
(net)
Sales
Company 1
$1,500
$1,200 $29,700
Company 2
3,100
3,300
80,000
For each company, calculate the receivables turnover ratio. Which company appears more efficient in collecting cash from sales?
Company 1 = 22; Company 2 = 25; Company 2 is more efficient Feedback: Company 1 = $29,700/[($1,500 + $1,200)/2] = 22. Company 2 = $80,000/[($3,100 + $3,300)/2] = 25.
AACSB: Analytical Thinking AICPA: FN Decision Making Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Topic: Receivables Turnover Ratio
5-203 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
218.
At the end of the year, a company reports a balance in its Allowance for Uncollectible Accounts of $1,400 (credit) before any year-end adjustment. The company estimates future uncollectible accounts to be 3% of credit sales for the year. Credit sales for the year total $280,000. Record the adjustment for the allowance for uncollectible accounts using the percentage-of-credit-sales method.
Bad Debt Expense
8,400
Allowance for Uncollectible Accounts
8,400
Feedback: Adjustment = $280,000 × 3% = 8,400. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method. Topic: Percentage-of-Credit-Sales Method
219.
At the end of the year, a company reports a balance in its Allowance for Uncollectible Accounts of $1,400 (debit) before any year-end adjustment. The company estimates future uncollectible accounts to be 3% of credit sales for the year. Credit sales for the year total $280,000. Record the adjustment for the allowance for uncollectible accounts using the percentage-of-credit-sales method.
Bad Debt Expense
8,400
Allowance for Uncollectible Accounts
8,400
Feedback: Adjustment = $280,000 × 3% = $8,400. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard
5-204 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method. Topic: Percentage-of-Credit-Sales Method
220.
Assume the following scenarios. Scenario 1. During 2018, Makers Consulting provides services of $100,000. The company receives an initial payment of $75,000 with the balance to be received the following year. Scenario 2. People-R-Us typically charges $75 for a one-year subscription. On January 1, 2018, Georgette, age 72, purchases a one-year subscription to the magazine and receives a 20% senior citizen discount. Scenario 3. During 2018, Waste Control provides services on account for $15,000. The customer pays for those services in 2019. Scenario 4. During 2018, Tasty Foods sells grocery items to one of its customers for $125,000 on account. Cash collections on those sales are $80,000 in 2018 and $30,000 in 2019. The remaining $15,000 is written off as uncollectible in 2019. Required: For each scenario, calculate the amount of revenue to be recognized in 2018.
Revenue recognized in 2018 Scenario 1: Scenario 2:
$100,000 $60 (= $75 × 80%)
Scenario 3:
$15,000
Scenario 4:
$125,000
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-01 Recognize accounts receivable. Topic: Credit Sales and Accounts Receivable
5-205 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
221.
Recovery Experts (RE) specializes in data recovery from crashed hard drives. The price charged varies based on the extent of damage and the amount of data being recovered. RE offers a 10% discount to students and faculty at educational institutions. Consider the following transactions during the month of June. June 10 Luke’s hard drive crashes and he sends it to RE. June 12 After initial evaluation, RE e-mails Luke to let him know that full data recovery will cost $1,600. June 13 Luke informs RE that he would like them to recover the data and that he is a student at USC, qualifying him for a 10% educational discount and reducing the cost by $160 ($1,600 × 10%). June 16 RE performs the work and claims to be successful in recovering all data. RE asks Luke to pay within 30 days of today’s date, offering a 5% discount for payment within 10 days. June 19 When Luke receives the hard drive, he notices that RE did not successfully recover all data. Approximately 25% of the data has not been recovered and he informs RE. June 20 RE reduces the amount Luke owes by 25%. June 30 Luke pays the amount owed.
Required: 1. Record the necessary transactions(s) for Recovery Experts on each date. 2. Calculate net revenues. 3. Show how net revenues would be presented in the income statement. 4. Calculate net revenues if Luke had paid his bill on June 25.
Requirement 1
June 10
Debit
Credit
No entry June 12 No entry June 13 No entry 5-206 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
June 16 Accounts Receivable
1,440
Service Revenue
1,440
(Provide services of $1,600 on
account with a 10% discount) June 19 No entry June 20 Sales Allowances
360
Accounts Receivable
360
(Sales allowance for services on
account) June 30 Cash
1,080
Accounts Receivable
1,080
(Receive cash on account)
Requirement 2 Total Service Revenue
$1,440
Less: Sales Allowances
360
Net Revenues
$1,080
Requirement 3 Recovery Experts Partial Income Statement Total Service Revenue
$1,440
Less: Sales Allowances
(360)
Net Revenues
$1,080
Requirement 4 June 25 Cash Sales Discounts Accounts Receivable
1026 54 1,080
5-207 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
(Receive cash on account with
5% sales discount) (Sales discount = 1,080 × 5%)
Total Service Revenue
$1,440
Less: Sales Allowances
360
Sales Discounts
54
Net Revenues
$1,026
AACSB: Analytical Thinking AICPA: FN Measurement AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-01 Recognize accounts receivable. Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Credit Sales and Accounts Receivable Topic: Net Revenues
5-208 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
222.
Tatsuo is the CEO of Ginjo Gallery. At the end of the year, the company's accountant provides Tatsuo with the following information, before any adjusting entries. Accounts receivable
$1,000,000
Estimated percentage
5%
uncollectible Allowance for uncollectible
$10,000 (credit)
accounts Operating income
$240,000
Tatsuo has significant stock ownership in the company and therefore would like to keep the stock price high. Analysts on Wall Street expect the company to have operating income of $170,000. The fact that actual operating income is well-above this amount will make investors happy and help maintain a high stock price. Meeting analysts' expectations will also help Tatsuo keep his job. Required: 1. Record the adjustment for uncollectible accounts using the accountant's estimate of 5% of accounts receivable. 2. After the adjustment is recorded in Requirement 1, what is the revised amount of operating income? Will Ginjo Gallery still meet analysts' expectations? 3. Tatsuo instructs the accountant to instead record $70,000 as bad debt expense so that operating income will exactly meet analysts' expectations. By how much would total assets and operating income be misstated if the accountant records this amount? 4. Why would Wanda be motivated to manage operating income in this way?
Requirement 1
Debit Bad Debt Expense Allowance for
Credit
40,000 40,000
Uncollectible Accounts (Estimate future bad debts) ($1,000,000 × 5% - $10,000 =
$40,000) 5-209 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Requirement 2 Revised operating income = $240,000 - $40,000 (bad debt expense) = $200,000 Ginjo Gallery will meet analysts' expectations because the revised operating income of $200,000 is greater than the $170,000 expectations. Requirement 3 Revised operating income = $240,000 - $70,000 (bad debt expense) = $170,000 If Ginjo Gallery records bad debt expense for $70,000 instead of $40,000, assets will be understated and operating income will be understated by $30,000. Requirement 4 By managing operating income downward, Tatsuo is "saving" reported income for the future. If bad debt expense is overestimated this year, then it can be understated next year. Understating bad debt expense next year will overstate operating income in that year. AACSB: Reflective Thinking AICPA: FN Decision Making AICPA: FN Measurement Blooms: Analyze Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
5-210 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
223.
The following events occur for Wortham Landscape Design during 2018 and 2019, its first two years of operations. February 2, 2018
Provide services to customers on account for $26,000.
July 23, 2018
Receive $20,000 from customers on account.
December 31, 2018
Estimate that 10% of uncollected accounts will not be received.
April 12, 2019
Provide services to customers on account for $40,000.
June 28, 2019
Receive $5,000 from customers for services provided in 2018.
September 13, 2019
Write off the remaining amounts owed from services provided in 2018.
October 5, 2019
Receive $33,000 from customers for services provided in 2019.
December 31, 2019
Estimate that 10% of uncollected accounts will not be received.
Required: 1. Record transactions for each date. 2. Post transactions to the following accounts: Cash, Accounts Receivable, and Allowance for Uncollectible Accounts. 3. Calculate the net realizable value of accounts receivable at the end of 2018 and 2019.
Requirement 1
February 2, 2018
Debit
Accounts Receivable
26,000
Service Revenue
Credit
26,000
(Provide services on account) July 23, 2018 Cash
20,000
Accounts Receivable
20,000
(Receive cash on account) December 31, 2018 Bad Debt Expense Allowance for Uncollectible
600 600
Accounts
5-211 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
(Estimate future bad debts) ($6,000 × 10% = $600) April 12, 2019 Accounts Receivable
40,000
Service Revenue
40,000
(Provide services on account) June 28, 2019 Cash
5,000
Accounts Receivable
5,000
(Receive cash on account) September 13, 2019 Allowance for Uncollectible
1,000
Accounts Accounts Receivable
1,000
(Write off actual bad debts) October 5, 2019 Cash
33,000
Accounts Receivable
33,000
(Receive cash on account) December 31, 2019 Bad Debt Expense
1,100
Allowance for Uncollectible
1,100
Accounts (Estimate future bad debts) ($7,000 × 10% + $400 = $1,100)
Requirement 2 Cash
Accounts Receivable
20,000
26,000
Dec.
Dec.
31,
31,
2018
20,000 5,000 33,000
2018
20,000 _______
6,000 40,000
5,000 1,000
5-212 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Dec.
58,000
33,000
31, 2019 Dec.
7,000
31, 2019
Allow. for Uncol. Accts. Dec. 31, 600 1,000
2018
1,100 700
Dec. 31, 2019
Requirement 3
Total accounts receivable Less: Allowance for
2018
2019
$6,000
$7,000
600
700
$5,400
$6,300
uncollectible accounts Net realizable value
AACSB: Analytical Thinking AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Learning Objective: 05-05 Apply the procedure to write off accounts receivable as uncollectible. Topic: Allowance Method Topic: Writing Off Accounts Receivable
5-213 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
224.
By the end of its first year of operations, Gallen Corporation has credit sales of $580,000 and accounts receivable of $200,000. Given it's the first year of operations, Gallen's management is unsure how much allowance for uncollectible accounts it should establish. One of the company's competitors, which has been in the same industry for an extended period, estimates uncollectible accounts to be 3% of ending accounts receivable, so Gallen decides to use that same amount. However, actual write-offs in the following year were 10% of the $200,000 ($20,000). Gallen's inexperience in the industry led to making sales to high credit risk customers. Required: 1. Record the adjustment for uncollectible accounts at the end of the first year of operations using the 3% estimate of accounts receivable. 2. By the end of the second year, Gallen has the benefit of hindsight to know that estimates of uncollectible accounts in the first year were too low. By how much did Gallen underestimate uncollectible accounts in the first year? How did this underestimation affect the reported amounts of total assets and expenses at the end of the first year? Ignore tax effects. 3. Should Gallen prepare new financial statements for the first year of operations to show the correct amount of uncollectible accounts? Explain.
Requirement 1
Debit Bad Debt Expense
Credit
6,000
Allowance for Uncollectible
6,000
Accounts (Estimate future bad debts) ($200,000
× 3% = $6,000)
Requirement 2 Gallen underestimated uncollectible accounts by $14,000. Actual bad debts in the second year were $20,000 and the company estimated bad debts to be only $6,000. Because of this, total assets will be overstated and total expenses will be understated by $14,000 in the first year. 5-214 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Requirement 3 Gallen should not prepare new financial statements for the first year. The fact that actual bad debts in the second year turned out to be different than the amount estimated at the end of the first year does not constitute a reason for re-issuing prior financial statements. Estimation error is an issue inherent in financial reporting. AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Analyze Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Learning Objective: 05-05 Apply the procedure to write off accounts receivable as uncollectible. Topic: Allowance Method Topic: Writing Off Accounts Receivable
5-215 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
225.
Power Corporation engages in the manufacture and sale of equipment related to alternative sources of energy. During the past year, operating revenues remained relatively flat compared to the prior year but management notices a big increase in accounts receivable. The increase in receivables is largely due to the recent economic slowdown in the commodities market. Many of the company's customers are having financial difficulty, lengthening the period of time it takes to collect on account. Below are year-end amounts. Accounts Age
Operating
Accounts Average
Group
Revenue Receivable
Written
Age
Off
$2,300,000
$80,000 13 days
$10,000
3,100,000
100,000 11 days
15,000
Current 3,000,000
350,000 27 days
0
Two years ago Last year
year
Peter, the CEO of Power, notices that accounts written off over the past three years have been minimal and therefore suggests that no allowance for uncollectible accounts be established in the current year. Any account proving uncollectible can be charged to next year's financial statements (the direct write-off method). Required: 1. Do you agree with Peter's reasoning? Explain. 2. Suppose that other companies in these industries had similar increasing trends in accounts receivable aging. These companies also had very successful collections in the past but now estimate uncollectible accounts to be 30% because of the significant downturn in the industries. If Power uses the allowance method estimated at 30% of accounts receivable, what should be the balance of the allowance for uncollectible accounts at the end of the current year? 3. Based on your answer in Requirement 2, for what amount will total assets and expenses be misstated in the current year if Power uses the direct write-off method? Ignore tax effects.
Requirement 1
5-216 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Power should not use the direct write-off method. Even if no accounts are known to be uncollectible at the time, Peter should estimate future bad debts and record those estimates as an expense (bad debt expense) and reduction in total assets (allowance for uncollectible accounts) in the current year. Requirement 2 Allowance for uncollectible accounts = $350,000 × 30% = $105,000. Requirement 3 If Power uses the direct write-off method, total assets will be overstated and total expenses will be understated by $105,000.
AACSB: Reflective Thinking AICPA: FN Decision Making AICPA: FN Measurement Blooms: Analyze Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Topic: Allowance Method Topic: Direct Write-Off Method
5-217 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
226.
Gable Incorporated provides legal services. During 2018, the company provides services of $500,000 on account. Of this amount, $70,000 remains uncollected at the end of the year. An aging schedule as of December 31, 2018, is provided below. Estimated Amount
Percent
Receivable
Uncollectible
Not yet due
$40,000
5%
0–30 days past
19,000
10%
9,000
20%
6,000
40%
Age Group
due 31–60 days past due More than 60 days past due Total
$74,000
Required: 1. Calculate the allowance for uncollectible accounts. 2. Record the December 31, 2018 adjustment, assuming the balance of Allowance for Uncollectible Accounts before adjustment is $500 ( debit). 3. On April 3, 2019, a customer's account balance of $600 is written off as uncollectible. Record the write-off. 4. On July 17, 2019, the customer whose account was written off in Requirement 3 unexpectedly pays $200 of the amount but does not expect to pay any additional amounts. Record the cash collection.
Requirement 1
Amount Age
receivable
group Not yet
Estimated percent uncollectible
Estimated amount uncollectible
$40,000
5%
$2,000
19,000
10%
1,900
due 0-90
5-218 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
days past due 91-180
9,000
20%
1,800
6,000
40%
2,400
days past due More than 180 days past due Total
$74,000
$8,100
Requirement 2 December 31,
Debit
Credit
2018 Bad Debt Expense
8,600
Allowance for Uncollectible
8,600
Accounts (Estimate future bad debts) ($8,100 +
$500 = $8,600)
Requirement 3 April 3, 2019 Allowance for Uncollectible Accounts
600
Accounts Receivable
600
(Write off actual bad debts)
Requirement 4 July 17, 2019 Accounts Receivable Allowance for Uncollectible
200 200
Accounts 5-219 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
(Re-establish portion of account
previously written off) July 17, 2019 Cash
200
Accounts Receivable
200
(Receive cash on account)
AACSB: Analytical Thinking AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-04 Use the aging method to estimate future uncollectible accounts. Learning Objective: 05-05 Apply the procedure to write off accounts receivable as uncollectible. Topic: Aging of Accounts Receivable Topic: Writing Off Accounts Receivable
5-220 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
227.
On June 1, 2018, Demer Consulting provides services to a customer for $150,000. To pay for the services, the customer signs a three-year, 12% note. The face amount is due at the end of the third year, while annual interest is due each June 1. Required: 1. Record the acceptance of the note on June 1, 2018. 2. Record the interest collected on June 1 for 2019 and 2020, and the adjustment for interest revenue on December 31, 2018, 2019, and 2020. 3. Record the cash collection on June 1, 2020.
Requirement 1
June 1, 2018 Notes Receivable
Debit
Credit
150,000
Service Revenue
150,000
(Provide services and issue note)
Requirement 2 December 31, 2018
Debit
Interest Receivable
10,500
Interest Revenue
Credit
10,500
(Adjust interest receivable) (Interest revenue = $150,000 ×
12% × 7/12) June 1, 2019 Cash
18,000
Interest Receivable
10,500
Interest Revenue
7,500
(Adjust interest receivable) (Interest revenue = $150,000 ×
12% × 5/12) December 31, 2019 Interest Receivable
10,500
5-221 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Interest Revenue
10,500
(Adjust interest receivable) (Interest revenue = $150,000 ×
12% × 7/12) June 1, 2020 Cash
18,000
Interest Receivable
10,500
Interest Revenue
7,500
(Adjust interest receivable) (Interest revenue = $150,000 ×
12% × 5/12) December 31, 2020 Interest Receivable
10,500
Interest Revenue
10,500
(Adjust interest receivable) (Interest revenue = $150,000 ×
12% × 7/12)
Requirement 3 June 1, 2020 Cash
Debit
Credit
168,000
Notes Receivable
150,000
Interest Receivable
10,500
Interest Revenue
7,500
(Receive cash on note and interest) (Interest revenue = $150,000 × 12%
× 5/12) AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-07 Account for notes receivable and interest revenue. Topic: Accounting for Notes Receivable
5-222 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
228.
Selected financial data for Strong Health Group and Sturdy Medical Corporation, two companies in the health-care industry, are as follows: Beginning ($ in
Ending
Net
Accounts
Accounts
millions)
Sales
Receivable
Receivable
Strong
$1,850
$200
$230
2,100
400
380
Health Sturdy Medical
Required: 1. Calculate the receivables turnover ratio and average collection period for Strong Health and Sturdy Medical. Round your answers to one decimal place. Compare your calculations with those for Tenet Healthcare and LifePoint Hospitals reported in the chapter text. Which of the four companies maintains a higher receivables turnover? 2. How does the receivables turnover ratio reflect the efficiency of management? Discuss factors that affect the receivables turnover ratio.
Requirement 1
Strong
Sturdy
Health
Medical
Group Corporation Receivables turnover
=
ratio
Net sales
$1,850
$2,100
Average
($200 +
($400 +
accounts
$230)/2
$380)/2
8.6
5.4 times
receivable =
times 365
365
365
Receivables
8.6
5.4
Average collection = period
turnover ratio
5-223 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
=
42.4
67.6 days
days
Compared to Sturdy Medical, Strong Health has a higher receivables turnover ratio and a lower average collection period, which means it collects cash more quickly from its customers. The receivables turnover ratio and average collection period for Tenet Healthcare in the most recent year reported in the text are 6.2 times and 58.9 days, respectively. The receivables turnover ratio and average collection period for LifePoint Hospitals in the most recent year reported in the text are 3.8 times and 96.1 days, respectively. Strong Health has the most favorable (highest) receivables turnover ratio of the four companies. Requirement 2 The receivables turnover ratio and average collection period provide an indication of management's ability to collect cash from customers in a timely manner. A high receivables turnover ratio suggests that managers are selling to customers that have the ability to pay their accounts in a timely manner. The more quickly a company can collect its receivables, the more quickly it can use that cash to generate even more cash by reinvesting in the business and generating additional sales. Factors that could affect the receivables turnover ratio would be managers failing to recognize the financial situation of lower-quality customers, being too aggressive in selling to customers on account, or encountering weak business conditions in the industry which would affect all companies. AACSB: Analytical Thinking AICPA: FN Decision Making AICPA: FN Measurement Blooms: Analyze Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. Topic: Receivables Turnover Ratio
Essay Questions
5-224 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
229.
Give three examples of contra revenue accounts and the transactions with which they are associated.
A sales discount represents a reduction, not in the selling price of a product or service, but in the amount to be paid by a credit customer if paid within a specified period of time.
Sales returns occur when a customer returns a product. Sales allowances occur when the seller reduces the customer's balance owed or provides at least a partial refund because of some deficiency in the company's product or service.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-02 Calculate net revenues using discounts, returns, and allowances. Topic: Net Revenues
230.
Explain how companies account for uncollectible accounts receivable (bad debts) for financial reporting purposes.
Companies should account for uncollectible accounts receivable using the allowance method. Under this method, a company estimates future bad debts and records those estimates as an expense and a contra asset in the current period.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
5-225 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
231.
What does it mean to report accounts receivable at their net realizable value.
Net realizable value is the amount of cash a company expects to collect from its accounts receivable, and it is calculated as total accounts receivable minus an allowance for uncollectible accounts. The net realizable value of accounts receivable is the amount reported in the balance sheet.
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Topic: Allowance Method
232.
Discuss the differences between the allowance method and the direct write-off method for recording uncollectible accounts. Which of the two is acceptable for financial reporting purposes?
The allowance method requires companies to estimate future bad debts and record those estimates in the current period as a reduction in accounts receivable (using a contra asset account) and an increase in bad debt expense. The direct write-off method makes no attempt to estimate future bad debts. Instead, the reduction in accounts receivable and increase in expense associated with bad debts is recorded only when the bad debt actually occurs. Only the allowance method is allowed for financial reporting purposes.
AACSB: Reflective Thinking AICPA: FN Measurement AICPA: FN Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts. Topic: Allowance Method Topic: Direct Write-Off Method
5-226 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
233.
Explain why the percentage-of-receivables method is referred to as the balance sheet
method and the percentage-of-credit-sales method is referred to as the income statement method. Which method is typically used in practice? Why?
The percentage-of-receivables method estimates future bad debts based on a balance sheet amount - accounts receivable. The percentage-of-credit-sales method estimates future bad debts based on an income statement amount - credit sales. The current emphasis on better measurement of assets (balance sheet focus) outweighs the emphasis on better measurement of net income (income statement focus). This is why the percentage-of-receivables method (balance sheet method) is the preferable method and most commonly used in practice, while the percentage-of-credit-sales method (income statement method) is allowed only if amounts do not differ significantly from estimates using the percentage-of-receivables method.
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-03 Record an allowance for future uncollectible accounts. Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method. Topic: Allowance Method Topic: Percentage-of-Credit-Sales Method
234.
How is the receivables turnover ratio measured? What does this ratio indicate? Is a higher or lower receivables turnover preferable?
The receivables turnover ratio equals net credit sales divided by average accounts receivable. The ratio shows the number of times during a year that the average accounts receivable balance is collected (or "turns over"). Typically, a higher ratio is a good indicator of a company's effectiveness in managing receivables.
AACSB: Reflective Thinking AICPA: FN Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-08 Calculate key ratios investors use to monitor a company's effectiveness in managing receivables. 5-227 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Receivables Turnover Ratio
5-228 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 06 Inventory and Cost of Goods Sold
True / False Questions
1. Inventory is usually reported as a long-term asset in the balance sheet. True
False
2. Cost of goods sold is an asset reported in the balance sheet and inventory is an expense reported in the income statement. True
False
3. Merchandising companies purchase inventories that are primarily in finished form for resale to customers. True
False
4. Cost of goods sold is an expense reported in the income statement and represents the cost of inventory sold during the period. True
False
5. If a company has beginning inventory of $15,000, purchases during the year of $75,000, and ending inventory of $20,000, cost of goods sold equals $70,000. True
False
6. A multiple-step income statement reports multiple levels of profitability, such as gross profit, operating income, income before income taxes, and net income. True
False
6-1 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
7. Gross profit equals net sales of inventory less cost of goods sold. True
False
8. Sales revenue minus cost of goods sold is referred to as operating income. True
False
9. Income before income taxes equals operating income plus nonoperating revenues less nonoperating expenses. True
False
10. If a company has ending inventory of $25,000, purchases during the year of $95,000, and beginning inventory of $30,000, cost of goods sold equals $90,000. True
False
11. Companies are not allowed to report inventory costs by assuming which units of inventory are sold and which units still remain on hand. True
False
12. Using the first-in, first-out method (FIFO), the first units purchased are assumed to be the first ones sold. True
False
13. Using the weighted-average cost method, the average cost of inventory is calculated as the average unit cost of inventory purchased during the year. True
False
14. Companies are free to choose FIFO, LIFO, or weighted-average cost to report inventory and cost of goods sold. True
False
6-2 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15. For most companies, actual physical flow of their inventory follows LIFO. True
False
16. During periods of rising costs, FIFO generally results in a higher ending inventory balance. True
False
17. During periods of rising costs, FIFO generally results in a higher cost of goods sold. True
False
18. During periods of rising costs, LIFO generally results in a higher cost of goods sold. True
False
19. During periods of rising costs, LIFO generally results in a higher ending inventory balance. True
False
20. Accountants often call FIFO the balance sheet approach because the amount it reports for ending inventory better approximates the current cost of inventory. True
False
21. One of the primary benefits of using FIFO when inventory costs are rising is that it results in greater tax savings. True
False
22. The LIFO conformity rule requires a company that uses LIFO for tax reporting to use FIFO for financial reporting. True
False
6-3 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
23. The LIFO difference (reserve) is the additional amount of inventory a company would report if it used FIFO instead of LIFO. True
False
24. Using a perpetual inventory system, the purchase of inventory is recorded with a debit to the Purchases account, which is a temporary account closed to cost of goods sold at the end of the period. True
False
25. For inventory that is shipped FOB destination, title transfers from the seller to the buyer once the seller ships the inventory. True
False
26. For inventory that is shipped FOB shipping point, title transfers from the seller to the buyer once the seller ships the inventory. True
False
27. Freight-in is included in the cost of inventory. True
False
28. At the time inventory is sold, cost of goods sold is recorded under the perpetual inventory system. True
False
29. Using LIFO, the amount reported for ending inventory does not differ depending on whether a company uses a periodic system or a perpetual system. True
False
6-4 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
30. When the value of inventory falls below its cost, companies other than those that use LIFO have the option of recording the inventory at cost or the lower net realizable value. True
False
31. When the net realizable value of inventory falls below its cost, no adjustment to the accounting records is needed. True
False
32. The adjustment to write down inventory from cost to its lower net realizable value includes a debit to Cost of Goods Sold and a credit to Inventory. True
False
33. The use of the lower of cost and net realizable value to report inventory is an example of conservatism in financial reporting. True
False
34. The inventory turnover ratio equals cost of goods sold divided by average inventory. True
False
35. Generally, a higher inventory turnover ratio reflects positively on a company's ability to manage its inventory. True
False
36. A company that has average inventory of $500 and cost of goods sold of $2,000 would have an inventory turnover ratio of 0.25. True
False
37. The gross profit ratio measures the amount by which the sale price of inventory exceeds its cost per dollar of sales. True
False
6-5 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
38. Generally, a lower gross profit ratio reflects positively on a company's ability to manage its inventory. True
False
39. A periodic inventory system does not continually modify inventory amounts, but instead adjusts for purchases and sales of inventory at the end of the reporting period based on a physical count of inventory on hand. True
False
40. Overstating ending inventory in the current year causes net income in the current year to be overstated. True
False
41. Understating ending inventory in the current year causes cost of goods sold in the current year to be understated. True
False
Multiple Choice Questions
42. One of the major differences between service companies and retail or manufacturing companies is that retailers and manufacturers must account for:
A. Current assets. B. Inventory. C. Selling expenses. D. Deferred revenue.
6-6 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
43. The cost of unsold inventory at the end of the year is classified as a(n) ______ in the ______.
A. Assets; Balance sheet B. Expense; Income statement C. Liability; Balance sheet D. Revenue; Income statement 44. What type of company purchases raw materials and makes goods to sell?
A. Wholesaler. B. Retailer. C. Merchandiser. D. Manufacturer. 45. A manufacturer's inventory consists of what type of inventory?
A. Raw materials. B. Finished goods. C. Work-in-process. D. All of the other answers are included in a manufacturer's inventory. 46. Inventory does not include:
A. Materials used in the production of goods to be sold. B. Assets intended to be sold in the normal course of business. C. Equipment used in the manufacturing of assets for sale. D. Assets currently in production for normal sales.
6-7 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
47. The cost of the goods that a company sold during a period is shown in its financial statements as ___________ and the cost of the goods that a company still has on hand at the end of the year is shown in the financial statements as ____________.
A. Cost of goods sold; inventory B. Goods on hand; inventory expense C. Inventory; cost of goods sold D. Sales revenue; cost of goods sold 48. Cost of Goods Sold is:
A. An asset account. B. A revenue account. C. An expense account. D. A permanent equity account. 49. The balance of the Cost of Goods Sold account at the end of the year represents:
A. The cost of inventory not sold in the current year. B. The total sales revenue to customers. C. The cost of inventory sold in the current year. D. Total purchases of inventory for the year. 50. The cost of inventory sold during the current year classified as a(n) ______ in the ______.
A. Assets; Balance sheet B. Expense; Income statement C. Liability; Balance sheet D. Revenue; Income statement
6-8 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
51. The largest expense on a retailer's income statement is typically:
A. Salaries. B. Cost of goods sold. C. Income tax expense. D. Depreciation expense. 52. Cost of goods sold equals:
A. Beginning inventory - net purchases + ending inventory. B. Beginning inventory - accounts payable - net purchases. C. Net purchases + ending inventory - beginning inventory. D. Beginning inventory + net purchases - ending inventory. 53. Baker Fine Foods has beginning inventory for the year of $12,000. During the year, Baker purchases inventory for $150,000 and ends the year with $20,000 of inventory. Baker will report cost of goods sold equal to:
A. $150,000. B. $158,000. C. $142,000. D. $170,000. 54. Tyler Toys has beginning inventory for the year of $18,000. During the year, Tyler purchases inventory for $230,000 and has cost of goods sold equal to $233,000. Tyler's ending inventory equals:
A. $15,000. B. $18,000. C. $21,000. D. $19,000.
6-9 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
55. Beginning inventory is $40,000. Purchases of inventory during the year are $200,000. Ending inventory is $100,000. What is cost of goods sold?
A. $340,000. B. $240,000. C. $260,000. D. $140,000. 56. Beginning inventory is $30,000. Purchases of inventory during the year are $50,000. Cost of goods sold is $60,000. What is ending inventory?
A. $20,000. B. $30,000. C. $10,000. D. $50,000. 57. The type of income statement that classifies items as operating and nonoperating is the ______ income statement.
A. Consolidated B. Multiple-step C. Classified D. Single-step 58. The type of income statement that reports a series of subtotals such as gross profit, operating income, and income before taxes is a ______ income statement.
A. Single-step B. Subtotaled C. Multiple-step D. Classified
6-10 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
59. The primary distinction between operating activities and nonoperating activities in a multiplestep income statement is whether the activity is:
A. A large or small dollar amount. B. Part of primary business operations. C. Related to current versus long-term assets. D. Reported as a revenue or an expense. 60. The distinction between operating and nonoperating income relates to:
A. Continuity of income. B. Principal activities of the reporting entity. C. Consistency of income stream. D. Reliability of measurements. 61. Which of the following items may be classified as nonoperating revenues and expenses?
A. Interest expense. B. Loss on the sale of equipment. C. Interest revenue. D. All of the other answers are classified as nonoperating revenues and expenses. 62. Gross profit is calculated as net sales minus:
A. Nonoperating expenses and income tax expense. B. Operating expenses. C. Cost of goods sold. D. All of the other answers are subtracted from net sales.
6-11 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
63. Ravens Inc. has net sales of $200,000, cost of goods sold of $120,000, selling expenses of $6,000, and nonoperating expenses of $2,000. What is the company's gross profit?
A. $76,000. B. $80,000. C. $74,000. D. $72,000. 64. Given the information below, what is the gross profit? Sales revenue
$320,000
Accounts receivable
50,000
Ending inventory
100,000
Cost of goods sold
250,000
Sales Returns
20,000
A. $250,000. B. $70,000. C. $220,000. D. $50,000.
6-12 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
65. Given the information in the table below, what is the company's gross profit? Sales revenue
$350,000
Accounts receivable
$280,000
Ending inventory
$230,000
Cost of goods sold
$180,000
Sales returns
$50,000
Sales discount
$20,000
A. $280,000. B. $170,000. C. $50,000. D. $100,000. 66. LeGrand Corporation reported the following amounts in its income statement: Sales revenue
$440,000
Advertising expense
60,000
Interest expense
10,000
Salaries expense
55,000
Utilities expense
25,000
Income tax expense
45,000
Cost of goods sold
180,000
What was LeGrand's gross profit?
A. $260,000. B. $180,000. C. $220,000. D. $120,000.
6-13 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
67. Wildwood, an outdoors clothing store, reports the following information for June: Sales
$104,000 Income tax
revenue
expense
Operating
22,000 Cost of goods
expenses
sold
Deferred
$15,000 Nonoperating
revenues
$11,000
65,000
12,000
revenues
What is Wildwood's gross profit for June?
A. $18,000. B. $39,000. C. $104,000. D. $17,000. 68. Operating income is calculated as net sales minus.
A. Utilities expense. B. Salaries expense. C. Cost of goods sold. D. All of the other answers are subtracted from net sales to calculate operating income. 69. Which measure reflects profitability from normal operations and a key performance measure for predicting the future profit-generating ability of a company?
A. Gross profit. B. Operating income. C. Income before income taxes. D. Net income.
6-14 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
70. Consider the following year-end information for Spitzer Corporation: Cost of goods sold
$420,000
Sales revenue
800,000
Nonoperating expenses
10,000
Operating expenses
170,000
Income tax expense
80,000
What amount will Spitzer report for operating income?
A. $200,000. B. $210,000. C. $380,000. D. $120,000. 71. LeGrand Corporation reported the following amounts in its income statement: Sales revenue
$440,000
Advertising expense
60,000
Interest expense
10,000
Salaries expense
55,000
Utilities expense
25,000
Income tax expense
45,000
Cost of goods sold
180,000
What was LeGrand's operating income?
A. $120,000. B. $260,000. C. $110,000. D. $65,000.
6-15 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
72. LeGrand Corporation reported the following amounts in its income statement: Sales revenue
$440,000
Advertising expense
60,000
Interest expense
10,000
Salaries expense
55,000
Utilities expense
25,000
Income tax expense
45,000
Cost of goods sold
180,000
What was LeGrand's net income?
A. $120,000. B. $60,000. C. $110,000. D. $65,000. 73. The inventory costing method that matches each unit of inventory with its actual cost is referred to as the _____ method.
A. Weighted-average. B. Specific identification. C. Actual cost. D. Matching unit. 74. A company is most likely to utilize the specific identification method if its inventory consists of:
A. Unique products. B. Very expensive products. C. A relatively small number of products. D. All of the other answers are reasons to utilize the specific identification method.
6-16 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
75. The inventory cost flow assumption that generally best matches the physical flow of inventory is:
A. FIFO. B. LIFO. C. Weighted-average. D. Lower of cost or net realizable value. 76. The inventory cost flow assumption that results in a random mixture of goods being included in the balance of inventory and cost of goods sold is:
A. FIFO. B. LIFO. C. Weighted-average. D. Lower of cost or net realizable value. 77. The inventory cost flow assumption that is least likely to match the physical flow of inventory for most companies is:
A. FIFO. B. LIFO. C. Weighted-average. D. Specific identification.
6-17 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
78. The following information relates to inventory for Shoeless Joe Inc. Date
Quantity
Price
20
$2
15
3
March 11 Sale
25
7
March 12 Purchase
20
4
March 1
Beginning Inventory
March 7
Purchase
At what amount would Shoeless report ending inventory using FIFO cost flow assumptions?
A. $55. B. $170. C. $110. D. $70. 79. The following information relates to inventory for Shoeless Joe Inc. Date
Quantity
Price
March 1
Beginning Inventory
20
$2
March 7
Purchase
15
3
March 11
Sale
25
7
March 12
Purchase
20
4
At what amount would Shoeless report gross profit using LIFO cost flow assumptions?
A. $105. B. $80. C. $175. D. $120.
6-18 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
80. The following information relates to inventory for Shoeless Joe Inc. Date
Quantity
Price
20
$2
15
3
March 11 Sale
30
7
March 12 Purchase
15
6
March 1
Beginning Inventory
March 7
Purchase
At what amount would Shoeless report cost of goods sold using the weighted-average cost flow assumption? (Round your answer to the nearest dollar)
A. $110. B. $73. C. $70. D. $105. 81. Inventory records for Dunbar Incorporated revealed the following: Number
Unit
of Units
Cost
Date
Transaction
Apr. 1
Beginning inventory
500
$2.40
Apr. 20
Purchase
400
2.50
Dunbar sold 700 units of inventory during the month. Ending inventory assuming FIFO would be:
A. $500. B. $490. C. $470. D. $480.
6-19 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
82. Inventory records for Dunbar Incorporated revealed the following: Date
Transaction
Number of Units
Unit Cost
Apr. 1
Beginning inventory
500
$2.40
Apr. 20
Purchase
400
2.50
Dunbar sold 700 units of inventory during the month. Cost of goods sold assuming FIFO would be:
A. $1,730. B. $1,700. C. $1,720. D. $1,710. 83. Inventory records for Dunbar Incorporated revealed the following: Date
Transaction
Number of Units
Unit Cost
Apr. 1
Beginning inventory
500
$2.40
Apr. 20
Purchase
400
2.50
Dunbar sold 700 units of inventory during the month. Ending inventory assuming LIFO would be:
A. $500. B. $490. C. $470. D. $480.
6-20 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
84. Inventory records for Dunbar Incorporated revealed the following: Date
Transaction
Number of Units
Unit Cost
Apr. 1
Beginning inventory
500
$2.40
Apr. 20
Purchase
400
2.50
Dunbar sold 700 units of inventory during the month. Cost of goods sold assuming LIFO would be:
A. $1,730. B. $1,700. C. $1,720. D. $1,710. 85. Inventory records for Dunbar Incorporated revealed the following: Date
Transaction
Number of Units
Unit Cost
Apr. 1
Beginning inventory
500
$2.40
Apr. 20
Purchase
400
2.50
Dunbar sold 700 units of inventory during the month. Ending inventory assuming weightedaverage cost would be (round weighted-average unit cost to four decimals and final answer to the nearest whole dollar):
A. $502. B. $490. C. $489. D. $480.
6-21 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
86. Inventory records for Dunbar Incorporated revealed the following: Date
Transaction
Number of Units
Unit Cost
Apr. 1
Beginning inventory
500
$2.40
Apr. 20
Purchase
400
2.50
Dunbar sold 700 units of inventory during the month. Cost of goods sold assuming weightedaverage cost would be (round weighted-average unit cost to four decimals and final answer to the nearest whole dollar):
A. $1,711. B. $1,700. C. $1,720. D. $1,708. 87. Inventory records for Marvin Company revealed the following: Date
Transaction
Number of Units
Unit Cost
Mar. 1
Beginning inventory
1,000
$7.20
Mar. 10
Purchase
600
7.25
Mar. 16
Purchase
800
7.30
Mar. 23
Purchase
600
7.35
Marvin sold 2,300 units of inventory during the month. Ending inventory assuming FIFO would be:
A. $5,140. B. $5,080. C. $5,060. D. $5,050.
6-22 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
88. Inventory records for Marvin Company revealed the following: Date
Transaction
Number of Units
Unit Cost
Mar. 1
Beginning inventory
1,000
$7.20
Mar. 10
Purchase
600
7.25
Mar. 16
Purchase
800
7.30
Mar. 23
Purchase
600
7.35
Marvin sold 2,300 units of inventory during the month. Cost of goods sold assuming FIFO would be:
A. $16,800. B. $16,760. C. $16,540. D. $16,660. 89. Inventory records for Marvin Company revealed the following: Date
Transaction
Number of Units
Unit Cost
Mar. 1
Beginning inventory
1,000
$7.20
Mar. 10
Purchase
600
7.25
Mar. 16
Purchase
800
7.30
Mar. 23
Purchase
600
7.35
Marvin sold 2,300 units of inventory during the month. Ending inventory assuming LIFO would be:
A. $5,040. B. $5,055. C. $5,075. D. $5,135.
6-23 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
90. Inventory records for Marvin Company revealed the following: Date
Transaction
Number of Units
Unit Cost
Mar. 1
Beginning inventory
1,000
$7.20
Mar. 10
Purchase
600
7.25
Mar. 16
Purchase
800
7.30
Mar. 23
Purchase
600
7.35
Marvin sold 2,300 units of inventory during the month. Cost of goods sold assuming LIFO would be:
A. $16,800. B. $16,760. C. $16,540. D. $16,660. 91. Inventory records for Marvin Company revealed the following: Date
Transaction
Number of Units
Unit Cost
Mar. 1
Beginning inventory
1,000
$7.20
Mar. 10
Purchase
600
7.25
Mar. 16
Purchase
800
7.30
Mar. 23
Purchase
600
7.35
Marvin sold 2,300 units of inventory during the month. Ending inventory assuming weightedaverage cost would be (round weighted-average unit cost to four decimals and final answer to the nearest whole dollar):
A. $5,087. B. $5,107. C. $5,077. D. $5,005.
6-24 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
92. Inventory records for Marvin Company revealed the following: Date
Transaction
Number of Units
Unit Cost
Mar. 1
Beginning inventory
1,000
$7.20
Mar. 10
Purchase
600
7.25
Mar. 16
Purchase
800
7.30
Mar. 23
Purchase
600
7.35
Marvin sold 2,300 units of inventory during the month. Cost of goods sold assuming weighted-average cost would be (round weighted-average unit cost to four decimals and final answer to the nearest whole dollar):
A. $16,733. B. $17,408. C. $16,713. D. $16,089. 93. The following information pertains to Julia & Company: March 1 Beginning inventory = 30 units @ $5 March 3 Purchased 15 units @ $4 March 9 Sold 25 units @ $8 What is the ending inventory balance for Julia & Company assuming that it uses FIFO?
A. $125. B. $100. C. $110. D. $85.
6-25 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
94. The following information pertains to Julia & Company: March 1 Beginning inventory = 30 units @ $5 March 3 Purchased 15 units @ $4 March 9 Sold 25 units @ $8 What is the cost of goods sold for Julia & Company assuming it uses LIFO?
A. $125. B. $100. C. $110. D. $85. 95. Consider the following inventory transactions for September: Beginning inventory
15 units @ $3.00
Purchase on September 12
20 units @ $3.50
Purchased on September 23
10 units @ $4.00
For the month of September, the company sold 35 units. What is cost of goods sold under the weighted-average cost method (round the weighted-average unit cost to four decimals and final answer to the nearest whole dollar)?
A. $121. B. $116. C. $124. D. $131. 96. FIFO is considered a balance sheet approach for reporting inventory because it:
A. Better approximates the value of ending inventory. B. Always results in a lower amount of inventory being reported. C. Better approximates inventory cost necessary to generate revenue. D. Always results in a higher amount of inventory being reported.
6-26 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
97. Which inventory method is better described as having a balance sheet focus and why is it considered as such?
A. FIFO; better approximates the value of ending inventory. B. LIFO; better approximates the value of ending inventory. C. LIFO; better approximates inventory cost necessary to generate revenue. D. FIFO; better approximates inventory cost necessary to generate revenue. 98. LIFO is considered an income statement approach for reporting inventory because it:
A. Always results in a higher amount of net income being reported. B. Better approximates the value of ending inventory. C. Better approximates inventory cost necessary to generate revenue. D. Always results in a lower amount of net income being reported. 99. Which inventory method is better described as having an income statement focus and why is it considered as such?
A. FIFO; better approximates the value of ending inventory. B. LIFO; better approximates the value of ending inventory. C. LIFO; better approximates inventory cost necessary to generate revenue. D. FIFO; better approximates inventory cost necessary to generate revenue. 100.Which inventory cost flow assumption more realistically matches the current cost of inventory with current sales revenue?
A. FIFO. B. LIFO. C. Weighted-average. D. Lower of cost and net realizable value.
6-27 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
101.The choice of inventory cost flow assumptions affects which of the following amounts?
A. Inventory. B. Cost of goods sold. C. Gross profit. D. All of the other answers are affected by the inventory cost flow assumption. 102.In a period when inventory costs are rising, the inventory method that most likely results in the highest ending inventory is:
A. Lower of cost and net realizable value. B. Weighted-average cost. C. FIFO. D. LIFO. 103.In a period when inventory costs are falling, the lowest taxable income is most likely reported by using the inventory method of:
A. Weighted-average. B. LIFO. C. Moving-average. D. FIFO. 104.Which of the following is true regarding LIFO and FIFO?
A. In a period of decreasing costs, LIFO results in lower total assets than FIFO. B. In a period of decreasing costs, LIFO results in lower net income than FIFO. C. In a period of rising costs, LIFO results in lower net income than FIFO. D. The amount reported for COGS is based on net realizable value of inventory if LIFO is used.
6-28 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
105.During periods when inventory costs are rising, cost of goods sold will most likely be:
A. Higher under FIFO than LIFO. B. Higher under FIFO than average cost. C. Lower under average cost than LIFO. D. Lower under LIFO than FIFO. 106.In a period of rising costs, which inventory valuation method would a company likely choose if they want to have the highest possible balance of inventory on the balance sheet?
A. Weighted-average cost. B. FIFO. C. LIFO. D. Periodic. 107.During periods when inventory costs are rising, ending inventory will most likely be:
A. Greater under LIFO than FIFO. B. Less under average cost than LIFO. C. Greater under average cost than FIFO. D. Greater under FIFO than LIFO. 108.The LIFO conformity rule states that if LIFO is used for:
A. One class of inventory, it must be used for all classes of inventory. B. Tax purposes, it must be used for financial reporting. C. One company in an affiliated group, it must be used by all companies in an affiliated group. D. Domestic companies, it must be used by foreign partners.
6-29 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
109.The primary reason for the popularity of LIFO is that it gives:
A. Better matching of physical flow and cost flow. B. A lower income tax obligation when inventory costs are rising. C. Simplified recordkeeping. D. A simpler method to apply. 110.Which of the following is true concerning inventory cost flow assumptions?
A. LIFO produces higher net income than FIFO in a period of rising costs. B. FIFO is an income statement focus. C. LIFO is a balance sheet focus. D. None of the other answers are true. 111.Which of the following is incorrect regarding LIFO and FIFO?
A. In a period of decreasing costs, FIFO will result in lower total assets than LIFO. B. In a period of increasing costs, net income will be greater under FIFO than LIFO. C. In a period of increasing costs, assets will be greater under LIFO than FIFO. D. In a period of decreasing costs, LIFO will result in greater net income than FIFO. 112.Which inventory cost flow assumption generally results in the highest reported amount for cost of goods sold when inventory costs are falling?
A. FIFO. B. LIFO. C. Weighted-average cost. D. Straight-line.
6-30 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
113.The disclosure that shows the difference in the cost of inventory between LIFO and FIFO is referred to as the:
A. FIFO adjustment. B. Inventory allowance. C. LIFO reserve. D. Net realizable value. 114.Which of the following considerations may influence a manager's choice of the inventory cost flow assumption for a company that experiences rising prices?
A. Compensation/bonus tied to reported income. B. Meeting earnings targets. C. Increase stock prices. D. All of the other answers are considerations for the choice of inventory cost flow assumptions. 115.A perpetual inventory system measures cost of goods sold by:
A. Estimating the amount of inventory sold. B. Making entries to the inventory account for each purchase and sale. C. Counting inventory at the end of the period. D. Debiting cost of goods sold for all purchases of inventory. 116.Using a perpetual inventory system, the purchase of inventory on account is recorded with a:
A. Debit to Inventory. B. Debit to Cost of Goods Sold. C. Debit to Accounts Payable. D. Credit to Sales Revenue.
6-31 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
117.Using a perpetual inventory systems, the sale of inventory on account is recorded with a:
A. Debit to Cost of Goods Sold. B. Credit to Inventory. C. Credit to Sales Revenue. D. All of the other answers are recorded with the sale of inventory on account. 118.Using a perpetual inventory system, the entry to record the return of inventory previously purchased on account includes a:
A. Debit to Cost of Goods Sold. B. Debit to Inventory. C. Debit to Accounts Payable. D. Credit to Sales Returns.
6-32 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
119.On May 1, Ace Bonding Company purchased inventory costing $2,000 on account with terms 2/10, n/30. On May 18, Ace pays for this inventory and records which of the following using a perpetual inventory system? A.
Accounts Payable
2,000
Cash B.
Accounts Payable Inventory
2,000 1,960 40
Cash C.
Accounts Payable
2,000 2,000
Inventory
40
Cash D.
Cash Accounts Payable
1,960 2,000 2,000
A. Option A B. Option B C. Option C D. Option D
6-33 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
120.Davis Hardware Company uses a perpetual inventory system. How should Davis record the return of inventory previously purchased on account for $200? A.
Inventory
200
Accounts Payable B.
Accounts Payable
200 200
Inventory C.
Purchase Returns
200 200
Accounts Payable D.
Accounts Payable Purchase Returns
200 200 200
A. Option A B. Option B C. Option C D. Option D
6-34 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
121.On May 1, Ace Bonding Company purchased inventory costing $2,000 on account with terms 2/10, n/30. On May 8, Ace pays for this inventory and records which of the following using a perpetual inventory system? A.
Accounts Payable
2,000
Cash B.
Accounts Payable Inventory
2,000 1,960 40
Cash C.
Accounts Payable
2,000 2,000
Inventory
40
Cash D.
Cash Accounts Payable
1,960 2,000 2,000
A. Option A B. Option B C. Option C D. Option D 122.In a perpetual inventory system, the purchase of inventory is debited to:
A. Purchases. B. Cost of Goods Sold. C. Inventory. D. Accounts Payable.
6-35 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
123.In a perpetual inventory system, the entry at the time of a sale to record the cost of the inventory sold includes a:
A. Debit to Accounts Receivable. B. Credit to Cost of Goods Sold. C. Debit to Cost of Goods Sold. D. Not recorded at the time of the sale. 124.Good Inc., sold inventory for $1,200 that was purchased for $700. Good records which of the following when it sells inventory using a perpetual inventory system?
A. No entry is required for cost of goods sold and inventory. B. Debit Cost of Goods Sold $700; credit Inventory $700. C. Debit Cost of Goods Sold $1,200; credit Inventory $1,200. D. Debit Inventory $700; credit Cost of Goods Sold $700.
6-36 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
125.Davis Hardware Company uses a perpetual inventory system. How should Davis record the sale of inventory costing $620 for $960 on account? A.
Inventory
620
Cost of Goods Sold Sales Revenue
620 960
Accounts Receivable B.
Accounts Receivable
960 960
Sales Revenue Cost of Goods Sold
960 620
Inventory C.
620
Inventory
620
Gain
340
Sales Revenue D.
Accounts Receivable
960 960
Sales Revenues
620
Gain
340
A. Option A B. Option B C. Option C D. Option D
6-37 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
126.Ace Bonding Company purchased inventory on account. The inventory costs $2,000 and is expected to sell for $3,000. How should Ace record the purchase using a perpetual inventory system? A.
Inventory
2,000
Accounts Payable B.
2,000
Cost of Goods Sold
2,000
Deferred Revenue
1,000
Sales Revenue C.
Cost of Goods Sold
3,000 2,000
Accounts Payable D.
2,000
Cost of Goods Sold
2,000
Gain
1,000
Accounts Payable
3,000
A. Option A B. Option B C. Option C D. Option D 127.Merchandise sold FOB destination indicates that:
A. The seller holds title until the merchandise is received at the buyer's location. B. The merchandise has not yet been shipped. C. The merchandise will not be shipped until payment has been received. D. The seller transfers title to the buyer once the merchandise is shipped.
6-38 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
128.Merchandise sold FOB shipping point indicates that:
A. The seller holds title until the merchandise is received at the buyer's location. B. The merchandise has not yet been shipped. C. The merchandise will not be shipped until payment has been received. D. The seller transfers title to the buyer once the merchandise is shipped. 129.If A sells to B, and B obtains title while goods are in transit, the goods were shipped _______. If C sells to D, and C maintains title until the goods arrive at D's door then the goods were shipped _______.
A. FOB shipping point; FOB destination B. FOB destination; FOB shipping point C. FOB destination; FOB destination D. FOB shipping point; FOB shipping point 130.Ending inventory is equal to the cost of items on hand plus:
A. Items in transit sold FOB shipping point. B. Sales discounts. C. Items in transit sold FOB destination. D. Advertising expense. 131.Suppose Company A places an order with Company B on May 12. On May 14, Company B ships the ordered goods to Company A with terms FOB destination. The goods arrive at Company A on May 17. Company A begins selling the goods to customers on May 19 and pays Company B on May 20. When would Company B record the sale of goods to Company A?
A. May 12. B. May 14. C. May 19. D. May 17.
6-39 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
132.Kelton Inc. purchases inventory for $2,000 and incurs shipping costs of $100 for the goods to be delivered. To record this transaction, the company debits Inventory for $2,000, debits Selling Expenses for $100, and credits Cash for $2,100. Which of the following statements is correct?
A. All accounts are accurately stated. B. Assets are understated. C. Net income is overstated. D. Revenues are understated. 133.The inventory method that will always produce the same amount for cost of goods sold in a periodic inventory system as in a perpetual inventory system would be:
A. FIFO. B. LIFO. C. Weighted average. D. Each method always produces a different amount. 134.The primary difference between the periodic and perpetual inventory systems is:
A. The reported amount of ending inventory is higher under the periodic system. B. The perpetual system maintains a continual record of inventory transactions, whereas the periodic system records these transactions only at the end of the period. C. The reported amount of sales revenue is higher under the periodic inventory system. D. The reported amount of cost of goods sold is higher under the perpetual inventory system. 135.In accounting for inventory, net realizable value equals:
A. Estimated selling price less expected returns by customers. B. Original purchase cost minus the estimated profit on the sale of inventory. C. Estimated selling price less any costs of completion, disposal, and transportation. D. Estimated cost to replace the inventory.
6-40 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
136.The lower of cost and net realizable value rule causes losses in the value of inventory to be recognized in the period when:
A. The inventory is purchased. B. Cash collection from the customer fails to occur. C. The inventory is sold. D. The value of inventory declines below cost. 137.The lower of cost and net realizable value method for inventory was developed to:
A. Avoid reporting inventory at an amount that exceeds the benefits it provides. B. Provide an alternative to the FIFO, LIFO, and weighted-average methods. C. Prevent the company from selling the inventory below its original cost. D. Prevent the company from selling inventory to customers who are not likely to pay.
6-41 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
138.Niva Company has the following information for its inventories A, B, C, and D: Historical
Net Realizable
Quantity
Cost
Value
A
15
20
25
B
20
35
30
C
40
25
40
D
25
50
35
The necessary adjustment associated with the lower of cost and net realizable value would be: A.
Inventory
675
Cost of Goods Sold B.
Cost of Goods Sold
675 675
Inventory C.
Inventory
675 475
Cost of Goods Sold D.
Cost of Goods Sold Inventory
475 475 475
A. Option A B. Option B C. Option C D. Option D
6-42 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
139.On April 1, Robert LLC purchased two units of inventory, A and B. The cost of unit A was $650, and the cost of unit B was $625. On April 30, Robert LLC had not sold the inventory. The net realizable value of unit A was now $685 while the net realizable value of unit B was $550. The adjustment associated with the lower of cost and net realizable value on April 30 will be: A.
Cost of Goods Sold
40
Inventory B.
Inventory
40 40
Cost of Goods Sold C.
Cost of Goods Sold
40 75
Inventory D.
Inventory Cost of Goods Sold
75 75 75
A. Option A B. Option B C. Option C D. Option D
6-43 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
140.Consider the following information pertaining to OldWest's inventory: Net Realizable Product
Quantity
Cost
Value
Revolvers
16
$120
$150
Spurs
23
27
22
Hats
12
56
40
At what amount should OldWest report its inventory?
A. $3,213. B. $3,386. C. $2,996. D. $2,906. 141.Under the principle of lower of cost and net realizable value, when a company has 10 units of inventory A with net realizable value of $50 and a cost of $60, what is the adjustment?
A. Debit Inventory $100; credit Cost of Goods Sold $100. B. Debit Inventory $500; credit Cost of Goods Sold $500. C. Debit Cost of Goods Sold $100; credit Inventory $100. D. Debit Cost of Goods Sold $500; credit Inventory $500.
6-44 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
142.Northern Town Equipment has four types of products in its inventory. Northern applies the rules under lower of cost and net realizable value to its inventory at the end of each year as shown below: Net Realizable Product
Quantity
Cost
Value
A
15
$7
$8
B
10
15
14
C
20
8
6
D
15
11
10
The year-end adjustment based upon the information above would include a:
A. Debit to Cost of Goods Sold $65. B. Credit to Inventory $50. C. Debit to Inventory $65. D. Debit to Cost of Goods Sold $50. 143.At the end of a reporting period, Gamble Corporation determines that its ending inventory has a cost of $300,000 and a net realizable value of $230,000. What would be the effect(s) of the adjustment to write down inventory to net realizable value?
A. Decrease total assets. B. Decrease net income. C. Increase retained earnings. D. Decrease total assets and net income.
6-45 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
144.Using the information below, determine the ending inventory value applying the lower of cost and net realizable value. Inventory
Net Realizable
Item
Quantity
Cost
Value
Cutlets
200
$12
$14
Chops
400
$16
$14
Shanks
300
$15
$12
A. $13,300. B. $12,000. C. $11,600. D. $13,700. 145.What effect would an adjustment to record inventory at the lower of cost and net realizable value have on the company's financial statements?
A. An increase to assets. B. An increase to stockholders' equity. C. A decrease to revenue. D. An increase to expense. 146.The practice of using the lower of cost and net realizable value to evaluate inventory reflects which of the following accounting principles?
A. Matching principle. B. Revenue recognition. C. Conservatism. D. Materiality.
6-46 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
147.After evaluating the lower of cost and net realizable value of inventory, the accountant prepares a year-end adjustment. That adjustment would:
A. Decrease the company's cost of goods sold. B. Reduce the company's stockholders' equity. C. Increase the company's inventory. D. Increase the company's total assets. 148.The inventory turnover ratio is measured as:
A. Cost of goods sold divided by average inventory. B. Average inventory divided by gross profit. C. Gross profit divided by net sales. D. Net sales divided by average inventory. 149.The inventory turnover ratio measures:
A. The portion of inventory that becomes obsolete each period. B. How many times the company purchases inventory during the current reporting period. C. The times per period the average inventory balance is sold. D. How many days it takes to collect its sales of inventory sold on account. 150.Martha Inc.'s sales equal $60,000 and cost of goods sold equals $20,000. Its beginning inventory was $1,600 and its ending inventory is $2,400. Martha's inventory turnover ratio equals:
A. 5 times. B. 10 times. C. 20 times. D. 30 times.
6-47 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
151.Lebaron Co.'s beginning inventory is $2,000 and its ending inventory is $1,000. The inventory turnover is 6 times. Cost of goods sold for the year must equal:
A. $9,000. B. $6,000. C. $12,000. D. $18,000. 152.Truman Co. sells a large number of common household items, while Stapleton sells a small number of expensive items. The two companies report the same dollar amount for ending inventory and gross profit for the year. Which of the following is most likely true?
A. Truman has a higher inventory turnover ratio and higher gross profit ratio. B. Truman has a higher inventory turnover ratio, and Stapleton has a higher gross profit ratio. C. Truman has a higher inventory turnover ratio, and Stapleton has a lower gross profit ratio. D. Stapleton has a higher inventory turnover ratio and higher gross profit ratio. 153.Consider the following inventory data for two companies: Nichols Inc.,
Winters Inc.,
$120,000
$150,000
Ending inventory
80,000
100,000
Purchases
240,000
310,000
Beginning inventory
Which of these companies had the higher inventory turnover ratio?
A. Nichols. B. Winters. C. The ratios are the same for both companies. D. Cannot determine with the information given.
6-48 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
154.The following balances come from the financial statements of Way Industries: Sales revenue
$850,000
Accounts receivable
$280,000
Beginning inventory
$50,000
Ending inventory
$30,000
Net purchases
$460,000
Sales returns
$50,000
Sales discount
$20,000
Given this information, what is the company's inventory turnover ratio?
A. 21.25. B. 28.33. C. 16.0. D. 12.0. 155.Company A is identical to Company B in every regard except that Company A uses FIFO and Company B uses LIFO. In an extended period of rising inventory costs, which of the following is true of Company A compared to Company B?
A. Company A's gross profit is lower and inventory turnover is lower. B. Company A's gross profit is higher and inventory turnover is higher. C. Company A's gross profit is higher and inventory turnover is lower. D. Company A's gross profit is lower and inventory turnover is higher.
6-49 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
156.Anthony Corporation reported the following amounts for the year: Net sales
$296,000
Cost of goods sold
138,000
Average inventory
50,000
Anthony's inventory turnover ratio is:
A. 2.42. B. 2.76. C. 3.21. D. 2.14. 157.Anthony Corporation reported the following amounts for the year: Net sales
$296,000
Cost of goods sold
138,000
Average inventory
50,000
Anthony's average days in inventory is (round to the nearest whole day):
A. 170 days. B. 114 days. C. 132 days. D. 151 days.
6-50 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
158.Consider the following inventory data: Beginning inventory
$150,000
Ending inventory
100,000
Purchases
310,000
What is the average days in inventory for the year?
A. 126.7 days. B. 101.4 days. C. 152.0 days. D. 111.7 days. 159.The gross profit ratio measures:
A. The ratio of net income to net sales. B. How quickly the company receives inventory from its suppliers. C. The amount by which the sale of inventory exceeds its cost per dollar of sales. D. How many times during the year a company sells its average inventory balance. 160.Which of the following would increase the gross profit ratio?
A. The company reduces operating expenses. B. The cost of inventory increases. C. The number of units sold increases. D. The sales price of a product increases by a higher percentage than does its cost of goods sold. 161.The gross profit ratio will typically be higher for companies that:
A. Collect cash more quickly from customers. B. Purchase inventory more frequently during the year. C. Sell products that are more highly specialized. D. Sell a greater number of units.
6-51 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
162.Nu Company reported the following data for its first year of operations: Net sales
$2,800
Cost of goods sold
1,680
Operating expenses
880
Ending inventories
820
What is Nu's gross profit ratio?
A. 80%. B. 49%. C. 40%. D. 5%. 163.Anthony Corporation reported the following amounts for the year: Net sales
$296,000
Cost of goods sold
138,000
Average inventory
50,000
Anthony's gross profit ratio is:
A. 53.4%. B. 51.9%. C. 50.3%. D. 46.6%. 164.In a periodic inventory system, the purchase of inventory is debited to:
A. Purchases. B. Cost of goods sold. C. Inventory. D. Accounts payable.
6-52 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
165.Northwest Fur Co. started the year with $94,000 of merchandise inventory on hand. During the year, $400,000 in merchandise was purchased on account with credit terms of 1/15, n/45. All discounts were taken. Northwest paid freight-in charges of $7,500. Merchandise with an invoice amount of $5,000 was returned for credit. Cost of goods sold for the year was $380,000. What is ending inventory?
A. $112,490. B. $112,550. C. $116,500. D. $120,300. 166.On May 1, Ace Bonding Company purchased inventory costing $2,000 on account with terms 2/10, n/30. On May 18, Ace pays for this inventory and records which of the following using a periodic inventory system? A.
Accounts Payable
2,000
Cash B.
2,000
Accounts Payable
1,960
Purchase Discounts
40
Cash C.
Accounts Payable
2,000 2,000
Purchase Discounts
40
Cash D.
Cash Accounts Payable
1,960 2,000 2,000
A. Option A B. Option B C. Option C D. Option D
6-53 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
167.On May 1, Ace Bonding Company purchased inventory costing $2,000 on account with terms 2/10, n/30. On May 8, Ace pays for this inventory and records which of the following using a periodic inventory system? A.
Accounts Payable
2,000
Cash B.
2,000
Accounts Payable
1,960
Purchase Discounts
40
Cash C.
Accounts Payable
2,000 2,000
Purchase Discounts
40
Cash D.
Cash Accounts Payable
1,960 2,000 2,000
A. Option A B. Option B C. Option C D. Option D
6-54 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
168.Ace Bonding Company purchased inventory on account. The inventory costs $2,000 and is expected to sell for $3,000. How should Ace record the purchase using a periodic inventory system? A.
Purchases
2,000
Accounts Payable B.
2,000
Cost of Goods Sold
2,000
Deferred Revenue
1,000
Sales Revenue C.
Cost of Goods Sold
3,000 2,000
Accounts Payable D.
2,000
Cost of Goods Sold
2,000
Gain
1,000
Accounts Payable
3,000
A. Option A B. Option B C. Option C D. Option D
6-55 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
169.Davis Hardware Company uses a periodic inventory system. How should Davis record the sale of inventory costing $620 for $960 on account? A.
Cost of Goods Sold
620
Purchases Accounts Receivable
620 960
Sales Revenue B.
Accounts Receivable
960 960
Sales Revenue C.
960
Purchases
620
Gain
340
Sales Revenue D.
Accounts Receivable
960 960
Sales Revenues
620
Gain
340
A. Option A B. Option B C. Option C D. Option D
6-56 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
170.Davis Hardware Company uses a periodic inventory system. How should Davis record the return of inventory previously purchased on account for $200? A.
Inventory
200
Accounts Payable B.
Accounts Payable
200 200
Inventory C.
Purchase Returns
200 200
Accounts Payable D.
Accounts Payable
200 200
Purchase Returns
200
A. Option A B. Option B C. Option C D. Option D 171.In a periodic inventory system, the entry at the time of a sale to record the cost of inventory sold includes a:
A. Debit to Accounts Receivable. B. Credit to Cost of Goods Sold. C. Debit to Cost of Goods Sold. D. Not recorded at this time of the sale. 172.Good Inc., sold inventory for $1,200 that was purchased for $700. Good records which of the following when it sells inventory using a periodic inventory system?
A. No entry is required for cost of goods sold and inventory. B. Debit Cost of Goods Sold $700; credit Inventory $700. C. Debit Cost of Goods Sold $1,200; credit Inventory $1,200. D. Debit Inventory $700; credit Cost of Goods Sold $700.
6-57 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
173.Suppose that Hastings Corporation overstates its ending inventory for 2018. What effect will this have on the reported amount of cost of goods sold for 2018?
A. Overstate cost of goods sold. B. Understate cost of goods sold. C. Have no effect on cost of goods sold. D. Cannot be determined given the information provided. 174.Bill Inc.'s correct ending balance for the inventory account at the end of 2018 should be $5,000, but the company incorrectly stated it as $3,000. In 2019, Bill correctly recorded its ending balance of the inventory account. Which one of the following is true?
A. Gross profit is overstated by $2,000 in 2018. B. Retained earnings are understated by $2,000 in 2019. C. Gross profit is overstated by $2,000 in 2019. D. Cost of goods sold is understated by $2,000 in 2018. 175.If a company overstates its ending balance of inventory in year 1 and it records inventory correctly in year 2, which one of the following is true?
A. Net income is overstated in year 2. B. Cost of goods sold is overstated in year 1. C. Net income is understated in year 1. D. Retained earnings is overstated in year 1. 176.If a company understates its ending balance of inventory in year 1 and it records inventory correctly in year 2, which one of the following is true?
A. Net income is overstated in year 1. B. Cost of goods sold is overstated in year 2. C. Net income is understated in year 2. D. Retained earnings is understated in year 2.
6-58 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
177.If a company understates its count of ending inventory in Year 1, which of the following is true?
A. Costs of goods sold is understated at the end of Year 1. B. Profit is correct in Year 2. C. The balance of retained earnings is overstated at the end of Year 1. D. The balance of retained earnings is correct at the end of Year 2.
Matching Questions
178.Match each term with its description.
Products that have started the production process but 1. Finished goods
are not yet complete at the end of the period.
____
Companies that purchase inventories that are primarily 2. Raw materials
in finished form for resale to customers.
____
Inventory items for which the manufacturing process is 3. Service companies 4. Manufacturing companies 5. Work-in-process inventory 6. Merchandise inventory
complete. Cost of components that will become part of the finished product but have not yet been used in production.
companies
____
Companies that produce the inventories they sell, rather than buying them from suppliers in finished form.
____
Companies that earn revenues by providing services to their customers rather than selling inventory.
7. Merchandising
____
____
Inventory that has been purchased in its finished form but has not yet been sold to customers.
____
6-59 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
179.Match each term used in a multiple-step income statement with its description.
Amount recorded from the sale of products and 1. Nonoperating expenses
services to customers.
____
Amount of profit after including nonoperating 2. Cost of goods sold
revenues and expenses.
____
Expenses arising from activities that are not part 3. Gross profit 4. Operating income
of a company's primary operations.
____
Cost of inventory sold during the period.
____
Profit from normal operations that is a key 5. Net income
performance measure for predicting future profit.
____
All revenues minus all expenses.
____
6. Operating expenses
Expenses arising from activities that are part of a 7. Sales revenue
company's normal operations.
8. Income before income taxes
____
Profit most directly related to the sale of inventory. ____
180.Match each inventory method with its definition.
Assume inventory sold for the year includes the items 1. LIFO
that were purchased first.
____
Ending inventory represents the actual units not sold 2. Specific Identification
during the year.
____
Assume ending inventory for the year includes the items 3. FIFO
that were purchased first.
____
Assume ending inventory for the year includes a random 4. Weighted average
mixture of all goods available for sale.
____
6-60 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
181.Match each term related to inventory methods with its description.
Results in higher ending inventory during periods of 1. LIFO
rising prices.
____
LIFO must be used for financial reporting if elected for 2. LIFO reserve
tax reporting.
____
Additional amount of inventory a company would report 3. LIFO conformity rule
if it used FIFO instead of LIFO.
____
Once a company chooses an inventory method, it is not 4. Consistency
allowed to frequently change to another one.
____
Best matches cost of inventory sold with its related 5. FIFO
revenue.
____
182.Match each term related to recording inventory transactions with its description.
1. Perpetual inventory system 2. FOB shipping point
Account to credit when inventory is sold. The amount to credit equals the selling price to customer.
____
Recording inventory transactions as they occur.
____
Record inventory purchases at the time inventory 3. Cost of goods sold 4. FOB destination
departs from the supplier.
____
Account to debit when inventory is sold.
____
Record inventory purchases at the time inventory 5. Freight-in
arrives at the company.
____
6. Inventory
The cost of shipping inventory from suppliers.
____
Calculate the balance of inventory once per period.
____
7. Periodic inventory system
Account to credit when inventory is sold. The 8. Sales revenue 9. Freight-out
amount to credit equals the original cost of inventory.
____
The cost of shipping inventory to customers.
____
6-61 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
183.Match each term related to inventory analysis with its description.
1. Average days in inventory
The number of times a firm sells its average inventory balance during a reporting period.
____
If a company's cost of inventory decreases and its selling 2. Gross profit ratio
price remains the same, the gross profit ratio _____.
3. Inventory turnover
The approximate length of time the average inventory is
ratio
held.
____ ____
When a company purchases inventory at the end of the 4. Higher
year and does not sell it, the inventory turnover ratio _____.
____
Typically, the more specialized the inventory item, the 5. Lower
_____ gross profit ratio.
____
A measure of the amount by which the sale of inventory 6. Increases
exceeds its cost per dollar of sales.
____
The less frequently a company sells its inventory, the 7. Decreases
_____ its inventory turnover ratio.
____
Essay Questions
184.At the beginning of 2018, Calston Incorporated reports inventory of $9,000. During 2018, the company purchases additional inventory for $25,000. At the end of 2018, the cost of inventory remaining is $8,000. Calculate cost of goods sold for 2018.
6-62 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
185.For each company, calculate the missing amount. Company
Sales Cost of Goods
Gross Profit
Sold
Operating
Net Income
Expenses
Lennon
$8,000
(a)
$4,000
$3,000
$1,000
Harrison
9,000
3,000
(b)
2,000
4,000
McCartney
8,000
3,000
5,000
(c)
2,000
Starr
7,000
3,000
5,000
3,000
(d)
186.Below are some of the items found in a multiple-step income statement: a. Sales revenue b. Net income c. Operating income d. Income before income taxes e. Gross profit Place these items in the order they would appear from first to last.
6-63 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
187.Beasley Inc., reports the following amounts in its December 31, 2018, income statement. Sales revenue
Income tax $300,000 expense
Interest expense
Cost of goods 12,000 sold
Salaries expense
$38,000
125,000
Advertising 35,000 expense
24,000
Utilities expense
41,000
Prepare a multiple-step income statement.
6-64 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
188.During 2018, a company sells 20 units of inventory. The company has the following inventory purchase transactions for 2018: Date
Transaction
Number of Units
Unit Cost
Total Cost
Jan. 1
Beginning inventory
15
$60
$900
Sep. 8
Purchase
10
62
620
25
$1,520
Calculate ending inventory and cost of goods sold for 2018 assuming the company uses FIFO with a periodic inventory system.
6-65 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
189.During 2018, a company sells 20 units of inventory. The company has the following inventory purchase transactions for 2018: Date
Transaction
Number of Units
Unit Cost
Total Cost
Jan. 1
Beginning inventory
15
$60
$900
Sep. 8
Purchase
10
62
620
25
$1,520
Calculate ending inventory and cost of goods sold for 2018 assuming the company uses LIFO with a periodic inventory system.
6-66 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
190.During 2018, a company sells 20 units of inventory. The company has the following inventory purchase transactions for 2018: Date
Transaction
Number of Units
Unit Cost
Total Cost
Jan. 1
Beginning inventory
15
$60
$900
Sep. 8
Purchase
10
62
620
25
$1,520
Calculate ending inventory and cost of goods sold for 2018 assuming the company uses weighted-average cost with a periodic inventory system.
6-67 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
191.During 2018, a company sells 300 units of inventory for $85 each. The company has the following inventory purchase transactions for 2018: Date
Transaction
Number of Units
Unit Cost
Total Cost
Jan. 1
Beginning inventory
60
$71
$4,260
May 5
Purchase
170
72
12,240
Nov. 3
Purchase
180
74
13,320
410
$29,820
Calculate ending inventory and cost of goods sold for 2018 assuming the company uses FIFO with a periodic inventory system.
6-68 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
192.During 2018, a company sells 400 units of inventory for $85 each. The company has the following inventory purchase transactions for 2018: Date
Transaction
Number of Units
Unit Cost
Total Cost
Jan. 1
Beginning inventory
60
$70
$4,200
May 5
Purchase
180
72
12,960
Nov. 3
Purchase
190
75
14,250
430
$31,410
Calculate ending inventory and cost of goods sold for 2018 assuming the company uses LIFO with a periodic inventory system.
6-69 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
193.During 2018, a company sells 500 units of inventory for $90 each. The company has the following inventory purchase transactions for 2018: Date
Transaction
Number of Units
Unit Cost
Total Cost
Jan. 1
Beginning inventory
80
$79
$6,320
May 5
Purchase
270
80
21,600
Nov. 3
Purchase
190
82
15,580
540
$43,500
Calculate cost of goods sold and ending inventory for 2018 assuming the company uses weighted-average cost with a periodic inventory system (round weighted-average unit cost to four decimals if necessary).
6-70 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
194.During 2018, a company sells 200 units of inventory for $50 each. The company has the following inventory purchase transactions for 2018: Date
Transaction
Number of Units
Unit Cost
Total Cost
Jan. 1
Beginning inventory
50
$39
$1,950
May 5
Purchase
100
38
3,800
Nov. 3
Purchase
80
37
2,960
230
$8,710
Actual sales by the company include its entire beginning inventory, 80 units of inventory from the May 5 purchase, and 70 units from the November 3 purchase. Calculate cost of goods sold and ending inventory for 2018 assuming the company uses specific identification.
6-71 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
195.For each item below, indicate whether FIFO or LIFO will generally result in a higher reported amount when inventory costs are rising versus falling. Inventory
Higher
Higher
Higher
Costs
Total
Cost of
Net
Assets
Goods
Income
Sold Rising Falling
196.When inventory costs are rising, __________ generally results in a higher amount of reported net income.
6-72 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
197.When inventory costs are declining, __________ generally results in a lower amount of reported cost of goods sold.
198.When inventory costs are declining, __________ generally results in a lower amount of reported inventory.
199.When inventory costs are rising, __________ generally results in a lower amount of reported cost of goods sold.
6-73 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
200.When inventory costs are declining, __________ generally results in a higher amount of reported net income.
201.__________ is commonly referred to as the balance sheet approach.
202.__________ is commonly referred to as the income statement approach.
6-74 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
203.When inventory costs are rising, __________ generally results in a lower income tax obligation.
204.A company uses a perpetual system to record inventory transactions. The company purchases inventory on account on February 9, 2018, for $50,000 and then sells this inventory on account on March 7, 2018, for $70,000. Record the transactions for the purchase and sale of the inventory.
6-75 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
205.A company has the following transactions during March: March 3 Purchases inventory on account for $3,500, terms 2/10, n/30. March 5 Pays freight costs of $200 on inventory purchased on March 3. March 6 Returns inventory with a cost of $500. March 12 Pays the full amount due on March 3 purchase. March 29 Sells all inventory purchased on March 3 (less those returned on March 6) for $5,000 on account. Record all transactions, assuming the company uses a perpetual inventory system.
206.A company reports inventory using the lower of cost and net realizable value (NRV). Below is information related to its year-end inventory. Calculate the amount to be reported for ending inventory.
6-76 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
207.A company reports inventory using the lower of cost and net realizable value. Below is information related to its year-end inventory: Inventory
Quantity
Cost
Market
Item A
100
$25
$30
Item B
50
30
20
Calculate ending inventory under the lower of cost and net realizable value and record any necessary adjustment to inventory.
6-77 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
208.A company reports inventory using the lower of cost and net realizable value. Below is information related to its year-end inventory: Inventory
Quantity
Cost
Market
Unit A
10
$30
$32
Unit B
18
43
40
Unit C
12
23
27
Unit D
15
18
17
Calculate ending inventory under the lower of cost and net realizable value and record any necessary adjustment to inventory.
6-78 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
209.A company reports the following amounts for 2018: Inventory (beginning)
$20,000
Inventory (ending)
30,000
Purchases
160,000
Purchase returns
10,000
Calculate cost of goods sold, the inventory turnover ratio, and the average days in inventory for 2018.
210.A company reports the following amounts at the end of the year: Sales revenue
$300,000
Cost of goods sold
225,000
Net income
50,000
Compute the company's gross profit ratio.
6-79 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
211.A company begins the year with inventory of $50,000 and ends the year with inventory of $55,000. During the year, the following amounts are recorded: Purchases
$210,000
Purchase returns
25,000
Purchase discounts
15,000
Freight-in
40,000
Calculate cost of goods sold for the year.
212.A company uses a periodic system to record inventory transactions. The company purchases inventory on account on February 9, 2018, for $50,000 and then sells this inventory on account on March 7, 2018, for $70,000. Record the transactions for the purchase and sale of the inventory.
6-80 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
213.A company has the following transactions during March: March 3 Purchases inventory on account for $3,500, terms 2/10, n/30. March 5 Pays freight costs of $200 on inventory purchased on March 3. March 6 Returns inventory with a cost of $500. March 12
Pays the full amount due on March 3 purchase.
March
Sells all inventory purchased on March 3 (less those returned on March 6) for
29
$5,000 on account.
Record all transactions, including the month-end adjustment to cost of goods sold, assuming the company uses a periodic inventory system and has no beginning inventory.
214.A company understated its ending inventory balance by $8,000 in 2018. What impact will this error have on cost of goods sold and gross profit in 2018 and 2019?
6-81 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
215.A company overstated its ending inventory balance by $6,000 in 2018. What impact will this error have on cost of goods sold and gross profit in 2018 and 2019?
216.A company understated its ending inventory balance by $5,000 in 2018. What impact will this error have on total assets and retained earnings in 2018 and 2019 (ignoring tax effects)?
217.A company overstated its ending inventory balance by $9,000 in 2018. What impact will this error have on total assets and retained earnings in 2018 and 2019 (ignoring tax effects)?
6-82 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
218.Giles Manufacturing uses a periodic inventory system and has the following transactions for the month of June 2018: Date
Transactions
Units
June 1
Beginning inventory
17
June 7
Sale
12
June 12
Purchase
13
June 15
Sale
11
June 24
Purchase
14
June 27
Sale
15
June 29
Purchase
8
Cost per Unit
Total Cost
$240
$4,080
230
2,990
220
3,080
210
1,680 $11,830
Required: 1. Calculate ending inventory and cost of goods sold at June 30, 2018, using the specific identification method. The June 7 sale consists of beginning inventory, the June 15 sale consists of three units from beginning inventory and eight from the June 12 purchase, and the June 27 sale consists of one unit from beginning inventory and fourteen units from the June 24 purchase. 2. Using FIFO, calculate ending inventory and cost of goods sold at June 30, 2018. 3. Using LIFO, calculate ending inventory and cost of goods sold at June 30, 2018. 4. Using weighted-average cost, calculate ending inventory and cost of goods sold at June 30, 2018.
6-83 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
219 Nadal Athletic uses a periodic inventory system and has the following transaction related to .
its inventory for the month of August 2018: Date
Transactions
Units
August 1
Beginning inventory
7
August 4
Sale ($150 each)
5
August 11
Purchase
9
August 13
Sale ($160 each)
7
August 20
Purchase
12
August 26
Sale ($170 each)
10
August 29
Purchase
12
Cost per Unit
Total Cost
$130
$910
120
1,080
110
1,320
100
1,200 $4,510
Required: 1. Calculate ending inventory and cost of goods sold at August 31, 2018, using the specific identification method. The August 4 sale consists of units from beginning inventory, the August 13 sale consists of units from the August 11 purchase, and the August 26 sale consists of two units from beginning inventory and eights units from the August 20 purchase. 2. Using FIFO, calculate ending inventory and cost of goods sold at August 31, 2018. 3. Using LIFO, calculate ending inventory and cost of goods sold at August 31, 2018. 4. Using weighted-average cost, calculate ending inventory and cost of goods sold at August 31, 2018. 5. Calculate sales revenue and gross profit under each of the four methods. 6. Comparing FIFO and LIFO, which one provides the more meaningful measure of ending inventory? Explain. 7. If Pete's chooses to report inventory using LIFO, record the LIFO adjustment.
6-84 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
220.At the beginning of June, Chow Company has a balance in inventory of $2,100. The following transactions occur during the month of June. June 2
Purchase radios on account from Air One for $2,400, terms 3/15, n/45.
June 4
Pay freight charges related to the June 2 purchase from Air One, $400.
June 8
Return defective radios to Air One and receive credit, $600.
June 10 Pay Air One in full. June 11 Sell radios to customers on account, $5,000, that had a cost of $3,300. June 18 Receive payment on account from customers, $3,100. June 20 Purchase radios on account from Motion Unlimited for $3,300, terms 3/10, n/30. June 23 Sell radios to customers for cash, $4,800, that had a cost of $3,200. June 26 Return damaged radios to Motion Unlimited and receive credit of $300. June 28 Pay Motion Unlimited in full.
Required: 1. Assuming that Chow Company uses a perpetual inventory system, record the transactions. 2. Prepare the top section of the multiple-step income statement through gross profit for the month of June.
6-85 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
221.A home improvement store carries the following items: Lower of
Inventory Items
Quantity
NRV
Cost and
per unit
NRV
Cost per Unit
Hammers
110
$6
$7
_______
Saws
60
11
9
_______
Screwdrivers
120
3
2
_______
Drills
50
22
21
_______
1-gallon paint cans
150
5
6
_______
Paint brushers
170
7
8
_______
Required: 1. Compute the total cost of inventory. 2. Determine whether each inventory item would be reported at cost or net realizable value. Multiply the quantity of each inventory item by the appropriate cost or NRV amount and place the total in the "Lower of Cost and NRV" column. Then determine the total of that column. 3. Compare your answers in Requirement 1 and Requirement 2 and then prepare any necessary adjustment to write down inventory from cost to net realizable value. 4. Discuss the financial statement effects of using lower of cost and net realizable value to report inventory.
6-86 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
222.During 2018, Liberty Company has the following inventory transactions. Date
Transaction
Units
Cost
Total Cost
Jan. 1
Beginning
10
$430
$4,300
inventory Apr. 9
Purchase
22
470
10,340
Oct. 4
Purchase
18
400
7,200
50 Jan. 1–
Sales
$21,840
44
Dec. 31
Because trends change frequently, Liberty estimates that the remaining six units have a net realizable value at December 31 of only $300 each. Required: 1. Using FIFO with a periodic inventory system, calculate ending inventory and cost of goods sold. 2. Using LIFO with a periodic inventory system, calculate ending inventory and cost of goods sold. 3. Determine the amount of ending inventory to report using the lower of cost and net realizable value under FIFO. Record any necessary adjustment.
6-87 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
223.At the beginning of November, Donkey Inc.'s inventory consists of 50 units with a cost per unit of $100. The following transactions occur during the month of November.
November 2 Purchase 80 units of inventory on account from Kong Inc. for $110 per unit, terms 2/10, n/30. November 3 Pay freight charges related to the November 2 purchase, $240. November 9 Return 20 defective units from the November 2 purchase and receive credit. November 11
Pay Toad Inc. in full.
November
Sell 100 units of inventory to customers on account, $14,000. [Hint: The
16
cost of units sold from the November 2 purchase includes $110 unit cost plus $3 per unit for freight less $2.20 per unit for the purchase discount, or $111.80 per unit.]
November 20
Receive full payment from customers related to the sale on November 16.
November
Purchase 70 units of inventory from Toad Inc. for $120 per unit, terms
21
1/10, n/30.
November 24
Sell 50 units of inventory to customers for cash, $9,000.
Required: 1. Assuming that Donkey Inc. uses a FIFO perpetual inventory system to maintain its internal inventory records, record the transactions. 2. Suppose by the end of November that the remaining inventory is estimated to have a net realizable value per unit of $90, record any necessary adjustment for the lower of cost and net realizable value. 3. Prepare the top section of the multiple-step income statement through gross profit for the 6-88 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
month of November after the adjustment for lower of cost and net realizable value.
6-89 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
224.Assume Party Store has the following account balances for the month of March 2018, and that the company uses a perpetual inventory system. Sales revenue
$75,800 Cost of goods
$38,500
sold Inventory
1,800
(Mar. 31, 2018) Advertising expense Rent expense
5,200 Insurance
1,700
expense 3,300 Sales
2,900
discounts Gain on sale of building Inventory (Mar. 1, 2018)
6,900 Salaries
8,200
expense 2,200 Income tax
6,100
expense
Required: 1. Prepare a multiple-step income statement for the month ended March 31, 2018. 2. Calculate the inventory turnover ratio for the month of March. Would you expect this ratio to be higher or lower in December 2018? Explain. 3. Calculate the gross profit ratio for the month of March.
6-90 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
225.Fancy Incorporated and Thrift Specialty both offer men's formal footwear. Thrift offers lowerto-middle priced footwear, whereas Fancy offers more specialized, higher-end footwear. The average price for a pair of shoes in Thrift may be about $40, whereas the average price in Fancy may be about $200. The types of shoes offered by Fancy are not sold by many other stores. Suppose Thrift and Fancy report the following amounts for men's shoes in the same year (company names are disguised): Company 1
Company 2
$120,000
$120,000
Cost of goods sold
46,000
80,000
Gross profit
$74,000
$40,000
Average inventory
$23,000
$20,000
Net sales
Required: 1. For Company 1 and Company 2, calculate the inventory turnover ratio. 2. For Company 1 and Company 2, calculate the gross profit ratio. 3. After comparing the inventory turnover ratios and gross profit ratios, which company do you think is Thrift and which is Fancy? Explain.
6-91 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
226.Refer to the transactions of Chow Company in P6-3C. Required: 1. Assuming that Chow Company uses a periodic inventory system, record the transactions. 2. Record the month-end adjustment to inventory, assuming that a final count reveals ending inventory with a cost of $656. 3. Prepare the top section of the multiple-step income statement through gross profit for the month of June.
6-92 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
227.Fulkerson Metals maintains accurate records of the inventory purchased from its suppliers and sold to customers. The records show the following purchases and sales during 2018. Date
Transactions
Units Cost
Total
per
Cost
Unit January 1 Beginning
28
$33
inventory
$924
April 14
Purchase
72
35
August
Purchase
115
37
22 October
2,520
4,255 Purchase
90
29
39 3,510
305
Jan. 1 –
Sales ($60
Dec. 31
each)
$11,209
280
Fulkerson uses a periodic inventory system and believes there are 25 units of ending inventory. However, Fulkerson neglects to make a final inventory count at the end of the year. An employee accidentally threw out 4 units of inventory, leaving only 21 units. Fulkerson is not aware of the lost inventory. Required: 1. What amount will Fulkerson calculate for ending inventory and cost of goods sold using FIFO, assuming it erroneously believes 25 units remain in ending inventory? 2. What amount would Fulkerson calculate for ending inventory and cost of goods sold using FIFO if it correctly knows that only 21 units remain in ending inventory? 3. What effect will the inventory error have on reported amounts for (a) ending inventory, (b) retained earnings, (c) cost of goods sold, and (d) net income (ignoring tax effects) in 2018? 4. Assuming that ending inventory is correctly counted at the end of 2019, what effect will the inventory error in 2018 have on reported amounts for (a) ending inventory, (b) retained earnings, (c) cost of goods sold, and (d) net income (ignoring tax effects) in 2019?
6-93 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
228.What does the balance of cost of goods sold in the income statement represent? What does the balance of inventory in the balance sheet represent?
229.What is a multiple-step income statement? What information does it provide beyond "bottom-line" net income?
230.What are the three primary cost flow assumptions? How does the specific identification method differ from these three primary cost flow assumptions?
6-94 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
231.What does it mean that FIFO has a balance sheet focus and LIFO has an income statement focus?
232.What is meant by the assertion that the lower of cost and net realizable value for inventory is an example of conservatism in accounting?
6-95 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 06 Inventory and Cost of Goods Sold Answer Key
True / False Questions
1.
Inventory is usually reported as a long-term asset in the balance sheet. FALSE Inventory is typically reported as a current asset because companies expect to convert it to cash in the near term.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-01 Trace the flow of inventory costs from manufacturing companies to merchandising companies. Topic: Inventory
2.
Cost of goods sold is an asset reported in the balance sheet and inventory is an expense reported in the income statement. FALSE Cost of goods sold is an expense reported in the income statement and inventory is an asset reported in the balance sheet.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-01 Trace the flow of inventory costs from manufacturing companies to merchandising companies. Topic: Inventory
6-96 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3.
Merchandising companies purchase inventories that are primarily in finished form for resale to customers. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy
Learning Objective: 06-01 Trace the flow of inventory costs from manufacturing companies to merchandising companies. Topic: Inventory
4.
Cost of goods sold is an expense reported in the income statement and represents the cost of inventory sold during the period. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
5.
If a company has beginning inventory of $15,000, purchases during the year of $75,000, and ending inventory of $20,000, cost of goods sold equals $70,000. TRUE AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
6-97 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
6.
A multiple-step income statement reports multiple levels of profitability, such as gross profit, operating income, income before income taxes, and net income. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
7.
Gross profit equals net sales of inventory less cost of goods sold. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
8.
Sales revenue minus cost of goods sold is referred to as operating income. FALSE Sales revenue minus cost of goods sold equals gross profit.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
6-98 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
9.
Income before income taxes equals operating income plus nonoperating revenues less nonoperating expenses. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
10.
If a company has ending inventory of $25,000, purchases during the year of $95,000, and beginning inventory of $30,000, cost of goods sold equals $90,000. FALSE Beginning Inventory ($30,000) + Purchases ($95,000) - Ending Inventory ($25,000) = Cost of Goods Sold ($100,000).
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
11.
Companies are not allowed to report inventory costs by assuming which units of inventory are sold and which units still remain on hand. FALSE Companies can assume which inventory units are sold and still remain on hand using a variety of methods (FIFO, LIFO, and weighted-average cost).
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand
6-99 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 2 Medium Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Topic: Inventory Cost Methods
12.
Using the first-in, first-out method (FIFO), the first units purchased are assumed to be the first ones sold. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy
Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Topic: Inventory Cost Methods
13.
Using the weighted-average cost method, the average cost of inventory is calculated as the average unit cost of inventory purchased during the year. FALSE The average is a weighted-average cost which includes both beginning inventory and purchases and is equal to total cost of goods available for sale divided by the total number of units available for sale.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Topic: Inventory Cost Methods
14.
Companies are free to choose FIFO, LIFO, or weighted-average cost to report inventory and cost of goods sold. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand 6-100 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 2 Medium Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
15.
For most companies, actual physical flow of their inventory follows LIFO. FALSE Most often, the actual physical flow of goods follows FIFO.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
16.
During periods of rising costs, FIFO generally results in a higher ending inventory balance. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
17.
During periods of rising costs, FIFO generally results in a higher cost of goods sold. FALSE During periods of rising costs, FIFO generally results in a lower cost of goods sold.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods 6-101 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
18.
During periods of rising costs, LIFO generally results in a higher cost of goods sold. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
19.
During periods of rising costs, LIFO generally results in a higher ending inventory balance. FALSE During periods of rising costs, LIFO generally results in a lower ending inventory balance.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
20.
Accountants often call FIFO the balance sheet approach because the amount it reports for ending inventory better approximates the current cost of inventory. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
6-102 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
21.
One of the primary benefits of using FIFO when inventory costs are rising is that it results in greater tax savings. FALSE When inventory costs are rising, LIFO provides greater tax savings.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
22.
The LIFO conformity rule requires a company that uses LIFO for tax reporting to use FIFO for financial reporting. FALSE The LIFO conformity rule requires a company that uses LIFO for tax reporting to also use it for financial reporting.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
23.
The LIFO difference (reserve) is the additional amount of inventory a company would report if it used FIFO instead of LIFO. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. 6-103 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Effects of Inventory Cost Methods
24.
Using a perpetual inventory system, the purchase of inventory is recorded with a debit to the Purchases account, which is a temporary account closed to cost of goods sold at the end of the period. FALSE The debit is to the Inventory account.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Topic: Perpetual Inventory System
25.
For inventory that is shipped FOB destination, title transfers from the seller to the buyer once the seller ships the inventory. FALSE For FOB destination, title transfers once the inventory reaches the buyer (destination).
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Topic: Perpetual Inventory System
26.
For inventory that is shipped FOB shipping point, title transfers from the seller to the buyer once the seller ships the inventory. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember 6-104 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 1 Easy Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Topic: Perpetual Inventory System
27.
Freight-in is included in the cost of inventory. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Topic: Perpetual Inventory System
28.
At the time inventory is sold, cost of goods sold is recorded under the perpetual inventory system. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Topic: Perpetual Inventory System
29.
Using LIFO, the amount reported for ending inventory does not differ depending on whether a company uses a periodic system or a perpetual system. FALSE The amount reported for ending inventory (or cost of goods sold) will differ.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Learning Objective: 06-08 Record inventory transactions using a periodic inventory system.
6-105 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Perpetual Inventory System Topic: Recording Inventory Transactions Using a Periodic Inventory System
30.
When the value of inventory falls below its cost, companies other than those that use LIFO have the option of recording the inventory at cost or the lower net realizable value. FALSE Companies must report inventory at the lower of cost and net realizable value.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Topic: Lower of Cost and Net Realizable Value
31.
When the net realizable value of inventory falls below its cost, no adjustment to the accounting records is needed. FALSE Companies are required to record an adjustment when net realizable value falls below cost. The adjustment has the effect of reducing assets and increasing expenses.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Topic: Lower of Cost and Net Realizable Value
32.
The adjustment to write down inventory from cost to its lower net realizable value includes a debit to Cost of Goods Sold and a credit to Inventory. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation 6-106 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Topic: Lower of Cost and Net Realizable Value
33.
The use of the lower of cost and net realizable value to report inventory is an example of conservatism in financial reporting. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Topic: Lower of Cost and Net Realizable Value
34.
The inventory turnover ratio equals cost of goods sold divided by average inventory. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Topic: Best Buy vs. Tiffany’s
35.
Generally, a higher inventory turnover ratio reflects positively on a company's ability to manage its inventory. TRUE AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Topic: Best Buy vs. Tiffany’s
6-107 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
36.
A company that has average inventory of $500 and cost of goods sold of $2,000 would have an inventory turnover ratio of 0.25. FALSE The inventory turnover ratio equals cost of goods sold ($2,000) divided by average inventory ($500), which equals 4.0 in this example.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Topic: Best Buy vs. Tiffany’s
37.
The gross profit ratio measures the amount by which the sale price of inventory exceeds its cost per dollar of sales. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Topic: Best Buy vs. Tiffany’s
38.
Generally, a lower gross profit ratio reflects positively on a company's ability to manage its inventory. FALSE A higher ratio is generally a stronger signal about the company's successful management of inventory.
AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Understand
6-108 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 2 Medium Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Topic: Best Buy vs. Tiffany’s
39.
A periodic inventory system does not continually modify inventory amounts, but instead adjusts for purchases and sales of inventory at the end of the reporting period based on a physical count of inventory on hand. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-08 Record inventory transactions using a periodic inventory system. Topic: Recording Inventory Transactions Using a Periodic Inventory System
40.
Overstating ending inventory in the current year causes net income in the current year to be overstated. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 06-09 Determine the financial statement effects of inventory errors. Topic: Inventory Errors
41.
Understating ending inventory in the current year causes cost of goods sold in the current year to be understated. FALSE Understating ending inventory in the current year will cause cost of goods sold in the current year to be overstated.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Evaluate 6-109 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 3 Hard Learning Objective: 06-09 Determine the financial statement effects of inventory errors. Topic: Inventory Errors
Multiple Choice Questions
42.
One of the major differences between service companies and retail or manufacturing companies is that retailers and manufacturers must account for:
A. Current assets. B. Inventory. C. Selling expenses. D. Deferred revenue. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-01 Trace the flow of inventory costs from manufacturing companies to merchandising companies. Topic: Inventory
43.
The cost of unsold inventory at the end of the year is classified as a(n) ______ in the ______.
A. Assets; Balance sheet B. Expense; Income statement C. Liability; Balance sheet D. Revenue; Income statement AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-01 Trace the flow of inventory costs from manufacturing companies to merchandising companies. Topic: Inventory
6-110 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
44.
What type of company purchases raw materials and makes goods to sell?
A. Wholesaler. B. Retailer. C. Merchandiser. D. Manufacturer. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-01 Trace the flow of inventory costs from manufacturing companies to merchandising companies. Topic: Inventory
45.
A manufacturer's inventory consists of what type of inventory?
A. Raw materials. B. Finished goods. C. Work-in-process. D. All of the other answers are included in a manufacturer's inventory. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-01 Trace the flow of inventory costs from manufacturing companies to merchandising companies. Topic: Inventory
46.
Inventory does not include:
A. Materials used in the production of goods to be sold. B. Assets intended to be sold in the normal course of business. C. Equipment used in the manufacturing of assets for sale. D. Assets currently in production for normal sales. AACSB: Reflective Thinking 6-111 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-01 Trace the flow of inventory costs from manufacturing companies to merchandising companies. Topic: Inventory
47.
The cost of the goods that a company sold during a period is shown in its financial statements as ___________ and the cost of the goods that a company still has on hand at the end of the year is shown in the financial statements as ____________.
A. Cost of goods sold; inventory B. Goods on hand; inventory expense C. Inventory; cost of goods sold D. Sales revenue; cost of goods sold AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-01 Trace the flow of inventory costs from manufacturing companies to merchandising companies. Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold Topic: Inventory
48.
Cost of Goods Sold is:
A. An asset account. B. A revenue account. C. An expense account. D. A permanent equity account. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
6-112 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
49.
The balance of the Cost of Goods Sold account at the end of the year represents:
A. The cost of inventory not sold in the current year. B. The total sales revenue to customers. C. The cost of inventory sold in the current year. D. Total purchases of inventory for the year. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
50.
The cost of inventory sold during the current year classified as a(n) ______ in the ______.
A. Assets; Balance sheet B. Expense; Income statement C. Liability; Balance sheet D. Revenue; Income statement AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
51.
The largest expense on a retailer's income statement is typically:
A. Salaries. B. Cost of goods sold. C. Income tax expense. D. Depreciation expense. AACSB: Reflective Thinking AICPA: FN Reporting 6-113 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
52.
Cost of goods sold equals:
A. Beginning inventory - net purchases + ending inventory. B. Beginning inventory - accounts payable - net purchases. C. Net purchases + ending inventory - beginning inventory. D. Beginning inventory + net purchases - ending inventory. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
53.
Baker Fine Foods has beginning inventory for the year of $12,000. During the year, Baker purchases inventory for $150,000 and ends the year with $20,000 of inventory. Baker will report cost of goods sold equal to:
A. $150,000. B. $158,000. C. $142,000. D. $170,000. Cost of goods sold = beginning inventory ($12,000) + purchases ($150,000) - ending inventory ($20,000) = $142,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold 6-114 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
54.
Tyler Toys has beginning inventory for the year of $18,000. During the year, Tyler purchases inventory for $230,000 and has cost of goods sold equal to $233,000. Tyler's ending inventory equals:
A. $15,000. B. $18,000. C. $21,000. D. $19,000. Ending inventory = beginning inventory ($18,000) + purchases ($230,000) - cost of goods sold ($233,000) = $15,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
55.
Beginning inventory is $40,000. Purchases of inventory during the year are $200,000. Ending inventory is $100,000. What is cost of goods sold?
A. $340,000. B. $240,000. C. $260,000. D. $140,000. $40,000 + $200,000 - $100,000 = $140,000
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
6-115 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
56.
Beginning inventory is $30,000. Purchases of inventory during the year are $50,000. Cost of goods sold is $60,000. What is ending inventory?
A. $20,000. B. $30,000. C. $10,000. D. $50,000. $30,000 + $50,000 - $60,000 = $20,000
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
57.
The type of income statement that classifies items as operating and nonoperating is the ______ income statement.
A. Consolidated B. Multiple-step C. Classified D. Single-step AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
6-116 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
58.
The type of income statement that reports a series of subtotals such as gross profit, operating income, and income before taxes is a ______ income statement.
A. Single-step B. Subtotaled C. Multiple-step D. Classified AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
59.
The primary distinction between operating activities and nonoperating activities in a multiple-step income statement is whether the activity is:
A. A large or small dollar amount. B. Part of primary business operations. C. Related to current versus long-term assets. D. Reported as a revenue or an expense. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
6-117 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
60.
The distinction between operating and nonoperating income relates to:
A. Continuity of income. B. Principal activities of the reporting entity. C. Consistency of income stream. D. Reliability of measurements. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
61.
Which of the following items may be classified as nonoperating revenues and expenses?
A. Interest expense. B. Loss on the sale of equipment. C. Interest revenue. D. All of the other answers are classified as nonoperating revenues and expenses. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
62.
Gross profit is calculated as net sales minus:
A. Nonoperating expenses and income tax expense. B. Operating expenses. C. Cost of goods sold. D. All of the other answers are subtracted from net sales. AACSB: Reflective Thinking AICPA: FN Reporting 6-118 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
63.
Ravens Inc. has net sales of $200,000, cost of goods sold of $120,000, selling expenses of $6,000, and nonoperating expenses of $2,000. What is the company's gross profit?
A. $76,000. B. $80,000. C. $74,000. D. $72,000. $200,000 - $120,000 = $80,000
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
6-119 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
64.
Given the information below, what is the gross profit? Sales revenue
$320,000
Accounts receivable
50,000
Ending inventory
100,000
Cost of goods sold
250,000
Sales Returns
20,000
A. $250,000. B. $70,000. C. $220,000. D. $50,000. Sales revenue ($320,000) - Sales returns ($20,000) - Cost of goods sold ($250,000) = $50,000.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
6-120 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
65.
Given the information in the table below, what is the company's gross profit? Sales revenue
$350,000
Accounts receivable
$280,000
Ending inventory
$230,000
Cost of goods sold
$180,000
Sales returns
$50,000
Sales discount
$20,000
A. $280,000. B. $170,000. C. $50,000. D. $100,000. Net sales = $350,000 - $50,000 - $20,000 = $280,000. Gross profit = $280,000 - $180,000 = $100,000.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
6-121 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
66.
LeGrand Corporation reported the following amounts in its income statement: Sales revenue
$440,000
Advertising expense
60,000
Interest expense
10,000
Salaries expense
55,000
Utilities expense
25,000
Income tax expense
45,000
Cost of goods sold
180,000
What was LeGrand's gross profit?
A. $260,000. B. $180,000. C. $220,000. D. $120,000. Gross profit = $440,000 - $180,000 = $260,000.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
6-122 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
67.
Wildwood, an outdoors clothing store, reports the following information for June: Sales
$104,000 Income tax
revenue
expense
Operating
22,000 Cost of goods
expenses
sold
Deferred
$15,000 Nonoperating
revenues
$11,000
65,000
12,000
revenues
What is Wildwood's gross profit for June?
A. $18,000. B. $39,000. C. $104,000. D. $17,000. Gross profit = $104,000 - $65,000 = $39,000.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
68.
Operating income is calculated as net sales minus.
A. Utilities expense. B. Salaries expense. C. Cost of goods sold. D. All of the other answers are subtracted from net sales to calculate operating income. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. 6-123 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Cost of Goods Sold
69.
Which measure reflects profitability from normal operations and a key performance measure for predicting the future profit-generating ability of a company?
A. Gross profit. B. Operating income. C. Income before income taxes. D. Net income. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
70.
Consider the following year-end information for Spitzer Corporation: Cost of goods sold
$420,000
Sales revenue
800,000
Nonoperating expenses
10,000
Operating expenses
170,000
Income tax expense
80,000
What amount will Spitzer report for operating income?
A. $200,000. B. $210,000. C. $380,000. D. $120,000. Operating income = $800,000 - $420,000 - $170,000 = $210,000.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation
6-124 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
71.
LeGrand Corporation reported the following amounts in its income statement: Sales revenue
$440,000
Advertising expense
60,000
Interest expense
10,000
Salaries expense
55,000
Utilities expense
25,000
Income tax expense
45,000
Cost of goods sold
180,000
What was LeGrand's operating income?
A. $120,000. B. $260,000. C. $110,000. D. $65,000. Operating income = $440,000 - $180,000 - ($60,000 + $55,000 + $25,000) = $120,000.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
6-125 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
72.
LeGrand Corporation reported the following amounts in its income statement: Sales revenue
$440,000
Advertising expense
60,000
Interest expense
10,000
Salaries expense
55,000
Utilities expense
25,000
Income tax expense
45,000
Cost of goods sold
180,000
What was LeGrand's net income?
A. $120,000. B. $60,000. C. $110,000. D. $65,000. Net income = $440,000 - $180,000 - ($60,000 + $55,000 + $25,000) - $10,000 - $45,000 = $65,000.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
73.
The inventory costing method that matches each unit of inventory with its actual cost is referred to as the _____ method.
A. Weighted-average. B. Specific identification. C. Actual cost. D. Matching unit. AACSB: Reflective Thinking 6-126 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Topic: Inventory Cost Methods
74.
A company is most likely to utilize the specific identification method if its inventory consists of:
A. Unique products. B. Very expensive products. C. A relatively small number of products. D. All of the other answers are reasons to utilize the specific identification method. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Topic: Inventory Cost Methods
75.
The inventory cost flow assumption that generally best matches the physical flow of inventory is:
A. FIFO. B. LIFO. C. Weighted-average. D. Lower of cost or net realizable value. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Topic: Inventory Cost Methods
6-127 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
76.
The inventory cost flow assumption that results in a random mixture of goods being included in the balance of inventory and cost of goods sold is:
A. FIFO. B. LIFO. C. Weighted-average. D. Lower of cost or net realizable value. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Topic: Inventory Cost Methods
77.
The inventory cost flow assumption that is least likely to match the physical flow of inventory for most companies is:
A. FIFO. B. LIFO. C. Weighted-average. D. Specific identification. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Topic: Inventory Cost Methods
6-128 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
78.
The following information relates to inventory for Shoeless Joe Inc. Date
Quantity
Price
20
$2
15
3
March 11 Sale
25
7
March 12 Purchase
20
4
March 1
Beginning Inventory
March 7
Purchase
At what amount would Shoeless report ending inventory using FIFO cost flow assumptions?
A. $55. B. $170. C. $110. D. $70. Ending inventory = ($3 × 10) + ($4 × 20) = $110.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Topic: Inventory Cost Methods
6-129 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
79.
The following information relates to inventory for Shoeless Joe Inc. Date
Quantity
Price
20
$2
15
3
March 11 Sale
25
7
March 12 Purchase
20
4
March 1
Beginning Inventory
March 7
Purchase
At what amount would Shoeless report gross profit using LIFO cost flow assumptions?
A. $105. B. $80. C. $175. D. $120. Sales revenue = $25 × 7 = $175. Cost of goods sold = ($4 × 20) + ($3 × 5) = $95. Gross profit = $175 - $95 = $80.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Topic: Inventory Cost Methods
6-130 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
80.
The following information relates to inventory for Shoeless Joe Inc. Date
Quantity
Price
20
$2
15
3
March 11 Sale
30
7
March 12 Purchase
15
6
March 1
Beginning Inventory
March 7
Purchase
At what amount would Shoeless report cost of goods sold using the weighted-average cost flow assumption? (Round your answer to the nearest dollar)
A. $110. B. $73. C. $70. D. $105. Total cost = [($2 × 20) + ($3 × 15) + ($6 × 15)] = $175. Total units = 20 + 15 + 15 = 50. Weighted-average = $175/50 = $3.50. Cost of goods sold = $3.50 × 30 = $105.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Topic: Inventory Cost Methods
6-131 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
81.
Inventory records for Dunbar Incorporated revealed the following:
Date
Transaction
Apr. 1
Beginning inventory
Apr. 20 Purchase
Number
Unit
of Units
Cost
500
$2.40
400
2.50
Dunbar sold 700 units of inventory during the month. Ending inventory assuming FIFO would be:
A. $500. B. $490. C. $470. D. $480. Ending inventory = 200 × $2.50 = $500.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Topic: Inventory Cost Methods
6-132 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
82.
Inventory records for Dunbar Incorporated revealed the following: Date
Transaction
Number of Units
Unit Cost
Apr. 1
Beginning inventory
500
$2.40
Apr. 20
Purchase
400
2.50
Dunbar sold 700 units of inventory during the month. Cost of goods sold assuming FIFO would be:
A. $1,730. B. $1,700. C. $1,720. D. $1,710. Cost of goods sold = (500 × $2.40) + (200 × $2.50) = $1,700.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Topic: Inventory Cost Methods
6-133 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
83.
Inventory records for Dunbar Incorporated revealed the following: Date
Transaction
Number of Units
Unit Cost
Apr. 1
Beginning inventory
500
$2.40
Apr. 20
Purchase
400
2.50
Dunbar sold 700 units of inventory during the month. Ending inventory assuming LIFO would be:
A. $500. B. $490. C. $470. D. $480. Ending inventory = 200 × $2.40 = $480.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Topic: Inventory Cost Methods
6-134 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
84.
Inventory records for Dunbar Incorporated revealed the following: Date
Transaction
Number of Units
Unit Cost
Apr. 1
Beginning inventory
500
$2.40
Apr. 20
Purchase
400
2.50
Dunbar sold 700 units of inventory during the month. Cost of goods sold assuming LIFO would be:
A. $1,730. B. $1,700. C. $1,720. D. $1,710. Cost of goods sold = (400 × $2.50) + (300 × $2.40) = $1,720.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Topic: Inventory Cost Methods
6-135 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
85.
Inventory records for Dunbar Incorporated revealed the following: Date
Transaction
Number of Units
Unit Cost
Apr. 1
Beginning inventory
500
$2.40
Apr. 20
Purchase
400
2.50
Dunbar sold 700 units of inventory during the month. Ending inventory assuming weighted-average cost would be (round weighted-average unit cost to four decimals and final answer to the nearest whole dollar):
A. $502. B. $490. C. $489. D. $480. Weighted-average cost = [(500 × $2.40) + (400 × $2.50)]/900 = $2.4444. Ending inventory = 200 × $2.4444 = $489 (rounded).
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Topic: Inventory Cost Methods
6-136 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
86.
Inventory records for Dunbar Incorporated revealed the following: Date
Transaction
Number of Units
Unit Cost
Apr. 1
Beginning inventory
500
$2.40
Apr. 20
Purchase
400
2.50
Dunbar sold 700 units of inventory during the month. Cost of goods sold assuming weighted-average cost would be (round weighted-average unit cost to four decimals and final answer to the nearest whole dollar):
A. $1,711. B. $1,700. C. $1,720. D. $1,708. Weighted-average cost = [(500 × $2.40) + (400 × $2.50)]/900 = $2.4444. Cost of goods sold = 700 × $2.4444 = $1,711 (rounded).
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Topic: Inventory Cost Methods
6-137 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
87.
Inventory records for Marvin Company revealed the following: Date
Transaction
Number of Units
Unit Cost
Mar. 1
Beginning inventory
1,000
$7.20
Mar. 10
Purchase
600
7.25
Mar. 16
Purchase
800
7.30
Mar. 23
Purchase
600
7.35
Marvin sold 2,300 units of inventory during the month. Ending inventory assuming FIFO would be:
A. $5,140. B. $5,080. C. $5,060. D. $5,050. Ending inventory = (100 × $7.30) + (600 × $7.35) = $5,140.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Topic: Inventory Cost Methods
6-138 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
88.
Inventory records for Marvin Company revealed the following: Date
Transaction
Number of Units
Unit Cost
Mar. 1
Beginning inventory
1,000
$7.20
Mar. 10
Purchase
600
7.25
Mar. 16
Purchase
800
7.30
Mar. 23
Purchase
600
7.35
Marvin sold 2,300 units of inventory during the month. Cost of goods sold assuming FIFO would be:
A. $16,800. B. $16,760. C. $16,540. D. $16,660. Cost of goods sold = (1,000 × $7.20) + (600 × $7.25) + (700 × $7.30) = $16,660.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Topic: Inventory Cost Methods
6-139 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
89.
Inventory records for Marvin Company revealed the following: Date
Transaction
Number of Units
Unit Cost
Mar. 1
Beginning inventory
1,000
$7.20
Mar. 10
Purchase
600
7.25
Mar. 16
Purchase
800
7.30
Mar. 23
Purchase
600
7.35
Marvin sold 2,300 units of inventory during the month. Ending inventory assuming LIFO would be:
A. $5,040. B. $5,055. C. $5,075. D. $5,135. Ending inventory = 700 × $7.20 = $5,040.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Topic: Inventory Cost Methods
6-140 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
90.
Inventory records for Marvin Company revealed the following: Date
Transaction
Number of Units
Unit Cost
Mar. 1
Beginning inventory
1,000
$7.20
Mar. 10
Purchase
600
7.25
Mar. 16
Purchase
800
7.30
Mar. 23
Purchase
600
7.35
Marvin sold 2,300 units of inventory during the month. Cost of goods sold assuming LIFO would be:
A. $16,800. B. $16,760. C. $16,540. D. $16,660. Cost of goods sold = (600 × $7.35) + (800 × $7.30) + (600 × $7.25) + (300 × $7.20) = $16,760.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Topic: Inventory Cost Methods
6-141 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
91.
Inventory records for Marvin Company revealed the following: Date
Transaction
Number of Units
Unit Cost
Mar. 1
Beginning inventory
1,000
$7.20
Mar. 10
Purchase
600
7.25
Mar. 16
Purchase
800
7.30
Mar. 23
Purchase
600
7.35
Marvin sold 2,300 units of inventory during the month. Ending inventory assuming weighted-average cost would be (round weighted-average unit cost to four decimals and final answer to the nearest whole dollar):
A. $5,087. B. $5,107. C. $5,077. D. $5,005. Weighted-average cost = [(1,000 × $7.20) + (600 × $7.25) + (800 × $7.30) + (600 × $7.35)]/3,000 = $7.2667. Ending inventory = 700 × $7.2667 = $5,087 (rounded).
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Topic: Inventory Cost Methods
6-142 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
92.
Inventory records for Marvin Company revealed the following: Date
Transaction
Number of Units
Unit Cost
Mar. 1
Beginning inventory
1,000
$7.20
Mar. 10
Purchase
600
7.25
Mar. 16
Purchase
800
7.30
Mar. 23
Purchase
600
7.35
Marvin sold 2,300 units of inventory during the month. Cost of goods sold assuming weighted-average cost would be (round weighted-average unit cost to four decimals and final answer to the nearest whole dollar):
A. $16,733. B. $17,408. C. $16,713. D. $16,089. Weighted-average cost = [(1,000 × $7.20) + (600 × $7.25) + (800 × $7.30) + (600 × $7.35)]/3,000 = $7.2667. Cost of goods sold = 2,300 × $7.2667 = $16,713 (rounded).
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Topic: Inventory Cost Methods
6-143 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
93.
The following information pertains to Julia & Company: March 1 Beginning inventory = 30 units @ $5 March 3 Purchased 15 units @ $4 March 9 Sold 25 units @ $8 What is the ending inventory balance for Julia & Company assuming that it uses FIFO?
A. $125. B. $100. C. $110. D. $85. Ending inventory = (15 × $4) + (5 × $5) = $85.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Topic: Inventory Cost Methods
6-144 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
94.
The following information pertains to Julia & Company: March 1 Beginning inventory = 30 units @ $5 March 3 Purchased 15 units @ $4 March 9 Sold 25 units @ $8 What is the cost of goods sold for Julia & Company assuming it uses LIFO?
A. $125. B. $100. C. $110. D. $85. Cost of goods sold = (15 × $4) + (10 × $5) = $110.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Topic: Inventory Cost Methods
6-145 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
95.
Consider the following inventory transactions for September: Beginning inventory
15 units @ $3.00
Purchase on September 12
20 units @ $3.50
Purchased on September 23
10 units @ $4.00
For the month of September, the company sold 35 units. What is cost of goods sold under the weighted-average cost method (round the weighted-average unit cost to four decimals and final answer to the nearest whole dollar)?
A. $121. B. $116. C. $124. D. $131. Weighted-average cost = [(15 × $3.00) + (20 × $3.50) + (10 × $4.00)]/45 = 3.4444. Cost of goods sold = 35 × $3.4444 = $121 (rounded).
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Topic: Inventory Cost Methods
96.
FIFO is considered a balance sheet approach for reporting inventory because it:
A. Better approximates the value of ending inventory. B. Always results in a lower amount of inventory being reported. C. Better approximates inventory cost necessary to generate revenue. D. Always results in a higher amount of inventory being reported. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium
6-146 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
97.
Which inventory method is better described as having a balance sheet focus and why is it considered as such?
A. FIFO; better approximates the value of ending inventory. B. LIFO; better approximates the value of ending inventory. C. LIFO; better approximates inventory cost necessary to generate revenue. D. FIFO; better approximates inventory cost necessary to generate revenue. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
98.
LIFO is considered an income statement approach for reporting inventory because it:
A. Always results in a higher amount of net income being reported. B. Better approximates the value of ending inventory. C. Better approximates inventory cost necessary to generate revenue. D. Always results in a lower amount of net income being reported. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
6-147 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
99.
Which inventory method is better described as having an income statement focus and why is it considered as such?
A. FIFO; better approximates the value of ending inventory. B. LIFO; better approximates the value of ending inventory. C. LIFO; better approximates inventory cost necessary to generate revenue. D. FIFO; better approximates inventory cost necessary to generate revenue. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
100.
Which inventory cost flow assumption more realistically matches the current cost of inventory with current sales revenue?
A. FIFO. B. LIFO. C. Weighted-average. D. Lower of cost and net realizable value. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
6-148 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
101.
The choice of inventory cost flow assumptions affects which of the following amounts?
A. Inventory. B. Cost of goods sold. C. Gross profit. D. All of the other answers are affected by the inventory cost flow assumption. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
102.
In a period when inventory costs are rising, the inventory method that most likely results in the highest ending inventory is:
A. Lower of cost and net realizable value. B. Weighted-average cost. C. FIFO. D. LIFO. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
6-149 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
103.
In a period when inventory costs are falling, the lowest taxable income is most likely reported by using the inventory method of:
A. Weighted-average. B. LIFO. C. Moving-average. D. FIFO. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
104.
Which of the following is true regarding LIFO and FIFO?
A. In a period of decreasing costs, LIFO results in lower total assets than FIFO. B. In a period of decreasing costs, LIFO results in lower net income than FIFO. C. In a period of rising costs, LIFO results in lower net income than FIFO. D. The amount reported for COGS is based on net realizable value of inventory if LIFO is used. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
6-150 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
105.
During periods when inventory costs are rising, cost of goods sold will most likely be:
A. Higher under FIFO than LIFO. B. Higher under FIFO than average cost. C. Lower under average cost than LIFO. D. Lower under LIFO than FIFO. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
106.
In a period of rising costs, which inventory valuation method would a company likely choose if they want to have the highest possible balance of inventory on the balance sheet?
A. Weighted-average cost. B. FIFO. C. LIFO. D. Periodic. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
6-151 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
107.
During periods when inventory costs are rising, ending inventory will most likely be:
A. Greater under LIFO than FIFO. B. Less under average cost than LIFO. C. Greater under average cost than FIFO. D. Greater under FIFO than LIFO. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
108.
The LIFO conformity rule states that if LIFO is used for:
A. One class of inventory, it must be used for all classes of inventory. B. Tax purposes, it must be used for financial reporting. C. One company in an affiliated group, it must be used by all companies in an affiliated group. D. Domestic companies, it must be used by foreign partners. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
109.
The primary reason for the popularity of LIFO is that it gives:
A. Better matching of physical flow and cost flow. B. A lower income tax obligation when inventory costs are rising. C. Simplified recordkeeping. D. A simpler method to apply. AACSB: Reflective Thinking 6-152 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
110.
Which of the following is true concerning inventory cost flow assumptions?
A. LIFO produces higher net income than FIFO in a period of rising costs. B. FIFO is an income statement focus. C. LIFO is a balance sheet focus. D. None of the other answers are true. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
111.
Which of the following is incorrect regarding LIFO and FIFO?
A. In a period of decreasing costs, FIFO will result in lower total assets than LIFO. B. In a period of increasing costs, net income will be greater under FIFO than LIFO. C. In a period of increasing costs, assets will be greater under LIFO than FIFO. D. In a period of decreasing costs, LIFO will result in greater net income than FIFO. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
6-153 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
112.
Which inventory cost flow assumption generally results in the highest reported amount for cost of goods sold when inventory costs are falling?
A. FIFO. B. LIFO. C. Weighted-average cost. D. Straight-line. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
113.
The disclosure that shows the difference in the cost of inventory between LIFO and FIFO is referred to as the:
A. FIFO adjustment. B. Inventory allowance. C. LIFO reserve. D. Net realizable value. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
6-154 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
114.
Which of the following considerations may influence a manager's choice of the inventory cost flow assumption for a company that experiences rising prices?
A. Compensation/bonus tied to reported income. B. Meeting earnings targets. C. Increase stock prices. D. All of the other answers are considerations for the choice of inventory cost flow assumptions. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
115.
A perpetual inventory system measures cost of goods sold by:
A. Estimating the amount of inventory sold. B. Making entries to the inventory account for each purchase and sale. C. Counting inventory at the end of the period. D. Debiting cost of goods sold for all purchases of inventory. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Topic: Perpetual Inventory System
6-155 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
116.
Using a perpetual inventory system, the purchase of inventory on account is recorded with a:
A. Debit to Inventory. B. Debit to Cost of Goods Sold. C. Debit to Accounts Payable. D. Credit to Sales Revenue. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Topic: Perpetual Inventory System
117.
Using a perpetual inventory systems, the sale of inventory on account is recorded with a:
A. Debit to Cost of Goods Sold. B. Credit to Inventory. C. Credit to Sales Revenue. D. All of the other answers are recorded with the sale of inventory on account. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Topic: Perpetual Inventory System
6-156 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
118.
Using a perpetual inventory system, the entry to record the return of inventory previously purchased on account includes a:
A. Debit to Cost of Goods Sold. B. Debit to Inventory. C. Debit to Accounts Payable. D. Credit to Sales Returns. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Topic: Perpetual Inventory System
6-157 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
119.
On May 1, Ace Bonding Company purchased inventory costing $2,000 on account with terms 2/10, n/30. On May 18, Ace pays for this inventory and records which of the following using a perpetual inventory system? A.
Accounts Payable
2,000
Cash B.
2,000
Accounts Payable Inventory
1,960 40
Cash C.
2,000
Accounts Payable
2,000
Inventory
40
Cash D.
1,960
Cash
2,000
Accounts Payable
2,000
A. Option A B. Option B C. Option C D. Option D There is no purchase discount because payment is not within the 10-day discount period.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Topic: Perpetual Inventory System
6-158 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
120.
Davis Hardware Company uses a perpetual inventory system. How should Davis record the return of inventory previously purchased on account for $200? A.
Inventory
200
Accounts Payable B.
Accounts Payable
200 200
Inventory C.
200
Purchase Returns
200
Accounts Payable D.
Accounts Payable Purchase Returns
200 200 200
A. Option A B. Option B C. Option C D. Option D AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Topic: Perpetual Inventory System
6-159 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
121.
On May 1, Ace Bonding Company purchased inventory costing $2,000 on account with terms 2/10, n/30. On May 8, Ace pays for this inventory and records which of the following using a perpetual inventory system? A.
Accounts Payable
2,000
Cash B.
2,000
Accounts Payable Inventory
1,960 40
Cash C.
2,000
Accounts Payable
2,000
Inventory
40
Cash D.
1,960
Cash
2,000
Accounts Payable
2,000
A. Option A B. Option B C. Option C D. Option D Purchase discount = $2,000 × 2% = $40.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Topic: Perpetual Inventory System
6-160 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
122.
In a perpetual inventory system, the purchase of inventory is debited to:
A. Purchases. B. Cost of Goods Sold. C. Inventory. D. Accounts Payable. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Topic: Perpetual Inventory System
123.
In a perpetual inventory system, the entry at the time of a sale to record the cost of the inventory sold includes a:
A. Debit to Accounts Receivable. B. Credit to Cost of Goods Sold. C. Debit to Cost of Goods Sold. D. Not recorded at the time of the sale. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Topic: Perpetual Inventory System
6-161 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
124.
Good Inc., sold inventory for $1,200 that was purchased for $700. Good records which of the following when it sells inventory using a perpetual inventory system?
A. No entry is required for cost of goods sold and inventory. B. Debit Cost of Goods Sold $700; credit Inventory $700. C. Debit Cost of Goods Sold $1,200; credit Inventory $1,200. D. Debit Inventory $700; credit Cost of Goods Sold $700. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Topic: Perpetual Inventory System
6-162 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
125.
Davis Hardware Company uses a perpetual inventory system. How should Davis record the sale of inventory costing $620 for $960 on account? A.
Inventory
620
Cost of Goods Sold Sales Revenue
620 960
Accounts Receivable B.
Accounts Receivable
960 960
Sales Revenue Cost of Goods Sold
960 620
Inventory C.
620
Inventory
620
Gain
340
Sales Revenue D.
Accounts Receivable
960 960
Sales Revenues
620
Gain
340
A. Option A B. Option B C. Option C D. Option D AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Topic: Perpetual Inventory System
6-163 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
126.
Ace Bonding Company purchased inventory on account. The inventory costs $2,000 and is expected to sell for $3,000. How should Ace record the purchase using a perpetual inventory system? A.
Inventory
2,000
Accounts Payable B.
2,000
Cost of Goods Sold
2,000
Deferred Revenue
1,000
Sales Revenue C.
Cost of Goods Sold
3,000 2,000
Accounts Payable D.
2,000
Cost of Goods Sold
2,000
Gain
1,000
Accounts Payable
3,000
A. Option A B. Option B C. Option C D. Option D AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Topic: Perpetual Inventory System
127.
Merchandise sold FOB destination indicates that:
A. The seller holds title until the merchandise is received at the buyer's location. B. The merchandise has not yet been shipped. C. The merchandise will not be shipped until payment has been received. D. The seller transfers title to the buyer once the merchandise is shipped. AACSB: Reflective Thinking 6-164 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Topic: Perpetual Inventory System
128.
Merchandise sold FOB shipping point indicates that:
A. The seller holds title until the merchandise is received at the buyer's location. B. The merchandise has not yet been shipped. C. The merchandise will not be shipped until payment has been received. D. The seller transfers title to the buyer once the merchandise is shipped. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Topic: Perpetual Inventory System
129.
If A sells to B, and B obtains title while goods are in transit, the goods were shipped _______. If C sells to D, and C maintains title until the goods arrive at D's door then the goods were shipped _______.
A. FOB shipping point; FOB destination B. FOB destination; FOB shipping point C. FOB destination; FOB destination D. FOB shipping point; FOB shipping point AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Topic: Perpetual Inventory System
6-165 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
130.
Ending inventory is equal to the cost of items on hand plus:
A. Items in transit sold FOB shipping point. B. Sales discounts. C. Items in transit sold FOB destination. D. Advertising expense. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Topic: Perpetual Inventory System
131.
Suppose Company A places an order with Company B on May 12. On May 14, Company B ships the ordered goods to Company A with terms FOB destination. The goods arrive at Company A on May 17. Company A begins selling the goods to customers on May 19 and pays Company B on May 20. When would Company B record the sale of goods to Company A?
A. May 12. B. May 14. C. May 19. D. May 17. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Topic: Perpetual Inventory System
6-166 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
132.
Kelton Inc. purchases inventory for $2,000 and incurs shipping costs of $100 for the goods to be delivered. To record this transaction, the company debits Inventory for $2,000, debits Selling Expenses for $100, and credits Cash for $2,100. Which of the following statements is correct?
A. All accounts are accurately stated. B. Assets are understated. C. Net income is overstated. D. Revenues are understated. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Topic: Perpetual Inventory System
133.
The inventory method that will always produce the same amount for cost of goods sold in a periodic inventory system as in a perpetual inventory system would be:
A. FIFO. B. LIFO. C. Weighted average. D. Each method always produces a different amount. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Learning Objective: 06-08 Record inventory transactions using a periodic inventory system. Topic: Perpetual Inventory System Topic: Recording Inventory Transactions Using a Periodic Inventory System
6-167 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
134.
The primary difference between the periodic and perpetual inventory systems is:
A. The reported amount of ending inventory is higher under the periodic system. B. The perpetual system maintains a continual record of inventory transactions, whereas the periodic system records these transactions only at the end of the period. C. The reported amount of sales revenue is higher under the periodic inventory system. D. The reported amount of cost of goods sold is higher under the perpetual inventory system. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Learning Objective: 06-08 Record inventory transactions using a periodic inventory system. Topic: Perpetual Inventory System Topic: Recording Inventory Transactions Using a Periodic Inventory System
135.
In accounting for inventory, net realizable value equals:
A. Estimated selling price less expected returns by customers. B. Original purchase cost minus the estimated profit on the sale of inventory. C. Estimated selling price less any costs of completion, disposal, and transportation. D. Estimated cost to replace the inventory. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Topic: Lower of Cost and Net Realizable Value
6-168 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
136.
The lower of cost and net realizable value rule causes losses in the value of inventory to be recognized in the period when:
A. The inventory is purchased. B. Cash collection from the customer fails to occur. C. The inventory is sold. D. The value of inventory declines below cost. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Topic: Lower of Cost and Net Realizable Value
137.
The lower of cost and net realizable value method for inventory was developed to:
A. Avoid reporting inventory at an amount that exceeds the benefits it provides. B. Provide an alternative to the FIFO, LIFO, and weighted-average methods. C. Prevent the company from selling the inventory below its original cost. D. Prevent the company from selling inventory to customers who are not likely to pay. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Topic: Lower of Cost and Net Realizable Value
6-169 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
138.
Niva Company has the following information for its inventories A, B, C, and D: Historical
Net Realizable
Quantity
Cost
Value
A
15
20
25
B
20
35
30
C
40
25
40
D
25
50
35
The necessary adjustment associated with the lower of cost and net realizable value would be: A.
Inventory
675
Cost of Goods Sold B.
Cost of Goods Sold
675 675
Inventory C.
Inventory
675 475
Cost of Goods Sold D.
Cost of Goods Sold Inventory
475 475 475
A. Option A B. Option B C. Option C D. Option D Need to reduce inventory cost to the lower net realizable value for items B and D. (20 × $5) + (25 × $15) = $475.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Topic: Lower of Cost and Net Realizable Value 6-170 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
139.
On April 1, Robert LLC purchased two units of inventory, A and B. The cost of unit A was $650, and the cost of unit B was $625. On April 30, Robert LLC had not sold the inventory. The net realizable value of unit A was now $685 while the net realizable value of unit B was $550. The adjustment associated with the lower of cost and net realizable value on April 30 will be: A.
Cost of Goods Sold
40
Inventory B.
Inventory
40 40
Cost of Goods Sold C.
Cost of Goods Sold
40 75
Inventory D.
Inventory
75 75
Cost of Goods Sold
75
A. Option A B. Option B C. Option C D. Option D Need to reduce inventory cost to the lower net realizable value for unit B. $625 - $550 = $75.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Topic: Lower of Cost and Net Realizable Value
6-171 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
140.
Consider the following information pertaining to OldWest's inventory: Net Realizable Product
Quantity
Cost
Value
Revolvers
16
$120
$150
Spurs
23
27
22
Hats
12
56
40
At what amount should OldWest report its inventory?
A. $3,213. B. $3,386. C. $2,996. D. $2,906. (16 × $120) + (23 × $22) + (12 × $40) = $2,906.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Topic: Lower of Cost and Net Realizable Value
141.
Under the principle of lower of cost and net realizable value, when a company has 10 units of inventory A with net realizable value of $50 and a cost of $60, what is the adjustment?
A. Debit Inventory $100; credit Cost of Goods Sold $100. B. Debit Inventory $500; credit Cost of Goods Sold $500. C. Debit Cost of Goods Sold $100; credit Inventory $100. D. Debit Cost of Goods Sold $500; credit Inventory $500. Need to reduce inventory cost to the lower net realizable value. 10 × $10 = $100
AACSB: Analytical Thinking AICPA: FN Measurement
6-172 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Topic: Lower of Cost and Net Realizable Value
142.
Northern Town Equipment has four types of products in its inventory. Northern applies the rules under lower of cost and net realizable value to its inventory at the end of each year as shown below: Net Realizable Product
Quantity
Cost
Value
A
15
$7
$8
B
10
15
14
C
20
8
6
D
15
11
10
The year-end adjustment based upon the information above would include a:
A. Debit to Cost of Goods Sold $65. B. Credit to Inventory $50. C. Debit to Inventory $65. D. Debit to Cost of Goods Sold $50. Product B = ($15 - $14) × 10 = $10. Product C = ($8 - $6) × 20 = $40. Product D = ($11 - $10) × 15 = $15. Total adjustment to cost of goods sold = $10 + $40 + $15 = $65.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Topic: Lower of Cost and Net Realizable Value
6-173 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
143.
At the end of a reporting period, Gamble Corporation determines that its ending inventory has a cost of $300,000 and a net realizable value of $230,000. What would be the effect(s) of the adjustment to write down inventory to net realizable value?
A. Decrease total assets. B. Decrease net income. C. Increase retained earnings. D. Decrease total assets and net income. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Topic: Lower of Cost and Net Realizable Value
144.
Using the information below, determine the ending inventory value applying the lower of cost and net realizable value. Inventory
Net Realizable
Item
Quantity
Cost
Value
Cutlets
200
$12
$14
Chops
400
$16
$14
Shanks
300
$15
$12
A. $13,300. B. $12,000. C. $11,600. D. $13,700. Cutlets = $12 × 200 = $2,400. Chops = $14 × 400 = $5,600. Shanks = $12 × 300 = $3,600. Ending inventory = $2,400 + $5,600 + $3,600 = $11,600.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation 6-174 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Topic: Lower of Cost and Net Realizable Value
145.
What effect would an adjustment to record inventory at the lower of cost and net realizable value have on the company's financial statements?
A. An increase to assets. B. An increase to stockholders' equity. C. A decrease to revenue. D. An increase to expense. AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Topic: Lower of Cost and Net Realizable Value
146.
The practice of using the lower of cost and net realizable value to evaluate inventory reflects which of the following accounting principles?
A. Matching principle. B. Revenue recognition. C. Conservatism. D. Materiality. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Topic: Lower of Cost and Net Realizable Value
6-175 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
147.
After evaluating the lower of cost and net realizable value of inventory, the accountant prepares a year-end adjustment. That adjustment would:
A. Decrease the company's cost of goods sold. B. Reduce the company's stockholders' equity. C. Increase the company's inventory. D. Increase the company's total assets. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Topic: Lower of Cost and Net Realizable Value
148.
The inventory turnover ratio is measured as:
A. Cost of goods sold divided by average inventory. B. Average inventory divided by gross profit. C. Gross profit divided by net sales. D. Net sales divided by average inventory. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Topic: Best Buy vs. Tiffany’s
149.
The inventory turnover ratio measures:
A. The portion of inventory that becomes obsolete each period. B. How many times the company purchases inventory during the current reporting period. C. The times per period the average inventory balance is sold. D. How many days it takes to collect its sales of inventory sold on account. AACSB: Reflective Thinking 6-176 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Topic: Best Buy vs. Tiffany’s
150.
Martha Inc.'s sales equal $60,000 and cost of goods sold equals $20,000. Its beginning inventory was $1,600 and its ending inventory is $2,400. Martha's inventory turnover ratio equals:
A. 5 times. B. 10 times. C. 20 times. D. 30 times. $20,000/[($1,600 + $2,400)/2] = 10 times
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Topic: Best Buy vs. Tiffany’s
151.
Lebaron Co.'s beginning inventory is $2,000 and its ending inventory is $1,000. The inventory turnover is 6 times. Cost of goods sold for the year must equal:
A. $9,000. B. $6,000. C. $12,000. D. $18,000. $X/[($2,000 + $1,000)/2] = 6 times $X = $9,000
AACSB: Analytical Thinking
6-177 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Topic: Best Buy vs. Tiffany’s
152.
Truman Co. sells a large number of common household items, while Stapleton sells a small number of expensive items. The two companies report the same dollar amount for ending inventory and gross profit for the year. Which of the following is most likely true?
A. Truman has a higher inventory turnover ratio and higher gross profit ratio. B. Truman has a higher inventory turnover ratio, and Stapleton has a higher gross profit ratio. C. Truman has a higher inventory turnover ratio, and Stapleton has a lower gross profit ratio. D. Stapleton has a higher inventory turnover ratio and higher gross profit ratio. AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Topic: Best Buy vs. Tiffany’s
6-178 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
153.
Consider the following inventory data for two companies: Nichols Inc., Winters Inc., Beginning inventory
$120,000
$150,000
Ending inventory
80,000
100,000
Purchases
240,000
310,000
Which of these companies had the higher inventory turnover ratio?
A. Nichols. B. Winters. C. The ratios are the same for both companies. D. Cannot determine with the information given. Nichols' cost of goods sold = $120,000 + $240,000 - $80,000 = $280,000. Nichols' inventory turnover ratio = $280,000/[($120,000 + $80,000)/2] = 2.80. Winters' cost of goods sold = $150,000 + $310,000 - $100,000 = $360,000. Winters' inventory turnover ratio = $360,000/[($150,000 + $100,000)/2] = 2.88.
AACSB: Analytical Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Topic: Best Buy vs. Tiffany’s
6-179 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
154.
The following balances come from the financial statements of Way Industries: Sales revenue
$850,000
Accounts receivable
$280,000
Beginning inventory
$50,000
Ending inventory
$30,000
Net purchases
$460,000
Sales returns
$50,000
Sales discount
$20,000
Given this information, what is the company's inventory turnover ratio?
A. 21.25. B. 28.33. C. 16.0. D. 12.0. Inventory turnover ratio = cost of goods sold ($480,000)/average inventory ($40,000) = 12.0. Cost of goods sold = beginning inventory + net purchases - ending inventory.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Topic: Best Buy vs. Tiffany’s
6-180 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
155.
Company A is identical to Company B in every regard except that Company A uses FIFO and Company B uses LIFO. In an extended period of rising inventory costs, which of the following is true of Company A compared to Company B?
A. Company A's gross profit is lower and inventory turnover is lower. B. Company A's gross profit is higher and inventory turnover is higher. C. Company A's gross profit is higher and inventory turnover is lower. D. Company A's gross profit is lower and inventory turnover is higher. AACSB: Analytical Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Topic: Best Buy vs. Tiffany’s
156.
Anthony Corporation reported the following amounts for the year: Net sales
$296,000
Cost of goods sold
138,000
Average inventory
50,000
Anthony's inventory turnover ratio is:
A. 2.42. B. 2.76. C. 3.21. D. 2.14. Inventory turnover ratio = cost of goods sold ($138,000)/average inventory ($50,000) = 2.76.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard
6-181 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Topic: Best Buy vs. Tiffany’s
157.
Anthony Corporation reported the following amounts for the year: Net sales
$296,000
Cost of goods sold
138,000
Average inventory
50,000
Anthony's average days in inventory is (round to the nearest whole day):
A. 170 days. B. 114 days. C. 132 days. D. 151 days. Average days in inventory = 365/inventory turnover ratio (2.76) = 132 (rounded).
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Difficulty: 3 Hard Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Topic: Best Buy vs. Tiffany’s
6-182 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
158.
Consider the following inventory data: Beginning inventory
$150,000
Ending inventory
100,000
Purchases
310,000
What is the average days in inventory for the year?
A. 126.7 days. B. 101.4 days. C. 152.0 days. D. 111.7 days. Cost of goods sold = $150,000 + $310,000 - $100,000 = $360,000. Inventory turnover ratio = $360,000/[($150,000 + $100,000)/2] = 2.88. Average days in inventory = 365/2.88 = 126.7 days (rounded).
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Topic: Best Buy vs. Tiffany’s
159.
The gross profit ratio measures:
A. The ratio of net income to net sales. B. How quickly the company receives inventory from its suppliers. C. The amount by which the sale of inventory exceeds its cost per dollar of sales. D. How many times during the year a company sells its average inventory balance. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Topic: Best Buy vs. Tiffany’s 6-183 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
160.
Which of the following would increase the gross profit ratio?
A. The company reduces operating expenses. B. The cost of inventory increases. C. The number of units sold increases. D. The sales price of a product increases by a higher percentage than does its cost of goods sold. AACSB: Analytical Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Topic: Best Buy vs. Tiffany’s
161.
The gross profit ratio will typically be higher for companies that:
A. Collect cash more quickly from customers. B. Purchase inventory more frequently during the year. C. Sell products that are more highly specialized. D. Sell a greater number of units. AACSB: Analytical Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Topic: Best Buy vs. Tiffany’s
6-184 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
162.
Nu Company reported the following data for its first year of operations: Net sales
$2,800
Cost of goods sold
1,680
Operating expenses
880
Ending inventories
820
What is Nu's gross profit ratio?
A. 80%. B. 49%. C. 40%. D. 5%. [Net sales ($2,800) - cost of goods sold ($1,680)]/net sales ($2,800) = 0.40.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Topic: Best Buy vs. Tiffany’s
6-185 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
163.
Anthony Corporation reported the following amounts for the year: Net sales
$296,000
Cost of goods sold
138,000
Average inventory
50,000
Anthony's gross profit ratio is:
A. 53.4%. B. 51.9%. C. 50.3%. D. 46.6%. Gross profit ratio = gross profit ($296,000 - $138,000)/net sales ($296,000) = 53.4% (rounded).
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Topic: Best Buy vs. Tiffany’s
164.
In a periodic inventory system, the purchase of inventory is debited to:
A. Purchases. B. Cost of goods sold. C. Inventory. D. Accounts payable. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-08 Record inventory transactions using a periodic inventory system. Topic: Recording Inventory Transactions Using a Periodic Inventory System
6-186 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
165.
Northwest Fur Co. started the year with $94,000 of merchandise inventory on hand. During the year, $400,000 in merchandise was purchased on account with credit terms of 1/15, n/45. All discounts were taken. Northwest paid freight-in charges of $7,500. Merchandise with an invoice amount of $5,000 was returned for credit. Cost of goods sold for the year was $380,000. What is ending inventory?
A. $112,490. B. $112,550. C. $116,500. D. $120,300. Beginning inventory ($94,000) + purchases ($400,000) + freight ($7,500) - purchase returns ($5,000) - purchase discounts ($3,950) - cost of goods sold ($380,000) = $112,550. Purchase discounts = ($400,000 - $5,000) × 1% = $3,950.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-08 Record inventory transactions using a periodic inventory system. Topic: Recording Inventory Transactions Using a Periodic Inventory System
6-187 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
166.
On May 1, Ace Bonding Company purchased inventory costing $2,000 on account with terms 2/10, n/30. On May 18, Ace pays for this inventory and records which of the following using a periodic inventory system? A.
Accounts Payable
2,000
Cash B.
2,000
Accounts Payable
1,960
Purchase Discounts
40
Cash C.
2,000
Accounts Payable
2,000
Purchase Discounts
40
Cash D.
1,960
Cash
2,000
Accounts Payable
2,000
A. Option A B. Option B C. Option C D. Option D There is no purchase discount because payment is not within the 10-day discount period.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-08 Record inventory transactions using a periodic inventory system. Topic: Recording Inventory Transactions Using a Periodic Inventory System
6-188 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
167.
On May 1, Ace Bonding Company purchased inventory costing $2,000 on account with terms 2/10, n/30. On May 8, Ace pays for this inventory and records which of the following using a periodic inventory system? A.
Accounts Payable
2,000
Cash B.
2,000
Accounts Payable
1,960
Purchase Discounts
40
Cash C.
2,000
Accounts Payable
2,000
Purchase Discounts
40
Cash D.
1,960
Cash
2,000
Accounts Payable
2,000
A. Option A B. Option B C. Option C D. Option D Purchase discount = $2,000 × 2% = $40.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-08 Record inventory transactions using a periodic inventory system. Topic: Recording Inventory Transactions Using a Periodic Inventory System
6-189 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
168.
Ace Bonding Company purchased inventory on account. The inventory costs $2,000 and is expected to sell for $3,000. How should Ace record the purchase using a periodic inventory system? A.
Purchases
2,000
Accounts Payable B.
2,000
Cost of Goods Sold
2,000
Deferred Revenue
1,000
Sales Revenue C.
Cost of Goods Sold
3,000 2,000
Accounts Payable D.
2,000
Cost of Goods Sold
2,000
Gain
1,000
Accounts Payable
3,000
A. Option A B. Option B C. Option C D. Option D AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-08 Record inventory transactions using a periodic inventory system. Topic: Recording Inventory Transactions Using a Periodic Inventory System
6-190 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
169.
Davis Hardware Company uses a periodic inventory system. How should Davis record the sale of inventory costing $620 for $960 on account? A.
Cost of Goods Sold
620
Purchases
620
Accounts Receivable
960
Sales Revenue B.
Accounts Receivable
960 960
Sales Revenue C.
960
Purchases
620
Gain
340
Sales Revenue D.
Accounts Receivable
960 960
Sales Revenues
620
Gain
340
A. Option A B. Option B C. Option C D. Option D AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-08 Record inventory transactions using a periodic inventory system. Topic: Recording Inventory Transactions Using a Periodic Inventory System
6-191 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
170.
Davis Hardware Company uses a periodic inventory system. How should Davis record the return of inventory previously purchased on account for $200? A.
Inventory
200
Accounts Payable B.
200
Accounts Payable
200
Inventory C.
200
Purchase Returns
200
Accounts Payable D.
200
Accounts Payable
200
Purchase Returns
200
A. Option A B. Option B C. Option C D. Option D AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-08 Record inventory transactions using a periodic inventory system. Topic: Recording Inventory Transactions Using a Periodic Inventory System
171.
In a periodic inventory system, the entry at the time of a sale to record the cost of inventory sold includes a:
A. Debit to Accounts Receivable. B. Credit to Cost of Goods Sold. C. Debit to Cost of Goods Sold. D. Not recorded at this time of the sale. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand 6-192 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 2 Medium Learning Objective: 06-08 Record inventory transactions using a periodic inventory system. Topic: Recording Inventory Transactions Using a Periodic Inventory System
172.
Good Inc., sold inventory for $1,200 that was purchased for $700. Good records which of the following when it sells inventory using a periodic inventory system?
A. No entry is required for cost of goods sold and inventory. B. Debit Cost of Goods Sold $700; credit Inventory $700. C. Debit Cost of Goods Sold $1,200; credit Inventory $1,200. D. Debit Inventory $700; credit Cost of Goods Sold $700. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-08 Record inventory transactions using a periodic inventory system. Topic: Recording Inventory Transactions Using a Periodic Inventory System
173.
Suppose that Hastings Corporation overstates its ending inventory for 2018. What effect will this have on the reported amount of cost of goods sold for 2018?
A. Overstate cost of goods sold. B. Understate cost of goods sold. C. Have no effect on cost of goods sold. D. Cannot be determined given the information provided. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 06-09 Determine the financial statement effects of inventory errors. Topic: Inventory Errors
6-193 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
174.
Bill Inc.'s correct ending balance for the inventory account at the end of 2018 should be $5,000, but the company incorrectly stated it as $3,000. In 2019, Bill correctly recorded its ending balance of the inventory account. Which one of the following is true?
A. Gross profit is overstated by $2,000 in 2018. B. Retained earnings are understated by $2,000 in 2019. C. Gross profit is overstated by $2,000 in 2019. D. Cost of goods sold is understated by $2,000 in 2018. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 06-09 Determine the financial statement effects of inventory errors. Topic: Inventory Errors
175.
If a company overstates its ending balance of inventory in year 1 and it records inventory correctly in year 2, which one of the following is true?
A. Net income is overstated in year 2. B. Cost of goods sold is overstated in year 1. C. Net income is understated in year 1. D. Retained earnings is overstated in year 1. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 06-09 Determine the financial statement effects of inventory errors. Topic: Inventory Errors
6-194 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
176.
If a company understates its ending balance of inventory in year 1 and it records inventory correctly in year 2, which one of the following is true?
A. Net income is overstated in year 1. B. Cost of goods sold is overstated in year 2. C. Net income is understated in year 2. D. Retained earnings is understated in year 2. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 06-09 Determine the financial statement effects of inventory errors. Topic: Inventory Errors
177.
If a company understates its count of ending inventory in Year 1, which of the following is true?
A. Costs of goods sold is understated at the end of Year 1. B. Profit is correct in Year 2. C. The balance of retained earnings is overstated at the end of Year 1. D. The balance of retained earnings is correct at the end of Year 2. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 06-09 Determine the financial statement effects of inventory errors. Topic: Inventory Errors
Matching Questions
6-195 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
178.
Match each term with its description.
Products that have started the production process 1. Finished goods
but are not yet complete at the end of the period.
5
Companies that purchase inventories that are 2. Raw materials
primarily in finished form for resale to customers.
7
Inventory items for which the manufacturing 3. Service companies
process is complete.
1
Cost of components that will become part of the finished product but have not yet been used in 4. Manufacturing companies
production.
2
Companies that produce the inventories they sell, rather than buying them from suppliers in finished 5. Work-in-process inventory
form.
4
Companies that earn revenues by providing services to their customers rather than selling 6. Merchandise inventory
inventory.
3
Inventory that has been purchased in its finished 7. Merchandising companies
form but has not yet been sold to customers.
6
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-01 Trace the flow of inventory costs from manufacturing companies to merchandising companies. Topic: Inventory
6-196 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
179.
Match each term used in a multiple-step income statement with its description.
Amount recorded from the sale of products and 1. Nonoperating expenses
services to customers.
7
Amount of profit after including nonoperating 2. Cost of goods sold
revenues and expenses.
8
Expenses arising from activities that are not part 3. Gross profit 4. Operating income
of a company's primary operations.
1
Cost of inventory sold during the period.
2
Profit from normal operations that is a key 5. Net income
performance measure for predicting future profit.
4
All revenues minus all expenses.
5
6. Operating expenses
Expenses arising from activities that are part of 7. Sales revenue
a company's normal operations.
6
Profit most directly related to the sale of 8. Income before income taxes
inventory.
3
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
180.
Match each inventory method with its definition.
Assume inventory sold for the year includes the items 1. LIFO 2. Specific Identification
that were purchased first.
3
Ending inventory represents the actual units not sold during the year.
2
Assume ending inventory for the year includes the items 3. FIFO
that were purchased first.
1
Assume ending inventory for the year includes a random 4. Weighted average
mixture of all goods available for sale.
4
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium 6-197 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Topic: Inventory Cost Methods
181.
Match each term related to inventory methods with its description.
Results in higher ending inventory during periods of 1. LIFO
rising prices.
5
LIFO must be used for financial reporting if elected for 2. LIFO reserve
tax reporting.
3
Additional amount of inventory a company would report 3. LIFO conformity rule
if it used FIFO instead of LIFO.
2
Once a company chooses an inventory method, it is not 4. Consistency
allowed to frequently change to another one.
4
Best matches cost of inventory sold with its related 5. FIFO
revenue.
1
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
6-198 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
182.
Match each term related to recording inventory transactions with its description.
1. Perpetual inventory system 2. FOB shipping point
Account to credit when inventory is sold. The amount to credit equals the selling price to customer.
8
Recording inventory transactions as they occur.
1
Record inventory purchases at the time inventory 3. Cost of goods sold 4. FOB destination
departs from the supplier.
2
Account to debit when inventory is sold.
3
Record inventory purchases at the time inventory arrives 5. Freight-in
at the company.
4
6. Inventory
The cost of shipping inventory from suppliers.
5
Calculate the balance of inventory once per period.
7
7. Periodic inventory system
Account to credit when inventory is sold. The amount to 8. Sales revenue
credit equals the original cost of inventory.
6
9. Freight-out
The cost of shipping inventory to customers.
9
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Topic: Perpetual Inventory System
6-199 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
183.
Match each term related to inventory analysis with its description.
1. Average days in inventory
The number of times a firm sells its average inventory balance during a reporting period.
3
If a company's cost of inventory decreases and its selling price remains the same, the gross profit ratio 2. Gross profit ratio
_____.
6
The approximate length of time the average inventory 3. Inventory turnover ratio
is held.
1
When a company purchases inventory at the end of the year and does not sell it, the inventory turnover ratio 4. Higher
_____.
7
Typically, the more specialized the inventory item, the 5. Lower
_____ gross profit ratio.
4
A measure of the amount by which the sale of 6. Increases
inventory exceeds its cost per dollar of sales.
2
The less frequently a company sells its inventory, the 7. Decreases
_____ its inventory turnover ratio.
5
AACSB: Analytical Thinking AICPA: BB Critical Thinking Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Topic: Best Buy vs. Tiffany’s
Essay Questions
6-200 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
184.
At the beginning of 2018, Calston Incorporated reports inventory of $9,000. During 2018, the company purchases additional inventory for $25,000. At the end of 2018, the cost of inventory remaining is $8,000. Calculate cost of goods sold for 2018.
Beginning inventory
$9,000
+ Purchases
25,000
Cost of goods available for sale
34,000
- Ending inventory
8,000
Cost of goods sold
$26,000
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
6-201 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
185.
For each company, calculate the missing amount. Company
Sales Cost of Goods
Gross Profit
Sold
Operating
Net Income
Expenses
Lennon
$8,000
(a)
$4,000
$3,000
$1,000
Harrison
9,000
3,000
(b)
2,000
4,000
McCartney
8,000
3,000
5,000
(c)
2,000
Starr
7,000
3,000
5,000
3,000
(d)
Cost of goods
Operating a
expenses
Net incomeb
Company
Sales
sold
Gross profit
Lennon
$8,000
4,000
$4,000
$3,000
$1,000
Harrison
9,000
3,000
6,000
2,000
4,000
McCartney
8,000
3,000
5,000
3,000
2,000
Starr
7,000
2,000
5,000
3,000
2,000
a
Gross profit = Sales revenue - Cost of goods sold
b
Net income = Gross profit - Operating expenses AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
6-202 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
186.
Below are some of the items found in a multiple-step income statement: a. Sales revenue b. Net income c. Operating income d. Income before income taxes e. Gross profit Place these items in the order they would appear from first to last.
a, e, c, d, b
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
6-203 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
187.
Beasley Inc., reports the following amounts in its December 31, 2018, income statement. Sales revenue
$300,000 Income tax expense
$38,000
Interest expense
12,000 Cost of goods sold
125,000
Salaries expense
35,000 Advertising expense
24,000
Utilities expense
41,000
Prepare a multiple-step income statement.
Beasley Inc., Multiple-step Income Statement For the year ended December 31, 2018 Sales revenue
$300,000
Cost of goods sold
125,000
Gross profit
$175,000
Salaries Expense
35,000
Utilities Expense
41,000
Advertising Expense
24,000
Total operating expenses
100,000
Operating income
75,000
Interest expense
12,000
Income before income
63,000
taxes Income tax expense
38,000
Net income
$25,000
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
6-204 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
188.
During 2018, a company sells 20 units of inventory. The company has the following inventory purchase transactions for 2018: Date Transaction
Number of Units Unit Cost Total Cost
Jan. 1 Beginning inventory
15
$60
$900
Sep. 8 Purchase
10
62
620
25
$1,520
Calculate ending inventory and cost of goods sold for 2018 assuming the company uses FIFO with a periodic inventory system.
Ending inventory = $310; Cost of goods sold = $1,210 Feedback:
Ending inventory: Date Transaction Sep. 8 Purchase
Number of units Unit cost 5
$62
Ending Inventory $310
Cost of goods sold: Date Transaction
Number of units Unit cost Cost of Goods Sold
Jan. 1 Beginning inventory
15
$60
$900
Sep. 8 Purchase
5
62
310
20
$1,210
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Topic: Inventory Cost Methods
6-205 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
189.
During 2018, a company sells 20 units of inventory. The company has the following inventory purchase transactions for 2018: Date Transaction
Number of Units Unit Cost Total Cost
Jan. 1 Beginning inventory
15
$60
$900
Sep. 8 Purchase
10
62
620
25
$1,520
Calculate ending inventory and cost of goods sold for 2018 assuming the company uses LIFO with a periodic inventory system.
Ending inventory = $300; Cost of goods sold = $1,220 Feedback:
Ending inventory: Date Transaction Jan. 1 Purchase
Number of units Unit cost 5
$60
Ending Inventory $300
Cost of goods sold: Date Transaction
Number of units Unit cost Cost of Goods Sold
Jan. 1 Beginning inventory
10
$60
$600
Sep. 8 Purchase
10
62
620
20
$1,220
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Topic: Inventory Cost Methods
6-206 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
190.
During 2018, a company sells 20 units of inventory. The company has the following inventory purchase transactions for 2018:
Date Transaction
Number of Units Unit Cost Total Cost
Jan. 1 Beginning inventory
15
$60
$900
Sep. 8 Purchase
10
62
620
25
$1,520
Calculate ending inventory and cost of goods sold for 2018 assuming the company uses weighted-average cost with a periodic inventory system.
Ending inventory = $304; cost of goods sold = $1,216 Feedback: Weighted-average cost = $1,520/25 units = $60.80/unit. Ending inventory = 5 × $60.80 = $304. Cost of goods sold = 20 × $60.80 = $1,216.
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Topic: Inventory Cost Methods
6-207 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
191.
During 2018, a company sells 300 units of inventory for $85 each. The company has the following inventory purchase transactions for 2018: Date Transaction
Number of Units Unit Cost Total Cost
Jan. 1 Beginning inventory
60
$71
$4,260
May 5 Purchase
170
72
12,240
Nov. 3 Purchase
180
74
13,320
410
$29,820
Calculate ending inventory and cost of goods sold for 2018 assuming the company uses FIFO with a periodic inventory system.
Ending inventory = $8,140; Cost of goods sold = $21,680 Feedback:
Ending inventory: Date Transaction Nov. 3 Purchase
Number of units Unit cost 110
$74
Ending Inventory $8,140
Cost of goods sold: Date Transaction
Number of units Unit cost Cost of Goods Sold
Jan. 1 Beginning inventory
60
$71
$4,260
May 5 Purchase
170
72
12,240
Nov. 3 Purchase
70
74
5,180
300
$21,680
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Topic: Inventory Cost Methods
6-208 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
192.
During 2018, a company sells 400 units of inventory for $85 each. The company has the following inventory purchase transactions for 2018: Date Transaction
Number of Units Unit Cost Total Cost
Jan. 1 Beginning inventory
60
$70
$4,200
May 5 Purchase
180
72
12,960
Nov. 3 Purchase
190
75
14,250
430
$31,410
Calculate ending inventory and cost of goods sold for 2018 assuming the company uses LIFO with a periodic inventory system.
Ending inventory = $2,100; Cost of goods sold = $29,310 Feedback: Ending Inventory:
Number of Units Unit Cost Total Cost Date
Transaction
Jan. 1 Beginning inventory
30
$70
$2,100
Cost of Goods Sold:
Number of Units Unit Cost Total Cost Date Transaction Jan. 1 Beginning inventory
30
$70
$2,100
May 5 Purchase
180
72
12,960
Nov. 3 Purchase
190
75
14,250
400
$29,310
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Topic: Inventory Cost Methods
6-209 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
193.
During 2018, a company sells 500 units of inventory for $90 each. The company has the following inventory purchase transactions for 2018: Date Transaction
Number of Units Unit Cost Total Cost
Jan. 1 Beginning inventory
80
$79
$6,320
May 5 Purchase
270
80
21,600
Nov. 3 Purchase
190
82
15,580
540
$43,500
Calculate cost of goods sold and ending inventory for 2018 assuming the company uses weighted-average cost with a periodic inventory system (round weighted-average unit cost to four decimals if necessary).
Ending inventory = $3,222 (rounded); cost of goods sold = $40,278 (rounded). Feedback: Weighted-average cost = $43,500/540 units = $80.5556/unit Ending inventory = 40 × $80.5556 = $3,222 (rounded) Cost of goods sold = 500 × $80.5556 = $40,278 (rounded)
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Topic: Inventory Cost Methods
6-210 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
194.
During 2018, a company sells 200 units of inventory for $50 each. The company has the following inventory purchase transactions for 2018: Date Transaction
Number of Units Unit Cost Total Cost
Jan. 1 Beginning inventory
50
$39
$1,950
May 5 Purchase
100
38
3,800
Nov. 3 Purchase
80
37
2,960
230
$8,710
Actual sales by the company include its entire beginning inventory, 80 units of inventory from the May 5 purchase, and 70 units from the November 3 purchase. Calculate cost of goods sold and ending inventory for 2018 assuming the company uses specific identification.
Ending inventory = $1,130; Cost of goods sold = $7,580 Feedback:
Ending inventory: Date Transaction
Number of units Unit cost
Ending Inventory
May 5 Purchase
20
$38
$760
Nov. 3 Purchase
10
37
370
30
$1,130
Cost of goods sold: Date Transaction
Number of units Unit cost Cost of Goods Sold
Jan. 1 Beginning inventory
50
$39
$1,950
May 5 Purchase
80
38
3,040
Nov. 3 Purchase
70
37
2,590
200
$7,580
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. 6-211 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Inventory Cost Methods
195.
For each item below, indicate whether FIFO or LIFO will generally result in a higher reported amount when inventory costs are rising versus falling. Inventory
Higher
Higher
Higher
Costs
Total
Cost of
Net
Assets
Goods
Income
Sold Rising Falling
Inventory
Higher
Higher
Higher
Costs
total
cost of
net
assets
goods sold
income
Rising
FIFO
LIFO
FIFO
Falling
LIFO
FIFO
LIFO
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
196.
When inventory costs are rising, __________ generally results in a higher amount of reported net income.
FIFO
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Understand Difficulty: 2 Medium
6-212 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
197.
When inventory costs are declining, __________ generally results in a lower amount of reported cost of goods sold.
LIFO
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
198.
When inventory costs are declining, __________ generally results in a lower amount of reported inventory.
FIFO
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
199.
When inventory costs are rising, __________ generally results in a lower amount of reported cost of goods sold.
FIFO
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Understand
6-213 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 2 Medium Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
200.
When inventory costs are declining, __________ generally results in a higher amount of reported net income.
LIFO
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
201.
__________ is commonly referred to as the balance sheet approach.
FIFO
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
202.
__________ is commonly referred to as the income statement approach.
LIFO
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. 6-214 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Effects of Inventory Cost Methods
203.
When inventory costs are rising, __________ generally results in a lower income tax obligation.
LIFO
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
204.
A company uses a perpetual system to record inventory transactions. The company purchases inventory on account on February 9, 2018, for $50,000 and then sells this inventory on account on March 7, 2018, for $70,000. Record the transactions for the purchase and sale of the inventory.
February 9, 2018 Inventory
50,000
Accounts Payable
50,000
March 7, 2018 Accounts Receivable
70,000
Sales Revenue Cost of Goods Sold Inventory
70,000 50,000 50,000
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Topic: Perpetual Inventory System 6-215 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
6-216 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
205.
A company has the following transactions during March: March 3 Purchases inventory on account for $3,500, terms 2/10, n/30. March 5 Pays freight costs of $200 on inventory purchased on March 3. March 6 Returns inventory with a cost of $500. March 12 Pays the full amount due on March 3 purchase. March 29 Sells all inventory purchased on March 3 (less those returned on March 6) for $5,000 on account. Record all transactions, assuming the company uses a perpetual inventory system.
March 3 Inventory
3,500
Accounts Payable
3,500
March 5 Inventory
200
Cash
200
March 6 Accounts Payable
500
Inventory
500
March 12 Accounts Payable
3,000
Inventory
60
Cash
2,940
March 30 Accounts Receivable
5,000
Sales Revenue Cost of Goods Sold Inventory
5,000 3,140 3,140
Feedback: Purchase discount = ($3,500 - $500) × 2% = $60. Cost of good sold = $3,500 (purchase) + $200 (freight-in) - $500 (return) - $60 (discount) = $3,140.
6-217 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Topic: Perpetual Inventory System
206.
A company reports inventory using the lower of cost and net realizable value (NRV). Below is information related to its year-end inventory. Calculate the amount to be reported for ending inventory.
Inventory
Quantity
Cost
Net Realizable Value
Ski Jackets
10
$130
$110
Skis
25
$250
$300
Lower of
Ending
Cost and
Inventory
Inventory
Quantity
NRV
Ski Jackets
10
$110
$1,100
Skis
25
$250
$6,250 $7,350
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Topic: Lower of Cost and Net Realizable Value
6-218 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
207.
A company reports inventory using the lower of cost and net realizable value. Below is information related to its year-end inventory: Inventory
Quantity
Cost
Market
Item A
100
$25
$30
Item B
50
30
20
Calculate ending inventory under the lower of cost and net realizable value and record any necessary adjustment to inventory.
Ending inventory = $3,500.
Cost of Goods Sold Inventory
500 500
Feedback: Ending inventory = (100 × $25) + (50 × $20) = $3,500. Write-down = $4,000 (total cost) - $3,500 (LCM) = $500. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Topic: Lower of Cost and Net Realizable Value
6-219 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
208.
A company reports inventory using the lower of cost and net realizable value. Below is information related to its year-end inventory: Inventory
Quantity
Cost
Market
Unit A
10
$30
$32
Unit B
18
43
40
Unit C
12
23
27
Unit D
15
18
17
Calculate ending inventory under the lower of cost and net realizable value and record any necessary adjustment to inventory.
Ending inventory = $1,551
Cost of Goods Sold Inventory
69 69
Feedback: Ending inventory = (10 × $30) + (18 × $40) + (12 × $23) + (15 × $17) = $1,551. Write-down = $1,620 (total cost) - $1,551 (LCM) = $69. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Topic: Lower of Cost and Net Realizable Value
6-220 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
209.
A company reports the following amounts for 2018: Inventory (beginning)
$20,000
Inventory (ending)
30,000
Purchases
160,000
Purchase returns
10,000
Calculate cost of goods sold, the inventory turnover ratio, and the average days in inventory for 2018.
Cost of goods sold = $140,000; inventory turnover ratio = 5.6 times; average days in inventory = 65.2 days Feedback: Cost of goods sold = $20,000 + $160,000 - $10,000 - $30,000 = $140,000. Inventory turnover ratio = $140,000/[( $20,000 + $30,000)/2] = 5.6 times. Average days in inventory = 365/5.6 = 65.2 days.
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Topic: Best Buy vs. Tiffany’s
6-221 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
210.
A company reports the following amounts at the end of the year: Sales revenue
$300,000
Cost of goods sold
225,000
Net income
50,000
Compute the company's gross profit ratio.
25% Feedback: Gross profit ratio = ($300,000 - $225,000)/$300,000 = 0.25.
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Topic: Best Buy vs. Tiffany’s
6-222 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
211.
A company begins the year with inventory of $50,000 and ends the year with inventory of $55,000. During the year, the following amounts are recorded: Purchases
$210,000
Purchase returns
25,000
Purchase discounts
15,000
Freight-in
40,000
Calculate cost of goods sold for the year.
Beginning inventory
$50,000
Add: Purchases
210,000
Freight-in
40,000
Less: Purchase returns
(25,000)
Purchase discounts
(15,000)
Cost of goods available for sale
260,000
Less: Ending inventory
(55,000)
Cost of goods sold
$205,000
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-08 Record inventory transactions using a periodic inventory system. Topic: Recording Inventory Transactions Using a Periodic Inventory System
6-223 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
212.
A company uses a periodic system to record inventory transactions. The company purchases inventory on account on February 9, 2018, for $50,000 and then sells this inventory on account on March 7, 2018, for $70,000. Record the transactions for the purchase and sale of the inventory.
February 9, 2018 Purchases
50,000
Accounts Payable
50,000
March 7, 2018 Accounts Receivable Sales Revenue
70,000 70,000
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-08 Record inventory transactions using a periodic inventory system. Topic: Recording Inventory Transactions Using a Periodic Inventory System
6-224 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
213.
A company has the following transactions during March: March 3 Purchases inventory on account for $3,500, terms 2/10, n/30. March 5 Pays freight costs of $200 on inventory purchased on March 3. March 6 Returns inventory with a cost of $500. March 12 Pays the full amount due on March 3 purchase. March 29 Sells all inventory purchased on March 3 (less those returned on March 6) for $5,000 on account.
Record all transactions, including the month-end adjustment to cost of goods sold, assuming the company uses a periodic inventory system and has no beginning inventory.
March 3 Purchases
3,500
Accounts Payable
3,500
March 5 Freight-In
200
Cash
200
March 6 Accounts Payable
500
Purchase Returns
500
March 12 Accounts Payable
3,000
Purchase Discounts
60
Cash
2,940
March 29 Accounts Receivable Sales Revenue
5,000 5,000
March 31 6-225 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Cost of Goods Sold
3,140
Purchase Returns
500
Purchase Discounts
60
Inventory (ending)
0
Inventory (beginning)
0
Purchases
3,500
Freight-In
200
Feedback: Purchase discount = ($3,500 - $500) × 2% = $60. Cost of goods sold = $3,500 (purchase) + $200 (freight-in) - $500 (return) - $60 (discount) = $3,140. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-08 Record inventory transactions using a periodic inventory system. Topic: Recording Inventory Transactions Using a Periodic Inventory System
214.
A company understated its ending inventory balance by $8,000 in 2018. What impact will this error have on cost of goods sold and gross profit in 2018 and 2019?
2018 Cost of goods sold is overstated by $8,000. Gross profit is understated by $8,000. 2019 Cost of goods sold is understated by $8,000. Gross profit is overstated by $8,000.
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 06-09 Determine the financial statement effects of inventory errors. Topic: Inventory Errors
6-226 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
215.
A company overstated its ending inventory balance by $6,000 in 2018. What impact will this error have on cost of goods sold and gross profit in 2018 and 2019?
2018 Cost of goods sold is understated by $6,000. Gross profit is overstated by $6,000. 2019 Cost of goods sold is overstated by $6,000. Gross profit is understated by $6,000.
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 06-09 Determine the financial statement effects of inventory errors. Topic: Inventory Errors
216.
A company understated its ending inventory balance by $5,000 in 2018. What impact will this error have on total assets and retained earnings in 2018 and 2019 (ignoring tax effects)?
2018 Total assets are understated by $5,000. Retained earnings is understated by $5,000. 2019 Total assets are stated correctly. Retained earnings is stated correctly.
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Evaluate Difficulty: 3 Hard 6-227 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 06-09 Determine the financial statement effects of inventory errors. Topic: Inventory Errors
217.
A company overstated its ending inventory balance by $9,000 in 2018. What impact will this error have on total assets and retained earnings in 2018 and 2019 (ignoring tax effects)?
2018 Total assets are overstated by $9,000. Retained earnings is overstated by $9,000. 2019 Total assets are stated correctly. Retained earnings is stated correctly.
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 06-09 Determine the financial statement effects of inventory errors. Topic: Inventory Errors
6-228 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
218.
Giles Manufacturing uses a periodic inventory system and has the following transactions for the month of June 2018: Date
Transactions
Units
June 1
Beginning inventory
17
June 7
Sale
12
June 12
Purchase
13
June 15
Sale
11
June 24
Purchase
14
June 27
Sale
15
June 29
Purchase
8
Cost per Unit
Total Cost
$240
$4,080
230
2,990
220
3,080
210
1,680 $11,830
Required: 1. Calculate ending inventory and cost of goods sold at June 30, 2018, using the specific identification method. The June 7 sale consists of beginning inventory, the June 15 sale consists of three units from beginning inventory and eight from the June 12 purchase, and the June 27 sale consists of one unit from beginning inventory and fourteen units from the June 24 purchase. 2. Using FIFO, calculate ending inventory and cost of goods sold at June 30, 2018. 3. Using LIFO, calculate ending inventory and cost of goods sold at June 30, 2018. 4. Using weighted-average cost, calculate ending inventory and cost of goods sold at June 30, 2018.
Requirement 1
Number of units Date
Unit cost
Transaction
Ending Inventory
Jun. 1
Beginning Inventory
1
$240
$240
Jun. 12
Purchase
5
230
1,150
Jun. 24
Purchase
0
220
0
Jun. 29
Purchase
8
210
1,680
6-229 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
14
Number of units
$3,070
Unit cost
Date
Transaction
Cost of Goods Sold
Jun. 1
Beginning Inventory
12a
$240
$2,880
Jun. 1
Beginning Inventory
3b
240
720
Jun. 12
Purchase
8b
230
1,840
Jun. 1
Beginning Inventory
1c
240
240
Jun. 24
Purchase
14c
220
3,080
38 a
$8,760
From the June 7 sale; b From the June 15 sale; c From the June 27 sale.
Requirement 2
Number of units
Unit cost
Date
Transaction
Ending Inventory
Jun. 24
Purchase
6
$220
$1,320
Jun. 29
Purchase
8
210
1,680
14
Number of units
$3,000
Unit cost
Date
Transaction
Cost of Goods Sold
Jun. 1
Beginning Inventory
17
$240
$4,080
Jun. 12
Purchase
13
230
2,990
Jun. 24
Purchase
8
220
1,760
38a a
$8,830
First 38 units purchased are assumed sold
Requirement 3
Number of units Date
Transaction
Jun. 1
Beginning Inventory
Unit cost Ending Inventory
14
$240
$3,360
6-230 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Number of units
Unit cost
Date
Transaction
Cost of Goods Sold
Jun. 1
Beginning Inventory
3
$240
$720
Jun. 12
Purchase
13
230
2,990
Jun. 24
Purchase
14
220
3,080
Jun. 29
Purchase
8
210
1,680
38*
$8,470
* Last 38 units purchased are assumed sold Requirement 4
Number of units
Unit cost
Total Cost
Beginning Inventory
17
$240
$4,080
Jun. 12
Purchase
13
230
2,990
Jun. 24
Purchase
14
220
3,080
Jun. 29
Purchase
8
210
1,680
Date
Transaction
Jun. 1
52
$11,830
Weighted-average cost = $11,830/52 units = $227.50. Ending inventory = 14 units × $227.50 = $3,185 Cost of goods sold = 38 units × $227.50 = 8,645 AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Topic: Inventory Cost Methods
6-231 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
219 Nadal Athletic uses a periodic inventory system and has the following transaction related to .
its inventory for the month of August 2018: Date
Transactions
Units
August 1
Beginning inventory
7
August 4
Sale ($150 each)
5
August 11
Purchase
9
August 13
Sale ($160 each)
7
August 20
Purchase
12
August 26
Sale ($170 each)
10
August 29
Purchase
12
Cost per Unit
Total Cost
$130
$910
120
1,080
110
1,320
100
1,200 $4,510
Required: 1. Calculate ending inventory and cost of goods sold at August 31, 2018, using the specific identification method. The August 4 sale consists of units from beginning inventory, the August 13 sale consists of units from the August 11 purchase, and the August 26 sale consists of two units from beginning inventory and eights units from the August 20 purchase. 2. Using FIFO, calculate ending inventory and cost of goods sold at August 31, 2018. 3. Using LIFO, calculate ending inventory and cost of goods sold at August 31, 2018. 4. Using weighted-average cost, calculate ending inventory and cost of goods sold at August 31, 2018. 5. Calculate sales revenue and gross profit under each of the four methods. 6. Comparing FIFO and LIFO, which one provides the more meaningful measure of ending inventory? Explain. 7. If Pete's chooses to report inventory using LIFO, record the LIFO adjustment.
Requirement 1
Number of units
Unit cost
Date
Transaction
Ending Inventory
Aug. 11
Purchase
2
$120
$240
Aug. 20
Purchase
4
110
440
6-232 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Aug. 29
Purchase
12
100
1,200
18
Number of units
$1,880
Unit cost
Date
Transaction
Cost of Goods Sold
Aug. 1
Beginning Inventory
5a
$130
$650
Aug. 11
Purchase
7b
120
840
Aug. 1
Beginning Inventory
2c
130
260
Aug. 20
Purchase
8c
110
880
22
$2,630
a From the August 4 sale; b From the August 13 sale; c From the August 26 sale. Requirement 2
Number of units
Unit cost
Date
Transaction
Ending Inventory
Aug. 20
Purchase
6
$110
$660
Aug. 29
Purchase
12
100
1,200
18
$1,860
Number of units
Unit cost
Date
Transaction
Cost of Goods Sold
Aug. 1
Beginning Inventory
7
$130
$910
Aug. 11
Purchase
9
120
1,080
Aug. 20
Purchase
6
110
660
22*
$2,650
* First 22 units purchased are assumed sold Requirement 3 Number of units Date
Transaction
Aug. 1
Beginning Inventory
Unit cost Ending Inventory 7
$130
$910
9
120
1,080
6-233 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Aug. 11
Purchase
2
110
18
Number of units
220 $2,210
Unit cost
Date
Transaction
Cost of Goods Sold
Aug. 20
Purchase
10
110
1,100
Aug. 29
Purchase
12
100
1,200
22*
$2,300
* Last 22 units purchased are assumed sold Requirement 4
Number of units
Unit cost
Total Cost
Beginning Inventory
7
$130
$910
Aug. 11
Purchase
9
120
1,080
Aug. 20
Purchase
12
110
1,320
Aug. 29
Purchase
12
100
1,200
Date
Transaction
Aug. 1
40
$4,510
Weighted-average cost = $4,510/40 units = $112.75 Ending inventory = 18 units × $112.75 = $2,029.50 Cost of goods sold = 22 units × $112.75 = $2,480.50 Requirement 5
Average Specific Identification Sales
Cost FIFO
LIFO
$3,570 $3,570 $3,570
$3,570
revenue Cost of
2,630
2,650
2,300
2,480.50
$940
$920 $1,270 $1,089.50
Goods Sold Gross Profit 6-234 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Requirement 6 FIFO provides the more meaningful measure of ending inventory. The amount of ending inventory reported using FIFO ($1,860) compared to LIFO ($2,210) better approximates the current cost of inventory at the end of the period ($100 per unit × 18 units = $1,800). Requirement 7 The LIFO reserve equals the difference in inventory reported using FIFO ($1,860) versus using LIFO ($2,210). The LIFO reserve equals -$350. Inventory
350
Cost of Goods Sold
350
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Topic: Effects of Inventory Cost Methods Topic: Inventory Cost Methods Topic: Perpetual Inventory System
6-235 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
220.
At the beginning of June, Chow Company has a balance in inventory of $2,100. The following transactions occur during the month of June. Purchase radios on account from Air One for $2,400, terms 3/15, June 2 n/45. Pay freight charges related to the June 2 purchase from Air One, June 4 $400. June 8 Return defective radios to Air One and receive credit, $600. June 10 Pay Air One in full. Sell radios to customers on account, $5,000, that had a cost of June 11 $3,300. June 18 Receive payment on account from customers, $3,100. Purchase radios on account from Motion Unlimited for $3,300, June 20 terms 3/10, n/30. June 23 Sell radios to customers for cash, $4,800, that had a cost of $3,200. Return damaged radios to Motion Unlimited and receive credit of June 26 $300. June 28 Pay Motion Unlimited in full.
Required: 1. Assuming that Chow Company uses a perpetual inventory system, record the transactions. 2. Prepare the top section of the multiple-step income statement through gross profit for the month of June.
June 2
Debit
Inventory
2,400
Accounts Payable
Credit
2,400
(Purchase inventory on account) June 4 Inventory Cash
400 400
(Pay freight-in) 6-236 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
June 8 Accounts Payable
600
Inventory
600
(Return inventory on account) June 10 Accounts Payable
1,800
Inventory
54
Cash
1,746
(Pay on account less 3% discount) ($54 = $1,800 × 3%) June 11 Accounts Receivable
5,000
Sales Revenue
5,000
(Sell inventory on account) Cost of Goods Sold
3,300
Inventory
3,300
(Record cost of inventory sold) June 18 Cash
3,100 Accounts Receivable
3,100
(Receive cash on account)
June 20
Debit Credit
Inventory
3,300
Accounts Payable
3,300
(Purchase inventory on account) June 23
Debit Credit
Cash
4,800 Sales Revenue
4,800
(Sell inventory for cash) Cost of Goods Sold Inventory
3,200 3,200
(Record cost of inventory sold)
6-237 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
June 26 Accounts Payable
300
Inventory
300
(Return inventory on account) June 28 Accounts Payable
3,000
Cash
2,910
Inventory
90
(Pay on account less 3% discount) ($90 = $3,000 × 3%)
Requirement 2
Chow Company Multiple-step Income Statement (partial) For the month of June Net sales
$9,800
Cost of goods sold
6,500
Gross profit
$3,300
AACSB: Analytical Thinking AICPA: FN Measurement AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Topic: Cost of Goods Sold Topic: Perpetual Inventory System
6-238 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
221.
A home improvement store carries the following items: Lower of
Inventory Items
Quantity
NRV
Cost and
per unit
NRV
Cost per Unit
Hammers
110
$6
$7
_______
Saws
60
11
9
_______
Screwdrivers
120
3
2
_______
Drills
50
22
21
_______
1-gallon paint cans
150
5
6
_______
Paint brushers
170
7
8
_______
Required: 1. Compute the total cost of inventory. 2. Determine whether each inventory item would be reported at cost or net realizable value. Multiply the quantity of each inventory item by the appropriate cost or NRV amount and place the total in the "Lower of Cost and NRV" column. Then determine the total of that column. 3. Compare your answers in Requirement 1 and Requirement 2 and then prepare any necessary adjustment to write down inventory from cost to net realizable value. 4. Discuss the financial statement effects of using lower of cost and net realizable value to report inventory.
Requirement 1
Inventory items
Cost
Total
Per unit
Cost
Quantity
Hammers
110
$6
$660
Saws
60
11
660
Screwdrivers
120
3
360
Drills
50
22
1,100
6-239 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
1-gallon paint
150
5
750
170
7
1,190
cans Paint brushers
$4,720
Requirement 2 Lower of
Cost NRV per
Cost
unit unit
and
Per Inventory items
Quantity
NRV Total
Hammers
110
$6
$7
$6
$660
Saws
60
11
9
9
540
Screwdrivers
120
3
2
2
240
Drills
50
22
21
21 1,050
1-gal. paint
150
5
6
5
170
7
8
7 1,190
750
cans Paint brushers Total
$4,430
Requirement 3 Because the total of lower of cost and net realizable value ($4,430) is less than total cost ($4,720), inventory is written down for the difference ($290). Debit Cost of Goods Sold Inventory
Credit
290 290
(Write down inventory to net
realizable value)
Requirement 4 The write-down of inventory from cost to net realizable value reduces total assets and increases total expenses, leading to lower net income and lower retained earnings. AACSB: Analytical Thinking 6-240 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Measurement AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Topic: Lower of Cost and Net Realizable Value
6-241 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
222.
During 2018, Liberty Company has the following inventory transactions. Date
Transaction
Units Cost
Total Cost
Jan. 1
Beginning
10 $430
$4,300
inventory Apr. 9
Purchase
22
470
10,340
Oct. 4
Purchase
18
400
7,200
50 Jan. 1–
Sales
$21,840
44
Dec. 31
Because trends change frequently, Liberty estimates that the remaining six units have a net realizable value at December 31 of only $300 each. Required: 1. Using FIFO with a periodic inventory system, calculate ending inventory and cost of goods sold. 2. Using LIFO with a periodic inventory system, calculate ending inventory and cost of goods sold. 3. Determine the amount of ending inventory to report using the lower of cost and net realizable value under FIFO. Record any necessary adjustment.
Requirement 1
Number Unit of units
cost
Date Transaction Oct.
Purchase
Ending Inventory
6 $400
$2,400
4
Date Transaction
Number
Unit
Cost of
of units
cost
Goods Sold
6-242 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Jan. 1 Beginning
10 $430
$4,300
Apr. 9 Purchase
22
470
10,340
Oct. 4 Purchase
12
400
4,800
inventory
44a a
$19,440
First 44 units purchased are assumed sold
Requirement 2
Number Unit of units
Ending
cost
Date Transaction
Inventory
Jan. 1 Beginning
6 $430
$2,580
Inventory
Number of units
Unit Cost of cost Goods
Date Transaction
Sold
Jan. 1 Beginning
4 $430
$1,720
Apr. 9 Purchase
22
470
10,340
Oct. 4 Purchase
18
400
7,200
Inventory
44a a
$19,260
Last 44 units purchased are assumed sold
Requirement 3 Ending Inventory Lower of cost and
FIFO a
Cost
NRV
NRV
a
$1,800
$1,800
$2,400
Ending inventory from Requirement 1 above.
FIFO
Debit Credit
6-243 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Cost of Goods Sold Inventory
600 600
(Write down inventory to net
realizable value) AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Topic: Inventory Cost Methods Topic: Lower of Cost and Net Realizable Value
6-244 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
223.
At the beginning of November, Donkey Inc.'s inventory consists of 50 units with a cost per unit of $100. The following transactions occur during the month of November. November 2 Purchase 80 units of inventory on account from Kong Inc. for $110 per unit, terms 2/10, n/30. November 3 Pay freight charges related to the November 2 purchase, $240. November 9 Return 20 defective units from the November 2 purchase and receive credit. November 11
Pay Toad Inc. in full.
November
Sell 100 units of inventory to customers on account, $14,000. [Hint: The
16
cost of units sold from the November 2 purchase includes $110 unit cost plus $3 per unit for freight less $2.20 per unit for the purchase discount, or $111.80 per unit.]
November 20
Receive full payment from customers related to the sale on November 16.
November
Purchase 70 units of inventory from Toad Inc. for $120 per unit, terms
21
1/10, n/30.
November 24
Sell 50 units of inventory to customers for cash, $9,000.
Required: 1. Assuming that Donkey Inc. uses a FIFO perpetual inventory system to maintain its internal inventory records, record the transactions. 2. Suppose by the end of November that the remaining inventory is estimated to have a net realizable value per unit of $90, record any necessary adjustment for the lower of cost and net realizable value. 3. Prepare the top section of the multiple-step income statement through gross profit for the month of November after the adjustment for lower of cost and net realizable value.
Requirement 1
November 2
Debit
Inventory
8,800
Credit
6-245 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accounts Payable
8,800
(Purchase inventory on account) November 3 Inventory
240
Cash
240
(Pay freight-in) November 9 Accounts Payable
2,200
Inventory
2,200
(Return inventory on account) November 11 Accounts Payable
6,600
Inventory
132
Cash
6,468
(Pay on account less 2% discount) ($132 = $6,600 × 2%) November 16
Debit
Accounts Receivable
14,000
Sales Revenue
Credit
14,000
(Sell inventory on account) Cost of Goods Sold
10,590
Inventory
10,590
(Record cost of inventory sold) ($10,640 = ($100 × 50 units) +
($111.80 × 50 units)) November 20 Cash
14,000
Accounts Receivable
14,000
(Receive cash on account)
November 21 Inventory
8,400
Accounts Payable
8,400
(Purchase inventory on account)
6-246 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
November 24 Cash
9,000
Sales Revenue
9,000
(Sell inventory for cash) Cost of Goods Sold
5,918
Inventory
5,918
(Record cost of inventory sold) ($5,918 =
($111.80 × 10 units) + ($120 × 40 units))
Requirement 2 November 30
Debit
Cost of Goods Sold
Credit
900
Inventory
900*
(Adjust inventory down to net
realizable value)
* The net realizable value of ending inventory ($2,700 = $90 net realizable value × 30 units) is $900 less than FIFO ending inventory ($3,600 from Requirement 1). FIFO ending inventory is calculated as: November 1
$5,000 (50 units × $100)
November 2
8,800
November 3
240
November 9
(2,200)
November 11
(132)
November 16
(10,590)
November 21
8,400
November 24
(5,918)
November 30
$3,600
Requirement 3
Donkey Inc. Multiple-step Income Statement (partial)
6-247 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
For the month of November Net sales
$23,000
Cost of goods sold*
17,408
Gross Profit
$5,592
* Cost of goods sold equals the cost of the units sold ($10,590 + $5,918) + write down to net realizable value ($900). AACSB: Analytical Thinking AICPA: FN Measurement AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Learning Objective: 06-05 Record inventory transactions using a perpetual inventory system. Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Topic: Effects of Inventory Cost Methods Topic: Inventory Cost Methods Topic: Lower of Cost and Net Realizable Value Topic: Perpetual Inventory System
6-248 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
224.
Assume Party Store has the following account balances for the month of March 2018, and that the company uses a perpetual inventory system. Sales revenue
$75,800 Cost of goods
$38,500
sold Inventory
1,800
(Mar. 31, 2018) Advertising
5,200 Insurance
expense
1,700
expense
Rent expense
3,300 Sales
2,900
discounts Gain on sale of
6,900 Salaries
building
8,200
expense
Inventory (Mar.
2,200 Income tax
1, 2018)
6,100
expense
Required: 1. Prepare a multiple-step income statement for the month ended March 31, 2018. 2. Calculate the inventory turnover ratio for the month of March. Would you expect this ratio to be higher or lower in December 2018? Explain. 3. Calculate the gross profit ratio for the month of March.
Requirement 1
Party Store Multiple-step Income Statement For the month ended March 31, 2018 Net sales: Total sales revenue
$75,800
Less: Sales discounts
(2,900)
Net sales
$72,900
Cost of goods sold
38,500
6-249 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Gross Profit
34,400
Operating expenses: Advertising
5,200
Rent
3,300
Insurance
1,700
Salaries
8,200
Total
18,400
Operating income
16,000
Non-operating items: Gain on sale of building
6,900
Income before income taxes
22,900
Income tax expense
6,100
Net income
$16,800
Requirement 2 Cost of goods Inventory turnover
sold =
$38,500 =
ratio
Average
($2,200 +
inventory
$1,800)/2 =
19.25
This ratio will likely be higher in December when inventory is being sold at a much faster pace due to the holiday season. Requirement 3 Gross profit ratio
Gross profit =
$34,400 =
Net sales
$72,900 0.47
AACSB: Analytical Thinking AICPA: FN Decision Making AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement.
6-250 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Topic: Best Buy vs. Tiffany’s Topic: Cost of Goods Sold
6-251 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
225.
Fancy Incorporated and Thrift Specialty both offer men's formal footwear. Thrift offers lower-to-middle priced footwear, whereas Fancy offers more specialized, higher-end footwear. The average price for a pair of shoes in Thrift may be about $40, whereas the average price in Fancy may be about $200. The types of shoes offered by Fancy are not sold by many other stores. Suppose Thrift and Fancy report the following amounts for men's shoes in the same year (company names are disguised): Company 1
Company 2
$120,000
$120,000
Cost of goods sold
46,000
80,000
Gross profit
$74,000
$40,000
Average inventory
$23,000
$20,000
Net sales
Required: 1. For Company 1 and Company 2, calculate the inventory turnover ratio. 2. For Company 1 and Company 2, calculate the gross profit ratio. 3. After comparing the inventory turnover ratios and gross profit ratios, which company do you think is Thrift and which is Fancy? Explain.
Requirement 1
Company Company 1
2
$46,000
$80,000
$23,000
$20,000
2.0
4.0
Cost of Inventory
goods
turnover =
sold
ratio
=
Average inventory =
Requirement 2 Company 1 Company 2 6-252 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Gross Gross
profit
profit = ratio
$74,000
$40,000
$120,000
$120,000
0.62
0.33
= Net sales =
Requirement 3 Company 1 is likely Fancy and Company 2 is likely Thrift. The reason is that common, lower-to-middle priced footwear is likely to sell more quickly than is more specialized, higher-end footwear. In addition, higher-end footwear is likely to be more profitable due to less competition. AACSB: Analytical Thinking AICPA: FN Decision Making AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-07 Analyze management of inventory using the inventory turnover ratio and gross profit ratio. Topic: Best Buy vs. Tiffany’s
6-253 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
226.
Refer to the transactions of Chow Company in P6-3C. Required: 1. Assuming that Chow Company uses a periodic inventory system, record the transactions. 2. Record the month-end adjustment to inventory, assuming that a final count reveals ending inventory with a cost of $656. 3. Prepare the top section of the multiple-step income statement through gross profit for the month of June.
Requirement 1
June 2
Debit
Purchases
2,400
Accounts Payable
Credit
2,400
(Purchase inventory on account) June 4
Debit
Freight-In
Credit
400
Cash
400
(Pay freight-in) June 8 Accounts Payable
600
Purchase Returns
600
(Return inventory on account) June 10 Accounts Payable
1,800
Purchase Discounts
54
Cash
1,746
(Pay on account less 3% discount) ($54 = $1,800 × 3%) June 11 Accounts Receivable
5,000
6-254 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Sales Revenue
5,000
(Sell inventory on account) June 18 Cash
3,100
Accounts Receivable
3,100
(Receive cash on account)
June 20 Purchases
3,300
Accounts Payable
3,300
(Purchase inventory on account) June 23 Cash
4,800
Sales Revenue
4,800
(Sell inventory for cash) June 26 Accounts Payable
300
Purchase Returns
300
(Return inventory on account) June 28 Accounts Payable
3,000
Cash
2,910
Purchase Discounts
90
(Pay cash on account) ($90 = $3,000 × 3%)
Requirement 2 July 31
Debit
Inventory (ending)
656
Cost of Goods Sold
6,500
Purchase Returns
900
Purchase Discounts
144
Purchases
Credit
5,700
6-255 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Freight-In
400
Inventory (beginning)
2,100
(Record period-end adjustment)
Requirement 3
Chow Company Multiple-step Income Statement (partial) For the month of July Net sales
$9,800
Cost of goods sold: Beginning inventory
2,100
Add: Purchases
5,700
Freight-in
400
Less: Purchase returns
(900)
Purchase discounts
(144)
Cost of goods available for sale
7,156
Less: Ending inventory
(656)
Cost of goods sold
6,500
Gross Profit
$3,300
AACSB: Analytical Thinking AICPA: FN Measurement AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-08 Record inventory transactions using a periodic inventory system. Topic: Recording Inventory Transactions Using a Periodic Inventory System
6-256 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
227.
Fulkerson Metals maintains accurate records of the inventory purchased from its suppliers and sold to customers. The records show the following purchases and sales during 2018. Date
Transactions
January 1 Beginning
Units
Cost per Unit
28
$33
inventory
$924
April 14
Purchase
72
35
August
Purchase
115
37
22 October
Total Cost
2,520
4,255 Purchase
90
29
39 3,510
305
Jan. 1 –
Sales ($60
Dec. 31
each)
$11,209
280
Fulkerson uses a periodic inventory system and believes there are 25 units of ending inventory. However, Fulkerson neglects to make a final inventory count at the end of the year. An employee accidentally threw out 4 units of inventory, leaving only 21 units. Fulkerson is not aware of the lost inventory. Required: 1. What amount will Fulkerson calculate for ending inventory and cost of goods sold using FIFO, assuming it erroneously believes 25 units remain in ending inventory? 2. What amount would Fulkerson calculate for ending inventory and cost of goods sold using FIFO if it correctly knows that only 21 units remain in ending inventory? 3. What effect will the inventory error have on reported amounts for (a) ending inventory, (b) retained earnings, (c) cost of goods sold, and (d) net income (ignoring tax effects) in 2018? 4. Assuming that ending inventory is correctly counted at the end of 2019, what effect will the inventory error in 2018 have on reported amounts for (a) ending inventory, (b) retained earnings, (c) cost of goods sold, and (d) net income (ignoring tax effects) in 2019?
Requirement 1
6-257 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Number Unit Ending
of units cost Date Transaction Oct.
Purchase
Inventory 25
$39
$975
Number Unit
Cost of
of units cost
Goods
29
Date
Transaction
Jan. 1 Beginning
Sold 28
$33
Inventory Apr.
Purchase
$924 72
35
14 Aug.
2,520 Purchase
115
37
22 Oct.
4,255 Purchase
65
39
29
2,535 280a
a
$10,234
First 280 units purchased are assumed sold
Requirement 2
Number Unit Ending
of units cost Date Transaction Oct.
Purchase
Inventory 21
$36
$819
Number Unit
Cost of
of units cost
Goods
29
Date
Transaction
Jan. 1 Beginning
Sold 28
$33
Inventory Apr.
Purchase
$924 72
35
14 Aug.
2,520 Purchase
115
37
4,255
6-258 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
22 Oct.
Purchase
69
39
2,691
29 284*
$10,390
* First 284 units purchased are assumed sold (including the 4 lost units) Requirements 3 and 4
(a) ending
2018
2019
Overstate
No Effect
Overstate
No Effect
Understate
Overstate
Overstate
Understate
inventory (b) retained earnings (c) cost of goods sold (d) net income
AACSB: Analytical Thinking AICPA: FN Measurement AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Learning Objective: 06-09 Determine the financial statement effects of inventory errors. Topic: Inventory Cost Methods Topic: Inventory Errors
228.
What does the balance of cost of goods sold in the income statement represent? What does the balance of inventory in the balance sheet represent?
The balance of cost of goods sold in the income statement represents the cost of inventory sold during the period. Cost of goods sold is an expense. The balance of inventory in the balance sheet represents the cost of inventory not sold by the end of the reporting period. Inventory is an asset.
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Understand 6-259 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 2 Medium Learning Objective: 06-01 Trace the flow of inventory costs from manufacturing companies to merchandising companies. Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold Topic: Inventory
229.
What is a multiple-step income statement? What information does it provide beyond "bottom-line" net income?
A multiple-step income statement reports multiple levels of profitability. Gross profit equals sales revenue minus cost of goods sold. Operating income equals gross profit minus operating expenses. Income before income taxes equals operating income plus non-operating revenues and minus non-operating expenses. Net income equals all revenues minus all expenses.
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-02 Understand how cost of goods sold is reported in a multiple-step income statement. Topic: Cost of Goods Sold
230.
What are the three primary cost flow assumptions? How does the specific identification method differ from these three primary cost flow assumptions?
The three most common inventory cost flow assumptions are FIFO (first-in, first-out), LIFO (last-in, first-out), and weighted-average cost. These methods provide assumptions as to which inventory units are sold, whereas the specific identification method matches or identifies each unit of inventory with its actual cost.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-03 Determine the cost of goods sold and ending inventory using different inventory cost methods. Topic: Inventory Cost Methods
6-260 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
231.
What does it mean that FIFO has a balance sheet focus and LIFO has an income statement focus?
Since FIFO assumes the first purchases sell first, the amount it reports for ending inventory (in the balance sheet) better approximates the current cost of inventory. LIFO assumes the last purchases are sold first, reporting the most recent inventory cost in cost of goods sold (in the income statement). Thus, LIFO more realistically matches the current costs of inventory needed to produce current revenues.
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-04 Explain the financial statement effects and tax effects of inventory cost methods. Topic: Effects of Inventory Cost Methods
232.
What is meant by the assertion that the lower of cost and net realizable value for inventory is an example of conservatism in accounting?
Firms are required to report the decreasing value of inventory but not allowed to report the increasing value of inventory. Conservative accounting implies that there is more potential harm to users of financial statements if estimated gains turn out to be wrong than if estimated losses turn out to be wrong. Therefore, companies typically do not report estimated gains.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-06 Apply the lower of cost and net realizable value rule for inventories. Topic: Lower of Cost and Net Realizable Value
6-261 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 07 Long-Term Assets
True / False Questions
1. The CEO, as head of the company, is ultimately responsible for the firm's accounting. True
False
2. We record a long-term asset at its cost less all expenditures necessary to get the asset ready for use. True
False
3. We use the term capitalize to describe recording an expenditure as an expense. True
False
4. Cash received from the sale of salvaged materials increases the total cost of land. True
False
5. Land improvements are recorded separately from the land itself because, unlike land, these assets are subject to depreciation. True
False
6. A basket purchase is the purchase of more than one asset at the same time for one purchase price. True
False
7-1 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
7. We allocate natural resources to expense through a process known as "depletion." True
False
8. Many intangible assets are not recorded on the balance sheet at their estimated market values. True
False
9. We record purchased intangible assets at their original cost plus all other costs necessary to get the asset ready for use. True
False
10. Most of the costs associated with internally developed intangible assets are recorded as intangible assets on the balance sheet. True
False
11. Research and development costs incurred in developing a patent internally are not recorded as an intangible asset in the balance sheet, but rather are expensed directly in the income statement. True
False
12. International accounting standards allow firms to record development costs that benefit future periods as an intangible asset. True
False
13. Advertising costs that increase the value of trademarks are recorded to the asset account entitled Trademarks. True
False
7-2 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
14. We expense internally generated intangible assets, such as research and development and advertising costs, as we incur them. True
False
15. A patent is an exclusive right to a published work such as a song, film, or painting. True
False
16. A copyright is an exclusive right of protection given to the creator of a published work such as a song, film, painting, photograph, book, or computer software. True
False
17. A trademark is a word, slogan, or symbol that distinctively identifies a company, product, or service. True
False
18. When a firm develops a trademark internally through advertising, it does not record the advertising costs as an intangible asset, but rather expenses them in the income statement. True
False
19. The franchisee's initial fee is recorded as an expense on the income statement. True
False
20. We record goodwill as an intangible asset in the balance sheet only when we purchase it as part of the acquisition of another company. True
False
21. The acquiring company records goodwill equal to the purchase price less the book value of the net assets acquired. True
False
7-3 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
22. We capitalize repairs and maintenance expenditures because they maintain a given level of benefits. True
False
23. If a firm successfully defends an intangible right, it should expense the litigation costs as incurred. True
False
24. If the defense of an intangible right is unsuccessful, then the firm should expense the litigation costs as incurred because they provide no future benefit. True
False
25. Depreciation in accounting is the process of allocating to expense the cost of an asset over its service life. True
False
26. Depreciation in accounting records the decrease in value of an asset. True
False
27. Accumulated Depreciation is a liability account that is increased by credits. True
False
28. Book value is equal to the original cost of the asset minus the current balance in Accumulated Depreciation. True
False
29. The Accumulated Depreciation account allows us to reduce the carrying value of assets through depreciation, while maintaining the original cost of each asset in the accounting records. True
False
7-4 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
30. The service life of an asset is always equal to the full life of the asset. True
False
31. Residual value, also referred to as salvage value, is the amount the company expects to receive from selling the asset at the end of its service life. True
False
32. With the straight-line depreciation method, we allocate an equal amount of the depreciable cost to each year of the asset's service life. True
False
33. When a change in estimate is required, the company changes depreciation in prior, current and future years. True
False
34. Straight-line depreciation assumes that the benefits we derive from the use of an asset are the same each year. True
False
35. Declining-balance depreciation will be lower than straight-line depreciation in earlier years, but higher in later years. True
False
36. In an activity-based depreciation method, we allocate an asset's cost based on its use. True
False
37. Straight-line produces a lower net income than accelerated methods in the earlier years of an asset's life. True
False
7-5 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
38. Straight-line, declining-balance, and activity-based depreciation all are acceptable depreciation methods for both financial reporting and tax reporting. True
False
39. Most companies use straight-line amortization for intangibles and credit the amount of amortization to the intangible asset account itself rather than to Accumulated Amortization. True
False
40. Goodwill is amortized over its estimated useful life. True
False
41. Intangible assets with an indefinite useful life (goodwill and most trademarks) are not amortized. True
False
42. We record a gain if we sell an asset for less than book value. True
False
43. We record a loss if we sell an asset for less than book value. True
False
44. A more comparable measure of profitability than income is return on assets, which equals net income divided by average total assets. True
False
45. Profit margin is net income divided by net sales. True
False
7-6 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
46. Asset turnover is net sales divided by ending total assets. True
False
47. Management must review long-term assets for impairment when events or changes in circumstances indicate that book value might not be recoverable. True
False
48. Impairment occurs when the future cash flows generated for a long-term asset fall below its fair value. True
False
49. An impairment loss is equal to the amount by which book value exceeds the fair value of a long-term asset. True
False
50. Taking a "big bath" is recording all losses in one year to make a bad year even worse. True
False
Multiple Choice Questions
7-7 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
51. Real Angus Steakhouse purchased land for $75,000 cash. They also incurred commissions of $4,500, property taxes of $5,000, and title insurance of $800. The $5,000 in property taxes includes $4,000 in back taxes paid by Real Angus on behalf of the seller and $1,000 due for the current year after the purchase date. For what amount should Real Angus Steakhouse record the land?
A. $83,500. B. $84,300. C. $85,300. D. $75,000. 52. Which of the following would be recorded as land improvements?
A. Property taxes. B. Title insurance. C. Real estate commissions. D. Adding a parking lot. 53. Which of the following would not be recorded as land improvements?
A. Adding a parking lot. B. Landscaping. C. Sidewalks. D. Closing costs on purchasing the land. 54. Bad Brads BBQ purchased a piece of equipment by paying $5,000 cash. They also incurred a shipping cost of $400 to get the equipment to its factory. The fair value of this equipment is $7,000. For what amount should Bad Brads BBQ record the equipment?
A. $5,000. B. $5,400. C. $7,000. D. $7,400.
7-8 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
55. Wiley Company purchased new equipment for $60,000. Wiley paid cash for the equipment. Other costs associated with the equipment were: transportation costs, $1,000; sales tax paid $3,000; and installation cost, $2,500. The cost recorded for the equipment was:
A. $60,000. B. $61,000. C. $64,000. D. $66,500. 56. Cowboy Development incurred the following costs associated with the purchase of a piece of land that it will use to re-build an office building: Sale price of the land
$400,000
Sale of salvaged parts already on land
$20,000
Demolition of the old building
$30,000
Ground breaking ceremony (food and supplies)
$1,500
Land preparation and leveling
$7,500
What amount should be recorded for the purchase of the land?
A. $437,500. B. $417,500. C. $439,000. D. $419,000. 57. Bahama Catering purchased a commercial dishwasher by paying cash of $8,000. The dishwasher's fair value on the date of the purchase was $10,000. The company incurred $600 in transportation costs, $500 installation fees, and paid $300 annual insurance of the equipment. For what amount will Bahama record the dishwasher?
A. $10,000. B. $9,100. C. $8,000. D. $9,400.
7-9 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
58. Bahama Catering purchased a commercial dishwasher by paying cash of $5,000. The dishwasher's fair value on the date of the purchase was $5,600. The company incurred $400 in transportation costs, $300 installation fees, and paid a $200 fine for illegal parking while the dishwasher was being delivered. For what amount will Bahama record the dishwasher?
A. $5,600. B. $5,700. C. $5,900. D. $6,300. 59. The following financial information is from Cook Company: Accounts Payable
$55,000
Land
$90,000
Inventory
$10,500
Accounts Receivable
$7,500
Equipment
$8,000
Deferred Revenue
$58,500
Short-term Investments
$20,000
Notes Receivable (due in 8 months)
$45,500
Interest Payable
$2,000
Patents
$75,000
What is the total amount of property, plant, and equipment assuming the accounts above reflect normal activity?
A. $90,000. B. $98,000. C. $165,000. D. $110,000.
7-10 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
60. Capital Construction purchased a 3-acre tract of land for a building site for $350,000. The company demolished the old building at a cost of $12,000, but was able to sell scrap from the building for $1,500. The cost of title insurance was $900 and attorney fees for reviewing the contract was $500. Property taxes paid were $3,000, of which $250 covered the period after the purchase date. The capitalized cost of the land is:
A. $366,400. B. $366,150. C. $364,650. D. $231,150. 61. Landon Co. purchased a $500,000 tract of land that is intended to be the site of a new office complex. Landon incurred additional costs and realized salvage proceeds as follows: Demolition of existing building on site
$75,000
Legal and other fees to close escrow
15,000
Proceeds from sale of demolition scrap 10,000
What would be the capitalized cost of the land?
A. $500,000. B. $575,000. C. $580,000. D. $590,000. 62. Fruitasia purchased land, a building, and equipment for $800,000. The estimated fair values of the land, building, and equipment are $100,000, $700,000, and $200,000, respectively. At what amount would the company record the land?
A. $80,000. B. $90,000. C. $100,000. D. $800,000.
7-11 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
63. Productive assets that are physically used up or depleted are:
A. Equipment. B. Land. C. Land improvements. D. Natural resources. 64. The following financial information is from Cook Company: Accounts Payable
$55,000
Land
$90,000
Inventory
$10,500
Accounts Receivable
$7,500
Equipment
$8,000
Deferred Revenue
$58,500
Short-term Investments
$20,000
Notes Receivable (due in 8 months)
$45,500
Interest Payable
$2,000
Patents
$75,000
What is the amount of long-term assets assuming the accounts above reflect normal activity?
A. $342,500. B. $173,000. C. $273,500. D. $98,000.
7-12 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
65. The following financial information is from Cook Company: Accounts Payable
$55,000
Land
$90,000
Inventory
$10,500
Accounts Receivable
$7,500
Equipment
$8,000
Deferred Revenue
$58,500
Short-term Investments
$20,000
Notes Receivable (due in 8 months)
$45,500
Interest Payable
$2,000
Patents
$75,000
What is the amount of intangible assets assuming the accounts above reflect normal activity?
A. $95,000. B. $75,000. C. $120,500. D. $140,500. 66. The legal life of a patent is:
A. Forty years. B. Twenty years. C. Life of the inventor plus fifty years. D. Indefinite.
7-13 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
67. An exclusive 20-year right to manufacture a product or to use a process is a:
A. Patent. B. Copyright. C. Trademark. D. Franchise. 68. The exclusive right to benefit from a creative work, such as a film, is a:
A. Patent. B. Copyright. C. Trademark. D. Franchise. 69. A word, slogan, or symbol that distinctively identifies a company, product, or service is a:
A. Patent. B. Copyright. C. Trademark. D. Franchise. 70. Research and development costs should be:
A. Expensed in the period incurred. B. Expensed in the period they are determined to be unsuccessful. C. Deferred pending determination of success. D. Expensed if unsuccessful, capitalized if successful.
7-14 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
71. Morgan Pharmaceutical spends $50,000 this year in research and development for a new drug to cure liver damage. By the end of the year, management feels confident that the new drug will gain FDA approval and lead to higher future sales. What impact will the $50,000 spending have on this year's financial statements?
A. Increase Assets. B. Decrease Revenues. C. Increase Expenses. D. Increase Revenues. 72. Aspen, Inc. developed a new horse transport device and incurred research and development costs of $250,000. Rather than continue with their own research, Aspen decided to purchase a patent for a similar design from Vail, Inc. for $350,000. What are the total assets and expenses for these developments?
A. Assets $600,000; Expenses $0. B. Assets $250,000; Expenses $350,000. C. Assets $350,000; Expenses $250,000. D. Assets $0; Expenses $600,000. 73. Research and development costs should be capitalized when the:
A. Future benefit is probable and the amount can be reasonably estimated. B. Future benefit is reasonably possible and the amount can be reasonably estimated. C. Future benefit is probable and the amount cannot be reasonably estimated. D. None of these.
7-15 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
74. Bio-Lab Pharmaceuticals carried on a project to develop a new drug that dramatically shortened the recovery period for flu infection. The project cost the company $150,000 before Bio-Lab abandoned the project due to the slim possibility to gain FDA approval. Bio-Lab then spent $300,000 on another project developing a kind of shot that achieves the same goal for flu recovery, and the company is confident in gaining FDA approval for the new shot and in making profits out of the shot. What amount would be expensed?
A. $0. B. $150,000. C. $300,000. D. $450,000. 75. Goodwill is:
A. Amortized over the greater of its estimated life or forty years. B. Only recorded by the seller of a business. C. The value of a business as a whole, over and above the value of its net identifiable assets. D. Recorded when created internally through advertising expense. 76. In accounting, goodwill
A. May be recorded whenever a company achieves a level of net income that exceeds the industry average. B. Is amortized over its useful life. C. May be recorded when a company purchases another business. D. Must be expensed in the period it is recorded because benefits from goodwill are difficult to identify. 77. In accounting, goodwill
A. Is never recorded. B. May be recorded when a company's level of net income exceeds the industry average. C. Must be expensed in the period when it is acquired. D. May be recorded when the company purchases another business.
7-16 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
78. The balance sheet of Cattleman's Steakhouse shows assets of $86,400 and liabilities of $15,000. The fair value of the assets is $90,000 and the fair value of its liabilities is $15,000. Longhorn paid Cattleman's $95,000 to acquire it. Longhorn should record goodwill on this purchase of:
A. $3,600. B. $5,000. C. $20,000. D. $23,600. 79. Northern purchased the entire business of Southern including all its assets and liabilities for $600,000. Below is information related to the two companies: Northern Southern Fair value of assets
$1,050,000 $800,000
Fair value of liabilities
575,000
300,000
Reported assets
800,000
650,000
Reported liabilities
500,000
250,000
Net Income for the year
60,000
50,000
How much goodwill did Northern pay for acquiring Southern?
A. $100,000. B. $300,000. C. $200,000. D. $150,000.
7-17 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
80. Lake Incorporated purchased all of the outstanding stock of Huron Company paying $850,000 cash. Lake assumed all of the liabilities. Book values and fair values of acquired assets and liabilities were: Book Value Fair Value Current assets (net)
$130,000
$125,000
Property, plant, equip. (net)
600,000
750,000
Liabilities
175,000
175,000
Lake would record goodwill of:
A. $0. B. $150,000. C. $345,000. D. $850,000. 81. Which of the following subsequent expenditures would be capitalized?
A. Ordinary repair. B. Costs that increase the service life of an asset. C. Routine maintenance. D. Ordinary repair and routine maintenance. 82. Which of the following subsequent expenditures would be capitalized?
A. Ordinary repairs and maintenance. B. Additions. C. Improvements. D. Additions and improvements.
7-18 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
83. The cost of an engine tune-up is an example of which of the following expenditures after acquisition?
A. Ordinary repairs and maintenance. B. Additions. C. Improvements. D. Legal defense of intangible assets. 84. Which of the following subsequent expenditures would not be capitalized?
A. Ordinary repairs and maintenance. B. Additions. C. Improvements. D. Legal defense of intangible assets. 85. The cost of replacing a major component on a piece of equipment is an example of:
A. Repairs and maintenance. B. Improvements. C. Additions. D. Legal defense of intangible assets. 86. Adding a refrigeration unit to a delivery truck that previously did not have this capability is an example of:
A. Repairs and maintenance. B. Additions. C. Improvements. D. Legal defense of intangible assets.
7-19 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
87. The purchase of a new cooling system for $150,000 to upgrade an office building owned by the company would be accounted for as:
A. Goodwill. B. An addition in the Buildings account. C. An expense in the period incurred. D. A patent. 88. Woods Company made an ordinary repair to a delivery truck at a cost of $500. Woods' accountant debited the asset account, Equipment. Was this treatment an error, and if so, what will be the effect on Woods' financial statements?
A. No, the repair was accounted for correctly. B. Yes, the error overstated assets and net income. C. Yes, in the years following, net income will be overstated. D. Yes, the error understated net income. 89. The replacement of a major component increased the productive capacity of equipment from 10 units per hour to 18 units per hour. The expenditure for the replacement component should be debited to:
A. Repairs Expense. B. Maintenance Expense. C. Equipment. D. Gain from Repairs. 90. Which of the following subsequent expenditures would not be capitalized?
A. Unsuccessful legal defense of intangible assets. B. Additions. C. Improvements. D. Successful legal defense of intangible assets.
7-20 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
91. Which one of the following regarding the book value of an asset is correct?
A. It is the fair value of the asset if the asset is sold. B. It reflects the original cost of the asset less accumulated depreciation. C. It is the original cost of the asset minus the depreciation expense for that asset during the year. D. It is the original cost at which the asset was purchased. 92. Which of the following is considered a "contra" account?
A. Deferred Revenue. B. Goodwill. C. Accumulated Depreciation. D. Cost of Goods Sold. 93. The factors used to compute depreciation expense are an asset's:
A. Cost, residual value, and physical life. B. Cost, residual value, and service life. C. Fair market value, residual value, and economic life. D. Cost, replacement value, and service life. 94. The depreciable cost used in calculating depreciation expense is:
A. Its service life. B. The amount allowable under tax depreciation methods. C. The difference between its replacement value and cost. D. The asset's cost minus its estimated residual value.
7-21 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
95. Kansas Enterprises purchased equipment for $60,000 on January 1, 2018. The equipment is expected to have a five-year life, with a residual value of $5,000 at the end of five years. Using the straight-line method, depreciation expense for 2018 would be:
A. $12,000. B. $11,000. C. $60,000. D. None of these. 96. Kansas Enterprises purchased equipment for $60,000 on January 1, 2018. The equipment is expected to have a five-year life, with a residual value of $5,000 at the end of five years. Using the straight-line method, the book value at December 31, 2018 would be:
A. $44,000. B. $49,000. C. $55,000. D. $60,000. 97. Kansas Enterprises purchased equipment for $60,000 on January 1, 2018. The equipment is expected to have a five-year life, with a residual value of $5,000 at the end of five years. Using the straight-line method, depreciation expense for 2019 and the book value at December 31, 2019 would be:
A. $12,000 and $36,000. B. $12,000 and $31,000. C. $11,000 and $33,000. D. $11,000 and $38,000.
7-22 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
98. Kansas Enterprises purchased equipment for $60,000 on January 1, 2018. The equipment is expected to have a five-year life, with a residual value of $5,000 at the end of five years. Using the double-declining balance method, depreciation expense for 2018 would be:
A. $24,000. B. $22,000. C. $19,000. D. $20,000. 99. Kansas Enterprises purchased equipment for $60,000 on January 1, 2018. The equipment is expected to have a five-year life, with a residual value of $5,000 at the end of five years. Using the double-declining balance method, depreciation expense for 2019 would be:
A. $22,000. B. $13,200. C. $14,400. D. $24,000. 100.Kansas Enterprises purchased equipment for $60,000 on January 1, 2018. The equipment is expected to have a five-year life, with a residual value of $5,000 at the end of five years. Using the double-declining balance method, the book value at December 31, 2019 would be:
A. $21,600. B. $24,800. C. $36,000. D. $45,600.
7-23 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
101.A machine has a cost of $15,000, an estimated residual value of $3,000, and an estimated useful life of four years. The machine is being depreciated on a straight-line basis. At the end of the second year, what amount will be reported for accumulated depreciation?
A. $9,000. B. $6,000. C. $7,500. D. $3,000. 102.A building was purchased for $50,000. The asset has an expected useful life of 6 years and depreciation expense each year is $8,000 using the straight-line method. What is the residual value of the building?
A. $0. B. $2,000. C. $4,000. D. $6,000. 103.Bricker Enterprises purchased a machine for $100,000 on October 1, 2018. The estimated service life is ten years with a $10,000 residual value. Bricker records partial-year depreciation based on the number of months in service. Depreciation expense for the year ended December 31, 2018, using straight-line depreciation, is:
A. $1,500. B. $7,500. C. $2,250. D. $2,500.
7-24 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
104.Schager Company purchased a computer system at a cost of $40,000. The estimated useful life is 10 years, and the estimated residual value is $5,000. Assuming the company will use the double-declining-balance method, what is the depreciation expense for the second year?
A. $8,000. B. $7,000. C. $5,600. D. $6,400. 105.Shasta Exploring purchases a piece of equipment for $50,000 and the equipment has an expected useful life of five years. Its residual value is estimated to be $4,000. Assuming Shasta uses the double-declining balance depreciation method, what is the depreciation expense for the equipment for the second full year?
A. $9,200. B. $9,040. C. $12,000. D. $11,040. 106.During the first two years, Supplies, Inc. drove the company truck 15,000 and 22,000 miles, respectively, to deliver merchandise to its customers. The company originally purchased the truck for $175,000. If the truck has an estimated life of 10 years or 300,000 miles, with an estimated residual value of $25,000, what amount of deprecation expense should Supplies, Inc. record in the second year using the activity-based method?
A. $11,000. B. $18,500. C. $7,500. D. $16,000.
7-25 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
107.Crestview Estates purchased a tractor on January 1, 2018, for $65,000. The tractor's useful life is estimated to be 30,000 miles and has a residual value of $5,000. If Crestview used the tractor 5,000 miles in 2018 and 3,000 miles in 2019, what is the balance for accumulated
depreciation at the end of 2019 using the activity-based method?
A. $38,000. B. $6,000. C. $16,000. D. $10,000. 108.Nanki Corporation purchased equipment at the beginning of 2018 for $650,000. In 2018 and 2019, Nanki depreciated the asset on a straight-line basis with an estimated useful life of 8 years and a $10,000 residual value. In 2020, due to changes in technology, Nanki revised the useful life to a total of six years (four more years) with zero residual value. What depreciation expense would Nanki record for the year 2020 on this equipment?
A. $108,333. B. $106,667. C. $122,500. D. $81,667. 109.Abbott Company purchased a computer that cost $10,000. It had an estimated useful life of 5 years and no residual value. The computer was depreciated by the straight-line method and was sold at the end of the fourth year of use for $3,000 cash. Abbott should record:
A. a gain of $1,000. B. a loss of $1,000. C. neither a gain nor a loss - the computer was sold at its book value. D. neither a gain nor a loss - the gain that occurred in this case would not be recognized.
7-26 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
110.Costello Company purchased a computer that cost $10,000. It had an estimated useful life of 5 years and no residual value. The computer was depreciated by the straight-line method and was sold at the end of the second year of use for $5,000 cash. Costello should record:
A. a loss of $1,000. B. a gain of $1,000. C. neither a gain nor a loss - the computer was sold at its book value. D. neither a gain nor a loss - the gain that occurred in this case would not be recognized. 111.On January 1, 2016, Jacob Inc. purchased a commercial truck for $48,000 and uses the straight-line depreciation method. The truck has a useful life of eight years and an estimated residual value of $8,000. On December 31, 2018, Jacob Inc. sold the truck for $30,000. What amount of gain or loss should Jacob Inc. record on December 31, 2018?
A. Gain, $22,000. B. Loss, $18,000. C. Gain, $5,000. D. Loss, $3,000. 112.On January 1, 2016, Jacob Inc. purchased a commercial truck for $48,000 and uses the straight-line depreciation method. The truck has a useful life of eight years and an estimated residual value of $8,000. On December 31, 2017, Jacob Inc. sold the truck for $43,000. What amount of gain or loss should Jacob Inc. record on December 31, 2017?
A. Gain, $22,000. B. Loss, $18,000. C. Gain, $5,000. D. Loss, $3,000.
7-27 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
113.On January 1, 2018, Jacob Inc. purchased a commercial truck for $48,000 and uses the straight-line depreciation method. The truck has a useful life of eight years and an estimated residual value of $8,000. Assume the truck was totaled in an accident on December 31, 2019. What amount of gain or loss should Jacob Inc. record on December 31, 2019?
A. Gain, $5,000. B. Loss, $18,000. C. Loss, $38,000. D. Loss, $3,000. 114.On January 1, 2018, Jacob Inc. purchased a commercial truck for $48,000 and uses the straight-line depreciation method. The truck has a useful life of eight years and an estimated residual value of $8,000. On December 31, 2019, the truck was exchanged for a new truck valued at $60,000. Jacob received a trade allowance of $35,000 on the exchange with the remaining $25,000 paid in cash. What amount of gain or loss should Jacob Inc. record on December 31, 2019?
A. Gain, $5,000. B. Loss, $18,000. C. Loss, $38,000. D. Loss, $3,000. 115.Alliance Products purchased equipment that cost $120,000. It had an estimated useful life of four years and no residual value. The equipment was depreciated by the straight-line method and was sold at the end of the third year of use for $25,000 cash. Alliance should record:
A. A gain of $5,000. B. A loss of $5,000. C. Neither a gain nor a loss since the computer was sold at its book value. D. Neither a gain nor a loss since the gain would not be recognized.
7-28 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
116.Alliance Products purchased equipment that cost $120,000. It had an estimated useful life of four years and no residual value. The equipment was depreciated by the straight-line method and was sold at the end of the second year of use for $65,000 cash. Alliance should record:
A. A gain of $5,000. B. A loss of $5,000. C. Neither a gain nor a loss since the computer was sold at its book value. D. Neither a gain nor a loss since the gain would not be recognized. 117.Career Services, Incorporated sold some office equipment for $52,000 on December 31, 2018. The journal entry to record the sale would include which of the following if the original cost of the equipment was $80,000 with a residual value of $5,000 and a useful life of 10 years? Assume the machine was purchased on January 1, 2015 and depreciated using the straightline method.
A. Gain of $2,000. B. Loss of $9,500. C. Gain of $9,500. D. Loss of $2,000. 118.ABO purchased a truck at the beginning of 2018 for $140,000. They sold the truck at the end of 2019 for $95,000. If the expected useful life of the truck was six years with a residual value of $20,000 and ABO uses straight-line depreciation, which of the following is true regarding the entry to record the sale of the truck?
A. Credit Gain $5,000. B. Debit Loss $5,000. C. Credit Accumulated Depreciation $40,000. D. Credit Equipment $100,000.
7-29 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
119.Oregon Adventures purchased equipment for $80,000. They sold the equipment at the end of three years for $45,000. If the expected useful life of the equipment was seven years with a residual value of $10,000, and they use straight-line depreciation, which of the following is true regarding the entry to record the sale of the equipment?
A. Debit Loss $5,000. B. Credit Gain $5,000. C. Credit Accumulated Depreciation $40,000. D. Credit Equipment $5,000. 120.Which of the following intangible assets is not amortized?
A. Patents. B. Copyrights. C. Franchises. D. Goodwill. 121.Which of the following intangible assets may or may not be amortized depending on whether it has a finite or an indefinite life?
A. Patents. B. Copyrights. C. Goodwill. D. Trademarks. 122.Which of the following intangible assets has an indefinite useful life?
A. Patents. B. Copyrights. C. Franchises. D. Goodwill.
7-30 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
123.Which of the following amortization methods is most commonly used?
A. Straight-line. B. Double declining balance. C. Activity based. D. A combination of methods. 124.Which of the following statements is true regarding the amortization of intangible assets?
A. The expected residual value of most intangible assets is zero. B. The service life of an intangible asset is always equal to its legal life. C. Intangible assets with a limited useful life are not amortized. D. In recording amortization, an accumulated amortization account is always used. 125.Bricktown Exchange purchases a copyright for $50,000. The copyright has a remaining legal life of 25 years, but only an expected useful life of five years with no residual value. Assuming the company uses the straight-line method, what is the amortization expense for the first year?
A. $0. B. $2,000. C. $3,333. D. $10,000. 126.Bricktown Exchange purchases a copyright for $50,000. The copyright has a remaining legal life of 25 years, but only an expected useful life of five years with no residual value. Assuming the company uses the straight-line method, what is the carrying value at the end of the first year?
A. $0. B. $10,000. C. $50,000. D. $40,000.
7-31 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
127.Bricktown Exchange purchases a copyright for $50,000. The copyright has a remaining legal life of 25 years, but only an expected useful life of five years with no residual value. Assuming the company uses the straight-line method, what is the carrying value at the end of the second year?
A. $10,000. B. $40,000. C. $50,000. D. $30,000. 128.Berry Co. purchases a patent on January 1, 2018, for $40,000 and the patent has an expected useful life of five years with no residual value. Assuming Berry Co. uses the straight-line method, what is the amortization expense for the year ended December 31, 2019?
A. $0. B. $8,000. C. $16,000. D. $40,000. 129.Berry Co. purchases a patent on January 1, 2018, for $40,000 and the patent has an expected useful life of five years with no residual value. Assuming Berry Co. uses the straight-line method, what is the carrying value of the patent on December 31, 2019?
A. $21,000. B. $33,000. C. $24,000. D. $26,000. 130.Gains on the sale of long-term assets for cash:
A. Are the excess of the book value over the cash received. B. Are recorded as a debit. C. Are reported on a net-of-tax basis if material. D. Are the excess of the cash received over the book value.
7-32 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
131.Losses on the sale of long-term assets for cash:
A. Are the excess of the book value over the cash received. B. Are recorded as a credit. C. Are reported on a net-of-tax basis if material. D. Are the excess of the cash received over the book value. 132.Return on assets is calculated as:
A. Net Income divided by total assets. B. Net Income divided by average total assets. C. Net Income divided by ending total assets. D. Ending total assets divided by net income. 133.Return on assets is equal to:
A. Profit margin plus asset turnover. B. Profit margin minus asset turnover. C. Profit margin times asset turnover. D. Profit margin divided by asset turnover. 134.The balance sheet of Paradise Pizza reports total assets of $1,500,000 and $1,700,000 at the beginning and end of the year, respectively. Net income and sales for the year are $240,000 and $2,000,000, respectively. What is Paradise Pizza's return on assets?
A. 15%. B. 14.12%. C. 16%. D. 12%.
7-33 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
135.The balance sheet of Paradise Pizza reports total assets of $1,500,000 and $1,700,000 at the beginning and end of the year, respectively. Net income and sales for the year are $240,000 and $2,000,000, respectively. What is Paradise Pizza's profit margin?
A. 15%. B. 14.12%. C. 16%. D. 12%. 136.The balance sheet of Paradise Pizza reports total assets of $1,500,000 and $1,700,000 at the beginning and end of the year, respectively. Net income and sales for the year are $240,000 and $2,000,000, respectively. What is Paradise Pizza's asset turnover?
A. 1.25 times. B. 1.33 times. C. 8.33 times. D. 0.80 times. 137.The balance sheet of Purdy's BBQ reports total assets of $800,000 and $900,000 at the beginning and end of the year, respectively. Net income and sales for the year are $85,000 and $1,700,000, respectively. What is Purdy's return on assets?
A. 10%. B. 20%. C. 200%. D. 5%.
7-34 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
138.The balance sheet of Purdy's BBQ reports total assets of $800,000 and $900,000 at the beginning and end of the year, respectively. Net income and sales for the year are $85,000 and $1,700,000, respectively. What is Purdy's profit margin?
A. 5%. B. 10%. C. 20%. D. 50%. 139.The balance sheet of Purdy's BBQ reports total assets of $800,000 and $900,000 at the beginning and end of the year, respectively. Net income and sales for the year are $85,000 and $1,700,000, respectively. What is Purdy's asset turnover?
A. 0.5 times. B. 20.0 times. C. 10.0 times. D. 2.0 times. 140.The balance sheet of Purdy's BBQ reports total assets of $800,000 and $900,000 at the beginning and end of the year, respectively. The return on assets for the year is 20%. What is Purdy's net income for the year?
A. $4,500,000. B. $170,000. C. $4,250,000. D. $85,000.
7-35 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
141.The balance sheet of Hidden Valley Farms reports total assets of $450,000 and $550,000 at the beginning and end of the year, respectively. Net income and sales for the year are $100,000 and $800,000, respectively. What is Hidden Valley's return on assets?
A. 10%. B. 20%. C. 160%. D. 18%. 142.The balance sheet of Hidden Valley Farms reports total assets of $450,000 and $550,000 at the beginning and end of the year, respectively. Net income and sales for the year are $100,000 and $800,000, respectively. What is Hidden Valley's profit margin?
A. 10%. B. 12.5%. C. 18%. D. 22%. 143.The balance sheet of Hidden Valley Farms reports total assets of $450,000 and $550,000 at the beginning and end of the year, respectively. Net income and sales for the year are $100,000 and $800,000, respectively. What is Hidden Valley's asset turnover?
A. 1.6 times. B. 1.8 times. C. 1.5 times. D. 0.2 times.
7-36 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
144.The balance sheet of Hidden Valley Farms reports total assets of $450,000 and $550,000 at the beginning and end of the year, respectively. The return on assets for the year is 10%. What is Hidden Valley's net income for the year?
A. $5,000,000. B. $55,000. C. $5,500,000. D. $50,000. 145.Recognition of impairment for long-term assets is required if book value exceeds:
A. Original cost. B. Fair value. C. Future cash flows. D. Accumulated depreciation. 146.The amount of impairment loss is the excess of book value over:
A. Carrying value. B. Future cash flows. C. Fair value. D. Future revenues. 147.Accounting for impairment losses:
A. Involves a two-step process to first test for impairment and then record the loss. B. Applies only to depreciable, operational assets. C. Applies only to assets with finite lives. D. All of these.
7-37 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
148.In testing for impairment of an operational asset, an impairment loss is required if the:
A. Asset's book value exceeds the present value of its expected future cash flows. B. Expected future cash flows exceeds the asset's book value. C. Present value of expected future cash flows exceeds its carrying value. D. Asset's book value exceeds the expected future cash flows. 149.Wilson Inc. owns equipment for which it originally paid $70 million and has recorded accumulated depreciation on the equipment of $12 million. Due to adverse economic conditions, Wilson's management determined that it should assess whether an impairment should be recognized for the equipment. The estimated future cash flows to be provided by the equipment total $60 million, and its fair value at that point totals $50 million. Under these circumstances, Wilson:
A. Would record no impairment loss on the equipment. B. Would record an $8 million impairment loss on the equipment. C. Would record a $20 million impairment loss on the equipment. D. Would record a $2 million impairment loss on the equipment. E. The estimated future cash flows exceed the current book value, so no impairment exists. 150.Leonard's Jewelry owns a patent with a carrying value of $50 million. Due to adverse economic conditions, Leonard's management determined that it should assess whether an impairment should be recognized for the patent. The estimated future cash flows to be provided by the patent total $43 million, and its fair value at that point totals $35 million. Under these circumstances, Leonard:
A. Would record no impairment loss on the patent. B. Would record a $7 million impairment loss on the patent. C. Would record a $15 million impairment loss on the patent. D. Would record a $31 million impairment loss on the patent.
7-38 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
151.C-Stop reports the following information at year-end: Book
Estimated
Fair
Value Cash Flows
Value
Building
$500,000
$380,000
$360,000
Patent
$35,000
$40,000
$38,000
Copyright
$40,000
$38,000
$39,000
Machine
$100,000
$120,000
$85,000
Based on the above information, what is the total amount of impairment loss that C-Stop should record at year end?
A. $141,000. B. $126,000. C. $123,000. D. $122,000. 152.Maple Inc. has the following information regarding its assets: Book
Estimated
Fair
Value
Cash Flows
Value
Equipment
$35,000
$30,000
$28,000
Building
$68,000
$70,000
$65,000
Patent
$30,000
$34,000
$32,000
What amount of loss should be recorded due to asset impairments?
A. $10,000. B. $9,000. C. $8,000. D. $7,000.
Matching Questions
7-39 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
153 Match the following . 1. Improvement
Recording an expenditure as an asset.
____
Expenses after acquisition that maintain a given level of 2. Addition 3. Materiality
benefits.
____
The cost of replacing a major component of an asset.
____
Occurs when we add a new major component to an existing 4. Capitalize
asset.
____
Large enough to influence an investor or creditor's decision.
____
Allocates an asset's cost based on its use.
____
5. Repairs and maintenance 154.Match the following
1. Straight-line method 2. Activity-based method 3. Amortization
Allocates an equal amount of depreciation to each year of the asset's service life.
____
Allocating the cost of an intangible asset over its service life.
____
The process of recording expense for natural resources.
____
4. Decliningbalance method
An accelerated depreciation method that records more 5. Depletion
depreciation in earlier years and less depreciation in later years.
____
155.Match the following
Payment for the exclusive right to use the company's name and to 1. Trademark 2. Patent
sell its products within a specified geographical area.
____
An exclusive right to manufacture a product or to use a process.
____
A word, slogan, or symbol that distinctively identifies a company, 3. Copyright
product, or service.
____
An exclusive right of protection given to the creator of a published work such as a song, film, painting, photograph, book, or computer 4. Goodwill
software.
____
The purchase price of a company less the fair value of the net 5. Franchise
assets acquired.
____
7-40 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
156.Match the following
1. Accumulated
A contra-asset account representing the total depreciation
depreciation
taken to date.
____
Equal to the original cost of the asset minus the current 2. Service life 3. Depreciation
balance in accumulated depreciation.
____
Allocating the cost of a tangible asset over its service life.
____
The amount the company expects to receive from selling the 4. Residual value
asset at the end of its service life.
____
How long the company expects to receive benefits from the 5. Book value
asset before disposing of it.
____
157.Match the following
Net income divided by average total assets; measures the amount 1. Impairment 2. Return on
of net income generated for each dollar invested in assets.
____
Net income divided by net sales; indicates the earnings per dollar of
assets
sales.
3. Asset
Net sales divided by average total assets; measures the sales per
turnover
dollar of assets invested.
____ ____
Occurs when the future cash flows (future benefits) generated for a long-term asset fall below its book value (cost minus accumulated 4. Big bath
depreciation).
____
Recording all losses in one year to make a bad year even worse.
____
5. Profit margin
Essay Questions
7-41 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
158.Soccer Wholesale purchased land and a warehouse for $800,000. In addition to the purchase price, Soccer Wholesale makes the following expenditures related to the acquisition: broker's commission, $48,000; title insurance, $3,000; and miscellaneous closing costs, $8,000. The warehouse is immediately demolished at a cost of $80,000 in anticipation of building a new warehouse. Determine the amount Soccer Wholesale should record as the cost of the land.
159.Holiday Laboratories purchased a high speed industrial centrifuge at a cost of $420,000. Shipping costs totaled $15,000. Foundation work to house the centrifuge cost $8,000. An additional water line had to be run to the equipment at a cost of $3,000. Labor and testing costs totaled $6,000. Materials used up in testing cost $3,000. What is the total cost of the equipment? How much of this amount should be expensed immediately?
7-42 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
160.Little King Sandwiches made the following expenditures related to its restaurant: 1. Replaced the heating and air conditioning equipment a cost of $15,000. 2. Remodeled the restaurant building. The total cost of the project was $150,000. 3. Performed annual building maintenance at a cost of $47,000. 4. Paid annual insurance premium on the property for the coming year, $7,700. 5. Purchased a new delivery truck, $22,500. 6. Landscaped the property and added outdoor lights, $9,000. Little King credits cash for each of these expenditures. Indicate the account to be debited for each of these expenditures.
7-43 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
161.Suddenly Salad had the following expenditures related to developing its trademark. General advertising costs
$300,000
Advertising specifically focused on trademark development 120,000 Legal fees to register trademark
52,000
Registration and design fees for the trademark
38,000
Legal fees for successful defense of the new trademark
33,000
Total
$543,000
During your year-end review of the accounts related to intangibles, you discover that the company has capitalized all the above as costs of the trademark. Management contends that all of the costs increase the value of the trademark; therefore, all the costs should be capitalized. 1. Which of the above costs should the company capitalize to the Trademark account in the balance sheet? 2. Which of the above costs should the company report as expense in the income statement?
7-44 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
162.New Harvest Bakery acquired all the outstanding common stock of Red Rock Bakery for $68,000 in cash. The book values and market values of Red Rock's assets and liabilities were as follows: Book Value Fair Value Current assets
$24,000
$30,000
Property, plant, and equipment
44,000
56,000
Other assets
4,000
6,000
Current liabilities
16,000
16,000
Long-term liabilities
24,000
22,000
Calculate the amount paid for goodwill.
163.Western Wholesale Foods incurs the following expenditures during the current fiscal year: (1) salaries for the repair technicians, $155,000; (2) remodeling of the executive offices, $84,000; (3) annual maintenance costs related to its machinery, $72,900; (4) improvement of the production line resulting in an increase in productivity, $38,000; and (5) addition of a sprinkler system to the manufacturing facility to reduce the risk of fire damage, $35,000. How should Western account for each of these expenditures?
7-45 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
164.Taco Hut purchased equipment on May 1, 2018, for $15,000. Residual value at the end of an estimated 8 year service life is expected to be $3,000. Calculate depreciation expense using the straight-line method for 2018 and 2019, assuming a December 31 year-end.
165.China Dragon purchased new restaurant equipment on September 1, 2018, for $8,000. Residual value at the end of an estimated 5 year service life is expected to be $2,000. Calculate depreciation expense using the straight-line method for 2018 and 2019, assuming a December 31 year-end.
7-46 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
166.Mountainview Resorts purchased equipment for $40,000. Residual value at the end of an estimated four-year service life is expected to be $8,000. The machine operated for 2,200 hours in the first year and the company expects the machine to operate for a total of 10,000 hours over its four year life. Calculate depreciation expense for the first year using each of the following depreciation methods: (1) straight-line, (2) double-declining-balance, and (3) activity-based.
167.Chubbyville purchases a delivery van for $23,500. Chubbyville estimates a four-year service life and a residual value of $2,500. During the four-year period, the company expects to drive the van 105,000 miles. Calculate annual depreciation for the four-year life of the van using each of the following methods. Round all amounts to the nearest dollar. 1. Straight line. 2. Double-declining-balance. 3. Activity-based. Actual miles driven each year were 24,000 miles in Year 1; 26,000 miles in Year 2; 22,000 miles in Year 3; and 25,000 miles in Year 4. Note that actual total miles of 97,000 fall short of expectations by 8,000 miles.
7-47 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
168.Burger Chef acquired a delivery truck on March 1, 2018 for $26,000. The company estimates a residual value of $2,000 and a 6-year service life. It expects to drive the truck 80,000 miles. Actual mileage was 12,000 miles in 2018 and 16,000 miles in 2019. Calculate depreciation expense using the activity-based method for 2018 and 2019, assuming a December 31 yearend.
169.Strawberry Fields purchased a tractor at a cost of $38,000 and sold it two years later for $25,000. Strawberry Fields recorded depreciation using the straight-line method, a five-year service life, and an $8,000 residual value. What was the gain or loss on the sale? Record the sale.
7-48 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
170.At the beginning of the year, Big Time Tires acquired 100% of the common stock of Discount Tires. The purchase price allocation included the following items: $800,000, patent; $300,000, trademark considered to have an indefinite useful life; and $2 million, goodwill. Big Time Tire's policy is to amortize intangible assets with finite useful lives using the straight-line method, no residual value, and a five-year service life. What is the total amount of amortization expense that would appear in Big Time Tire's income statement for the first year related to these items?
171.On January 1, 2018, The Donut Stop purchased a patent for $80,000. The remaining legal life is 20 years, but the company estimates the patent will be useful for only five more years. In January 2019, the company incurred legal fees of $25,000 in successfully defending a patent infringement suit. The successful defense did not change the company's estimate of useful life. The Donut Stop's year end is December 31. Record the purchase and amortization in 2018 and the legal fees and amortization in 2019. What is the balance in the Patents account at the end of 2019?
7-49 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
172.The Bomb Pop Corporation sold ice cream equipment for $16,000. They originally purchased the equipment for $40,000, and depreciation through the date of sale totaled $25,000. What was the gain or loss on the sale of the equipment? Record the sale of the equipment.
173.Nate's Hot Dogs exchanges long-term assets with Lizzy's Lemonade. Nate receives a delivery truck and gives up a piece of machinery. The fair value and book value of the machinery were $27,000 and $25,000 (original cost of $35,000 less accumulated depreciation of $10,000), respectively. Since the delivery truck was worth $32,000, Nate paid an additional $5,000 in cash to Lizzy. Record the exchange for Nate's Hot Dogs.
7-50 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
174.New World Deli exchanged land for a more suitable parcel of land to be used for a new restaurant. New World Deli reported the old land at its original cost of $85,000. According to an independent appraisal, the old land currently is worth $110,000. New World Deli paid $15,000 in cash to complete the transaction. Record the exchange.
7-51 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
175.Allied Construction and Axis Construction reported the following information in their annual financial statements ($ in millions): Allied Construction
2018
2017
$48,283
$46,927
Net income
2,809
3,105
Total assets
30,869
27,767
Axis Construction
2018
2017
$77,349
$90,837
Net income
4,395
5,761
Total assets
44,324
52,263
Sales
Sales
Required: 1. Calculate Allied Construction’s return on assets, profit margin, and asset turnover ratio for 2018. 2. Calculate Axis Construction's return on assets, profit margin, and asset turnover ratio for 2018. 3. Which company has the better profit margin and which company has the better asset turnover?
7-52 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
176.ACME Drilling is evaluating an offshore oil-drilling platform for possible impairment. They estimate the following: book value, $18.5 million; fair value, $12 million; sum of estimated future cash flows generated from the oil drilling platform, $16 million. What amount of impairment loss, if any, should they record?
177.Northwest Catering owns and operates several restaurant services in Oregon, Washington, and Idaho. One restaurant chain has experienced sharply declining profits. The company's management has decided to test the operational assets for possible impairment. The relevant information for these assets is presented below: Book value
$4.5 million
Estimated total future cash flows
5.0 million
Fair value
3.5 million
Determine the amount of the impairment loss, if any.
7-53 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
178.China Express purchased land for $140,000. Prior to construction on the new building, the land had to be cleared of trees and brush. Costs incurred during the first year are listed below: Land clearing costs
$5,000
Architect fees (for new building)
30,000
Legal fees for title investigation of land
1,000
Property taxes on land (for the first year)
2,500
Building construction costs
440,000
Required: Determine the amounts that should be recorded in the land and the new building accounts.
7-54 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
179.El Tapitio purchased equipment from Old World Deli. Old World Deli was closing its business and sold its restaurant equipment for $80,000. In addition to the purchase price, El Tapitio paid shipping costs of $2,000. Employees of El Tapitio installed the ovens; labor costs were $10,000. An outside contractor performed some of the electrical work for $2,200. El Tapitio incurred costs of $800 in testing the equipment. Required: 1. Prepare a schedule showing the amount at which the equipment should be recorded in El Tapitio's equipment account. 2. Indicate where any amounts not included in the equipment account should be recorded.
7-55 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
180.Nordic Outfitters purchased all the outstanding common stock of European Retail for $3,000,000 in cash. The book values and fair values of European Retail's assets and liabilities were: Book Value Fair Value Receivables
$250,000
Property, plant, and equipment
2,000,000 2,400,000
Intangible assets Liabilities Net Assets
200,000
$250,000
500,000
(650,000) (650,000) $1,800,000 $2,500,000
Required: 1. Calculate the amount paid for goodwill. 2. Record Nordic Outfitters' acquisition of European Retail.
7-56 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
181.Lincoln Driving Academy purchased a used car to use in its driver's education program. Lincoln incurred the following expenses related to the car: 1. Painted the car and fixed a dent on the side of the car at a cost of $2,700. The repairs are considered extensive and increase future benefits. 2. Installed a driver's side brake to be used by the instructor if necessary. 3. Paid the annual registration fees of $120. 4. Performed annual maintenance and repairs at $400. 5. Overhauled the engine at a cost $2,600, increasing the service life of the car by an estimated four years. Required: Indicate whether Lincoln should capitalize or expense each of these expenditures. How could Lincoln use expenditures like these to increase reported earnings?
7-57 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
182.Diamond Autobody purchased new equipment for $90,000. Residual value at the end of an estimated four-year service life is expected to be $10,000. During the four-year period, the company expects to use the equipment a total of 5,000 hours. Required: Prepare a depreciation schedule for the four-year life of the equipment using the following methods: 1. Straight-line. 2. Double-declining-balance. 3. Activity-based. Actual use per year was as follows: Year
Hours Used
1
1,200
2
1,400
3
1,500
4
1,100
7-58 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
183.The Snack Stop had the following long-term asset balances as of January 1, 2018: Accumulated
Book
Cost
Depreciation
Value
Land
$90,000
–
$90,000
Building
600,000
($60,000)
540,000
Equipment
200,000
(72,000)
128,000
Patent
80,000
(20,000)
60,000
All of the assets were purchased at the beginning of 2016. The building is depreciated over a 20-year service life using the straight-line method and estimating no residual value. The equipment is depreciated over a 10-year useful life using the double-declining-balance method with an estimated residual value of $10,000. The patent is estimated to have an 8year service life with no residual value and is amortized using the straight-line method. Depreciation and amortization has already been calculated for the first two years. Required: 1. For the year ended December 31, 2018, record depreciation expense for buildings and equipment. Land is not depreciated. 2. For the year ended December 31, 2018, record amortization expense for the patent. 3. Calculate the book value for each of the four long-term assets at December 31, 2018.
7-59 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
184.Old World Deli is in the process of closing its operations. It sold its three-year-old restaurant equipment to El Tapitio for $80,000. The equipment originally cost $220,000 and had an estimated service life of 5 years and an estimated residual value of $20,000. Old World Deli uses straight-line depreciation for all equipment. Required: 1. Calculate the balance in the accumulated depreciation account at the end of the third year. 2. Calculate the book value of the equipment at the end of the third year. 3. What is the gain or loss on the sale of the equipment at the end of the third year? 4. Record the sale of the equipment at the end of the third year.
7-60 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
185.The following information relates to the intangible assets of University Hero: a. On January 1, 2018, University Hero completed the purchase of Whole Grain Foods for $800,000 in cash. The fair value of the identifiable net assets of Whole Grain Foods was $625,000. b. Included in the assets purchased from Whole grain Foods was a patent valued at $75,000. The original legal life of the patent was 20 years. There are still 8 years left on the patent, but University Hero estimates the patent will be useful for only 3 more years. c. University Hero acquired a franchise on July 1, 2018, by paying an initial franchise fee of $100,000. The contractual life of the franchise is 5 years. Required: 1. Record amortization expense for the intangible assets at December 31, 2018. 2. Prepare the intangible asset section of the December 31, 2018 balance sheet.
7-61 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
186.Reported below is selected financial information from two competing retail companies ($ in millions): Company A
2018
2017
Sales
$405,607
$378,799
Net income
$13,400
$12,731
Total assets
$163,429
$163,514
Company B
2018
2017
Sales
$64,948
$63,367
Net income
$2,214
$2,849
Total assets
$44,106
$44,560
Required: 1. Calculate the return on assets, profit margin, and asset turnover ratio for Company A for 2018. 2. Calculate the return on assets, profit margin, and asset turnover ratio for Company B for 2018. 3. Which company has the higher profit margin and which company has the higher asset turnover?
7-62 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
187.Kelli Davis is in the flower business. While business has been steady, she wonders if she should expand her business to include candy as well. Both flowers and candy fit well into her business model. Kelli provides the following projections of annual sales, net income, and average total assets for the flower business alone and for the business if both flowers and candy were sold. Flowers and Flowers Only
Candy
$380,000
$500,000
Net income
40,000
60,000
Average total assets
200,000
250,000
Sales
Required: 1. Calculate Kelli's return on assets, profit margin, and asset turnover for flowers only. 2. Calculate Kelli's return on assets, profit margin, and asset turnover for flowers and candy. 3. Based on these ratios, what recommendation would you make?
188.If a company initially records an expense incorrectly as an asset, explain how this mistake affects the income statement and the balance sheet.
7-63 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
189.Why don't we depreciate land? What are land improvements? Why do we record land and land improvements separately?
190.Explain how the accounting treatment differs between purchased and internally developed intangible assets.
191.Contrast the effects of the straight-line, declining-balance, and activity-based depreciation methods on annual depreciation expense.
7-64 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
192.Which depreciation method is most common for financial reporting? Which depreciation method is most common for tax reporting? Why do companies choose these methods?
7-65 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 07 Long-Term Assets Answer Key
True / False Questions
1.
The CEO, as head of the company, is ultimately responsible for the firm's accounting. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Topic: Property, Plant, and Equipment
2.
We record a long-term asset at its cost less all expenditures necessary to get the asset ready for use. FALSE We record a long-term asset at its cost plus all expenditures necessary to get the asset ready for use.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Topic: Property, Plant, and Equipment
7-66 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3.
We use the term capitalize to describe recording an expenditure as an expense. FALSE We use the term capitalize to describe recording an expenditure as an asset.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Topic: Property, Plant, and Equipment
4.
Cash received from the sale of salvaged materials increases the total cost of land. FALSE Cash received from the sale of salvaged materials decreases the total cost of land.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Topic: Property, Plant, and Equipment
5.
Land improvements are recorded separately from the land itself because, unlike land, these assets are subject to depreciation. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Topic: Property, Plant, and Equipment
7-67 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
6.
A basket purchase is the purchase of more than one asset at the same time for one purchase price. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Topic: Property, Plant, and Equipment
7.
We allocate natural resources to expense through a process known as "depletion." TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Topic: Property, Plant, and Equipment
8.
Many intangible assets are not recorded on the balance sheet at their estimated market values. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-02 Identify the major types of intangible assets. Topic: Intangible Assets
7-68 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
9.
We record purchased intangible assets at their original cost plus all other costs necessary to get the asset ready for use. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-02 Identify the major types of intangible assets. Topic: Intangible Assets
10.
Most of the costs associated with internally developed intangible assets are recorded as intangible assets on the balance sheet. FALSE We expense most of the costs for internally developed intangible assets to the income statement as we incur them.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-02 Identify the major types of intangible assets. Topic: Intangible Assets
11.
Research and development costs incurred in developing a patent internally are not recorded as an intangible asset in the balance sheet, but rather are expensed directly in the income statement. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-02 Identify the major types of intangible assets. Topic: Intangible Assets
7-69 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12.
International accounting standards allow firms to record development costs that benefit future periods as an intangible asset. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-02 Identify the major types of intangible assets. Topic: Intangible Assets
13.
Advertising costs that increase the value of trademarks are recorded to the asset account entitled Trademarks. FALSE Advertising costs are recorded as expenses in the income statement.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-02 Identify the major types of intangible assets. Topic: Intangible Assets
14.
We expense internally generated intangible assets, such as research and development and advertising costs, as we incur them. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-02 Identify the major types of intangible assets. Topic: Intangible Assets
7-70 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15.
A patent is an exclusive right to a published work such as a song, film, or painting. FALSE A patent is an exclusive right to manufacture a product or to use a process. A copyright is an exclusive right of protection given to the creator of a published work such as a song, film, painting, photograph, book, or computer software.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-02 Identify the major types of intangible assets. Topic: Intangible Assets
16.
A copyright is an exclusive right of protection given to the creator of a published work such as a song, film, painting, photograph, book, or computer software. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-02 Identify the major types of intangible assets. Topic: Intangible Assets
17.
A trademark is a word, slogan, or symbol that distinctively identifies a company, product, or service. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-02 Identify the major types of intangible assets. Topic: Intangible Assets
7-71 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
18.
When a firm develops a trademark internally through advertising, it does not record the advertising costs as an intangible asset, but rather expenses them in the income statement. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-02 Identify the major types of intangible assets. Topic: Intangible Assets
19.
The franchisee's initial fee is recorded as an expense on the income statement. FALSE The franchisee's initial fee is recorded as an intangible asset and then expensed over the life of the franchise agreement.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-02 Identify the major types of intangible assets. Topic: Intangible Assets
20.
We record goodwill as an intangible asset in the balance sheet only when we purchase it as part of the acquisition of another company. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-02 Identify the major types of intangible assets. Topic: Intangible Assets
7-72 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
21.
The acquiring company records goodwill equal to the purchase price less the book value of the net assets acquired. FALSE The acquiring company records goodwill equal to the purchase price less the fair value of the net assets acquired.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-02 Identify the major types of intangible assets. Topic: Intangible Assets
22.
We capitalize repairs and maintenance expenditures because they maintain a given level of benefits. FALSE We expense repairs and maintenance expenditures in the period incurred because they maintain a given level of benefits.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-03 Describe the accounting treatment of expenditures after acquisition. Topic: Expenditures after Acquisition
7-73 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
23.
If a firm successfully defends an intangible right, it should expense the litigation costs as incurred. FALSE If a firm successfully defends an intangible right, it should capitalize the litigation costs and amortize them over the remaining useful life of the related intangible.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-03 Describe the accounting treatment of expenditures after acquisition. Topic: Expenditures after Acquisition
24.
If the defense of an intangible right is unsuccessful, then the firm should expense the litigation costs as incurred because they provide no future benefit. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-03 Describe the accounting treatment of expenditures after acquisition. Topic: Expenditures after Acquisition
25.
Depreciation in accounting is the process of allocating to expense the cost of an asset over its service life. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
7-74 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
26.
Depreciation in accounting records the decrease in value of an asset. FALSE Depreciation in accounting is the process of allocating to expense the cost of an asset over its service life.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
27.
Accumulated Depreciation is a liability account that is increased by credits. FALSE Accumulated Depreciation is a contra-asset account; it reduces an asset account.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
28.
Book value is equal to the original cost of the asset minus the current balance in Accumulated Depreciation. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
7-75 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
29.
The Accumulated Depreciation account allows us to reduce the carrying value of assets through depreciation, while maintaining the original cost of each asset in the accounting records. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
30.
The service life of an asset is always equal to the full life of the asset. FALSE The service life is how long the company expects to receive benefits from the asset before disposing of it.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
31.
Residual value, also referred to as salvage value, is the amount the company expects to receive from selling the asset at the end of its service life. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
7-76 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
32.
With the straight-line depreciation method, we allocate an equal amount of the depreciable cost to each year of the asset's service life. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
33.
When a change in estimate is required, the company changes depreciation in prior, current and future years. FALSE When a change in estimate is required, the company changes depreciation in current and future years, but not in prior periods.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
34.
Straight-line depreciation assumes that the benefits we derive from the use of an asset are the same each year. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
7-77 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
35.
Declining-balance depreciation will be lower than straight-line depreciation in earlier years, but higher in later years. FALSE Declining-balance depreciation will be higher than straight-line depreciation in earlier years, but lower in later years.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
36.
In an activity-based depreciation method, we allocate an asset's cost based on its use. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
37.
Straight-line produces a lower net income than accelerated methods in the earlier years of an asset's life. FALSE Straight-line produces a higher net income than accelerated methods in the earlier years of an asset's life.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. 7-78 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Depreciation of Property, Plant, and Equipment
38.
Straight-line, declining-balance, and activity-based depreciation all are acceptable depreciation methods for both financial reporting and tax reporting. FALSE These are acceptable methods for financial reporting, not tax reporting. Most companies use MACRS for income tax depreciation.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
39.
Most companies use straight-line amortization for intangibles and credit the amount of amortization to the intangible asset account itself rather than to Accumulated Amortization. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-05 Calculate amortization of intangible assets. Topic: Amortization of Intangible Assets
40.
Goodwill is amortized over its estimated useful life. FALSE Intangible assets with an indefinite useful life (goodwill and most trademarks) are not amortized.
AACSB: Reflective Thinking AICPA: FN Measurement
7-79 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-05 Calculate amortization of intangible assets. Topic: Amortization of Intangible Assets
41.
Intangible assets with an indefinite useful life (goodwill and most trademarks) are not amortized. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-05 Calculate amortization of intangible assets. Topic: Amortization of Intangible Assets
42.
We record a gain if we sell an asset for less than book value. FALSE We record a gain if we sell an asset for more than book value.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-06 Account for the disposal of long-term assets. Topic: Asset Disposition: Sale, Retirement, or Exchange
43.
We record a loss if we sell an asset for less than book value. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-06 Account for the disposal of long-term assets. Topic: Asset Disposition: Sale, Retirement, or Exchange 7-80 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
44.
A more comparable measure of profitability than income is return on assets, which equals net income divided by average total assets. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Topic: Walmart vs. Costco
45.
Profit margin is net income divided by net sales. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Topic: Walmart vs. Costco
46.
Asset turnover is net sales divided by ending total assets. FALSE Asset turnover is net sales divided by average total assets.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Topic: Walmart vs. Costco
7-81 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
47.
Management must review long-term assets for impairment when events or changes in circumstances indicate that book value might not be recoverable. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-08 Identify impairment situations and describe the two-step impairment process. Topic: Asset Impairment
48.
Impairment occurs when the future cash flows generated for a long-term asset fall below its fair value. FALSE Impairment occurs when the future cash flows generated for a long-term asset fall below its book value (cost minus accumulated depreciation).
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-08 Identify impairment situations and describe the two-step impairment process. Topic: Asset Impairment
49.
An impairment loss is equal to the amount by which book value exceeds the fair value of a long-term asset. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-08 Identify impairment situations and describe the two-step impairment process. Topic: Asset Impairment
7-82 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
50.
Taking a "big bath" is recording all losses in one year to make a bad year even worse. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-08 Identify impairment situations and describe the two-step impairment process. Topic: Asset Impairment
Multiple Choice Questions
51.
Real Angus Steakhouse purchased land for $75,000 cash. They also incurred commissions of $4,500, property taxes of $5,000, and title insurance of $800. The $5,000 in property taxes includes $4,000 in back taxes paid by Real Angus on behalf of the seller and $1,000 due for the current year after the purchase date. For what amount should Real Angus Steakhouse record the land?
A. $83,500. B. $84,300. C. $85,300. D. $75,000. $75,000 + $4,500 + $4,000 + $800 = $84,300.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Topic: Property, Plant, and Equipment
7-83 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
52.
Which of the following would be recorded as land improvements?
A. Property taxes. B. Title insurance. C. Real estate commissions. D. Adding a parking lot. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Topic: Property, Plant, and Equipment
53.
Which of the following would not be recorded as land improvements?
A. Adding a parking lot. B. Landscaping. C. Sidewalks. D. Closing costs on purchasing the land. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Topic: Property, Plant, and Equipment
7-84 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
54.
Bad Brads BBQ purchased a piece of equipment by paying $5,000 cash. They also incurred a shipping cost of $400 to get the equipment to its factory. The fair value of this equipment is $7,000. For what amount should Bad Brads BBQ record the equipment?
A. $5,000. B. $5,400. C. $7,000. D. $7,400. $5,000 + $400 = $5,400.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Topic: Property, Plant, and Equipment
55.
Wiley Company purchased new equipment for $60,000. Wiley paid cash for the equipment. Other costs associated with the equipment were: transportation costs, $1,000; sales tax paid $3,000; and installation cost, $2,500. The cost recorded for the equipment was:
A. $60,000. B. $61,000. C. $64,000. D. $66,500. $60,000 + $1,000 + $3,000 + $2,500 = $66,500.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Topic: Property, Plant, and Equipment
7-85 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
56.
Cowboy Development incurred the following costs associated with the purchase of a piece of land that it will use to re-build an office building: Sale price of the land
$400,000
Sale of salvaged parts already on land
$20,000
Demolition of the old building
$30,000
Ground breaking ceremony (food and supplies)
$1,500
Land preparation and leveling
$7,500
What amount should be recorded for the purchase of the land?
A. $437,500. B. $417,500. C. $439,000. D. $419,000. $400,000 - $20,000 + $30,000 + $7,500 = $417,500. The $1,500 in costs for the ground breaking ceremony should be expensed.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Topic: Property, Plant, and Equipment
7-86 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
57.
Bahama Catering purchased a commercial dishwasher by paying cash of $8,000. The dishwasher's fair value on the date of the purchase was $10,000. The company incurred $600 in transportation costs, $500 installation fees, and paid $300 annual insurance of the equipment. For what amount will Bahama record the dishwasher?
A. $10,000. B. $9,100. C. $8,000. D. $9,400. $8,000 + $600 + $500 = $9,100. The annual insurance on the equipment of $300 should be recorded as insurance expense over the first year of coverage.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Topic: Property, Plant, and Equipment
58.
Bahama Catering purchased a commercial dishwasher by paying cash of $5,000. The dishwasher's fair value on the date of the purchase was $5,600. The company incurred $400 in transportation costs, $300 installation fees, and paid a $200 fine for illegal parking while the dishwasher was being delivered. For what amount will Bahama record the dishwasher?
A. $5,600. B. $5,700. C. $5,900. D. $6,300. $5,000 + $400 + $300 = $5,700. The parking ticket should be expensed as incurred since it is not a cost necessary to get the asset ready for use.
AACSB: Analytical Thinking AICPA: FN Measurement
7-87 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Topic: Property, Plant, and Equipment
59.
The following financial information is from Cook Company: Accounts Payable
$55,000
Land
$90,000
Inventory
$10,500
Accounts Receivable
$7,500
Equipment
$8,000
Deferred Revenue
$58,500
Short-term Investments
$20,000
Notes Receivable (due in 8 months)
$45,500
Interest Payable
$2,000
Patents
$75,000
What is the total amount of property, plant, and equipment assuming the accounts above reflect normal activity?
A. $90,000. B. $98,000. C. $165,000. D. $110,000. $90,000 + $8,000 = $98,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Topic: Property, Plant, and Equipment
7-88 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
60.
Capital Construction purchased a 3-acre tract of land for a building site for $350,000. The company demolished the old building at a cost of $12,000, but was able to sell scrap from the building for $1,500. The cost of title insurance was $900 and attorney fees for reviewing the contract was $500. Property taxes paid were $3,000, of which $250 covered the period after the purchase date. The capitalized cost of the land is:
A. $366,400. B. $366,150. C. $364,650. D. $231,150.
Purchase price
$350,000
Demolition costs
12,000
Scrap sold
(1,500)
Title insurance
900
Legal fees
500
Property taxes ($3,000 – 250) Total cost of land
2,750 $364,650
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Topic: Property, Plant, and Equipment
7-89 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
61.
Landon Co. purchased a $500,000 tract of land that is intended to be the site of a new office complex. Landon incurred additional costs and realized salvage proceeds as follows: Demolition of existing building on site
$75,000
Legal and other fees to close escrow
15,000
Proceeds from sale of demolition scrap 10,000
What would be the capitalized cost of the land?
A. $500,000. B. $575,000. C. $580,000. D. $590,000.
Purchase price
$500,000
Demolition costs
75,000
Legal fees
15,000
Sale of scrap
(10,000)
Total cost of land
$580,000
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Topic: Property, Plant, and Equipment
7-90 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
62.
Fruitasia purchased land, a building, and equipment for $800,000. The estimated fair values of the land, building, and equipment are $100,000, $700,000, and $200,000, respectively. At what amount would the company record the land?
A. $80,000. B. $90,000. C. $100,000. D. $800,000. $800,000 × [$100,000/($100,000 + $700,000 + $200,000)] = $80,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Topic: Property, Plant, and Equipment
63.
Productive assets that are physically used up or depleted are:
A. Equipment. B. Land. C. Land improvements. D. Natural resources. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Topic: Property, Plant, and Equipment
7-91 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
64.
The following financial information is from Cook Company: Accounts Payable
$55,000
Land
$90,000
Inventory
$10,500
Accounts Receivable
$7,500
Equipment
$8,000
Deferred Revenue
$58,500
Short-term Investments
$20,000
Notes Receivable (due in 8 months)
$45,500
Interest Payable
$2,000
Patents
$75,000
What is the amount of long-term assets assuming the accounts above reflect normal activity?
A. $342,500. B. $173,000. C. $273,500. D. $98,000. $90,000 + $8,000 + $75,000 = $173,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Learning Objective: 07-02 Identify the major types of intangible assets. Topic: Intangible Assets Topic: Property, Plant, and Equipment
7-92 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
65.
The following financial information is from Cook Company: Accounts Payable
$55,000
Land
$90,000
Inventory
$10,500
Accounts Receivable
$7,500
Equipment
$8,000
Deferred Revenue
$58,500
Short-term Investments
$20,000
Notes Receivable (due in 8 months)
$45,500
Interest Payable
$2,000
Patents
$75,000
What is the amount of intangible assets assuming the accounts above reflect normal activity?
A. $95,000. B. $75,000. C. $120,500. D. $140,500. Patents = $75,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-02 Identify the major types of intangible assets. Topic: Intangible Assets
7-93 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
66.
The legal life of a patent is:
A. Forty years. B. Twenty years. C. Life of the inventor plus fifty years. D. Indefinite. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-02 Identify the major types of intangible assets. Topic: Intangible Assets
67.
An exclusive 20-year right to manufacture a product or to use a process is a:
A. Patent. B. Copyright. C. Trademark. D. Franchise. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-02 Identify the major types of intangible assets. Topic: Intangible Assets
68.
The exclusive right to benefit from a creative work, such as a film, is a:
A. Patent. B. Copyright. C. Trademark. D. Franchise. AACSB: Reflective Thinking AICPA: BB Critical Thinking 7-94 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-02 Identify the major types of intangible assets. Topic: Intangible Assets
69.
A word, slogan, or symbol that distinctively identifies a company, product, or service is a:
A. Patent. B. Copyright. C. Trademark. D. Franchise. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-02 Identify the major types of intangible assets. Topic: Intangible Assets
70.
Research and development costs should be:
A. Expensed in the period incurred. B. Expensed in the period they are determined to be unsuccessful. C. Deferred pending determination of success. D. Expensed if unsuccessful, capitalized if successful. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-02 Identify the major types of intangible assets. Topic: Intangible Assets
7-95 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
71.
Morgan Pharmaceutical spends $50,000 this year in research and development for a new drug to cure liver damage. By the end of the year, management feels confident that the new drug will gain FDA approval and lead to higher future sales. What impact will the $50,000 spending have on this year's financial statements?
A. Increase Assets. B. Decrease Revenues. C. Increase Expenses. D. Increase Revenues. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 07-02 Identify the major types of intangible assets. Topic: Intangible Assets
72.
Aspen, Inc. developed a new horse transport device and incurred research and development costs of $250,000. Rather than continue with their own research, Aspen decided to purchase a patent for a similar design from Vail, Inc. for $350,000. What are the total assets and expenses for these developments?
A. Assets $600,000; Expenses $0. B. Assets $250,000; Expenses $350,000. C. Assets $350,000; Expenses $250,000. D. Assets $0; Expenses $600,000. AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 07-02 Identify the major types of intangible assets. Topic: Intangible Assets
7-96 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
73.
Research and development costs should be capitalized when the:
A. Future benefit is probable and the amount can be reasonably estimated. B. Future benefit is reasonably possible and the amount can be reasonably estimated. C. Future benefit is probable and the amount cannot be reasonably estimated. D. None of these. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-02 Identify the major types of intangible assets. Topic: Intangible Assets
74.
Bio-Lab Pharmaceuticals carried on a project to develop a new drug that dramatically shortened the recovery period for flu infection. The project cost the company $150,000 before Bio-Lab abandoned the project due to the slim possibility to gain FDA approval. Bio-Lab then spent $300,000 on another project developing a kind of shot that achieves the same goal for flu recovery, and the company is confident in gaining FDA approval for the new shot and in making profits out of the shot. What amount would be expensed?
A. $0. B. $150,000. C. $300,000. D. $450,000. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 07-02 Identify the major types of intangible assets. Topic: Intangible Assets
7-97 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
75.
Goodwill is:
A. Amortized over the greater of its estimated life or forty years. B. Only recorded by the seller of a business. C. The value of a business as a whole, over and above the value of its net identifiable assets. D. Recorded when created internally through advertising expense. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-02 Identify the major types of intangible assets. Topic: Intangible Assets
76.
In accounting, goodwill
A. May be recorded whenever a company achieves a level of net income that exceeds the industry average. B. Is amortized over its useful life. C. May be recorded when a company purchases another business. D. Must be expensed in the period it is recorded because benefits from goodwill are difficult to identify. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-02 Identify the major types of intangible assets. Topic: Intangible Assets
7-98 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
77.
In accounting, goodwill
A. Is never recorded. B. May be recorded when a company's level of net income exceeds the industry average. C. Must be expensed in the period when it is acquired. D. May be recorded when the company purchases another business. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-02 Identify the major types of intangible assets. Topic: Intangible Assets
78.
The balance sheet of Cattleman's Steakhouse shows assets of $86,400 and liabilities of $15,000. The fair value of the assets is $90,000 and the fair value of its liabilities is $15,000. Longhorn paid Cattleman's $95,000 to acquire it. Longhorn should record goodwill on this purchase of:
A. $3,600. B. $5,000. C. $20,000. D. $23,600.
Purchase price
$95,000
Less: Fair value of net assets: Assets
$90,000
Less: Liabilities assumed 15,000 (75,000) Goodwill
$20,000
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-02 Identify the major types of intangible assets. 7-99 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Intangible Assets
79.
Northern purchased the entire business of Southern including all its assets and liabilities for $600,000. Below is information related to the two companies: Northern Southern Fair value of assets
$1,050,000 $800,000
Fair value of liabilities
575,000
300,000
Reported assets
800,000
650,000
Reported liabilities
500,000
250,000
Net Income for the year
60,000
50,000
How much goodwill did Northern pay for acquiring Southern?
A. $100,000. B. $300,000. C. $200,000. D. $150,000.
Purchase price
$600,000
Less: Fair value of net assets: Assets
$800,000
Less: Liabilities assumed 300,000 (500,000) Goodwill
$100,000
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-02 Identify the major types of intangible assets. Topic: Intangible Assets
7-100 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
80.
Lake Incorporated purchased all of the outstanding stock of Huron Company paying $850,000 cash. Lake assumed all of the liabilities. Book values and fair values of acquired assets and liabilities were: Book Value Fair Value Current assets (net)
$130,000
$125,000
Property, plant, equip. (net)
600,000
750,000
Liabilities
175,000
175,000
Lake would record goodwill of:
A. $0. B. $150,000. C. $345,000. D. $850,000.
Purchase price
$850,000
Less: Fair value of net assets: Assets ($125,000 + 750,000) $875,000 Less: Liabilities assumed Goodwill
175,000 (700,000) $150,000
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-02 Identify the major types of intangible assets. Topic: Intangible Assets
7-101 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
81.
Which of the following subsequent expenditures would be capitalized?
A. Ordinary repair. B. Costs that increase the service life of an asset. C. Routine maintenance. D. Ordinary repair and routine maintenance. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-03 Describe the accounting treatment of expenditures after acquisition. Topic: Expenditures after Acquisition
82.
Which of the following subsequent expenditures would be capitalized?
A. Ordinary repairs and maintenance. B. Additions. C. Improvements. D. Additions and improvements. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-03 Describe the accounting treatment of expenditures after acquisition. Topic: Expenditures after Acquisition
83.
The cost of an engine tune-up is an example of which of the following expenditures after acquisition?
A. Ordinary repairs and maintenance. B. Additions. C. Improvements. D. Legal defense of intangible assets. AACSB: Reflective Thinking 7-102 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-03 Describe the accounting treatment of expenditures after acquisition. Topic: Expenditures after Acquisition
84.
Which of the following subsequent expenditures would not be capitalized?
A. Ordinary repairs and maintenance. B. Additions. C. Improvements. D. Legal defense of intangible assets. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-03 Describe the accounting treatment of expenditures after acquisition. Topic: Expenditures after Acquisition
85.
The cost of replacing a major component on a piece of equipment is an example of:
A. Repairs and maintenance. B. Improvements. C. Additions. D. Legal defense of intangible assets. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-03 Describe the accounting treatment of expenditures after acquisition. Topic: Expenditures after Acquisition
7-103 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
86.
Adding a refrigeration unit to a delivery truck that previously did not have this capability is an example of:
A. Repairs and maintenance. B. Additions. C. Improvements. D. Legal defense of intangible assets. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-03 Describe the accounting treatment of expenditures after acquisition. Topic: Expenditures after Acquisition
87.
The purchase of a new cooling system for $150,000 to upgrade an office building owned by the company would be accounted for as:
A. Goodwill. B. An addition in the Buildings account. C. An expense in the period incurred. D. A patent. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-03 Describe the accounting treatment of expenditures after acquisition. Topic: Expenditures after Acquisition
7-104 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
88.
Woods Company made an ordinary repair to a delivery truck at a cost of $500. Woods' accountant debited the asset account, Equipment. Was this treatment an error, and if so, what will be the effect on Woods' financial statements?
A. No, the repair was accounted for correctly. B. Yes, the error overstated assets and net income. C. Yes, in the years following, net income will be overstated. D. Yes, the error understated net income. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 07-03 Describe the accounting treatment of expenditures after acquisition. Topic: Expenditures after Acquisition
89.
The replacement of a major component increased the productive capacity of equipment from 10 units per hour to 18 units per hour. The expenditure for the replacement component should be debited to:
A. Repairs Expense. B. Maintenance Expense. C. Equipment. D. Gain from Repairs. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-03 Describe the accounting treatment of expenditures after acquisition. Topic: Expenditures after Acquisition
7-105 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
90.
Which of the following subsequent expenditures would not be capitalized?
A. Unsuccessful legal defense of intangible assets. B. Additions. C. Improvements. D. Successful legal defense of intangible assets. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-03 Describe the accounting treatment of expenditures after acquisition. Topic: Expenditures after Acquisition
91.
Which one of the following regarding the book value of an asset is correct?
A. It is the fair value of the asset if the asset is sold. B. It reflects the original cost of the asset less accumulated depreciation. C. It is the original cost of the asset minus the depreciation expense for that asset during the year. D. It is the original cost at which the asset was purchased. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
92.
Which of the following is considered a "contra" account?
A. Deferred Revenue. B. Goodwill. C. Accumulated Depreciation. D. Cost of Goods Sold. AACSB: Reflective Thinking 7-106 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
93.
The factors used to compute depreciation expense are an asset's:
A. Cost, residual value, and physical life. B. Cost, residual value, and service life. C. Fair market value, residual value, and economic life. D. Cost, replacement value, and service life. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
94.
The depreciable cost used in calculating depreciation expense is:
A. Its service life. B. The amount allowable under tax depreciation methods. C. The difference between its replacement value and cost. D. The asset's cost minus its estimated residual value. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
7-107 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
95.
Kansas Enterprises purchased equipment for $60,000 on January 1, 2018. The equipment is expected to have a five-year life, with a residual value of $5,000 at the end of five years. Using the straight-line method, depreciation expense for 2018 would be:
A. $12,000. B. $11,000. C. $60,000. D. None of these. Depreciation expense = (($60,000 - $5,000)/5 years) = $11,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
96.
Kansas Enterprises purchased equipment for $60,000 on January 1, 2018. The equipment is expected to have a five-year life, with a residual value of $5,000 at the end of five years. Using the straight-line method, the book value at December 31, 2018 would be:
A. $44,000. B. $49,000. C. $55,000. D. $60,000. Depreciation expense = (($60,000 - $5,000)/5 years) = $11,000. Book value = $60,000 - $11,000 = $49,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard
7-108 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
97.
Kansas Enterprises purchased equipment for $60,000 on January 1, 2018. The equipment is expected to have a five-year life, with a residual value of $5,000 at the end of five years. Using the straight-line method, depreciation expense for 2019 and the book value at December 31, 2019 would be:
A. $12,000 and $36,000. B. $12,000 and $31,000. C. $11,000 and $33,000. D. $11,000 and $38,000. Depreciation expense = (($60,000 - $5,000)/5 years) = $11,000. Book value = $60,000 - ($11,000 × 2) = $38,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
7-109 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
98.
Kansas Enterprises purchased equipment for $60,000 on January 1, 2018. The equipment is expected to have a five-year life, with a residual value of $5,000 at the end of five years. Using the double-declining balance method, depreciation expense for 2018 would be:
A. $24,000. B. $22,000. C. $19,000. D. $20,000. Depreciation rate = 2/5 = .40. Depreciation expense = $60,000 × .40 = $24,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
99.
Kansas Enterprises purchased equipment for $60,000 on January 1, 2018. The equipment is expected to have a five-year life, with a residual value of $5,000 at the end of five years. Using the double-declining balance method, depreciation expense for 2019 would be:
A. $22,000. B. $13,200. C. $14,400. D. $24,000. Depreciation rate = 2/5 = .40. Depreciation expense = [$60,000 - ($60,000 × .40)] × .40 = $14,400.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze
7-110 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 3 Hard Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
100.
Kansas Enterprises purchased equipment for $60,000 on January 1, 2018. The equipment is expected to have a five-year life, with a residual value of $5,000 at the end of five years. Using the double-declining balance method, the book value at December 31, 2019 would be:
A. $21,600. B. $24,800. C. $36,000. D. $45,600. Depreciation rate = 2/5 = .40. $60,000 × 20% = $24,000 depreciation in the first year. ($60,000 - 24,000) × 20% = $14,400 depreciation in the second year. Book value = $60,000 - $24,000 - $14,400 = $21,600.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
7-111 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
101.
A machine has a cost of $15,000, an estimated residual value of $3,000, and an estimated useful life of four years. The machine is being depreciated on a straight-line basis. At the end of the second year, what amount will be reported for accumulated depreciation?
A. $9,000. B. $6,000. C. $7,500. D. $3,000. ($15,000 - $3,000)/4 years = $3,000 per year × 2 years = $6,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
102.
A building was purchased for $50,000. The asset has an expected useful life of 6 years and depreciation expense each year is $8,000 using the straight-line method. What is the residual value of the building?
A. $0. B. $2,000. C. $4,000. D. $6,000. ($50,000 - X)/6 years = $8,000 depreciation expense, therefore X = $2,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
7-112 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
103.
Bricker Enterprises purchased a machine for $100,000 on October 1, 2018. The estimated service life is ten years with a $10,000 residual value. Bricker records partial-year depreciation based on the number of months in service. Depreciation expense for the year ended December 31, 2018, using straight-line depreciation, is:
A. $1,500. B. $7,500. C. $2,250. D. $2,500. Depreciation expense = [($100,000 - 10,000)/10 years] × 3/12 = $2,250.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
104.
Schager Company purchased a computer system at a cost of $40,000. The estimated useful life is 10 years, and the estimated residual value is $5,000. Assuming the company will use the double-declining-balance method, what is the depreciation expense for the second year?
A. $8,000. B. $7,000. C. $5,600. D. $6,400. Depreciation rate = 2/10 = 20%. $40,000 × 20% = $8,000 depreciation in the first year. ($40,000 - 8,000) × 20% = $6,400 depreciation in the second year.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation
7-113 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
105.
Shasta Exploring purchases a piece of equipment for $50,000 and the equipment has an expected useful life of five years. Its residual value is estimated to be $4,000. Assuming Shasta uses the double-declining balance depreciation method, what is the depreciation expense for the equipment for the second full year?
A. $9,200. B. $9,040. C. $12,000. D. $11,040. Depreciation rate = 2/10 = 20%. $50,000 × 40% = $20,000 depreciation in the first year. ($50,000 - 20,000) × 40% = $12,000 depreciation in the second year.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
7-114 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
106.
During the first two years, Supplies, Inc. drove the company truck 15,000 and 22,000 miles, respectively, to deliver merchandise to its customers. The company originally purchased the truck for $175,000. If the truck has an estimated life of 10 years or 300,000 miles, with an estimated residual value of $25,000, what amount of deprecation expense should Supplies, Inc. record in the second year using the activity-based method?
A. $11,000. B. $18,500. C. $7,500. D. $16,000. ($175,000 - $25,000)/300,000 miles = $0.50 per mile × 22,000 miles = $11,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
107.
Crestview Estates purchased a tractor on January 1, 2018, for $65,000. The tractor's useful life is estimated to be 30,000 miles and has a residual value of $5,000. If Crestview used the tractor 5,000 miles in 2018 and 3,000 miles in 2019, what is the balance for
accumulated depreciation at the end of 2019 using the activity-based method?
A. $38,000. B. $6,000. C. $16,000. D. $10,000. ($65,000 - $5,000)/30,000 miles = $2 per mile × 8,000 miles = $16,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard 7-115 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
108.
Nanki Corporation purchased equipment at the beginning of 2018 for $650,000. In 2018 and 2019, Nanki depreciated the asset on a straight-line basis with an estimated useful life of 8 years and a $10,000 residual value. In 2020, due to changes in technology, Nanki revised the useful life to a total of six years (four more years) with zero residual value. What depreciation expense would Nanki record for the year 2020 on this equipment?
A. $108,333. B. $106,667. C. $122,500. D. $81,667. The depreciation for 2018 and 2019 was [($650,000 - $10,000)/8] × 2 = $160,000. This leaves a book value of $490,000 ($650,000 - $160,000), so the new annual depreciation would be $122,500 ($490,000/4).
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
7-116 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
109.
Abbott Company purchased a computer that cost $10,000. It had an estimated useful life of 5 years and no residual value. The computer was depreciated by the straight-line method and was sold at the end of the fourth year of use for $3,000 cash. Abbott should record:
A. a gain of $1,000. B. a loss of $1,000. C. neither a gain nor a loss - the computer was sold at its book value. D. neither a gain nor a loss - the gain that occurred in this case would not be recognized. $10,000/5 years = depreciation of $2,000 per year. After four years, the book value would be $10,000 - ($2,000 × 4 years) = $2,000. The asset was sold for $3,000, so the company should record a gain of $1,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Learning Objective: 07-06 Account for the disposal of long-term assets. Topic: Asset Disposition: Sale, Retirement, or Exchange Topic: Depreciation of Property, Plant, and Equipment
7-117 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
110.
Costello Company purchased a computer that cost $10,000. It had an estimated useful life of 5 years and no residual value. The computer was depreciated by the straight-line method and was sold at the end of the second year of use for $5,000 cash. Costello should record:
A. a loss of $1,000. B. a gain of $1,000. C. neither a gain nor a loss - the computer was sold at its book value. D. neither a gain nor a loss - the gain that occurred in this case would not be recognized. $10,000/5 years = depreciation of $2,000 per year. After two years, the book value would be $10,000 - ($2,000 × 2 years) = $6,000. The asset was sold for $5,000, so the company should record a loss of $1,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Learning Objective: 07-06 Account for the disposal of long-term assets. Topic: Asset Disposition: Sale, Retirement, or Exchange Topic: Depreciation of Property, Plant, and Equipment
7-118 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
111.
On January 1, 2016, Jacob Inc. purchased a commercial truck for $48,000 and uses the straight-line depreciation method. The truck has a useful life of eight years and an estimated residual value of $8,000. On December 31, 2018, Jacob Inc. sold the truck for $30,000. What amount of gain or loss should Jacob Inc. record on December 31, 2018?
A. Gain, $22,000. B. Loss, $18,000. C. Gain, $5,000. D. Loss, $3,000. ($48,000 - $8,000)/8 = depreciation of $5,000 per year. After three years, the book value would be [$48,000 - ($5,000 × 3 years)] = $33,000. The truck was sold for $30,000, so the company should record a loss of $3,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Learning Objective: 07-06 Account for the disposal of long-term assets. Topic: Asset Disposition: Sale, Retirement, or Exchange Topic: Depreciation of Property, Plant, and Equipment
7-119 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
112.
On January 1, 2016, Jacob Inc. purchased a commercial truck for $48,000 and uses the straight-line depreciation method. The truck has a useful life of eight years and an estimated residual value of $8,000. On December 31, 2017, Jacob Inc. sold the truck for $43,000. What amount of gain or loss should Jacob Inc. record on December 31, 2017?
A. Gain, $22,000. B. Loss, $18,000. C. Gain, $5,000. D. Loss, $3,000. ($48,000 - $8,000)/8 years = depreciation of $5,000 per year. After two years, the book value would be [$48,000 - ($5,000 × 2 years)] = $38,000. The truck was sold for $43,000, so the company should record a $5,000 gain.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Learning Objective: 07-06 Account for the disposal of long-term assets. Topic: Asset Disposition: Sale, Retirement, or Exchange Topic: Depreciation of Property, Plant, and Equipment
7-120 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
113.
On January 1, 2018, Jacob Inc. purchased a commercial truck for $48,000 and uses the straight-line depreciation method. The truck has a useful life of eight years and an estimated residual value of $8,000. Assume the truck was totaled in an accident on December 31, 2019. What amount of gain or loss should Jacob Inc. record on December 31, 2019?
A. Gain, $5,000. B. Loss, $18,000. C. Loss, $38,000. D. Loss, $3,000. ($48,000 - $8,000)/8 years = depreciation of $5,000 per year. After two years, the book value would be [$48,000 - ($5,000 × 2 years)] = $38,000. The truck was retired at a loss of $38,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Learning Objective: 07-06 Account for the disposal of long-term assets. Topic: Asset Disposition: Sale, Retirement, or Exchange Topic: Depreciation of Property, Plant, and Equipment
7-121 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
114.
On January 1, 2018, Jacob Inc. purchased a commercial truck for $48,000 and uses the straight-line depreciation method. The truck has a useful life of eight years and an estimated residual value of $8,000. On December 31, 2019, the truck was exchanged for a new truck valued at $60,000. Jacob received a trade allowance of $35,000 on the exchange with the remaining $25,000 paid in cash. What amount of gain or loss should Jacob Inc. record on December 31, 2019?
A. Gain, $5,000. B. Loss, $18,000. C. Loss, $38,000. D. Loss, $3,000. ($48,000 - $8,000)/8 years = depreciation of $5,000 per year. After two years, the book value would be [$48,000 - ($5,000 × 2 years)] = $38,000. The truck was exchanged receiving a trade allowance of only $35,000, so the company should record a loss of $3,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Learning Objective: 07-06 Account for the disposal of long-term assets. Topic: Asset Disposition: Sale, Retirement, or Exchange Topic: Depreciation of Property, Plant, and Equipment
7-122 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
115.
Alliance Products purchased equipment that cost $120,000. It had an estimated useful life of four years and no residual value. The equipment was depreciated by the straight-line method and was sold at the end of the third year of use for $25,000 cash. Alliance should record:
A. A gain of $5,000. B. A loss of $5,000. C. Neither a gain nor a loss since the computer was sold at its book value. D. Neither a gain nor a loss since the gain would not be recognized. $120,000/4 years = depreciation of $30,000 per year. After three years, the book value would be [$120,000 - ($30,000 × 3 years)] = $30,000. The asset was sold for $25,000, so the company should record a loss of $5,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Learning Objective: 07-06 Account for the disposal of long-term assets. Topic: Asset Disposition: Sale, Retirement, or Exchange Topic: Depreciation of Property, Plant, and Equipment
7-123 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
116.
Alliance Products purchased equipment that cost $120,000. It had an estimated useful life of four years and no residual value. The equipment was depreciated by the straight-line method and was sold at the end of the second year of use for $65,000 cash. Alliance should record:
A. A gain of $5,000. B. A loss of $5,000. C. Neither a gain nor a loss since the computer was sold at its book value. D. Neither a gain nor a loss since the gain would not be recognized. $120,000/4 years = depreciation of $30,000 per year. After two years, the book value would be [$120,000 - ($30,000 × 2 years)] = $60,000. The asset was sold for $65,000, so the company should record a gain of $5,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Learning Objective: 07-06 Account for the disposal of long-term assets. Topic: Asset Disposition: Sale, Retirement, or Exchange Topic: Depreciation of Property, Plant, and Equipment
7-124 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
117.
Career Services, Incorporated sold some office equipment for $52,000 on December 31, 2018. The journal entry to record the sale would include which of the following if the original cost of the equipment was $80,000 with a residual value of $5,000 and a useful life of 10 years? Assume the machine was purchased on January 1, 2015 and depreciated using the straight-line method.
A. Gain of $2,000. B. Loss of $9,500. C. Gain of $9,500. D. Loss of $2,000. [($80,000 - $5,000)/10 years] = $7,500 depreciation per year. After four years, the book value would be [$80,000 - ($7,500 × 4 years)] = $50,000. The asset was sold for $52,000, so the company should record a gain of $2,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Learning Objective: 07-06 Account for the disposal of long-term assets. Topic: Asset Disposition: Sale, Retirement, or Exchange Topic: Depreciation of Property, Plant, and Equipment
7-125 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
118.
ABO purchased a truck at the beginning of 2018 for $140,000. They sold the truck at the end of 2019 for $95,000. If the expected useful life of the truck was six years with a residual value of $20,000 and ABO uses straight-line depreciation, which of the following is true regarding the entry to record the sale of the truck?
A. Credit Gain $5,000. B. Debit Loss $5,000. C. Credit Accumulated Depreciation $40,000. D. Credit Equipment $100,000. The journal entry to record the sale of the truck would be:
Cash
95,000
Accumulated Depreciation 40,000* Loss Equipment
5,000 140,000
*[($140,000 - $20,000)/6 years] = $20,000 per year × 2 years = $40,000. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Learning Objective: 07-06 Account for the disposal of long-term assets. Topic: Asset Disposition: Sale, Retirement, or Exchange Topic: Depreciation of Property, Plant, and Equipment
7-126 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
119.
Oregon Adventures purchased equipment for $80,000. They sold the equipment at the end of three years for $45,000. If the expected useful life of the equipment was seven years with a residual value of $10,000, and they use straight-line depreciation, which of the following is true regarding the entry to record the sale of the equipment?
A. Debit Loss $5,000. B. Credit Gain $5,000. C. Credit Accumulated Depreciation $40,000. D. Credit Equipment $5,000. The sale of equipment is recorded as:
Cash
45,000
Accumulated Depreciation 30,000* Loss Equipment
5,000 80,000
*[($80,000 - $10,000)/7 years] = $10,000 per year × 3 years = $30,000. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Learning Objective: 07-06 Account for the disposal of long-term assets. Topic: Asset Disposition: Sale, Retirement, or Exchange Topic: Depreciation of Property, Plant, and Equipment
120.
Which of the following intangible assets is not amortized?
A. Patents. B. Copyrights. C. Franchises. D. Goodwill. AACSB: Reflective Thinking
7-127 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-05 Calculate amortization of intangible assets. Topic: Amortization of Intangible Assets
121.
Which of the following intangible assets may or may not be amortized depending on whether it has a finite or an indefinite life?
A. Patents. B. Copyrights. C. Goodwill. D. Trademarks. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-05 Calculate amortization of intangible assets. Topic: Amortization of Intangible Assets
122.
Which of the following intangible assets has an indefinite useful life?
A. Patents. B. Copyrights. C. Franchises. D. Goodwill. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-05 Calculate amortization of intangible assets. Topic: Amortization of Intangible Assets
7-128 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
123.
Which of the following amortization methods is most commonly used?
A. Straight-line. B. Double declining balance. C. Activity based. D. A combination of methods. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-05 Calculate amortization of intangible assets. Topic: Amortization of Intangible Assets
124.
Which of the following statements is true regarding the amortization of intangible assets?
A. The expected residual value of most intangible assets is zero. B. The service life of an intangible asset is always equal to its legal life. C. Intangible assets with a limited useful life are not amortized. D. In recording amortization, an accumulated amortization account is always used. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-05 Calculate amortization of intangible assets. Topic: Amortization of Intangible Assets
7-129 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
125.
Bricktown Exchange purchases a copyright for $50,000. The copyright has a remaining legal life of 25 years, but only an expected useful life of five years with no residual value. Assuming the company uses the straight-line method, what is the amortization expense for the first year?
A. $0. B. $2,000. C. $3,333. D. $10,000. $50,000/5 years = $10,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-05 Calculate amortization of intangible assets. Topic: Amortization of Intangible Assets
7-130 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
126.
Bricktown Exchange purchases a copyright for $50,000. The copyright has a remaining legal life of 25 years, but only an expected useful life of five years with no residual value. Assuming the company uses the straight-line method, what is the carrying value at the end of the first year?
A. $0. B. $10,000. C. $50,000. D. $40,000. $50,000/5 years = $10,000 amortization per year.
Cost
$50,000
Less: Accumulated Amortization
(10,000)
= Carrying Value, end of year 1
$40,000
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-05 Calculate amortization of intangible assets. Topic: Amortization of Intangible Assets
7-131 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
127.
Bricktown Exchange purchases a copyright for $50,000. The copyright has a remaining legal life of 25 years, but only an expected useful life of five years with no residual value. Assuming the company uses the straight-line method, what is the carrying value at the end of the second year?
A. $10,000. B. $40,000. C. $50,000. D. $30,000. $50,000/5 years = $10,000 amortization per year.
Cost
$50,000
Less: Accumulated Amortization
(20,000)
= Carrying Value, end of year 2
$30,000
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-05 Calculate amortization of intangible assets. Topic: Amortization of Intangible Assets
7-132 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
128.
Berry Co. purchases a patent on January 1, 2018, for $40,000 and the patent has an expected useful life of five years with no residual value. Assuming Berry Co. uses the straight-line method, what is the amortization expense for the year ended December 31, 2019?
A. $0. B. $8,000. C. $16,000. D. $40,000. $40,000/5 years = $8,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-05 Calculate amortization of intangible assets. Topic: Amortization of Intangible Assets
129.
Berry Co. purchases a patent on January 1, 2018, for $40,000 and the patent has an expected useful life of five years with no residual value. Assuming Berry Co. uses the straight-line method, what is the carrying value of the patent on December 31, 2019?
A. $21,000. B. $33,000. C. $24,000. D. $26,000. $40,000/5 years = $8,000 amortization per year.
Cost
$40,000
Less: Accumulated Amortization
(16,000)
= Carrying Value, 12/31/2019
$24,000
AACSB: Analytical Thinking 7-133 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-05 Calculate amortization of intangible assets. Topic: Amortization of Intangible Assets
130.
Gains on the sale of long-term assets for cash:
A. Are the excess of the book value over the cash received. B. Are recorded as a debit. C. Are reported on a net-of-tax basis if material. D. Are the excess of the cash received over the book value. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-06 Account for the disposal of long-term assets. Topic: Asset Disposition: Sale, Retirement, or Exchange
131.
Losses on the sale of long-term assets for cash:
A. Are the excess of the book value over the cash received. B. Are recorded as a credit. C. Are reported on a net-of-tax basis if material. D. Are the excess of the cash received over the book value. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-06 Account for the disposal of long-term assets. Topic: Asset Disposition: Sale, Retirement, or Exchange
7-134 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
132.
Return on assets is calculated as:
A. Net Income divided by total assets. B. Net Income divided by average total assets. C. Net Income divided by ending total assets. D. Ending total assets divided by net income. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Topic: Walmart vs. Costco
133.
Return on assets is equal to:
A. Profit margin plus asset turnover. B. Profit margin minus asset turnover. C. Profit margin times asset turnover. D. Profit margin divided by asset turnover. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Topic: Walmart vs. Costco
7-135 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
134.
The balance sheet of Paradise Pizza reports total assets of $1,500,000 and $1,700,000 at the beginning and end of the year, respectively. Net income and sales for the year are $240,000 and $2,000,000, respectively. What is Paradise Pizza's return on assets?
A. 15%. B. 14.12%. C. 16%. D. 12%. $240,000/[($1,500,000 + $1,700,000)/2] = 15%.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Topic: Walmart vs. Costco
135.
The balance sheet of Paradise Pizza reports total assets of $1,500,000 and $1,700,000 at the beginning and end of the year, respectively. Net income and sales for the year are $240,000 and $2,000,000, respectively. What is Paradise Pizza's profit margin?
A. 15%. B. 14.12%. C. 16%. D. 12%. $240,000/$2,000,000 = 12%.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Topic: Walmart vs. Costco
7-136 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
136.
The balance sheet of Paradise Pizza reports total assets of $1,500,000 and $1,700,000 at the beginning and end of the year, respectively. Net income and sales for the year are $240,000 and $2,000,000, respectively. What is Paradise Pizza's asset turnover?
A. 1.25 times. B. 1.33 times. C. 8.33 times. D. 0.80 times. $2,000,000/[($1,500,000 + $1,700,000)/2] = 1.25 times.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Topic: Walmart vs. Costco
137.
The balance sheet of Purdy's BBQ reports total assets of $800,000 and $900,000 at the beginning and end of the year, respectively. Net income and sales for the year are $85,000 and $1,700,000, respectively. What is Purdy's return on assets?
A. 10%. B. 20%. C. 200%. D. 5%. $85,000/[($800,000 + $900,000)/2] = 10%.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Topic: Walmart vs. Costco
7-137 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
138.
The balance sheet of Purdy's BBQ reports total assets of $800,000 and $900,000 at the beginning and end of the year, respectively. Net income and sales for the year are $85,000 and $1,700,000, respectively. What is Purdy's profit margin?
A. 5%. B. 10%. C. 20%. D. 50%. $85,000/$1,700,000 = 5%.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Topic: Walmart vs. Costco
139.
The balance sheet of Purdy's BBQ reports total assets of $800,000 and $900,000 at the beginning and end of the year, respectively. Net income and sales for the year are $85,000 and $1,700,000, respectively. What is Purdy's asset turnover?
A. 0.5 times. B. 20.0 times. C. 10.0 times. D. 2.0 times. $1,700,000/[($800,000 + $900,000)/2] = 2.0 times.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Topic: Walmart vs. Costco
7-138 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
140.
The balance sheet of Purdy's BBQ reports total assets of $800,000 and $900,000 at the beginning and end of the year, respectively. The return on assets for the year is 20%. What is Purdy's net income for the year?
A. $4,500,000. B. $170,000. C. $4,250,000. D. $85,000. Net income divided by average total assets equals 20%. Average total assets equal $850,000 [($800,000 + $900,000)/2]; therefore, net income must be $170,000 ($850,000 × 20%).
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Topic: Walmart vs. Costco
141.
The balance sheet of Hidden Valley Farms reports total assets of $450,000 and $550,000 at the beginning and end of the year, respectively. Net income and sales for the year are $100,000 and $800,000, respectively. What is Hidden Valley's return on assets?
A. 10%. B. 20%. C. 160%. D. 18%. $100,000/[($450,000 + $550,000)/2] = 20%.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. 7-139 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Walmart vs. Costco
142.
The balance sheet of Hidden Valley Farms reports total assets of $450,000 and $550,000 at the beginning and end of the year, respectively. Net income and sales for the year are $100,000 and $800,000, respectively. What is Hidden Valley's profit margin?
A. 10%. B. 12.5%. C. 18%. D. 22%. $100,000/$800,000 = 12.5%.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Topic: Walmart vs. Costco
143.
The balance sheet of Hidden Valley Farms reports total assets of $450,000 and $550,000 at the beginning and end of the year, respectively. Net income and sales for the year are $100,000 and $800,000, respectively. What is Hidden Valley's asset turnover?
A. 1.6 times. B. 1.8 times. C. 1.5 times. D. 0.2 times. $800,000/[($450,000 + $550,000)/2] = 1.6 times.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover.
7-140 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Walmart vs. Costco
144.
The balance sheet of Hidden Valley Farms reports total assets of $450,000 and $550,000 at the beginning and end of the year, respectively. The return on assets for the year is 10%. What is Hidden Valley's net income for the year?
A. $5,000,000. B. $55,000. C. $5,500,000. D. $50,000. Net income divided by average total assets equals 10%. Average total assets equal $500,000 [($450,000 + $550,000)/2]; therefore, net income must be $50,000 ($500,000 × 10%).
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Topic: Walmart vs. Costco
145.
Recognition of impairment for long-term assets is required if book value exceeds:
A. Original cost. B. Fair value. C. Future cash flows. D. Accumulated depreciation. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-08 Identify impairment situations and describe the two-step impairment process. Topic: Asset Impairment
7-141 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
146.
The amount of impairment loss is the excess of book value over:
A. Carrying value. B. Future cash flows. C. Fair value. D. Future revenues. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-08 Identify impairment situations and describe the two-step impairment process. Topic: Asset Impairment
147.
Accounting for impairment losses:
A. Involves a two-step process to first test for impairment and then record the loss. B. Applies only to depreciable, operational assets. C. Applies only to assets with finite lives. D. All of these. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-08 Identify impairment situations and describe the two-step impairment process. Topic: Asset Impairment
148.
In testing for impairment of an operational asset, an impairment loss is required if the:
A. Asset's book value exceeds the present value of its expected future cash flows. B. Expected future cash flows exceeds the asset's book value. C. Present value of expected future cash flows exceeds its carrying value. D. Asset's book value exceeds the expected future cash flows. AACSB: Reflective Thinking AICPA: FN Measurement 7-142 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-08 Identify impairment situations and describe the two-step impairment process. Topic: Asset Impairment
149.
Wilson Inc. owns equipment for which it originally paid $70 million and has recorded accumulated depreciation on the equipment of $12 million. Due to adverse economic conditions, Wilson's management determined that it should assess whether an impairment should be recognized for the equipment. The estimated future cash flows to be provided by the equipment total $60 million, and its fair value at that point totals $50 million. Under these circumstances, Wilson:
A. Would record no impairment loss on the equipment. B. Would record an $8 million impairment loss on the equipment. C. Would record a $20 million impairment loss on the equipment. D. Would record a $2 million impairment loss on the equipment. E. The estimated future cash flows exceed the current book value, so no impairment exists. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-08 Identify impairment situations and describe the two-step impairment process. Topic: Asset Impairment
7-143 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
150.
Leonard's Jewelry owns a patent with a carrying value of $50 million. Due to adverse economic conditions, Leonard's management determined that it should assess whether an impairment should be recognized for the patent. The estimated future cash flows to be provided by the patent total $43 million, and its fair value at that point totals $35 million. Under these circumstances, Leonard:
A. Would record no impairment loss on the patent. B. Would record a $7 million impairment loss on the patent. C. Would record a $15 million impairment loss on the patent. D. Would record a $31 million impairment loss on the patent. The patent is impaired because estimated future cash flows of $43 million are less than the carrying value of $50 million. The impairment loss is measured by the difference between its carrying value of $50 million and its fair value of $35 million.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-08 Identify impairment situations and describe the two-step impairment process. Topic: Asset Impairment
7-144 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
151.
C-Stop reports the following information at year-end: Estimated
Fair
Value Cash Flows
Book
Value
Building
$500,000
$380,000
$360,000
Patent
$35,000
$40,000
$38,000
Copyright
$40,000
$38,000
$39,000
Machine
$100,000
$120,000
$85,000
Based on the above information, what is the total amount of impairment loss that C-Stop should record at year end?
A. $141,000. B. $126,000. C. $123,000. D. $122,000. The building and the copyright are impaired since their estimated future cash flows are less than book value. The impairment loss is calculated as the difference between the book value and the fair value: Building ($500,000 - $360,000) = $140,000 and Copyright (40,000 - $39,000) = $1,000. Total impairment loss ($140,000 + $1,000) = $141,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-08 Identify impairment situations and describe the two-step impairment process. Topic: Asset Impairment
7-145 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
152.
Maple Inc. has the following information regarding its assets: Book
Estimated
Fair
Value
Cash Flows
Value
Equipment
$35,000
$30,000
$28,000
Building
$68,000
$70,000
$65,000
Patent
$30,000
$34,000
$32,000
What amount of loss should be recorded due to asset impairments?
A. $10,000. B. $9,000. C. $8,000. D. $7,000. Only the equipment is impaired since its estimated future cash flows are less than book value. The impairment loss is calculated as the difference between the book value and the fair value (35,000 - $28,000) = $7,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-08 Identify impairment situations and describe the two-step impairment process. Topic: Asset Impairment
Matching Questions
7-146 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
153.
Match the following
1. Improvement
Recording an expenditure as an asset.
4
Expenses after acquisition that maintain a given level of 2. Addition 3. Materiality
benefits.
3
The cost of replacing a major component of an asset.
5
Occurs when we add a new major component to an existing 4. Capitalize
asset.
5. Repairs and
2
Large enough to influence an investor or creditor's decision.
maintenance
1 AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Learning Objective: 07-03 Describe the accounting treatment of expenditures after acquisition. Topic: Expenditures after Acquisition Topic: Property, Plant, and Equipment
154.
Match the following
1. Straight-line method 2. Activity-based method 3. Amortization
Allocates an asset's cost based on its use.
3
Allocates an equal amount of depreciation to each year of the asset's service life.
5
Allocating the cost of an intangible asset over its service life.
1
The process of recording expense for natural resources.
4
4. Decliningbalance method
An accelerated depreciation method that records more 5. Depletion
depreciation in earlier years and less depreciation in later years.
2
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Learning Objective: 07-05 Calculate amortization of intangible assets. Topic: Amortization of Intangible Assets
7-147 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Depreciation of Property, Plant, and Equipment Topic: Property, Plant, and Equipment
155.
Match the following
Payment for the exclusive right to use the company's name and to 1. Trademark 2. Patent
sell its products within a specified geographical area.
2
An exclusive right to manufacture a product or to use a process.
3
A word, slogan, or symbol that distinctively identifies a company, 3. Copyright
product, or service.
1
An exclusive right of protection given to the creator of a published work such as a song, film, painting, photograph, book, or computer 4. Goodwill
software.
5
The purchase price of a company less the fair value of the net 5. Franchise
assets acquired.
4
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-02 Identify the major types of intangible assets. Topic: Intangible Assets
156.
Match the following
1. Accumulated depreciation
A contra-asset account representing the total depreciation taken to date.
1
Equal to the original cost of the asset minus the current 2. Service life 3. Depreciation
balance in accumulated depreciation.
5
Allocating the cost of a tangible asset over its service life.
3
The amount the company expects to receive from selling the 4. Residual value
asset at the end of its service life.
4
How long the company expects to receive benefits from the 5. Book value
asset before disposing of it.
2
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. 7-148 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Depreciation of Property, Plant, and Equipment
157.
Match the following
Net income divided by average total assets; measures the amount 1. Impairment 2. Return on
of net income generated for each dollar invested in assets.
2
Net income divided by net sales; indicates the earnings per dollar of
assets
sales.
3. Asset
Net sales divided by average total assets; measures the sales per
turnover
dollar of assets invested.
5 3
Occurs when the future cash flows (future benefits) generated for a long-term asset fall below its book value (cost minus accumulated 4. Big bath
depreciation).
1
Recording all losses in one year to make a bad year even worse.
4
5. Profit margin
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Learning Objective: 07-08 Identify impairment situations and describe the two-step impairment process. Topic: Asset Impairment Topic: Walmart vs. Costco
Essay Questions
7-149 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
158.
Soccer Wholesale purchased land and a warehouse for $800,000. In addition to the purchase price, Soccer Wholesale makes the following expenditures related to the acquisition: broker's commission, $48,000; title insurance, $3,000; and miscellaneous closing costs, $8,000. The warehouse is immediately demolished at a cost of $80,000 in anticipation of building a new warehouse. Determine the amount Soccer Wholesale should record as the cost of the land.
Purchase price of land (and
$800,000
warehouse to be removed) Broker’s Commission
48,000
Title insurance
3,000
Closing costs
8,000
Cost of removing the warehouse
80,000
Total cost of the land
$939,000
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Topic: Property, Plant, and Equipment
7-150 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
159.
Holiday Laboratories purchased a high speed industrial centrifuge at a cost of $420,000. Shipping costs totaled $15,000. Foundation work to house the centrifuge cost $8,000. An additional water line had to be run to the equipment at a cost of $3,000. Labor and testing costs totaled $6,000. Materials used up in testing cost $3,000. What is the total cost of the equipment? How much of this amount should be expensed immediately?
Purchase price
$420,000
Shipping Costs
15,000
Foundation work
8,000
Water line
3,000
Labor and testing
6,000
Materials used in testing
3,000
Total cost of equipment
$455,000
Immediately expensed
$0
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Topic: Property, Plant, and Equipment
7-151 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
160.
Little King Sandwiches made the following expenditures related to its restaurant: 1. Replaced the heating and air conditioning equipment a cost of $15,000. 2. Remodeled the restaurant building. The total cost of the project was $150,000. 3. Performed annual building maintenance at a cost of $47,000. 4. Paid annual insurance premium on the property for the coming year, $7,700. 5. Purchased a new delivery truck, $22,500. 6. Landscaped the property and added outdoor lights, $9,000. Little King credits cash for each of these expenditures. Indicate the account to be debited for each of these expenditures.
1.
Equipment (or Building)
2.
Building
3.
Maintenance Expense
4.
Prepaid Insurance
5.
Equipment
6.
Land Improvements
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Learning Objective: 07-03 Describe the accounting treatment of expenditures after acquisition. Topic: Expenditures after Acquisition Topic: Property, Plant, and Equipment
7-152 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
161.
Suddenly Salad had the following expenditures related to developing its trademark. General advertising costs
$300,000
Advertising specifically focused on trademark development 120,000 Legal fees to register trademark
52,000
Registration and design fees for the trademark
38,000
Legal fees for successful defense of the new trademark
33,000
Total
$543,000
During your year-end review of the accounts related to intangibles, you discover that the company has capitalized all the above as costs of the trademark. Management contends that all of the costs increase the value of the trademark; therefore, all the costs should be capitalized. 1. Which of the above costs should the company capitalize to the Trademark account in the balance sheet? 2. Which of the above costs should the company report as expense in the income statement?
1. Trademark account in the balance sheet: Legal fees to register trademark
$52,000
Registration and design fees for the trademark
38,000
Legal fees for successful defense of the new trademark
33,000
Total costs capitalized
$123,000
2. Expense in the income statement: General advertising costs
$300,000
Advertising specifically focused on trademark development 120,000 Total costs expensed
$420,000
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-02 Identify the major types of intangible assets. 7-153 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Intangible Assets
162.
New Harvest Bakery acquired all the outstanding common stock of Red Rock Bakery for $68,000 in cash. The book values and market values of Red Rock's assets and liabilities were as follows: Book Value Fair Value Current assets
$24,000
$30,000
Property, plant, and equipment
44,000
56,000
Other assets
4,000
6,000
Current liabilities
16,000
16,000
Long-term liabilities
24,000
22,000
Calculate the amount paid for goodwill.
Purchase price
$68,000
Less: Fair value of assets acquired
92,000
Less: fair value of liabilities assumed (38,000) Fair value of identifiable net assets Goodwill
54,000 $14,000
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-02 Identify the major types of intangible assets. Topic: Intangible Assets
7-154 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
163.
Western Wholesale Foods incurs the following expenditures during the current fiscal year: (1) salaries for the repair technicians, $155,000; (2) remodeling of the executive offices, $84,000; (3) annual maintenance costs related to its machinery, $72,900; (4) improvement of the production line resulting in an increase in productivity, $38,000; and (5) addition of a sprinkler system to the manufacturing facility to reduce the risk of fire damage, $35,000. How should Western account for each of these expenditures?
(1) Expense in the period incurred. (2) Capitalize and depreciate over the useful life of the asset. (3) Expense in the period incurred. (4) Capitalize and depreciate over the useful life of the asset. (5) Capitalize and depreciate over the useful life of the asset.
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 07-03 Describe the accounting treatment of expenditures after acquisition. Topic: Expenditures after Acquisition
164.
Taco Hut purchased equipment on May 1, 2018, for $15,000. Residual value at the end of an estimated 8 year service life is expected to be $3,000. Calculate depreciation expense using the straight-line method for 2018 and 2019, assuming a December 31 year-end.
Year 2018
(15,000 3,000)
=
8
1,500 × 8/12
= $1,000
(15,000 2019
3,000) 8
= $1,500
AACSB: Analytical Thinking AICPA: FN Measurement 7-155 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
165.
China Dragon purchased new restaurant equipment on September 1, 2018, for $8,000. Residual value at the end of an estimated 5 year service life is expected to be $2,000. Calculate depreciation expense using the straight-line method for 2018 and 2019, assuming a December 31 year-end.
Year 2018 ($8,000 - $2,000) = $1,200 × 4/12 = 5
$400
2019 ($8,000 - $2,000) = 5
$1,200
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
166.
Mountainview Resorts purchased equipment for $40,000. Residual value at the end of an estimated four-year service life is expected to be $8,000. The machine operated for 2,200 hours in the first year and the company expects the machine to operate for a total of 10,000 hours over its four year life. Calculate depreciation expense for the first year using each of the following depreciation methods: (1) straight-line, (2) double-decliningbalance, and (3) activity-based.
(1) ($40,000 - $8,000)/4 = $8,000. (2) $40,000 × 2/4 = $20,000. (3) ($40,000 - $8,000)/10,000 hours = $3.20 per hour × 2,200 hours = $7,040.
AACSB: Analytical Thinking 7-156 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
7-157 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
167.
Chubbyville purchases a delivery van for $23,500. Chubbyville estimates a four-year service life and a residual value of $2,500. During the four-year period, the company expects to drive the van 105,000 miles. Calculate annual depreciation for the four-year life of the van using each of the following methods. Round all amounts to the nearest dollar. 1. Straight line. 2. Double-declining-balance. 3. Activity-based. Actual miles driven each year were 24,000 miles in Year 1; 26,000 miles in Year 2; 22,000 miles in Year 3; and 25,000 miles in Year 4. Note that actual total miles of 97,000 fall short of expectations by 8,000 miles.
Straightline $23,500 Depreciatio n Expense
=
$2,500
=
4 years
$5,250 per year
Double-declining Balance Calculation
End of Year Amounts
Yea
Beginning
r
Book Value
1
$23,500
0.50
$11,750
$11,750
$11,750
2
11,750
0.50
5,875
17,625
5,875
3
5,875
0.50
2,938
20,563
2,937
4
2,937
437***
21,000
2,500
×
Depreciatio n Rate*
Tota
=
Depreciatio Accumulated Book Value** n Expense Depreciation
$21,000
l * 2/4 years = 0.50 per year ** $23,500 cost minus accumulated depreciation *** Amount needed to reduce book value to residual value.
7-158 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Activity Based Calculation Miles
×
End of Year Amounts
Depreciati on Rate*
=
Depreciatio Accumulated Book Value**
Year
Used
1
24,000
$0.20
$4,800
$4,800
$18,700
2
26,000
$0.20
5,200
10,000
13,500
3
22,000
$0.20
4,400
14,400
9,100
4
25,000
$0.20
5,000
19,400
4,100
Total
n Expense Depreciation
$19,400
* ($23,500 - $2,500)/105,000 miles = $.20/mile ** $23,500 cost minus accumulated depreciation
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
168.
Burger Chef acquired a delivery truck on March 1, 2018 for $26,000. The company estimates a residual value of $2,000 and a 6-year service life. It expects to drive the truck 80,000 miles. Actual mileage was 12,000 miles in 2018 and 16,000 miles in 2019. Calculate depreciation expense using the activity-based method for 2018 and 2019, assuming a December 31 year-end.
($26,000 - $2,000) =
$0.30/mile
80,000 miles
Year 2018
12,000
×
$0.30
$3,600
2019
16,000
×
$0.30
$4,800
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze 7-159 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 3 Hard Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
169.
Strawberry Fields purchased a tractor at a cost of $38,000 and sold it two years later for $25,000. Strawberry Fields recorded depreciation using the straight-line method, a fiveyear service life, and an $8,000 residual value. What was the gain or loss on the sale? Record the sale.
Sale amount
$25,000
Less: Cost of tractor
38,000
Less: Accumulated depreciation* (12,000) Book value
26,000
Loss on sale
($1,000)
* ($38,000 - $8,000)/5 years = $6,000 per year × 2 years = $12,000. Debit Cash
25,000
Accumulated Depreciation
12,000
Loss
1,000
Equipment
Credit
38,000
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Learning Objective: 07-06 Account for the disposal of long-term assets. Topic: Asset Disposition: Sale, Retirement, or Exchange Topic: Depreciation of Property, Plant, and Equipment
7-160 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
170.
At the beginning of the year, Big Time Tires acquired 100% of the common stock of Discount Tires. The purchase price allocation included the following items: $800,000, patent; $300,000, trademark considered to have an indefinite useful life; and $2 million, goodwill. Big Time Tire's policy is to amortize intangible assets with finite useful lives using the straight-line method, no residual value, and a five-year service life. What is the total amount of amortization expense that would appear in Big Time Tire's income statement for the first year related to these items?
The patent would have amortization expense of $160,000 ($800,000/5 years). The trademark and goodwill would not be amortized because they have an indefinite life.
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-05 Calculate amortization of intangible assets. Topic: Amortization of Intangible Assets
7-161 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
171.
On January 1, 2018, The Donut Stop purchased a patent for $80,000. The remaining legal life is 20 years, but the company estimates the patent will be useful for only five more years. In January 2019, the company incurred legal fees of $25,000 in successfully defending a patent infringement suit. The successful defense did not change the company's estimate of useful life. The Donut Stop's year end is December 31. Record the purchase and amortization in 2018 and the legal fees and amortization in 2019. What is the balance in the Patents account at the end of 2019?
January 1, 2018
Debit
Patents
Credit
$80,000
Cash
80,000
December 31, 2018 Amortization Expense ($80,000/5 years)
16,000
Patents
16,000
January, 2019 Patents
25,000
Cash
25,000
December 31, 2019 Amortization Expense*
22,250
Patents
22,250
*($80,000 - $16,000 + $25,000)/4 remaining years = $22,250.
Patents 80,000
16,000
25,000
22,250
66,750
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-05 Calculate amortization of intangible assets. 7-162 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Amortization of Intangible Assets
172.
The Bomb Pop Corporation sold ice cream equipment for $16,000. They originally purchased the equipment for $40,000, and depreciation through the date of sale totaled $25,000. What was the gain or loss on the sale of the equipment? Record the sale of the equipment.
Sale amount
$16,000
Less: Cost of the ice cream equipment
40,000
Less: Accumulated depreciation (25,000) Book value
15,000
Gain on sale
$1,000
Debit Cash
16,000
Accumulated Depreciation
25,000
Credit
Equipment
40,000
Gain
1,000
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-06 Account for the disposal of long-term assets. Topic: Asset Disposition: Sale, Retirement, or Exchange
7-163 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
173.
Nate's Hot Dogs exchanges long-term assets with Lizzy's Lemonade. Nate receives a delivery truck and gives up a piece of machinery. The fair value and book value of the machinery were $27,000 and $25,000 (original cost of $35,000 less accumulated depreciation of $10,000), respectively. Since the delivery truck was worth $32,000, Nate paid an additional $5,000 in cash to Lizzy. Record the exchange for Nate's Hot Dogs.
Debit Credit Delivery Truck ($27,000 + $5,000) $32,000 Accumulated Depreciation
10,000
Cash
5,000
Machinery
35,000
Gain on exchange
2,000
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-06 Account for the disposal of long-term assets. Topic: Asset Disposition: Sale, Retirement, or Exchange
7-164 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
174.
New World Deli exchanged land for a more suitable parcel of land to be used for a new restaurant. New World Deli reported the old land at its original cost of $85,000. According to an independent appraisal, the old land currently is worth $110,000. New World Deli paid $15,000 in cash to complete the transaction. Record the exchange.
Fair value of the old land
$110,000
Cash paid to complete the purchase Fair value of the new land
15,000 $125,000
Journal entry to record exchange
Debit
Land, new
$125,000
Credit
Land, old
85,000
Cash
15,000
Gain on exchange
25,000
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-06 Account for the disposal of long-term assets. Topic: Asset Disposition: Sale, Retirement, or Exchange
7-165 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
175.
Allied Construction and Axis Construction reported the following information in their annual financial statements ($ in millions): Allied Construction
2018
2017
$48,283
$46,927
Net income
2,809
3,105
Total assets
30,869
27,767
Axis Construction
2018
2017
$77,349
$90,837
Net income
4,395
5,761
Total assets
44,324
52,263
Sales
Sales
Required: 1. Calculate Allied Construction’s return on assets, profit margin, and asset turnover ratio for 2018. 2. Calculate Axis Construction's return on assets, profit margin, and asset turnover ratio for 2018. 3. Which company has the better profit margin and which company has the better asset turnover?
Allied Construction:
Net
÷
Income $2,809
Average Total
= Return on
Assets ÷
($30,869 +
Assets =
9.6%
=
Profit
$27,767)/2
Net
÷
Sales
Income
Margin
$2,809
÷
$48,283
Sales
÷ Average Total Assets
=
5.8%
=
Asset Turnover
7-166 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
$48,283
÷
($30,869 +
=
1.65 times
$27,767)/2
Axis Construction: Net
÷
Income $4,395
Average Total
= Return on
Assets ÷
($44,324 +
Assets =
9.1%
$52,263)/2
Net
÷
Sales
=
Income $4,395
÷
Sales
÷ Average Total
$77,349
=
=
Assets $77,349
Profit Margin
÷
($44,324 +
5.7%
Asset Turnover
=
1.60 times
$52,263)/2
Allied has a slightly better (higher) profit margin and a slightly better (higher) asset turnover resulting in a higher return on assets. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Topic: Walmart vs. Costco
7-167 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
176.
ACME Drilling is evaluating an offshore oil-drilling platform for possible impairment. They estimate the following: book value, $18.5 million; fair value, $12 million; sum of estimated future cash flows generated from the oil drilling platform, $16 million. What amount of impairment loss, if any, should they record?
Step 1: Test for Impairment The long-term asset is impaired since future cash flows ($16 million) are less than book value ($18.5 million). Step 2: If Impaired, Record Loss The impairment loss is $6.5 million calculated as the amount by which book value ($18.5 million) exceeds fair market value ($12 million).
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-08 Identify impairment situations and describe the two-step impairment process. Topic: Asset Impairment
7-168 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
177.
Northwest Catering owns and operates several restaurant services in Oregon, Washington, and Idaho. One restaurant chain has experienced sharply declining profits. The company's management has decided to test the operational assets for possible impairment. The relevant information for these assets is presented below: Book value
$4.5 million
Estimated total future cash flows
5.0 million
Fair value
3.5 million
Determine the amount of the impairment loss, if any.
Step 1: Test for Impairment The long-term asset is not impaired since future cash flows ($5.0 million) exceed book value ($4.5 million). Step 2: If Impaired, Record Loss Since the asset does not meet the first test for impairment, no impairment loss is recorded.
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-08 Identify impairment situations and describe the two-step impairment process. Topic: Asset Impairment
7-169 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
178.
China Express purchased land for $140,000. Prior to construction on the new building, the land had to be cleared of trees and brush. Costs incurred during the first year are listed below: Land clearing costs
$5,000
Architect fees (for new building)
30,000
Legal fees for title investigation of land
1,000
Property taxes on land (for the first year)
2,500
Building construction costs
440,000
Required: Determine the amounts that should be recorded in the land and the new building accounts.
Land Building Purchase price of land
140,000
Land clearing costs
5,000
Architect fees (for new building) Legal fees (for title investigation of land) Building construction costs Totals
$30,000 1,000 440,000 $146,000 $470,000
The property taxes on the land of $2,500 will be recorded as property tax expense over the first year. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Topic: Property, Plant, and Equipment
7-170 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
179.
El Tapitio purchased equipment from Old World Deli. Old World Deli was closing its business and sold its restaurant equipment for $80,000. In addition to the purchase price, El Tapitio paid shipping costs of $2,000. Employees of El Tapitio installed the ovens; labor costs were $10,000. An outside contractor performed some of the electrical work for $2,200. El Tapitio incurred costs of $800 in testing the equipment. Required: 1. Prepare a schedule showing the amount at which the equipment should be recorded in El Tapitio's equipment account. 2. Indicate where any amounts not included in the equipment account should be recorded.
Requirement 1
The ovens should be recorded in the equipment account at $95,000 as detailed in the following schedule: Purchase price
$80,000
Shipping costs
2,000
Labor costs
10,000
Electrical work
2,200
Costs incurred in testing equipment Total Equipment
800 $95,000
Requirement 2 All amounts were included in the equipment account. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Topic: Property, Plant, and Equipment
7-171 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
180.
Nordic Outfitters purchased all the outstanding common stock of European Retail for $3,000,000 in cash. The book values and fair values of European Retail's assets and liabilities were: Book Value Fair Value Receivables
$250,000
Property, plant, and equipment
2,000,000 2,400,000
Intangible assets Liabilities Net Assets
$250,000
200,000
500,000
(650,000) (650,000) $1,800,000 $2,500,000
Required: 1. Calculate the amount paid for goodwill. 2. Record Nordic Outfitters' acquisition of European Retail.
1. The amount Nordic Outfitters paid for goodwill is $500,000 calculated as follows: Purchase price
$3,000,000
Less: Fair value of assets acquired
3,150,000
Less: fair value of liabilities assumed
(650,000)
Fair value of identifiable net assets
2,500,000
Goodwill
$500,000
2. The journal entry to record Nordic Outfitters’ acquisition of European Retail is: Debit Receivables (at fair value) Property, Plant, and Equipment (at fair value)
Credit
250,000 2,400,000
Intangible Assets (at fair value)
500,000
Goodwill (remaining purchase price)
500,000
Liabilities (at fair value)
650,000
Cash (at purchase price)
3,000,000
7-172 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-02 Identify the major types of intangible assets. Topic: Intangible Assets
181.
Lincoln Driving Academy purchased a used car to use in its driver's education program. Lincoln incurred the following expenses related to the car: 1. Painted the car and fixed a dent on the side of the car at a cost of $2,700. The repairs are considered extensive and increase future benefits. 2. Installed a driver's side brake to be used by the instructor if necessary. 3. Paid the annual registration fees of $120. 4. Performed annual maintenance and repairs at $400. 5. Overhauled the engine at a cost $2,600, increasing the service life of the car by an estimated four years. Required: Indicate whether Lincoln should capitalize or expense each of these expenditures. How could Lincoln use expenditures like these to increase reported earnings?
1. Capitalize 2. Capitalize 3. Expense 4. Expense 5. Capitalize Lincoln could increase reported earnings by improperly recording expenses as assets. For example, Lincoln could record repairs and maintenance expense to the equipment (asset) account. This would lower expenses and increase earnings reported in the current year.
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Apply 7-173 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 3 Hard Learning Objective: 07-03 Describe the accounting treatment of expenditures after acquisition. Topic: Expenditures after Acquisition
7-174 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
182.
Diamond Autobody purchased new equipment for $90,000. Residual value at the end of an estimated four-year service life is expected to be $10,000. During the four-year period, the company expects to use the equipment a total of 5,000 hours. Required: Prepare a depreciation schedule for the four-year life of the equipment using the following methods: 1. Straight-line. 2. Double-declining-balance. 3. Activity-based. Actual use per year was as follows: Year
Hours Used
1
1,200
2
1,400
3
1,500
4
1,100
Requirement 1
Calculation Year
Allocation Base*
×
End of Year Amounts
Depreciation Rate
=
Depreciation Accumulated
Book
Expense Depreciation
Value**
1
80,000
0.25
20,000
20,000
70,000
2
80,000
0.25
20,000
40,000
50,000
3
80,000
0.25
20,000
60,000
30,000
4
80,000
0.25
20,000
80,000
10,000
Total
80,000
* $90,000 - $10,000 = $80,000 ** $90,000 cost minus accumulated depreciation.
Requirement 2
7-175 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Calculation Year Beginning Book
×
Value
End of Year Amounts
Depreciation Rate*
Depreciation Accumulated =
Book
Expense Depreciation Value**
1
90,000
0.50
45,000
45,000
45,000
2
45,000
0.50
22,500
67,500
22,500
3
22,500
0.50
11,250
78,750
11,250
4
11,250
0.50
1,250***
80,000
10,000
Total
80,000
* 2/4 years = 0.50 per year ** $90,000 cost minus accumulated depreciation. *** Amount needed to reduce book value to residual value.
Requirement 3 Calculation Year
Hours Used
×
Depreciation Rate*
End of Year Amounts =
Depreciation
Accumulated
Book
Expense
Depreciation
Value**
1
1,200
$16
19,200
19,200
70,800
2
1,400
$16
22,400
41,600
48,400
3
1,500
$16
24,000
65,600
24,400
4
1,100
$16
14,400***
80,000
10,000
Total
5,200
80,000
* $80,000/5,000 hours = $16/hour ** $90,000 cost minus accumulated depreciation. *** Amount needed to reduce book value to residual value.
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
7-176 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
183.
The Snack Stop had the following long-term asset balances as of January 1, 2018:
Cost
Accumulated
Book
Depreciation
Value
Land
$90,000
– $90,000
Building
600,000
($60,000) 540,000
Equipment
200,000
(72,000) 128,000
Patent
80,000
(20,000)
60,000
All of the assets were purchased at the beginning of 2016. The building is depreciated over a 20-year service life using the straight-line method and estimating no residual value. The equipment is depreciated over a 10-year useful life using the double-decliningbalance method with an estimated residual value of $10,000. The patent is estimated to have an 8-year service life with no residual value and is amortized using the straight-line method. Depreciation and amortization has already been calculated for the first two years. Required: 1. For the year ended December 31, 2018, record depreciation expense for buildings and equipment. Land is not depreciated. 2. For the year ended December 31, 2018, record amortization expense for the patent. 3. Calculate the book value for each of the four long-term assets at December 31, 2018.
Requirement 1
Debit Depreciation Expense ($600,000/20)
Credit
30,000
Accumulated Depreciation
30,000
(To record depreciation on the building) Depreciation Expense ($128,000 × 2/10)
25,600
Accumulated Depreciation
25,600
(To record depreciation on the equipment)
Requirement 2
7-177 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Debit Credit Amortization Expense ($80,000/8)
10,000
Patent
10,000
(To record amortization on the patent)
Requirement 3
The Snack Stop December 31, 2018
Accumulated
Book
Depreciation
Value
Cost Land
$90,000
–
$90,000
Building
600,000
($90,000)
510,000
Equipment
200,000
(97,600)
102,400
Patent
80,000
(30,000)
50,000
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Learning Objective: 07-05 Calculate amortization of intangible assets. Topic: Amortization of Intangible Assets Topic: Depreciation of Property, Plant, and Equipment
7-178 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
184.
Old World Deli is in the process of closing its operations. It sold its three-year-old restaurant equipment to El Tapitio for $80,000. The equipment originally cost $220,000 and had an estimated service life of 5 years and an estimated residual value of $20,000. Old World Deli uses straight-line depreciation for all equipment. Required: 1. Calculate the balance in the accumulated depreciation account at the end of the third year. 2. Calculate the book value of the equipment at the end of the third year. 3. What is the gain or loss on the sale of the equipment at the end of the third year? 4. Record the sale of the equipment at the end of the third year.
Requirement 1
$220,000 - $20,000 $120,000
=
×
3 years
5 years
Requirement 2 Cost of the equipment
$220,000
Less: Accumulated Depreciation
(120,000)
Book value at the end of year 3
$100,000
Requirement 3 The loss on sale is calculated as: Sale amount
$80,000
Less: Cost of the equipment Less: Accumulated Depreciation Book value at the end of year 3 Loss on sale
220,000 (120,000) 100,000 $20,000
Requirement 4
7-179 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
The entry to record the loss on sale is as follows: Debit Cash
Credit
80,000
Accumulated Depreciation
120,000
Loss on Sale
20,000
Equipment
220,000
(To record loss on sale)
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Learning Objective: 07-06 Account for the disposal of long-term assets. Topic: Asset Disposition: Sale, Retirement, or Exchange Topic: Depreciation of Property, Plant, and Equipment
7-180 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
185.
The following information relates to the intangible assets of University Hero: a. On January 1, 2018, University Hero completed the purchase of Whole Grain Foods for $800,000 in cash. The fair value of the identifiable net assets of Whole Grain Foods was $625,000. b. Included in the assets purchased from Whole grain Foods was a patent valued at $75,000. The original legal life of the patent was 20 years. There are still 8 years left on the patent, but University Hero estimates the patent will be useful for only 3 more years. c. University Hero acquired a franchise on July 1, 2018, by paying an initial franchise fee of $100,000. The contractual life of the franchise is 5 years. Required: 1. Record amortization expense for the intangible assets at December 31, 2018. 2. Prepare the intangible asset section of the December 31, 2018 balance sheet.
Requirement 1
a. Goodwill is not amortized. Debit b. Amortization Expense
Credit
25,000
Patent
25,000
(To record amortization = $75,000/3 years)
c. Amortization Expense Franchise
10,000 10,000
(To record amortization = $100,000/5 years × 1/2 year)
Requirement 2 University Hero Balance Sheet 7-181 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
December 31, 2018 (Intangible Assets Section) Intangible Assets Goodwill
$175,000
Patent ($75,000 - $25,000)
50,000
Franchise ($100,000 - $10,000)
90,000
Total Intangible Assets
$315,000
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-05 Calculate amortization of intangible assets. Topic: Amortization of Intangible Assets
7-182 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
186.
Reported below is selected financial information from two competing retail companies ($ in millions): Company A
2018
2017
Sales
$405,607
$378,799
Net income
$13,400
$12,731
Total assets
$163,429
$163,514
Company B
2018
2017
Sales
$64,948
$63,367
Net income
$2,214
$2,849
Total assets
$44,106
$44,560
Required: 1. Calculate the return on assets, profit margin, and asset turnover ratio for Company A for 2018. 2. Calculate the return on assets, profit margin, and asset turnover ratio for Company B for 2018. 3. Which company has the higher profit margin and which company has the higher asset turnover?
Requirement 1 Company A
Net
÷
Income $13,400
Average Total
= Return on
Assets ÷
($163,429 +
Assets =
8.2%
=
Profit
$163,514)/2
Net
÷
Sales
Income $13,400
Margin ÷
$405,607
=
3.3%
7-183 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Sales
÷ Average Total
=
Assets $405,607
÷
($163,429 +
Asset Turnover
=
2.5 times
$163,514)/2
Requirement 2 Company B Net
÷
Average Total
Income $2,214
= Return on
Assets ÷
($44,106 +
Assets =
5.0%
=
Profit
$44,560)/2
Net
÷
Sales
Income
Margin
$2,214
÷
$64,948
Sales
÷ Average Total
=
3.4%
=
Asset
Assets $64,948
÷
($44,106 +
Turnover =
1.5 times
$44,560)/2
Requirement 3 Company B has a slightly higher profit margin, while Company A has a much higher asset turnover (2.5 times vs. 1.5 times). The higher asset turnover results in a return on assets of 8.2% for Company A compared to only 5.0% for Company B. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Topic: Walmart vs. Costco
7-184 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
187.
Kelli Davis is in the flower business. While business has been steady, she wonders if she should expand her business to include candy as well. Both flowers and candy fit well into her business model. Kelli provides the following projections of annual sales, net income, and average total assets for the flower business alone and for the business if both flowers and candy were sold. Flowers and Flowers Only
Candy
$380,000
$500,000
Net income
40,000
60,000
Average total
200,000
250,000
Sales
assets
Required: 1. Calculate Kelli's return on assets, profit margin, and asset turnover for flowers only. 2. Calculate Kelli's return on assets, profit margin, and asset turnover for flowers and candy. 3. Based on these ratios, what recommendation would you make?
Requirement 1 Flowers Only
Net
÷ Average Total
Income
= Return on
Assets
Assets
$40,000
÷
$200,000
=
Net
÷
Sales
=
Income $40,000
Sales
$380,000
20.0%
Profit Margin
÷
=
10.5%
÷ Average Total =
Asset
Assets
Turnover
÷
$380,000
$200,000
=
1.9 times
7-185 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Requirement 2 Flowers and Candy Net
÷
Income
Average
= Return on
Total Assets
Assets
$60,000
÷
$250,000
=
24.0%
Net
÷
Sales
=
Profit
Income
Margin
$60,00
÷
$500,000
=
12.0%
Sales
÷
Average
=
Asset
Total Assets $500,000
÷
$250,000
Turnover =
2.0 times
Requirement 3 Go forward with the expansion plans to include the sale of candy. The return on assets, profit margin, and asset turnover are all higher with the additional sale of candy. AACSB: Analytical Thinking AICPA: FN Decision Making AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset turnover. Topic: Walmart vs. Costco
7-186 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
188.
If a company initially records an expense incorrectly as an asset, explain how this mistake affects the income statement and the balance sheet.
This mistake will overstate net income on the income statement and overstate assets and retained earnings on the balance sheet. If a company initially records an expense incorrectly as an asset, expenses are understated or too small. Since expenses are subtracted from revenues in arriving at net income, understating expenses will overstate net income reported on the income statement. Similarly, recording an expense as an asset will overstate assets on the balance sheet. Retained earnings on the balance sheet will also be overstated due to the overstatement of net income.
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Apply Difficulty: 3 Hard Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Topic: Property, Plant, and Equipment
189.
Why don't we depreciate land? What are land improvements? Why do we record land and land improvements separately?
We don't depreciate land because its service life never ends. Land improvements are additional amounts spent to improve the land such as a parking lot, paving, temporary landscaping, lighting systems, fences, sprinkler systems, and similar additions. We record land improvements separately from land because, unlike land, these assets are subject to depreciation.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-01 Identify the major types of property, plant, and equipment. Topic: Property, Plant, and Equipment
7-187 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
190.
Explain how the accounting treatment differs between purchased and internally developed intangible assets.
We value purchased intangible assets at their original cost plus all other costs, such as legal and filing fees, necessary to get the asset ready for use. Reporting intangible assets
developed internally is quite different. Rather than recording these as an intangible asset on the balance sheet, we expense most of the costs for internally developed intangible assets to the income statement as we incur them.
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-02 Identify the major types of intangible assets. Topic: Intangible Assets
191.
Contrast the effects of the straight-line, declining-balance, and activity-based depreciation methods on annual depreciation expense.
Straight-line creates an equal amount of depreciation each year. Double-decliningbalance creates more depreciation in earlier years and less depreciation in later years. Activity-based depreciation varies depending on the use of the asset each year.
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
7-188 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
192.
Which depreciation method is most common for financial reporting? Which depreciation method is most common for tax reporting? Why do companies choose these methods?
Most companies use the straight-line method for financial reporting and the Internal Revenue Service's prescribed accelerated method (called MACRS) for income tax purposes. Companies choose straight-line for financial reporting for several reasons. Many probably believe they realize benefits from their plant assets approximately evenly over these assets' useful lives. Another contributing factor is that straight-line is the easiest method to understand and apply. One more important motivation is the positive effect on reported income. Straight-line produces a higher net income than accelerated methods in the earlier years of an asset's life. Most companies choose MACRS for tax reporting to reduce taxable income. MACRS combines declining-balance methods in earlier years with straight-line in later years to allow for a more advantageous tax depreciation deduction.
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 07-04 Calculate depreciation of property, plant, and equipment. Topic: Depreciation of Property, Plant, and Equipment
7-189 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 08 Current Liabilities
True / False Questions
1. American, Delta, and United Airlines have all, at one time, filed for bankruptcy. True
False
2. In a classified balance sheet, we categorize all liabilities as current. True
False
3. Commonly, current liabilities are payable within one year, and long-term liabilities are payable more than one year from now. True
False
4. Given a choice, most companies would prefer to report a liability as current rather than longterm, because doing so may cause the firm to appear less risky. True
False
5. When a company borrows cash from a bank promising to repay the amount borrowed plus interest, the borrower reports its liability as notes payable. True
False
6. Interest is stated in terms of an annual percentage rate to be applied to the face value of the loan. True
False
8-1 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
7. We record interest expense in the period in which we pay it, rather than in the period we incur it. True
False
8. A line of credit is an informal agreement that permits a company to borrow up to a prearranged limit without having to follow formal loan procedures and paperwork. True
False
9. If a company borrows from another company rather than from a bank, the note is referred to as commercial paper. True
False
10. Accounts payable are amounts the company owes to suppliers of merchandise or services that it has bought on credit. True
False
11. Deductions from employee salaries in determining the amount of payroll checks include withholdings for federal and state income taxes, FICA taxes, and the employee portion of insurance and retirement contributions. True
False
12. All states impose a state income tax. True
False
13. Companies are required by law to withhold federal and state income taxes from employees' paychecks and remit these taxes to the government. True
False
8-2 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
14. The employer records amounts deducted from employee payroll as liabilities until it pays them to the appropriate organizations. True
False
15. FICA taxes are paid only by the employee. True
False
16. The employer is required to match the amount of FICA taxes withheld for each employee, effectively doubling the amount paid into Social Security. True
False
17. Additional employee benefits paid for by the employer are often referred to as fringe benefits. True
False
18. When a company receives cash in advance, it debits Cash and credits a revenue account called Deferred Revenue. True
False
19. Airlines do not record revenue when a ticket is sold, but wait to record revenue until the actual flight occurs. True
False
20. All states impose a general state sales tax, and many areas include an additional local sales tax. True
False
8-3 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
21. Companies selling products subject to sales taxes are responsible for collecting the sales tax directly from customers and periodically remitting the sales taxes collected to the state and local governments. True
False
22. When a company collects sales taxes, the debit is to Cash and the credit is to Sales Tax Payable. True
False
23. Sales taxes collected from customers by the seller are not an expense, instead they represent current liabilities payable to the government. True
False
24. Long-term obligations such as notes, mortgages, and bonds are reported as long-term liabilities when they become payable within the upcoming year. True
False
25. Given a choice, most managers would choose to record an obligation as long-term rather than current. True
False
26. A contingent liability is an existing, uncertain situation that might result in a loss. True
False
27. We record a contingent liability when the likelihood of the loss occurring is reasonably possible and the amount is reasonably estimable. True
False
8-4 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
28. The journal entry to record a contingent liability requires a debit to a loss (or expense) account and a credit to a liability. True
False
29. Regarding a contingent liability, when no amount within a range of potential losses appears more likely than others, we record the maximum amount in the range. True
False
30. If the likelihood of a loss is reasonably possible rather than probable, we record no entry, but make full disclosure in a footnote to the financial statements to describe the contingency. True
False
31. If the likelihood of loss is remote, disclosure usually is not required. True
False
32. A contingent liability is recorded only if a loss is at least reasonably possible and the amount is reasonably estimable. True
False
33. The balance in the Warranty Liability account is always equal to Warranty Expense. True
False
34. A gain contingency is an existing uncertain situation that might result in a gain, which often is the flip side of loss contingencies. True
False
35. We record gain contingencies when the gain is probable and the amount is reasonably estimable. True
False
8-5 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
36. A company is said to be liquid if it has sufficient cash to pay currently maturing debts. True
False
37. The current ratio is calculated by dividing current liabilities by current assets. True
False
38. The acid-test ratio, or quick ratio, is similar to the current ratio but is based on a more conservative measure of current assets available to pay current liabilities. True
False
39. Quick assets include only cash, short-term investments, and accounts receivable. True
False
40. A lower current ratio or acid-test ratio generally indicates a greater ability to pay current liabilities on a timely basis. True
False
Multiple Choice Questions
41. Which of the following is not a reason why a company might prefer to report a liability as long-term rather than current?
A. It may cause the firm to appear less risky to investors and creditors. B. It may increase interest rates on borrowing. C. It may cause the company to appear more stable commanding a higher stock price for new stock listings. D. It may reduce interest rates on borrowing.
8-6 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
42. Given a choice, most companies would prefer to report a liability as long-term rather than current because:
A. It may cause the firm to appear less risky to investors and creditors. B. It may reduce interest rates on borrowing. C. It may cause the company to appear more stable, commanding a higher stock price for new stock listings. D. All of these. 43. Which of the following is not a current liability?
A. Accounts payable. B. A note payable due in 2 years. C. Current portion of long-term debt. D. Sales tax payable. 44. In most cases, current liabilities are payable within ____ year(s), and long-term liabilities are payable more than ____ year(s) from now.
A. one; two B. one; one C. two; two D. one; ten 45. Which of the following is not a characteristic of a liability?
A. It represents a probable, future sacrifice of economic benefits. B. It must be payable in cash. C. It arises from present obligations to other entities. D. It results from past transactions or events.
8-7 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
46. Which of the following is not a liability?
A. Notes payable. B. Current portion of long-term debt. C. An unused line of credit. D. Deferred revenue. 47. Liabilities are defined as:
A. Resources owed by an entity as a result of past transactions. B. Resources owned by an entity as a result of past transactions. C. Selling products and services to customers in the current period. D. Costs of running the business in the current period. 48. Brian Inc. borrowed $8,000 from First Bank and signed a promissory note. What entry should Brian Inc. record?
A. Debit Cash, $8,000; Credit Notes Receivable, $8,000. B. Debit Notes Receivable, $8,000; Credit Cash, $8,000. C. Debit Cash, $8,000; Credit Notes Payable, $8,000. D. Debit Notes Payable, $8,000; Credit Cash, $8,000. 49. Brian Inc. borrowed $8,000 from First Bank and signed a promissory note. What entry should First Bank record?
A. Debit Cash, $8,000; Credit Notes Receivable, $8,000. B. Debit Notes Receivable, $8,000; Credit Cash, $8,000. C. Debit Cash, $8,000; Credit Notes Payable, $8,000. D. Debit Notes Payable, $8,000; Credit Cash, $8,000.
8-8 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
50. Bear Essentials borrowed $50,000 from Stacks Bank and signed a promissory note. What entry should Bear Essentials record?
A. Debit Cash, $50,000; Credit Notes Receivable, $50,000. B. Debit Notes Receivable, $50,000; Credit Cash, $50,000. C. Debit Cash, $50,000; Credit Notes Payable, $50,000. D. Debit Notes Payable, $50,000; Credit Cash, $50,000. 51. Bear Essentials borrowed $50,000 from Stacks Bank and signed a promissory note. What entry should Stacks Bank record?
A. Debit Cash, $50,000; Credit Notes Receivable, $50,000. B. Debit Notes Receivable, $50,000; Credit Cash, $50,000. C. Debit Cash, $50,000; Credit Notes Payable, $50,000. D. Debit Notes Payable, $50,000; Credit Cash, $50,000. 52. On November 1, 2018, The Bagel Factory signed a $100,000, 6%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 2019. The Bagel Factory should report interest payable at December 31, 2018, in the amount of:
A. $0. B. $1,000. C. $2,000. D. $3,000.
8-9 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
53. On November 1, 2018, The Bagel Factory signed a $100,000, 6%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 2019. The Bagel Factory records the appropriate adjusting entry for the note on December 31, 2018. In recording the payment of the note plus accrued interest at maturity on May 1, 2019, The Bagel Factory would
A. Debit Interest Expense, $2,000. B. Debit Interest Expense, $1,000. C. Debit Interest Payable, $2,000. D. Debit Interest Expense, $3,000. 54. On September 1, 2018, Daylight Donuts signed a $100,000, 9%, six-month note payable with the amount borrowed plus accrued interest due six months later on March 1, 2019. Daylight Donuts should report interest payable at December 31, 2018, in the amount of:
A. $0. B. $1,500. C. $3,000. D. $4,500. 55. On September 1, 2018, Daylight Donuts signed a $100,000, 9%, six-month note payable with the amount borrowed plus accrued interest due six months later on March 1, 2019. Daylight Donuts records the appropriate adjusting entry for the note on December 31, 2018. In recording the payment of the note plus accrued interest at maturity on March 1, 2019, Daylight Donuts would
A. Debit Interest Expense, $3,000. B. Debit Interest Expense, $1,500. C. Debit Interest Payable, $1,500. D. Debit Interest Expense, $4,500.
8-10 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
56. On December 1, 2018, Old World Deli signed a $300,000, 5%, six-month note payable with the amount borrowed plus accrued interest due six months later on June 1, 2019. Old World Deli should record which of the following adjusting entries at December 31, 2018?
A. Debit Interest Expense and credit Interest Payable, $7,500. B. Debit Interest Expense and credit Cash, $7,500. C. Debit Interest Expense and credit Interest Payable, $1,250. D. Debit Interest Expense and credit Cash, $1,250. 57. On December 1, 2018, Old World Deli signed a $300,000, 5%, six-month note payable with the amount borrowed plus accrued interest due six months later on June 1, 2019. Old World Deli records the appropriate adjusting entry for the note on December 31, 2018. What amount of cash will be needed to pay back the note payable plus any accrued interest on June 1, 2019?
A. $300,000. B. $301,250. C. $306,250. D. $307,500. 58. On November 1, 2018, New Morning Bakery signed a $200,000, 6%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 2019. New Morning Bakery should record which of the following adjusting entries at December 31, 2018?
A. Debit Interest Expense and credit Interest Payable, $2,000. B. Debit Interest Expense and credit Cash, $2,000. C. Debit Interest Expense and credit Interest Payable, $6,000. D. Debit Interest Expense and credit Cash, $6,000.
8-11 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
59. On November 1, 2018, New Morning Bakery signed a $200,000, 6%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 2019. New Morning Bakery records the appropriate adjusting entry for the note on December 31, 2018. What amount of cash will be needed to pay back the note payable plus any accrued interest on May 1, 2019?
A. $200,000. B. $202,000. C. $204,000. D. $206,000. 60. The Pita Pit borrowed $100,000 on November 1, 2018, and signed a six-month note bearing interest at 12%. Principal and interest are payable in full at maturity on May 1, 2019. In connection with this note, The Pita Pit should report interest expense at December 31, 2018, in the amount of:
A. $0. B. $1,000. C. $2,000. D. $6,000. 61. The Pita Pit borrowed $100,000 on November 1, 2018, and signed a six-month note bearing interest at 12%. Principal and interest are payable in full at maturity on May 1, 2019. In connection with this note, The Pita Pit should report interest expense in 2019 for the amount of:
A. $0. B. $4,000. C. $2,000. D. $6,000.
8-12 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
62. Universal Travel, Inc. borrowed $500,000 on November 1, 2018, and signed a twelve-month note bearing interest at 6%. Principal and interest are payable in full at maturity on October 31, 2019. In connection with this note, Universal Travel, Inc. should report interest payable at December 31, 2018, in the amount of:
A. $8,000. B. $30,000. C. $5,000. D. $25,000. 63. Universal Travel, Inc. borrowed $500,000 on November 1, 2018, and signed a twelve-month note bearing interest at 6%. Principal and interest are payable in full at maturity on October 31, 2019. In connection with this note, Universal Travel, Inc. should record interest expense in 2019 in the amount of:
A. $8,000. B. $30,000. C. $5,000. D. $25,000. 64. Large, highly-rated firms sometimes sell commercial paper:
A. To borrow funds at a lower rate than through a bank. B. To borrow funds when they cannot obtain a loan from a bank. C. Because they can't borrow anywhere else. D. To improve their credit rating. 65. An informal agreement that allows a company to borrow up to a prearranged limit without having to follow formal loan procedures and prepare paperwork is known as:
A. A line of credit B. Commercial Paper C. A debt covenant D. Working capital
8-13 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
66. Which of the following is not an employer payroll cost?
A. FICA taxes. B. Federal and state unemployment taxes. C. Federal and state income taxes. D. Employer contributions to a retirement plan. 67. Which of the following are employer payroll costs? I. FICA taxes. II. Federal and state unemployment taxes. III. Federal and state income taxes. IV. Employer contributions to a retirement plan.
A. I and IV B. I, III, and IV C. I, II, and IV D. II and III 68. Which of the following is not withheld from an employee's salary?
A. FICA taxes. B. Federal and state unemployment taxes. C. Federal and state income taxes. D. Employee portion of health insurance.
8-14 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
69. Which of the following are withheld from an employee's salary? I. FICA taxes. II. Federal and state unemployment taxes. III. Federal and state income taxes. IV. Employee portion of health insurance.
A. I, II, and IV B. I, III, and IV C. I and IV D. II and III 70. Which of the following is true regarding FICA taxes?
A. FICA taxes are paid only by the employee. B. FICA taxes are paid only by the employer. C. FICA taxes are paid in equal amounts by the employee and the employer. D. FICA taxes are paid in different amounts by the employee and the employer. 71. Which of the following are not included in an employer's payroll tax expense?
A. Employer portion of FICA taxes. B. Federal unemployment taxes. C. State unemployment taxes. D. State income taxes. 72. Which of the following are included in an employer's payroll tax expense?
A. Employer portion of FICA taxes. B. Federal unemployment taxes. C. State unemployment taxes. D. All of these.
8-15 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
73. Mike Gundy is a college football coach making a base salary of $2,400,000 a year ($200,000 per month). Employers are required to withhold a 6.2% Social Security tax up to a maximum base amount and a 1.45% Medicare tax with no maximum. Assuming the Social Security maximum base amount is $118,500, how much will be withheld during the year for the coach's Social Security and Medicare.
A. $34,800. B. $42,147. C. $148,800. D. None of these. 74. Mike Gundy is a college football coach making a base salary of $2,400,000 a year ($200,000 per month). Employers are required to withhold a 6.2% Social Security tax up to a maximum base amount and a 1.45% Medicare tax with no maximum. Assuming the Social Security maximum base amount is $118,500, through what month will Social Security be withheld?
A. Social Security will be withheld only in January. B. Social Security will be withheld through the entire year. C. Social Security will be withheld through the month of March. D. Social Security will be withheld through the month of June. 75. Greger Peterson is a senior manager at a public accounting firm making a base salary of $180,000 a year ($15,000 per month). Employers are required to withhold a 6.2% Social Security tax up to a maximum base amount and a 1.45% Medicare tax with no maximum. Assuming the Social Security maximum base amount is $118,500, how much will be withheld during the year for Greger's Social Security and Medicare.
A. $2,610. B. $9,957. C. $13,770. D. None of these.
8-16 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
76. Greger Peterson is a senior manager at a public accounting firm making a base salary of $180,000 a year ($15,000 per month). Employers are required to withhold a 6.2% Social Security tax up to a maximum base amount and a 1.45% Medicare tax with no maximum. Assuming the Social Security maximum base amount is $118,500, through what month will Social Security be withheld?
A. Social Security will be withheld through the month of August. B. Social Security will be withheld through the entire year. C. Social Security will be withheld through the month of January. D. Social Security will be withheld through the month of October. 77. Action Travel has 10 employees each working 40 hours per week and earning $20 an hour. Federal income taxes are withheld at 15% and state income taxes at 6%. FICA taxes are 7.65% and unemployment taxes are 3.8% of the first $7,000 earned per employee. What is the actual direct deposit of payroll for the first week of January?
A. $5,404. B. $5,708. C. $4,792. D. $8,000. 78. Action Travel has 10 employees each working 40 hours per week and earning $20 an hour. Federal income taxes are withheld at 15% and state income taxes at 6%. FICA taxes are 7.65% and unemployment taxes are 3.8% of the first $7,000 earned per employee. What is the employer's total payroll tax expense for the first week of January?
A. $612. B. $1,224. C. $916. D. $304.
8-17 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
79. Rock Adventures has 15 employees each working 40 hours per week and earning $30 an hour. Federal income taxes are withheld at 15% and state income taxes at 6%. FICA taxes are 7.65% and unemployment taxes are 3.8% of the first $7,000 earned per employee. What is the actual direct deposit of payroll for the first week of January?
A. $13,923. B. $12,843. C. $5,157. D. $18,000. 80. Rock Adventures has 15 employees each working 40 hours per week and earning $30 an hour. Federal income taxes are withheld at 15% and state income taxes at 6%. FICA taxes are 7.65% and unemployment taxes are 3.8% of the first $7,000 earned per employee. What is the employer's total payroll tax expense for the first week of January?
A. $1,377. B. $3,141. C. $2,061. D. $684. 81. Deferred Revenues is a(n):
A. Liability account. B. Asset account. C. Stockholders' equity account. D. Revenue account.
8-18 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
82. In December 2017, Quebecor Printing received magazine subscriptions for 2018 from a customer, who paid $500 in cash. What would be the appropriate journal entry for this event?
A. Debit Cash, $500; credit Subscription Revenue, $500. B. Debit Cash, $500; credit Deferred Revenue, $500. C. Debit Subscription Revenue, $200; credit Cash, $200. D. No journal entry is necessary. 83. In January 2018, Summit Co. sells a gift card for $50 and receives cash. What would be the appropriate journal entry for this event?
A. Debit Cash, $50; credit Sales Revenue, $50. B. Debit Cash, $50; credit Deferred Revenue, $50. C. Debit Sales Revenue, $20; credit Cash, $20. D. No journal entry is necessary. 84. In January, 2018, Summit Co. sells a gift card for $50 and receives cash. In February, 2018, the customer comes back and spends $20 of their gift card on a water bottle. What would be the appropriate journal entry for the purchase of the water bottle?
A. Debit Deferred Revenue, $50; credit Sales Revenue, $50. B. Debit Deferred Revenue, $20; credit Sales Revenue, $20. C. Debit Sales Revenue, $20; credit Deferred Revenue, $20. D. No journal entry is necessary. 85. At times, businesses require advance payments from customers that will be applied to the purchase price when goods are delivered or services provided. These customer advances represent:
A. Liabilities until the product or service is provided. B. A component of stockholders' equity. C. Long-term assets until the product or service is provided. D. Revenue upon receipt of the advance payment.
8-19 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
86. The sale of gift cards by a company is a direct example of:
A. Deferred revenues. B. Sales tax payable. C. Current portion of long-term debt. D. Contingencies. 87. When a company delivers a product or service for which a customer has previously paid, the company records the following:
A. A debit to a revenue account and a credit to a liability account. B. A debit to a revenue account and a credit to an asset account. C. A debit to an asset account and a credit to a revenue account. D. A debit to a liability account and a credit to a revenue account. 88. Sales taxes collected by a company on behalf of the state and local government are recorded by:
A. A debit to an expense account. B. A credit to a revenue account. C. A debit to a revenue account. D. A credit to a liability account. 89. When a company collects sales tax from a customer, the event is recorded by:
A. A debit to Sales Tax Expense and a credit to Sales Tax Payable. B. A debit to Cash and a credit to Sales Tax Payable. C. A debit to Sales Tax Payable and a credit to Sales Tax Expense. D. A debit to Sales Tax Payable and a credit to Cash.
8-20 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
90. When a company collects sales tax from a customer, the event is recorded with a(n) _________ in Cash and a(n) _________ in Sales Tax Payable:
A. increase; decrease B. increase; increase C. decrease; increase D. decrease; decrease 91. Suppose you buy lunch for $8.39 that includes a 5% sales tax. How much did the restaurant charge you for the lunch (excluding any tax) and how much do they owe for sales tax?
A. $8.39 for lunch and $0.42 for sales tax. B. $8.39 for lunch and no sales tax. C. $8.81 for lunch and $0.42 for sales tax. D. $7.99 for lunch and $0.40 for sales tax. 92. The Route 66 Gift Shop, which records sales and sales tax separately, had sales on account of $1,500 and cash sales of $1,000. The state sales tax is 8%. The journal entry to record the sales would include a:
A. Debit to Sales Tax Payable for $75. B. Debit to Cash of $1,000. C. Credit to Sales Revenue of $2,700. D. Debit to Accounts Receivable of $1,620 and a debit to Cash of $1,080. 93. Suppose you buy dinner for $23.75 that includes an 8% sales tax. How much did the restaurant charge you for the dinner (excluding any tax) and how much do they owe for sales tax?
A. $23.75 for dinner and $1.90 for sales tax. B. $23.75 for dinner and no sales tax. C. $21.85 for dinner and $1.90 for sales tax. D. $21.99 for dinner and $1.76 for sales tax.
8-21 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
94. If a 6% sales tax is recorded together with sales revenue in the sales account and the balance at the end of the month is $5,300, how much sales tax is payable?
A. $600.00 B. $280.00 C. $318.00 D. $300.00 95. Union Apparel has sales including sales taxes for the month of $551,200. If the sales tax rate is 6%, what are Union Apparel's sales for the month?
A. $500,000. B. $518,128. C. $520,000. D. $551,200. 96. Union Apparel has sales including sales taxes for the month of $551,200. If the sales tax rate is 6%, how much does Union Apparel owe for sales tax?
A. $51,200. B. $33,272. C. $31,200. D. $551,200. 97. The current portion of long-term debt should be
A. Reported as a current liability on the balance sheet. B. Reported as a long-term liability on the balance sheet. C. Combined with the rest of the long-term debt on the balance sheet. D. Paid immediately.
8-22 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
98. The current portion of long-term debt is:
A. The amount that will be paid within the next year B. Reported as an asset C. Reported as a long-term liability D. None of these 99. Region Jet has a $50 million liability at December 31, 2018, of which $10 million is payable in 2019. In its December 31, 2018 balance sheet, the company reports the $50 million debt as a:
A. $50 million current liability on the balance sheet. B. $50 million long-term liability on the balance sheet. C. $10 million current liability and a $40 million long-term liability on the balance sheet. D. $40 million current liability and a $10 million long-term liability on the balance sheet. 100.United Supply has a $5 million liability at December 31, 2018, of which $1 million is payable in each of the next five years. United Supply reports the liability on the balance sheet as a:
A. $5 million current liability. B. $5 million long-term liability. C. $1 million current liability and a $4 million long-term liability. D. $4 million current liability and a $1 million long-term liability. 101.If management can estimate the amount of loss that will occur due to litigation against the company, and the likelihood of the loss is reasonably possible, a contingent liability should be
A. Disclosed, but not reported as a liability. B. Disclosed and reported as a liability. C. Neither disclosed nor reported as a liability. D. Reported as a liability, but not disclosed.
8-23 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
102.If management can estimate the amount of loss that will occur due to litigation against the company, and the likelihood of the loss is probable, a contingent liability should be
A. Disclosed, but not reported as a liability. B. Disclosed and reported as a liability. C. Neither disclosed nor reported as a liability. D. Reported as a liability, but not disclosed. 103.Reeves Co. filed suit against Higgins, Inc., seeking damages for copyright violations. Higgins' legal counsel believes it is probable that Higgins will settle the lawsuit for an estimated amount in the range of $100,000 to $200,000, with all amounts in the range considered equally likely. How should Higgins report this litigation?
A. As a liability for $100,000 with disclosure of the range. B. As a liability for $150,000 with disclosure of the range. C. As a liability for $200,000 with disclosure of the range. D. As a disclosure only. No liability is reported. 104.Away Travel filed suit against West Coast Travel seeking damages for copyright violations. West Coast Travel's legal counsel believes it is reasonably possible that West Coast Travel will settle the lawsuit for an estimated amount in the range of $100,000 to $200,000, with all amounts in the range considered equally likely. How should West Coast Travel report this litigation?
A. As a liability for $100,000 with disclosure of the range. B. As a liability for $150,000 with disclosure of the range. C. As a liability for $200,000 with disclosure of the range. D. As a disclosure only. No liability is reported.
8-24 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
105.Away Travel filed suit against West Coast Travel seeking damages for copyright violations. Away Travel's legal counsel believes it is probable (but not certain) that Away Travel will win the lawsuit for an estimated amount in the range of $100,000 to $200,000, with all amounts in the range considered equally likely. How should Away Travel report this litigation?
A. As a receivable for $100,000 with disclosure of the range. B. As a receivable for $150,000 with disclosure of the range. C. As a receivable for $200,000 with disclosure of the range. D. As a disclosure only. No receivable is reported. 106.Young Company is involved in a lawsuit. The liability that could arise as a result of this lawsuit should be recorded on the books if the probability of Young owing money as a result of the lawsuit is:
A. Remote and the amount is reasonably estimable. B. Probable and the amount is reasonably estimable. C. Reasonably possible and the amount is reasonably estimable. D. Probable and the amount is not reasonably estimable. 107.Ogden Motors, Inc. is involved in a lawsuit. It is reasonably possible that the jury will find in favor of the plaintiff and Ogden will owe ten million dollars. What is the appropriate reporting of this lawsuit and what is the effect on the balance sheet?
A. Record; decrease stockholders' equity and increase liabilities. B. Record; increase stockholders' equity and decrease liabilities. C. Disclose; no effect on the balance sheet. D. Disclose; decrease stockholders' equity and decrease liabilities.
8-25 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
108.Amplify, Inc. was sued by Sound City for $50,000. Sound City feels very confident that it will win the case and will be awarded the full amount. Amplify, Inc. feels it is probable that it will lose the case and pay Sound City the full amount. Which of the following is correct?
A. Amplify, Inc. would record a loss and contingent liability for $50,000. B. Sound City would record a gain and lawsuit receivable for $50,000. C. Sound City would record nothing. D. Amplify, Inc. would record a loss and contingent liability for $50,000; Sound City would record nothing. 109.At the beginning of 2018, Angel Corporation began offering a 1-year warranty on its products. The warranty program was expected to cost Angel 4% of net sales. Net sales made under warranty in 2018 were $180 million. Five percent of the units sold were returned in 2018 and repaired or replaced at a cost of $5.3 million. The amount of warranty expense on Angel's 2018 income statement is:
A. $5.3 million. B. $7.2 million. C. $9.0 million. D. $27.0 million. 110.The account "Warranty Liability":
A. is adjusted at the end of the year. B. is closed at the end of the year. C. has a year-end credit balance equal to the cost of warranty repairs made during the year. D. is credited each time a warranty repair is made.
8-26 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
111.Strikers, Inc. sells soccer goals to customers over the Internet. History has shown that 2% of Strikers' goals will need repair under the warranty program. For the year, Strikers has sold 4,000 goals and 45 have been repaired. If the estimated cost to repair a goal is $200, what would be the warranty expense for the year?
A. $0. B. $16,000. C. $7,000. D. $9,000. 112.Strikers, Inc. sells soccer goals to customers over the Internet. History has shown that 2% of Strikers' goals will need repair under the warranty program. For the year, Strikers has sold 4,000 goals and 45 have been repaired. If the estimated cost to repair a goal is $200, what would be the warranty liability at the end of the year?
A. $0. B. $16,000. C. $7,000. D. $9,000. 113.Bears Inc. sells football helmets to local schools and warrants all of its products for one year. While no helmets sold in 2018 have been returned yet, based upon previous years, Bears Inc. estimates that 3% of its products will need repairs or be replaced within the next year. What effect would this warranty have on assets, liabilities, and stockholders' equity in 2018?
A. A decrease in assets and decrease in stockholders' equity. B. No journal entry is necessary until products under warranty are returned. C. An increase in stockholders' equity and a decrease in liabilities. D. A decrease in stockholders' equity and an increase in liabilities.
8-27 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
114.Patriot Paddleboards sells a paddleboard model that carries a one-year warranty on all included accessories. Past experience indicates that 15% of those sold will have defective accessories within a year and that average repair cost is $20 per paddleboard. If 1,000 were sold this year and 50 have already been repaired under warranty, the entry to record warranty expense for the year would include a debit to:
A. Warranty Expense of $2,000 B. Warranty Liability of $2,000 C. Warranty Liability of $3,000 D. Warranty Expense of $3,000 115.Talks-A-Lot, Inc. sells cell phones to customers and expects that 10% of phones sold will be returned for repair under its warranty program. The average repair cost is $75 per phone. For 2018, Talks-A-Lot has sold 750 cell phones and has repaired 30 of them as of December 31, 2018. What amount of warranty liability should be reported at December 31, 2018?
A. $2,250. B. $3,375. C. $5,625. D. None, all expected returns from warranties have been received. 116.Carpenter Inc. estimates warranty expense at 2% of sales. Sales during the year were $4 million and warranty expenditures were $44,000. What was the balance in the Warranty Liability account at the end of the year?
A. $44,000. B. $80,000. C. $36,000. D. $480,000.
8-28 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
117.Footnote disclosure is required for material potential losses when the loss is at least reasonably possible:
A. Only if the amount is known. B. Only if the amount is known or reasonably estimable. C. Unless the amount is not reasonably estimable. D. Even if the amount is not reasonably estimable. 118.Gain contingencies usually are recognized in a company's income statement when:
A. The gain is certain. B. The amount is reasonably estimable. C. The gain is reasonably possible and the amount is reasonably estimable. D. The gain is probable and the amount is reasonably estimable. 119.A contingent liability should be recorded on a company's financial statements only if the likelihood of a loss occurring is:
A. At least remotely possible and the amount of the loss is known. B. At least reasonably possible and the amount of the loss is known. C. At least reasonably possible and the amount of the loss is reasonably estimable. D. Probable and the amount of the loss can be reasonably estimated. 120.When a gain contingency is probable and the amount of gain is reasonably estimable, the gain should be:
A. Reported in the income statement and disclosed. B. Offset against stockholders' equity. C. Disclosed, but not recognized in the income statement. D. Reported in the income statement, but not disclosed.
8-29 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
121.A contingent liability should be disclosed in a note to the financial statements rather than being recorded if:
A. The likelihood of a loss is remote. B. The likelihood of a loss is reasonably possible. C. The likelihood of a loss is probable. D. The likelihood of a loss is eighty percent. 122.Volt Electronics sells equipment that includes a three-year warranty. Repairs under the warranty are performed by an independent service company under a contract with Volt. Based on prior experience, warranty costs are estimated to be $25 per item sold. Volt should recognize these warranty costs:
A. When the equipment is sold. B. When the repairs are performed. C. When payments are made to the service firm. D. Evenly over the life of the warranty. 123.Which of the following is a contingency that should be recorded?
A. The company is being sued and a loss is reasonably possible and reasonably estimable. B. The company deducts life insurance premiums from employees' paychecks. C. The company offers a two-year warranty and the expenses can be reasonably estimated. D. It is probable that the company will receive $100,000 in settlement of a lawsuit. 124.Unified Airlines is being sued by Northeast Airlines for $5,000,000. At the end of the year, Unified feels it is probable that it will pay $5,000,000 at some point in the following year. What should Unified and Northeast record at the end of the year concerning the lawsuit?
A. Unified does not record any contingent loss; Northeast records $5,000,000 contingent gain. B. Unified records $5,000,000 contingent loss; Northeast does not record any contingent gain. C. Unified records $5,000,000 contingent loss; Northeast records $5,000,000 contingent gain. D. Neither company records a contingent loss or gain.
8-30 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
125.Unified Airlines is being sued by Northeast Airlines for $5,000,000. At the end of the year, Unified feels it is reasonably possible that it will pay $5,000,000 at some point in the following year. What should Unified and Northeast record at the end of the year concerning the lawsuit?
A. Unified does not record any contingent loss; Northeast records $5,000,000 contingent gain. B. Neither company records a contingent loss or gain. C. Unified records $5,000,000 contingent loss; Northeast records $5,000,000 contingent gain. D. Unified records $5,000,000 contingent loss; Northeast does not record any contingent gain. 126.Discount Travel has the following current assets: cash, $102 million; receivables, $94 million; inventory, $182 million; and other current assets, $18 million. Discount Travel also has the following liabilities: accounts payable, $98 million; current portion of long-term debt, $35 million; and long-term debt, $23 million. Based on these amounts, what is the current ratio?
A. 2.54. B. 2.98. C. 4.04. D. 2.84. 127.Discount Travel has the following current assets: cash, $102 million; receivables, $94 million; inventory, $182 million; and other current assets, $18 million. Discount Travel also has the following liabilities: accounts payable, $98 million; current portion of long-term debt, $35 million; and long-term debt, $23 million. Based on these amounts, what is the acid-test ratio?
A. 1.47. B. 2.00. C. 2.84. D. 3.86.
8-31 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
128.Which of the following statements regarding liquidity ratios is false?
A. A high current ratio generally indicates the ability to pay current liabilities on a timely basis. B. A high acid-test ratio generally indicates the ability to pay current liabilities on a timely basis. C. All current assets are due within one year and therefore have essentially equal liquidity. D. As a rule of thumb, a current ratio of 1 or higher often reflects an acceptable level of liquidity. 129.Which of the following statements regarding liquidity ratios is true?
A. A low current ratio generally indicates the ability to pay current liabilities on a timely basis. B. A low acid-test ratio generally indicates the ability to pay current liabilities on a timely basis. C. All current assets are due within one year and therefore have essentially equal liquidity. D. A high working capital generally indicates the ability to pay current liabilities on a timely basis. 130.Which of the following is true regarding the relationship between the current ratio and the acid-test ratio?
A. The current ratio will always be equal to or larger than the acid-test ratio for a specific company. B. The acid-test ratio will always be equal to or larger than the current ratio for a specific company. C. Either the current ratio or the acid-test ratio could be larger for a specific company. D. One ratio will always exceed 1.0, while the other will always be less than 1.0.
8-32 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
131.A company's liquidity refers to its:
A. Ability to collect accounts receivable. B. Ability to sell inventory efficiently. C. Ability to generate profits from operations. D. Ability to pay currently maturing debts. 132.Which financial ratio relates most closely to a company's ability to pay its short-term debts?
A. Receivables turnover B. Debt to equity ratio C. Return on assets D. Current ratio 133.Working capital is
A. Current assets divided by current liabilities. B. Current assets minus current liabilities. C. Cash, short-term investments, and accounts receivable divided by current liabilities. D. Cash, short-term investments, and accounts receivable minus current liabilities. 134.The current ratio is
A. Current assets divided by current liabilities. B. Cash and short-term investments divided by current liabilities. C. Cash, short-term investments, and accounts receivable divided by current liabilities. D. Cash, short-term investments, accounts receivable, and inventory divided by current liabilities.
8-33 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
135.The acid-test ratio is
A. Current assets divided by current liabilities. B. Cash and short-term investments divided by current liabilities. C. Cash, short-term investments, and accounts receivable divided by current liabilities. D. Cash, short-term investments, accounts receivable, and inventory divided by current liabilities. 136.Which of the following measures of liquidity does not control for the relative size of the company?
A. Working capital. B. Current ratio. C. Acid-test ratio. D. They all control for the relative size of the company. 137.Assuming a current ratio of 1.2 and an acid-test ratio of 0.80, how will the purchase of inventory with cash affect each ratio?
A. Increase the current ratio and increase the acid-test ratio. B. No change to the current ratio and decrease the acid-test ratio. C. Decrease the current ratio and decrease the acid-test ratio. D. Decrease the current ratio and increase the acid-test ratio. 138.Assuming a current ratio of 1.0 and an acid-test ratio of 0.80, how will the borrowing of cash by issuing a six-month note payable affect each ratio?
A. Increase the current ratio and increase the acid-test ratio. B. No change to the current ratio and increase the acid-test ratio. C. Decrease the current ratio and decrease the acid-test ratio. D. Decrease the current ratio and increase the acid-test ratio.
8-34 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
139.Assuming a current ratio of 1.2 and an acid-test ratio of 0.80, how will an increase in accounts receivable affect each ratio?
A. No change to the current ratio and decrease the acid-test ratio. B. Increase the current ratio and increase the acid-test ratio. C. Decrease the current ratio and decrease the acid-test ratio. D. Decrease the current ratio and increase the acid-test ratio. 140.Which of the following would not result in an increase in both the current ratio and the acidtest ratio?
A. Increase in cash B. Increase in inventory C. Increase in accounts receivable D. Increase in current investments 141.Which of the following would result in an increase in the current ratio, but not necessarily the acid-test ratio?
A. Increase in current assets B. Increase in quick assets C. Decrease in current liabilities D. Decrease in current assets
Matching Questions
8-35 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
142.Match the following
1. Current portion of long-term debt
Long-term debt maturing within one year.
____
FICA and FUTA.
____
2. The riskiness of a business's obligations
Informal agreement that permits a company to borrow up to 3. Interest on debt
a prearranged limit.
____
Classifying liabilities as either current or long-term helps 4. Payroll taxes
investors and creditors assess this.
____
Amount of note payable × annual interest rate × fraction of 5. Line of credit
the year.
____
143.Match the following
Cash, short-term investments, and accounts receivable all 1. Acid-test ratio
divided by current liabilities.
____
Loss is probable and amount is reasonably estimable.
____
Gift cards.
____
4. Commercial paper
Long-term debt maturing within one year.
____
5. Deferred revenues
Social Security and Medicare.
____
2. Current portion of long-term debt 3. Recording a contingent liability
Interest expense is recorded in the period interest is 6. FICA 7. Accrual accounting 8. Interest expense
incurred rather than in the period interest is paid.
____
Loss is reasonably possible and amount is reasonably estimable.
____
Incurred on a notes payable.
____
9. The riskiness of a business's obligations
Unsecured notes sold in minimum denominations of $25,000 with maturities up to 270 days.
10. Disclosure of a
Classifying liabilities as either current or long-term helps
contingent liability
investors and creditors assess this.
____ ____
8-36 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
144.Match the following
A written promise to repay the amount borrowed plus 1. Notes payable 2. Recording a contingent liability
interest.
____
Loss is reasonably possible and amount is reasonably estimable.
____
Debt that will be paid within the next year.
____
Loss is probable and amount is reasonably estimable.
____
3. Current portion of long-term debt 4. Disclosure of a contingent liability
A liability that requires the sacrifice of something other 5. Deferred revenues
than cash.
____
Essay Questions
8-37 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
145.Match (by letter) the correct reporting method for each of the items listed below. Reporting Method C. Current liability L. Long-term liability D. Disclosure note only N. Not reported Item _____ 1. Accounts payable. _____ 2. A contingent liability that is probable of occurring within the next year and is reasonably estimable. _____ 3. A contingent liability that is reasonably possible of occurring within the next year and is reasonably estimable. _____ 4. Current portion of long-term debt. _____ 5. Sales tax collected from customers.
8-38 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
146.Match (by letter) the correct reporting method for each of the items listed below. Reporting Method C. Current liability L. Long-term liability D. Disclosure note only N. Not reported Item _____1. Notes payable due in two years. _____2. Customer advances. _____3. Commercial paper. _____4. Unused line of credit. _____ 5. A contingent liability that is probable of occurring within the next year but cannot be estimated.
147.On November 1, Vacation Destinations borrows $1.5 million and issues a six-month, 8% note payable. Interest is payable at maturity. Record the issuance of the note and the appropriate adjusting entry for interest expense at December 31, the end of the reporting period.
8-39 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
148.On September 1, 2018, Allied Moving Corp. borrows $100,000 cash from First National Bank. Allied signs a six-month, 6% note payable. Interest is payable at maturity. Allied's year-end is December 31. 1. Record the note payable by Allied Moving Corp. 2. Record the appropriate adjusting entry for the note by Allied Moving Corp. on December 31, 2018. 3. Record the payment of the note at maturity.
149.On November 1, 2018, Dual Systems borrows $200,000 to expand operations. Dual Systems signs a six-month, 9% promissory note. Interest is payable at maturity. Dual System's yearend is December 31. 1. Record the issuance of the note by Dual Systems. 2. Record the appropriate adjusting entry for the note by Dual Systems on December 31, 2018. 3. Record the payment of the note by Dual Systems at maturity on April 30, 2019.
8-40 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
150.Assume that on July 1, 2018, Togo's Sandwiches issues a $2 million, one-year note. Interest is payable at maturity. Determine the amount of interest expense that should be recorded in a year-end adjusting entry under each of the following independent assumptions: Interest Rate
Fiscal Year-End
1.
8%
31 December
2.
9%
30 September
3.
6%
31 October
4.
7%
31 January
8-41 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
151.The following selected transactions relate to liabilities of Food Emporium whose fiscal year ends on December 31. Negotiated a line of credit with City Bank that can be renewed annually upon bank approval. The amount available under the line of credit is $1 million at the bank’s Jan. 26
prime rate. Arranged a six-month bank loan of $400,000 with City Bank under the line of credit agreement. Interest at the
March 1
prime rate of 8% is payable at maturity.
September 1 Paid the 8% note at maturity.
Record the appropriate entries, if any, on January 26, March 1, and September 1.
152.Mike Smith is a college football coach making a base salary of $960,000 a year ($80,000 per month). Employers are required to withhold a 6.2% Social Security tax up to a maximum base amount and a 1.45% Medicare tax with no maximum. Assuming the Social Security base amount is $118,500, compute how much will be withheld during the year for Coach Smith's Social Security and Medicare. Through what month will Social Security be withheld? What additional amount will the employer need to contribute?
8-42 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
153.Accurate Reports has 50 employees each working 40 hours per week and earning $25 an hour. Federal income taxes are withheld at 15% and state income taxes at 6%. FICA taxes are 7.65% of the first $118,500 earned per employee and 1.45% thereafter. Unemployment taxes are 3.8% of the first $7,000 earned per employee. 1. Compute the total salaries expense, the total withholdings from employee salaries, and the actual direct deposit of payroll for the first week of January. 2. Compute the total payroll tax expense Accurate Reports will pay for the first week of January.
154.During January, Deluxe Printing pays employee salaries of $1 million. Withholdings in January are $76,500 for the employee portion of FICA, $210,000 for federal and state income tax, and $40,000 for the employee portion of health insurance (payable to Blue Cross/Blue Shield). The company incurs an additional $38,000 for federal and state unemployment tax and $30,000 for the employer portion of health insurance. 1. Record the employee salary expense, withholdings, and salaries payable. 2. Record the employer-provided fringe benefits. 3. Record the employer payroll taxes.
8-43 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
155.Midwest Shipping pays employees at the end of each month. Payroll information is listed below for January, the first month of the fiscal year. Assume that none of the employees exceeds the Federal unemployment tax maximum salary of $7,000 in January. Salaries
$800,000
Federal and state income taxes withheld
160,000
Federal unemployment tax rate
0.80%
State unemployment tax rate (after FUTA deduction)
3.00%
Social Security (FICA) tax rate
7.65%
Record salaries expense and payroll tax expense for the January pay period.
156.On July 8, Compusoft receives $250,000 from a customer toward a cash sale of $1 million for customized computer equipment to be completed on August 1. The remaining $750,000 payment is received upon delivery of the product on August 1. The equipment had a total production cost of $700,000. What journal entries should Compusoft record on July 8 and August 1? Assume Compusoft uses the perpetual inventory system.
8-44 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
157.T. Boone Pickens football stadium at Oklahoma State University has a seating capacity of about 60,000. Assume the stadium sells out all six home games before the season begins and the athletic department collects $30.6 million in ticket sales. 1. What was the average price per season ticket and average price per individual game ticket sold? 2. Record the advance collection of $30.6 million in ticket sales. 3. Record the revenue earned after the first home game was completed.
158.During November, Wireless, Inc., makes a $1,600 credit sale excluding sales tax. The state sales tax rate is 5% and the local sales tax rate is 1.5%. Record sales revenue and sales tax payable.
8-45 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
159.On April 1, 2018, the Electronic Superstore borrows $22 million of which $4 million is due in 2019. Show how the company would report the $22 million debt on its December 31, 2018 balance sheet.
160.Consultants notify management of Generic Drug that a prescription medication poses a potential health risk. Legal counsel indicates that a product recall is probable and is estimated to cost the company between $5 and $8 million. How will this affect the company's income statement and balance sheet this period?
8-46 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
161.Decorative Concrete produces a concrete overlay for residential and commercial concrete flooring. Customers have complained that one of the products results in excessive cracking. The likelihood the company will incur a loss on this product is probable and the amount of the loss is estimated to be somewhere between $1.5 and $3 million. 1. Should this contingent liability be reported, disclosed in a note only, or both? Explain. 2. What loss, if any, should Decorative Concrete report in its income statement? 3. What liability, if any, should Decorative Concrete report in its balance sheet? 4. What entry, if any, should be recorded?
8-47 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
162.Panama Shirt Designs is a defendant in litigation involving an employee accident in its manufacturing plant. For each of the following scenarios, determine the appropriate way to report the situation. Explain your reasoning and record any necessary entry. 1 The likelihood of a loss occurring is probable and the estimated loss is $650,000. The likelihood of a loss occurring is probable and the loss is estimated to be in the range of 2 $500,000 to $800,000. 3 The likelihood of a loss occurring is reasonably possible and the estimated loss is $650,000. 4 The likelihood of a loss occurring is remote, while the estimated potential loss is $650,000.
8-48 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
163.Rotary Tools sells power tools and backs each product it sells with a one-year warranty against defects. Based on previous experience, the company expects warranty costs to be approximately 5% of sales. By the end of the first year, sales are $800,000. Actual warranty expenses incurred so far are $13,000. 1. Does this situation represent a contingent liability? Why or why not? 2. Record warranty expense and warranty liability for the year based on 5% of sales. 3. Record the actual warranty expenditures of $13,000 incurred so far. 4. What is the balance in the Warranty Liability account after the entries in parts 2 and 3?
164.The Copper Grill has the following current assets: cash, $12 million; receivables, $50 million; inventory, $44 million; and other current assets $4 million. The Copper Grill has the following liabilities: accounts payable, $38 million; current portion of long-term debt, $7 million; and long-term debt, $12 million. Based on these amounts, calculate the current ratio and the acid-test ratio for The Copper Grill.
8-49 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
165.Selected financial data regarding current assets and current liabilities for two competing companies, Simon and Garfunkel, are provided as follows: ($ in millions)
Simon
Garfunkel
Cash and cash equivalents
$648
$2,917
Short-term investments
3,676
Current assets
Net receivables
991
1,372
Inventory
515
202
Other current assets
334
476
Total current assets
$6,164
$4,967
Accounts payable
$7,081
$4,295
Short-term debt
1,239
1,021
Current liabilities
Other current liabilities Total current liabilities
1,308 $8,320
$6,624
1. Calculate the current ratio for Simon. Then calculate the current ratio for Garfunkel. Which of the two companies has the best current ratio? 2. Calculate the acid-test (quick) ratio for Simon. Then calculate the acid-test (quick) ratio for Garfunkel. Which of the two companies has the best acid-test ratio?
8-50 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
166.Listed below are several terms and phrases associated with current liabilities. Pair each item from List A (by letter) with the item from List B that is most appropriately associated with it. List A
List B
_____ 1. Long-term debt maturing within one year.
a. FICA
_____ 2. Borrowing from another company with
b. Acid-test ratio
maturities up to 270 days. _____ 3. Classifying liabilities as either current or
c. Accrual accounting
long-term helps investors and creditors assess this. _____ 4. Cash, short-term investments, and
d. Recording a contingent liability
accounts receivable all divided by current liabilities. _____ 5. Incurred on a notes payable.
e. Deferred revenues
_____ 6. Interest expense is recorded in the period
f. The riskiness of a business’s
interest is incurred rather than in the period
obligations
interest is paid. _____ 7. Loss is reasonably possible and amount is
g. Current portion of long-term debt
reasonably estimable. _____ 8. Loss is probable and amount is reasonably
h. Disclosure of a contingent liability
estimable. _____ 9. Gift cards.
i. Interest expense
_____ 10. Social Security and Medicare.
j. Commercial paper
8-51 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
167.Aerospace Engineering borrows $40 million cash on November 1, 2018. Aerospace signs a six-month, 6% promissory note to First National Bank under a prearranged short-term line of credit. Interest on the note is payable at maturity. Each firm has a December 31 year end. Required: 1. Prepare the journal entries on November 1, 2018 to record (a) the notes payable for Aerospace Engineering and (b) the notes receivable for First National Bank. 2. Record the adjusting entries on December 31, 2018 for (a) Aerospace Engineering and (b) First National Bank. 3. Prepare the journal entries on April 30, 2019 to record payment of (a) the notes payable for Aerospace Engineering and (b) the notes receivable for First National Bank.
8-52 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
168.Assume payroll for Kicker Sound Systems for the month of January was $150,000 and the following withholdings, fringe benefits, and payroll taxes apply: Federal and state income taxes withheld
$38,000
Health insurance premiums (Blue Cross) paid by employer
12,000
Contribution to retirement plan (Fidelity) paid by employer
15,000
FICA tax rate (Social Security and Medicare)
7.65%
Federal and state unemployment tax rate
3.80%
Assume that Kicker has paid none of the withholdings or payroll taxes by the end of January (record them as payables) and that no employee’s cumulative wages exceed the relevant wage bases. Required: 1. Record the employee salary expense, withholdings, and salaries payable. 2. Record the employer-provided fringe benefits. 3. Record the employer payroll taxes.
8-53 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
169.Arrow Systems offers its employees free medical, dental, and life insurance coverage. It also matches employee contributions to a voluntary retirement plan up to 6% of their salaries. Assume that no employee's cumulative wages exceed the relevant wage bases. Payroll information for the bi-weekly payroll period ending January 24th is listed below. Wages and salaries
$1,000,000
Employee contribution to voluntary retirement plan
60,000
Medical insurance premiums
25,000
Dental insurance premiums
6,000
Life insurance premiums
7,000
Federal and state income taxes to be withheld
205,000
FICA tax rate
7.65%
Federal and state unemployment tax rate
3.80%
Required: 1. Record the employee salary expense, withholdings, and salaries payable. 2. Record the employer-provided fringe benefits. 3. Record the employer payroll taxes.
8-54 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
170.The University of Nebraska football stadium is the third largest city in the state of Nebraska on game days. The stadium has sold out every game since the late 1960's. The seating capacity is about 80,000 fans. Assume the stadium sells out all six home games before the season begins, and the athletic department collects $38.4 million in ticket sales. Required: 1. What is the average price per season ticket and average price per individual game ticket sold? 2. Record the advance collection of $38.4 million in ticket sales. 3. Record the revenue earned after the first home game is completed.
8-55 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
171.During its first three months of operation, Palimino's sold gift cards in various amounts totaling $5,200. The gift cards are redeemable for meals within one year of the purchase date. Gift cards totaling $1,900 were presented for redemption prior to yearend on December 31. The sales tax rate on restaurant sales is 7%, assessed at the time meals (not gift cards) are purchased. Palimino's will remit sales taxes in January. Required: 1. Record (in summary form) the $5,200 in gift cards sold (keeping in mind that, in actuality, each sale of a gift card or a meal would be recorded individually). 2. Record the $1,900 in gift cards redeemed. The $1,900 includes a 7% sales tax of $124.30. 3. Determine the balance in the deferred revenue account (remaining liability for gift card) to be reported on the December 31 balance sheet.
8-56 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
172.Leisure Luggage manufactures a line of luggage designed for airline travel. Assume the following transactions occur during the year ended December 31, 2018. Required: Record any amounts as a result of each of these contingencies. 1. In November 2018, Leisure Luggage became aware of a design flaw in one of its lines of luggage. A product recall is probable and is estimated to cost the company between $300,000 and $500,000. 2. Leisure Luggage is the defendant in a patent infringement lawsuit brought by a competitor. It appears reasonably possible Leisure Luggage will lose the case, and potential losses are estimated to be $1.2 million. 3. Credit sales were $12 million for 2018. Although no customer accounts have been shown to be uncollectible, the company estimates that 3% of credit sales will eventually prove uncollectible. 4. Leisure Luggage is the plaintiff in a lawsuit filed against a supplier. The suit is in final appeal, and attorneys advise it is virtually certain that Leisure Luggage will win and be awarded $800,000.
8-57 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
173.Washington County Airport (WCA) faces three potential contingency situations, described below. Their fiscal year ends December 31, 2018. Required: Determine the appropriate means of reporting each situation for the year ended December 31, 2018 and record any necessary entries. Explain your reasoning. 1. WCA is suing a national airline. WCA's lawyers confirm that it is probable WCA will be awarded damages of $500,000 in the case. 2. In June, 2018 a worker was injured in an accident and has sued the company for $200,000. Legal counsel believes it is reasonably possible, but not probable, that the outcome of the suit will be unfavorable, and that the settlement would cost the company from $100,000 to $200,000. 3. A suit for $1.5 million was filed by an airline on November 3, 2018. Legal counsel believes an unfavorable outcome is probable. A reasonable estimate of the award payment to the airline is between $500,000 and $1 million. No amount within this range is a better estimate of potential damages than any other amount.
8-58 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
174.Selected financial data regarding two competing airlines are provided as follows: ($ in millions)
Company A
Company B
Cash and cash equivalents
$1,225
$4,684
Short-term investments
3,104
1,351
Net receivables
811
1,844
Inventory
525
388
Other current assets
270
637
$5,935
$8,904
Accounts payable
$6,702
$6,991
Short-term debt
2,672
2,407
Current assets
Total current assets Current liabilities
Other current liabilities Total current liabilities
1,624 $9,374
$11,022
Required: 1. Calculate the current ratio for both companies. Which airline has the best current ratio? 2. Calculate the acid-test (quick) ratio for both companies. Which airline has the best acidtest ratio? 3. How would the purchase of additional inventory by issuing short-term debt affect the current ratio? How would it affect the acid-test ratio?
8-59 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
175.Why is it important to distinguish between current and long-term liabilities?
176.Explain why we record interest in the period in which we incur it rather than in the period we pay it.
177.Name as many items as you can that are withheld from employee payroll checks. Which employee deductions are required by law and which are voluntary? Name as many items as you can that are employer payroll costs in addition to the employee's salary. Which employer costs are required by law and which are voluntary?
8-60 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
178.Retailers like McDonalds, American Eagle, and Apple Computer sell a large number of gift cards. Explain how these companies account for the sale of gift cards.
179.Define a contingent liability. Provide three common examples. Under what circumstances should a firm report a contingent liability?
8-61 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 08 Current Liabilities Answer Key
True / False Questions
1.
American, Delta, and United Airlines have all, at one time, filed for bankruptcy. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-01 Distinguish between current and long-term liabilities. Topic: Current Liabilities
2.
In a classified balance sheet, we categorize all liabilities as current. FALSE Liabilities may be classified as either current or long-term.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-01 Distinguish between current and long-term liabilities. Topic: Current Liabilities
3.
Commonly, current liabilities are payable within one year, and long-term liabilities are payable more than one year from now. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember
8-62 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 1 Easy Learning Objective: 08-01 Distinguish between current and long-term liabilities. Topic: Current Liabilities
4.
Given a choice, most companies would prefer to report a liability as current rather than long-term, because doing so may cause the firm to appear less risky. FALSE Companies prefer to report a liability as long-term, because long-term debt makes a company appear less risky.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-01 Distinguish between current and long-term liabilities. Topic: Current Liabilities
5.
When a company borrows cash from a bank promising to repay the amount borrowed plus interest, the borrower reports its liability as notes payable. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-02 Account for notes payable and interest expense. Topic: Notes Payable
6.
Interest is stated in terms of an annual percentage rate to be applied to the face value of the loan. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy 8-63 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 08-02 Account for notes payable and interest expense. Topic: Notes Payable
7.
We record interest expense in the period in which we pay it, rather than in the period we incur it. FALSE Interest expense is recorded in the period incurred, not in the period in which we pay it.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-02 Account for notes payable and interest expense. Topic: Notes Payable
8.
A line of credit is an informal agreement that permits a company to borrow up to a prearranged limit without having to follow formal loan procedures and paperwork. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-02 Account for notes payable and interest expense. Topic: Notes Payable
9.
If a company borrows from another company rather than from a bank, the note is referred to as commercial paper. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-02 Account for notes payable and interest expense. Topic: Notes Payable 8-64 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
10.
Accounts payable are amounts the company owes to suppliers of merchandise or services that it has bought on credit. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-02 Account for notes payable and interest expense. Topic: Notes Payable
11.
Deductions from employee salaries in determining the amount of payroll checks include withholdings for federal and state income taxes, FICA taxes, and the employee portion of insurance and retirement contributions. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-03 Account for employee and employer payroll liabilities. Topic: Payroll Liabilities
12.
All states impose a state income tax. FALSE Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming have no state income tax.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-03 Account for employee and employer payroll liabilities. Topic: Payroll Liabilities
8-65 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
13.
Companies are required by law to withhold federal and state income taxes from employees' paychecks and remit these taxes to the government. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-03 Account for employee and employer payroll liabilities. Topic: Payroll Liabilities
14.
The employer records amounts deducted from employee payroll as liabilities until it pays them to the appropriate organizations. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-03 Account for employee and employer payroll liabilities. Topic: Payroll Liabilities
15.
FICA taxes are paid only by the employee. FALSE The employer is required to match the amount withheld for each employee, effectively doubling the amount paid into Social Security.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-03 Account for employee and employer payroll liabilities. Topic: Payroll Liabilities
8-66 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
16.
The employer is required to match the amount of FICA taxes withheld for each employee, effectively doubling the amount paid into Social Security. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-03 Account for employee and employer payroll liabilities. Topic: Payroll Liabilities
17.
Additional employee benefits paid for by the employer are often referred to as fringe benefits. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-03 Account for employee and employer payroll liabilities. Topic: Payroll Liabilities
18.
When a company receives cash in advance, it debits Cash and credits a revenue account called Deferred Revenue. FALSE When a company receives cash in advance, it debits Cash and credits a liability account called Deferred Revenue.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Other Current Liabilities
8-67 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
19.
Airlines do not record revenue when a ticket is sold, but wait to record revenue until the actual flight occurs. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Other Current Liabilities
20.
All states impose a general state sales tax, and many areas include an additional local sales tax. FALSE Alaska, Delaware, Montana, New Hampshire, and Oregon do not have a general state sales tax.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Other Current Liabilities
21.
Companies selling products subject to sales taxes are responsible for collecting the sales tax directly from customers and periodically remitting the sales taxes collected to the state and local governments. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Other Current Liabilities
8-68 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
22.
When a company collects sales taxes, the debit is to Cash and the credit is to Sales Tax Payable. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Other Current Liabilities
23.
Sales taxes collected from customers by the seller are not an expense, instead they represent current liabilities payable to the government. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Other Current Liabilities
24.
Long-term obligations such as notes, mortgages, and bonds are reported as long-term liabilities when they become payable within the upcoming year. FALSE These liabilities usually are reclassified and reported as current liabilities when they become payable within the upcoming year.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Other Current Liabilities
8-69 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
25.
Given a choice, most managers would choose to record an obligation as long-term rather than current. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Other Current Liabilities
26.
A contingent liability is an existing, uncertain situation that might result in a loss. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
27.
We record a contingent liability when the likelihood of the loss occurring is reasonably possible and the amount is reasonably estimable. FALSE We record a contingent liability when the likelihood of the loss occurring is probable and the amount is reasonably estimable.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
8-70 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
28.
The journal entry to record a contingent liability requires a debit to a loss (or expense) account and a credit to a liability. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
29.
Regarding a contingent liability, when no amount within a range of potential losses appears more likely than others, we record the maximum amount in the range. FALSE When no amount within a range of potential losses appears more likely than others, we record the minimum amount in the range.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
30.
If the likelihood of a loss is reasonably possible rather than probable, we record no entry, but make full disclosure in a footnote to the financial statements to describe the contingency. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
8-71 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
31.
If the likelihood of loss is remote, disclosure usually is not required. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
32.
A contingent liability is recorded only if a loss is at least reasonably possible and the amount is reasonably estimable. FALSE A contingent liability is recorded only if a loss is probable and the amount is reasonably estimable.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
33.
The balance in the Warranty Liability account is always equal to Warranty Expense. FALSE The Warranty Liability account is increased by warranty expense, but it is also reduced over time by actual warranty expenditures.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies 8-72 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
34.
A gain contingency is an existing uncertain situation that might result in a gain, which often is the flip side of loss contingencies. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
35.
We record gain contingencies when the gain is probable and the amount is reasonably estimable. FALSE We do not record gain contingencies until the gain is certain.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
36.
A company is said to be liquid if it has sufficient cash to pay currently maturing debts. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-06 Assess liquidity using current liability ratios. Topic: United Airlines vs. American Airlines
8-73 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
37.
The current ratio is calculated by dividing current liabilities by current assets. FALSE The current ratio is calculated by dividing current assets by current liabilities.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-06 Assess liquidity using current liability ratios. Topic: United Airlines vs. American Airlines
38.
The acid-test ratio, or quick ratio, is similar to the current ratio but is based on a more conservative measure of current assets available to pay current liabilities. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-06 Assess liquidity using current liability ratios. Topic: United Airlines vs. American Airlines
39.
Quick assets include only cash, short-term investments, and accounts receivable. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-06 Assess liquidity using current liability ratios. Topic: United Airlines vs. American Airlines
8-74 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
40.
A lower current ratio or acid-test ratio generally indicates a greater ability to pay current liabilities on a timely basis. FALSE A higher current ratio or acid-test ratio generally indicates a greater ability to pay current liabilities on a timely basis.
AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 08-06 Assess liquidity using current liability ratios. Topic: United Airlines vs. American Airlines
Multiple Choice Questions
41.
Which of the following is not a reason why a company might prefer to report a liability as long-term rather than current?
A. It may cause the firm to appear less risky to investors and creditors. B. It may increase interest rates on borrowing. C. It may cause the company to appear more stable commanding a higher stock price for new stock listings. D. It may reduce interest rates on borrowing. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-01 Distinguish between current and long-term liabilities. Topic: Current Liabilities
8-75 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
42.
Given a choice, most companies would prefer to report a liability as long-term rather than current because:
A. It may cause the firm to appear less risky to investors and creditors. B. It may reduce interest rates on borrowing. C. It may cause the company to appear more stable, commanding a higher stock price for new stock listings. D. All of these. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-01 Distinguish between current and long-term liabilities. Topic: Current Liabilities
43.
Which of the following is not a current liability?
A. Accounts payable. B. A note payable due in 2 years. C. Current portion of long-term debt. D. Sales tax payable. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-01 Distinguish between current and long-term liabilities. Topic: Current Liabilities
8-76 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
44.
In most cases, current liabilities are payable within ____ year(s), and long-term liabilities are payable more than ____ year(s) from now.
A. one; two B. one; one C. two; two D. one; ten AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-01 Distinguish between current and long-term liabilities. Topic: Current Liabilities
45.
Which of the following is not a characteristic of a liability?
A. It represents a probable, future sacrifice of economic benefits. B. It must be payable in cash. C. It arises from present obligations to other entities. D. It results from past transactions or events. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-01 Distinguish between current and long-term liabilities. Topic: Current Liabilities
46.
Which of the following is not a liability?
A. Notes payable. B. Current portion of long-term debt. C. An unused line of credit. D. Deferred revenue. AACSB: Reflective Thinking 8-77 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-01 Distinguish between current and long-term liabilities. Topic: Current Liabilities
47.
Liabilities are defined as:
A. Resources owed by an entity as a result of past transactions. B. Resources owned by an entity as a result of past transactions. C. Selling products and services to customers in the current period. D. Costs of running the business in the current period. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-01 Distinguish between current and long-term liabilities. Topic: Current Liabilities
48.
Brian Inc. borrowed $8,000 from First Bank and signed a promissory note. What entry should Brian Inc. record?
A. Debit Cash, $8,000; Credit Notes Receivable, $8,000. B. Debit Notes Receivable, $8,000; Credit Cash, $8,000. C. Debit Cash, $8,000; Credit Notes Payable, $8,000. D. Debit Notes Payable, $8,000; Credit Cash, $8,000. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 08-02 Account for notes payable and interest expense. Topic: Notes Payable
8-78 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
49.
Brian Inc. borrowed $8,000 from First Bank and signed a promissory note. What entry should First Bank record?
A. Debit Cash, $8,000; Credit Notes Receivable, $8,000. B. Debit Notes Receivable, $8,000; Credit Cash, $8,000. C. Debit Cash, $8,000; Credit Notes Payable, $8,000. D. Debit Notes Payable, $8,000; Credit Cash, $8,000. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 08-02 Account for notes payable and interest expense. Topic: Notes Payable
50.
Bear Essentials borrowed $50,000 from Stacks Bank and signed a promissory note. What entry should Bear Essentials record?
A. Debit Cash, $50,000; Credit Notes Receivable, $50,000. B. Debit Notes Receivable, $50,000; Credit Cash, $50,000. C. Debit Cash, $50,000; Credit Notes Payable, $50,000. D. Debit Notes Payable, $50,000; Credit Cash, $50,000. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 08-02 Account for notes payable and interest expense. Topic: Notes Payable
8-79 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
51.
Bear Essentials borrowed $50,000 from Stacks Bank and signed a promissory note. What entry should Stacks Bank record?
A. Debit Cash, $50,000; Credit Notes Receivable, $50,000. B. Debit Notes Receivable, $50,000; Credit Cash, $50,000. C. Debit Cash, $50,000; Credit Notes Payable, $50,000. D. Debit Notes Payable, $50,000; Credit Cash, $50,000. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 08-02 Account for notes payable and interest expense. Topic: Notes Payable
52.
On November 1, 2018, The Bagel Factory signed a $100,000, 6%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 2019. The Bagel Factory should report interest payable at December 31, 2018, in the amount of:
A. $0. B. $1,000. C. $2,000. D. $3,000. [($100,000 × 6%) × 2/12] = $1,000.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-02 Account for notes payable and interest expense. Topic: Notes Payable
8-80 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
53.
On November 1, 2018, The Bagel Factory signed a $100,000, 6%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 2019. The Bagel Factory records the appropriate adjusting entry for the note on December 31, 2018. In recording the payment of the note plus accrued interest at maturity on May 1, 2019, The Bagel Factory would
A. Debit Interest Expense, $2,000. B. Debit Interest Expense, $1,000. C. Debit Interest Payable, $2,000. D. Debit Interest Expense, $3,000. Interest expense in 2019 = [($100,000 × 6%) × 4/12] = $2,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-02 Account for notes payable and interest expense. Topic: Notes Payable
54.
On September 1, 2018, Daylight Donuts signed a $100,000, 9%, six-month note payable with the amount borrowed plus accrued interest due six months later on March 1, 2019. Daylight Donuts should report interest payable at December 31, 2018, in the amount of:
A. $0. B. $1,500. C. $3,000. D. $4,500. [($100,000 × 9%) × 4/12] = $3,000.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-02 Account for notes payable and interest expense. 8-81 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Notes Payable
55.
On September 1, 2018, Daylight Donuts signed a $100,000, 9%, six-month note payable with the amount borrowed plus accrued interest due six months later on March 1, 2019. Daylight Donuts records the appropriate adjusting entry for the note on December 31, 2018. In recording the payment of the note plus accrued interest at maturity on March 1, 2019, Daylight Donuts would
A. Debit Interest Expense, $3,000. B. Debit Interest Expense, $1,500. C. Debit Interest Payable, $1,500. D. Debit Interest Expense, $4,500. Interest expense in 2019 = [($100,000 × 9%) × 2/12] = $1,500.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-02 Account for notes payable and interest expense. Topic: Notes Payable
56.
On December 1, 2018, Old World Deli signed a $300,000, 5%, six-month note payable with the amount borrowed plus accrued interest due six months later on June 1, 2019. Old World Deli should record which of the following adjusting entries at December 31, 2018?
A. Debit Interest Expense and credit Interest Payable, $7,500. B. Debit Interest Expense and credit Cash, $7,500. C. Debit Interest Expense and credit Interest Payable, $1,250. D. Debit Interest Expense and credit Cash, $1,250. [($300,000 × 5%) × 1/12] = $1,250.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze 8-82 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 3 Hard Learning Objective: 08-02 Account for notes payable and interest expense. Topic: Notes Payable
57.
On December 1, 2018, Old World Deli signed a $300,000, 5%, six-month note payable with the amount borrowed plus accrued interest due six months later on June 1, 2019. Old World Deli records the appropriate adjusting entry for the note on December 31, 2018. What amount of cash will be needed to pay back the note payable plus any accrued interest on June 1, 2019?
A. $300,000. B. $301,250. C. $306,250. D. $307,500. $300,000 + [$300,000 × 5% × 6/12] = $307,500.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-02 Account for notes payable and interest expense. Topic: Notes Payable
58.
On November 1, 2018, New Morning Bakery signed a $200,000, 6%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 2019. New Morning Bakery should record which of the following adjusting entries at December 31, 2018?
A. Debit Interest Expense and credit Interest Payable, $2,000. B. Debit Interest Expense and credit Cash, $2,000. C. Debit Interest Expense and credit Interest Payable, $6,000. D. Debit Interest Expense and credit Cash, $6,000. [($200,000 × 6%) × 2/12] = $2,000.
AACSB: Analytical Thinking 8-83 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-02 Account for notes payable and interest expense. Topic: Notes Payable
59.
On November 1, 2018, New Morning Bakery signed a $200,000, 6%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 2019. New Morning Bakery records the appropriate adjusting entry for the note on December 31, 2018. What amount of cash will be needed to pay back the note payable plus any accrued interest on May 1, 2019?
A. $200,000. B. $202,000. C. $204,000. D. $206,000. $200,000 + [$200,000 × 6% × 6/12] = $206,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-02 Account for notes payable and interest expense. Topic: Notes Payable
8-84 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
60.
The Pita Pit borrowed $100,000 on November 1, 2018, and signed a six-month note bearing interest at 12%. Principal and interest are payable in full at maturity on May 1, 2019. In connection with this note, The Pita Pit should report interest expense at December 31, 2018, in the amount of:
A. $0. B. $1,000. C. $2,000. D. $6,000. [($100,000 × 12%) × 2/12] = $2,000.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-02 Account for notes payable and interest expense. Topic: Notes Payable
61.
The Pita Pit borrowed $100,000 on November 1, 2018, and signed a six-month note bearing interest at 12%. Principal and interest are payable in full at maturity on May 1, 2019. In connection with this note, The Pita Pit should report interest expense in 2019 for the amount of:
A. $0. B. $4,000. C. $2,000. D. $6,000. [($100,000 × 12%) × 4/12] = $4,000.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-02 Account for notes payable and interest expense. 8-85 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Notes Payable
62.
Universal Travel, Inc. borrowed $500,000 on November 1, 2018, and signed a twelvemonth note bearing interest at 6%. Principal and interest are payable in full at maturity on October 31, 2019. In connection with this note, Universal Travel, Inc. should report interest payable at December 31, 2018, in the amount of:
A. $8,000. B. $30,000. C. $5,000. D. $25,000. [($500,000 × 6%) × 2/12] = $5,000.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-02 Account for notes payable and interest expense. Topic: Notes Payable
63.
Universal Travel, Inc. borrowed $500,000 on November 1, 2018, and signed a twelvemonth note bearing interest at 6%. Principal and interest are payable in full at maturity on October 31, 2019. In connection with this note, Universal Travel, Inc. should record interest expense in 2019 in the amount of:
A. $8,000. B. $30,000. C. $5,000. D. $25,000. [($500,000 × 6%) × 10/12] = $25,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze 8-86 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 3 Hard Learning Objective: 08-02 Account for notes payable and interest expense. Topic: Notes Payable
64.
Large, highly-rated firms sometimes sell commercial paper:
A. To borrow funds at a lower rate than through a bank. B. To borrow funds when they cannot obtain a loan from a bank. C. Because they can't borrow anywhere else. D. To improve their credit rating. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-02 Account for notes payable and interest expense. Topic: Notes Payable
65.
An informal agreement that allows a company to borrow up to a prearranged limit without having to follow formal loan procedures and prepare paperwork is known as:
A. A line of credit B. Commercial Paper C. A debt covenant D. Working capital AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-02 Account for notes payable and interest expense. Topic: Notes Payable
8-87 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
66.
Which of the following is not an employer payroll cost?
A. FICA taxes. B. Federal and state unemployment taxes. C. Federal and state income taxes. D. Employer contributions to a retirement plan. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-03 Account for employee and employer payroll liabilities. Topic: Payroll Liabilities
67.
Which of the following are employer payroll costs? I. FICA taxes. II. Federal and state unemployment taxes. III. Federal and state income taxes. IV. Employer contributions to a retirement plan.
A. I and IV B. I, III, and IV C. I, II, and IV D. II and III AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-03 Account for employee and employer payroll liabilities. Topic: Payroll Liabilities
8-88 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
68.
Which of the following is not withheld from an employee's salary?
A. FICA taxes. B. Federal and state unemployment taxes. C. Federal and state income taxes. D. Employee portion of health insurance. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-03 Account for employee and employer payroll liabilities. Topic: Payroll Liabilities
69.
Which of the following are withheld from an employee's salary? I. FICA taxes. II. Federal and state unemployment taxes. III. Federal and state income taxes. IV. Employee portion of health insurance.
A. I, II, and IV B. I, III, and IV C. I and IV D. II and III AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-03 Account for employee and employer payroll liabilities. Topic: Payroll Liabilities
8-89 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
70.
Which of the following is true regarding FICA taxes?
A. FICA taxes are paid only by the employee. B. FICA taxes are paid only by the employer. C. FICA taxes are paid in equal amounts by the employee and the employer. D. FICA taxes are paid in different amounts by the employee and the employer. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-03 Account for employee and employer payroll liabilities. Topic: Payroll Liabilities
71.
Which of the following are not included in an employer's payroll tax expense?
A. Employer portion of FICA taxes. B. Federal unemployment taxes. C. State unemployment taxes. D. State income taxes. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-03 Account for employee and employer payroll liabilities. Topic: Payroll Liabilities
72.
Which of the following are included in an employer's payroll tax expense?
A. Employer portion of FICA taxes. B. Federal unemployment taxes. C. State unemployment taxes. D. All of these. AACSB: Reflective Thinking AICPA: FN Measurement 8-90 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-03 Account for employee and employer payroll liabilities. Topic: Payroll Liabilities
73.
Mike Gundy is a college football coach making a base salary of $2,400,000 a year ($200,000 per month). Employers are required to withhold a 6.2% Social Security tax up to a maximum base amount and a 1.45% Medicare tax with no maximum. Assuming the Social Security maximum base amount is $118,500, how much will be withheld during the year for the coach's Social Security and Medicare.
A. $34,800. B. $42,147. C. $148,800. D. None of these.
Total withheld for: Social Security Medicare Total
$118,500 × .062
=
7,347
$2,400,000 × .0145
=
34,800 $42,147
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-03 Account for employee and employer payroll liabilities. Topic: Payroll Liabilities
8-91 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
74.
Mike Gundy is a college football coach making a base salary of $2,400,000 a year ($200,000 per month). Employers are required to withhold a 6.2% Social Security tax up to a maximum base amount and a 1.45% Medicare tax with no maximum. Assuming the Social Security maximum base amount is $118,500, through what month will Social Security be withheld?
A. Social Security will be withheld only in January. B. Social Security will be withheld through the entire year. C. Social Security will be withheld through the month of March. D. Social Security will be withheld through the month of June. The coach's monthly salary of $200,000 exceeds the Social Security maximum base amount of $118,500, so the total amount of Social Security for the year will be withheld in January.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-03 Account for employee and employer payroll liabilities. Topic: Payroll Liabilities
8-92 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
75.
Greger Peterson is a senior manager at a public accounting firm making a base salary of $180,000 a year ($15,000 per month). Employers are required to withhold a 6.2% Social Security tax up to a maximum base amount and a 1.45% Medicare tax with no maximum. Assuming the Social Security maximum base amount is $118,500, how much will be withheld during the year for Greger's Social Security and Medicare.
A. $2,610. B. $9,957. C. $13,770. D. None of these.
Total withheld for: Social Security
$118,500 × .062 = 7,347
Medicare
$180,000 × .0145 = 2,610
Total
$9,957
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-03 Account for employee and employer payroll liabilities. Topic: Payroll Liabilities
8-93 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
76.
Greger Peterson is a senior manager at a public accounting firm making a base salary of $180,000 a year ($15,000 per month). Employers are required to withhold a 6.2% Social Security tax up to a maximum base amount and a 1.45% Medicare tax with no maximum. Assuming the Social Security maximum base amount is $118,500, through what month will Social Security be withheld?
A. Social Security will be withheld through the month of August. B. Social Security will be withheld through the entire year. C. Social Security will be withheld through the month of January. D. Social Security will be withheld through the month of October. Greger's monthly salary of $15,000 exceeds the Social Security maximum base amount of $118,500 during the 8th month, so Social Security will only be withheld through August.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-03 Account for employee and employer payroll liabilities. Topic: Payroll Liabilities
8-94 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
77.
Action Travel has 10 employees each working 40 hours per week and earning $20 an hour. Federal income taxes are withheld at 15% and state income taxes at 6%. FICA taxes are 7.65% and unemployment taxes are 3.8% of the first $7,000 earned per employee. What is the actual direct deposit of payroll for the first week of January?
A. $5,404. B. $5,708. C. $4,792. D. $8,000.
Total Salaries Expense
[(10 × 40 hours) × $20]
$8,000
Less: Withholdings Federal Income Taxes ($8,000 × .15)
$1,200
State Income Taxes
($8,000 × .06)
480
FICA Taxes
($8,000 × .0765)
612
Total Withholdings Actual Direct Deposit
2,292 $5,708
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-03 Account for employee and employer payroll liabilities. Topic: Payroll Liabilities
8-95 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
78.
Action Travel has 10 employees each working 40 hours per week and earning $20 an hour. Federal income taxes are withheld at 15% and state income taxes at 6%. FICA taxes are 7.65% and unemployment taxes are 3.8% of the first $7,000 earned per employee. What is the employer's total payroll tax expense for the first week of January?
A. $612. B. $1,224. C. $916. D. $304.
FICA Taxes
($8,000* × .0765)
$612
Unemployment Taxes
($8,000* × .038)
304
Total Payroll Tax Expense
$916 * [(10 × 40 hours) × $20]
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-03 Account for employee and employer payroll liabilities. Topic: Payroll Liabilities
8-96 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
79.
Rock Adventures has 15 employees each working 40 hours per week and earning $30 an hour. Federal income taxes are withheld at 15% and state income taxes at 6%. FICA taxes are 7.65% and unemployment taxes are 3.8% of the first $7,000 earned per employee. What is the actual direct deposit of payroll for the first week of January?
A. $13,923. B. $12,843. C. $5,157. D. $18,000.
Total Salaries Expense
[((15 × 40 hours) × $30)]
$18,000
Less: Withholdings Federal Income Taxes ($18,000 × .15)
$2,700
State Income Taxes
($18,000 × .06)
1,080
FICA Taxes
($18,000 × .0765)
1,377
Total Withholdings
5,157
Actual Direct Deposit
$12,843
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-03 Account for employee and employer payroll liabilities. Topic: Payroll Liabilities
8-97 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
80.
Rock Adventures has 15 employees each working 40 hours per week and earning $30 an hour. Federal income taxes are withheld at 15% and state income taxes at 6%. FICA taxes are 7.65% and unemployment taxes are 3.8% of the first $7,000 earned per employee. What is the employer's total payroll tax expense for the first week of January?
A. $1,377. B. $3,141. C. $2,061. D. $684.
FICA Taxes
($18,000* × .0765) $1,377
Unemployment Taxes ($18,000* × .038) Total Payroll Tax Expense
684 $2,061
* [(15 × 40 hours) × $30]
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-03 Account for employee and employer payroll liabilities. Topic: Payroll Liabilities
81.
Deferred Revenues is a(n):
A. Liability account. B. Asset account. C. Stockholders' equity account. D. Revenue account. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Other Current Liabilities
8-98 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
82.
In December 2017, Quebecor Printing received magazine subscriptions for 2018 from a customer, who paid $500 in cash. What would be the appropriate journal entry for this event?
A. Debit Cash, $500; credit Subscription Revenue, $500. B. Debit Cash, $500; credit Deferred Revenue, $500. C. Debit Subscription Revenue, $200; credit Cash, $200. D. No journal entry is necessary. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Other Current Liabilities
83.
In January 2018, Summit Co. sells a gift card for $50 and receives cash. What would be the appropriate journal entry for this event?
A. Debit Cash, $50; credit Sales Revenue, $50. B. Debit Cash, $50; credit Deferred Revenue, $50. C. Debit Sales Revenue, $20; credit Cash, $20. D. No journal entry is necessary. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Other Current Liabilities
8-99 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
84.
In January, 2018, Summit Co. sells a gift card for $50 and receives cash. In February, 2018, the customer comes back and spends $20 of their gift card on a water bottle. What would be the appropriate journal entry for the purchase of the water bottle?
A. Debit Deferred Revenue, $50; credit Sales Revenue, $50. B. Debit Deferred Revenue, $20; credit Sales Revenue, $20. C. Debit Sales Revenue, $20; credit Deferred Revenue, $20. D. No journal entry is necessary. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Other Current Liabilities
85.
At times, businesses require advance payments from customers that will be applied to the purchase price when goods are delivered or services provided. These customer advances represent:
A. Liabilities until the product or service is provided. B. A component of stockholders' equity. C. Long-term assets until the product or service is provided. D. Revenue upon receipt of the advance payment. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Other Current Liabilities
8-100 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
86.
The sale of gift cards by a company is a direct example of:
A. Deferred revenues. B. Sales tax payable. C. Current portion of long-term debt. D. Contingencies. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Other Current Liabilities
87.
When a company delivers a product or service for which a customer has previously paid, the company records the following:
A. A debit to a revenue account and a credit to a liability account. B. A debit to a revenue account and a credit to an asset account. C. A debit to an asset account and a credit to a revenue account. D. A debit to a liability account and a credit to a revenue account. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Other Current Liabilities
8-101 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
88.
Sales taxes collected by a company on behalf of the state and local government are recorded by:
A. A debit to an expense account. B. A credit to a revenue account. C. A debit to a revenue account. D. A credit to a liability account. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Other Current Liabilities
89.
When a company collects sales tax from a customer, the event is recorded by:
A. A debit to Sales Tax Expense and a credit to Sales Tax Payable. B. A debit to Cash and a credit to Sales Tax Payable. C. A debit to Sales Tax Payable and a credit to Sales Tax Expense. D. A debit to Sales Tax Payable and a credit to Cash. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Other Current Liabilities
8-102 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
90.
When a company collects sales tax from a customer, the event is recorded with a(n) _________ in Cash and a(n) _________ in Sales Tax Payable:
A. increase; decrease B. increase; increase C. decrease; increase D. decrease; decrease AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Other Current Liabilities
91.
Suppose you buy lunch for $8.39 that includes a 5% sales tax. How much did the restaurant charge you for the lunch (excluding any tax) and how much do they owe for sales tax?
A. $8.39 for lunch and $0.42 for sales tax. B. $8.39 for lunch and no sales tax. C. $8.81 for lunch and $0.42 for sales tax. D. $7.99 for lunch and $0.40 for sales tax. $8.39/1.05 = $7.99.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Other Current Liabilities
8-103 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
92.
The Route 66 Gift Shop, which records sales and sales tax separately, had sales on account of $1,500 and cash sales of $1,000. The state sales tax is 8%. The journal entry to record the sales would include a:
A. Debit to Sales Tax Payable for $75. B. Debit to Cash of $1,000. C. Credit to Sales Revenue of $2,700. D. Debit to Accounts Receivable of $1,620 and a debit to Cash of $1,080. ($1,500 × 1.08) = $1,620 ($1,000 × 1.08) = $1,080
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Other Current Liabilities
93.
Suppose you buy dinner for $23.75 that includes an 8% sales tax. How much did the restaurant charge you for the dinner (excluding any tax) and how much do they owe for sales tax?
A. $23.75 for dinner and $1.90 for sales tax. B. $23.75 for dinner and no sales tax. C. $21.85 for dinner and $1.90 for sales tax. D. $21.99 for dinner and $1.76 for sales tax. $23.75/1.08 = $21.99.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Other Current Liabilities
8-104 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
94.
If a 6% sales tax is recorded together with sales revenue in the sales account and the balance at the end of the month is $5,300, how much sales tax is payable?
A. $600.00 B. $280.00 C. $318.00 D. $300.00 $5,300/1.06 = $5,000 $5,300 - 5,000 = $300
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Other Current Liabilities
95.
Union Apparel has sales including sales taxes for the month of $551,200. If the sales tax rate is 6%, what are Union Apparel's sales for the month?
A. $500,000. B. $518,128. C. $520,000. D. $551,200. $551,200/1.06 = $520,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Other Current Liabilities
8-105 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
96.
Union Apparel has sales including sales taxes for the month of $551,200. If the sales tax rate is 6%, how much does Union Apparel owe for sales tax?
A. $51,200. B. $33,272. C. $31,200. D. $551,200. $551,200/1.06 = $520,000. $551,200 - 520,000 = $31,200
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Other Current Liabilities
97.
The current portion of long-term debt should be
A. Reported as a current liability on the balance sheet. B. Reported as a long-term liability on the balance sheet. C. Combined with the rest of the long-term debt on the balance sheet. D. Paid immediately. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Other Current Liabilities
8-106 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
98.
The current portion of long-term debt is:
A. The amount that will be paid within the next year B. Reported as an asset C. Reported as a long-term liability D. None of these AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Other Current Liabilities
99.
Region Jet has a $50 million liability at December 31, 2018, of which $10 million is payable in 2019. In its December 31, 2018 balance sheet, the company reports the $50 million debt as a:
A. $50 million current liability on the balance sheet. B. $50 million long-term liability on the balance sheet. C. $10 million current liability and a $40 million long-term liability on the balance sheet. D. $40 million current liability and a $10 million long-term liability on the balance sheet. AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Other Current Liabilities
8-107 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
100.
United Supply has a $5 million liability at December 31, 2018, of which $1 million is payable in each of the next five years. United Supply reports the liability on the balance sheet as a:
A. $5 million current liability. B. $5 million long-term liability. C. $1 million current liability and a $4 million long-term liability. D. $4 million current liability and a $1 million long-term liability. AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Other Current Liabilities
101.
If management can estimate the amount of loss that will occur due to litigation against the company, and the likelihood of the loss is reasonably possible, a contingent liability should be
A. Disclosed, but not reported as a liability. B. Disclosed and reported as a liability. C. Neither disclosed nor reported as a liability. D. Reported as a liability, but not disclosed. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
8-108 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
102.
If management can estimate the amount of loss that will occur due to litigation against the company, and the likelihood of the loss is probable, a contingent liability should be
A. Disclosed, but not reported as a liability. B. Disclosed and reported as a liability. C. Neither disclosed nor reported as a liability. D. Reported as a liability, but not disclosed. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
103.
Reeves Co. filed suit against Higgins, Inc., seeking damages for copyright violations. Higgins' legal counsel believes it is probable that Higgins will settle the lawsuit for an estimated amount in the range of $100,000 to $200,000, with all amounts in the range considered equally likely. How should Higgins report this litigation?
A. As a liability for $100,000 with disclosure of the range. B. As a liability for $150,000 with disclosure of the range. C. As a liability for $200,000 with disclosure of the range. D. As a disclosure only. No liability is reported. When no amount within a range of potential losses appears more likely than others, the liability is recorded at the minimum amount in the range.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
8-109 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
104.
Away Travel filed suit against West Coast Travel seeking damages for copyright violations. West Coast Travel's legal counsel believes it is reasonably possible that West Coast Travel will settle the lawsuit for an estimated amount in the range of $100,000 to $200,000, with all amounts in the range considered equally likely. How should West Coast Travel report this litigation?
A. As a liability for $100,000 with disclosure of the range. B. As a liability for $150,000 with disclosure of the range. C. As a liability for $200,000 with disclosure of the range. D. As a disclosure only. No liability is reported. A contingent liability is not recorded if the likelihood of loss is only reasonably possible.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
105.
Away Travel filed suit against West Coast Travel seeking damages for copyright violations. Away Travel's legal counsel believes it is probable (but not certain) that Away Travel will win the lawsuit for an estimated amount in the range of $100,000 to $200,000, with all amounts in the range considered equally likely. How should Away Travel report this litigation?
A. As a receivable for $100,000 with disclosure of the range. B. As a receivable for $150,000 with disclosure of the range. C. As a receivable for $200,000 with disclosure of the range. D. As a disclosure only. No receivable is reported. A contingent gain is not recorded until the gain is certain.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation
8-110 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
106.
Young Company is involved in a lawsuit. The liability that could arise as a result of this lawsuit should be recorded on the books if the probability of Young owing money as a result of the lawsuit is:
A. Remote and the amount is reasonably estimable. B. Probable and the amount is reasonably estimable. C. Reasonably possible and the amount is reasonably estimable. D. Probable and the amount is not reasonably estimable. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
107.
Ogden Motors, Inc. is involved in a lawsuit. It is reasonably possible that the jury will find in favor of the plaintiff and Ogden will owe ten million dollars. What is the appropriate reporting of this lawsuit and what is the effect on the balance sheet?
A. Record; decrease stockholders' equity and increase liabilities. B. Record; increase stockholders' equity and decrease liabilities. C. Disclose; no effect on the balance sheet. D. Disclose; decrease stockholders' equity and decrease liabilities. The outcome is reasonably possible, not probable, so the contingent liability will be disclosed, but not recorded.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium
8-111 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
108.
Amplify, Inc. was sued by Sound City for $50,000. Sound City feels very confident that it will win the case and will be awarded the full amount. Amplify, Inc. feels it is probable that it will lose the case and pay Sound City the full amount. Which of the following is correct?
A. Amplify, Inc. would record a loss and contingent liability for $50,000. B. Sound City would record a gain and lawsuit receivable for $50,000. C. Sound City would record nothing. D. Amplify, Inc. would record a loss and contingent liability for $50,000; Sound City would record nothing. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
109.
At the beginning of 2018, Angel Corporation began offering a 1-year warranty on its products. The warranty program was expected to cost Angel 4% of net sales. Net sales made under warranty in 2018 were $180 million. Five percent of the units sold were returned in 2018 and repaired or replaced at a cost of $5.3 million. The amount of warranty expense on Angel's 2018 income statement is:
A. $5.3 million. B. $7.2 million. C. $9.0 million. D. $27.0 million. $180 million × 4% = $7.2 million.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard 8-112 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
110.
The account "Warranty Liability":
A. is adjusted at the end of the year. B. is closed at the end of the year. C. has a year-end credit balance equal to the cost of warranty repairs made during the year. D. is credited each time a warranty repair is made. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
111.
Strikers, Inc. sells soccer goals to customers over the Internet. History has shown that 2% of Strikers' goals will need repair under the warranty program. For the year, Strikers has sold 4,000 goals and 45 have been repaired. If the estimated cost to repair a goal is $200, what would be the warranty expense for the year?
A. $0. B. $16,000. C. $7,000. D. $9,000. [(4,000 goals × 2%) × $200] = $16,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
8-113 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
112.
Strikers, Inc. sells soccer goals to customers over the Internet. History has shown that 2% of Strikers' goals will need repair under the warranty program. For the year, Strikers has sold 4,000 goals and 45 have been repaired. If the estimated cost to repair a goal is $200, what would be the warranty liability at the end of the year?
A. $0. B. $16,000. C. $7,000. D. $9,000. [(4,000 goals × 2%) × $200] = $16,000. [$16,000 - (45 × $200)] = $7,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
113.
Bears Inc. sells football helmets to local schools and warrants all of its products for one year. While no helmets sold in 2018 have been returned yet, based upon previous years, Bears Inc. estimates that 3% of its products will need repairs or be replaced within the next year. What effect would this warranty have on assets, liabilities, and stockholders' equity in 2018?
A. A decrease in assets and decrease in stockholders' equity. B. No journal entry is necessary until products under warranty are returned. C. An increase in stockholders' equity and a decrease in liabilities. D. A decrease in stockholders' equity and an increase in liabilities. The company would record an expense and a liability related to the estimated warranties.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation
8-114 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Blooms: Apply Difficulty: 3 Hard Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
114.
Patriot Paddleboards sells a paddleboard model that carries a one-year warranty on all included accessories. Past experience indicates that 15% of those sold will have defective accessories within a year and that average repair cost is $20 per paddleboard. If 1,000 were sold this year and 50 have already been repaired under warranty, the entry to record warranty expense for the year would include a debit to:
A. Warranty Expense of $2,000 B. Warranty Liability of $2,000 C. Warranty Liability of $3,000 D. Warranty Expense of $3,000 [(1,000 × 15%) × $20] = $3,000
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
8-115 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
115.
Talks-A-Lot, Inc. sells cell phones to customers and expects that 10% of phones sold will be returned for repair under its warranty program. The average repair cost is $75 per phone. For 2018, Talks-A-Lot has sold 750 cell phones and has repaired 30 of them as of December 31, 2018. What amount of warranty liability should be reported at December 31, 2018?
A. $2,250. B. $3,375. C. $5,625. D. None, all expected returns from warranties have been received. [(750 × 10%) × $75] = $5,625. [$5,625 - (30 × $75)] = $3,375.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
116.
Carpenter Inc. estimates warranty expense at 2% of sales. Sales during the year were $4 million and warranty expenditures were $44,000. What was the balance in the Warranty Liability account at the end of the year?
A. $44,000. B. $80,000. C. $36,000. D. $480,000. $4 million × 2% = $80,000. $80,000 - $44,000 = $36,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation
8-116 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
117.
Footnote disclosure is required for material potential losses when the loss is at least reasonably possible:
A. Only if the amount is known. B. Only if the amount is known or reasonably estimable. C. Unless the amount is not reasonably estimable. D. Even if the amount is not reasonably estimable. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
118.
Gain contingencies usually are recognized in a company's income statement when:
A. The gain is certain. B. The amount is reasonably estimable. C. The gain is reasonably possible and the amount is reasonably estimable. D. The gain is probable and the amount is reasonably estimable. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
8-117 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
119.
A contingent liability should be recorded on a company's financial statements only if the likelihood of a loss occurring is:
A. At least remotely possible and the amount of the loss is known. B. At least reasonably possible and the amount of the loss is known. C. At least reasonably possible and the amount of the loss is reasonably estimable. D. Probable and the amount of the loss can be reasonably estimated. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
120.
When a gain contingency is probable and the amount of gain is reasonably estimable, the gain should be:
A. Reported in the income statement and disclosed. B. Offset against stockholders' equity. C. Disclosed, but not recognized in the income statement. D. Reported in the income statement, but not disclosed. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
8-118 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
121.
A contingent liability should be disclosed in a note to the financial statements rather than being recorded if:
A. The likelihood of a loss is remote. B. The likelihood of a loss is reasonably possible. C. The likelihood of a loss is probable. D. The likelihood of a loss is eighty percent. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
122.
Volt Electronics sells equipment that includes a three-year warranty. Repairs under the warranty are performed by an independent service company under a contract with Volt. Based on prior experience, warranty costs are estimated to be $25 per item sold. Volt should recognize these warranty costs:
A. When the equipment is sold. B. When the repairs are performed. C. When payments are made to the service firm. D. Evenly over the life of the warranty. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
8-119 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
123.
Which of the following is a contingency that should be recorded?
A. The company is being sued and a loss is reasonably possible and reasonably estimable. B. The company deducts life insurance premiums from employees' paychecks. C. The company offers a two-year warranty and the expenses can be reasonably estimated. D. It is probable that the company will receive $100,000 in settlement of a lawsuit. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
124.
Unified Airlines is being sued by Northeast Airlines for $5,000,000. At the end of the year, Unified feels it is probable that it will pay $5,000,000 at some point in the following year. What should Unified and Northeast record at the end of the year concerning the lawsuit?
A. Unified does not record any contingent loss; Northeast records $5,000,000 contingent gain. B. Unified records $5,000,000 contingent loss; Northeast does not record any contingent gain. C. Unified records $5,000,000 contingent loss; Northeast records $5,000,000 contingent gain. D. Neither company records a contingent loss or gain. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
8-120 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
125.
Unified Airlines is being sued by Northeast Airlines for $5,000,000. At the end of the year, Unified feels it is reasonably possible that it will pay $5,000,000 at some point in the following year. What should Unified and Northeast record at the end of the year concerning the lawsuit?
A. Unified does not record any contingent loss; Northeast records $5,000,000 contingent gain. B. Neither company records a contingent loss or gain. C. Unified records $5,000,000 contingent loss; Northeast records $5,000,000 contingent gain. D. Unified records $5,000,000 contingent loss; Northeast does not record any contingent gain. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
126.
Discount Travel has the following current assets: cash, $102 million; receivables, $94 million; inventory, $182 million; and other current assets, $18 million. Discount Travel also has the following liabilities: accounts payable, $98 million; current portion of long-term debt, $35 million; and long-term debt, $23 million. Based on these amounts, what is the current ratio?
A. 2.54. B. 2.98. C. 4.04. D. 2.84. ($102 + $94 + $182 + $18)/($98 + $35) = 2.98 (rounded).
AACSB: Analytical Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Analyze
8-121 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 3 Hard Learning Objective: 08-06 Assess liquidity using current liability ratios. Topic: United Airlines vs. American Airlines
127.
Discount Travel has the following current assets: cash, $102 million; receivables, $94 million; inventory, $182 million; and other current assets, $18 million. Discount Travel also has the following liabilities: accounts payable, $98 million; current portion of long-term debt, $35 million; and long-term debt, $23 million. Based on these amounts, what is the acid-test ratio?
A. 1.47. B. 2.00. C. 2.84. D. 3.86. ($102 + $94)/($98 + $35) = 1.47 (rounded).
AACSB: Analytical Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-06 Assess liquidity using current liability ratios. Topic: United Airlines vs. American Airlines
128.
Which of the following statements regarding liquidity ratios is false?
A. A high current ratio generally indicates the ability to pay current liabilities on a timely basis. B. A high acid-test ratio generally indicates the ability to pay current liabilities on a timely basis. C. All current assets are due within one year and therefore have essentially equal liquidity. D. As a rule of thumb, a current ratio of 1 or higher often reflects an acceptable level of liquidity. AACSB: Analytical Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation 8-122 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 08-06 Assess liquidity using current liability ratios. Topic: United Airlines vs. American Airlines
129.
Which of the following statements regarding liquidity ratios is true?
A. A low current ratio generally indicates the ability to pay current liabilities on a timely basis. B. A low acid-test ratio generally indicates the ability to pay current liabilities on a timely basis. C. All current assets are due within one year and therefore have essentially equal liquidity. D. A high working capital generally indicates the ability to pay current liabilities on a timely basis. AACSB: Analytical Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 08-06 Assess liquidity using current liability ratios. Topic: United Airlines vs. American Airlines
130.
Which of the following is true regarding the relationship between the current ratio and the acid-test ratio?
A. The current ratio will always be equal to or larger than the acid-test ratio for a specific company. B. The acid-test ratio will always be equal to or larger than the current ratio for a specific company. C. Either the current ratio or the acid-test ratio could be larger for a specific company. D. One ratio will always exceed 1.0, while the other will always be less than 1.0. AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 08-06 Assess liquidity using current liability ratios.
8-123 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: United Airlines vs. American Airlines
131.
A company's liquidity refers to its:
A. Ability to collect accounts receivable. B. Ability to sell inventory efficiently. C. Ability to generate profits from operations. D. Ability to pay currently maturing debts. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-06 Assess liquidity using current liability ratios. Topic: United Airlines vs. American Airlines
132.
Which financial ratio relates most closely to a company's ability to pay its short-term debts?
A. Receivables turnover B. Debt to equity ratio C. Return on assets D. Current ratio AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-06 Assess liquidity using current liability ratios. Topic: United Airlines vs. American Airlines
8-124 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
133.
Working capital is
A. Current assets divided by current liabilities. B. Current assets minus current liabilities. C. Cash, short-term investments, and accounts receivable divided by current liabilities. D. Cash, short-term investments, and accounts receivable minus current liabilities. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-06 Assess liquidity using current liability ratios. Topic: United Airlines vs. American Airlines
134.
The current ratio is
A. Current assets divided by current liabilities. B. Cash and short-term investments divided by current liabilities. C. Cash, short-term investments, and accounts receivable divided by current liabilities. D. Cash, short-term investments, accounts receivable, and inventory divided by current liabilities. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-06 Assess liquidity using current liability ratios. Topic: United Airlines vs. American Airlines
8-125 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
135.
The acid-test ratio is
A. Current assets divided by current liabilities. B. Cash and short-term investments divided by current liabilities. C. Cash, short-term investments, and accounts receivable divided by current liabilities. D. Cash, short-term investments, accounts receivable, and inventory divided by current liabilities. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-06 Assess liquidity using current liability ratios. Topic: United Airlines vs. American Airlines
136.
Which of the following measures of liquidity does not control for the relative size of the company?
A. Working capital. B. Current ratio. C. Acid-test ratio. D. They all control for the relative size of the company. AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-06 Assess liquidity using current liability ratios. Topic: United Airlines vs. American Airlines
8-126 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
137.
Assuming a current ratio of 1.2 and an acid-test ratio of 0.80, how will the purchase of inventory with cash affect each ratio?
A. Increase the current ratio and increase the acid-test ratio. B. No change to the current ratio and decrease the acid-test ratio. C. Decrease the current ratio and decrease the acid-test ratio. D. Decrease the current ratio and increase the acid-test ratio. AACSB: Analytical Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-06 Assess liquidity using current liability ratios. Topic: United Airlines vs. American Airlines
138.
Assuming a current ratio of 1.0 and an acid-test ratio of 0.80, how will the borrowing of cash by issuing a six-month note payable affect each ratio?
A. Increase the current ratio and increase the acid-test ratio. B. No change to the current ratio and increase the acid-test ratio. C. Decrease the current ratio and decrease the acid-test ratio. D. Decrease the current ratio and increase the acid-test ratio. AACSB: Analytical Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-06 Assess liquidity using current liability ratios. Topic: United Airlines vs. American Airlines
8-127 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
139.
Assuming a current ratio of 1.2 and an acid-test ratio of 0.80, how will an increase in accounts receivable affect each ratio?
A. No change to the current ratio and decrease the acid-test ratio. B. Increase the current ratio and increase the acid-test ratio. C. Decrease the current ratio and decrease the acid-test ratio. D. Decrease the current ratio and increase the acid-test ratio. AACSB: Analytical Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-06 Assess liquidity using current liability ratios. Topic: United Airlines vs. American Airlines
140.
Which of the following would not result in an increase in both the current ratio and the acid-test ratio?
A. Increase in cash B. Increase in inventory C. Increase in accounts receivable D. Increase in current investments AACSB: Analytical Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-06 Assess liquidity using current liability ratios. Topic: United Airlines vs. American Airlines
8-128 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
141.
Which of the following would result in an increase in the current ratio, but not necessarily the acid-test ratio?
A. Increase in current assets B. Increase in quick assets C. Decrease in current liabilities D. Decrease in current assets AACSB: Analytical Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-06 Assess liquidity using current liability ratios. Topic: United Airlines vs. American Airlines
Matching Questions
142.
Match the following
1. Current portion of long-term debt
Long-term debt maturing within one year.
1
FICA and FUTA.
4
2. The riskiness of a business's obligations Informal agreement that permits a company to borrow up to 3. Interest on debt
a prearranged limit.
5
Classifying liabilities as either current or long-term helps 4. Payroll taxes
investors and creditors assess this.
2
Amount of note payable × annual interest rate × fraction 5. Line of credit
of the year.
3
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium 8-129 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 08-01 Distinguish between current and long-term liabilities. Learning Objective: 08-02 Account for notes payable and interest expense. Learning Objective: 08-03 Account for employee and employer payroll liabilities. Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Current Liabilities Topic: Notes Payable Topic: Other Current Liabilities Topic: Payroll Liabilities
143.
Match the following
Cash, short-term investments, and accounts receivable all 1. Acid-test ratio
divided by current liabilities.
1
Loss is probable and amount is reasonably estimable.
3
Gift cards.
5
Long-term debt maturing within one year.
2
Social Security and Medicare.
6
2. Current portion of long-term debt 3. Recording a contingent liability 4. Commercial paper 5. Deferred revenues Interest expense is recorded in the period interest is 6. FICA
incurred rather than in the period interest is paid.
7. Accrual accounting 8. Interest expense
7
Loss is reasonably possible and amount is reasonably estimable.
10
Incurred on a notes payable.
8
9. The riskiness of a business's
Unsecured notes sold in minimum denominations of
obligations
$25,000 with maturities up to 270 days.
10. Disclosure of a
Classifying liabilities as either current or long-term helps
contingent liability
investors and creditors assess this.
4 9
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-01 Distinguish between current and long-term liabilities. Learning Objective: 08-02 Account for notes payable and interest expense. Learning Objective: 08-03 Account for employee and employer payroll liabilities. Learning Objective: 08-04 Explain the accounting for other current liabilities. Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies.
8-130 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 08-06 Assess liquidity using current liability ratios. Topic: Contingencies Topic: Current Liabilities Topic: Notes Payable Topic: Other Current Liabilities Topic: Payroll Liabilities Topic: United Airlines vs. American Airlines
144.
Match the following
A written promise to repay the amount borrowed plus 1. Notes payable
interest.
2. Recording a
1
Loss is reasonably possible and amount is reasonably
contingent liability
estimable.
4
Debt that will be paid within the next year.
3
Loss is probable and amount is reasonably estimable.
2
3. Current portion of long-term debt 4. Disclosure of a contingent liability
A liability that requires the sacrifice of something other 5. Deferred revenues
than cash.
5
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-02 Account for notes payable and interest expense. Learning Objective: 08-04 Explain the accounting for other current liabilities. Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies Topic: Notes Payable Topic: Other Current Liabilities
Essay Questions
8-131 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
145.
Match (by letter) the correct reporting method for each of the items listed below. Reporting Method C. Current liability L. Long-term liability D. Disclosure note only N. Not reported Item _____ 1. Accounts payable. _____ 2. A contingent liability that is probable of occurring within the next year and is reasonably estimable. _____ 3. A contingent liability that is reasonably possible of occurring within the next year and is reasonably estimable. _____ 4. Current portion of long-term debt. _____ 5. Sales tax collected from customers.
C; C; D; C; C
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-01 Distinguish between current and long-term liabilities. Learning Objective: 08-04 Explain the accounting for other current liabilities. Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies Topic: Current Liabilities Topic: Other Current Liabilities
8-132 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
146.
Match (by letter) the correct reporting method for each of the items listed below. Reporting Method C. Current liability L. Long-term liability D. Disclosure note only N. Not reported Item _____1. Notes payable due in two years. _____2. Customer advances. _____3. Commercial paper. _____4. Unused line of credit. _____ 5. A contingent liability that is probable of occurring within the next year but cannot be estimated.
L; C; C; D; D
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-02 Account for notes payable and interest expense. Learning Objective: 08-04 Explain the accounting for other current liabilities. Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies Topic: Notes Payable Topic: Other Current Liabilities
8-133 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
147.
On November 1, Vacation Destinations borrows $1.5 million and issues a six-month, 8% note payable. Interest is payable at maturity. Record the issuance of the note and the appropriate adjusting entry for interest expense at December 31, the end of the reporting period.
November 1
Debit
Cash
Credit
1,500,000 Notes Payable
1,500,000
(Issuance of notes payable) December 31 Interest Expense [($1,500,000 × .08) × 2/12] Interest Payable
20,000 20,000
(Interest expense incurred, but not paid)
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-02 Account for notes payable and interest expense. Topic: Notes Payable
8-134 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
148.
On September 1, 2018, Allied Moving Corp. borrows $100,000 cash from First National Bank. Allied signs a six-month, 6% note payable. Interest is payable at maturity. Allied's year-end is December 31. 1. Record the note payable by Allied Moving Corp. 2. Record the appropriate adjusting entry for the note by Allied Moving Corp. on December 31, 2018. 3. Record the payment of the note at maturity.
1. September 1, 2018
Debit
Cash
Credit
100,000
Notes Payable
100,000
(Issuance of notes payable) 2. December 31, 2018 Interest Expense [($100,000 × 6%) × 4/12]
2,000
Interest Payable
2,000
(Interest expense incurred, but not paid) 3. March 1, 2019 Notes Payable
100,000
Interest Expense [($100,000 × 6%) × 2/12]
1,000
Interest Payable [($100,000 × 6%) × 4/12]
2,000
Cash
103,000
(Payment of notes payable and interest)
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-02 Account for notes payable and interest expense. Topic: Notes Payable
8-135 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
149.
On November 1, 2018, Dual Systems borrows $200,000 to expand operations. Dual Systems signs a six-month, 9% promissory note. Interest is payable at maturity. Dual System's year-end is December 31. 1. Record the issuance of the note by Dual Systems. 2. Record the appropriate adjusting entry for the note by Dual Systems on December 31, 2018. 3. Record the payment of the note by Dual Systems at maturity on April 30, 2019.
1. November 1, 2018
Debit
Cash
Credit
200,000
Notes Payable
200,000
(Issuance of notes payable) 2. December 31, 2018 Interest Expense [($200,000 × 9%) × 2/12]
3,000
Interest Payable
3,000
(Interest expense incurred, but not paid) 3. April 30, 2019 Notes Payable
200,000
Interest Expense ($200,000 × 9% × 4/12)
6,000
Interest Payable ($200,000 × 9% × 2/12)
3,000
Cash
209,000
(Payment of notes payable and interest)
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-02 Account for notes payable and interest expense. Topic: Notes Payable
8-136 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
150.
Assume that on July 1, 2018, Togo's Sandwiches issues a $2 million, one-year note. Interest is payable at maturity. Determine the amount of interest expense that should be recorded in a year-end adjusting entry under each of the following independent assumptions: Interest Rate
Fiscal Year-End
1.
8%
31 December
2.
9%
30 September
3.
6%
31 October
4.
7%
31 January
1. $2,000,000
× .08 × 6/12
= $80,000.
2. $2,000,000
× .09 × 3/12
= $45,000.
3. $2,000,000
× .06 × 4/12
= $40,000.
4. $2,000,000
× .07 × 7/12
= $81,667.
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-02 Account for notes payable and interest expense. Topic: Notes Payable
8-137 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
151.
The following selected transactions relate to liabilities of Food Emporium whose fiscal year ends on December 31. Negotiated a line of credit with City Bank that can be renewed annually upon bank approval. The amount available under the line of Jan. 26
credit is $1 million at the bank’s prime rate. Arranged a six-month bank loan of $400,000 with City Bank under the line of credit agreement. Interest at the prime rate of 8% is payable at
March 1
maturity.
September 1 Paid the 8% note at maturity.
Record the appropriate entries, if any, on January 26, March 1, and September 1.
January 26
Debit
Credit
No Journal Entry March 1 Cash
400,000 Notes Payable
400,000
(Issuance of notes payable) September 1 Notes Payable
400,000
Interest Expense [(400,000 × .08) × 6/12]
16,000
Cash
416,000
(Payment of notes payable and interest)
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-02 Account for notes payable and interest expense. Topic: Notes Payable
8-138 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
152.
Mike Smith is a college football coach making a base salary of $960,000 a year ($80,000 per month). Employers are required to withhold a 6.2% Social Security tax up to a maximum base amount and a 1.45% Medicare tax with no maximum. Assuming the Social Security base amount is $118,500, compute how much will be withheld during the year for Coach Smith's Social Security and Medicare. Through what month will Social Security be withheld? What additional amount will the employer need to contribute?
Total withheld for: Social Security
$118,500 × .062 =
7,347
Medicare
$960,000 × .0145 = 13,920
Total
$21,267
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-03 Account for employee and employer payroll liabilities. Topic: Payroll Liabilities
8-139 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
153.
Accurate Reports has 50 employees each working 40 hours per week and earning $25 an hour. Federal income taxes are withheld at 15% and state income taxes at 6%. FICA taxes are 7.65% of the first $118,500 earned per employee and 1.45% thereafter. Unemployment taxes are 3.8% of the first $7,000 earned per employee. 1. Compute the total salaries expense, the total withholdings from employee salaries, and the actual direct deposit of payroll for the first week of January. 2. Compute the total payroll tax expense Accurate Reports will pay for the first week of January.
1. Total Salaries Expense
(50 × 40 hours × $25)
$50,000
Less: Withholdings Federal Income Taxes ($50,000 × .15)
$7,500
State Income Taxes
($50,000 × .06)
3,000
FICA Taxes
($50,000 × .0765)
3,825
Total Withholdings
14,325
Actual Direct Deposit
$35,675
2. FICA Taxes
($50,000 × .0765) $3,825
Unemployment Taxes
($50,000 × .038)
Total Payroll Tax Expense
1,900 $5,725
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-03 Account for employee and employer payroll liabilities. Topic: Payroll Liabilities
8-140 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
154.
During January, Deluxe Printing pays employee salaries of $1 million. Withholdings in January are $76,500 for the employee portion of FICA, $210,000 for federal and state income tax, and $40,000 for the employee portion of health insurance (payable to Blue Cross/Blue Shield). The company incurs an additional $38,000 for federal and state unemployment tax and $30,000 for the employer portion of health insurance. 1. Record the employee salary expense, withholdings, and salaries payable. 2. Record the employer-provided fringe benefits. 3. Record the employer payroll taxes.
January 31 Salaries Expense
Debit
Credit
1,000,000
Income Tax Payable
210,000
FICA Tax Payable
76,500
Accounts Payable (Blue Cross/Blue
40,000
Shield) Salaries Payable (to balance)
673,500
(Employee salary expense and withholdings)
January 31 Salaries Expense (fringe benefits)
30,000
Accounts Payable (Blue Cross/Blue
30,000
Shield)
(Employer-provided fringe benefits)
January 31 Payroll Tax Expense (total)
114,500
FICA Tax Payable
76,500
Unemployment Tax Payable
38,000
(Employer payroll taxes)
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze
8-141 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 3 Hard Learning Objective: 08-03 Account for employee and employer payroll liabilities. Topic: Payroll Liabilities
155.
Midwest Shipping pays employees at the end of each month. Payroll information is listed below for January, the first month of the fiscal year. Assume that none of the employees exceeds the Federal unemployment tax maximum salary of $7,000 in January. Salaries
$800,000
Federal and state income taxes withheld
160,000
Federal unemployment tax rate
0.80%
State unemployment tax rate (after FUTA deduction)
3.00%
Social Security (FICA) tax rate
7.65%
Record salaries expense and payroll tax expense for the January pay period.
January 31
Debit
Salaries Expense
Credit
800,000
Income Tax Payable
160,000
FICA Tax Payable ($800,000 × .0765)
61,200
Salaries Payable (to balance)
578,800
(Employee salary expense) January 31 Payroll Tax Expense (total)
91,600
FICA Tax Payable ($800,000 × .0765)
61,200
Unemployment Tax Payable ($800,000 × .038)
30,400
(Employer payroll tax expense)
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-03 Account for employee and employer payroll liabilities. Topic: Payroll Liabilities
8-142 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
156.
On July 8, Compusoft receives $250,000 from a customer toward a cash sale of $1 million for customized computer equipment to be completed on August 1. The remaining $750,000 payment is received upon delivery of the product on August 1. The equipment had a total production cost of $700,000. What journal entries should Compusoft record on July 8 and August 1? Assume Compusoft uses the perpetual inventory system.
July 8
Debit
Cash
250,000 Deferred Revenue
Credit
250,000
(to record advance receipt of cash)
August 1 Cash
750,000
Deferred Revenue
250,000
Sales Revenue Cost of Goods Sold Inventory
1,000,000 700,000 700,000
(to complete the sale)
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Other Current Liabilities
8-143 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
157.
T. Boone Pickens football stadium at Oklahoma State University has a seating capacity of about 60,000. Assume the stadium sells out all six home games before the season begins and the athletic department collects $30.6 million in ticket sales. 1. What was the average price per season ticket and average price per individual game ticket sold? 2. Record the advance collection of $30.6 million in ticket sales. 3. Record the revenue earned after the first home game was completed.
1. $30,600,000 = $510 per season ticket 60,000 $510 = 6 games
2.
$85 per individual game ticket
Cash
30,600,000 Deferred
Revenue
30,600,000
(Advance collection of ticket sales)
3. Deferred Revenue
5,100,000
Sales Revenue ($30,600,000/6)
5,100,000
(Revenue earned after first home game) AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Other Current Liabilities
8-144 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
158.
During November, Wireless, Inc., makes a $1,600 credit sale excluding sales tax. The state sales tax rate is 5% and the local sales tax rate is 1.5%. Record sales revenue and sales tax payable.
Debit Accounts Receivable
Credit
1,704
Sales Revenue
1,600
Sales Tax Payable (.065 ×
104
$1,600) (Record sales and sales tax)
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Other Current Liabilities
159.
On April 1, 2018, the Electronic Superstore borrows $22 million of which $4 million is due in 2019. Show how the company would report the $22 million debt on its December 31, 2018 balance sheet.
Electronic Superstore Partial Balance Sheet December 31, 2018 Current Liabilities: Current portion of long-term
$4,000,000
debt Long-Term Liabilities: Notes payable Total Liabilities
$18,000,000 $22,000,000
AACSB: Analytical Thinking 8-145 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Other Current Liabilities
160.
Consultants notify management of Generic Drug that a prescription medication poses a potential health risk. Legal counsel indicates that a product recall is probable and is estimated to cost the company between $5 and $8 million. How will this affect the company's income statement and balance sheet this period?
The contingent liability is probable and reasonably estimable, so a loss and a liability for the minimum amount of the range ($5 million) must be recorded. The entry will reduce income before taxes on the income statement and increase total liabilities on the balance sheet by $5 million.
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
8-146 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
161. Decorative Concrete produces a concrete overlay for residential and commercial concrete flooring. Customers have complained that one of the products results in excessive cracking. The likelihood the company will incur a loss on this product is probable and the amount of the loss is estimated to be somewhere between $1.5 and $3 million. 1. Should this contingent liability be reported, disclosed in a note only, or both? Explain. 2. What loss, if any, should Decorative Concrete report in its income statement? 3. What liability, if any, should Decorative Concrete report in its balance sheet? 4. What entry, if any, should be recorded?
1. The contingent liability is probable and reasonably estimable, so it must be reported. The details of the contingent liability should also be provided in a note to the financial statements. 2. When the loss is estimated within a range, the minimum amount of the loss, $1.5 million, should be reported in the company's 2018 income statement. 3. Similarly, a $1.5 million liability should be reported in the 2018 balance sheet. 4. The journal entry is as follows:
Loss
1,500,000
Contingent Liability
1,500,000
(Record a contingent liability) AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
8-147 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
162. Panama Shirt Designs is a defendant in litigation involving an employee accident in its manufacturing plant. For each of the following scenarios, determine the appropriate way to report the situation. Explain your reasoning and record any necessary entry. 1 The likelihood of a loss occurring is probable and the estimated loss is $650,000. The likelihood of a loss occurring is probable and the loss is estimated to be in the range of 2 $500,000 to $800,000. 3 The likelihood of a loss occurring is reasonably possible and the estimated loss is $650,000. 4 The likelihood of a loss occurring is remote, while the estimated potential loss is $650,000.
1. The contingent liability is probable and reasonably estimable, so it must be recorded as follows:
Loss
650,000
Contingent Liability
650,000
(Entry to record the contingent liability)
2. Panama Shirt Designs should record a loss and a liability for the minimum amount ($500,000) and disclose the range between $500,000 and $800,000 in the footnotes to the financial statements. The journal entry is as follows: Loss
500,000
Contingent Liability
500,000
(Entry to record the contingent liability)
3. If the likelihood of loss is reasonably possible rather than probable, we record no entry, but make full disclosure in a footnote to the financial statements to describe the contingency. 4. If the likelihood of loss is remote, disclosure is usually not required. AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard
8-148 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
163. Rotary Tools sells power tools and backs each product it sells with a one-year warranty against defects. Based on previous experience, the company expects warranty costs to be approximately 5% of sales. By the end of the first year, sales are $800,000. Actual warranty expenses incurred so far are $13,000. 1. Does this situation represent a contingent liability? Why or why not? 2. Record warranty expense and warranty liability for the year based on 5% of sales. 3. Record the actual warranty expenditures of $13,000 incurred so far. 4. What is the balance in the Warranty Liability account after the entries in parts 2 and 3?
1. Yes, it's probable that costs for warranties will be incurred and based on previous experience the company can reasonably estimate the amount.
2.
Warranty Expense ($800,000 × 5%)
40,000
Warranty Liability
40,000
(Record liability for warranties) 3.
Warranty Liability
13,000
Cash
13,000
(Record actual warranty expenditures) 4.
Warranty Liability Payment $13,000
$40,000 Expense $27,000 Balance
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
8-149 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
164.
The Copper Grill has the following current assets: cash, $12 million; receivables, $50 million; inventory, $44 million; and other current assets $4 million. The Copper Grill has the following liabilities: accounts payable, $38 million; current portion of long-term debt, $7 million; and long-term debt, $12 million. Based on these amounts, calculate the current ratio and the acid-test ratio for The Copper Grill.
($ in millions)
Current Assets ($12 + 50 +
÷ Current
= Ratio
÷ ($38 + 7)
2.44
44 + 4) Quick Assets ($12 + 50)
Current
Liabilities
= (rounded) ÷ Current
Acid-Test
Liabilities
= Ratio
÷ ($38 + 7)
1.38 = (rounded)
AACSB: Analytical Thinking AICPA: FN Decision Making Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-06 Assess liquidity using current liability ratios. Topic: United Airlines vs. American Airlines
8-150 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
165.
Selected financial data regarding current assets and current liabilities for two competing companies, Simon and Garfunkel, are provided as follows: ($ in millions)
Simon
Garfunkel
$648
$2,917
Current assets Cash and cash equivalents Short-term investments
3,676
Net receivables
991
1,372
Inventory
515
202
Other current assets
334
476
Total current assets
$6,164
$4,967
Accounts payable
$7,081
$4,295
Short-term debt
1,239
1,021
Current liabilities
Other current liabilities Total current liabilities
1,308 $8,320
$6,624
1. Calculate the current ratio for Simon. Then calculate the current ratio for Garfunkel. Which of the two companies has the best current ratio? 2. Calculate the acid-test (quick) ratio for Simon. Then calculate the acid-test (quick) ratio for Garfunkel. Which of the two companies has the best acid-test ratio?
1. Garfunkel has a slightly better current ratio.
($ in
Total
÷ Total
millions)
Current
Current
Assets
Liabilities
= Current Ratio
0.74 Simon
$6,164
÷ $8,320
= (rounded) 0.75
Garfunkel
$4,967
÷ $6,624
= (rounded)
2. Garfunkel also has a slightly better acid-test ratio.
8-151 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
($ in
Quick ÷ Total
millions)
Assets
Current
= Acid-Test Ratio
Liabilities $5,315 Simon
(a)
0.64 ÷ $8,320
$4,289 Garfunkel
(b)
= (rounded) 0.65
÷ $6,624
= (rounded)
$648 + $3,676 + $991 $2,917 + $1,372 AACSB: Analytical Thinking AICPA: FN Decision Making Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 08-06 Assess liquidity using current liability ratios. Topic: United Airlines vs. American Airlines
8-152 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
166.
Listed below are several terms and phrases associated with current liabilities. Pair each item from List A (by letter) with the item from List B that is most appropriately associated with it. List A _____ 1. Long-term debt maturing within one
List B a. FICA
year. _____ 2. Borrowing from another company with b. Acid-test ratio maturities up to 270 days. _____ 3. Classifying liabilities as either current
c. Accrual accounting
or long-term helps investors and creditors assess this. _____ 4. Cash, short-term investments, and
d. Recording a contingent liability
accounts receivable all divided by current liabilities. _____ 5. Incurred on a notes payable.
e. Deferred revenues
_____ 6. Interest expense is recorded in the
f. The riskiness of a business’s obligations
period interest is incurred rather than in the period interest is paid. _____ 7. Loss is reasonably possible and
g. Current portion of long-term debt
amount is reasonably estimable. _____ 8. Loss is probable and amount is
h. Disclosure of a contingent liability
reasonably estimable. _____ 9. Gift cards.
i. Interest expense
_____ 10. Social Security and Medicare.
j. Commercial paper
List A __g___
List B
1. Long-term debt maturing within one a. FICA year.
__j___
2. Borrowing from another company
b. Acid-test ratio
with maturities up to 270 days. __f___
3. Classifying liabilities as either
c. Accrual accounting
current or long-term helps investors
8-153 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
and creditors assess this. __b___
4. Cash, short-term investments, and
d. Recording a contingent liability
accounts receivable all divided by current liabilities. __i___
5. Incurred on a notes payable.
e. Deferred revenues
__c___
6. Interest expense is recorded in the
f. The riskiness of a business’s obligations
period interest is incurred rather than in the period interest is paid. __h___
7. Loss is reasonably possible and
g. Current portion of long-term debt
amount is reasonably estimable. __d___
8. Loss is probable and amount is
h. Disclosure of a contingent liability
reasonably estimable. __e___
9. Gift cards.
i. Interest expense
__a___
10. Social Security and Medicare.
j. Commercial paper
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-01 Distinguish between current and long-term liabilities. Topic: Current Liabilities
8-154 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
167.
Aerospace Engineering borrows $40 million cash on November 1, 2018. Aerospace signs a six-month, 6% promissory note to First National Bank under a prearranged short-term line of credit. Interest on the note is payable at maturity. Each firm has a December 31 year end. Required: 1. Prepare the journal entries on November 1, 2018 to record (a) the notes payable for Aerospace Engineering and (b) the notes receivable for First National Bank. 2. Record the adjusting entries on December 31, 2018 for (a) Aerospace Engineering and (b) First National Bank. 3. Prepare the journal entries on April 30, 2019 to record payment of (a) the notes payable for Aerospace Engineering and (b) the notes receivable for First National Bank.
Requirement 1
(a). November 1, 2018 Cash
40,000,000 Notes Payable
40,000,000
(Issuance of notes payable)
(b). November 1, 2018 Notes Receivable
40,000,000
Cash
40,000,000
(Acceptance of notes receivable)
Requirement 2 (a). December 31, 2018 Interest Expense ($40 million × 6% × 2/12)
400,000 Interest Payable
400,000
(To record interest expense incurred, but not paid)
(b). December 31, 2018 8-155 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Interest Receivable ($40 million × 6% × 2/12)
400,000 Interest Revenue
400,000
(Interest revenue earned, but not received)
Requirement 3 (a). April 30, 2019 Notes Payable
40,000,000
Interest Expense ($40 million × 6% × 4/12)
800,000
Interest Payable ($40 million × 6% × 2/12)
400,000
Cash
41,200,000
(Payment of notes payable and interest) (b). April 30, 2019 Cash
41,200,000 Interest Revenue ($40 million × 6% × 4/12)
800,000
Interest Receivable ($40 million × 6% × 2/12)
400,000
Notes Receivable
40,000,000
(Collection of notes receivable and interest)
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-02 Account for notes payable and interest expense. Topic: Notes Payable
8-156 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
168.
Assume payroll for Kicker Sound Systems for the month of January was $150,000 and the following withholdings, fringe benefits, and payroll taxes apply: Federal and state income taxes
$38,000
withheld Health insurance premiums (Blue
12,000
Cross) paid by employer Contribution to retirement plan
15,000
(Fidelity) paid by employer FICA tax rate (Social Security and
7.65%
Medicare) Federal and state unemployment tax
3.80%
rate
Assume that Kicker has paid none of the withholdings or payroll taxes by the end of January (record them as payables) and that no employee’s cumulative wages exceed the relevant wage bases. Required: 1. Record the employee salary expense, withholdings, and salaries payable. 2. Record the employer-provided fringe benefits. 3. Record the employer payroll taxes.
Requirement 1
January 31 Salaries Expense
150,000
Income Tax Payable
38,000
FICA Tax Payable
11,475
Salaries Payable (to
100,525
balance)
(Employee salary expense and withholdings)
Requirement 2
8-157 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
January 31 Salaries Expense (fringe
27,000
benefits) Payable to Blue Cross
12,000
Payable to Fidelity
15,000
(Employer-provided fringe benefits)
Requirement 3 January 31 Payroll Tax Expense (total)
17,175
FICA Tax Payable
11,475
Unemployment Tax
5,700
Payable
(Employer payroll taxes) AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-03 Account for employee and employer payroll liabilities. Topic: Payroll Liabilities
8-158 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
169.
Arrow Systems offers its employees free medical, dental, and life insurance coverage. It also matches employee contributions to a voluntary retirement plan up to 6% of their salaries. Assume that no employee's cumulative wages exceed the relevant wage bases. Payroll information for the bi-weekly payroll period ending January 24th is listed below. Wages and salaries
$1,000,000
Employee contribution to voluntary retirement plan
60,000
Medical insurance premiums
25,000
Dental insurance premiums
6,000
Life insurance premiums
7,000
Federal and state income taxes to be withheld
205,000
FICA tax rate
7.65%
Federal and state unemployment tax rate
3.80%
Required: 1. Record the employee salary expense, withholdings, and salaries payable. 2. Record the employer-provided fringe benefits. 3. Record the employer payroll taxes.
Requirement 1
January 24 Salaries Expense
1,000,000
Income Tax Payable
205,000
FICA Tax Payable
76,500
Payable for Retirement Plan
60,000
Salaries Payable (to balance)
658,500
(Employee salary expense and withholdings)
Requirement 2 January 24 Salaries Expense (fringe benefits) Payable for Medical Insurance
98,000 25,000
8-159 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Payable for Dental Insurance
6,000
Payable for Life Insurance
7,000
Payable for Retirement Plan
60,000
(Employer-provided fringe benefits)
Requirement 3 January 24 Payroll Tax Expense (total)
114,500
FICA Tax Payable
76,500
Unemployment Tax Payable
38,000
(Employer payroll taxes) AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-03 Account for employee and employer payroll liabilities. Topic: Payroll Liabilities
8-160 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
170.
The University of Nebraska football stadium is the third largest city in the state of Nebraska on game days. The stadium has sold out every game since the late 1960's. The seating capacity is about 80,000 fans. Assume the stadium sells out all six home games before the season begins, and the athletic department collects $38.4 million in ticket sales. Required: 1. What is the average price per season ticket and average price per individual game ticket sold? 2. Record the advance collection of $38.4 million in ticket sales. 3. Record the revenue earned after the first home game is completed.
Requirement 1
$38,400,000 = $480 per season ticket 80,000 $480 = 6 games
$80 per individual game ticket
Requirement 2 Cash
38,400,000 Deferred
Revenue
38,400,000 (Advance collection of ticket sales)
Requirement 3 Deferred Revenue
6,400,000 Sales Revenue
($38,400,000/6)
6,400,000
(Revenue earned after first home
game)
8-161 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Other Current Liabilities
8-162 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
171.
During its first three months of operation, Palimino's sold gift cards in various amounts totaling $5,200. The gift cards are redeemable for meals within one year of the purchase date. Gift cards totaling $1,900 were presented for redemption prior to yearend on December 31. The sales tax rate on restaurant sales is 7%, assessed at the time meals (not gift cards) are purchased. Palimino's will remit sales taxes in January. Required: 1. Record (in summary form) the $5,200 in gift cards sold (keeping in mind that, in actuality, each sale of a gift card or a meal would be recorded individually). 2. Record the $1,900 in gift cards redeemed. The $1,900 includes a 7% sales tax of $124.30. 3. Determine the balance in the deferred revenue account (remaining liability for gift card) to be reported on the December 31 balance sheet.
Requirement 1
Cash
5,200
Deferred Revenue
5,200
(Sale of gift cards)
Requirement 2 Deferred Revenue
1,900
Sales ($1,900/1.07)
1,775.70
Sales Tax Payable
124.30
(Redemption of gift cards)
Requirement 3 Deferred Revenue 1,900
5,200 3,300 Balance
AACSB: Analytical Thinking AICPA: FN Measurement 8-163 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Other Current Liabilities
8-164 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
172.
Leisure Luggage manufactures a line of luggage designed for airline travel. Assume the following transactions occur during the year ended December 31, 2018. Required: Record any amounts as a result of each of these contingencies. 1. In November 2018, Leisure Luggage became aware of a design flaw in one of its lines of luggage. A product recall is probable and is estimated to cost the company between $300,000 and $500,000. 2. Leisure Luggage is the defendant in a patent infringement lawsuit brought by a competitor. It appears reasonably possible Leisure Luggage will lose the case, and potential losses are estimated to be $1.2 million. 3. Credit sales were $12 million for 2018. Although no customer accounts have been shown to be uncollectible, the company estimates that 3% of credit sales will eventually prove uncollectible. 4. Leisure Luggage is the plaintiff in a lawsuit filed against a supplier. The suit is in final appeal, and attorneys advise it is virtually certain that Leisure Luggage will win and be awarded $800,000.
Requirement 1
Loss
300,000
Contingent
300,000
Liability
(Record the contingent liability)
Requirement 2 The likelihood of loss is reasonably possible rather than probable, so no journal entry is recorded. However, full disclosure of the contingent liability and the estimated loss of $1.2 million is disclosed in notes to the financial statements. Requirement 3 Bad Debt Expense ($12 million × 3%)
360,000
8-165 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Allowance for Uncollectible Accounts
360,000
(Estimated uncollectible accounts)
Requirement 4 Leisure Luggage has a contingent gain that is probable and is reasonably estimable; however, contingent gains are not recorded until the gain is certain. Though firms do not record contingent gains in the accounts, they sometimes disclose them in notes to the financial statements. AACSB: Analytical Thinking AICPA: FN Measurement AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
8-166 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
173.
Washington County Airport (WCA) faces three potential contingency situations, described below. Their fiscal year ends December 31, 2018. Required: Determine the appropriate means of reporting each situation for the year ended December 31, 2018 and record any necessary entries. Explain your reasoning. 1. WCA is suing a national airline. WCA's lawyers confirm that it is probable WCA will be awarded damages of $500,000 in the case. 2. In June, 2018 a worker was injured in an accident and has sued the company for $200,000. Legal counsel believes it is reasonably possible, but not probable, that the outcome of the suit will be unfavorable, and that the settlement would cost the company from $100,000 to $200,000. 3. A suit for $1.5 million was filed by an airline on November 3, 2018. Legal counsel believes an unfavorable outcome is probable. A reasonable estimate of the award payment to the airline is between $500,000 and $1 million. No amount within this range is a better estimate of potential damages than any other amount.
Requirement 1 Washington County Airport (WCA) has a contingent gain that is probable and can be reasonably estimated at $500,000 however, contingent gains are not recorded until the gain is certain. Though firms do not record contingent gains in the accounts, they sometimes disclose them in notes to the financial statements. Requirement 2 The contingent liability is reasonably possible and the amount is reasonably estimable within a range; however, because the loss is not probable, no journal entry for a loss and liability is required. WCA must disclose a description of the contingency in the notes to the financial statements. Requirement 3 The contingent liability is probable and reasonably estimable, so it must be reported. Because the estimate of the loss is a range where no amount within the range is a better estimate than any other amount, the minimum amount of the range will be recorded as follows: 8-167 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Loss
500,000
Contingent Liability
500,000
(Record the contingent liability)
The range of the potential loss (from $500,000 to $1 million) should also be disclosed. AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
8-168 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
174.
Selected financial data regarding two competing airlines are provided as follows: ($ in millions)
Company A Company B
Current assets Cash and cash equivalents
$1,225
$4,684
Short-term investments
3,104
1,351
Net receivables
811
1,844
Inventory
525
388
Other current assets
270
637
$5,935
$8,904
Accounts payable
$6,702
$6,991
Short-term debt
2,672
2,407
Total current assets Current liabilities
Other current liabilities
1,624
Total current liabilities
$9,374
$11,022
Required: 1. Calculate the current ratio for both companies. Which airline has the best current ratio? 2. Calculate the acid-test (quick) ratio for both companies. Which airline has the best acid-test ratio? 3. How would the purchase of additional inventory by issuing short-term debt affect the current ratio? How would it affect the acid-test ratio?
Requirement 1
($ in
Total
millions)
Current
÷
Current
Total
Assets
Liabilities
= Current Ratio
Company A $5,935 ÷
$9,374
=
0.63
Company B $8,904 ÷
$11,022
=
0.81
Company B (0.81) has the best current ratio.
8-169 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Requirement 2 ($ in
Quick ÷
Total
=
Acid-
millions)
Assets
Current
Test
Liabilities
Ratio
Company A
$5,140 ÷
$9,374
=
0.55
Company B
$7,879 ÷
$11,022
=
0.71
Company B (0.71) also has the best acid-test ratio. Requirement 3 The purchase of additional inventory by issuing short-term debt would increase the current ratio as both current assets and current liabilities would increase by an equal amount. The purchase of additional inventory by issuing short-term debt would decrease the acid-test ratio due to the increase in current liabilities in the denominator of the ratio. Recall that inventory is excluded in calculating the numerator for the acid-test ratio. AACSB: Analytical Thinking AICPA: FN Decision Making AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 08-06 Assess liquidity using current liability ratios. Topic: United Airlines vs. American Airlines
175.
Why is it important to distinguish between current and long-term liabilities?
Distinguishing between current and long-term liabilities is important in helping investors and creditors assess the riskiness of a business' obligations. Given a choice, most companies would prefer to report a liability as long-term rather than current because it may cause the firm to appear less risky. In turn, less risky firms may enjoy lower interest rates on borrowing and command higher stock prices for new stock listings.
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-01 Distinguish between current and long-term liabilities. Topic: Current Liabilities 8-170 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
176.
Explain why we record interest in the period in which we incur it rather than in the period we pay it.
Accrual-basis accounting requires expenses to be recorded when incurred; cash-basis requires expenses to be recorded when the cash is paid. Generally Accepted Accounting Principles (GAAP) requires the use of accrual-basis accounting in preparing financial statements because it best reflects the timing of the expense.
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-02 Account for notes payable and interest expense. Topic: Notes Payable
177.
Name as many items as you can that are withheld from employee payroll checks. Which employee deductions are required by law and which are voluntary? Name as many items as you can that are employer payroll costs in addition to the employee's salary. Which employer costs are required by law and which are voluntary?
Items commonly withheld from employee payroll checks include federal and state income taxes, Social Security and Medicare, health, dental, disability, and life insurance premiums, and employee investments to retirement or savings plans. Federal and state income taxes, Social Security and Medicare are required by law. The rest are voluntary. Common employer payroll costs, in additional to the employee's salary, include federal and state unemployment taxes, the employer portion of Social Security and Medicare, employer contributions for health, dental, disability, and life insurance, and employer contributions to retirement or savings plans. Federal and state unemployment taxes and the employer portion of Social Security and Medicare are required by law. The rest are voluntary benefits paid by a company on behalf of its employees.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium 8-171 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 08-03 Account for employee and employer payroll liabilities. Topic: Payroll Liabilities
178.
Retailers like McDonalds, American Eagle, and Apple Computer sell a large number of gift cards. Explain how these companies account for the sale of gift cards.
When a company receives cash in advance through the sale of gift cards, it debits Cash and credits a current liability account called Deferred Revenue. When it earns the revenue through the sale of goods or services, the company debits Deferred Revenue and credits Sales Revenue.
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-04 Explain the accounting for other current liabilities. Topic: Other Current Liabilities
179.
Define a contingent liability. Provide three common examples. Under what circumstances should a firm report a contingent liability?
A contingent liability is an existing, uncertain situation that might result in a loss. Examples include lawsuits, product warranties, environmental problems, and premium offers. A contingent liability is recorded only if a loss is probable and the amount is reasonably estimable.
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-05 Apply the appropriate accounting treatment for contingencies. Topic: Contingencies
8-172 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 09 Long-Term Liabilities
True / False Questions
1. The mixture of liabilities and stockholders' equity a business uses is called its capital structure. True
False
2. Interest expense incurred when borrowing money, as well as dividends paid to stockholders, are tax-deductible. True
False
3. As a company's level of debt increases, bankruptcy risk increases. True
False
4. Companies that are believed to have high bankruptcy risk generally receive higher credit ratings and pay a lower interest rate for borrowing. True
False
5. Bonds are the most common form of corporate debt. True
False
6. A private placement is when a company chooses to sell the debt securities directly to a single investor. True
False
9-1 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
7. Monthly installment payments on a note payable include both an amount that represents interest and an amount that represents a reduction of the outstanding loan balance. True
False
8. A lease is a contractual arrangement by which the lessor provides the lessee the right to use an asset for a specified period of time. True
False
9. Operating leases are contractual agreements where the lessor owns the asset and the lessee simply uses the asset temporarily. True
False
10. Operating leases occur when the lessee essentially buys an asset and borrows the money through a lease to pay for the asset. True
False
11. Secured bonds are backed by the federal government. True
False
12. Unsecured bonds are not backed by a specific asset. True
False
13. Term bonds require payments in installments over a series of years. True
False
14. Serial bonds require payment of the full principal amount of the bond at a single maturity date. True
False
9-2 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15. A callable bond allows the borrower to repay the bonds before their scheduled maturity date at a specified call price. True
False
16. Convertible bonds allow the investor to convert each bond into a specified number of shares of common stock. True
False
17. We can calculate the issue price of a bond as the face amount plus the total periodic interest payments. True
False
18. The market interest rate represents the true interest rate used by investors to value a company's bond issue. True
False
19. The stated interest rate is the rate quoted in the bond contract used to calculate the cash payments for interest. True
False
20. The market interest rate does not change over time. True
False
21. The stated interest rate does not change over time. True
False
22. As a company's default risk increases, investors demand a higher market interest rate on their bond investments. True
False
9-3 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
23. The lower the market interest rate, the lower the bond issue price will be. True
False
24. Bonds issued below face amount are said to be issued at a discount. True
False
25. A premium occurs when the issue price of a bond is above its face amount. True
False
26. The amount reported on the balance sheet for bonds payable is equal to the carrying value at the balance sheet date. True
False
27. When bonds are issued at a discount (below face amount), the carrying value and the corresponding interest expense increase over time. True
False
28. When bonds are issued at a premium (above face amount), the carrying value and the corresponding interest expense increase over time. True
False
29. Interest expense is calculated as the carrying value times the market rate. True
False
30. The cash payment each period is calculated as the carrying value times the market rate. True
False
9-4 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
31. An amortization schedule provides a summary of the cash interest payments, interest expense, and changes in carrying value for each period. True
False
32. For bonds issued at a premium, the difference between interest expense and the cash paid increases the carrying value of the bonds. True
False
33. At the maturity date, the carrying value will equal the face amount of the bond. True
False
34. The market value of bonds moves in the opposite direction of interest rates. True
False
35. When an issuer retires debt of any type before its scheduled maturity date, the transaction is an early extinguishment of debt. True
False
36. Gains/losses on the early extinguishment of debt are reported as part of operating income in the income statement. True
False
37. Losses have the effect of reducing net income, while gains increase net income. True
False
38. A gain or loss is recorded on bonds retired at maturity. True
False
9-5 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
39. The debt to equity ratio measures a company's risk and is calculated as total liabilities divided by stockholders' equity. True
False
40. Leverage enables a company to earn a higher return using debt than without debt. True
False
41. Return on assets is calculated as net income divided by the ending balance for total assets. True
False
42. The times interest earned ratio compares interest expense with income available to pay interest charges. True
False
Multiple Choice Questions
43. Which of the following is not a primary source of corporate debt financing?
A. Bonds Payable. B. Common Stock. C. Leases. D. Notes Payable. 44. Which of the following is the primary source of corporate equity financing?
A. Bonds Payable. B. Common Stock. C. Leases. D. Notes Payable.
9-6 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
45. Profits generated by the company are a(n):
A. source of external financing. B. source of internal financing. C. liability. D. asset. 46. The mixture of liabilities and stockholders' equity a business uses is called its:
A. Bond contract. B. Carrying value. C. Capital structure. D. Accounting equation. 47. Which of the following is not a true statement?
A. Companies that are believed to have high bankruptcy risk generally receive low credit ratings and must pay a higher interest rate for borrowing. B. As a company's level of debt increases, the risk of bankruptcy increases. C. Interest expense incurred when borrowing money, as well as dividends paid to stockholders, are both tax-deductible. D. The mixture of liabilities and stockholders' equity a business uses is called its capital structure. 48. In each succeeding payment on an installment note:
A. The amount that goes to decreasing the carrying value of the note increases. B. The amount that goes to decreasing the carrying value of the note decreases. C. The amount that goes to decreasing the carrying value of the note is unchanged. D. The amounts paid for both interest and principal increase proportionately.
9-7 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
49. For a five-year installment note signed on January 1, 2016, at which of the following dates would the carrying value be the lowest?
A. April 30, 2020 B. November 30, 2019 C. August 1, 2016 D. December 31, 2018 50. For a five-year installment note signed on January 1, 2016, at which of the following dates would the carrying value be the highest?
A. August 1, 2016 B. November 30, 2019 C. April 30, 2020 D. December 31, 2018 51. In each succeeding payment on an installment note:
A. The amount of interest expense increases. B. The amount of interest expense decreases. C. The amount of interest expense is unchanged. D. The amounts paid for both interest and principal increase proportionately. 52. The entry to record a monthly payment on an installment note such as a car loan:
A. Increases expense, decreases liabilities, and decreases assets. B. Increases expense, increases liabilities, and increases assets. C. Increases expense, decreases liabilities, and increases assets. D. Increases expense, increases liabilities, and decreases assets.
9-8 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
53. How does the amortization schedule for an installment note such as a car loan differ from an amortization schedule for bonds?
A. The final carrying value is zero in an amortization schedule for an installment note. B. The final carrying value is zero in an amortization schedule for bonds. C. The final carrying value is zero in both amortization schedules. D. The final carrying value is not zero in either amortization schedule. 54. Camp Elim obtains a $125,000, 6%, five-year loan for a new camp bus on January 1, 2018. What amount will be recorded for interest expense for the first payment on January 31, 2018?
A. $625 B. $125 C. $7,500 D. $1,000 55. Camp Elim obtains a $125,000, 6%, five-year loan for a new camp bus on January 1, 2018. If the monthly payment is $2,416.60, by how much will the carrying value decrease when the first payment is made on January 31, 2018?
A. $1,791.60 B. $625.00 C. $2,416.60 D. $1,000.60 56. Which of the following leases is just like a rental?
A. An operating lease. B. A capital lease. C. Both an operating and a capital lease. D. Neither an operating lease nor a capital lease.
9-9 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
57. Which of the following leases is essentially the purchase of an asset with debt financing?
A. An operating lease. B. A capital lease. C. Both an operating and a capital lease. D. Neither an operating lease nor a capital lease. 58. Which of the following is not a reason why some companies lease rather than buy?
A. Leasing may allow you to borrow with little or no down payment. B. Leasing can improve the balance sheet by reducing long-term debt. C. Leasing can lower income taxes. D. Leasing transfers the title to the lessee at the beginning of the lease. 59. Which of the following is a reason why some companies lease rather than buy?
A. Leasing may allow you to borrow with little or no down payment. B. Leasing can improve the balance sheet by reducing long-term debt. C. Leasing can lower income taxes. D. All of the above 60. Under an operating lease, leasing improves the balance sheet by reducing:
A. There is no effect on the balance sheet. B. Short-term debt. C. Assets. D. Long-term debt.
9-10 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
61. The advantages of obtaining long-term funds by issuing bonds, rather than issuing additional common stock, include which of the following?
A. Interest payments are tax deductible to the company, while dividends are not. B. The risk of going bankrupt decreases. C. Expansion is achieved without surrendering ownership control. D. Interest payments are tax deductible to the company, while dividends are not. Also, expansion is achieved without surrendering ownership control. 62. The advantages of obtaining long-term funds by issuing bonds, rather than issuing additional common stock, include which of the following?
A. Funds are obtained without surrendering ownership control. B. Interest expense is tax-deductible. C. The company's default risk decreases. D. Funds are obtained without surrendering ownership control, as well as, interest expense is tax-deductible. 63. Which of the following definitions describes a term bond?
A. Matures on a single date. B. Secured only by the "full faith and credit" of the issuing corporation. C. Matures in installments. D. Supported by specific assets pledged as collateral by the issuer. 64. Which of the following definitions describes a serial bond?
A. Matures on a single date. B. Secured only by the "full faith and credit" of the issuing corporation. C. Matures in installments. D. Supported by specific assets pledged as collateral by the issuer.
9-11 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
65. Which of the following definitions describes a secured bond?
A. Matures on a single date. B. Secured only by the "full faith and credit" of the issuing corporation. C. Matures in installments. D. Supported by specific assets pledged as collateral by the issuer. 66. Term bonds are:
A. Bonds issued below the face amount. B. Bonds that mature in installments. C. Bonds that mature all at once. D. Bonds issued above the face amount. 67. Serial bonds are:
A. Bonds backed by collateral. B. Bonds that mature in installments. C. Bonds with greater risk. D. Bonds issued below the face amount. 68. Bonds can be secured or unsecured. Likewise, bonds can be term or serial bonds. Which is more common?
A. Secured and term. B. Secured and serial. C. Unsecured and term. D. Unsecured and serial.
9-12 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
69. A home loan with fixed monthly payments and the house as collateral most closely represents which of the following bond characteristics?
A. Secured and term. B. Secured and serial. C. Unsecured and term. D. Unsecured and serial. 70. Which of the following is not true regarding callable bonds?
A. This feature allows the borrower to repay the bonds before their scheduled maturity date. B. This feature helps protect the borrower against future decreases in interest rates. C. Callable bonds benefit the bond investor. D. A bond can be both callable and convertible. 71. Convertible bonds:
A. Provide potential benefits only to the issuer. B. Provide potential benefits only to the investor. C. Provide potential benefits to both the issuer and the investor. D. Provide no potential benefits. 72. The price of a bond is equal to:
A. The future value of the face amount only. B. The present value of the interest only. C. The present value of the face amount plus the present value of the stated interest payments. D. The future value of the face amount plus the future value of the stated interest payments.
9-13 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
73. A bond issue with a face amount of $500,000 bears interest at the rate of 10%. The current market rate of interest is also 10%. These bonds will sell at a price that is:
A. Equal to $500,000. B. More than $500,000. C. Less than $500,000. D. The answer cannot be determined from the information provided. 74. A bond issue with a face amount of $500,000 bears interest at the rate of 7%. The current market rate of interest is 8%. These bonds will sell at a price that is:
A. Equal to $500,000. B. More than $500,000. C. Less than $500,000. D. The answer cannot be determined from the information provided. 75. A bond issue with a face amount of $500,000 bears interest at the rate of 7%. The current market rate of interest is 6%. These bonds will sell at a price that is:
A. Equal to $500,000. B. More than $500,000. C. Less than $500,000. D. The answer cannot be determined from the information provided. 76. Ordinarily, the proceeds from the sale of a bond issue will be equal to:
A. The face amount of the bond. B. The total of the face amount plus all interest payments. C. The present value of the face amount plus the present value of the stream of interest payments. D. The face amount of the bond plus the present value of the stream of interest payments.
9-14 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
77. A $500,000 bond issue sold for $510,000. Therefore, the bonds:
A. Sold at a premium because the stated interest rate was higher than the market rate. B. Sold for the $500,000 face amount plus $10,000 of accrued interest. C. Sold at a discount because the stated interest rate was higher than the market rate. D. Sold at a premium because the market interest rate was higher than the stated rate. 78. A $500,000 bond issue sold for $490,000. Therefore, the bonds:
A. Sold at a discount because the stated interest rate was higher than the market rate. B. Sold for the $500,000 face amount less $10,000 of accrued interest. C. Sold at a premium because the stated interest rate was higher than the market rate. D. Sold at a discount because the market interest rate was higher than the stated rate. 79. For a bond issue that sells for more than the bond face amount, the stated interest rate is:
A. The actual yield rate. B. The prime rate. C. More than the market rate. D. Less than the market rate. 80. For a bond issue that sells for less than the bond face amount, the stated interest rate is:
A. The actual yield rate. B. The prime rate. C. More than the market rate. D. Less than the market rate.
9-15 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
81. Bond X and Bond Y are both issued by the same company. Each of the bonds has a face value of $100,000 and each matures in 10 years. Bond X pays 8% interest while Bond Y pays 7% interest. The current market rate of interest is 7%. Which of the following is correct?
A. Both bonds will sell for the same amount. B. Bond X will sell for more than Bond Y. C. Bond Y will sell for more than Bond X. D. Both bonds will sell at a premium. 82. Bond X and Bond Y are both issued by the same company. Each of the bonds has a face value of $100,000 and each matures in 10 years. Bond X pays 8% interest while Bond Y pays 9% interest. The current market rate of interest is 8%. Which of the following is correct?
A. Both bonds will sell for the same amount. B. Bond X will sell for more than Bond Y. C. Bond Y will sell for more than Bond X. D. Both bonds will sell at a discount. 83. Seaside issues a bond with a stated interest rate of 10%, face value of $50,000, and due in 5 years. Interest payments are made semi-annually. The market rate for this type of bond is 12%. What is the issue price of the bond?
A. $83,920. B. $46,320. C. $53,605. D. $50,000.
9-16 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
84. Seaside issues a bond with a stated interest rate of 10%, face value of $50,000, and due in 5 years. Interest payments are made semi-annually. The market rate for this type of bond is 8%. What is the issue price of the bond? (Use Table 2 and Table 4)
A. $83,920. B. $46,320. C. $54,055. D. $50,000. 85. Given the information below, which bond(s) will be issued at a discount? Bond 1 Bond 2 Bond 3 Bond 4 Stated Rate of
5%
7%
12%
10%
7%
8%
12%
9%
Return Market Rate of Return
A. Bond 1. B. Bond 2. C. Bond 4. D. Bonds 1 and 2.
9-17 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
86. Given the information below, which bond(s) will be issued at a premium? Bond 1 Bond 2 Bond 3 Bond 4 Stated Rate of
5%
10%
7%
10%
7%
8%
7%
9%
Return Market Rate of Return
A. Bond 1. B. Bond 2. C. Bond 3. D. Bonds 2 and 4. 87. Given the information below, which bond(s) will be issued at a discount? Bond 1 Bond 2 Bond 3 Bond 4 Stated Rate of
10%
8%
12%
12%
12%
8%
15%
10%
Return Market Rate of Return
A. Bond 1. B. Bond 3. C. Bonds 2 and 4. D. Bonds 1 and 3.
9-18 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
88. Given the information below, which bond(s) will be issued at a premium? Bond 1 Bond 2 Bond 3 Bond 4 Stated Rate of
7%
12%
10%
8%
8%
10%
10%
9%
Return Market Rate of Return
A. Bond 1. B. Bond 2. C. Bond 3. D. Bonds 2 and 4. 89. The rate quoted in the bond contract used to calculate the cash payments for interest is called the:
A. Face rate. B. Yield rate. C. Market rate. D. Stated rate. 90. The true interest rate used by investors to value a bond is called the:
A. Face interest rate. B. Cash payment rate. C. Market interest rate. D. Stated interest rate.
9-19 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
91. The rate quoted on the bond contract used to calculate the cash payments for interest is called the:
A. Face interest rate. B. Interest expense rate. C. Market interest rate. D. Stated interest rate. 92. Which of the following is true for bonds issued at a discount?
A. The stated interest rate is greater than the market interest rate. B. The market interest rate is greater than the stated interest rate. C. The stated interest rate and the market interest rate are equal. D. The stated interest rate and the market interest rate are unrelated. 93. Which of the following is true for bonds issued at a premium?
A. The stated interest rate is less than the market interest rate. B. The market interest rate is less than the stated interest rate. C. The stated interest rate and the market interest rate are equal. D. The stated interest rate and the market interest rate are unrelated. 94. Samson Enterprises issued a ten-year, $20 million bond with a 10% interest rate for $19,500,000. The entry to record the bond issuance would have what effect on the financial statements?
A. Increase assets. B. Increase liabilities. C. Increase stockholders' equity. D. Increase assets and liabilities.
9-20 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
95. Megginson, Inc. issued a five-year corporate bond of $300,000 with a 5% interest rate for $290,000. What effect would the bond issuance have on Megginson, Inc.'s accounting equation?
A. Increase assets and liabilities. B. Increase and decrease assets. C. Increase assets and stockholders' equity. D. Increase and decrease stockholders' equity. 96. The cash interest payment each period is calculated as the:
A. Face amount times the stated interest rate. B. Face amount times the market interest rate. C. Carrying value times the market interest rate. D. Carrying value times the stated interest rate. 97. Interest expense on bonds payable is calculated as the:
A. Face amount times the stated interest rate. B. Face amount times the market interest rate. C. Carrying value times the market interest rate. D. Carrying value times the stated interest rate. 98. When bonds are issued at a discount, what happens to the carrying value and interest expense over the life of the bonds?
A. Carrying value and interest expense increase. B. Carrying value and interest expense decrease. C. Carrying value decreases and interest expense increases. D. Carrying value increases and interest expense decreases.
9-21 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
99. When bonds are issued at a premium, what happens to the carrying value and interest expense over the life of the bonds?
A. Carrying value and interest expense increase. B. Carrying value and interest expense decrease. C. Carrying value decreases and interest expense increases. D. Carrying value increases and interest expense decreases. 100.Bonds payable should be reported as a long-term liability in the balance sheet at:
A. Face value. B. Current bond market price. C. Carrying value. D. Face value less accrued interest since the last interest payment date. 101.A bond issued at a discount indicates that at the date of issue:
A. Its stated rate was lower than the prevailing market rate of interest on similar bonds. B. Its stated rate was higher than the prevailing market rate of interest on similar bonds. C. The bonds were issued at a price greater than their face value. D. The bonds must be non-interest bearing. 102.A bond issued at a premium indicates that at the date of issue:
A. Its stated rate was lower than the prevailing market rate of interest on similar bonds. B. Its stated rate was higher than the prevailing market rate of interest on similar bonds. C. The bonds were issued at a price greater than their face value. D. The bonds must be non-interest bearing.
9-22 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
103.How would the carrying value of bonds payable change over time for bonds issued at a discount and for bonds issued at a premium?
A. Decrease for bonds issued at a discount and decrease for bonds issued at a premium. B. Decrease for bonds issued at a discount and increase for bonds issued at a premium. C. Increase for bonds issued at a discount and decrease for bonds issued at a premium. D. Increase for bonds issued at a discount and increase for bonds issued at a premium. 104.The carrying value, using the effective interest method, would decrease each year:
A. If the bonds were sold at a discount. B. If the bonds were sold at a premium. C. If the bonds were sold at either a discount or a premium. D. The carrying value of bonds will never decrease. 105.The carrying value, using the effective interest method, would increase each year:
A. The carrying value of bonds will never increase. B. If the bonds were sold at either a discount or a premium. C. If the bonds were sold at a premium. D. If the bonds were sold at a discount. 106.When bonds are issued at a discount and the effective interest method is used for amortization, at each subsequent interest payment date, the cash paid is:
A. Less than the interest expense. B. Equal to the interest expense. C. Greater than the interest expense. D. More than if the bonds had been sold at a premium.
9-23 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
107.When bonds are issued at a premium and the effective interest method is used for amortization, at each subsequent interest payment date, the cash paid is:
A. Less than the interest expense. B. Equal to the interest expense. C. Greater than the interest expense. D. More than if the bonds had been sold at a discount. 108.When bonds are issued at a discount and the effective interest method is used for amortization, at each interest payment date, the interest expense:
A. Increases. B. Decreases. C. Remains the same. D. Is equal to the change in book value. 109.When bonds are issued at a premium and the effective interest method is used for amortization, at each interest payment date, the interest expense:
A. Increases. B. Decreases. C. Remains the same. D. Is equal to the change in book value. 110.An amortization schedule for a bond issued at a discount:
A. Has a carrying value that decreases over time. B. Is contained in the balance sheet. C. Is a schedule that reflects the changes in bonds payable over its term to maturity. D. All of these.
9-24 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
111.An amortization schedule for a bond issued at a premium:
A. Has a carrying value that increases over time. B. Is contained in the balance sheet. C. Is a schedule that reflects the changes in bonds payable over its term to maturity. D. All of these. 112.Discount-Mart issues $10 million in bonds on January 1, 2018. The bonds have a ten-year term and pay interest semiannually on June 30 and December 31 each year. Below is a partial bond amortization schedule for the bonds: Date
Cash Interest Increase Paid Expense
in
Carrying Value
Carrying Value 1/1/2018
$8,640,967
6/30/2018 $300,000 $345,639 $45,639 8,686,606 12/31/2018 300,000 347,464
47,464 8,734,070
6/30/2019
300,000 349,363
49,363 8,783,433
12/31/2019 300,000 351,337
51,337 8,834,770
What is the stated annual rate of interest on the bonds? (Hint: Be sure to provide the annual rate rather than the six month rate.)
A. 3%. B. 4%. C. 6%. D. 8%.
9-25 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
113.Discount-Mart issues $10 million in bonds on January 1, 2018. The bonds have a ten-year term and pay interest semiannually on June 30 and December 31 each year. Below is a partial bond amortization schedule for the bonds: Increase Date
Cash Interest
in
Carrying
Paid Expense Carrying
Value
Value 1/1/2018
$8,640,967
6/30/2018 $300,000 $345,639 $45,639 8,686,606 12/31/2018 300,000 347,464
47,464 8,734,070
6/30/2019
300,000 349,363
49,363 8,783,433
12/31/2019 300,000 351,337
51,337 8,834,770
What is the market annual rate of interest on the bonds? (Hint: Be sure to provide the annual rate rather than the six month rate.)
A. 3%. B. 4%. C. 6%. D. 8%.
9-26 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
114.Discount-Mart issues $10 million in bonds on January 1, 2018. The bonds have a ten-year term and pay interest semiannually on June 30 and December 31 each year. Below is a partial bond amortization schedule for the bonds: Date
Cash Interest Increase Paid Expense
in
Carrying Value
Carrying Value 1/1/2018
$8,640,967
6/30/2018 $300,000 $345,639 $45,639 8,686,606 12/31/2018 300,000 347,464
47,464 8,734,070
6/30/2019
300,000 349,363
49,363 8,783,433
12/31/2019 300,000 351,337
51,337 8,834,770
What is the interest expense on the bonds in 2018?
A. $693,103. B. $600,000. C. $345,639. D. $347,464.
9-27 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
115.Discount-Mart issues $10 million in bonds on January 1, 2018. The bonds have a ten-year term and pay interest semiannually on June 30 and December 31 each year. Below is a partial bond amortization schedule for the bonds: Date
Cash Interest Increase Paid Expense
in
Carrying Value
Carrying Value 1/1/2018
$8,640,967
6/30/2018 $300,000 $345,639 $45,639 8,686,606 12/31/2018 300,000 347,464
47,464 8,734,070
6/30/2019
300,000 349,363
49,363 8,783,433
12/31/2019 300,000 351,337
51,337 8,834,770
What is the carrying value of the bonds as of December 31, 2019?
A. $8,834,770. B. $8,686,606. C. $8,734,070. D. $8,783,433.
9-28 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
116.Tony Hawk's Adventure (THA) issued callable bonds on January 1, 2018. THA's accountant has projected the following amortization schedule from issuance until maturity: Date
Cash Interest Increase Carrying Paid Expense
in
Value
Carrying Value 1/1/2018
$194,758
6/30/2018 $7,000
$7,790
$790
195,548
12/31/2018
7,000
7,822
822
196,370
6/30/2019
7,000
7,855
855
197,225
12/31/2019
7,000
7,889
889
198,114
6/30/2020
7,000
7,925
925
199,039
12/31/2020
7,000
7,961
961
200,000
THA issued the bonds:
A. At par. B. At a premium. C. At a discount. D. Cannot be determined from the given information.
9-29 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
117.Tony Hawk's Adventure (THA) issued callable bonds on January 1, 2018. THA's accountant has projected the following amortization schedule from issuance until maturity: Date
Cash Interest Increase Carrying Paid Expense
in
Value
Carrying Value 1/1/2018
$194,758
6/30/2018 $7,000
$7,790
$790
195,548
12/31/2018
7,000
7,822
822
196,370
6/30/2019
7,000
7,855
855
197,225
12/31/2019
7,000
7,889
889
198,114
6/30/2020
7,000
7,925
925
199,039
12/31/2020
7,000
7,961
961
200,000
THA issued the bonds for:
A. $200,000. B. $194,758. C. $242,000. D. Cannot be determined from the given information.
9-30 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
118.Tony Hawk's Adventure (THA) issued callable bonds on January 1, 2018. THA's accountant has projected the following amortization schedule from issuance until maturity: Date
Cash Interest Increase Carrying Paid Expense
in
Value
Carrying Value 1/1/2018
$194,758
6/30/2018 $7,000
$7,790
$790
195,548
12/31/2018
7,000
7,822
822
196,370
6/30/2019
7,000
7,855
855
197,225
12/31/2019
7,000
7,889
889
198,114
6/30/2020
7,000
7,925
925
199,039
12/31/2020
7,000
7,961
961
200,000
The THA bonds have a life of:
A. 2 years. B. 3 years. C. 6 years. D. Cannot be determined from the given information.
9-31 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
119.Tony Hawk's Adventure (THA) issued callable bonds on January 1, 2018. THA's accountant has projected the following amortization schedule from issuance until maturity: Date
Cash Interest Increase Carrying Paid Expense
in
Value
Carrying Value 1/1/2018
$194,758
6/30/2018 $7,000
$7,790
$790
195,548
12/31/2018
7,000
7,822
822
196,370
6/30/2019
7,000
7,855
855
197,225
12/31/2019
7,000
7,889
889
198,114
6/30/2020
7,000
7,925
925
199,039
12/31/2020
7,000
7,961
961
200,000
What is the annual stated interest rate on the bonds? (Hint: Be sure to provide the annual rate rather than the six month rate.)
A. 3%. B. 3.5%. C. 6%. D. 7%.
9-32 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
120.Tony Hawk's Adventure (THA) issued callable bonds on January 1, 2018. THA's accountant has projected the following amortization schedule from issuance until maturity: Date
Cash Interest Increase Carrying Paid Expense
in
Value
Carrying Value 1/1/2018
$194,758
6/30/2018 $7,000
$7,790
$790
195,548
12/31/2018
7,000
7,822
822
196,370
6/30/2019
7,000
7,855
855
197,225
12/31/2019
7,000
7,889
889
198,114
6/30/2020
7,000
7,925
925
199,039
12/31/2020
7,000
7,961
961
200,000
What is the annual market interest rate on the bonds? (Hint: Be sure to provide the annual rate rather than the six month rate.)
A. 4%. B. 3.5%. C. 7%. D. 8%.
9-33 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
121.X2 issued callable bonds on January 1, 2018. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity: Date
Cash Paid
Decrease in
Carrying
Expense Carrying Value
Interest
Value
1/1/2018
$104,212
12/31/2018
$7,000
$6,253
$747
103,465
12/31/2019
7,000
6,208
792
102,673
12/31/2020
7,000
6,160
840
101,833
12/31/2021
7,000
6,110
890
100,943
12/31/2022
7,000
6,057
943
100,000
X2 issued the bonds:
A. At par value. B. At a premium. C. At a discount. D. Cannot be determined from the given information.
9-34 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
122.X2 issued callable bonds on January 1, 2018. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity: Date
Cash Paid
Decrease in
Carrying
Expense Carrying Value
Interest
Value
1/1/2018
$104,212
12/31/2018
$7,000
$6,253
$747
103,465
12/31/2019
7,000
6,208
792
102,673
12/31/2020
7,000
6,160
840
101,833
12/31/2021
7,000
6,110
890
100,943
12/31/2022
7,000
6,057
943
100,000
X2 issued the bonds for:
A. $100,000. B. $107,000. C. $104,212. D. Cannot be determined from the given information.
9-35 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
123.X2 issued callable bonds on January 1, 2018. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity: Date
Cash Paid
Decrease in
Carrying
Expense Carrying Value
Interest
Value
1/1/2018
$104,212
12/31/2018
$7,000
$6,253
$747
103,465
12/31/2019
7,000
6,208
792
102,673
12/31/2020
7,000
6,160
840
101,833
12/31/2021
7,000
6,110
890
100,943
12/31/2022
7,000
6,057
943
100,000
The X2 bonds have a life of:
A. 3 years. B. 4 years. C. 5 years. D. Cannot be determined from the given information.
9-36 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
124.X2 issued callable bonds on January 1, 2018. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity: Date
Cash Paid
Decrease in
Carrying
Expense Carrying Value
Interest
Value
1/1/2018
$104,212
12/31/2018
$7,000
$6,253
$747
103,465
12/31/2019
7,000
6,208
792
102,673
12/31/2020
7,000
6,160
840
101,833
12/31/2021
7,000
6,110
890
100,943
12/31/2022
7,000
6,057
943
100,000
What is the annual stated interest rate on the bonds?
A. 3%. B. 3.5%. C. 6%. D. 7%.
9-37 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
125.X2 issued callable bonds on January 1, 2018. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity: Date
Cash Paid
Decrease in
Carrying
Expense Carrying Value
Interest
Value
1/1/2018
$104,212
12/31/2018
$7,000
$6,253
$747
103,465
12/31/2019
7,000
6,208
792
102,673
12/31/2020
7,000
6,160
840
101,833
12/31/2021
7,000
6,110
890
100,943
12/31/2022
7,000
6,057
943
100,000
What is the annual market interest rate on the bonds?
A. 3%. B. 3.5%. C. 6%. D. 7%. 126.Which of the following statements is correct?
A. Bonds are always issued at their face value. B. Bonds issued at more than their face value are said to be issued at a discount. C. Bondholders must hold their bonds until maturity to receive cash for their investment. D. None of these.
9-38 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
127.Tony Hawk's Adventure (THA) issued callable bonds on January 1, 2018. THA's accountant has projected the following amortization schedule from issuance until maturity: Date
Cash Interest Increase Carrying Paid Expense
in
Value
Carrying Value 1/1/2018
$194,758
6/30/2018 $7,000
$7,790
$790
195,548
12/31/2018
7,000
7,822
822
196,370
6/30/2019
7,000
7,855
855
197,225
12/31/2019
7,000
7,889
889
198,114
6/30/2020
7,000
7,925
925
199,039
12/31/2020
7,000
7,961
961
200,000
THA buys back the bonds for $196,000 immediately after the interest payment on 12/31/2018 and retires them. What gain or loss, if any, would THA record on this date?
A. No gain or loss. B. $370 gain. C. $4,000 gain. D. $1,242 loss.
9-39 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
128.X2 issued callable bonds on January 1, 2018. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity: Date
Cash Paid
Decrease in
Carrying
Expense Carrying Value
Interest
Value
1/1/2018
$104,212
12/31/2018
$7,000
$6,253
$747
103,465
12/31/2019
7,000
6,208
792
102,673
12/31/2020
7,000
6,160
840
101,833
12/31/2021
7,000
6,110
890
100,943
12/31/2022
7,000
6,057
943
100,000
X2 buys back the bonds for $103,000 immediately after the interest payment on 12/31/2019 and retires them. What gain or loss, if any, would X2 record on this date?
A. No gain or loss. B. $3,000 gain. C. $1,202 loss. D. $327 loss. 129.When bonds are retired before their maturity date:
A. GAAP has been violated. B. The issuing company will always report a non-operating gain. C. The issuing company will always report a non-operating loss. D. The issuing company may report a non-operating gain or loss.
9-40 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
130.The Viper retires a $40 million bond issue when the carrying value of the bonds is $42 million, but the market value of the bonds is $36 million. The entry to record the retirement will include:
A. A credit of $6 million to a gain account. B. A debit of $6 million to a loss account. C. No gain or loss on retirement. D. A credit to cash for $42 million. 131.The Raptor retires a $20 million bond issue when the carrying value of the bonds is $18 million, but the market value of the bonds is $15 million. The entry to record the retirement will include:
A. A debit of $3 million to a loss account. B. A credit of $3 million to a gain account. C. No gain or loss on retirement. D. A credit to cash for $18 million. 132.The Titan retires a $20 million bond issue when the carrying value of the bonds is $18 million, but the market value of the bonds is $23 million. The entry to record the retirement will include:
A. A debit of $5 million to a loss account. B. A credit of $5 million to a gain account. C. No gain or loss on retirement. D. A credit to cash for $18 million.
9-41 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
133.The balance sheet of Sub America reports total assets of $400,000 and $450,000 at the beginning and end of the year, respectively. The return on assets for the year is 10%. What is Sub America's net income for the year?
A. $42,500. B. $45,000. C. $4,250,000. D. $85,000. 134.The balance sheet of Montezuma reports total assets of $900,000 and $1,100,000 at the beginning and end of the year, respectively. The net income for the year is $100,000. What is Montezuma's return on assets?
A. 10% B. 11% C. 9% D. 25% 135.Prowler reports net income of $250,000. The return on assets for the year is 20%. What is Prowler's average total assets for the year?
A. $1,250,000 B. $1,000,000 C. $1,500,000 D. $250,000 136.The balance sheet of Montezuma reports stockholders' equity of $400,000, total liabilities of $600,000, and total assets of $1,000,000. What is Montezuma's debt to equity ratio?
A. 1.5 B. 0.66 C. 2.5 D. 1.0
9-42 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
137.The balance sheet of Gatekeeper reports stockholders' equity of $800,000. The debt to equity ratio is 2.5. What is Gatekeeper's total liabilities?
A. $2,000,000 B. $320,000 C. $1,000,000 D. $800,000 138.The balance sheet of Gatekeeper reports total liabilities of $2,000,000. The debt to equity ratio is 2.5. What is Gatekeeper's stockholders' equity?
A. $800,000 B. $320,000 C. $1,000,000 D. $2,000,000 139.Financial leverage is best measured by which of the following ratios?
A. The debt to equity ratio. B. The return on equity ratio. C. The times interest earned ratio. D. The return on assets ratio. 140.Which of the following is true regarding a company assuming more debt?
A. Assuming more debt is always bad for the company. B. Assuming more debt is always good for the company. C. Assuming more debt can be good for the company as long as they earn a return in excess of the rate charged on the borrowed funds. D. Assuming more debt reduces leverage.
9-43 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
141.Which of the following is not a true statement?
A. The debt to equity ratio measures a company's risk and is calculated as total liabilities divided by stockholders' equity. B. Leverage enables a company to earn a higher return using debt than without debt. C. Return on assets is calculated as net income divided by the ending balance for total assets. D. The times interest earned ratio compares interest expense with income available to pay interest charges. 142.The times interest earned ratio is calculated as
A. Interest expense/Net income. B. Net income/Interest expense. C. (Net income + interest expense + tax expense)/Interest expense. D. Interest expense/(Net income + interest expense + tax expense). 143.Selected financial data for Company A is provided below: ($ in millions) Sales Interest expense
Company A $66,176 676
Tax expense
1,362
Net income
$2,620
What is the times interest earned ratio for Company A?
A. 6.9 times. B. 3.9 times. C. 0.3 times. D. 97.9 times.
9-44 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
144.Selected financial data for Company B is provided below: ($ in millions) Sales Interest expense
Company B $47,220 287
Tax expense
1,042
Net income
$1,783
What is the times interest earned ratio for Company B?
A. 6.2 times. B. 10.8 times. C. 0.2 times. D. 164.5 times.
Matching Questions
9-45 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
145.Match the following
1. Times interest earned ratio 2. Debt to equity ratio 3. Amortization schedule 4. Discount 5. Sinking fund 6. Market interest rate
The rate quoted in the bond contract used to calculate the cash payments for interest.
____
The lessor owns the asset and the lessee simply uses the asset temporarily.
____
Total liabilities divided by total stockholders' equity; measure a company's risk.
____
The true interest rate used by investors to value a bond.
____
The issue price is below its face amount.
____
Provides a summary of the cash interest payments, interest expense, and changes in carrying value for debt instruments.
____
The lessee essentially buys an asset and borrows the money 7. Capital lease
through a lease to pay for the asset.
____
The issue price is above its face amount.
____
8. Operating lease 9. Stated interest rate
Ratio that compares interest expense with income available to pay those charges.
____
An investment fund used to set aside money to be used to pay 10. Premium
debts as they come due.
____
9-46 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
146.Match the following
1. Term bond.
Matures in installments.
____
Allows the issuer to pay off the bonds early at a fixed price.
____
2. Bond issue costs. 3. Private placement. 4. Secured bond.
Allows the investor to transfer each bond into shares of common stock.
____
Includes underwriting, legal, accounting, registration, and printing fees.
____
Sale of debt securities directly to a single investor.
____
5. Callable bond. 6. Convertible
Supported by specific assets pledged as collateral by the issuer.
bond.
____ Secured only by the "full faith and credit" of the issuing
7. Serial bond.
corporation.
____
Matures on a single date.
____
Matures in installments.
____
Matures on a single date.
____
Supported by specific assets pledged as collateral by the issuer.
____
8. Unsecured bond. 147.Match the following
1. Secured bond. 2. Term bond. 3. Unsecured bond.
Secured only by the "full faith and credit" of the issuing 4. Serial bond.
corporation.
____
9-47 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
148.Match the following
1. Private placement. 2. Callable bond.
Allows the issuer to pay off the bonds early at a fixed price. Allows the investor to transfer each bond into shares of common stock.
3. Bond issue costs.
____ ____
Includes underwriting, legal, accounting, registration, and printing fees.
____
Sale of debt securities directly to a single investor.
____
The true interest rate used by investors to value a bond.
____
The stated interest rate is more than the market interest rate.
____
The stated interest rate equals the market interest rate.
____
at face value
The stated interest rate is less than the market interest rate.
____
5. Bonds issued
The rate quoted in the bond contract used to calculate the cash
4. Convertible bond. 149.Match the following
1. Market interest rate 2. Stated interest rate 3. Bonds issued at a discount 4. Bonds issued
at a premium
payments for interest.
____
Essay Questions
9-48 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
150.Frontier City is trying to decide between the following two alternatives to finance its new $10 million roller coaster: a. Issue $10 million of 6% bonds at face amount. b. Issue one million shares of common stock for $10 per share. Issue Bonds Issue Stock Operating income
$5,000,000
$5,000,000
Net income
$
$
# of shares
3,000,000
4,000,000
$
$
Interest expense (bonds only) Income before tax Income tax expense (30%)
Earnings per share (Net income/# of shares)
Assuming bonds or shares of stock are issued at the beginning of the year, complete the income statement listed above for each alternative. Which alternative results in the highest earnings per share?
9-49 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
151.On January 1, 2018, Julee Enterprises borrows $30,000 to purchase a new Toyota Highlander by agreeing to a 6%, 4-year note with the bank. Payments of $704.55 are due at the end of each month with the first installment due on January 31, 2018. Record the issuance of the note payable and the first two monthly payments.
152.Valentino's Pizza issues $40 million of 3% convertible bonds that mature in ten years. Each $1,000 bond is convertible into twenty-five shares of common stock. The current market price of Valentino's stock is $35 per share. 1. Explain why Valentino's might choose to issue convertible bonds. 2. Explain why investors might choose to purchase Valentino's convertible bonds.
9-50 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
153.Stealth Fitness Center issues 7%, 10-year bonds with a face amount of $200,000. The market interest rate for bonds of similar risk and maturity is 8%. Interest is paid semiannually. At what price will the bonds be issued?
154.Stealth Fitness Center issues 7%, 15-year bonds with a face amount of $200,000. The market interest rate for bonds of similar risk and maturity is 6%. Interest is paid semiannually. At what price will the bonds be issued?
9-51 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
155.On January 1, 2018, Water Wonderland issues $20 million of 8% bonds, due in ten years, with interest payable semiannually on June 30 and December 31 each year. 1. If the market rate is 7%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price. 2. If the market rate is 8%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price. 3. If the market rate is 9%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price.
156.Pizza Pier issues 7%, 10-year bonds with a face amount of $80,000 on January 1, 2018. The market interest rate for bonds of similar risk and maturity is also 7%. Interest is paid semiannually on June 30 and December 31. 1. Record the bond issue. 2. Record the first interest payment on June 30, 2018.
9-52 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
157.Pizza Pier issues 7%, 10-year bonds with a face amount of $80,000 for $74,564 on January 1, 2018. The market interest rate for bonds of similar risk and maturity is 8%. Interest is paid semiannually on June 30 and December 31. 1. Record the bond issue. 2. Record the first interest payment on June 30, 2018.
158.Pizza Pier issues 7%, 10-year bonds with a face amount of $80,000 for $85,951 on January 1, 2018. The market interest rate for bonds of similar risk and maturity is 6%. Interest is paid semiannually on June 30 and December 31. 1. Record the bond issue. 2. Record the first interest payment on June 30, 2018.
9-53 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
159.Presented below is a partial amortization schedule for Discount Foods: (1) Period (2) Cash (3) Interest (4) Increase in (5) Carrying Paid
Expense Carrying Value
Issue date
Value $74,564
1
$2,800
$2,983
$183
74,747
2
2,800
2,990
190
74,937
1. Record the bond issue assuming the face value of bonds payable is $80,000. 2. Record the first interest payment.
160.Presented below is a partial amortization schedule for Premium Foods: (1) Period (2) Cash (3) Interest (4) Decrease in (5) Carrying Paid
Expense Carrying Value
Issue date
Value $85,951
1
$2,800
$2,579
$221
85,730
2
2,800
2,572
228
85,502
1. Record the bond issue assuming the face value of bonds payable is $80,000. 2. Record the first interest payment.
9-54 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
161.On January 1, 2018, Ripstick Park issues $800,000 of 8% bonds, due in ten years, with interest payable semiannually on June 30 and December 31 each year. Assuming the market interest rate on the issue date is 8%, the bonds will issue at $800,000. Record the bond issue on January 1, 2018, and the first two semiannual interest payments on June 30, 2018, and December 31, 2018.
162.On January 1, 2018, Ripstick Park issues $800,000 of 8% bonds, due in ten years, with interest payable semiannually on June 30 and December 31 each year. Assuming the market interest rate on the issue date is 9%, the bonds will issue at $747,968. 1. Complete the first three rows of an amortization table through December 31, 2018. 2. Record the bond issue on January 1, 2018, and the first two semi-annual interest payments on June 30, 2018, and December 31, 2018.
9-55 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
163.On January 1, 2018, Ripstick Park issues $800,000 of 8% bonds, due in ten years, with interest payable semiannually on June 30 and December 31 each year. Assuming the market interest rate on the issue date is 7%, the bonds will issue at $856,850. 1. Complete the first three rows of an amortization table through December 31, 2018. 2. Record the bond issue on January 1, 2018, and the first two semi-annual interest payments on June 30, 2018, and December 31, 2018.
9-56 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
164.Sun City issues $50 million of bonds on January 1, 2018 that pay interest semiannually on June 30 and December 31. Portions of the bond amortization schedule appear below: (1) Date
(2) Cash Paid
(3)
(4)
(5)
Interest Decrease
Carrying
Expense
Value
in Carrying Value
1/1/2018
$55,338,768
6/30/2018 2,000,000 1,936,857
63,143
55,275,625
12/31/2018 2,000,000 1,934,647
65,353
55,210,272
Required: 1. Were the bonds issued at face amount, a discount, or a premium? 2. What is the original issue price of the bonds? 3. What is the face amount of the bonds? 4. What is the stated annual interest rate? (Hint: Be sure to provide the annual rate rather than the six month rate.) 5. What is the market annual interest rate? (Hint: Be sure to provide the annual rate rather than the six month rate.) 6. What is the total cash paid for interest assuming the bonds mature in 20 years?
9-57 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
165.Pizza Pier retires its 7% bonds for $68,000 before their scheduled maturity. At the time, the bonds have a face value of $70,000 carrying value of $74,937. Record the early retirement of the bonds.
166.Magic Mountain retires its 8% bonds for $127,000 before their scheduled maturity. At the time, the bonds have a face value of 125,000 and a carrying value of $118,000. Record the early retirement of the bonds.
9-58 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
167.Western World has the following selected data ($ in millions): Balance Sheet Data
2018
2017
Total Assets
$2,511
$2,315
Total Liabilities
1,685
1,525
826
790
Total Stockholders’ Equity Income Statement Data Sales
$786
Interest Expense
77
Tax Expense
32
Net Income
80
Based on these amounts, calculate the following ratios for Western World in 2018: 1. Debt to equity ratio. 2. Return on assets ratio. 3. Times interest earned ratio.
9-59 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
168.Selected financial data for these two close competitors in the home building industry are provided below: ($ in millions)
Company A
Company B
Total assets
$40,877
$33,005
Total liabilities
21,484
13,936
19,393
19,069
$66,176
$47,220
676
287
Tax expense
1,362
1,042
Net income
2,620
1,783
Total stockholders’ equity Sales Interest expense
1. Calculate the debt to equity ratio for Company A and Company B. Which company has the higher ratio? 2. Calculate the times interest earned ratio for Company A and Company B. Which company is better able to meet interest payments as they become due?
9-60 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
169.On January 1, 2018, Florida Investments purchases a condo for $400,000, paying $80,000 down and borrowing the remaining $320,000, signing a 6%, 30-year mortgage. Installment payments of $1,918.56 are due at the end of each month, with the first payment due on January 31, 2018. Required: 1. Record issuance of the mortgage installment note on January 1, 2018. 2. Complete the first three rows of an amortization schedule. 3. Record the first monthly mortgage payment on January 31, 2018. How much of the first payment goes to interest expense and how much goes to reducing the carrying value of the loan? 4. Total payments over the 30 years are $690,682 ($1,918.56 × 360 monthly payments). How much of this is interest expense and how much is actual payment of the loan?
9-61 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
170.Super Slides has $20 million in bonds payable. The bond indenture states that the debt to equity ratio cannot exceed 2.0. Super Slide's total assets are $90 million and its liabilities other than the bonds payable are $40 million. The company is considering some additional financing through leasing. Required: 1. Calculate total stockholders' equity using the balance sheet equation. 2. What is the debt to equity ratio? 3. Explain the difference between an operating and a capital lease. 4. The company enters a lease agreement requiring lease payments with a present value of $2 million. Will this lease agreement affect the debt to equity ratio differently if the lease is recorded as an operating lease or a capital lease? 5. Will entering into the lease cause the debt to equity ratio to be in violation of the contractual agreement in the bond indenture? Show your calculations (a) assuming an operating lease and (b) assuming a capital lease.
9-62 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
171.Lakeside Amusement Park issues $600,000 of 6% bonds, due in ten years, with interest payable semi-annually on June 30 and December 31 each year. Required: Calculate the issue price of a bond and complete the first three rows of an amortization schedule when: 1. The market interest rate is 6% and the bonds issue at face amount. 2. The market interest rate is 7% and the bonds issue at a discount. 3. The market interest rate is 5% and the bonds issue at a premium.
9-63 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
172.Astro World issues $20 million in bonds on January 1, 2018 that pay interest semi-annually on June 30 and December 31. Portions of the bond amortization schedule appear below: (1) Date
(2)
(3)
(4)
(5)
Cash
Interest Increase
Carrying
Paid
Expense
Value
in Carrying Value
1/1/2018
$17,864,493
6/30/2018 600,000 625,257
25,257
17,889,750
12/31/2018 600,000 626,141
26,141
17,915,891
Required: 1. Were the bonds issued at face amount, a discount, or a premium? 2. What is the original issue price of the bonds? 3. What is the face amount of the bonds? 4. What is the stated annual interest rate? 5. What is the market annual interest rate? 6. What is the total cash paid for interest assuming the bonds mature in 20 years?
9-64 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
173.On January 1, 2018, Water Mania issues $1,000,000 of 6% bonds, due in ten years, with interest payable semi-annually on June 30 and December 31 each year. Required: 1. If the market interest rate is 6%, the bonds will issue at $1,000,000. Record the bond issue on January 1, 2018, and the first two semi-annual interest payments on June 30, 2018, and December 31, 2018. 2. If the market interest rate is 7%, the bonds will issue at $928,938. Record the bond issue on January 1, 2018, and the first two semi-annual interest payments on June 30, 2018, and December 31, 2018. 3. If the market interest rate is 5% the bonds will issue at $1,077,946. Record the bond issue on January 1, 2018, and the first two semi-annual interest payments on June 30, 2018, and December 31, 2018.
9-65 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
174.Aqua Zone issues $1.2 million, 7% bonds on January 1, 2018 that mature in twenty years. The market interest rate for bonds of similar risk and maturity is 6% and the bonds issue for $1,338,689. Interest is paid semi-annually on June 30 and December 31. Required: 1. Complete the first three rows of an amortization schedule. 2. Record the issuance of the bonds on January 1, 2018. 3. Record the interest payments on June 30, 2018 and December 31, 2018.
9-66 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
175.Selected financial data for two competitors in the construction supply industry are provided as follows: ($ in millions)
Company A
Company B
2018
2017
2018
2017
Total assets
$40,877
$41,164
$33,005
$32,625
Total liabilities
21,484
23,387
13,936
14,570
Total stockholders’ equity
$19,393
$17,777
$19,069
$18,055
Sales
$66,176
$47,220
676
383
Tax expense
1,362
1,042
Net income
$2,661
$1,783
Interest expense
Required: 1. Calculate the debt to equity ratio for 2018 for both companies. Which company has the higher ratio? 2. Calculate the return on assets for 2018 for both companies. Which company appears more profitable? 3. Calculate the times interest earned ratio for 2018 for both companies. Which company is better able to meet interest payments as they become due?
9-67 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
176.What is capital structure? Why would a company choose to borrow money rather than issue additional stock?
177.Why do some companies issue bonds rather than borrow money directly from a bank?
178.Contrast the following types of bonds: (a) Secured and unsecured. (b) Term and serial. (c) Callable and convertible.
9-68 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
179.Explain how each of the columns in an amortization schedule is calculated, assuming the bonds are issued at a discount. How is the amortization schedule different if bonds are issued at a premium?
180.What are the potential risks and rewards of carrying additional debt? How does additional debt affect a company's return to investors?
9-69 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 09 Long-Term Liabilities Answer Key
True / False Questions
1.
The mixture of liabilities and stockholders' equity a business uses is called its capital structure. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-01 Explain financing alternatives. Topic: Financing Alternatives
2.
Interest expense incurred when borrowing money, as well as dividends paid to stockholders, are tax-deductible. FALSE Interest expense incurred when borrowing money is tax deductible, while dividends paid to stockholders are not tax-deductible.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-01 Explain financing alternatives. Topic: Financing Alternatives
3.
As a company's level of debt increases, bankruptcy risk increases. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking 9-70 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-01 Explain financing alternatives. Topic: Financing Alternatives
4.
Companies that are believed to have high bankruptcy risk generally receive higher credit ratings and pay a lower interest rate for borrowing. FALSE Companies that are believed to have high bankruptcy risk generally receive low credit ratings and must pay a higher interest rate for borrowing.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-01 Explain financing alternatives. Topic: Financing Alternatives
5.
Bonds are the most common form of corporate debt. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-01 Explain financing alternatives. Topic: Financing Alternatives
6.
A private placement is when a company chooses to sell the debt securities directly to a single investor. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember 9-71 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 1 Easy Learning Objective: 09-01 Explain financing alternatives. Topic: Financing Alternatives
7.
Monthly installment payments on a note payable include both an amount that represents interest and an amount that represents a reduction of the outstanding loan balance. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-02 Account for installment notes payable. Topic: Installment Notes
8.
A lease is a contractual arrangement by which the lessor provides the lessee the right to use an asset for a specified period of time. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-03 Understand the balance sheet effects of operating and capital leases. Topic: Leases
9.
Operating leases are contractual agreements where the lessor owns the asset and the lessee simply uses the asset temporarily. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-03 Understand the balance sheet effects of operating and capital leases. Topic: Leases
9-72 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
10.
Operating leases occur when the lessee essentially buys an asset and borrows the money through a lease to pay for the asset. FALSE Capital leases occur when the lessee essentially buys an asset and borrows the money through a lease to pay for the asset.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-03 Understand the balance sheet effects of operating and capital leases. Topic: Leases
11.
Secured bonds are backed by the federal government. FALSE Secured bonds are supported by specific assets the issuer has pledged as collateral.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-04 Identify the characteristics of bonds. Topic: Bonds
12.
Unsecured bonds are not backed by a specific asset. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-04 Identify the characteristics of bonds. Topic: Bonds
9-73 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
13.
Term bonds require payments in installments over a series of years. FALSE Term bonds require payment of the full principal amount of the bond at a single maturity date.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-04 Identify the characteristics of bonds. Topic: Bonds
14.
Serial bonds require payment of the full principal amount of the bond at a single maturity date. FALSE Serial bonds require payments in installments over a series of years.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-04 Identify the characteristics of bonds. Topic: Bonds
15.
A callable bond allows the borrower to repay the bonds before their scheduled maturity date at a specified call price. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-04 Identify the characteristics of bonds. Topic: Bonds 9-74 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
16.
Convertible bonds allow the investor to convert each bond into a specified number of shares of common stock. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-04 Identify the characteristics of bonds. Topic: Bonds
17.
We can calculate the issue price of a bond as the face amount plus the total periodic interest payments. FALSE We can calculate the issue price of a bond as the present value of the face amount plus the present value of the periodic interest payments. The market rate of interest is used to calculate the present value.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-05 Determine the price of a bond issue. Topic: Pricing a Bond
18.
The market interest rate represents the true interest rate used by investors to value a company's bond issue. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-05 Determine the price of a bond issue. Topic: Pricing a Bond 9-75 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
19.
The stated interest rate is the rate quoted in the bond contract used to calculate the cash payments for interest. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-05 Determine the price of a bond issue. Topic: Pricing a Bond
20.
The market interest rate does not change over time. FALSE Market rates change continuously. Announcements by the Federal Reserve regarding its intentions to increase the federal funds rate, political unrest, an increase in the price of oil, and fears of growing inflation can all cause an increase in market interest rates.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-05 Determine the price of a bond issue. Topic: Pricing a Bond
21.
The stated interest rate does not change over time. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-05 Determine the price of a bond issue. Topic: Pricing a Bond
9-76 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
22.
As a company's default risk increases, investors demand a higher market interest rate on their bond investments. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-05 Determine the price of a bond issue. Topic: Pricing a Bond
23.
The lower the market interest rate, the lower the bond issue price will be. FALSE The higher the market interest rate, the lower the bond issue price will be.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-05 Determine the price of a bond issue. Topic: Pricing a Bond
24.
Bonds issued below face amount are said to be issued at a discount. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-05 Determine the price of a bond issue. Topic: Pricing a Bond
9-77 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
25.
A premium occurs when the issue price of a bond is above its face amount. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-05 Determine the price of a bond issue. Topic: Pricing a Bond
26.
The amount reported on the balance sheet for bonds payable is equal to the carrying value at the balance sheet date. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
27.
When bonds are issued at a discount (below face amount), the carrying value and the corresponding interest expense increase over time. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
9-78 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
28.
When bonds are issued at a premium (above face amount), the carrying value and the corresponding interest expense increase over time. FALSE When bonds are issued at a premium (above face amount), the carrying value and the corresponding interest expense decrease over time.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
29.
Interest expense is calculated as the carrying value times the market rate. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
30.
The cash payment each period is calculated as the carrying value times the market rate. FALSE The cash payment each period is calculated as the face value times the stated interest rate.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable 9-79 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
31.
An amortization schedule provides a summary of the cash interest payments, interest expense, and changes in carrying value for each period. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
32.
For bonds issued at a premium, the difference between interest expense and the cash paid increases the carrying value of the bonds. FALSE For bonds issued at a premium, the difference between interest expense and the cash paid decreases the carrying value of the bonds.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
33.
At the maturity date, the carrying value will equal the face amount of the bond. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
9-80 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
34.
The market value of bonds moves in the opposite direction of interest rates. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
35.
When an issuer retires debt of any type before its scheduled maturity date, the transaction is an early extinguishment of debt. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-07 Record the retirement of bonds. Topic: Accounting for Bond Retirements
36.
Gains/losses on the early extinguishment of debt are reported as part of operating income in the income statement. FALSE Gains/losses on the early extinguishment of debt are reported as non-operating items in the income statement.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-07 Record the retirement of bonds. Topic: Accounting for Bond Retirements
9-81 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
37.
Losses have the effect of reducing net income, while gains increase net income. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-07 Record the retirement of bonds. Topic: Accounting for Bond Retirements
38.
A gain or loss is recorded on bonds retired at maturity. FALSE No gain or loss is recorded on bonds retired at maturity, as the carrying value at maturity is equal to the face amount of the bond.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-07 Record the retirement of bonds. Topic: Accounting for Bond Retirements
39.
The debt to equity ratio measures a company's risk and is calculated as total liabilities divided by stockholders' equity. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-08 Make financial decisions using long-term liability ratios. Topic: Coca-Cola vs. PepsiCo
9-82 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
40.
Leverage enables a company to earn a higher return using debt than without debt. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-08 Make financial decisions using long-term liability ratios. Topic: Coca-Cola vs. PepsiCo
41.
Return on assets is calculated as net income divided by the ending balance for total assets. FALSE Return on assets is calculated as net income divided by average total assets.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-08 Make financial decisions using long-term liability ratios. Topic: Coca-Cola vs. PepsiCo
42.
The times interest earned ratio compares interest expense with income available to pay interest charges. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-08 Make financial decisions using long-term liability ratios. Topic: Coca-Cola vs. PepsiCo
9-83 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Multiple Choice Questions
43.
Which of the following is not a primary source of corporate debt financing?
A. Bonds Payable. B. Common Stock. C. Leases. D. Notes Payable. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-01 Explain financing alternatives. Topic: Financing Alternatives
44.
Which of the following is the primary source of corporate equity financing?
A. Bonds Payable. B. Common Stock. C. Leases. D. Notes Payable. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-01 Explain financing alternatives. Topic: Financing Alternatives
9-84 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
45.
Profits generated by the company are a(n):
A. source of external financing. B. source of internal financing. C. liability. D. asset. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-01 Explain financing alternatives. Topic: Financing Alternatives
46.
The mixture of liabilities and stockholders' equity a business uses is called its:
A. Bond contract. B. Carrying value. C. Capital structure. D. Accounting equation. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-01 Explain financing alternatives. Topic: Financing Alternatives
9-85 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
47.
Which of the following is not a true statement?
A. Companies that are believed to have high bankruptcy risk generally receive low credit ratings and must pay a higher interest rate for borrowing. B. As a company's level of debt increases, the risk of bankruptcy increases. C. Interest expense incurred when borrowing money, as well as dividends paid to stockholders, are both tax-deductible. D. The mixture of liabilities and stockholders' equity a business uses is called its capital structure. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-01 Explain financing alternatives. Topic: Financing Alternatives
48.
In each succeeding payment on an installment note:
A. The amount that goes to decreasing the carrying value of the note increases. B. The amount that goes to decreasing the carrying value of the note decreases. C. The amount that goes to decreasing the carrying value of the note is unchanged. D. The amounts paid for both interest and principal increase proportionately. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-02 Account for installment notes payable. Topic: Installment Notes
9-86 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
49.
For a five-year installment note signed on January 1, 2016, at which of the following dates would the carrying value be the lowest?
A. April 30, 2020 B. November 30, 2019 C. August 1, 2016 D. December 31, 2018 AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-02 Account for installment notes payable. Topic: Installment Notes
50.
For a five-year installment note signed on January 1, 2016, at which of the following dates would the carrying value be the highest?
A. August 1, 2016 B. November 30, 2019 C. April 30, 2020 D. December 31, 2018 AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-02 Account for installment notes payable. Topic: Installment Notes
9-87 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
51.
In each succeeding payment on an installment note:
A. The amount of interest expense increases. B. The amount of interest expense decreases. C. The amount of interest expense is unchanged. D. The amounts paid for both interest and principal increase proportionately. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-02 Account for installment notes payable. Topic: Installment Notes
52.
The entry to record a monthly payment on an installment note such as a car loan:
A. Increases expense, decreases liabilities, and decreases assets. B. Increases expense, increases liabilities, and increases assets. C. Increases expense, decreases liabilities, and increases assets. D. Increases expense, increases liabilities, and decreases assets. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 09-02 Account for installment notes payable. Topic: Installment Notes
53.
How does the amortization schedule for an installment note such as a car loan differ from an amortization schedule for bonds?
A. The final carrying value is zero in an amortization schedule for an installment note. B. The final carrying value is zero in an amortization schedule for bonds. C. The final carrying value is zero in both amortization schedules. D. The final carrying value is not zero in either amortization schedule. AACSB: Reflective Thinking 9-88 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-02 Account for installment notes payable. Topic: Installment Notes
54.
Camp Elim obtains a $125,000, 6%, five-year loan for a new camp bus on January 1, 2018. What amount will be recorded for interest expense for the first payment on January 31, 2018?
A. $625 B. $125 C. $7,500 D. $1,000 $125,000 × 6% × 1/12 = $625.00
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-02 Account for installment notes payable. Topic: Installment Notes
9-89 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
55.
Camp Elim obtains a $125,000, 6%, five-year loan for a new camp bus on January 1, 2018. If the monthly payment is $2,416.60, by how much will the carrying value decrease when the first payment is made on January 31, 2018?
A. $1,791.60 B. $625.00 C. $2,416.60 D. $1,000.60 $125,000 × 6% × 1/12 = $625.00 interest expense $2,416.60 - $625.00 = $1,791.60
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-02 Account for installment notes payable. Topic: Installment Notes
56.
Which of the following leases is just like a rental?
A. An operating lease. B. A capital lease. C. Both an operating and a capital lease. D. Neither an operating lease nor a capital lease. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-03 Understand the balance sheet effects of operating and capital leases. Topic: Leases
9-90 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
57.
Which of the following leases is essentially the purchase of an asset with debt financing?
A. An operating lease. B. A capital lease. C. Both an operating and a capital lease. D. Neither an operating lease nor a capital lease. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-03 Understand the balance sheet effects of operating and capital leases. Topic: Leases
58.
Which of the following is not a reason why some companies lease rather than buy?
A. Leasing may allow you to borrow with little or no down payment. B. Leasing can improve the balance sheet by reducing long-term debt. C. Leasing can lower income taxes. D. Leasing transfers the title to the lessee at the beginning of the lease. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-03 Understand the balance sheet effects of operating and capital leases. Topic: Leases
59.
Which of the following is a reason why some companies lease rather than buy?
A. Leasing may allow you to borrow with little or no down payment. B. Leasing can improve the balance sheet by reducing long-term debt. C. Leasing can lower income taxes. D. All of the above AACSB: Reflective Thinking AICPA: BB Critical Thinking 9-91 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-03 Understand the balance sheet effects of operating and capital leases. Topic: Leases
60.
Under an operating lease, leasing improves the balance sheet by reducing:
A. There is no effect on the balance sheet. B. Short-term debt. C. Assets. D. Long-term debt. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-03 Understand the balance sheet effects of operating and capital leases. Topic: Leases
61.
The advantages of obtaining long-term funds by issuing bonds, rather than issuing additional common stock, include which of the following?
A. Interest payments are tax deductible to the company, while dividends are not. B. The risk of going bankrupt decreases. C. Expansion is achieved without surrendering ownership control. D. Interest payments are tax deductible to the company, while dividends are not. Also, expansion is achieved without surrendering ownership control. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-04 Identify the characteristics of bonds. Topic: Bonds
9-92 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
62.
The advantages of obtaining long-term funds by issuing bonds, rather than issuing additional common stock, include which of the following?
A. Funds are obtained without surrendering ownership control. B. Interest expense is tax-deductible. C. The company's default risk decreases. D. Funds are obtained without surrendering ownership control, as well as, interest expense is tax-deductible. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-04 Identify the characteristics of bonds. Topic: Bonds
63.
Which of the following definitions describes a term bond?
A. Matures on a single date. B. Secured only by the "full faith and credit" of the issuing corporation. C. Matures in installments. D. Supported by specific assets pledged as collateral by the issuer. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-04 Identify the characteristics of bonds. Topic: Bonds
9-93 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
64.
Which of the following definitions describes a serial bond?
A. Matures on a single date. B. Secured only by the "full faith and credit" of the issuing corporation. C. Matures in installments. D. Supported by specific assets pledged as collateral by the issuer. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-04 Identify the characteristics of bonds. Topic: Bonds
65.
Which of the following definitions describes a secured bond?
A. Matures on a single date. B. Secured only by the "full faith and credit" of the issuing corporation. C. Matures in installments. D. Supported by specific assets pledged as collateral by the issuer. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-04 Identify the characteristics of bonds. Topic: Bonds
66.
Term bonds are:
A. Bonds issued below the face amount. B. Bonds that mature in installments. C. Bonds that mature all at once. D. Bonds issued above the face amount. AACSB: Reflective Thinking AICPA: BB Critical Thinking 9-94 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-04 Identify the characteristics of bonds. Topic: Bonds
67.
Serial bonds are:
A. Bonds backed by collateral. B. Bonds that mature in installments. C. Bonds with greater risk. D. Bonds issued below the face amount. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-04 Identify the characteristics of bonds. Topic: Bonds
68.
Bonds can be secured or unsecured. Likewise, bonds can be term or serial bonds. Which is more common?
A. Secured and term. B. Secured and serial. C. Unsecured and term. D. Unsecured and serial. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-04 Identify the characteristics of bonds. Topic: Bonds
9-95 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
69.
A home loan with fixed monthly payments and the house as collateral most closely represents which of the following bond characteristics?
A. Secured and term. B. Secured and serial. C. Unsecured and term. D. Unsecured and serial. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-04 Identify the characteristics of bonds. Topic: Bonds
70.
Which of the following is not true regarding callable bonds?
A. This feature allows the borrower to repay the bonds before their scheduled maturity date. B. This feature helps protect the borrower against future decreases in interest rates. C. Callable bonds benefit the bond investor. D. A bond can be both callable and convertible. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-04 Identify the characteristics of bonds. Topic: Bonds
9-96 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
71.
Convertible bonds:
A. Provide potential benefits only to the issuer. B. Provide potential benefits only to the investor. C. Provide potential benefits to both the issuer and the investor. D. Provide no potential benefits. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-04 Identify the characteristics of bonds. Topic: Bonds
72.
The price of a bond is equal to:
A. The future value of the face amount only. B. The present value of the interest only. C. The present value of the face amount plus the present value of the stated interest payments. D. The future value of the face amount plus the future value of the stated interest payments. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-05 Determine the price of a bond issue. Topic: Pricing a Bond
9-97 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
73.
A bond issue with a face amount of $500,000 bears interest at the rate of 10%. The current market rate of interest is also 10%. These bonds will sell at a price that is:
A. Equal to $500,000. B. More than $500,000. C. Less than $500,000. D. The answer cannot be determined from the information provided. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-05 Determine the price of a bond issue. Topic: Pricing a Bond
74.
A bond issue with a face amount of $500,000 bears interest at the rate of 7%. The current market rate of interest is 8%. These bonds will sell at a price that is:
A. Equal to $500,000. B. More than $500,000. C. Less than $500,000. D. The answer cannot be determined from the information provided. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-05 Determine the price of a bond issue. Topic: Pricing a Bond
9-98 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
75.
A bond issue with a face amount of $500,000 bears interest at the rate of 7%. The current market rate of interest is 6%. These bonds will sell at a price that is:
A. Equal to $500,000. B. More than $500,000. C. Less than $500,000. D. The answer cannot be determined from the information provided. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-05 Determine the price of a bond issue. Topic: Pricing a Bond
76.
Ordinarily, the proceeds from the sale of a bond issue will be equal to:
A. The face amount of the bond. B. The total of the face amount plus all interest payments. C. The present value of the face amount plus the present value of the stream of interest payments. D. The face amount of the bond plus the present value of the stream of interest payments. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-05 Determine the price of a bond issue. Topic: Pricing a Bond
9-99 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
77.
A $500,000 bond issue sold for $510,000. Therefore, the bonds:
A. Sold at a premium because the stated interest rate was higher than the market rate. B. Sold for the $500,000 face amount plus $10,000 of accrued interest. C. Sold at a discount because the stated interest rate was higher than the market rate. D. Sold at a premium because the market interest rate was higher than the stated rate. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-05 Determine the price of a bond issue. Topic: Pricing a Bond
78.
A $500,000 bond issue sold for $490,000. Therefore, the bonds:
A. Sold at a discount because the stated interest rate was higher than the market rate. B. Sold for the $500,000 face amount less $10,000 of accrued interest. C. Sold at a premium because the stated interest rate was higher than the market rate. D. Sold at a discount because the market interest rate was higher than the stated rate. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-05 Determine the price of a bond issue. Topic: Pricing a Bond
79.
For a bond issue that sells for more than the bond face amount, the stated interest rate is:
A. The actual yield rate. B. The prime rate. C. More than the market rate. D. Less than the market rate. AACSB: Reflective Thinking 9-100 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-05 Determine the price of a bond issue. Topic: Pricing a Bond
80.
For a bond issue that sells for less than the bond face amount, the stated interest rate is:
A. The actual yield rate. B. The prime rate. C. More than the market rate. D. Less than the market rate. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-05 Determine the price of a bond issue. Topic: Pricing a Bond
81.
Bond X and Bond Y are both issued by the same company. Each of the bonds has a face value of $100,000 and each matures in 10 years. Bond X pays 8% interest while Bond Y pays 7% interest. The current market rate of interest is 7%. Which of the following is correct?
A. Both bonds will sell for the same amount. B. Bond X will sell for more than Bond Y. C. Bond Y will sell for more than Bond X. D. Both bonds will sell at a premium. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 09-05 Determine the price of a bond issue. Topic: Pricing a Bond
9-101 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
82.
Bond X and Bond Y are both issued by the same company. Each of the bonds has a face value of $100,000 and each matures in 10 years. Bond X pays 8% interest while Bond Y pays 9% interest. The current market rate of interest is 8%. Which of the following is correct?
A. Both bonds will sell for the same amount. B. Bond X will sell for more than Bond Y. C. Bond Y will sell for more than Bond X. D. Both bonds will sell at a discount. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 09-05 Determine the price of a bond issue. Topic: Pricing a Bond
83.
Seaside issues a bond with a stated interest rate of 10%, face value of $50,000, and due in 5 years. Interest payments are made semi-annually. The market rate for this type of bond is 12%. What is the issue price of the bond?
A. $83,920. B. $46,320. C. $53,605. D. $50,000. FV ($50,000); PMT ($2,500); I (6%); N (10 periods) = $46,320. PMT = $50,000 × 10% × ½ year = $2,500. I = 12%/2 semiannual periods = 6%. N = 5 years × 2 periods each year = 10 periods.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-05 Determine the price of a bond issue. Topic: Pricing a Bond 9-102 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
84.
Seaside issues a bond with a stated interest rate of 10%, face value of $50,000, and due in 5 years. Interest payments are made semi-annually. The market rate for this type of bond is 8%. What is the issue price of the bond? (Use http://lectures.mhhe.com/connect/1259307956/Table2.pdf and http://lectures.mhhe.com/connect/1259307956/Table4.pdf)
A. $83,920. B. $46,320. C. $54,055. D. $50,000. FV ($50,000); PMT ($2,500); I (4%); N (10 periods) = $54,055. PMT = $50,000 × 10% × ½ year = $2,500. I = 8%/2 semiannual periods = 4%. N = 5 years × 2 periods each year = 10 periods.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-05 Determine the price of a bond issue. Topic: Pricing a Bond
9-103 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
85.
Given the information below, which bond(s) will be issued at a discount? Bond 1 Bond 2 Bond 3 Bond 4 Stated Rate of
5%
7%
12%
10%
7%
8%
12%
9%
Return Market Rate of Return
A. Bond 1. B. Bond 2. C. Bond 4. D. Bonds 1 and 2. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-05 Determine the price of a bond issue. Topic: Pricing a Bond
86.
Given the information below, which bond(s) will be issued at a premium? Bond 1 Bond 2 Bond 3 Bond 4 Stated Rate
5%
10%
7%
10%
7%
8%
7%
9%
of Return Market Rate of Return
A. Bond 1. B. Bond 2. C. Bond 3. D. Bonds 2 and 4. AACSB: Analytical Thinking AICPA: FN Measurement
9-104 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-05 Determine the price of a bond issue. Topic: Pricing a Bond
87.
Given the information below, which bond(s) will be issued at a discount? Bond 1 Bond 2 Bond 3 Bond 4 Stated Rate of
10%
8%
12%
12%
12%
8%
15%
10%
Return Market Rate of Return
A. Bond 1. B. Bond 3. C. Bonds 2 and 4. D. Bonds 1 and 3. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-05 Determine the price of a bond issue. Topic: Pricing a Bond
9-105 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
88.
Given the information below, which bond(s) will be issued at a premium? Bond 1 Bond 2 Bond 3 Bond 4 Stated Rate
7%
12%
10%
8%
8%
10%
10%
9%
of Return Market Rate of Return
A. Bond 1. B. Bond 2. C. Bond 3. D. Bonds 2 and 4. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-05 Determine the price of a bond issue. Topic: Pricing a Bond
89.
The rate quoted in the bond contract used to calculate the cash payments for interest is called the:
A. Face rate. B. Yield rate. C. Market rate. D. Stated rate. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-05 Determine the price of a bond issue. Topic: Pricing a Bond
9-106 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
90.
The true interest rate used by investors to value a bond is called the:
A. Face interest rate. B. Cash payment rate. C. Market interest rate. D. Stated interest rate. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-05 Determine the price of a bond issue. Topic: Pricing a Bond
91.
The rate quoted on the bond contract used to calculate the cash payments for interest is called the:
A. Face interest rate. B. Interest expense rate. C. Market interest rate. D. Stated interest rate. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-05 Determine the price of a bond issue. Topic: Pricing a Bond
92.
Which of the following is true for bonds issued at a discount?
A. The stated interest rate is greater than the market interest rate. B. The market interest rate is greater than the stated interest rate. C. The stated interest rate and the market interest rate are equal. D. The stated interest rate and the market interest rate are unrelated. AACSB: Reflective Thinking 9-107 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-05 Determine the price of a bond issue. Topic: Pricing a Bond
93.
Which of the following is true for bonds issued at a premium?
A. The stated interest rate is less than the market interest rate. B. The market interest rate is less than the stated interest rate. C. The stated interest rate and the market interest rate are equal. D. The stated interest rate and the market interest rate are unrelated. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-05 Determine the price of a bond issue. Topic: Pricing a Bond
94.
Samson Enterprises issued a ten-year, $20 million bond with a 10% interest rate for $19,500,000. The entry to record the bond issuance would have what effect on the financial statements?
A. Increase assets. B. Increase liabilities. C. Increase stockholders' equity. D. Increase assets and liabilities. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
9-108 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
95.
Megginson, Inc. issued a five-year corporate bond of $300,000 with a 5% interest rate for $290,000. What effect would the bond issuance have on Megginson, Inc.'s accounting equation?
A. Increase assets and liabilities. B. Increase and decrease assets. C. Increase assets and stockholders' equity. D. Increase and decrease stockholders' equity. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
96.
The cash interest payment each period is calculated as the:
A. Face amount times the stated interest rate. B. Face amount times the market interest rate. C. Carrying value times the market interest rate. D. Carrying value times the stated interest rate. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
9-109 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
97.
Interest expense on bonds payable is calculated as the:
A. Face amount times the stated interest rate. B. Face amount times the market interest rate. C. Carrying value times the market interest rate. D. Carrying value times the stated interest rate. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
98.
When bonds are issued at a discount, what happens to the carrying value and interest expense over the life of the bonds?
A. Carrying value and interest expense increase. B. Carrying value and interest expense decrease. C. Carrying value decreases and interest expense increases. D. Carrying value increases and interest expense decreases. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
9-110 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
99.
When bonds are issued at a premium, what happens to the carrying value and interest expense over the life of the bonds?
A. Carrying value and interest expense increase. B. Carrying value and interest expense decrease. C. Carrying value decreases and interest expense increases. D. Carrying value increases and interest expense decreases. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
100.
Bonds payable should be reported as a long-term liability in the balance sheet at:
A. Face value. B. Current bond market price. C. Carrying value. D. Face value less accrued interest since the last interest payment date. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
101.
A bond issued at a discount indicates that at the date of issue:
A. Its stated rate was lower than the prevailing market rate of interest on similar bonds. B. Its stated rate was higher than the prevailing market rate of interest on similar bonds. C. The bonds were issued at a price greater than their face value. D. The bonds must be non-interest bearing. AACSB: Reflective Thinking 9-111 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
102.
A bond issued at a premium indicates that at the date of issue:
A. Its stated rate was lower than the prevailing market rate of interest on similar bonds. B. Its stated rate was higher than the prevailing market rate of interest on similar bonds. C. The bonds were issued at a price greater than their face value. D. The bonds must be non-interest bearing. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
103.
How would the carrying value of bonds payable change over time for bonds issued at a discount and for bonds issued at a premium?
A. Decrease for bonds issued at a discount and decrease for bonds issued at a premium. B. Decrease for bonds issued at a discount and increase for bonds issued at a premium. C. Increase for bonds issued at a discount and decrease for bonds issued at a premium. D. Increase for bonds issued at a discount and increase for bonds issued at a premium. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
9-112 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
104.
The carrying value, using the effective interest method, would decrease each year:
A. If the bonds were sold at a discount. B. If the bonds were sold at a premium. C. If the bonds were sold at either a discount or a premium. D. The carrying value of bonds will never decrease. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
105.
The carrying value, using the effective interest method, would increase each year:
A. The carrying value of bonds will never increase. B. If the bonds were sold at either a discount or a premium. C. If the bonds were sold at a premium. D. If the bonds were sold at a discount. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
106.
When bonds are issued at a discount and the effective interest method is used for amortization, at each subsequent interest payment date, the cash paid is:
A. Less than the interest expense. B. Equal to the interest expense. C. Greater than the interest expense. D. More than if the bonds had been sold at a premium. AACSB: Reflective Thinking 9-113 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
107.
When bonds are issued at a premium and the effective interest method is used for amortization, at each subsequent interest payment date, the cash paid is:
A. Less than the interest expense. B. Equal to the interest expense. C. Greater than the interest expense. D. More than if the bonds had been sold at a discount. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
108.
When bonds are issued at a discount and the effective interest method is used for amortization, at each interest payment date, the interest expense:
A. Increases. B. Decreases. C. Remains the same. D. Is equal to the change in book value. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
9-114 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
109.
When bonds are issued at a premium and the effective interest method is used for amortization, at each interest payment date, the interest expense:
A. Increases. B. Decreases. C. Remains the same. D. Is equal to the change in book value. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
110.
An amortization schedule for a bond issued at a discount:
A. Has a carrying value that decreases over time. B. Is contained in the balance sheet. C. Is a schedule that reflects the changes in bonds payable over its term to maturity. D. All of these. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
111.
An amortization schedule for a bond issued at a premium:
A. Has a carrying value that increases over time. B. Is contained in the balance sheet. C. Is a schedule that reflects the changes in bonds payable over its term to maturity. D. All of these. AACSB: Reflective Thinking 9-115 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
112.
Discount-Mart issues $10 million in bonds on January 1, 2018. The bonds have a ten-year term and pay interest semiannually on June 30 and December 31 each year. Below is a partial bond amortization schedule for the bonds: Date
Cash Interest Increase Paid Expense
in
Carrying Value
Carrying Value 1/1/2018
$8,640,967
6/30/2018 $300,000 $345,639 $45,639 8,686,606 12/31/2018 300,000 347,464
47,464 8,734,070
6/30/2019
300,000 349,363
49,363 8,783,433
12/31/2019 300,000 351,337
51,337 8,834,770
What is the stated annual rate of interest on the bonds? (Hint: Be sure to provide the annual rate rather than the six month rate.)
A. 3%. B. 4%. C. 6%. D. 8%. ($300,000/$10,000,000) × 2 payments per year = 6%.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
9-116 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
113.
Discount-Mart issues $10 million in bonds on January 1, 2018. The bonds have a ten-year term and pay interest semiannually on June 30 and December 31 each year. Below is a partial bond amortization schedule for the bonds: Increase Date
Cash Interest
in
Carrying
Paid Expense Carrying
Value
Value 1/1/2018
$8,640,967
6/30/2018 $300,000 $345,639 $45,639 8,686,606 12/31/2018 300,000 347,464
47,464 8,734,070
6/30/2019
300,000 349,363
49,363 8,783,433
12/31/2019 300,000 351,337
51,337 8,834,770
What is the market annual rate of interest on the bonds? (Hint: Be sure to provide the annual rate rather than the six month rate.)
A. 3%. B. 4%. C. 6%. D. 8%. ($345,639/$8,640,967) × 2 payments per year = 8%.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
9-117 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
114.
Discount-Mart issues $10 million in bonds on January 1, 2018. The bonds have a ten-year term and pay interest semiannually on June 30 and December 31 each year. Below is a partial bond amortization schedule for the bonds: Date
Cash Interest Increase Paid Expense
in
Carrying Value
Carrying Value 1/1/2018
$8,640,967
6/30/2018 $300,000 $345,639 $45,639 8,686,606 12/31/2018 300,000 347,464
47,464 8,734,070
6/30/2019
300,000 349,363
49,363 8,783,433
12/31/2019 300,000 351,337
51,337 8,834,770
What is the interest expense on the bonds in 2018?
A. $693,103. B. $600,000. C. $345,639. D. $347,464. $345,639 + $347,464 = $693,103.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
9-118 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
115.
Discount-Mart issues $10 million in bonds on January 1, 2018. The bonds have a ten-year term and pay interest semiannually on June 30 and December 31 each year. Below is a partial bond amortization schedule for the bonds: Date
Cash Interest Increase Paid Expense
in
Carrying Value
Carrying Value 1/1/2018
$8,640,967
6/30/2018 $300,000 $345,639 $45,639 8,686,606 12/31/2018 300,000 347,464
47,464 8,734,070
6/30/2019
300,000 349,363
49,363 8,783,433
12/31/2019 300,000 351,337
51,337 8,834,770
What is the carrying value of the bonds as of December 31, 2019?
A. $8,834,770. B. $8,686,606. C. $8,734,070. D. $8,783,433. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
9-119 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
116.
Tony Hawk's Adventure (THA) issued callable bonds on January 1, 2018. THA's accountant has projected the following amortization schedule from issuance until maturity: Date
Cash Interest Increase Carrying Paid Expense
in
Value
Carrying Value 1/1/2018
$194,758
6/30/2018 $7,000
$7,790
$790
195,548
12/31/2018
7,000
7,822
822
196,370
6/30/2019
7,000
7,855
855
197,225
12/31/2019
7,000
7,889
889
198,114
6/30/2020
7,000
7,925
925
199,039
12/31/2020
7,000
7,961
961
200,000
THA issued the bonds:
A. At par. B. At a premium. C. At a discount. D. Cannot be determined from the given information. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
9-120 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
117.
Tony Hawk's Adventure (THA) issued callable bonds on January 1, 2018. THA's accountant has projected the following amortization schedule from issuance until maturity: Date
Cash Interest Increase Carrying Paid Expense
in
Value
Carrying Value 1/1/2018
$194,758
6/30/2018 $7,000
$7,790
$790
195,548
12/31/2018
7,000
7,822
822
196,370
6/30/2019
7,000
7,855
855
197,225
12/31/2019
7,000
7,889
889
198,114
6/30/2020
7,000
7,925
925
199,039
12/31/2020
7,000
7,961
961
200,000
THA issued the bonds for:
A. $200,000. B. $194,758. C. $242,000. D. Cannot be determined from the given information. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
9-121 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
118.
Tony Hawk's Adventure (THA) issued callable bonds on January 1, 2018. THA's accountant has projected the following amortization schedule from issuance until maturity: Date
Cash Interest Increase Carrying Paid Expense
in
Value
Carrying Value 1/1/2018
$194,758
6/30/2018 $7,000
$7,790
$790
195,548
12/31/2018
7,000
7,822
822
196,370
6/30/2019
7,000
7,855
855
197,225
12/31/2019
7,000
7,889
889
198,114
6/30/2020
7,000
7,925
925
199,039
12/31/2020
7,000
7,961
961
200,000
The THA bonds have a life of:
A. 2 years. B. 3 years. C. 6 years. D. Cannot be determined from the given information. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
9-122 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
119.
Tony Hawk's Adventure (THA) issued callable bonds on January 1, 2018. THA's accountant has projected the following amortization schedule from issuance until maturity: Date
Cash Interest Increase Carrying Paid Expense
in
Value
Carrying Value 1/1/2018
$194,758
6/30/2018 $7,000
$7,790
$790
195,548
12/31/2018
7,000
7,822
822
196,370
6/30/2019
7,000
7,855
855
197,225
12/31/2019
7,000
7,889
889
198,114
6/30/2020
7,000
7,925
925
199,039
12/31/2020
7,000
7,961
961
200,000
What is the annual stated interest rate on the bonds? (Hint: Be sure to provide the annual rate rather than the six month rate.)
A. 3%. B. 3.5%. C. 6%. D. 7%. ($7,000/$200,000) × 2 payments per year = 7%.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
9-123 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
120.
Tony Hawk's Adventure (THA) issued callable bonds on January 1, 2018. THA's accountant has projected the following amortization schedule from issuance until maturity: Date
Cash Interest Increase Carrying Paid Expense
in
Value
Carrying Value 1/1/2018
$194,758
6/30/2018 $7,000
$7,790
$790
195,548
12/31/2018
7,000
7,822
822
196,370
6/30/2019
7,000
7,855
855
197,225
12/31/2019
7,000
7,889
889
198,114
6/30/2020
7,000
7,925
925
199,039
12/31/2020
7,000
7,961
961
200,000
What is the annual market interest rate on the bonds? (Hint: Be sure to provide the annual rate rather than the six month rate.)
A. 4%. B. 3.5%. C. 7%. D. 8%. ($7,790/$194,758) × 2 payments per year = 8%.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
9-124 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
121.
X2 issued callable bonds on January 1, 2018. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity: Date
Cash Interest Decrease Carrying Paid Expense
in
Value
Carrying Value 1/1/2018
$104,212
12/31/2018 $7,000
$6,253
$747 103,465
12/31/2019 7,000
6,208
792 102,673
12/31/2020 7,000
6,160
840 101,833
12/31/2021 7,000
6,110
890 100,943
12/31/2022 7,000
6,057
943 100,000
X2 issued the bonds:
A. At par value. B. At a premium. C. At a discount. D. Cannot be determined from the given information. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
9-125 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
122.
X2 issued callable bonds on January 1, 2018. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity: Date
Cash Interest Decrease Carrying Paid Expense
in
Value
Carrying Value 1/1/2018
$104,212
12/31/2018 $7,000
$6,253
$747 103,465
12/31/2019 7,000
6,208
792 102,673
12/31/2020 7,000
6,160
840 101,833
12/31/2021 7,000
6,110
890 100,943
12/31/2022 7,000
6,057
943 100,000
X2 issued the bonds for:
A. $100,000. B. $107,000. C. $104,212. D. Cannot be determined from the given information. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
9-126 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
123.
X2 issued callable bonds on January 1, 2018. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity: Date
Cash Interest Decrease Carrying Paid Expense
in
Value
Carrying Value 1/1/2018
$104,212
12/31/2018 $7,000
$6,253
$747 103,465
12/31/2019 7,000
6,208
792 102,673
12/31/2020 7,000
6,160
840 101,833
12/31/2021 7,000
6,110
890 100,943
12/31/2022 7,000
6,057
943 100,000
The X2 bonds have a life of:
A. 3 years. B. 4 years. C. 5 years. D. Cannot be determined from the given information. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
9-127 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
124.
X2 issued callable bonds on January 1, 2018. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity: Date
Cash Interest Decrease Carrying Paid Expense
in
Value
Carrying Value 1/1/2018
$104,212
12/31/2018 $7,000
$6,253
$747 103,465
12/31/2019 7,000
6,208
792 102,673
12/31/2020 7,000
6,160
840 101,833
12/31/2021 7,000
6,110
890 100,943
12/31/2022 7,000
6,057
943 100,000
What is the annual stated interest rate on the bonds?
A. 3%. B. 3.5%. C. 6%. D. 7%. $7,000/$100,000 = 7%.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
9-128 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
125.
X2 issued callable bonds on January 1, 2018. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity: Date
Cash Interest Decrease Carrying Paid Expense
in
Value
Carrying Value 1/1/2018
$104,212
12/31/2018 $7,000
$6,253
$747 103,465
12/31/2019 7,000
6,208
792 102,673
12/31/2020 7,000
6,160
840 101,833
12/31/2021 7,000
6,110
890 100,943
12/31/2022 7,000
6,057
943 100,000
What is the annual market interest rate on the bonds?
A. 3%. B. 3.5%. C. 6%. D. 7%. $6,253/$104,212 = 6%.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
9-129 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
126.
Which of the following statements is correct?
A. Bonds are always issued at their face value. B. Bonds issued at more than their face value are said to be issued at a discount. C. Bondholders must hold their bonds until maturity to receive cash for their investment. D. None of these. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-06 Account for the issuance of bonds. Learning Objective: 09-07 Record the retirement of bonds. Topic: Accounting for Bond Retirements Topic: Recording Bonds Payable
9-130 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
127.
Tony Hawk's Adventure (THA) issued callable bonds on January 1, 2018. THA's accountant has projected the following amortization schedule from issuance until maturity: Date
Cash Interest Increase Carrying Paid Expense
in
Value
Carrying Value 1/1/2018
$194,758
6/30/2018 $7,000
$7,790
$790
195,548
12/31/2018
7,000
7,822
822
196,370
6/30/2019
7,000
7,855
855
197,225
12/31/2019
7,000
7,889
889
198,114
6/30/2020
7,000
7,925
925
199,039
12/31/2020
7,000
7,961
961
200,000
THA buys back the bonds for $196,000 immediately after the interest payment on 12/31/2018 and retires them. What gain or loss, if any, would THA record on this date?
A. No gain or loss. B. $370 gain. C. $4,000 gain. D. $1,242 loss. THA paid only $196,000 to remove a liability with a carrying value of $196,370 on December 31, 2018. The difference is a gain of $370.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-07 Record the retirement of bonds. Topic: Accounting for Bond Retirements
9-131 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
128.
X2 issued callable bonds on January 1, 2018. The bonds pay interest annually on December 31 each year. X2's accountant has projected the following amortization schedule from issuance until maturity: Date
Cash Interest Decrease Carrying Paid Expense
in
Value
Carrying Value 1/1/2018
$104,212
12/31/2018 $7,000
$6,253
$747 103,465
12/31/2019 7,000
6,208
792 102,673
12/31/2020 7,000
6,160
840 101,833
12/31/2021 7,000
6,110
890 100,943
12/31/2022 7,000
6,057
943 100,000
X2 buys back the bonds for $103,000 immediately after the interest payment on 12/31/2019 and retires them. What gain or loss, if any, would X2 record on this date?
A. No gain or loss. B. $3,000 gain. C. $1,202 loss. D. $327 loss. X2 paid $103,000 to remove a liability with a carrying value of $102,673. The difference is a loss of $327.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-07 Record the retirement of bonds. Topic: Accounting for Bond Retirements
9-132 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
129.
When bonds are retired before their maturity date:
A. GAAP has been violated. B. The issuing company will always report a non-operating gain. C. The issuing company will always report a non-operating loss. D. The issuing company may report a non-operating gain or loss. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-07 Record the retirement of bonds. Topic: Accounting for Bond Retirements
130.
The Viper retires a $40 million bond issue when the carrying value of the bonds is $42 million, but the market value of the bonds is $36 million. The entry to record the retirement will include:
A. A credit of $6 million to a gain account. B. A debit of $6 million to a loss account. C. No gain or loss on retirement. D. A credit to cash for $42 million. Carrying value, $42 million, less cash paid to retire the bonds of $36 million = $6 million gain.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-07 Record the retirement of bonds. Topic: Accounting for Bond Retirements
9-133 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
131.
The Raptor retires a $20 million bond issue when the carrying value of the bonds is $18 million, but the market value of the bonds is $15 million. The entry to record the retirement will include:
A. A debit of $3 million to a loss account. B. A credit of $3 million to a gain account. C. No gain or loss on retirement. D. A credit to cash for $18 million. Carrying value, $18 million, less cash paid to retire the bonds of $15 million = $3 million gain.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-07 Record the retirement of bonds. Topic: Accounting for Bond Retirements
132.
The Titan retires a $20 million bond issue when the carrying value of the bonds is $18 million, but the market value of the bonds is $23 million. The entry to record the retirement will include:
A. A debit of $5 million to a loss account. B. A credit of $5 million to a gain account. C. No gain or loss on retirement. D. A credit to cash for $18 million. Carrying value, $18 million, less cash paid to retire the bonds of $23 million = $5 million loss.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-07 Record the retirement of bonds. 9-134 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Accounting for Bond Retirements
133.
The balance sheet of Sub America reports total assets of $400,000 and $450,000 at the beginning and end of the year, respectively. The return on assets for the year is 10%. What is Sub America's net income for the year?
A. $42,500. B. $45,000. C. $4,250,000. D. $85,000. Net income divided by average total assets equals 10%. Average total assets equal $425,000 [($400,000 + $450,000)/2]; therefore, net income must be $42,500 ($425,000 × 10%).
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-08 Make financial decisions using long-term liability ratios. Topic: Coca-Cola vs. PepsiCo
134.
The balance sheet of Montezuma reports total assets of $900,000 and $1,100,000 at the beginning and end of the year, respectively. The net income for the year is $100,000. What is Montezuma's return on assets?
A. 10% B. 11% C. 9% D. 25% [$100,000/($900,000 + $1,100,000)/2] = 10%
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze 9-135 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 3 Hard Learning Objective: 09-08 Make financial decisions using long-term liability ratios. Topic: Coca-Cola vs. PepsiCo
135.
Prowler reports net income of $250,000. The return on assets for the year is 20%. What is Prowler's average total assets for the year?
A. $1,250,000 B. $1,000,000 C. $1,500,000 D. $250,000 $250,000/X = 20%, therefore X = ($250,000/20%) = $1,250,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-08 Make financial decisions using long-term liability ratios. Topic: Coca-Cola vs. PepsiCo
136.
The balance sheet of Montezuma reports stockholders' equity of $400,000, total liabilities of $600,000, and total assets of $1,000,000. What is Montezuma's debt to equity ratio?
A. 1.5 B. 0.66 C. 2.5 D. 1.0 $600,000/$400,000 = 1.5
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-08 Make financial decisions using long-term liability ratios. Topic: Coca-Cola vs. PepsiCo 9-136 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
137.
The balance sheet of Gatekeeper reports stockholders' equity of $800,000. The debt to equity ratio is 2.5. What is Gatekeeper's total liabilities?
A. $2,000,000 B. $320,000 C. $1,000,000 D. $800,000 X/$800,000 = 2.5, therefore X = ($800,000 × 2.5) = $2,000,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-08 Make financial decisions using long-term liability ratios. Topic: Coca-Cola vs. PepsiCo
138.
The balance sheet of Gatekeeper reports total liabilities of $2,000,000. The debt to equity ratio is 2.5. What is Gatekeeper's stockholders' equity?
A. $800,000 B. $320,000 C. $1,000,000 D. $2,000,000 $2,000,000/X = 2.5, therefore X = ($2,000,000/2.5) = $800,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-08 Make financial decisions using long-term liability ratios. Topic: Coca-Cola vs. PepsiCo
9-137 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
139.
Financial leverage is best measured by which of the following ratios?
A. The debt to equity ratio. B. The return on equity ratio. C. The times interest earned ratio. D. The return on assets ratio. AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-08 Make financial decisions using long-term liability ratios. Topic: Coca-Cola vs. PepsiCo
140.
Which of the following is true regarding a company assuming more debt?
A. Assuming more debt is always bad for the company. B. Assuming more debt is always good for the company. C. Assuming more debt can be good for the company as long as they earn a return in excess of the rate charged on the borrowed funds. D. Assuming more debt reduces leverage. AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-08 Make financial decisions using long-term liability ratios. Topic: Coca-Cola vs. PepsiCo
9-138 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
141.
Which of the following is not a true statement?
A. The debt to equity ratio measures a company's risk and is calculated as total liabilities divided by stockholders' equity. B. Leverage enables a company to earn a higher return using debt than without debt. C. Return on assets is calculated as net income divided by the ending balance for total assets. D. The times interest earned ratio compares interest expense with income available to pay interest charges. AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-08 Make financial decisions using long-term liability ratios. Topic: Coca-Cola vs. PepsiCo
142.
The times interest earned ratio is calculated as
A. Interest expense/Net income. B. Net income/Interest expense. C. (Net income + interest expense + tax expense)/Interest expense. D. Interest expense/(Net income + interest expense + tax expense). AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-08 Make financial decisions using long-term liability ratios. Topic: Coca-Cola vs. PepsiCo
9-139 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
143.
Selected financial data for Company A is provided below: ($ in millions) Sales Interest expense
Company A $66,176 676
Tax expense
1,362
Net income
$2,620
What is the times interest earned ratio for Company A?
A. 6.9 times. B. 3.9 times. C. 0.3 times. D. 97.9 times. ($2,620 + $676 + $1,362)/$676 = 6.9 times (rounded).
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-08 Make financial decisions using long-term liability ratios. Topic: Coca-Cola vs. PepsiCo
9-140 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
144.
Selected financial data for Company B is provided below: ($ in millions) Sales Interest expense
Company B $47,220 287
Tax expense
1,042
Net income
$1,783
What is the times interest earned ratio for Company B?
A. 6.2 times. B. 10.8 times. C. 0.2 times. D. 164.5 times. ($1,783 + $287 + $1,042)/$287 = 10.8 times (rounded).
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-08 Make financial decisions using long-term liability ratios. Topic: Coca-Cola vs. PepsiCo
Matching Questions
9-141 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
145.
Match the following
1. Times interest earned ratio
The rate quoted in the bond contract used to calculate the cash payments for interest.
2. Debt to equity ratio
The lessor owns the asset and the lessee simply uses the asset temporarily.
3. Amortization schedule 4. Discount 5. Sinking fund 6. Market interest rate
9 8
Total liabilities divided by total stockholders' equity; measure a company's risk.
2
The true interest rate used by investors to value a bond.
6
The issue price is below its face amount.
4
Provides a summary of the cash interest payments, interest expense, and changes in carrying value for debt instruments.
3
The lessee essentially buys an asset and borrows the money 7. Capital lease
through a lease to pay for the asset.
7
The issue price is above its face amount.
10
8. Operating lease 9. Stated interest rate
Ratio that compares interest expense with income available to pay those charges.
1
An investment fund used to set aside money to be used to pay 10. Premium
debts as they come due.
5
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-03 Understand the balance sheet effects of operating and capital leases. Learning Objective: 09-04 Identify the characteristics of bonds. Learning Objective: 09-05 Determine the price of a bond issue. Learning Objective: 09-06 Account for the issuance of bonds. Learning Objective: 09-08 Make financial decisions using long-term liability ratios. Topic: Bonds Topic: Coca-Cola vs. PepsiCo Topic: Leases Topic: Pricing a Bond Topic: Recording Bonds Payable
9-142 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
146.
Match the following
1. Term bond.
Matures in installments.
7
Allows the issuer to pay off the bonds early at a fixed price.
5
2. Bond issue costs. 3. Private placement. 4. Secured bond.
Allows the investor to transfer each bond into shares of common stock.
6
Includes underwriting, legal, accounting, registration, and printing fees.
2
Sale of debt securities directly to a single investor.
3
5. Callable bond. 6. Convertible
Supported by specific assets pledged as collateral by the issuer.
bond.
4 Secured only by the "full faith and credit" of the issuing
7. Serial bond.
corporation.
8
Matures on a single date.
1
8. Unsecured bond.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-04 Identify the characteristics of bonds. Topic: Bonds
147.
Match the following
1. Secured bond. 2. Term bond.
Matures in installments.
4
Matures on a single date.
2
Supported by specific assets pledged as collateral by the issuer.
1
3. Unsecured bond.
Secured only by the "full faith and credit" of the issuing 4. Serial bond.
corporation.
3
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium 9-143 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 09-04 Identify the characteristics of bonds. Topic: Bonds
148.
Match the following
1. Private placement. 2. Callable bond.
Allows the issuer to pay off the bonds early at a fixed price. Allows the investor to transfer each bond into shares of common stock.
3. Bond issue costs.
2 4
Includes underwriting, legal, accounting, registration, and printing fees.
3
Sale of debt securities directly to a single investor.
1
4. Convertible bond.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-04 Identify the characteristics of bonds. Topic: Bonds
149.
Match the following
1. Market interest rate
The true interest rate used by investors to value a bond.
1
The stated interest rate is more than the market interest rate.
5
The stated interest rate equals the market interest rate.
4
The stated interest rate is less than the market interest rate.
3
2. Stated interest rate 3. Bonds issued at a discount 4. Bonds issued at face value 5. Bonds issued at a premium
The rate quoted in the bond contract used to calculate the cash payments for interest.
2
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-05 Determine the price of a bond issue. Learning Objective: 09-06 Account for the issuance of bonds. 9-144 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Pricing a Bond Topic: Recording Bonds Payable
Essay Questions
9-145 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
150.
Frontier City is trying to decide between the following two alternatives to finance its new $10 million roller coaster: a. Issue $10 million of 6% bonds at face amount. b. Issue one million shares of common stock for $10 per share. Issue Bonds Issue Stock Operating income
$5,000,000
$5,000,000
Net income
$
$
# of shares
3,000,000
4,000,000
$
$
Interest expense (bonds only) Income before tax Income tax expense (30%)
Earnings per share (Net income/# of shares)
Assuming bonds or shares of stock are issued at the beginning of the year, complete the income statement listed above for each alternative. Which alternative results in the highest earnings per share?
Issue Bonds Issue Stock Operating income Interest expense (bonds only)
$5,000,000
$5,000,000
600,000
Income before tax
4,400,000
5,000,000
Income tax expense (30%)
1,320,000
1,500,000
Net income
$3,080,000
$3,500,000
# of shares
3,000,000
4,000,000
$1.03
$0.88
Earnings per share (Net income/# of shares)
Issuing bonds results in earnings per share of $1.03 compared with earnings per share of $0.88 for issuing stock. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Evaluate Difficulty: 3 Hard 9-146 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 09-01 Explain financing alternatives. Topic: Financing Alternatives
151.
On January 1, 2018, Julee Enterprises borrows $30,000 to purchase a new Toyota Highlander by agreeing to a 6%, 4-year note with the bank. Payments of $704.55 are due at the end of each month with the first installment due on January 31, 2018. Record the issuance of the note payable and the first two monthly payments.
January 1, 2018
Debit
Cash
30,000
Notes Payable
Credit
30,000
(Issuance of note payable)
January 31, 2018 Interest Expense ($30,000 ×
150.00
6% × 1/12) Notes Payable (difference)
554.55
Cash (monthly payment)
704.55
(to record the first monthly payment)
February 28, 2018 Interest Expense [($30,000 -
147.23
$554.55) × 6% × 1/12] Notes Payable (difference) Cash (monthly payment)
557.32 704.55
(to record the second monthly payment) AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-02 Account for installment notes payable. Topic: Installment Notes
9-147 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
152.
Valentino's Pizza issues $40 million of 3% convertible bonds that mature in ten years. Each $1,000 bond is convertible into twenty-five shares of common stock. The current market price of Valentino's stock is $35 per share. 1. Explain why Valentino's might choose to issue convertible bonds. 2. Explain why investors might choose to purchase Valentino's convertible bonds.
1. Convertible bonds sell at a higher price and require a lower interest rate than bonds without a conversion feature. 2. Investors would benefit if the market price of the common stock goes above $40 per share ($1,000/25 shares = $40 per share) assuming the current market price of the bond is $1,000. Example: If the company's stock price goes to $50 per share, the convertible bondholder could trade a $1,000 bond for 25 shares of stock worth $50 per share (or $1,250). Prior to conversion the bondholder still receives interest on the convertible bond.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-04 Identify the characteristics of bonds. Topic: Bonds
9-148 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
153.
Stealth Fitness Center issues 7%, 10-year bonds with a face amount of $200,000. The market interest rate for bonds of similar risk and maturity is 8%. Interest is paid semiannually. At what price will the bonds be issued?
If the market rate is 8%, the bonds will be issued at $186,410 (a discount).
Calculator Input Bond Characteristics Key Amount 1. Face amount
FV $200,000
2. Interest payment
PMT
3. Market interest rate
I
4% = 8%/2 semiannual periods
4. Periods to maturity
N
20 = 10 years × 2 periods each year
$7,000 = $200,000 × 7% × ½ year
Calculator Output Issue price
PV $186,410
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-05 Determine the price of a bond issue. Topic: Pricing a Bond
9-149 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
154.
Stealth Fitness Center issues 7%, 15-year bonds with a face amount of $200,000. The market interest rate for bonds of similar risk and maturity is 6%. Interest is paid semiannually. At what price will the bonds be issued?
If the market rate is 6%, the bonds will be issued at $219,600 (a premium).
Calculator Input Bond Characteristics Key Amount 1. Face amount
FV $200,000
2. Interest payment
PMT
3. Market interest rate
I
3% = 6%/2 semiannual periods
4. Periods to maturity
N
30 = 15 years × 2 periods each year
$7,000 = $200,000 × 7% × ½ year
Calculator Output Issue price
PV $219,600
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-05 Determine the price of a bond issue. Topic: Pricing a Bond
9-150 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
155.
On January 1, 2018, Water Wonderland issues $20 million of 8% bonds, due in ten years, with interest payable semiannually on June 30 and December 31 each year. 1. If the market rate is 7%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price. 2. If the market rate is 8%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price. 3. If the market rate is 9%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price.
1. Premium. The issue price is $21,421,240.
Calculator Input Bond
Key
Amount
1. Face amount
FV
$20,000,000
2. Interest
PMT
Characteristics
$800,000 =
payment
$20,000,000 × 8% × ½ year
3. Market
I
3.5% = 7%/2
interest rate
semiannual periods
4. Periods to
N
20 = 10 years
maturity
× 2 periods each year Calculator Output
Issue price
PV
$21,421,240
2. Face amount. The issue price is $20,000,000. Calculator Input Bond
Key
Amount
FV
$20,000,000
Characteristics 1. Face amount
9-151 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
2. Interest
PMT
$800,000 =
payment
$20,000,000 × 8% × ½ year
3. Market
I
4% = 8%/2
interest rate
semiannual periods
4. Periods to
N
20 = 10 years
maturity
× 2 periods each year Calculator Output
Issue price
PV
$20,000,000
3. Discount. The issue price is $18,699,206. Calculator Input Bond
Key
Amount
1. Face amount
FV
$20,000,000
2. Interest
PMT
Characteristics
$800,000 =
payment
$20,000,000 × 8% × ½ year
3. Market
I
4.5% = 9%/2
interest rate
semiannual periods
4. Periods to
N
20 = 10 years
maturity
× 2 periods each year Calculator Output
Issue price
PV
$18,699,206
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-05 Determine the price of a bond issue. Topic: Pricing a Bond
9-152 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
156.
Pizza Pier issues 7%, 10-year bonds with a face amount of $80,000 on January 1, 2018. The market interest rate for bonds of similar risk and maturity is also 7%. Interest is paid semiannually on June 30 and December 31. 1. Record the bond issue. 2. Record the first interest payment on June 30, 2018.
1.
Debit Credit
January 1, 2018 Cash
80,000 Bonds Payable
80,000
(to record the bond issue) 2. June 30, 2018 Interest Expense Cash ($80,000 × 7% × ½)
2,800 2,800
(First semiannual interest payment) AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 2 Medium Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
9-153 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
157.
Pizza Pier issues 7%, 10-year bonds with a face amount of $80,000 for $74,564 on January 1, 2018. The market interest rate for bonds of similar risk and maturity is 8%. Interest is paid semiannually on June 30 and December 31. 1. Record the bond issue. 2. Record the first interest payment on June 30, 2018.
1.
Debit Credit
January 1, 2018 Cash
74,564
Discount on Bonds Payable
5,436
Bonds Payable
80,000
(to record the bond issue) 2. June 30, 2018 Interest Expense ($74,564 × 8% × ½)
2,983
Discount on Bonds Payable (difference) Cash ($80,000 × 7% × ½)
183 2,800
(First semiannual interest payment) AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
9-154 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
158.
Pizza Pier issues 7%, 10-year bonds with a face amount of $80,000 for $85,951 on January 1, 2018. The market interest rate for bonds of similar risk and maturity is 6%. Interest is paid semiannually on June 30 and December 31. 1. Record the bond issue. 2. Record the first interest payment on June 30, 2018.
1.
Debit Credit
January 1, 2018 Cash
85,951 Bonds Payable
80,000
Premium on Bonds Payable
5,951
(to record the bond issue) 2. June 30, 2018 Interest Expense ($85,951 × 6% × ½)
2,579
Premium on Bonds Payable (difference)
221
Cash ($80,000 × 7% × ½)
2,800
(First semiannual interest payment) AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
9-155 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
159.
Presented below is a partial amortization schedule for Discount Foods: (1) Period
(2)
(3)
(4)
(5)
Cash Interest Increase Carrying Paid Expense
in
Value
Carrying Value Issue date
$74,564
1
$2,800
$2,983
$183
74,747
2
2,800
2,990
190
74,937
1. Record the bond issue assuming the face value of bonds payable is $80,000. 2. Record the first interest payment.
1.
Debit
Cash
74,564
Discount on Bonds Payable
5,436
Bonds Payable
Credit
80,000
(to record the bond issue) 2. Interest Expense Discount on Bonds
2,983 183
Payable Cash
2,800
(First interest payment) AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
9-156 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
160.
Presented below is a partial amortization schedule for Premium Foods: (1) Period
(2)
(3)
(4)
(5)
Cash Interest Decrease Carrying Paid Expense
in
Value
Carrying Value Issue date
$85,951
1
$2,800
$2,579
$221
85,730
2
2,800
2,572
228
85,502
1. Record the bond issue assuming the face value of bonds payable is $80,000. 2. Record the first interest payment.
1.
Debit
Cash
85,951
Credit
Bonds Payable
80,000
Premium on Bonds
5,951
Payable
(to record the bond issue) 2. Interest Expense Premium on Bonds Payable Cash
2,579 221 2,800
(First interest payment) AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
9-157 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
161.
On January 1, 2018, Ripstick Park issues $800,000 of 8% bonds, due in ten years, with interest payable semiannually on June 30 and December 31 each year. Assuming the market interest rate on the issue date is 8%, the bonds will issue at $800,000. Record the bond issue on January 1, 2018, and the first two semiannual interest payments on June 30, 2018, and December 31, 2018.
January 1, 2018 Cash
Debit
Credit
800,000 Bonds Payable
800,000
(to record the bond issue) June 30, 2018 Interest Expense
32,000
Cash ($800,000 ×
32,000
8% × ½)
(First semiannual interest payment) December 31, 2018 Interest Expense Cash ($800,000 ×
32,000 32,000
8% × ½)
(Second semiannual interest payment) AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 2 Medium Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
9-158 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
162.
On January 1, 2018, Ripstick Park issues $800,000 of 8% bonds, due in ten years, with interest payable semiannually on June 30 and December 31 each year. Assuming the market interest rate on the issue date is 9%, the bonds will issue at $747,968. 1. Complete the first three rows of an amortization table through December 31, 2018. 2. Record the bond issue on January 1, 2018, and the first two semi-annual interest payments on June 30, 2018, and December 31, 2018.
(1) Date
(2) Cash (3) Interest Paid
Expense
(4)
(5) Carrying
Increase
Value
in Carrying Value Face
Carrying
(3) – (2)
Prior
Amount
Value ×
Carrying
×
Market
Value + (4)
Stated
Rate
Rate 1/1/2018
$747,968
6/30/2018 $32,000
$33,659
$1,659
749,627
12/31/2018 32,000
33,733
1,733
751,360
January 1, 2018
Debit
Cash
747,968
Discount on Bonds Payable
52,032
Bonds Payable
Credit
800,000
(to record the bond issue) June 30, 2018 Interest Expense ($747,968
33,659
× 9% × ½) Discount on Bonds
1,659
Payable (difference) Cash ($800,000 × 8%
32,000
9-159 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
× ½)
(First semiannual interest payment) December 31, 2018 Interest Expense ($749,627
33,733
× 9% × ½) Discount on Bonds
1,733
Payable (difference) Cash ($800,000 × 8%
32,000
× ½)
(Second semiannual interest payment) AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
9-160 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
163.
On January 1, 2018, Ripstick Park issues $800,000 of 8% bonds, due in ten years, with interest payable semiannually on June 30 and December 31 each year. Assuming the market interest rate on the issue date is 7%, the bonds will issue at $856,850. 1. Complete the first three rows of an amortization table through December 31, 2018. 2. Record the bond issue on January 1, 2018, and the first two semi-annual interest payments on June 30, 2018, and December 31, 2018.
(1) Date
(2) Cash (3) Interest Paid
Expense
(4)
(5) Carrying
Decrease
Value
in Carrying Value Face
Carrying
(2) – (3)
Prior
Amount
Value ×
Carrying
×
Market
Value – (4)
Stated
Rate
Rate 1/1/2018
$856,850
6/30/2018 $32,000
$29,990
$2,010
854,840
12/31/2018 32,000
29,919
2,081
852,759
January 1, 2018 Cash
Debit
Credit
856,850
Bonds Payable
800,000
Premium on Bonds
56,850
Payable
(to record the bond issue) June 30, 2018 Interest Expense ($856,850
29,990
× 7% × ½) Premium on Bonds Payable
2,010
(difference) Cash ($800,000 ×
32,000
9-161 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
8% × ½)
(First semiannual interest payment) December 31, 2018 Interest Expense
29,919
($854,,840 × 7% × ½) Premium on Bonds Payable
2,081
(difference) Cash ($800,000 ×
32,000
8% × ½)
(Second semiannual interest payment)
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
9-162 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
164.
Sun City issues $50 million of bonds on January 1, 2018 that pay interest semiannually on June 30 and December 31. Portions of the bond amortization schedule appear below: (1) Date
(2) Cash Paid
(3)
(4)
(5)
Interest Decrease
Carrying
Expense
Value
in Carrying Value
1/1/2018
$55,338,768
6/30/2018 2,000,000 1,936,857
63,143
55,275,625
12/31/2018 2,000,000 1,934,647
65,353
55,210,272
Required: 1. Were the bonds issued at face amount, a discount, or a premium? 2. What is the original issue price of the bonds? 3. What is the face amount of the bonds? 4. What is the stated annual interest rate? (Hint: Be sure to provide the annual rate rather than the six month rate.) 5. What is the market annual interest rate? (Hint: Be sure to provide the annual rate rather than the six month rate.) 6. What is the total cash paid for interest assuming the bonds mature in 20 years?
1. Premium. 2. $55,338,768. 3. $50,000,000. 4. 8%. [($2,000,000 cash paid ÷ $50,000,000 face value) × 2] 5. 7%. [($1,936,857 interest expense ÷ $55,338,768 carrying value) × 2] 6. $80,000,000. ($2,000,000 × 40 payments)
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
9-163 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
165.
Pizza Pier retires its 7% bonds for $68,000 before their scheduled maturity. At the time, the bonds have a face value of $70,000 carrying value of $74,937. Record the early retirement of the bonds.
Credit Debit Bonds Payable
70,000
Premium on Bonds Payable
4,937
Gain
6,937
Cash
68,000
(Entry to record early retirement) AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-07 Record the retirement of bonds. Topic: Accounting for Bond Retirements
9-164 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
166.
Magic Mountain retires its 8% bonds for $127,000 before their scheduled maturity. At the time, the bonds have a face value of 125,000 and a carrying value of $118,000. Record the early retirement of the bonds.
Debit Bonds Payable Loss Discount on Bonds
Credit
125,000 9,000 7,000
Payable Cash
127,000
(Entry to record early retirement) AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-07 Record the retirement of bonds. Topic: Accounting for Bond Retirements
9-165 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
167.
Western World has the following selected data ($ in millions): Balance Sheet Data
2018
2017
Total Assets
$2,511
$2,315
Total Liabilities
1,685
1,525
826
790
Total Stockholders’ Equity Income Statement Data Sales
$786
Interest Expense
77
Tax Expense
32
Net Income
80
Based on these amounts, calculate the following ratios for Western World in 2018: 1. Debt to equity ratio. 2. Return on assets ratio. 3. Times interest earned ratio.
1. Total
÷ Stockholders’
Liabilities
Debt to
Equity
$1,685
÷
$826
Net
÷
Average
Equity =
Ratio
=
2.04
2.
Income
Return on
Total Assets
Assets Ratio =
$80
÷
$2,413*
=
3.3%
*($2,511 + $2,315) / 2 3.
9-166 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Net Income
÷
Interest
+ Interest +
Interest = Earned Ratio
Taxes $189
Times
÷
$77
=
2.5
AACSB: Analytical Thinking AICPA: FN Decision Making AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-08 Make financial decisions using long-term liability ratios. Topic: Coca-Cola vs. PepsiCo
9-167 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
168.
Selected financial data for these two close competitors in the home building industry are provided below: ($ in millions)
Company A
Company B
Total assets
$40,877
$33,005
Total liabilities
21,484
13,936
19,393
19,069
$66,176
$47,220
676
287
Tax expense
1,362
1,042
Net income
2,620
1,783
Total stockholders’ equity Sales Interest expense
1. Calculate the debt to equity ratio for Company A and Company B. Which company has the higher ratio? 2. Calculate the times interest earned ratio for Company A and Company B. Which company is better able to meet interest payments as they become due?
1. ($ in millions)
Debt Total Liabilities ÷
Stockholders’ Equity
to = Equity Ratio
Company A
$21,484 ÷
$19,393
=
1.11
$13,936 ÷
$19,069
=
0.73
Company B
Company A has a higher debt to equity ratio than Company B. Company B, with a lower debt to equity ratio is considered to be less risky. 2. ($ in millions)
Net
Times
Income +
Interest
9-168 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Interest +
Earned
Taxes
÷ Interest =
$4,658
÷
$676
= 6.9 times
$3,112
÷
$287
= 10.8 times
Ratio
Company A Company B
Company B, with a times interest earned ratio of 10.8 times is better able to meet interest payments as they become due than Company A with a ratio of 6.9 times. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-08 Make financial decisions using long-term liability ratios. Topic: Coca-Cola vs. PepsiCo
9-169 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
169.
On January 1, 2018, Florida Investments purchases a condo for $400,000, paying $80,000 down and borrowing the remaining $320,000, signing a 6%, 30-year mortgage. Installment payments of $1,918.56 are due at the end of each month, with the first payment due on January 31, 2018. Required: 1. Record issuance of the mortgage installment note on January 1, 2018. 2. Complete the first three rows of an amortization schedule. 3. Record the first monthly mortgage payment on January 31, 2018. How much of the first payment goes to interest expense and how much goes to reducing the carrying value of the loan? 4. Total payments over the 30 years are $690,682 ($1,918.56 × 360 monthly payments). How much of this is interest expense and how much is actual payment of the loan?
Requirement 1
January 1, 2018 Buildings
400,000
Cash
80,000
Notes Payable
320,000
(Issuance of a mortgage note payable)
Requirement 2 (1) Date
(2) Cash (3) Interest (4) Decrease (5) Carrying Paid
Expense
in
Value
Carrying Value Prior Carrying Value ×
(2) – (3)
Carrying Value – (4)
.06 × 1/12 1/1/18
$320,000.00
9-170 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
1/31/18 $1,918.56 $1,600.00
$318.56
319,681.44
2/28/18 1,918.56
320.15
319,361.29
1,598.41
Requirement 3 January 31, 2018 Interest Expense
1,600.00
($320,000 × 6% × 1/12) Notes Payable (difference) Cash (monthly
318.56 1,918.56
payment)
(To record the first monthly mortgage payment)
In the first monthly payment, $1,600.00 goes to interest expense and only $318.56 goes to reducing the carrying value of the loan. Requirement 4 The actual payments on the loan are $320,000. Therefore, total interest expense over the 30 year mortgage is $370,682 ($690,682 - $320,000). Over a 30 year mortgage, payments for interest expense exceed actual payments on the loan. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-02 Account for installment notes payable. Topic: Installment Notes
9-171 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
170.
Super Slides has $20 million in bonds payable. The bond indenture states that the debt to equity ratio cannot exceed 2.0. Super Slide's total assets are $90 million and its liabilities other than the bonds payable are $40 million. The company is considering some additional financing through leasing. Required: 1. Calculate total stockholders' equity using the balance sheet equation. 2. What is the debt to equity ratio? 3. Explain the difference between an operating and a capital lease. 4. The company enters a lease agreement requiring lease payments with a present value of $2 million. Will this lease agreement affect the debt to equity ratio differently if the lease is recorded as an operating lease or a capital lease? 5. Will entering into the lease cause the debt to equity ratio to be in violation of the contractual agreement in the bond indenture? Show your calculations (a) assuming an operating lease and (b) assuming a capital lease.
Requirement 1
Assets
=
Liabilities
+
Stockholders’ Equity
$90
$20 + $40 =
million
$60 million
?
Stockholders' equity must be $30 million ($90 million - $60 million). Requirement 2 Total
÷ Stockholders’
Liabilities
=
Equity
Debt to Equity Ratio
$60 million
÷
$30 million
=
2.00
Requirement 3 An operating lease is like a rental. Over the lease term, the company making the lease payments records rent expense and the company receiving the rent payments records rent 9-172 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
revenue. A capital lease is different. In a capital lease, the company making lease payments (called the lessee) essentially buys the asset and borrows the money through a lease to pay for the asset. The lease is recorded as an asset and a liability on the lessee's records calculated as the present value of the lease payments. Requirement 4 Yes. The debt to equity ratio will not be affected under an operating lease. However, under a capital lease, assets and liabilities will both increase $2 million while stockholders' equity will remain unchanged. The increase in liabilities will increase the debt to equity ratio. Requirement 5 The debt to equity ratio will not be in violation (exceed 2.0) under an operating lease, but will be in violation (exceed 2.0) under a capital lease. Therefore, Super Slides has a strong incentive to structure the lease agreement as an operating lease. Operating lease Total
÷ Stockholders’
Liabilities
=
Equity
Debt to Equity Ratio
$60 million
÷
$30 million
=
2.00
=
Debt to
Capital lease Total
÷ Stockholders’
Liabilities
Equity
Equity Ratio
$62 million
÷
$30 million
=
2.07
AACSB: Analytical Thinking AICPA: FN Decision Making AICPA: FN Measurement Blooms: Analyze Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 09-03 Understand the balance sheet effects of operating and capital leases. Learning Objective: 09-08 Make financial decisions using long-term liability ratios. Topic: Coca-Cola vs. PepsiCo Topic: Leases
9-173 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
171.
Lakeside Amusement Park issues $600,000 of 6% bonds, due in ten years, with interest payable semi-annually on June 30 and December 31 each year. Required: Calculate the issue price of a bond and complete the first three rows of an amortization schedule when: 1. The market interest rate is 6% and the bonds issue at face amount. 2. The market interest rate is 7% and the bonds issue at a discount. 3. The market interest rate is 5% and the bonds issue at a premium.
Requirement 1 Face amount. The issue price is $600,000.
Calculator Input Bond
Key
Amount
1. Face amount
FV
$600,000
2. Interest
PMT
$18,000 = $600,000 × 6% × ½ year
Characteristics
payment 3. Market
I
3.0% = 6%/2 semi-annual periods
interest rate 4. Periods to
N
20 = 10 years × 2 periods each year
maturity Calculator Output Issue price
PV
$600,000
(1) Date (2) Cash (3) Interest
(4)
(5) Carrying
Paid
Increase
Value
Expense
in Carrying Value Face
Carrying
Amount
Value ×
(3) – (2)
Prior Carrying
9-174 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
×
Market
Stated
Rate
Value + (4)
Rate 1/1/18
$600,000
6/30/18 $18,000
$18,000
$0
600,000
12/31/18 18,000
18,000
0
600,000
Requirement 2 Discount. The issue price is $557,363. Calculator Input Bond
Key
Amount
1. Face amount
FV
$600,000
2. Interest
PMT
$18,000 = $600,000 × 6% × ½ year
Characteristics
payment 3. Market
I
3.5% = 7%/2 semi-annual periods
interest rate 4. Periods to
N
20 = 10 years × 2 periods each year
maturity Calculator Output Issue price
PV
$557,363
(1) Date (2) Cash (3) Interest
(4)
(5) Carrying
Paid
Increase
Value
Expense
in Carrying Value Face
Carrying
(3) – (2)
Prior
Amount
Value ×
Carrying
×
Market
Value + (4)
Stated
Rate
Rate 1/1/18
$557,363
6/30/18 $18,000
$19,508
$1,508
558,871
12/31/18 18,000
19,560
1,560
560,431
9-175 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Requirement 3 Premium. The issue price is $646,767. Calculator Input Bond
Key
Amount
1. Face amount
FV
$600,000
2. Interest
PMT
$18,000 = $600,000 × 6% × ½ year
Characteristics
payment 3. Market
I
2.5% = 5%/2 semi-annual periods
interest rate 4. Periods to
N
20 = 10 years × 2 periods each year
maturity Calculator Output Issue price
PV
$646,767
(1) Date (2) Cash (3) Interest
(4)
(5) Carrying
Paid
Decrease
Value
Expense
in Carrying Value Face
Carrying
(2) – (3)
Prior
Amount
Value ×
Carrying
×
Market
Value – (4)
Stated
Rate
Rate 1/1/18
$646,767
6/30/18 $18,000
$16,169
$1,831
644,936
12/31/18 18,000
16,123
1,877
643,059
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-05 Determine the price of a bond issue. Learning Objective: 09-06 Account for the issuance of bonds. Topic: Pricing a Bond Topic: Recording Bonds Payable
9-176 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
172.
Astro World issues $20 million in bonds on January 1, 2018 that pay interest semi-annually on June 30 and December 31. Portions of the bond amortization schedule appear below: (1) Date
(2)
(3)
(4)
(5)
Cash
Interest Increase
Carrying
Paid
Expense
Value
in Carrying Value
1/1/2018
$17,864,493
6/30/2018 600,000 625,257
25,257
17,889,750
12/31/2018 600,000 626,141
26,141
17,915,891
Required: 1. Were the bonds issued at face amount, a discount, or a premium? 2. What is the original issue price of the bonds? 3. What is the face amount of the bonds? 4. What is the stated annual interest rate? 5. What is the market annual interest rate? 6. What is the total cash paid for interest assuming the bonds mature in 20 years?
1. Discount 2. $17,864,493 3. $20,000,000 4. 6% ($600,000 cash paid ÷ $20,000,000 face value) × 2 5. 7% ($625,257 interest expense ÷ $17,864,493 carrying value) × 2 6. $24,000,000 ($600,000 × 40 payments)
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-05 Determine the price of a bond issue. Learning Objective: 09-06 Account for the issuance of bonds. Topic: Pricing a Bond Topic: Recording Bonds Payable
9-177 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
173.
On January 1, 2018, Water Mania issues $1,000,000 of 6% bonds, due in ten years, with interest payable semi-annually on June 30 and December 31 each year. Required: 1. If the market interest rate is 6%, the bonds will issue at $1,000,000. Record the bond issue on January 1, 2018, and the first two semi-annual interest payments on June 30, 2018, and December 31, 2018. 2. If the market interest rate is 7%, the bonds will issue at $928,938. Record the bond issue on January 1, 2018, and the first two semi-annual interest payments on June 30, 2018, and December 31, 2018. 3. If the market interest rate is 5% the bonds will issue at $1,077,946. Record the bond issue on January 1, 2018, and the first two semi-annual interest payments on June 30, 2018, and December 31, 2018.
Requirement 1
January 1, 2018 Cash
1,000,000 Bonds Payable
1,000,000
(To record the bond issue) June 30, 2018 Interest Expense
30,000
Cash ($1,000,000
30,000
× 6% × ½)
(First semi-annual interest payment) December 31, 2018 Interest Expense
30,000
Cash ($1,000,000 × 6% × ½)
30,000
(Second semi-annual interest payment)
Requirement 2 January 1, 2018 9-178 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Cash
928,938
Discount on Bonds
71,062
Payable Bonds Payable
1,000,000
(To record the bond issue) June 30, 2018 Interest Expense
32,513
($928,938 × 7% × ½) Discount on Bonds Payable
2,513
(difference) Cash ($1,000,000 × 6% × ½)
30,000
(First semi-annual interest payment) December 31, 2018 Interest Expense
32,601
([$928,938 + 2,513] × 7% × ½) Discount on Bonds Payable
2,601
(difference) Cash ($1,000,000 × 6% × ½)
30,000
(Second semi-annual interest payment)
Requirement 3 January 1, 2018 Cash
1,077,946 Bonds Payable
1,000,000
Premium on Bonds Payable
77,946
(To record the bond issue) June 30, 2018 Interest Expense
26,949
($1,077,946 × 5% × ½) Premium on Bonds
3,051
Payable (difference) Cash ($1,000,000 × 6% × ½)
30,000
(First semi-annual interest payment)
9-179 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
December 31, 2018 Interest Expense
76,872
([$1,077,946 - $3,051] × 5% × ½) Premium on Bonds
3,128
Payable (difference) Cash ($1,000,000 × 6% × ½)
30,000
(Second semi-annual interest payment) AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
9-180 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
174.
Aqua Zone issues $1.2 million, 7% bonds on January 1, 2018 that mature in twenty years. The market interest rate for bonds of similar risk and maturity is 6% and the bonds issue for $1,338,689. Interest is paid semi-annually on June 30 and December 31. Required: 1. Complete the first three rows of an amortization schedule. 2. Record the issuance of the bonds on January 1, 2018. 3. Record the interest payments on June 30, 2018 and December 31, 2018.
Requirement 1
(1) Date (2) Cash (3) Interest
(4)
(5) Carrying
Paid
Decrease
Value
Expense
in Carrying Value Face
Carrying
Amount
Value ×
(2) – (3)
Carrying
Prior
×
Market
Value – (4)
Stated
Rate
Rate 1/1/18
$1,338,689
6/30/18 $42,000
$40,161
$1,839
1,336,850
12/31/18 42,000
40,106
1,894
1,334,956
Requirement 2 January 1, 2018 Cash
1,338,689 Bonds Payable Premium on Bonds
1,200,000 138,689
Payable
(To record the bond issue)
9-181 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Requirement 3 June 30, 2018 Interest Expense ($1,338,689
40,161
× 6% × ½) Premium on Bonds Payable
1,839
(difference) Cash ($1,200,000 ×
42,000
7% × ½)
(First semi-annual interest payment) December 31, 2018 Interest Expense ($1,336,850
40,106
× 6% × ½) Premium on Bonds Payable
1,894
(difference) Cash ($1,200,000 ×
42,000
7% × ½)
(Second semi-annual interest payment) AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
9-182 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
175.
Selected financial data for two competitors in the construction supply industry are provided as follows: ($ in millions)
Total assets
Company A
Company B
2018
2018
2017
2017
$40,877 $41,164 $33,005 $32,625
Total
21,484
liabilities
23,387
13,936
14,570
Total stockholders’ $19,393 $17,777 $19,069 $18,055 equity Sales
$66,176
$47,220
676
383
Tax expense
1,362
1,042
Net income
$2,661
$1,783
Interest expense
Required: 1. Calculate the debt to equity ratio for 2018 for both companies. Which company has the higher ratio? 2. Calculate the return on assets for 2018 for both companies. Which company appears more profitable? 3. Calculate the times interest earned ratio for 2018 for both companies. Which company is better able to meet interest payments as they become due?
Requirement 1
($ in millions)
Debt Total
÷ Stockholders’ =
to
Liabilities
Equity
Equity Ratio
Company A
$21,484 ÷
$19,393
=
1.11
9-183 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Company B
$13,936 ÷
$19,069
=
0.73
Company A has a higher debt to equity ratio than Company B. Requirement 2 ($ in millions)
Average Net
÷
Total
Income
Return =
Assets
on Assets Ratio
Company A
$2,661
÷ $41,021*
=
6.5%
$1,783
÷ $32,815** =
5.4%
Company B
*($40,877 + $41,164)/2 **($33,005 + $32,625)/2 Company A appears more profitable than Company B. Requirement 3 ($ in millions)
Net
=
Times
Income + ÷ Interest
Interest
Interest
Earned
+ Taxes
Ratio
Company A
$4,699
÷
$676
=
7.0
$3,208
÷
$383
=
8.4
Company B
Company B, with a times interest earned ratio of 8.4, is better able to meet interest payments as they become due than Company A with a ratio of 7.0. AACSB: Analytical Thinking AICPA: FN Decision Making AICPA: FN Measurement Blooms: Analyze Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 09-08 Make financial decisions using long-term liability ratios. 9-184 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Coca-Cola vs. PepsiCo
176.
What is capital structure? Why would a company choose to borrow money rather than issue additional stock?
Capital structure is the mixture of liabilities and stockholders' equity a business uses. One of the primary reasons a company chooses to borrow money relates to taxes. Interest expense incurred when borrowing money is tax deductible, while dividends paid to stockholders is not tax deductible. Due to tax considerations, debt can be a less costly form of financing. A second reason relates to control. If a company issues additional shares to investors, control in the company is shared with the new shareholders. If a company borrows funds, voting control in the company is retained.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-01 Explain financing alternatives. Topic: Financing Alternatives
177.
Why do some companies issue bonds rather than borrow money directly from a bank?
A company that borrows by issuing bonds is effectively by-passing the bank and borrowing directly from the investing public, usually at a lower interest rate than in a bank loan. However, issuing bonds entails significant bond issue costs that often exceed 5% of the amount borrowed. For smaller loans, the additional bond issue costs exceed the savings from a lower interest rate, making it more economical to borrow from a bank. For loans of $20 million or more, the interest rate savings often exceed the additional bond issuance costs, making a bond issue more attractive.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-01 Explain financing alternatives. Topic: Financing Alternatives
9-185 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
178.
Contrast the following types of bonds: (a) Secured and unsecured. (b) Term and serial. (c) Callable and convertible.
(a) Secured bonds are supported by assets pledged as collateral. Unsecured bonds, also referred to as debentures, are not backed by a specific asset. (b) Term bonds require payment of the full principal amount of the bond at a single maturity date. Serial bonds require payments in installments over a series of years. (c) Callable bonds allow the issuer to repay the bonds before their scheduled maturity date at a specified call price. Convertible bonds allow the investor to convert each bond into a specified number of shares of common stock.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-04 Identify the characteristics of bonds. Topic: Bonds
179.
Explain how each of the columns in an amortization schedule is calculated, assuming the bonds are issued at a discount. How is the amortization schedule different if bonds are issued at a premium?
Cash paid is calculated as the face amount of the bonds times the stated interest rate. Interest expense is the carrying value times the market rate. The difference between interest expense and the cash paid increases the carrying value of the bonds. At the maturity date, the carrying value will equal the face amount. The amortization schedule is similar when bonds are issued at a premium, except that the difference between interest expense and the cash paid decreases, rather than increases, the carrying value of the bonds over time.
AACSB: Reflective Thinking AICPA: FN Measurement Blooms: Understand 9-186 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 2 Medium Learning Objective: 09-06 Account for the issuance of bonds. Topic: Recording Bonds Payable
180.
What are the potential risks and rewards of carrying additional debt? How does additional debt affect a company's return to investors?
Additional debt increases risk. Failure to repay debt, or the interest associated with the debt, on a timely basis may result in default and perhaps even bankruptcy. Other things being equal, the higher the debt, the higher the risk of bankruptcy. Additional debt also offers potential rewards. If a company earns a return in excess of the cost of borrowing the funds, stockholders are provided with a total return greater than what could have been earned with equity funds alone. Unfortunately, borrowing is not always favorable. Sometimes the cost of borrowing the funds exceeds the returns they generate. If a company has returns in excess of the rate charged on borrowed funds, assuming additional debt will result in a higher return to investors. However, if returns should fall below the rate charged on borrowed funds, assuming additional debt will result in lower overall returns to investors.
AACSB: Reflective Thinking AICPA: FN Decision Making Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 09-08 Make financial decisions using long-term liability ratios. Topic: Coca-Cola vs. PepsiCo
9-187 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 10 Stockholders' Equity
True / False Questions
1. Assets plus liabilities equal stockholders' equity. True
False
2. Paid-in Capital is the amount stockholders have invested in the company. True
False
3. Retained Earnings is the amount stockholders have invested in the company. True
False
4. Angel investors are investors that focus on companies at or near bankruptcy. True
False
5. All publicly held corporations in the United States are regulated by the Securities and Exchange Commission. True
False
6. Limited liability means that even in the event of bankruptcy, stockholders in a corporation can lose no more than the amount they invested in the company. True
False
10-1 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
7. Owners in a sole proprietorship or a partnership can be held personally liable for debts the company has incurred, over and beyond the investment they have made. True
False
8. A corporation has limited liability and attracting outside investment is easier relative to soleproprietorships and partnerships. True
False
9. A corporation has lower taxes and less paperwork relative to sole-proprietorships and partnerships. True
False
10. An S Corporation allows a company to enjoy limited liability as a corporation, but tax treatment as a partnership. True
False
11. Authorized stock is the number of shares that have been sold to investors. True
False
12. Outstanding stock is the number of shares held by investors. True
False
13. Par value is the legal capital per share of stock that's assigned when the corporation is first established. True
False
14. Par value has a direct relationship to the market value of the common stock. True
False
10-2 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
15. A company credits Additional Paid-in Capital for the portion of the cash proceeds above par value received for the issuance of stock. True
False
16. The number of shares outstanding is equal to the number of shares issued minus the number of shares repurchased. True
False
17. In the event a corporation is dissolved, common stockholders receive preference over preferred stockholders in the distribution of assets. True
False
18. Convertible preferred stock allows the stockholder to convert shares of preferred stock into common stock at a specified conversion ratio. True
False
19. Cumulative preferred stock means that dividends accumulate interest during the year. True
False
20. We usually record preferred stock as equity and report it in the stockholders' equity section of the balance sheet just above common stock. True
False
21. Treasury stock is the repurchase of a company's own issued stock. True
False
22. If a company purchases shares of another company, it records this transaction as treasury stock. True
False
10-3 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
23. Stock repurchases reduce the number of shares outstanding, thereby increasing earnings per share. True
False
24. We record treasury stock at the cost of the shares acquired. True
False
25. Treasury stock is a contra-equity account because treasury stock increases total stockholders' equity. True
False
26. When we reissue treasury stock, we report the difference between its cost and the cash received as an increase/decrease in additional paid-in capital. True
False
27. Retained earnings represent the earnings retained in the corporation - earnings not paid out as dividends to stockholders. True
False
28. The amount of retained earnings equals net income minus dividends for the current year. True
False
29. If a company has expenses that are more than revenues, the net loss decreases retained earnings. True
False
30. Dividends are paid on all shares issued by the company including treasury stock. True
False
10-4 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
31. Total assets, total liabilities, and total stockholders' equity do not change as a result of a stock dividend. True
False
32. Small stock dividends are recorded by debiting Retained Earnings for the par value per share. True
False
33. No journal entry is made to record a stock split. True
False
34. A stock split has no effect on the total of any account in stockholders' equity. True
False
35. Common stock is listed before preferred stock in the balance sheet. True
False
36. We can estimate the average purchase cost of treasury stock per share by dividing the treasury stock balance by the number of shares repurchased. True
False
37. The statement of stockholders' equity shows how each equity account changed during the year. True
False
38. The stockholders' equity section of the balance sheet shows how each equity account changed during the year. True
False
10-5 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
39. The return on equity measures the ability of company management to generate earnings from the resources that owners provide. True
False
40. We compute the return on equity ratio by dividing net income by ending stockholders' equity. True
False
41. Earnings per share (EPS) measures the net income earned per share of common stock outstanding. True
False
42. We calculate earnings per share as net income divided by the average shares outstanding during the period. True
False
43. Earnings per share is useful in comparing earnings performance across companies. True
False
44. We calculate the PE ratio as the stock price divided by earnings per share so that both stock price and earnings are expressed on a per share basis. True
False
Multiple Choice Questions
10-6 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
45. Which of the following accounts is not reported in the stockholders' equity section of the balance sheet?
A. Treasury Stock. B. Common Stock. C. Sales Revenue. D. Retained Earnings. 46. Which of the following is a disadvantage of an S Corporation?
A. Double Taxation B. Liability C. Restrictions on number of stockholders D. Inability to transfer ownership 47. Which of the following stages of equity financing comes last in the traditional order of progression?
A. Investment by friends and family of the founders. B. Investment by the founders of the business. C. Initial public offering (IPO). D. Outside investment by "angel" investors and venture capital firms. 48. Which of the following stages of equity financing comes first in the traditional order of progression?
A. Investment by friends and family of the founders. B. Initial Public Offering. C. Investment by the founders of the business. D. Outside investment by "angel" investors and venture capital firms.
10-7 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
49. In terms of total sales, assets, and earnings, the dominant form of business organization is a:
A. Sole proprietorship. B. Partnership. C. Corporation. D. Limited liability company (LLC). 50. Common stockholders usually have all of the following rights except:
A. To receive dividends when declared. B. To share in the distribution of assets. C. To elect board of directors. D. To participate in the day-to-day operations. 51. All publicly held corporations are regulated by what government organization?
A. The Financial Accounting Standards Board. B. The Commission on Accounting Procedures. C. The Accounting Principles Board. D. The Securities and Exchange Commission. 52. Which of the following is a reason that a corporation would prefer to issue stock instead of bonds?
A. Dividend payments can be deducted for income tax purposes but interest payments cannot. B. Expansion is accomplished without surrendering ownership control. C. The risk of going bankrupt is less. D. All of these.
10-8 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
53. Advantages of the corporate form that have led to the growth of this form of business ownership include all of the following except:
A. Ability to raise capital. B. Low government regulation. C. Limited liability. D. Ability to transfer ownership. 54. Advantages of the corporate form of business include which of the following? I. Double taxation II. Ability to raise capital III. Ability to transfer ownership IV. More paperwork V. Limited liability
A. II. B. II., III., V. C. I., II., III. D. II., IV., V. 55. Which of the following statements regarding the corporate form of business is correct?
A. The disadvantages are that generating capital is difficult and that owners have limited liability. B. Disadvantages are that the business is subject to government regulations and double taxation on its income. C. One disadvantage is that ownership is easy to transfer. D. All of these.
10-9 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
56. The disadvantages of the corporate form of business include:
A. Ability to transfer ownership. B. Additional taxes. C. Limited liability. D. Ability to raise capital. 57. The correct order from the smallest number of shares to the largest number of shares is:
A. Authorized, issued, and outstanding. B. Outstanding, issued, and authorized. C. Issued, outstanding, and authorized. D. Issued, authorized, and outstanding. 58. Authorized common stock refers to the total number of shares:
A. Outstanding. B. Issued. C. Issued and outstanding. D. That can be issued. 59. Issued stock refers to the number of shares:
A. Outstanding plus treasury shares. B. Authorized. C. In the hand of stockholders. D. That may be issued under state law.
10-10 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
60. Outstanding common stock refers to the total number of shares:
A. Issued. B. Issued plus treasury stock. C. Issued less treasury stock. D. Authorized. 61. Outstanding common stock specifically refers to:
A. Stock that is performing well. B. Stock that has been authorized for issuance. C. Stock issued plus treasury stock. D. Stock in the hands of stockholders. 62. The par value of shares issued is normally recorded in the:
A. Additional Paid-in Capital account. B. Common Stock account. C. Retained Earnings account. D. Treasury Stock account. 63. The par value of common stock represents:
A. The amount received when the stock was issued. B. The liquidation value of a share. C. The market value of a share of stock. D. The legal capital per share of stock assigned when the corporation was first established.
10-11 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
64. If a company issues 1,000 shares of $1 par value common stock for $20 per share, what would be the effect on the accounting equation?
A. Increase assets and increase liabilities. B. Increase assets and increase revenue. C. Increase assets and increase stockholders' equity. D. Increase assets and decrease stockholders' equity. 65. If a company issues 1,000 shares of $1 par value common stock for $20 per share, which of the following accounts would be credited?
A. Treasury Stock B. Cash C. Additional Paid-in Capital D. Retained Earnings 66. When a company issues 25,000 shares of $1 par value common stock for $10 per share, the journal entry for this issuance would include:
A. A debit to Cash for $25,000. B. A debit to Additional Paid-in Capital for $25,000. C. A credit to Common Stock for $250,000. D. A credit to Additional Paid-in Capital for $225,000. 67. Wright Inc. issued 20,000 shares of $1 par value common stock for $80,000. The journal entry to record this issuance includes a:
A. Credit to Common Stock for $80,000 B. Debit to Additional Paid-In Capital for $60,000 C. Credit to Cash for $80,000 D. Credit to Common Stock for $20,000
10-12 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
68. When a company issues 25,000 shares of $1 par value common stock for $10 per share, the journal entry for this issuance would include:
A. A debit to Cash for $25,000. B. A debit to Additional Paid-in Capital for $25,000. C. A credit to Additional Paid-in Capital for $250,000. D. A credit to Common Stock for $25,000. 69. Jade Jewelers issued 15,000 shares of $1 par value stock for $20 per share. What is true about the journal entry to record the issuance?
A. Credit Common Stock $300,000. B. Credit Cash $300,000. C. Credit Common Stock $15,000. D. Debit Additional Paid-In Capital $285,000. 70. South Beach Apparel issued 10,000 shares of $1 par value stock for $5 per share. What is true about the journal entry to record the issuance?
A. Debit Common Stock $10,000. B. Credit Cash $50,000. C. Credit Common Stock $50,000. D. Credit Additional Paid-In Capital $40,000. 71. Hayes Corporation issues 100 shares of its $1 par value common stock for $15 per share. The entry to record the issuance will not include a:
A. Debit to Cash $1,500. B. Credit to Additional Paid-In Capital $1,400. C. Credit to Common Stock of $100. D. All of these.
10-13 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
72. Preferred stock is called preferred because it usually has two preferences over common stock. These preferences relate to:
A. Dividends and voting rights. B. Par value and dividends. C. The preemptive right and voting rights. D. Dividends and distribution of assets if the corporation is dissolved. 73. Preferred stock:
A. Is always recorded as a liability. B. Is always recorded as part of stockholders' equity. C. Can have features of both liabilities and stockholders' equity. D. Is not included in either liabilities or stockholders' equity. 74. Which of the following has the highest expected return to the investor?
A. Common Stock. B. Preferred Stock. C. Bonds. D. They all have similar expected returns. 75. Which of the following has the lowest expected return to the investor?
A. Bonds. B. Preferred Stock. C. Common Stock. D. They all have similar expected returns.
10-14 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
76. Which of the following is the most likely to have voting rights?
A. Common Stock. B. Preferred Stock. C. Bonds. D. They all have similar voting rights. 77. Which of the following financing alternatives has the highest preference of payment in a case where the company liquidates its assets?
A. Common Stock. B. Preferred Stock. C. Bonds. D. They have equal preference. 78. Which of the following is not a potential feature of preferred stock?
A. Convertible. B. Redeemable. C. Cumulative. D. They all are potential features of preferred stock. 79. A company issued 1,000 shares of $1 par value preferred stock for $5 per share. What is true about the journal entry to record the issuance?
A. Debit Preferred Stock $5,000. B. Credit Cash $5,000. C. Credit Preferred Stock $5,000. D. Credit Additional Paid-In Capital $4,000.
10-15 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
80. The Surf's Up issues 1,000 shares of 6%, $100 par value preferred stock at the beginning of 2017. All remaining shares are common stock. The company was not able to pay dividends in 2017, but plans to pay dividends of $18,000 in 2018. Assuming the preferred stock is
cumulative, how much of the $18,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2018?
A. $6,000 to preferred stockholders and $12,000 to common stockholders. B. $18,000 to preferred stockholders and $0 to common stockholders. C. $12,000 to preferred stockholders and $6,000 to common stockholders. D. $9,000 to preferred stockholders and $9,000 to common stockholders. 81. The Surf's Up issues 1,000 shares of 6%, $100 par value preferred stock at the beginning of 2017. All remaining shares are common stock. The company was not able to pay dividends in 2017, but plans to pay dividends of $18,000 in 2018. Assuming the preferred stock is
noncumulative, how much of the $18,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2018?
A. $6,000 to preferred stockholders and $12,000 to common stockholders. B. $18,000 to preferred stockholders and $0 to common stockholders. C. $12,000 to preferred stockholders and $6,000 to common stockholders. D. $9,000 to preferred stockholders and $9,000 to common stockholders. 82. California Adventures issues 5,000 shares of 8%, $100 par value preferred stock at the beginning of 2017. All remaining shares are common stock. The company was not able to pay dividends in 2017, but plans to pay dividends of $100,000 in 2018. Assuming the preferred stock is cumulative, how much of the $100,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2018?
A. $40,000 to preferred stockholders and $60,000 to common stockholders. B. $80,000 to preferred stockholders and $20,000 to common stockholders. C. $20,000 to preferred stockholders and $80,000 to common stockholders. D. $100,000 to preferred stockholders and $0 to common stockholders.
10-16 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
83. California Adventures issues 5,000 shares of 8%, $100 par value preferred stock at the beginning of 2017. All remaining shares are common stock. The company was not able to pay dividends in 2017, but plans to pay dividends of $100,000 in 2018. Assuming the preferred stock is noncumulative, how much of the $100,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2018?
A. $40,000 to preferred stockholders and $60,000 to common stockholders. B. $80,000 to preferred stockholders and $20,000 to common stockholders. C. $20,000 to preferred stockholders and $80,000 to common stockholders. D. $100,000 to preferred stockholders and $0 to common stockholders. 84. Treasury Stock is normally reported as:
A. A reduction of total stockholders' equity. B. An asset account. C. A liability account. D. An expense account. 85. When treasury stock is resold at a price above cost:
A. A gain account is credited. B. A loss is reported. C. A revenue account is credited. D. Additional Paid-in Capital is increased. 86. When treasury stock is acquired, what is the effect on total stockholders' equity?
A. Decrease. B. Increase. C. No effect. D. Cannot tell from the given information.
10-17 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
87. When shares of another corporation are purchased, what is the effect on total stockholders' equity?
A. Decrease. B. Increase. C. No effect. D. Cannot tell from the given information. 88. When treasury stock is acquired, what is the effect on assets and stockholders' equity?
A. Assets and stockholders' equity increase. B. Assets and stockholders' equity decrease. C. Assets increase and stockholders' equity decrease. D. Assets decrease and stockholders' equity increase. 89. Treasury Stock:
A. Has a normal credit balance. B. Decreases stockholders' equity. C. Is recorded as an investment. D. Increases stockholders' equity. 90. Which of the following statements about treasury stock transactions is true?
A. Treasury stock is recorded as an asset by the acquiring company. B. Only losses on the sale of treasury stock are recorded on the income statement. C. Stockholders' equity is reduced when treasury stock is acquired. D. Gains and losses on the sale of treasury stock are recorded on the income statement.
10-18 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
91. Which of the following is TRUE regarding the accounting for treasury stock?
A. Treasury stock is reported on the balance sheet in the equity section. B. The purchase and sale of treasury stock has no impact on the income statement. C. Treasury stock represents a negative equity account. D. All of these. 92. What would be the impact on the accounting equation when a company acquires treasury stock?
A. Increase assets and increase stockholders' equity. B. Decrease assets and increase stockholders' equity. C. Decrease assets and decrease stockholders' equity. D. No effect on the accounting equation. 93. The corporation's own stock that has been issued and then repurchased by the company is referred to as:
A. Preferred Stock. B. Authorized Stock. C. Treasury Stock. D. Common Stock. 94. When treasury stock is resold at a gain, the difference between its cost and the cash received when resold:
A. Increases net income. B. Increases stockholders' equity. C. Has no effect on net income or stockholders' equity. D. Increases net income but decreases stockholders' equity.
10-19 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
95. Crossroads Mall had 100,000 outstanding shares of common stock. On June 16, 2018, Crossroads repurchased 20,000 shares of its own stock at $30 per share. On July 23, 2018, Crossroads resold 10,000 shares at $28 per share. What net effect did the repurchase and the resell of common stock have on the accounting equation?
A. Increase in assets and decrease in stockholders' equity. B. Decrease in assets and increase in stockholders' equity. C. Increase in assets and increase in stockholders' equity. D. Decrease in assets and decrease in stockholders' equity. 96. On December 2, Coley Corp. acquired 1,000 shares of its $2 par value common stock for $27 each. On December 20, Coley Corp. reissued 400 shares for $15 each. Which of the following is correct regarding the journal entry for the reissued shares?
A. Debit Cash $15,000. B. Credit Treasury Stock $10,800. C. Credit Additional Paid in Capital $5,200. D. Credit Treasury Stock $6,000. 97. On November 6, Coleman Corp. acquired 1,000 shares of its $2 par value common stock for $27 each. On November 20, Coleman Corp. reissued 400 shares for $30 each. Which of the following is correct regarding the effect of the journal entry for the reissued shares?
A. Assets decrease. B. Liabilities decrease. C. Expenses increase. D. Stockholders' Equity increases.
10-20 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
98. A company acquires 1,000 shares of its own $1 par common stock for $15 per share. This purchase would be recorded with a:
A. Credit to Treasury Stock for $1,000 B. Debit to Additional Paid-In Capital for $14,000 C. Credit to Treasury Stock for $15,000 D. Debit to Treasury Stock for $15,000 99. A company reissues 400 shares of its own common stock for $20 per share. The company had acquired these shares two months before for $15 per share. The reissuance of this stock would be recorded with a:
A. Credit to Treasury Stock for $8,000 B. Debit to Additional Paid-In Capital for $2,000 C. Debit to Common Stock for $8,000 D. Credit to Additional Paid-In Capital for $2,000 100.On February 22, Brett Corporation acquired 200 shares of its $5 par value common stock for $25 each. On March 15, the company reissued 70 shares for $30 each. What is true of the entry for reissuing the shares?
A. Credit Cash $1,750. B. Credit Additional Paid in Capital $350. C. Debit Treasury Stock $1,750. D. Credit Treasury Stock $2,100. 101.Retained Earnings represent a company's:
A. Net income less dividends since the company first began operations. B. Undistributed net assets. C. Extra paid-in capital. D. Undistributed cash.
10-21 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
102.The Retained Earnings balance reported on the balance sheet typically is not affected by:
A. Net income. B. Net loss. C. Dividends paid. D. Stock splits. 103.The Retained Earnings balance reported on the balance sheet typically is affected by:
A. Net income. B. Net loss. C. Dividends paid. D. All of the above. 104.The balance of Retained Earning at the end of the year represents:
A. Current year's profits less payments to owners. B. Total earnings less payments to owners over the life of the company. C. Total contributions from owners less withdrawals over the life of the company. D. Total earnings over the life of the company. 105.Retained Earnings:
A. Has a normal debit balance. B. Decreases stockholders' equity. C. Is equal to the balance in cash. D. Increases stockholders' equity.
10-22 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
106.Journal entries to record cash dividends are made on the:
A. Declaration date, record date, and payment date. B. Record date and payment date. C. Declaration date and payment date. D. Declaration date and record date. 107.On June 1, the board of directors declares a cash dividend to be paid on June 30 to shareholders of record on June 15. On which date would the company record a credit to the Dividends Payable account?
A. June 30 B. June 15 C. June 1 D. Dividends Payable is never credited
10-23 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
108.The board of directors of Capstone Inc. declared a $0.60 per share cash dividend on its $1 par common stock. On the date of declaration, there were 50,000 shares authorized, 20,000 shares issued, and 5,000 shares held as treasury stock. What is the entry when the dividends are declared? A.
Dividends
9,000
Dividends Payable B.
Dividends
9,000 9,000
Cash C.
Dividends
9,000 12,000
Dividends Payable D.
Dividends Cash
12,000 12,000 12,000
A. Option A B. Option B C. Option C D. Option D
10-24 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
109.The following amounts represent totals from the first three years of operations. Calculate the balance of Retained Earnings at the end of 2018. 2016
2017
2018
$1,200
-$500
$2,300
Net Cash Flows
$500
$300
$2,800
Dividends
$200
$0
$200
Issuance of
$2,000
$0
$0
Net Income
Stock
A. $2,600 B. $4,600 C. $3,100 D. $3,500
10-25 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
110.The board of directors of Capstone Inc. declared a $0.60 per share cash dividend on its $1 par common stock. On the date of declaration, there were 50,000 shares authorized, 20,000 shares issued, and 5,000 shares held as treasury stock. Assuming the dividends were declared on June 1, what is the entry on June 30 to record the payment of cash dividends? A.
Dividends
9,000
Dividends Payable B.
Dividends Payable
9,000 9,000
Cash C.
Dividends
9,000 12,000
Dividends Payable D.
Dividends Payable Cash
12,000 12,000 12,000
A. Option A B. Option B C. Option C D. Option D 111.The ending Retained Earnings balance of Lambert Inc. increased by $1.5 million from the beginning of the year. The company's net income earned during the year is $3.5 million. What is the amount of dividends Lambert Inc. declared and paid?
A. $1.5 million. B. $3.5 million. C. $2.0 million. D. $5.0 million.
10-26 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
112.Over the first four years of the company's life, the company earned the following net income (loss): $6,000; $3,000; $6,000, and ($2,000). If the company's ending retained earnings is $10,000 after year 4, what is the average amount of dividends paid per year?
A. $3,000. B. $7,000. C. $0. D. $750. 113.Fashion, Inc. had a Retained Earnings balance of $12,000 at December 31, 2018. The company had an average income of $7,500 over the next 3 years, and an ending Retained Earnings balance of $15,000 at December 31, 2019. What was the total amount of dividends paid over the last three years?
A. $4,500. B. $6,500. C. $19,500. D. $27,000. 114.Both cash dividends and stock dividends:
A. Reduce total assets. B. Reduce total liabilities. C. Reduce total stockholders' equity. D. Reduce retained earnings. 115.The declaration and issuance of a stock dividend:
A. Does not change total assets, liabilities, or total stockholders' equity. B. Decreases total stockholders' equity and increases common stock. C. Decreases assets and decreases total stockholders' equity. D. Does not change retained earnings or paid-in capital.
10-27 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
116.The issuer of a 100% common stock dividend (large stock dividend) to common stockholders should debit stock dividends for an amount equal to the
A. Book value of the shares issued. B. Par value of the shares issued. C. Market value of the shares issued. D. Minimum legal requirements. 117.The issuer of a 100% common stock dividend (large stock dividend) to common stockholders should credit common stock for an amount equal to the
A. Book value of the shares issued. B. Par value of the shares issued. C. Market value of the shares issued. D. Minimum legal requirements. 118.The issuer of a 5% common stock dividend (small stock dividend) to common stockholders should debit stock dividends for an amount equal to the
A. Book value of the shares issued. B. Par or stated value of the shares issued. C. Market value of the shares issued. D. Minimum legal requirements. 119.The entry to record a large stock dividend would include a:
A. Debit to Additional Paid-in Capital B. Debit to Common Stock C. Debit to Stock Dividends D. Credit to Stock Dividends
10-28 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
120.The issuer of a 5% common stock dividend (small stock dividend) to common stockholders should credit common stock for an amount equal to the
A. Book value of the shares issued. B. Par or stated value of the shares issued. C. Market value of the shares issued. D. Minimum legal requirements. 121.A feature common to both stock splits and stock dividends is
A. That there is no effect on total stockholders' equity. B. A reduction in the contributed capital of a corporation. C. A transfer to earned capital of a corporation. D. An increase in total liabilities of a corporation. 122.Large stock dividends and stock splits are issued primarily to:
A. Lower the trading price of the stock per share. B. Increase the number of authorized shares. C. Increase legal capital. D. Increase the number of outstanding shares. 123.The Common Stock account on a company's balance sheet is measured as:
A. The number of common shares outstanding × the stock's par value per share. B. The number of common shares outstanding × the stock's current market value per share. C. The number of common shares issued × the stock's par value per share. D. The number of common shares issued × the stock's current market value per share.
10-29 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
124.The stockholders' equity section in the balance sheet shows:
A. The ending balance in each stockholders' equity account. B. How each equity account changed over time. C. The average balance in each stockholders' equity account. D. More information than the statement of stockholders' equity. 125.The statement of stockholders' equity shows:
A. Only the ending balance in each stockholders' equity account. B. How each equity account changed over time. C. Only the beginning balance in each stockholders' equity account. D. Less information than the stockholders' equity section in the balance sheet. 126.The statement of stockholders' equity shows:
A. Only the ending balance in each stockholders' equity account. B. More information than the stockholders' equity section in the balance sheet. C. Only the beginning balance in each stockholders' equity account. D. Less information than the stockholders' equity section in the balance sheet. 127.How does the stockholders' equity section in the balance sheet differ from the statement of stockholders' equity?
A. The stockholders' equity section is more detailed than the statement of stockholders' equity. B. The stockholders' equity section shows balances at a point in time, whereas the statement of stockholders' equity shows activity over a period of time. C. The stockholders' equity section shows activity over a period of time, whereas the statement of stockholders' equity is at a point time. D. There are no differences between them.
10-30 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
128.Clothing Emporium was organized on January 1, 2018. The firm was authorized to issue 100,000 shares of $5 par value common stock. During 2018, Clothing Emporium had the following transactions relating to shareholders' equity: Issued 30,000 shares of common stock at $7 per share. Issued 20,000 shares of common stock at $8 per share. Reported a net income of $100,000. Paid dividends of $50,000. What is the total stockholders' equity at the end of 2018?
A. $420,000. B. $370,000. C. $470,000. D. $250,000. 129.Clothing Emporium was organized on January 1, 2018. The firm was authorized to issue 100,000 shares of $5 par value common stock. During 2018, Clothing Emporium had the following transactions relating to shareholders' equity: Issued 30,000 shares of common stock at $7 per share. Issued 20,000 shares of common stock at $8 per share. Reported a net income of $100,000. Paid dividends of $50,000. What is the ending balance in the Retained Earnings account at the end of 2018?
A. $50,000. B. $370,000. C. $420,000. D. $100,000.
10-31 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
130.Clothing Emporium was organized on January 1, 2018. The firm was authorized to issue 100,000 shares of $5 par value common stock. During 2018, Clothing Emporium had the following transactions relating to shareholders' equity: Issued 30,000 shares of common stock at $7 per share. Issued 20,000 shares of common stock at $8 per share. Reported a net income of $100,000. Paid dividends of $50,000. What is the total amount recorded in the Common Stock account at the end of 2018?
A. $420,000. B. $370,000. C. $470,000. D. $250,000. 131.Clothing Emporium was organized on January 1, 2018. The firm was authorized to issue 100,000 shares of $5 par value common stock. During 2018, Clothing Emporium had the following transactions relating to shareholders' equity: Issued 30,000 shares of common stock at $7 per share. Issued 20,000 shares of common stock at $8 per share. Reported a net income of $100,000. Paid dividends of $50,000. What is total paid-in capital at the end of 2018?
A. $420,000. B. $370,000. C. $470,000. D. $320,000.
10-32 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
132.Roberto Designers was organized on January 1, 2018. The firm was authorized to issue 100,000 shares of $5 par value common stock. During 2018, Roberto had the following transactions relating to stockholders' equity: Issued 10,000 shares of common stock at $7 per share. Issued 20,000 shares of common stock at $8 per share. Reported a net income of $100,000. Paid dividends of $50,000. Purchased 3,000 shares of treasury stock at $10 (part of the 20,000 shares issued at $8). What is total stockholders' equity at the end of 2018?
A. $270,000. B. $300,000. C. $250,000. D. $200,000. 133.Roberto Designers was organized on January 1, 2018. The firm was authorized to issue 100,000 shares of $5 par value common stock. During 2018, Roberto had the following transactions relating to stockholders' equity: Issued 10,000 shares of common stock at $7 per share. Issued 20,000 shares of common stock at $8 per share. Reported a net income of $100,000. Paid dividends of $50,000. Purchased 3,000 shares of treasury stock at $10 (part of the 20,000 shares issued at $8). What is the balance in the Treasury Stock account at the end of 2018?
A. $160,000. B. $260,000. C. $30,000. D. $250,000.
10-33 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
134.The balance sheet of California Clothing reports total equity of $600,000 and $700,000 at the beginning and end of the year, respectively. Net income and sales for the year are $65,000 and $1,300,000, respectively. What is California Clothing's return on equity?
A. 10%. B. 20%. C. 200%. D. 5%. 135.California Clothing reports net income and sales for the year of $65,000 and $1,300,000, respectively. Return on equity is 10%. What is California Clothing's average Stockholders' Equity for the year?
A. $650,000 B. $13,000,000 C. $682,500 D. 5% 136.The balance sheet of Sand Sportswear reports total equity of $500,000 and $650,000 at the beginning and end of the year, respectively. The return on equity for the year is 20%. What is Sand Sportswear's net income for the year?
A. $100,000. B. $130,000. C. $2,875,000. D. $115,000. 137.Dividend Yield is calculated as:
A. Dividends per share divided by the stock price. B. Net income divided by average stockholders' equity. C. The stock price divided by dividends per share. D. Dividends divided by stockholders' equity.
10-34 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
138.Beach Boards reports dividends per share of $1.40 and net income for the year of $150,000. The current stock price is $40.00. What is Beach Boards' dividend yield?
A. 1.2% B. 26.7% C. 4.0% D. 3.5% 139.Beach Boards reports dividends per share of $1.40 and net income for the year of $150,000. Dividend yield is 3.5%. What is Beach Boards' current stock price?
A. $23.82 B. $15.00 C. $35.00 D. $40.00 140.Financial information for Accessories Unlimited includes the following selected data: Dividends (in millions)
$75
Shares outstanding (in millions)
300
Stock price
$20.00
What is the company's dividend yield?
A. 1.25% B. 10.0% C. 5.0% D. 2.5%
10-35 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
141.Financial information for Accessories Unlimited includes the following selected data: Net income (in millions)
$150
Shares outstanding (in millions)
300
Stock price
$20.00
What is the company's earnings per share?
A. $0.50. B. $0.25. C. $2.00. D. $0.05. 142.Financial information for Accessories Unlimited includes the following selected data: Net income (in millions)
$150
Shares outstanding (in millions)
300
Stock price
$20.00
What is the company's price-earnings ratio?
A. 20.0. B. 40.0. C. 60.0. D. 80.0. 143.Return on equity is calculated as:
A. Net income divided by average stockholders' equity. B. Net income divided by ending stockholders' equity. C. Net income divided by average market value of equity. D. Net income divided by ending market value of equity.
10-36 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
144.Why doesn't stockholders' equity equal the market value of equity?
A. Stockholders' equity usually does equal the market value of equity. B. Investors tend to incorrectly price the market value of equity. C. It's related to the use of historical cost to report many long-term assets and the expensing of value generating costs such as research and development and advertising. D. It's due to incorrect entries prepared by accountants. 145.Earnings per share (EPS)
A. Is useful in comparing earnings performance across companies. B. Is useful in comparing earnings performance for the same company over time. C. Is useful in both comparing earnings performance across companies and in comparing earnings performance for the same company over time. D. Is not useful in comparing earnings performance across companies or in comparing earnings performance for the same company over time. 146.Which of the following statements is not true regarding earnings per share?
A. Earnings per share is useful in comparing earnings performance across companies at the same point in time. B. Earnings per share is useful in comparing earnings performance for the same company over time. C. Earnings per share is calculated as net income minus dividends on preferred stock all divided by the average number of common shares outstanding. D. Earnings per share is forecasted by financial analysts.
10-37 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
147.Financial information for Retro Designs includes the following selected data: Net income (in millions)
$175
Preferred stock dividends (in millions)
$25
Common shares outstanding (in millions)
250
Stock price
$10.00
What is the company's earnings per share?
A. $0.60. B. $0.70. C. $0.50. D. $0.05. 148.Financial information for Retro Designs includes the following selected data: Net income (in millions)
$175
Preferred stock dividends (in millions)
$25
Common shares outstanding (in millions)
250
Stock price
$10.00
What is the company's price-earnings ratio?
A. 14.3. B. 16.7. C. 5.7. D. 15.0.
10-38 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
149.The PE ratio:
A. Tends to be higher for growth stocks. B. Tends to be higher for value stocks. C. Indicates how a stock is trading in relation to cumulative earnings over the life of the company. D. Typically is less than 1.
Matching Questions
150.Match the following
1. Articles of
Provide additional financing, often in the millions, for a
Incorporation
percentage ownership in the company.
2. Limited liability company 3. Publicly held corporation
____
Allows for legal treatment as a corporation, but tax treatment as a partnership.
____
Like an S corporation, but there are no limitations on the number of owners as in an S corporation.
____
Wealthy individuals willing to risk investment funds on a 4. Angel investors
promising business venture.
____
Has stock traded on a stock exchange such as the New York 5. Limited liability
Stock Exchange (NYSE).
____
Corporate earnings are taxed twice - at the corporate level 6. Double taxation
and individual stockholder level.
____
Describe (a) the nature of the firm's business activities, (b) the shares to be issued, and (c) the composition of the initial 7. S Corporation
board of directors.
8. Venture capital
Stockholders can lose no more than the amount they invest in
firms
the company.
____ ____
10-39 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
151.Match the following
Wealthy individuals willing to risk investment funds on a 1. Angel investors
promising business venture.
____
The amount invested by stockholders.
____
Shares actually sold.
____
Shares available to sell.
____
2. Retained earnings 3. Authorized stock 4. Limited liability 5. Outstanding stock
Shares can be returned to the corporation at a predetermined price.
____
Shares receive priority for future dividends, if dividends are 6. Redeemable
not paid in a given year.
____
7. Cumulative
The earnings not paid out in dividends.
____
Shareholders can lose no more than the amount they invested 8. Paid-in capital
in the company.
____
9. Treasury stock
The corporation's own stock that it acquired.
____
10. Issued stock
Shares held by investors.
____
10-40 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
152.Match the following
Provide additional financing, often in the millions, for a 1. Organization chart
percentage ownership in the company.
2. Additional paid-in
A mixture of attributes somewhere between common
capital
stock and bonds payable.
____ ____
Summarizes the changes in the balance in each 3. Retained earnings
stockholders' equity account over a period of time.
____
Traces the line of authority for a typical corporation.
____
The portion of the cash proceeds above par value.
____
4. Statement of stockholders' equity 5. Venture capital firms
A large stock dividend recorded as a reduction in the par 6. Dividends
or stated value per share.
____
Represents all net income, less all dividends, since the 7. Stock split 8. Preferred stock
company began.
____
Distributions by a corporation to its stockholders.
____
9. Articles of
Additional shares of the companies' own stock given to
incorporation
stockholders.
____
Describes the nature of the firm's business activities, the shares to be issued, and the composition of the initial 10. Stock dividends
board of directors.
____
1. Redeemable
Shares can be exchanged for common stock.
____
2. Cumulative
Shares can be sold at a predetermined price.
____
3. Convertible
Shares receive dividend priority, if dividend not paid.
____
153.Match the following
10-41 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
154.Match the following
Summarizes the changes in the balance in each 1. Return on equity
stockholders' equity account over a period of time.
____
The corporation's own stock that it acquired.
____
Priced low in relation to current earnings.
____
The earnings not paid out in dividends.
____
The stock price divided by earnings per share.
____
2. Statement of stockholders' equity 3. Stockholders' equity section of the balance sheet 4. Retained earnings 5. Treasury stock
Shows the balance in each equity account at a point 6. Accumulated deficit
in time.
____
Measures the ability of company management to generate earnings from the resources that owners 7. 100% stock dividend
provide.
____
Priced high in relation to current earnings as investors 8. Growth stocks 9. PE ratio 10. Value stocks
expect future earnings to be higher.
____
Effectively the same as a 2-for-1 stock split.
____
A debit balance in retained earnings.
____
Essay Questions
10-42 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
155.The Shoe Exchange issues 5,000 shares of its $1 par value common stock to provide funds for further expansion. If the issue price is $15 per share, what is the entry to record the issuance of the stock?
156.Environmental Designs issues 10,000 shares of its $1 par value common stock at $25 per share. (1) Record the issuance of the stock. (2) Record the issuance of the stock assuming it is no-par value stock.
10-43 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
157.Diane's Designs has two classes of stock authorized: 8%, $10 par preferred and $1 par value common. The following transactions affect stockholders' equity during 2018, its first year of operations: January 1
Issue 200,000 shares of common stock for $15 per share.
February 6
Issue 1,000 shares of preferred stock for $11 per share.
October 10
Repurchase 10,000 shares of its own common stock for $18 per share.
November 12 Reissue 5,000 shares of treasury stock at $20 per share.
Record each of these transactions.
10-44 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
158.Northwest Clothing Supply has the following transactions during the year related to stockholders' equity: January 1
Issues 3,000 shares of no-par value common stock for $20 per share.
March 15
Issues 800 shares of $20 par value preferred stock for $22 per share.
December 1 Declares a cash dividend of $1 per share to all stockholders of record (both common and preferred) on December 15. December
Date of record.
15 December
Pays the cash dividend declared on December 1.
31
Record each of these transactions.
159.Oregon Outfitters issues 1,000 shares of $1 par value common stock at $20 per share. Later in the year, the company decides to repurchase 200 shares at a cost of $22 per share. (1) Record the original issue of the 1,000 shares, (2) Record the repurchase of 200 shares, and (3) record the entry if Oregon Outfitters reissues the 200 shares of treasury stock at $25 per share.
10-45 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
160.Court Casuals has 100,000 shares of common stock outstanding as of the beginning of the year and has the following transactions affecting stockholders' equity during the year. May 18
Issues 25,000 additional shares of $1 par value common stock for $40 per share.
May 31
Repurchases 5,000 shares of treasury stock for $45 per share.
July 1
Declares a cash dividend of $1 per share to all stockholders of record on July 15. Hint: Dividends are not paid on treasury stock.
July 31
Pays the cash dividend declared on July 1.
August
Reissues 2,500 shares of treasury stock purchased on May 31 for $46 per share.
10
Record each of these transactions.
161.Tropical Rainwear issues 1,000 shares of its $20 par value preferred stock for cash at $22 per share. Record the issuance of the preferred shares.
10-46 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
162.Desert Apparel has 5,000 shares of common stock outstanding. On April 1, the company declares a $2 per share dividend to stockholders of record on April 15. The dividend is paid on April 30. Record all necessary entries on the appropriate dates for cash dividends.
163.On May 15, Canadian Falcon declares a quarterly cash dividend of $0.15 per share payable on June 10 to all stockholders of record on May 31. Record Canadian Falcon's declaration and payment of cash dividends for its 200,000 shares of common stock.
164.On March 31, the board of directors of Shoeboxes, Inc. declares a 100% stock dividend on its 100,000, $0.01 par value, common shares. The market price of Shoeboxes common stock is $30 on March 31. Record the stock dividend.
10-47 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
165.Indicate whether each of the following transactions increases (+), decreases (-), or has no effect (NE) on total assets, total liabilities, and total stockholders' equity. Transaction
Total Assets Total Liabilities Total Stockholders’ Equity
Issue common stock Issue preferred stock Purchase treasury stock Sale of treasury stock
10-48 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
166.Indicate whether each of the following transactions increases (+), decreases (-), or has no effect (NE) on total assets, total liabilities, and total stockholders' equity. Transaction
Total Assets Total Liabilities Total Stockholders’ Equity
Issue common stock Issue preferred stock Repurchase treasury stock Sale of treasury stock Declare cash dividend Pay cash dividend 100% stock dividend 2-for-1 stock split
167.Prom Night Formal Wear has the following stockholders' equity accounts at December 31, 2018: Common Stock, $1 par value, 2,000,000 shares; Additional Paid-in Capital, $22 million; Retained Earnings, $15 million; and Treasury Stock, 50,000 shares, $1.25 million. Prepare the stockholders' equity section of the balance sheet.
10-49 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
168.Donnie Hilfiger has the following balances in its stockholders' equity accounts on December 31, 2018: Treasury Stock, $375,000; Common Stock, $350,000; Preferred Stock, $1,200,000; Retained Earnings, $1,675,000; and Additional Paid-in Capital, $3,150,000. Prepare the stockholders' equity section of the balance sheet for Donnie Hilfiger as of December 31, 2018.
10-50 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
169.Court Casuals has the following beginning balances in its stockholders' equity accounts on January 1, 2018: Common Stock, $100,000; Additional Paid-in Capital, $4,100,000; and Retained Earnings, $3,000,000. Net income for the year ended December 31, 2018, is $800,000. Court Casuals has the following transactions affecting stockholders' equity in 2018: May 18
Issues 25,000 additional shares of $1 par value common stock for $40 per share.
May 31
Repurchases 5,000 shares of treasury stock for $45 per share.
July 1
Declares a cash dividend of $1 per share to all stockholders of record on July 15. Hint: Dividends are not paid on treasury stock.
July 31
Pays the cash dividend declared on July 1.
August
Reissues 2,500 shares of treasury stock purchased on May 31 for $48 per share.
10
Taking into consideration all the entries described above, prepare the statement of stockholders' equity for the year ended December 31, 2018, using the format provided. Court Casuals Statement of Stockholders’ Equity For the year ended December 31, 2018 Common Stock
Additional
Retained
Treasury
Total
Paid-in
Earnings
Stock
Stockholders’
Capital Balance,
$100,000
4,100,000
Equity 3,000,000
-0-
$7,200,000
January 1 Issued common stock Repurchased treasury stock Cash dividends Sold treasury stock Net income Balance, December 31
10-51 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
170.The financial statements of Heatwave Athletic Wear include the following selected data ($ in millions): Sales, $22,502; Net income $875; Beginning stockholders' equity $3,567; Ending stockholders' equity, $4,102. Calculate the return on equity.
10-52 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
171.The financial statements of Trail Apparel include the following selected data (in millions): ($ in thousands) Sales
2018
2017
$728,121 $751,558
Net income
16,012
13,626
Stockholders’ equity, end of year
235,153 221,457
Shares outstanding (in thousands)
45,000
-
Average stock price
$5.40
-
1. Calculate the return on equity for 2018. 2. Calculate the price-earnings ratio for 2018.
10-53 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
172.Match (by letter) the following terms with their definitions. Each letter is used only once. Terms _____ 1. 100% stock dividend _____2. Statement of stockholders’ equity _____3. Treasury stock _____4. Value stocks _____5. PE ratio _____6. Stockholders’ equity section of the balance sheet _____7. Return on equity _____ 8. Retained earnings _____ 9. Accumulated deficit _____10. Growth stocks
Definitions a. Summarizes the changes in the balance in each stockholders' equity account over a
period of time. b. Priced low in relation to current earnings. c. Measures the ability of company management to generate earnings from the resources that owners provide. d. Shows the balance in each equity account at a point in time. e. The corporation's own stock that it reacquired. f. A debit balance in retained earnings. g. Priced high in relation to current earnings as investors expect future earnings to be higher. h. Effectively the same as a 2-for-1 stock split. i. The earnings not paid out in dividends. j. The stock price divided by earnings per share.
10-54 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
173.Sweet Sixteen has two classes of stock authorized: $100 par value preferred and $1 par value common. As of the beginning of 2018, 1,000 shares of preferred stock have been issued and 20,000 shares of common stock have been issued. The following transactions affect stockholders' equity during 2018: March 1
Issue 3,000 additional shares of common stock for $22 per share.
April 1
Issue 5,000 additional shares of preferred stock for $110 per share.
June 1
Declare a cash dividend on common stock of $1 per share and a cash dividend on preferred stock of $5 per share to all stockholders of record on June 15.
June 30
Pay the cash dividends declared on June 1.
August 1
Purchase 2,000 shares of common treasury stock for $18 per share.
October 1
Reissue 1,000 shares of treasury stock purchased on August 1 for $20 per share.
Required:
1. Record each of these transactions. 2. Indicate whether each of these transactions would increase (+), decrease (-), or have no effect (NE) on total assets, total liabilities, and total stockholders' equity by completing the following chart.
Total Stockholders’ Transaction
Total Assets
Total Liabilities
Equity
Issue common stock Issue preferred stock Declare cash dividends Pay cash dividends 10-55 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Purchase treasury stock Reissue treasury stock
10-56 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
174.Hoop It Up has two classes of stock authorized: 7%, $20 par value preferred and $1 par value common. The following transactions affect stockholders' equity during 2018, its first year of operations: February 2 Issue 1 million shares of common stock for $20 per share. February 4 Issue 50,000 shares of preferred stock for $21 per share. June 15 Purchase 100,000 shares of its own common stock for $18 per share. August 15 Reissue 75,000 shares of treasury stock for $23 per share. November 1 Declare a cash dividend on its common stock of $1 per share and a $70,000 (7% of par value) cash dividend on its preferred stock payable to all stockholders on record on November 15. Hint: Dividends are not paid on treasury stock. November Pay the dividends declared on November 1. 30
Required: 1. Record each of these transactions. 2. Prepare the stockholders' equity section of the balance sheet as of December 31, 2018. Net income for the year was $3,200,000.
10-57 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
175.Brooks Brothers has done very well the past year and its stock price is now trading over $100 per share. Management is considering either a 100% stock dividend or a 2-for-1 stock split. Required: Complete the following chart comparing the effects of a 100% stock dividend versus a 2-for1 stock split on the stockholders' equity accounts, shares outstanding, par value, and share price. Before
After 100%
After 2-for-1
Stock
Stock Split
Dividend Common stock, $1 par value
$10,000
Additional paid-in capital
250,000
Total paid-in capital
260,000
Retained earnings
150,000
Total stockholders’ equity
$410,000
Shares outstanding
10,000
Par value per share
$1
Share price
$102
What is the primary reason companies declare a large stock dividend or a stock split?
10-58 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
176.The stockholders' equity section of University Fashions is presented here. University Fashions Balance Sheet (Stockholders’ Equity Section) ($ in thousands) Stockholders’ equity: Preferred stock, $50 par value
$50,000
Common stock, $5 par value
$25,000
Additional paid-in capital
120,000
Total paid-in capital
195,000
Retained earnings
140,000
Treasury stock
(20,900)
Total stockholders’ equity
$314,100
Required: Based on the stockholders' equity section of University Fashions, answer the following questions. Remember that all amounts are presented in thousands. 1. How many shares of preferred stock have been issued? 2. How many shares of common stock have been issued? 3. Assuming the preferred shares were issued at par value, at what average price per share were the common shares issued? 4. If retained earnings at the beginning of the period was $120 million and net income during the year was $30 million, how much was paid in dividends for the year? 5. If the treasury stock was reacquired at $20 per share, how many shares were reacquired?
10-59 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
177.Sweet Sixteen has the following beginning balances in its stockholders' equity accounts on January 1, 2018: preferred stock, $100,000, common stock, $20,000; paid-in capital, $380,000; and retained earnings, $450,000. Net income for the year ended December 31, 2018, is $65,000. The following transactions affect stockholders' equity during 2018: March 1
Issue 3,000 additional shares of common stock for $22 per share.
April 1
Issue 5,000 additional shares of preferred stock for $110 per share.
June 1
Declare a cash dividend on common stock of $1 per share and a cash dividend on preferred stock of $5 per share to all stockholders of record on June 15.
June 30
Pay the cash dividends declared on June 1.
August 1
Purchase 2,000 shares of common treasury stock for $18 per share.
October 1
Reissue 1,000 shares of treasury stock purchased on August 1 for $20 per share.
Required: Taking into consideration the beginning balances and all the transactions during 2018, respond to the following for Sweet Sixteen: 1. Prepare the statement of stockholders' equity for the year ended December 31, 2018. 2. Prepare the stockholders' equity section of the balance sheet as of December 31, 2018. 3. Explain how requirements 1 and 2 are similar and how they are different.
10-60 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
178.Selected financial data is provided as follows: ($ in millions)
2018
2017
2016
$14,526
$15,763
$15,943
Net income
967
833
778
Total assets
$7,564
$7,838
$8,544
Total liabilities
$3,177
$3,564
$3,370
Stockholders’ equity
4,387
4,274
5,174
$7,564
$7,838
$8,544
694
791
816
$16
$19
$18
Sales
Total liabilities and stockholders’ equity Average shares outstanding (in millions) Average stock price
Required: 1. Calculate the return on equity for 2018. How does it compare with the return on equity for 2017? 2. Calculate the price-earnings ratio for 2018. How does it compare with the price-earnings ratio for 2017? Is the company trading at a higher or lower price per dollar of earnings in 2018?
10-61 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
179.Corporations typically do not start raising capital by issuing stock to the general public. What are the common stages of equity financing leading to an initial public offering (IPO)?
180.Describe the primary advantages and disadvantages of a corporation in comparison to a sole-proprietorship or partnership.
181.Explain the difference between authorized, issued, and outstanding shares.
10-62 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
182.Explain why preferred stock often is said to have a mixture of attributes somewhere between common stock and bonds.
183.Contrast the effects of a cash dividend and a stock dividend on total assets, total liabilities, and total stockholders' equity.
10-63 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 10 Stockholders' Equity Answer Key
True / False Questions
1.
Assets plus liabilities equal stockholders' equity. FALSE Assets equal liabilities plus stockholders' equity.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Topic: Corporations
2.
Paid-in Capital is the amount stockholders have invested in the company. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Topic: Corporations
3.
Retained Earnings is the amount stockholders have invested in the company. FALSE Paid-in capital is the amount stockholders have invested in the company.
AACSB: Reflective Thinking AICPA: FN Measurement
10-64 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Topic: Corporations
4.
Angel investors are investors that focus on companies at or near bankruptcy. FALSE Angel investors are wealthy individuals in the business community willing to risk investment funds on a promising business venture.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Topic: Corporations
5.
All publicly held corporations in the United States are regulated by the Securities and Exchange Commission. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Topic: Corporations
6.
Limited liability means that even in the event of bankruptcy, stockholders in a corporation can lose no more than the amount they invested in the company. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember 10-65 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 1 Easy Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Topic: Corporations
7.
Owners in a sole proprietorship or a partnership can be held personally liable for debts the company has incurred, over and beyond the investment they have made. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Topic: Corporations
8.
A corporation has limited liability and attracting outside investment is easier relative to sole-proprietorships and partnerships. TRUE Two advantages of a corporation relative to sole-proprietorships and partnerships are (1) limited liability and (2) the ability to raise capital and transfer ownership.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Topic: Corporations
10-66 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
9.
A corporation has lower taxes and less paperwork relative to sole-proprietorships and partnerships. FALSE A corporation has higher taxes and more paperwork relative to sole-proprietorships and partnerships.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Topic: Corporations
10.
An S Corporation allows a company to enjoy limited liability as a corporation, but tax treatment as a partnership. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Topic: Corporations
11.
Authorized stock is the number of shares that have been sold to investors. FALSE Authorized stock is the total number of shares available to sell, stated in the company's articles of incorporation. Issued stock is the number of shares that have been sold to investors.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember
10-67 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 1 Easy Learning Objective: 10-02 Record the issuance of common stock. Topic: Common Stock
12.
Outstanding stock is the number of shares held by investors. TRUE Issued stock is the number of shares that have been sold to investors. Outstanding stock is the number of shares held by investors. Issued stock includes treasury stock. Outstanding stock excludes treasury stock.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-02 Record the issuance of common stock. Topic: Common Stock
13.
Par value is the legal capital per share of stock that's assigned when the corporation is first established. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-02 Record the issuance of common stock. Topic: Common Stock
14.
Par value has a direct relationship to the market value of the common stock. FALSE Par value is the legal capital per share of stock that's assigned when the corporation is first established. Par value has no relationship to the market value of the common stock.
AACSB: Reflective Thinking AICPA: BB Critical Thinking 10-68 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-02 Record the issuance of common stock. Topic: Common Stock
15.
A company credits Additional Paid-in Capital for the portion of the cash proceeds above par value received for the issuance of stock. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-02 Record the issuance of common stock. Topic: Common Stock
16.
The number of shares outstanding is equal to the number of shares issued minus the number of shares repurchased. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-02 Record the issuance of common stock.
Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Topic: Common Stock Topic: Stockholders' Equity in the Balance Sheet
10-69 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
17.
In the event a corporation is dissolved, common stockholders receive preference over preferred stockholders in the distribution of assets. FALSE Preferred stockholders receive preference over common stockholders in the distribution of assets in the event the corporation is dissolved.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-03 Contrast preferred stock with common stock and bonds payable. Topic: Preferred Stock
18.
Convertible preferred stock allows the stockholder to convert shares of preferred stock into common stock at a specified conversion ratio. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-03 Contrast preferred stock with common stock and bonds payable. Topic: Preferred Stock
19.
Cumulative preferred stock means that dividends accumulate interest during the year. FALSE Cumulative preferred stock means shares receive priority for future dividends, if dividends are not paid in a given year.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-03 Contrast preferred stock with common stock and bonds payable. 10-70 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Preferred Stock
20.
We usually record preferred stock as equity and report it in the stockholders' equity section of the balance sheet just above common stock. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-03 Contrast preferred stock with common stock and bonds payable.
Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Topic: Preferred Stock Topic: Stockholders' Equity in the Balance Sheet
21.
Treasury stock is the repurchase of a company's own issued stock. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-04 Account for treasury stock. Topic: Treasury Stock
22.
If a company purchases shares of another company, it records this transaction as treasury stock. FALSE If a company purchases shares of another company, it records this transaction as an investment and not as treasury stock.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium 10-71 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 10-04 Account for treasury stock. Topic: Treasury Stock
23.
Stock repurchases reduce the number of shares outstanding, thereby increasing earnings per share. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-04 Account for treasury stock. Topic: Treasury Stock
24.
We record treasury stock at the cost of the shares acquired. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-04 Account for treasury stock. Topic: Treasury Stock
25.
Treasury stock is a contra-equity account because treasury stock increases total stockholders' equity. FALSE Treasury stock is a contra-equity account because treasury stock decreases total stockholders' equity.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-04 Account for treasury stock. Topic: Treasury Stock 10-72 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
26.
When we reissue treasury stock, we report the difference between its cost and the cash received as an increase/decrease in additional paid-in capital. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-04 Account for treasury stock. Topic: Treasury Stock
27.
Retained earnings represent the earnings retained in the corporation - earnings not paid out as dividends to stockholders. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-05 Describe retained earnings and record cash dividends. Topic: Earned Capital
28.
The amount of retained earnings equals net income minus dividends for the current year. FALSE The amount of retained earnings equals all net income, less all dividends, since the company began operations.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-05 Describe retained earnings and record cash dividends. Topic: Earned Capital
10-73 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
29.
If a company has expenses that are more than revenues, the net loss decreases retained earnings. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-05 Describe retained earnings and record cash dividends. Topic: Earned Capital
30.
Dividends are paid on all shares issued by the company including treasury stock. FALSE Dividends are not paid on treasury shares repurchased by the company.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-05 Describe retained earnings and record cash dividends. Topic: Earned Capital
31.
Total assets, total liabilities, and total stockholders' equity do not change as a result of a stock dividend. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-06 Explain the effect of stock dividends and stock splits. Topic: Stock Dividends and Stock Splits
10-74 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
32.
Small stock dividends are recorded by debiting Retained Earnings for the par value per share. FALSE Small stock dividends are recorded by debiting Retained Earnings for the market value, rather than the par value, per share.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-06 Explain the effect of stock dividends and stock splits. Topic: Stock Dividends and Stock Splits
33.
No journal entry is made to record a stock split. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-06 Explain the effect of stock dividends and stock splits. Topic: Stock Dividends and Stock Splits
34.
A stock split has no effect on the total of any account in stockholders' equity. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-06 Explain the effect of stock dividends and stock splits. Topic: Stock Dividends and Stock Splits
10-75 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
35.
Common stock is listed before preferred stock in the balance sheet. FALSE Preferred stock is listed before common stock in the balance sheet.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Topic: Stockholders' Equity in the Balance Sheet
36.
We can estimate the average purchase cost of treasury stock per share by dividing the treasury stock balance by the number of shares repurchased. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy
Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Topic: Stockholders' Equity in the Balance Sheet
37.
The statement of stockholders' equity shows how each equity account changed during the year. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy
Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Topic: Stockholders' Equity in the Balance Sheet
10-76 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
38.
The stockholders' equity section of the balance sheet shows how each equity account changed during the year. FALSE The stockholders' equity section of the balance sheet presents the balance of each equity account at a point in time. The statement of stockholders' equity shows how each account changed during the period.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Topic: Stockholders' Equity in the Balance Sheet
39.
The return on equity measures the ability of company management to generate earnings from the resources that owners provide. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Topic: Ralph Lauren vs. Abercrombie
40.
We compute the return on equity ratio by dividing net income by ending stockholders' equity. FALSE We compute the return on equity ratio by dividing net income by average stockholders' equity.
AACSB: Reflective Thinking AICPA: FN Measurement 10-77 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Topic: Ralph Lauren vs. Abercrombie
41.
Earnings per share (EPS) measures the net income earned per share of common stock outstanding. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Topic: Ralph Lauren vs. Abercrombie
42.
We calculate earnings per share as net income divided by the average shares outstanding during the period. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Topic: Ralph Lauren vs. Abercrombie
43.
Earnings per share is useful in comparing earnings performance across companies. FALSE Earnings per share is useful in comparing earnings performance for the same company over time. Earnings per share cannot be used to compare across companies because of differences in the number of shares outstanding among companies.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation 10-78 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Topic: Ralph Lauren vs. Abercrombie
44.
We calculate the PE ratio as the stock price divided by earnings per share so that both stock price and earnings are expressed on a per share basis. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Topic: Ralph Lauren vs. Abercrombie
Multiple Choice Questions
45.
Which of the following accounts is not reported in the stockholders' equity section of the balance sheet?
A. Treasury Stock. B. Common Stock. C. Sales Revenue. D. Retained Earnings. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Topic: Corporations
10-79 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
46.
Which of the following is a disadvantage of an S Corporation?
A. Double Taxation B. Liability C. Restrictions on number of stockholders D. Inability to transfer ownership AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Topic: Corporations
47.
Which of the following stages of equity financing comes last in the traditional order of progression?
A. Investment by friends and family of the founders. B. Investment by the founders of the business. C. Initial public offering (IPO). D. Outside investment by "angel" investors and venture capital firms. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Topic: Corporations
10-80 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
48.
Which of the following stages of equity financing comes first in the traditional order of progression?
A. Investment by friends and family of the founders. B. Initial Public Offering. C. Investment by the founders of the business. D. Outside investment by "angel" investors and venture capital firms. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Topic: Corporations
49.
In terms of total sales, assets, and earnings, the dominant form of business organization is a:
A. Sole proprietorship. B. Partnership. C. Corporation. D. Limited liability company (LLC). AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Topic: Corporations
10-81 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
50.
Common stockholders usually have all of the following rights except:
A. To receive dividends when declared. B. To share in the distribution of assets. C. To elect board of directors. D. To participate in the day-to-day operations. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Topic: Corporations
51.
All publicly held corporations are regulated by what government organization?
A. The Financial Accounting Standards Board. B. The Commission on Accounting Procedures. C. The Accounting Principles Board. D. The Securities and Exchange Commission. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Topic: Corporations
10-82 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
52.
Which of the following is a reason that a corporation would prefer to issue stock instead of bonds?
A. Dividend payments can be deducted for income tax purposes but interest payments cannot. B. Expansion is accomplished without surrendering ownership control. C. The risk of going bankrupt is less. D. All of these. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Topic: Corporations
53.
Advantages of the corporate form that have led to the growth of this form of business ownership include all of the following except:
A. Ability to raise capital. B. Low government regulation. C. Limited liability. D. Ability to transfer ownership. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Topic: Corporations
10-83 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
54.
Advantages of the corporate form of business include which of the following? I. Double taxation II. Ability to raise capital III. Ability to transfer ownership IV. More paperwork V. Limited liability
A. II. B. II., III., V. C. I., II., III. D. II., IV., V. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Topic: Corporations
55.
Which of the following statements regarding the corporate form of business is correct?
A. The disadvantages are that generating capital is difficult and that owners have limited liability. B. Disadvantages are that the business is subject to government regulations and double taxation on its income. C. One disadvantage is that ownership is easy to transfer. D. All of these. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Topic: Corporations
10-84 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
56.
The disadvantages of the corporate form of business include:
A. Ability to transfer ownership. B. Additional taxes. C. Limited liability. D. Ability to raise capital. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Topic: Corporations
57.
The correct order from the smallest number of shares to the largest number of shares is:
A. Authorized, issued, and outstanding. B. Outstanding, issued, and authorized. C. Issued, outstanding, and authorized. D. Issued, authorized, and outstanding. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-02 Record the issuance of common stock. Topic: Common Stock
58.
Authorized common stock refers to the total number of shares:
A. Outstanding. B. Issued. C. Issued and outstanding. D. That can be issued. AACSB: Reflective Thinking AICPA: BB Critical Thinking 10-85 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-02 Record the issuance of common stock. Topic: Common Stock
59.
Issued stock refers to the number of shares:
A. Outstanding plus treasury shares. B. Authorized. C. In the hand of stockholders. D. That may be issued under state law. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-02 Record the issuance of common stock. Topic: Common Stock
60.
Outstanding common stock refers to the total number of shares:
A. Issued. B. Issued plus treasury stock. C. Issued less treasury stock. D. Authorized. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-02 Record the issuance of common stock. Topic: Common Stock
10-86 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
61.
Outstanding common stock specifically refers to:
A. Stock that is performing well. B. Stock that has been authorized for issuance. C. Stock issued plus treasury stock. D. Stock in the hands of stockholders. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-02 Record the issuance of common stock. Topic: Common Stock
62.
The par value of shares issued is normally recorded in the:
A. Additional Paid-in Capital account. B. Common Stock account. C. Retained Earnings account. D. Treasury Stock account. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-02 Record the issuance of common stock. Topic: Common Stock
63.
The par value of common stock represents:
A. The amount received when the stock was issued. B. The liquidation value of a share. C. The market value of a share of stock. D. The legal capital per share of stock assigned when the corporation was first established. AACSB: Reflective Thinking 10-87 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-02 Record the issuance of common stock. Topic: Common Stock
64.
If a company issues 1,000 shares of $1 par value common stock for $20 per share, what would be the effect on the accounting equation?
A. Increase assets and increase liabilities. B. Increase assets and increase revenue. C. Increase assets and increase stockholders' equity. D. Increase assets and decrease stockholders' equity. The journal entry would be:
Cash
20,000
Common Stock
1,000
Additional Paid-in Capital
19,000
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-02 Record the issuance of common stock. Topic: Common Stock
10-88 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
65.
If a company issues 1,000 shares of $1 par value common stock for $20 per share, which of the following accounts would be credited?
A. Treasury Stock B. Cash C. Additional Paid-in Capital D. Retained Earnings The journal entry would be:
Cash
20,000
Common Stock
1,000
Additional Paid-in Capital
19,000
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-02 Record the issuance of common stock. Topic: Common Stock
10-89 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
66.
When a company issues 25,000 shares of $1 par value common stock for $10 per share, the journal entry for this issuance would include:
A. A debit to Cash for $25,000. B. A debit to Additional Paid-in Capital for $25,000. C. A credit to Common Stock for $250,000. D. A credit to Additional Paid-in Capital for $225,000. The journal entry would be:
Cash Common Stock
250,000 25,000
Additional Paid-in Capital
225,000
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-02 Record the issuance of common stock. Topic: Common Stock
10-90 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
67.
Wright Inc. issued 20,000 shares of $1 par value common stock for $80,000. The journal entry to record this issuance includes a:
A. Credit to Common Stock for $80,000 B. Debit to Additional Paid-In Capital for $60,000 C. Credit to Cash for $80,000 D. Credit to Common Stock for $20,000 The journal entry would be:
Cash
80,000
Common Stock
20,000
Additional Paid-in Capital
60,000
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-02 Record the issuance of common stock. Topic: Common Stock
10-91 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
68.
When a company issues 25,000 shares of $1 par value common stock for $10 per share, the journal entry for this issuance would include:
A. A debit to Cash for $25,000. B. A debit to Additional Paid-in Capital for $25,000. C. A credit to Additional Paid-in Capital for $250,000. D. A credit to Common Stock for $25,000. The journal entry would be:
Cash Common Stock
250,000 25,000
Additional Paid-in Capital
225,000
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-02 Record the issuance of common stock. Topic: Common Stock
10-92 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
69.
Jade Jewelers issued 15,000 shares of $1 par value stock for $20 per share. What is true about the journal entry to record the issuance?
A. Credit Common Stock $300,000. B. Credit Cash $300,000. C. Credit Common Stock $15,000. D. Debit Additional Paid-In Capital $285,000. The journal entry would be:
Cash Common Stock
300,000 15,000
Additional Paid-in Capital
285,000
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-02 Record the issuance of common stock. Topic: Common Stock
10-93 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
70.
South Beach Apparel issued 10,000 shares of $1 par value stock for $5 per share. What is true about the journal entry to record the issuance?
A. Debit Common Stock $10,000. B. Credit Cash $50,000. C. Credit Common Stock $50,000. D. Credit Additional Paid-In Capital $40,000. The journal entry would be:
Cash
50,000
Common Stock
10,000
Additional Paid-in Capital
40,000
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-02 Record the issuance of common stock. Topic: Common Stock
10-94 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
71.
Hayes Corporation issues 100 shares of its $1 par value common stock for $15 per share. The entry to record the issuance will not include a:
A. Debit to Cash $1,500. B. Credit to Additional Paid-In Capital $1,400. C. Credit to Common Stock of $100. D. All of these. The journal entry would be:
Cash
1,500
Common Stock
100
Additional Paid-in Capital
1,400
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-02 Record the issuance of common stock. Topic: Common Stock
72.
Preferred stock is called preferred because it usually has two preferences over common stock. These preferences relate to:
A. Dividends and voting rights. B. Par value and dividends. C. The preemptive right and voting rights. D. Dividends and distribution of assets if the corporation is dissolved. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-03 Contrast preferred stock with common stock and bonds payable. Topic: Preferred Stock
10-95 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
73.
Preferred stock:
A. Is always recorded as a liability. B. Is always recorded as part of stockholders' equity. C. Can have features of both liabilities and stockholders' equity. D. Is not included in either liabilities or stockholders' equity. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-03 Contrast preferred stock with common stock and bonds payable. Topic: Preferred Stock
74.
Which of the following has the highest expected return to the investor?
A. Common Stock. B. Preferred Stock. C. Bonds. D. They all have similar expected returns. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-03 Contrast preferred stock with common stock and bonds payable. Topic: Preferred Stock
75.
Which of the following has the lowest expected return to the investor?
A. Bonds. B. Preferred Stock. C. Common Stock. D. They all have similar expected returns. AACSB: Reflective Thinking AICPA: BB Critical Thinking 10-96 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-03 Contrast preferred stock with common stock and bonds payable. Topic: Preferred Stock
76.
Which of the following is the most likely to have voting rights?
A. Common Stock. B. Preferred Stock. C. Bonds. D. They all have similar voting rights. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-03 Contrast preferred stock with common stock and bonds payable. Topic: Preferred Stock
77.
Which of the following financing alternatives has the highest preference of payment in a case where the company liquidates its assets?
A. Common Stock. B. Preferred Stock. C. Bonds. D. They have equal preference. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-03 Contrast preferred stock with common stock and bonds payable. Topic: Preferred Stock
10-97 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
78.
Which of the following is not a potential feature of preferred stock?
A. Convertible. B. Redeemable. C. Cumulative. D. They all are potential features of preferred stock. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-03 Contrast preferred stock with common stock and bonds payable. Topic: Preferred Stock
79.
A company issued 1,000 shares of $1 par value preferred stock for $5 per share. What is true about the journal entry to record the issuance?
A. Debit Preferred Stock $5,000. B. Credit Cash $5,000. C. Credit Preferred Stock $5,000. D. Credit Additional Paid-In Capital $4,000. The journal entry would be:
Cash
5,000
Preferred Stock
1,000
Additional Paid-in Capital
4,000
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-03 Contrast preferred stock with common stock and bonds payable. Topic: Preferred Stock
10-98 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
80.
The Surf's Up issues 1,000 shares of 6%, $100 par value preferred stock at the beginning of 2017. All remaining shares are common stock. The company was not able to pay dividends in 2017, but plans to pay dividends of $18,000 in 2018. Assuming the preferred stock is cumulative, how much of the $18,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2018?
A. $6,000 to preferred stockholders and $12,000 to common stockholders. B. $18,000 to preferred stockholders and $0 to common stockholders. C. $12,000 to preferred stockholders and $6,000 to common stockholders. D. $9,000 to preferred stockholders and $9,000 to common stockholders.
Preferred dividends in arrears from 2017
$6,000
Preferred dividends for 2018 (1,000 shares × 6% × $100 par value)
6,000
Remaining dividends to common stockholders
6,000
Total dividends
$18,000
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-03 Contrast preferred stock with common stock and bonds payable. Topic: Preferred Stock
10-99 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
81.
The Surf's Up issues 1,000 shares of 6%, $100 par value preferred stock at the beginning of 2017. All remaining shares are common stock. The company was not able to pay dividends in 2017, but plans to pay dividends of $18,000 in 2018. Assuming the preferred stock is noncumulative, how much of the $18,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2018?
A. $6,000 to preferred stockholders and $12,000 to common stockholders. B. $18,000 to preferred stockholders and $0 to common stockholders. C. $12,000 to preferred stockholders and $6,000 to common stockholders. D. $9,000 to preferred stockholders and $9,000 to common stockholders.
Preferred dividends in arrears from 2017 are lost
$0
Preferred dividends for 2018 (1,000 shares × 6% × $100 par value)
6,000
Remaining dividends to common stockholders
12,000
Total dividends
$18,000
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-03 Contrast preferred stock with common stock and bonds payable. Topic: Preferred Stock
10-100 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
82.
California Adventures issues 5,000 shares of 8%, $100 par value preferred stock at the beginning of 2017. All remaining shares are common stock. The company was not able to pay dividends in 2017, but plans to pay dividends of $100,000 in 2018. Assuming the preferred stock is cumulative, how much of the $100,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2018?
A. $40,000 to preferred stockholders and $60,000 to common stockholders. B. $80,000 to preferred stockholders and $20,000 to common stockholders. C. $20,000 to preferred stockholders and $80,000 to common stockholders. D. $100,000 to preferred stockholders and $0 to common stockholders.
Preferred dividends in arrears from 2017
$40,000
Preferred dividends for 2018 (5,000 shares × 8% × $100 par value)
40,000
Remaining dividends to common stockholders
20,000
Total dividends
$100,000
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-03 Contrast preferred stock with common stock and bonds payable. Topic: Preferred Stock
10-101 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
83.
California Adventures issues 5,000 shares of 8%, $100 par value preferred stock at the beginning of 2017. All remaining shares are common stock. The company was not able to pay dividends in 2017, but plans to pay dividends of $100,000 in 2018. Assuming the preferred stock is noncumulative, how much of the $100,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2018?
A. $40,000 to preferred stockholders and $60,000 to common stockholders. B. $80,000 to preferred stockholders and $20,000 to common stockholders. C. $20,000 to preferred stockholders and $80,000 to common stockholders. D. $100,000 to preferred stockholders and $0 to common stockholders.
Preferred dividends in arrears from 2017 are lost
$0
Preferred dividends for 2018 (5,000 shares × 8% × $100 par value)
40,000
Remaining dividends to common stockholders
60,000
Total dividends
$100,000
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-03 Contrast preferred stock with common stock and bonds payable. Topic: Preferred Stock
84.
Treasury Stock is normally reported as:
A. A reduction of total stockholders' equity. B. An asset account. C. A liability account. D. An expense account. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-04 Account for treasury stock.
10-102 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Treasury Stock
85.
When treasury stock is resold at a price above cost:
A. A gain account is credited. B. A loss is reported. C. A revenue account is credited. D. Additional Paid-in Capital is increased. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-04 Account for treasury stock. Topic: Treasury Stock
86.
When treasury stock is acquired, what is the effect on total stockholders' equity?
A. Decrease. B. Increase. C. No effect. D. Cannot tell from the given information. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-04 Account for treasury stock. Topic: Treasury Stock
10-103 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
87.
When shares of another corporation are purchased, what is the effect on total stockholders' equity?
A. Decrease. B. Increase. C. No effect. D. Cannot tell from the given information. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-04 Account for treasury stock. Topic: Treasury Stock
88.
When treasury stock is acquired, what is the effect on assets and stockholders' equity?
A. Assets and stockholders' equity increase. B. Assets and stockholders' equity decrease. C. Assets increase and stockholders' equity decrease. D. Assets decrease and stockholders' equity increase. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-04 Account for treasury stock. Topic: Treasury Stock
89.
Treasury Stock:
A. Has a normal credit balance. B. Decreases stockholders' equity. C. Is recorded as an investment. D. Increases stockholders' equity. AACSB: Reflective Thinking 10-104 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-04 Account for treasury stock. Topic: Treasury Stock
90.
Which of the following statements about treasury stock transactions is true?
A. Treasury stock is recorded as an asset by the acquiring company. B. Only losses on the sale of treasury stock are recorded on the income statement. C. Stockholders' equity is reduced when treasury stock is acquired. D. Gains and losses on the sale of treasury stock are recorded on the income statement. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-04 Account for treasury stock. Topic: Treasury Stock
91.
Which of the following is TRUE regarding the accounting for treasury stock?
A. Treasury stock is reported on the balance sheet in the equity section. B. The purchase and sale of treasury stock has no impact on the income statement. C. Treasury stock represents a negative equity account. D. All of these. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-04 Account for treasury stock. Topic: Treasury Stock
10-105 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
92.
What would be the impact on the accounting equation when a company acquires treasury stock?
A. Increase assets and increase stockholders' equity. B. Decrease assets and increase stockholders' equity. C. Decrease assets and decrease stockholders' equity. D. No effect on the accounting equation. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-04 Account for treasury stock. Topic: Treasury Stock
93.
The corporation's own stock that has been issued and then repurchased by the company is referred to as:
A. Preferred Stock. B. Authorized Stock. C. Treasury Stock. D. Common Stock. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-04 Account for treasury stock. Topic: Treasury Stock
10-106 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
94.
When treasury stock is resold at a gain, the difference between its cost and the cash received when resold:
A. Increases net income. B. Increases stockholders' equity. C. Has no effect on net income or stockholders' equity. D. Increases net income but decreases stockholders' equity. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-04 Account for treasury stock. Topic: Treasury Stock
10-107 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
95.
Crossroads Mall had 100,000 outstanding shares of common stock. On June 16, 2018, Crossroads repurchased 20,000 shares of its own stock at $30 per share. On July 23, 2018, Crossroads resold 10,000 shares at $28 per share. What net effect did the repurchase and the resell of common stock have on the accounting equation?
A. Increase in assets and decrease in stockholders' equity. B. Decrease in assets and increase in stockholders' equity. C. Increase in assets and increase in stockholders' equity. D. Decrease in assets and decrease in stockholders' equity. The journal entries would be:
June 16 Treasury Stock
600,000
Cash
600,000
July 23 Cash (10,000 × $28)
280,000
Additional Paid-in Capital
20,000
Treasury Stock (10,000 × $30)
300,000
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-04 Account for treasury stock. Topic: Treasury Stock
10-108 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
96.
On December 2, Coley Corp. acquired 1,000 shares of its $2 par value common stock for $27 each. On December 20, Coley Corp. reissued 400 shares for $15 each. Which of the following is correct regarding the journal entry for the reissued shares?
A. Debit Cash $15,000. B. Credit Treasury Stock $10,800. C. Credit Additional Paid in Capital $5,200. D. Credit Treasury Stock $6,000. The journal entry for the reissued shares would be:
Cash (400 × $15)
6,000
Additional Paid-in Capital
4,800
Treasury Stock (400 × $27)
10,800
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-04 Account for treasury stock. Topic: Treasury Stock
10-109 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
97.
On November 6, Coleman Corp. acquired 1,000 shares of its $2 par value common stock for $27 each. On November 20, Coleman Corp. reissued 400 shares for $30 each. Which of the following is correct regarding the effect of the journal entry for the reissued shares?
A. Assets decrease. B. Liabilities decrease. C. Expenses increase. D. Stockholders' Equity increases. The entry for the reissued shares would be:
Cash (400 × $30)
12,000
Treasury Stock (400 × $27)
10,800
Additional Paid-in Capital
1,200
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-04 Account for treasury stock. Topic: Treasury Stock
10-110 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
98.
A company acquires 1,000 shares of its own $1 par common stock for $15 per share. This purchase would be recorded with a:
A. Credit to Treasury Stock for $1,000 B. Debit to Additional Paid-In Capital for $14,000 C. Credit to Treasury Stock for $15,000 D. Debit to Treasury Stock for $15,000 The entry for the purchase of Treasury Stock would be:
Treasury Stock Cash
15,000 15,000
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-04 Account for treasury stock. Topic: Treasury Stock
10-111 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
99.
A company reissues 400 shares of its own common stock for $20 per share. The company had acquired these shares two months before for $15 per share. The reissuance of this stock would be recorded with a:
A. Credit to Treasury Stock for $8,000 B. Debit to Additional Paid-In Capital for $2,000 C. Debit to Common Stock for $8,000 D. Credit to Additional Paid-In Capital for $2,000 The entry for the reissued shares would be:
Cash (400 × $20)
8,000
Treasury Stock (400 × $15)
6,000
Additional Paid-in Capital
2,000
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-04 Account for treasury stock. Topic: Treasury Stock
10-112 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
100.
On February 22, Brett Corporation acquired 200 shares of its $5 par value common stock for $25 each. On March 15, the company reissued 70 shares for $30 each. What is true of the entry for reissuing the shares?
A. Credit Cash $1,750. B. Credit Additional Paid in Capital $350. C. Debit Treasury Stock $1,750. D. Credit Treasury Stock $2,100. The entry to reissue the shares would be:
Cash (70 × $30)
2,100
Treasury Stock (70 × $25)
1,750
Additional Paid-in Capital
350
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-04 Account for treasury stock. Topic: Treasury Stock
101.
Retained Earnings represent a company's:
A. Net income less dividends since the company first began operations. B. Undistributed net assets. C. Extra paid-in capital. D. Undistributed cash. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-05 Describe retained earnings and record cash dividends. Topic: Earned Capital
10-113 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
102.
The Retained Earnings balance reported on the balance sheet typically is not affected by:
A. Net income. B. Net loss. C. Dividends paid. D. Stock splits. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-05 Describe retained earnings and record cash dividends. Topic: Earned Capital
103.
The Retained Earnings balance reported on the balance sheet typically is affected by:
A. Net income. B. Net loss. C. Dividends paid. D. All of the above. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-05 Describe retained earnings and record cash dividends. Topic: Earned Capital
104.
The balance of Retained Earning at the end of the year represents:
A. Current year's profits less payments to owners. B. Total earnings less payments to owners over the life of the company. C. Total contributions from owners less withdrawals over the life of the company. D. Total earnings over the life of the company. AACSB: Reflective Thinking AICPA: FN Measurement 10-114 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-05 Describe retained earnings and record cash dividends. Topic: Earned Capital
105.
Retained Earnings:
A. Has a normal debit balance. B. Decreases stockholders' equity. C. Is equal to the balance in cash. D. Increases stockholders' equity. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-05 Describe retained earnings and record cash dividends. Topic: Earned Capital
106.
Journal entries to record cash dividends are made on the:
A. Declaration date, record date, and payment date. B. Record date and payment date. C. Declaration date and payment date. D. Declaration date and record date. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-05 Describe retained earnings and record cash dividends. Topic: Earned Capital
10-115 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
107.
On June 1, the board of directors declares a cash dividend to be paid on June 30 to shareholders of record on June 15. On which date would the company record a credit to the Dividends Payable account?
A. June 30 B. June 15 C. June 1 D. Dividends Payable is never credited AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-05 Describe retained earnings and record cash dividends. Topic: Earned Capital
10-116 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
108.
The board of directors of Capstone Inc. declared a $0.60 per share cash dividend on its $1 par common stock. On the date of declaration, there were 50,000 shares authorized, 20,000 shares issued, and 5,000 shares held as treasury stock. What is the entry when the dividends are declared? A.
Dividends
9,000
Dividends Payable B.
Dividends
9,000 9,000
Cash C.
Dividends
9,000 12,000
Dividends Payable D.
Dividends
12,000 12,000
Cash
12,000
A. Option A B. Option B C. Option C D. Option D
Dividends [(20,000 – 5,000) × $.60] Dividends Payable
9,000 9,000
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-05 Describe retained earnings and record cash dividends. Topic: Earned Capital
10-117 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
109.
The following amounts represent totals from the first three years of operations. Calculate the balance of Retained Earnings at the end of 2018. 2016
2017
2018
$1,200
-$500
$2,300
Net Cash Flows
$500
$300
$2,800
Dividends
$200
$0
$200
Issuance of
$2,000
$0
$0
Net Income
Stock
A. $2,600 B. $4,600 C. $3,100 D. $3,500 ($1,200 - $500 + $2,300) - $200 - $200 = $2,600
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-05 Describe retained earnings and record cash dividends. Topic: Earned Capital
10-118 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
110.
The board of directors of Capstone Inc. declared a $0.60 per share cash dividend on its $1 par common stock. On the date of declaration, there were 50,000 shares authorized, 20,000 shares issued, and 5,000 shares held as treasury stock. Assuming the dividends were declared on June 1, what is the entry on June 30 to record the payment of cash dividends? A.
Dividends
9,000
Dividends Payable B.
Dividends Payable
9,000 9,000
Cash C.
Dividends
9,000 12,000
Dividends Payable D. Dividends Payable
12,000 12,000
Cash
12,000
A. Option A B. Option B C. Option C D. Option D
Dividends Payable [(20,000 – 5,000) ×
9,000
$.60] Cash
9,000
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-05 Describe retained earnings and record cash dividends. Topic: Earned Capital
10-119 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
111.
The ending Retained Earnings balance of Lambert Inc. increased by $1.5 million from the beginning of the year. The company's net income earned during the year is $3.5 million. What is the amount of dividends Lambert Inc. declared and paid?
A. $1.5 million. B. $3.5 million. C. $2.0 million. D. $5.0 million. Net income minus dividends equals the change in retained earnings.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-05 Describe retained earnings and record cash dividends. Topic: Earned Capital
112.
Over the first four years of the company's life, the company earned the following net income (loss): $6,000; $3,000; $6,000, and ($2,000). If the company's ending retained earnings is $10,000 after year 4, what is the average amount of dividends paid per year?
A. $3,000. B. $7,000. C. $0. D. $750. ($6,000 + $3,000 + $6,000 - $2,000) = $13,000 - $10,000 = $3,000/4 = $750.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-05 Describe retained earnings and record cash dividends. Topic: Earned Capital
10-120 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
113.
Fashion, Inc. had a Retained Earnings balance of $12,000 at December 31, 2018. The company had an average income of $7,500 over the next 3 years, and an ending Retained Earnings balance of $15,000 at December 31, 2019. What was the total amount of dividends paid over the last three years?
A. $4,500. B. $6,500. C. $19,500. D. $27,000. Beginning RE + Net income - Dividends = Ending RE. $12,000 + 22,500 ($7,500 × 3) - Dividends = $15,000. Dividends = $19,500.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-05 Describe retained earnings and record cash dividends. Topic: Earned Capital
114.
Both cash dividends and stock dividends:
A. Reduce total assets. B. Reduce total liabilities. C. Reduce total stockholders' equity. D. Reduce retained earnings. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-05 Describe retained earnings and record cash dividends. Learning Objective: 10-06 Explain the effect of stock dividends and stock splits. Topic: Earned Capital Topic: Stock Dividends and Stock Splits
10-121 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
115.
The declaration and issuance of a stock dividend:
A. Does not change total assets, liabilities, or total stockholders' equity. B. Decreases total stockholders' equity and increases common stock. C. Decreases assets and decreases total stockholders' equity. D. Does not change retained earnings or paid-in capital. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-06 Explain the effect of stock dividends and stock splits. Topic: Stock Dividends and Stock Splits
116.
The issuer of a 100% common stock dividend (large stock dividend) to common stockholders should debit stock dividends for an amount equal to the
A. Book value of the shares issued. B. Par value of the shares issued. C. Market value of the shares issued. D. Minimum legal requirements. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-06 Explain the effect of stock dividends and stock splits. Topic: Stock Dividends and Stock Splits
10-122 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
117.
The issuer of a 100% common stock dividend (large stock dividend) to common stockholders should credit common stock for an amount equal to the
A. Book value of the shares issued. B. Par value of the shares issued. C. Market value of the shares issued. D. Minimum legal requirements. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-06 Explain the effect of stock dividends and stock splits. Topic: Stock Dividends and Stock Splits
118.
The issuer of a 5% common stock dividend (small stock dividend) to common stockholders should debit stock dividends for an amount equal to the
A. Book value of the shares issued. B. Par or stated value of the shares issued. C. Market value of the shares issued. D. Minimum legal requirements. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-06 Explain the effect of stock dividends and stock splits. Topic: Stock Dividends and Stock Splits
10-123 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
119.
The entry to record a large stock dividend would include a:
A. Debit to Additional Paid-in Capital B. Debit to Common Stock C. Debit to Stock Dividends D. Credit to Stock Dividends AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 10-06 Explain the effect of stock dividends and stock splits. Topic: Stock Dividends and Stock Splits
120.
The issuer of a 5% common stock dividend (small stock dividend) to common stockholders should credit common stock for an amount equal to the
A. Book value of the shares issued. B. Par or stated value of the shares issued. C. Market value of the shares issued. D. Minimum legal requirements. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-06 Explain the effect of stock dividends and stock splits. Topic: Stock Dividends and Stock Splits
121.
A feature common to both stock splits and stock dividends is
A. That there is no effect on total stockholders' equity. B. A reduction in the contributed capital of a corporation. C. A transfer to earned capital of a corporation. D. An increase in total liabilities of a corporation. AACSB: Reflective Thinking 10-124 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-06 Explain the effect of stock dividends and stock splits. Topic: Stock Dividends and Stock Splits
122.
Large stock dividends and stock splits are issued primarily to:
A. Lower the trading price of the stock per share. B. Increase the number of authorized shares. C. Increase legal capital. D. Increase the number of outstanding shares. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-06 Explain the effect of stock dividends and stock splits. Topic: Stock Dividends and Stock Splits
123.
The Common Stock account on a company's balance sheet is measured as:
A. The number of common shares outstanding × the stock's par value per share. B. The number of common shares outstanding × the stock's current market value per share. C. The number of common shares issued × the stock's par value per share. D. The number of common shares issued × the stock's current market value per share. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Topic: Stockholders' Equity in the Balance Sheet
10-125 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
124.
The stockholders' equity section in the balance sheet shows:
A. The ending balance in each stockholders' equity account. B. How each equity account changed over time. C. The average balance in each stockholders' equity account. D. More information than the statement of stockholders' equity. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Topic: Stockholders' Equity in the Balance Sheet
125.
The statement of stockholders' equity shows:
A. Only the ending balance in each stockholders' equity account. B. How each equity account changed over time. C. Only the beginning balance in each stockholders' equity account. D. Less information than the stockholders' equity section in the balance sheet. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Topic: Stockholders' Equity in the Balance Sheet
10-126 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
126.
The statement of stockholders' equity shows:
A. Only the ending balance in each stockholders' equity account. B. More information than the stockholders' equity section in the balance sheet. C. Only the beginning balance in each stockholders' equity account. D. Less information than the stockholders' equity section in the balance sheet. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Topic: Stockholders' Equity in the Balance Sheet
127.
How does the stockholders' equity section in the balance sheet differ from the statement of stockholders' equity?
A. The stockholders' equity section is more detailed than the statement of stockholders' equity. B. The stockholders' equity section shows balances at a point in time, whereas the statement of stockholders' equity shows activity over a period of time. C. The stockholders' equity section shows activity over a period of time, whereas the statement of stockholders' equity is at a point time. D. There are no differences between them. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Topic: Stockholders' Equity in the Balance Sheet
10-127 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
128.
Clothing Emporium was organized on January 1, 2018. The firm was authorized to issue 100,000 shares of $5 par value common stock. During 2018, Clothing Emporium had the following transactions relating to shareholders' equity: Issued 30,000 shares of common stock at $7 per share. Issued 20,000 shares of common stock at $8 per share. Reported a net income of $100,000. Paid dividends of $50,000. What is the total stockholders' equity at the end of 2018?
A. $420,000. B. $370,000. C. $470,000. D. $250,000. (30,000 × $7) + (20,000 × $8) + $100,000 - $50,000 = $420,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Topic: Stockholders' Equity in the Balance Sheet
10-128 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
129.
Clothing Emporium was organized on January 1, 2018. The firm was authorized to issue 100,000 shares of $5 par value common stock. During 2018, Clothing Emporium had the following transactions relating to shareholders' equity: Issued 30,000 shares of common stock at $7 per share. Issued 20,000 shares of common stock at $8 per share. Reported a net income of $100,000. Paid dividends of $50,000. What is the ending balance in the Retained Earnings account at the end of 2018?
A. $50,000. B. $370,000. C. $420,000. D. $100,000. $100,000 - $50,000 = $50,000
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Topic: Stockholders' Equity in the Balance Sheet
10-129 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
130.
Clothing Emporium was organized on January 1, 2018. The firm was authorized to issue 100,000 shares of $5 par value common stock. During 2018, Clothing Emporium had the following transactions relating to shareholders' equity: Issued 30,000 shares of common stock at $7 per share. Issued 20,000 shares of common stock at $8 per share. Reported a net income of $100,000. Paid dividends of $50,000. What is the total amount recorded in the Common Stock account at the end of 2018?
A. $420,000. B. $370,000. C. $470,000. D. $250,000. (30,000 × $5) + (20,000 × $5) = $250,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Topic: Stockholders' Equity in the Balance Sheet
10-130 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
131.
Clothing Emporium was organized on January 1, 2018. The firm was authorized to issue 100,000 shares of $5 par value common stock. During 2018, Clothing Emporium had the following transactions relating to shareholders' equity: Issued 30,000 shares of common stock at $7 per share. Issued 20,000 shares of common stock at $8 per share. Reported a net income of $100,000. Paid dividends of $50,000. What is total paid-in capital at the end of 2018?
A. $420,000. B. $370,000. C. $470,000. D. $320,000. (30,000 × $7) + (20,000 × $8) = $370,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Topic: Stockholders' Equity in the Balance Sheet
10-131 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
132.
Roberto Designers was organized on January 1, 2018. The firm was authorized to issue 100,000 shares of $5 par value common stock. During 2018, Roberto had the following transactions relating to stockholders' equity: Issued 10,000 shares of common stock at $7 per share. Issued 20,000 shares of common stock at $8 per share. Reported a net income of $100,000. Paid dividends of $50,000. Purchased 3,000 shares of treasury stock at $10 (part of the 20,000 shares issued at $8). What is total stockholders' equity at the end of 2018?
A. $270,000. B. $300,000. C. $250,000. D. $200,000.
Issue of stock (10,000 × $7)
$70,000
Issue of stock (20,000 × $8)
160,000
Net income
100,000
Dividends
(50,000)
Treasury stock (3,000 × $10)
(30,000) $250,000
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Topic: Stockholders' Equity in the Balance Sheet
10-132 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
133.
Roberto Designers was organized on January 1, 2018. The firm was authorized to issue 100,000 shares of $5 par value common stock. During 2018, Roberto had the following transactions relating to stockholders' equity: Issued 10,000 shares of common stock at $7 per share. Issued 20,000 shares of common stock at $8 per share. Reported a net income of $100,000. Paid dividends of $50,000. Purchased 3,000 shares of treasury stock at $10 (part of the 20,000 shares issued at $8). What is the balance in the Treasury Stock account at the end of 2018?
A. $160,000. B. $260,000. C. $30,000. D. $250,000. (3,000 × $10) = $30,000
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Topic: Stockholders' Equity in the Balance Sheet
10-133 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
134.
The balance sheet of California Clothing reports total equity of $600,000 and $700,000 at the beginning and end of the year, respectively. Net income and sales for the year are $65,000 and $1,300,000, respectively. What is California Clothing's return on equity?
A. 10%. B. 20%. C. 200%. D. 5%. $65,000/[($600,000 + $700,000)/2] = 10%.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Topic: Ralph Lauren vs. Abercrombie
135.
California Clothing reports net income and sales for the year of $65,000 and $1,300,000, respectively. Return on equity is 10%. What is California Clothing's average Stockholders' Equity for the year?
A. $650,000 B. $13,000,000 C. $682,500 D. 5% $65,000/10% = $650,000
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Topic: Ralph Lauren vs. Abercrombie
10-134 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
136.
The balance sheet of Sand Sportswear reports total equity of $500,000 and $650,000 at the beginning and end of the year, respectively. The return on equity for the year is 20%. What is Sand Sportswear's net income for the year?
A. $100,000. B. $130,000. C. $2,875,000. D. $115,000. Net income divided by average total equity equals 20%. Average total equity equals $575,000 [($500,000 + $650,000)/2]; therefore, net income must be $115,000 ($575,000 × 20%).
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Topic: Ralph Lauren vs. Abercrombie
137.
Dividend Yield is calculated as:
A. Dividends per share divided by the stock price. B. Net income divided by average stockholders' equity. C. The stock price divided by dividends per share. D. Dividends divided by stockholders' equity. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Topic: Ralph Lauren vs. Abercrombie
10-135 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
138.
Beach Boards reports dividends per share of $1.40 and net income for the year of $150,000. The current stock price is $40.00. What is Beach Boards' dividend yield?
A. 1.2% B. 26.7% C. 4.0% D. 3.5% Dividends per share divided by stock price equals 3.5% ($1.40/$40.00) = .035
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Topic: Ralph Lauren vs. Abercrombie
139.
Beach Boards reports dividends per share of $1.40 and net income for the year of $150,000. Dividend yield is 3.5%. What is Beach Boards' current stock price?
A. $23.82 B. $15.00 C. $35.00 D. $40.00 Dividends per share divided by dividend yield equals $40.00 ($1.40/.035) = $40.00
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Topic: Ralph Lauren vs. Abercrombie
10-136 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
140.
Financial information for Accessories Unlimited includes the following selected data: Dividends (in millions)
$75
Shares outstanding (in millions)
300
Stock price
$20.00
What is the company's dividend yield?
A. 1.25% B. 10.0% C. 5.0% D. 2.5% ($75 ÷ 300)/$20.00 = 0.0125 or 1.25%
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Topic: Ralph Lauren vs. Abercrombie
10-137 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
141.
Financial information for Accessories Unlimited includes the following selected data: Net income (in millions)
$150
Shares outstanding (in millions)
300
Stock price
$20.00
What is the company's earnings per share?
A. $0.50. B. $0.25. C. $2.00. D. $0.05. $150 ÷ 300 = $0.50.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Topic: Ralph Lauren vs. Abercrombie
10-138 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
142.
Financial information for Accessories Unlimited includes the following selected data: Net income (in millions)
$150
Shares outstanding (in millions)
300
Stock price
$20.00
What is the company's price-earnings ratio?
A. 20.0. B. 40.0. C. 60.0. D. 80.0. $20 ÷ $0.50* = 40.0. *Earnings per share = $150 ÷ 300 = $0.50.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Topic: Ralph Lauren vs. Abercrombie
143.
Return on equity is calculated as:
A. Net income divided by average stockholders' equity. B. Net income divided by ending stockholders' equity. C. Net income divided by average market value of equity. D. Net income divided by ending market value of equity. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Topic: Ralph Lauren vs. Abercrombie
10-139 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
144.
Why doesn't stockholders' equity equal the market value of equity?
A. Stockholders' equity usually does equal the market value of equity. B. Investors tend to incorrectly price the market value of equity. C. It's related to the use of historical cost to report many long-term assets and the expensing of value generating costs such as research and development and advertising. D. It's due to incorrect entries prepared by accountants. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Topic: Ralph Lauren vs. Abercrombie
145.
Earnings per share (EPS)
A. Is useful in comparing earnings performance across companies. B. Is useful in comparing earnings performance for the same company over time. C. Is useful in both comparing earnings performance across companies and in comparing earnings performance for the same company over time. D. Is not useful in comparing earnings performance across companies or in comparing earnings performance for the same company over time. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Topic: Ralph Lauren vs. Abercrombie
10-140 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
146.
Which of the following statements is not true regarding earnings per share?
A. Earnings per share is useful in comparing earnings performance across companies at the same point in time. B. Earnings per share is useful in comparing earnings performance for the same company over time. C. Earnings per share is calculated as net income minus dividends on preferred stock all divided by the average number of common shares outstanding. D. Earnings per share is forecasted by financial analysts. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Topic: Ralph Lauren vs. Abercrombie
147.
Financial information for Retro Designs includes the following selected data: Net income (in millions)
$175
Preferred stock dividends (in
$25
millions) Common shares outstanding (in
250
millions) Stock price
$10.00
What is the company's earnings per share?
A. $0.60. B. $0.70. C. $0.50. D. $0.05. ($175 - $25) ÷ 250 = $0.60.
AACSB: Analytical Thinking AICPA: FN Measurement 10-141 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Topic: Ralph Lauren vs. Abercrombie
148.
Financial information for Retro Designs includes the following selected data: Net income (in millions)
$175
Preferred stock dividends (in
$25
millions) Common shares outstanding (in
250
millions) Stock price
$10.00
What is the company's price-earnings ratio?
A. 14.3. B. 16.7. C. 5.7. D. 15.0. $10 ÷ $0.60* = 16.7. *Earnings per share = ($175 - $25) ÷ 250 = $0.60.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Topic: Ralph Lauren vs. Abercrombie
10-142 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
149.
The PE ratio:
A. Tends to be higher for growth stocks. B. Tends to be higher for value stocks. C. Indicates how a stock is trading in relation to cumulative earnings over the life of the company. D. Typically is less than 1. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Topic: Ralph Lauren vs. Abercrombie
Matching Questions
10-143 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
150.
Match the following
1. Articles of
Provide additional financing, often in the millions, for a
Incorporation
percentage ownership in the company.
2. Limited liability company 3. Publicly held corporation
8
Allows for legal treatment as a corporation, but tax treatment as a partnership.
7
Like an S corporation, but there are no limitations on the number of owners as in an S corporation.
2
Wealthy individuals willing to risk investment funds on a 4. Angel investors
promising business venture.
4
Has stock traded on a stock exchange such as the New 5. Limited liability
York Stock Exchange (NYSE).
3
Corporate earnings are taxed twice - at the corporate level 6. Double taxation
and individual stockholder level.
6
Describe (a) the nature of the firm's business activities, (b) the shares to be issued, and (c) the composition of the 7. S Corporation 8. Venture capital firms
initial board of directors.
1
Stockholders can lose no more than the amount they invest in the company.
5
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Topic: Corporations
10-144 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
151.
Match the following
Wealthy individuals willing to risk investment funds on a 1. Angel investors
promising business venture.
1
2. Retained earnings
The amount invested by stockholders.
8
3. Authorized stock
Shares actually sold.
10
4. Limited liability
Shares available to sell.
3
Shares can be returned to the corporation at a 5. Outstanding stock
predetermined price.
6
Shares receive priority for future dividends, if dividends 6. Redeemable
are not paid in a given year.
7
7. Cumulative
The earnings not paid out in dividends.
2
Shareholders can lose no more than the amount they 8. Paid-in capital
invested in the company.
4
9. Treasury stock
The corporation's own stock that it acquired.
9
10. Issued stock
Shares held by investors.
5
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Learning Objective: 10-02 Record the issuance of common stock. Learning Objective: 10-03 Contrast preferred stock with common stock and bonds payable. Learning Objective: 10-04 Account for treasury stock. Learning Objective: 10-05 Describe retained earnings and record cash dividends. Topic: Common Stock Topic: Corporations Topic: Earned Capital Topic: Preferred Stock Topic: Treasury Stock
10-145 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
152.
Match the following
Provide additional financing, often in the millions, for a 1. Organization chart
percentage ownership in the company.
2. Additional paid-in
A mixture of attributes somewhere between common
capital
stock and bonds payable.
5 8
Summarizes the changes in the balance in each 3. Retained earnings
stockholders' equity account over a period of time.
4
Traces the line of authority for a typical corporation.
1
The portion of the cash proceeds above par value.
2
4. Statement of stockholders' equity 5. Venture capital firms
A large stock dividend recorded as a reduction in the 6. Dividends
par or stated value per share.
7
Represents all net income, less all dividends, since the 7. Stock split 8. Preferred stock
company began.
3
Distributions by a corporation to its stockholders.
6
9. Articles of
Additional shares of the companies' own stock given to
incorporation
stockholders.
10
Describes the nature of the firm's business activities, the shares to be issued, and the composition of the initial 10. Stock dividends
board of directors.
9
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Learning Objective: 10-02 Record the issuance of common stock. Learning Objective: 10-03 Contrast preferred stock with common stock and bonds payable. Learning Objective: 10-05 Describe retained earnings and record cash dividends. Learning Objective: 10-06 Explain the effect of stock dividends and stock splits. Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Topic: Common Stock Topic: Corporations Topic: Earned Capital Topic: Preferred Stock Topic: Stock Dividends and Stock Splits Topic: Stockholders' Equity in the Balance Sheet
10-146 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
153.
Match the following
1. Redeemable
Shares can be exchanged for common stock.
3
2. Cumulative
Shares can be sold at a predetermined price.
1
3. Convertible
Shares receive dividend priority, if dividend not paid.
2
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-03 Contrast preferred stock with common stock and bonds payable. Topic: Preferred Stock
154.
Match the following
Summarizes the changes in the balance in each 1. Return on equity
stockholders' equity account over a period of time.
2
The corporation's own stock that it acquired.
5
Priced low in relation to current earnings.
10
The earnings not paid out in dividends.
4
The stock price divided by earnings per share.
9
2. Statement of stockholders' equity 3. Stockholders' equity section of the balance sheet 4. Retained earnings 5. Treasury stock
Shows the balance in each equity account at a point 6. Accumulated deficit
in time.
3
Measures the ability of company management to generate earnings from the resources that owners 7. 100% stock dividend
provide.
1
Priced high in relation to current earnings as 8. Growth stocks
investors expect future earnings to be higher.
8
9. PE ratio
Effectively the same as a 2-for-1 stock split.
7
A debit balance in retained earnings.
6
10. Value stocks
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-04 Account for treasury stock.
10-147 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 10-05 Describe retained earnings and record cash dividends. Learning Objective: 10-06 Explain the effect of stock dividends and stock splits. Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Topic: Earned Capital Topic: Ralph Lauren vs. Abercrombie Topic: Stock Dividends and Stock Splits Topic: Stockholders' Equity in the Balance Sheet Topic: Treasury Stock
Essay Questions
155.
The Shoe Exchange issues 5,000 shares of its $1 par value common stock to provide funds for further expansion. If the issue price is $15 per share, what is the entry to record the issuance of the stock?
Cash (5,000 shares × $15)
75,000
Common Stock (5,000 shares × $1)
5,000
Additional Paid-in Capital (difference)
70,000
(Issue common stock above par) AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-02 Record the issuance of common stock. Topic: Common Stock
10-148 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
156.
Environmental Designs issues 10,000 shares of its $1 par value common stock at $25 per share. (1) Record the issuance of the stock. (2) Record the issuance of the stock assuming it is no-par value stock.
Cash (10,000 shares × $25)
250,000
Common Stock (10,000 shares × $1)
10,000
Additional Paid-in Capital (difference)
240,000
(Issue common stock above par)
Cash (10,000 shares × $25) Common Stock
250,000 250,000
(Issue no-par value common stock) AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-02 Record the issuance of common stock. Topic: Common Stock
10-149 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
157.
Diane's Designs has two classes of stock authorized: 8%, $10 par preferred and $1 par value common. The following transactions affect stockholders' equity during 2018, its first year of operations: January 1
Issue 200,000 shares of common stock for $15 per share.
February 6
Issue 1,000 shares of preferred stock for $11 per share.
October 10
Repurchase 10,000 shares of its own common stock for $18 per share.
November 12 Reissue 5,000 shares of treasury stock at $20 per share.
Record each of these transactions.
January 1, 2018 Cash (200,000 × $15)
Debit
Credit
3,000,000
Common Stock (200,000 × $1)
200,000
Additional Paid-in Capital (difference)
2,800,000
(Issue common stock above par) February 6, 2018 Cash (1,000 × $11)
11,000
Preferred Stock (1,000 × $10)
10,000
Additional Paid-in Capital (difference)
1,000
(Issue preferred stock above par) October 10, 2018 Treasury Stock (10,000 shares × $18)
180,000
Cash
180,000
(Purchase treasury stock) November 12, 2018 Cash (5,000 shares × $20)
100,000
Treasury Stock (5,000 shares × $18)
90,000
Additional Paid-in Capital (difference)
10,000
(Reissue treasury stock above cost)
10-150 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-02 Record the issuance of common stock. Learning Objective: 10-03 Contrast preferred stock with common stock and bonds payable. Learning Objective: 10-04 Account for treasury stock. Topic: Common Stock Topic: Preferred Stock Topic: Treasury Stock
10-151 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
158.
Northwest Clothing Supply has the following transactions during the year related to stockholders' equity: January 1
Issues 3,000 shares of no-par value common stock for $20 per share.
March 15
Issues 800 shares of $20 par value preferred stock for $22 per share.
December 1 Declares a cash dividend of $1 per share to all stockholders of record (both common and preferred) on December 15. December
Date of record.
15 December
Pays the cash dividend declared on December 1.
31
Record each of these transactions.
January 1
Debit Credit
Cash (3,000 × $20)
60,000
Common Stock (3,000 × $20)
60,000
(Issue no-par value common stock) March 15 Cash (800 × $22)
17,600
Preferred Stock (800 × $20)
16,000
Additional Paid-in Capital (difference)
1,600
(Issue preferred stock above par) December 1 Dividends (3,800 shares × $1)
3,800
Dividends Payable
3,800
(Declare cash dividends) December 15 No Entry December 31 Dividends Payable (3,800 shares × $1)
3,800
10-152 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Cash
3,800
(Pay cash dividends) AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-02 Record the issuance of common stock. Learning Objective: 10-03 Contrast preferred stock with common stock and bonds payable. Learning Objective: 10-05 Describe retained earnings and record cash dividends. Topic: Common Stock Topic: Earned Capital Topic: Preferred Stock
10-153 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
159.
Oregon Outfitters issues 1,000 shares of $1 par value common stock at $20 per share. Later in the year, the company decides to repurchase 200 shares at a cost of $22 per share. (1) Record the original issue of the 1,000 shares, (2) Record the repurchase of 200 shares, and (3) record the entry if Oregon Outfitters reissues the 200 shares of treasury stock at $25 per share.
Cash (1,000 shares × $20)
20,000
Common Stock (1,000 shares × $1)
1,000
Additional Paid-in Capital (difference)
19,000
(Issue common stock above par)
Treasury Stock (200 shares × $22) 4,400 Cash
4,400
(Repurchase treasury stock)
Cash (200 shares × $25)
5,000
Treasury Stock (200 shares × $22)
4,400
Additional Paid-in Capital (difference)
600
(Reissue treasury stock above cost) AACSB: Analytical Thinking
10-154 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-02 Record the issuance of common stock. Learning Objective: 10-04 Account for treasury stock. Topic: Common Stock Topic: Treasury Stock
10-155 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
160.
Court Casuals has 100,000 shares of common stock outstanding as of the beginning of the year and has the following transactions affecting stockholders' equity during the year. May 18
Issues 25,000 additional shares of $1 par value common stock for $40 per share.
May 31
Repurchases 5,000 shares of treasury stock for $45 per share.
July 1
Declares a cash dividend of $1 per share to all stockholders of record on July 15. Hint: Dividends are not paid on treasury stock.
July 31
Pays the cash dividend declared on July 1.
August 10 Reissues 2,500 shares of treasury stock purchased on May 31 for $46 per share.
Record each of these transactions.
May 18 Cash (25,000 × $40)
Debit
Credit
1,000,000
Common Stock (25,000 × $1)
25,000
Additional Paid-in Capital (difference)
975,000
(Issue common stock above par) May 31 Treasury Stock (5,000 shares × $45)
225,000
Cash
225,000
(Purchase treasury stock) July 1 Dividends (120,000 shares × $1)
120,000
Dividends Payable
120,000
(Declare cash dividends) July 31 Dividends Payable (120,000 shares × $1) Cash
120,000 120,000
(Pay cash dividends) August 10
10-156 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Cash (2,500 shares × $46)
115,000
Treasury Stock (2,500 shares × $45)
112,500
Additional Paid-in Capital (difference)
2,500
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-02 Record the issuance of common stock. Learning Objective: 10-04 Account for treasury stock. Learning Objective: 10-05 Describe retained earnings and record cash dividends. Topic: Common Stock Topic: Earned Capital Topic: Treasury Stock
161.
Tropical Rainwear issues 1,000 shares of its $20 par value preferred stock for cash at $22 per share. Record the issuance of the preferred shares.
Cash (1,000 shares × $22)
22,000
Preferred Stock (1,000 shares × $20)
20,000
Additional Paid-in Capital (difference)
2,000
(Issue preferred stock above par) AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 2 Medium Learning Objective: 10-03 Contrast preferred stock with common stock and bonds payable. Topic: Preferred Stock
10-157 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
162.
Desert Apparel has 5,000 shares of common stock outstanding. On April 1, the company declares a $2 per share dividend to stockholders of record on April 15. The dividend is paid on April 30. Record all necessary entries on the appropriate dates for cash dividends.
April 1 Dividends (5,000 shares × $2)
10,000
Dividends Payable
10,000
(Declare cash dividends) April 15 No Entry April 30 Dividends Payable (5,000 shares × $2) 10,000 Cash
10,000
(Pay cash dividends) AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-05 Describe retained earnings and record cash dividends. Topic: Earned Capital
10-158 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
163.
On May 15, Canadian Falcon declares a quarterly cash dividend of $0.15 per share payable on June 10 to all stockholders of record on May 31. Record Canadian Falcon's declaration and payment of cash dividends for its 200,000 shares of common stock.
May 15
Debit Credit
Dividends (200,000 shares × $0.15)
30,000
Dividends Payable
30,000
(Declare cash dividends) May 31 No Entry June 10 Dividends Payable (200,000 shares × $0.15) 30,000 Cash
30,000
(Pay cash dividends) AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-05 Describe retained earnings and record cash dividends. Topic: Earned Capital
10-159 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
164.
On March 31, the board of directors of Shoeboxes, Inc. declares a 100% stock dividend on its 100,000, $0.01 par value, common shares. The market price of Shoeboxes common stock is $30 on March 31. Record the stock dividend.
March 31 Stock Dividends (100,000 shares × $0.01) 1,000 Common Stock
1,000
(Record a large stock dividend) AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-06 Explain the effect of stock dividends and stock splits. Topic: Stock Dividends and Stock Splits
10-160 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
165.
Indicate whether each of the following transactions increases (+), decreases (-), or has no effect (NE) on total assets, total liabilities, and total stockholders' equity. Transaction
Total Assets Total Liabilities Total Stockholders’ Equity
Issue common stock Issue preferred stock Purchase treasury stock Sale of treasury stock
Transaction
Total Assets Total Liabilities Total Stockholders’ Equity
Issue common stock
+
NE
+
Issue preferred stock
+
NE
+
Purchase treasury stock
-
NE
-
Sale of treasury stock
+
NE
+
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Topic: Stockholders' Equity in the Balance Sheet
10-161 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
166.
Indicate whether each of the following transactions increases (+), decreases (-), or has no effect (NE) on total assets, total liabilities, and total stockholders' equity. Transaction
Total Assets Total Liabilities Total Stockholders’ Equity
Issue common stock Issue preferred stock Repurchase treasury stock Sale of treasury stock Declare cash dividend Pay cash dividend 100% stock dividend 2-for-1 stock split
Transaction
Total Assets Total Liabilities Total Stockholders’ Equity
Issue common stock
+
NE
+
Issue preferred stock
+
NE
+
Repurchase treasury stock
-
NE
-
Sale of treasury stock
+
NE
+
Declare cash dividend
NE
+
-
Pay cash dividend
-
-
NE
100% stock dividend
NE
NE
NE
2-for-1 stock split
NE
NE
NE AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Apply Difficulty: 3 Hard
Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Topic: Stockholders' Equity in the Balance Sheet
10-162 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
167.
Prom Night Formal Wear has the following stockholders' equity accounts at December 31, 2018: Common Stock, $1 par value, 2,000,000 shares; Additional Paid-in Capital, $22 million; Retained Earnings, $15 million; and Treasury Stock, 50,000 shares, $1.25 million. Prepare the stockholders' equity section of the balance sheet.
Prom Night Formal Wear Balance Sheet (Stockholders’ Equity Section) December 31, 2018 Stockholders’ equity: Common stock, $1 par value
$2,000,000
Additional paid-in capital
22,000,000
Total paid-in capital
24,000,000
Retained earnings
15,000,000
Treasury stock, 50,000 shares
(1,250,000)
Total stockholders’ equity
$37,750,000
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Topic: Stockholders' Equity in the Balance Sheet
10-163 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
168.
Donnie Hilfiger has the following balances in its stockholders' equity accounts on December 31, 2018: Treasury Stock, $375,000; Common Stock, $350,000; Preferred Stock, $1,200,000; Retained Earnings, $1,675,000; and Additional Paid-in Capital, $3,150,000. Prepare the stockholders' equity section of the balance sheet for Donnie Hilfiger as of December 31, 2018.
Donnie Hilfiger Balance Sheet (Stockholders’ Equity Section) December 31, 2018 Stockholders’ equity: Preferred stock
$1,200,000
Common stock
350,000
Additional paid-in capital
3,150,000
Total paid-in capital
4,700,000
Retained earnings
1,675,000
Treasury stock
(375,000)
Total stockholders’ equity
$6,000,000
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Topic: Stockholders' Equity in the Balance Sheet
10-164 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
169.
Court Casuals has the following beginning balances in its stockholders' equity accounts on January 1, 2018: Common Stock, $100,000; Additional Paid-in Capital, $4,100,000; and Retained Earnings, $3,000,000. Net income for the year ended December 31, 2018, is $800,000. Court Casuals has the following transactions affecting stockholders' equity in 2018: May 18
Issues 25,000 additional shares of $1 par value common stock for $40 per share.
May 31
Repurchases 5,000 shares of treasury stock for $45 per share.
July 1
Declares a cash dividend of $1 per share to all stockholders of record on July 15. Hint: Dividends are not paid on treasury stock.
July 31
Pays the cash dividend declared on July 1.
August 10 Reissues 2,500 shares of treasury stock purchased on May 31 for $48 per share.
Taking into consideration all the entries described above, prepare the statement of stockholders' equity for the year ended December 31, 2018, using the format provided. Court Casuals Statement of Stockholders’ Equity For the year ended December 31, 2018 Common Additional Retained Treasury Stock
Paid-in Earnings
Stock Stockholders’
Capital Balance,
$100,000 4,100,000 3,000,000
Total Equity
-0-
$7,200,000
January 1 Issued common stock Repurchased treasury stock Cash dividends Sold treasury stock Net income
10-165 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Balance, December 31
Court Casuals Statement of Stockholders’ Equity For the Year Ended December 31, 2018 Common Additional Retained Treasury Stock
Paid-in Earnings
Stock
Capital Balance,
Total Stockholders’ Equity
$100,000 4,100,000 3,000,000
-0-
7,200,000
January 1 Issued
25,000
975,000
1,000,000
common stock Purchase
(225,000)
(225,000)
of treasury stock Cash
(120,000)
(120,000)
dividends Sale of
7,500
112,500
120,000
treasury stock Net
800,000
800,000
income Balance,
$125,000 5,082,500 3,680,000 (112,500)
$8,775,000
December 31
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of 10-166 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
stockholders' equity. Topic: Stockholders' Equity in the Balance Sheet
170.
The financial statements of Heatwave Athletic Wear include the following selected data ($ in millions): Sales, $22,502; Net income $875; Beginning stockholders' equity $3,567; Ending stockholders' equity, $4,102. Calculate the return on equity.
Net Income
Average ÷
Stockholders’
=
Equity
Return on Equity
($3,567 + $875
÷
4,102)/2
=
22.8%
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Topic: Ralph Lauren vs. Abercrombie
10-167 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
171.
The financial statements of Trail Apparel include the following selected data (in millions): ($ in thousands)
2018
Sales
2017
$728,121 $751,558
Net income
16,012
13,626
Stockholders’ equity, end of year
235,153 221,457
Shares outstanding (in thousands)
45,000
-
Average stock price
$5.40
-
1. Calculate the return on equity for 2018. 2. Calculate the price-earnings ratio for 2018.
Net Income
Average ÷
Stockholders’
=
Equity
Return on Equity
($235,153 + $16,012 ÷
Stock Price $5.40
221,457)/2
=
7.0%
Price÷
Earnings Per Share =
Earnings Ratio
÷
($16,012/45,000)
=
15.2%
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Topic: Ralph Lauren vs. Abercrombie
10-168 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
172.
Match (by letter) the following terms with their definitions. Each letter is used only once. Terms _____ 1. 100% stock dividend _____2. Statement of stockholders’ equity _____3. Treasury stock _____4. Value stocks _____5. PE ratio _____6. Stockholders’ equity section of the balance sheet _____7. Return on equity _____ 8. Retained earnings _____ 9. Accumulated deficit _____10. Growth stocks
Definitions a. Summarizes the changes in the balance in each stockholders' equity account over a
period of time. b. Priced low in relation to current earnings. c. Measures the ability of company management to generate earnings from the resources that owners provide. d. Shows the balance in each equity account at a point in time. e. The corporation's own stock that it reacquired. f. A debit balance in retained earnings. g. Priced high in relation to current earnings as investors expect future earnings to be higher. h. Effectively the same as a 2-for-1 stock split. i. The earnings not paid out in dividends. j. The stock price divided by earnings per share.
Terms __h__ 1. 100% stock dividend __a__ 2. Statement of stockholders’ equity
10-169 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
__e__ 3. Treasury stock __b__ 4. Value stocks __j__ 5. PE ratio __d__ 6. Stockholders’ equity section of the balance sheet __c__ 7. Return on equity __i__ 8. Retained earnings __f__ 9. Accumulated deficit __g__ 10. Growth stocks
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Learning Objective: 10-05 Describe retained earnings and record cash dividends. Learning Objective: 10-06 Explain the effect of stock dividends and stock splits. Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Topic: Corporations Topic: Earned Capital Topic: Ralph Lauren vs. Abercrombie Topic: Stock Dividends and Stock Splits Topic: Stockholders' Equity in the Balance Sheet
10-170 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
173.
Sweet Sixteen has two classes of stock authorized: $100 par value preferred and $1 par value common. As of the beginning of 2018, 1,000 shares of preferred stock have been issued and 20,000 shares of common stock have been issued. The following transactions affect stockholders' equity during 2018: March 1
Issue 3,000 additional shares of common stock for $22 per share.
April 1
Issue 5,000 additional shares of preferred stock for $110 per share.
June 1
Declare a cash dividend on common stock of $1 per share and a cash dividend on preferred stock of $5 per share to all stockholders of record on June 15.
June 30
Pay the cash dividends declared on June 1.
August 1
Purchase 2,000 shares of common treasury stock for $18 per share.
October 1
Reissue 1,000 shares of treasury stock purchased on August 1 for $20 per share.
Required: 1. Record each of these transactions. 2. Indicate whether each of these transactions would increase (+), decrease (-), or have no effect (NE) on total assets, total liabilities, and total stockholders' equity by completing the following chart.
Transaction
Total Assets Total Liabilities Total Stockholders’ Equity
Issue common stock Issue preferred stock Declare cash dividends Pay cash dividends Purchase treasury stock Reissue treasury stock
Requirement 1
10-171 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
March 1, 2018
Debit
Cash (3,000 × $22)
66,000
Credit
Common Stock (3,000 × $1.00)
3,000
Additional Paid-in Capital (difference)
63,000
(Issue common stock) April 1, 2018 Cash (5,000 shares × $110)
550,000
Preferred Stock (5,000 shares × $100)
500,000
Additional Paid-in Capital (difference)
50,000
(Issue preferred stock) June 1, 2018 Dividends (23,000 × $1 + 6,000 × $5)
53,000
Dividends Payable
53,000
(Declare cash dividends) June 30, 2018 Dividends Payable (23,000 × $1 + 6,000 × $5) 53,000 Cash
53,000
(Pay cash dividends) August 1, 2018 Treasury Stock (2,000 shares × $18)
36,000
Cash
36,000
(Purchase treasury stock) October 1, 2018 Cash (1,000 shares × $20)
20,000
Treasury Stock (1,000 shares × $18)
18,000
Additional Paid-in Capital (1,000 × $2)
2,000
(Reissue treasury stock above cost)
Requirement 2 Total Total Liabilities Transaction
Assets
Total Stockholders’ Equity
Issue common stock
+
NE
+
Issue preferred stock
+
NE
+
10-172 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Declare cash dividends
NE
+
-
Pay cash dividends
-
-
NE
Purchase treasury stock
-
NE
-
Reissue treasury stock
+
NE
+
AACSB: Analytical Thinking AICPA: FN Measurement AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-02 Record the issuance of common stock. Learning Objective: 10-03 Contrast preferred stock with common stock and bonds payable. Learning Objective: 10-04 Account for treasury stock. Learning Objective: 10-05 Describe retained earnings and record cash dividends. Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Topic: Common Stock Topic: Earned Capital Topic: Preferred Stock Topic: Stockholders' Equity in the Balance Sheet Topic: Treasury Stock
10-173 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
174.
Hoop It Up has two classes of stock authorized: 7%, $20 par value preferred and $1 par value common. The following transactions affect stockholders' equity during 2018, its first year of operations: February 2 Issue 1 million shares of common stock for $20 per share. February 4 Issue 50,000 shares of preferred stock for $21 per share. June 15 Purchase 100,000 shares of its own common stock for $18 per share. August 15 Reissue 75,000 shares of treasury stock for $23 per share. November 1 Declare a cash dividend on its common stock of $1 per share and a $70,000 (7% of par value) cash dividend on its preferred stock payable to all stockholders on record on November 15. Hint: Dividends are not paid on treasury stock. November Pay the dividends declared on November 1. 30
Required: 1. Record each of these transactions. 2. Prepare the stockholders' equity section of the balance sheet as of December 31, 2018. Net income for the year was $3,200,000.
Requirement 1
February 2, 2018 Cash (1,000,000 × $20)
Debit
Credit
20,000,000
Common Stock (1,000,000 × $1)
1,000,000
Additional Paid-in Capital (difference)
19,000,000
(Issue common stock above par) February 4, 2018 Cash (50,000 × $21) Preferred Stock (50,000 × $20) Additional Paid-in Capital (difference)
1,050,000 1,000,000 50,000
(Issue preferred stock above par)
10-174 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
June 15, 2018 Treasury Stock (100,000 shares × $18)
1,800,000
Cash
1,800,000
(Purchase treasury stock) August 15, 2018 Cash (75,000 shares × $23)
1,725,000
Treasury Stock (75,000 shares × $18)
1,350,000
Additional Paid-in Capital (75,000 × $5)
375,000
(Reissue treasury stock above cost) November 1, 2018 Dividends (975,000 shares × $1.00 + $70,000) 1,045,000 Dividends Payable
1,045,000
(Declare cash dividends) November 30, 2018 Dividends Payable
1,045,000
Cash
1,045,000
(Pay cash dividends)
Requirement 2 Hoop It Up Balance Sheet (Stockholders’ Equity Section) December 31, 2018 Stockholders’ equity: Preferred stock, $20 par value
$1,000,000
Common stock, $1 par value
1,000,000
Additional paid-in capital
19,425,000
Total paid-in capital
21,425,000
Retained earnings*
2,155,000
Treasury stock, 25,000 shares
(450,000)
Total stockholders’ equity
$23,130,000
*$3,200,000 net income minus $1,045,000 in dividends. AACSB: Analytical Thinking 10-175 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Measurement AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-02 Record the issuance of common stock. Learning Objective: 10-03 Contrast preferred stock with common stock and bonds payable. Learning Objective: 10-04 Account for treasury stock. Learning Objective: 10-05 Describe retained earnings and record cash dividends. Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Topic: Common Stock Topic: Earned Capital Topic: Preferred Stock Topic: Stockholders' Equity in the Balance Sheet Topic: Treasury Stock
10-176 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
175.
Brooks Brothers has done very well the past year and its stock price is now trading over $100 per share. Management is considering either a 100% stock dividend or a 2-for-1 stock split. Required: Complete the following chart comparing the effects of a 100% stock dividend versus a 2for-1 stock split on the stockholders' equity accounts, shares outstanding, par value, and share price. Before After 100% Stock Dividend After 2-for-1 Stock Split Common stock, $1 par value $10,000 Additional paid-in capital
250,000
Total paid-in capital
260,000
Retained earnings
150,000
Total stockholders’ equity
$410,000
Shares outstanding
10,000
Par value per share
$1
Share price
$102
What is the primary reason companies declare a large stock dividend or a stock split?
Requirement 1
Before After 100% Stock Dividend After 2-for-1 Stock Split Common stock, $1 par value $10,000
$20,000
$10,000
Additional paid-in capital
250,000
250,000
250,000
Total paid-in capital
260,000
270,000
260,000
Retained Earnings
150,000
140,000
150,000
Total stockholders’ equity
$410,000
$410,000
$410,000
Shares outstanding
10,000
20,000
20,000
Par value per share
$1
$1
$0.50
$102
$51
$51
Share price
10-177 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Requirement 2 The primary reason companies declare a large stock dividend or a stock split is to lower the trading price of the stock to a more acceptable trading range, making it attractive to a larger number of potential investors. AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-06 Explain the effect of stock dividends and stock splits. Topic: Stock Dividends and Stock Splits
10-178 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
176.
The stockholders' equity section of University Fashions is presented here. University Fashions Balance Sheet (Stockholders’ Equity Section) ($ in thousands) Stockholders’ equity: Preferred stock, $50 par value
$50,000
Common stock, $5 par value
$25,000
Additional paid-in capital
120,000
Total paid-in capital
195,000
Retained earnings
140,000
Treasury stock
(20,900)
Total stockholders’ equity
$314,100
Required: Based on the stockholders' equity section of University Fashions, answer the following questions. Remember that all amounts are presented in thousands. 1. How many shares of preferred stock have been issued? 2. How many shares of common stock have been issued? 3. Assuming the preferred shares were issued at par value, at what average price per share were the common shares issued? 4. If retained earnings at the beginning of the period was $120 million and net income during the year was $30 million, how much was paid in dividends for the year? 5. If the treasury stock was reacquired at $20 per share, how many shares were reacquired?
Requirement 1: 1,000,000 shares = ($50,000/$50 par value per share) in thousands (× 1,000). Requirement 2: 5,000,000 shares = ($25,000/$5 par value per share) in thousands (× 1,000). Requirement 3: $29 per share. The total paid-in capital for common stock is $25,000 + $120,000 = $145,000 (in thousands). $145,000,000 divided by 5,000,000 shares indicates 10-179 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
an average issue price of $29 per share. Requirement 4:
Retained Earnings, Beginning + Net Income - Dividends = Retained Earnings, Ending
$120,000,000 30,000,000 ? $140,000,000
Dividends paid for the year were $10,000,000. Requirement 5: 1,045,000 shares = ($20,900/$20 per share) in thousands (× 1,000). AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Topic: Stockholders' Equity in the Balance Sheet
10-180 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
177.
Sweet Sixteen has the following beginning balances in its stockholders' equity accounts on January 1, 2018: preferred stock, $100,000, common stock, $20,000; paid-in capital, $380,000; and retained earnings, $450,000. Net income for the year ended December 31, 2018, is $65,000. The following transactions affect stockholders' equity during 2018: March 1
Issue 3,000 additional shares of common stock for $22 per share.
April 1
Issue 5,000 additional shares of preferred stock for $110 per share.
June 1
Declare a cash dividend on common stock of $1 per share and a cash dividend on preferred stock of $5 per share to all stockholders of record on June 15.
June 30
Pay the cash dividends declared on June 1.
August 1
Purchase 2,000 shares of common treasury stock for $18 per share.
October 1
Reissue 1,000 shares of treasury stock purchased on August 1 for $20 per share.
Required: Taking into consideration the beginning balances and all the transactions during 2018, respond to the following for Sweet Sixteen: 1. Prepare the statement of stockholders' equity for the year ended December 31, 2018. 2. Prepare the stockholders' equity section of the balance sheet as of December 31, 2018. 3. Explain how requirements 1 and 2 are similar and how they are different.
Requirement 1
Sweet Sixteen Statement of Stockholders’ Equity For the Year Ended December 31, 2018 Preferred Common Additional Retained Treasury Stock
Stock
Paid-in Earnings
Stock Stockholders’
Capital Balance,
$100,000
$20,000
$380,000 $450,000
Total Equity
$-0-
$950,000
January 1 Issued
3,000
63,000
66,000
common 10-181 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
stock Issued
500,000
50,000
550,000
preferred stock Cash
(53,000)
(53,000)
dividends Purchase
(36,000)
(36,000)
18,000
20,000
treasury stock Reissue
2,000
treasury stock Net
65,000
65,000
income Balance,
$600,000 $23,000 $495,000 $462,000 ($18,000)
$1,562,000
December 31
Requirement 2 Sweet Sixteen Balance Sheet (Stockholders’ Equity Section) December 31, 2018 Stockholders’ equity: Preferred stock, $100 par value
$600,000
Common stock, $1 par value
23,000
Additional paid-in capital
495,000
Total paid-in capital
1,118,000
Retained earnings
462,000
Treasury stock, 100 shares
(18,000)
Total stockholders’ equity
$1,562,000
Requirement 3 Requirements 1 and 2 are similar in that requirement 1 shows the equity balances across the bottom row and requirement 2 shows these same balances in a column format. However, requirements 1 and 2 serve different purposes. The statement of stockholders'
10-182 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
equity in requirement 1 shows the change in each equity account balance over time The stockholders' equity section of the balance sheet in requirement 2 presents the balance of each equity account at a point in time. AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-07 Prepare and analyze the stockholders' equity section of a balance sheet and the statement of stockholders' equity. Topic: Stockholders' Equity in the Balance Sheet
10-183 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
178.
Selected financial data is provided as follows: ($ in millions)
2018
Sales
2017
2016
$14,526 $15,763 $15,943
Net income
967
833
778
Total assets
$7,564
$7,838
$8,544
Total liabilities
$3,177
$3,564
$3,370
Stockholders’
4,387
4,274
5,174
$7,564
$7,838
$8,544
694
791
816
$16
$19
$18
equity Total liabilities and stockholders’ equity Average shares outstanding (in millions) Average stock price
Required: 1. Calculate the return on equity for 2018. How does it compare with the return on equity for 2017? 2. Calculate the price-earnings ratio for 2018. How does it compare with the priceearnings ratio for 2017? Is the company trading at a higher or lower price per dollar of earnings in 2018?
Requirement 1
($ in
Net
millions) Income
Average
Return
÷ Stockholders’ =
on
Equity
Equity
($4,387 + 2018
$967
÷
4,274)/2
= 22.3%
($4,274 + 2017
$833
÷
5,174)/2
= 17.6%
10-184 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
The return on equity is higher in 2018 than in 2017. Requirement 2
($ in millions)
Stock ÷ Price
Earnings Per Share
Price= Earnings Ratio
2018
$16
÷ ($967/694) =
11.5
2017
$19
÷ ($833/791) =
18.0
The price-earnings ratio in 2018 is much lower than in 2017. The company is trading at a lower price per dollar of earnings in 2018. AACSB: Analytical Thinking AICPA: FN Decision Making AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-08 Evaluate company performance using information on stockholders' equity. Topic: Ralph Lauren vs. Abercrombie
179.
Corporations typically do not start raising capital by issuing stock to the general public. What are the common stages of equity financing leading to an initial public offering (IPO)?
Most corporations first raise money by selling stock to the founders of the business and their friends and family. As the equity financing needs of the corporation grow, companies prepare a business plan and seek outside investment from "angel" investors and venture capital firms. Angel investors are wealthy individuals in the business community willing to risk investment funds on a promising business venture. Venture capital firms provide additional financing, often in the millions, for a percentage ownership in the company. Many venture capital firms look to invest in promising companies to which they can add value through business contacts, financial expertise, or marketing channels. Most corporations do not consider issuing stock to the general public (going public) until their equity financing needs exceed $20 million.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand 10-185 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 2 Medium Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Topic: Corporations
180.
Describe the primary advantages and disadvantages of a corporation in comparison to a sole-proprietorship or partnership.
A corporation offers two primary advantages over sole-proprietorships and partnerships. These are (1) limited liability and (2) the ability to raise capital and transfer ownership. Because of limited liability, even in the event of bankruptcy, stockholders in a corporation can lose no more than the amount they invested in the company. Because corporations sell ownership interest in the form of shares of stock, ownership rights are easily transferred. An investor can sell his or her ownership interest (shares of stock) at any time and without affecting the structure of the corporation or its operations. A corporation has two primary disadvantages relative to sole-proprietorships and partnerships. These are (1) additional taxes and (2) more paperwork. Corporations have double taxation. Corporate income is taxed once on earnings at the corporate level, and again on dividends at the individual level. Corporations also have more paperwork as federal and state governments impose extensive reporting requirements on the company.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-01 Identify the advantages and disadvantages of the corporate form of ownership. Topic: Corporations
10-186 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
181.
Explain the difference between authorized, issued, and outstanding shares.
Authorized stock is the total number of shares available to sell, stated in the company's articles of incorporation. Issued stock is the number of shares that have been sold to investors. A company usually does not issue all its authorized stock. Outstanding stock is the number of shares held by investors. Issued and outstanding are the same amounts as long as the corporation has not repurchased any of its shares. Repurchased shares, called treasury stock, are included as part of shares issued, but excluded from shares outstanding.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-02 Record the issuance of common stock. Topic: Common Stock
182.
Explain why preferred stock often is said to have a mixture of attributes somewhere between common stock and bonds.
Investors in common stock are the owners of the corporation because they have voting rights. Investors in bonds are creditors who have loaned money to the corporation. Preferred stock fits somewhere between common stock and bonds. There are other factors where preferred stock falls in the middle between common stock and bonds. For example, the risk and expected return are greatest for investments in common stock followed by preferred stock and then bonds. In contrast, preference for payments of interest and dividends are given first to bonds, then preferred stock, and then common stock.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-03 Contrast preferred stock with common stock and bonds payable. Topic: Preferred Stock
10-187 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
183.
Contrast the effects of a cash dividend and a stock dividend on total assets, total liabilities, and total stockholders' equity.
Declaration and payment of a cash dividend reduces total assets and total stockholders' equity. Declaration and payment of a stock dividend has no effect on total assets, total liabilities, and total stockholders' equity.
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-05 Describe retained earnings and record cash dividends. Learning Objective: 10-06 Explain the effect of stock dividends and stock splits. Topic: Earned Capital Topic: Stock Dividends and Stock Splits
10-188 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 11 Statement of Cash Flows
True / False Questions
1. A statement of cash flows provides a summary of cash inflows and cash outflows during the reporting period. True
False
2. The three primary categories of cash flows are cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. True
False
3. Financing activities include cash receipts and cash payments for transactions relating to revenue and expense activities. True
False
4. Investing activities include cash transactions involving the purchase and sale of long-term assets and current investments. True
False
5. Operating activities are both inflows and outflows of cash resulting from the external financing of a business. True
False
6. We report interest and dividends received from investments with investing activities. True
False
11-1 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
7. We report interest paid on bonds or notes payable with operating activities rather than financing activities. True
False
8. We record dividends received as a financing activity. True
False
9. We record dividends paid as a financing activity. True
False
10. Transactions that do not increase or decrease cash, but that result in significant investing and financing activities, are reported either directly after the cash flow statement or in a separate note to the financial statements as noncash activities. True
False
11. The purchase of long-term assets by issuing debt is recorded as both an investing activity and a financing activity. True
False
12. The total net cash flows from operating activities differ between the direct and indirect methods. True
False
13. Using the indirect method, we begin with net income and then list adjustments to net income in order to arrive at operating cash flows. True
False
11-2 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
14. If no cash was exchanged in the purchase of equipment financed entirely with a note payable, we represent this as both an investing activity and a financing activity in the statement of cash flows. True
False
15. Using the direct method we adjust the items in the income statement to directly show the cash inflows and outflows from operations. True
False
16. Because depreciation expense reduces net income, companies will add depreciation expense back to net income as a step in arriving at net cash flows from operations under the indirect method. True
False
17. A loss on the sale of long-term assets is added back to net income to arrive at net cash flows from operating activities under the indirect method. True
False
18. A gain on the sale of long-term assets is added back to net income to arrive at net cash flows from operating activities under the indirect method. True
False
19. Under the indirect method, a decrease in accounts receivable is added to net income to arrive at net cash flows from operating activities. True
False
20. Under the indirect method, an increase in prepaid rent is added to net income to arrive at net cash flows from operating activities. True
False
11-3 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
21. Under the indirect method, an increase in inventory is added to net income and a decrease in inventory is subtracted from net income to arrive at net cash flows from operating activities. True
False
22. When preparing a statement of cash flows using the indirect method, a decrease in accounts payable is subtracted from net income. True
False
23. Under the indirect method, an increase in accounts payable is added to net income to arrive at net cash flows from operating activities. True
False
24. Under the indirect method, a decrease in accounts payable is added to net income to arrive at net cash flows from operating activities. True
False
25. The long-term assets section of the balance sheet is the place to look for investing activities. True
False
26. The sale of land is reported in the operating section of the statement of cash flows. True
False
27. We report the purchase of stock in another corporation as a cash outflow from investing activities. True
False
28. We report the actual amount of cash proceeds received from the sale of land as a cash inflow from investing activities. True
False
11-4 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
29. We can find most financing activities by examining changes in long-term liabilities and stockholders' equity accounts. True
False
30. The inflow of cash received from issuing common stock is reported as an investing activity. True
False
31. The balance in Retained Earnings is increased by net income and is decreased by dividends. True
False
32. We report the payment of cash dividends as a cash outflow from investing activities. True
False
33. The total of the cash flows from operating, investing, and financing activities equals the net increase or decrease in cash for the period. True
False
34. We calculate cash return on assets as the change in cash divided by average total assets. True
False
35. Cash return on assets indicates the amount of operating cash flow generated for each dollar invested in assets. True
False
36. To maximize cash flow from operations, a company strives to increase both cash flows per dollar of sales and sales per dollar of assets invested. True
False
11-5 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
37. Cash return on assets can be separated to examine two important business strategies: cash flow to sales and asset turnover. True
False
38. Income statement items that have no cash effect are still reported under the direct method. True
False
39. Using the direct method, we examine each account in the income statement and convert it from an accrual amount to a cash amount. True
False
40. If accounts receivable decreases, this indicates that revenues exceed cash receipts from customers. True
False
41. When accounts payable decrease, cash paid to suppliers must have been more than purchases. True
False
42. If there are no current assets or liabilities associated with operating expenses, the amounts we report for these expenses in the income statement must equal the amount of cash we paid for these items. True
False
43. Depreciation expense is not reported on the statement of cash flows under the direct method. True
False
11-6 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
44. We add an increase in interest payable to interest expense in arriving at cash paid for interest under the direct method. True
False
45. We add a decrease in income tax payable to income tax expense to calculate cash paid for income taxes. True
False
46. The indirect method begins with net income, while the direct method considers each of the individual accounts that make up net income. True
False
Multiple Choice Questions
47. The Statement of Cash Flows:
A. Lists all cash flows over the life of a company. B. Breaks down all cash transactions into investing and financing cash flows. C. Shows that the change in total cash from one year to the next is equal to the net operating, investing, and financing cash flows. D. Has two methods for investing cash flows - direct and indirect. 48. Which financial statement separates business activities into operating, investing and financing activities?
A. Statement of Stockholders' Equity B. Income Statement C. Statement of Cash Flows D. Balance Sheet
11-7 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
49. The balance of cash reported in the balance sheet this year minus the balance of cash reported in the balance sheet last year equals:
A. Net cash flows from operating activities only B. Net income C. Net cash flows from operating, investing, and financing activities D. Net cash flows from financing activities only 50. The purchase of land is classified in the statement of cash flows as a(n):
A. Operating activity. B. Investing activity. C. Financing activity. D. Noncash activity. 51. The sale of a good or service is classified in the statement of cash flows as a(n):
A. Investing activity. B. Operating activity. C. Financing activity. D. Noncash activity. 52. The payment of salaries is classified in the statement of cash flows as a(n):
A. Investing activity. B. Operating activity. C. Financing activity. D. Noncash activity.
11-8 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
53. The issuance of notes payable for borrowing is classified in the statement of cash flows as a(n):
A. Operating activity. B. Investing activity. C. Financing activity. D. Noncash activity. 54. The purchase of treasury stock is classified in the statement of cash flows as a(n):
A. Operating activity. B. Investing activity. C. Financing activity. D. Noncash activity. 55. Operating cash flows exclude:
A. Interest received. B. Interest paid. C. Dividends received. D. Dividends paid. 56. The statement of cash flows reports cash flows from the activities of:
A. Operating, purchasing, and investing. B. Borrowing, paying, and investing. C. Operating, investing, and financing. D. Using, investing, and financing.
11-9 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
57. Which of the following is correct about the statement of cash flows?
A. A company with a net loss will always have a cash outflow from operating activities. B. Collecting interest earned from a note receivable creates a cash inflow from investing activities. C. Paying dividends to investors creates a cash outflow from financing activities. D. The repayment of long-term debt is a cash inflow from financing activities. 58. Which of the following is correct about the statement of cash flows?
A. A company with a net loss on the income statement will always have a net cash outflow from operating activities. B. A purchase of equipment is classified as a cash inflow from investing activities. C. Cash dividends received on stock investments are classified as cash flows from operating activities. D. Cash dividends paid are classified as cash flows from operating activities. 59. Which of the following is not correct about the statement of cash flows?
A. Paying dividends to investors creates a cash outflow from financing activities. B. A purchase of equipment is classified as a cash outflow from investing activities. C. Cash dividends paid are classified as cash flows from operating activities. D. Cash dividends received on stock investments are classified as cash flows from operating activities. 60. Which of the following is not correct about the statement of cash flows?
A. Paying dividends to investors creates a cash outflow from financing activities. B. A purchase of equipment is classified as a cash outflow from investing activities. C. A company with a net loss on the income statement will always have a net cash outflow from operating activities. D. Cash dividends received on stock investments are classified as cash flows from operating activities.
11-10 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
61. All classifications on the Balance Sheet have a general relationship with sections identified on the Statement of Cash Flows. Indicate which relationships are correctly identified in the table below. #
Classification on the
Section on
Balance Sheet
Statement of Cash Flows
I
Bonds Payable
Financing
II
Equipment
Operating
III
Common Stock
Financing
IV
Accounts Payable
Operating
V
Accounts Receivable
Operating
A. IV, V. B. I, II, III. C. I, III, IV, V. D. All of these. 62. Under what section of the Statement of Cash Flows would you classify dividends paid on common stock?
A. Operating. B. Investing. C. Financing. D. Noncash activity.
11-11 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
63. Under what section of the Statement of Cash Flows would you classify the purchase of equipment by issuing a long-term note payable?
A. Operating. B. Investing. C. Financing. D. Noncash activity. 64. Which of the following transactions would not create a cash flow?
A. The company purchased some of its own stock from a stockholder. B. Payment of a dividend. C. The company purchased land by issuing common stock. D. Sale of equipment at book value. 65. Which of the following is an example of a noncash activity?
A. Sale of land for less than its cost. B. Purchase of land by issuing debt. C. Sale of land for more than its cost. D. Purchase of land using cash proceeds from issuance of common stock. 66. Which of the following is not true regarding cash flows?
A. Operating activities include the payment of dividends. B. Investing activities involve long-term investments. C. Financing activities involve long-term liabilities and equities. D. Purchasing a building with a note is considered a noncash activity.
11-12 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
67. Dividends received from an investment is classified as a(an) __________ cash flow, and paying dividends on stock issued is classified as a(an) ____________ cash flow on the Statement of Cash Flows.
A. Operating; Operating B. Operating; Financing C. Financing; Operating D. Investing; Financing 68. The collection of cash from customers would be classified as which type of cash flow on the Statement of Cash Flows?
A. Financing. B. Investing. C. Operating. D. Not reported on the statement of cash flows. 69. The indirect and direct methods:
A. Are used by companies about equally in actual practice. B. Affect the presentations of operating, investing, and financing activities. C. Arrive at different amounts for net cash flows from operating activities. D. Are two allowable methods to present operating activities in the statement of cash flows. 70. In the operating activities section of the statement of cash flows, we start with net income when using:
A. The direct method. B. The indirect method. C. Both the direct and the indirect method. D. Neither the direct nor the indirect method.
11-13 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
71. Arrow Printers paid $2,000 interest on short-term notes payable, $10,000 interest on longterm bonds, and $6,000 in dividends on its common stock. Arrow would report cash outflows from activities, as follows:
A. Operating, $2,000; Financing $16,000. B. Operating, $0; Financing $18,000. C. Operating, $12,000; Financing $6,000. D. Operating, $18,000; Financing $0. 72. Bad Brad's BBQ had cash flows for the year as follows ($ in millions): CASH RECEIVED FROM: Customers
$1,800
Interest on investments
200
Sale of land
100
Sale of common stock
600
Issuance of debt securities
2,000
CASH PAID FOR: Interest on debt Income tax
$300 80
Debt principal reduction
1,500
Purchase of equipment
4,000
Purchase of inventory
1,000
Dividends on common stock
200
Operating expenses
500
Bad Brad's would report net cash inflows (outflows) from operating activities in the amount of:
A. ($80). B. $120. C. $200. D. $420.
11-14 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
73. We can identify operating activities from income statement information and changes in
A. Long-term asset accounts. B. Long-term liability accounts. C. Current asset and current liability accounts. D. Stockholders' equity accounts. 74. In preparing a statement of cash flows under the indirect method, a decrease in accounts receivable would be reported or included as a(n):
A. Addition to net income in the operating activities section. B. Deduction from net income in the operating activities section. C. Financing activity. D. Investing activity. 75. In preparing a statement of cash flows under the indirect method, an increase in accounts payable would be reported as a(n):
A. Addition to net income in the operating activities section. B. Deduction from net income in the operating activities section. C. Financing activity. D. Investing activity. 76. Which of the following is NOT a correct practice when adjusting net income to net operating cash flows?
A. Subtract depreciation expense. B. Add losses on sales of assets. C. Subtract increase in Accounts Receivable. D. Add increase in Accounts Payable.
11-15 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
77. Which of the following is added to net income as an adjustment under the indirect method of preparing the statement of cash flows?
A. Salaries payable increase. B. Gain on the sale of land. C. Inventory increase. D. Accounts receivable increase. 78. Which of the following is subtracted from net income as an adjustment under the indirect method of preparing the statement of cash flows?
A. Gain on the sale of land. B. Accounts receivable decrease. C. Inventory decrease. D. Salaries payable increase.
11-16 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
79. Consider the following items: (a) Decrease in
(f) Gain on the sale of
accounts receivable
equipment
(b) Issuance of common (g) Depreciation expense stock (c) Increase in interest
(h) Payment of dividends
receivable (d) Purchase of land
(i) Decrease in utilities payable
(e) Decrease in
(j) Increase in inventory
accounts payable
How many of these items would be added to net income when using the indirect method to prepare the operating activities section of the statement of cash flows?
A. 2 B. 4 C. 1 D. 3
11-17 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
80. Consider the following items: (a) Decrease in
(f) Gain on the sale of
accounts receivable
equipment
(b) Issuance of common (g) Depreciation expense stock (c) Increase in interest
(h) Payment of dividends
receivable (d) Purchase of land
(i) Decrease in utilities payable
(e) Decrease in
(j) Increase in inventory
accounts payable
How many of these items would be subtracted from net income when using the indirect method to prepare the operating activities section of the statement of cash flows?
A. 5 B. 4 C. 1 D. 2 81. Which of the following is subtracted from net income as an adjustment under the indirect method of preparing the statement of cash flows?
A. Salaries payable decrease. B. Inventory decrease. C. Depreciation expense. D. Accounts receivable decrease.
11-18 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
82. Which of the following is not subtracted from net income as an adjustment under the indirect method of preparing the statement of cash flows?
A. Depreciation expense. B. Interest receivable increase. C. Increase in inventory. D. Salaries payable decrease. 83. Given the items below, which of the following is a subtraction from net income to arrive at operating cash flows using the indirect method? I. Loss on sale of assets II. Increase in Supplies III. Increase in Accounts Payable IV. Depreciation expense
A. II. only. B. IV. only. C. I. and II. D. II. and III. 84. Given the items below, which of the following is an addition to net income to arrive at operating cash flows using the indirect method? I. Loss on sale of assets II. Increase in Supplies III. Increase in Accounts Payable IV. Increase in Accounts Receivable
A. I. and III. B. I. only. C. III. and IV. D. II. and III.
11-19 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
85. Rachel's Recordings reported net income of $200,000. Beginning balances in Accounts Receivable and Accounts Payable were $15,000 and $20,000, respectively. Ending balances in these accounts were $12,000 and $22,000, respectively. Assuming that all relevant information has been presented, Rachel's net cash flows from operating activities would be:
A. $200,000. B. $195,000. C. $205,000. D. $199,000. 86. Mary's Music Store reported net income of $135,000. Beginning balances in Accounts Receivable and Accounts Payable were $29,000 and $26,000, respectively. Ending balances in these accounts were $30,000 and $24,000, respectively. Assuming that all relevant information has been presented, Mary's net cash flows from operating activities would be:
A. $132,000. B. $134,000. C. $136,000. D. $138,000. 87. Kela Corporation reports net income of $450,000 that includes depreciation expense of $70,000. Also, cash of $50,000 was borrowed on a 5-year note payable. Based on this data, total cash inflows from operating activities are:
A. $380,000. B. $470,000. C. $520,000. D. $570,000.
11-20 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
88. Assume net income was $100,000, depreciation expense was $8,000, accounts receivable decreased by $7,500, and accounts payable decreased by $2,500. The amount of net cash flows from operating activities is:
A. $103,000. B. $100,000. C. $108,000. D. $113,000. 89. Innovative Products reported net income of $205,000. Beginning and ending Inventory balances were $40,000 and $45,000, respectively. Accounts Payable balances at the beginning and end of the year were $35,000 and $33,000, respectively. Assuming that all relevant information has been presented, the company would report net operating cash flows of:
A. $202,000. B. $198,000. C. $212,000. D. $205,000. 90. Lense Laboratories' net income was $250,000. Given the account information below, what is the net operating cash flows for Lense Laboratories? Increase in Accounts Receivable
$60,000
Increase in Salaries Payable
$50,000
Decrease in Inventory
$30,000
Depreciation Expense
$45,000
Increase in Prepaid Insurance
$3,000
A. $152,000. B. $278,000. C. $312,000. D. $438,000.
11-21 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
91. Servo Industries' net income was $300,000. Given the account information below, what is the net operating cash flows for Servo Industries? Decrease in Accounts Receivable
$50,000
Decrease in Salaries Payable
$75,000
Decrease in Inventory
$20,000
Depreciation Expense
$35,000
Increase in Interest Payable
$7,000
A. $487,000. B. $323,000. C. $337,000. D. $237,000. 92. Laser World's income statement reported total revenues, $850,000 and total expenses (including $40,000 depreciation) of $720,000. The balance sheet reported the following: Accounts Receivable—beginning balance, $50,000 and ending balance, $60,000; Accounts Payable—beginning balance, $22,000 and ending balance, $28,000. Therefore, based only on this information, the net cash flows from operating activities were:
A. $126,000. B. $166,000. C. $174,000. D. $186,000.
11-22 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
93. Assuming Net Income for the year is $115,000, what is the net operating cash flows given the following information: Increase in Salaries Payable
$15,000
Depreciation Expense
$6,000
Increase in Prepaid Rent
$24,000
Loss on sale of asset
$1,000
Increase in Accounts Payable
$25,000
Increase in Inventory
$50,000
A. $112,000. B. $88,000. C. $118,000. D. $188,000. 94. Which of the following statements is true?
A. Investment in another company's common stock is classified as a cash outflow from financing activities on the Statement of Cash Flows. B. Repayment of long-term debt is classified as a cash outflow from investing activities on the Statement of Cash Flows. C. Losses on the sale of long-term assets are an adjustment reported in the operating activities section of the Statement of Cash Flows under the indirect method. D. Dividends paid are classified as a cash outflow from operating activities on the Statement of Cash Flows. 95. Which of the following is an example of a cash outflow from an investing activity?
A. Payment of cash for treasury stock. B. Payment of cash for the purchase of land. C. Payment of cash for inventory. D. Payment on a long-term note payable.
11-23 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
96. Which of the following transactions would generally result in an investing cash inflow?
A. Receive cash from borrowing at the bank. B. Receive cash from the sale of land. C. Receive cash from customers. D. Receive cash from stockholders for the issuance of common stock. 97. Which of the following is an example of a cash inflow from a financing activity?
A. Issuance of bonds. B. Sale of an intangible asset. C. Receipt of cash dividends. D. Purchase of land. 98. _________ is an investing cash flow and ________ is a financing cash flow, as reported on the Statement of Cash Flows.
A. Issuing bonds; selling investments B. Purchasing land; repaying a bank loan C. Receiving cash from the sale of inventory; paying cash dividends D. Purchasing treasury stock; lending cash to an employee 99. Cash flows from investing activities do not include cash flows from:
A. Lending. B. The sale of equipment. C. Borrowing. D. The purchase of land and buildings.
11-24 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
100.Cash flows from financing activities include:
A. Interest received. B. Interest paid. C. Dividends received. D. Cash dividends paid. 101.Cash flows from financing activities do not include:
A. Retirement of bonds payable. B. Cash dividends paid. C. Issuance of common stock. D. Interest received. 102.Cash flows from investing activities do not include:
A. Proceeds from the sale of land. B. Proceeds from the issuance of common stock. C. Proceeds from the sale of marketable securities. D. Cash outflows from acquiring land. 103.Cash flows from investing activities include:
A. Proceeds from the issuance of common stock. B. Cash outflows from acquiring land. C. Retirement of bonds payable. D. Interest received.
11-25 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
104.Shively Mfg. Co. sold land costing $10,000 for $12,000. Shively would report:
A. Operating cash inflows of $12,000. B. Investing cash inflows of $12,000. C. Financing cash inflows of $12,000. D. Financing cash inflows of $2,000. 105.Bad Brad's BBQ had cash flows for the year as follows ($ in millions): CASH RECEIVED FROM: Customers
$1,800
Interest on investments
200
Sale of land
100
Sale of common stock
600
Issuance of debt securities
2,000
CASH PAID FOR: Interest on debt Income tax
$300 80
Debt principal reduction
1,500
Purchase of equipment
4,000
Purchase of inventory
1,000
Dividends on common stock
200
Operating expenses
500
Bad Brad's would report net cash inflows (outflows) from investing activities in the amount of:
A. ($4,000). B. $100. C. ($3,900). D. ($1,900).
11-26 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
106.Bad Brad's BBQ had cash flows for the year as follows ($ in millions): CASH RECEIVED FROM: Customers
$1,800
Interest on investments
200
Sale of land
100
Sale of common stock
600
Issuance of debt securities
2,000
CASH PAID FOR: Interest on debt Income tax
$300 80
Debt principal reduction
1,500
Purchase of equipment
4,000
Purchase of inventory
1,000
Dividends on common stock
200
Operating expenses
500
Bad Brad's would report net cash inflows (outflows) from financing activities in the amount of:
A. $1,100. B. ($1,100). C. $820. D. $900.
11-27 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
107.During the year, Next Tec Corp. had the following cash flows: receipt from customers, $10,000; receipt from the bank for long-term borrowing, $6,000; payment to suppliers, $5,000; payment of dividends, $1,000, payment to workers, $2,000; and payment for machinery, $8,000. What amount would be reported for investing net cash flows on the Statement of Cash Flows?
A. $5,000. B. $2,000. C. $6,000. D. ($8,000). 108.During the year, Next Tec Corp. had the following cash flows: receipt from customers, $10,000; receipt from the bank for long-term borrowing, $6,000; payment to suppliers, $5,000; payment of dividends, $1,000, payment to workers, $2,000; and payment for machinery, $8,000. What amount would be reported for net financing cash flows on the Statement of Cash Flows?
A. $5,000. B. $2,000. C. $6,000. D. ($8,000).
11-28 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
109.A company had the following cash flows for the year: (a) Purchased inventory, $60,000 (b) Sold goods to customers, $90,000 (c) Received loan from a local bank, $150,000 (d) Purchased land, $180,000 (e) Purchased treasury stock, $40,000 (f) Paid dividends, $10,000 (g) Sold delivery truck, $30,000 What amount would be reported for net investing cash flows on the Statement of Cash Flows?
A. ($150,000). B. ($180,000). C. $30,000. D. ($190,000). 110.A company had the following cash flows for the year: (a) Purchased land, $60,000 (b) Borrowed from a local bank, $100,000 (c) Paid employee salaries, $50,000 (d) Issued common stock, $75,000 (e) Paid dividends, $20,000 (f) Sold equipment, $40,000 (g) Sold services to customers, $120,000 What amount would be reported for net investing cash flows on the Statement of Cash Flows?
A. ($20,000). B. $70,000. C. $155,000. D. $40,000.
11-29 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
111.A company had the following cash flows for the year: (a) Purchased land, $60,000 (b) Borrowed from a local bank, $100,000 (c) Paid employee salaries, $50,000 (d) Issued common stock, $75,000 (e) Paid dividends, $20,000 (f) Sold equipment, $40,000 (g) Sold services to customers, $120,000 What amount would be reported for net financing cash flows on the Statement of Cash Flows?
A. $155,000. B. $70,000. C. ($20,000). D. $40,000. 112.Financing activities would include cash paid for:
A. The stock of another company. B. Dividends to stockholders. C. The purchase of treasury stock. D. Both dividends to stockholders and the purchase of treasury stock. 113.Cash received from issuing common stock would be classified in which section of the Statement of Cash Flows?
A. Operating. B. Investing. C. Financing. D. Not shown in the Statement of Cash Flows.
11-30 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
114.Which of the following would be classified as an investing cash flow?
A. Issue bonds. B. Receive cash in advance from a customer. C. Sell a piece of equipment below cost. D. Repurchase the company's own shares of common stock. 115.During 2018, Victory Solutions had the following cash flows: (1) received cash of $5,000 billed to a customer in 2017; (2) earned $20,000 of net income; (3) paid interest of $6,000 on a corporate bond issued; (4) paid dividends of $8,000 to its stockholders; (5) borrowed $40,000 from a local bank; and (6) purchased its own shares of common stock for $10,000. What is Victory Solution's net cash flows from financing activities for 2018?
A. $40,000. B. $30,000. C. $22,000. D. $16,000. 116.The following information pertains to Alpha Computing at the end of 2018: Assets
$970,000
Liabilities
$560,000
Net Income
$90,000
Common Stock
$350,000
Alpha Computing's Retained Earnings account had a zero balance at the beginning of 2018. What amount of dividends did the company pay in 2018?
A. $280,000. B. $150,000. C. $30,000. D. $80,000.
11-31 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
117.The balance sheet of Computer World reports total assets of $350,000 and $450,000 at the beginning and end of the year, respectively. Sales revenues are $800,000, net income is $100,000, and net cash flows from operating activities are $150,000. What is Computer Worlds' cash return on assets?
A. 33.3%. B. 42.9%. C. 25.0%. D. 37.5%. 118.The balance sheet of Computer World reports total assets of $350,000 and $450,000 at the beginning and end of the year, respectively. Sales revenues are $800,000, net income is $100,000, and net cash flows from operating activities are $150,000. What is Computer World's cash flow to sales?
A. 15.6%. B. 25.0%. C. 18.8%. D. 37.5%. 119.The balance sheet of Computer World reports total assets of $350,000 and $450,000 at the beginning and end of the year, respectively. Sales revenues are $800,000, net income is $100,000, and net cash flows from operating activities are $150,000. What is Computer World's asset turnover?
A. 2.0 times. B. 2.3 times. C. 0.5 times. D. 1.8 times.
11-32 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
120.The balance sheet of Sound Designs reports total assets of $750,000 and $800,000 at the beginning and end of the year, respectively. Sales revenues are $1.5 million ($1.2 million in the previous year), net income is $150,000, and net cash flows from operating activities are $175,000. What is Sound Designs' cash return on assets?
A. 19.4%. B. 21.9%. C. 22.6%. D. 18.8%. 121.The balance sheet of Sound Designs reports total assets of $750,000 and $800,000 at the beginning and end of the year, respectively. Sales revenues are $1.5 million ($1.2 million in the previous year), net income is $150,000, and net cash flows from operating activities are $175,000. What is Sound Designs' cash flow to sales?
A. 22.6%. B. 11.7%. C. 14.6%. D. 13.0%. 122.The balance sheet of Sound Designs reports total assets of $750,000 and $800,000 at the beginning and end of the year, respectively. Sales revenues are $1.5 million ($1.2 million in the previous year), net income is $150,000, and net cash flows from operating activities are $175,000. What is Sound Designs' asset turnover?
A. 2.0 times. B. 1.7 times. C. 0.5 times. D. 1.9 times.
11-33 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
123.The balance sheet of Tech Track reports total assets of $400,000 and $500,000 at the beginning and end of the year, respectively. Sales revenues are $1.1 million ($0.8 million in the previous year), net income is $40,000, and net cash flows from operating activities are $50,000. How does Tech Track's cash return on assets compare to the industry average of 10%?
A. Better. B. Worse. C. Same as. D. Cannot be determined with the data provided. 124.The balance sheet of Tech Track reports total assets of $400,000 and $500,000 at the beginning and end of the year, respectively. Sales revenues are $1.1 million ($0.8 million in the previous year), net income is $40,000, and net cash flows from operating activities are $50,000. How does Tech Track's cash flow to sales ratio compare to the industry average of 5%?
A. Better. B. Worse. C. Same as. D. Cannot be determined with the data provided. 125.The balance sheet of Tech Track reports total assets of $400,000 and $500,000 at the beginning and end of the year, respectively. Sales revenues are $1,080,000($800,000 in the previous year), net income is $40,000, and net cash flows from operating activities are $50,000. How does Tech Track's asset turnover compare to the industry average of 2.4 times?
A. Better. B. Worse. C. Same as. D. Cannot be determined with the data provided.
11-34 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
126.We can separate cash return on assets into:
A. Cash flow to sales and return on assets. B. Cash flow to sales and asset turnover. C. Cash flow to sales and profit margin. D. Profit margin and asset turnover. 127.Some cash flow ratios are derived by substituting net cash flows from operating activities in place of:
A. average total assets. B. net income. C. average stockholders' equity. D. the change in cash. 128.The balance sheet of Technology World reports total assets of $800,000 and $900,000 at the beginning and end of the year, respectively. The cash return on assets for the year is 20%. What is Technology World's net operating cash flows for the year?
A. $4,500,000. B. $170,000. C. $4,250,000. D. $85,000. 129.The balance sheet of Orion Medical Equipment reports total assets of $450,000 and $550,000 at the beginning and end of the year, respectively. The cash return on assets for the year is 10%. What is Orion's net operating cash flows for the year?
A. $5,000,000. B. $55,000. C. $5,500,000. D. $50,000.
11-35 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
130.We calculate cash return on assets as
A. The change in cash divided by average total assets. B. Net cash flows from operating activities divided by average total assets. C. The change in cash divided by ending total assets. D. Net cash flows from operating activities divided by ending total assets. 131.Which of the following statements is not true relating to cash flow analysis?
A. Cash return on assets indicates the amount of operating cash flow generated for each dollar invested in assets. B. To maximize cash flow from operations, a company strives to increase both cash flow per dollar of sales and sales per dollar of assets invested. C. Cash return on assets can be separated to examine two important business strategies: cash flow to sales and asset turnover. D. Positive cash flow from operations is not important to a company's survival in the longrun. 132.The balance sheet of Storage Solutions reports total assets of $300,000 and $350,000 at the beginning and end of the year, respectively. The cash return on assets for the year is 10%. What is Storage Solutions' net cash flows from operating activities for the year?
A. $25,000. B. $30,000. C. $32,500. D. $35,000.
11-36 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
133.In 2018, Hope Company incurred sales on account of $100,000. The company also has the following information:
Accounts
December 31,
December 31,
2018
2017
$20,000
$50,000
$40,000
$65,000
Receivable Accounts Payable
What is the amount of cash received from customers for Hope Company in 2018?
A. $100,000. B. $45,000. C. $130,000. D. $70,000. 134.Wireless Technologies reports sales of $50 million. Accounts receivable at the beginning and end of the year are $5 million and $7 million, respectively. What is the amount of cash received from customers?
A. $50 million. B. $52 million. C. $48 million. D. $55 million. 135.At the beginning of the period, Utilities Payable equals $500. At the end of the period, Utilities Payable equals $700. If Utilities Expense for the period equals $1,500, what was the cash paid for utilities for the period?
A. $500. B. $1,500. C. $1,300. D. $700.
11-37 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
136.At the beginning of the period, Accounts Receivable equals $1,700. At the end of the period, Accounts Receivable equals $2,200. If Service Revenue for the period equals $15,400, what was the cash received from customers for the period?
A. $13,200. B. $15,900. C. $14,900. D. $15,400. 137.Wireless Technologies reports cost of goods sold of $40 million. Inventory at the beginning and end of the year are $4 million and $3 million, respectively. Accounts payable at the beginning and end of the year are $3 million and $6 million, respectively. What is the amount of cash paid to suppliers?
A. $40 million. B. $36 million. C. $44 million. D. $42 million. 138.Wireless Technologies reports operating expenses of $2 million. Operating expenses include rent expense. Prepaid rent at the beginning and end of the year are $20,000 and $70,000, respectively. All other operating expenses were paid in cash as incurred. What is the amount of cash paid for operating expenses?
A. $2,000,000. B. $2,070,000. C. $1,950,000. D. $2,050,000.
11-38 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
139.Wireless Technologies reports income tax expense of $800,000. Income tax payable at the beginning and end of the year are $50,000 and $70,000, respectively. What is the amount of cash paid for income taxes?
A. $780,000. B. $800,000. C. $820,000. D. $870,000. 140.Data Solutions reports sales of $100 million. Accounts receivable at the beginning and end of the year are $6 million and $9 million, respectively. What is the amount of cash received from customers?
A. $100 million. B. $103 million. C. $97 million. D. $109 million. 141.Data Solutions reports cost of goods sold of $75 million. Inventory at the beginning and end of the year are $8 million and $9 million, respectively. Accounts payable at the beginning and end of the year are $5 million and $3 million, respectively. What is the amount of cash paid to suppliers?
A. $78 million. B. $72 million. C. $75 million. D. $76 million.
11-39 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
142.Data Solutions reports operating expenses of $5 million. Operating expenses include rent expense. Prepaid rent at the beginning and end of the year are $120,000 and $80,000, respectively. All other operating expenses were paid in cash as incurred. What is the amount of cash paid for operating expenses?
A. $5,000,000. B. $5,040,000. C. $4,960,000. D. $5,080,000. 143.Data Solutions reports income tax expense of $1,700,000. Income taxes payable at the beginning and end of the year are $250,000 and $370,000, respectively. What is the amount of cash paid for income taxes?
A. $1,700,000. B. $1,820,000. C. $2,070,000. D. $1,580,000. 144.Schneider Inc. purchases its inventory from suppliers on account. During the year, its Inventory account increased by $10 million and its accounts payable to suppliers decreased by $3 million. If cost of goods sold was $440 million, its cash outflows to inventory suppliers totaled:
A. $453 million. B. $447 million. C. $433 million. D. $427 million.
11-40 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
145.A company's Income Tax Payable account decreased from $14 million to $12 million during the year. If its income tax expense was $80 million, what would be shown as cash paid for income taxes under the direct method?
A. A cash outflow of $12 million. B. A cash outflow of $78 million. C. A cash outflow of $80 million. D. A cash outflow of $82 million. 146.Which of the following items is not reported in the operating section of the statement of cash flows using the direct method?
A. Depreciation expense. B. Cash paid to suppliers. C. Cash received from customers. D. Cash paid for income taxes. 147.Which of the following items is reported in the operating section of the statement of cash flows using the direct method?
A. Depreciation expense. B. Gain on sale of an asset. C. Cash received from customers. D. Loss on sale of an asset.
Matching Questions
11-41 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
148.Match the following
1. Financing activities 2. Investing activities 3. Statement of cash flows 4. Noncash activities
Begins with net income and then list adjustments to net income in order to arrive at operating cash flows.
____
Significant investing and financing activities that do not affect cash.
____
Sales revenue divided by average total assets; measures the sales revenue generated per dollar of assets.
____
Includes cash receipts and cash payments for transactions relating to revenue and expense activities.
____
Net cash flows from operating activities divided by average 5. Cash flow to sales
total assets; measures the operating cash flow generated per dollar of assets.
____
A summary of cash inflows and cash outflows during the reporting period sorted by operating, investing, and financing 6. Indirect method
activities.
____
Net cash flows from operating activities divided by sales 7. Operating activities
revenue; measures the operating cash flow generated per dollar of sales.
____
Includes cash transactions resulting from the external 8. Asset turnover
financing of a business.
9. Cash return on
Includes cash transactions involving the purchase and sale of
assets
long-term assets and current investments.
____ ____
Adjusts the items on the income statement to show items such as cash received from customers, and cash paid for 10. Direct method
inventory, salaries, rent, interest and taxes.
____
Essay Questions
11-42 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
149.For each of the following ten transactions, indicate by letter whether the cash effect of each transaction is reported in a statement of cash flows as an operating (O), investing (I), financing (F), or noncash (NC) activity. Also, indicate whether the transaction is a cash inflow (CI), cash outflow (CO), or no effect on cash (NE). The first answer is provided as an example. Type of
Cash
Activity
Inflow or
Transaction
Outflow O
CO
Payment of employee salaries 1. Issuance of bonds 2. Payment of income taxes 3. Payment of a long-term note payable 4. Sale of treasury stock 5. Payment of an account payable 6. Sale of land for cash 7. Purchase of long-term assets by issuing debt. 8. Collection of an account receivable 9. Issuance of common stock 10. Purchase of inventory
11-43 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
150.For each of the following five transactions, indicate by letter whether the cash effect of each transaction is reported in a statement of cash flows as an operating (O), investing (I), financing (F), or noncash (NC) activity. Type of
Transaction
Activity 1. Investment in bonds 2. Payment of interest on bonds payable 3. Payment of a cash dividend 4. Purchase of a building 5. Collection of a note receivable
11-44 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
151.For each of the following five transactions, indicate by letter whether the cash effect of each transaction is reported in a statement of cash flows as an operating (O), investing (I), financing (F), or noncash (NC) activity. Type of
Transaction
Activity 1. Issuance of common stock 2. Sale of land for cash 3. Purchase of treasury stock 4. Collection of an account receivable 5. Issuance of a note payable
11-45 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
152.For each of the following five transactions, indicate by letter whether the cash effect of each transaction is reported in a statement of cash flows as an operating (O), investing (I), financing (F), or noncash (NC) activity. Type of
Transaction
Activity 1. Purchase of inventory 2. Repayment of note payable 3. Payment of employee salaries 4. Sale of equipment for a note receivable 5. Issuance of bonds
11-46 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
153.Classify each of the following items as an operating, investing, or financing activity. 1. Dividends paid. 2. Sale of goods or services for cash. 3. Sale of equipment. 4. Purchase of inventory. 5. Repayment of notes payable.
154.Classify each of the following items as an operating, investing, or financing activity. 1. Payment of income taxes. 2. Sale of investments. 3. Receipt of interest. 4. Issuance of common stock. 5. Purchase of intangibles.
11-47 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
155.The following selected transactions occur during the first year of operations. Determine how each should be reported in the statement of cash flows. State whether it is a cash inflow or a cash outflow and whether it is an operating, investing, or financing activity. 1. Issued a million shares of common stock at $20 per share. 2. Purchased land and a building for $3 million. 3. Received $200,000 from a cash sale of merchandise to customers. 4. Paid a dividend of $1 per share to common stockholders. 5. Loaned $50,000 to an employee and accepted a note receivable.
11-48 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
156.Analysis of an income statement, balance sheets, and additional information from the accounting records of Gaming Strategies reveal the following items: 1. Collection of notes receivable. 2. Purchase of equipment. 3. Exchange of long-term assets. 4. Decrease in accounts payable. 5. Payment of dividends. 6. Purchase of a patent. 7. Depreciation expense. 8. Decrease in accounts receivable. 9. Issuance of note payable. 10. Increase in inventory. Indicate in which section of the statement of cash flows each of these items would be reported: operating activities (indirect method), investing activities, financing activities, or noncash activities.
11-49 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
157.Place the following items in the correct order as they would appear in the statement of cash flows: 1. Beginning cash balance 2. Ending cash balance 3. Investing activities 4. Financing activities 5. Net increase (decrease) in cash 6. Operating activities
158.Electronic Wonders reports net income of $95,000. The accounting records reveal Depreciation Expense of $50,000 as well as increases in Prepaid Rent, Accounts Payable, and Income Tax Payable of $40,000, $23,000, and $20,000, respectively. Prepare the operating activities section of Electronic Wonders' statement of cash flows using the indirect method.
11-50 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
159.Micro Manufacturing reports net income of $850,000. Depreciation Expense is $60,000, Accounts Receivable increases $30,000 and Accounts Payable decreases $10,000. Calculate net cash flows from operating activities using the indirect method.
160.Fidelity Systems reports net income of $80 million. Included in that number is depreciation expense of $8 million, and a gain on the sale of equipment of $1 million. Records reveal increases in Accounts Receivable, Inventory, and Accounts Payable of $4 million, $3 million, and $2 million, respectively. Calculate Fidelity's net cash flows from operating activities using the indirect method.
11-51 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
161.Alpha Computers reports net income of $44 million. Included in that number are depreciation expense of $7 million and a loss on the sale of land of $2 million. Records reveal decreases in Accounts Receivable, Inventory, and Accounts Payable of $4 million, $3 million, and $2 million, respectively. Calculate Alpha Computers' net cash flows from operating activities using the indirect method.
11-52 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
162.Portions of the financial statements for Horizon Telecom are provided below.
Horizon Telecom Income Statement For the Year Ended December 31, 2018
Revenues
$610,000
Expenses: Cost of goods sold
370,000
Operating expenses
120,000
Depreciation expense
32,000
Income tax expense
44,000
Total expenses Net Income
566,000 $44,000
Horizon Telecom Selected Balance Sheet Data December 31, 2018 Increase in accounts receivable
$6,000
Increase in inventory
13,000
Decrease in prepaid rent
9,000
11-53 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Increase in operating expenses
5,000
payable Decrease in accounts payable
8,000
Increase in income tax payable
20,000
Prepare the operating activities section of the statement of cash flows for Horizon Telecom using the indirect method.
11-54 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
163.Nathan Herrmann has completed the basic format to be used in preparing the statement of cash flows (indirect method) for CEO Consultants. CEO Consultants Statement of Cash Flows For the Year Ended December 31, 2018 Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash flows from operating activities: Net cash flows from operating activities Cash Flows from Investing Activities Net cash flows from investing activities Cash Flows from Financing Activities Net cash flows from financing activities Net increase (decrease) in cash
(50,000)
Cash at the beginning of the period
95,000
Cash at the end of the period
$45,000
Listed below in random order are line items to be included in the statement of cash flows. Purchase of equipment
$220,000
Increase in inventory
30,000
Increase in prepaid rent
10,000
Payment of dividends
40,000
Depreciation expense
20,000
Increase in accounts receivable
60,000
Increase in accounts payable
10,000
Loss on sale of land
7,000
Net income
70,000
Repayment of notes payable
50,000
Cash received from the sale of land
3,000
Issuance of common stock
250,000
11-55 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Prepare the statement of cash flows for CEO Consultants using the indirect method.
164.Mobile Video Systems sold land, investments, and issued their own common stock for $10 million, $15 million, and $20 million, respectively. Mobile Video also purchased treasury stock, equipment, and a patent for $2 million, $4 million, and $6 million, respectively. What amount should the company report as net cash flows from investing activities? What amount should the company report as net cash flows from financing activities?
11-56 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
165.Two competitors in the construction supply industry report the following selected financial data: Company A Company B Sales
$47,220
$66,176
Net income
1,783
2,620
Operating cash flows
4,054
5,125
Total assets,
32,625
41,164
33,005
40,877
beginning Total assets, ending
Calculate the cash return on assets, cash flow to sales ratio, and asset turnover ratio for each company. Which company has the better cash flow to sales ratio and which company has the better asset turnover ratio?
166.The balance sheet of Integrated Systems reports total assets of $890,000 and $950,000 at the beginning and end of the year, respectively. Sales revenues are $1.6 million, net income is $185,000, and net cash flows from operating activities are $155,000. Calculate the cash return on assets, cash flow to sales, and asset turnover for Integrated Systems.
11-57 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
167.The balance sheet of The Computer Doctor reports total assets of $160,000 and $220,000 at the beginning and end of the year, respectively. The cash return on assets for the year is 10%. Calculate The Computer Doctor's net cash flows from operating activities for the year.
168.Discount Computers' accounts receivable increases during the year by $3 million. What is the amount of cash received from customers during the reporting period if its sales are $47 million?
169.Laser Solutions' inventory decreases during the year by $8 million and its accounts payable to suppliers increases by $6 million during the same period. What is the amount of cash paid to suppliers of merchandise during the reporting period if its cost of goods sold is $81 million?
11-58 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
170.Freedom Wireless reports operating expenses of $255,000. Operating expenses include both rent expense and salaries expense. Prepaid rent decreases during the year by $10,000 and salaries payable increases by $25,000. What is the cash paid for operating expenses during the year?
171.Wilson Electric reports income tax expense of $150,000. Income tax payable at the beginning and end of the year are $20,000 and $25,000, respectively. What is the cash paid for income taxes during the year?
11-59 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
172.Portions of the financial statements for Horizon Telecom are provided below.
Horizon Telecom Income Statement For the Year Ended December 31, 2018
Revenues
$610,000
Expenses: Cost of goods sold
391,000
Operating expenses
120,000
Depreciation expense
32,000
Income tax expense
44,000
Total expenses
566,000
Net Income
$44,000 Horizon Telecom Selected Balance Sheet Data December 31, 2018
Increase in accounts receivable
$6,000
Increase in inventory
13,000
Decrease in prepaid rent
9,000
Increase in operating expenses payable
5,000
Decrease in accounts payable
8,000
11-60 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Increase in income tax payable
20,000
Prepare the operating activities section of the statement of cash flows for Horizon Telecom using the direct method.
11-61 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
173.Listed below are several transactions. For each transaction, indicate by letter whether the cash effect of each transaction is reported in a statement of cash flows as an operating (O), investing (I), financing (F), or noncash (NC) activity. Also, indicate whether the transaction is a cash inflow (CI), cash outflow (CO), or no effect on cash (NE). The first answer is provided as an example. Type of
Cash
Activity
Inflow or
Transaction
Outflow
F
CI
1. Issuance of common stock 2. Issuance of bonds 3. Investment in bonds 4. Collection of a note receivable 5. Sale of inventory 6. Repayment of note payable 7. Payment of a cash dividend 8. Purchase of land for cash 9. Reissue of treasury stock 10. Collection of an account receivable 11. Issuance of a note payable 12. Payment of employee salaries 13. Sale of equipment for a note receivable 14. Payment of interest on bonds payable 15. Sale of a building
11-62 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
174.Portions of the financial statements for Security Solutions are provided below. Security Solutions Income Statement For the Year Ended December 31, 2018 Revenues
$960,000
Expenses: Cost of goods sold
$650,000
Operating expenses
210,000
Depreciation expense
25,000
Income tax expense
20,000
Total expenses
905,000
Net Income
$55,000
Security Solutions Selected Balance Sheet Data December 31 Increase in accounts receivable
5,000
Decrease in inventory
10,000
Increase in prepaid rent
4,000
Decrease in salaries payable
6,000
Increase in accounts payable
8,000
Decrease in income tax payable
3,000
Required:
Prepare the operating activities section of the statement of cash flows for Security Solutions 11-63 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
using the indirect method.
11-64 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
175.Amy Bourne completed the basic format to be used in preparing the statement of cash flows (indirect method) for Alpha Technologies. All amounts are in thousands (000's). Alpha Technologies Statement of Cash Flows For the Year Ended December 31, 2018 Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash flows from operating activities: Net cash flows from operating activities Cash Flows from Investing Activities Net cash flows from investing activities Cash Flows from Financing Activities Net cash flows from financing activities Net increase (decrease) in cash
(40,000)
Cash at the beginning of the period
80,000
Cash at the end of the period
$40,000
Listed below in random order are line items to be included in the statement of cash flows. Purchase of equipment
$220,000
Payment of dividends
40,000
Net income
80,000
Increase in inventory
30,000
Increase in prepaid rent
10,000
Repayment of notes payable
50,000
Cash received from the sale of land
3,000
Issuance of common stock
250,000
Increase in accounts payable
10,000
Loss on sale of land
7,000
Depreciation expense
20,000
Increase in accounts receivable
60,000
Required:
11-65 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Prepare the statement of cash flows for Alpha Technologies using the indirect method.
11-66 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
176.The income statement, balance sheets, and additional information for Communication Accessories are provided. Communication Accessories Income Statement For the Year Ended December 31, 2018 Revenues
$2,800,000
Gain on sale of land
4,000
Total revenues
2,804,000
Expenses: Cost of goods sold
1,900,000
Operating expenses
575,000
Depreciation expense
38,000
Interest expense
16,000
Income tax expense
63,000
Total expenses
2,592,000
Net Income
$212,000 Communication Accessories Balance Sheets December 31
Assets
2018
2017
$182,000
$187,000
Accounts receivable
83,000
95,000
Inventory
121,000
138,000
7,000
5,000
Investment in stock
195,000
100,000
Land
230,000
260,000
Equipment
305,000
225,000
(138,000)
(100,000)
$985,000
$910,000
$40,000
$58,000
Current Assets: Cash
Prepaid rent Long-Term Assets:
Accumulated depreciation Total Assets Liabilities and Stockholders’ Equity Current Liabilities: Accounts payable
11-67 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Interest payable
1,000
2,000
Income tax payable
12,000
10,000
285,000
205,000
Common stock
350,000
350,000
Retained earnings
297,000
285,000
$985,000
$910,000
Long-Term Liabilities: Notes payable Stockholders’ Equity:
Total Liabilities and Equity
Additional Information for 2018: 1. Purchase additional investment in stocks for $95,000. 2. Sell land costing $30,000 for $34,000 resulting in a $4,000 gain on sale of land. 3. Purchase $80,000 in equipment by borrowing $80,000 with a note payable due in three years. No cash is exchanged in the transaction. 4. The company declares and pays a cash dividend of $200,000.
Required: Prepare the statement of cash flows using the indirect method. Disclose any noncash transactions in an accompanying footnote.
11-68 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
177.Selected financial data for two competitors in the telecommunications industry are as follows: ($ in millions)
2018
2017
Net Sales
$71,486
$475,203
Net Income
5,622
10,612
Net Cash Flows from
4,507
11,609
55,799
55,380
Net Sales
$39,540
$34,922
Net Income
8,052
7,333
Net Cash Flows from
12,089
10,104
58,734
53,340
Company A
Operations Total Assets Company B
Operations Total Assets
Required: 1. Calculate the return on assets for 2018 for both companies. Which company has the better return on assets? 2. Calculate the cash return on assets for 2018 for both companies. Which company has the better cash return on assets? 3. Calculate the cash flow to sales ratio and the asset turnover ratio for 2018 for both companies. Which company has the better ratios?
11-69 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
178.Cash flows from operating activities for both the indirect and direct methods are presented for Audio Systems. Cash Flows from Operating Activities Net income
$45,000
Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense
7,000
Decrease in accounts receivable
9,000
Increase in accounts payable
4,000
Decrease in income tax payable
(6,000)
Net cash flows from operating
$59,000
activities
Cash Flows from Operating Activities Cash received from customers
$93,000
Cash paid for operating expenses
(22,000)
Cash paid for income taxes
(12,000)
Net cash flows from operating
$59,000
activities
Required: Complete the following income statement for Audio Systems. Assume all accounts payable are for operating expenses. Audio Systems Income Statement For the Year Ended December 31, 2018 Revenues
$?
Expenses: Operating expenses Depreciation expense Income tax expense Total expenses Net Income
? 7,000 ? ? $45,000
11-70 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Hint: Use the following calculations and work backwards from bottom (in red) to top for each item. Revenues ± Change in accounts receivable = Cash received from customers Operating expenses ± Change in accounts payable = Cash paid for operating expenses Income tax expense ± Change in income tax payable = Cash paid for income taxes
11-71 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
179.The income statement, balance sheets, and additional information for Communication Accessories are provided. Communication Accessories Income Statement For the Year Ended December 31, 2018 Revenues
$2,800,000
Gain on sale of land
4,000
Total revenues
2,804,000
Expenses: Cost of goods sold
1,900,000
Operating expenses
575,000
Depreciation expense
38,000
Interest expense
16,000
Income tax expense
63,000
Total expenses
2,592,000
Net Income
$212,000 Communication Accessories Balance Sheets December 31
Assets
2018
2017
$182,000
$187,000
Accounts receivable
83,000
95,000
Inventory
121,000
138,000
7,000
5,000
Investment in stock
195,000
100,000
Land
230,000
260,000
Equipment
305,000
225,000
(138,000)
(100,000)
$985,000
$910,000
$40,000
$58,000
Current Assets: Cash
Prepaid rent Long-Term Assets:
Accumulated depreciation Total Assets Liabilities and Stockholders’ Equity Current Liabilities: Accounts payable
11-72 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Interest payable
1,000
2,000
Income tax payable
12,000
10,000
285,000
205,000
Common stock
350,000
350,000
Retained earnings
297,000
285,000
Total Liabilities and Equity
$985,000
$910,000
Long-Term Liabilities: Notes payable Stockholders’ Equity:
Additional Information for 2018: 1. Purchase additional investment in stocks for $95,000. 2. Sell land costing $30,000 for $34,000 resulting in a $4,000 gain on sale of land. 3. Purchase $80,000 in equipment by borrowing $80,000 with a note payable due in three years. No cash is exchanged in the transaction. 4. The company declares and pays a cash dividend of $200,000. Required:
Prepare the statement of cash flows for Communication Accessories using the direct method. Disclose any noncash transactions in an accompanying footnote.
11-73 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
11-74 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
180.Portions of the financial statements for Security Solutions are provided below. Security Solutions Income Statement For the Year Ended December 31, 2018
Revenues
$960,000
Expenses: Cost of goods sold
$650,000
Operating expenses
210,000
Depreciation expense
25,000
Income tax expense
20,000
Total expenses
905,000
Net Income
$55,000
Security Solutions Selected Balance Sheet Data December 31 Increase in accounts receivable
5,000
Decrease in inventory
10,000
Increase in prepaid rent
4,000
Decrease in salaries payable
6,000
Increase in accounts payable
8,000
Decrease in income tax payable
3,000
Required: Prepare the operating activities section of the statement of cash flows for Security Solutions using the direct method.
11-75 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
181.Identify and briefly describe the three categories of cash flows reported in the statement of cash flows.
182.Distinguish between the indirect method and the direct method for reporting net cash flows from operating activities. Which method is more common in practice? Which method provides a more logical presentation of cash flows?
183.Highland Park Homes reports net income of $300,000, and yet its net cash flow from operating activities is a negative $200,000 during the same period. Is this possible? Explain.
11-76 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
184.A $10,000 investment on the books of the company is sold for $11,000. How does this transaction affect operating, investing, and financing activities under the indirect method?
185.Explain the difference in the calculation of return on assets and cash return on assets. How can cash-based ratios supplement the analysis of ratios based on income statement and balance sheet information?
11-77 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 11 Statement of Cash Flows Answer Key
True / False Questions
1.
A statement of cash flows provides a summary of cash inflows and cash outflows during the reporting period. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
2.
The three primary categories of cash flows are cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
3.
Financing activities include cash receipts and cash payments for transactions relating to revenue and expense activities. FALSE Operating activities include cash receipts and cash payments for transactions relating to revenue and expense activities.
AACSB: Reflective Thinking 11-78 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
4.
Investing activities include cash transactions involving the purchase and sale of long-term assets and current investments. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
5.
Operating activities are both inflows and outflows of cash resulting from the external financing of a business. FALSE Financing activities are both inflows and outflows of cash resulting from the external financing of a business.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
11-79 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
6.
We report interest and dividends received from investments with investing activities. FALSE We report interest and dividends received from investments with operating activities.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
7.
We report interest paid on bonds or notes payable with operating activities rather than financing activities. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
8.
We record dividends received as a financing activity. FALSE We record dividends received as an operating activity.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
11-80 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
9.
We record dividends paid as a financing activity. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
10.
Transactions that do not increase or decrease cash, but that result in significant investing and financing activities, are reported either directly after the cash flow statement or in a separate note to the financial statements as noncash activities. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
11.
The purchase of long-term assets by issuing debt is recorded as both an investing activity and a financing activity. FALSE Purchase of long-term assets by issuing debt is reported as a noncash activity either directly after the cash flow statement or in a separate note to the financial statements.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
11-81 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12.
The total net cash flows from operating activities differ between the direct and indirect methods. FALSE The total net cash flows from operating activities are identical under both the direct and indirect methods.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
13.
Using the indirect method, we begin with net income and then list adjustments to net income in order to arrive at operating cash flows. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Classification of Transactions Topic: Operating Activities - Indirect Method
11-82 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
14.
If no cash was exchanged in the purchase of equipment financed entirely with a note payable, we represent this as both an investing activity and a financing activity in the statement of cash flows. FALSE We represent this as a noncash activity either directly after the cash flow statement or in a note to the financial statements.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Classification of Transactions Topic: Investing and Financing Activities
15.
Using the direct method we adjust the items in the income statement to directly show the cash inflows and outflows from operations. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities.
Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct method. Topic: Classification of Transactions Topic: Operating Activities - Direct Method
16.
Because depreciation expense reduces net income, companies will add depreciation expense back to net income as a step in arriving at net cash flows from operations under the indirect method. TRUE AACSB: Reflective Thinking
11-83 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method
17.
A loss on the sale of long-term assets is added back to net income to arrive at net cash flows from operating activities under the indirect method. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method
18.
A gain on the sale of long-term assets is added back to net income to arrive at net cash flows from operating activities under the indirect method. FALSE A gain on the sale of long-term assets is subtracted from net income to arrive at net cash flows from operating activities under the indirect method.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method
11-84 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
19.
Under the indirect method, a decrease in accounts receivable is added to net income to arrive at net cash flows from operating activities. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method
20.
Under the indirect method, an increase in prepaid rent is added to net income to arrive at net cash flows from operating activities. FALSE We would subtract an increase in prepaid rent from net income to arrive at net cash flows from operating activities under the indirect method.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method
21.
Under the indirect method, an increase in inventory is added to net income and a decrease in inventory is subtracted from net income to arrive at net cash flows from operating activities. FALSE We would subtract an increase in inventory and add a decrease in inventory to net income to arrive at net cash flows from operating activities under the indirect method.
AACSB: Reflective Thinking 11-85 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method
22.
When preparing a statement of cash flows using the indirect method, a decrease in accounts payable is subtracted from net income. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method
23.
Under the indirect method, an increase in accounts payable is added to net income to arrive at net cash flows from operating activities. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method
11-86 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
24.
Under the indirect method, a decrease in accounts payable is added to net income to arrive at net cash flows from operating activities. FALSE We would subtract a decrease in accounts payable from net income to arrive at net cash flows from operating activities under the indirect method.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method
25.
The long-term assets section of the balance sheet is the place to look for investing activities. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy
Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Investing and Financing Activities
26.
The sale of land is reported in the operating section of the statement of cash flows. FALSE The sale of land is reported in the investing section of the statement of cash flows.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium 11-87 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Investing and Financing Activities
27.
We report the purchase of stock in another corporation as a cash outflow from investing activities. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium
Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Investing and Financing Activities
28.
We report the actual amount of cash proceeds received from the sale of land as a cash inflow from investing activities. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium
Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Investing and Financing Activities
29.
We can find most financing activities by examining changes in long-term liabilities and stockholders' equity accounts. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy
Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows.
11-88 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Investing and Financing Activities
30.
The inflow of cash received from issuing common stock is reported as an investing activity. FALSE The inflow of cash received from issuing common stock is reported as a financing activity.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Investing and Financing Activities
31.
The balance in Retained Earnings is increased by net income and is decreased by dividends. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy
Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Investing and Financing Activities
32.
We report the payment of cash dividends as a cash outflow from investing activities. FALSE We report the payment of cash dividends as a cash outflow from financing activities.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand 11-89 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 2 Medium Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Investing and Financing Activities
33.
The total of the cash flows from operating, investing, and financing activities equals the net increase or decrease in cash for the period. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy
Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Investing and Financing Activities
34.
We calculate cash return on assets as the change in cash divided by average total assets. FALSE We calculate cash return on assets as net cash flows from operating activities divided by average total assets.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-04 Perform financial analysis using the statement of cash flows. Topic: Apple vs. Google
35.
Cash return on assets indicates the amount of operating cash flow generated for each dollar invested in assets. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand 11-90 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 2 Medium Learning Objective: 11-04 Perform financial analysis using the statement of cash flows. Topic: Apple vs. Google
36.
To maximize cash flow from operations, a company strives to increase both cash flows per dollar of sales and sales per dollar of assets invested. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-04 Perform financial analysis using the statement of cash flows. Topic: Apple vs. Google
37.
Cash return on assets can be separated to examine two important business strategies: cash flow to sales and asset turnover. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-04 Perform financial analysis using the statement of cash flows. Topic: Apple vs. Google
38.
Income statement items that have no cash effect are still reported under the direct method. FALSE Income statement items that have no cash effect are simply not reported under the direct method.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy 11-91 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct method. Topic: Operating Activities - Direct Method
39.
Using the direct method, we examine each account in the income statement and convert it from an accrual amount to a cash amount. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy
Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct method. Topic: Operating Activities - Direct Method
40.
If accounts receivable decreases, this indicates that revenues exceed cash receipts from customers. FALSE If accounts receivable increases, this indicates that revenues exceed cash receipts from customers.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct method. Topic: Operating Activities - Direct Method
41.
When accounts payable decrease, cash paid to suppliers must have been more than purchases. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium
Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct method. 11-92 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Operating Activities - Direct Method
42.
If there are no current assets or liabilities associated with operating expenses, the amounts we report for these expenses in the income statement must equal the amount of cash we paid for these items. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium
Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct method. Topic: Operating Activities - Direct Method
43.
Depreciation expense is not reported on the statement of cash flows under the direct method. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy
Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct method. Topic: Operating Activities - Direct Method
44.
We add an increase in interest payable to interest expense in arriving at cash paid for interest under the direct method. FALSE We deduct an increase in interest payable from interest expense in arriving at cash paid for interest under the direct method.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct method. 11-93 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Operating Activities - Direct Method
45.
We add a decrease in income tax payable to income tax expense to calculate cash paid for income taxes. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium
Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct method. Topic: Operating Activities - Direct Method
46.
The indirect method begins with net income, while the direct method considers each of the individual accounts that make up net income. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium
Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct method. Topic: Operating Activities - Direct Method
Multiple Choice Questions
11-94 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
47.
The Statement of Cash Flows:
A. Lists all cash flows over the life of a company. B. Breaks down all cash transactions into investing and financing cash flows. C. Shows that the change in total cash from one year to the next is equal to the net operating, investing, and financing cash flows. D. Has two methods for investing cash flows - direct and indirect. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
48.
Which financial statement separates business activities into operating, investing and financing activities?
A. Statement of Stockholders' Equity B. Income Statement C. Statement of Cash Flows D. Balance Sheet AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
11-95 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
49.
The balance of cash reported in the balance sheet this year minus the balance of cash reported in the balance sheet last year equals:
A. Net cash flows from operating activities only B. Net income C. Net cash flows from operating, investing, and financing activities D. Net cash flows from financing activities only AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
50.
The purchase of land is classified in the statement of cash flows as a(n):
A. Operating activity. B. Investing activity. C. Financing activity. D. Noncash activity. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
51.
The sale of a good or service is classified in the statement of cash flows as a(n):
A. Investing activity. B. Operating activity. C. Financing activity. D. Noncash activity. AACSB: Reflective Thinking 11-96 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
52.
The payment of salaries is classified in the statement of cash flows as a(n):
A. Investing activity. B. Operating activity. C. Financing activity. D. Noncash activity. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
53.
The issuance of notes payable for borrowing is classified in the statement of cash flows as a(n):
A. Operating activity. B. Investing activity. C. Financing activity. D. Noncash activity. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
11-97 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
54.
The purchase of treasury stock is classified in the statement of cash flows as a(n):
A. Operating activity. B. Investing activity. C. Financing activity. D. Noncash activity. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
55.
Operating cash flows exclude:
A. Interest received. B. Interest paid. C. Dividends received. D. Dividends paid. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
56.
The statement of cash flows reports cash flows from the activities of:
A. Operating, purchasing, and investing. B. Borrowing, paying, and investing. C. Operating, investing, and financing. D. Using, investing, and financing. AACSB: Reflective Thinking AICPA: FN Reporting 11-98 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
57.
Which of the following is correct about the statement of cash flows?
A. A company with a net loss will always have a cash outflow from operating activities. B. Collecting interest earned from a note receivable creates a cash inflow from investing activities. C. Paying dividends to investors creates a cash outflow from financing activities. D. The repayment of long-term debt is a cash inflow from financing activities. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
58.
Which of the following is correct about the statement of cash flows?
A. A company with a net loss on the income statement will always have a net cash outflow from operating activities. B. A purchase of equipment is classified as a cash inflow from investing activities. C. Cash dividends received on stock investments are classified as cash flows from operating activities. D. Cash dividends paid are classified as cash flows from operating activities. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
11-99 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
59.
Which of the following is not correct about the statement of cash flows?
A. Paying dividends to investors creates a cash outflow from financing activities. B. A purchase of equipment is classified as a cash outflow from investing activities. C. Cash dividends paid are classified as cash flows from operating activities. D. Cash dividends received on stock investments are classified as cash flows from operating activities. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
60.
Which of the following is not correct about the statement of cash flows?
A. Paying dividends to investors creates a cash outflow from financing activities. B. A purchase of equipment is classified as a cash outflow from investing activities. C. A company with a net loss on the income statement will always have a net cash outflow from operating activities. D. Cash dividends received on stock investments are classified as cash flows from operating activities. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
11-100 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
61.
All classifications on the Balance Sheet have a general relationship with sections identified on the Statement of Cash Flows. Indicate which relationships are correctly identified in the table below. #
Classification on the
Section on
Balance Sheet
Statement of Cash Flows
I
Bonds Payable
Financing
II
Equipment
Operating
III
Common Stock
Financing
IV
Accounts Payable
Operating
V
Accounts Receivable
Operating
A. IV, V. B. I, II, III. C. I, III, IV, V. D. All of these. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
62.
Under what section of the Statement of Cash Flows would you classify dividends paid on common stock?
A. Operating. B. Investing. C. Financing. D. Noncash activity. AACSB: Reflective Thinking
11-101 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
63.
Under what section of the Statement of Cash Flows would you classify the purchase of equipment by issuing a long-term note payable?
A. Operating. B. Investing. C. Financing. D. Noncash activity. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
64.
Which of the following transactions would not create a cash flow?
A. The company purchased some of its own stock from a stockholder. B. Payment of a dividend. C. The company purchased land by issuing common stock. D. Sale of equipment at book value. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
11-102 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
65.
Which of the following is an example of a noncash activity?
A. Sale of land for less than its cost. B. Purchase of land by issuing debt. C. Sale of land for more than its cost. D. Purchase of land using cash proceeds from issuance of common stock. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
66.
Which of the following is not true regarding cash flows?
A. Operating activities include the payment of dividends. B. Investing activities involve long-term investments. C. Financing activities involve long-term liabilities and equities. D. Purchasing a building with a note is considered a noncash activity. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
11-103 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
67.
Dividends received from an investment is classified as a(an) __________ cash flow, and paying dividends on stock issued is classified as a(an) ____________ cash flow on the Statement of Cash Flows.
A. Operating; Operating B. Operating; Financing C. Financing; Operating D. Investing; Financing AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
68.
The collection of cash from customers would be classified as which type of cash flow on the Statement of Cash Flows?
A. Financing. B. Investing. C. Operating. D. Not reported on the statement of cash flows. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
11-104 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
69.
The indirect and direct methods:
A. Are used by companies about equally in actual practice. B. Affect the presentations of operating, investing, and financing activities. C. Arrive at different amounts for net cash flows from operating activities. D. Are two allowable methods to present operating activities in the statement of cash flows. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
70.
In the operating activities section of the statement of cash flows, we start with net income when using:
A. The direct method. B. The indirect method. C. Both the direct and the indirect method. D. Neither the direct nor the indirect method. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
11-105 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
71.
Arrow Printers paid $2,000 interest on short-term notes payable, $10,000 interest on longterm bonds, and $6,000 in dividends on its common stock. Arrow would report cash outflows from activities, as follows:
A. Operating, $2,000; Financing $16,000. B. Operating, $0; Financing $18,000. C. Operating, $12,000; Financing $6,000. D. Operating, $18,000; Financing $0. AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
11-106 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
72.
Bad Brad's BBQ had cash flows for the year as follows ($ in millions): CASH RECEIVED FROM: Customers
$1,800
Interest on investments
200
Sale of land
100
Sale of common stock
600
Issuance of debt securities
2,000
CASH PAID FOR: Interest on debt Income tax
$300 80
Debt principal reduction
1,500
Purchase of equipment
4,000
Purchase of inventory
1,000
Dividends on common stock
200
Operating expenses
500
Bad Brad's would report net cash inflows (outflows) from operating activities in the amount of:
A. ($80). B. $120. C. $200. D. $420.
Customers Interest on investments
$1,800 200
Interest on debt
(300)
Income tax
(80)
Purchase of inventory
(1,000)
Operating expenses
(500)
Net cash inflows from operating
$120
activities
11-107 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method
73.
We can identify operating activities from income statement information and changes in
A. Long-term asset accounts. B. Long-term liability accounts. C. Current asset and current liability accounts. D. Stockholders' equity accounts. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method
74.
In preparing a statement of cash flows under the indirect method, a decrease in accounts receivable would be reported or included as a(n):
A. Addition to net income in the operating activities section. B. Deduction from net income in the operating activities section. C. Financing activity. D. Investing activity. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method 11-108 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
75.
In preparing a statement of cash flows under the indirect method, an increase in accounts payable would be reported as a(n):
A. Addition to net income in the operating activities section. B. Deduction from net income in the operating activities section. C. Financing activity. D. Investing activity. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method
76.
Which of the following is NOT a correct practice when adjusting net income to net operating cash flows?
A. Subtract depreciation expense. B. Add losses on sales of assets. C. Subtract increase in Accounts Receivable. D. Add increase in Accounts Payable. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method
11-109 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
77.
Which of the following is added to net income as an adjustment under the indirect method of preparing the statement of cash flows?
A. Salaries payable increase. B. Gain on the sale of land. C. Inventory increase. D. Accounts receivable increase. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method
78.
Which of the following is subtracted from net income as an adjustment under the indirect method of preparing the statement of cash flows?
A. Gain on the sale of land. B. Accounts receivable decrease. C. Inventory decrease. D. Salaries payable increase. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method
11-110 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
79.
Consider the following items: (a) Decrease in accounts receivable
(f) Gain on the sale of equipment
(b) Issuance of common stock
(g) Depreciation expense
(c) Increase in interest receivable
(h) Payment of dividends
(d) Purchase of land
(i) Decrease in utilities payable
(e) Decrease in accounts payable
(j) Increase in inventory
How many of these items would be added to net income when using the indirect method to prepare the operating activities section of the statement of cash flows?
A. 2 B. 4 C. 1 D. 3 (a) Decrease in accounts receivable and (g) Depreciation expense.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method
11-111 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
80.
Consider the following items: (a) Decrease in accounts receivable
(f) Gain on the sale of equipment
(b) Issuance of common stock
(g) Depreciation expense
(c) Increase in interest receivable
(h) Payment of dividends
(d) Purchase of land
(i) Decrease in utilities payable
(e) Decrease in accounts payable
(j) Increase in inventory
How many of these items would be subtracted from net income when using the indirect method to prepare the operating activities section of the statement of cash flows?
A. 5 B. 4 C. 1 D. 2 (c) Increase in interest receivable, (e) Decrease in accounts payable, (f) Gain on the sale of equipment, (i) Decrease in utilities payable, (j) Increase in inventory.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method
81.
Which of the following is subtracted from net income as an adjustment under the indirect method of preparing the statement of cash flows?
A. Salaries payable decrease. B. Inventory decrease. C. Depreciation expense. D. Accounts receivable decrease. AACSB: Reflective Thinking AICPA: FN Reporting 11-112 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method
82.
Which of the following is not subtracted from net income as an adjustment under the indirect method of preparing the statement of cash flows?
A. Depreciation expense. B. Interest receivable increase. C. Increase in inventory. D. Salaries payable decrease. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method
83.
Given the items below, which of the following is a subtraction from net income to arrive at operating cash flows using the indirect method? I. Loss on sale of assets II. Increase in Supplies III. Increase in Accounts Payable IV. Depreciation expense
A. II. only. B. IV. only. C. I. and II. D. II. and III. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand 11-113 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 2 Medium Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method
84.
Given the items below, which of the following is an addition to net income to arrive at operating cash flows using the indirect method? I. Loss on sale of assets II. Increase in Supplies III. Increase in Accounts Payable IV. Increase in Accounts Receivable
A. I. and III. B. I. only. C. III. and IV. D. II. and III. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method
11-114 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
85.
Rachel's Recordings reported net income of $200,000. Beginning balances in Accounts Receivable and Accounts Payable were $15,000 and $20,000, respectively. Ending balances in these accounts were $12,000 and $22,000, respectively. Assuming that all relevant information has been presented, Rachel's net cash flows from operating activities would be:
A. $200,000. B. $195,000. C. $205,000. D. $199,000.
Net income
200,000
Add decrease in A/R
3,000
Add increase in A/P
2,000
Net cash flows from operating
$205,000
activities
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method
11-115 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
86.
Mary's Music Store reported net income of $135,000. Beginning balances in Accounts Receivable and Accounts Payable were $29,000 and $26,000, respectively. Ending balances in these accounts were $30,000 and $24,000, respectively. Assuming that all relevant information has been presented, Mary's net cash flows from operating activities would be:
A. $132,000. B. $134,000. C. $136,000. D. $138,000.
Net income
135,000
Subtract increase in A/R
(1,000)
Subtract decrease in A/P
(2,000)
Net cash flows from operating
$132,000
activities
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method
11-116 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
87.
Kela Corporation reports net income of $450,000 that includes depreciation expense of $70,000. Also, cash of $50,000 was borrowed on a 5-year note payable. Based on this data, total cash inflows from operating activities are:
A. $380,000. B. $470,000. C. $520,000. D. $570,000. $450,000 + $70,000 = $520,000. The $50,000 cash borrowed is a financing activity.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method
88.
Assume net income was $100,000, depreciation expense was $8,000, accounts receivable decreased by $7,500, and accounts payable decreased by $2,500. The amount of net cash flows from operating activities is:
A. $103,000. B. $100,000. C. $108,000. D. $113,000. $100,000 + $8,000 + $7,500 - $2,500 = $113,000.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method.
11-117 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Operating Activities - Indirect Method
89.
Innovative Products reported net income of $205,000. Beginning and ending Inventory balances were $40,000 and $45,000, respectively. Accounts Payable balances at the beginning and end of the year were $35,000 and $33,000, respectively. Assuming that all relevant information has been presented, the company would report net operating cash flows of:
A. $202,000. B. $198,000. C. $212,000. D. $205,000.
Net income
$205,000
Subtract increase in Inventory
(5,000)
Subtract decrease in A/P
(2,000)
Cash flows from operating activities
$198,000
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method
11-118 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
90.
Lense Laboratories' net income was $250,000. Given the account information below, what is the net operating cash flows for Lense Laboratories? Increase in Accounts Receivable
$60,000
Increase in Salaries Payable
$50,000
Decrease in Inventory
$30,000
Depreciation Expense
$45,000
Increase in Prepaid Insurance
$3,000
A. $152,000. B. $278,000. C. $312,000. D. $438,000.
Net Income
$250,000
Adjustments to reconcile net income to net cash flows from operating activities: Depreciation Expense Increase in Accounts Receivable
45,000 (60,000)
Decrease in Inventory
30,000
Increase in Prepaid insurance
(3,000)
Increase in Salaries Payable
50,000
Net Operating Cash Flows
$312,000
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method
11-119 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
91.
Servo Industries' net income was $300,000. Given the account information below, what is the net operating cash flows for Servo Industries? Decrease in Accounts Receivable
$50,000
Decrease in Salaries Payable
$75,000
Decrease in Inventory
$20,000
Depreciation Expense
$35,000
Increase in Interest Payable
$7,000
A. $487,000. B. $323,000. C. $337,000. D. $237,000.
Net Income
$300,000
Adjustments to reconcile net income to net cash flows from operating activities: Depreciation Expense
35,000
Decrease in Accounts Receivable
50,000
Decrease in Inventory
20,000
Increase in Interest Payable
7,000
Decrease in Salaries Payable
(75,000)
Net Operating Cash Flows
$337,000
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method
11-120 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
92.
Laser World's income statement reported total revenues, $850,000 and total expenses (including $40,000 depreciation) of $720,000. The balance sheet reported the following: Accounts Receivable—beginning balance, $50,000 and ending balance, $60,000; Accounts Payable—beginning balance, $22,000 and ending balance, $28,000. Therefore, based only on this information, the net cash flows from operating activities were:
A. $126,000. B. $166,000. C. $174,000. D. $186,000.
Net Income
$130,000
Adjustments to reconcile net income to net cash flows from operating activities: Depreciation Expense
40,000
Increase in Accounts Receivable
(10,000)
Increase in Accounts Payable
6,000
Net Operating Cash Flows
$166,000
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method
11-121 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
93.
Assuming Net Income for the year is $115,000, what is the net operating cash flows given the following information: Increase in Salaries Payable
$15,000
Depreciation Expense
$6,000
Increase in Prepaid Rent
$24,000
Loss on sale of asset
$1,000
Increase in Accounts Payable
$25,000
Increase in Inventory
$50,000
A. $112,000. B. $88,000. C. $118,000. D. $188,000.
Net Income
$115,000
Adjustments to reconcile net income to net cash flows from operating activities: Depreciation Expense
6,000
Loss on sale of asset
1,000
Increase in Salaries Payable
15,000
Increase in Prepaid Rent Increase in Accounts Payable Increase in Inventory Net Operating Cash Flows
(24,000) 25,000 (50,000) $88,000
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method 11-122 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
94.
Which of the following statements is true?
A. Investment in another company's common stock is classified as a cash outflow from financing activities on the Statement of Cash Flows. B. Repayment of long-term debt is classified as a cash outflow from investing activities on the Statement of Cash Flows. C. Losses on the sale of long-term assets are an adjustment reported in the operating activities section of the Statement of Cash Flows under the indirect method. D. Dividends paid are classified as a cash outflow from operating activities on the Statement of Cash Flows. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Investing and Financing Activities Topic: Operating Activities - Indirect Method
95.
Which of the following is an example of a cash outflow from an investing activity?
A. Payment of cash for treasury stock. B. Payment of cash for the purchase of land. C. Payment of cash for inventory. D. Payment on a long-term note payable. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Investing and Financing Activities
11-123 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
96.
Which of the following transactions would generally result in an investing cash inflow?
A. Receive cash from borrowing at the bank. B. Receive cash from the sale of land. C. Receive cash from customers. D. Receive cash from stockholders for the issuance of common stock. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Investing and Financing Activities
97.
Which of the following is an example of a cash inflow from a financing activity?
A. Issuance of bonds. B. Sale of an intangible asset. C. Receipt of cash dividends. D. Purchase of land. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Investing and Financing Activities
11-124 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
98.
_________ is an investing cash flow and ________ is a financing cash flow, as reported on the Statement of Cash Flows.
A. Issuing bonds; selling investments B. Purchasing land; repaying a bank loan C. Receiving cash from the sale of inventory; paying cash dividends D. Purchasing treasury stock; lending cash to an employee AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Investing and Financing Activities
99.
Cash flows from investing activities do not include cash flows from:
A. Lending. B. The sale of equipment. C. Borrowing. D. The purchase of land and buildings. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Investing and Financing Activities
11-125 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
100.
Cash flows from financing activities include:
A. Interest received. B. Interest paid. C. Dividends received. D. Cash dividends paid. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Investing and Financing Activities
101.
Cash flows from financing activities do not include:
A. Retirement of bonds payable. B. Cash dividends paid. C. Issuance of common stock. D. Interest received. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Investing and Financing Activities
11-126 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
102.
Cash flows from investing activities do not include:
A. Proceeds from the sale of land. B. Proceeds from the issuance of common stock. C. Proceeds from the sale of marketable securities. D. Cash outflows from acquiring land. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Investing and Financing Activities
103.
Cash flows from investing activities include:
A. Proceeds from the issuance of common stock. B. Cash outflows from acquiring land. C. Retirement of bonds payable. D. Interest received. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Investing and Financing Activities
11-127 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
104.
Shively Mfg. Co. sold land costing $10,000 for $12,000. Shively would report:
A. Operating cash inflows of $12,000. B. Investing cash inflows of $12,000. C. Financing cash inflows of $12,000. D. Financing cash inflows of $2,000. AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Investing and Financing Activities
11-128 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
105.
Bad Brad's BBQ had cash flows for the year as follows ($ in millions): CASH RECEIVED FROM: Customers
$1,800
Interest on investments
200
Sale of land
100
Sale of common stock
600
Issuance of debt securities
2,000
CASH PAID FOR: Interest on debt Income tax
$300 80
Debt principal reduction
1,500
Purchase of equipment
4,000
Purchase of inventory
1,000
Dividends on common stock
200
Operating expenses
500
Bad Brad's would report net cash inflows (outflows) from investing activities in the amount of:
A. ($4,000). B. $100. C. ($3,900). D. ($1,900).
Sale of land
$100
Purchase of equipment
(4,000)
Net cash outflows from investing
($3,900)
activities
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard 11-129 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Investing and Financing Activities
11-130 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
106.
Bad Brad's BBQ had cash flows for the year as follows ($ in millions): CASH RECEIVED FROM: Customers
$1,800
Interest on investments
200
Sale of land
100
Sale of common stock
600
Issuance of debt securities
2,000
CASH PAID FOR: Interest on debt Income tax
$300 80
Debt principal reduction
1,500
Purchase of equipment
4,000
Purchase of inventory
1,000
Dividends on common stock
200
Operating expenses
500
Bad Brad's would report net cash inflows (outflows) from financing activities in the amount of:
A. $1,100. B. ($1,100). C. $820. D. $900.
Sale of common stock
$600
Issuance of debt securities
2,000
Debt principal reduction
(1,500)
Dividends on common stock
(200)
Net cash inflows from financing
$900
activities
AACSB: Analytical Thinking AICPA: FN Reporting 11-131 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Investing and Financing Activities
107.
During the year, Next Tec Corp. had the following cash flows: receipt from customers, $10,000; receipt from the bank for long-term borrowing, $6,000; payment to suppliers, $5,000; payment of dividends, $1,000, payment to workers, $2,000; and payment for machinery, $8,000. What amount would be reported for investing net cash flows on the Statement of Cash Flows?
A. $5,000. B. $2,000. C. $6,000. D. ($8,000). Payment for machinery, $8,000.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Investing and Financing Activities
11-132 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
108.
During the year, Next Tec Corp. had the following cash flows: receipt from customers, $10,000; receipt from the bank for long-term borrowing, $6,000; payment to suppliers, $5,000; payment of dividends, $1,000, payment to workers, $2,000; and payment for machinery, $8,000. What amount would be reported for net financing cash flows on the Statement of Cash Flows?
A. $5,000. B. $2,000. C. $6,000. D. ($8,000). Receipt from the bank for long-term borrowing, $6,000 minus payment of dividends, $1,000.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Investing and Financing Activities
11-133 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
109.
A company had the following cash flows for the year: (a) Purchased inventory, $60,000 (b) Sold goods to customers, $90,000 (c) Received loan from a local bank, $150,000 (d) Purchased land, $180,000 (e) Purchased treasury stock, $40,000 (f) Paid dividends, $10,000 (g) Sold delivery truck, $30,000 What amount would be reported for net investing cash flows on the Statement of Cash Flows?
A. ($150,000). B. ($180,000). C. $30,000. D. ($190,000). ($150,000) = $30,000 (f) - $180,000 (d)
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Investing and Financing Activities
11-134 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
110.
A company had the following cash flows for the year: (a) Purchased land, $60,000 (b) Borrowed from a local bank, $100,000 (c) Paid employee salaries, $50,000 (d) Issued common stock, $75,000 (e) Paid dividends, $20,000 (f) Sold equipment, $40,000 (g) Sold services to customers, $120,000 What amount would be reported for net investing cash flows on the Statement of Cash Flows?
A. ($20,000). B. $70,000. C. $155,000. D. $40,000. ($20,000) = $40,000 (f) - $60,000 (a).
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Investing and Financing Activities
11-135 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
111.
A company had the following cash flows for the year: (a) Purchased land, $60,000 (b) Borrowed from a local bank, $100,000 (c) Paid employee salaries, $50,000 (d) Issued common stock, $75,000 (e) Paid dividends, $20,000 (f) Sold equipment, $40,000 (g) Sold services to customers, $120,000 What amount would be reported for net financing cash flows on the Statement of Cash Flows?
A. $155,000. B. $70,000. C. ($20,000). D. $40,000. $155,000 = $100,000 (b) + $75,000 (d) - $20,000 (e).
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Investing and Financing Activities
112.
Financing activities would include cash paid for:
A. The stock of another company. B. Dividends to stockholders. C. The purchase of treasury stock. D. Both dividends to stockholders and the purchase of treasury stock. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation 11-136 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Investing and Financing Activities
113.
Cash received from issuing common stock would be classified in which section of the Statement of Cash Flows?
A. Operating. B. Investing. C. Financing. D. Not shown in the Statement of Cash Flows. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Investing and Financing Activities
114.
Which of the following would be classified as an investing cash flow?
A. Issue bonds. B. Receive cash in advance from a customer. C. Sell a piece of equipment below cost. D. Repurchase the company's own shares of common stock. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Investing and Financing Activities
11-137 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
115.
During 2018, Victory Solutions had the following cash flows: (1) received cash of $5,000 billed to a customer in 2017; (2) earned $20,000 of net income; (3) paid interest of $6,000 on a corporate bond issued; (4) paid dividends of $8,000 to its stockholders; (5) borrowed $40,000 from a local bank; and (6) purchased its own shares of common stock for $10,000. What is Victory Solution's net cash flows from financing activities for 2018?
A. $40,000. B. $30,000. C. $22,000. D. $16,000. (1), (2), and (3) are operating activities. (4), (5), and (6) are financing activities. (5) is a financing inflow and (4) and (6) are financing outflows. Therefore, $40,000 - $8,000 $10,000 = $22,000.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Investing and Financing Activities
11-138 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
116.
The following information pertains to Alpha Computing at the end of 2018: Assets
$970,000
Liabilities
$560,000
Net Income
$90,000
Common Stock
$350,000
Alpha Computing's Retained Earnings account had a zero balance at the beginning of 2018. What amount of dividends did the company pay in 2018?
A. $280,000. B. $150,000. C. $30,000. D. $80,000. Assets = Liabilities + Common Stock + Retained Earnings. $970,000 = $560,000 + $350,000 + Retained Earnings. Therefore, Retained Earnings = $60,000. $60,000 = $0 + $90,000 - Dividends. Therefore, Dividends = $30,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Investing and Financing Activities
11-139 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
117.
The balance sheet of Computer World reports total assets of $350,000 and $450,000 at the beginning and end of the year, respectively. Sales revenues are $800,000, net income is $100,000, and net cash flows from operating activities are $150,000. What is Computer Worlds' cash return on assets?
A. 33.3%. B. 42.9%. C. 25.0%. D. 37.5%.
Operating
÷
Average
= Cash Return on Assets
Cash Flows
Total Assets
$150,000
÷ ($350,000 + $450,000)/2 =
37.5%
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-04 Perform financial analysis using the statement of cash flows. Topic: Apple vs. Google
11-140 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
118.
The balance sheet of Computer World reports total assets of $350,000 and $450,000 at the beginning and end of the year, respectively. Sales revenues are $800,000, net income is $100,000, and net cash flows from operating activities are $150,000. What is Computer World's cash flow to sales?
A. 15.6%. B. 25.0%. C. 18.8%. D. 37.5%.
Operating
÷
Sales
=
Cash Flows
Cash Flow to Sales
$150,000
÷
$800,000
=
18.8%
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-04 Perform financial analysis using the statement of cash flows. Topic: Apple vs. Google
11-141 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
119.
The balance sheet of Computer World reports total assets of $350,000 and $450,000 at the beginning and end of the year, respectively. Sales revenues are $800,000, net income is $100,000, and net cash flows from operating activities are $150,000. What is Computer World's asset turnover?
A. 2.0 times. B. 2.3 times. C. 0.5 times. D. 1.8 times.
Sales
÷
Average Total Assets
=
Asset Turnover
$800,000 ÷ ($350,000 + $450,000)/2 = 2.0 times
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-04 Perform financial analysis using the statement of cash flows. Topic: Apple vs. Google
11-142 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
120.
The balance sheet of Sound Designs reports total assets of $750,000 and $800,000 at the beginning and end of the year, respectively. Sales revenues are $1.5 million ($1.2 million in the previous year), net income is $150,000, and net cash flows from operating activities are $175,000. What is Sound Designs' cash return on assets?
A. 19.4%. B. 21.9%. C. 22.6%. D. 18.8%.
Operating
÷
Average
= Cash Return on Assets
Cash Flows
Total Assets
$175,000
÷ ($750,000 + $800,000)/2 =
22.6%
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-04 Perform financial analysis using the statement of cash flows. Topic: Apple vs. Google
11-143 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
121.
The balance sheet of Sound Designs reports total assets of $750,000 and $800,000 at the beginning and end of the year, respectively. Sales revenues are $1.5 million ($1.2 million in the previous year), net income is $150,000, and net cash flows from operating activities are $175,000. What is Sound Designs' cash flow to sales?
A. 22.6%. B. 11.7%. C. 14.6%. D. 13.0%.
Operating
÷
Sales
=
Cash Flows
Cash Flow to Sales
$175,000
÷
$1,500,000
=
11.7%
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-04 Perform financial analysis using the statement of cash flows. Topic: Apple vs. Google
11-144 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
122.
The balance sheet of Sound Designs reports total assets of $750,000 and $800,000 at the beginning and end of the year, respectively. Sales revenues are $1.5 million ($1.2 million in the previous year), net income is $150,000, and net cash flows from operating activities are $175,000. What is Sound Designs' asset turnover?
A. 2.0 times. B. 1.7 times. C. 0.5 times. D. 1.9 times.
Sales
÷
Average Total Assets
=
Asset Turnover
$1,500,000 ÷ ($750,000 + $800,000)/2 = 1.9 times
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-04 Perform financial analysis using the statement of cash flows. Topic: Apple vs. Google
11-145 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
123.
The balance sheet of Tech Track reports total assets of $400,000 and $500,000 at the beginning and end of the year, respectively. Sales revenues are $1.1 million ($0.8 million in the previous year), net income is $40,000, and net cash flows from operating activities are $50,000. How does Tech Track's cash return on assets compare to the industry average of 10%?
A. Better. B. Worse. C. Same as. D. Cannot be determined with the data provided.
Operating
÷
Average
= Cash Return on Assets
Cash Flows
Total Assets
$50,000
÷ ($400,000 + $500,000)/2 =
11.1%
AACSB: Analytical Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-04 Perform financial analysis using the statement of cash flows. Topic: Apple vs. Google
11-146 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
124.
The balance sheet of Tech Track reports total assets of $400,000 and $500,000 at the beginning and end of the year, respectively. Sales revenues are $1.1 million ($0.8 million in the previous year), net income is $40,000, and net cash flows from operating activities are $50,000. How does Tech Track's cash flow to sales ratio compare to the industry average of 5%?
A. Better. B. Worse. C. Same as. D. Cannot be determined with the data provided.
Operating
÷
Sales
=
Cash Flows
Cash Flow to Sales
$50,000
÷
$1,100,000
=
4.5%
AACSB: Analytical Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-04 Perform financial analysis using the statement of cash flows. Topic: Apple vs. Google
11-147 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
125.
The balance sheet of Tech Track reports total assets of $400,000 and $500,000 at the beginning and end of the year, respectively. Sales revenues are $1,080,000($800,000 in the previous year), net income is $40,000, and net cash flows from operating activities are $50,000. How does Tech Track's asset turnover compare to the industry average of 2.4 times?
A. Better. B. Worse. C. Same as. D. Cannot be determined with the data provided.
Sales
÷
Average
=
Total Assets
Asset Turnover
$1,100,000 ÷ ($400,000 + $500,000)/2 = 2.4 times
AACSB: Analytical Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-04 Perform financial analysis using the statement of cash flows. Topic: Apple vs. Google
126.
We can separate cash return on assets into:
A. Cash flow to sales and return on assets. B. Cash flow to sales and asset turnover. C. Cash flow to sales and profit margin. D. Profit margin and asset turnover. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-04 Perform financial analysis using the statement of cash flows. Topic: Apple vs. Google
11-148 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
127.
Some cash flow ratios are derived by substituting net cash flows from operating activities in place of:
A. average total assets. B. net income. C. average stockholders' equity. D. the change in cash. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 11-04 Perform financial analysis using the statement of cash flows. Topic: Apple vs. Google
128.
The balance sheet of Technology World reports total assets of $800,000 and $900,000 at the beginning and end of the year, respectively. The cash return on assets for the year is 20%. What is Technology World's net operating cash flows for the year?
A. $4,500,000. B. $170,000. C. $4,250,000. D. $85,000. Operating cash flows divided by average total assets equals 20%. Average total assets equal $850,000 [($800,000 + $900,000)/2]; therefore, operating cash flows must be $170,000 ($850,000 × 20%).
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-04 Perform financial analysis using the statement of cash flows. Topic: Apple vs. Google
11-149 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
129.
The balance sheet of Orion Medical Equipment reports total assets of $450,000 and $550,000 at the beginning and end of the year, respectively. The cash return on assets for the year is 10%. What is Orion's net operating cash flows for the year?
A. $5,000,000. B. $55,000. C. $5,500,000. D. $50,000. Operating cash flows divided by average total assets equals 10%. Average total assets equal $500,000 [($450,000 + $550,000)/2]; therefore, operating cash flows must be $50,000 ($500,000 × 10%).
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-04 Perform financial analysis using the statement of cash flows. Topic: Apple vs. Google
130.
We calculate cash return on assets as
A. The change in cash divided by average total assets. B. Net cash flows from operating activities divided by average total assets. C. The change in cash divided by ending total assets. D. Net cash flows from operating activities divided by ending total assets. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-04 Perform financial analysis using the statement of cash flows. Topic: Apple vs. Google
11-150 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
131.
Which of the following statements is not true relating to cash flow analysis?
A. Cash return on assets indicates the amount of operating cash flow generated for each dollar invested in assets. B. To maximize cash flow from operations, a company strives to increase both cash flow per dollar of sales and sales per dollar of assets invested. C. Cash return on assets can be separated to examine two important business strategies: cash flow to sales and asset turnover. D. Positive cash flow from operations is not important to a company's survival in the longrun. AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-04 Perform financial analysis using the statement of cash flows. Topic: Apple vs. Google
132.
The balance sheet of Storage Solutions reports total assets of $300,000 and $350,000 at the beginning and end of the year, respectively. The cash return on assets for the year is 10%. What is Storage Solutions' net cash flows from operating activities for the year?
A. $25,000. B. $30,000. C. $32,500. D. $35,000.
Operating Cash Flows ($300,000 + $350,000) ÷ 2
=
.10
Operating Cash Flows = .10 * [($300,000 + $350,000) ÷ 2] = $32,500. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze
11-151 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 3 Hard Learning Objective: 11-04 Perform financial analysis using the statement of cash flows. Topic: Apple vs. Google
133.
In 2018, Hope Company incurred sales on account of $100,000. The company also has the following information:
Accounts
December 31,
December 31,
2018
2017
$20,000
$50,000
$40,000
$65,000
Receivable Accounts Payable
What is the amount of cash received from customers for Hope Company in 2018?
A. $100,000. B. $45,000. C. $130,000. D. $70,000. $100,000 + $30,000 decrease in accounts receivable = $130,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct method. Topic: Operating Activities - Direct Method
11-152 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
134.
Wireless Technologies reports sales of $50 million. Accounts receivable at the beginning and end of the year are $5 million and $7 million, respectively. What is the amount of cash received from customers?
A. $50 million. B. $52 million. C. $48 million. D. $55 million.
Sales
$50
- Increase in accounts receivable
(2)
Cash received from customers
$48
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct method. Topic: Operating Activities - Direct Method
11-153 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
135.
At the beginning of the period, Utilities Payable equals $500. At the end of the period, Utilities Payable equals $700. If Utilities Expense for the period equals $1,500, what was the cash paid for utilities for the period?
A. $500. B. $1,500. C. $1,300. D. $700.
Utilities Expense
$1,500
- Increase in Utilities Payable
(200)
Cash paid for utilities
$1,300
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct method. Topic: Operating Activities - Direct Method
11-154 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
136.
At the beginning of the period, Accounts Receivable equals $1,700. At the end of the period, Accounts Receivable equals $2,200. If Service Revenue for the period equals $15,400, what was the cash received from customers for the period?
A. $13,200. B. $15,900. C. $14,900. D. $15,400.
Service Revenue - Increase in Accounts
$15,400 (500)
Receivable Cash received from customers
$14,900
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct method. Topic: Operating Activities - Direct Method
11-155 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
137.
Wireless Technologies reports cost of goods sold of $40 million. Inventory at the beginning and end of the year are $4 million and $3 million, respectively. Accounts payable at the beginning and end of the year are $3 million and $6 million, respectively. What is the amount of cash paid to suppliers?
A. $40 million. B. $36 million. C. $44 million. D. $42 million.
Cost of goods sold
$40
- Decrease in inventory
(1)
= Purchases
39
- Increase in accounts payable
(3)
= Cash paid to suppliers
$36
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct method. Topic: Operating Activities - Direct Method
11-156 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
138.
Wireless Technologies reports operating expenses of $2 million. Operating expenses include rent expense. Prepaid rent at the beginning and end of the year are $20,000 and $70,000, respectively. All other operating expenses were paid in cash as incurred. What is the amount of cash paid for operating expenses?
A. $2,000,000. B. $2,070,000. C. $1,950,000. D. $2,050,000.
Operating expenses
$2,000,000
+ Increase in prepaid rent
50,000
= Cash paid for operating
$2,050,000
expenses
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct method. Topic: Operating Activities - Direct Method
11-157 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
139.
Wireless Technologies reports income tax expense of $800,000. Income tax payable at the beginning and end of the year are $50,000 and $70,000, respectively. What is the amount of cash paid for income taxes?
A. $780,000. B. $800,000. C. $820,000. D. $870,000.
Income tax expense
$800,000
- Increase in income tax payable
(20,000)
Cash paid for income taxes
$780,000
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct method. Topic: Operating Activities - Direct Method
11-158 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
140.
Data Solutions reports sales of $100 million. Accounts receivable at the beginning and end of the year are $6 million and $9 million, respectively. What is the amount of cash received from customers?
A. $100 million. B. $103 million. C. $97 million. D. $109 million.
Sales
$100
- Increase in accounts receivable
(3)
Cash received from customers
$97
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct method. Topic: Operating Activities - Direct Method
11-159 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
141.
Data Solutions reports cost of goods sold of $75 million. Inventory at the beginning and end of the year are $8 million and $9 million, respectively. Accounts payable at the beginning and end of the year are $5 million and $3 million, respectively. What is the amount of cash paid to suppliers?
A. $78 million. B. $72 million. C. $75 million. D. $76 million.
Cost of goods sold
$75
+ Increase in inventory
1
= Purchases
76
+ Decrease in accounts payable
2
= Cash paid to suppliers
$78
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct method. Topic: Operating Activities - Direct Method
11-160 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
142.
Data Solutions reports operating expenses of $5 million. Operating expenses include rent expense. Prepaid rent at the beginning and end of the year are $120,000 and $80,000, respectively. All other operating expenses were paid in cash as incurred. What is the amount of cash paid for operating expenses?
A. $5,000,000. B. $5,040,000. C. $4,960,000. D. $5,080,000.
Operating expenses
$5,000,000
- Decrease in prepaid rent
(40,000)
= Cash paid for operating
$4,960,000
expenses
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct method. Topic: Operating Activities - Direct Method
11-161 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
143.
Data Solutions reports income tax expense of $1,700,000. Income taxes payable at the beginning and end of the year are $250,000 and $370,000, respectively. What is the amount of cash paid for income taxes?
A. $1,700,000. B. $1,820,000. C. $2,070,000. D. $1,580,000.
Income tax expense
$1,700,000
- Increase in income taxes
(120,000)
payable Cash paid for income taxes
$1,580,000
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct method. Topic: Operating Activities - Direct Method
11-162 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
144.
Schneider Inc. purchases its inventory from suppliers on account. During the year, its Inventory account increased by $10 million and its accounts payable to suppliers decreased by $3 million. If cost of goods sold was $440 million, its cash outflows to inventory suppliers totaled:
A. $453 million. B. $447 million. C. $433 million. D. $427 million.
Cost of goods sold
$440
+ Increase in inventory
10
= Purchases
450
+ Decrease in accounts payable = Cash paid to suppliers
3 $453
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct method. Topic: Operating Activities - Direct Method
11-163 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
145.
A company's Income Tax Payable account decreased from $14 million to $12 million during the year. If its income tax expense was $80 million, what would be shown as cash paid for income taxes under the direct method?
A. A cash outflow of $12 million. B. A cash outflow of $78 million. C. A cash outflow of $80 million. D. A cash outflow of $82 million. $80 million + $2 million decrease in income tax payable = $82 million.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct method. Topic: Operating Activities - Direct Method
146.
Which of the following items is not reported in the operating section of the statement of cash flows using the direct method?
A. Depreciation expense. B. Cash paid to suppliers. C. Cash received from customers. D. Cash paid for income taxes. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct method. Topic: Operating Activities - Direct Method
11-164 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
147.
Which of the following items is reported in the operating section of the statement of cash flows using the direct method?
A. Depreciation expense. B. Gain on sale of an asset. C. Cash received from customers. D. Loss on sale of an asset. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct method. Topic: Operating Activities - Direct Method
Matching Questions
11-165 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
148.
Match the following
1. Financing
Begins with net income and then list adjustments to net
activities
income in order to arrive at operating cash flows.
2. Investing activities
6
Significant investing and financing activities that do not affect cash.
3. Statement of cash flows
4
Sales revenue divided by average total assets; measures the sales revenue generated per dollar of assets.
4. Noncash activities
8
Includes cash receipts and cash payments for transactions relating to revenue and expense activities.
7
Net cash flows from operating activities divided by average 5. Cash flow to sales
total assets; measures the operating cash flow generated per dollar of assets.
9
A summary of cash inflows and cash outflows during the reporting period sorted by operating, investing, and financing 6. Indirect method
activities.
3
Net cash flows from operating activities divided by sales 7. Operating activities
revenue; measures the operating cash flow generated per dollar of sales.
5
Includes cash transactions resulting from the external 8. Asset turnover
financing of a business.
9. Cash return on
Includes cash transactions involving the purchase and sale
assets
1
of long-term assets and current investments.
2
Adjusts the items on the income statement to show items such as cash received from customers, and cash paid for 10. Direct method
inventory, salaries, rent, interest and taxes.
10
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Learning Objective: 11-04 Perform financial analysis using the statement of cash flows. Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct method. Topic: Apple vs. Google Topic: Classification of Transactions
11-166 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Investing and Financing Activities Topic: Operating Activities - Direct Method Topic: Operating Activities - Indirect Method
Essay Questions
11-167 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
149.
For each of the following ten transactions, indicate by letter whether the cash effect of each transaction is reported in a statement of cash flows as an operating (O), investing (I), financing (F), or noncash (NC) activity. Also, indicate whether the transaction is a cash inflow (CI), cash outflow (CO), or no effect on cash (NE). The first answer is provided as an example. Type of
Cash
Activity
Inflow or
Transaction
Outflow O
CO
Payment of employee salaries 1. Issuance of bonds 2. Payment of income taxes 3. Payment of a long-term note payable 4. Sale of treasury stock 5. Payment of an account payable 6. Sale of land for cash 7. Purchase of long-term assets by issuing debt. 8. Collection of an account receivable 9. Issuance of common stock 10. Purchase of inventory
Type of
Cash
Activity
Inflow or
Transaction
Outflow O
CO
Payment of employee salaries
F
CI
1. Issuance of bonds
O
CO
2. Payment of income taxes
F
CO
3. Payment of a long-term note payable
F
CI
4. Sale of treasury stock
O
CO
5. Payment of an account payable
I
CI
6. Sale of land for cash
11-168 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
NC
NE
7. Purchase of long-term assets by issuing debt.
O
CI
8. Collection of an account receivable
F
CI
9. Issuance of common stock
O
CO
10. Purchase of inventory
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
150.
For each of the following five transactions, indicate by letter whether the cash effect of each transaction is reported in a statement of cash flows as an operating (O), investing (I), financing (F), or noncash (NC) activity. Type of
Transaction
Activity 1. Investment in bonds 2. Payment of interest on bonds payable 3. Payment of a cash dividend 4. Purchase of a building 5. Collection of a note receivable
Type of
Transaction
Activity I
1. Investment in bonds
O
2. Payment of interest on bonds payable
F
3. Payment of a cash dividend
I
4. Purchase of a building
I
5. Collection of a note receivable
AACSB: Reflective Thinking
11-169 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Reporting Blooms: Understand Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
151.
For each of the following five transactions, indicate by letter whether the cash effect of each transaction is reported in a statement of cash flows as an operating (O), investing (I), financing (F), or noncash (NC) activity. Type of
Transaction
Activity 1. Issuance of common stock 2. Sale of land for cash 3. Purchase of treasury stock 4. Collection of an account receivable 5. Issuance of a note payable
Type of
Transaction
Activity F
1. Issuance of common stock
I
2. Sale of land for cash
F
3. Purchase of treasury stock
O
4. Collection of an account receivable
F
5. Issuance of a note payable
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
11-170 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
152.
For each of the following five transactions, indicate by letter whether the cash effect of each transaction is reported in a statement of cash flows as an operating (O), investing (I), financing (F), or noncash (NC) activity. Type of
Transaction
Activity 1. Purchase of inventory 2. Repayment of note payable 3. Payment of employee salaries 4. Sale of equipment for a note receivable 5. Issuance of bonds
Type of
Transaction
Activity O
1. Purchase of inventory
F
2. Repayment of note payable
O
3. Payment of employee salaries
NC
4. Sale of equipment for a note receivable
F
5. Issuance of bonds
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
11-171 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
153.
Classify each of the following items as an operating, investing, or financing activity. 1. Dividends paid. 2. Sale of goods or services for cash. 3. Sale of equipment. 4. Purchase of inventory. 5. Repayment of notes payable.
1. Financing Activity. 2. Operating Activity. 3. Investing Activity. 4. Operating Activity. 5. Financing Activity.
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
154.
Classify each of the following items as an operating, investing, or financing activity. 1. Payment of income taxes. 2. Sale of investments. 3. Receipt of interest. 4. Issuance of common stock. 5. Purchase of intangibles.
1. Operating Activity. 2. Investing Activity. 3. Operating Activity. 4. Financing Activity. 5. Investing Activity.
AACSB: Reflective Thinking 11-172 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
155.
The following selected transactions occur during the first year of operations. Determine how each should be reported in the statement of cash flows. State whether it is a cash inflow or a cash outflow and whether it is an operating, investing, or financing activity. 1. Issued a million shares of common stock at $20 per share. 2. Purchased land and a building for $3 million. 3. Received $200,000 from a cash sale of merchandise to customers. 4. Paid a dividend of $1 per share to common stockholders. 5. Loaned $50,000 to an employee and accepted a note receivable.
1. Cash inflow, Financing activity. 2. Cash outflow, Investing activity. 3. Cash inflow, Operating activity. 4. Cash outflow, Financing activity. 5. Cash outflow, Investing activity.
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
11-173 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
156.
Analysis of an income statement, balance sheets, and additional information from the accounting records of Gaming Strategies reveal the following items: 1. Collection of notes receivable. 2. Purchase of equipment. 3. Exchange of long-term assets. 4. Decrease in accounts payable. 5. Payment of dividends. 6. Purchase of a patent. 7. Depreciation expense. 8. Decrease in accounts receivable. 9. Issuance of note payable. 10. Increase in inventory. Indicate in which section of the statement of cash flows each of these items would be reported: operating activities (indirect method), investing activities, financing activities, or noncash activities.
1. Investing activities. 2. Investing activities. 3. Noncash activities. 4. Operating activities. 5. Financing activities. 6. Investing activities. 7. Operating activities. 8. Operating activities. 9. Financing activities. 10. Operating activities.
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
11-174 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
157.
Place the following items in the correct order as they would appear in the statement of cash flows: 1. Beginning cash balance 2. Ending cash balance 3. Investing activities 4. Financing activities 5. Net increase (decrease) in cash 6. Operating activities
Operating activities Investing activities Financing activities Net increase (decrease) in cash Beginning cash balance Ending cash balance
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
11-175 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
158.
Electronic Wonders reports net income of $95,000. The accounting records reveal Depreciation Expense of $50,000 as well as increases in Prepaid Rent, Accounts Payable, and Income Tax Payable of $40,000, $23,000, and $20,000, respectively. Prepare the operating activities section of Electronic Wonders' statement of cash flows using the indirect method.
Cash Flows from Operating Activities Net income
$95,000
Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense
50,000
Increase in prepaid rent
(40,000)
Increase in accounts payable
23,000
Increase in income tax payable
20,000
Net cash flows from operating activities
$148,000
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method
11-176 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
159.
Micro Manufacturing reports net income of $850,000. Depreciation Expense is $60,000, Accounts Receivable increases $30,000 and Accounts Payable decreases $10,000. Calculate net cash flows from operating activities using the indirect method.
Cash Flows from Operating Activities Net income
$850,000
Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense
60,000
Increase in accounts receivable
(30,000)
Decrease in accounts payable
(10,000)
Net cash flows from operating activities
$870,000
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method
11-177 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
160.
Fidelity Systems reports net income of $80 million. Included in that number is depreciation expense of $8 million, and a gain on the sale of equipment of $1 million. Records reveal increases in Accounts Receivable, Inventory, and Accounts Payable of $4 million, $3 million, and $2 million, respectively. Calculate Fidelity's net cash flows from operating activities using the indirect method.
Cash Flows from Operating Activities ($ in millions) Net income
$80
Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense
8
Gain on sale of equipment
(1)
Increase in accounts receivable
(4)
Increase in inventory
(3)
Increase in accounts payable Net cash flows from operating activities
2 $82
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method
11-178 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
161.
Alpha Computers reports net income of $44 million. Included in that number are depreciation expense of $7 million and a loss on the sale of land of $2 million. Records reveal decreases in Accounts Receivable, Inventory, and Accounts Payable of $4 million, $3 million, and $2 million, respectively. Calculate Alpha Computers' net cash flows from operating activities using the indirect method.
Cash Flows from Operating Activities ($ in millions) Net income
$44
Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense
7
Loss on sale of land
2
Decrease in accounts receivable
4
Decrease in inventory
3
Decrease in accounts payable Net cash flows from operating activities
(2) $58
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method
11-179 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
162.
Portions of the financial statements for Horizon Telecom are provided below. Horizon Telecom Income Statement For the Year Ended December 31, 2018
Revenues
$610,000
Expenses: Cost of goods sold
370,000
Operating expenses
120,000
Depreciation expense
32,000
Income tax expense
44,000
Total expenses
566,000
Net Income
$44,000
Horizon Telecom Selected Balance Sheet Data December 31, 2018 Increase in accounts receivable
$6,000
Increase in inventory
13,000
Decrease in prepaid rent
9,000
Increase in operating expenses payable
5,000
Decrease in accounts payable
8,000
Increase in income tax payable
20,000
Prepare the operating activities section of the statement of cash flows for Horizon Telecom using the indirect method.
Horizon Telecom Statement of Cash Flows For the Year Ended December 31, 2018 Cash Flows from Operating Activities Net income
$44,000
11-180 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense
32,000
Increase in accounts receivable
(6,000)
Increase in inventory
(13,000)
Decrease in prepaid rent
9,000
Increase in operating expenses payable
5,000
Decrease in accounts payable
(8,000)
Increase in income tax payable
20,000
Net cash flows from operating activities
$83,000
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method
11-181 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
163.
Nathan Herrmann has completed the basic format to be used in preparing the statement of cash flows (indirect method) for CEO Consultants. CEO Consultants Statement of Cash Flows For the Year Ended December 31, 2018 Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash flows from operating activities: Net cash flows from operating activities Cash Flows from Investing Activities Net cash flows from investing activities Cash Flows from Financing Activities Net cash flows from financing activities Net increase (decrease) in cash
(50,000)
Cash at the beginning of the period
95,000
Cash at the end of the period
$45,000
Listed below in random order are line items to be included in the statement of cash flows. Purchase of equipment
$220,000
Increase in inventory
30,000
Increase in prepaid rent
10,000
Payment of dividends
40,000
Depreciation expense
20,000
Increase in accounts receivable
60,000
Increase in accounts payable
10,000
Loss on sale of land
7,000
Net income
70,000
Repayment of notes payable
50,000
Cash received from the sale of land
3,000
Issuance of common stock
250,000
Prepare the statement of cash flows for CEO Consultants using the indirect method.
11-182 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
CEO Consultants Statement of Cash Flows For the Year Ended December 31, 2018 Cash Flows from Operating Activities Net income
$70,000
Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense
20,000
Loss on sale of land
7,000
Increase in accounts receivable
(60,000)
Increase in inventory
(30,000)
Increase in prepaid rent
(10,000)
Increase in accounts payable
10,000
Net cash flows from operating activities
$7,000
Cash Flows from Investing Activities Cash received from sale of land Purchase of equipment
3,000 (220,000)
Net cash flows from investing activities
(217,000)
Cash Flows from Financing Activities Issuance of common stock
250,000
Payment of dividends
(40,000)
Repayment of notes payable
(50,000)
Net cash flows from financing activities Net increase (decrease) in cash
160,000 (50,000)
Cash at the beginning of the period
95,000
Cash at the end of the period
$45,000
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows.
11-183 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Investing and Financing Activities Topic: Operating Activities - Indirect Method
164.
Mobile Video Systems sold land, investments, and issued their own common stock for $10 million, $15 million, and $20 million, respectively. Mobile Video also purchased treasury stock, equipment, and a patent for $2 million, $4 million, and $6 million, respectively. What amount should the company report as net cash flows from investing activities? What amount should the company report as net cash flows from financing activities?
Cash Flows from Investing Activities Sale of land
$10
Sale of investments
15
Purchase equipment
(4)
Purchase a patent
(6)
Net cash flows from
$15
investing activities
Cash Flows from Financing Activities Issuance of common stock
$20
Purchase treasury stock
(2)
Net cash flows from
$18
financing activities
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Investing and Financing Activities
11-184 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
165.
Two competitors in the construction supply industry report the following selected financial data: Company A Company B Sales
$47,220
$66,176
Net income
1,783
2,620
Operating cash
4,054
5,125
32,625
41,164
33,005
40,877
flows Total assets, beginning Total assets, ending
Calculate the cash return on assets, cash flow to sales ratio, and asset turnover ratio for each company. Which company has the better cash flow to sales ratio and which company has the better asset turnover ratio?
($ in millions) Operating
÷
Average
= Cash Return on Assets
Cash Flows
Total Assets
Company A
$4,054
÷ ($32,625 + $33,005)/2 =
12.4%
Company B
$5,125
÷ ($41,164 + $40,877)/2
12.5%
($ in millions) Operating
÷
Sales
= Cash Flow
Cash Flows
to Sales
Company A
$4,054
÷ $47,220 =
8.6%
Company B
$5,125
÷ $66,176 =
7.7%
($ in millions)
Sales
÷
Average Total Assets
=
Asset Turnover
Company A
$47,220 ÷ ($32,625 + $33,005)/2 = 1.4 times
Company B
$66,176 ÷ ($41,164 + $40,877)/2 = 1.6 times
Company A has a better (higher) cash flow to sales ratio, while Company B has a better (higher) asset turnover. AACSB: Analytical Thinking 11-185 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Decision Making AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-04 Perform financial analysis using the statement of cash flows. Topic: Apple vs. Google
166.
The balance sheet of Integrated Systems reports total assets of $890,000 and $950,000 at the beginning and end of the year, respectively. Sales revenues are $1.6 million, net income is $185,000, and net cash flows from operating activities are $155,000. Calculate the cash return on assets, cash flow to sales, and asset turnover for Integrated Systems.
Operating
÷
Average
= Cash Return on Assets
Cash Flows
Total Assets
$155,000
÷ ($890,000 + $950,000)/2 =
Operating
÷
Sales
=
Cash Flows
16.8%
Cash Flow to Sales
$155,000
Sales
÷
÷
$1,600,000
Average Total Assets
=
9.7%
=
Asset Turnover
$1,600,000 ÷ ($890,000 + $950,000)/2 = 1.7 times
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-04 Perform financial analysis using the statement of cash flows. Topic: Apple vs. Google
11-186 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
167.
The balance sheet of The Computer Doctor reports total assets of $160,000 and $220,000 at the beginning and end of the year, respectively. The cash return on assets for the year is 10%. Calculate The Computer Doctor's net cash flows from operating activities for the year.
Operating Cash Flows ($160,000 + $220,000) ÷ 2
=
.10
Operating Cash Flows = .10 * [($160,000 + $220,000) ÷ 2] = $19,000. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-04 Perform financial analysis using the statement of cash flows. Topic: Apple vs. Google
168.
Discount Computers' accounts receivable increases during the year by $3 million. What is the amount of cash received from customers during the reporting period if its sales are $47 million?
Sales
$47
- Increase in accounts receivable
(3)
Cash received from customers
$44
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct method. Topic: Operating Activities - Direct Method
11-187 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
169.
Laser Solutions' inventory decreases during the year by $8 million and its accounts payable to suppliers increases by $6 million during the same period. What is the amount of cash paid to suppliers of merchandise during the reporting period if its cost of goods sold is $81 million?
Cost of goods sold
$81
- Decrease in inventory
(8)
= Purchases
73
- Increase in accounts payable
(6)
= Cash paid to suppliers
$67
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct method. Topic: Operating Activities - Direct Method
170.
Freedom Wireless reports operating expenses of $255,000. Operating expenses include both rent expense and salaries expense. Prepaid rent decreases during the year by $10,000 and salaries payable increases by $25,000. What is the cash paid for operating expenses during the year?
Operating expenses
$255,000
- Decrease in prepaid rent
(10,000)
- Increase in salaries payable
(25,000)
= Cash paid for operating
$220,000
expenses
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard 11-188 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct method. Topic: Operating Activities - Direct Method
171.
Wilson Electric reports income tax expense of $150,000. Income tax payable at the beginning and end of the year are $20,000 and $25,000, respectively. What is the cash paid for income taxes during the year?
Income tax expense - Increase in income tax payable Cash paid for income taxes
$150,000 (5,000) $145,000
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct method. Topic: Operating Activities - Direct Method
11-189 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
172.
Portions of the financial statements for Horizon Telecom are provided below. Horizon Telecom Income Statement For the Year Ended December 31, 2018
Revenues
$610,000
Expenses: Cost of goods sold
391,000
Operating expenses
120,000
Depreciation expense
32,000
Income tax expense
44,000
Total expenses
566,000
Net Income
$44,000 Horizon Telecom Selected Balance Sheet Data December 31, 2018
Increase in accounts receivable
$6,000
Increase in inventory
13,000
Decrease in prepaid rent
9,000
Increase in operating expenses payable
5,000
Decrease in accounts payable
8,000
Increase in income tax payable
20,000
Prepare the operating activities section of the statement of cash flows for Horizon Telecom using the direct method.
Horizon Telecom Statement of Cash Flows For the Year Ended December 31, 2018 Cash Flows from Operating Activities Cash received from customers
$604,000
Cash paid to suppliers
(412,000)
Cash paid for operating
(106,000)
11-190 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
expenses Cash paid for income taxes Net cash flows from
(24,000) $62,000
operating activities
Revenues
$610,000
- Increase in accounts receivable
(6,000)
= Cash received from customers
$604,000
Cost of goods sold
$391,000
+ Increase in inventory
13,000
= Purchases
404,000
+ Decrease in accounts payable
8,000
= Cash paid to suppliers
$412,000
Operating expenses
$120,000
- Decrease in prepaid rent
(9,000)
- Increase in operating expenses payable
(5,000)
= Cash paid for operating expenses
$106,000
Income tax expense
$44,000
- Increase in income tax payable
(20,000)
= Cash paid for income taxes
$24,000
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct method. Topic: Operating Activities - Direct Method
11-191 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
173.
Listed below are several transactions. For each transaction, indicate by letter whether the cash effect of each transaction is reported in a statement of cash flows as an operating (O), investing (I), financing (F), or noncash (NC) activity. Also, indicate whether the transaction is a cash inflow (CI), cash outflow (CO), or no effect on cash (NE). The first answer is provided as an example. Type of
Cash
Activity
Inflow or
Transaction
Outflow
F
CI
1. Issuance of common stock 2. Issuance of bonds 3. Investment in bonds 4. Collection of a note receivable 5. Sale of inventory 6. Repayment of note payable 7. Payment of a cash dividend 8. Purchase of land for cash 9. Reissue of treasury stock 10. Collection of an account receivable 11. Issuance of a note payable 12. Payment of employee salaries 13. Sale of equipment for a note receivable 14. Payment of interest on bonds payable 15. Sale of a building
Type of
Cash
Activity
Inflow or
Transaction
Outflow F
CI
1. Issuance of common stock
F
CI
2. Issuance of bonds
I
CO
3. Investment in bonds
11-192 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
I
4. Collection of a note receivable CI
O
CI
5. Sale of inventory
F
CO
6. Repayment of note payable
F
CO
7. Payment of a cash dividend
I
CO
8. Purchase of land for cash
F
CI
9. Reissue of treasury stock
O
CI
10. Collection of an account receivable
F
CI
11. Issuance of a note payable
O
CO
12. Payment of employee salaries
NC
NE
13. Sale of equipment for a note receivable
O
CO
14. Payment of interest on bonds payable
I
CI
15. Sale of a building
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
11-193 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
174.
Portions of the financial statements for Security Solutions are provided below. Security Solutions Income Statement For the Year Ended December 31, 2018 Revenues
$960,000
Expenses: Cost of goods sold
$650,000
Operating expenses
210,000
Depreciation expense
25,000
Income tax expense
20,000
Total expenses
905,000
Net Income
$55,000
Security Solutions Selected Balance Sheet Data December 31 Increase in accounts receivable
5,000
Decrease in inventory
10,000
Increase in prepaid rent
4,000
Decrease in salaries payable
6,000
Increase in accounts payable
8,000
Decrease in income tax payable
3,000
Required: Prepare the operating activities section of the statement of cash flows for Security Solutions using the indirect method.
11-194 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Security Solutions Statement of Cash Flows For the Year Ended December 31, 2018 Cash Flows from Operating Activities Net income
$55,000
Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense
25,000
Increase in accounts receivable
(5,000)
Decrease in inventory
10,000
Increase in prepaid rent
(4,000)
Decrease in salaries payable
(6,000)
Increase in accounts payable
8,000
Decrease in income tax payable
(3,000)
Net cash flows from
$80,000
operating activities
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method
11-195 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
175.
Amy Bourne completed the basic format to be used in preparing the statement of cash flows (indirect method) for Alpha Technologies. All amounts are in thousands (000's). Alpha Technologies Statement of Cash Flows For the Year Ended December 31, 2018 Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash flows from operating activities: Net cash flows from operating activities Cash Flows from Investing Activities Net cash flows from investing activities Cash Flows from Financing Activities Net cash flows from financing activities Net increase (decrease) in cash
(40,000)
Cash at the beginning of the period
80,000
Cash at the end of the period
$40,000
Listed below in random order are line items to be included in the statement of cash flows. Purchase of equipment
$220,000
Payment of dividends
40,000
Net income
80,000
Increase in inventory
30,000
Increase in prepaid rent
10,000
Repayment of notes payable
50,000
Cash received from the sale of land
3,000
Issuance of common stock
250,000
Increase in accounts payable
10,000
Loss on sale of land
7,000
Depreciation expense
20,000
Increase in accounts receivable
60,000
Required:
11-196 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Prepare the statement of cash flows for Alpha Technologies using the indirect method.
Alpha Technologies Statement of Cash Flows For the Year Ended December 31, 2018 Cash Flows from Operating Activities Net income
$80,000
Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense
20,000
Loss on sale of land
7,000
Increase in accounts receivable
(60,000)
Increase in inventory
(30,000)
Increase in prepaid rent
(10,000)
Increase in accounts payable
10,000
Net cash flows from operating
$17,000
activities Cash Flows from Investing Activities Cash received from sale of land Purchase of equipment
3,000 (220,000)
Net cash flows from investing activities
(217,000)
Cash Flows from Financing Activities Issuance of common stock
250,000
Payment of dividends
(40,000)
Repayment of notes payable
(50,000)
Net cash flows from financing activities Net increase (decrease) in cash
160,000 (40,000)
Cash at the beginning of the period
80,000
Cash at the end of the period
$40,000
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze 11-197 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 3 Hard Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Investing and Financing Activities Topic: Operating Activities - Indirect Method
11-198 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
176.
The income statement, balance sheets, and additional information for Communication Accessories are provided. Communication Accessories Income Statement For the Year Ended December 31, 2018 Revenues
$2,800,000
Gain on sale of land
4,000
Total revenues
2,804,000
Expenses: Cost of goods sold
1,900,000
Operating expenses
575,000
Depreciation expense
38,000
Interest expense
16,000
Income tax expense
63,000
Total expenses
2,592,000
Net Income
$212,000 Communication Accessories Balance Sheets December 31
Assets
2018
2017
$182,000
$187,000
Accounts receivable
83,000
95,000
Inventory
121,000
138,000
7,000
5,000
Investment in stock
195,000
100,000
Land
230,000
260,000
Equipment
305,000
225,000
(138,000)
(100,000)
$985,000
$910,000
Current Assets: Cash
Prepaid rent Long-Term Assets:
Accumulated depreciation Total Assets Liabilities and Stockholders’ Equity Current Liabilities: Accounts payable
$40,000
$58,000
11-199 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Interest payable
1,000
2,000
Income tax payable
12,000
10,000
285,000
205,000
Common stock
350,000
350,000
Retained earnings
297,000
285,000
$985,000
$910,000
Long-Term Liabilities: Notes payable Stockholders’ Equity:
Total Liabilities and Equity
Additional Information for 2018: 1. Purchase additional investment in stocks for $95,000. 2. Sell land costing $30,000 for $34,000 resulting in a $4,000 gain on sale of land. 3. Purchase $80,000 in equipment by borrowing $80,000 with a note payable due in three years. No cash is exchanged in the transaction. 4. The company declares and pays a cash dividend of $200,000. Required: Prepare the statement of cash flows using the indirect method. Disclose any noncash transactions in an accompanying footnote.
Communication Accessories Statement of Cash Flows For the Year Ended December 31, 2018 Cash Flows from Operating Activities Net income
$212,000
Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense
38,000
Gain on sale of land
(4,000)
Decrease in accounts
12,000
receivable
11-200 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Decrease in inventory
17,000
Increase in prepaid rent
(2,000)
Decrease in accounts
(18,000)
payable Decrease in interest payable Increase in income tax
(1,000) 2,000
payable Net cash flows from
$256,000
operating activities Cash Flows from Investing Activities Purchase investment in stock Sale of land
(95,000) 34,000
Net cash flows from investing
(61,000)
activities Cash Flows from Financing Activities Payment of cash dividends Net cash flows from financing
(200,000) (200,000)
activities Net increase (decrease) in cash
(5,000)
Cash at the beginning of the period
187,000
Cash at the end of the period
$182,000
Note: Noncash Activities Purchase equipment issuing a note
$80,000
payable
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Investing and Financing Activities Topic: Operating Activities - Indirect Method
11-201 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
177.
Selected financial data for two competitors in the telecommunications industry are as follows: ($ in millions)
2018
2017
Net Sales
$71,486
$475,203
Net Income
5,622
10,612
Net Cash Flows from
4,507
11,609
55,799
55,380
Net Sales
$39,540
$34,922
Net Income
8,052
7,333
Net Cash Flows from
12,089
10,104
58,734
53,340
Company A
Operations Total Assets Company B
Operations Total Assets
Required: 1. Calculate the return on assets for 2018 for both companies. Which company has the better return on assets? 2. Calculate the cash return on assets for 2018 for both companies. Which company has the better cash return on assets? 3. Calculate the cash flow to sales ratio and the asset turnover ratio for 2018 for both companies. Which company has the better ratios?
1.
($ in millions) Net Income ÷
Average
= Return on Assets
Total Assets Company A
5,622
÷ (55,799 + 55,380)/2 =
10.1%
Company B
8,052
÷ (58,734 + 53,340)/2 =
14.4%
Company B has a higher return on assets (14.4%) compared to Company A (10.1%).
11-202 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
2. ($ in millions) Operating ÷
Average
= Cash Return on Assets
Cash Flows
Total Assets
Company A
4,507
÷ (55,799 + 55,380)/2 =
8.1%
Company B
12,089
(58,734 + 53,340)/2 =
21.6%
Company B also has a higher cash return on assets (21.6%) compared to Company A (8.1%). 3. ($ in millions) Operating ÷ Sales = Cash Flow Cash Flows
to Sales
Company A
4,507
÷ 71,486 =
6.3%
Company B
12,089
÷ 39,540 =
30.1%
($ in millions) Sales ÷
Average
=
Total Assets
Asset Turnover
Company A
71,486 ÷ (55,799 + 55,380)/2 = 1.29 times
Company B
39,540 ÷ (58,734 + 53,340)/2 = 0.71 times
AACSB: Analytical Thinking AICPA: FN Decision Making AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-04 Perform financial analysis using the statement of cash flows. Topic: Apple vs. Google
11-203 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
178.
Cash flows from operating activities for both the indirect and direct methods are presented for Audio Systems. Cash Flows from Operating Activities Net income
$45,000
Adjustments to reconcile net income to net cash flows from operating activities: Depreciation expense
7,000
Decrease in accounts receivable
9,000
Increase in accounts payable
4,000
Decrease in income tax payable
(6,000)
Net cash flows from operating
$59,000
activities
Cash Flows from Operating Activities Cash received from customers
$93,000
Cash paid for operating expenses
(22,000)
Cash paid for income taxes
(12,000)
Net cash flows from operating activities
$59,000
Required: Complete the following income statement for Audio Systems. Assume all accounts payable are for operating expenses. Audio Systems Income Statement For the Year Ended December 31, 2018 Revenues
$?
Expenses: Operating expenses Depreciation expense Income tax expense Total expenses Net Income
? 7,000 ? ? $45,000
Hint: Use the following calculations and work backwards from bottom (in red) to top for 11-204 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
each item. Revenues ± Change in accounts receivable = Cash received from customers Operating expenses ± Change in accounts payable = Cash paid for operating expenses Income tax expense ± Change in income tax payable = Cash paid for income taxes
Audio Systems Income Statement For the Year Ended December 31, 2018 Revenues
$84,000
Expenses: Operating expenses
$26,000
Depreciation expense
7,000
Income tax expense
6,000
Total expenses
39,000
Net Income
Revenues + Decrease in accounts
$45,000
$84,000 9,000
receivable = Cash received from customers
$93,000
Operating expenses
$26,000
- Increase in accounts payable
(4,000)
= Cash paid for operating
$22,000
expenses
11-205 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Income tax expense + Decrease in income tax payable = Cash paid for income taxes
$6,000 6,000 $12,000
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct method. Topic: Operating Activities - Direct Method Topic: Operating Activities - Indirect Method
11-206 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
179.
The income statement, balance sheets, and additional information for Communication Accessories are provided. Communication Accessories Income Statement For the Year Ended December 31, 2018 Revenues
$2,800,000
Gain on sale of land
4,000
Total revenues
2,804,000
Expenses: Cost of goods sold
1,900,000
Operating expenses
575,000
Depreciation expense
38,000
Interest expense
16,000
Income tax expense
63,000
Total expenses
2,592,000
Net Income
$212,000 Communication Accessories Balance Sheets December 31
Assets
2018
2017
$182,000
$187,000
Accounts receivable
83,000
95,000
Inventory
121,000
138,000
7,000
5,000
Investment in stock
195,000
100,000
Land
230,000
260,000
Equipment
305,000
225,000
(138,000)
(100,000)
$985,000
$910,000
Current Assets: Cash
Prepaid rent Long-Term Assets:
Accumulated depreciation Total Assets Liabilities and Stockholders’ Equity Current Liabilities: Accounts payable
$40,000
$58,000
11-207 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Interest payable
1,000
2,000
Income tax payable
12,000
10,000
285,000
205,000
Common stock
350,000
350,000
Retained earnings
297,000
285,000
Total Liabilities and Equity
$985,000
$910,000
Long-Term Liabilities: Notes payable Stockholders’ Equity:
Additional Information for 2018: 1. Purchase additional investment in stocks for $95,000. 2. Sell land costing $30,000 for $34,000 resulting in a $4,000 gain on sale of land. 3. Purchase $80,000 in equipment by borrowing $80,000 with a note payable due in three years. No cash is exchanged in the transaction. 4. The company declares and pays a cash dividend of $200,000. Required: Prepare the statement of cash flows for Communication Accessories using the direct method. Disclose any noncash transactions in an accompanying footnote.
Communication Accessories Statement of Cash Flows For the Year Ended December 31, 2018 Cash Flows from Operating Activities Cash received from customers
$2,812,000
Cash paid to suppliers
(1,901,000)
Cash paid for operating expenses
(577,000)
Cash paid for interest
(17,000)
Cash paid for income taxes
(61,000)
Net cash flows from operating
$256,000
activities Cash Flows from Investing Activities
11-208 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Purchase investment in stock
(95,000)
Sale of land
34,000
Net cash flows from investing
(61,000)
activities Cash Flows from Financing Activities Payment of cash dividends
(200,000)
Net cash flows from financing
(200,000)
activities Net increase (decrease) in cash
(5,000)
Cash at the beginning of the period
187,000
Cash at the end of the period
$182,000
Note: Noncash Activities Purchase equipment issuing a note
$80,000
payable
Feed Back:
Revenues + Decrease in accounts
$2,800,000 12,000
receivable = Cash received from customers
$2,812,000
Cost of goods sold
$1,900,000
- Decrease in inventory
(17,000)
= Purchases
1,883,000
+ Decrease in accounts payable = Cash paid to suppliers Operating expenses
18,000 $1,901,000 $575,000
11-209 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
+ Increase in prepaid rent
2,000
= Cash paid for operating
$577,000
expenses Interest expense + Decrease in interest payable
$16,000 1,000
= Cash paid for interest
$17,000
Income tax expense
$63,000
- Increase in income tax payable
(2,000)
= Cash paid for income taxes
$61,000
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct method. Topic: Operating Activities - Direct Method
11-210 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
180.
Portions of the financial statements for Security Solutions are provided below. Security Solutions Income Statement For the Year Ended December 31, 2018
Revenues
$960,000
Expenses: Cost of goods sold
$650,000
Operating expenses
210,000
Depreciation expense
25,000
Income tax expense
20,000
Total expenses
905,000
Net Income
$55,000
Security Solutions Selected Balance Sheet Data December 31 Increase in accounts receivable
5,000
Decrease in inventory
10,000
Increase in prepaid rent
4,000
Decrease in salaries payable
6,000
Increase in accounts payable
8,000
Decrease in income tax payable
3,000
Required: Prepare the operating activities section of the statement of cash flows for Security Solutions using the direct method.
11-211 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Security Solutions Statement of Cash Flows For the Year Ended December 31, 2018 Cash Flows from Operating Activities Cash received from customers
$955,000
Cash paid to suppliers
(632,000)
Cash paid for operating expenses
(220,000)
Cash paid for income taxes
(23,000)
Net cash flows from operating
$80,000
activities
Feedback: Revenues
$960,000
- Increase in accounts receivable
5,000
= Cash received from customers
$955,000
Cost of goods sold
$650,000
- Decrease in inventory
(10,000)
= Purchases
640,000
- Increase in accounts payable
(8,000)
= Cash paid to suppliers
$632,000
Operating expenses
$210,000
+ Increase in prepaid rent
4,000
+ Decrease in operating expenses payable
6,000
= Cash paid for operating expenses
$220,000
Income tax expense
$20,000
+ Decrease in income tax payable = Cash paid for income taxes
3,000 $23,000
AACSB: Analytical Thinking AICPA: FN Reporting Blooms: Analyze Difficulty: 3 Hard Learning Objective: 11-05 Prepare the operating activities section of the statement of cash flows using the direct method. Topic: Operating Activities - Direct Method
11-212 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
181.
Identify and briefly describe the three categories of cash flows reported in the statement of cash flows.
The three categories of cash flows are operating activities, investing activities, and financing activities. Operating activities include cash receipts and cash payments for transactions relating to revenue and expense activities, essentially the very same activities reported in the income statement. Investing activities include cash transactions involving the purchase and sale of long-term assets and current investments. Financing activities are cash flows resulting from the external financing of a business such as long-term liabilities and stockholders' equity.
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
182.
Distinguish between the indirect method and the direct method for reporting net cash flows from operating activities. Which method is more common in practice? Which method provides a more logical presentation of cash flows?
Using the indirect method, we begin with net income and then list adjustments to net income in order to arrive at operating cash flows. Using the direct method, we adjust the items in the income statement to directly show the cash inflows and outflows from operations such as cash received from customers, and cash paid for inventory, salaries, rent, interest and taxes. The indirect method is more common in practice, while the direct method provides a more logical presentation of cash flows.
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Classify cash transactions as operating, investing, or financing activities. Topic: Classification of Transactions
11-213 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
183.
Highland Park Homes reports net income of $300,000, and yet its net cash flow from operating activities is a negative $200,000 during the same period. Is this possible? Explain.
It is possible to report net income and negative operating cash flows at the same time. Increases in current assets and decreases in current liabilities both result in net income that is higher than operating cash flows. As one specific example, an increase in accounts receivable of $500,000 would result in net income exceeding operating cash flows by $500,000.
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Apply Difficulty: 3 Hard Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Topic: Operating Activities - Indirect Method
184.
A $10,000 investment on the books of the company is sold for $11,000. How does this transaction affect operating, investing, and financing activities under the indirect method?
The $1,000 gain on sale of the investment is subtracted from net income in arriving at net operating cash flows. The sale of the investment is also reported as an $11,000 increase to cash flows from investing activities. This transaction has no effect on financing activities.
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Apply Difficulty: 3 Hard Learning Objective: 11-02 Prepare the operating activities section of the statement of cash flows using the indirect method. Learning Objective: 11-03 Prepare the investing activities section and the financing activities section of the statement of cash flows. Topic: Investing and Financing Activities Topic: Operating Activities - Indirect Method
11-214 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
185.
Explain the difference in the calculation of return on assets and cash return on assets. How can cash-based ratios supplement the analysis of ratios based on income statement and balance sheet information?
Return on assets has net income in the numerator while cash return on assets has cash flows from operations in the numerator. Both ratios divide by average total assets. Analysts often supplement their investigation of income statement and balance sheet amounts with cash flow ratios. Some cash flow ratios are derived by substituting net cash flows from operating activities in place of net income. Cash flow ratios offer additional insight in the evaluation of a company's profitability and financial strength.
AACSB: Reflective Thinking AICPA: FN Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-04 Perform financial analysis using the statement of cash flows. Topic: Apple vs. Google
11-215 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 12 Financial Statement Analysis
True / False Questions
1. We can use ratios to help evaluate a firm's performance and financial position. True
False
2. Vertical analysis expresses each item in a financial statement as a percentage of the same base amount. True
False
3. Vertical analysis calculates the amount and percentage change of an account over time. True
False
4. We use vertical analysis for income statement accounts, but not balance sheet accounts. True
False
5. We use vertical analysis to express each income statement item as a percentage of sales. True
False
6. For vertical analysis, we express each balance sheet item as a percentage of sales. True
False
12-1 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
7. Horizontal analysis analyzes trends in financial statement data for a single company over time. True
False
8. If the base-year amount is zero, we can't calculate a percentage change under horizontal analysis. True
False
9. Using horizontal analysis, if the base year is negative and the following year is positive, the percentage change is just as useful as if the base year and the following year were both positive. True
False
10. We use horizontal analysis to analyze trends in financial statement data, such as the dollar amount of change and the percentage change, for one company over time. True
False
11. We measure income statement accounts at a point in time and balance sheet accounts over a period of time. True
False
12. Ratios that compare an income statement account with a balance sheet account should express the balance sheet account as an average of the beginning and ending balances. True
False
13. Every liquidity ratio is calculated using one or more current asset accounts. True
False
12-2 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
14. Solvency refers to a company's ability to pay its current liabilities while liquidity refers to a company's ability to pay its long-term liabilities. True
False
15. The receivables turnover ratio measures how many times, on average, a company collects its receivables during the year. True
False
16. A low receivables turnover ratio is a positive sign that a company can quickly turn its receivables into cash. True
False
17. The average collection period converts the receivables turnover ratio into days. True
False
18. A low inventory turnover ratio usually is a positive sign and indicates that inventory is selling quickly. True
False
19. An extremely high inventory turnover ratio may be a signal that the company is losing sales due to inventory shortages. True
False
20. The average days in inventory converts the inventory turnover ratio into days. True
False
21. A low current ratio indicates that a company has sufficient current assets to pay current liabilities as they become due. True
False
12-3 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
22. The acid-test ratio is always smaller than the current ratio. True
False
23. Other things being equal, the higher the debt to equity ratio, the higher the risk of bankruptcy. True
False
24. We use the times interest earned ratio to compare interest payments with a company's income available to pay those charges. True
False
25. We calculate the times interest earned ratio by dividing net income by interest expense. True
False
26. The gross profit ratio is calculated as gross profit divided by net sales. True
False
27. Return on assets is calculated as net income divided by ending total assets. True
False
28. Profit margin measures the income earned on each dollar of sales, and is calculated by dividing net income by net sales. True
False
29. Asset turnover measures sales volume in relation to the investment in assets, and is calculated as net sales divided by average total assets. True
False
12-4 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
30. Return on equity is calculated by dividing the stock return by average stockholders' equity. True
False
31. The price-earnings (PE) ratio compares a company's share price with its earnings per share. True
False
32. Growth stocks have high expectations of future earnings growth, and therefore, usually trade at higher PE ratios. True
False
33. Value stocks have lower share prices in relationship to their fundamental ratios, and therefore, trade at lower PE ratios. True
False
34. A discontinued operation is the sale or disposal of any long-term asset. True
False
35. We report any profits or losses on discontinued operations in the current year, separately from profits and losses on the portion of the business that will continue. True
False
36. We report discontinued items separately, net of taxes, near the bottom of the income statement. True
False
37. The location where a loss is reported in the income statement does not really matter as long as the loss is reported. True
False
12-5 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
38. When using a company's current earnings to estimate future earnings performance, investors normally should exclude discontinued operations. True
False
39. Conservative accounting practices are those that result in reporting higher income, higher assets, and lower liabilities. True
False
40. Conservative accounting practices are those that result in reporting lower income, lower assets, and higher liabilities. True
False
41. A larger estimation of the allowance for uncollectible accounts, the write-down of overvalued inventory and the use of a shorter useful life for depreciation are all examples of conservative accounting. True
False
42. Use of a longer useful life for depreciation is an example of conservative accounting. True
False
43. Aggressive accounting practices result in reporting higher income, higher assets, and lower liabilities. True
False
44. Changes in accounting estimates usually have no effect on a company's underlying cash flows. True
False
Multiple Choice Questions
12-6 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
45. Which of the following is not a common type of comparison in accounting?
A. Comparisons of sales growth between companies. B. Comparisons of earnings per share between companies. C. Comparisons of earnings this year with earnings for the same company last year. D. Comparisons to industry. 46. When using vertical analysis, we express income statement accounts as a percentage of
A. Net income. B. Gross profit. C. Sales. D. Total assets. 47. When using vertical analysis, we express balance sheet accounts as a percentage of
A. Sales. B. Total assets. C. Total liabilities. D. Total stockholders' equity. 48. ______ analysis identifies the relative contribution made by each financial statement line item.
A. Ratio B. Vertical C. Horizontal D. Diagonal
12-7 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
49. Common-size analysis is another term used for ____ analysis.
A. Ratio B. Vertical C. Horizontal D. Diagonal 50. Which of the following types of analysis allows for the comparison of financial statement items between companies of different size?
A. Horizontal approach B. Vertical approach C. Diagonal approach D. Circular approach 51. Which of the following is an example of vertical analysis?
A. Comparing gross profit across companies. B. Comparing income statement items as a percentage of sales. C. Comparing debt with industry averages. D. Comparing the change in sales over time. 52. Comparing operating expenses as a percentage of sales is an example of:
A. Vertical analysis. B. Horizontal analysis. C. Diagonal analysis. D. Both vertical and horizontal analysis.
12-8 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
53. To perform a vertical analysis of an income statement, you would divide each line item on the statement by ______.
A. sales B. net income C. total assets D. operating expenses 54. To perform a vertical analysis of a balance sheet, you would divide each line item on the statement by ______.
A. total assets B. net income C. sales D. operating expenses 55. Ronaldo Soccer Shop's income statement reports sales of $100,000; cost of goods sold of $46,000, operating expenses of $34,000, interest expense of $15,000, income tax expense of $2,000, and net income of $3,000. If you were to perform a vertical analysis of this income statement, you would divide each of these income statement line items by:
A. $100,000 B. $46,000 C. $34,000 D. $3,000
12-9 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
56. The following is an example of: Amount
%
Cash
$300,000
6.0
Accounts receivable
500,000
10.0
Inventory
800,000
16.0
Long-term assets
3,400,000
68.0
Total assets
$5,000,000
100.0
A. Vertical analysis. B. Horizontal analysis. C. Diagonal analysis. D. Both vertical and horizontal analysis. 57. The following is an example of: Year
Increase (Decrease)
2018
2017
Amount
%
Cash
$300,000
$800,000
($500,000)
(62.5)
Accounts receivable
500,000
200,000
300,000
150.0
Inventory
800,000
700,000
100,000
14.3
Long-term assets
3,400,000 2,300,000
1,100,000
47.8
Total assets
$5,000,000 $4,000,000
$1,000,000
25.0
A. Vertical analysis. B. Horizontal analysis. C. Diagonal analysis. D. Both vertical and horizontal analysis.
12-10 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
58. Trend analysis and time-series analysis refer to ____ analysis.
A. horizontal B. vertical C. ratio D. diagonal 59. To calculate a year-to-year percentage change in any financial statement line item such as sales, you should take the current year's amount, subtract the prior year's amount, then divide by ______, and finally multiply the result by 100.
A. net income B. total assets C. the current year's amount D. the prior year's amount 60. Brady's Inflation Needle Co. reports accounts receivable of $100,000 in 2017 and $250,000 in 2018. Using horizontal analysis, what would be the percentage increase or decrease in accounts receivable?
A. 60% decrease B. 60% increase C. 150% decrease D. 150% increase 61. The type of analysis used to analyze trends in financial statement data over time is:
A. Horizontal analysis B. Vertical analysis C. Diagonal analysis D. Both horizontal and vertical analysis
12-11 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
62. Horizontal analysis is used to analyze trends in financial statement data over time:
A. For one company B. Between two companies C. Across an industry D. None of these 63. Horizontal analysis examines trends in a company
A. Over time. B. Between income statement accounts in the same year. C. Between balance sheet accounts in the same year. D. Between income statement and balance sheet accounts in the same year. 64. Which of the following is an example of horizontal analysis?
A. Comparing COGS with sales. B. Comparing net income across companies. C. Comparing debt with equity. D. Comparing the growth in sales over time. 65. Which of the following is an example of horizontal analysis?
A. Comparing gross profit across companies. B. Comparing gross profit with operating expenses. C. Comparing assets with equity. D. Comparing the change in sales over time.
12-12 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
66. Comparing changes in net income for one company over time is an example of:
A. Vertical analysis. B. Horizontal analysis. C. Diagonal analysis. D. Both vertical and horizontal analysis. 67. Which of the following is correct?
A. The receivables turnover ratio depicts the company's frequency of cash collections. B. The inventory turnover ratio can be used to assess the company's frequency of selling inventory. C. The current ratio reflects the company's ability to pay current debt. D. All of these. 68. Which of the following ratios is most useful in evaluating liquidity?
A. Return on assets. B. Return on equity. C. Debt to equity ratio. D. Current ratio. 69. Which of the following ratios is most useful in evaluating liquidity?
A. Acid-test ratio. B. Return on equity. C. Profit margin ratio. D. Asset turnover.
12-13 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
70. Which of the following ratios is most useful in evaluating solvency?
A. Debt to equity ratio. B. Current ratio. C. Receivables turnover ratio. D. Inventory turnover ratio. 71. Which of the following is a sign that a company can quickly turn its receivables into cash?
A. A low receivables turnover ratio. B. A high receivables turnover ratio. C. A high average collection period. D. Both a low receivables turnover ratio and a high average collection period. 72. Which of the following is a sign that a company cannot quickly turn its receivables into cash?
A. A high receivables turnover ratio. B. A low receivables turnover ratio. C. A low average collection period. D. Both a high receivables turnover ratio and a low average collection period. 73. Which of the following is a negative sign that a company is not selling its inventory quickly?
A. A low inventory turnover ratio. B. A high inventory turnover ratio. C. A low average days in inventory. D. Both a high inventory turnover ratio and a low average days in inventory.
12-14 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
74. Which of the following is a positive sign that a company is selling its inventory quickly?
A. A low inventory turnover ratio. B. A high inventory turnover ratio. C. A low average days in inventory. D. Both a high inventory turnover ratio and a low average days in inventory. 75. The current ratio is calculated as:
A. Current assets divided by noncurrent assets. B. Current assets divided by current liabilities. C. Current liabilities divided by noncurrent liabilities. D. Current liabilities divided by current assets. 76. The acid-test ratio is most similar to the:
A. Current ratio. B. Debt to equity ratio. C. Times interest earned ratio. D. Inventory turnover ratio. 77. The acid-test ratio is:
A. The liquidity ratio divided by the equity ratio. B. Current assets minus inventory divided by current liabilities minus accounts payable. C. Cash, net receivables, and current investments divided by current liabilities. D. Cash divided by accounts payable.
12-15 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
78. Which of the following is not a solvency ratio?
A. Time interest earned ratio. B. The debt to equity ratio. C. The current ratio. D. All of these. 79. When a company with a current ratio of 1.2 pays a current liability:
A. Its current ratio decreases. B. Its current ratio increases. C. Its current ratio remains unchanged. D. Its debt to equity ratio increases. 80. Assuming a current ratio of 1.0, how will the purchase of inventory with cash affect the ratio?
A. Increase the current ratio. B. No change to the current ratio. C. Decrease the current ratio. D. Could either increase or decrease the current ratio. 81. Assuming an acid-test ratio of 1.0, how will the purchase of inventory with cash affect the ratio?
A. Increase the acid-test ratio. B. No change to the acid-test ratio. C. Decrease the acid-test ratio. D. Could either increase or decrease the acid-test ratio.
12-16 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
82. Assuming a current ratio of 1.0 and an acid-test ratio of 0.75, how will the purchase of inventory with cash affect each ratio?
A. Increase the current ratio and increase the acid-test ratio. B. No change to the current ratio and decrease the acid-test ratio. C. Decrease the current ratio and decrease the acid-test ratio. D. Increase the current ratio and decrease the acid-test ratio. 83. When a company sells land for cash and makes a $25,000 gain:
A. Its acid-test ratio decreases. B. Its current ratio decreases. C. Its debt to equity ratio decreases. D. Cannot determine from the given information. 84. Assume a company's current ratio and acid-test ratio are less than 1.0 before it purchases inventory on credit. When it makes the purchase:
A. Its current ratio decreases. B. Its acid-test ratio decreases. C. Its current ratio remains unchanged. D. Its acid-test ratio remains unchanged.
12-17 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
85. A partial balance sheet for Captain D's Sportswear is shown below.
(dollars in thousands) Assets:
Liabilities:
Cash
$60 Accounts payable
$240
Accounts receivable (net)
170 Other liabilities
80
Investments
50 Total current liabilities
320
Inventory
200 Long-term liabilities
110
Prepaid rent
25
430
Total current assets Property & Equipment,
Total liabilities
505 Stockholders’ equity: 255 Common stock
150
(net)
Total assets
Retained earnings
180
Total stockholders’ equity
330
$760 Total liabilities and equity
$760
The current ratio is (rounded to two decimal places):
A. 1.98. B. 1.58. C. 1.17. D. 0.66.
12-18 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
86. A partial balance sheet for Captain D's Sportswear is shown below.
(dollars in thousands)
Assets:
Liabilities:
Cash
$60 Accounts payable
$240
Accounts receivable (net)
170 Other liabilities
80
Investments
50 Total current liabilities
320
Inventory
200 Long-term liabilities
110
Prepaid rent
25
430
Total current assets
Total liabilities
505 Stockholders’ equity:
Property & Equipment, (net) 255 Common stock Retained earnings
150 180
Total stockholders’ equity 330 Total assets
$760 Total liabilities and equity $760
The acid-test ratio is (rounded to two decimal places):
A. 0.25. B. 0.88. C. 1.17. D. 1.58.
12-19 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
87. A partial balance sheet for Captain D's Sportswear is shown below.
(dollars in thousands) Assets:
Liabilities:
Cash
$60 Accounts payable
$240
Accounts receivable (net)
170 Other liabilities
80
Investments
50 Total current liabilities
320
Inventory
200 Long-term liabilities
110
Prepaid rent
25
430
Total current assets
Total liabilities
505 Stockholders’ equity:
Property & Equipment, (net) 255 Common stock Retained earnings
150 180
Total stockholders’ equity 330 Total assets
$760 Total liabilities and equity $760
The debt to equity ratio is (rounded to two decimal places):
A. 0.33. B. 0.77. C. 1.17. D. 1.30.
12-20 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
88. Recent financial statement data for Harmony Health Foods (HHF) Inc. is shown below. Current liabilities
$180 Income before interest and taxes $125
10% Bonds, long-term
360 Interest expense
36
Total liabilities
540 Income before tax
89
Income tax
27
Common stock
200 Net income
$62
Retained earnings
280
Total stockholders’ equity
480
Stockholders’ equity
Total liabilities and equity $1,020
HHF's debt to equity ratio is (rounded to two decimal places):
A. 0.75. B. 1.13. C. 0.38. D. 1.80.
12-21 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
89. Recent financial statement data for Harmony Health Foods (HHF) Inc. is shown below. Current liabilities
$180 Income before interest and taxes $125
10% Bonds, long-term
360 Interest expense
36
Total liabilities
540 Income before tax
89
Income tax
27
Common stock
200 Net income
$62
Retained earnings
280
Total stockholders’ equity
480
Stockholders’ equity
Total liabilities and equity $1,020
HHF's times interest earned ratio is (rounded to two decimal places):
A. 3.47. B. 1.72. C. 2.47. D. 10.0.
12-22 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
90. Excerpts from Stealth Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$40,000
$36,000
Inventory
28,000
35,000
Net sales
190,000
186,000
Cost of goods sold
114,000
108,000
Total assets
425,000
405,000
Total stockholders’ equity
240,000
225,000
Net income
32,500
28,000
Stealth Company's 2018 receivables turnover ratio is:
A. 2.85. B. 4.70. C. 5.00. D. 10.63.
12-23 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
91. Excerpts from Stealth Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$40,000
$36,000
Inventory
28,000
35,000
Net sales
190,000
186,000
Cost of goods sold
114,000
108,000
Total assets
425,000
405,000
Total stockholders’ equity
240,000
225,000
Net income
32,500
28,000
Stealth Company's 2018 average collection period is:
A. 73 days. B. 104 days. C. 109 days. D. 128 days.
12-24 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
92. Excerpts from Stealth Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$40,000
$36,000
Inventory
28,000
35,000
Net sales
190,000
186,000
Cost of goods sold
114,000
108,000
Total assets
425,000
405,000
Total stockholders’ equity
240,000
225,000
Net income
32,500
28,000
Stealth Company's 2018 inventory turnover is (rounded to two decimal places):
A. 3.62 times. B. 3.96 times. C. 4.07 times. D. 6.03 times.
12-25 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
93. Excerpts from Stealth Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$40,000
$36,000
Inventory
28,000
35,000
Net sales
190,000
186,000
Cost of goods sold
114,000
108,000
Total assets
425,000
405,000
Total stockholders’ equity
240,000
225,000
Net income
32,500
28,000
Stealth Company's 2018 average days in inventory is (round intermediate calculations to two decimal places and final answer to one decimal place):
A. 60.5 days. B. 92.2 days. C. 100.8 days. D. 89.7 days.
12-26 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
94. Excerpts from Stealth Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$40,000
$36,000
Inventory
28,000
35,000
Net sales
190,000
186,000
Cost of goods sold
114,000
108,000
Total assets
425,000
405,000
Total stockholders’ equity
240,000
225,000
Net income
32,500
28,000
Stealth Company's 2018 debt to equity ratio is (rounded to one decimal place):
A. 77.1%. B. 80.0%. C. 40.0%. D. 60.0%.
12-27 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
95. Excerpts from TPX Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$80,000
$72,000
Inventory
84,000
70,000
Net sales
400,000
372,000
Cost of goods sold
254,000
216,000
Total assets
850,000
810,000
Total stockholders’ equity
500,000
450,000
Net income
75,000
56,000
TPX Company's 2018 receivables turnover ratio is (rounded to one decimal place):
A. 5.3 times. B. 5.6 times. C. 5.0 times. D. 0.2 times.
12-28 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
96. Excerpts from TPX Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$80,000
$72,000
Inventory
84,000
70,000
Net sales
400,000
372,000
Cost of goods sold
254,000
216,000
Total assets
850,000
810,000
Total stockholders’ equity
500,000
450,000
Net income
75,000
56,000
TPX Company's 2018 average collection period is (round intermediate calculations to one decimal place and final answer to the nearest day):
A. 69 days. B. 65 days. C. 73 days. D. 1,825 days.
12-29 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
97. Excerpts from TPX Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$80,000
$72,000
Inventory
84,000
70,000
Net sales
400,000
372,000
Cost of goods sold
254,000
216,000
Total assets
850,000
810,000
Total stockholders’ equity
500,000
450,000
Net income
75,000
56,000
TPX Company's 2018 inventory turnover is (rounded to one decimal place):
A. 3.0 times. B. 5.2 times. C. 3.3 times. D. 3.6 times.
12-30 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
98. Excerpts from TPX Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$80,000
$72,000
Inventory
84,000
70,000
Net sales
400,000
372,000
Cost of goods sold
254,000
216,000
Total assets
850,000
810,000
Total stockholders’ equity
500,000
450,000
Net income
75,000
56,000
TPX Company's 2018 average days in inventory is (round all calculations to one decimal place):
A. 121.7 days. B. 70.2 days. C. 110.6 days. D. 101.4 days.
12-31 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
99. Excerpts from TPX Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$80,000
$72,000
Inventory
84,000
70,000
Net sales
400,000
372,000
Cost of goods sold
254,000
216,000
Total assets
850,000
810,000
Total stockholders’ equity
500,000
450,000
Net income
75,000
56,000
TPX Company's 2018 debt to equity ratio is:
A. 50.0%. B. 60.0%. C. 70.0%. D. 80.0%.
12-32 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
100.Excerpts from Stealth Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$40,000
$36,000
Inventory
28,000
35,000
Net sales
190,000
186,000
Cost of goods sold
114,000
108,000
Total assets
425,000
405,000
Total stockholders’ equity
240,000
225,000
Net income
32,500
28,000
Stealth Company's 2018 gross profit ratio is:
A. 77.1%. B. 80.0%. C. 40.0%. D. 60.0%.
12-33 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
101.Excerpts from Stealth Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$40,000
$36,000
Inventory
28,000
35,000
Net sales
190,000
186,000
Cost of goods sold
114,000
108,000
Total assets
425,000
405,000
Total stockholders’ equity
240,000
225,000
Net income
32,500
28,000
Stealth Company's 2018 return on assets is (rounded to one decimal place):
A. 7.1%. B. 7.8%. C. 13.5%. D. 44.7%.
12-34 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
102.Excerpts from Stealth Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$40,000
$36,000
Inventory
28,000
35,000
Net sales
190,000
186,000
Cost of goods sold
114,000
108,000
Total assets
425,000
405,000
Total stockholders’ equity
240,000
225,000
Net income
32,500
28,000
Stealth Company's 2018 profit margin is (rounded to one decimal place):
A. 17.1%. B. 13.5%. C. 7.6%. D. 4.5%.
12-35 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
103.Excerpts from Stealth Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$40,000
$36,000
Inventory
28,000
35,000
Net sales
190,000
186,000
Cost of goods sold
114,000
108,000
Total assets
425,000
405,000
Total stockholders’ equity
240,000
225,000
Net income
32,500
28,000
Stealth Company's 2018 asset turnover is (rounded to one decimal place):
A. 3.7 times. B. 2.8 times. C. 2.2 times. D. 0.5 times.
12-36 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
104.Excerpts from Stealth Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$40,000
$36,000
Inventory
28,000
35,000
Net sales
190,000
186,000
Cost of goods sold
114,000
108,000
Total assets
425,000
405,000
Total stockholders’ equity
240,000
225,000
Net income
32,500
28,000
Stealth Company's 2018 return on equity is (rounded to one decimal place):
A. 17.1%. B. 14.0%. C. 12.6%. D. 7.1%.
12-37 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
105.Excerpts from TPX Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$80,000
$72,000
Inventory
84,000
70,000
Net sales
400,000
372,000
Cost of goods sold
254,000
216,000
Total assets
850,000
810,000
Total stockholders’ equity
500,000
450,000
Net income
75,000
56,000
TPX Company's 2018 gross profit ratio is:
A. 57.5%. B. 36.5%. C. 63.5%. D. 60.0%.
12-38 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
106.Excerpts from TPX Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$80,000
$72,000
Inventory
84,000
70,000
Net sales
400,000
372,000
Cost of goods sold
254,000
216,000
Total assets
850,000
810,000
Total stockholders’ equity
500,000
450,000
Net income
75,000
56,000
TPX Company's 2018 return on assets is (rounded to one decimal place):
A. 48.2%. B. 9.3%. C. 8.8%. D. 9.0%.
12-39 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
107.Excerpts from TPX Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$80,000
$72,000
Inventory
84,000
70,000
Net sales
400,000
372,000
Cost of goods sold
254,000
216,000
Total assets
850,000
810,000
Total stockholders’ equity
500,000
450,000
Net income
75,000
56,000
TPX Company's 2018 profit margin is (rounded to one decimal place):
A. 18.8%. B. 9.0%. C. 19.4%. D. 15.1%.
12-40 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
108.Excerpts from TPX Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$80,000
$72,000
Inventory
84,000
70,000
Net sales
400,000
372,000
Cost of goods sold
254,000
216,000
Total assets
850,000
810,000
Total stockholders’ equity
500,000
450,000
Net income
75,000
56,000
TPX Company's 2018 asset turnover is (rounded to one decimal place):
A. 3.7 times. B. 2.8 times. C. 2.2 times. D. 0.5 times.
12-41 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
109.Excerpts from TPX Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$80,000
$72,000
Inventory
84,000
70,000
Net sales
400,000
372,000
Cost of goods sold
254,000
216,000
Total assets
850,000
810,000
Total stockholders’ equity
500,000
450,000
Net income
75,000
56,000
TPX Company's 2018 return on equity is (rounded to one decimal place):
A. 16.7%. B. 15.0%. C. 15.8%. D. 21.4%. 110.Given the information below, what is the company's gross profit? Sales Revenue
$320,000
Accounts Receivable
$50,000
Ending Inventory
$100,000
Cost of Goods Sold
$250,000
Sales Returns
$20,000
A. $250,000. B. $70,000. C. $220,000. D. $50,000.
12-42 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
111.Return on assets equals:
A. Gross profit ratio × Inventory turnover. B. Profit margin × Inventory turnover. C. Gross profit ratio × Asset turnover. D. Profit margin × Asset turnover. 112.The profit margin ratio indicates the amount of net income achieved for each:
A. collection on a receivable. B. dollar of inventory. C. dollar of total assets. D. dollar of sales. 113.Nerf Mania reports net income of $500,000, net sales of $4,000,000, and average assets of $2,000,000. The return on assets is:
A. 200%. B. 25%. C. 50%. D. 12.5%. 114.Nerf Mania reports net income of $500,000, net sales of $4,000,000, and average assets of $2,000,000. The profit margin is:
A. 12.5%. B. 25%. C. 50%. D. 8 times.
12-43 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
115.Nerf Mania reports net income of $500,000, net sales of $4,000,000, and average assets of $2,000,000. The asset turnover is:
A. 0.25 times. B. 0.5 times. C. 2 times. D. 8 times. 116.Richard's Sporting Goods reports net income of $100,000, net sales of $500,000, and average assets of $1,000,000. The return on assets is:
A. 10%. B. 20%. C. 50%. D. 5 times. 117.Richard's Sporting Goods reports net income of $100,000, net sales of $500,000, and average assets of $1,000,000. The profit margin is:
A. 10%. B. 20%. C. 50%. D. 5 times. 118.Richard's Sporting Goods reports net income of $100,000, net sales of $500,000, and average assets of $1,000,000. The asset turnover is:
A. 0.1 times. B. 0.5 times. C. 2 times. D. 5 times.
12-44 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
119.The price-earnings (PE) ratio is calculated as:
A. Earnings per share divided by the stock price B. Retained earnings times the stock price C. Stock price divided by net income D. Stock price divided by earnings per share 120.Curry Footwear reports net income of $500,000, earnings per share of $1.50, and has a stock price of $45.00 at the end of the year. What is Curry Footwear's price-earnings ratio?
A. 30.0 B. 11,111.1 C. 67.5 D. 46.5 121.Compared to growth stocks, value stocks' price-earnings ratio is typically:
A. There is no relationship between the price-earnings ratios of growth and value stocks B. The same C. Higher D. Lower 122.All of the following are profitability ratios except:
A. Profit margin B. Return on equity C. Asset turnover D. Current ratio
12-45 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
123.Investors view what as the number one measure of company success?
A. Liquidity B. Solvency C. Employee satisfaction D. Profitability 124.Which of the following items would be reported at the very bottom of the income statement just before net income?
A. Gain on the sale of long-term assets. B. Discontinued operations. C. Loss due to business restructuring. D. Loss due to write-down of receivables. 125.The sale or disposal of a significant component of a company's operations is referred to as:
A. A discontinued operation. B. Other gains and losses. C. Other revenues and expenses. D. Gain or loss on sale of assets. 126.A discontinued operation refers to:
A. The sale or disposal of a significant component of a company's operations. B. Discontinued inventory items. C. Inventory items that have been completed and sold. D. The sale of most long-term assets.
12-46 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
127.What is the correct order to present the following items in the income statement?
A. Other revenues and expenses, income tax expense, discontinued operations, net income. B. Other revenues and expenses, income tax expense, net income, discontinued operations. C. Discontinued operations, net income, other revenues and expenses, income tax expense. D. Discontinued operations, net income, income tax expense, other revenues and expenses. 128.Popson Inc. incurred a material loss due to the write-down of inventory. This loss should be reported as:
A. Other revenues. B. A loss from discontinued operations. C. Other expenses. D. A separate line item in retained earnings. 129.Popson Inc. incurred a material gain on the sale of land. This gain should be reported as:
A. Other revenues. B. A gain from discontinued operations. C. Other expenses. D. A separate line item in retained earnings. 130.Which of the following statements is not true?
A. We report any profits or losses on discontinued operations in the current year, separately from profits and losses on the portion of the business that will continue. B. We report discontinued items separately, net of taxes, near the bottom of the income statement. C. The location where a loss is reported in the income statement does not really matter as long as the loss is reported. D. When using a company's current earnings to estimate future earnings performance, investors normally should exclude discontinued operations.
12-47 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
131.Examples of discontinued operations include all of the following except:
A. A disposal of a major geographical area. B. A disposal of a major piece of equipment. C. A disposal of a major line of business. D. A disposal of a major investment in which the company has significant influence. 132.Which of the following income statement items is least likely to persist into future periods?
A. Sales revenue. B. Discontinued operations. C. Cost of goods sold. D. Salaries expense. 133.LeBron's Bookstores has two divisions: media and books. The media division had another great year with net sales of $14 million, cost of goods sold of $8 million, operating expenses of $3 million, and income tax expense of $900,000. The book division did not do as well and was sold during the year. The loss from operations and sale of the book division was $400,000 before taxes and $280,000 after taxes. Assuming the sale of the book division is reported as a discontinued operation, at what amount did LeBron's Bookstores report the discontinued operations?
A. Gain of $1,820,000. B. Loss of $280,000. C. Loss of $400,000. D. Gain of $1,700,000.
12-48 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
134.LeBron's Bookstores has two divisions: media and books. The media division had another great year with net sales of $14 million, cost of goods sold of $8 million, operating expenses of $3 million, and income tax expense of $900,000. The book division did not do as well and was sold during the year. The loss from operations and sale of the book division was $400,000 before taxes and $280,000 after taxes. Assuming the sale of the book division is reported as a discontinued operation, at what amount did LeBron's Bookstores report net income?
A. $3,000,000. B. $1,820,000. C. $2,100,000. D. $1,700,000. 135.LeBron's Bookstores has two divisions: media and books. The media division had another great year with net sales of $14 million, cost of goods sold of $8 million, operating expenses of $3 million, and income tax expense of $900,000. The book division did not do as well and was sold during the year. The loss from operations and sale of the book division was $400,000 before taxes and $280,000 after taxes. Assuming the sale of the book division is reported as a discontinued operation, at what amount did LeBron's Bookstores report income before tax?
A. $1,820,000. B. $3,000,000. C. $2,100,000. D. $1,700,000. 136.Which of the following is a result of conservative accounting practices?
A. Higher income, higher assets, and lower liabilities. B. Lower income, higher assets, and lower liabilities. C. Higher income, lower assets, and lower liabilities. D. Lower income, lower assets, and higher liabilities.
12-49 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
137.Which of the following is a result of aggressive accounting practices?
A. Lower income, higher assets, and higher liabilities. B. Higher income, higher assets, and lower liabilities. C. Lower income, lower assets, and higher liabilities. D. Higher income, lower assets, and higher liabilities. 138.The financial statements of a firm that uses more conservative accounting practices would be likely to report:
A. Higher profitability. B. Higher dividends. C. Higher liabilities. D. Higher stockholders' equity. 139.The financial statements of a firm that uses more aggressive accounting practices would be likely to report:
A. Higher profitability. B. Higher dividends. C. Higher liabilities. D. Lower assets. 140.Which of the following is NOT an example of applying conservatism in accounting?
A. Recording contingent losses that are probable. B. Expensing all research and development costs as they are incurred. C. Using the lower of cost and net realizable value for inventory accounting. D. Increasing the useful life used in calculating depreciation.
12-50 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
141.Which of the following is NOT an example of aggressive accounting practices?
A. Recording contingent losses that are probable. B. Recording research and development costs as assets. C. Using a lower estimate of bad debts. D. Increasing the useful life used in calculating depreciation. 142.Which of the following is a conservative accounting practice?
A. The use of a longer service life for depreciation. B. Waiting to record a litigation loss. C. Adjust the allowance for uncollectible accounts to a smaller amount. D. The write-down of overvalued inventory. 143.Which of the following is an aggressive accounting practice?
A. The use of a shorter service life for depreciation. B. Waiting to record a litigation loss. C. Adjust the allowance for uncollectible accounts to a larger amount. D. The write-down of overvalued inventory. 144.Which of the following is a conservative accounting practice?
A. Change from double-declining balance to straight-line depreciation. B. Record sales revenue before it is actually earned. C. Adjust the allowance for uncollectible accounts to a larger amount. D. Record inventory at market rather than lower of cost or market.
12-51 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
145.Which of the following is an aggressive accounting practice?
A. Change from straight-line to double-declining balance depreciation. B. Record sales revenue before it is actually earned. C. Adjust the allowance for uncollectible accounts to a larger amount. D. Record inventory at the lower of cost and net realizable value. 146.Which of the following is a conservative accounting practice?
A. The use of a longer service life for depreciation. B. Waiting to record a litigation loss. C. Recording a lower amount for bad debt expense. D. Taking an asset write-down early. 147.Which of the following is an aggressive accounting practice?
A. The use of a shorter service life for depreciation. B. Waiting to record a litigation loss. C. Recording a higher amount for bad debt expense. D. Taking an asset write-down early.
Matching Questions
12-52 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
148.Match the following
Analyzes trends in financial statement data for a single 1. Solvency
company over time.
2. Profitability ratios
____
Have lower share prices in relationship to their fundamental ratios and therefore trade at lower PE ratios.
____
Expresses each item in a financial statement as a percentage 3. Liquidity
of the same base amount.
____
Refers to a company's ability to pay its current liabilities.
____
Refers to a company's ability to pay its long-term liabilities.
____
4. Horizontal analysis 5. Value Stocks
Have high expectations of future earnings and therefore 6. Growth stocks
usually trade at higher P/E ratios.
____
Measure the earnings or operating effectiveness of a 7. Vertical analysis
company.
____
1. Vertical analysis
A company's ability to pay its current liabilities.
____
2. Aggressive accounting
Accounting choices that result in reporting lower
149.Match the following
practices
income, lower assets, and higher liabilities.
____
The sale or disposal of most long-term assets.
____
3. Discontinued operation 4. Conservative accounting practices
Accounting choices that result in reporting higher income, higher assets, and lower liabilities.
____
A tool to analyze trends in financial statement data for 5. Solvency
a single company over time.
____
The sale or disposal of a significant component of a 6. Liquidity 7. Other revenues and expenses 8. Horizontal analysis
company's operations.
____
A means to express each item in a financial statement as a percentage of a base amount.
____
A company's ability to pay its long-term liabilities.
____
12-53 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
150.Match the following
Cost of goods sold divided by average inventory; the number 1. Debt to equity ratio 2. Average days in inventory
of times the firm sells its average inventory balance during a reporting period.
____
Total liabilities divided by total stockholders' equity; measure a company's solvency risk.
____
Approximate number of days the average inventory is held.
____
3. Times interest earned ratio
Ratio that compares interest expense with income available 4. Acid-test ratio
to pay those charges.
____
Net sales divided by average accounts receivable; the 5. Receivables
number of times during a year that the average accounts
turnover ratio
receivable balance is collected.
____
Cash, short-term investments, and accounts receivable 6. Inventory turnover ratio 7. Average collection period
divided by current liabilities; measures the availability of liquid current assets to pay current liabilities.
____
Current assets divided by current liabilities; measures the availability of current assets to pay current liabilities.
____
Approximate number of days the average accounts receivable 8. Current ratio
balance is outstanding.
____
12-54 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
151.Match the following
Net income divided by average total assets; measures the amount of net income generated for each dollar invested in 1. Asset turnover
assets.
____
Compares a company's share price with its earnings per 2. Return on assets
share.
____
Net income divided by average stockholders' equity; 3. Gross profit ratio
measures the income generated per dollar of equity.
____
Gross profit divided by net sales; measures the amount by which the sale price of inventory exceeds its cost per dollar of 4. Return on equity 5. Price-earnings (PE) ratio
sales.
____
Net sales divided by average total assets; which measures the sales per dollar of assets invested.
____
Net income divided by net sales; indicates the earnings per 6. Profit margin
dollar of sales.
____
accounting practices
The sale or disposal of most long-term assets.
____
2. Other revenues and
The sale or disposal of a significant component of a
152.Match the following
1. Aggressive
expenses
company's operations.
____
Refers to the ability of reported earnings to reflect the 3. Discontinued operation 4. Conservative accounting practices
company's true earnings, as well as the usefulness of reported earnings to predict future earnings.
____
Practices that result in reporting lower income, lower assets, and higher liabilities.
____
Practices that result in reporting higher income, higher 5. Quality of earnings
assets, and lower liabilities.
____
Essay Questions
12-55 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
153.Perform a vertical analysis on the following information: 2018
2017
Cash
$500,000
$200,000
Accounts receivable
900,000
800,000
Inventory
700,000
500,000
Long-term assets
2,200,000
2,500,000
Total assets
$4,300,000
$4,000,000
12-56 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
154.Perform a horizontal analysis on the following information providing both the dollar amount and percentage change:
2018
2017
Cash
$500,000
$200,000
Accounts receivable
900,000
800,000
Inventory
700,000
500,000
Long-term assets
2,200,000
2,500,000
Total assets
$4,300,000
$4,000,000
12-57 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
155.Assume a company's sales are $1.6 million in 2017, $1.8 million in 2018, and $1.7 million in 2019. What is the percentage change from 2017 to 2018? What is the percentage change from 2018 to 2019? Be sure to indicate whether the percentage change is an increase or a decrease.
156.If a company's sales are $648,000 in 2018, and this represents an 8% increase over sales in 2017, what were sales in 2017?
157.United Products began the year with an Accounts Receivable balance of $250,000, and had a year-end balance of $280,000. Credit sales of $800,000 generated a gross profit of $150,000. Calculate the receivables turnover ratio for the year.
12-58 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
158.United Products began the year with an Inventory balance of $180,000, and had a year-end balance of $200,000. Sales of $800,000 generated a gross profit of $150,000. Calculate the inventory turnover ratio for the year.
159.BC Training reports sales revenue of $2,200,000. Average inventory during the year was $200,000. The inventory turnover ratio for the year is 8.0. What amount of gross profit would the company report in its income statement?
160.LeBron's Kids Camps has a current ratio of 0.75 to 1, based on current assets of $3 million and current liabilities of $4 million. How, if at all, will a $500,000 cash purchase of inventory affect the current ratio? How, if at all, will a $500,000 purchase of inventory on account affect the current ratio?
12-59 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
161.The following income statement and balance sheets for Laser World are provided: Laser World Income Statement For the year-ended December 31, 2018 Sales revenue
$2,200,000
Cost of goods sold
1,500,000
Gross profit
700,000
Expenses: Operating expenses
350,000
Depreciation expense
70,000
Loss on sale of land
5,000
Interest expense
25,000
Income tax expense
60,000
Total expenses
510,000
Net income
$190,000
Laser World Balance Sheets December 31 Assets
2018
2017
$120,000
$112,000
Accounts receivable
90,000
70,000
Inventory
120,000
100,000
Prepaid rent
10,000
10,000
Land
260,000
200,000
Equipment
350,000
210,000
Accumulated depreciation
(70,000)
(42,000)
$880,000
$660,000
Current assets: Cash
Long-term assets:
Total assets
Liabilities and Stockholders’ Equity Current liabilities: Accounts payable
$55,000
$75,000
Interest payable
8,000
7,000
12-60 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Income tax payable
15,000
12,000
400,000
300,000
Common stock
200,000
200,000
Retained earnings
202,000
66,000
Total liabilities and equity
$880,000
$660,000
Long-term liabilities: Notes payable Stockholders’ equity:
Assuming that all sales were on account, calculate the following risk ratios for 2018: 1. Receivables turnover ratio 2. Average collection period
5. Current ratio
6. Acid-test ratio
3. Inventory turnover ratio
7. Debt to equity ratio
4. Average days in
8. Times interest
inventory
earned ratio
12-61 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
162.The following income statement and balance sheets for Laser World are provided: Laser World Income Statement For the year-ended December 31, 2018 Sales revenue
$2,200,000
Cost of goods sold
1,500,000
Gross profit
700,000
Expenses: Operating expenses
350,000
Depreciation expense
70,000
Loss on sale of land
5,000
Interest expense
25,000
Income tax expense
60,000
Total expenses
510,000
Net income
$190,000
Laser World Balance Sheet December 31 Assets
2018
2017
$120,000
$112,000
Accounts receivable
90,000
70,000
Inventory
120,000
100,000
Prepaid rent
10,000
10,000
Land
260,000
200,000
Equipment
350,000
210,000
Accumulated depreciation
(70,000)
(42,000)
$880,000
$660,000
Current assets: Cash
Long-term assets:
Total assets
Liabilities and Stockholders’ Equity Current liabilities: Accounts payable
$55,000
$75,000
12-62 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Interest payable
8,000
7,000
Income tax payable
15,000
12,000
400,000
300,000
Common stock
200,000
200,000
Retained earnings
202,000
66,000
Total liabilities and equity
$880,000
$660,000
Long-term liabilities: Notes payable Stockholders’ equity:
Earnings per share for the year ended December 31, 2018, is $1.90. The closing stock price on December 31, 2018, is $30.40. Calculate the following profitability ratios for 2018: 1. Gross profit ratio
4. Asset turnover
2. Return on assets
5. Return on equity
3. Profit margin
6. Price-earnings ratio
12-63 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
163.Barry's BBQ had sales revenue for the year of $200 million and net income of $20 million. Total assets were $70 million at the beginning of the year, and $80 million at the end of the year. Calculate Barry's return on assets, profit margin, and asset turnover ratios.
164.Paul Pierce Enterprises reports net income of $800,000, average total assets of $2,400,000, and average total liabilities of $400,000. Calculate the return on assets and return on equity ratios.
12-64 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
165.Phillip's Fun Center has several playgrounds areas, go-karts, miniature golf, bumper boats, paintball, and laser tag. Determine whether the company should report each of the following items as discontinued operations, other revenues, or other expenses: 1. The company sells an outdoor playground at a gain of $5,000. 2. The company sold its old go-karts at a loss of $25,000 and replaced them with all new gokarts. 3. The company sold its laser tag center at a loss of $10,000 to focus on the other more profitable segments. Laser tag is considered to be a separate business segment. 4. The company restructured its business at a cost of $75,000, replacing some employee positions with automated equipment.
166.Classify each of the following accounting practices as conservative or aggressive: 1. Increase the allowance for uncollectible accounts. 2. When costs are rising, change from FIFO to LIFO. 3. Increase the estimated useful life of equipment.
12-65 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
167.Classify each of the following accounting practices as conservative or aggressive: 1. Choosing a shorter life for calculating depreciation. 2. The write-down of inventory. 3. Decrease the allowance for uncollectible accounts. 4. Recording revenues sooner.
12-66 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
168.The Sports Warehouse operates in two distinct segments; equipment and apparel. The income statements for each operating segment are presented below. The Sports Warehouse Income Statements For the Year Ended December 31, 2018 Equipment Amount
Apparel %
Amount
Sales
$1,700,000
$2,850,000
Cost of goods sold
1,100,000
1,400,000
Gross profit
600,000
1,450,000
Operating expenses
250,000
500,000
Operating income
350,000
950,000
Other income (expense)
25,000
(60,000)
Income before tax
375,000
890,000
Income tax expense
90,000
280,000
$285,000
$610,000
Net income
%
Required: 1. Complete the "%" columns to be used in a vertical analysis of The Sports Warehouse's two operating segments. Express each amount as a percentage of sales. 2. Use vertical analysis to compare the profitability of the two operating segments. Which segment is more profitable?
12-67 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
169.The following balance sheets for The Sports Shack are provided. The Sports Shack Balance Sheets December 31 Assets
2018
2017
Cash
$218,000
$196,000
Accounts receivable
680,000
880,000
Inventory
1,250,000
1,100,000
Supplies
90,000
65,000
Equipment
1,200,000
900,000
Accumulated depreciation
(350,000)
(250,000)
$3,088,000
$2,891,000
Accounts payable
$65,000
$55,000
Interest payable
4,000
6,000
Income tax payable
40,000
30,000
400,000
300,000
900,000
900,000
Retained earnings
1,679,000
1,600,000
Total liabilities and equity
$3,088,000
$2,891,000
Current assets:
Long-term assets:
Total assets Liabilities and Stockholders’ Equity Current liabilities:
Long-term liabilities: Notes payable Stockholders’ equity: Common stock
Required: 1. Prepare a vertical analysis of The Sports Shack's 2018 and 2017 balance sheets. Express each amount as a percentage of total assets for that year. 2. Prepare a horizontal analysis of The Sports Shack's 2018 balance sheet using 2017 as the base year.
12-68 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
170.The income statements for The Sports Warehouse for the years ending December 31, 2019, and 2018, are provided. The Sports Warehouse Income Statements For the Years Ended December 31 Increase (Decrease) 2019
2018
Sales
$4,700,000
$4,550,000
Cost of goods sold
2,600,000
2,500,000
Gross profit
2,100,000
2,050,000
Operating expenses
690,000
750,000
Operating income
1,410,000
1,300,000
Other income (expense)
(40,000)
(35,000)
Income before tax
1,370,000
1,265,000
Income tax expense
400,000
370,000
Net income
$970,000
$895,000
Amount
%
Required: 1. Complete the "Amount" and "%" columns to be used in a horizontal analysis of The Sports Warehouse's income statement. 2. Discuss the major fluctuations in income statement items during the year.
12-69 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
171.The following income statement and balance sheets for The Sports Shack are provided. The Sports Shack Income Statement For the year ended December 31, 2018
Sales revenue
$6,600,000
Cost of goods sold
4,700,000
Gross profit
1,900,000
Expenses: Operating expenses
1,400,000
Depreciation expense
100,000
Interest expense
50,000
Income tax expense
80,000
Total expenses
1,630,000
Net income
$270,000
The Sports Shack Balance Sheets December 31 Assets
2018
2017
Cash
$218,000
$196,000
Accounts receivable
680,000
880,000
Inventory
1,250,000
1,100,000
Supplies
90,000
65,000
Equipment
1,200,000
900,000
Accumulated depreciation
(350,000)
(250,000)
Total assets
$3,088,000
$2,891,000
Accounts payable
$65,000
$55,000
Interest payable
4,000
6,000
Income tax payable
40,000
30,000
Current assets:
Long-term assets:
Liabilities and Stockholders’ Equity Current liabilities:
12-70 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Long-term liabilities: Notes payable
400,000
300,000
900,000
900,000
Retained earnings
1,679,000
1,600,000
Total liabilities and equity
$3,088,000
$2,891,000
Stockholders’ equity: Common stock
Required: Assuming that all sales were on account, calculate the following risk ratios for 2018. 1. Receivables turnover ratio 2. Average collection period 3. Inventory turnover ratio
5. Current ratio
6. Acid-test ratio
7. Debt to equity ratio
4. Average days in
8. Times interest earned
inventory
ratio
12-71 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
172.Income statement and balance sheet data for The Sports Shack are provided below. The Sports Shack Income Statements For the years ended December 31 2019
2018
Sales revenue
$8,200,000
$6,600,000
Cost of goods sold
6,100,000
4,700,000
Gross profit
2,100,000
1,900,000
Operating expenses
1,450,000
1,400,000
Depreciation expense
90,000
100,000
Interest expense
25,000
50,000
Income tax expense
95,000
80,000
Total expenses
1,660,000
1,630,000
$440,000
$270,000
2019
2018
2017
Cash
$290,000
$218,000
$196,000
Accounts receivable
1,050,000
680,000
880,000
Inventory
919,000
1,250,000
1,100,000
Supplies
80,000
90,000
65,000
Equipment
1,100,000
1,200,000
900,000
Accumulated
(440,000)
(350,000)
(250,000)
$2,999,000
$3,088,000
$2,891,000
Expenses:
Net income
The Sports Shack Balance Sheets December 31 Assets Current assets:
Long-term assets:
depreciation Total assets
Liabilities and Stockholders’ Equity Current liabilities: Accounts payable
$50,000
$65,000
$55,000
Interest payable
2,000
4,000
6,000
12-72 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Income tax payable
38,000
40,000
30,000
200,000
400,000
300,000
900,000
900,000
900,000
Retained earnings
1,809,000
1,679,000
1,600,000
Total liabilities and equity
$2,999,000
$3,088,000
$2,891,000
Long-term liabilities: Notes payable Stockholders’ equity: Common stock
Required: 1. Calculate the following risk ratios for 2018 and 2019. Receivables turnover ratio Current ratio Inventory turnover ratio
Debt to equity ratio
2. Calculate the following profitability ratios for 2018 and 2019. Gross profit ratio
Profit margin
Return on assets
Asset turnover
3. Based on the ratios calculated, determine whether overall risk and profitability improved from 2018 to 2019.
12-73 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
173.Data for The Sports Shack is provided in 172. Earnings per share for the year ended December 31, 2018, is $0.30. The closing stock price on December 31, 2018, is $5.40. Required: Calculate the following profitability ratios for 2018. 1. Gross profit ratio
4. Asset turnover
2. Return on assets
5. Return on equity
3. Profit margin
6. Price-earnings ratio
174.Explain the difference between vertical and horizontal analysis.
12-74 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
175.Explain why ratios that compare an income statement account with a balance sheet account should express the balance sheet account as an average of the beginning and ending balances.
176.Sideline Sports Products reports a return on assets of 6%, and a return on equity of 10%. Why do these two ratios differ?
177.Define earnings persistence. How does earnings persistence relate to the reporting of discontinued operations?
12-75 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
178.Explain the difference between conservative and aggressive accounting practices. Provide an example of a conservative accounting practice and explain why this practice is conservative. Provide an example of an aggressive accounting practice and explain why this practice is aggressive.
12-76 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 12 Financial Statement Analysis Answer Key
True / False Questions
1.
We can use ratios to help evaluate a firm's performance and financial position. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-01 Perform vertical analysis. Topic: Vertical Analysis
2.
Vertical analysis expresses each item in a financial statement as a percentage of the same base amount. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-01 Perform vertical analysis. Topic: Vertical Analysis
3.
Vertical analysis calculates the amount and percentage change of an account over time. FALSE Horizontal analysis calculates the amount and percentage change of an account over time.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember
12-77 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 1 Easy Learning Objective: 12-01 Perform vertical analysis. Topic: Vertical Analysis
4.
We use vertical analysis for income statement accounts, but not balance sheet accounts. FALSE We use vertical analysis for income statement and balance sheet accounts.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-01 Perform vertical analysis. Topic: Vertical Analysis
5.
We use vertical analysis to express each income statement item as a percentage of sales. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-01 Perform vertical analysis. Topic: Vertical Analysis
6.
For vertical analysis, we express each balance sheet item as a percentage of sales. FALSE For vertical analysis, we express each balance sheet item as a percentage of total assets.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-01 Perform vertical analysis. Topic: Vertical Analysis 12-78 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
7.
Horizontal analysis analyzes trends in financial statement data for a single company over time. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-02 Perform horizontal analysis. Topic: Horizontal Analysis
8.
If the base-year amount is zero, we can't calculate a percentage change under horizontal analysis. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-02 Perform horizontal analysis. Topic: Horizontal Analysis
9.
Using horizontal analysis, if the base year is negative and the following year is positive, the percentage change is just as useful as if the base year and the following year were both positive. FALSE If the base year is negative and the following year is positive, the percentage change is not useful.
AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-02 Perform horizontal analysis. Topic: Horizontal Analysis 12-79 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
10.
We use horizontal analysis to analyze trends in financial statement data, such as the dollar amount of change and the percentage change, for one company over time. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-02 Perform horizontal analysis. Topic: Horizontal Analysis
11.
We measure income statement accounts at a point in time and balance sheet accounts over a period of time. FALSE We measure income statement accounts over a period of time and balance sheet accounts at a point in time.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-03 Use ratios to analyze a company's risk. Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis Topic: Risk Analysis
12.
Ratios that compare an income statement account with a balance sheet account should express the balance sheet account as an average of the beginning and ending balances. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-03 Use ratios to analyze a company's risk. 12-80 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis Topic: Risk Analysis
13.
Every liquidity ratio is calculated using one or more current asset accounts. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
14.
Solvency refers to a company's ability to pay its current liabilities while liquidity refers to a company's ability to pay its long-term liabilities. FALSE Liquidity refers to a company's ability to pay its current liabilities. Solvency refers to a company's ability to pay its long-term liabilities.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
15.
The receivables turnover ratio measures how many times, on average, a company collects its receivables during the year. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-03 Use ratios to analyze a company's risk. 12-81 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Risk Analysis
16.
A low receivables turnover ratio is a positive sign that a company can quickly turn its receivables into cash. FALSE A high receivables turnover ratio is a positive sign that a company can quickly turn its receivables into cash.
AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
17.
The average collection period converts the receivables turnover ratio into days. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
18.
A low inventory turnover ratio usually is a positive sign and indicates that inventory is selling quickly. FALSE A high inventory turnover ratio usually is a positive sign and indicates that inventory is selling quickly.
AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Understand 12-82 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 2 Medium Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
19.
An extremely high inventory turnover ratio may be a signal that the company is losing sales due to inventory shortages. TRUE AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
20.
The average days in inventory converts the inventory turnover ratio into days. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
21.
A low current ratio indicates that a company has sufficient current assets to pay current liabilities as they become due. FALSE A high current ratio indicates that a company has sufficient current assets to pay current liabilities as they become due.
AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-03 Use ratios to analyze a company's risk. 12-83 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Risk Analysis
22.
The acid-test ratio is always smaller than the current ratio. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
23.
Other things being equal, the higher the debt to equity ratio, the higher the risk of bankruptcy. TRUE AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
24.
We use the times interest earned ratio to compare interest payments with a company's income available to pay those charges. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
12-84 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
25.
We calculate the times interest earned ratio by dividing net income by interest expense. FALSE We calculate the times interest earned ratio by dividing net income before interest expense and income taxes by interest expense.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
26.
The gross profit ratio is calculated as gross profit divided by net sales. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
27.
Return on assets is calculated as net income divided by ending total assets. FALSE Return on assets is calculated as net income divided by average total assets.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
12-85 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
28.
Profit margin measures the income earned on each dollar of sales, and is calculated by dividing net income by net sales. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
29.
Asset turnover measures sales volume in relation to the investment in assets, and is calculated as net sales divided by average total assets. TRUE AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
30.
Return on equity is calculated by dividing the stock return by average stockholders' equity. FALSE Return on equity is calculated by dividing net income by average stockholders' equity.
AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
12-86 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
31.
The price-earnings (PE) ratio compares a company's share price with its earnings per share. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
32.
Growth stocks have high expectations of future earnings growth, and therefore, usually trade at higher PE ratios. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
33.
Value stocks have lower share prices in relationship to their fundamental ratios, and therefore, trade at lower PE ratios. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
12-87 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
34.
A discontinued operation is the sale or disposal of any long-term asset. FALSE A discontinued operation is the sale or disposal of a significant component of a business.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Topic: Earnings Persistence and Earnings Quality
35.
We report any profits or losses on discontinued operations in the current year, separately from profits and losses on the portion of the business that will continue. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Topic: Earnings Persistence and Earnings Quality
36.
We report discontinued items separately, net of taxes, near the bottom of the income statement. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Topic: Earnings Persistence and Earnings Quality
12-88 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
37.
The location where a loss is reported in the income statement does not really matter as long as the loss is reported. FALSE The location of a loss in the income statement does matter as investors attempt to determine if the loss is recurring or a one-time occurrence.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Topic: Earnings Persistence and Earnings Quality
38.
When using a company's current earnings to estimate future earnings performance, investors normally should exclude discontinued operations. TRUE AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Topic: Earnings Persistence and Earnings Quality
39.
Conservative accounting practices are those that result in reporting higher income, higher assets, and lower liabilities. FALSE Conservative accounting practices are those that result in reporting lower income, lower assets, and higher liabilities.
AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand
12-89 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Difficulty: 2 Medium Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Topic: Quality of Earnings
40.
Conservative accounting practices are those that result in reporting lower income, lower assets, and higher liabilities. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Topic: Quality of Earnings
41.
A larger estimation of the allowance for uncollectible accounts, the write-down of overvalued inventory and the use of a shorter useful life for depreciation are all examples of conservative accounting. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Topic: Quality of Earnings
42.
Use of a longer useful life for depreciation is an example of conservative accounting. FALSE Use of a shorter useful life for depreciation is an example of conservative accounting.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. 12-90 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Quality of Earnings
43.
Aggressive accounting practices result in reporting higher income, higher assets, and lower liabilities. TRUE AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Topic: Quality of Earnings
44.
Changes in accounting estimates usually have no effect on a company's underlying cash flows. TRUE AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Topic: Quality of Earnings
Multiple Choice Questions
45.
Which of the following is not a common type of comparison in accounting?
A. Comparisons of sales growth between companies. B. Comparisons of earnings per share between companies. C. Comparisons of earnings this year with earnings for the same company last year. D. Comparisons to industry. AACSB: Reflective Thinking
12-91 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-01 Perform vertical analysis. Topic: Vertical Analysis
46.
When using vertical analysis, we express income statement accounts as a percentage of
A. Net income. B. Gross profit. C. Sales. D. Total assets. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-01 Perform vertical analysis. Topic: Vertical Analysis
47.
When using vertical analysis, we express balance sheet accounts as a percentage of
A. Sales. B. Total assets. C. Total liabilities. D. Total stockholders' equity. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-01 Perform vertical analysis. Topic: Vertical Analysis
12-92 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
48.
______ analysis identifies the relative contribution made by each financial statement line item.
A. Ratio B. Vertical C. Horizontal D. Diagonal AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-01 Perform vertical analysis. Topic: Vertical Analysis
49.
Common-size analysis is another term used for ____ analysis.
A. Ratio B. Vertical C. Horizontal D. Diagonal AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-01 Perform vertical analysis. Topic: Vertical Analysis
12-93 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
50.
Which of the following types of analysis allows for the comparison of financial statement items between companies of different size?
A. Horizontal approach B. Vertical approach C. Diagonal approach D. Circular approach AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-01 Perform vertical analysis. Topic: Vertical Analysis
51.
Which of the following is an example of vertical analysis?
A. Comparing gross profit across companies. B. Comparing income statement items as a percentage of sales. C. Comparing debt with industry averages. D. Comparing the change in sales over time. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-01 Perform vertical analysis. Topic: Vertical Analysis
52.
Comparing operating expenses as a percentage of sales is an example of:
A. Vertical analysis. B. Horizontal analysis. C. Diagonal analysis. D. Both vertical and horizontal analysis. AACSB: Reflective Thinking 12-94 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-01 Perform vertical analysis. Topic: Vertical Analysis
53.
To perform a vertical analysis of an income statement, you would divide each line item on the statement by ______.
A. sales B. net income C. total assets D. operating expenses AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-01 Perform vertical analysis. Topic: Vertical Analysis
54.
To perform a vertical analysis of a balance sheet, you would divide each line item on the statement by ______.
A. total assets B. net income C. sales D. operating expenses AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-01 Perform vertical analysis. Topic: Vertical Analysis
12-95 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
55.
Ronaldo Soccer Shop's income statement reports sales of $100,000; cost of goods sold of $46,000, operating expenses of $34,000, interest expense of $15,000, income tax expense of $2,000, and net income of $3,000. If you were to perform a vertical analysis of this income statement, you would divide each of these income statement line items by:
A. $100,000 B. $46,000 C. $34,000 D. $3,000 AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-01 Perform vertical analysis. Topic: Vertical Analysis
56.
The following is an example of: Amount
%
Cash
$300,000
6.0
Accounts receivable
500,000
10.0
Inventory
800,000
16.0
Long-term assets
3,400,000
68.0
Total assets
$5,000,000
100.0
A. Vertical analysis. B. Horizontal analysis. C. Diagonal analysis. D. Both vertical and horizontal analysis. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium
12-96 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 12-01 Perform vertical analysis. Topic: Vertical Analysis
57.
The following is an example of: Year
Increase (Decrease)
2018
2017
Amount
%
Cash
$300,000
$800,000
($500,000)
(62.5)
Accounts receivable
500,000
200,000
300,000
150.0
Inventory
800,000
700,000
100,000
14.3
Long-term assets
3,400,000 2,300,000
1,100,000
47.8
Total assets
$5,000,000 $4,000,000
$1,000,000
25.0
A. Vertical analysis. B. Horizontal analysis. C. Diagonal analysis. D. Both vertical and horizontal analysis. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-02 Perform horizontal analysis. Topic: Horizontal Analysis
58.
Trend analysis and time-series analysis refer to ____ analysis.
A. horizontal B. vertical C. ratio D. diagonal AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy 12-97 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objective: 12-02 Perform horizontal analysis. Topic: Horizontal Analysis
59.
To calculate a year-to-year percentage change in any financial statement line item such as sales, you should take the current year's amount, subtract the prior year's amount, then divide by ______, and finally multiply the result by 100.
A. net income B. total assets C. the current year's amount D. the prior year's amount AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-02 Perform horizontal analysis. Topic: Horizontal Analysis
60.
Brady's Inflation Needle Co. reports accounts receivable of $100,000 in 2017 and $250,000 in 2018. Using horizontal analysis, what would be the percentage increase or decrease in accounts receivable?
A. 60% decrease B. 60% increase C. 150% decrease D. 150% increase AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-02 Perform horizontal analysis. Topic: Horizontal Analysis
12-98 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
61.
The type of analysis used to analyze trends in financial statement data over time is:
A. Horizontal analysis B. Vertical analysis C. Diagonal analysis D. Both horizontal and vertical analysis AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-02 Perform horizontal analysis. Topic: Horizontal Analysis
62.
Horizontal analysis is used to analyze trends in financial statement data over time:
A. For one company B. Between two companies C. Across an industry D. None of these AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-02 Perform horizontal analysis. Topic: Horizontal Analysis
63.
Horizontal analysis examines trends in a company
A. Over time. B. Between income statement accounts in the same year. C. Between balance sheet accounts in the same year. D. Between income statement and balance sheet accounts in the same year. AACSB: Reflective Thinking AICPA: BB Critical Thinking 12-99 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-02 Perform horizontal analysis. Topic: Horizontal Analysis
64.
Which of the following is an example of horizontal analysis?
A. Comparing COGS with sales. B. Comparing net income across companies. C. Comparing debt with equity. D. Comparing the growth in sales over time. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-02 Perform horizontal analysis. Topic: Horizontal Analysis
65.
Which of the following is an example of horizontal analysis?
A. Comparing gross profit across companies. B. Comparing gross profit with operating expenses. C. Comparing assets with equity. D. Comparing the change in sales over time. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-02 Perform horizontal analysis. Topic: Horizontal Analysis
12-100 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
66.
Comparing changes in net income for one company over time is an example of:
A. Vertical analysis. B. Horizontal analysis. C. Diagonal analysis. D. Both vertical and horizontal analysis. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-02 Perform horizontal analysis. Topic: Horizontal Analysis
67.
Which of the following is correct?
A. The receivables turnover ratio depicts the company's frequency of cash collections. B. The inventory turnover ratio can be used to assess the company's frequency of selling inventory. C. The current ratio reflects the company's ability to pay current debt. D. All of these. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
68.
Which of the following ratios is most useful in evaluating liquidity?
A. Return on assets. B. Return on equity. C. Debt to equity ratio. D. Current ratio. AACSB: Reflective Thinking 12-101 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
69.
Which of the following ratios is most useful in evaluating liquidity?
A. Acid-test ratio. B. Return on equity. C. Profit margin ratio. D. Asset turnover. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
70.
Which of the following ratios is most useful in evaluating solvency?
A. Debt to equity ratio. B. Current ratio. C. Receivables turnover ratio. D. Inventory turnover ratio. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
12-102 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
71.
Which of the following is a sign that a company can quickly turn its receivables into cash?
A. A low receivables turnover ratio. B. A high receivables turnover ratio. C. A high average collection period. D. Both a low receivables turnover ratio and a high average collection period. AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
72.
Which of the following is a sign that a company cannot quickly turn its receivables into cash?
A. A high receivables turnover ratio. B. A low receivables turnover ratio. C. A low average collection period. D. Both a high receivables turnover ratio and a low average collection period. AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
12-103 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
73.
Which of the following is a negative sign that a company is not selling its inventory quickly?
A. A low inventory turnover ratio. B. A high inventory turnover ratio. C. A low average days in inventory. D. Both a high inventory turnover ratio and a low average days in inventory. AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
74.
Which of the following is a positive sign that a company is selling its inventory quickly?
A. A low inventory turnover ratio. B. A high inventory turnover ratio. C. A low average days in inventory. D. Both a high inventory turnover ratio and a low average days in inventory. AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
75.
The current ratio is calculated as:
A. Current assets divided by noncurrent assets. B. Current assets divided by current liabilities. C. Current liabilities divided by noncurrent liabilities. D. Current liabilities divided by current assets. AACSB: Reflective Thinking 12-104 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
76.
The acid-test ratio is most similar to the:
A. Current ratio. B. Debt to equity ratio. C. Times interest earned ratio. D. Inventory turnover ratio. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
77.
The acid-test ratio is:
A. The liquidity ratio divided by the equity ratio. B. Current assets minus inventory divided by current liabilities minus accounts payable. C. Cash, net receivables, and current investments divided by current liabilities. D. Cash divided by accounts payable. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
12-105 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
78.
Which of the following is not a solvency ratio?
A. Time interest earned ratio. B. The debt to equity ratio. C. The current ratio. D. All of these. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
79.
When a company with a current ratio of 1.2 pays a current liability:
A. Its current ratio decreases. B. Its current ratio increases. C. Its current ratio remains unchanged. D. Its debt to equity ratio increases. AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
80.
Assuming a current ratio of 1.0, how will the purchase of inventory with cash affect the ratio?
A. Increase the current ratio. B. No change to the current ratio. C. Decrease the current ratio. D. Could either increase or decrease the current ratio. AACSB: Reflective Thinking 12-106 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
81.
Assuming an acid-test ratio of 1.0, how will the purchase of inventory with cash affect the ratio?
A. Increase the acid-test ratio. B. No change to the acid-test ratio. C. Decrease the acid-test ratio. D. Could either increase or decrease the acid-test ratio. AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
82.
Assuming a current ratio of 1.0 and an acid-test ratio of 0.75, how will the purchase of inventory with cash affect each ratio?
A. Increase the current ratio and increase the acid-test ratio. B. No change to the current ratio and decrease the acid-test ratio. C. Decrease the current ratio and decrease the acid-test ratio. D. Increase the current ratio and decrease the acid-test ratio. AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
12-107 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
83.
When a company sells land for cash and makes a $25,000 gain:
A. Its acid-test ratio decreases. B. Its current ratio decreases. C. Its debt to equity ratio decreases. D. Cannot determine from the given information. AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
84.
Assume a company's current ratio and acid-test ratio are less than 1.0 before it purchases inventory on credit. When it makes the purchase:
A. Its current ratio decreases. B. Its acid-test ratio decreases. C. Its current ratio remains unchanged. D. Its acid-test ratio remains unchanged. AACSB: Reflective Thinking AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: 3 Hard Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
12-108 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
85.
A partial balance sheet for Captain D's Sportswear is shown below.
(dollars in thousands) Assets:
Liabilities:
Cash
$60 Accounts payable
$240
Accounts receivable (net)
170 Other liabilities
80
Investments
50 Total current liabilities
320
Inventory
200 Long-term liabilities
110
Prepaid rent
25
430
Total current assets
Total liabilities
505 Stockholders’ equity:
Property & Equipment, (net) 255 Common stock Retained earnings
150 180
Total stockholders’ equity 330 Total assets
$760 Total liabilities and equity $760
The current ratio is (rounded to two decimal places):
A. 1.98. B. 1.58. C. 1.17. D. 0.66. $505/$320 = 1.58.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
12-109 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
86.
A partial balance sheet for Captain D's Sportswear is shown below.
(dollars in thousands)
Assets:
Liabilities:
Cash
$60 Accounts payable
$240
Accounts receivable (net)
170 Other liabilities
80
Investments
50 Total current liabilities
320
Inventory
200 Long-term liabilities
110
Prepaid rent
25
430
Total current assets Property & Equipment, (net)
Total liabilities
505 Stockholders’ equity: 255 Common stock Retained earnings
150 180
Total stockholders’ equity 330 Total assets
$760 Total liabilities and equity $760
The acid-test ratio is (rounded to two decimal places):
A. 0.25. B. 0.88. C. 1.17. D. 1.58. ($505 - $200 - $25)/$320 = .88.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
12-110 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
87.
A partial balance sheet for Captain D's Sportswear is shown below.
(dollars in thousands) Assets:
Liabilities:
Cash
$60 Accounts payable
$240
Accounts receivable (net)
170 Other liabilities
80
Investments
50 Total current liabilities
320
Inventory
200 Long-term liabilities
110
Prepaid rent
25
430
Total current assets Property & Equipment, (net)
Total liabilities
505 Stockholders’ equity: 255 Common stock Retained earnings
150 180
Total stockholders’ equity 330 Total assets
$760 Total liabilities and equity $760
The debt to equity ratio is (rounded to two decimal places):
A. 0.33. B. 0.77. C. 1.17. D. 1.30. $430/$330 = 1.30.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
12-111 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
88.
Recent financial statement data for Harmony Health Foods (HHF) Inc. is shown below. Current liabilities
$180 Income before interest and taxes $125
10% Bonds, long-term
360 Interest expense
36
Total liabilities
540 Income before tax
89
Income tax
27
Common stock
200 Net income
$62
Retained earnings
280
Total stockholders’ equity
480
Stockholders’ equity
Total liabilities and equity $1,020
HHF's debt to equity ratio is (rounded to two decimal places):
A. 0.75. B. 1.13. C. 0.38. D. 1.80. $540/$480 = 1.13.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
12-112 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
89.
Recent financial statement data for Harmony Health Foods (HHF) Inc. is shown below. Current liabilities
$180 Income before interest and taxes $125
10% Bonds, long-term
360 Interest expense
36
Total liabilities
540 Income before tax
89
Income tax
27
Common stock
200 Net income
$62
Retained earnings
280
Total stockholders’ equity
480
Stockholders’ equity
Total liabilities and equity $1,020
HHF's times interest earned ratio is (rounded to two decimal places):
A. 3.47. B. 1.72. C. 2.47. D. 10.0. $125/$36 = 3.47.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
12-113 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
90.
Excerpts from Stealth Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$40,000
$36,000
Inventory
28,000
35,000
Net sales
190,000
186,000
Cost of goods sold
114,000
108,000
Total assets
425,000
405,000
Total stockholders’ equity
240,000
225,000
Net income
32,500
28,000
Stealth Company's 2018 receivables turnover ratio is:
A. 2.85. B. 4.70. C. 5.00. D. 10.63.
Receivables turnover =
$190,000 ($40,000 + $36,000)/2
= 5.0%
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
12-114 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
91.
Excerpts from Stealth Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$40,000
$36,000
Inventory
28,000
35,000
Net sales
190,000
186,000
Cost of goods sold
114,000
108,000
Total assets
425,000
405,000
Total stockholders’ equity
240,000
225,000
Net income
32,500
28,000
Stealth Company's 2018 average collection period is:
A. 73 days. B. 104 days. C. 109 days. D. 128 days.
Receivables turnover =
$190,000 ($40,000 + $36,000)/2
= 5.0%
Average collection period = 365/5.0 = 73 days. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
12-115 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
92.
Excerpts from Stealth Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$40,000
$36,000
Inventory
28,000
35,000
Net sales
190,000
186,000
Cost of goods sold
114,000
108,000
Total assets
425,000
405,000
Total stockholders’ equity
240,000
225,000
Net income
32,500
28,000
Stealth Company's 2018 inventory turnover is (rounded to two decimal places):
A. 3.62 times. B. 3.96 times. C. 4.07 times. D. 6.03 times.
Inventory turnover =
$114,000 ($28,000 + $35,000)/2
= 3.62%
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
12-116 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
93.
Excerpts from Stealth Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$40,000
$36,000
Inventory
28,000
35,000
Net sales
190,000
186,000
Cost of goods sold
114,000
108,000
Total assets
425,000
405,000
Total stockholders’ equity
240,000
225,000
Net income
32,500
28,000
Stealth Company's 2018 average days in inventory is (round intermediate calculations to two decimal places and final answer to one decimal place):
A. 60.5 days. B. 92.2 days. C. 100.8 days. D. 89.7 days.
Inventory turnover =
$114,000 ($28,000 + $35,000)/2
= 3.62%
Average days in inventory = 365/3.62 = 100.8 days. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
12-117 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
94.
Excerpts from Stealth Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$40,000
$36,000
Inventory
28,000
35,000
Net sales
190,000
186,000
Cost of goods sold
114,000
108,000
Total assets
425,000
405,000
Total stockholders’ equity
240,000
225,000
Net income
32,500
28,000
Stealth Company's 2018 debt to equity ratio is (rounded to one decimal place):
A. 77.1%. B. 80.0%. C. 40.0%. D. 60.0%. Assets = Liabilities + Stockholders' Equity. $425,000 = Liabilities + $240,000. Liabilities = $185,000. Debt to equity ratio = $185,000/$240,000 = 77.1%.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
12-118 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
95.
Excerpts from TPX Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$80,000
$72,000
Inventory
84,000
70,000
Net sales
400,000
372,000
Cost of goods sold
254,000
216,000
Total assets
850,000
810,000
Total stockholders’ equity
500,000
450,000
Net income
75,000
56,000
TPX Company's 2018 receivables turnover ratio is (rounded to one decimal place):
A. 5.3 times. B. 5.6 times. C. 5.0 times. D. 0.2 times.
Receivable turnover =
$400,000 ($80,000 + $72,000)/2
= 5.3%
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
12-119 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
96.
Excerpts from TPX Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$80,000
$72,000
Inventory
84,000
70,000
Net sales
400,000
372,000
Cost of goods sold
254,000
216,000
Total assets
850,000
810,000
Total stockholders’ equity
500,000
450,000
Net income
75,000
56,000
TPX Company's 2018 average collection period is (round intermediate calculations to one decimal place and final answer to the nearest day):
A. 69 days. B. 65 days. C. 73 days. D. 1,825 days.
Receivable turnover =
$400,000 ($80,000 + $72,000)/2
= 5.3%
Average collection period = 365/5.3 = 69 days. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
12-120 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
97.
Excerpts from TPX Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$80,000
$72,000
Inventory
84,000
70,000
Net sales
400,000
372,000
Cost of goods sold
254,000
216,000
Total assets
850,000
810,000
Total stockholders’ equity
500,000
450,000
Net income
75,000
56,000
TPX Company's 2018 inventory turnover is (rounded to one decimal place):
A. 3.0 times. B. 5.2 times. C. 3.3 times. D. 3.6 times.
Inventory turnover =
$254,000 ($84,000 + $70,000)/2
= 3.3%
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
12-121 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
98.
Excerpts from TPX Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$80,000
$72,000
Inventory
84,000
70,000
Net sales
400,000
372,000
Cost of goods sold
254,000
216,000
Total assets
850,000
810,000
Total stockholders’ equity
500,000
450,000
Net income
75,000
56,000
TPX Company's 2018 average days in inventory is (round all calculations to one decimal place):
A. 121.7 days. B. 70.2 days. C. 110.6 days. D. 101.4 days.
Inventory turnover =
$254,000 ($84,000 + $70,000)/2
= 3.3%
Average days in inventory = 365/3.3 = 110.6 days. AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
12-122 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
99.
Excerpts from TPX Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$80,000
$72,000
Inventory
84,000
70,000
Net sales
400,000
372,000
Cost of goods sold
254,000
216,000
Total assets
850,000
810,000
Total stockholders’ equity
500,000
450,000
Net income
75,000
56,000
TPX Company's 2018 debt to equity ratio is:
A. 50.0%. B. 60.0%. C. 70.0%. D. 80.0%. Assets = Liabilities + Stockholders' Equity.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
12-123 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
100.
Excerpts from Stealth Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$40,000
$36,000
Inventory
28,000
35,000
Net sales
190,000
186,000
Cost of goods sold
114,000
108,000
Total assets
425,000
405,000
Total stockholders’ equity
240,000
225,000
Net income
32,500
28,000
Stealth Company's 2018 gross profit ratio is:
A. 77.1%. B. 80.0%. C. 40.0%. D. 60.0%. ($190,000 - $114,000)/$190,000 = 40.0%.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
12-124 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
101.
Excerpts from Stealth Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$40,000
$36,000
Inventory
28,000
35,000
Net sales
190,000
186,000
Cost of goods sold
114,000
108,000
Total assets
425,000
405,000
Total stockholders’ equity
240,000
225,000
Net income
32,500
28,000
Stealth Company's 2018 return on assets is (rounded to one decimal place):
A. 7.1%. B. 7.8%. C. 13.5%. D. 44.7%.
$32,500 ($425,000 + $405,000)/2
= 7.8%
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
12-125 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
102.
Excerpts from Stealth Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$40,000
$36,000
Inventory
28,000
35,000
Net sales
190,000
186,000
Cost of goods sold
114,000
108,000
Total assets
425,000
405,000
Total stockholders’ equity
240,000
225,000
Net income
32,500
28,000
Stealth Company's 2018 profit margin is (rounded to one decimal place):
A. 17.1%. B. 13.5%. C. 7.6%. D. 4.5%. $32,500/$190,000 = 17.1%.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
12-126 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
103.
Excerpts from Stealth Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$40,000
$36,000
Inventory
28,000
35,000
Net sales
190,000
186,000
Cost of goods sold
114,000
108,000
Total assets
425,000
405,000
Total stockholders’ equity
240,000
225,000
Net income
32,500
28,000
Stealth Company's 2018 asset turnover is (rounded to one decimal place):
A. 3.7 times. B. 2.8 times. C. 2.2 times. D. 0.5 times.
$190,000 ($425,000 + $405,000)/2
= 0.5%
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
12-127 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
104.
Excerpts from Stealth Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$40,000
$36,000
Inventory
28,000
35,000
Net sales
190,000
186,000
Cost of goods sold
114,000
108,000
Total assets
425,000
405,000
Total stockholders’ equity
240,000
225,000
Net income
32,500
28,000
Stealth Company's 2018 return on equity is (rounded to one decimal place):
A. 17.1%. B. 14.0%. C. 12.6%. D. 7.1%.
$32,500 ($240,000 + $225,000)/2
= 14.0%
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
12-128 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
105.
Excerpts from TPX Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$80,000
$72,000
Inventory
84,000
70,000
Net sales
400,000
372,000
Cost of goods sold
254,000
216,000
Total assets
850,000
810,000
Total stockholders’ equity
500,000
450,000
Net income
75,000
56,000
TPX Company's 2018 gross profit ratio is:
A. 57.5%. B. 36.5%. C. 63.5%. D. 60.0%. ($400,000 - $254,000)/$400,000 = 36.5%.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
12-129 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
106.
Excerpts from TPX Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$80,000
$72,000
Inventory
84,000
70,000
Net sales
400,000
372,000
Cost of goods sold
254,000
216,000
Total assets
850,000
810,000
Total stockholders’ equity
500,000
450,000
Net income
75,000
56,000
TPX Company's 2018 return on assets is (rounded to one decimal place):
A. 48.2%. B. 9.3%. C. 8.8%. D. 9.0%.
$75,000 ($850,000 + $810,000)/2
= 9.0%
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
12-130 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
107.
Excerpts from TPX Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$80,000
$72,000
Inventory
84,000
70,000
Net sales
400,000
372,000
Cost of goods sold
254,000
216,000
Total assets
850,000
810,000
Total stockholders’ equity
500,000
450,000
Net income
75,000
56,000
TPX Company's 2018 profit margin is (rounded to one decimal place):
A. 18.8%. B. 9.0%. C. 19.4%. D. 15.1%. $75,000/$400,000 = 18.8%.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
12-131 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
108.
Excerpts from TPX Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$80,000
$72,000
Inventory
84,000
70,000
Net sales
400,000
372,000
Cost of goods sold
254,000
216,000
Total assets
850,000
810,000
Total stockholders’ equity
500,000
450,000
Net income
75,000
56,000
TPX Company's 2018 asset turnover is (rounded to one decimal place):
A. 3.7 times. B. 2.8 times. C. 2.2 times. D. 0.5 times.
$400,000 ($850,000 + $810,000)/2
= 0.5%
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
12-132 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
109.
Excerpts from TPX Company's December 31, 2018 and 2017, financial statements are presented below: 2018
2017
Accounts receivable
$80,000
$72,000
Inventory
84,000
70,000
Net sales
400,000
372,000
Cost of goods sold
254,000
216,000
Total assets
850,000
810,000
Total stockholders’ equity
500,000
450,000
Net income
75,000
56,000
TPX Company's 2018 return on equity is (rounded to one decimal place):
A. 16.7%. B. 15.0%. C. 15.8%. D. 21.4%.
$75,000 ($500,000 + $450,000)/2
= 15.8%
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
12-133 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
110.
Given the information below, what is the company's gross profit? Sales Revenue
$320,000
Accounts Receivable
$50,000
Ending Inventory
$100,000
Cost of Goods Sold
$250,000
Sales Returns
$20,000
A. $250,000. B. $70,000. C. $220,000. D. $50,000. [($320,000 - $20,000) - $250,000] = $50,000.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
111.
Return on assets equals:
A. Gross profit ratio × Inventory turnover. B. Profit margin × Inventory turnover. C. Gross profit ratio × Asset turnover. D. Profit margin × Asset turnover. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
12-134 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
112.
The profit margin ratio indicates the amount of net income achieved for each:
A. collection on a receivable. B. dollar of inventory. C. dollar of total assets. D. dollar of sales. AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
113.
Nerf Mania reports net income of $500,000, net sales of $4,000,000, and average assets of $2,000,000. The return on assets is:
A. 200%. B. 25%. C. 50%. D. 12.5%. $500,000/$2,000,000 = 25%.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
12-135 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
114.
Nerf Mania reports net income of $500,000, net sales of $4,000,000, and average assets of $2,000,000. The profit margin is:
A. 12.5%. B. 25%. C. 50%. D. 8 times. $500,000/$4,000,000 = 12.5%.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
115.
Nerf Mania reports net income of $500,000, net sales of $4,000,000, and average assets of $2,000,000. The asset turnover is:
A. 0.25 times. B. 0.5 times. C. 2 times. D. 8 times. $4,000,000/$2,000,000 = 2 times.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
12-136 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
116.
Richard's Sporting Goods reports net income of $100,000, net sales of $500,000, and average assets of $1,000,000. The return on assets is:
A. 10%. B. 20%. C. 50%. D. 5 times. $100,000/$1,000,000 = 10%.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
117.
Richard's Sporting Goods reports net income of $100,000, net sales of $500,000, and average assets of $1,000,000. The profit margin is:
A. 10%. B. 20%. C. 50%. D. 5 times. $100,000/$500,000 = 20%.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
12-137 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
118.
Richard's Sporting Goods reports net income of $100,000, net sales of $500,000, and average assets of $1,000,000. The asset turnover is:
A. 0.1 times. B. 0.5 times. C. 2 times. D. 5 times. $500,000/$1,000,000 = 0.5 times.
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
119.
The price-earnings (PE) ratio is calculated as:
A. Earnings per share divided by the stock price B. Retained earnings times the stock price C. Stock price divided by net income D. Stock price divided by earnings per share AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
12-138 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
120.
Curry Footwear reports net income of $500,000, earnings per share of $1.50, and has a stock price of $45.00 at the end of the year. What is Curry Footwear's price-earnings ratio?
A. 30.0 B. 11,111.1 C. 67.5 D. 46.5 $45.00/$1.50 = 30.0
AACSB: Analytical Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
121.
Compared to growth stocks, value stocks' price-earnings ratio is typically:
A. There is no relationship between the price-earnings ratios of growth and value stocks B. The same C. Higher D. Lower AACSB: Reflective Thinking AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
12-139 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
122.
All of the following are profitability ratios except:
A. Profit margin B. Return on equity C. Asset turnover D. Current ratio AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
123.
Investors view what as the number one measure of company success?
A. Liquidity B. Solvency C. Employee satisfaction D. Profitability AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
124.
Which of the following items would be reported at the very bottom of the income statement just before net income?
A. Gain on the sale of long-term assets. B. Discontinued operations. C. Loss due to business restructuring. D. Loss due to write-down of receivables. AACSB: Reflective Thinking 12-140 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Topic: Earnings Persistence and Earnings Quality
125.
The sale or disposal of a significant component of a company's operations is referred to as:
A. A discontinued operation. B. Other gains and losses. C. Other revenues and expenses. D. Gain or loss on sale of assets. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Topic: Earnings Persistence and Earnings Quality
126.
A discontinued operation refers to:
A. The sale or disposal of a significant component of a company's operations. B. Discontinued inventory items. C. Inventory items that have been completed and sold. D. The sale of most long-term assets. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Topic: Earnings Persistence and Earnings Quality
12-141 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
127.
What is the correct order to present the following items in the income statement?
A. Other revenues and expenses, income tax expense, discontinued operations, net income. B. Other revenues and expenses, income tax expense, net income, discontinued operations. C. Discontinued operations, net income, other revenues and expenses, income tax expense. D. Discontinued operations, net income, income tax expense, other revenues and expenses. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Topic: Earnings Persistence and Earnings Quality
128.
Popson Inc. incurred a material loss due to the write-down of inventory. This loss should be reported as:
A. Other revenues. B. A loss from discontinued operations. C. Other expenses. D. A separate line item in retained earnings. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Topic: Earnings Persistence and Earnings Quality
12-142 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
129.
Popson Inc. incurred a material gain on the sale of land. This gain should be reported as:
A. Other revenues. B. A gain from discontinued operations. C. Other expenses. D. A separate line item in retained earnings. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Topic: Earnings Persistence and Earnings Quality
130.
Which of the following statements is not true?
A. We report any profits or losses on discontinued operations in the current year, separately from profits and losses on the portion of the business that will continue. B. We report discontinued items separately, net of taxes, near the bottom of the income statement. C. The location where a loss is reported in the income statement does not really matter as long as the loss is reported. D. When using a company's current earnings to estimate future earnings performance, investors normally should exclude discontinued operations. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Topic: Earnings Persistence and Earnings Quality
12-143 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
131.
Examples of discontinued operations include all of the following except:
A. A disposal of a major geographical area. B. A disposal of a major piece of equipment. C. A disposal of a major line of business. D. A disposal of a major investment in which the company has significant influence. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Topic: Earnings Persistence and Earnings Quality
132.
Which of the following income statement items is least likely to persist into future periods?
A. Sales revenue. B. Discontinued operations. C. Cost of goods sold. D. Salaries expense. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Topic: Earnings Persistence and Earnings Quality
12-144 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
133.
LeBron's Bookstores has two divisions: media and books. The media division had another great year with net sales of $14 million, cost of goods sold of $8 million, operating expenses of $3 million, and income tax expense of $900,000. The book division did not do as well and was sold during the year. The loss from operations and sale of the book division was $400,000 before taxes and $280,000 after taxes. Assuming the sale of the book division is reported as a discontinued operation, at what amount did LeBron's Bookstores report the discontinued operations?
A. Gain of $1,820,000. B. Loss of $280,000. C. Loss of $400,000. D. Gain of $1,700,000. AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Topic: Earnings Persistence and Earnings Quality
12-145 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
134.
LeBron's Bookstores has two divisions: media and books. The media division had another great year with net sales of $14 million, cost of goods sold of $8 million, operating expenses of $3 million, and income tax expense of $900,000. The book division did not do as well and was sold during the year. The loss from operations and sale of the book division was $400,000 before taxes and $280,000 after taxes. Assuming the sale of the book division is reported as a discontinued operation, at what amount did LeBron's Bookstores report net income?
A. $3,000,000. B. $1,820,000. C. $2,100,000. D. $1,700,000. $14,000,000 - $8,000,000 - $3,000,000 - $900,000 - $280,000 = $1,820,000.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Topic: Earnings Persistence and Earnings Quality
12-146 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
135.
LeBron's Bookstores has two divisions: media and books. The media division had another great year with net sales of $14 million, cost of goods sold of $8 million, operating expenses of $3 million, and income tax expense of $900,000. The book division did not do as well and was sold during the year. The loss from operations and sale of the book division was $400,000 before taxes and $280,000 after taxes. Assuming the sale of the book division is reported as a discontinued operation, at what amount did LeBron's Bookstores report income before tax?
A. $1,820,000. B. $3,000,000. C. $2,100,000. D. $1,700,000. $14,000,000 - $8,000,000 - $3,000,000 = $3,000,000.
AACSB: Analytical Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Topic: Earnings Persistence and Earnings Quality
136.
Which of the following is a result of conservative accounting practices?
A. Higher income, higher assets, and lower liabilities. B. Lower income, higher assets, and lower liabilities. C. Higher income, lower assets, and lower liabilities. D. Lower income, lower assets, and higher liabilities. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Topic: Quality of Earnings
12-147 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
137.
Which of the following is a result of aggressive accounting practices?
A. Lower income, higher assets, and higher liabilities. B. Higher income, higher assets, and lower liabilities. C. Lower income, lower assets, and higher liabilities. D. Higher income, lower assets, and higher liabilities. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Topic: Quality of Earnings
138.
The financial statements of a firm that uses more conservative accounting practices would be likely to report:
A. Higher profitability. B. Higher dividends. C. Higher liabilities. D. Higher stockholders' equity. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: 2 Medium Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Topic: Quality of Earnings
12-148 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
139.
The financial statements of a firm that uses more aggressive accounting practices would be likely to report:
A. Higher profitability. B. Higher dividends. C. Higher liabilities. D. Lower assets. AACSB: Reflective Thinking AICPA: FN Reporting Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: 2 Medium Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Topic: Quality of Earnings
140.
Which of the following is NOT an example of applying conservatism in accounting?
A. Recording contingent losses that are probable. B. Expensing all research and development costs as they are incurred. C. Using the lower of cost and net realizable value for inventory accounting. D. Increasing the useful life used in calculating depreciation. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Topic: Quality of Earnings
141.
Which of the following is NOT an example of aggressive accounting practices?
A. Recording contingent losses that are probable. B. Recording research and development costs as assets. C. Using a lower estimate of bad debts. D. Increasing the useful life used in calculating depreciation. AACSB: Reflective Thinking 12-149 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 3 Hard Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Topic: Quality of Earnings
142.
Which of the following is a conservative accounting practice?
A. The use of a longer service life for depreciation. B. Waiting to record a litigation loss. C. Adjust the allowance for uncollectible accounts to a smaller amount. D. The write-down of overvalued inventory. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Topic: Quality of Earnings
143.
Which of the following is an aggressive accounting practice?
A. The use of a shorter service life for depreciation. B. Waiting to record a litigation loss. C. Adjust the allowance for uncollectible accounts to a larger amount. D. The write-down of overvalued inventory. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Topic: Quality of Earnings
12-150 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
144.
Which of the following is a conservative accounting practice?
A. Change from double-declining balance to straight-line depreciation. B. Record sales revenue before it is actually earned. C. Adjust the allowance for uncollectible accounts to a larger amount. D. Record inventory at market rather than lower of cost or market. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Topic: Quality of Earnings
145.
Which of the following is an aggressive accounting practice?
A. Change from straight-line to double-declining balance depreciation. B. Record sales revenue before it is actually earned. C. Adjust the allowance for uncollectible accounts to a larger amount. D. Record inventory at the lower of cost and net realizable value. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Topic: Quality of Earnings
146.
Which of the following is a conservative accounting practice?
A. The use of a longer service life for depreciation. B. Waiting to record a litigation loss. C. Recording a lower amount for bad debt expense. D. Taking an asset write-down early. AACSB: Reflective Thinking AICPA: BB Critical Thinking 12-151 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Topic: Quality of Earnings
147.
Which of the following is an aggressive accounting practice?
A. The use of a shorter service life for depreciation. B. Waiting to record a litigation loss. C. Recording a higher amount for bad debt expense. D. Taking an asset write-down early. AACSB: Reflective Thinking AICPA: BB Critical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Topic: Quality of Earnings
Matching Questions
12-152 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
148.
Match the following
Analyzes trends in financial statement data for a single 1. Solvency 2. Profitability ratios
company over time.
4
Have lower share prices in relationship to their fundamental ratios and therefore trade at lower PE ratios.
5
Expresses each item in a financial statement as a 3. Liquidity
percentage of the same base amount.
7
Refers to a company's ability to pay its current liabilities.
3
Refers to a company's ability to pay its long-term liabilities.
1
4. Horizontal analysis 5. Value Stocks
Have high expectations of future earnings and therefore 6. Growth stocks
usually trade at higher P/E ratios.
6
Measure the earnings or operating effectiveness of a 7. Vertical analysis
company.
2
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-01 Perform vertical analysis. Learning Objective: 12-02 Perform horizontal analysis. Learning Objective: 12-03 Use ratios to analyze a company's risk. Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Horizontal Analysis Topic: Profitability Analysis Topic: Risk Analysis Topic: Vertical Analysis
12-153 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
149.
Match the following
1. Vertical analysis 2. Aggressive accounting practices
A company's ability to pay its current liabilities.
6
Accounting choices that result in reporting lower income, lower assets, and higher liabilities.
4
The sale or disposal of most long-term assets.
7
3. Discontinued operation 4. Conservative accounting practices
Accounting choices that result in reporting higher income, higher assets, and lower liabilities.
2
A tool to analyze trends in financial statement data for a 5. Solvency
single company over time.
8
The sale or disposal of a significant component of a 6. Liquidity
company's operations.
7. Other revenues and expenses 8. Horizontal analysis
3
A means to express each item in a financial statement as a percentage of a base amount.
1
A company's ability to pay its long-term liabilities.
5
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-01 Perform vertical analysis. Learning Objective: 12-02 Perform horizontal analysis. Learning Objective: 12-03 Use ratios to analyze a company's risk. Learning Objective: 12-04 Use ratios to analyze a company's profitability. Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Topic: Earnings Persistence and Earnings Quality Topic: Horizontal Analysis Topic: Profitability Analysis Topic: Quality of Earnings Topic: Risk Analysis Topic: Vertical Analysis
12-154 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
150.
Match the following
Cost of goods sold divided by average inventory; the number of times the firm sells its average inventory balance 1. Debt to equity ratio 2. Average days in inventory 3. Times interest
during a reporting period.
6
Total liabilities divided by total stockholders' equity; measure a company's solvency risk.
1
Approximate number of days the average inventory is held.
earned ratio
2 Ratio that compares interest expense with income available
4. Acid-test ratio
to pay those charges.
3
Net sales divided by average accounts receivable; the 5. Receivables
number of times during a year that the average accounts
turnover ratio
receivable balance is collected.
5
Cash, short-term investments, and accounts receivable 6. Inventory turnover ratio 7. Average collection period
divided by current liabilities; measures the availability of liquid current assets to pay current liabilities.
4
Current assets divided by current liabilities; measures the availability of current assets to pay current liabilities.
8
Approximate number of days the average accounts 8. Current ratio
receivable balance is outstanding.
7
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
12-155 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
151.
Match the following
Net income divided by average total assets; measures the amount of net income generated for each dollar invested in 1. Asset turnover 2. Return on assets
assets.
2
Compares a company's share price with its earnings per share. 5
3. Gross profit ratio
Net income divided by average stockholders' equity; measures the income generated per dollar of equity.
4
Gross profit divided by net sales; measures the amount by which the sale price of inventory exceeds its cost per dollar of 4. Return on equity 5. Price-earnings (PE) ratio
sales.
3
Net sales divided by average total assets; which measures the sales per dollar of assets invested.
1
Net income divided by net sales; indicates the earnings per 6. Profit margin
dollar of sales.
6
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
12-156 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
152.
Match the following
1. Aggressive accounting practices
The sale or disposal of most long-term assets.
2. Other revenues and expenses
2
The sale or disposal of a significant component of a company's operations.
3
Refers to the ability of reported earnings to reflect the 3. Discontinued operation
company's true earnings, as well as the usefulness of reported earnings to predict future earnings.
4. Conservative accounting practices
5
Practices that result in reporting lower income, lower assets, and higher liabilities.
4
Practices that result in reporting higher income, higher 5. Quality of earnings
assets, and lower liabilities.
1
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Topic: Earnings Persistence and Earnings Quality Topic: Quality of Earnings
Essay Questions
12-157 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
153.
Perform a vertical analysis on the following information: 2018
2017
Cash
$500,000
$200,000
Accounts receivable
900,000
800,000
Inventory
700,000
500,000
Long-term assets
2,200,000
2,500,000
Total assets
$4,300,000
$4,000,000
2018
2017
Amount
%
Amount
%
Cash
$500,000
11.6
$200,000
5.0
Accounts
900,000
20.9
800,000
20.0
Inventory
700,000
16.3
500,000
12.5
Long-term
2,200,000
51.2
2,500,000
62.5
receivable
assets Total
$4,300,000 100.0 $4,000,000 100.0
assets
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-01 Perform vertical analysis. Topic: Vertical Analysis
12-158 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
154.
Perform a horizontal analysis on the following information providing both the dollar amount and percentage change:
2018
2017
Cash
$500,000
$200,000
Accounts receivable
900,000
800,000
Inventory
700,000
500,000
Long-term assets
2,200,000
2,500,000
Total assets
$4,300,000
$4,000,000
Year
Increase (Decrease)
2018
2017
Amount
%
Cash
$500,000
$200,000
$300,000
150.0
Accounts receivable
900,000
800,000
100,000
12.5
Inventory
700,000
500,000
200,000
40.0
Long-term assets
2,200,000 2,500,000
(300,000)
(12.0)
Total assets
$4,300,000 $4,000,000
$300,000
7.5
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-02 Perform horizontal analysis. Topic: Horizontal Analysis
12-159 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
155.
Assume a company's sales are $1.6 million in 2017, $1.8 million in 2018, and $1.7 million in 2019. What is the percentage change from 2017 to 2018? What is the percentage change from 2018 to 2019? Be sure to indicate whether the percentage change is an increase or a decrease.
% change from 2017 to 2018 = ($1.8 million - $1.6 million)/$1.6 million = 12.5% increase. % change from 2018 to 2019 = ($1.7 million - $1.8 million)/$1.8 million = 5.6% decrease.
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-02 Perform horizontal analysis. Topic: Horizontal Analysis
156.
If a company's sales are $648,000 in 2018, and this represents an 8% increase over sales in 2017, what were sales in 2017?
$648,000/1.08 = $600,000.
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-02 Perform horizontal analysis. Topic: Horizontal Analysis
12-160 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
157.
United Products began the year with an Accounts Receivable balance of $250,000, and had a year-end balance of $280,000. Credit sales of $800,000 generated a gross profit of $150,000. Calculate the receivables turnover ratio for the year.
Receivables turnover ratio
$800,000 ($250,000 + $280,000)/2
= 3.0 times
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
158.
United Products began the year with an Inventory balance of $180,000, and had a yearend balance of $200,000. Sales of $800,000 generated a gross profit of $150,000. Calculate the inventory turnover ratio for the year.
Inventory turnover ratio
$650,000* ($180,000 + $200,000)/2
= 3.4 times
*$800,000 (sales) - $150,000 (gross profit) = $650,000 COGS. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
12-161 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
159.
BC Training reports sales revenue of $2,200,000. Average inventory during the year was $200,000. The inventory turnover ratio for the year is 8.0. What amount of gross profit would the company report in its income statement?
Inventory turnover
COGS*
ratio
$200,000
= 8.0 times
*COGS = $200,000 × 8.0 = $1,600,000. Given sales of $2,200,000 and calculating COGS of $1,600,000, gross profit is $600,000. Sales
$2,200,000
- Cost of goods sold
1,600,000
= Gross profit
$600,000
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
12-162 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
160.
LeBron's Kids Camps has a current ratio of 0.75 to 1, based on current assets of $3 million and current liabilities of $4 million. How, if at all, will a $500,000 cash purchase of inventory affect the current ratio? How, if at all, will a $500,000 purchase of inventory on account affect the current ratio?
A cash purchase of inventory will not affect the current ratio, but a purchase of inventory on account will increase the current ratio as shown below:
Current ratio before purchase of inventory: $3,000,000 $4,000,000
= 0.75 to 1
Current ratio after $500,000 cash purchase of inventory: $3,000,000 + $500,000 inventory $500,000 cash
= 0.75 to 1
$4,000,000 Current ratio after $500,000 purchase of inventory on account: $3,000,000 + $500,000 inventory $4,000,000 + $500,000 accounts
= 0.78 to 1
payable
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
12-163 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
161.
The following income statement and balance sheets for Laser World are provided: Laser World Income Statement For the year-ended December 31, 2018 Sales revenue
$2,200,000
Cost of goods sold
1,500,000
Gross profit
700,000
Expenses: Operating expenses
350,000
Depreciation expense
70,000
Loss on sale of land
5,000
Interest expense
25,000
Income tax expense
60,000
Total expenses
510,000
Net income
$190,000
Laser World Balance Sheets December 31 Assets
2018
2017
$120,000
$112,000
Accounts receivable
90,000
70,000
Inventory
120,000
100,000
Prepaid rent
10,000
10,000
Land
260,000
200,000
Equipment
350,000
210,000
Accumulated depreciation
(70,000)
(42,000)
$880,000
$660,000
Accounts payable
$55,000
$75,000
Interest payable
8,000
7,000
Current assets: Cash
Long-term assets:
Total assets Liabilities and Stockholders’ Equity Current liabilities:
12-164 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Income tax payable
15,000
12,000
400,000
300,000
Common stock
200,000
200,000
Retained earnings
202,000
66,000
Total liabilities and equity
$880,000
$660,000
Long-term liabilities: Notes payable Stockholders’ equity:
Assuming that all sales were on account, calculate the following risk ratios for 2018: 1. Receivables turnover ratio 2. Average collection period
5. Current ratio
6. Acid-test ratio
3. Inventory turnover ratio 7. Debt to equity ratio 4. Average days in
8. Times interest
inventory
earned ratio
Risk Ratios 1. Receivables turnover ratio
2. Average collection period
3. Inventory turnover ratio
4. Average days in inventory
5. Current ratio
6. Acid-test ratio
7. Debt to equity ratio
Calculations $2,200,000 ($90,000 + $70,000)/2 365 27.5 $1,500,000 ($120,000 + $100,000)/2 365 13.6 $340,000 $78,000 $120,000 + $90,000 $78,000 $478,000 $402,000
= 27.5 times
= 13.3 days
= 13.6 times
= 26.8 days
= 4.4 to 1
= 2.7 to 1
= 118.9%
12-165 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
8. Times interest earned ratio
$190,000 + $25,000 + $60,000 $25,000
= 11.0 times
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
12-166 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
162.
The following income statement and balance sheets for Laser World are provided: Laser World Income Statement For the year-ended December 31, 2018 Sales revenue
$2,200,000
Cost of goods sold
1,500,000
Gross profit
700,000
Expenses: Operating expenses
350,000
Depreciation expense
70,000
Loss on sale of land
5,000
Interest expense
25,000
Income tax expense
60,000
Total expenses
510,000
Net income
$190,000
Laser World Balance Sheet December 31 Assets
2018
2017
$120,000
$112,000
Accounts receivable
90,000
70,000
Inventory
120,000
100,000
Prepaid rent
10,000
10,000
Land
260,000
200,000
Equipment
350,000
210,000
Accumulated depreciation
(70,000)
(42,000)
$880,000
$660,000
Current assets: Cash
Long-term assets:
Total assets Liabilities and Stockholders’ Equity Current liabilities:
12-167 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accounts payable
$55,000
$75,000
Interest payable
8,000
7,000
Income tax payable
15,000
12,000
400,000
300,000
Common stock
200,000
200,000
Retained earnings
202,000
66,000
Total liabilities and equity
$880,000
$660,000
Long-term liabilities: Notes payable Stockholders’ equity:
Earnings per share for the year ended December 31, 2018, is $1.90. The closing stock price on December 31, 2018, is $30.40. Calculate the following profitability ratios for 2018: 1. Gross profit ratio
4. Asset turnover
2. Return on assets
5. Return on equity
3. Profit margin
6. Price-earnings ratio
Profitability Ratios 1. Gross profit ratio
2. Return on assets
3. Profit margin
4. Asset turnover
5. Return on equity
6. Price-earnings ratio
Calculations $700,000 $2,200,000 $190,000 ($880,000 + $660,000)/2 $190,000 $2,200,000 $2,200,000 ($880,000 + $660,000)/2 $190,000 ($402,000 + $266,000)/2 $30.40 $1.90
= 31.8%
= 24.7%
= 8.6%
= 2.9 times
= 56.9%
= 16.0
12-168 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
163.
Barry's BBQ had sales revenue for the year of $200 million and net income of $20 million. Total assets were $70 million at the beginning of the year, and $80 million at the end of the year. Calculate Barry's return on assets, profit margin, and asset turnover ratios.
(dollars in millions) Return on assets
$20
= 26.7%
($70 + $80)/2 Profit margin
Asset turnover
$20 $200 $200 ($70 + $80)/2
= 10.0%
= 2.7 times
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
12-169 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
164.
Paul Pierce Enterprises reports net income of $800,000, average total assets of $2,400,000, and average total liabilities of $400,000. Calculate the return on assets and return on equity ratios.
Return on
$800,000
assets
$2,400,000
Return on equity
= 33.3%
$800,000 ($2,400,000 -
= 40.0%
$400,000)
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
165.
Phillip's Fun Center has several playgrounds areas, go-karts, miniature golf, bumper boats, paintball, and laser tag. Determine whether the company should report each of the following items as discontinued operations, other revenues, or other expenses: 1. The company sells an outdoor playground at a gain of $5,000. 2. The company sold its old go-karts at a loss of $25,000 and replaced them with all new go-karts. 3. The company sold its laser tag center at a loss of $10,000 to focus on the other more profitable segments. Laser tag is considered to be a separate business segment. 4. The company restructured its business at a cost of $75,000, replacing some employee positions with automated equipment.
1. Other revenues. 2. Other expenses. 3. Discontinued operations. 4. Other expenses.
AACSB: Reflective Thinking 12-170 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA: FN Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Topic: Earnings Persistence and Earnings Quality
166.
Classify each of the following accounting practices as conservative or aggressive: 1. Increase the allowance for uncollectible accounts. 2. When costs are rising, change from FIFO to LIFO. 3. Increase the estimated useful life of equipment.
1. Conservative 2. Conservative 3. Aggressive
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Topic: Quality of Earnings
167.
Classify each of the following accounting practices as conservative or aggressive: 1. Choosing a shorter life for calculating depreciation. 2. The write-down of inventory. 3. Decrease the allowance for uncollectible accounts. 4. Recording revenues sooner.
1. Conservative 2. Conservative 3. Aggressive 4. Aggressive
AACSB: Reflective Thinking AICPA: BB Critical Thinking
12-171 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Topic: Quality of Earnings
12-172 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
168.
The Sports Warehouse operates in two distinct segments; equipment and apparel. The income statements for each operating segment are presented below. The Sports Warehouse Income Statements For the Year Ended December 31, 2018 Equipment
Apparel
Amount %
Amount %
Sales
$1,700,000
$2,850,000
Cost of goods
1,100,000
1,400,000
Gross profit
600,000
1,450,000
Operating
250,000
500,000
350,000
950,000
25,000
(60,000)
375,000
890,000
90,000
280,000
$285,000
$610,000
sold
expenses Operating income Other income (expense) Income before tax Income tax expense Net income
Required: 1. Complete the "%" columns to be used in a vertical analysis of The Sports Warehouse's two operating segments. Express each amount as a percentage of sales. 2. Use vertical analysis to compare the profitability of the two operating segments. Which segment is more profitable?
Requirement 1
The Sports Warehouse Income Statements
12-173 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
For the Year Ended December 31, 2018 Equipment Amount
Apparel %
Amount
%
Sales
$1,700,000 100.0 $2,850,000 100.0
Cost of
1,100,000
65.7
1,400,000
49.1
Gross profit
600,000
35.3
1,450,000
50.9
Operating
250,000
14.7
500,000
17.6
350,000
20.6
950,000
33.3
25,000
1.5
(60,000) (2.1)
375,000
22.1
890,000
31.2
90,000
5.3
280,000
9.8
$285,000
16.8
$610,000
21.4
goods sold
expenses Operating income Other income (expense) Income before tax Income tax expense Net income
Requirement 2 The apparel segment is more profitable. Net income is 21.4% of sales in that segment compared to only 16.8% of sales in the equipment segment. If these results continue, the company may want to place greater focus on the expansion of the more profitable apparel segment. AACSB: Analytical Thinking AICPA: FN Decision Making AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-01 Perform vertical analysis. Topic: Vertical Analysis
12-174 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
169.
The following balance sheets for The Sports Shack are provided. The Sports Shack Balance Sheets December 31 Assets
2018
2017
Cash
$218,000
$196,000
Accounts receivable
680,000
880,000
Inventory
1,250,000
1,100,000
Supplies
90,000
65,000
Equipment
1,200,000
900,000
Accumulated depreciation
(350,000)
(250,000)
$3,088,000
$2,891,000
Accounts payable
$65,000
$55,000
Interest payable
4,000
6,000
Income tax payable
40,000
30,000
400,000
300,000
900,000
900,000
Retained earnings
1,679,000
1,600,000
Total liabilities and equity
$3,088,000
$2,891,000
Current assets:
Long-term assets:
Total assets Liabilities and Stockholders’ Equity Current liabilities:
Long-term liabilities: Notes payable Stockholders’ equity: Common stock
Required: 1. Prepare a vertical analysis of The Sports Shack's 2018 and 2017 balance sheets. Express each amount as a percentage of total assets for that year. 2. Prepare a horizontal analysis of The Sports Shack's 2018 balance sheet using 2017 as the base year.
12-175 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Requirement 1
The Sports Shack Balance Sheets December 31 Assets
2018
2017
Amount
% Amount
%
Cash
$218,000
7.1
$196,000
6.8
Accounts receivable
680,000
22.0
880,000 30.4
Current assets:
Inventory
1,250,000
40.5 1,100,000 38.1
Supplies
90,000
2.9
65,000
Equipment
1,200,000
38.9
900,000 31.1
Accumulated depreciation
(350,000) (11.4) (250,000) (8.7)
2.3
Long-term assets:
Total assets
$3,088,000 100.0 $2,891,000 100.0
Liabilities and Stockholders’ Equity Current liabilities: Accounts payable
$65,000
2.1
$55,000
1.9
Interest payable
4,000
0.1
6,000
0.2
Income tax payable
40,000
1.3
30,000
1.1
400,000
13.0
300,000 10.4
900,000
29.1
900,000 31.1
Long-term liabilities: Notes payable Stockholders’ equity: Common stock Retained earnings Total liabilities and equity
1,679,000
54.4 1,600,000 55.3
$3,088,000 100.0 $2,891,000 100.0
Requirement 2
12-176 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
The Sports Shack Balance Sheets December 31 Year Assets
Increase (Decrease)
2018
2017
Amount
%
Cash
$218,000
$196,000
22,000
11.2
Accounts receivable
680,000
880,000
(200,000)
(22.7)
1,250,000 1,100,000
150,000
13.6
Current assets:
Inventory Supplies
90,000
65,000
25,000
38.5
Equipment
1,200,000
900,000
300,000
33.3
Accumulated depreciation
(350,000) (250,000)
(100,000)
(40.0)
$3,088,000 $2,891,000
$197,000
6.8
Long-term assets:
Total assets
Liabilities and Stockholders’ Equity Current liabilities: Accounts payable
$65,000
$55,000
10,000
18.2
Interest payable
4,000
6,000
(2,000)
(33.3)
Income tax payable
40,000
30,000
10,000
33.3
400,000
300,000
100,000
33.3
900,000
900,000
0
0
Retained earnings
1,679,000 1,600,000
79,000
4.9
Total liabilities and equity
$3,088,000 $2,891,000
$197,000
6.8
Long-term liabilities: Notes payable Stockholders’ equity: Common stock
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-01 Perform vertical analysis. Learning Objective: 12-02 Perform horizontal analysis. Topic: Horizontal Analysis Topic: Vertical Analysis
12-177 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
170.
The income statements for The Sports Warehouse for the years ending December 31, 2019, and 2018, are provided. The Sports Warehouse Income Statements For the Years Ended December 31 Increase (Decrease) 2019
2018
Sales
$4,700,000 $4,550,000
Cost of goods sold
2,600,000 2,500,000
Gross profit
2,100,000 2,050,000
Operating expenses
690,000
Amount
%
750,000
Operating income
1,410,000 1,300,000
Other income (expense)
(40,000)
Income before tax
1,370,000 1,265,000
(35,000)
Income tax expense
400,000
370,000
Net income
$970,000
$895,000
Required: 1. Complete the "Amount" and "%" columns to be used in a horizontal analysis of The Sports Warehouse's income statement. 2. Discuss the major fluctuations in income statement items during the year.
Requirement 1
The Sports Warehouse Income Statements For the Years Ended December 31 Increase (Decrease) 2019
2018
Amount
%
Sales
$4,700,000 $4,550,000
$150,000
3.3
Cost of goods sold
2,600,000 2,500,000
100,000
4.0
Gross profit
2,100,000 2,050,000
50,000
2.4
12-178 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Operating expenses
690,000
750,000
(60,000)
(8.0)
Operating income
1,410,000 1,300,000
110,000
8.5
Other income (expense)
(40,000)
(35,000)
(5,000)
(14.3)
Income before tax
1,370,000 1,265,000
105,000
8.3
Income tax expense
400,000
370,000
30,000
8.1
Net income
$970,000
$895,000
$75,000
8.4
Requirement 2 Sales and gross profit both increased about 3%. The company also managed to decrease operating expenses by 8%. This resulted in increases to operating income, income before tax, and net income around 8% as well. AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-02 Perform horizontal analysis. Topic: Horizontal Analysis
12-179 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
171.
The following income statement and balance sheets for The Sports Shack are provided. The Sports Shack Income Statement For the year ended December 31, 2018
Sales revenue
$6,600,000
Cost of goods sold
4,700,000
Gross profit
1,900,000
Expenses: Operating expenses
1,400,000
Depreciation expense
100,000
Interest expense
50,000
Income tax expense
80,000
Total expenses
1,630,000
Net income
$270,000
The Sports Shack Balance Sheets December 31 Assets
2018
2017
Cash
$218,000
$196,000
Accounts receivable
680,000
880,000
Inventory
1,250,000
1,100,000
Supplies
90,000
65,000
Equipment
1,200,000
900,000
Accumulated depreciation
(350,000)
(250,000)
Total assets
$3,088,000
$2,891,000
Accounts payable
$65,000
$55,000
Interest payable
4,000
6,000
Income tax payable
40,000
30,000
Current assets:
Long-term assets:
Liabilities and Stockholders’ Equity Current liabilities:
12-180 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Long-term liabilities: Notes payable
400,000
300,000
900,000
900,000
Retained earnings
1,679,000
1,600,000
Total liabilities and equity
$3,088,000
$2,891,000
Stockholders’ equity: Common stock
Required: Assuming that all sales were on account, calculate the following risk ratios for 2018. 1. Receivables turnover ratio 5. Current ratio 2. Average collection period 6. Acid-test ratio 3. Inventory turnover ratio
7. Debt to equity ratio
4. Average days in inventory 8. Times interest earned ratio
Risk Ratios 1. Receivables turnover ratio
2. Average collection period
3. Inventory turnover ratio
4. Average days in inventory
5. Current ratio
6. Acid-test ratio
7. Debt to equity ratio
8. Times interest earned ratio
Calculations $6,600,000 ($680,000 + $880,000)/2 365 8.5 $4,700,000 ($1,250,000 + $1,100,000)/2 365 4.0 $2,238,000 $109,000 $218,000 + $680,000 $109,000 $509,000 $2,579,000 $270,000 + $50,000 + $80,000 $50,000
= 8.5 times
= 42.9 days
= 4.0 times
= 91.3 days
= 20.5 to 1
= 8.2 to 1
= 19.7%
= 8.0 times
12-181 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-03 Use ratios to analyze a company's risk. Topic: Risk Analysis
12-182 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
172.
Income statement and balance sheet data for The Sports Shack are provided below. The Sports Shack Income Statements For the years ended December 31 2019
2018
Sales revenue
$8,200,000
$6,600,000
Cost of goods sold
6,100,000
4,700,000
Gross profit
2,100,000
1,900,000
Operating expenses
1,450,000
1,400,000
Depreciation expense
90,000
100,000
Interest expense
25,000
50,000
Income tax expense
95,000
80,000
Total expenses
1,660,000
1,630,000
$440,000
$270,000
Expenses:
Net income
The Sports Shack Balance Sheets December 31 Assets
2019
2018
2017
Cash
$290,000
$218,000
$196,000
Accounts receivable
1,050,000
680,000
880,000
Inventory
919,000
1,250,000
1,100,000
Supplies
80,000
90,000
65,000
Equipment
1,100,000
1,200,000
900,000
Accumulated
(440,000)
(350,000)
(250,000)
$2,999,000
$3,088,000
$2,891,000
Current assets:
Long-term assets:
depreciation Total assets
Liabilities and Stockholders’ Equity Current liabilities: Accounts payable
$50,000
$65,000
$55,000
Interest payable
2,000
4,000
6,000
12-183 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Income tax payable
38,000
40,000
30,000
200,000
400,000
300,000
900,000
900,000
900,000
1,809,000
1,679,000
1,600,000
$2,999,000
$3,088,000
$2,891,000
Long-term liabilities: Notes payable Stockholders’ equity: Common stock Retained earnings Total liabilities and equity
Required: 1. Calculate the following risk ratios for 2018 and 2019. Receivables turnover ratio Current ratio Inventory turnover ratio
Debt to equity ratio
2. Calculate the following profitability ratios for 2018 and 2019. Gross profit ratio
Profit margin
Return on assets
Asset turnover
3. Based on the ratios calculated, determine whether overall risk and profitability improved from 2018 to 2019.
Requirement 1
Risk Ratios
Calculations
Receivables turnover ratio 2018
2019
$6,600,000 ($680,000 + $880,000)/2 $8,200,000 ($1,050,000 + $680,000)/2
= 8.5 times
= 9.5 times
Inventory turnover ratio 2018
$4,700,000 ($1,250,000 + $1,100,000)/2
= 4.0 times
12-184 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
2019
$6,100,000 ($919,000 + $1,250,000)/2
= 5.6 times
Current ratio 2018
2019
$2,238,000 $109,000 $2,339,000 $90,000
= 20.5 to 1
= 26.0 to 1
Debt to equity ratio 2018
2019
$509,000 $2,579,000 $290,000 $2,709,000
= 19.7%
= 10.7%
Requirement 2 Profitability Ratios
Calculations
Gross profit ratio 2018
2019
$1,900,000 $6,600,000 $2,100,000 $8,200,000
= 28.8%
= 25.6%
Return on assets 2018
2019
$270,000 ($3,088,000 + $2,891,000)/2 $440,000 ($2,999,000 + $3,088,000)/2
= 9.0%
= 14.5%
Profit margin 2018
2019
$270,000 $6,600,000 $440,000 $8,200,000
= 4.1%
= 5.4%
Asset turnover 2018
2019
$6,600,000 ($3,088,000 + $2,891,000)/2 $8,200,000 ($2,999,000 + $3,088,000)/2
= 2.2 times
= 2.7 times
12-185 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Requirement 3 Based on the ratios calculated, the company's overall risk improved in 2019. The receivables turnover ratio, the inventory turnover ratio, and the current ratio all increased, while the debt to equity ratio decreased from 2018 to 2019. These are all positive signs of less risk for the company. Based on the ratios calculated, the company's overall profitability improved in 2019. The return on assets, profit margin, and asset turnover ratios all increased, while the gross profit ratio decreased from 28.8% to 25.6%. Gross profit measures the amount by which the sales price of inventory exceeds its cost per dollar of sales. One factor that may cause a decrease in gross profit is increased competition in the industry resulting in a lower markup. AACSB: Analytical Thinking AICPA: FN Decision Making AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-03 Use ratios to analyze a company's risk. Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis Topic: Risk Analysis
12-186 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
173.Data for The Sports Shack is provided in 172. Earnings per share for the year ended December 31, 2018, is $0.30. The closing stock price on December 31, 2018, is $5.40. Required: Calculate the following profitability ratios for 2018. 1. Gross profit ratio
4. Asset turnover
2. Return on assets
5. Return on equity
3. Profit margin
6. Price-earnings ratio
Profitability Ratios 1. Gross profit ratio
2. Return on assets
3. Profit margin
4. Asset turnover
5. Return on equity
6. Price-earnings ratio
Calculations $1,900,000 $6,600,000 $270,000 ($3,088,000 + $2,891,000)/2 $270,000 $6,600,000 $6,600,000 ($3,088,000 + $2,891,000)/2 $270,000 ($2,579,000 + $2,500,000)/2 $5.40 $0.30
= 28.8%
= 9.0%
= 4.1%
= 2.2 times
= 10.6%
= 18.0 times
AACSB: Analytical Thinking AICPA: FN Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
12-187 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
174.
Explain the difference between vertical and horizontal analysis.
For vertical analysis, we express each item as a percentage of the same base amount, such as a percentage of sales in the income statement or as a percentage of total assets in the balance sheet. We use horizontal analysis to analyze trends in financial statement data, such as the dollar amount of change and the percentage change, for one company over time.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-01 Perform vertical analysis. Learning Objective: 12-02 Perform horizontal analysis. Topic: Horizontal Analysis Topic: Vertical Analysis
175.
Explain why ratios that compare an income statement account with a balance sheet account should express the balance sheet account as an average of the beginning and ending balances.
We measure income statement accounts over a period of time (like a video), while we measure balance sheet accounts at a point in time (like a photograph). Therefore, ratios that compare an income statement account with a balance sheet account should express the balance sheet account as an average of the beginning and ending balances.
AACSB: Reflective Thinking AICPA: BB Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-03 Use ratios to analyze a company's risk. Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis Topic: Risk Analysis
12-188 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
176.
Sideline Sports Products reports a return on assets of 6%, and a return on equity of 10%. Why do these two ratios differ?
The return on assets and the return on equity differ due to financial leverage - the amount of debt a company carries. If a company earns a return on investment above the interest cost of borrowing, then the additional debt will benefit investors in the company. The result, as is the case for Sideline Sports Products, is that the return on equity will exceed the return on assets.
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-04 Use ratios to analyze a company's profitability. Topic: Profitability Analysis
177.
Define earnings persistence. How does earnings persistence relate to the reporting of discontinued operations?
Earnings persistence is the ability of current earnings to continue or persist into future years. Certain items are part of net income in the current year but are not expected to persist. We refer to these as one-time income items. A primary example is discontinued operations.
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Apply Difficulty: 3 Hard Learning Objective: 12-05 Distinguish persistent earnings from one-time items. Topic: Earnings Persistence and Earnings Quality
12-189 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
178.
Explain the difference between conservative and aggressive accounting practices. Provide an example of a conservative accounting practice and explain why this practice is conservative. Provide an example of an aggressive accounting practice and explain why this practice is aggressive.
Conservative accounting practices are those that result in reporting lower income, lower assets, and higher liabilities. In contrast, aggressive accounting practices result in reporting higher income, higher assets, and lower liabilities. A larger estimation of the allowance for uncollectible accounts, the write-down of overvalued inventory, the use of a shorter useful life for depreciation, and the recording of a contingent litigation loss are all examples of conservative accounting. They are conservative because all of these practices report lower net income. A lower estimation of the allowance for uncollectible accounts, waiting to report an inventory write-down, choosing a longer useful life for depreciation, and waiting to record a litigation loss all are examples of more aggressive accounting. They are aggressive because all of these practices report higher net income.
AACSB: Reflective Thinking AICPA: FN Reporting Blooms: Apply Difficulty: 3 Hard Learning Objective: 12-06 Distinguish between conservative and aggressive accounting practices. Topic: Quality of Earnings
12-190 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.