TEST BANK FOR Financial Accounting The Cornerstone of Business Decision-Making 6e Jay Rich, Jeff Jon by StudyGuide

Ch 01 Accounting and the Financial Statements

Indicate whether the statement is true or false. 1. Internal users of accounting information include present creditors and management. a. True b. False 2. Creditors use accounting information to evaluate whether to loan money to a company. a. True b. False 3. The purpose of financial reporting is to provide economic information to investors, creditors, and other financial statement users. a. True b. False 4. Investing is the business activity that measures a company's ability to generate cash from its revenue and expense activities. a. True b. False 5. The three main business activities are financing, operating, and investing. a. True b. False 6. The owners of a sole proprietorship, a partnership, and corporations have limited liability. a. True b. False 7. There are more corporations than sole proprietorships and partnerships in the United States. a. True b. False 8. The four basic financial statements are the income statement, retained earnings statement, balance sheet, and statement of cash flows. a. True b. False 9. Stockholders' equity is composed of two main sources: liabilities and contributed capital. a. True b. False 10. The first step in preparing the classified balance sheet is to list the assets in order of liquidity. a. True b. False 11. Stockholders' equity is composed of contributed capital and retained earnings. Powered by Cognero

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Ch 01 Accounting and the Financial Statements a. True b. False 12. The classifications in the balance sheet are to help users determine how a company obtained its resources. a. True b. False 13. Contributed capital is the residual interest that remains after deducting liabilities from stockholders' equity. a. True b. False 14. Current assets include cash, inventory, equipment, supplies, and accounts receivable. a. True b. False 15. In the stockholders' equity section of a classified balance sheet, a distinction is made between the amounts invested by owners and the amounts financed by creditors. a. True b. False 16. One primary purpose of the classified balance sheet is to help users evaluate the working capital of a company. a. True b. False 17. Three common categories of long-term assets are property, plant, and equipment; long-term investments; and intangible and other noncurrent assets. a. True b. False 18. The ending cash balance is shown on the balance sheet and the retained earnings statement. a. True b. False 19. The current ratio is useful in determining a company's ability to pay obligations when they become due. a. True b. False 20. Current liabilities are typically listed in the order in which they will be paid. a. True b. False 21. The only financial statement that reports the retained earnings balance at the end of the period is the retained earnings statement. a. True b. False Powered by Cognero

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Ch 01 Accounting and the Financial Statements 22. The income statement provides information at one specific point in time, while the other basic financial statements provide information on activities that occur over a period of time. a. True b. False 23. The income statement summarizes the assets, liabilities, and stockholders' equity for a period of time. a. True b. False 24. When an entity's stock issuances exceed its expenses for a period of time, the entity will report net income. a. True b. False 25. Income from operations is computed after taking into account interest revenue and interest expense because these items are considered to be operating in nature. a. True b. False 26. The amount of earnings distributed to stockholders can be found on the income statement as an expense. a. True b. False 27. The four steps in preparing the income statement are: (1) prepare a heading, (2) list the revenues of the company, (3) list the expenses of the company, and (4) list the dividends of the company. a. True b. False 28. Net loss reduces a company's retained earnings balance. a. True b. False 29. Dividend payments appear on the retained earnings statement. a. True b. False 30. The statement of cash flows, like the income statement, reports only the operating activities of a company. a. True b. False 31. The statement of cash flows shows cash inflows and cash outflows for a period of time. a. True b. False 32. A company with healthy cash flows from operating activities is in a good position to repay its debts. a. True b. False Powered by Cognero

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Ch 01 Accounting and the Financial Statements 33. Because the four financial statements are interrelated (i.e., there is a natural progression from one financial statement to another), the balance sheet should be prepared first. a. True b. False 34. Violations of ethical standards often lead to long-lasting negative consequences for companies. a. True b. False

Indicate the answer choice that best completes the statement or answers the question. 35. Which of the following types of information is used by external users and outside decision-makers? a. financial accounting b. managerial accounting c. cost accounting d. internal accounting 36. Which of the following types of data analytics recommends a possible course of action? a. descriptive b. diagnostic c. prescriptive d. predictive 37. Which of the following is not one of the three forms of business organizations? a. sole proprietorship b. individual company c. partnership d. corporation 38. Owners of a corporation who have claims to the corporation’s economic resources are called a. managers. b. members of the board of directors. c. creditors. d. shareholders. 39. Which type of business activity relates to obtaining funds from either issuing stock or borrowing money? a. lending b. investing c. financing d. operating 40. Which of the following is not one of the four basic financial statements? a. balance sheet b. bank reconciliation statement Powered by Cognero

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Ch 01 Accounting and the Financial Statements c. income statement d. statement of cash flows 41. The fundamental accounting equation is a. Assets + Stockholders’ Equity = Liabilities. b. Assets + Liabilities = Stockholders’ Equity. c. Assets = Liabilities – Stockholders’ Equity. d. Assets = Liabilities + Stockholders’ Equity. 42. An obligation that requires payment beyond 1 year would be categorized on the classified balance sheet as a a. long-term liability. b. long-term asset. c. current liability. d. current asset. 43. What is the purpose of the balance sheet? a. to report the operating activities of the company b. to report the cash activities of the company c. to report the financial position of the company d. to report the dividends paid to shareholders 44. Cash and other assets that are reasonably expected to be converted into cash within 1 year or one operating cycle, whichever is longer, are known as a. contributed capital. b. intangible assets. c. long-term assets. d. current assets. 45. Property, plant, and equipment is classified on the balance sheet as a. long-term liabilities. b. current assets. c. noncurrent assets. d. current liabilities. 46. The liquidity measure that is calculated by subtracting current liabilities from current assets is known as a. working capital. b. net income. c. retained earnings. d. net loss. 47. The ability of a company to pay its debt as it becomes due is referred to as a. timeliness. b. liquidity. c. solvency. Powered by Cognero

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Ch 01 Accounting and the Financial Statements d. creditworthiness. 48. The current ratio is found by a. multiplying the current assets by the current liabilities. b. subtracting the current liabilities from the current assets. c. dividing the current assets by the current liabilities. d. dividing the current liabilities by the current assets. 49. Which financial statement lists revenues, starting with the sales revenue? a. balance sheet b. statement of cash flows c. retained earnings statement d. income statement 50. Which income statement format adds total expenses together and then deducts them from total revenues? a. classified income statement b. single-step income statement c. multiple-step income statement d. gross margin income statement 51. Which two financial statements show net income as a line item? a. income statement and retained earnings statement b. income statement and balance sheet c. balance sheet and retained earnings statement d. balance sheet and statement of cash flows 52. Which financial statement shows both net income and dividends as line items? a. balance sheet b. income statement c. retained earnings statement d. statement of cash flows 53. What are the three categories of cash flow activities shown on the statement of cash flows? a. operating, investing, selling b. investing, financing, borrowing c. operating, investing, financing d. operating, purchasing, financing 54. Cash flows related to the acquisition or sale of long-term assets are reported as part of cash flows from a. investing activities. b. financing activities. c. borrowing activities. d. operating activities.

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Ch 01 Accounting and the Financial Statements 55. The relationships created between financial statements are known as a. cohesion. b. relevance. c. connectivity. d. articulation. 56. Which one of the following is an internal user of financial information? a. company management b. governmental agencies c. creditors d. investors 57. Which of the following users of accounting information would be interested in knowing a company's prospects of making future dividend payments? a. investors b. suppliers c. labor union d. governmental agencies 58. Which one of the following is not an external user of the financial statements of a company? a. Internal Revenue Service b. creditors c. stockholders d. the company's president 59. Which of the following groups is considered an internal user of financial statements? a. a supplier considering selling to the company on credit b. the labor union representing employees of a company that is involved in labor negotiations c. the financial analysts of a brokerage firm who are preparing recommendations for the firm's brokers on companies in a certain industry d. managers of the company who supervise production workers 60. External users of financial information a. need detailed accounting records of the business to make informed decisions. b. are primarily responsible for the preparation of financial statements. c. rely on the financial statements to help make informed decisions. d. rely on the employees to tell them whether the company is a good investment. 61. What is the primary objective of financial reporting? a. to help the creditors in evaluating their decision to make loans to a company b. to help management make appropriate decisions related to company operations c. to help the investors assess the future prospects of a company d. all of these 62. What is the name of the branch of accounting concerned with providing external decision-makers with information to Powered by Cognero

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Ch 01 Accounting and the Financial Statements assess the amounts, timing, and uncertainties of the company's future cash flows? a. financial accounting b. auditing c. managerial accounting d. bookkeeping 63. What is the name for a person who lends funds to a business entity and expects repayment of the funds with interest? a. creditor b. owner c. proprietor d. stockholder 64. Which of the following invests funds into a business and is considered an owner? a. stockholders b. creditors c. bankers d. lenders 65. Which of the following is not a form of a business organization? a. sole proprietorship b. partnership c. governmental agency d. corporation 66. In which form of organization is the owners' legal responsibility for the debt of the business limited to the amount they invested in the business? a. cooperative b. corporation c. partnership d. proprietorship 67. Businesses engage in which of the following three main activities? a. financing, investing, and operating b. financing, investing, and credit c. financing, credit, and operating d. financing, management, and operating 68. Which of the following is not one of the three business activities? a. financing b. operating c. investing d. measuring 69. Which organization has been entrusted with the development of generally accepted accounting principles (GAAP)? a. Institute of Management Accountants (IMA) Powered by Cognero

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Ch 01 Accounting and the Financial Statements b. Accounting Principles Board (APB) c. International Accounting Standards Board (IASB) d. Financial Accounting Standards Board (FASB) 70. On January 1, a company reported assets of $1,000,000 and liabilities of $600,000. During the year, assets decreased by $100,000 and stockholders' equity decreased by $200,000. What is the amount of liabilities on December 31? a. $200,000 b. $500,000 c. $600,000 d. $700,000 71. Economic resources are known as a. assets. b. liabilities and stockholders' equity. c. owners' equity and stockholders' equity. d. retained earnings and revenues. 72. Which of the following correctly represents one of the basic financial statement models? a. Assets − Liabilities = Net Income b. Assets + Liabilities = Total Assets c. Revenues + Expenses = Net Income d. Beginning Retained Earnings + Net Income − Dividends = Ending Retained Earnings 73. Which of the following is the correct fundamental accounting equation? a. Assets + Liabilities = Stockholders' Equity b. Assets + Retained Earnings = Stockholders' Equity c. Assets + Stockholders' Equity = Liabilities d. Assets = Liabilities + Stockholders' Equity 74. You are a potential creditor and are concerned that a particular company you are ready to give a loan to might have too much debt. Which financial statement would provide you the information needed in order to evaluate your concern? a. balance sheet b. income statement c. retained earnings statement d. statement of cash flows 75. How is unearned revenue classified on a balance sheet? a. stockholders' equity b. liability c. asset d. revenue 76. Which financial statement would help you determine how much resources (assets) the company owned? a. balance sheet b. retained earnings statement Powered by Cognero

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Ch 01 Accounting and the Financial Statements c. income statement d. statement of cash flows 77. Which of the following financial statements show the end-of-year cash balance for a business entity? a. income statement and retained earnings statement b. balance sheet and statement of cash flows c. retained earnings statement and statement of cash flows d. balance sheet and retained earnings statement 78. Which of the following statements about balance sheets is correct? a. The amount of retained earnings is reported on the balance sheet as a liability. b. Retained earnings is added to total assets and reported on the balance sheet. c. Retained earnings is reported in the stockholders' equity section of the balance sheet. d. There is no link between the balance sheet and other statements, as each contains different accounts and provides different information. 79. Bennett Motors is facing the following events. Which decision will least likely require Bennett's financial information? a. A local bank is reviewing the company’s loan application. b. The company is attempting to sell its stock to the public. c. The labor union representing the company's employees is negotiating a pay raise as part of a new labor agreement. d. The company's management is deciding whether to get detailing done on its vehicles today or tomorrow. 80. Which of the following best describes the term "retained earnings" of a company? a. the amount of total profits earned by a company since it began operations b. the amount of claim that the owners have on the assets of the company c. the future economic resources of a company d. the accumulated net income of a company that has not been distributed to owners in the form of dividends 81. Which of the following best describes the term "current assets"? a. the amount of total profits earned by a business since it began operations plus all the existing resources b. the amount of claim that the owners have in the business in the current year c. assets expected to be converted into cash within 1 year or one operating cycle, whichever is longer d. the cumulative profits earned by a business during its life less any dividends distributed in the current period 82. Which of the following items is a classification on the classified balance sheet? a. operating accounts b. stockholders' equity c. revenues and expenses d. net income and dividends 83. Which of the following is a noncurrent asset? a. property, plant, and equipment b. accounts receivable Powered by Cognero

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Ch 01 Accounting and the Financial Statements c. inventories d. unearned revenues 84. Which of the following items appears on a balance sheet? a. service revenue b. unearned revenue c. dividends d. cash flow from operations 85. Which of the following financial statements reports an entity's financial position at a specific date? a. balance sheet b. retained earnings statement c. income statement d. both the income statement and the balance sheet 86. Bargain Spot Fabrics’ end-of-year balance sheet consisted of the following amounts: Cash Property, plant, and equipment Common stock Retained earnings

$ 75,000 Accounts receivable 350,000 Long-term liabilities 500,000 Accounts payable ? Inventory

$250,000 200,000 100,000 175,000

What amount should the company report on its balance sheet for total assets? a. $550,000 b. $775,000 c. $850,000 d. $950,000 87. Bargain Spot Fabrics’ end-of-year balance sheet consisted of the following amounts: Cash Property, plant, and equipment Common stock Retained earnings

$ 75,000 Accounts receivable 350,000 Long-term liabilities 500,000 Accounts payable ? Inventory

$250,000 200,000 100,000 175,000

What is the retained earnings balance at the end of the current year? a. $50,000 b. $550,000 c. $800,000 d. $850,000 88. A company had the following balance sheet amounts at the beginning of the year: Total assets Total stockholders' equity

$650,000 250,000

During the year, total assets increased by $350,000, total liabilities increased by $100,000, and dividends were paid in the amount of $300,000. No other transactions occurred except revenues and expenses. How much is net income for the year? a. $750,000 Powered by Cognero

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Ch 01 Accounting and the Financial Statements b. $650,000 c. $500,000 d. $550,000 89. If a company has assets of $5,000,000, liabilities of $3,000,000, and retained earnings of $1,200,000, how much is total stockholders' equity? a. $800,000 b. $2,000,000 c. $3,800,000 d. $1,800,000 90. Benchmark Surveyors had the following balances: Cash Inventory Land

$234,000Accounts payable 121,000Notes payable (long-term) 453,000Accounts receivable

$97,000 211,000 46,000

Calculate current assets. a. $498,000 b. $401,000 c. $854,000 d. $709,000 91. Benchmark Surveyors had the following balances: Cash Inventory Land

$234,000Accounts payable 121,000Notes payable (long-term) 453,000Accounts receivable

$97,000 211,000 46,000

Calculate current liabilities. a. $97,000 b. $211,000 c. $354,000 d. $143,000 92. Which one of the following accounts is reported as part of stockholders' equity on a classified balance sheet? a. Unearned Revenue b. Accounts Payable c. Land d. Common Stock 93. Barnes Restaurant reports the following amounts: Cash Land Equipment

$125,000Inventory 275,000Unearned revenue 350,000Common stock

$215,000 117,000 300,000

Calculate current assets. Powered by Cognero

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Ch 01 Accounting and the Financial Statements a. $457,000 b. $615,000 c. $125,000 d. $340,000 94. Which of the following accounts are normally reported as current liabilities on a classified balance sheet? a. Accounts Payable and Prepaid Insurance b. Interest Payable and Interest Receivable c. Income Taxes Payable and Salaries Payable d. Common Stock and Accounts Payable 95. Which of the following is not a major category of long-term assets? a. intangible and other noncurrent assets b. property, plant, and equipment c. inventory d. long-term investments 96. Which of the following would not be considered an intangible asset? a. franchises b. copyrights c. investments d. trademarks 97. If assets are expected to be realized in cash, sold, or consumed within the normal operating cycle of a business or within 1 year (if the operating cycle is shorter than 1 year), how are they reported on a classified balance sheet? a. property, plant, and equipment b. current assets c. intangible assets d. current liabilities 98. Which set of items are current assets? a. Accounts Receivable, Net Income, Inventory, and Dividends b. Cash, Accounts Receivable, Common Stock, and Sales c. Net Income, Cash, Office Supplies, and Inventory d. Cash, Accounts Receivable, Inventory, and Office Supplies 99. A nonclassified balance sheet typically does not have a distinction between which of the following items? a. assets and liabilities b. current and noncurrent items c. liabilities and stockholders' equity d. resources invested by the owners and amounts borrowed from creditors 100. For the most recent year, a company's current ratio was significantly lower than its industry average. What is the best possible explanation for this situation? a. The company's competitors were profitable. Powered by Cognero

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Ch 01 Accounting and the Financial Statements b. The company's liquidity has improved compared to previous years. c. The company has less equity than the rest of the industry. d. The company's liquidity is worse than the rest of the industry. 101. The following balances were taken from Bass Tours' records: Inventory Land Cash Prepaid rent Retained earnings

$380,000Accounts receivable 290,000Accounts payable 129,000Unearned revenue 33,000Common stock 220,000Long-term notes payable

$190,000 180,000 110,000 312,000 200,000

Calculate the total current assets. a. $842,000 b. $1,022,000 c. $732,000 d. $842,000 102. The following balances were taken from Bass Tours' records: Inventory Land Cash Prepaid Rent Retained Earnings

$380,000Accounts receivable 290,000Accounts payable 129,000Unearned revenue 33,000Common stock 220,000Long-term notes payable

$190,000 180,000 110,000 312,000 200,000

Calculate the current ratio. a. 3.00 to 1 b. 2.75 to 1 c. 2.52 to 1 d. 2.10 to 1 103. The following balances were taken from Bass Tours' records: Inventory Land Cash Prepaid rent Retained earnings

$380,000Accounts receivable 290,000Accounts payable 129,000Unearned revenue 33,000Common stock 220,000Long-term notes payable

$190,000 180,000 110,000 312,000 200,000

If the average current ratio for similar companies is 2.00 to 1, what does this tell you about Bass' financial position? a. The company is more liquid than its competitors. b. The company has more long-term assets than its competitors. c. The company is bankrupt. d. The company is more profitable than its competitors. 104. A company has current assets of $2,100,000 and current liabilities of $500,000. Calculate its working capital. a. $2,100,000 b. $2,600,000 Powered by Cognero

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Ch 01 Accounting and the Financial Statements c. $1,600,000 d. $500,000 105. Working capital is calculated by which of the following? a. current assets divided by current liabilities b. total assets minus total liabilities c. current assets minus current liabilities d. current assets plus current liabilities 106. A company has current assets of $100,000, total assets of $250,000, current liabilities of $20,000, and long-term liabilities of $50,000. How much of its existing cash can the company use to acquire equipment without allowing its current ratio to decline below 2.00 to 1? a. $40,000 b. $150,000 c. $180,000 d. $60,000 107. A company has experienced an increase in its dollar amount of working capital over the past several years. Which of the following measures should be used to further evaluate the company's short-run liquidity? a. asset ratio b. analysis of the company's long-term debt c. analysis of the return on stockholders' equity d. current ratio 108. Which financial statement reports information helpful in assessing working capital? a. balance sheet b. income statement c. retained earnings statement d. statement of cash flows 109. Barrett Oil Company reported the following balances as of December 31: Accounts Receivable Cash Land Building Inventories

$125,000 Unearned revenue 150,000 Notes payable (due in 6 months) 200,000 Accounts payable 400,000 Equipment 105,000 Notes payable (due in 5 years)

5,000 115,000 70,000 165,000 600,000

What is the company's current ratio? a. 0.48 to 1 b. 2.00 to 1 c. 2.55 to 1 d. 2.86 to 1 110. If the current ratio is 2.00 to 1 and current assets equal $200,000, how much is working capital? a. $0 Powered by Cognero

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Ch 01 Accounting and the Financial Statements b. $100,000 c. $200,000 d. $300,000 111. Working capital and current ratio are most useful in evaluating a company’s a. liquidity. b. solvency. c. profitability. d. revenues. 112. A question frequently asked by investors is "How much debt does this company have?" Which financial statement answers this question? a. single-step income statement b. statement of cash flows c. multiple-step income statement d. classified balance sheet 113. Resources that provide a benefit over a number of years and lack physical substance are classified as a. property, plant, and equipment. b. intangible assets. c. long-term investments. d. contributed capital. 114. Liquidity a. measures the ability of the firm to pay financial obligations as they become due. b. cannot be measured in terms of working capital. c. cannot be assessed by the current ratio. d. measures the amount of net income over the past year. 115. Which of the following would appear on an income statement? a. unearned revenue b. cost of sales c. retained earnings d. dividends 116. Beaver Tree Service reported the following amounts: Beginning retained earnings Ending retained earnings Dividends paid Revenue

$550,000 700,000 100,000 525,000

What is the company's net income? a. $150,000 b. $250,000 Powered by Cognero

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Ch 01 Accounting and the Financial Statements c. $300,000 d. $350,000 117. Beaver Tree Service reported the following amounts: Beginning retained earnings Ending retained earnings Dividends paid Revenue

$550,000 700,000 100,000 525,000

The company's expenses are a. $100,000. b. $150,000. c. $450,000. d. $275,000. 118. If a company has revenues of $10,500,000, declares and pays $550,000 in dividends, and has net income of $1,600,000, how much were expenses for the year? a. $9,950,000 b. $1,050,000 c. $2,150,000 d. $8,900,000 119. Bay Camera reported the following items on its financial statements for the current year ended December 31: Sales Selling, general, and administrative expenses Dividends

$780,000 Cost of sales

$700,000

20,000 Other expense

15,000

5,000 Income tax expense

12,500

What amount will be reported as retained earnings on the balance sheet on December 31 of the current year, assuming this is the first year of operations? a. $22,500 b. $27,500 c. $42,500 d. cannot be determined from this limited information 120. Bay Camera reported the following items on its financial statements for the year ended December 31: Sales Selling, general, and administrative expenses Dividends

$780,000Cost of sales

$700,000

20,000Other expense

15,000

5,000Income tax expense

12,500

What is the company’s net income for the current year? a. $22,500 b. $32,500 Powered by Cognero

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Ch 01 Accounting and the Financial Statements c. $42,500 d. $80,000 121. Suppose a company reports the following information at December 31: Sales Cash Unearned revenue Dividends Cost of sales

$15,000,000 $ 3,000,000 $ 400,000 $ 1,000,000 $ 8,500,000

What is the company's gross profit? a. $6,100,000 b. $5,500,000 c. $6,500,000 d. $12,000,000 122. Which of the following best describes the term "expenses"? a. the cost of assets used in the investing activities of a business b. the amount of interest or claim that the owners have in a business c. the future economic resources of a business entity d. the cost of resources used to earn revenues of a business 123. Which financial statement would you analyze to assess a firm’s operating performance for the past year? a. balance sheet b. retained earnings statement c. income statement d. statement of cash flows 124. Which statement summarizes the results of the company's operations? a. statement of cash flows b. retained earnings statement c. balance sheet d. income statement 125. Calculate total sales for a company that reported a net loss of $1,500,000 and total expenses of $2,900,000. a. $4,400,000 b. $1,400,000 c. $2,400,000 d. $1,600,000 126. The income statement shows a. how much profit the company has earned since it began operations. b. net income equal to the amount of cash on the balance sheet. c. a summary of the results of operations for a period of time. d. the liquidity of the company on an annual basis. Powered by Cognero

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Ch 01 Accounting and the Financial Statements 127. Which of the following items would not be reported on a multiple-step income statement after income from operations? a. income taxes b. interest income c. selling expenses d. interest expense 128. The cost of resources used to earn revenues during a period is called a. net income. b. expenses. c. revenues. d. dividends. 129. On a multiple-step income statement, income from operations results from subtracting total operating expenses from which of the following amounts? a. gross margin b. cost of goods sold c. income before taxes d. net sales 130. Revenues are best described as a. decreases in net assets resulting from the sale of goods or services. b. increases in net assets resulting from the sale of products or services. c. assets used or consumed in the sale of products or services. d. an increase in the financing activities. 131. Net profit margin is calculated as a. net income divided by sales revenue. b. sales revenue divided by net income. c. net income divided by income from operations. d. income from operations divided by net income. 132. Which of the following is the correct date format for a financial statement heading? a. Balance Sheet, For the year ended June 30 b. Income Statement, December 31 c. Income Statement, For the year ended December 31 d. Retained Earnings Statement, December 31 133. The following list contains several items that appear on a multiple-step income statement: 1. 2. 3. 4. 5.

Other income and expense Income before income taxes Net income Operating expenses Gross margin

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Ch 01 Accounting and the Financial Statements 6. 7.

Net sales Income from operations

Select the choice that lists the items in the order they would appear on a multiple-step income statement. a. 6, 5, 4, 7, 1, 2, and 3 b. 7, 6, 1, 4, 2, 3, and 5 c. 6, 5, 4, 1, 7, 2, and 3 d. 6, 7, 4, 1, 2, 3, and 5 134. Bellweather Times reports the following amounts: Other revenue Dividends paid Selling expenses

$180,000 General and administrative expenses 220,000 Gross margin 280,000 Income tax expense

$320,000 700,000 60,000

What is the company's income from operations? a. $280,000 b. $220,000 c. $100,000 d. $40,000 135. Bellweather Times reports the following amounts: Other revenue Dividends paid Selling expenses

$180,000 General and administrative expenses $220,000 Gross margin 280,000 Income tax expense

$320,000 700,000 60,000

What is the company's net income? a. $280,000 b. $220,000 c. $100,000 d. $40,000 136. Bellweather Times reports the following amounts: Other revenue Dividends paid Selling expenses

$180,000 General and administrative expenses 220,000 Gross margin 280,000 Income tax expense

$320,000 700,000 60,000

By what amount will net income on a single-step income statement differ from net income on a multiple-step income statement if the company prepares both formats? a. $0 b. $2,000 c. $6,000 d. $8,000 137. Been There Used Furniture began operations on January 1 with an initial investment of $100,000 from each of its five stockholders. During the year, the company had net income of $200,000 and paid dividends of $50,000. If the Powered by Cognero

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Ch 01 Accounting and the Financial Statements company's revenues were $500,000 for the year, how much were total expenses? a. $300,000 b. $250,000 c. $350,000 d. $800,000 138. A company reported the following income statement amounts: Current Year Service revenues $950,000 Operating expenses $700,000 Income taxes expense $100,000

Prior Year $800,000 $550,000 $100,000

Which of the following best describes the company's performance? a. The company's operating profit as a percentage of operating revenues decreased. b. The company has become more profitable. c. The increase in operating revenues increased the company's net income. d. The operating expenses as a percentage of operating revenues remained the same. 139. Which of the following equations represents the retained earnings statement activity? a. Beginning Retained Earnings + Net Income + Dividends = Ending Retained Earnings b. Beginning Retained Earnings + Cash Inflows − Cash Outflows = Ending Retained Earnings c. Beginning Retained Earnings + Dividends − Net Income = Ending Retained Earnings d. Beginning Retained Earnings + Net Income − Dividends = Ending Retained Earnings 140. Been There Used Furniture began operations on January 1 with an initial investment of $100,000 from each of its five stockholders. During the year, the company had net income of $200,000 and paid dividends of $50,000. Calculate the retained earnings balance at December 31. a. $150,000 b. $200,000 c. $500,000 d. $650,000 141. Barr Attorneys reported the following information for the year ended December 31, current year. Revenue Expenses Dividends Retained earnings at December 31, current year

$14,000,000 11,500,000 1,000,000 1,750,000

What was the retained earnings balance at December 31, prior year? a. $250,000 b. $2,500,000 c. $1,500,000 d. $350,000 142. On January 1, a company's balance in retained earnings was $275,000. During the year, the company earned net Powered by Cognero

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Ch 01 Accounting and the Financial Statements income of $23,500 and paid $11,200 in dividends. Calculate the retained earnings balance at December 31. a. $263,800 b. $298,500 c. $262,700 d. $287,300 143. Which of the following terms best describes the distribution of a company’s net income to its owners? a. retained earnings b. dividends c. liquidation of assets d. monetary unit 144. B&B Painting reported the following information for the year ended December 31, current year: Revenues Expenses Retained earnings at December 31, prior year Retained earnings at December 31, current year

$2,500,000 2,000,000 100,000 450,000

How much was paid out in dividends in the current year? a. $500,000 b. $150,000 c. $350,000 d. $250,000 145. On January 1, a company's balance in retained earnings was $10,000,000. At December 31, the balance in retained earnings was $9,400,000. If the company earned net income of $440,000 during the year, how much were dividends? a. $1,040,000 b. $1,000,000 c. $ 600,000 d. $440,000 146. Beard Marine reported the following information for the year ended December 31: Net income Dividends Retained earnings at December 31, current year

$100,000 6,000 120,000

What was the economic effect of the dividend payment? a. The dividend payment reduced net income for the current year. b. The dividend payment would have been added to net income if the company's accounting equation were in balance. c. The dividend payment reduced total retained earnings. d. The dividend payment reduced income from operations. 147. Beard Marine reported the following information for the year ended December 31: Net income $100,000 Powered by Cognero

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Ch 01 Accounting and the Financial Statements Dividends Retained earnings at December 31, current year

6,000 120,000

What was the balance of retained earnings at January 1, current year? a. $21,000 b. $26,000 c. $106,000 d. $214,000 148. Been There Used Furniture began operations on January 1 with an initial investment of $100,000 from each of its five stockholders. During the year, the company had net income of $200,000 and paid dividends of $50,000. The dividends for the year a. increase the amount of common stock reported by the company. b. are part of the company's operating expense. c. are reported on the retained earnings statement. d. are reported on the income statement. 149. Which of the following is not one of the activities on the statement of cash flows? a. operating activities b. investing activities c. retained activities d. financing activities 150. Which of the following best describes a company's operating activities? a. Operating activities are cash flows directly related to earning income. b. Operating activities are necessary to provide the money to start a business. c. Operating activities are needed to provide the valuable assets required to run a business. d. Operating activities represent the right to receive a benefit in the future. 151. Which category of the statement of cash flows reports the cash flows related to obtaining capital for a company? a. operating activities b. investing activities c. financing activities d. noncurrent activities 152. Net income appears on a. the balance sheet only. b. the income statement only. c. both the balance sheet and the income statement. d. both the income statement and the retained earnings statement.

153. The beginning balance of retained earnings was $800,000, and the ending balance was $500,000. The company paid dividends of $50,000. Powered by Cognero

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Ch 01 Accounting and the Financial Statements A)

Determine the amount of net income (loss) for the year.

What information would one find on the income statement in addition to net income?

154. The accountant for Backus Tractor Sales prepared the following list of account balances from the company's records for the year ended December 31: Sales revenue Accounts receivable Equipment Accounts payable Salaries and wages expense Inventories Income taxes payable Notes payable (due in 2 years)

$1,650,000Cash 140,000Selling expenses 420,000Common stock 120,000Interest income 400,000Cost of sales 220,000Prepaid expenses 50,000Income taxes expense 200,000Retained earnings

$300,000 440,000 170,000 30,000 510,000 20,000 180,000 ?

Determine the following amounts for Backus Tractor Sales: A)

The balance of retained earnings at the end of the year.

The total stockholders' equity at the end of the year.

Name two events that might cause stockholders' equity to increase.

155. Best Deal Auto Parts began the year with $400,000 in assets, $140,000 in liabilities, and $160,000 of retained earnings. Net income for the year was $100,000, and dividends of $80,000 were paid. A)

Prepare a retained earnings statement for the year ended December 31.

What is the nature or purpose of the retained earnings statement?

What was the amount of common stock at the beginning of the year?

What events would cause the two stockholders' equity items to increase?

How do you identify whether the company was profitable during the year by examining the retained earnings statement?

156. The following selected data are from a balance sheet: Current assets Property, plant, and equipment Other assets Current liabilities Total long-term debt Total stockholders' equity A)

$250,000 700,000 ? 200,000 500,000 275,000

Determine the amount of Other assets. (Hint: You must use the accounting equation concept to determine your answer.) How much of the company is financed by creditors? How much is financed by the owners?

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157. The following accounts were taken from a company's accounting records. Answer the questions that follow. Total liabilities, end of year Common stock, end of year Dividends for period

$920,000Total assets, end of year 160,000Retained earnings, beginning of year 200,000Net income for year

$1,430,000 150,000 400,000

What is the balance of retained earnings at the end of the year?

Show the company's accounting equation at the end of the year with the respective dollar amounts.

If stockholders' equity increases during the year, does that mean that the company is profitable? Explain your answer.

158. A certain company started business on January 1 with assets of $1,000,000 and stockholders' equity of $565,000. By the end of the year, assets increased by $100,000 and liabilities decreased by $150,000. Other than net income or loss, the only change in stockholders' equity was due to dividends paid worth $50,000. A)

What was the amount of total stockholders' equity at the end of the year?

What was the amount of net income or net loss for the year?

159. A certain company began the year with total assets of $10,000,000 and total liabilities of $6,200,000. No additional stock was issued during the year. Use the accounting equation to answer the following questions: A)

What was the amount of total assets at the end of the year if liabilities decreased by $600,000 and stockholders' equity increased by $900,000?

Was the company profitable? Explain your answer.

160. The following balance sheet information is provided:

January 1 December 31

Assets

Liabilities

Stockholder's Equity

$1,500,000 1,810,000

$540,000 _______

$________ 1,400,000

What is the amount of stockholders' equity at January 1?

What is the amount of liabilities at December 31?

Assume that the company paid dividends of $620,000 during the year. How much net income did it earn during the year?

Assume that the company paid no dividends during the year. Without looking at the income statement, how can you tell if the company is profitable or not?

161. The accountant for Backus Tractor Sales prepared the following list of account balances from the company's records Powered by Cognero

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Ch 01 Accounting and the Financial Statements for the year ended December 31: Sales revenue Accounts receivable Equipment Accounts payable Salaries and wages expense Inventories Income taxes payable Notes payable (due in 2 years)

$1,650,000Cash 140,000Selling expenses 420,000Common stock 120,000Interest income 400,000Cost of sales 220,000Prepaid expenses 50,000Income taxes expense 200,000Retained earnings

$300,000 440,000 170,000 30,000 510,000 20,000 180,000 ?

Determine the following amounts for Backus Tractor Sales. A)

Current assets at the end of the year Total assets at the end of the year

Total liabilities at the end of the year

What parties have a claim on the company's assets? Explain your answer in terms of the accounting equation.

162. The accountant for Backus Tractor Sales prepared the following list of account balances from the company's records for the year ended December 31: Sales revenue Accounts receivable Equipment Accounts payable Salaries and wages expense Inventories Income taxes payable Notes payable (due in 2 years)

$1,650,000Cash 140,000Selling expenses 420,000Common stock 120,000Interest income 400,000Cost of sales 220,000Prepaid expenses 50,000Income taxes expense 200,000Retained earnings

$300,000 440,000 170,000 30,000 510,000 20,000 180,000 ?

Prepare a balance sheet for Backus Tractor Sales in good form. 163. The accountant for Jen & Terry’s Ice Cream prepared the following list from the company's accounting records for the year ended December 31: Retained earnings Cash Accounts payable Sales revenue Cost of sales Land Notes payable Inventory

?Prepaid expenses $77,000Common stock 50,000Accounts receivable 955,000Interest income 700,000Salary expense 750,000Income tax expense 450,000Selling expense 200,000Salaries payable

$50,000 400,000 170,000 50,000 140,000 20,000 45,000 40,000

Determine the following amounts for Jen & Terry's Ice Cream. A)

Total assets at the end of the year.

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Ch 01 Accounting and the Financial Statements B)

Total liabilities at the end of the year.

Total equity at the end of the year.

164. The accountant for Jen & Terry’s Ice Cream prepared the following list from the company's accounting records for the year ended December 31: Retained earnings Cash Accounts payable Sales revenue Cost of sales Land Notes payable Inventory

?Prepaid expenses $77,000Common stock 50,000Accounts receivable 955,000Interest income 700,000Salary expense 750,000Income tax expense 450,000Selling expense 200,000Salaries payable

$50,000 400,000 170,000 50,000 140,000 20,000 45,000 40,000

Using good form, prepare a balance sheet for Jen & Terry's Ice Cream. 165. Dunn, Inc., started the year with total assets of $1,400,000 and total liabilities of $240,000. Net income for the year is $1,000,000, and dividends declared and paid during the year are $450,000. A)

What is the amount of Dunn's total stockholders' equity at the end of the year?

Could Dunn have paid additional dividends during the year? Explain your answer.

166. The following amounts were taken from the accounting records at December 31: Accounts payable Cash Inventories

$400,000Dividends paid 100,000Expenses 700,000Revenue

$100,000 600,000 750,000

Calculate total assets.

Calculate net income for the year.

Calculate total stockholders' equity at the end of the year.

Calculate total stockholders' equity at the beginning of the year assuming there were no stock transactions during the year.

167. The following information is taken from the balance sheet at December 31: Cash Inventory Equipment Common stock

$288,000Retained earnings 96,000Accounts payable 456,000Bonds payable 312,000

$168,000 84,000 276,000

How much did creditors provide to this company?

At which financial statement would an investor look to see if any stock was issued during

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Ch 01 Accounting and the Financial Statements the year? 168. Balloon-E-Tunes reported the following balances from the company’s records: Retained earnings Accumulated depreciation Income taxes payable Plant Cash Accounts receivable Common stock

$370,000Notes payable (due in 6 years) 130,000Salaries payable 240,000Supplies 480,000Accounts payable 110,000Inventory 350,000Land 600,000Prepaid insurance

$120,000 10,000 20,000 360,000 330,000 500,000 40,000

Prepare the current assets section of the balance sheet. You may omit the heading. How does the concept of liquidity apply? 169. Balloon-E-Tunes reported the following balances from the company’s records: Retained earnings Accumulated depreciation Income taxes payable Plant Cash Accounts receivable Common stock

$370,000Notes payable (due in 6 years) 130,000Salaries payable 240,000Supplies 480,000Accounts payable 110,000Inventory 350,000Land 600,000Prepaid insurance

$120,000 10,000 20,000 360,000 330,000 500,000 40,000

Prepare the current liabilities section of the balance sheet. You may omit the heading. If the amount of current liabilities were larger, what effect would this have on the current ratio? 170. Balloon-E-Tunes reported the following balances from the company’s records: Retained earnings Accumulated depreciation Income taxes payable Plant Cash Accounts receivable Common stock

$370,000Notes payable (due in 6 years) 130,000Salaries payable 240,000Supplies 480,000Accounts payable 110,000Inventory 350,000Land 600,000Prepaid insurance

$120,000 10,000 20,000 360,000 330,000 500,000 40,000

Prepare the long-term assets section of the balance sheet. You may omit the heading. Why are these amounts classified as long-term? 171. Balloon-E-Tunes reported the following balances from the company’s records: Retained earnings Accumulated depreciation Income taxes payable Plant Cash Accounts receivable Common stock Powered by Cognero

$370,000Notes payable (due in 6 years) 130,000Salaries payable 240,000Supplies 480,000Accounts payable 110,000Inventory 350,000Land 600,000Prepaid insurance

$120,000 10,000 20,000 360,000 330,000 500,000 40,000 Page 28

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Ch 01 Accounting and the Financial Statements Calculate the current ratio. What does this ratio tell you about the composition of the current assets? 172. Balloon-E-Tunes reported the following balances from the company’s records: Retained earnings Accumulated depreciation Income taxes payable Plant Cash Accounts receivable Common stock

$370,000Notes payable (due in 6 years) 130,000Salaries payable 240,000Supplies 480,000Accounts payable 110,000Inventory 350,000Land 600,000Prepaid insurance

$120,000 10,000 20,000 360,000 330,000 500,000 40,000

Calculate the amount of working capital. What can you learn from the current ratio that you cannot learn from the amount of working capital? 173. B-There Transportation calculated the following current ratios for the year ending December 31, current year and prior year. Current ratio

Current Year 4.00 to 1

Prior Year 2.00 to 1

What does this change in the current ratio indicate? Explain.

174. B-There Transportation calculated the following current ratios for the year ending December 31, current year and prior year. Current ratio

Current Year 4.00 to 1

Prior Year 2.00 to 1

Suppose the company had a decrease in its cash account from prior year to current year. Would the other current assets amounts have increased or decreased? Explain. 175. After reporting a profit of $20,000 for the year, a certain company reported the following items on its balance sheet: Cash Accounts receivable Inventory Prepaid insurance Land Building Accounts payable Salaries payable Common stock Retained earnings

$225,000 110,000 80,000 5,000 100,000 280,000 60,000 10,000 500,000 230,000

Calculate the current ratio and determine the amount of working capital.

Beyond the information provided in your answers to part A, what does the composition of the current assets tell you about the company's liquidity?

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Ch 01 Accounting and the Financial Statements C)

Which other financial statement would help to fully access liquidity?

176. The following amounts were taken from the accounting records at December 31: Service revenue Dividends paid Buildings Accounts payable Common stock Utilities expense Income tax payable

$600,000Salaries expense 50,000Rent expense 110,000Land 40,000Accounts receivable 60,000Retained earnings, January 1 19,000Notes payable 4,000Income tax expense

Calculate net income for the year.

Calculate retained earnings at the end of the year.

$200,000 86,000 100,000 28,000 400,000 30,000 110,000

177. The following selected data are from the accounting records for the year: Sales Income tax expense Cost of sales Operating expenses Dividends

$900,000 80,000 550,000 150,000 75,000

Calculate the net income or loss for the year.

Did the company's financial position improve or deteriorate during the year? Explain.

Is the company profitable? Explain.

178. The accountant for Backus Tractor Sales prepared the following list of account balances from the company's records for the year ended December 31: Sales revenue Accounts receivable Equipment Accounts payable Salaries and wages expense Inventories Income taxes payable Notes payable (due in 2 years)

$1,650,000Cash 140,000Selling expenses 420,000Common stock 120,000Interest income 400,000Cost of sales 220,000Prepaid expenses 50,000Income taxes expense 200,000Retained earnings

$300,000 440,000 170,000 30,000 510,000 20,000 180,000 ?

Determine the following amounts for Backus Tractor Sales: A)

The total revenues for the year.

The total expenses for the year.

What is the purpose of the income statement?

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Ch 01 Accounting and the Financial Statements D)

Is this company profitable? Explain your answer.

Is this the first year of operations for this company? Explain your answer.

179. The following amounts were taken from the income statement of Beauty World for the current year ending December 31: Net sales Selling, general, and administrative expense Research and development expense Other income (net)

Current Year $750,000 450,000 50,000 25,000

How much is net income for the current year ended December 31? Would the net income amount have been different if the company had used a single-step income statement rather than the multiple-step income statement? Explain. 180. The accountant for Backus Tractor Sales prepared the following list of account balances from the company's records for the year ended December 31: Sales revenue Accounts receivable Equipment Accounts payable Salaries and wages expense Inventories Income taxes payable Notes payable (due in 2 years)

$1,650,000Cash 140,000Selling expenses 420,000Common stock 120,000Interest income 400,000Cost of sales 220,000Prepaid expenses 50,000Income taxes expense 200,000Retained earnings

$300,000 440,000 170,000 30,000 510,000 20,000 180,000 ?

Prepare a single-step income statement for Backus Tractor Sales in good form. 181. Several amounts from the accounting records of Bike Links for the year ended December 31 follow. Prepare a multiple-step income statement in good form. Service revenue Selling expense Income taxes expense General and administrative expenses Interest revenue

$960,000 176,000 160,000 280,000 8,000

182. The accountant for Jen & Terry’s Ice Cream prepared the following list from the company's accounting records for the year ended December 31: Retained earnings Cash Accounts payable Sales revenue Cost of sales Land Notes payable Inventory Powered by Cognero

?Prepaid expenses $77,000Common stock 50,000Accounts receivable 955,000Interest income 700,000Salaries expense 750,000Income taxes expense 450,000Selling expense 200,000Salaries payable

$50,000 400,000 170,000 50,000 140,000 20,000 45,000 40,000 Page 31

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Ch 01 Accounting and the Financial Statements Determine the following amounts for Jen & Terry's Ice Cream: A)

Total revenues for the year.

Total expenses for the year.

Net income for the year.

183. Several amounts from the accounting records of Big Tom's Pawn Shops for the year ended December 31 follow. Prepare a single-step income statement in good form. Salaries expense Rent expense Sales Retained earnings Insurance expense Income taxes expense

$145,000 12,000 225,000 100,000 11,000 30,000

184. The accountant for Jen & Terry’s Ice Cream prepared the following list from the company's accounting records for the year ended December 31: Retained earnings Cash Accounts payable Sales revenue Cost of sales Land Notes payable Inventory

?Prepaid expenses $77,000Common stock 50,000Accounts receivable 955,000Interest income 700,000Salaries expense 750,000Income taxes expense 450,000Selling expense 200,000Salaries payable

$50,000 400,000 170,000 50,000 140,000 20,000 45,000 40,000

Using good form, prepare a single-step income statement for Jen & Terry's Ice Cream. 185. Blackbeard's Restaurant began operations on January 1, 2024, with a total investment of $100,000 by its stockholders. The restaurant had a net loss in its first year of business of $15,000. During 2025 and 2026, the business was profitable with net incomes of $25,000 and $50,000, respectively. The company paid $5,000 per year in dividends to its shareholders in 2025 and 2026. In good form, prepare a retained earnings statement for the year ended December 31, A) 2025. B)

How much is total retained earnings on December 31, 2026?

Explain the link between the retained earnings statement and the balance sheet.

186. Assume that you have received copies of the financial statements for Best Buy Company for 2 consecutive years. Answer the following questions: A)

If you were a banker, why would you need information from the company's financial statements?

If you were a potential investor in Best Buy Company stock, what information would you

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Ch 01 Accounting and the Financial Statements want from its financial statements?

If you were a labor negotiator for a union that represents a group of Best Buy Company employees, which financial statement would provide you with the most useful information?

187. List three different groups of users of accounting information. Indicate the type of decisions each group typically makes from accounting information. 188. Condensed data from Baker’s Pride Bakery's current year and prior year financial statements follow. Dollar amounts are expressed in thousands. Statement A Assets: Total current assets Property, plant, and equipment (net of accumulated depreciation) Investments Other assets Total assets Liabilities: Total current liabilities Long-term debt Total liabilities Stockholders' equity: Contributed capital Retained earnings Total stockholders' equity Total liabilities and stockholders' equity Statement B Net sales Cost of sales Gross margin Selling, general, and administrative expenses Other income (expense) Income (loss) before income taxes Income tax expense Net income (loss)

Current Year

Prior Year

$219,560

$198,088

18,320

13,996

3,370 12,220 $253,470

1,167 11,667 $224,918

$ 92,990 15,160 $108,150

$ 95,260 22,172 $117,432

$ 53,680 91,640 $145,320 $253,470

$ 35,475 72,011 $107,486 $224,918

Current Year $229,301 (135,453) $ 93,848 (64,832) 693 $ 29,709 (3,534) $ 26,175

Prior Year $203,171 (131,212) $ 71,959 (57,442) (130) $ 14,387 (2,320) $ 12,067

Based on the information provided, is the company considered a business or nonbusiness entity? How do you know by examining the financial statements? 189. Condensed data from Baker’s Pride Bakery's current year and prior year financial statements follow. Dollar amounts are expressed in thousands. Statement A Assets: Total current assets Property, plant, and equipment (net of accumulated depreciation) Powered by Cognero

Current Year

Prior Year

$219,560

$198,088

18,320

13,996 Page 33

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Ch 01 Accounting and the Financial Statements Investments Other assets Total assets Liabilities: Total current liabilities Long-term debt Total liabilities Stockholders' equity: Contributed capital Retained earnings Total stockholders' equity Total liabilities and stockholders' equity Statement B Net sales Cost of sales Gross margin Selling, general, and administrative expenses Other income (expense) Income (loss) before income taxes Income tax expense Net income (loss)

3,370 12,220 $253,470

$224,918

$ 92,990 15,160 $108,150

$ 95,260 22,172 $117,432

$ 53,680 91,640 $145,320 $253,470

$ 35,475 72,011 $107,486 $224,918

Current Year $229,301 (135,453) $ 93,848 (64,832) 693 $ 29,709 (3,534) $ 26,175

1,167 11,667

Prior Year $203,171 (131,212) $ 71,959 (57,442) (130) $ 14,387 (2,320) $ 12,067

Based on the information provided, is the company legally organized as a sole proprietorship, partnership, or corporation? How can you tell? 190. List the four financial statements. Explain the connection between these four statements. 191. Condensed data from Baker’s Pride Bakery's current year and prior year financial statements follow. Dollar amounts are expressed in thousands. Statement A Assets: Total current assets Property, plant, and equipment (net of accumulated depreciation) Investments Other assets Total assets Liabilities: Total current liabilities Long-term debt Total liabilities Stockholders' equity: Contributed capital Retained earnings Total stockholders' equity Total liabilities and stockholders' equity

Current Year

Prior Year

$219,560

$198,088

18,320

13,996

3,370 12,220 $253,470

1,167 11,667 $224,918

$ 92,990 15,160 $108,150

$ 95,260 22,172 $117,432

$ 53,680 91,640 $145,320 $253,470

$ 35,475 72,011 $107,486 $224,918

Statement B

Current

Prior Year Page 34

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Ch 01 Accounting and the Financial Statements Net sales Cost of sales Gross margin Selling, general, and administrative expenses Other income (expense) Income (loss) before income taxes Income tax expense Net income (loss)

Year $229,301 (135,453) $ 93,848 (64,832) 693 $ 29,709 (3,534) $ 26,175

$203,171 (131,212) $ 71,959 (57,442) (130) $ 14,387 (2,320) $ 12,067

Which statement indicates the financial position of the company on a specific date? What information is provided on that statement that indicates the financial position of the company? Explain. 192. Condensed data from Baker’s Pride Bakery's current year and prior year financial statements follow. Dollar amounts are expressed in thousands. Statement A Assets: Total current assets Property, plant, and equipment (net of accumulated depreciation) Investments Other assets Total assets Liabilities: Total current liabilities Long-term debt Total liabilities Stockholders' equity: Contributed capital Retained earnings Total stockholders' equity Total liabilities and stockholders' equity Statement B Net sales Cost of sales Gross margin Selling, general, and administrative expenses Other income (expense) Income (loss) before income taxes Income tax expense Net income (loss)

Current Year

Prior Year

$219,560

$198,088

18,320

13,996

3,370 12,220 $253,470

1,167 11,667 $224,918

$ 92,990 15,160 $108,150

$ 95,260 22,172 $117,432

$ 53,680 91,640 $145,320 $253,470

$ 35,475 72,011 $107,486 $224,918

Current Year $229,301 (135,453) $ 93,848 (64,832) 693 $ 29,709 (3,534) $ 26,175

Prior Year $203,171 (131,212) $ 71,959 (57,442) (130) $ 14,387 (2,320) $ 12,067

How much of the company is financed by the owners at the end of the current year?

193. Condensed data from Baker’s Pride Bakery's current year and prior year financial statements follow. Dollar amounts Powered by Cognero

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Ch 01 Accounting and the Financial Statements are expressed in thousands. Statement A Assets: Total current assets Property, plant, and equipment (net of accumulated depreciation) Investments Other assets Total assets Liabilities: Total current liabilities Long-term debt Total liabilities Stockholders' equity: Contributed capital Retained earnings Total stockholders' equity Total liabilities and stockholders' equity Statement B Net sales Cost of sales Gross margin Selling, general, and administrative expenses Other income (expense) Income (loss) before income taxes Income tax expense Net income (loss)

Current Year

Prior Year

$219,560

$198,088

18,320

13,996

3,370 12,220 $253,470

1,167 11,667 $224,918

$ 92,990 15,160 $108,150

$ 95,260 22,172 $117,432

$ 53,680 91,640 $145,320 $253,470

$ 35,475 72,011 $107,486 $224,918

Current Year $229,301 (135,453) $ 93,848 (64,832) 693 $ 29,709 (3,534) $ 26,175

Prior Year $203,171 (131,212) $ 71,959 (57,442) (130) $ 14,387 (2,320) $ 12,067

How much of the company is financed by creditors at the end of the current year? 194. What financial statement items are investors and creditors most interested in and why? 195. How is a classified balance sheet useful to decision-makers? 196. How are current liabilities closely related to current assets? 197. Potential stockholders and lenders are interested in a company's financial statements. Use this list of financial statement items to answer the questions that follow. Accounts receivable Cash Common stock Retained earnings Office supplies Unearned revenue A)

Accounts payable Depreciation expense Land held for future expansion Loss on the sale of equipment Patent amortization expense Utilities expense

Advertising expense Income taxes Dividends Service revenue Sales Net income

List the two items from this list in which stockholders would be most interested. Explain why the two you selected are important to stockholders.

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Ch 01 Accounting and the Financial Statements B)

In which one item would lenders be most interested? Explain why this item is important.

198. A friend of yours is seeking advice on which stocks to buy. Right now, she is looking for a stock that pays cash dividends on a regular basis. She has obtained 6 years’ worth of financial statements for the two stocks under consideration. Describe at least one item on each financial statement that she should study to determine which stock is more likely to pay future cash dividends. 199. Condensed data from Baker’s Pride Bakery's current year and prior year financial statements follow. Dollar amounts are expressed in thousands. Statement A Assets: Total current assets Property, plant, and equipment (net of accumulated depreciation) Investments Other assets Total assets Liabilities: Total current liabilities Long-term debt Total liabilities Stockholders' equity: Contributed capital Retained earnings Total stockholders' equity Total liabilities and stockholders' equity Statement B Net sales Cost of sales Gross margin Selling, general, and administrative expenses Other income (expense) Income (loss) before income taxes Income tax expense Net income (loss) A)

What is the name of Statement A?

What is the name of Statement B?

Current Year

Prior Year

$219,560

$198,088

18,320

13,996

3,370 12,220 $253,470

1,167 11,667 $224,918

$ 92,990 15,160 $108,150

$ 95,260 22,172 $117,432

$ 53,680 91,640 $145,320 $253,470

$ 35,475 72,011 $107,486 $224,918

Current Year $229,301 (135,453) $ 93,848 (64,832) 693 $ 29,709 (3,534) $ 26,175

Prior Year $203,171 (131,212) $ 71,959 (57,442) (130) $ 14,387 (2,320) $ 12,067

200. Each of the four statements that comprise a full set of financial statements has an underlying equation or formula. List the statements in the order they are prepared and the underlying equation of each. 201. Condensed data from Baker’s Pride Bakery's current year and prior year financial statements follow. Dollar amounts are expressed in thousands. Statement A Assets: Powered by Cognero

Current Year

Prior Year Page 37

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Ch 01 Accounting and the Financial Statements Total current assets Property, plant, and equipment (net of accumulated depreciation) Investments Other assets Total assets Liabilities: Total current liabilities Long-term debt Total liabilities Stockholders' equity: Contributed capital Retained earnings Total stockholders' equity Total liabilities and stockholders' equity Statement B Net sales Cost of sales Gross margin Selling, general, and administrative expenses Other income (expense) Income (loss) before income taxes Income tax expense Net income (loss)

$219,560

$198,088

18,320

13,996

3,370 12,220 $253,470

1,167 11,667 $224,918

$ 92,990 15,160 $108,150

$ 95,260 22,172 $117,432

$53,680 91,640 $145,320 $253,470

$ 35,475 72,011 $107,486 $224,918

Current Year $229,301 (135,453) $ 93,848 (64,832) 693 $ 29,709 (3,534) $ 26,175

Prior Year $203,171 (131,212) $ 71,959 (57,442) (130) $ 14,387 (2,320) $ 12,067

Was the company profitable in both years? What are the amounts of the total revenues and total expenses, respectively, for the current year? Which financial statement provides this information to you? 202. What is the purpose of an income statement? 203. You are the chairman of the board of directors of NuWave Technology. You are in Vegas attending the company's annual meeting and it is now time for the question and answer session with shareholders. The very first question you take is this: "I own stock in a dozen companies. Every one of them pays me dividends except NuWave. Why is that?" How do you respond?

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Ch 01 Accounting and the Financial Statements Answer Key 1. False 2. True 3. True 4. False 5. True 6. False 7. False 8. True 9. False 10. False 11. True 12. True 13. False 14. False 15. False 16. True 17. True 18. False 19. True 20. True 21. False 22. False 23. False 24. False 25. False Powered by Cognero

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Ch 01 Accounting and the Financial Statements 26. False 27. False 28. True 29. True 30. False 31. True 32. True 33. False 34. True 35. a 36. c 37. b 38. d 39. c 40. b 41. d 42. a 43. c 44. d 45. c 46. a 47. b 48. c 49. d 50. b 51. a Powered by Cognero

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Ch 01 Accounting and the Financial Statements 52. c 53. c 54. a 55. d 56. a 57. a 58. d 59. d 60. c 61. d 62. a 63. a 64. a 65. c 66. b 67. a 68. d 69. d 70. d 71. a 72. d 73. d 74. a 75. b 76. a Powered by Cognero

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Ch 01 Accounting and the Financial Statements 77. b 78. c 79. d 80. d 81. c 82. b 83. a 84. b 85. a 86. c 87. a 88. d 89. b 90. b 91. a 92. d 93. d 94. c 95. c 96. c 97. b 98. d 99. b 100. d 101. c 102. c Powered by Cognero

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Ch 01 Accounting and the Financial Statements 103. a 104. c 105. c 106. d 107. d 108. a 109. b 110. b 111. a 112. d 113. b 114. a 115. b 116. b 117. d 118. d 119. b 120. b 121. c 122. d 123. c 124. d 125. b 126. c 127. c Powered by Cognero

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Ch 01 Accounting and the Financial Statements 128. b 129. a 130. b 131. a 132. c 133. a 134. c 135. b 136. a 137. a 138. a 139. d 140. a 141. a 142. d 143. b 144. b 145. a 146. c 147. b 148. c 149. c 150. a 151. c 152. d 153. Powered by Cognero

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Ch 01 Accounting and the Financial Statements A)

154. A)

155. A)

$(250,000) loss $500,000 Ending Retained Earnings − $800,000 Beginning Retained Earnings = $(300,000) $(300,000) Decrease + $50,000 Dividends Paid = $(250,000) Loss The income statement will show the sources of amounts earned (revenues) as well as the amount and type of costs incurred by the company (expenses) during the period.

$560,000 $1,100,000 Total Assets − $370,000 Total Liabilities − $170,000 Common Stock = $560,000 $730,000 $1,100,000 Total Assets − $370,000 Total Liabilities = $730,000 OR $170,000 Common Stock + $560,000 Retained Earnings = $730,000 Stockholders' equity can increase when common stock is issued to investors. It also can increase through increases in retained earnings. The latter happens when the net income of the business is greater than any dividends paid to the shareholders.

Best Deal Auto Parts Retained Earnings Statement For the Year Ended December 31 Retained earnings, January 1 Add: Net income Less: Dividends Retained earnings, December 31

$160,000 100,000 (80,000) $180,000

Retained earnings is the amount of income earned by the company less any dividends paid to the stockholders since the company began operations. The retained earnings statement summarizes and explains the changes in retained earnings during the accounting period. $100,000 $400,000 Total Assets − $140,000 Total Liabilities − $160,000 Beginning Retained Earnings = $100,000

One way that the company can increase stockholders' equity is by selling additional shares of stock to investors. Another way is by retaining some or all of the net income earned each year rather than paying it out in dividends. This accumulated income is the company's retained earnings.

The retained earnings statement shows that the company was profitable for the year as there is reported net income for the period. If the company were to experience an operating loss, then this would be shown as a deduction from the beginning balance of retained earnings.

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Ch 01 Accounting and the Financial Statements 156. A)

$25,000 $200,000 Current Liabilities + $500,000 Total Long-Term Debt + $275,000 Total Stockholders' Equity = $975,000 Total Assets $975,000 Total Assets − $250,000 Current Assets − $700,000 Property, Plant, and Equipment = $25,000 Amount of financing by creditors: $700,000 $200,000 Current Liabilities + $500,000 Long-Term Debt = $700,000 Amount of financing by owners': $275,000 (stockholders' equity)

157. A)

$350,000 $150,000 Retained Earnings, Beginning of Year + $400,000 Net Income − $200,000 Dividends for Period = $350,000 OR $1,430,000 Total Assets, End of Year − $920,000 Total Liabilities, End of Year − $160,000 Common Stock, End of Year = $350,000 $1,430,000 Total Assets, End of Year = $920,000 Total Liabilities, End of Year + $510,000 Stockholders' Equity, End of Year OR $160,000 Common Stock, End of Year + $350,000 Retained Earnings, End of Year This would depend upon what causes the stockholders' equity to increase. If the increase was due to an increase in retained earnings, then the company would have been profitable for the period. But if the increase was due to an increase in the amount of common stock issued, this would not be a measure of profitability.

158. A) Beginning of the year Change during the year End of the year B)

159. A)

Change in equity Add: Dividends Net income

Assets $1,000,000 +100,000 $1,100,000

Liabilities

Stockholders' Equity

$435,000 −150,000 $285,000

$565,000 +250,000 $815,000

$ 250,000 50,000 $ 300,000

$10,300,000

Beginning of the year Change during the year End of the year B) Powered by Cognero

Assets

Liabilities

Stockholders' Equity

$10,000,000 300,000 $10,300,000

$6,200,000 (600,000) $5,600,000

$3,800,000 900,000 $4,700,000

Yes, the company was profitable because the stockholders' equity increased Page 46

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Ch 01 Accounting and the Financial Statements from the beginning of the year to the end of the year despite no additional stock being issued during the year. 160. A)

$960,000 $1,500,000 Assets − $540,000 Liabilities = $960,000

$410,000 $1,810,000 Assets − $1,400,000 Stockholders' Equity = $410,000 Liabilities

$1,060,000 $960,000 Beginning Stockholders' Equity + X − $620,000 Dividends = $1,400,000 Ending Stockholders' Equity X = $1,060,000

161. A)

Assuming that the increase in stockholders' equity would come from net income, the company would have to be considered profitable. Net income will increase retained earnings which is part of stockholders' equity.

Current Assets = $680,000 $300,000 Cash + $140,000 Accounts Receivable + $220,000 Inventories + $20,000 Prepaid Expenses = $680,000 Total Assets = $1,100,000 $300,000 Cash + $140,000 Accounts Receivable + $220,000 Inventories + $20,000 Prepaid Expenses + $420,000 Equipment

Total Liabilities = $370,000 $120,000 Accounts Payable + $50,000 Income Taxes Payable + $200,000 Notes Payable = $370,000 Both the creditors and the owners have a claim on the assets of the corporation. The creditors have their claim arising from the liabilities of the corporation, while the owners have a claim through the stockholders' equity.

162.

Assets Cash Accounts receivable Inventories Prepaid expenses Equipment Total assets Powered by Cognero

Backus Tractor Sales Balance Sheet December 31 Liabilities and Stockholders' Equity $ 300,000Accounts payable $ 120,000 140,000Income taxes payable 50,000 220,000Notes payable 200,000 20,000Common stock 170,000 420,000Retained earnings 560,000 Total liabilities and $1,100,000 $1,100,000 stockholders' equity Page 47

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Ch 01 Accounting and the Financial Statements

163. A)

$1,247,000 $77,000 Cash + $170,000 Accounts Receivable + $200,000 Inventory + $50,000 Prepaid Expenses + $750,000 Land = $1,247,000

$540,000 $50,000 Accounts Payable + $450,000 Notes Payable + $40,000 Salaries Payable = $540,000

$707,000 $1,247,000 Total Assets − $540,000 Total Liabilities = $707,000

164.

Assets Cash Accounts receivable Inventory Prepaid expenses Land Total assets

165. A)

166. A)

Jen & Terry's Ice Cream Balance Sheet December 31 Liabilities and Owners' Equity $ 77,000Accounts payable 170,000Salaries payable 200,000Notes payable 50,000Common stock 750,000Retained earnings Total liabilities and owners' $1,247,000 equity

50,000 40,000 450,000 400,000 307,000

$1,247,000

$1,710,000 $1,400,000 Total Assets (at beginning of year) − $240,000 Total Liabilities (at beginning of year) = $1,160,000 Total Stockholders' Equity (at beginning of year) $1,160,000 Total Stockholders' Equity (at beginning of year) + $1,000,000 Net Income − $450,000 Dividends = $1,710,000 Yes. Assuming the company has enough cash to do so, additional dividends can be paid. Net income exceeded the amount of dividends paid by $550,000 ($1,000,000 − $450,000), so the amount paid could have been increased. Also, the company has total positive retained earnings.

$800,000 $100,000 Cash + $700,000 Inventories = $800,000

$150,000 $750,000 Revenue − $600,000 Expenses = $150,000

$400,000

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Ch 01 Accounting and the Financial Statements $800,000 Total Assets − $400,000 Accounts Payable = $400,000 D)

167. A)

$350,000 $400,000 (end of year) – $150,000 (NI = $750,000 – $600,000) + $100,000 Dividends

$360,000 $84,000 Accounts Payable + $276,000 Bond Payable While the balance sheet may show an amount for common stock, this amount is an ending balance and would not show the results of any transactions involving new issuances of stock during the period. Comparing the current year balance sheet with the prior year balance sheet would give this information in the form of the difference between the contributed capital. Also, the statement of cash flows for the current year would show this information under cash flows from financing activities.

168. Cash Accounts receivable Inventory Prepaid insurance Supplies

$110,000 350,000 330,000 40,000 20,000 Total current assets $850,000 Liquidity is an indicator of how close to cash the company's assets are. Those assets that are most liquid are listed first. Liquidity relates to the company's ability to pay its obligations as they become due. Current assets are expected to be converted into cash within 1 year or one operating cycle, whichever is longer, so they are a key determinant of liquidity. 169. Accounts payable Salaries payable Income taxes payable

$360,000 10,000 240,000 Total $610,000 When current liabilities increase, the denominator of the current ratio increases. This causes the current ratio itself to decrease. 170. Land Plant Less: Accumulated depreciation

$500,000 $480,000 (130,000) Total

350,000 $850,000

Long-term assets are those that are expected to benefit the company beyond the current accounting period. Both the land and the buildings are expected to provide a benefit for more than one accounting period. Accumulated depreciation is the portion of the cost of the plant that has been expensed in the accounting periods to date. 171. Current Assets = $850,000 $110,000 Cash + $350,000 Accounts Receivable + $330,000 Inventory + $40,000 Prepaid Insurance + $20,000 Supplies = $850,000 Current Liabilities = $610,000 Powered by Cognero

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Ch 01 Accounting and the Financial Statements $360,000 Accounts Payable + $10,000 Salaries Payable + $240,000 Income Taxes Payable = $610,000 Current Ratio = 1.39 to 1 ($850,000 ÷ $610,000) The current ratio does not provide information about the composition of the company's current assets and current liabilities. Only total current assets are used to calculate the current ratio. 172. Current Assets = $850,000 $110,000 Cash + $350,000 Accounts Receivable + $330,000 Inventory + $40,000 Prepaid Insurance + $20,000 Supplies = $850,000 Current Liabilities = $610,000 $360,000 Accounts Payable + $10,000 Salaries Payable + $240,000 Income Taxes Payable = $610,000 Working Capital = $240,000 ($850,000 − $610,000) Working capital and the current ratio are both measures of liquidity. Working capital is a dollar amount and the information it can convey is limited. The current ratio is based on a relative relationship and hence allows comparisons to be made between different companies. 173. The current ratio increased from 2.00 to 1 to 4.00 to 1. This is an unusually large increase for most companies. A larger current ratio means a company is more liquid. Its current assets as a percentage of its current liabilities have increased. 174. Since the current ratio increased from prior year to current year, the current assets other than cash would have had to increase substantially to offset the decline in cash. However, cash could also have been used to pay down current liabilities but then current ratio would not be impacted substantially. 175. A)

Current ratio: 6.00 to 1 ($225,000 Cash + $110,000 Accounts Receivable + $80,000 Inventory + $5,000 Prepaid insurance) ÷ ($60,000 Accounts Payable + $10,000 Salaries Payable) = 6.00 to 1 Working capital: $350,000 $420,000 Total Current Assets − $70,000 Total Current Liabilities = $350,000

The closer an asset is to being converted to cash, the more liquid the asset is. Some assets, like inventory, take much longer to turn into cash because they must be sold before collection of the cash can be made. Prepaid insurance is not as liquid as accounts receivable since it will be consumed as time passes. Receivables are more liquid than inventory because a sale has already occurred

The statement of cash flows would be helpful to determine the cash inflows and outflows that occurred during the year. The balance sheet represents only the ending balance of the cash account. The statement of cash flows also identifies the sources and uses of cash by accounting activity.

176. A)

$185,000 $600,000 Service Revenue − $200,000 Salaries Expense − $86,000 Rent Expense − $19,000 Utilities Expense − $110,000 Income Tax Expense = $185,000 $535,000 $400,000 Retained Earnings, January 1 + $185,000 Net Income − $50,000 Dividends Paid = $535,000

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Ch 01 Accounting and the Financial Statements 177. A)

Net income: $120,000 $900,000 Sales − $550,000 Cost of Sales − $150,000 Operating Expenses − $80,000 Income Tax Expense = $120,000

The financial position improved since the net income increases the company's retained earnings.

Yes. The amount of revenues exceeds the amount of expenses by $120,000.

178. A)

$1,680,000 $1,650,000 Sales Revenue + $30,000 Interest Income = $1,680,000 $1,530,000 $510,000 Cost of Sales + $400,000 Salaries and Wages Expense + $440,000 Selling Expenses + $180,000 Income Taxes Expense = $1,530,000

The purpose of the income statement is to provide information regarding the revenues and expenses of the company. The difference between the two shows the profitability of the company for a particular period of time.

The company had net income of $150,000 for the period. Since revenues exceeded expenses for the period, the company would be considered profitable.

This would not be the first year of operations for this company. The reasons for this are that the ending retained earnings balance is greater than the net income of $150,000. Since the ending balance of retained earnings is $560,000 and net income for the period was $150,000 as well as apparently no dividends were being paid to the stockholders during the year, the company began the year with a balance of $410,000 ($560,000 − $150,000) in retained earnings.

179. Net Income = $275,000 $750,000 Net Sales + $25,000 Other Income (net) − $450,000 Selling, General, and Administrative Expenses − $50,000 Research and Development Expense = $275,000 Net income is the same under both single- and multiple-step income statements. Only subtotals and the order the amounts are listed in differ. 180. Backus Tractor Sales Income Statement For the Year Ended December 31 Revenues: Sales revenue Interest income Total revenues

$1,650,000 30,000

Cost of sales Salaries and wages expense Selling expenses

$ 510,000 400,000 440,000

$1,680,000

Expenses:

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Ch 01 Accounting and the Financial Statements Income taxes expense Total Expenses

180,000 (1,530,000) $ 150,000

Net income

181. Bike Links Income Statement For the Year Ended December 31 Service revenue Operating expenses:

$960,000 Selling expenses General and administrative expenses Total operating expenses

$176,000 280,000 (456,000) $ 504,000

Income from operations Other income and expenses Interest revenue

8,000 $ 512,000 (160,000) $ 352,000

Income before taxes Income taxes expense Net income

182. A)

$1,005,000 $955,000 Sales Revenue + $50,000 Interest Income = $1,005,000

$905,000 $700,000 Cost of Sales + $140,000 Salaries Expense + $20,000 Income Taxes Expense + $45,000 Selling Expense = $905,000

$100,000 $1,005,000 Total Revenues − $905,000 Total Expenses = $100,000

183. Big Tom's Pawn Shops Income Statement For the Year Ended December 31 Revenues: Sales

$ 225,000

Expenses Salaries expense Rent expense Insurance expense Income taxes expense Total expenses Net Income

$145,000 12,000 11,000 30,000 (198,000) $ 27,000

184. Powered by Cognero

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Ch 01 Accounting and the Financial Statements Jen & Terry's Ice Cream Income Statement For the Year Ended December 31 Revenues: Sales revenue Interest income Total revenues

$955,000 50,000

Cost of sales Salaries expense Selling expense Income taxes expense Total expenses

$700,000 140,000 45,000 20,000

$1,005,000

Expenses:

905,000 $ 100,000

Net income

185. A)

Blackbeard’s Restaurant Retained Earnings Statement For the Year Ended December 31, 2025 Beginning balance, January 1, 2025 Add: Net income for 2025 Less: Dividends paid during the year Ending balance, December 31, 2025

$(15,000)* 25,000 (5,000) $ 5,000

*$(15,000) Net Loss for 2024 − $0 Dividends Paid = $(15,000) Balance, January 1, 2025 B)

Retained Earnings at December 31, 2026 = $50,000 ($5,000 Beginning Balance, January 1, 2026 + $50,000 Net Income for 2026 − $5,000 Dividends Paid During Year = $50,000) The ending balance of the retained earnings statement represents the cumulative earnings less all the dividends declared and paid for the life of the business. This amount appears on the balance sheet as a component of stockholders' equity.

186. A)

A banker wants to be assured that the company will make its interest payments and repay the principle of the loan in a timely manner. A banker would also want to know about the value of the assets that could be used to secure the loan or liquidated if the company can't repay the loan.

Investors want to know whether they should make an investment in the company's stock or continue to hold their investment. They will be looking at the company's recent performance, whether the company has been profitable, how its profits compare with other companies, and how much the company has paid in dividends.

A labor negotiator needs to know how much profit the company has made. This information is found on the income statement.

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Ch 01 Accounting and the Financial Statements

187. The groups and their decisions are: Stockholders: Management: Bankers: Creditors: Governmental agencies:

Is the company profitable enough to pay dividends? Did the company make a profit for the period? How should an item be priced? Should we continue operations? Can we give employees raises? Can the company pay interest and principal when it comes due? Can the company pay bills when they are due? How much did the company earn (i.e., how much taxes should be paid)?

188. All businesses engage in activities that can be categorized as financing, investing, or operating activities. The given balance sheet and income statement show that Baker's Pride Bakery has taken part in all the aforementioned activities and thus is a business entity. It has raised capital from stockholders and creditors and also carried on operations which resulted in sales and net income. 189. The company is organized as a corporation as evidenced by the stockholders' equity items. 190. 1. The balance sheet 2. The income statement 3. The retained earnings statement 4. The statement of cash flows Net income on the income statement increases retained earnings on the retained earnings statement. The balance on the retained earnings statement goes to the balance sheet. The ending balance for cash on the statement of cash flows is also shown on the balance sheet. The statement of cash flows explains the change in cash during the year. 191. The classified balance sheet provides information about the financial position of the company. It is expressed in terms of the accounting equation. When total liabilities are subtracted from total assets, the difference is stockholders' equity. 192. The amount of financing by the owners for the current year is represented by the amount of stockholders' equity, $145,320. 193. The amount of financing provided by creditors for the current year is the amount of liabilities reported on the balance sheet, $108,150. For the prior year, the amount was $117,432. Total liabilities decreased by $9,282, or 8.58% ($9,282 ÷ $108,150), from the prior year to the current year. 194. Investors are most interested in cash receipts from dividends and the profitability trend of the company. Creditors are most interested in cash to be received for interest payments and the repayment of the principal. If a company does not have sufficient cash flows, investors and creditors could suffer as a result. The financial position, shown on the company's balance sheet, is also a concern for both investors and creditors because even though the company may have what appears to be sufficient cash flows for the current period, the long-term cash flow could be weak. 195. The classification helps the users know how a company obtained its resources and whether a company will be able to pay its obligations when they become due. A classified balance sheet helps evaluate the liquidity of a company by separating the current assets from long-term assets and current liabilities from long-term liabilities. The user can then Powered by Cognero

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Ch 01 Accounting and the Financial Statements determine the amount of working capital and the current ratio, which are both useful measures of liquidity. 196. Current liabilities are obligations that will be satisfied within the operating cycle or within 1 year if the cycle is shorter than 1 year. These can be satisfied through the payment of cash or by providing goods or services. Current assets will be converted into cash, or sold, or consumed during the operating cycle or within 1 year if the cycle is shorter. For most companies, both current assets and liabilities are reported on the balance sheet using a 1-year time period. 197. A)

Stockholders are interested in net income and dividends. They want to make sure the company is profitable. If a company is incurring losses, it may not pay dividends.

Lenders are most interested in the company's ability to pay bills when they become due. Cash can be a big problem if a company does not have enough to pay its bills. This includes the company's ability to repay the lender.

198. Income statement: Trend of profitable operations Retained earnings statement: The payment of cash dividends in the past Balance sheet: The existence of sufficient cash from which to pay dividends Statement of cash flows: Trend of positive cash flows from operations 199. A)

Statement A is the classified balance sheet.

Statement B is the multiple-step income statement.

200. 1. Income statement: Revenues – Expenses = Net Income (Net Loss) 2. Retained earnings statement: Beginning Retained Earnings + Net Income (Net Loss) – Dividends = Ending Retained Earnings 3. Balance sheet: Assets = Liabilities + Stockholders' Equity 4. Statement of cash flows: Beginning Cash +/– Operating Cash Flows +/– Investing Cash Flows +/– Financing Cash Flows = Ending Cash

201. The company was profitable in both years. For the current year, total revenues include net sales of $229,301 and other income $693, for a total of $229,994. Total expenses for the current year include cost of sales of $135,453, selling, general, and administrative expenses of $64,832, and income tax expense of $3,534, for a total of $203,819. Information about revenues, expenses, and profitability is reported on the income statement. 202. An income statement reports the company's revenues and expenses for a period of time and shows the company's operating performance and profitability (or lack thereof). 203. First, point out that retained earnings is an important source of financing for NuWave. Then explain that you believe that it is in the shareholders' best interest to reinvest the company's earnings into the many profitable growth opportunities available rather than pay dividends. If a firm has been profitable for many years and if its stockholders have been willing to forgo large dividends, retained earnings may be a large portion of equity. Remind them that the reinvestment of the earnings hopefully will result in increased wealth for them in the future as the company profits from its growth.

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Ch 02 The Accounting Information System

Indicate whether the statement is true or false. 1. The time-period assumption assumes that a company prepares its financial statements every month. a. True b. False 2. Because it tends to provide the most reliable measure of activity, all assets are reported on the balance sheet at their fair market values. a. True b. False 3. The term used to refer to an asset's original cost is book value. a. True b. False 4. The going concern assumption infers that a company will continue to operate into the future. a. True b. False 5. A company in the process of liquidation is considered to be under the going concern assumption. a. True b. False 6. According to the historical cost principle, assets are always carried at their current market value. a. True b. False 7. The conservatism principle is concerned with the possibility of understating assets or income. a. True b. False 8. A full disclosure policy stipulates that all information that would make a difference to financial statement users should be revealed. a. True b. False 9. The purchase of office supplies from a supplier is an example of an external event. a. True b. False 10. In order for an event to be recorded, or recognized, in the accounting system, the items making up the event must be a faithful representation of the event. a. True b. False 11. If a company made a payment on account, then assets and liabilities would both decrease. Powered by Cognero

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Ch 02 The Accounting Information System a. True b. False 12. The issuance of common stock increases a company's assets and stockholders’ equity. a. True b. False 13. The payment of a dividend increases both cash and stockholders' equity of the distributing entity. a. True b. False 14. An accounting transaction may impact only one financial statement or multiple statements. a. True b. False 15. The accounting equation must balance before and after every accounting transaction. a. True b. False 16. A chart of accounts is prepared to determine whether the books have gotten out of balance. a. True b. False 17. GAAP has established a universal chart of accounts that is applicable to all businesses in the United States. a. True b. False 18. A T-account for Cash cannot contain any credits. a. True b. False 19. A debit entry increases assets and revenue accounts. a. True b. False 20. The dividends declared account has a normal debit balance. a. True b. False 21. Under the double-entry system of accounting, every transaction is entered in at least two accounts on opposite sides of a T-account. a. True b. False 22. Under the double-entry system of accounting, a debit is always a negative entry. a. True Powered by Cognero

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Ch 02 The Accounting Information System b. False 23. Income statement accounts have normal credit balances. a. True b. False 24. The initial step in the recording process is sometimes referred to as journalizing. a. True b. False 25. If a company performed services for credit, then the debit side of the journal entry would be to Accounts Payable and the credit would be to Service Revenue. a. True b. False 26. The general ledger is an example of a book of original entry. a. True b. False 27. The general ledger is often used for the initial recording of repetitive transactions. a. True b. False 28. A trial balance is the listing of each active account and its corresponding debit or credit balance at a particular point in time. a. True b. False 29. Even though a trial balance reveals that the debits equal the credits, there still may be errors in the company’s books. a. True b. False

Indicate the answer choice that best completes the statement or answers the question. 30. The various rules and conventions that have evolved over time to guide the preparation of financial statements in the United States are called a. the SEC rules of accounting. b. generally accepted accounting principles. c. FASB mandates. d. the Internal Revenue Code. 31. Which accounting concept assumes that assets are recorded at the amount paid to acquire them? a. revenue recognition b. historical cost c. conservatism d. monetary unit Powered by Cognero

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Ch 02 The Accounting Information System 32. Which accounting concept assumes that an entity is not in the process of bankruptcy? a. economic entity b. monetary unit c. time-period d. going concern 33. The magnitude of an omission or misstatement in accounting information that will influence a decision of someone relying on the information is called a. materiality. b. faithful representation. c. verifiability. d. understandability. 34. The capacity of information to make a difference in a decision by helping make timely predictions or provide timely feedback is known as a. faithful representation. b. relevance. c. comparability. d. verifiability. 35. When preparing financial statements, an accountant must estimate the balances of certain accounts. When two possible estimates are available and when these estimates are about equally likely, the accountant's prudent reaction is to select the least optimistic estimate in terms of the recorded amounts of assets or income statement accounts. Which accounting principle does this refer to? a. revenue recognition b. historical cost c. conservatism d. expense recognition 36. Which fundamental characteristic states that accounting information should portray real-world economic events as intended? a. relevance b. predictive value c. faithful representation d. materiality 37. What quality of accounting information allows a user to compare two or more accounting periods for a single company? a. consistency b. timeliness c. understandability d. verifiability 38. What quality of accounting information allows a user to analyze two or more companies for similarities and differences? Powered by Cognero

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Ch 02 The Accounting Information System a. consistency b. verifiability c. understandability d. comparability 39. What accounting principle states that assets of a company must be initially recorded at their original cost? a. expense recognition b. conservatism c. historical cost d. revenue recognition 40. Which accounting characteristic implies that information should be complete, neutral, and free from errors? a. confirmatory value b. materiality c. relevance d. faithful representation 41. Which of the following provides evidence needed in an accounting system to record a transaction? a. calculations from spreadsheets b. source documents c. budgetary data d. industry averages 42. Which financial statement elements are increased when common stock is issued? a. assets and stockholders’ equity b. liabilities and assets c. stockholders’ equity and liabilities d. revenues and expenses 43. A company borrows $1,500 from a bank to purchase computer equipment. In addition to increasing assets, what other accounting element is increased in this transaction? a. expenses b. revenues c. stockholders’ equity d. liabilities 44. A law firm provides services on account to its clients. In addition to an increase in revenues, what other accounting element is increased in the transaction? a. assets b. liabilities c. expenses d. gains 45. The list of all accounts used by an entity is known as the a. journal. Powered by Cognero

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Ch 02 The Accounting Information System b. general ledger. c. chart of accounts. d. balance sheet. 46. Which category of accounting elements is decreased with a debit? a. assets b. liabilities c. expenses d. losses 47. Which of the following accounting elements is decreased with a credit? a. revenues b. liabilities c. stockholders’ equity d. assets 48. Which of the following accounting elements will decrease with a debit? a. assets, liabilities, and stockholders' equity b. liabilities, stockholders' equity, and revenues c. liabilities, revenues, and expenses d. assets, liabilities, and expenses 49. Which of the following statements is correct regarding T-accounts? a. Credits are always on the left side of a T-account. b. Debits are always on the left side of a T-account. c. Either debits or credits can be on the left side of a T-account. d. Debits are always on the right side of a T-account. 50. Which of the following accounts have a normal credit balance? a. revenues and expenses b. assets and liabilities c. assets and revenues d. liabilities and stockholders' equity 51. When employees’ salaries are paid, which account is credited? a. Wages Payable b. Salary Expense c. Cash d. Sales 52. A chronological record that shows the debit and credit effects of transactions in a company is called a. a journal. b. the general ledger. c. the chart of accounts. Powered by Cognero

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Ch 02 The Accounting Information System d. a trial balance. 53. A file or book that contains all of a company’s accounts and their net balances from transactions is called a. a journal. b. the general ledger. c. a chart of accounts. d. the income statement 54. A list of each active account and its debit or credit balance, which is used to aid in the preparation of financial statements, is called a. a trial balance. b. the general ledger. c. a journal. d. a chart of accounts. 55. Which of the following underlying assumptions for the conceptual framework is the reason the dollar is used in the preparation of financial statements? a. economic entity b. continuity c. time-period d. monetary unit 56. Which of the following is an assumption made in the preparation of the financial statements? a. Financial statements are prepared for a specific entity that is distinct from the entity's owners. b. The current market value is assumed to be more relevant than the original cost paid. c. The preparation of financial statements for a specific time period assumes that the balance sheet covers a designated period of time. d. Financial statements are prepared assuming that inflation has a distinct effect on the monetary unit. 57. The time-period assumption is necessary because a. inflation exists and causes confusing swings in financial statement amounts over time. b. external users of financial statements want accurately reported net income for a specific period of time. c. financial statement users expect full disclosure of all economic events throughout the entire time period. d. it is required by the federal government. 58. Which of the following statements is true concerning assets? a. Assets are measured using a time-period approach. b. Assets are initially recorded at market value and then adjusted for inflation. c. Assets are initially recorded using the historical cost principle. d. Assets are initially recorded at market value, since historical cost tends to be too arbitrary. 59. Homevestors purchased land for $400,000 twelve years ago. During the current year, an independent appraiser assessed the value of the land at $900,000. At what amount should the land be recorded on the company's current year financial statements? a. at its cost of $400,000 Powered by Cognero

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Ch 02 The Accounting Information System b. at its appraised value of $900,000 c. at $500,000, the difference between the land’s cost and the assessed value d. whichever amount the company considers to be the best indicator of the land's true value 60. Which of the following characteristics of accounting refers to users comprehending the meaning of accounting information, given reasonable study and effort? a. verifiability b. understandability c. consistency d. timeliness 61. In order for accounting information to be useful in making informed decisions, it must be a. internal. b. relevant. c. reliable. d. both relevant and reliable. 62. Which of the following is a constraint to the qualitative characteristics of useful accounting information? a. conservatism b. materiality c. relevance d. comparability 63. The principle of conservatism is concerned with the a. avoidance of overstating assets or income in the preparation of financial statements. b. minimization of costs associated with providing financial information. c. company's ability to carry out its existing commitments. d. company's procedures for recording activities at their initial exchange price. 64. The going concern assumption relates to a. the company's ability to continue operations long enough to carry out its existing obligations. b. any information that is capable of influencing the decisions of anyone using financial statements. c. measuring ongoing business activities at their exchange price at the time of the initial external transaction. d. offsetting management's natural optimism by providing a prudent approach to uncertainty in financial statement items. 65. Which of the following statements is false with respect to the qualitative characteristics of useful accounting information? a. Comparability is concerned with different companies using the same accounting methods, whereas consistency is concerned with a single company using the same accounting methods over time. b. Trade-offs are often necessary in evaluating relevant versus reliable information. c. All external and internal events must be fully disclosed in the accounting system. d. The full disclosure policy should be followed in all situations that would make a difference to financial statement users. Powered by Cognero

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Ch 02 The Accounting Information System 66. High Point Furniture Company manufactures furniture. The company has applied for a sizeable loan to expand its operations. Based on the company’s annual report, the loan officer concludes that High Point is very profitable and appears to have a strong financial position. However, watching the nightly news on television that evening, the banker discovers that High Point is a defendant in a class action lawsuit related to defective products. Serious injuries were allegedly caused by the company’s infant highchairs overturning. The television news report is an example of financial information that is a. predictable. b. conservative. c. relevant. d. comparable. 67. If an investor can use accounting information for two different companies to evaluate the types and amounts of expenses, the information is said to have the quality of a. comparability. b. consistency. c. neutrality. d. materiality. 68. Hunsinger Enterprises purchases many small pieces of office furniture, such as trash cans, that cost less than $100 each. The company accounts for these items as expenses when acquired rather than reporting them as property, plant, and equipment on its balance sheet. The company's accountant states that no accounting principle has been violated. The justification for expensing these furniture items is based on cost versus benefit considerations as well as the accounting constraint of a. conservatism. b. materiality. c. neutrality. d. verifiability. 69. Information that is material means that an error in recording the dollar amount of a transaction would a. likely affect the judgment of someone relying on the financial statements. b. not affect the decisions of financial statement users. c. not impact a business decision of a creditor. d. result in the overstatement of assets or income. 70. A company follows the qualitative characteristic of consistency. This means that a. for expenses, the company uses the same account names as used by its competitors. b. the company has elected certain accounting principles that can never be changed. c. the company applies the same accounting principles each period. d. the company applies the same accounting principles as its competitors. 71. An accountant is uncertain about the best estimate of an amount for a business transaction. If there are two possible amounts that could be recorded, the amount least likely to overstate assets and earnings is selected. Which of the following qualities is characterized by this action? a. comparability b. conservatism c. materiality Powered by Cognero

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Ch 02 The Accounting Information System d. neutrality 72. The qualitative characteristics of accounting information include a. faithful representation. b. cash flow information. c. all accounting information. d. assets reported on the balance sheet. 73. Which of the following statements is true regarding economic events? a. The signing of a service contract is an example of an external event that is recorded in the accounting records. b. Every event that affects an entity can be identified from a source document. c. All internal and external events must be measured with sufficient reliability. d. External events involve exchanges between an entity and another entity outside the company. 74. Which of the following is an internal event? a. Caddie salaries are paid by a country club. b. Dividends are distributed to a company's stockholders. c. Potatoes used to make French fries in a fast-food restaurant are purchased. d. Products are transferred from the assembly area to the painting station. 75. All of the following are external events except a grocery store a. recognizing losses from spoilage. b. running ads in a local newspaper. c. purchasing produce from a local farmer. d. selling groceries to customers on credit. 76. Which of the following is an internal event for a business entity? a. An attorney provides services for clients. b. An attorney purchases computer equipment. c. An attorney uses computer equipment to maintain business records and prepare legal documents. d. An attorney receives cash payments from clients who were billed for legal services. 77. Which of the following statements is true? a. Only the effects of internal transactions must be recognized and recorded in the accounting system. b. An internal transaction represents a business activity between an entity and its environment. c. Evidence used to record transactions affecting a business entity comes from source documents. d. Only the effects of external events must be recognized, measured, and recorded in an entity's accounting system. 78. Which of the following statements is false regarding the use of source documents? a. Checks and deposit slips are the main source documents backing up a bank statement. b. Retailers may use cash register tapes to recognize sales transactions. c. Stock certificates provide evidence of being a creditor of the company. d. Timecards may be used as a source of information to record wages. Powered by Cognero

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Ch 02 The Accounting Information System 79. What effect does the purchase of office equipment on credit have on the accounting equation? a. Assets and stockholders' equity decrease. b. Liabilities increase and stockholders' equity decreases. c. Assets and liabilities increase. d. Assets and liabilities decrease. 80. What effect does the payment of employee salaries have on the accounting equation? a. Assets and stockholders' equity decrease. b. Liabilities and stockholders' equity decrease. c. Assets decrease and liabilities increase. d. Assets increase and liabilities decrease. 81. During March, Honeybaked Spam purchases supplies for cash. The supplies will be used in April. What effect does this transaction have on the accounting equation at the time the supplies are purchased? a. Assets increase and stockholders' equity decreases. b. Assets and liabilities increase. c. There is no effect on the accounting equation, as one asset account increases while another asset account decreases. d. There is no effect on the accounting equation, as the transaction should not be recognized until April. 82. A novelties company makes cash sales to customers. What effect does this transaction have on the accounting equation? a. Liabilities and retained earnings increase. b. Assets and liabilities increase. c. Assets and retained earnings increase. d. There is no effect on the accounting equation, as one asset account increases while another asset account decreases. 83. Two friends decide to launch a new business by investing $25,000 each in Hot Spot Tanning. They are given shares of stock as evidence of their ownership interest. What effect does this transaction have on the accounting equation? a. Assets and liabilities increase. b. Assets and contributed capital increase. c. Liabilities increase and retained earnings decrease. d. Assets and liabilities decrease. 84. Machinery is purchased on credit. What effect does this transaction have on the accounting equation? a. Assets and liabilities increase. b. Assets and stockholders' equity increase. c. Liabilities increase and stockholders' equity decreases. d. Assets and liabilities decrease. 85. A company provided services to customers and then sent them invoices for the amounts owed. What effect does this transaction have on the accounting equation? a. Assets and liabilities increase. b. Assets and retained earnings increase. Powered by Cognero

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Ch 02 The Accounting Information System c. Liabilities decrease and contributed capital increases. d. Assets and liabilities decrease. 86. Hypnosis Institute received payments from customers who had been billed earlier for services provided. What effect does this transaction have on the accounting equation? a. Assets and liabilities increase. b. Assets and stockholders' equity increase. c. Assets and liabilities decrease. d. There is no effect on the accounting equation, as one asset account increases while another asset account decreases. 87. Payment is made for machinery purchased previously on credit. What effect does this transaction have on the accounting equation? a. Assets and liabilities increase. b. Assets and contributed capital increase. c. Liabilities decrease and retained earnings increase. d. Assets and liabilities decrease. 88. The telephone bill for the current period is received and recorded, but payment will be made later. What effect does this transaction have on the accounting equation? a. Assets and liabilities increase. b. Assets and contributed capital increase. c. Liabilities increase and retained earnings decrease. d. Assets and liabilities decrease. 89. Payment is made for the telephone bill that was recorded previously. What effect does this transaction have on the accounting equation? a. Assets and liabilities increase. b. Assets and retained earnings increase. c. Liabilities increase and contributed capital decreases. d. Assets and liabilities decrease. 90. Services are provided for customers who pay for their services immediately. What effect does this transaction have on the accounting equation? a. Assets and liabilities increase. b. Assets and retained earnings increase. c. Liabilities increase and retained earnings decreases. d. Assets and liabilities decrease. 91. Dividends are declared and paid to the company's stockholders. What effect does this transaction have on the company's accounting equation? a. Assets and liabilities decrease. b. Assets and retained earnings decrease. c. Liabilities decrease and retained earnings increases. d. Liabilities increase and contributed capital decreases. Powered by Cognero

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Ch 02 The Accounting Information System 92. When a firm borrows money, one effect on the accounting equation is a(n) a. decrease in contributed capital. b. increase in assets. c. decrease in liabilities. d. decrease in assets. 93. Which of the following statements best describes the effects of recognizing revenue earned by a business entity? a. Assets increase only when cash sales are collected. b. Stockholders' equity increases only when credit sales are made. c. Assets and stockholders' equity increase when either cash or credit sales are made. d. Assets increase and stockholders' equity decreases when either cash or credit sales are made. 94. Which of the following best describes one effect of recognizing expenses incurred by a business entity? a. Assets will increase. b. Liabilities will decrease. c. Contributed capital will increase. d. Retained earnings will decrease. 95. Which of the following statements regarding a company's operating activities is true? a. Revenues and gains decrease stockholders' equity. b. Expenses and losses increase stockholders' equity. c. Expenses and losses decrease stockholders' equity. d. Dividends declared decrease assets. 96. Which of the following transactions does not affect total assets? a. A bill is received for last month's utilities. b. Dividends are paid to stockholders. c. Customers are billed for services provided on credit. d. New equipment is purchased on credit. 97. Which of the following transactions affects total liabilities? a. Equipment is purchased for cash. b. Services are provided to a customer for credit. c. Payment is made on a bank loan. d. Common stock is issued. 98. A company purchased equipment for $150,000 cash. What is the effect on total assets? a. increase b. decrease c. no net effect d. cannot be determined from this limited information. 99. A consulting firm provided services last month and billed its client. This month, the company received payment from the customer. What is the net effect on the assets of the company over the 2 months? a. increase Powered by Cognero

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Ch 02 The Accounting Information System b. decrease c. no net effect d. cannot be determined with this limited information 100. A list of all asset, liability, stockholders' equity, revenue and gain, expense and loss, and dividend declared accounts that are used by a company is called a a. general ledger. b. general journal. c. chart of accounts. d. trial balance. 101. The two-column record used to accumulate monetary increases and decreases in individual assets, liabilities, stockholders' equity, revenues, gains, expenses, and dividends declared items is called a. the chart of accounts. b. a T-account. c. the trial balance. d. posting. 102. The correct term for the entry made on the left side of a T-account is a. debit. b. credit. c. posting. d. journalizing. 103. The system of accounting in which there are at least two accounts affected in every transaction so that the accounting equation stays in balance is called a. debit. b. credit. c. double-entry. d. full disclosure. 104. A credit means an event had a. a favorable impact on an entity's financial statements. b. an unfavorable impact on an entity's financial statements. c. an effect on the right side of the T-account. d. the effect of increasing the account balance. 105. When the amount for a debit entry in a journal is transferred to a specific account in the general ledger, it must be posted as a a. debit to the account in the general ledger. b. credit to the account in the general ledger. c. total amount, without regard to debit or credit, since the general ledger accounts do not have spaces for debit and credit entries. d. decrease to the account in the general ledger. Powered by Cognero

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Ch 02 The Accounting Information System 106. An entry made to the right side of an account is always a(n) a. debit. b. credit. c. increase. d. decrease. 107. An abbreviated version of an account, which is useful for analyzing the effects of business events, is the a. chart of accounts. b. T-account. c. journal. d. double-entry system. 108. Debit entries are used to increase a. asset accounts. b. revenue and gain accounts. c. liability accounts. d. stockholders' equity accounts. 109. Credit entries are used to increase a. asset accounts. b. liability accounts. c. expense and loss accounts. d. dividend declared accounts 110. Which of the following accounts is decreased by a debit entry? a. Unearned Revenue b. Prepaid Insurance c. Cash d. Insurance Expense 111. Which of the following accounts is decreased by a debit entry? a. Cash b. Prepaid Insurance c. Accounts Payable d. Insurance Expense 112. Which of the following accounts is increased by a debit entry? a. Common Stock b. Equipment c. Notes Payable d. Service Revenue 113. Which of the following accounts is increased by a credit entry? a. Cash Powered by Cognero

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Ch 02 The Accounting Information System b. Dividends Declared c. Capital Stock d. Salary Expense 114. All of the following accounts have normal debit balances except a. Accounts Receivable. b. Dividends Declared. c. Supplies Expense. d. Service Revenue. 115. All of the following accounts have normal credit balances except a. Accounts Payable. b. Unearned Revenue. c. Common Stock. d. Inventory. 116. Which pair of accounts has the same set of rules for debit and credit entries? a. Common Stock and Accounts Payable b. Salary Expense and Retained Earnings c. Cash and Notes Payable d. Sales Revenue and Accounts Receivable 117. Which pair of accounts has the same set of procedures for debit and credit entries? a. Service Revenue and Rent Expense b. Dividends Declared and Retained Earnings c. Equipment and Salary Expense d. Accounts Receivable and Accounts Payable 118. The following selected accounts for Happy Heights Country Club are for July 31: CASH 7/1 Bal. 7/3 7/5 7/7

UNEARNED TUITION REVENUE 7/ 3 1,000

12,000 1,000 3,600 1,800

ACCOUNTS RECEIVABLE 7/2

3,600

7/7

MEMBERSHIP REVENUE 1,800

7/ 2 7/ 5

3,600 3,600

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Ch 02 The Accounting Information System On which date did the country club sell a club membership on account? a. July 2 b. July 3 c. July 5 d. July 7 119. The following selected accounts for Happy Heights Country Club are for July 31: CASH 7/1 Bal. 7/3 7/5 7/7

UNEARNED TUITION REVENUE 7/ 3 1,000

12,000 1,000 3,600 1,800

ACCOUNTS RECEIVABLE 7/2

3,600

7/7

MEMBERSHIP REVENUE 7/ 2 7/ 5

1,800

3,600 3,600

On which date did the country club sell a club membership for cash? a. July 2 b. July 3 c. July 5 d. July 7 120. The following selected accounts for Happy Heights Country Club are for July 31: CASH 7/1 Bal. 7/3 7/5 7/7

UNEARNED TUITION REVENUE 7/ 3 1,000

12,000 1,000 3,600 1,800

ACCOUNTS RECEIVABLE 7/2

3,600

7/7

MEMBERSHIP REVENUE 1,800

7/ 2 7/ 5

3,600 3,600

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Ch 02 The Accounting Information System On which date did the country club collect golf lessons revenue in advance? a. July 2 b. July 3 c. July 5 d. July 7 121. The following selected accounts for Happy Heights Country Club are for July 31: CASH 7/1 Bal. 7/3 7/5 7/7

UNEARNED TUITION REVENUE 7/ 3 1,000

12,000 1,000 3,600 1,800

ACCOUNTS RECEIVABLE 7/2

3,600

7/7

MEMBERSHIP REVENUE 7/ 2 7/ 5

1,800

3,600 3,600

Which of the following describes the transactions that occurred on July 7? a. sold club membership on credit b. collected revenue in advance c. collected accounts receivable d. sold club membership for cash 122. The following selected accounts for Happy Heights Country Club are for July 31: CASH 7/1 Bal. 7/3 7/5 7/7

UNEARNED TUITION REVENUE 7/ 3 1,000

12,000 1,000 3,600 1,800

ACCOUNTS RECEIVABLE 7/2

3,600

7/7

MEMBERSHIP REVENUE 1,800

7/ 2 7/ 5

3,600 3,600

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Ch 02 The Accounting Information System Assuming that there are no other transactions, how much was owed to the country club by its members at the end of the month? a. $3,600 b. $7,200 c. $1,800 d. $1,000 123. What type of account is increased with a debit but represents a decrease in retained earnings? a. liability b. asset c. revenue and gain d. dividend declared 124. The term for the process of recording business events in a book of original entry is a. analyzing. b. journalizing. c. posting. d. classifying. 125. The following transactions for HVAC Service occurred during November:

Nov. 1

Sent bills to clients for services provided in August in the amount of $12,000.

Purchased office equipment of $4,000 and office supplies of $150 from Office Supplies Depot, receiving an invoice for $4,150. None of the office supplies were used during November.

Paid for the office furniture and supplies purchased from Office Supplies Depot.

Received a $350 bill from WKRP Radio for advertising. The bill will be paid next month.

Paid salaries of $2,500 to employees.

The journal entry to record the bills sent to clients includes a debit of $12,000 to a. Service Revenue. b. Cash. c. Accounts Receivable. d. Retained Earnings. 126. The following transactions for HVAC Service occurred during November: Nov. 1 9

Sent bills to clients for services provided in August in the amount of $12,000. Purchased office equipment of $4,000 and office supplies of $150 from Office Supplies Depot, receiving an invoice for $4,150. None of the office supplies were used during November.

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Ch 02 The Accounting Information System 15

Paid for the office furniture and supplies purchased from Office Supplies Depot.

Received a $350 bill from WKRP Radio for advertising. The bill will be paid next month.

Paid salaries of $2,500 to employees.

The journal entry to record the purchase of office equipment and supplies includes a credit to a. Furniture and Supplies. b. Cash. c. Accounts Payable. d. Delivery Expense. 127. The following transactions for HVAC Service occurred during November: Nov. 1

Sent bills to clients for services provided in August in the amount of $12,000.

Purchased office equipment of $4,000 and office supplies of $150 from Office Supplies Depot, receiving an invoice for $4,150. None of the office supplies were used during November.

Paid for the office furniture and supplies purchased from Office Supplies Depot.

Received a $350 bill from WKRP Radio for advertising. The bill will be paid next month.

Paid salaries of $2,500 to employees.

The journal entry to record payment for the office equipment and supplies includes a debit to a. Salary Expense. b. Salaries Payable. c. Prepaid Expenses. d. Accounts Payable. 128. The following transactions for HVAC Service occurred during November: Nov. 1

Sent bills to clients for services provided in August in the amount of $12,000.

Purchased office equipment of $4,000 and office supplies of $150 from Office Supplies Depot, receiving an invoice for $4,150. None of the office supplies were used during November.

Paid for the office furniture and supplies purchased from Office Supplies Depot.

Received a $350 bill from WKRP Radio for advertising. The bill will be paid next month.

Paid salaries of $2,500 to employees.

The journal entry to record the bill received from WKRP Radio includes a debit to a. Accounts Receivable. b. Cash. Powered by Cognero

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Ch 02 The Accounting Information System c. Advertising Expense. d. Accounts Payable. 129. The following transactions for HVAC Service occurred during November: Nov. 1 Sent bills to clients for services provided in August in the amount of $12,000. 9

Purchased office equipment of $4,000 and office supplies of $150 from Office Supplies Depot, receiving an invoice for $4,150. None of the office supplies were used during November.

Paid for the office furniture and supplies purchased from Office Supplies Depot.

Received a $350 bill from WKRP Radio for advertising. The bill will be paid next month.

Paid salaries of $2,500 to employees.

The journal entry to record payment of the salaries includes a credit to a. Salary Expense. b. Salary Payable. c. Prepaid Salaries. d. Cash. 130. The following transactions for HVAC Service occurred during November: Nov. 1

Sent bills to clients for services provided in August in the amount of $12,000.

Purchased office equipment of $4,000 and office supplies of $150 from Office Supplies Depot, receiving an invoice for $4,150. None of the office supplies were used during November.

Paid for the office furniture and supplies purchased from Office Supplies Depot.

Received a $350 bill from WKRP Radio for advertising. The bill will be paid next month.

Paid salaries of $2,500 to employees.

Based on these transactions, what is the total amount of expense that should be reported on the company's income statement for the month? a. $350 b. $2,500 c. $2,850 d. $3,000 131. The following transactions for Hesson Properties Inc. occurred during June: June 1

Purchased two new maintenance carts on account at $750 each. Payment is due in 30 days.

Accepted $500 of advance payments from customers for services to be provided next month.

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Ch 02 The Accounting Information System 15

Received the utility bill for $300. Payment is due in 30 days.

Billed customers $1,500 for services provided. Payment is due in 30 days.

Received $500 from customers who were billed earlier.

What journal entry is required to record the purchase of the carts? a. Equipment 1,500 Accounts Payable 1,500 b. Equipment 1,500 Cash 1,500 c. Cash 1,500 Equipment 1,500 d. Accounts Payable 1,500 Equipment 1,500 132. The following transactions for Hesson Properties Inc. occurred during June: Purchased two new maintenance carts on account at $750 each. Payment is due June 1 in 30 days. 8

Accepted $500 of advance payments from customers for services to be provided next month.

Received the utility bill for $300. Payment is due in 30 days.

Billed customers $1,500 for services provided. Payment is due in 30 days.

Received $500 from customers who were billed earlier.

What journal entry is required to record the cash collected in advance? a. Cash 500 Service Revenue 500 b. Accounts Receivable 500 Service Revenue 500 c. Cash 500 Unearned Revenue 500 d. Unearned Revenue 500 Accounts Receivable 500 133. The following transactions for Hesson Properties Inc. occurred during June: June 1

Purchased two new maintenance carts on account at $750 each. Payment is due in 30 days.

Accepted $500 of advance payments from customers for services to be provided next month.

Received a utility bill for $300. Payment is due in 30 days.

Billed customers $1,500 for services provided. Payment is due in 30 days.

Received $500 from customers who were billed earlier.

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Ch 02 The Accounting Information System What journal entry is required to record the utility bill? a. Utilities Expense 300 Cash 300 b. Accounts Receivable 300 Utilities Expense 300 c. Utilities Expense 300 Accounts Payable 300 d. Cash 300 Utilities Expense 300 134. The following transactions for Hesson Properties Inc. occurred during June: June 1

Purchased two new maintenance carts on account at $750 each. Payment is due in 30 days.

Accepted $500 of advance payments from customers for services to be provided next month.

Received a utility bill for $300. Payment is due in 30 days.

Billed customers $1,500 for services provided. Payment is due in 30 days.

Received $500 from customers who were billed earlier.

What journal entry is required to record the services provided to customers? a. Cash 1,500 Accounts Receivable 1,500 b. Accounts Receivable 1,500 Service Revenue 1,500 c. Service Revenue 1,500 Cash 1,500 d. Service Revenue 1,500 Accounts Payable 1,500 135. The following transactions for Hesson Properties Inc. occurred during June: June 1

Purchased two new maintenance carts on account at $750 each. Payment is due in 30 days.

Accepted $500 of advance payments from customers for services to be provided next month.

Received a utility bill for $300. Payment is due in 30 days.

Billed customers $1,500 for services provided. Payment is due in 30 days.

Received $500 from customers who were billed earlier.

What journal entry is required to record the collections on account from customers? a. Cash 500 Accounts Receivable 500 Powered by Cognero

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Ch 02 The Accounting Information System b. Accounts Receivable Service Revenue c. Accounts Payable Cash d. Service Revenue Cash

500 500 500 500 500 500

136. The following transactions for Hesson Properties Inc. occurred during June: June 1

Purchased two new maintenance carts on account at $750 each. Payment is due in 30 days.

Accepted $500 of advance payments from customers for services to be provided next month.

Received a utility bill for $300. Payment is due in 30 days.

Billed customers $1,500 for services provided. Payment is due in 30 days.

Received $500 from customers who were billed earlier.

How much is still owed to the company by its customers at the end of the month? a. $0 b. $500 c. $1,000 d. $1,500 137. The chronological record in which transactions are initially recorded in the order in which they occur is called a a. T-account. b. chart of accounts. c. trial balance. d. journal. 138. The process of transferring amounts from the book of original entry into specific account records is referred to as a. journalizing. b. posting. c. analyzing. d. classifying. 139. Which of the following statements is true? a. An entry in a general ledger account can be traced to the trial balance by referring to the page listed in the Posting Reference column of that ledger account. b. The posting of an amount recorded in the general ledger can be verified by referring to the account number listed in the Posting Reference column on that line in the general journal. c. Business transactions are recorded first in the general ledger, then that information is transferred to the general journal. d. No explanation is needed for each entry in the general ledger. Powered by Cognero

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Ch 02 The Accounting Information System 140. Which of the following statements is true? a. If a debit entry is made to an account in the general journal, the same account will receive a credit entry when the amount is posted to the general ledger. b. If all transactions are correctly posted to the general ledger, the sum of the accounts with debit balances should be equal to the sum of the accounts with credit balances. c. Posting occurs when numbers in the general ledger accounts are transferred to the general journal. d. If the sum of the debit balances equals the sum of the credit balances, this proves that there were no mistakes made in the posting process. 141. A trial balance is a(n) a. optional financial statement used only by creditors. b. tool used to prove the equality of debits and credits in the general ledger. c. list of accounts and their balances taken from the chart of accounts. d. financial statement that can be used in place of a balance sheet. 142. If the sum of the debits is not equal to the sum of the credits in a trial balance, then a. there is no concern because the two amounts are not meant to be equal. b. the chart of accounts does not balance. c. it is safe to proceed with the preparation of financial statements. d. it is likely that an error was made in journalizing or posting transactions or in computing the account balance. 143. Which of the following will not cause a trial balance to be out of balance? a. The balance for the account is incorrectly computed. b. A debit entry is posted as a credit. c. A credit entry is posted to the wrong account, but still as a credit. d. An account is accidentally omitted from the trial balance. 144. The list of all active accounts and their balances at a particular date, which is used to prove the equality of debits and credits, is called a a. chart of accounts. b. general ledger. c. journal. d. trial balance.

145. The following transactions for Hatcher Tool Service occurred during June: June 1

Purchased a service truck for $25,500, paying $5,500 now and issuing a note payable for the balance; the note is due in monthly installments of $500 plus 10% interest on the unpaid principal balance.

Performed services of $30,400. Received $6,400 cash from customers and $24,000 from customers billed for completed services.

Issued common stock in exchange for land having a fair value of $70,000.

Received an invoice for $2,400 from the company's advertising agency for radio

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Ch 02 The Accounting Information System and television ads that were run during the month; the invoice is due in 30 days. Indicate the economic effects of each transaction on the accounting equation. Use the following format for your answers. Show the dollar amounts in the appropriate columns and use a plus (+) sign to indicate an increase and a minus (−) sign to indicate a decrease. Transaction Date

Assets

Liabilities

Stockholders' Equity

146. The following transactions were incurred by H&R Clock Company during July: July 1

Raised $30,000 by issuing a note to the bank for $15,000 and issuing $15,000 of common stock.

Purchased $5,100 of office supplies on credit; payment is due in 30 days.

Performed $18,000 of services for customers on credit; collection is due in 30 days.

Performed services for customers and collected $8,800.

Paid for the supplies purchased on July 5.

Collected $15,000 of the amounts due from customers.

Received and paid the electric bill for the month of July, $640.

Paid employee salaries of $3,800.

Use the following format to indicate the economic effects of each transaction on the expanded accounting equation. Show the dollar amounts in the appropriate columns and use a plus (+) sign to indicate an increase and a minus (−) sign to indicate a decrease. Transaction Date

Assets

Liabilities

Contributed Capital

Retained Earnings

147. A bookkeeper prepared the following journal entries for Holiday Marina during May. Assume that the descriptions of the entries are correct. Journal (partial): Date May 5

Accounts and Descriptions Accounts Receivable

Debit 1,600 Service Revenue Billed customers for services completed.

Credit 1,600

Cash

500 Service Revenue 500 Collected from a customer billed on May 5 for services rendered.

Office Supplies

700 Accounts Payable Purchased furniture on credit; payment due in 30 days.

Office Furniture

700 Cash

700

500 Page 26

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Ch 02 The Accounting Information System Paid the $700 furniture bill received on May 15. Identify the transactions that the bookkeeper recorded incorrectly in the journal. Prepare the journal entry that the bookkeeper should have made for each transaction that you identify as being made incorrectly. 148. Heart & Hands Clinic began business as a corporation in the current year. Descriptions for several transactions that occurred early in the year follow. Record each transaction in proper journal form, excluding written explanations. A)

Jan. 23

Stockholders invested $70,000 in the business and received shares of common stock as evidence of ownership.

Feb. 1

Rent of $1,600 was paid for the month of February.

Feb. 7

Equipment with a cost of $3,000 was purchased on credit; payment is due in 30 days.

Feb. 14

Fees totaling $5,400 were billed to patients; $2,900 was collected immediately and the balance of $2,500 is due within 30 days.

Feb. 18

Full payment was made for the equipment purchased on February 7.

Feb. 22

$1,900 was collected from patients with balances due from February 14.

Feb. 28

Employee salaries of $3,300 were paid.

149. The following transactions for Hatcher Tool Service occurred during June:

June 1

Purchased a service truck for $25,500, paying $5,500 now and issuing a note payable for the balance; the note is due in monthly installments of $500 plus 10% interest on the unpaid principal balance.

Performed services of $30,400. Received $6,400 cash from customers and $24,000 from customers billed for completed services.

Issued common stock in exchange for land having a fair value of $70,000.

Received an invoice for $2,400 from the company's advertising agency for radio and television ads that were run during the month; the invoice is due in 30 days.

Record each transaction in proper journal entry format in the journal provided. A written explanation for each journal entry is not required. JOURNAL Date

Accounts

Debit

Credit

150. Several transactions that might be recorded by a music supply company follow. Several accounts from the company's chart of accounts are also listed. Using these account titles, record each transaction in proper journal entry format. A written explanation for each journal entry is not required. Accounts: Cash Accounts Receivable Inventory Powered by Cognero

Common Stock Retained Earnings Sales Revenue Page 27

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Ch 02 The Accounting Information System Accounts Payable Unearned Revenue

Selling Expenses Administrative Expenses

Bills are mailed for musical instruments sold to customers, $225,000.

Customers pay for musical instruments in advance, $130,000.

Administrative employees are paid their monthly salaries, $14,000.

An invoice is received for $15,200 of new musical instruments purchased for sale to customers; payment is due in 30 days.

Payments are received from customers for amounts billed in a previous transaction, $135,000.

Full payment is made for the musical instruments invoice received in a previous transaction.

151. A bookkeeper prepared the following journal entries for Holiday Marina during May. Assume that the descriptions of the entries are correct. Journal (partial): Date May 5

Accounts and Descriptions Accounts Receivable

Debit 1,600 Service Revenue Billed customers for services completed.

Cash

Credit 1,600

500 Service Revenue 500 Collected from a customer billed on May 5 for services rendered.

Office Supplies

Office Furniture

700 Accounts Payable Purchased furniture on credit; payment due in 30 days.

700

700 Cash Paid the $700 furniture bill received on May 15.

500

Assume that the incorrect journal entries have been posted to the general ledger. For each incorrect journal entry, explain why the error would or would not be discovered by preparing a trial balance.

152. The following transactions for H&R Clock Company were incurred during July: July 1

Raised $30,000 by issuing a note to the bank for $15,000 and issuing $15,000 of common stock.

Purchased $5,100 of office supplies on credit; payment is due in 30 days.

Performed $18,000 of services for customers on credit; collection is due in 30 days.

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Ch 02 The Accounting Information System 13

Performed services for customers and collected $8,800.

Paid for the supplies purchased on July 5.

Collected $15,000 of the amounts due from customers.

Received and paid a utility bill for the month of July, $640.

Paid employee salaries of $3,800.

Record each transaction in the proper journal entry format in the journal provided. A written explanation for each journal entry is not required. JOURNAL Date

Accounts

Debit

Credit

153. The following transactions for Hatcher Tool Service occurred during June: June 1

Purchased a service truck for $25,500, paying $5,500 now and issuing a note payable for the balance; the note is due in monthly installments of $500 plus 10% interest on the unpaid principal balance.

Performed services of $30,400. Received $6,400 cash from customers and $24,000 from customers billed for completed services.

Issued common stock in exchange for land having a fair value of $70,000.

Received an invoice for $2,400 from the company's advertising agency for radio and television ads that were run during the month; the invoice is due in 30 days. Set up T-accounts and post each transaction to the T-accounts. 30

154. Home Accent Interiors’ bookkeeper prepared the following journal entries and posted them to the general ledger as indicated in the T-accounts presented. Assume that the dollar amounts and descriptions of the entries are correct. Journal (partial): Date May 5

Accounts and Descriptions Accounts Receivable

Debit 6,400 Service Revenue Billed customers for services completed.

Cash

Supplies

Office Furniture

2,000 Service Revenue Received payment from a customer for services rendered in a prior month. 2,800 Accounts Payable Purchased furniture on account; payment due in 30 days.

6,400

2,000

2,800

2,800 Cash Paid for the office furniture purchased earlier.

Credit

2,800 Page 29

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Ch 02 The Accounting Information System General Ledger (partial): Accounts Receivable

Service Revenue

5/5 6,400

Cash

Accounts Payable

5/11 2,000

5/15 2,800

Office Furniture 5/11 2,000

5/25 2,800 Supplies 5/15 2,800

Identify the postings to the general ledger that were made incorrectly. Describe how each incorrect posting should have been made. For this problem, assume that the journal entries have been correctly recorded. 155. The following transactions for H&R Clock Company were incurred during July: July 1

Raised $30,000 by issuing a note to the bank for $15,000 and issuing $15,000 of common stock.

Purchased $5,100 of office supplies on credit; payment is due in 30 days.

Performed $18,000 of services for customers on credit; collection is due in 30 days.

Performed services for customers and collected $8,800.

Paid for the supplies purchased on July 5.

Collected $15,000 of the amounts due from customers.

Received and paid the utility bill for the month of July, $640.

Paid employee salaries of $3,800.

Set up T-accounts and post each transaction to the T-accounts. 156. The following transactions for Hatcher Tool Service occurred during June:

June 1

Purchased a service truck for $25,500, paying $5,500 now and issuing a note payable for the balance; the note is due in monthly installments of $500 plus 10% interest on the unpaid principal balance.

Performed services of $30,400. Received $6,400 cash from customers and $24,000 from customers billed for completed services.

Issued common stock in exchange for land having a fair value of $70,000.

Received an invoice for $2,400 from the company's advertising agency for radio and television ads that were run during the month; the invoice is due in 30 days.

Prepare a trial balance in the proper format. Assume that there are no additional accounts or balances other than those created from the June transactions. Powered by Cognero

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Ch 02 The Accounting Information System 157. The following T-accounts are taken from the general ledger of Health Force Corporation on March 31. Determine the balance of each account and present them in the proper trial balance format. Cash

Accounts Payable

5,000 9,000 44,000 36,000

12,000 650 15,200 650

8,000 3,000 24,000 10,000

16,100 650 16,400 3,200 750

Accounts Receivable 21,000

8,000 3,000

Prepaid Insurance 1,200

3,200

Common Stock

4,200

30,000 24,000

Salaries Payable

Service Revenue

5,000

21,000 9,000 22,000 36,000

Unearned Revenue 22,000

Advertising Expense

44,000

4,200

Notes Payable 100 100 100

Salaries Expense

16,500

Equipment

15,200 16,100 16,400 5,000 Rent Expense

35,300

650 650 650

Insurance Expense 100 100 100

Dividends Declared 7,750

158. The following accounts are from the accounting records of Hoosier Momma Promotions on September 30. Assume that each account balance is normal and present them in the proper trial balance format. Cash Short-Term Investments Accounts Receivable Inventory Land Building Powered by Cognero

4,200 13,000 4,500 23,000 90,000 700,000 Page 31

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Ch 02 The Accounting Information System Furniture Equipment Accounts Payable Salaries Payable Unearned Revenue Interest Payable Notes Payable Common Stock Retained Earnings Sales Cost of Goods Sold Salaries Expense Rent Expense Insurance Expense Depreciation Expense Utility Expense Dividends Declared

450,000 281,700 7,200 4,100 17,000 2,000 70,000 460,000 977,000 158,000 78,000 24,000 6,000 1,000 11,000 900 8,000

159. The following transactions for H&R Clock Company were incurred during July: July 1

Raised $30,000 by issuing a note to the bank for $15,000 and issuing $15,000 of common stock.

Purchased $5,100 of office supplies on credit; payment is due in 30 days.

Performed $18,000 of services for customers on credit; collection is due in 30 days.

Performed services for customers and collected $8,800.

Paid for the supplies purchased on July 5.

Collected $15,000 of the amounts due from customers.

Received and paid a utility bill for the month of July, $640.

Paid employee salaries of $3,800.

Prepare a trial balance in the proper format. Assume that the company had no additional accounts or balances other than those created from the July transactions.

160. What is the difference between comparability and consistency? 161. What is conservatism, and why is it important in accounting? 162. What are generally accepted accounting principles? 163. Each of the situations in A through C applies to one of the assumptions or principles included in the conceptual framework of accounting. Identify which assumption or principle applies and explain why that assumption or principle Powered by Cognero

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Ch 02 The Accounting Information System applies. A)

High Collectibles is a U.S. company that has divisions in several countries around the world. Each country has a currency different than the U.S. dollar. The company must include the financial data of its worldwide divisions in its financial statements.

Howell Trucking operates as a partnership. The partners are considering a change to the corporate form of the business organization.

Holly Company is a local company. The owners have decided to expand into nearby cities. Expansion will require more capital, but management does not expect it will stay in business for more than one year or so regardless of its expansion plans.

164. Given the overall objective of providing useful information, the FASB has identified two fundamental characteristics that useful information should possess. Explain these two characteristics. 165. Several terms that represent the components of an accounting system follow. For each term, write a brief explanation of how that component is used in the accounting cycle. A)

Accounts

Chart of accounts

Double-entry system with debits and credits

Journal

General ledger

Trial balance

166. Write an explanation for the following four journal entries. A) Cash Service Revenue

12,200

17,500

Accounts Receivable

12,200

Service Revenue C)

Cash

17,500 16,900

Accounts Receivable D)

Cash

16,900 1,830

Unearned Revenue

1,830

167. A bookkeeper made the following errors while recording transactions for a certain period: A)

A purchase of equipment for $450 cash was recorded as a debit to Equipment for $540 and a credit to Cash for $540.

The sale of services for cash in the amount of $4,134 was recorded as a debit to Cash for $4,134 and a credit to Service Revenue for $4,314.

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Ch 02 The Accounting Information System C)

A purchase of supplies for $200 cash was recorded correctly in the journal but was omitted from the general ledger.

The sale of services for credit in the amount of $3,800 was recorded correctly in the journal but was posted twice to the general ledger.

$5,500 cash paid for salaries was recorded in the journal as a $5,500 debit to Cash and a $5,500 credit to Salaries Expense. Indicate whether or not the debit and credit columns of the trial balance will be equal after recording each of these erroneous entries. Then identify the account(s) that will be misstated as a result of these errors and the direction of the misstatement (i.e., understatement or overstatement). E)

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Ch 02 The Accounting Information System Answer Key 1. False 2. False 3. False 4. True 5. False 6. False 7. False 8. True 9. True 10. True 11. True 12. True 13. False 14. True 15. True 16. False 17. False 18. False 19. False 20. True 21. True 22. False 23. False 24. True 25. False Powered by Cognero

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Ch 02 The Accounting Information System 26. False 27. False 28. True 29. True 30. b 31. b 32. d 33. a 34. b 35. c 36. c 37. a 38. d 39. c 40. d 41. b 42. a 43. d 44. a 45. c 46. b 47. d 48. b 49. b 50. d 51. c Powered by Cognero

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Ch 02 The Accounting Information System 52. a 53. b 54. a 55. d 56. a 57. b 58. c 59. a 60. b 61. d 62. b 63. a 64. a 65. c 66. c 67. a 68. b 69. a 70. c 71. b 72. a 73. d 74. d 75. a 76. c Powered by Cognero

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Ch 02 The Accounting Information System 77. c 78. c 79. c 80. a 81. c 82. c 83. b 84. a 85. b 86. d 87. d 88. c 89. d 90. b 91. b 92. b 93. c 94. d 95. c 96. a 97. c 98. c 99. a 100. c 101. b 102. a Powered by Cognero

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Ch 02 The Accounting Information System 103. c 104. c 105. a 106. b 107. b 108. a 109. b 110. a 111. c 112. b 113. c 114. d 115. d 116. a 117. c 118. a 119. c 120. b 121. c 122. c 123. d 124. b 125. c 126. c 127. d Powered by Cognero

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Ch 02 The Accounting Information System 128. c 129. d 130. c 131. a 132. c 133. c 134. b 135. a 136. c 137. d 138. b 139. b 140. b 141. b 142. d 143. c 144. d 145. Transaction Date June 1

Assets +$20,000 ($25,500 − $5,500)

Liabilities +$20,000

Stockholders' Equity

June 8

+$30,400 ($6,400 + $24,000)

+$30,400

June 22

+$70,000

June 30 146. Transaction Date July 1 Powered by Cognero

−$2,400

+$2,400

Assets +$30,000

Liabilities +$15,000

Contributed Capital +$15,000

Retained Earnings

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Ch 02 The Accounting Information System July 5

+$5,100

July 12

+$18,000

July 13

+$8,800

July 20

−$5,100

July 22

$0 (+$15,000 − $15,000)

July 30

−$640

July 31

−$3,800

−$5,100

147. The May 11, 15, and 25 entries were recorded incorrectly. The correct entries are as follows: Date May 11

Accounts and Descriptions Cash

Debit 500 Accounts Receivable Collected from a customer for services billed earlier.

Office Furniture

700 Accounts Payable Purchased furniture on credit; payment due in 30 days.

Accounts Payable

Credit 500

700

700 Cash Paid the furniture bill.

700

148. A)

Date Jan. 23

Account Cash

Debit 70,000 Common Stock

Feb. 1

Rent Expense

70,000 1,600

Cash C)

Feb. 7

Equipment

1,600 3,000

Accounts Payable D)

Feb. 14

Cash Accounts Receivable

3,000 2,900 2,500

Service Revenue E)

Feb. 18

Accounts Payable

5,400 3,000

Cash F)

Feb. 22

Cash

3,000 1,900

Accounts Receivable G)

Feb. 28

Salary Expense

Credit

1,900 3,300 Page 41

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Ch 02 The Accounting Information System Cash

3,300

149. JOURNAL Date June 1

Accounts Vehicles

Debit 25,500 Cash Note Payable

Cash Accounts Receivable

5,500 20,000 6,400 24,000

Service Revenue 22

Land

30,400 70,000

Common Stock 30

Credit

Advertising Expense

70,000 2,400

Accounts Payable

2,400

150. A)

Account Accounts Receivable

Debit 225,000 Sales Revenue

Cash

225,000 130,000

Unearned Revenue C)

Administrative Expenses

130,000 14,000

Cash D)

Inventory

14,000 15,200

Accounts Payable E)

Cash

15,200 135,000

Accounts Receivable F)

Credit

Accounts Payable

135,000 15,200

Cash

15,200

151. May 11: Because equal dollar amounts were recorded in the journal entry, preparing a trial balance would not help discover the error. May 15: Because equal dollar amounts were recorded in the journal entry, preparing a trial balance would not help discover the error. May 25: This error would be discovered by preparing a trial balance because the total debits would be $200 higher than the total credits. 152. JOURNAL Date July 1

Accounts Cash

Debit 30,000 Note Payable

Credit 15,000 Page 42

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Ch 02 The Accounting Information System Common Stock 5

15,000

Office Supplies

5,100 Accounts Payable

5,100

Accounts Receivable

18,000 Service Revenue

18,000

Cash

8,800 Service Revenue

8,800

Accounts Payable

5,100 Cash

5,100

Cash

15,000 Accounts Receivable

15,000

Utilities Expense

640 Cash

640

Salaries Expense

3,800 Cash

3,800

153. Vehicles 6/1 25,500

Cash 6/8 6,400

Accounts Receivable

Notes Payable 6/1 5,500

Service Revenue

6/8 24,000

6/8 30,400

Common Stock 6/22 70,000

Advertising Expense 6/30 2,400

6/1 20,000

Land 6/22 70,000

Accounts Payable 6/30 2,400

154. The bookkeeper incorrectly posted the May 5 and 15 journal entries. For the May 5 journal entry, the $6,400 credit to Service Revenue should have been posted to the service revenue account as a credit, not as a debit. For the May 15 journal entry, the $2,800 credit to Accounts Payable should have been posted to the accounts payable account as a credit, not as a debit. The bookkeeper failed to credit Cash for $2,800 for the May 25 journal entry. 155. Powered by Cognero

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Ch 02 The Accounting Information System Cash

Note Payable

7/1 30,000

7/20 5,100

7/13 8,800

7/30 640

7/22 15,000

7/31 3,800

Common Stock

7/1 15,000

Office Supplies

Accounts Payable

7/5 5,100

7/20 5,100

Service Revenue

7/1 15,000

Accounts Receivable

7/5 5,100

7/12 18,000

Utilities Expense

7/12 18,000 7/13 8,800

7/22 15,000 Salaries Expense

7/30 640

7/31 3,800

156. Hatcher Tool Service Trial Balance June 30 Account Cash Accounts Receivable Land Vehicles Accounts Payable Notes Payable Common Stock Service Revenue Advertising Expense

Debit 900 24,000 70,000 25,500

Credit

2,400 $122,800

$ 2,400 20,000 70,000 30,400 _______ $122,800

157. Health Force Corporation Trial Balance March 31 Account Cash Accounts Receivable Prepaid Insurance Powered by Cognero

Debit $ 73,400 10,000 900

Credit

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Ch 02 The Accounting Information System Equipment Accounts Payable Salaries Payable Unearned Revenue Notes Payable Common Stock Service Revenue Advertising Expense Salaries Expense Rent Expense Insurance Expense Dividends Declared

35,300 $ 1,000 5,000 22,000 16,500 54,000 88,000 4,200 52,700 1,950 300 7,750 $186,500

________ $186,500

158. Hoosier Momma Promotions Trial Balance September 30 Account Cash Short-Term investments Accounts Receivable Inventory Land Building Furniture Equipment Accounts Payable Salaries Payable Unearned Revenue Interest Payable Notes Payable Common Stock Retained Earnings Sales Cost of Goods Sold Salaries Expense Rent Expense Insurance Expense Depreciation Expense Utility Expense Dividends Declared

Debit 4,200 13,000 4,500 23,000 90,000 700,000 450,000 281,700

Credit

78,000 24,000 6,000 1,000 11,000 900 8,000 $1,695,300

7,200 4,100 17,000 2,000 70,000 460,000 977,000 158,000

_________ $1,695,300

159. H&R Clock Company Trial Balance July 31 Account Cash Powered by Cognero

Debit $44,260

Credit Page 45

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Ch 02 The Accounting Information System Accounts Receivable Office Supplies Accounts Payable Notes Payable Common Stock Service Revenue Utilities Expense Salaries Expense

3,000 5,100 $ 0 15,000 15,000 26,800 640 3,800 $56,800

_______ $56,800

160. Comparability allows comparisons to be made between or among companies. Even though a certain amount of freedom exists in selecting accounting principles, when this information is disclosed in financial statements, users can still compare the information when they know what principle is used. Consistency refers to the application of the same accounting principles over time. It involves the relationships between a set of numbers over several periods, but within one company only, unlike comparability that can be between or among companies. 161. Conservatism is choosing the path that will be least likely to overstate assets or income. It is used in situations in which there is uncertainty about how to account for a particular item. In accounting, it is used in the balance sheet and income statement in an effort to provide the least optimistic amount. Conservatism is a prudent reaction to uncertainty that offsets management's natural optimism. 162. Generally accepted accounting principles (GAAP) are a set of guidelines that are based on a conceptual framework. They represent the various rules, practices, and other procedures used as a basis for accounting principles. GAAP was created in response to the need to make it easier to use financial statements over time and across companies. 163. A)

Monetary Unit Assumption. Financial statements must be reported in monetary terms, and the standard monetary unit should be denominated in one currency.

Economic Entity Assumption. A business can take three forms. Regardless of the form, however, the unit itself is distinct from its owners.

Continuity (Going Concern) Assumption. A business is assumed to continue to operate long enough to carry out its obligations, to more accurately reflect the valuation of assets and to appropriately allocate costs to accounting periods.

164. The two fundamental characteristics that useful accounting information should possess are relevance and faithful representation. Relevant information has the capacity to make a difference in a decision. It helps users predict future events or provides feedback. Accounting information should be a faithful representation of the real-world economic event that it is intending to portray. Faithfully represented information should be complete (include all necessary information for the user to understand the economic event), neutral (unbiased), and free from error (as accurate as possible). 165. A)

An account is a record used to accumulate monetary amounts of increases and decreases

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Ch 02 The Accounting Information System for each basic element reported in an entity's financial statements. A separate record is prepared for each asset, liability, stockholders' equity, revenue, expense, gain, loss, and dividend declared element.

A chart of accounts is a list of all accounts (financial statement elements) used by a company, including numbers assigned to the accounts by the entity to facilitate bookkeeping activities. The chart of accounts is used to locate accounts in a general ledger.

In a double-entry system with debits and credits, equal debit and credit amounts are recorded for the effects of each transaction on an entity's accounts. Increases and decreases are recorded as debits (left-side entries) or credits (right-side entries) in the accounts. To maintain the equality of the accounting equation, assets = liabilities + stockholders' equity, the rules of debit and credit require that some accounts increase by debits and decrease by credits and that other accounts increase by credits and decrease by debits.

A journal is an accounting record in which all business transactions are recorded in chronological order as they occur. The transaction date, accounts affected, amounts to be debited and credited to the affected accounts, and a brief description of the transaction are recorded. As the amounts are transferred to the accounts in the general ledger, the account numbers are entered in the Posting Reference column of the journal.

A general ledger is a book or file that contains a record for each account used by an entity. The individual account records contain the monetary amounts transferred from the general journal entries. The difference between the debit and credit entries is the account balance. Periodically, the account balances are listed in a trial balance and used in the preparation of financial statements.

A trial balance is a schedule or list of all accounts and their balances from the general ledger. Amounts for accounts with debit balances are listed in one column, and amounts for accounts with credit balances are listed in a second column. The sum of the debit and credit balances should be equal in the double-entry system. If the sums of the debit and credit balances are not equal, procedures for locating the error(s) must be applied. The trial balance provides information that is needed to prepare financial statements.

166. A)

Cash was received for services provided to customers.

Customers were billed for services provided.

Cash was collected from customers who had been billed previously.

Cash was collected from customers for services to be provided later.

167. A)

The trial balance will still balance, but both of the accounts will be overstated by $90.

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Ch 02 The Accounting Information System B)

The trial balance will be out of balance, as Service Revenues will be overstated by $180.

The trial balance will still balance, but Supplies will be understated by $200 and Cash will be overstated by $200.

TThe trial balance will still balance, but both Accounts Receivable and Service Revenue will be overstated by $3,800.

The trial balance will still balance, but Cash will be overstated by $11,000 and Salaries Expense will be understated by $11,000.

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Ch 03 Accrual Accounting

Indicate whether the statement is true or false. 1. Most companies use the accrual basis of accounting because it is required under generally accepted accounting principles. a. True b. False 2. Most companies use cash-basis accounting. a. True b. False 3. The expense recognition principle requires that expenses be recorded and reported in the same period as the revenue that they helped to generate. a. True b. False 4. Adjusting entries are prepared using the accrual basis of accounting for preparing financial statements. a. True b. False 5. Adjustments are recorded for all transactions involving outside entities. a. True b. False 6. Three months before its year-end, a company signed a $250,000, 12%, 8-month note. Principal and interest will be paid at maturity. No interest should be accrued at year-end because the company has no obligation to pay the interest until the note matures. a. True b. False 7. When a company recognizes the portion of supplies used during a year, the effect is a decrease in net income. a. True b. False 8. Accrued revenue is recognized when cash is received. a. True b. False 9. One effect of recognizing depreciation is to decrease net income. a. True b. False 10. A company that forgets to recognize depreciation for the year understates its income and assets. a. True b. False Powered by Cognero

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Ch 03 Accrual Accounting 11. The cash account is never part of an adjusting entry. a. True b. False 12. A cost can be an asset or expense depending on whether or not the future economic benefits have expired. a. True b. False 13. When cash is paid before an expense is incurred, an accrual is necessary. a. True b. False 14. The amount of interest accrued is added to the note payable account and reported in the liabilities section of the balance sheet. a. True b. False 15. Accumulated Depreciation is a contra asset account. a. True b. False 16. When revenue is earned after the earlier receipt of cash, an adjustment that increases a revenue account and decreases a liability account is recorded. a. True b. False 17. Every adjustment involves at least one income statement and one balance sheet account. a. True b. False 18. When an expense is incurred prior to the payment of cash for that expense, an adjustment that increases an expense account and increases a liability is prepared. a. True b. False 19. The balance in the account, Rent Collected in Advance, is reported as a liability on the balance sheet of the landlord. a. True b. False 20. Adjusting entries are recorded at the end of each accounting period so that net income is accurately reflected in the financial statements for the period. a. True b. False 21. Income statement accounts are closed to Retained Earnings. a. True Powered by Cognero

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Ch 03 Accrual Accounting b. False 22. Since dividends do not impact the income statement, the dividends account is not closed to the retained earnings account. a. True b. False 23. Closing entries are necessary to ensure that the company's net income for an accounting period is accurately determined. a. True b. False 24. During the closing process, revenues, expenses, and dividends must be closed to Retained Earnings. a. True b. False 25. Dividends are closed to the retained earnings account during the end-of-period closing process. a. True b. False 26. Adjusting entries must be made prior to the preparation of financial statements. a. True b. False 27. Publicly traded companies must prepare an additional financial statement called a worksheet. a. True b. False 28. In a worksheet, the first set of columns immediately following the account titles is for the adjusted trial balance. a. True b. False 29. A worksheet facilitates the preparation of the income statement and retained earnings statement, but not the balance sheet. a. True b. False 30. On a worksheet, the retained earnings balance that gets transferred from the retained earnings statement section of the worksheet to the balance sheet section is the beginning retained earnings balance. a. True b. False

Indicate the answer choice that best completes the statement or answers the question. 31. Which accounting principle determines when revenue is recorded and reported? a. expense recognition Powered by Cognero

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Ch 03 Accrual Accounting b. revenue recognition c. time-period assumption d. accrual accounting 32. Which basis of accounting recognizes revenue when it is received regardless of when the revenue is earned? a. recognition basis b. accrual-basis c. cash-basis d. revenue basis 33. Which basis of accounting recognizes revenues when they are earned and expenses when they are incurred? a. accrual-basis b. cash-basis c. revenue basis d. recognition basis 34. The basis of accounting that requires revenues to be recorded in the period they are earned rather than in the period they are received is called the a. cash-basis b. recognition basis c. time-period assumption basis. d. accrual basis. 35. The difference between accrual-based revenue and accrual-based expenses in the period the activity occurred is called a. net income. b. net income or net loss. c. accrued income. d. net loss. 36. Which principle attempts to associate the revenue of the period with all costs necessary to generate that revenue? a. expense recognition b. revenue recognition c. time-period assumption d. accrual accounting 37. Which principle requires that expenses be recorded and reported in the same period as the revenue that it helped to generate? a. expense recognition b. revenue recognition c. time-period assumption d. accrual accounting 38. Which type of journal entries are necessary to get the account balances properly stated and up to date? a. reversing entries b. deferred entries Powered by Cognero

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Ch 03 Accrual Accounting c. recurring entries d. adjusting entries 39. The allocation of the cost of a tangible, long-term asset over its useful life is called a. deferred revenue. b. prepaid expense. c. depreciation. d. an accrued revenue. 40. Which of the following is not one of the four major types of adjusting entries? a. accrued revenues b. deferred revenues c. accrued expenses d. deferred adjustments 41. What adjustment is necessary to record an expense and the associated increase in a company’s liabilities? a. deferred revenue b. accrued expense c. accrued revenue d. deferred expense 42. What adjustment is necessary when cash is received before it is earned and reported on the income statement? a. deferred revenue b. accrued revenue c. accrued expense d. deferred expense 43. Which of the following is not affected by adjusting entries? a. income statement accounts b. the cash account c. expense accounts d. balance sheet accounts 44. What adjustment is necessary when revenue is earned in advance of receiving cash? a. deferred revenue b. accrued revenue c. accrued expense d. deferred expense 45. What is prepared after adjustments are made to ensure the accounting equation is still in balance and to help prepare the financial statements? a. bank reconciliation report b. closing entries c. unadjusted trial balance Powered by Cognero

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Ch 03 Accrual Accounting d. adjusted trial balance 46. Revenue, expense, and dividend accounts are closed at the end of the period because they are a. income statement accounts. b. permanent accounts. c. temporary accounts. d. balance sheet accounts. 47. Balance sheet accounts are known as a. net income accounts. b. revenue accounts. c. temporary accounts. d. permanent accounts. 48. Journal entries made at the end of the accounting period to return the balance in all temporary accounts to zero are called a. closing entries. b. reversing entries. c. adjusting entries. d. recurring entries. 49. What is the first step in the accounting cycle? a. journalize transactions b. post journal entries to the general ledger c. analyze transactions d. adjust the accounts 50. Which financial statement is the first one prepared when using a worksheet? a. retained earnings statement b. income statement c. adjusted trial balance d. balance sheet 51. Which financial statement is not prepared with the assistance of a worksheet? a. income statement b. balance sheet c. statement of cash flows d. retained earnings statement 52. Under accrual accounting, when are revenue and expenses recognized? a. Revenue is recognized when cash is received, and expenses are recognized when cash is paid. b. Revenue is recognized when cash is received, and expenses are recognized when the cost is incurred. c. Revenue is recognized when it is earned, and expenses are recognized when they are incurred. d. Revenue is recognized when it is earned, and expenses are recognized when cash is paid. Powered by Cognero

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Ch 03 Accrual Accounting 53. When are revenues and expenses recognized in the same accounting period that cash receipts and payments occur? a. under the cash basis of accounting b. under the accrual basis of accounting c. under the adjusting method of accounting d. under the strategic method of accounting 54. A tax service prepared tax returns for 20 clients at $200 each. By the end of June, the service had collected from eight clients. What amount will be reported on the income statement for June, if it is prepared under the accrual basis of accounting and if it is prepared under the cash basis of accounting? Income Statement (under the accrual basis) a. $4,000 b. $4,000 c. $2,400 d. $1,600

Income Statement (under the cash basis) $1,600 $4,000 $2,400 $1,600

55. Which of the following concepts is important to accrual accounting? a. Time period, because accrual accounting divides earnings into time periods b. Market basis, because inflation is a big factor in the environment c. Cash basis, because if cash is not received, revenue is not accrued d. The entity concept, because personal transactions must be separated from business transactions 56. Canterbury Cycles sells Harleys and pays each salesperson a commission of $800 for each cycle sold. During the month of December, a salesperson sold three cycles. The company pays commissions on the 5th day of the month following the sale. Which of the following statements is true? a. The salesperson will recognize commission revenue earned in the amount of $2,400 in December. b. The company will recognize commission expense in the amount of $2,400 in December. c. The salesperson will recognize commission expense in the amount of $2,400 in January. d. The salesperson will recognize revenue in the same month that the cycle dealer recognizes expense. 57. When should a shipping company recognize revenue from its delivery service? a. on the date the customer places an order b. on the date the customer's packages are delivered c. on the date the invoice is mailed to the customer d. on the date the customer's payment is received 58. When is revenue from the sale of merchandise normally recognized? a. on the date the sale is made b. on the date the customer pays for the merchandise c. either on the date on which the sale occurs or on the date on which the customer pays d. when the merchandise is sold, if sold for cash, or when payment is received, if sold on credit 59. Expenses should be matched against revenue a. before the earnings process is complete. b. only after cash is collected from the customer. Powered by Cognero

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Ch 03 Accrual Accounting c. in the same period as the revenue that they helped generate. d. after payment has been made for any costs related to the revenue. 60. Which of the following situations violates the matching principle during the current year for a real estate company that pays its agents on commission? a. Sales commissions are charged to expense in the current year on all sales made in the current year even though some of the commissions have not been paid. b. Insurance expense is recognized for the total cost of a 1-year policy purchased in July of the current year. c. Wages expense is recognized in the current year even though payday is not until sometime in next year. d. Sales commissions paid in the current year for next-year commissions are recorded as prepaid expenses for the current year. 61. Calmar Corporation sold merchandise to a customer for $30,000 on credit on July 15. The customer paid Calmar Corporation the amount due on July 31. Under the accrual basis of accounting, how should Calmar Corporation record the transaction? a. The company will recognize the revenue on July 31. b. The July 15 transaction increases revenue, but it has no effect on assets because cash was not received. c. Revenue is recognized after the cost of the merchandise sold is paid by Calmar Corporation d. The July 31 transaction has no effect on total assets under the accrual basis. 62. Adjusting journal entries are made at the end of a period when a. the cash basis of accounting is used for all accounting periods. b. cash receipts and payments occur before or after the point in time when revenues and expenses should be recognized under the accrual basis of accounting. c. management reports its adjustments on the statement of cash flows. d. the company reports revenue in the same period cash is collected. 63. A company that sells merchandise to customers should normally recognize a. revenue only after the cash is collected. b. revenue and the related expenses in the period the revenue is earned, whether payment is received or not. c. both revenue and expenses in the period following the sale. d. expenses in the period the merchandise is sold and revenue in the following period. 64. A local tennis club sells season memberships for $1,000 each. During January, 50 season memberships were sold. As of March 31, only $25,000 of season membership fees were collected from customers. The tennis season runs for 6 months starting April 1. Which of the following is an amount reported on the balance sheet dated March 31? a. unearned tennis membership revenue of $25,000 b. unearned tennis membership revenue of $50,000 c. accounts receivable of $50,000 d. tennis membership revenue of $25,000 65. Cambridge Cleaners started business on January 1 of the current year and immediately purchased $5,000 of supplies to use in the business. At the end of the month, 30% of the supplies remained unpaid and 20% were still on hand. What amount should appear as an expense on the income statement for January? a. $5,000 b. $1,000 Powered by Cognero

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Ch 03 Accrual Accounting c. $4,000 d. $3,500 66. During December, Camp David Inc. purchased $5,000 of supplies for use in its business. At the end of December, 20% of the supplies were still on hand, but only 70% had been paid. What amounts will appear on the company's balance sheet on December 31? Supplies on Hand a. $5,000 b. $1,000 c. $4,000 d. $1,000

Accounts Payable $3,500 $1,500 $1,500 $5,000

67. Camper City started business on January 1 of the current year. It performed services for customers totaling $250,000, of which 40% remained uncollected at the end of December of the current year. Under the accrual basis, what amounts would appear on the company's financial statements for the current year? (Assume that the beginning balance of accounts receivable was zero.) Income Statement a. $250,000 b. $250,000 c. $100,000 d. $100,000

Balance Sheet $100,000 $250,000 $100,000 $250,000

68. What does the phrase "Revenue is recognized when earned" mean? a. Revenue is recorded in the accounting records when the goods are received from a supplier, and it is reported on the income statement when sold to the customer. b. Revenue is recorded in the accounting records and reported on the income statement when cash is received from the customer. c. Revenue is recorded in the accounting records when the goods are sold to a customer, and it is reported on the income statement when the cash payment is received from the customer. d. Revenue is recorded in the accounting records and reported on the income statement when goods are sold and delivered to a customer. 69. On December 31 of the previous year, a company signed a 1-year contract to provide services to a particular customer for $12,000. The customer will pay for the services during January of the current year. Using the accrual basis of accounting, when should the company recognize revenue? a. in January of the current year, when the cash is received b. on December 31 of the current year, after all the services have been provided c. equally throughout the current year, as the revenue is earned d. on December 31 of the previous year, when the contract is signed 70. Accrued expenses originate from a. paying off liabilities. b. paying for items such as insurance in advance. c. collecting cash from customers. d. incurring expenses without yet having paid cash for them. Powered by Cognero

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Ch 03 Accrual Accounting 71. Which of the following is not a proper method of recognizing assets as expenses in a particular accounting period? a. Customers' account balances in accounts receivable are assigned to expense in the period in which each customer pays. b. Prepaid insurance is assigned to expense as the insurance expires. c. A building is depreciated and its cost is assigned to the current and future accounting periods in which the building is expected to be used. d. Merchandise inventory is assigned to cost of goods sold in the period the goods are sold. 72. A manufacturing company purchased equipment nine years ago for $450,000. As of January 1 of the current year, total accumulated depreciation of $202,500 had been recorded on this asset. Depreciation expense for the current year is $22,500. After the adjustments are recorded and posted on December 31 of the current year, what are the balances for the Equipment and Accumulated Depreciation?

Equipment Accumulated Depreciation a. $450,000 $0 b. $450,000 $225,000 c. $225,000 $22,500 d. $225,000 $225,000 73. A tool company purchased equipment at a cost of $100,000, using straight-line depreciation with no salvage value. As of January 1 of the current year, a total accumulated depreciation of $45,000 had been recorded on this asset. The depreciation expense for the current year is $5,000. After the adjustments are recorded and posted on December 31 of the current year, what are the balances for Depreciation Expense and Accumulated Depreciation? Depreciation Expense Accumulated Depreciation a. $5,000 $50,000 b. $45,000 $45,000 c. $5,000 $45,000 d. $45,000 $50,000 74. Assets become expenses when a. they are purchased for cash or on credit. b. they are delivered. c. they are paid for in cash. d. their economic benefits expire. 75. Which of the following is an example of a deferred revenue? a. Sales are made to customers on credit. b. Revenue has been earned but not yet recorded. c. Payments are received prior to providing services to customers. d. Cash sales are made to customers. 76. What effect does recognizing accrued interest revenue at the end of the accounting period have on the accounting equation? Powered by Cognero

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Ch 03 Accrual Accounting a. Assets increase and stockholders' equity decreases. b. Assets increase and stockholders' equity increases. c. Assets decrease and liabilities decrease. d. Liabilities increase and stockholders' equity decreases. 77. What effect does recognizing revenue at the end of the accounting period for rent previously received in advance have on the accounting equation for the insurance company? a. Assets increase and liabilities decrease. b. Assets increase and stockholders' equity increases. c. Assets decrease and liabilities decrease. d. Liabilities decrease and stockholders' equity increases. 78. Carithers Cleaning Service received advance payments of $24,000 from customers during the current year. As of December 31 of the current year, $5,000 of the advance payments still had not been earned. After the adjustments are recorded and posted on December 31 of the current year, the balances in Unearned Service Revenue and Service Revenue will be as follows: Unearned Service Revenue a. $0 b. $5,000 c. $5,000 d. $24,000

Service Revenue $24,000 $19,000 $24,000 $5,000

79. An insurance company received advance payments of $12,000 from clients during the current year. As of December 31 of the current year, $10,000 of the advance payments still had not been earned. After the adjustments are recorded and posted on December 31 of the current year, what will the balances be in Unearned Insurance Revenue and Insurance Revenue? Unearned Insurance Revenue a. $10,000 b. $0 c. $2,000 d. $10,000

Insurance Revenue $10,000 $12,000 $10,000 $2,000

80. Carlock Systems received a 6-month, 12% note for $50,000 from a customer on November 1 of the current year. The note is due on April 30 of next year. Assuming the company's accounting period ends on December 31, how much interest revenue should be recognized during the current year and the next year? Current Year a. $2,000 b. $1,000 c. $0 d. $1,000

Next Year $1,000 $2,000 $6,000 $5,000

81. Carnegie Jewelers accepted a 9-month, 9% note for $100,000 from a customer on July 1 of the current year. The note is due on March 31 of next year. Assuming the company's accounting period ends on December 31 of the current year, how much interest revenue should be recognized during the current year and the next year? Powered by Cognero

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Ch 03 Accrual Accounting Current Year a. $2,250 b. $4,500 c. $9,000 d. $4,500

Next Year $4,500 $2,250 $0 $4,500

82. Which of the following is an example of an accrued liability? a. Rent has been incurred but has not been paid at the end of a period. b. Equipment that will benefit several periods has been purchased. c. An insurance policy that expires in a future period has been acquired. d. Supplies are purchased and used over several months. 83. What happens to the accounting equation when the adjustment for depreciation expense for the accounting period is recorded? a. Assets decrease and stockholders' equity decreases. b. Assets increase and stockholders' equity increases. c. Assets decrease and liabilities decrease. d. Liabilities increase and stockholders' equity decreases. 84. What happens to the accounting equation when the adjustment is recorded to recognize earned revenue previously recorded as unearned revenue? a. Assets increase and liabilities increase. b. Liabilities decrease and stockholders' equity increases. c. Assets decrease and liabilities decrease. d. Stockholders' equity increases and decreases by the same amount. 85. A particular company had $2,400 of supplies on hand on January 1. During the year, supplies with a cost of $4,000 were purchased. On December 31, the actual supplies on hand amounted to $2,000. After the adjustments are recorded and posted on December 31, what are the ending balances in Supplies and Supplies Expense? Supplies Supplies Expense a. $4,400 $2,000 b. $2,000 $4,400 c. $2,400 $4,000 d. $4,000 $2,400 86. Carolina Truck Lines purchased a truck at a cost of $22,000 five years ago. As of January 1 of the current year, a total accumulated depreciation of $18,000 had been recorded on this asset. The depreciation expense for the current year is $2,000. Before the adjustments are recorded and posted on December 31 of the current year, what is the truck's book value? a. $22,000 b. $18,000 c. $4,000 d. $2,000 87. Match Incorporated recorded a salary expense of $120,000 in the current year. However, additional salaries of $9,000 Powered by Cognero

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Ch 03 Accrual Accounting had been earned, but not paid or recorded as of December 31 of the current year. After the adjustments are recorded and posted on December 31 of the current year, the balances in the salaries expense and salaries payable accounts will be which of the following? Salaries Expense Salaries Payable a. $129,000 $9,000 b. $120,000 $0 c. $120,000 $9,000 d. $109,000 $0 88. On October 1 of the current year, a company paid $9,000 rent in advance. The rent per month is $1,000. Assuming the company's accounting period ends on December 31 in the current year, what will be reported on the financial statements? a. Prepaid Rent of $6,000 on its balance sheet on December 31 of the current year b. Prepaid Rent of $9,000 on its balance sheet on December 31 of the current year c. Rent Expense of $9,000 on its current year income statement d. Rent Revenue of $6,000 on its current year income statement 89. Cozy Corporation purchased supplies at a cost of $15,000 during the year. As of January 1, supplies on hand were $5,000. On December 31, the supplies on hand were $2,000. Calculate the supplies expense for the year. a. $18,000 b. $15,000 c. $13,000 d. $2,000 90. Carver Memorial Gardens purchased supplies for $14,500 during the year. On January 1, the supplies on hand were $1,000. On December 31, the supplies on hand were $3,500. Determine the amount of supplies expense for the year. a. $14,500 b. $12,000 c. $13,500 d. $17,000 91. Cash Express had no supplies on January 1, but purchased $2,581 in supplies during the year. On December 31, the supplies on hand were $1,492. What amount for supplies will be reported on the firm's balance sheet? a. $0 b. $1,089 c. $1,492 d. $2,581 92. A sporting goods chain purchased supplies at a cost of $11,000 during the year. On January 1, the beginning balance in the supplies account was $3,000. On December 31, the supplies on hand were $800. Determine the supplies expense for the year. a. $3,000 b. $13,200 c. $11,000 d. $11,800 Powered by Cognero

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Ch 03 Accrual Accounting 93. A law firm purchased supplies at a cost of $20,000 during the year. On January 1, the beginning balance in the supplies account was $1,300. For the year, the supplies expense was $11,200. What is the amount of supplies on hand as of December 31? a. $10,100 b. $10,400 c. $20,000 d. $21,300 94. Which of the following adjustments will increase assets? a. Interest incurred on money borrowed during the period but not yet paid to the bank is accrued. b. Rent revenue is recorded for amounts owed by a tenant but not yet paid. c. The use of supplies is recorded. d. Depreciation for the period is recorded. 95. A company forgot to record four adjustments during the current year. Which of the following omissions of adjustments will understate net income? a. Sales made during the last week of the period are not recorded. b. Interest on monies borrowed has not yet been recorded. c. Prepaid insurance is not reduced for the portion of the policy that has expired during the period. d. Income taxes owed but not yet paid are ignored. 96. A company forgot to record four adjustments during the current year. Which of the following omissions of adjustments will understate assets? a. Unearned revenue is not reduced for the portion that has been earned. b. Interest on monies loaned out has not yet been recorded. c. Prepaid insurance is not reduced for the portion of the policy that has expired during the period. d. Income taxes owed but not yet paid are ignored. 97. If the end-of-year supplies on hand totaled $200, the purchases totaled $300, and the supplies on hand at the beginning of the year amounted to $100, how much will be reported as supplies expense for the current year? a. $200 b. $400 c. $300 d. $600 98. On October 1, a company borrowed $200,000 on a 2-year, 12% note, with interest and principal to be paid at maturity. How much interest expense will be reported on the income statement for the year ending December 31? a. $6,000 b. $18,000 c. $24,000 d. $12,000 99. A company borrowed $500,000 on a 1-year, 10% note on October 1 of the prior year, with interest and principal to be paid at maturity. How much interest should be reported on the income statement for the current year ending December 31? Powered by Cognero

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Ch 03 Accrual Accounting a. $50,000 b. $75,000 c. $150,000 d. $37,500 100. A company borrowed $100,000 on a 1-year, 10% note on September 1, with interest and principal to be paid at maturity. How much interest payable will be reported on the balance sheet on November 30? a. $2,500 b. $7,500 c. $10,000 d. $3,333 101. The university satellite office operates 5 days per week with a daily payroll of $5,000. Employees are paid every Saturday for the workweek just completed (Monday through Friday). The last day of the month is Wednesday, October 31. What is the effect of the correct adjustment as of October 31? a. It increases stockholders' equity and wages payable by $15,000. b. It increases wages payable and decreases cash by $10,000. c. It decreases stockholders' equity and increases wages payable by $15,000. d. It increases wages payable and increases wages expense by $25,000. 102. Based on its income for the month, a company estimates that it will owe $23,000 of federal income taxes for the month of May. What is the effect of the adjustment on the financial statements? a. increase in stockholders' equity b. increase in income taxes expense c. increase in retained earnings d. decrease in income taxes payable 103. Which of the following adjustments increases the net income for a period? a. recognition of the amount of supplies used b. recognition revenue earned but not recorded c. recognition of wages earned but not paid to employees d. recognition of rent costs that had been paid to the landlord in advance 104. A local medical clinic operates 5 days per week with a daily payroll of $100,000. Employees are paid every Tuesday for the prior week's work (Monday through Friday). The last day of the month is Tuesday, April 30. What effect does the accrual on April 30 have on the clinic's net income? a. An increase by $200,000 b. A decrease by $300,000 c. A decrease by $200,000 d. An increase by $300,000 105. Accumulated Depreciation a. increases with a debit. b. decreases with a credit. c. increases with a credit. Powered by Cognero

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Ch 03 Accrual Accounting d. is an adjunct account. 106. A landscaping company operates 5 days per week with a daily payroll of $16,000. Employees are paid every Saturday for the workweek just completed (Monday through Friday). The last day of the month is Wednesday, March 31. The company records all accruals on a monthly basis. What is the amount of wages expense recorded on the next payday, Saturday, April 3? a. $0 b. $48,000 c. $32,000 d. $80,000 107. Certified Electronics operates 5 days per week with a daily payroll of $40,000. Employees are paid every Saturday for the workweek just completed (Monday through Friday). The last day of the month is Wednesday, May 31. The correct adjusting entry at May 31 is a. Wages Expense 40,000 Wages Payable 40,000 b. Wages Payable 40,000 Cash 40,000 c. Wages Expense 120,000 Cash 120,000 d. Wages Expense 120,000 Wages Payable 120,000 108. A company rented office space to a tenant on January 1 and received a total of $90,000 for the first 9 months of rent. The amount was recorded as Rent Collected in Advance when received. Adjustments are recorded only at the end of every quarter. What effect does the adjustment on March 31 have on the company's net income for the quarter ending March 31? a. An increase by $90,000 b. A decrease by $60,000 c. A decrease by $30,000 d. An increase by $30,000 109. The supplies account has a balance of $1,000 on January 1. During January, the company purchased $25,000 of supplies on account and the liability was appropriately recorded. A count of supplies at the end of January indicates a balance of $3,000. Which of the following is the correct amount to be reported on the company's financial statements for the month ending January 31? a. Supplies expense: $23,000 b. Supplies on hand: $1,000 c. Accounts payable: $28,000 d. Supplies expense: $26,000 110. Which of the following adjusting entries involves the cash account? a. deferred revenues b. accrued expenses c. deferred liabilities d. none of these

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Ch 03 Accrual Accounting 111. The asset account, Supplies, has a balance of $10,000 on January 1. During January, $22,000 of supplies were purchased on account and the liability was appropriately recorded. A count of supplies at the end of January indicates a balance of $2,000. What adjusting entry is necessary on January 31? a. Supplies Expense 22,000 Supplies 20,000 Accounts Payable 2,000 b. Supplies Expense 24,000 Supplies 24,000 c. Supplies Expense 30,000 Supplies 30,000 d. Supplies 22,000 Accounts Payable 22,000 112. Which of the following adjustments decreases the net income for a period? a. recognition of depreciation on plant assets b. recognition of interest earned on a note receivable c. recognition of services that have been provided to customers, but the cash has not yet been received d. recognition of rent earned that has been received in advance from customers 113. What is the effect on the accounting equation when a company recognizes rent as earned that had previously been received in advance from customers? a. assets increase b. revenues decrease c. liabilities increase d. stockholders' equity increases 114. Failure to record accrued interest expense would result in a. assets being overstated. b. assets being understated. c. liabilities being overstated. d. liabilities being understated. 115. Failure to record the earned portion of unearned revenue would result in a. net income being understated. b. no effect on total liabilities. c. stockholders' equity being overstated. d. total assets being understated. 116. Failure to record dividends paid would result in a. net income being understated. b. an increase in total liabilities. c. stockholders' equity being overstated. d. net income being overstated. 117. Failure to record the supplies used during the year would result in Powered by Cognero

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Ch 03 Accrual Accounting a. net income being understated. b. an overstatement of liabilities. c. assets and stockholders' equity being overstated. d. total assets being understated. 118. Failure to record amounts earned for services provided to customers but not yet paid results in a. net income being overstated. b. no effect on total assets. c. stockholders' equity being overstated. d. total assets being understated. 119. Failure to record the depreciation expense for a period results in all of the following except a. net income being overstated. b. assets being overstated. c. stockholders' equity being overstated. d. total liabilities being overstated. 120. The financial statements are prepared after a. business transactions are recorded. b. adjustments are recorded. c. the accounts are closed. d. the adjusted trial balance is prepared. 121. Balance sheet accounts are also known as a. nominal accounts. b. permanent accounts. c. temporary accounts. d. closing accounts. 122. Income statement accounts are also known as a. temporary accounts. b. real accounts. c. permanent accounts. d. asset accounts. 123. The dividends account is known as a a. temporary account. b. closing account. c. real account. d. deferred account. 124. Which of the following does not occur during the closing process? a. Journal entries are made to return the balance in all nominal accounts to zero. b. Journal entries are made to close all the temporary accounts. Powered by Cognero

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Ch 03 Accrual Accounting c. Journal entries are made to return the balance in all real accounts to zero. d. Journal entries are made to transfer the dividends to retained earnings. 125. Which of the following entries properly closes a temporary account? a. Retained Earnings 20,000 Service Revenue 20,000 b. Dividends 200 Retained Earnings 200 c. Accumulated Depreciation 1,600 Retained Earnings 1,600 d. Retained Earnings 400 Salaries Expense 400 126. Which of the following entries properly closes a temporary account? a. Service Revenues 20,000 Retained Earnings 20,000 b. Unearned Revenue 10,200 Retained Earnings 10,200 c. Accumulated Depreciation 1,600 Retained Earnings 1,600 d. Dividends 400 Retained Earnings 400 127. Which of the following groups of accounts represents temporary accounts? a. Depreciation Expense, Unearned Revenue, and Prepaid Insurance b. Land, Rent Revenue, and Cash c. Equipment, Accounts Payable, and Income Tax Payable d. Dividends, Depreciation Expense, and Supplies Expenses 128. Which of the following groups of accounts represents permanent accounts? a. Depreciation Expense, Cash, and Prepaid Insurance b. Building, Rent Expense, and Utilities Expense c. Prepaid Insurance, Unearned Service Revenue, and Common Stock d. Dividends, Retained Earnings, and Supplies Expenses 129. Which of the following steps in the accounting cycle is completed only at the end of an accounting period? a. Business transactions are recorded. b. Adjustments are recorded. c. Transactions are journalized. d. Journal entries are posted to the ledger. 130. Which of the following is the last step in the accounting cycle? a. analyzing transactions b. recording and posting adjustments c. closing the accounts Powered by Cognero

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Ch 03 Accrual Accounting d. preparing financial statements 131. Some of the steps in the accounting cycle follow. Select the option that places these steps in the correct order. 1. 2. 3. 4. 5.

Close the accounts. Post transactions to accounts in the ledger. Journalize daily transactions. Record and post adjustments. Prepare financial statements. a. 2, 3, 4, 5, 1 b. 3, 2, 4, 5, 1 c. 3, 2, 4, 1, 5 d. 3, 2, 5, 4, 1

132. The worksheet facilitates the preparation of all the following financial statements except the a. statement of cash flows. b. balance sheet. c. retained earnings statement. d. income statement. 133. Select the incorrect statement about worksheets. a. Worksheets facilitate the preparation of financial statements. b. The retained earnings account is used to determine the net income for a period. c. Two trial balances appear on a worksheet. d. The income statement section precedes the retained earnings statement section.

134. Chastain Park Entertainment paid salaries expense of $350,000 during the year. However, additional salaries of $20,000 were earned by employees but not paid or recorded on December 31. A) What adjusting entry is necessary on December 31? B) Under which basis, cash, accrual, or both, would the adjustment in part A be prepared? Explain. C)

Under the accrual basis of accounting, what is the total amount of salaries expense for the year ending December 31?

Under the accrual basis of accounting, what is the total amount of salaries payable to be reported on December 31?

Under the cash basis of accounting, what is the total amount of salaries expense for the year ending December 31?

F) Under the cash basis of accounting, what is the total amount of salaries payable on December 31? 135. A marine company pays its sales personnel a 6% commission of the selling price of each yacht. During November, yacht sales totaled $20,400,000. During December, sales totaled $25,100,000. Because its policy is to pay commissions only in the month after the sales, the company paid commissions during December for November. During January, the Powered by Cognero

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Ch 03 Accrual Accounting company paid its salespeople commissions for December. A)

If the cash basis of accounting is used, how much commission expense is reported on the income statement for December?

If the accrual basis of accounting is used, how much commission expense is reported on the income statement for December?

136. Cabana Club's consolidated statement of income is as follows:

(in millions of dollars) Revenues: Sales by company-operated restaurant stores Revenue from franchised stores Total revenues Operating costs and expenses Company-operated restaurant expenses: Food and packaging Payroll and other employee benefits Occupancy and other operating expenses Franchised restaurants-occupancy expenses General, administrative, and selling expenses Made-for-you and special charges Other operating (income) expense Total operating costs and expenses Operating income Interest expense Other nonoperating expenses Income before provision for income taxes Income tax expense Net income

Years ended December 31, Current Year Prior Year $ 8,894.9 3,526.5 $12,421.4

$ 8,136.5 3,272.3 $11,408.8

$(2,997.4) (2,220.3) (2,043.9) $(7,261.6) $ (678.0) (1,458.5) (321.6) 60.2 $(9,659.5) $ 2,761.9 (393.8) (60.7) $ 2,307.4 (757.3) $ 1,550.1

$(2,772.6) (2,025.1) (1,851.9) $(6,649.6) $ (613.9) (1,450.5) 113.5 $(8,600.5) $ 2,808.3 (364.4) (36.6) $ 2,407.3 (764.8) $ 1,642.5

The company reported $210,000,000 and $120,000,000 of accrued interest payable in the liability section of its balance sheet on December 31, for the current year and the prior year, respectively. How much cash did it pay during the current year for interest? 137. Chattahoochee Excursions, a calendar-year company, purchased supplies at a cost of $12,215 during the year. On January 1, the supplies on hand were $10,312. During the year, the company used $14,000 of supplies. A) What adjusting entry is prepared on December 31? B)

Under the accrual basis of accounting, how much is the supplies expense for the year?

How much should be reported on the balance sheet for December 31 for supplies?

D) What type of adjustment was made in part A? 138. A company employs 10 workers in its manufacturing facility. Each employee is paid $10 per hour and works 8 hours per day, Monday through Friday. Employees are paid every Wednesday for the previous Monday through Friday workweek. The last payday was Wednesday, October 28. A) Compute the dollar amount of the company's weekly payroll. Powered by Cognero

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Ch 03 Accrual Accounting B) Prepare the adjusting entry on Saturday, October 31, the last day of the fiscal period. C)

What special precautions are necessary upon recording the payment of wages to employees on the next payday, November 4?

139. Cherokee Hills began operations on December 1 of the current year, and immediately paid $60,000 for 6 months' rent in advance for the period beginning December 1 of the current year. The company's accounting period ends on December 31 of the current year. Indicate how much will be reported for each of the following accounts on the company's financial statements for the period ending December 31 of the current year. If the amount reported is zero, indicate so by writing $0, and explain why zero is the appropriate amount. A) Rent Expense B) Rent Payable C) Rent Revenue D) Prepaid Rent 140. A company borrowed $100,000 from Better Bank on November 1. The terms of the loan (note) are 6% interest due in 4 months. A) Prepare the necessary journal entry on November 1 to record the loan. B) Prepare the necessary adjusting entry for this loan on December 31. 141. Chicago Works employs 20 workers. Each employee is paid wages of $25 per hour and works an 8-hour workday, Monday through Friday. Employee wages are paid every Friday for the workweek just ending. A) Compute the dollar amount of the weekly payroll. B)

The last payday of the year was Friday, December 26. Prepare the adjusting entry for wages on Wednesday, December 31, the last day of the fiscal period.

142. The following unadjusted amounts were taken from a company's accounting records as of December 31: Note payable, 6%, 4-month, dated December 1, for $500,000 Note receivable, 12%, 6-month, dated October 1, for $400,000 A) Prepare any adjusting entries necessary on December 31 for the notes. B)

Fill in the following partial balance sheet by showing the notes and the effects of any adjustments related to the notes. Current Assets

Current Liabilities

143. The following unadjusted amounts were taken from the accounting records of an insurance company on December 31 of the current year: Powered by Cognero

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Ch 03 Accrual Accounting Insurance collected in advance Office supplies A)

$120,000 1,200

Prepare any necessary adjusting entries on December 31 of the current year for both of the following transactions: 1.

The insurance premiums collected cover the period December 1 of the current year through May 31 of next year.

At the end of the year, an inventory revealed that $250 of the office supplies remained on hand.

B) What is the effect of omitting these adjustments on the current year's net income? 144. The following unadjusted account balance was taken from the accounting records as of December 31: Unearned subscription revenue

$180,000

A) Prepare any adjusting entries necessary on December 31 for each of the transactions that follow: 1. During the year, the company sold 12-month subscriptions for its flagship magazine. Half of the subscriptions began on October 1, while the other half began on December 1. 2. The company estimates its income taxes to be 40% of its estimated income of $500,000. B) Prepare the current liabilities section of the balance sheet by listing any current liabilities and the related amounts as a result of the adjustments in part A. 145. California Condos uses the accrual basis of accounting, and it had the following account balances on its financial statements on December 31. Rent revenue Accounts receivable Utilities payable Rent expense Unearned revenue Depreciation expense Salaries expense Salaries payable Retained earnings, January 1 Dividends Interest revenue

$340,000 89,200 12,000 22,000 17,000 12,000 45,000 4,000 60,000 2,500 10,000

The company reported interest receivable of $2,500 on December 31 and $0 at the beginning of the year. How much cash did the company collect for interest during the year? 146. C2IT Corporation was organized on July 1 of the current year, after the two principal owners each contributed $100,000 and received shares of stock in exchange. The company's year-end is December 31. The following events occurred during the first year of operations: July 1

Acquired a building by paying $100,000 cash and borrowing $375,000 from Big Bank. Depreciation expense per year is $12,500. The note payable will be due in full in 10 years.

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Ch 03 Accrual Accounting Interest is payable annually. The interest rate on the note is 10%. Sept. 1

Paid cash in the amount of $12,000 for a 1-year property insurance policy.

Oct. 1

Purchased computers for $10,000 cash. The computers will be depreciated using the straightline method and will have $2,000 depreciation expense per year.

Nov. 1

Received $240,000 in cash for services to be provided evenly during the next 6 months.

Prepare the necessary adjustment on December 31 for each of the following: 1. Depreciation on the building 2. Interest on the promissory note 3. Recognition of the expired portion of the insurance policy 4. Depreciation on the computers 5. Recognition of the revenue earned during the current period For each of the adjusting entries, indicate which of the following types of entry was recorded: accrued expense, accrued revenue, deferred expense, or deferred revenue.

147. California Condos uses the accrual basis of accounting, and it had the following account balances on its financial statements on December 31. Rent revenue Accounts receivable Utilities payable Rent expense Unearned revenue Depreciation expense Salaries expense Salaries payable Retained earnings, January 1 Dividends Interest revenue

$340,000 89,200 12,000 22,000 17,000 12,000 45,000 4,000 60,000 2,500 10,000

On January 1, the balance of unearned rent revenue was $0. The company collected cash from the tenants of its apartment building totaling $600,000 during the year. How much should be reported as unearned rent revenue as of December 31? 148. California Condos uses the accrual basis of accounting, and it had the following account balances on its financial statements on December 31. Rent revenue Accounts receivable Utilities payable Rent expense Unearned revenue Depreciation expense Salaries payable Salaries payable Retained earnings, January 1 Dividends Interest revenue Powered by Cognero

$340,000 89,200 12,000 22,000 17,000 12,000 45,000 4,000 60,000 2,500 10,000 Page 24

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Ch 03 Accrual Accounting On January 1, the utilities payable account had a zero balance. The company paid cash for utilities totaling $50,000 during the year. How much should be reported as utilities expense for the year ending December 31? 149. California Condos uses the accrual basis of accounting, and it had the following account balances on its financial statements on December 31. Rent revenue Accounts receivable Utilities payable Rent expense Unearned revenue Depreciation expense Salaries expense Salaries payable Retained earnings, January 1 Dividends Interest revenue

$340,000 89,200 12,000 22,000 17,000 12,000 45,000 4,000 60,000 2,500 10,000

On January 1, there was a zero balance in the salaries payable account. How much cash did the company pay for salaries during the year? 150. A calendar-year company paid $24,000 on October 1 of the current year to purchase 2 years of insurance coverage for its retail shop. The prepayment was initially recorded as an asset. A) What adjusting journal entry is necessary as of December 31 of the current year? B)

How much will be reported on the balance sheet on December 31 of the current year? for prepaid insurance?

How much will be reported on the income statement for the year ended December 31 of the current year or insurance expense?

If the adjustment in part A is not recorded, by what amount will the net income be over- or understated on December 31 of the current year?

What adjusting journal entry is necessary on December 31 of next year?

How much will be reported on the balance sheet on December 31 of next year for prepaid insurance?

How much will be reported on the income statement for the year ended December 31 of next year for insurance expense?

151. Cabana Club's consolidated statement of income is as follows: (in millions of dollars) Revenues: Sales by company-operated restaurant stores Revenue from franchised stores Total revenues Operating costs and expenses Company-operated restaurant expenses: Food and packaging Powered by Cognero

Years ended December 31, Current Year Prior Year $ 8,894.9 3,526.5 $12,421.4

$ 8,136.5 3,272.3 $11,408.8

$(2,997.4)

$(2,772.6) Page 25

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Ch 03 Accrual Accounting Payroll and other employee benefits Occupancy and other operating expenses Franchised restaurants-occupancy expenses General, administrative, and selling expenses Made-for-You and special charges Other operating (income) expense Total operating costs and expenses Operating income Interest expense Other nonoperating expenses Income before provision for income taxes Income tax expense Net income

(2,220.3) (2,043.9) $(7,261.6) $ (678.0) (1,458.5) (321.6) 60.2 $(9,659.5) $ 2,761.9 (393.8) (60.7) $ 2,307.4 (757.3) $ 1,550.1

(2,025.1) (1,851.9) $(6,649.6) $ (613.9) (1,450.5) 113.5 $(8,600.5) $ 2,808.3 (364.4) (36.6) $ 2,407.3 (764.8) $ 1,642.5

Identify three specific accounts in which the company might need to accrue additional expenses as a result of adjustments. Indicate the effects of these adjustments on the fundamental accounting equation. Ignore the amounts.

152. Cabana Club's consolidated statement of income is as follows:

(in millions of dollars) Revenues: Sales by company-operated restaurant stores Revenue from franchised stores Total revenues Operating costs and expenses Company-operated restaurant expenses: Food and packaging Payroll and other employee benefits Occupancy and other operating expenses Franchised restaurants-occupancy expenses General, administrative, and selling expenses Made-for-You and special charges Other operating (income) expense Total operating costs and expenses Operating income Interest expense Other nonoperating expenses Income before provision for income taxes Income tax expense Net income

Years ended December 31, Current Year Prior Year $ 8,894.9 3,526.5 $12,421.4

$ 8,136.5 3,272.3 $11,408.8

$(2,997.4) (2,220.3) (2,043.9) $(7,261.6) $(678.0) (1,458.5) (321.6) 60.2 $(9,659.5) $ 2,761.9 (393.8) (60.7) $ 2,307.4 (757.3) $ 1,550.1

$(2,772.6) (2,025.1) (1,851.9) $(6,649.6) $(613.9) (1,450.5) 113.5 $(8,600.5) $ 2,808.3 (364.4) (36.6) $ 2,407.3 (764.8) $ 1,642.5

What impact will an adjustment to the Income Tax Expense account on December 31 of the current year have on the accounting equation? 153. Cabana Club's consolidated statement of income is as follows:

(in millions of dollars) Powered by Cognero

Years ended December 31, Current Year Prior Year Page 26

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Ch 03 Accrual Accounting Revenues: Sales by company-operated restaurant stores Revenue from franchised stores Total revenues Operating costs and expenses Company-operated restaurant expenses: Food and packaging Payroll and other employee benefits Occupancy and other operating expenses Franchised restaurants-occupancy expenses General, administrative, and selling expenses Made-for-You and special charges Other operating (income) expense Total operating costs and expenses Operating income Interest expense Other nonoperating expenses Income before provision for income taxes Income tax expense Net income

$ 8,894.9 3,526.5 $12,421.4

$ 8,136.5 3,272.3 $11,408.8

$(2,997.4) (2,220.3) (2,043.9) $(7,261.6) $(678.0) (1,458.5) (321.6) 60.2 $(9,659.5) $ 2,761.9 (393.8) (60.7) $ 2,307.4 (757.3) $ 1,550.1

$(2,772.6) (2,025.1) (1,851.9) $(6,649.6) $(613.9) (1,450.5) 113.5 $(8,600.5) $ 2,808.3 (364.4) (36.6) $ 2,407.3 (764.8) $ 1,642.5

Identify three specific expenses that might be accrued as a result of adjusting journal entries. Show what these entries would look like in journal format. Ignore amounts. 154. The following amounts were taken from a company's unadjusted trial balance on December 31 of the current year: Prepaid rent $ 12,000 Wages expense 122,100 Unearned rent revenue 9,200 Prepare any adjusting entries necessary as of December 31 of the current year, for each of the transactions that follow. A) The rent collected in advance represents rent for the period of December 1 of the current year through January 31 of the next year. B)

In addition to the wages paid during the year, employees have not been paid for the last week of December, which amounts to $1,900.

155. A photo processing store purchased office supplies on January 15 by paying cash of $5,000. On January 1, the supplies account had a beginning balance of $500. On December 31, an inventory revealed that the supplies on hand amounted to $500. A) What adjusting journal entry is necessary on December 31? B)

How much will be reported on the balance sheet on December 31 for supplies?

How much supplies expense will be reported on the income statement?

D) If the adjustment in part A is not recorded, what will be the impact on the income statement, retained earnings statement, and balance sheet?

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Ch 03 Accrual Accounting 156. The accounts from the ledger after adjustments have been posted on December 31 are as follows: Sales revenue Accounts payable Cash Interest expense Retained Earnings, January 1 Depreciation expense Supplies expense Notes payable

$60,000 Accounts receivable 1,500 Rent expense 25,600 Prepaid rent 2,900 Interest payable 22,100 Dividends 1,000 Supplies 2,200 Cost of sales 3,000 Common stock

$ 8,200 2,100 1,500 800 5,000 900 40,000 2,000

A) Identify which adjustments were likely made that are 1. Accrued revenues 2. Accrued expenses B) Which accounts would not be used in a cash-basis system? 157. At the end of the current year, the unadjusted accounting records contain the following selected accounts and balances: Other revenue Supplies expense Depreciation expense Utilities expense Accounts receivable

$13,600 Salary expense 16,500 Rent expense 22,000 Legal fees earned 22,400 Income tax expense 22,300 Dividends

$32,200 12,400 64,300 15,800 13,000

A) The company has not paid its employees for the final 3 days in the year. The amount owed is $2,500. How much salary expense should be reported for the year ended December 31? B)

What additional adjustments would you expect the company to make at year-end that would result in additional revenue as a result of the accounts listed?

158. Can We Help?, a local walk-in medical practice, had the following account balances on December 31 of the prior year: Building Cash Supplies

$480,000 Accumulated depreciation (building) $20,000 Common stock $2,000 Retained earnings

$12,000 $300,000 $190,000

During the current year, the following transactions occurred: 1. 2. 3. 4. 5. 6. 7. 8.

On March 1, it purchased a 1-year malpractice insurance policy for $12,000 cash. On July 1, it borrowed $50,000 cash from First American Bank. The interest rate on the note payable is 8%. Principal and interest are due in cash in 1 year. Employee salaries in the amount of $23,000 were paid in cash. At the end of the year, $1,000 of the supplies remained on hand. It provided $100,000 in consulting services for cash during the current year in cash. On December 31, $6,000 in employee salaries was accrued. On December 31, it received $10,000 in cash representing advance payment for services to be provided in February of next year. The annual depreciation on the building is based on a useful life of 20 years and no salvage

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Ch 03 Accrual Accounting value. A)

B) C) D)

Determine the effect on the accounting equation of the preceding transactions including any related year-end adjusting entries that may be required. Hint: It may be helpful to create a table to reflect the increases and decreases in accounts. (Use the minus sign to show a decrease in the account balance.) Prepare an income statement for the current year ignoring income taxes. Prepare a statement of retained earnings for the current year, assuming no dividends were paid. Prepare a classified balance sheet as of December 31 of the current year.

159. The accounting records of Cary's Magic Shows reflect the following account balances on January 1 of the current year: Cash $200,000Supplies $ 14,000 Common stock $100,000Retained earnings $114,000 During the current year, the following transactions occurred: 1. On February 1, the company rented a small office for a 1-year period. It paid $12,000 cash. 2. On November 1, the company received $3,600 cash for magic lessons to be provided evenly over November, December, and January of the next year. 3. By December 31, the company used $6,000 of the supplies. 4. At December 31, the company accrued $5,000 in wages and salaries. 5. During the year, the company paid cash for $25,000 in wages and salaries. 6. During the year, the company $65,000 cash in magic lesson revenue. A) Determine the effect on financial statement accounts of the preceding transactions. Hint: It may be helpful to create a table to reflect the increases and decreases in account. (Use the minus sign to show a decrease in the account balance.) B) Prepare an income statement for the current year, ignoring income taxes. C) Prepare a classified balance sheet as of December 31 of the current year. 160. C2IT Corporation was organized on July 1 of the current year, after the two principal owners each contributed $100,000 and received shares of stock in exchange. The company's year-end is December 31. The following events occurred during the first year of operations: July 1

Acquired a building by paying $100,000 cash and borrowing $375,000 from Big Bank. Depreciation expense per year is $12,500. The note payable will be due in full in 10 years. Interest is payable annually. The interest rate on the note is 10%.

Sept. 1

Paid cash in the amount of $12,000 for a 1-year property insurance policy.

Oct. 1

Purchased computers for $10,000 cash. The computers will be depreciated using the straight-line method and will have $2,000 depreciation expense per year.

Nov. 1

Received $240,000 in cash for services to be provided evenly during the next 6 months.

A) Determine and indicate the effect on the accounting equation of the preceding transactions, individually. (Use the minus sign to show a decrease in the account balance.) B) Determine and indicate the effects of the following adjustments on the fundamental accounting equation, individually. (Use the minus sign to show a decrease in the account balance.) C) Prepare an income statement for the 6 months ended December 31 of the current year. Powered by Cognero

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Ch 03 Accrual Accounting 161. Cabana Club's consolidated statement of income is as follows: (in millions of dollars) Revenues: Sales by company-operated restaurant stores Revenue from franchised stores Total revenues Operating costs and expenses Company-operated restaurant expenses: Food and packaging Payroll and other employee benefits Occupancy and other operating expenses Franchised restaurants-occupancy expenses General, administrative, and selling expenses Made-for-you and special charges Other operating (income) expense Total operating costs and expenses Operating income Interest expense Other nonoperating expenses Income before provision for income taxes Income tax expense Net income

Years ended December 31, Current Year Prior Year $ 8,894.9 3,526.5 $12,421.4

$ 8,136.5 3,272.3 $11,408.8

$ (2,997.4) (2,220.3) (2,043.9) $ (7,261.6 $ (678.0) (1,458.5) (321.6) 60.2 $ (9,659.5) $ 2,761.9 (393.8) (60.7) $ 2,307.4 (757.3) $ 1,550.1

$ (2,772.6) (2,025.1) (1,851.9) $ (6,649.6) $ (613.9) (1,450.5) 113.5 $ (8,600.5) $ 2,808.3 (364.4) (36.6) $ 2,407.3 (764.8) $1,642.5

Prepare all closing entries necessary based on the income statement for the year ended December 31 of the current year. Write your answers in millions of dollars. 162. The bookkeeper for City Rentals closed the books before the accountant had a chance to prepare the financial statements. Use the bookkeeper's closing entries to prepare, in proper format, a statement of retained earnings for the year ended December 31, which is the first year of operations for this company. Assume that the beginning balance for retained earnings is zero. Closing Entries: Dec. 31 Sales Revenue 125,000 Rent Revenue 22,000 Retained Earnings 147,000 Retained Earnings Salaries and Wages Expense Rent Expense Utilities Expense Supplies Expense Insurance Expense

78,400

Retained Earnings Dividends

22,000

45,000 18,000 9,200 1,000 5,200 22,000

163. The following are selected data from a large company's financial statements: Net income Powered by Cognero

$12,400 million Page 30

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Ch 03 Accrual Accounting Cash dividends 2,000 million Retained earnings 8,500 million Identify the steps in the accounting cycle that must have been completed prior to determining these amounts.

164. Describe why the accrual basis of accounting is preferred over the cash basis for financial reporting. 165. Why does the accrual basis of accounting require adjustments, while the cash basis does not? 166. Why is the cash basis of accounting too limited for proper financial reporting? 167. What is the revenue recognition principle? 168. Explain the differences between the cash and accrual bases of accounting and how the adjusting process fits in. 169. You are the owner and operator of a catering business. In addition to catering a wide variety of functions such as business meetings, weddings, and birthday parties, you sell decorated cakes in your store. A particular business customer has signed a $12,000 contract with you to provide refreshments for its monthly business meetings with the total contract amount due at the contract signing. Describe the rules you will follow in booking (i.e., recording) the cake sales revenues and catering contracts such as the one described here. 170. What are adjusting entries and what is their purpose? 171. What is the significance of the timing in which cash is paid or received as it relates to the adjusting process? 172. You are the CFO for Cabbage Patch Toys. The board of directors is meeting this afternoon. While reviewing your company's financial statements just minutes before the meeting, you notice that no depreciation expense has been reported. A) Describe to the board the impact that omitting this adjustment has had on your company’s financial statements. B) The board has asked you whether this mistake would impact their plan to declare a cash dividend during the meeting. Respond.

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Ch 03 Accrual Accounting Answer Key 1. True 2. False 3. True 4. True 5. False 6. False 7. True 8. False 9. True 10. False 11. True 12. True 13. False 14. False 15. True 16. True 17. True 18. True 19. True 20. True 21. True 22. False 23. False 24. True 25. True Powered by Cognero

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Ch 03 Accrual Accounting 26. True 27. False 28. False 29. False 30. False 31. b 32. c 33. a 34. d 35. b 36. b 37. a 38. d 39. c 40. d 41. b 42. a 43. b 44. b 45. d 46. c 47. d 48. a 49. c 50. b 51. c Powered by Cognero

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Ch 03 Accrual Accounting 52. c 53. a 54. a 55. a 56. b 57. b 58. a 59. c 60. b 61. d 62. b 63. b 64. a 65. c 66. b 67. a 68. d 69. c 70. d 71. a 72. b 73. a 74. d 75. c 76. b Powered by Cognero

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Ch 03 Accrual Accounting 77. d 78. b 79. d 80. b 81. b 82. a 83. a 84. b 85. b 86. c 87. a 88. a 89. a 90. b 91. c 92. b 93. a 94. b 95. a 96. b 97. a 98. a 99. d 100. a 101. c 102. b Powered by Cognero

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Ch 03 Accrual Accounting 103. b 104. c 105. c 106. c 107. d 108. d 109. a 110. d 111. c 112. a 113. d 114. d 115. a 116. c 117. c 118. d 119. d 120. d 121. b 122. a 123. a 124. c 125. d 126. a 127. d Powered by Cognero

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Ch 03 Accrual Accounting 128. c 129. b 130. c 131. b 132. a 133. b 134. A) Salaries Expense Salaries Payable

20,000 20,000

B) Only the accrual basis requires adjustments. Adjustments are necessary under the accrual basis because income represents amounts earned during the period, not just collected in cash. The accrual basis also includes expenses that have been incurred regardless of whether payment has been made. Net income under the accrual basis represents the net effect of amounts earned less amounts incurred. C) $350,000 + $20,000 = $370,000 D) $20,000 E) $350,000 F) $0

135. A) $20,400,000 × 6% = $1,224,000 November Commissions Paid B) $25,100,000 × 6% = $1,506,000 December Commissions Accrued 136. $303,800,000 $393,800,000 Interest Expense (for current year) + $120,000,000 Interest Payable (12/31/prior year) − $210,000,000 Interest Payable (12/31/current year) = $303,800,000 137. A) Supplies Expense Supplies

14,000 14,000

B) $14,000 C) $10,312 + $12,215 − $14,000 = $8,527 D) Deferred (prepaid) expense 138. A) 8 hours × $10 per hour × 5 days × 10 workers = $4,000 Powered by Cognero

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Ch 03 Accrual Accounting B) Wages Expense Wages Payable (8 hours × $10 per hour × 5 days × 10 workers)

4,000 4,000

C) If an adjusting entry is made on October 31, a liability, Wages Payable, is created, which is reported on the balance sheet account (and does not get closed), so the $4,000 will remain in this account on November 1. When the entry is made to record the payment of the wages on November 4, the liability must be reduced.

139. A) $10,000 ($60,000 Prepaid Rent ÷ 6 Months) B) $0 rent was paid in advance, which means that no amount is owed at the end of the year. C)

$0 rent is an expense or a cost for Cherokee Hills. It does not create revenue since no amounts are earned for rent.

D) $50,000 ($60,000 − $10,000 Expense = $50,000)

140. A) Cash

100,000 100,000

Notes Payable B)

Interest Expense Interest Payable ($100,000 × 0.06 × 2/12)

1,000 1,000

141. A) 8 hours × $25 per hour × 20 workers × 5 days = $20,000 B) Wages Expense Wages Payable (8 hours × $25 per hour × 20 workers × 3 days) 142. A) Interest Expense Interest Payable ($500,000 × 6% × 1/12) Interest Receivable Interest Revenue ($400,000 × 12% × 3/12) B) Current Assets Note receivable Interest receivable

12,000 12,000

2,500 2,500 12,000 12,000 Current Liabilities $400,000 Note payable 12,000 Interest payable

$500,000 2,500

143. Powered by Cognero

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Ch 03 Accrual Accounting A)

1. Insurance Collected in Advance Insurance Revenue

20,000 20,000

2. Office Supplies Expense Office Supplies B)

950

The revenue would be understated by $20,000 because of the omission of the first transaction. Expenses would be understated in the amount of $950 if the second transaction was omitted. The combined result would be an understatement of $19,050 in net income.

144. A) 1. Unearned Subscription Revenue Subscription Revenue ($90,000 × 3/12) + ($90,000 × 1/12) = $22,500 + $7,500 = $30,000 2. Income Tax Expense Income Taxes Payable ($500,000 × 40% = $200,000) B)

950

30,000 30,000

200,000 200,000

Current liabilities: Unearned subscription revenue ($180,000 − $30,000) Income taxes payable Total current liabilities

$150,000 200,000 $350,000

145. $7,500 $10,000 Interest Revenue − $2,500 Interest Receivable (on December 31) = $7,500 146. A) 1. Depreciation Expense ($12,500 × 6/12 = $6,250) Accumulated Depreciation

6,250

2. Interest Expense ($375,000 × 10% × 6/12) Interest Payable

18,750

3. Insurance Expense ($12,000 × 4/12) Prepaid Insurance

4,000

4. Depreciation Expense ($2,000 × 3/12) Accumulated Depreciation

500

5. Unearned Revenue ($240,000 × 2/6) Service Revenue

80,000

6,250 18,750 4,000 500 80,000

B) 1) Deferred expense as cash was paid before the expense was incurred 2) Accrued expense as the expense was incurred before cash was paid 3) Deferred expense as cash was paid before the expense was incurred 4) Deferred expense as cash was paid before the expense was incurred 5) Deferred revenue as cash was received before the service was provided 147. $260,000 $600,000 Cash Collected − $340,000 Rent Revenue = $260,000 Powered by Cognero

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Ch 03 Accrual Accounting 148. $62,000 $50,000 Cash Paid + $12,000 Utilities Payable = $62,000 149. $41,000 $45,000 Salaries Expense − $4,000 Salaries Payable = $41,000 150. A) Insurance Expense Prepaid Insurance [3 months × ($24,000/24 months)]

3,000 3,000

B) Prepaid Insurance = $21,000 C) Insurance Expense = $3,000 D) Overstated by $3,000 E) Insurance Expense Prepaid Insurance

12,000 12,000

F) Prepaid Insurance = $9,000 G) Insurance Expense = $12,000

151. The accounts are as follows: Payroll and Other Employee Benefits, Interest Expense, and Income Tax Expense. Other accounts that may be used are Food and Packaging; General, Administrative, and Selling Expenses; etc. The effects are as follows: Payroll and other employee benefits decrease stockholders' equity and increase liabilities. Food and packaging decrease stockholders' equity and increase liabilities. General, administrative, and selling expenses decrease stockholders' equity and increase liabilities. Income tax expense decreases stockholders' equity and increases liabilities. Interest expense decreases stockholders' equity and increases liabilities. 152. The adjustment would cause a decrease in stockholders' equity (from increasing income tax expense) and an increase in liabilities (from increasing taxes payable). 153. The accounts are Payroll and Other Employee Benefits Expense, Interest Expense, and Income Tax Expense. Other accounts that may be used are Food and Packaging; General, Administrative, and Selling Expenses; etc. The entries are as follows: Payroll and Other Employee Benefits Expense Payroll and Other Employee Benefits Payable

xxx

Income Tax Expense Income Taxes Payable

xxx

Interest Expense Interest Payable

xxx

154. A) Unearned Rent Revenue Powered by Cognero

xxx xxx xxx

4,600 Page 40

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Ch 03 Accrual Accounting Rent Revenue

4,600

B) Wages Expense Wages Payable

1,900 1,900

155. A) Supplies Expense Supplies ($500 + $5,000 − $500 = $5,000)

5,000 5,000

B) Supplies = $500 C) Supplies Expense = $5,000 D) Income statement: Expenses are understated; therefore, net income is overstated by $5,000. Retained earnings statement: Net income is overstated; therefore, ending retained earnings will be overstated. Balance sheet: Assets are overstated and retained earnings (and therefore stockholders' equity) will be overstated.

156. A) 1. Accrued revenues: Accounts Receivable 2. Accrued expenses: Interest Expense and Interest Payable, Accounts Payable B) Accounts Payable, Accounts Receivable, Prepaid Rent, Supplies, Interest Payable, and perhaps Depreciation Expense are accounts that would not be used in a true cash-basis system. 157. A) $34,700 ($32,200 Unadjusted Salary Expense + $2,500 Salaries Owed)) B) Legal fees earned, accounts receivable, and other revenue could all result in additional revenues. 158. A) Trans

Cash

Beg 1 2 3 4 5 6 7 8 adj 1 adj 2

20,000 −12,000 50,000 −23,000

Supplies

2,000

PP Ins

0 12,000

Bldg

A/D Bldg

480,000

−12,000

−1,000 100,000 10,000

−24,000 −10,000

Notes Pay.

> > 0 > > 50,000 > > > > > > > > > Page 41

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Ch 03 Accrual Accounting 145,000 > > > > > > > > > > > > > >

Trans

Beg 1 2 3 4 5 6 7 8 adj 1 adj 2

Int. Pay.

1,000

Sal. Pay.

2,000

Unearned Revenue

480,000

−36,000

Common Retained Stock Earnings 300,000 190,000

50,000 >

Rev.

Exp.

−23,000 −1,000 100,000 −6,000

6,000 10,000

2,000 2,000

6,000

10,000

300,000

190,000

Can We Help? Income Statement For the Year ended December 31, Current Year Consulting revenue Expenses: Salary expense $(29,000) Supplies expense (1,000) Depreciation expense (24,000) Insurance expense (10,000) Interest expense (2,000) Net income Can We Help? Retained Earnings Statement For the year ended December 31, Current Year Retained earnings, December 31, prior year Add: Net income $34,000 Less: Dividends 0 Retained earnings, December 31, current year

Assets Cash Supplies Prepaid insurance Total current assets Building Less: Accumulated depreciation Total property, plant, and equipment Powered by Cognero

100,000

−24,000 −10,000 −2,000 −66,000

$100,000

(66,000) $34,000

$190,000 34,000 $224,000

Can We Help? Balance Sheet December 31, Current Year Liabilities and Stockholders' Equity $145,000 Note payable $ 50,000 1,000 Interest payable 2,000 2,000 Salaries payable 6,000 $148,000 Unearned revenue 10,000 Total current liabilities $ 68,000 $480,000 Common stock $300,000 (36,000) Retained earnings 224,000 Total stockholders' $444,000 equity $524,000 Total liabilities and Page 42

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Ch 03 Accrual Accounting $592,000 stockholders' equity

Total assets

$592,000

159. A)

Trans Beg 1 2 3 4 5 6 adj 1 adj 2

Cash 200,000 −12,000 3,600

Supplies 14,000

Trans

Sal. Pay.

1,000

> > > > > 5,000 > > > > > 5000 >

Revenue

Expense

12,000 −6,000

−25,000 65,000 −11,000 231,600

> > > > > > > > > > >

PP Rent

Unearned Rev.

Beg 1 2 3 4 5 6 adj 1 adj 2

8,000

Common Stock

Retained Earnings

100,000

114,000

3,600 −6,000 −5,000 −25,000 65,000 −11,000 −2,400 1,200

100,000

114,000

2,400 67,400

−47,000

Cary's Magic Shows Income Statement For the year ended December 31, Current Year Magic lessons revenues Expenses: Wages and salaries expense $30,000 Supplies expense 6,000 Rent expense 11,000 Net income

Assets Cash Supplies Prepaid rent Powered by Cognero

Cary's Magic Shows Balance Sheet December 31, Current Year Liabilities and Owners' Equity $231,600 Salaries payable 8,000 Unearned revenue 1,000 Total liabilities Common stock

$67,400

47,000 $20,400

5,000 1,200 $ 6,200 $100,000 Page 43

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Ch 03 Accrual Accounting

Total assets 160. A) 1.

Retained earnings Total stockholders' equity _______ Total liabilities and $240,600 stockholders’ equity

Cash Building −100,000 +475,000 Assets increase and liabilities increase.

Cash Prepaid Insurance −12,000 12,000 No net change in assets.

Cash Computers −10,000 10,000 No net change in assets.

Cash Unearned Revenue 240,000 240,000 Assets increase and liabilities increase.

B) 1.

Accumulated Depr. Depr. Expense 6,250 6,250 Assets decrease and expenses increase. $12,500 × 6/12 = $6,250

Interest Payable Interest Expense 18,750 18,750 Liabilities increase and expenses increase. $375,000 × 10% × 6/12 = $18,750

Prepaid Insurance Insurance Expense −4,000 4,000 Assets decrease and expenses increase. $12,000 × 4/12 = $4,000

Accumulated Depr. Depreciation Expense 500 500 Assets decrease and expenses increase. $2,000 × 3/12 = $500

Unearned Revenue Revenue −80,000 80,000 Liabilities decrease and revenue increases. $240,000 × 2/6 = $80,000

134,400 $234,400 $240,600

Notes Payable +375,000

C2IT Corporation Income Statement For the 6 months ended December 31, Current Year Consulting revenue Expenses:

$ 80,000 Page 44

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Ch 03 Accrual Accounting Depreciation expense Insurance expense Interest expense Income before taxes Income tax expense ($50,500 × 0.3) Net income 161. Sales by Company-Operated Restaurants Stores Revenues from Franchised Stores Retained Earnings Retained Earnings Other Operating (Income) Expense Food and Packaging Payroll and Other Employee Benefits Occupancy and Other Operating Expenses Franchised Restaurants-Occupancy Expenses General, Administrative, and Selling Expenses Made-for-You and Special Charges Interest Expense Other Nonoperating Expenses Income Tax Expense

$ (6,750) (4,000) (18,750)

(29,500) $50,500 (15,150) $35,350

8,894.9 3,526.5 12,421.4 10,871.3 60.2 2,997.4 2,220.3 2,043.9 678.0 1,458.5 321.6 393.8 60.7 757.3

Note: The line item "Other operating (income) expense" appears in the expense section of the statement but has a credit balance. Including it with the revenue closing entry is an option. 162. City Rentals Statement of Retained Earnings For the year ended December 31 Retained earnings, January 1 Add: Net income ($147,000 − $78,400) Less: Dividends Retained earnings, December 31

0 68,600 (22,000) $ 46,600

163. The steps in the accounting cycle are as follows: 1. Collect and analyze information from source documents. 2. Journalize transactions. 3. Post transactions to accounts in the ledger. 4. Adjust the accounts. 5. Prepare financial statements. 164. Cash-basis accounting is not conducive to a comprehensive view of a company's financial health. By recording only the cash effect of transactions, cash-basis financial statements may not reflect all of the assets and liabilities of a company at a particular date. The accrual process is designed to recognize revenue when actually earned and expenses when actually incurred regardless of when cash changes hands. This is in keeping with the matching principle and provides a better picture of a company's true financial health. 165. Adjustments are necessary under the accrual basis because income represents the amounts that are earned during the Powered by Cognero

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Ch 03 Accrual Accounting period, not just collected in cash. The accrual basis includes expenses that have been incurred regardless of whether a payment has been made or not. Net income under the accrual basis represents the net effect of amounts earned, less amounts incurred, while under the cash basis only receipts and payments of cash are recorded. 166. The limitations of cash-basis accounting are very clear. Using this approach, too few financial transactions that impact a company's financial health are shown for the reader, hence its limitations. The cash basis does not accurately match revenue with related expenses or accurately reflect the earnings of a business for a specific time period. 167. The revenue recognition principle requires that revenues be recognized, or recorded, in the period in which goods have been delivered to a customer or when services have been performed for a customer. 168. The cash basis of accounting assumes revenues are recognized when cash is received and expenses are recognized when cash is paid. The accrual basis assumes revenues are recognized when earned and expenses are recognized when incurred. The two approaches differ in the timing of when revenues and expenses are recognized on the income statement. The adjusting process is used for the accrual basis but is unnecessary for the cash basis of accounting. 169. The revenue from cake sales should be booked at the time the cake is delivered to the customer. This is when the earnings process is completed. Amounts for contracts received in advance should not be recorded as revenue but should be recorded as a liability such as Unearned Revenue. On a periodic basis, an appropriate amount (e.g., in this case 1/12 each month) should be transferred from the liability account to the catering revenue account. 170. Adjusting entries are journal entries made at the end of the accounting period to record the completed portion of the partially completed transactions. Adjusting entries are necessary to apply the revenue recognition and matching principles and ensure that a company's financial statements include the proper amount for revenues, expenses, assets, liabilities, and stockholders' equity. 171. Cash paid before an expense is incurred results in a deferred expense, which is recognized as an asset on the balance sheet. The adjusting entry reduces the asset and recognizes a corresponding amount of expense. Cash received before revenue is earned requires the recognition of a liability, a deferred revenue. The adjusting entry reduces the liability and recognizes a corresponding amount of revenue. At the end of the period, if cash has not been paid or received, amounts must be accrued for any assets expected to be received and the related revenue, or any liabilities owed and the related expenses. 172. A) Because of the omission, expenses on the income statement will be understated; therefore, net income will be overstated by the same amount. On the retained earnings statement, just as net income is overstated, so also are the ending retained earnings. On the balance sheet, assets and retained earnings (and therefore stockholders' equity) are overstated. B) This error will not likely prevent the board from declaring the dividend. Since depreciation is a noncash expense, no cash is required. (Granted, the balance in the retained earnings account is too high; however, it is unlikely that the dividend will be larger than the currently reported balance in the account. The fact that dividends are paid with cash but "out of" retained earnings is covered in a later chapter.)

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CH 04 Internal Control and Cash

Indicate whether the statement is true or false. 1. Internal control over financial reporting is concerned with ensuring the reliability of the financial statements. a. True b. False 2. The sole purpose for creating an internal control system is to deter embezzlement. a. True b. False 3. A company's internal control system must be designed and maintained by its external auditors. a. True b. False 4. If a company hires honest employees and its top management acts with integrity, no internal control procedures will be necessary. a. True b. False 5. The best response to an employee caught stealing from the company is to say: “Don't ever let me catch you doing that again!” a. True b. False 6. The stronger the system of internal control, the higher the accuracy of the company's accounting records and financial reports. a. True b. False 7. A good system of internal control requires that the physical custody of assets be separated from the accounting for those assets. This concept is known as safeguarding of assets and records. a. True b. False 8. An accounting system must be computerized in order to implement any internal control procedures. a. True b. False 9. If a company has an internal audit function, it does not need to have external auditors. a. True b. False 10. Petty Cash is not considered to be a cash equivalent. a. True b. False Powered by Cognero

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CH 04 Internal Control and Cash 11. The key to being classified as a cash equivalent is that the amount must be available to pay debts within a year's time or less. a. True b. False 12. Cash equivalents typically appear in the long-term investments section of a balance sheet. a. True b. False 13. Money market accounts with original maturities of less than 90 days are cash equivalents. a. True b. False 14. Collections of Accounts Receivable are considered to be cash equivalents. a. True b. False 15. A check written by a company but not yet presented to the bank for payment is called a check in transit. a. True b. False 16. When reconciling a bank account, the company has to prepare an adjusting entry for outstanding checks. a. True b. False 17. When reconciling a bank account, the company must prepare an adjusting entry for deposits in transit. a. True b. False 18. In a sound system of internal control, cash receipts should be deposited daily. a. True b. False 19. A debit memo may be issued in the monthly bank statement in order for the bank to notify a company that a service charge has been assessed on the company's account. a. True b. False 20. On a bank reconciliation, outstanding checks are added to the cash balance per the bank statement. a. True b. False 21. When a bank pays interest on a company's checking account balance, the bank will likely issue a credit memo. a. True b. False Powered by Cognero

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CH 04 Internal Control and Cash 22. When a bank collects a note on behalf of a company, the bank is likely to issue a debit memo. a. True b. False 23. On a bank reconciliation, bank service charges for the month are added to the cash balance per the company records. a. True b. False 24. On a bank reconciliation, interest earned for the month is added to the cash balance per the company records. a. True b. False 25. As a result of the bank reconciliation process, a company will prepare an adjusting entry for a debit memo but not for a credit memo. a. True b. False 26. The establishment of a petty cash fund has no effect on the company's total cash balance. a. True b. False 27. Replenishment of petty cash does not impact the balance of the petty cash fund. a. True b. False 28. No special internal control procedures are necessary with a petty cash fund because the amount is so small. a. True b. False 29. As part of a sound system of internal controls, all disbursements (with the exception of petty cash) should be made by check. a. True b. False 30. If the bank credits a customer's account, then that customer's cash balance increases. a. True b. False 31. If the bank debits its customer's checking account, then the customer's cash balance increases. a. True b. False 32. The accountant must make adjusting journal entries for all items in the bank section of the bank reconciliation. a. True b. False Powered by Cognero

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CH 04 Internal Control and Cash 33. The accountant must make adjusting journal entries for all items in the book section of the bank reconciliation. a. True b. False 34. The length of the operating cycle affects the amount of capital a business needs. a. True b. False

Indicate the answer choice that best completes the statement or answers the question. 35. Which of the following is not one of the three objective areas covered by internal control systems? a. operations b. compliance c. financial performance d. reporting 36. The foundation of an internal control system is the control a. philosophy. b. environment. c. effectiveness. d. structure. 37. Possible external threats to an organization’s success in accomplishing its objectives are called a. strategic risks. b. competitive risks. c. business process risks. d. production risks. 38. An internal control activity that separates responsibilities so that no one person prepares all the documents and records for a particular activity is referred to as a. collusion. b. safeguarding. c. physical control over assets. d. segregation of duties. 39. When two or more employees engage in a fraudulent scheme, it is known as a. collusion. b. safeguarding of assets. c. segregation of duties. d. business process risk. 40. Possible threats to an organization’s goal accomplishments due to its resource allocations are called a. ethical risks. b. business process risks. c. strategic risks. Powered by Cognero

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CH 04 Internal Control and Cash d. control risks. 41. Cash-handling activities and cash recordkeeping activities should be assigned to different employees according to an internal control activity known as a. mitigation of risk. b. collusion. c. safeguarding of assets. d. segregation of duties. 42. Investments and deposits with financial institutions that are readily convertible into known amounts of cash and also have original maturities of 3 months or less are called a. petty cash. b. cash equivalents. c. long-term assets. d. accounts receivable. 43. The process used by an accountant to ensure consistency between the cash balance shown on a bank statement and the cash balance shown in the company’s records is called a. a bank adjustment. b. safeguarding of assets. c. a bank reconciliation. d. segregation of duties. 44. A check written by a company but not yet presented to the bank for payment is called a(n) a. deposit in transit. b. debit memo. c. outstanding check. d. non-sufficient funds check. 45. When a bank collects and deposits a payment on behalf of a business into the company’s account, it issues a(n) a. service charge. b. debit memo. c. error correction. d. credit memo. 46. A check that was returned by the bank because of a lack of funds in the issuer’s account is called a(n) a. error correction. b. credit memo. c. outstanding check. d. non-sufficient funds check. 47. An amount recorded as an increase in a company’s cash account at the end of a period, but which has not yet been reflected on the bank statement, is called a(n) a. deposit in transit. b. debit memo. Powered by Cognero

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CH 04 Internal Control and Cash c. outstanding check. d. non-sufficient funds check. 48. When a bank processes a prearranged payment from a company’s account, it results in a(n) a. deposit in transit. b. debit memo. c. credit memo. d. outstanding check. 49. If a company records a $450 bank deposit as $540, it is known as a(n) a. transposition error. b. bank error. c. outstanding deposit. d. deposit in transit. 50. An account used to record discrepancies that will occasionally occur between amounts deposited and amounts shown on cash register tapes is called a. Petty Cash. b. Miscellaneous Expense. c. Cash Over and Short. d. Miscellaneous Revenues. 51. A fund used in many organizations to handle disbursements and documentation for small expenditures is called a. Cash Over and Short. b. Petty Cash. c. Accounts Receivable. d. Miscellaneous Expense. 52. The elapsed time between the purchase of goods for resale and the collection of cash from customers is referred to as the a. disbursement cycle. b. production cycle. c. cash management cycle. d. operating cycle. 53. The practice of delaying payments to suppliers, speeding up collections from customers, and earning the greatest possible return on any excess cash is known as a. the operating cycle. b. cash management. c. the collection period. d. liquidation. 54. According to the Sarbanes-Oxley Act of 2002, who is primarily responsible for establishing and maintaining a system of internal control over the company's financial reporting? a. management of the company Powered by Cognero

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CH 04 Internal Control and Cash b. the company's auditor's c. the company's internal auditors d. the audit committee of the company's board of directors 55. Internal control systems provide assurance in each of the following areas except a. effectiveness and efficiency of the company's operations. b. compliance with applicable laws and regulations. c. consolidation of departments within the accounting function. d. reliability of financial reporting. 56. Which of the following activities would lead to a violation of the internal control process? a. All supporting documents attached to an invoice are canceled when the check is signed. b. The clerk in the accounting department records both purchases and payments of invoices. c. Monthly statements are mailed to customers to indicate the current balance due. d. The receiving department compares the quantity of merchandise received with the quantity ordered. 57. Identify the activity that would contribute to strengthening the internal control process. a. Checks are signed by the clerk in the accounting department. b. A mailroom employee opens the mail, counts the money received, and updates the accounting records for the amount received. c. An accounting department employee records cash receipts from customers and prepares the bank deposit slips. d. Cash register tapes are recorded daily by an employee from the accounting department. 58. Which of the following is not a requirement of the Sarbanes-Oxley Act? a. Internal audit services cannot be provided by a publicly traded corporation's external auditors. b. All publicly traded corporations must have an internal audit function. c. All publicly traded corporations must have internal control procedures so as to produce reliable financial statements. d. The audit committee of a publicly traded corporation must report to the company's external auditors. 59. Which of the following is not a provision of the Sarbanes-Oxley Act as to the responsibility of a company's top managers? a. They must establish formal procedures to receive, retain, and address any information that may affect the company's accounting. b. They must certify that they are primarily responsible for the company's internal controls over financial reporting. c. They must certify that the company's financial statements are fairly presented. d. They may deny responsibility for certain financial reporting matters if they are not knowledgeable about the proper accounting procedures for those transactions. 60. Which of the following is an essential element of internal control? a. computerized accounting systems. b. an outsourced internal audit function. c. procedures for proper authorization of transactions. d. verification of accounting records by government agencies. Powered by Cognero

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CH 04 Internal Control and Cash 61. Which of the following is not a generally recognized internal control activity? a. establishment of clear lines of authority to carry out specific tasks b. preparation of bank reconciliations on a monthly basis c. reducing the cost of hiring seasonal employees d. limiting access to computerized accounting records 62. Which of the following is not a generally recognized internal control activity? a. separation of the custody and recordkeeping responsibilities for any business activity b. internal review of business transactions by the board of directors c. internal review of business transactions by the internal auditors d. independent verification of the work of one employee by another employee 63. Allowing only certain employees to order goods and services on behalf of the company is an example of what internal control activity? a. segregation of duties b. safeguarding of assets and records c. checks on recorded amounts d. clearly defined authority and responsibility 64. Which internal control activity is followed when management authorizes only the purchasing department to order goods and services for the company? a. segregation of duties b. safeguarding of assets and records c. checks on recorded amounts d. clearly defined authority and responsibility 65. Which internal control activity is followed when the work of one department is inspected by another department? a. segregation of duties b. safeguarding of assets and records c. checks on recorded amounts d. clearly defined authority and responsibility 66. Which internal control activity is followed when inventory storage areas are secured with limited access? a. segregation of duties b. safeguarding of assets and records c. checks on recorded amounts d. clearly defined authority and responsibility 67. A physical count of inventory is required even though the company uses the perpetual inventory system. This is an example of which of the following internal control activities? a. segregation of duties b. safeguarding of assets and records c. checks on recorded amounts d. clearly defined authority and responsibility Powered by Cognero

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CH 04 Internal Control and Cash 68. Having the same employee prepare company checks and sign those checks relates to which internal control activity? a. a violation of proper segregation of duties b. a violation of adequate documents and records c. a good example of checks on recorded amounts d. a good example of clearly defined authority and responsibility 69. Which of the following statements regarding internal control is false? a. It is not possible to design a system of internal controls that is foolproof. b. A well-designed system of internal controls should be the goal of every organization whether for-profit or notfor-profit. c. Separation of duties is the easiest control activity to implement in small companies. d. Internal control systems should be designed to ensure the reliability of financial as well as non-financial reporting. 70. Strategic risk assessment is primarily concerned with a. possible external threats to the company's success in accomplishing its objectives. b. allocation of the company's resources to accomplish its internal processes. c. safeguarding of the company's computerized assets and records. d. achieving operating efficiencies in the areas of production and human resources. 71. The control activity “segregation of duties” is most effective in a. increasing cost of sales. b. preventing collusion. c. assisting employees in performing risk assessment procedures. d. increasing the likelihood of embezzlement. 72. Which of the following statements best describes the act of collusion? a. Collusion is caused by an overstatement of ending inventory. b. Collusion is an intentional act of two or more employees to accomplish theft of company assets. c. Collusion is one of the necessary outcomes of a system of internal control over financial reporting. d. Collusion is enhanced by an effective system of independent reconciliations and other checks on recorded amounts. 73. Which internal control activity is violated when the cashier at a cash register in a retail store also records the daily receipts in a journal? a. segregation of duties b. adequate documents and records c. independent checks on recorded amounts d. safeguards over assets and records 74. A company's control environment is primarily influenced by all of the following except the a. philosophy and operating style of management. b. policies and practices that are promoted within the company. c. experiential background of internal auditors. Powered by Cognero

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CH 04 Internal Control and Cash d. priority placed upon the company's internal control system. 75. All of the following would be considered internal control weaknesses except a. the practice of shipping goods to customers right before year-end even though the customers had not ordered them. b. the person who opens the mail also makes the journal entry to record any customer payments received in the mail. c. it takes 2 days to get a check written because of the approvals required. d. no physical inventory is ever taken to confirm the amount of inventory recorded in the accounting records. 76. The internal audit function of publicly traded corporations is required to report to the a. external auditors. b. internal auditors. c. audit committee. d. managers. 77. Which of the following is not a sound internal control procedure for cash disbursements? a. paying with a check to provide a record of the payment b. designating an authorized check signer who has no cash recordkeeping responsibilities c. marking supporting documents when paid in order to prevent duplicate payment d. paying suppliers with petty cash to expedite the payment process 78. Which of the following assets listed is considered the most liquid? a. Accounts Receivable b. Cash Equivalents c. Inventory d. Prepaid Insurance 79. Which of the following is not included in cash and cash equivalents on a company's balance sheet? a. a savings account at the bank b. a checking account at the bank c. a bank certificate of deposit for 1 year d. petty cash 80. Which of the following is not considered to be a cash equivalent? a. corporate commercial paper due in 60 days after purchase b. U.S. Treasury bills with an original maturity of 6 months c. a money market account with a bank d. a certificate of deposit with a term of 75 days when acquired 81. How are cash equivalents reported or disclosed in financial statements? a. They are included with cash as a current asset on the balance sheet. b. They are only reported on the statement of cash flows. c. They are only disclosed in the notes to the financial statements. d. They are included with short-term investments as a current asset on the balance sheet. Powered by Cognero

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CH 04 Internal Control and Cash 82. Which of the following would never be considered a cash equivalent? a. U.S. Treasury bills b. corporate commercial paper c. money market funds d. common stock issued by a corporation 83. Each of the following items is considered a cash equivalent except a a. 30-day certificate of deposit. b. 60-day corporate commercial paper. c. 75-day U.S. Treasury bill. d. 180-day note issued by a local government. 84. Effective cash management and internal control practices include all of the following except the a. use of a petty cash fund. b. preparation of monthly bank reconciliations. c. practice of using surplus cash for the purchase of bonds or other long-term investments. d. practice of keeping inventory levels low. 85. Checks presented for payment and paid by the bank are known as a. certified checks. b. NSF checks. c. outstanding checks. d. canceled checks. 86. Amounts collected and recorded by a company but not yet reflected in a bank statement are known as a. debit memos. b. credit memos. c. outstanding checks. d. deposits in transit. 87. Which of the following statements is true? a. Sound internal control practice dictates that disbursements should be made by check. b. Good cash management practice dictates that large cash balances should be maintained. c. The person handling cash should also prepare the bank reconciliation. d. Petty cash can be substituted for a checking account to expedite the payment of all disbursements. 88. A check returned by a bank because the issuer's account balance could not cover the check is called a(n) a. outstanding check. b. canceled check. c. certified check. d. NSF check. 89. Which of the following would never appear on a bank statement for a checking account? Powered by Cognero

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CH 04 Internal Control and Cash a. service charges b. outstanding checks c. credit memos d. interest earned 90. Which of the following procedures is not part of the preparation of a bank reconciliation for a checking account? a. comparing deposits listed on the bank statement to the cash account to identify deposits in transit b. comparing canceled checks returned with the bank statement to the cash account to identify outstanding checks c. looking for bank services charges and other items on the bank statement that have not yet been included in the cash account d. reversing all the transactions recorded on the company's records that do not yet appear on the bank statement 91. Which of the following items would not be a reconciling item on a bank reconciliation? a. canceled checks b. NSF checks c. outstanding checks d. bounced checks 92. Which of the following items would be added to the company's cash balance on a bank reconciliation? a. outstanding checks b. deposits in transit c. bank service charges d. interest earned on the bank account 93. While preparing a bank reconciliation, which of the following items would be added to the bank statement balance? a. outstanding checks b. deposits in transit c. bank service charges d. interest earned on the bank account 94. While preparing a bank reconciliation, which of the following items would be subtracted from the balance per the bank statement? a. outstanding checks b. deposits in transit c. bank service charges d. interest earned on the bank account 95. While preparing a bank reconciliation, which of the following items would be subtracted from the balance per the company records? a. outstanding checks b. deposits in transit c. bank service charges d. interest earned on the bank account Powered by Cognero

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CH 04 Internal Control and Cash 96. Which of the following statements best describes the term "outstanding check" from a company's point of view? a. a check written by the company and presented to the bank for payment b. a check written by the company but not yet presented to the bank for payment c. a check written by a customer to the company, and the check has been presented to the bank for payment d. a check written by a customer to the company, but it has not yet been presented to the bank for payment 97. While preparing the February 28 bank reconciliation, the accountant identified the following items: Company's balance according to the general ledger $23,100 Outstanding checks 550 Interest earned on the checking account 100 A customer's NSF check returned by the bank 1,000 In the process of preparing the reconciliation, the accountant discovered an error in recording a customer's check—the amount was incorrectly recorded on the books as a cash receipt of $600, while the bank correctly recorded the amount as $650. What is the company's adjusted cash balance on February 28? a. $22,250 b. $21,700 c. $22,200 d. $22,150 98. While preparing the April 30 bank reconciliation, the accountant identified the following items: Company's balance according to the general ledger Outstanding checks Bank service charge A customer's NSF check returned by the bank

$15,000 2,500 15 100

What is the company's adjusted cash balance at April 30? a. $12,385 b. $12,500 c. $14,885 d. $17,385 99. The following items were identified while preparing a bank reconciliation for Dance Town Academy’s checking account as of March 31: Cash balance according to the general ledger Bank statement balance Outstanding checks Customer's bounced check Bank service charges Deposits in transit Interest earned on the checking account

? $18,500 2,700 350 100 1,000 60

How will the deposits in transit be handled on a bank reconciliation? a. They will be added to the balance from the company records. b. They will be subtracted from the balance from the company records. c. They will be added to the bank statement balance. Powered by Cognero

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CH 04 Internal Control and Cash d. They will be subtracted from the bank statement balance. 100. The following items were identified while preparing a bank reconciliation for Dance Town Academy’s checking account as of March 31: Cash balance according to the general ledger Bank statement balance Outstanding checks Customer's bounced check Bank service charges Deposits in transit Interest earned on the checking account

? $18,500 2,700 350 100 1,000 60

How will the customer's bounced checks be handled on a bank reconciliation? a. They will be added to the balance from the company records. b. They will be subtracted from the balance from the company records. c. They will be added to the bank statement balance. d. They will be subtracted from the bank statement balance. 101. The following items were identified while preparing a bank reconciliation for Dance Town Academy’s checking account as of March 31: Cash balance according to the general ledger Bank statement balance Outstanding checks Customer's bounced check Bank service charges Deposits in transit Interest earned on the checking account

? $18,500 2,700 350 100 1,000 60

How will the interest earned on the checking account be handled on a bank reconciliation? a. It will be added to the balance from the company records. b. It will be subtracted from the balance from the company records. c. It will be added to the bank statement balance. d. It will be subtracted from the bank statement balance. 102. The following items were identified while preparing a bank reconciliation for Dance Town Academy’s checking account as of March 31: Cash balance according to the general ledger Bank statement balance Outstanding checks Customer's bounced check Bank service charges Deposits in transit Interest earned on the checking account

? $18,500 2,700 350 100 1,000 60

How will the outstanding checks be handled on the bank reconciliation? a. They will be added to the balance from the company records. Powered by Cognero

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CH 04 Internal Control and Cash b. They will be subtracted from the balance from the company records. c. They will be added to the bank statement balance. d. They will be subtracted from the bank statement balance. 103. The following items were identified while preparing a bank reconciliation for Dance Town Academy’s checking account as of March 31: Cash balance according to the general ledger Bank statement balance Outstanding checks Customer's bounced check Bank service charges Deposits in transit Interest earned on the checking account

? $18,500 2,700 350 100 1,000 60

How will the bank services charges be handled on a bank reconciliation? a. They will be added to the balance from the company records. b. They will be subtracted from the balance from the company records. c. They will be added to the bank statement balance. d. They will be subtracted from the bank statement balance. 104. The following items were identified while preparing a bank reconciliation for Dance Town Academy’s checking account as of March 31: Cash balance according to the general ledger Bank statement balance Outstanding checks Customer's bounced check Bank service charges Deposits in transit Interest earned on the checking account

? $18,500 2,700 350 100 1,000 60

Determine the amount of the company's adjusted cash balance. a. $16,800 b. $20,200 c. $1,700 d. cannot be determined from this limited information 105. The following items were identified while preparing a bank reconciliation for Dance Town Academy’s checking account as of March 31: Cash balance according to the general ledger Bank statement balance Outstanding checks Customer's bounced check Bank service charges Deposits in transit Interest earned on the checking account

? $18,500 2,700 350 100 1,000 60

Determine the company's cash balance before adjustment. Powered by Cognero

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CH 04 Internal Control and Cash a. $16,410 b. $16,900 c. $17,190 d. $17,310 106. While reconciling the checking account, the accountant noticed that an error had been made in recording a check received by the company. The bookkeeper had recorded the receipt as $729, but the correct amount of the check was $279. Which of the following reconciling adjustments is necessary? a. Add $450 to the company's records. b. Deduct $450 from the company's records. c. Add $450 to the bank statement balance. d. Deduct $450 from the bank statement balance. 107. A debit memo appeared on the May bank statement. How should this amount be treated on the May bank reconciliation? a. Add it to the company's cash balance. b. Add it to the bank balance. c. Deduct it from the company's cash balance. d. Deduct it from the bank balance. 108. A credit memo appeared on the September bank statement. How should this amount be treated on the September bank reconciliation? a. Add it to the company's cash balance. b. Add it to the bank balance. c. Deduct it from the company's cash balance. d. Deduct it from the bank balance. 109. Which of the following is an example of a debit memo? a. notice of a bank service charge b. notice of interest earned on a checking account c. outstanding checks d. a company's transposition error in the recording of a deposit 110. Which of the following is an example of a credit memo? a. notice of a bank service charge b. notice of interest earned on a checking account c. outstanding checks d. a company's transposition error in the recording of a customer's check 111. Which of the following is not part of the procedure used for establishing and maintaining a petty cash fund? a. A check is prepared for a small, fixed amount; when the check is cashed, the money is entrusted to a petty cash custodian. b. The company must record an entry for the establishment of the fund. c. When appropriate documentation is presented, cash payments are made from the fund; the petty cash custodian retains the documentation. Powered by Cognero

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CH 04 Internal Control and Cash d. When the petty cash fund needs to be replenished, an entry is recorded to recognize an increase in the petty cash account. 112. Which of the following statements is true regarding a credit memo and its relationship to a company's bank reconciliation procedures? a. It must be recorded as a credit to the balance per the company's records. b. It is issued to notify a company of bank service charges that need to be recorded on the company's records. c. It is issued when a customer gives the company an NSF check that needs to be recorded on the company's records. d. It must be recorded as a debit to the balance per the company's records. 113. Which of the following statements is false regarding a credit memo and its relationship to a company's bank reconciliation procedures? a. It is issued to notify a company of canceled checks that have been paid by the bank. b. It is issued to notify a company of interest earned that needs to be recorded on the company's records. c. It is issued when the bank collects a note on behalf of the company. d. It must be recorded as a debit to the balance per the company's records. 114. If a company erroneously records a $500 deposit as $50 in its records, which of the following must occur when reconciling its bank statement? a. The company must increase the balance per its records by $500. b. The company must increase the balance per its records by $450. c. The company must decrease the balance per its records by $500. d. The company must decrease the balance per its records by $450. 115. If a company erroneously records a $50 check received from a customer as $500 in its records, which of the following must occur when reconciling its bank statement? a. The company must increase the balance per its records by $500. b. The company must increase the balance per its records by $450. c. The company must decrease the balance per its records by $500. d. The company must decrease the balance per its records by $450. 116. A company's unadjusted bank balance is $3,000. Outstanding checks amount to $500 and deposits in transit total $300. Based on this information alone, what is the company's adjusted cash balance for the purpose of preparing a bank reconciliation? a. $3,200 b. $3,300 c. $2,800 d. $2,700 117. A Day Spa accepted a check from a customer as payment for services. Unfortunately, the customer's check bounced. The journal entry required on the company's books as a result of this bank reconciliation item will a. increase total assets only. b. decrease total assets only. c. affect both total assets and stockholders' equity. Powered by Cognero

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CH 04 Internal Control and Cash d. have no net impact on total assets. 118. If the balance on the bank statement does not equal the balance per the company's records, then it can be assumed that a. the company has no errors in its records concerning the cash account. b. the bank has made errors in preparing the bank statement. c. the company has made errors in its records concerning the cash account. d. there will be items reconciling the difference. 119. Which of the following is a reconciling item on the bank side of a bank reconciliation? a. canceled checks b. outstanding checks only c. NSF checks only d. both outstanding checks and NSF checks 120. In the reconciliation of a bank statement, deposits in transit should be a. added to the unadjusted balance per the company's records. b. subtracted from the unadjusted balance per the company's records. c. added to the unadjusted bank statement balance. d. subtracted from the unadjusted bank statement balance. 121. A treasurer preparing the October bank reconciliation identified the following items: Cash balance per the company's records Deposits in transit Outstanding checks Interest earned on the checking account NSF check from customer

$32,800 4,300 2,200 100 400

What is the company's adjusted cash balance at October 31? a. $34,600 b. $34,900 c. $32,500 d. $32,800 122. On June 30, a company had $1,924 in its cash account according to its general ledger. This included a deposit of $174 that was in transit on June 30. The June 30 bank statement contained the following information: Bank statement balance Bank service charge Collection of notes receivable NSF check

$2,178 14 136 32

Assuming outstanding checks of $338, what is the company's adjusted cash balance at June 30? a. $1,840 b. $1,880 c. $2,014 Powered by Cognero

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CH 04 Internal Control and Cash d. $2,178 123. The accountant preparing the January bank reconciliation identified the following items: Cash balance per company records Outstanding checks Interest earned on the checking account Customer's NSF check returned by the bank

$35,900 12,050 75 325

There was also an error in the accounting records whereby a customer's check for $101 was recorded as $110. What is the company's adjusted cash balance at January 31? a. $23,591 b. $35,641 c. $35,659 d. $47,691 124. In anticipation of preparing the July bank reconciliation, the accountant gathered the following information: Bank statement balance Deposit in transit Outstanding checks Bank service charges Customer's NSF check returned by the bank

$4,300 500 300 10 50

What is the company's adjusted cash balance at July 31? a. $4,300 b. $4,050 c. $4,140 d. $4,500 125. The following items relate to Delco Construction’s March bank reconciliation: Bank statement balance Unadjusted cash balance according to company records Deposit in transit Outstanding checks Bank service charges Interest earned on the bank account Customer's NSF check returned by the bank

$29,600 ? 2,200 3,100 200 100 300

What is the company's adjusted cash balance at March 31? a. $28,700 b. $29,100 c. $28,300 d. $29,600 126. The following items relate to Delco Construction’s March bank reconciliation: Bank statement balance Unadjusted cash balance according to company records Powered by Cognero

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CH 04 Internal Control and Cash Deposit in transit Outstanding checks Bank service charges Interest earned on the bank account Customer's NSF check returned by the bank

2,200 3,100 200 100 300

What is the company's unadjusted cash balance in its accounting records at March 31 before the reconciliation was completed? a. $28,700 b. $29,100 c. $28,300 d. $29,600 127. The following items relate to Delco Construction’s March bank reconciliation: Bank statement balance Unadjusted cash balance according to company records Deposit in transit Outstanding checks Bank service charges Interest earned on the bank account Customer's NSF check returned by the bank

$29,600 ? 2,200 3,100 200 100 300

What is the net amount of the adjustments to the company's cash balance as a result of the bank reconciliation? a. a $400 increase b. a $400 decrease c. a $900 increase d. No adjustments are needed. 128. The following information relates to Designer Mart’s May bank reconciliation: Bank statement balance Unadjusted cash balance from the company records Deposit in transit Outstanding checks Bank service charges Interest earned on the bank account Customer's NSF check returned by the bank

$5,000 ? 1,000 500 50 10 25

In addition, a check issued was recorded in the accounting records as $1,200, but the correct amount as recorded by the bank was only $1,000. What is the unadjusted cash balance according to the company's records on May 31? a. $5,365 b. $5,500 c. $5,000 d. $4,865 129. The following information relates to Designer Mart’s May bank reconciliation: Powered by Cognero

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CH 04 Internal Control and Cash Bank statement balance Unadjusted cash balance from the company records Deposit in transit Outstanding checks Bank service charges Interest earned on the bank account Customer's NSF check returned by the bank

$5,000 ? 1,000 500 50 10 25

In addition, a check issued was recorded in the accounting records as $1,200, but the correct amount as recorded by the bank was only $1,000. What is the company's adjusted cash balance at May 31? a. $4,865 b. $5,000 c. $5,365 d. $5,500 130. The following information relates to Designer Mart’s May bank reconciliation: Bank statement balance Unadjusted cash balance from the company records Deposit in transit Outstanding checks Bank service charges Interest earned on the bank account Customer's NSF check returned by the bank

$5,000 ? 1,000 500 50 10 25

In addition, a check issued was recorded in the accounting records as $1,200, but the correct amount as recorded by the bank was only $1,000. What is the net amount of the adjustments to the company's cash balance as a result of the bank reconciliation process? a. a $210 increase b. a $135 increase c. a $135 decrease d. a $65 decrease 131. The following information relates to Dreammaker Kitchens’ November bank reconciliation: Bank statement balance Unadjusted cash balance from the company's records Deposit in transit Outstanding checks Bank service charges Interest earned on the bank account Customer's NSF check returned by the bank

$10,700 ? 2,100 1,200 300 100 400

What is the company's adjusted cash balance on November 30? a. $12,200 b. $11,600 c. $10,700 Powered by Cognero

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CH 04 Internal Control and Cash d. $10,100 132. The following information relates to Dreammaker Kitchens’ November bank reconciliation: Bank statement balance Unadjusted cash balance from the company's records Deposit in transit Outstanding checks Bank service charges Interest earned on the bank account Customer's NSF check returned by the bank

$10,700 ? 2,100 1,200 300 100 400

What was the company's unadjusted cash balance on November 30 before the bank reconciliation process was undertaken? a. $10,700 b. $11,300 c. $12,200 d. $11,600 133. The following information relates to Dreammaker Kitchens’ November bank reconciliation: Bank statement balance Unadjusted cash balance from the company's records Deposit in transit Outstanding checks Bank service charges Interest earned on the bank account Customer's NSF check returned by the bank

$10,700 ? 2,100 1,200 300 100 400

As a result of the bank reconciliation process, what is the net decrease in cash that must be recorded on the company's books? a. a $100 decrease b. a $300 decrease c. a $400 decrease d. a $600 decrease 134. Which of the following documents is used as a control measure to check cash receipts? a. canceled checks b. outstanding checks c. bank deposit slips d. bank debit memos 135. Each of the following documents is used in the reconciliation of cash receipts except a. NSF checks. b. outstanding checks. c. bank deposit slips. d. bank credit memos.

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CH 04 Internal Control and Cash 136. Each of the following documents is used in the reconciliation of cash disbursements except a. canceled checks. b. outstanding checks. c. bank credit memos. d. bank debit memos. 137. Which of the following is a transposition error? a. writing $89 as $98 b. writing $10 as $100 c. debiting or crediting an amount to the wrong account d. debiting or crediting the right account with the wrong amount 138. A customer's check for $25 that had been deposited into the company’s checking account the previous month was returned stamped “NSF” by the bank. Which of the following journal entries is required in the company’s books? a. Cash 25 Accounts Receivable 25 b. Cash 25 Accounts Payable 25 c. Account Receivable 25 Petty Cash 25 d. Accounts Receivable 25 Cash 25 139. During the bank reconciliation process, an accountant identified an error. A check written for $20 to pay a supplier for goods purchased on credit was erroneously recorded in the company's records as $200. Which of the following entries would correct this error? a. Cash 180 Accounts Payable 180 b. Cash 180 Accounts Receivable 180 c. Account Receivable 180 Accounts Payable 180 d. None of these, as the error should be corrected by the supplier's personnel 140. The account that records differences between amounts of cash deposited and amounts from the cash register tapes is called a. Petty Cash. b. Cash Over and Short. c. Cash Equivalents. d. Discrepancy Expense. 141. The amount of cash in the cash register from sales totals $534. The amount for sales recorded on the cash register tape was $530. Which journal entry is required to take care of this discrepancy? a. Cash in Bank 530 Sales 530 Powered by Cognero

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CH 04 Internal Control and Cash b. Cash in Bank 534 Sales c. Cash in Bank 534 Sales Cash Over and Short d. Cash in Bank 530 Cash Over and Short 4 Sales

534 530 4

534

142. It is important that the petty cash custodian a. signs the check that reimburses the petty cash fund. b. records all petty cash expenditures in the company's accounting records. c. prepares the bank reconciliation for the petty cash account. d. maintains supporting documentation for all payments made from the petty cash fund. 143. Which of the following is the correct entry to establish a petty cash fund in the amount of $300? a. Cash 300 Petty Cash Fund 300 b. Petty Cash Fund 300 Cash 300 c. Miscellaneous Expense 300 Petty Cash Fund 300 d. None of these, as no entry is necessary to record an exchange of cash 144. A petty cash custodian maintains a $250 petty cash fund. At the end of each month, the custodian tallies the records of the petty cash transactions and presents them for reimbursement. Apr. 4 21 25

U.S. Post Office (postage) Callabaugh Supply (office supplies) Speedy Delivery (package delivery)

$ 48 146 35

Which of the following entries is necessary for recording the replenishment of the fund? a. Cash 229 Petty Cash Fund 229 b. Postage Expense 48 Office Supplies Expense 146 Delivery Expense 35 Petty Cash 229 c. Postage Expense 48 Office Supplies Expense 146 Delivery Expense 35 Cash 229 d. Postage Expense 48 Office Supplies Expense 146 Delivery Expense 35 Cash Over and Short 21 Petty Cash Fund 250

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CH 04 Internal Control and Cash 145. When the petty cash balance is replenished and the expenses are recognized, the a. petty cash balance increases b. cash balance increases c. petty cash balance decreases d. petty cash balance is not affected 146. Once the bank reconciliation is completed, an adjusting entry in the company's books needs to be made for each of the following items except a. credit memos. b. non-sufficient funds checks. c. outstanding checks. d. bank service charges. 147. A check written on the company's account in May and paid by the bank is returned with the bank statement for May. Identify the treatment of this check at the time of reconciliation. a. It would be added to the balance as per bank statement. b. It would be added to balance as per company's books. c. It would not be included on the reconciliation statement. d. It would be subtracted from the balance as per company's books. 148. The operating cycle is the elapsed time between the a. purchase of goods or services and the ultimate collection of cash from customers related to the sale of those goods. b. sale of goods or services to customers and the payment to suppliers for those goods. c. purchase of goods from suppliers and the performance of the related service for customers. d. sale of goods and the delivery of those goods to customers. 149. Each of the following represents an effective cash management practice except a. short-term investments should be purchased with excess cash in order to maximize the interest-earning potential. b. payments should be delayed as long as possible (without compromising the relationship with the payee) in order to maximize the interest-earning potential. c. payments should be expedited in order to simplify recordkeeping. d. receivable collections should be expedited, or receivables should be sold in order to minimize the costs associated with accounting for customer accounts and servicing delinquent accounts.

150. A company's bank statement balance shows that there is $4,230 in the checking account at the end of the month. Comparing the company's records with the bank statement reveals several additional items, such as outstanding checks of $2,880, deposits in transit of $1,280, an NSF check for $160, and a bank service charge of $40. Calculate the adjusted cash balance for this checking account. 151. A company's bank statement balance shows that there is $4,190 in the checking account at the end of the month. Comparing the company's records with the bank statement reveals several additional items, such as outstanding checks of $1,860, deposits in transit of $2,080, an NSF check for $209, interest earned of $21.52, a bank service charge of $40, and a check for $120 recorded twice by the company. Calculate the adjusted cash balance for this checking account. Powered by Cognero

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CH 04 Internal Control and Cash 152. A company's records indicate the balance in its checking account at the end of the month is $5,671. Comparing the company's records with the monthly bank statement reveals several additional transactions, such as a bank service charge of $75, a $4,000 note receivable collected by the bank plus interest earned of $100, and an NSF check for $350. Determine the company's adjusted cash balance and prepare the journal entries necessary to adjust the account balance. 153. A company's records indicate the balance in its checking account at the end of the month is $3,918. Comparing the company's records with the monthly bank statement reveals several additional cash transactions, such as deposits in transit of $4,022, three outstanding checks totaling $497, a $30 bank service charge, a $1,000 note receivable collected by the bank plus interest earned of $35, and an NSF check for $150. Determine the company's adjusted cash balance and prepare the journal entries necessary to adjust the account balance. 154. The accounting records for Durden Rentals show a cash balance of $13,676 on March 31. On the evening of March 31, company receipts of $3,250 were placed in the bank's night deposit drop box; this deposit was processed by the bank on April 1. The March 31 bank statement shows a balance of $9,866, including a service charge of $45, an NSF check from a customer for $210, and a $650 debit memo for the payment of the company's utility bill. All of the checks that the company had written during March were listed on the bank statement except for Check #2156 in the amount of $345. Prepare a bank reconciliation to calculate the company's adjusted cash balance at March 31. 155. The accounting records for Dutch Island Company shows a cash balance of $4,133 on January 31. On the evening of January 31, company receipts of $1,250 were placed in the bank's night deposit drop box; this deposit was processed by the bank on February 1. The January 31 bank statement shows a balance of $8,876, including collection of a $5,000 note receivable plus $55 of interest earned, a service charge of $40, and a $550 debit memo for the payment of the company's utility bill. All of the checks that the company had written during January were listed on the bank statement except for Check #731 in the amount of $1,528. Prepare a bank reconciliation to calculate the company's adjusted cash balance at January 31. 156. The accounting records of Delta Driving School show a cash balance of $14,134 on February 28. On the evening of February 28, company receipts of $1,250 were placed in the bank's night deposit drop box; this deposit was processed by the bank on March 1. The February 28 bank statement shows a balance of $18,877, including collection of a $6,000 note receivable plus $55 of interest earned, a service charge of $40, and a $1,550 debit memo for the payment of the company's utility bill. All of the checks that the company had written during February were listed on the bank statement except for Check #1908 in the amount of $1,528. A) Prepare a bank reconciliation to calculate the company's adjusted cash balance at February 28. B) Prepare the journal entries needed to adjust the cash records as a result of the bank reconciliation procedures. 157. The accounting records of Dusek Dentistry, Inc. show the following information for February 28: Balance Receipts Payments Balance

Deposits:

Date Feb. 1

Feb. 28

Amount $ 8,510 Checks: 10,600 (11,300) $ 7,810

Feb. 4 Feb. 11 Feb. 18 Feb. 25

$ 1,200 1,200 2,700 3,400

Number 343 344 345 346 347 348 349

Date Feb. 2 Feb. 4 Feb. 11 Feb. 12 Feb. 18 Feb. 26 Feb. 28

Amount $ 4,100 1,800 2,100 1,200 300 400 1,400 $11,300

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CH 04 Internal Control and Cash Feb. 26 Feb. 27 Feb. 28

700 200 1,200 $10,600 Additional information pertaining to this checking account was obtained by comparing the monthly bank statement with the company's records. The following was revealed: 1. The ending cash balance per the bank statement was $7,960. 2. Deposits of 2,100 from February 26–28 are in transit. 3. Checks #347 and #349 are outstanding. A $100 NSF check from a customer did not clear the bank. This NSF check was included in 4. the February 25 deposit. Check #343 was prepared correctly as a $1,400 payment on account. This check was 5. properly recorded by the bank but was erroneously included on the company's records in the amount of $4,100. A debit memo for $2,000 was shown on the bank statement as notice that the company's rent 6. was automatically paid from the checking account on February 1. A credit memo for $15 was shown on the bank statement as notice that the company had 7. earned interest on its average daily balance in this checking account. 8. The bank's fees for the month totaled $65. A) Prepare a bank reconciliation to calculate the company's adjusted cash balance at February 28. B) Prepare the journal entries that must be recorded to adjust the cash records as a result of these bank reconciliation procedures. 158. Dinah Corp. prepares monthly bank reconciliations of its checking account balance. The bank statement for June indicated the following: Balance, June 30 $63,400 Bank service charges for June 160 Interest earned during June 100 NSF check from a customer that had been previously deposited by Dinah 1,150 Collection of note ($3,000) and the related interest ($80) from Dinah's customer 3,080 An analysis of canceled checks and deposits and the records of Dinah revealed the following items: Checking account balance per Dinah's accounting records $58,770 Outstanding checks as of June 30 4,630 Deposits in transit on June 30 1,780 Error in recording Check #3549 issued by Dinah 90 The correct amount of Check #3549 is $760, but it was recorded as a cash disbursement of $670. The check was issued to pay for merchandise purchased. The check was written correctly and appeared on the bank statement correctly. A)

Prepare a bank reconciliation in proper form for June.

What amount should be reported as the cash balance on the June 30 balance sheet?

159. Diamond Corp. prepares monthly bank reconciliations of its checking account balance. The bank statement for October indicated the following: Balance, October 31 Bank service charges for October Interest earned during October NSF check from a customer that had been previously deposited by Diamond Powered by Cognero

$29,700 80 120 230 Page 27

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CH 04 Internal Control and Cash Collection of note ($4,000) and the related interest ($100) from Diamond's customer 4,100 An analysis of canceled checks and deposits and the records of Diamond revealed the following items: Checking account balance per Diamond's accounting records $26,040 Outstanding checks as of October 31 2,950 Deposits in transit on October 31 3,110 Error in recording Check # 627 issued by Diamond 90 The correct amount of Check #627 is $980, but it was recorded as a cash disbursement of $890. The check was issued to pay for merchandise purchased. The check was written correctly and appeared on the bank statement correctly. A)

Prepare a bank reconciliation in proper form for October.

What amount would Diamond report as its cash balance on its October 31, balance sheet?

160. Deal Corp. prepares monthly bank reconciliations of its checking account balance. The bank statement for December indicated the following: Balance, December 31 $7,920 Bank service charges for December 20 Interest earned during December 30 NSF check from a customer that had been previously deposited by Deal 32 Collection of note ($1,000) and the related interest ($40) from Deal's customer 1,040 An analysis of cancelled checks and deposits and the records of Deal revealed the following items: Checking account balance per Deal's accounting records $7,170 Outstanding checks as of December 31 952 Deposits in transit on December 31 1,310 Error in recording Check #267 issued by Deal 90 The correct amount of Check #267 is $340, but it was recorded as a cash disbursement of $430. The check was issued to pay for merchandise purchased. The check was written correctly and appeared on the bank statement correctly. A)

Prepare a bank reconciliation in proper form for December 31.

What amount would Deal report as its cash balance on its December 31 balance sheet?

What adjusting entries will Deal record as a result of this bank reconciliation process?

161. Discount Muffler Company is preparing its bank reconciliation for June 30. Its bank statement and general ledger Taccount for its checking account are as follows: Best Bank 41 N. Main Street Best, GA 32664

Account Statement June 30

Member FDIC Discount Muffler Company 161 N. Hill Street Best, GA 32664 Previous Balance Powered by Cognero

Acct. 00709561

Checks and Debits

Deposits and Credits

Current Balance Page 28

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CH 04 Internal Control and Cash $9,675.20

Date 6/03 6/04 6/06 6/07 6/10 6/11 6/12 6/12 6/13 6/14 6/17 6/18 6/19 6/19 6/20 6/21 6/24 6/25 6/26 6/27 6/28 6/30 6/30 Symbols:

$10,685.26

Checks and Debits No. 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 DM 1994 1995 1996 1997 1998 NSF 1999 2000 2002 2003 SC DM Debit Memo(utility bill)

Deposits and Credits Amount Date $ 182.00 217.26 6/04 1,075.00 37.50 6/07 826.00 50.00 2,670.00 67.90 890.00 27.50 111.00 380.00 60.00 510.00 30.00 1,600.00 78.00 200.00 208.80 1,250.00 175.00 25.30 6/30 14.00 CM Credit Memo

INT Interest Earned

$7,175.10

$6,165.04

Daily Balance Amount Date 6/03 2673.10 6/04 6/06 4500.00 6/07 6/10 6/11

Amount $ 9,493.20 11,949.04 10,874.04 15,336.54 14,510.54 14,460.54

6/12 6/13 6/14 6/17 6/18

11,722.64 10,832.64 10,805.14 10,694.14 10,314.14

6/19 6/20 6/21 6/24 6/25 6/26 6/27 6/28

9,744.14 9,714.14 8,114.14 8,036.14 7,836.14 7,627.34 6,377.34 6,202.34

6/30

6,165.04

INT 2.00

NSF NonSufficient Funds

SC Service Charge

Discount Muffler Company

Date Beg. Bal. 5/31 6/01 6/05 6/30

Cash Amount Deposited Check # $8,200.94 1986 2,673.10 1987 4,500.00 1988 300.00 1989 1990 1991 1992 1993 1994 1995 1996 1997

Amount Disbursed $ 37.50 826.00 50.00 2,670.00 67.90 890.00 27.50 111.00 60.00 510.00 30.00 1,600.00 Page 29

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CH 04 Internal Control and Cash 1998 1999 2000 2001 2002 2003 2004 2005 6/30

87.00 208.80 1,250.00 93.00 175.00 25.30 72.50 891.00

$5,991.54

Prepare a bank reconciliation in proper form for June. Note that the beginning balance was correctly reconciled at the end of the previous month and that all outstanding checks (#1983, #1984, and #1985) and deposits in transit from the previous month cleared the bank during May.

How much cash will the company report on its June 30 balance sheet?

What adjusting entries will the company record as a result of this bank reconciliation process? Assume that the bank correctly recorded all transactions and that any errors noted in the reconciliation process involve transactions on credit.

162. Dovetail Company is preparing its bank reconciliation for July 31. Its bank statement and general ledger T-account for its checking account are as follows: First Yard Bank 41 N. First Street Headon, MA 72594

Account Statement July 31

Member FDIC Dovetail Company 168 N. Oak Street Headon, MA 72594 Previous Balance $10,753.40

Date 7/03 7/04 7/06 7/07 7/10 7/11 7/12 7/13 7/14 7/17 7/18

Checks and Debits No. 744 745 746 747 748 749 750 751 752 753 DM

Acct. 004-706037

Checks and Debits $18,831.26 Deposits and Credits Amount Date 162.00 227.26 7/04 1,175.00 637.50 7/07 5,526.00 510.00 69.90 3,710.00 7/13 287.50 11.00 284.00 7/18

Deposits and Credits $29,526.75 Daily Balance Amount Date 7/03 12,674.10 7/04 7/06 5,500.00 7/07 7/10 7/11 7/12 435.00 7/13 7/14 7/17 870.00 7/18

Current Balance $21,448.89

Amount 10,591.40 23,038.24 21,863.24 26,725.74 21,199.74 20,689.74 20,619.84 17,344.84 17,057.34 17,046.34 17,632.34 Page 30

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CH 04 Internal Control and Cash 7/19 7/20 7/21 7/24 7/25 7/26 7/27 7/28 7/31 7/31

754 755 756 757 NSF 759 760 762 764 SC

Symbols:

DM Debit Memo(utility bill)

500.00 2,060.00 1,680.00 7/21 78.00 200.00 7/25 208.80 7/26 1,290.00 75.00 45.30 7/31 94.00 CM Credit Memo

INT Interest Earned

7/19 7/20 975.00 7/21 7/24 98.00 7/25 8,961.50 7/26 7/27 7/28 INT 13.15 7/31 NSF NonSufficient Funds

17,132.34 15,072.34 14,367.34 14,289.34 14,187.34 22,940.04 21,650.04 21,575.04 21,448.89

SC Service Charge

Dovetail Company

Date Beg. Bal. 7/01 7/01

7/06

7/12

7/17 7/20 7/24 7/25

7/31 7/31

Cash Amount Deposited Check # $ 9,189.14 747 12,674.10 748 749 750 5,500.00 751 752 753 754 435.00 755 756 757 870.00 758 975.00 759 760 98.00 761 8,961.50 762 763 764 300.00 765 766 $20,219.24

Amount Disbursed $ 637.50 5,526.00 510.00 69.90 3,710.00 287.50 11.00 500.00 206.00 1,680.00 78.00 1,600.00 208.80 1,290.00 1,250.00 75.00 135.00 45.30 72.50 891.00

Prepare a bank reconciliation in proper form for July. Note that the beginning balance was correctly reconciled at the end of the previous month and that all outstanding checks (#744, #745, and #746) and deposits in transit from last month cleared the bank this month.

How much cash would the company report on its July 31 balance sheet?

What adjusting entries will the company record as a result of this bank reconciliation

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CH 04 Internal Control and Cash process? Assume that the bank correctly reported all transactions and that any errors noted in the reconciliation process involve transactions on credit.

163. The accountant prepared the firm's bank reconciliation and noted several reconciling items. Indicate whether the firm should add or subtract each item from its balance of cash or on its bank balance.

1. 2. 3. 4. 5. 6. 7. 8.

Bank Balance

Reconciling Items Deposits in transit NSF checks Check issued recorded twice by the company Interest earned Outstanding checks Bank service charges Bank debit memos Bank credit memos

Company Balance

164. The accountant prepared the firm's bank reconciliation and noted the following adjustments to the company records for its checking account. In the following table, indicate the impact on the accounting equation of recording the various adjusting journal entries for these items by inserting an “I” for increase or a “D” for decrease. It is possible that an adjustment both increases and decreases an element of the accounting equation, as in the case of the first adjustment which has been completed as an example.

1. 2. 3. 4. 5. 6.

Adjustments to Company Records

Assets

NSF checks Check for utilities recorded twice by the company Interest earned Bank service charges Bank debit memos for payment of rent Bank credit memos for collection of a note receivable

I, D

Liabilities

Stockholders' Equity

165. On April 1, a company established a petty cash fund of $300. By the end of the month, the petty cash custodian requested reimbursement of $225 for the following expenditures from the fund: Office supplies Overtime meals Postage Miscellaneous

$58 61 75 31

Record the entries to (a) establish the petty cash fund and (b) replenish the fund and recognize expenses at the end of April.

166. A petty cash fund of $300 was established on May 1. By the end of the month, the petty cash custodian requested reimbursement of $222 for the following expenditures from the fund: Powered by Cognero

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CH 04 Internal Control and Cash Office supplies Deliveries Fuel Postage

$68 30 56 68

Record the entries to (a) establish the petty cash fund, (b) replenish the fund as of the end of May, and (c) increase the fund balance to $500. 167. Dow Electronics established a petty cash fund in the amount of $250 to pay for small, incidental expenditures incurred at the office. The fund is handled by a trustworthy custodian. At the end of the month, the fund is replenished. On September 30, the petty cash fund contained $13 in cash and the following reimbursements were requested: Office supplies Delivery fees Repairs Postage

$87 35 67 48

Record journal entries to (a) establish the petty cash fund of $250, (b) replenish the fund and recognize expenses at the end of September, and (c) increase the fund balance to $300. 168. During April, Downtown Iron Works engaged in the following transactions involving its petty cash fund: Date Apr. 1

Description The company established the petty cash fund by issuing a check to the fund's custodian.

Amount $250

Apr. 4

The custodian paid for freight charges on new equipment.

125

Apr. 13

The custodian paid for postage services on the mailing of blueprints.

Apr. 21

The custodian paid for office supplies.

Apr. 25

The custodian requested reimbursement of the petty cash expenditures during the month and received a check to replenish the fund.

Prepare the journal entries necessary to record the company's petty cash transactions.

169. Explain some internal control procedures that a fast-food restaurant like McDonald's may use to control cash receipts. 170. You are an entrepreneur about to open a coffee and internet cafe near your college campus. You have decided to accept cash and credit and will use college student employees. While you plan to be at the shop during most hours that the business will be open, you have made one of the student employees your assistant manager to manage in your absence. Describe at least five procedures that you might use to provide adequate internal control over cash and credit sales and bank deposits. 171. The following information is provided for a company that manufactures bicycles. The factory foreman determines Powered by Cognero

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CH 04 Internal Control and Cash when orders for materials are necessary. The orders are sent to the purchasing department that places orders with the vendors recommended by the factory foreman. When the materials are received, they are immediately delivered to a central storeroom. When invoices are received for the items purchased, they are sent to the accounting department for payment. The accounting department compares the invoices with the purchase orders. If the two documents are in agreement, the invoice is approved for payment. The accounting department prepares checks that are signed by the company treasurer. Recommend three or four improvements in the company's procedures for purchasing and paying for purchases of materials that will provide better internal control. 172. An effective system of internal control is critical to protecting a company's investment in cash. Identify the five control activities and provide one example that relates to each control as it would be applied to cash. 173. You have just accepted a part-time job at one of the campus eateries. During your training, the manager was called away to deal with some crisis and asked one of your coworkers to complete your training on using the cash register. The coworker proceeds to tell you that if the money in the register drawer doesn't equal the total on the cash register tape, you will be responsible for the difference. If there is a cash shortage, you must make up the shortage out of your own pocket, but if there is excess cash, you may keep the overage. Proudly, with the wink of an eye, she states, “I was short one time, right after I started working here. But I made sure, if you know what I mean, that I would never be short again.” A) Evaluate this control. Is it strong or weak? What kind of behavior will it encourage? B) Do you have a professional obligation to report your coworker to management? Explain. 174. What is meant by the term "cash equivalents"? 175. What adjustments are often necessary to the accounting records after the reconciliation of a bank account? 176. Explain how a company can control small cash payments that are made in cash rather than by check. 177. Explain how checking accounts, bank statements, and a bank reconciliation are used to help a company control its cash. 178. Why is cash management necessary?

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CH 04 Internal Control and Cash Answer Key 1. True 2. False 3. False 4. False 5. False 6. True 7. False 8. False 9. False 10. True 11. False 12. False 13. True 14. False 15. False 16. False 17. False 18. True 19. True 20. False 21. True 22. False 23. False 24. True 25. False Powered by Cognero

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CH 04 Internal Control and Cash 26. True 27. True 28. False 29. True 30. True 31. False 32. False 33. True 34. True 35. c 36. b 37. a 38. d 39. a 40. b 41. d 42. b 43. c 44. c 45. d 46. d 47. a 48. b 49. a 50. c 51. b Powered by Cognero

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CH 04 Internal Control and Cash 52. d 53. b 54. a 55. c 56. a 57. d 58. d 59. d 60. c 61. c 62. b 63. d 64. d 65. c 66. b 67. c 68. a 69. c 70. a 71. b 72. b 73. a 74. c 75. c 76. c Powered by Cognero

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CH 04 Internal Control and Cash 77. d 78. b 79. c 80. b 81. a 82. d 83. d 84. c 85. d 86. d 87. a 88. d 89. b 90. d 91. a 92. d 93. b 94. a 95. c 96. b 97. a 98. c 99. c 100. b 101. a 102. d Powered by Cognero

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CH 04 Internal Control and Cash 103. b 104. a 105. c 106. b 107. c 108. a 109. a 110. b 111. d 112. d 113. a 114. b 115. d 116. c 117. d 118. d 119. b 120. c 121. c 122. c 123. b 124. d 125. a 126. b 127. b Powered by Cognero

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CH 04 Internal Control and Cash 128. a 129. d 130. b 131. b 132. c 133. d 134. c 135. b 136. c 137. a 138. d 139. a 140. b 141. c 142. d 143. b 144. c 145. d 146. c 147. c 148. a 149. c 150. $4,230 Bank Balance + $1,280 Deposits in Transit − $2,880 Outstanding Checks = $2,630 151. $4,190 Bank Balance + $2,080 Deposits in Transit − $1,860 Outstanding Checks = $4,410 152. $5,671 Book Balance + $4,000 Note + $100 Interest − $350 NSF − $75 Bank Service Charge = $9,346 Adjusted Cash Balance Powered by Cognero

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CH 04 Internal Control and Cash Accounts Cash

Debit 4,000 Notes Receivable

Cash

Credit 4,000

100 Interest Income

Accounts Receivable

100 350

Cash Bank Service Charge Expense

350 75

Cash

153. $3,918 Book Balance + $1,000 Note + $35 Interest − $150 NSF − $30 Bank Service Charge = $4,773 Adjusted Cash Balance Accounts Cash

Debit 1,000 Notes Receivable

Cash

Credit 1,000

35 Interest Income

Accounts Receivable

35 150

Cash Bank Service Charge Expense

150 30

Cash

154. Durden Rentals Bank Reconciliation March 31 Cash balance from the bank statement Add: Deposits in transit Less: Outstanding checks Adjusted cash balance

$ 9,866 3,250 (345) $12,771

Cash balance from company records Less: NSF check Less: Bank service charges Less: Debit memo (utility bill) Adjusted cash balance

$13,676 (210) (45) (650) $12,771

155. Dutch Island Company Bank Reconciliation January 31 Cash balance from the bank statement Add: Deposits in transit Powered by Cognero

$8,876 1,250 Page 41

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CH 04 Internal Control and Cash Less: Outstanding checks Adjusted cash balance

(1,528) $8,598

Cash balance from company records Add: Collection of note receivable Add: Interest earned Less: Bank service charges Less: Debit memo (utility bill) Adjusted cash balance

$4,133 5,000 55 (40) (550) $8,598

156. A) Delta Driving School Bank Reconciliation February 28 Cash balance from the bank statement Add: Deposits in transit Less: Outstanding checks Adjusted cash balance Cash balance from company records Add: Collection of note receivable Add: Interest earned Less: Bank service charges Less: Debit memo (utility bill) Adjusted cash balance B) Accounts Cash

$18,877 1,250 (1,528) $18,599 $14,134 6,000 55 (40) (1,550) $18,599 Debit 6,000

Notes Receivable Cash

Credit 6,000

55 Interest Income

Bank Service Charge Expense

55 40

Cash Utilities Expense

40 1,550

Cash

1,550

157. A) Dusek Dentistry, Inc. Bank Reconciliation February 28 Cash balance from the bank statement Add: Deposits in transit Less: Outstanding checks Adjusted cash balance Powered by Cognero

$ 7,960 2,100 (1,700) $ 8,360 Page 42

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CH 04 Internal Control and Cash Cash balance from company records Add: Correction of error, Check #343 Add: Credit memo, interest earned Less: Bank service charges Less: NSF check Less: Debit memo, rent Adjusted cash balance

$ 7,810 2,700 15 (65) (100) (2,000) $ 8,360

B) Accounts Cash

Debit 2,700 Accounts Payable

Cash

2,700 15

Interest Income Bank Service Charge Expense

15 65

Cash Accounts Receivable

65 100

Cash Rent Expense

100 2,000

Cash

158. A)

159. A)

Credit

2,000

Dinah Corp. Bank Reconciliation June 30 Cash balance from the bank statement Add: Deposits in transit Less: Outstanding checks Adjusted cash balance

$63,400 1,780 (4,630) $60,550

Cash balance from company records Add: Interest earned Add: Note and interest collected by the bank Less: NSF check Less: Bank service charges Less: Correction of error Adjusted cash balance

$58,770 100 3,080 (1,150) (160) (90) $60,550

$60,550

Diamond Corp. Bank Reconciliation October 31 Cash balance from the bank statement

$29,700 Page 43

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CH 04 Internal Control and Cash

Add: Deposits in transit Less: Outstanding checks Adjusted cash balance

3,110 (2,950) $29,860

Cash balance from company records Add: Interest earned Add: Note and interest collected by the bank Less: NSF check Less: Bank service charges Less: correction of error Adjusted cash balance

$26,040 120 4100 (230) (80) (90) $29,860

$29,860

160. A)

Deal Corp. Bank Reconciliation December 31 $7,920 1,310 (952) $8,278

Cash balance from the bank statement Add: Deposits in transit Less: Outstanding checks Adjusted cash balance Cash balance from company records Add: Interest earned Add: Note and interest collected by the bank Add: Correction of error Less: NSF check Less: Bank service charges Adjusted cash balance B)

$8,278

Cash

$7,170 30 1,040 90 (32) (20) $8,278

30 Interest Income

Cash

30 1,040

Notes Receivable Interest Income Cash

1,000 40 90

Merchandise Inventory Accounts Receivable

90 32

Cash Bank Service Charge Expense

20 Cash

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CH 04 Internal Control and Cash 161. A)

Discount Muffler Company Bank Reconciliation June 30 $6,165.04 300.00 (1,056.50) $5,408.54

Cash balance from the bank statement Add: Deposits in transit Less: Outstanding checks (#2001, 2004, and 2005) Adjusted cash balance Cash balance from company records Add: Interest earned Add: Correction of error for Check #1998 Less: Debit memo Less: NSF check Less: Bank service charges Adjusted cash balance B)

$5,408.54

Cash

$5,991.54 2.00 9.00 (380.00) (200.00) (14.00) $5,408.54

2 Interest Income

Cash

2 9

Accounts Payable Utilities Expense

9 380

Cash Accounts Receivable

380 200

Cash Bank Service Charge Expense

200 14

Cash

162. A)

Cash balance from the bank statement Add: Deposits in transit Less: Outstanding checks (#758, 761, 763, 765, and 766) Adjusted cash balance Cash balance from company records Add: Interest earned Less: Correction of error for Check #755 Less: Debit memo Less: NSF check Less: Bank service charges Powered by Cognero

Dovetail Company Bank Reconciliation July 31 $21,448.89 300.00 (3,948.50) $17,800.39 $20,219.24 13.15 (1,854.00) (284.00) (200.00) (94.00) Page 45

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CH 04 Internal Control and Cash Adjusted cash balance B)

$17,800.39

Cash

$17,800.39

13.15 Interest Income

Accounts Payable

13.15 1,854.00

Cash

1,854.00

Utilities Expense

284.00 Cash

284.00

Accounts Receivable

200.00 Cash

200.00

Bank Service Charge Expense

94.00 Cash

94.00

163.

1. 2. 3. 4. 5. 6. 7. 8.

Bank Balance Add

Reconciling Items Deposits in transit NSF checks Check issued recorded twice by the company Interest earned Outstanding checks Bank service charges Bank debit memos Bank credit memos

Company Balance Subtract Add Add

Subtract Subtract Subtract Add

164.

1. 2. 3. 4. 5. 6.

Adjustments to Company Records

Assets

NSF checks Check for utilities recorded twice by the company Interest earned Bank service charges Bank debit memos for payment of rent Bank credit memos for collection of a note receivable

I, D

165. Date (a)

Liabilities

Stockholders' Equity

I D D

I, D

Accounts Petty Cash Fund

Debit 300 Cash

(b)

Office Supplies Expense

Credit 300

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CH 04 Internal Control and Cash Postage Expense Miscellaneous Expense

75 92 Cash

166. Date (a)

Accounts Petty Cash Fund

225

Debit 300 Cash

(b)

(c)

300

Office Supplies Expense Delivery Expense Fuel Expense Postage Expense Cash

68 30 56 68

Petty Cash Fund

200

222

Cash

167. Date (a)

Accounts Petty Cash Fund

200

Debit 250 Cash

(b)

(c)

Credit

Office Supplies Expense Delivery Expense Repairs Expense Postage Expense Cash

Credit 250

87 35 67 48 237

Petty Cash Fund

50 Cash

168. Date Apr. 1

Accounts Petty Cash Fund

Debit 250 Cash

Apr. 30

Delivery Expense Postage Expense Office Supplies

Credit 250

125 50 25 Cash

200

169. Each cashier should start with their own cash drawer, with the manager noting the amount of cash in the drawer at the beginning of each shift. The cash should be counted when the cashier ends work. The manager should take a cash register reading and reconcile this reading with the amount of cash reported in the drawer at the end of the shift. The manager should also observe the activities of the cashiers from time to time during their shifts. It may not be possible to achieve a complete segregation of duties as the manager likely will be responsible for depositing cash and reconciling Powered by Cognero

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CH 04 Internal Control and Cash cashier drawers. 170. The following procedures should be considered: 1. All sales should be recorded on prenumbered sales slips. A separate type of form could be used to distinguish cash and credit sales. 2. On the cash sales slips, important information should be recorded such as the quantity, price, and totals. 3. Separate cash register keys should be used to enter cash and credit sales transactions. 4. The number of employees allowed to operate the cash register should be limited, and separate cash drawers should be used for each cashier. 5. On a daily basis, the cash register tape should be reconciled with the cash, the cash sales slips, and the credit sales slips. 6. You should try to be the only one with responsibility for making the bank deposits. 7. You should observe that employees follow established procedures for control over cash and credit sales and ensure that your assistant manager is adequately trained to observe in your absence. 171. The following procedures should be considered: The purchasing department should determine the vendor to use rather than the foreman. All materials should be counted as soon as they are received and a receiving report should be prepared. Invoices should be compared with purchase orders and receiving reports before they are approved for payment. Invoices should be checked for mathematical accuracy before they are approved for payment. Checks should be prepared by the treasurer's department so that the accounting department does not have access to blank checks. 172. Control Activity Clearly defined authority and responsibility

Segregation of duties

Adequate documents and records Safeguards over assets and records

Checks on recorded amounts

Possible Examples Only an authorized, designated person should be responsible for signing company checks. Only one cashier should be assigned to any cash register. The duties of the cashier or check-signer, who handle cash, should not be shared with any employee who is responsible for maintaining records for the cash account. Company checks should be prenumbered and issued in sequence. Cash on hand and blank checks should be stored in vaults or other locked facilities. Passwords should be used to control access to computerized records. Bank reconciliations should be prepared on a monthly basis. Mathematical accuracy of cash records should be checked by an employee other than the preparer of the record. Management should review cash reports.

173. A) This is a weak control. It encourages employees to shortchange their customers or ring up a smaller sales amount Powered by Cognero

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CH 04 Internal Control and Cash than the cash they put in the cash drawer in order to cover a shortage and/or build up an overage. With this control, there is no real pressure on the employees to be diligent in their operation of the register. B) Yes, it could be argued that you have a professional obligation to report your coworker. However, it is likely that the manager already knows since under this system there probably are very few, if any, instances of cash shortages. 174. Cash equivalents are very short-term, highly liquid investments with an original maturity of 3 months or less at the date of purchase. Because these securities can be converted into cash when needed very quickly and without material loss, they are considered to be the equivalent of cash and are normally included with cash on the balance sheet and statement of cash flows. 175. Adjustments are usually necessary because the dollar amount in the company's cash account may differ from the actual amount available to use. Items that cause this difference include bank service charges deducted from the company's bank account, interest earned added to the company's bank account, NSF checks returned with the bank statement, and other miscellaneous transfers that may not have been recorded in the company's accounting records. Any debit memos and credit memos that have been recorded by the bank need to be adjusted. Additionally, any errors in recording transactions also need to be adjusted. 176. Using a petty cash fund can control small cash payments. The amount of cash to which employees have direct access is small. A designated custodian should control the use of the petty cash and the documentation that is necessary for any disbursements of petty cash. The custodian submits all supporting documentation to the company. After company personnel determine the authenticity of the documents, the custodian is given an amount to replenish the petty cash fund. The company then records the amounts spent in the accounting records. 177. Checking accounts allow entities an opportunity to make all or most of its cash payments by check. Preventing direct access to cash provides better internal control. Bank statements and bank reconciliations serve a control function by identifying errors and providing an inspection of detailed records that deters theft. 178. Cash management is necessary to ensure that a company maximizes the usefulness of its cash balances. A company can significantly increase its net income through its cash management policies. At any point in time, management should ensure that the company has neither too little nor too much cash on hand. Cash on hand is necessary for payment to suppliers, employees, and other creditors. Since cash is essentially a nonearning asset, too much cash means the company may not be earning the return that it could if it were invested otherwise.

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Ch 05 Sales and Receivables

Indicate whether the statement is true or false. 1. Net Sales = Total Credit Sales – Sales Discounts – Sales Returns and Allowances a. True b. False 2. Selling on credit protects a company from the risk that some of its receivables will never be collected. a. True b. False 3. Accounts receivable are shown on the balance sheet at their net realizable value. a. True b. False 4. The use of the allowance method is an attempt by accountants to match bad debts as an expense with the revenue of the period in which a sale on credit takes place. a. True b. False 5. A primary advantage of the allowance method to account for bad debts is that it supports the matching principle. a. True b. False 6. Under the allowance method of accounting for bad debts, the company estimates the amount of bad debts before those debts actually occur. a. True b. False 7. Because the allowance method results in better matching, GAAP requires its use rather than the direct write-off method, unless bad debts are immaterial. a. True b. False 8. The longer a customer's account balance remains outstanding, the greater the likelihood that it will be collected in the near future. a. True b. False 9. If a company estimates its bad debt expense on the basis of a receivables aging, the balance in the allowance for doubtful accounts account will not affect the amount of the end-of-period adjusting entry for bad debts. a. True b. False 10. A balance sheet approach to estimating bad debt expense is not permitted under generally accepted accounting principles (GAAP). a. True Powered by Cognero

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Ch 05 Sales and Receivables b. False 11. If a company accepts a major credit card such as Visa from a customer, then the company is responsible for the amount of the sale in case of nonpayment from a cardholder. a. True b. False 12. Cash-basis accounting recognizes revenue when control of a product is transferred to a customer. a. True b. False 13. Channel stuffing happens when a company sends a customer more than they ordered near the end of a reporting period to boost sales, even though the customer will likely return the excess goods in the subsequent reporting period. a. True b. False 14. The amount of interest paid is a function of three variables: the amount borrowed, the interest rate, and the length of the loan period. a. True b. False 15. A sale and its associated receivable are recorded only when the order, shipping, and billing documents are all present. a. True b. False 16. The accounts receivable turnover ratio is used to evaluate how well a company does in collecting its accounts receivable. a. True b. False 17. The higher the accounts receivable turnover the better because it indicates that the company is more quickly collecting cash (through sales). a. True b. False

Indicate the answer choice that best completes the statement or answers the question. 18. The basis of accounting that recognizes revenue when the company’s performance obligation is satisfied is called the a. cash basis. b. accrual basis. c. sales basis. d. tax basis. 19. Which of the following is the correct calculation of net sales? a. Net Sales = Total Sales – Sales Discounts + Sales Returns and Allowances b. Net Sales = Total Sales + Sales Discounts – Sales Returns and Allowances Powered by Cognero

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Ch 05 Sales and Receivables c. Net Sales = Total Sales – Sales Discounts – Sales Returns and Allowances d. Net Sales = Total Sales + Sales Discounts + Sales Returns and Allowances 20. A sales invoice that bears the notation 2/10, n/30 means the customer can a. take a 2% discount if they pay within 10 days of the invoice date. b. take a 10% discount if they pay within 2 days of the invoice date. c. pay 2% of the invoice within the first 10 days, then pay the balance due within 30 days. d. pay the invoice between 2 and 10 days, but not in 30 days. 21. The best incentive to encourage prompt payment of an invoice is to offer the customer a. future discounts on orders. b. prompt delivery of the products. c. a sales discount if the invoice is paid within a certain number of days. d. substitute products if items are not available. 22. Which method of recording bad debt expense waits until an account is determined to be uncollectible? a. allowance method b. aging method c. percentage of credit sales method d. direct write-off method 23. Which allowance method of recognizing bad debt expense estimates the collectability of accounts receivable in time categories based on past experience? a. direct write-off method b. aging method c. percentage of credit sales method d. percentage of sales method 24. Which of the following statements about the allowance method of estimating bad debts is not correct? a. The allowance method follows the matching principle to properly match revenues and expenses. b. The allowance method waits until a customer defaults to write off the amount that is uncollectible. c. The direct write-off method is a type of allowance method to estimate bad debts. d. The allowance method is not acceptable based on GAAP. 25. A company’s acceptance of bank cards such as Visa or MasterCard is a special type of a. factoring. b. accounts receivable. c. sales discount. d. note receivable. 26. Which type of customer payment will cause an immediate reduction in their bank account? a. credit card b. check c. note receivable Powered by Cognero

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Ch 05 Sales and Receivables d. debit card 27. For a note receivable, the excess of money collected over the amount lent is called the a. interest. b. discount. c. principal. d. accrual. 28. In a sale, which of the following is necessary for a buyer to incur an obligation to accept and pay for goods? a. invoice b. note receivable c. shipping document d. purchase order 29. Money borrowed when a promissory note is issued is called a. interest. b. principal. c. compensation. d. income. 30. Which of the following is not required in order for a sale and its associated accounts receivable to be recorded? a. purchase order b. billing documents c. payment for the goods d. shipping documents 31. Which of the following is not considered a profitability ratio? a. operating margin b. gross profit margin c. net profit margin d. accounts receivable turnover 32. The measurement of how efficiently a company is using the resources at its disposal is called the a. gross profit margin. b. accounts receivable turnover. c. operating margin. d. net profit margin. 33. Action Signs recorded credit sales of $10,000 on the gross method. Terms are 2/20, n/30. Select the correct statement about the entry to record this sale. a. Accounts receivable increase by $10,000. b. Sales increase by $9,800. c. Sales discounts increase by $200. d. A discount can be taken if paid within 30 days. Powered by Cognero

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Ch 05 Sales and Receivables 34. A company receiving a payment of $20,000 accounts receivable within 10 days with terms of 2/10, n/30 would record a sales discount of a. 10% of $20,000. b. 2% of $20,000. c. (100% – 10%) × $20,000. d. (100% – 2%) × $20,000. 35. Which of the following statements is true if a company's collection period for accounts receivable is unacceptably long? a. The collection cost would be reduced. b. The company may offer sales discounts to shorten the collection period. c. Cash flows from operations may be higher than expected for the company's sales. d. The company should expand operations with its excess cash. 36. A company had sales of $40,000, sales discounts of $800, sales returns of $1,600, and commissions owed to salespeople of $600. Compute net sales. a. $37,600 b. $37,000 c. $38,400 d. $39,200 37. The following information was presented on the balance sheet of Acworth Pools as of December 31: Trade accounts receivable, net of allowance for doubtful accounts of $200,000

$1,700,000

Select the incorrect statement from the following. a. The company expects to actually collect $1,700,000 of its receivables. b. The balance in the accounts receivable account in the company's general ledger is $1,700,000. c. The net realizable value of the company's receivables is $1,700,000. d. The company expects uncollectibles to total $200,000. 38. On December 15, the accounts receivable balance was $50,000 and the balance in the allowance for doubtful accounts was $5,000. That morning, a $1,000 uncollected account was written off. The net realizable value of accounts receivable immediately after the write-off is a. $49,000. b. $46,000. c. $45,000. d. $44,000. 39. Which of the following is an accurate description of the allowance for doubtful accounts? a. contra account b. liability account c. revenue account d. expense account Powered by Cognero

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Ch 05 Sales and Receivables 40. If a company uses the direct write-off method of accounting for bad debts, a. it establishes an estimate for the allowance for doubtful accounts. b. it will record bad debt expense only when an account is determined to be uncollected. c. iy will reduce the accounts receivable account at the end of the accounting period for estimated uncollected accounts. d. when an account is written off, total assets will stay the same. 41. A company uses the direct write-off method to account for bad debts. What are the effects on the accounting equation of the entry to record the write-off of a customer's account balance? a. Assets and liabilities decrease. b. Assets and stockholders' equity decrease. c. Stockholders' equity and liabilities decrease. d. Assets increase, while stockholders' equity decreases. 42. Which of the following is not true for a company that uses the allowance method of accounting for bad debts? a. It uses a contra-asset account called Allowance for Doubtful Accounts. b. It records bad debt expense each time an account is determined to be uncollectible. c. It reduces its accounts receivable balance when the account is written off. d. It reports accounts receivable on the balance sheet at their net realizable value. 43. If a company uses the allowance method to account for doubtful accounts, when will the company's stockholders' equity decrease? a. at the date a customer's account is written off b. at the end of the accounting period when an adjusting entry for bad debts is recorded c. at the date a customer's account is determined to be uncollected d. when the accounts receivable amount becomes past due 44. Which allowance method approach is considered to be an income statement approach for estimating bad debts? a. percentage of accounts receivable approach b. percentage of accounts written off method c. percentage of credit sales method d. direct write-off method 45. Which of the approaches for the allowance procedure emphasizes the net realizable value of accounts receivable on the balance sheet? a. aging of accounts receivable method b. percentage of credit sales method c. percentage of accounts written off method d. direct write-off method 46. A company's accounts receivable balance after posting net collections from customers for the current year is $150,000. Management feels that uncollected accounts should be based on the following aging of accounts receivable and uncollected percentages. There is $100,000 that is 1–30 days past due at 2%, and there is $50,000 that is 31–60 days past due at 10%. The net realizable value of the accounts receivable is a. $145,000. Powered by Cognero

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Ch 05 Sales and Receivables b. $148,000. c. $150,000. d. $143,000. 47. All Star Auto has an accounts receivable balance after posting net collections from customers of $180,000. The customers took advantage of sales discounts of $15,000. Management aged the accounts receivable and estimate for uncollected account percentages as follows: $90,000 Current at 2% $50,000 1–30 days past due at 5% $30,000 31–60 days past due at 10% $10,000 60+ days past due at 25% The net realizable value of the accounts receivable is a. $185,200. b. $170,200. c. $172,700. d. $180,000. 48. Beginning accounts receivable were $200,000, and ending accounts receivable were $300,000. Assuming cash collections totaled $1,100,000, what were the credit sales? a. $1,200,000 b. $1,100,000 c. $1,300,000 d. $1,000,000 49. Alco Roofing Company's beginning accounts receivable were $200,000, and ending accounts receivable were $270,000. During the period, credit sales totaled $570,000. How much cash was collected from customers? a. $470,000 b. $500,000 c. $570,000 d. $640,000 50. A company had beginning accounts receivable of $175,000. All sales were on account and totaled $550,000. Cash collected from customers totaled $650,000. Calculate the ending accounts receivable balance. a. $725,000 b. $275,000 c. $75,000 d. $175,000 51. The following data for the year ended December 31 are for AT&U Company: Sales (credit) Sales returns and allowances Accounts receivable (December 31) Allowance for doubtful accounts (before adjustment at December 31) Estimated amount of uncollected accounts based on aging analysis Powered by Cognero

$2,500,000 50,000 640,000 20,000 45,000 Page 7

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Ch 05 Sales and Receivables If the company estimates its bad debt to be 2% of net credit sales, what will be the balance in the allowance for doubtful accounts account after the adjustment for bad debts? a. $20,000 b. $29,000 c. $49,000 d. $69,000 52. The following data for the year ended December 31 are for AT&U Company: Sales (credit) Sales returns and allowances Accounts receivable (December 31) Allowance for doubtful accounts (before adjustment at December 31) Estimated amount of uncollected accounts based on aging analysis

$2,500,000 50,000 640,000 20,000 45,000

If the company uses the aging of accounts receivable approach to estimate its bad debts, what will be the net realizable value of its accounts receivable after the adjustment for bad debt expense? a. $640,000 b. $595,000 c. $620,000 d. $575,000 53. The following data for the year ended December 31 are for AT&U Company: Sales (credit) Sales returns and allowances Accounts receivable (December 31) Allowance for doubtful accounts (before adjustment at December 31) Estimated amount of uncollected accounts based on aging analysis

$2,500,000 50,000 640,000 20,000 45,000

If the company uses the aging of accounts receivable approach to estimate its bad debts, what amount will be reported as bad debt expense? a. $25,000 b. $45,000 c. $20,000 d. $65,000 54. The following data for the year ended December 31 are for AT&U Company: Sales (credit) Sales returns and allowances Accounts receivable (December 31) Allowance for doubtful accounts (before adjustment at December 31) Estimated amount of uncollected accounts based on aging analysis

$2,500,000 50,000 640,000 20,000 45,000

If the company estimates its bad debts at 1% of net credit sales, what amount will be reported as bad debt expense? Powered by Cognero

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Ch 05 Sales and Receivables a. $44,500 b. $25,000 c. $24,500 d. $45,000 55. The allowance for doubtful accounts represents a. bad debt losses incurred in the current period. b. the amount of uncollected accounts written off to date. c. the difference between total sales made on credit and the amount collected from those credit sales. d. the difference between the recorded value of accounts receivable and the net realizable value of accounts receivable. 56. Which of the following statements is true regarding the two allowance procedures used to estimate bad debts? a. The percentage of net credit sales method takes into account the existing balance in the allowance for doubtful accounts account. b. The direct write-off method takes into account the existing balance in the allowance for doubtful accounts account. c. The aging of accounts receivable method takes into account the existing balance in the allowance for doubtful accounts account. d. The direct write-off method does a better job of matching revenues and expenses. 57. The following data are from A2Z’s records for the year ended December 31: Credit sales during the year Accounts receivable—December 31 Allowance for doubtful accounts—December 31 (after adjustment) Bad debt expense for the year

$2,400,000 410,000 55,000 70,000

What amount will the company show on its year-end balance sheet for the net realizable value of its accounts receivable? a. $410,000 b. $285,000 c. $340,000 d. $355,000 58. The following data are from A2Z’s records for the year ended December 31: Credit sales during the year Accounts receivable—December 31 Allowance for doubtful accounts—December 31 (after adjustment) Bad debt expense for the year

$2,400,000 410,000 55,000 70,000

What are the effects on the accounting equation when the company makes the adjustment to record bad debt expense using the allowance method? a. Assets increase and liabilities decrease. b. Assets and stockholders' equity decrease. c. Assets increase, and stockholders' equity decreases. d. Assets decrease, and stockholders' equity increases. Powered by Cognero

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Ch 05 Sales and Receivables 59. The following data are from A2Z’s records for the year ended December 31: Credit sales during the year Accounts receivable—December 31 Allowance for doubtful accounts—December 31 (after adjustment) Bad debt expense for the year

$2,400,000 410,000 55,000 70,000

What are the effects on the accounting equation when the company writes off a bad debt under the allowance method? a. Assets decrease and stockholders' equity increases. b. Assets and stockholders' equity decrease. c. Assets increase and stockholders' equity decreases. d. There is no effect on overall assets or stockholders' equity. 60. The following data are from Accelerated Solutions’ records for the year ended December 31: Accounts receivable—January 1 Credit sales during the year Collections from credit customers during the year Customer accounts written off as uncollected during the year Allowance for doubtful accounts—January 1 Estimated uncollected accounts based on an aging analysis

$ 350,000 1,200,000 850,000 10,000 35,000 50,000

What is the balance of accounts receivable on December 31? a. $700,000 b. $340,000 c. $690,000 d. $710,000 61. The following data are from Accelerated Solutions’ records for the year ended December 31: Accounts receivable—January 1 Credit sales during the year Collections from credit customers during the year Customer accounts written off as uncollected during the year Allowance for doubtful accounts—January 1 Estimated uncollected accounts based on an aging analysis

$ 350,000 1,200,000 850,000 10,000 35,000 50,000

If the aging method is used to estimate bad debts, what amount should be recorded as bad debt expense? a. $50,000 b. $5,000 c. $15,000 d. $25,000 62. The following data are from Accelerated Solutions’ records for the year ended December 31: Accounts receivable—January 1 Credit sales during the year Collections from credit customers during the year Customer accounts written off as uncollected during the year Allowance for doubtful accounts—January 1 Powered by Cognero

$ 350,000 1,200,000 850,000 10,000 35,000 Page 10

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Ch 05 Sales and Receivables Estimated uncollected accounts based on an aging analysis

50,000

If the aging approach is used to estimate bad debts, find the balance in Allowance for Doubtful Accounts after the bad debt expense adjustment. a. $75,000 b. $15,000 c. $25,000 d. $50,000 63. The following data are from A-One Construction’s records for the year ended December 31: Accounts receivable—January 1 Credit sales during the year Collections from credit customers during the year Customer accounts written off as uncollected during the year Allowance for doubtful accounts (after write-off of uncollected accounts) Estimated uncollected accounts based on an aging analysis

$455,000 900,000 825,000 15,000 2,100 29,200

What is the balance of accounts receivable on December 31? a. $545,000 b. $440,000 c. $515,000 d. $530,000 64. The following data are from A-One Construction’s records for the year ended December 31: Accounts receivable—January 1 Credit sales during the year Collections from credit customers during the year Customer accounts written off as uncollected during the year Allowance for doubtful accounts (after write-off of uncollected accounts) Estimated uncollected accounts based on an aging analysis

$455,000 900,000 825,000 15,000 2,100 29,200

If the aging approach is used to estimate bad debts, what amount should be recorded as bad debt expense? a. $12,100 b. $27,100 c. $29,200 d. $31,300 65. The following data are from A-One Construction’s records for the year ended December 31: Accounts receivable—January 1 Credit sales during the year Collections from credit customers during the year Customer accounts written off as uncollected during the year Allowance for doubtful accounts (after write-off of uncollected accounts) Powered by Cognero

$455,000 900,000 825,000 15,000 2,100 Page 11

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Ch 05 Sales and Receivables Estimated uncollected accounts based on an aging analysis

29,200

If the aging approach is used to estimate bad debts, what should the balance in Allowance for Doubtful Accounts be after the bad debts adjustment? a. $2,100 b. $31,100 c. $29,200 d. $27,100 66. The following data are for the current year ended December 31 for A&B Foods: Sales (100% on credit) Sales returns Accounts receivable (December 31) Allowance for doubtful accounts (before adjustment on December 31) Estimated amount of uncollected accounts based on an aging analysis

$2,100,000 150,000 420,000 25,000 75,000

If the company estimates its bad debts at 4% of net credit sales, what amount will be reported as bad debt expense? a. $50,000 b. $75,000 c. $78,000 d. $84,000 67. The following data are for the current year ended December 31 for A&B Foods: Sales (100% on credit) Sales returns Accounts receivable (December 31) Allowance for doubtful accounts (before adjustment on December 31) Estimated amount of uncollected accounts based on an aging analysis

$2,100,000 150,000 420,000 25,000 75,000

If the company uses 4% of net credit sales to estimate its bad debts, what will be the balance in Allowance for Doubtful Accounts after the adjustment for bad debts? a. $50,000 b. $103,000 c. $78,000 d. $75,000 68. The following data are for the current year ended December 31 for A&B Foods: Sales (100% on credit) Sales returns Accounts receivable (December 31) Allowance for doubtful accounts (before adjustment on December 31) Estimated amount of uncollected accounts based on an aging analysis

$2,100,000 150,000 420,000 25,000 75,000

If the company uses the aging of accounts receivable method to estimate its bad debts, what amount will be reported as Powered by Cognero

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Ch 05 Sales and Receivables bad debt expense? a. $50,000 b. $75,000 c. $75,000 d. $100,000 69. The following data are for the current year ended December 31 for A&B Foods: Sales (100% on credit) Sales returns Accounts receivable (December 31) Allowance for doubtful accounts (before adjustment on December 31) Estimated amount of uncollected accounts based on an aging analysis

$2,100,000 150,000 420,000 25,000 75,000

If the company uses the aging of accounts receivable method to estimate its bad debts, what will be the net realizable value of its accounts receivable after the adjustment for bad debt expense? a. $370,000 b. $345,000 c. $420,000 d. $395,000 70. On January 1, Ace Computing Company’s accounts receivable and allowance for doubtful accounts carried balances of $40,000 and $1,500, respectively. During the year, the company reported $80,000 of credit sales. There were $500 of receivables written off as uncollected during the year. Cash collections of receivables amounted to $78,200. The company estimates that it will be unable to collect 4% of the year-end accounts receivable balance. The amount of bad debts expense recognized in the income statement will be a. $1,652. b. $652. c. $672. d. $2,650. 71. On January 1, Ace Computing Company’s accounts receivable and allowance for doubtful accounts carried balances of $40,000 and $1,500, respectively. During the year, the company reported $80,000 of credit sales. There were $500 of receivables written off as uncollected during the year. Cash collections of receivables amounted to $78,200. The company estimates that it will be unable to collect 4% of the year-end accounts receivable balance. The entry required to recognize the bad debts expense will act to a. increase total assets and retained earnings. b. decrease total assets and retained earnings. c. decrease total assets and increase net income. d. increase total assets and decrease net income. 72. On January 1, Ace Computing Company’s accounts receivable and allowance for doubtful accounts carried balances of $40,000 and $1,500 respectively. During the year, the company reported $80,000 of credit sales. There were $500 of receivables written off as uncollected during the year. Cash collections of receivables amounted to $78,200. The company estimates that it will be unable to collect 4% of the year-end accounts receivable balance. Powered by Cognero

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Ch 05 Sales and Receivables The net realizable value of receivables appearing on the balance sheet will amount to a. $40,648. b. $39,648. c. $41,300. d. $42,952. 73. On December 1, Anson's Drug Store concluded that a customer's $325 account receivable was uncollected and that the account should be written off. What effect will this write-off have on the company's net income and balance sheet totals assuming the direct write-off method is used to account for bad debts? a. decrease in net income; decrease in total assets b. increase in net income; no effect on total assets c. no effect on net income; decrease in total assets d. no effect on net income; no effect on total assets 74. The following information was obtained from Abbot Safe & Lock’s records for the current year ended December 31: Credit sales during the year Accounts receivable—December 31 Allowance for doubtful accounts—December 31 (after adjustment) Bad debt expense for the year

$3,200,000 325,000 35,000 20,000

What is the effect on liquidity when the company records its estimate for bad debt expense using the allowance method? a. liquidity decreases. b. liquidity increases. c. liquidity stays the same. d. liquidity both increases and decreases. 75. The following information was obtained from Abbot Safe & Lock’s records for the current year ended December 31: Credit sales during the year Accounts receivable—December 31 Allowance for doubtful accounts—December 31 (after adjustment) Bad debt expense for the year

$3,200,000 325,000 35,000 20,000

What amount will the company show on its year-end balance sheet for the net realizable value of its accounts receivable? a. $305,000 b. $290,000 c. $270,000 d. $325,000 76. College Store accepts MasterCard for payments of purchases made by students. The credit card drafts are deposited directly in a bank account. MasterCard charges a 1.55% collection fee. Credit card drafts totaling $10,000 are deposited during August. Recording the sales and deposits will result in an increase in a. cash for $10,000. b. sales for $ 9,854. c. accounts receivable for $9,854. d. service charge expense for $155. Powered by Cognero

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Ch 05 Sales and Receivables 77. Which of the following would be correct if a company factored $2,500,000 of receivables with a 2% fee? a. $2,450,000 credit to Cash b. $50,000 debit to Factoring Fee Expense c. $2,500,000 debit to Accounts Receivable d. $50,000 debit to Factoring Fee Receivable 78. Advanced Packaging accepted a credit card account receivable in exchange for $25,000 of services provided to a customer. The credit card company charges a 4% service charge. Recording the transaction in the company's accounting records will have what effect on the accounting equation? a. increase assets and stockholders' equity by $24,000 b. decrease assets and stockholders' equity by $1,000 c. increase assets by $25,000 d. increase stockholders' equity by $25,000 79. The principal amount of a note receivable plus the interest due is referred to as the note's a. face value. b. promissory value. c. expected value. d. maturity value. 80. How will the lender of a promissory note record the note on its books? a. The promissory note will be recorded as an asset. b. The promissory note will be recorded as a contra asset. c. The promissory note will be recorded as revenue. d. The promissory note will be recorded as an expense. 81. What is the distinguishing characteristic between accounts receivable and notes receivable? a. Accounts receivable are usually current assets, while notes receivable are usually long-term assets. b. Accounts receivable require payment of interest, while notes receivable do not have payment of interest. c. Notes receivable result from credit sale transactions for merchandising companies, while accounts receivable result from credit sale transactions for service companies. d. Notes receivable generally specify an interest rate and a maturity date at which any interest and principal must be repaid. 82. A company needs to record 6 months of accrued interest on a 4-year, 12%, $12,000 promissory note payable. How much interest expense should be accrued? a. $2,160 b. $1,440 c. $2,880 d. $720 83. On October 1 of the current year, Academy Grill Supply received a $50,000 promissory note from a customer. The annual interest rate is 6%. Principal and interest will be collected in cash at the maturity date of September 30 of next year. If the company's year ends on December 31 of the current year, an adjusting entry is needed to increase Powered by Cognero

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Ch 05 Sales and Receivables a. interest revenue by $2,250. b. notes receivable by $750. c. interest receivable by $750. d. notes receivable by $2,250. 84. On October 1 of the current year, Academy Grill Supply received a $50,000 promissory note from a customer. The annual interest rate is 6%. Principal and interest will be collected in cash at the maturity date of September 30 of next year. The effect on the company's financial statements on December 31 of the current year is a. assets and stockholders' equity increase. b. assets and stockholders' equity decrease. c. assets and liabilities increase. d. no net change in assets. 85. Absolute Appliances sold merchandise to a customer on December 1 of the current year for $120,000. The company accepted a promissory note as payment. The note has a term of 3 months and an annual interest rate of 10%. The company's accounting period ends on December 31. What is the maturity date of the note? a. December 31 of the current year b. January 31 of next year c. February 28 of next year d. March 1 of next year 86. Absolute Appliances sold merchandise to a customer on December 1 of the current year for $120,000. The company accepted a promissory note as payment. The note has a term of 3 months and an annual interest rate of 10%. The company's accounting period ends on December 31. What amount should the company recognize as interest revenue on December 31 of the current year? a. $0 b. $1,000 c. $12,000 d. $11,000 87. Absolute Appliances sold merchandise to a customer on December 1 of the current year for $120,000. The company accepted a promissory note as payment. The note has a term of 3 months and an annual interest rate of 10%. The company's accounting period ends on December 31. What amount should the company recognize as interest revenue in next year? a. $0 b. $1,000 c. $2,000 d. $3,000 88. Accent Flooring received a promissory note from a customer on March 1 of the current year. The principal amount of the note is $20,000; the terms are 3 months and 9% annual interest. Powered by Cognero

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Ch 05 Sales and Receivables What is the total amount of interest the company will receive when the note is collected? a. $300 b. $150 c. $450 d. $1,800 89. Accent Flooring received a promissory note from a customer on March 1 of the current year. The principal amount of the note is $20,000; the terms are 3 months and 9% annual interest. At the maturity date, the customer pays the amount due for the note and interest. What entry is required on the books of Accent Flooring on the maturity date assuming that none of the interest had already been recognized? a. increase cash and decrease notes receivable by $20,000 b. increase cash by $20,450, increase interest revenue by $450, and decrease notes receivable by $20,000 c. increase cash by $20,450, increase notes receivable by $20,000, and increase interest revenue by $450 d. No entry is required when the customer pays the amount due to Accent Flooring. 90. A Better Mousetrap sold merchandise to a customer on December 1 of the current year for $100,000. The customer paid with a promissory note that has a term of 6 months and an annual interest rate of 9%. The company's accounting period ends on December 31. What amount should the company recognize as interest revenue on December 31? a. $0 b. $750 c. $3,750 d. $9,000 91. A Better Mousetrap sold merchandise to a customer on December 1 of the current year for $100,000. The customer paid with a promissory note that has a term of 6 months and an annual interest rate of 9%. The company's accounting period ends on December 31. What amount should the company recognize as interest revenue on the maturity date of the note? a. $0 b. $750 c. $3,750 d. $9,000 92. Art Shoes received a promissory note from a customer on July 1 of the current year. The face amount of the note is $45,000; the terms are 12 months and 10% annual interest. How much interest revenue will the company recognize for the current year? a. $0 b. $9,000 c. $2,250 d. $4,500 93. Art Shoes received a promissory note from a customer on July 1 of the current year. The face amount of the note is $45,000; the terms are 12 months and 10% annual interest. Powered by Cognero

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Ch 05 Sales and Receivables At the maturity date, the customer pays for the note and interest. The company made the proper adjustment at the end of December for interest. The effect of recognizing the transaction on the maturity date is a(n) a. a decrease to cash. b. an increase to notes receivable. c. an increase to discount on notes receivable. d. a decrease to notes receivable. 94. Internal control for sales involves which of the following documentation? a. A sale and its associated receivable are recorded only when the order, shipping, and billing documents are all presented. b. A sale and its associated receivable are recorded only when the billing documents are prepared. c. A sale and its associated receivable are recorded only when the goods are ordered. d. A sale and its associated receivable are recorded only when the goods are produced. 95. Allatoona Landing reported net credit sales of $1,250,000 and cost of goods sold of $900,000 during the current year. Its beginning balance in accounts receivable was $175,000. The accounts receivable balance decreased by $25,000 during the year. Rounded to two decimal places, what is the company's accounts receivable turnover rate for the current year? a. 7.14 b. 7.69 c. 8.33 d. 12.50 96. What should a company do to improve its accounts receivable turnover rate? a. lower its selling prices b. extend credit to customers who are not paying c. give customers credit terms of 2/10, n/30 rather than 1/10, n/30 d. reduce the number of employees working in the credit department 97. Allgood Pet Supplies reported net credit sales of $3,200,000 and cost of goods sold of $2,600,000 for the current year. On January 1 of the current year, accounts receivable were $450,000. Amounts owed by customers increased by $50,000 during the current year. Rounding to two decimal places, what is the company's accounts receivable turnover rate for the current year? a. 5.47 b. 6.40 c. 6.74 d. 5.20 98. The following information is available for All Care Nursing Supply for the fiscal year ending December 31 of the current year. Calculate the accounts receivable turnover ratio. Net sales Operating income Net income

$450,000 120,000 100,000

Accounts receivable, December 31 of previous year Accounts receivable, December 31 of current year

$175,000 125,000

a. 3.0 b. 0.8 c. 3.6 Powered by Cognero

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Ch 05 Sales and Receivables d. 2.6 99. During the current year, the accounts receivable turnover ratio for Adaptive Equipment increased from 10 to 15 times per year. Which of the following statements is the most likely explanation for the change? a. The company's credit department has followed up with customers whose account balances are past due in order to generate quicker collections. b. The company has decreased sales to its most creditworthy customers. c. The company has increased the number of days in the credit terms. d. The company has extended credit to more risky customers in order to increase sales. 100. On January 2, Alfredo Corporation sold merchandise with a gross price of $100,000 to a customer with terms of 2/10, n/30. How much sales discount would be recorded if the payment was received from the customer on January 8? Assume the company uses the gross method of recording receivables. a. $0 b. $2,000 c. $98,000 d. $100.000

101. Advanced Technology reported the following on its balance sheet on December 31: Accounts receivable, less allowance for doubtful accounts of $20,500, net $580,200 A)

What is the net realizable value of the company's accounts receivable?

What is the balance of the accounts receivable account?

Are you able to determine whether the company uses the allowance method or the direct write-off method for bad debts? Why or why not?

102. The following information was taken from Atlantis Tropicals’ records for the year ended December 31: Credit sales Sales returns and allowances Accounts receivable—December 31 Allowance for doubtful accounts—December 31 (before adjustment for bad debts) Estimated uncollected accounts (per aging schedule at December 31)

$1,000,000 80,000 255,000 23,000 35,000

If bad debts are estimated at 1% of net credit sales, how much will the company report as bad debts expense? 103. The following information was taken from Atlantis Tropicals’ records for the year ended December 31: Credit sales Sales returns and allowances Accounts receivable—December 31 Allowance for doubtful accounts—December 31 (before adjustment for bad debts) Estimated uncollected accounts Powered by Cognero

$1,000,000 80,000 255,000 23,000 Page 19

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Ch 05 Sales and Receivables (per aging schedule at December 31)

35,000

If the aging approach is used to estimate bad debts, how much bad debt expense will the company report? 104. The following information was taken from Atlantis Tropicals’ records for the year ended December 31: Credit sales Sales returns and allowances Accounts receivable—December 31 Allowance for doubtful accounts—December 31 (before adjustment for bad debts) Estimated uncollected accounts (per aging schedule at December 31)

$1,000,000 80,000 255,000 23,000 35,000

If the aging approach is used to estimate bad debts, how much is the net realizable value of the accounts receivable on December 31? 105. The following information was taken from Atlantis Tropicals’ records for the year ended December 31: Credit sales Sales returns and allowances Accounts receivable—December 31 Allowance for doubtful accounts—December 31 (before adjustment for bad debts) Estimated uncollected accounts (per aging schedule at December 31)

$1,000,000 80,000 255,000 23,000 35,000

Assume that the net realizable value is $210,000 after the adjustment for bad debts. How much is the net realizable value of accounts receivable after a customer's account of $15,000 is written off? Explain why. 106. The following information was taken from Atlantis Tropicals’ records for the year ended December 31: Credit sales Sales returns and allowances Accounts receivable—December 31 Allowance for doubtful accounts—December 31 (before adjustment for bad debts) Estimated uncollected accounts (per aging schedule at December 31)

$1,000,000 80,000 255,000 23,000 35,000

Determine the effect on the company's accounting equation of the year-end adjustment of bad debts using the aging approach. Assets

= Liabilities

+ Stockholders' Equity

107. Aardvark Resale sells merchandise only on credit. For the year ended December 31, the following data are available: Sales Powered by Cognero

$1,200,000 Page 20

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Ch 05 Sales and Receivables Sales returns and allowances Accounts receivable—January 1 Allowance for doubtful accounts—January 1 Collections during the year Accounts written off as uncollected during the year

50,000 225,000 15,000 1,050,000 10,000

Determine the balance of accounts receivable on December 31. 108. Aardvark Resale sells merchandise only on credit. For the year ended December 31, the following data are available: Sales Sales returns and allowances Accounts receivable—January 1 Allowance for doubtful accounts—January 1 Collections during the year Accounts written off as uncollected during the year

$1,200,000 50,000 225,000 15,000 1,050,000 10,000

Assume that the company estimates bad debts at 2% of net credit sales. A)

What amount will the company record as bad debt expense?

How much is the net realizable value of accounts receivable reported on the company's balance sheet on December 31?

109. Aardvark Resale sells merchandise only on credit. For the year ended December 31, the following data are available: Sales Sales returns and allowances Accounts receivable—January 1 Allowance for doubtful accounts—January 1 Collections during the year Accounts written off as uncollected during the year

$1,200,000 50,000 225,000 15,000 1,050,000 10,000

Assume that the company estimates bad debts based on the aging method, and the aging schedule indicates that $30,100 of the year-end accounts receivable will be uncollected. A)

What amount will the company recognize as bad debt expense for the year?

How much is the net realizable value of the receivables to be reported on the company's balance sheet at year-end?

110. Aardvark Resale sells merchandise only on credit. For the year ended December 31, the following data are available: Sales Sales returns and allowances Accounts receivable—January 1 Allowance for doubtful accounts—January 1 Collections during the year Accounts written off as uncollected during the year

$1,200,000 50,000 225,000 15,000 1,050,000 10,000

Since the company has a choice of acceptable methods to estimate bad debts, what factors should be considered in the selection? Powered by Cognero

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Ch 05 Sales and Receivables 111. Aardvark Resale sells merchandise only on credit. For the year ended December 31, the following data are available: Sales Sales returns and allowances Accounts receivable—January 1 Allowance for doubtful accounts—January 1 Collections during the year Accounts written off as uncollected during the year

$1,200,000 50,000 225,000 15,000 1,050,000 10,000

Can the company use the direct write-off method rather than the allowance method to account for bad debts expense? Explain why or why not. 112. Abundant Returns sells its merchandise only on credit. The following data are available for the current year ended December 31: Sales Sales returns and allowances Accounts receivable on January 1 Allowance for doubtful accounts on January 1 Cash collections during the year Accounts written off as uncollected during the year

$411,000 12,000 89,000 4,100 385,100 3,600

Determine the balance of accounts receivable on December 31. 113. Abundant Returns sells its merchandise only on credit. The following data are available for the current year ended December 31: Sales Sales returns and allowances Accounts receivable on January 1 Allowance for doubtful accounts on January 1 Cash collections during the year Accounts written off as uncollected during the year

$411,000 12,000 89,000 4,100 385,100 3,600

The firm estimates that bad debts could be 2% of net sales. A)

What amount will the company recognize as bad debt expense for the year?

Assume that the company has a balance of accounts receivable of $108,900 and an allowance for doubtful accounts of $820. What will be the net realizable value once the adjustment from part A is made?

114. On January 1 of the current year, Alliance Company had the following balances for accounts receivable and allowance for doubtful accounts: Accounts receivable $750,000 (debit) Allowance for doubtful accounts 50,000 (credit) During the year, the company made $3,200,000 in credit sales, collected $3,000,000 of accounts receivable, and wrote off $20,000 of accounts receivable as uncollected. Required: Powered by Cognero

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Ch 05 Sales and Receivables A)

What is the company's preadjustment balance in accounts receivable on December 31?

What is the preadjustment balance in allowance for doubtful accounts on December 31?

Assume an analysis of aging accounts receivable indicates that $45,000 of the current accounts receivable balance is uncollected. By what amount will the allowance for doubtful accounts need to be adjusted?

Prepare the adjusting entry for the year ended December 31 for Allowance for Doubtful Accounts.

115. Abundant Returns sells its merchandise only on credit. The following data are available for the current year ended December 31: Sales Sales returns and allowances Accounts receivable on January 1 Allowance for doubtful accounts on January 1 Cash collections during the year Accounts written off as uncollected during the year

$411,000 12,000 89,000 4,100 385,100 3,600

Assume that the company estimates bad debts using the aging method. The aging schedule indicates that $11,500 of the end-of-year accounts receivable will be uncollected. A)

What amount will the company recognize as bad debt expense for the year?

If the ending balance of accounts receivables is $65,200, what is the net realizable value of accounts receivable reported on December 31?

116. The following information was taken from the records of Alphabet Soup for the year ended December 31: Cash sales Credit sales Sales discounts Accounts receivable Allowance for doubtful accounts (before adjustment) Estimated uncollected accounts Cost of goods sold

$1,000,000 500,000 5,000 250,000 (25,000) 2,475 975,000

Determine the following: A) Gross sales B) Net sales C) Gross profit Assuming the company uses the income statement approach to estimating uncollectibles, determine the: D) Bad debt estimate percentage E) Year-end adjusting entry to record bad debt expense F) Ending balance in allowance for doubtful accounts after adjustment G) Net realizable value of receivables after adjustment for bad debts Assuming the company uses the balance sheet approach to estimating uncollectibles, determine the: H) Gross receivables Powered by Cognero

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Ch 05 Sales and Receivables I) Ending balance in allowance for doubtful accounts after adjustment J) Net realizable value of receivables after adjustment for bad debts 117. The following comparative financial statements for the years ended December 31 of the current year (CY) and the previous year (PY) are provided for Air Plus Company: Balance Sheet: Cash and cash equivalents Accounts receivables, less allowance for doubtful accounts of $90 (CY) and $82 (PY) Notes receivable

Current Year $87,000

Previous Year $71,600

3,800

2,500

15,000

20,000

$9,700 920

$8,800 1,050

Income Statement: Net sales for the year Net income for the year

What is the gross amount of accounts receivable on December 31 of the current year? Why is this amount different from the receivables amount shown in the current year column of the balance sheet?

What is the net realizable value of accounts receivable on December 31 of the current year? What does this amount represent?

How should accounts receivable be classified on a classified balance sheet? Why?

118. Alpha Company's accounts receivable and allowance for doubtful accounts balances were $100,000 and $14,000 (credit), respectively, at the beginning of the current year. During the year, a customer defaults on a $12,000 balance related to goods purchased in the previous year. By the end of the year, the company had made credit sales of $2,400,000 and collected $2,200,000 on account. It now estimates that 1% of its credit sales will default. A)

Prepare the journal entry to record the write-off of the bad debt.

Prepare the adjusting entry to record bad debt expense for the current year.

What is the net accounts receivable balance at the end of the current year?

119. On November 1 of the current year, Aero Graphics sold merchandise to a customer and received a 10%, 90-day promissory note with a principal amount of $60,000. A)

Identify the maturity date of the note.

How much total interest revenue will the company earn over the term of the note?

By how much will net income be understated if the company fails to make a year-end adjusting entry for the note?

120. On May 1 of the current year, Accutemp Heating & Air sold merchandise to a customer and received an 8%, 6month note with a principal amount of $100,000. The company's year-end is December 31. Powered by Cognero

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Ch 05 Sales and Receivables Identify the maturity date of the note. 121. On May 1 of the current year, Accutemp Heating & Air sold merchandise to a customer and received an 8%, 6month note with a principal amount of $100,000. The company's year-end is December 31. How much total interest revenue will the company recognize over the term of the note? 122. Affinity Services Group received a 12%, 6-month promissory note with a principal amount of $10,000 from a customer for the sale of merchandise on December 1 of the current year. A)

How much interest revenue will the company recognize as of December 31 of the current year?

How much interest revenue will the company recognize in the following year?

Determine the total amount of cash the company will collect on the date of the note's maturity.

123. All American Storage Corporation sold merchandise with credit terms of 2/10, n/30 for $100,000 to a customer on January of the current year. Nine months later, on October 1 of the current year, the company accepted a 12%, 6-month note receivable in settlement of the account. The customer paid the maturity value of the note on the due date. A)

Record the sale of merchandise on January 1 of the current year.

Record the receipt of the note receivable on October 1 of the current year.

C) Record the adjusting entry to accrue interest on December 31 of the current year. D)

What is the due date of the note?

Record the collection of the note on the due date.

124. The following information is available for All-4-U Company for the year ending December 31 of the current year: Net sales Cost of goods sold Operating sales Net sales

$5,000,000 3,500,000 $600,000 $400,000

Accounts receivable, December 31 of previous year Accounts receivable, December 31 of current year

Compute the gross profit ratio for the current year.

Compute the operating margin ratio for the current year.

Compute the net profit margin ratio for the current year.

Compute the accounts receivable turnover for the current year.

$1,250,000 1,000,000

125. On June 3, Alpine Corporation sold merchandise with a gross price of $45,000 with terms of 2/10, n/30. Prepare the journal entries to: Powered by Cognero

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Ch 05 Sales and Receivables A)

record the sale using the gross method.

record the receipt if payment is received on June 10.

record the receipt if payment is not received until June 21.

126. What is the purpose of an aging schedule for accounts receivable? 127. You are the credit manager at a large retail department store. What steps should you take before deciding to write off a customer's account? 128. Identify two methods of accelerating cash from sales. 129. Airport Support Company reported its accounts receivable turnover ratio at 10 times. Its credit terms are 2/10, n/20. What does this ratio tell you about this company?

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Ch 05 Sales and Receivables Answer Key 1. False 2. False 3. True 4. True 5. True 6. True 7. True 8. False 9. False 10. False 11. False 12. False 13. True 14. True 15. True 16. True 17. True 18. b 19. c 20. a 21. c 22. d 23. b 24. c 25. a Powered by Cognero

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Ch 05 Sales and Receivables 26. d 27. a 28. d 29. b 30. c 31. d 32. b 33. a 34. b 35. b 36. a 37. b 38. c 39. a 40. b 41. b 42. b 43. b 44. c 45. a 46. d 47. b 48. a 49. b 50. c 51. d Powered by Cognero

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Ch 05 Sales and Receivables 52. b 53. a 54. c 55. d 56. c 57. d 58. b 59. d 60. c 61. d 62. d 63. c 64. b 65. c 66. c 67. b 68. a 69. b 70. b 71. b 72. b 73. a 74. a 75. b 76. d Powered by Cognero

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Ch 05 Sales and Receivables 77. b 78. a 79. d 80. a 81. d 82. d 83. c 84. a 85. d 86. b 87. c 88. c 89. b 90. b 91. c 92. c 93. d 94. a 95. b 96. c 97. c 98. a 99. a 100. b 101. A)

$580,200

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Ch 05 Sales and Receivables B)

$580,200 + $20,500 = $600,700

The company uses the allowance method. This is seen by the presentation on the balance sheet of the receivables that shows a deduction from the gross amount of receivables. Only a company that uses the allowance method would show a deduction from receivables for doubtful accounts.

102. ($1,000,000 − $80,000) × 1% = $9,200 103. $35,000 − $23,000 = $12,000 104. $255,000 Accounts Receivable − $35,000 Allowance for Doubtful Accounts = $220,000 105. $210,000 Accounts receivable and the allowance for doubtful accounts both decrease by the same amount, $15,000, leaving the net realizable value of the accounts receivable unaffected. 106. Assets Allow. for Doubtful Accounts ($12,000)

= Liabilities

+ Stockholders' Equity Bad Debt Expense ($12,000)

107. $315,000 $225,000 Accounts Receivable on January 1 + $1,200,000 Sales − $50,000 Sales Returns and Allowances − $1,050,000 Collections − $10,000 Accounts Written Off = $315,000 108. A)

($1,200,000 − $50,000) × 0.02 = $23,000

$225,000 Accounts Receivable on January 1 + $1,200,000 Sales − $50,000 Sales Returns and Allowances − $1,050,000 Collections − $10,000 Accounts Written Off = $315,000; $315,000 Accounts Receivable on December 31 – ($15,000 − $10,000 + $23,000) Allowance for Doubtful Accounts (after write-off and year-end adjustment) = $287,000

109. A)

$30,100 − ($15,000 − $10,000) = $25,100

110. The percentage of credit sales method emphasizes the matching principle. The aging method emphasizes the valuation of the receivables at the net amount to be collected. The company would be concerned with both income measurement and balance sheet valuation, but it must choose one of the two approaches, most likely based on the management philosophy. If most customer balances fall within a small range of variation, the percentage of credit sales method, which is easier to apply, will probably give reasonable results for both income measurement and asset valuation. However, if there is a wide variation in the amounts of customer balances, and especially if some large customer balances are significantly past due and their collection is uncertain, then the aging method should give better results for both income measurement and asset valuation. Powered by Cognero

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Ch 05 Sales and Receivables 111. The direct write-off method is not an acceptable generally accepted accounting principles (GAAP) procedure to account for bad debts. It does not adequately match bad debt expense with the revenues unless the accounts are determined to be uncollected in the same year that the revenue was recognized. In rare cases, when a company has very infrequent and immaterial amounts of bad debts, the direct write-off method can be justified. It does not appear that the company's situation meets these conditions for use of the direct write-off method. 112. $99,300 $89,000 Account Receivable—January 1 + $411,000 Sales − $12,000 Sales Returns and Allowances − $385,100 Cash Collections − $3,600 Accounts Written Off = $99,300 113. A)

$411,000 − $12,000 = $399,000; Net Sales × 2% = $7,980

$108,900 Accounts Receivables Balance − ($820 + $7,980) = $100,100

114. A)

Beginning accounts receivable, January 1 Plus sales during the year Minus collections during the year Minus accounts written off during the year

$ 750,000 3,200,000 −3,000,000 − 20,000

Accounts receivable, December 31

$ 930,000

Beginning allowance for doubtful accounts Minus accounts written off during the year Preadjustment balance, allowance for doubtful accounts

$ −

50,000 20,000

30,000

Preadjustment balance, allowance for doubtful accounts Balance in allowance for doubtful accounts after adjustment Adjustment to allowance for doubtful accounts

D) 12/31

Bad Debt Expense

Debit 15,000 Allowance for Doubtful Accounts

115. A)

$11,500 − ($4,100 − $3,600) = $11,000

$65,200 Accounts Receivable − $11,500 Allowance = $53,700

45,000 $

15,000 Credit 15,000

116. A) $1,000,000 + $500,000 = $1,500,000 B) $1,500,000 Gross Sales – $5,000 Sales Discounts = $1,495,000 C) $1,495,000 Net Sales – $975,000 CGS = $520,000 D) $2,475 Bad Debt Estimate ÷ $495,000 Net Credit Sales = 0.005 (or 1/2 of 1%) Powered by Cognero

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Ch 05 Sales and Receivables E) Bad Debt Expense 2,475 Allowance for Doubtful Accounts 2,475 F) $25,000 Beginning Balance + $2,475 Adjusting Entry = $27,475 G) $250,000 A/R – $27,475 Allowance = $222,525 H) $250,000 I) $2,475 J) $250,000 A/R – $2,475 = $247,525 117. A)

$3,800 + $90 = $3,890. It is different because, unlike the balance sheet presentation, it has not been adjusted for the estimated amount of receivables that are deemed uncollected.

$3,800. This is the amount that the company expects to collect.

Accounts receivable should be classified as a current asset since receivables are expected to be collected within a year's time or less.

118. Debit Allowance for Doubtful A) Accounts

Credit

12,000 Accounts Receivable

B) Bad Debt Expense

12,000 24,000

Allowance for Doubtful Accounts ($2,400,000 × 1% = $24,000) A/R ($100,000 + C) $2,400,000 – $2,200,000 – $12,000 Less: Allow. for doubtful accts. ($14,000 – $12,000 + $24,000)

24,000

$288,000

(26,000) Net accounts receivable

$262,000

119. A)

90 – 29 days (Nov.) – 31 days (Dec.) = 30. Therefore, the due date is January 30 of the following year.

$60,000 × 10% × 90/365 = $1,479.45

Net income will be understated by $986.30 ($1,479.45 × 60/90).

120. November 1 of the current year Powered by Cognero

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Ch 05 Sales and Receivables 121. $4,000 $100,000 Principal × 8% Interest Rate × 6/12 Time Period = $4,000 122. A)

$10,000 × 12% × 1/12 = $100

$10,000 × 12% × 5/12 = $500

$10,000 + ($10,000 × 12% × 6/12) = $10,600

123. Debit Jan. 1 of A) current year

Accounts Receivable

Credit

100,000 Sales Revenue

Oct. 1 of B) current Notes Receivable year

100,000

100,000 Accounts Receivable

Dec. 31 of C) current Interest Receivable year

100,000

3,000 Interest Income ($100,000 × 0.12 × 6/12 × 1/2 )

3,000

April 1 of D) following year April 1 of Cash ($100,000 + E) following $6,000 Interest) year

106,000 Notes Receivable Interest Receivable Interest Revenue

100,000 3,000 3,000

124. A)

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Ch 05 Sales and Receivables C)

D) 125. A) 6/3

Debit 45,000

Accounts Receivable Sales Revenue

6/10 Cash ($45,000 × 98%) Sales Discounts

45,000 44,100 900

Accounts Receivable C)

Credit

6/21 Cash

45,000 45,000

Accounts Receivable

45,000

126. An aging schedule categorizes the various account receivable amounts by age based on how long an account is past due or outstanding. A company uses this for estimating how much of its accounts receivable are expected to default. It is a refined approach because it lists the dollar amounts of receivables based on the period of time each has been outstanding, such as 30, 60, or more days outstanding. 127. After giving customers a grace period, you might send them a series of past due notices. The tone of the notices would get increasingly urgent. Eventually, you may decide to turn the account over to a collection agency. If all these efforts fail, you would likely write off the account. 128. Using credit cards often accelerates cash collections. The bank charges a fee, but the company receives payment from the credit card company instead of waiting until the customer actually pays. A company is also able to accelerate cash by factoring receivables to the bank. This involves selling accounts receivable to the bank instead of waiting for the customer to actually pay. 129. With an accounts receivable turnover of 10 times per year, the company's receivables are outstanding approximately 36 days prior to collection (360/10 days). Given that credit terms are 2/10, n/20, one would expect customers to pay within 20 days. Customers should pay within 10 days to obtain the discount of 2%. The company needs to make more efforts to collect its receivables given its current credit terms.

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Ch 06 Cost of Goods Sold and Inventory

Indicate whether the statement is true or false. 1. For a merchandising company, the cost of goods sold is subtracted from net sales to arrive at gross profit. a. True b. False 2. Cost of goods sold represents an outflow of a resource, or inventory, which is caused by the sale of products. a. True b. False 3. If cost of goods sold does not equal the cost of merchandise purchased during the period, an adjustment must be made to correct the error. a. True b. False 4. Cost of goods sold is the difference between the costs of goods available for sale and ending inventory. a. True b. False 5. With the perpetual inventory system, the inventory account is updated after each sale or purchase. a. True b. False 6. Under the periodic inventory system, a physical inventory must be taken to determine cost of goods sold. a. True b. False 7. Under a perpetual inventory system, each time goods are purchased by a customer, the inventory account is transferred to sales revenue. a. True b. False 8. A company using a periodic inventory system must total the selling prices of the units on hand at the end of the period in order to value the ending inventory. a. True b. False 9. When the shipping terms are F.O.B. destination, the buyer must record transportation costs as an additional cost of acquiring the inventory under the perpetual inventory system. a. True b. False 10. Sales discounts decrease the cost of inventory acquired. a. True b. False Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory 11. The buyer must include goods purchased F.O.B. shipping point in its inventory account if the goods are still in transit. a. True b. False 12. When merchandise is sold F.O.B. destination, the seller is responsible for the shipping costs. a. True b. False 13. The weighted average cost per unit must be continually updated under the perpetual inventory system. a. True b. False 14. During periods of stable purchase prices, FIFO produces the highest ending inventory relative to the other inventory costing methods. a. True b. False 15. During periods of declining purchase prices, LIFO produces the lowest amount of ending inventory relative to the other inventory costing methods. a. True b. False 16. A loss in inventory value caused by the applying of the lower of cost or net realizable value (LCNRV) rule is recorded in a loss from impairment account. a. True b. False 17. The lower of cost or net realizable value (LCNRV) rule violates the historical cost principle. a. True b. False 18. A LIFO liquidation occurs when a company sells more units than it buys during the period. a. True b. False 19. A LIFO reserve represents the amount by which cost of goods sold on a FIFO basis exceeds the cost of goods sold on a LIFO basis for the current year. a. True b. False 20. The inventory turnover ratio is defined as the cost of goods sold divided by average inventory. a. True b. False 21. The inventory turnover ratio is a measure of how many times during a period a company sells off its inventory. a. True Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory b. False 22. If the ending inventory is understated, then the cost of goods sold is understated. a. True b. False 23. If the ending inventory is overstated, then the net income is overstated as well. a. True b. False 24. Under a periodic inventory system, the purchases account accumulates the cost of the inventory acquired during the period. a. True b. False 25. A purchases account is not needed under a periodic inventory system. a. True b. False 26. Under the periodic method, the information on sales can be combined within any period because all purchases are assumed to occur before any sales transactions. a. True b. False 27. The weighted average cost is calculated by adding the units' costs from each purchase and then dividing by the number of purchases. a. True b. False 28. Under the FIFO method of inventory costing, the units in the ending inventory represent the oldest purchase(s). a. True b. False 29. The difference between the FIFO, LIFO, and average cost methods is that each of these methods of inventory costing makes a specific assumption about the flow of costs. a. True b. False 30. Under the LIFO method of inventory costing, the units in the ending inventory represent the most recent purchase(s). a. True b. False

Indicate the answer choice that best completes the statement or answers the question. 31. Which of the following is not one of the three categories of inventory in a manufacturing company? a. raw materials Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory b. work-in-process inventory c. finished goods inventory d. merchandise inventory 32. Cost of goods sold is equal to a. beginning inventory plus the net cost of purchases plus ending inventory. b. beginning inventory plus the net cost of purchases minus ending inventory. c. ending inventory plus beginning inventory. d. ending inventory less beginning inventory. 33. In which inventory system does the inventory account get updated after each purchase or sale? a. perpetual inventory b. physical inventory c. work-in-process inventory d. raw materials inventory 34. After items are sold, the cost of inventory will ultimately be recognized on the income statement as a. inventory expense. b. sales. c. cost of goods sold. d. cost of goods available for sale. 35. Which shipping term refers to the buyer paying the shipping costs? a. discount shipping b. F.O.B. destination c. F.O.B. shipping point d. consigned goods delivery 36. Shipping terms of F.O.B. destination mean the shipping costs are paid by the a. freight carrier. b. buyer. c. seller. d. consignee. 37. A company that uses LIFO experienced a partial or complete liquidation of its older, lower-priced inventory for the period. Its gross margin for the period will a. not be affected. b. be higher. c. be lower. d. be zero. 38. Which of the following inventory accounting methods is a departure from the historical cost principle mandated by generally accepted accounting principles? a. first-in, first-out (FIFO) b. specific identification Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory c. lower of cost or net realizable value d. last-in, first-out (LIFO) 39. Per the conservatism principle, accountants define the selling price of inventory as its a. fair market value. b. appraised value. c. marked up value. d. net realizable value. 40. The excess of an inventory’s value stated on a FIFO basis over its value stated on a LIFO basis is called the a. temporary inventory cost. b. inventory method variance. c. LIFO reserve. d. FIFO reserve. 41. The ratio of a company’s cost of goods sold to its average inventory is called its a. average days to sell inventory. b. gross profit ratio. c. average cost of goods sold. d. inventory turnover ratio. 42. A company can calculate its average days to sell inventory by dividing 365 days per year by its a. inventory turnover ratio. b. cost of goods sold. c. average inventory. d. purchases. 43. Within the same accounting period, if ending inventories are understated, cost of goods sold will be a. overstated. b. understated. c. unaffected. d. unverifiable. 44. If there is an overstatement error in the inventory account in the current period, in the subsequent period, there will be an understatement in a. purchases. b. sales. c. net income. d. cash. 45. Under a periodic inventory system, which account accumulates the cost of inventory acquired during the period? a. Inventory b. Cost of Goods Sold c. Merchandise Inventory Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory d. Purchases 46. Under a periodic inventory system, which account is charged for shipping costs? a. Inventory b. Transportation-In c. Cost of Goods Sold d. Purchases 47. Under the periodic inventory system, which of the following account balances is added to the purchases account to determine the net cost of purchases? a. Purchase Discounts b. Purchase Returns and Allowances c. Cost of Goods Sold d. Transportation-In 48. How are net purchases calculated under the periodic inventory system? a. Purchases + Transportation-In – Purchase Discounts – Purchase Returns and Allowances b. Purchases – Transportation-In + Purchase Discounts + Purchase Returns and Allowances c. Purchases + Transportation-In + Purchase Discounts – Purchase Returns and Allowances d. Purchases – Transportation-In – Purchase Discounts + Purchase Returns and Allowances 49. Which of the following types of inventory accounts would be used by a wholesaler or retailer? a. merchandise inventory b. raw materials inventory c. work-in-process inventory d. finished goods inventory 50. The inventory account a manufacturer uses to record the cost of products completed and available for sale is called a. raw materials inventory. b. work-in-process inventory. c. finished goods inventory. d. merchandise inventory. 51. Items should be included as part of the company's inventory if they are a. purchased from a creditor, although not paid for by year-end. b. held in anticipation of an increase in market value. c. determined to be part of cost of goods sold. d. sold during the period. 52. Determine the amount of inventory on the balance sheet of a manufacturing company from the following account balances: Finished goods Raw materials

$24,000 30,000

Merchandise inventory Work-in-process

$50,000 6,000

a. $24,000 Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory b. $60,000 c. $74,000 d. $104,000 53. A manufacturing company reported a total inventory of $75,000. Assuming the following account balances, what is this company’s work-in-process inventory? Finished goods Raw materials

$15,000 40,000

Merchandise inventory

$10,000

a. $10,000 b. $20,000 c. $60,000 d. $65,000 54. Which of the following accounts would most likely appear on the income statement of a merchandise company but not on the income statement of a service company? a. Cost of Goods Sold b. Selling Expenses c. Administrative Expenses d. Income Tax Expense 55. Which of the following best describes "cost of goods available for sale"? a. Cost of goods available for sale is an expense account. b. Cost of goods available for sale is added to beginning inventory to determine the cost of purchases during the period. c. Cost of goods available for sale is subtracted from net sales to arrive at the gross margin. d. Cost of goods available for sale is allocated into cost of ending inventory and cost of goods sold. 56. Aaron Corporation is a merchandising company. Selected account balances are as follows: Sales Purchases Beginning inventory Ending inventory Operating expenses Income tax expense Beginning retained earnings Dividends

$250,000 112,500 8,000 15,000 74,000 5,000 26,500 7,500

Calculate gross margin. a. $120,500 b. $137,500 c. $144,500 d. $212,500 57. Aaron Corporation is a merchandising company. Selected account balances are as follows: Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory Sales Purchases Beginning inventory Ending inventory Operating expenses Income tax expense Beginning retained earnings Dividends

$250,000 112,500 8,000 15,000 74,000 5,000 26,500 7,500

Calculate the cost of goods sold. a. $137,500 b. $129,500 c. $120,500 d. $105,500 58. Aaron Corporation is a merchandising company. Selected account balances are as follows: Sales Purchases Beginning inventory Ending inventory Operating expenses Income tax expense Beginning retained earnings Dividends

$250,000 112,500 8,000 15,000 74,000 5,000 26,500 7,500

Calculate net income. a. $144,500 b. $70,500 c. $65,500 d. $58,000 59. Bihary Company has a beginning balance in its inventory account of $2,250 and the ending balance is $1,500. The cost of goods sold is $9,750. According to the cost of goods sold model, what was the amount of inventory purchased during the year? a. $750 b. $9,000 c. $10,500 d. $11,250 60. The cost of goods sold is equal to the a. total amount of merchandise purchased during the year. b. cost of merchandise purchased plus transportation costs less ending inventory. c. cost of merchandise purchased plus transportation costs plus beginning inventory minus purchase returns and allowances and purchased discounts minus ending inventory. d. cost of merchandise purchased plus transportation costs plus beginning inventory minus purchase returns and allowances and purchase discounts. Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory 61. In a periodic inventory system, the cost of purchases is recognized as a. an integral part of the calculation of cost of goods sold. b. the only part of the calculation of cost of goods sold. c. an increase in the inventory account. d. an increase in an asset account. 62. The cost of goods sold is equal to a. purchases less beginning inventory plus ending inventory. b. the inventory account as reported on the balance sheet. c. the cost of goods available for sale less ending inventory. d. the amount of inventory on hand at the end of the accounting period. 63. Which of the following statements is false? a. The inventory account is updated after every sale and after every merchandise purchase under the perpetual inventory system. b. The inventory account is updated only at the end of the accounting period under the periodic inventory system. c. The cost of goods sold account is updated after each sale of merchandise under the periodic inventory system. d. The purchases account is used only under the periodic inventory system. 64. In order to determine inventory for its balance sheet, a company must count the inventory at the end of its accounting period according to a. the periodic inventory system. b. the perpetual inventory system. c. both the periodic and perpetual inventory systems. d. neither the periodic nor the perpetual inventory system. 65. Which of the following statements is true? a. Inventory data can be identified and controlled better under the perpetual system. b. Inventory can only be sold at the end of an accounting period under the periodic system. c. There is no difference in cost to implement a perpetual as compared to a periodic system. d. The perpetual system eliminated the need for an annual inventory count. 66. Which of the following statements is false regarding the reason that inventory costs are recorded as expenses when sold rather than when incurred? a. It gives the users of the company's financial statements a clearer picture of profitability. b. It helps the company achieve a better matching of expenses with related revenues. c. It gives the company's accounting personnel more time to record inventory transactions. d. Inventory is an asset at the time it is acquired. 67. Which of the following statements is true regarding just-in-time inventory management? a. It requires a perpetual inventory system. b. It requires the average cost inventory costing method. c. It requires detailed information about profitability and the users of the company's financial statements. d. It requires detailed information about order-to-delivery times, receiving-to-ready-for-sale times, and inventory Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory quantities. 68. The amount recognized on the balance sheet as the cost of inventory will ultimately be recognized as a. sales revenue. b. cost of goods sold. c. operating expenses. d. administrative expenses. 69. A customer returned damaged goods for credit. Under a perpetual system, which of the seller's accounts decreases? a. Purchase Returns b. Accounts Receivable c. Sales Returns d. Sales Revenue 70. Ending inventory is equal to the cost of items on hand plus merchandise a. in transit sold to customers with terms F.O.B. shipping point. b. in transit sold to customers with terms F.O.B. destination. c. returned to sellers in transit with terms F.O.B. shipping point. d. purchased from buyers in transit with terms F.O.B. destination. 71. Dollar Town is a merchandising company that uses the periodic inventory system. Selected account balances are as follows: Sales Purchases Beginning inventory Ending inventory Purchase returns and allowances Purchase discounts Transportation-in Sales discounts Sales returns and allowances

$105,000 54,000 13,800 10,200 1,800 4,200 2,400 4,800 3,000

Calculate net sales. a. $97,200 b. $100,200 c. $102,000 d. $105,000 72. Dollar Town is a merchandising company that uses the periodic inventory system. Selected account balances are as follows: Sales Purchases Beginning inventory Ending inventory Purchase returns and allowances Purchase discounts Powered by Cognero

$105,000 54,000 13,800 10,200 1,800 4,200 Page 10

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Ch 06 Cost of Goods Sold and Inventory Transportation-in Sales discounts Sales returns and allowances

2,400 4,800 3,000

Calculate the net cost of goods purchased. a. $50,400 b. $54,000 c. $61,800 d. $70,200 73. Dollar Town is a merchandising company that uses the periodic inventory system. Selected account balances are as follows: Sales Purchases Beginning inventory Ending inventory Purchase returns and allowances Purchase discounts Transportation-in Sales discounts Sales returns and allowances

$105,000 54,000 13,800 10,200 1,800 4,200 2,400 4,800 3,000

Calculate the company’s gross margin. a. $40,800 b. $43,200 c. $46,800 d. $51,000 74. What effects on a retail store's accounting equation occur when it records merchandise purchased for cash assuming the use of a perpetual inventory system? a. Assets and stockholders' equity increase. b. Assets and stockholders' equity decrease. c. Assets and liabilities increase. d. There is no net effect. 75. What effects on a retail store's accounting equation occur when merchandise returned by customers is recorded? a. Assets and stockholders' equity decrease. b. Assets and stockholders' equity increase. c. Assets decrease and liabilities increase. d. Stockholders' equity decreases and liabilities increase. 76. Coffski, Inc. sold merchandise to a customer on credit. The invoice amount was $1,000; the invoice date was June 10; and credit terms were 1/10, n/30. Which of the following statements is true? a. The customer can take a 10% discount if the invoice is paid by June 30. b. The customer should pay $1,000 if the invoice is paid on July 9. c. The customer must pay a $10 penalty if payment is made after July. Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory d. The customer must pay $1,010 if payment is made after June 20. 77. Dietz, Inc. sells merchandise on credit. If a customer pays its balance due within the discount period, what is the effect of the payment on Dietz's accounting equation? a. Assets and stockholders' equity decrease. b. Assets and stockholders' equity increase. c. Assets decrease and liabilities increase. d. Stockholders' equity decreases and liabilities increase. 78. Echols Company sells merchandise on credit. If a customer pays its balance due after the discount period has passed, what is the effect of the payment on the seller's accounting equation? a. Assets and stockholders' equity decrease. b. Assets and stockholders' equity increase. c. Assets decrease and liabilities increase. d. There is no net effect. 79. Eli Company sells novelty items and offers terms of 1/10, n/30 to credit customers. One customer, Faulkner, Inc., purchased 100 Sweet-16 party decor packs with a list price of $20 each on March 5. If the customer pays the amount of the invoice for its purchase on March 14, how much cash will Eli Company receive? a. $1,400 b. $1,800 c. $1,980 d. $2,000 80. Eli Company sells novelty items and offers terms of 1/10, n/30 to credit customers. One customer, Faulkner, Inc., purchased 100 Sweet-16 party decor packs with a list price of $20 each on March 5. If the customer pays the invoice on March 31, how much sales discount will Eli Company recognize? a. $0 b. $20 c. $200 d. $600 81. The following information is from Gbane Company's accounting records for the year ended December 31: Purchases Transportation-in Inventory, January 1 Inventory, December 31 Purchase returns and allowances

$218,400 13,200 31,800 34,560 10,080

How much will the company report as net purchases for the year ended December 31? a. $221,520 b. $231,600 c. $241,680 d. $253,320 Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory 82. The following information is from Gbane Company's accounting records for the year ended December 31: Purchases Transportation-in Inventory, January 1 Inventory, December 31 Purchase returns and allowances

$218,400 13,200 31,800 34,560 10,080

Using the cost of goods sold model, how much will the company report as its cost of goods sold on its income statement for the year ended December 31? a. $215,880 b. $218,760 c. $224,280 d. $228,840 83. Gools, Inc. buys designer clothing to sell in its retail stores. Since much of the merchandise comes from Europe, Gools, Inc. must pay freight charges. Which of the following statements must be true? a. Transportation-in is added to the inventory account under the periodic system. b. Transportation-in is subtracted from purchases under the periodic system. c. Freight charges are only paid by a buyer in a periodic system. d. Transportation-in is included in the total cost of purchases used to determine cost of goods sold in a periodic system. 84. Harris Corp. sold merchandise on account to Ichay Company on December 28 of the current year, with shipping terms of F.O.B. destination. The buyer received the merchandise on January 3 of the next year. Which of the following is true? a. The seller should record the sales revenue on December 28 of the current year. b. The buyer should pay the transportation costs. c. The buyer should include the merchandise in its inventory on December 31 of the current year. d. The buyer should record a liability for the purchase on January 3 of the next year. 85. Transportation-in is a. an operating expense. b. part of purchase returns and allowances. c. added to transportation-out as part of the calculation of cost of goods sold. d. part of the net cost of purchases. 86. Irwin Company counted its ending inventory as $178,000 at its January 31 year-end. Upon review of the records, it was noted that the following items were in transit during the count: Goods totaling $2,000 shipped by the supplier F.O.B. destination on January 31 were received on February 5 but were not counted by Irwin Company. Goods totaling $5,000 shipped by the supplier F.O.B. shipping point on January 30 were received on February 2 but were not counted by Irwin Company. Goods totaling $6,000 shipped by Irwin Company to a customer F.O.B. shipping point on January 31 were received by the customer on February 3 and were counted by Irwin Company. What is Irwin Company's correct inventory balance on its January 31 year-end? a. $172,000 Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory b. $174,000 c. $177,000 d. $178,000 87. At the year-end inventory count, if goods in transit are shipped F.O.B. destination, they should be included in the inventory count of a. the seller. b. the buyer. c. the shipping company. d. neither the buyer nor the seller. 88. At the year-end inventory count, if goods in transit are shipped F.O.B. shipping point, they should be included in the inventory count of a. the seller. b. the buyer. c. the shipping company. d. both the seller and the buyer. 89. The journal entries required for purchase and sales transactions using the perpetual system are more complex than under the periodic system but offer the advantage of a. requiring the additional control of a physical inventory count whenever accurate inventory amounts are needed. b. delaying the majority of the accounting effort until year-end. c. requiring the use of the average cost method. d. providing management with more complete information from which to control inventories. 90. The following journal entry was included in the accounting records of Jentzen Company: Oct. 15

Accounts Payable

4,000 Merchandise Inventory Cash Based on this information, it is likely that the company: a. purchased inventory for cash. b. paid for inventory purchased on credit and took advantage of a 1% purchase discount. c. sold inventory for cash. d. collected cash for inventory sold on credit and recognized a 1% sales discount.

40 3,960

91. The following journal entry was included in the accounting records of Jumani Company: Feb. 11 Merchandise Inventory Cost of Goods Sold

7,000 7,000

This entry is needed to record the a. cost of merchandise sold. b. sales price of merchandise sold. c. cost of merchandise returned by a customer. d. net effect of a sales transaction. Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory 92. Satoor, Inc., which uses a periodic inventory system, purchased merchandise from Taye Company on July 7 for $15,000. The credit terms were 1/10, n/30. The goods were shipped F.O.B. shipping point on July 7. Satoor, Inc. received the merchandise on July 10 and paid the amount due on July 15. When did the title to the merchandise transfer from the seller to the buyer? a. July 7 b. July 10 c. July 15 d. cannot be determined from this limited information 93. Satoor, Inc., which uses a periodic inventory system, purchased merchandise from Taye Company on July 7 for $15,000. The credit terms were 1/10, n/30. The goods were shipped F.O.B. shipping point on July 7. Satoor, Inc. received the merchandise on July 10 and paid the amount due on July 15. Who is responsible for the payment of the transportation costs on the merchandise sold? a. the seller b. the buyer c. The transportation costs are split equally between the two companies. d. cannot be determined from this limited information 94. Which of the following is true of consignment arrangements? a. In consignment arrangements, the sellers retain ownership of the goods. b. In consignment arrangements, the sellers earn a fee when the consigned goods are sold. c. Retailers find consignment arrangements unattractive because these result in increased investment in inventory for them. d. Goods are included in the seller's inventory under consignment arrangements. 95. Which of the following statements regarding inventory costs is true? a. The flow of inventory costs should match the physical flow of the merchandise. b. Accounting standards require that merchandise costs be specifically traced to units left in inventory and to units that have been sold. c. Accountants have developed methods that make assumptions concerning how costs should be assigned to inventory and cost of goods sold. d. Alternative inventory cost flow assumptions have the same effect on the amount of net income reported. 96. Which inventory cost flow method assigns the cost of the most recent items purchased to ending inventory? a. specific identification b. weighted average cost c. FIFO d. LIFO 97. Which inventory cost flow method assigns the cost of the most recent items purchased to cost of goods sold? a. specific identification b. weighted average cost c. FIFO d. LIFO Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory 98. Which inventory cost flow method assigns the same cost to all units whether sold or left in ending inventory? a. specific identification b. weighted average cost c. FIFO d. LIFO 99. For which type of merchandise will a company most likely use the specific identification method of inventory costing? a. gasoline held in storage tanks b. cases of bottled water c. custom-made boats d. boxes of bran cereal 100. Klinc Company uses a perpetual inventory system and had the following inventory transactions for the month of June: June

1 4 5 10 24

On hand, 50 units at $14 each $ 700 Purchased 115 units at $15 each $1,725 Sold 100 units Purchased 75 units at $16 each $1,200 Sold 50 units Total cost of goods available for sale $3,625 30 On hand, 90 units The June 30 inventory included 45 units from the June 4 purchase and 45 units from the June 10 purchase. What is the cost of ending inventory on June 30 under the specific identification method? a. $1,350 b. $1,359 c. $1,375 d. $1,395 101. Klinc Company uses a perpetual inventory system and had the following inventory transactions for the month of June: June

1 4 5 10 24

On hand, 50 units at $14 each $ 700 Purchased 115 units at $15 each $1,725 Sold 100 units Purchased 75 units at $16 each $1,200 Sold 50 units Total cost of goods available for sale $3,625 30 On hand, 90 units The June 30 inventory included 45 units from the June 4 purchase and 45 units from the June 10 purchase. What is the cost of goods sold for June under the specific identification method? a. $2,230 b. $1,575 c. $1,500 d. $1,450 Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory 102. Klump Co. uses a perpetual inventory system and had the following inventory transactions for the month of June: June

1 4 5 10 24 30

On hand, 50 units at $18.00 each Purchased 115 units at $18.20 each Sold 100 units Purchased 75 units at $18.25 each Sold 40 units Total cost of goods available for sale On hand, 100 units

$ 900.00 $2,093.00 $1,368.75 $4,361.75

If the company uses the FIFO inventory costing method, the amount of ending inventory reported on the balance sheet is a. $1,800.00. b. $1,810.00. c. $1,823.75. d. $1,825.00. 103. Klump Co. uses a perpetual inventory system and had the following inventory transactions for the month of June: June

1 4 5 10 24 30

On hand, 50 units at $18.00 each Purchased 115 units at $18.20 each Sold 100 units Purchased 75 units at $18.25 each Sold 40 units Total cost of goods available for sale On hand, 100 units

$ 900.00 $2,093.00 $1,368.75 $4,361.75

If the company uses the FIFO inventory costing method, cost of goods sold for the month of June is a. $2,520. b. $2,538. c. $2,540. d. $2,550. 104. Klump Co. uses a perpetual inventory system and had the following inventory transactions for the month of June: June

1 4 5 10 24 30

On hand, 50 units at $18.00 each Purchased 115 units at $18.20 each Sold 100 units Purchased 75 units at $18.25 each Sold 40 units Total cost of goods available for sale On hand, 100 units

$ 900.00 $2,093.00 $1,368.75 $4,361.75

If the company uses the LIFO inventory costing method, ending inventory on June 30 is: a. $1,823.25. b. $1,811.75. c. $1,810.00. d. $1,806.25.

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Ch 06 Cost of Goods Sold and Inventory 105. Klump Co. uses a perpetual inventory system and had the following inventory transactions for the month of June: June

1 4 5 10 24 30

On hand, 50 units at $18.00 each Purchased 115 units at $18.20 each Sold 100 units Purchased 75 units at $18.25 each Sold 40 units Total cost of goods available for sale On hand, 100 units

$ 900.00 $2,093.00 $1,368.75 $4,361.75

If the company uses the LIFO inventory costing method, cost of goods sold for the month of June is a. $2,538.00. b. $2,550.00. c. $2,551.25. d. $2,555.00. 106. Klump Co. uses a perpetual inventory system and had the following inventory transactions for the month of June: June

1 4 5 10 24 30

On hand, 50 units at $18.00 each Purchased 115 units at $18.20 each Sold 100 units Purchased 75 units at $18.25 each Sold 40 units Total cost of goods available for sale On hand, 100 units

$ 900.00 $2,093.00 $1,368.75 $4,361.75

the company uses the (moving) average cost inventory costing method, ending inventory on June 30 is closest to a. $1,815.00. b. $1,817.40. c. $1,818.00. d. $1,819.86. 107. Klump Co. uses a perpetual inventory system and had the following inventory transactions for the month of June: June

1 4 5 10 24 30

On hand, 50 units at $18.00 each Purchased 115 units at $18.20 each Sold 100 units Purchased 75 units at $18.25 each Sold 40 units Total cost of goods available for sale On hand, 100 units

$ 900.00 $2,093.00 $1,368.75 $4,361.75

If the company uses the (moving) average cost inventory costing method, cost of goods sold for the month of June is closest to a. $2,539.52 b. $2,541.90 c. $2,544.35 d. $2,555.00 108. Lemke Corp. uses a perpetual inventory system with a (moving) weighted average inventory costing method. The Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory following information is available for the month of April: Apr.

1 8 15 22 30

On hand, 30 units at $5.00 each Purchased 40 units at $5.35 each Sold 50 units Purchased 40 units at $5.50 each On hand, 60 units

$150 $214 $220

How much is the cost of goods sold for the units sold on April 15? a. $245 b. $255 c. $260 d. $270 109. Lemke Corp. uses a perpetual inventory system with a (moving) weighted average inventory costing method. The following information is available for the month of April: Apr.

1 8 15 22 30

On hand, 30 units at $5.00 each Purchased 40 units at $5.35 each Sold 50 units Purchased 40 units at $5.50 each On hand, 60 units

$150 $214 $220

How much is ending inventory on April 30? a. $265.45 b. $312.00 c. $318.55 d. $324.00 110. Lowery Company uses a perpetual inventory system. The following information is available for the month of March: Mar.

1 4 22 26

On hand, 10 units at $2 each Sold 8 units for $10 each Purchased 50 units at $4 each Sold 48 units for $10 each

$ 20 80 200 480

If the company uses the FIFO inventory costing method, how much is the cost of goods sold for March? a. $560 b. $212 c. $208 d. $204 111. Lowery Company uses a perpetual inventory system. The following information is available for the month of March: Mar.

1 4 22 26

On hand, 10 units at $2 each Sold 8 units for $10 each Purchased 50 units at $4 each Sold 48 units for $10 each

$20 80 200 480

If the company uses the FIFO inventory costing method, how much is ending inventory on March 31? Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory a. $40 b. $16 c. $12 d. $8 112. Lowery Company uses a perpetual inventory system. The following information is available for the month of March: Mar.

1 4 22 26

On hand, 10 units at $2 each Sold 8 units for $10 each Purchased 50 units at $4 each Sold 48 units for $10 each

$ 20 80 200 480

If the company uses the LIFO inventory costing method, how much is the cost of goods sold for the month of March? a. $560 b. $212 c. $208 d. $204 113. Which of the following statements is false regarding the choice between alternative inventory costing methods? a. Each alternative method provides for the same amount of cost of goods available for sale to be allocated between ending inventory and cost of goods sold. b. In terms of current costs, FIFO presents a more realistic balance sheet, whereas LIFO presents a more realistic income statement. c. Companies sometimes choose FIFO because it is easier and less expensive to implement, whereas LIFO is often chosen for the tax benefits. d. Companies sometimes choose FIFO because it presents a more realistic income statement in terms of current market values. 114. All of the following are acceptable for financial accounting purposes except a. specific identification. b. FIFO. c. LIFO. d. retail cost. 115. Which inventory costing method results in the highest inventory balance during a period of rising purchase prices? a. weighted average cost b. FIFO c. LIFO d. Both FIFO and LIFO result in the same inventory balance. 116. Which inventory costing method might allow a company to manipulate income by making significant inventory purchases at year-end? a. FIFO b. LIFO c. specific identification d. weighted average cost Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory 117. Which inventory costing method results in the lowest income tax expense during a period of decreasing purchase prices? a. FIFO b. LIFO c. specific identification d. weighted average cost 118. During a period of increasing purchase prices, which inventory costing method will yield the lowest cost of goods sold? a. any method in which the company uses a periodic system b. FIFO c. LIFO d. weighted average cost 119. Madlock Company, which started business at the beginning of the year, selected the FIFO method for its inventory costing. In order to maximize profits for the year under this method, purchase prices must be a. increasing. b. decreasing. c. stable. d. fluctuating up and down at the same amount consistently throughout the year. 120. Oliver & Co. has been in business for 15 years. During that time, the company has consistently used the LIFO inventory costing method. Because of inflation, purchase prices for merchandise have increased consistently over the 15 years. The company has maintained the same inventory quantities over the 15 years. Which of the following statements is true for the company? a. The company's total net income for the past 15 years is greater than it would have reported using another inventory method. b. The company would have paid more income taxes over the past 15 years than it would have if it had used the FIFO method. c. The company will have to continue to use the LIFO method indefinitely because of federal income tax rules. d. The ending inventory amount reported on the balance sheet may be significantly lower than its current value. 121. Which of the following statements regarding changing inventory costing methods is true? a. A change in inventory methods can be justified if the change is made to better match profits with revenue. b. Changing inventory costing methods violates consistency. c. One place that the reader of an annual report would be able to identify that a company changed inventory costing methods is the statement of stockholders' equity. d. Tax advantages are a valid justification for changing inventory costing methods. 122. When the selling price of inventory items has declined below its cost, which method would be the most appropriate in complying with GAAP? a. retail b. LIFO c. lower of cost or net realizable value d. FIFO Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory 123. Which of the following statements regarding the application of the lower of cost or net realizable value (LCNRV) method is true? a. Generally, historical cost is greater than replacement cost. b. When the lower of cost or net realizable value method is used, inventories are valued at their selling price. c. The lower of cost or net realizable value method is most commonly applied on a total inventory basis because it is a more conservative approach. d. The lower of cost or net realizable value method is an exception to the historical cost principle. 124. When inventories are written down due to the applying of the lower of cost or net realizable value (LCNRV) rule, which of the following is usually increased? a. cost of goods sold b. inventories c. operating expenses d. accumulated depreciation—inventory 125. The lower of cost or net realizable value rule applies to the write-down of inventory values when net realizable value is less than cost. Why does this rule not allow for write-ups in inventory value? a. Write-ups in inventory value are more uncertain than write-downs. b. The most prudent approach to preparing financial statements involves avoidance of pessimistic projections regarding the company's future prospects. c. Writing up inventory to net realizable value would be inconsistent with the conservatism principle. d. Write-ups in inventory value are inconsistent with the matching principle. 126. Noland, Inc. uses the LIFO method of inventory costing and is facing the possibility of a LIFO liquidation for the current year. Merchandise purchase prices have increased since the LIFO method was adopted. If the company does not purchase additional merchandise before year-end, which of the following effects will occur as a result of a LIFO liquidation? a. Reported earnings for the current year will be higher. b. Income taxes for the current year will be lower. c. Cost of goods sold for the current year will be higher. d. Gross margin for the current year will be lower. 127. A LIFO inventory liquidation occurs when a company that uses the LIFO inventory costing method a. buys more merchandise during the accounting period than it sells. b. cannot determine the ending inventory because it has been destroyed or stolen. c. changes its inventory method from FIFO to LIFO. d. sells more merchandise during the accounting period than it purchased. 128. Parlato Corp. has an inventory turnover rate of 8 times. If its cost of goods sold is $150,000, then the company a. will report sales of $1,200,000. b. will report gross margin of $1,200,000. c. will have average inventory of $18,750. d. sells its inventory 1,200 times per year. 129. Parlato Corp. has an inventory turnover rate of 8 times. Calculate the company's average days to sell inventory. Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory a. 1,200 b. 150 c. 120 d. 45.625 130. The following selected financial information is available for Pham Enterprises for the year ended December 31: Net sales Cost of goods sold

$450,000 299,500

Inventory, January 1 Inventory, December 31

$48,400 49,670

What is the company's gross profit ratio for the year ended December 31? a. 33.44% b. 50.25% c. 66.55% d. 299.00% 131. The following selected financial information is available for Pham Enterprises for the year ended December 31: Net sales Cost of goods sold

$450,000 299,500

Inventory, January 1 Inventory, December 31

$48,400 49,670

What is the company's inventory turnover ratio for the year ended December 31? a. 6.188 b. 6.030 c. 6.108 d. 16.372 132. The following selected financial information is available for Pham Enterprises for the year ended December 31: Net sales Cost of goods sold

$450,000 299,500

Inventory, January 1 Inventory, December 31

$48,400 49,670

What is the company's average-days-to-sell inventory measure? a. 58.98 b. 60.53 c. 22.29 d. 59.76 133. If the amount assigned to ending inventory is incorrect, a. the balance sheet is affected but the income statement is not. b. the income statement is affected but the balance sheet is not. c. the balance sheet is affected but cost of goods sold is not. d. both the balance sheet and income statement are affected. 134. Qualls Department Store counted some of its inventory items twice. As a result, its operating expenses will be a. correct assuming the company calculates its cost of goods sold correctly. Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory b. correct since operating expenses are not affected by inventory costs. c. overstated. d. understated. 135. If a company understates its inventory, what are the effects on cost of goods sold and net income for the current year? a. Cost of goods sold will be understated and net income will be overstated. b. Cost of goods sold will be overstated and net income will be understated. c. Both cost of goods sold and net income will be understated. d. Both cost of goods sold and net income will be overstated. 136. Regan Company reported net income of $95,000 for Year 1. Early in Year 2, the company discovered that its Year 1 ending inventory was overstated by $5,000. Determine the effects of the inventory errors for Year 1. a. Assets and stockholders' equity would have been overstated by $5,000 on the balance sheet, and expenses and net income would have been understated by $5,000 on the income statement. b. Assets and stockholders' equity would have been overstated by $5,000 on the balance sheet, and expenses would have been overstated by $5,000 on the income statement so net income would have been understated by $5,000. c. Assets and stockholders' equity would have been understated by $5,000 on the balance sheet, and expenses would have been overstated by $5,000 on the income statement so net income would have been understated by $5,000. d. Assets and stockholders' equity would have been overstated by $5,000 on the balance sheet, and expenses would have been understated by $5,000 on the income statement so net income would have been overstated by $5,000. 137. Regan Company reported net income of $95,000 for Year 1. Early in Year 2, the company discovered that its Year 1 ending inventory was overstated by $5,000. Determine the financial statement effects of the inventory error for Year 2. a. Expenses will be understated, and net income will be overstated. b. Expenses will be overstated, and net income will be understated. c. Both expenses and net income will be overstated. d. Both expenses and net income will be understated. 138. How are purchase returns and purchase discounts recorded by a company using the periodic inventory system? a. as a reduction to the purchases account b. in contra-accounts to the purchases account c. as operating expenses d. as miscellaneous expenses 139. Roe Company purchased merchandise on account from Rodriguez Company on December 12, Year 1. On December 13, Year 1, Roe Company returned damaged merchandise to Rodriguez Company and was granted an adjustment on its account. Roe Company uses the periodic inventory system. What effect does the merchandise return have on Roe Company's accounting equation? a. Assets and stockholders' equity decrease Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory b. Assets and liabilities decrease c. Liabilities decrease and stockholders' equity increases d. Liabilities and stockholders' equity decrease 140. Satoor, Inc., which uses a periodic inventory system, purchased merchandise from Taye Company on July 7 for $15,000. The credit terms were 1/10, n/30. The goods were shipped F.O.B. shipping point on July 7. Satoor, Inc. received the merchandise on July 10 and paid the amount due on July 15. What effect does recording the purchase of merchandise on July 7 have on the buyer's accounting equation? a. Assets and liabilities increase b. Liabilities increase and stockholders' equity decreases c. Assets and stockholders' equity increase d. Liabilities and stockholders' equity decrease 141. Satoor, Inc., which uses a periodic inventory system, purchased merchandise from Taye Company on July 7 for $15,000. The credit terms were 1/10, n/30. The goods were shipped F.O.B. shipping point on July 7. Satoor, Inc. received the merchandise on July 10 and paid the amount due on July 15. When the buyer records the payment on July 15, its journal entry will a. reduce purchases by $15,000. b. increase inventory by $14,850. c. increase cash by $15,000. d. reduce accounts payable by $15,000. 142. Stallworth Corp. uses a periodic inventory system. The following information is available for the month of November: Nov.

1 5 16 30

On hand, 50 units at $15.00 each Purchased, 115 units at $15.10 each Purchased, 75 units at $15.20 each Total cost of goods available for sale On hand, 100 units

$ 750.00 $1,736.50 $1,140.00 $3,626.50

How many units did the company sell during November? a. 240 b. 140 c. 100 d. 50 143. Stallworth Corp. uses a periodic inventory system. The following information is available for the month of November: Nov.

1 5 16 30

On hand, 50 units at $15.00 each Purchased, 115 units at $15.10 each Purchased, 75 units at $15.20 each Total cost of goods available for sale On hand, 100 units

$ 750.00 $1,736.50 $1,140.00 $3,626.50

If the company uses the FIFO inventory costing method, the amount assigned to the November 30 inventory would be Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory a. $1,505.00. b. $1,517.50. c. $2,109.00. d. $2,121.50. 144. Stallworth Corp. uses a periodic inventory system. The following information is available for the month of November: Nov.

1 5 16 30

On hand, 50 units at $15.00 each Purchased, 115 units at $15.10 each Purchased, 75 units at $15.20 each Total cost of goods available for sale On hand, 100 units

$ 750.00 $1,736.50 $1,140.00 $3,626.50

If the company uses the LIFO inventory costing method, the cost of goods sold for November would be a. $1,505.00. b. $1,517.50. c. $2,109.00. d. $2,121.50. 145. Stallworth Corp. uses a periodic inventory system. The following information is available for the month of November: Nov.

1 5 16 30

On hand, 50 units at $15.00 each Purchased, 115 units at $15.10 each Purchased, 75 units at $15.20 each Total cost of goods available for sale On hand, 100 units

$ 750.00 $1,736.50 $1,140.00 $3,626.50

If the company uses the weighted average cost method, the cost assigned to each unit in ending inventory would be a. $15.00. b. $15.10. c. $15.11. d. $15.20. 146. Tedder uses a periodic inventory system. At the end of January, 20 units were on hand. The following additional information is available for the month of January: Jan.

1 20

Beginning inventory: 10 units at $2 each Purchased 90 units for $3 each Cost of goods available for sale

$ 20 $270 $290

Which of the following entries correctly records the purchase assuming the units were acquired on credit under terms of 2/10, n/30? a. Inventory 270.00 Cash 270.00 b. Inventory 270.00 Accounts Payable 270.00 c. Purchases 264.60 Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory Purchase Discounts 5.40 Accounts Payable 270.00 d. Purchases 270.00 Accounts Payable 270.00 147. Tedder uses a periodic inventory system. At the end of January, 20 units were on hand. The following additional information is available for the month of January: Jan.

1 20

Beginning inventory: 10 units at $2 each Purchased 90 units for $3 each Cost of goods available for sale

$ 20 $270 $290

company uses the FIFO inventory costing method, how much is the cost of goods sold for January? a. $230 b. $232 c. $240 d. $250 148. Tedder uses a periodic inventory system. At the end of January, 20 units were on hand. The following additional information is available for the month of January: Jan.

1 20

Beginning inventory: 10 units at $2 each Purchased 90 units for $3 each Cost of goods available for sale

$ 20 $270 $290

If the company uses the LIFO inventory costing method, how much is inventory on the balance sheet at the end of January? a. $40 b. $50 c. $58 d. $60 149. Tedder uses a periodic inventory system. At the end of January, 20 units were on hand. The following additional information is available for the month of January: Jan.

1 20

Beginning inventory: 10 units at $2 each Purchased 90 units for $3 each Cost of goods available for sale

$ 20 $270 $290

If the company uses the weighted average method of inventory costing, how much is the cost of goods sold for January? a. $230 b. $232 c. $240 d. $250

150. Touchton Company reported the following financial results for the previous year and the current year: Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory Sales Sales returns and allowances Net sales Cost of goods sold: Beginning inventory Net purchases Cost of goods available for sale Ending inventory Cost of goods sold Gross profit

Previous Year Current Year $500,000 $600,000 10,000 D 490,000 580,000 30,000 A 250,000 40,000 B C

E 340,000 380,000 30,000 F G

Provide the answer for each missing letter. 151. Selected data from the financial statements of Tarpley & Underwood are as follows: Net sales Cost of goods sold Selling, general, and administrative expenses Other operating expenses Income tax expense Beginning inventory Ending inventory Ending retained earnings

$170,000 136,000 63,000 600 3,000 13,000 11,000 39,000

First, determine the dollar amount of cost of goods purchased. Then, prepare a cost of goods sold schedule using the cost of goods sold model illustrated in the text.

152. The cost of goods sold for Uzzi Corp. totaled $750,000. Sales returns and purchase returns were $3,000 and $5,000, respectively. Purchases totaled $800,000. Purchase discounts totaled $7,000, while sales discounts totaled $9,000. Beginning inventory was $100,000. Determine the amount of ending inventory to be reported on the company's balance sheet. 153. Vaden Company uses the periodic inventory system. The following data are from the company's accounting records for the year ended December 31: Sales Sales discounts Purchases Purchase returns Beginning inventory Ending inventory Operating expenses Transportation-in Beginning retained earnings

$600,000 10,000 350,000 5,000 30,000 40,000 150,000 10,000 71,000

Calculate the company's cost of goods sold for the year. 154. The following partially completed income statement is for Waddy Corp. for the year ended December 31. Determine the missing amount for each letter. Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory Net sales Cost of goods sold: Beginning inventory Net purchases Cost of goods available for sale Ending inventory Cost of goods sold Gross profit Selling, general, and administrative expenses Operating income

A B 140,000 160,000 C 125,000 75,000 D 10,000

155. Ward Company had a beginning inventory of $40,000 on January 1. During the year, the company purchased $660,000 of goods from a supplier. On December 31, the cost of unsold inventory was $50,000. Compute Ward Company's cost of goods available for sale and the cost of goods sold for the year. 156. The following information is available for Yancey Company, a retail store, for the year ended December 31. The company uses a periodic inventory system. Beginning inventory was $32,000. During the year, Yancey Company purchased goods totaling $634,000 on account with terms of 2/10, n/30, F.O.B. shipping point. Yancey Company paid $1,000 in total freight charges directly to the freight company. At the end of the year, inventory on hand totaled $45,000. Net sales reported on the income statement for the year totaled $1,300,000. How much would Yancey Company pay its supplier if it paid for one-half of the goods acquired within the discount period and the other half after the expiration of the discount period? 157. The following information is available for Yancey Company, a retail store, for the year ended December 31. The company uses a periodic inventory system. Beginning inventory was $32,000. During the year, Yancey Company purchased goods totaling $634,000 on account with terms of 2/10, n/30, F.O.B. shipping point. Yancey Company paid $1,000 in total freight charges directly to the freight company. At the end of the year, inventory on hand totaled $45,000. Net sales reported on the income statement for the year totaled $1,300,000. How much is the cost of goods available for sale for the year ended December 31 assuming that Yancey Company takes advantage of one-half of the cash discounts? 158. The following information is available for Yancey Company, a retail store, for the year ended December 31. The company uses a periodic inventory system. Beginning inventory was $32,000. During the year, Yancey Company purchased goods totaling $634,000 on account with terms of 2/10, n/30, F.O.B. shipping point. Yancey Company paid $1,000 in total freight charges directly to the freight company. At the end of the year, inventory on hand totaled $45,000. Net sales reported on the income statement for the year totaled $1,300,000. How much is the cost of goods sold assuming that Yancey Company takes advantage of one-half of the cash discount? 159. On August 1, White Appliances purchased 75 refrigerators for $45,000 cash and also paid $1,500 transportation costs related to this purchase. On the same date, White purchased 100 dishwashers for $20,000 on credit; however, the seller paid the $1,200 freight. The credit terms for the dishwashers were 2/10, n/30. On August 3, White determined that five of the refrigerators were defective, so they were returned to the seller. White paid for the dishwashers on August 9. On August 10, White purchased 90 microwave ovens for $9,000 on credit with terms of 1/10, n/30. The seller paid the freight. White paid for the microwave ovens on August 21. Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory Prepare all of the company's journal entries for August assuming the use of a perpetual inventory system. 160. On August 1, White Appliances purchased 75 refrigerators for $45,000 cash and also paid $1,500 transportation costs related to this purchase. On the same date, White purchased 100 dishwashers for $20,000 on credit; however, the seller paid the $1,200 freight. The credit terms for the dishwashers were 2/10, n/30. On August 3, White determined that five of the refrigerators were defective, so they were returned to the seller. White paid for the dishwashers on August 9. On August 10, White purchased 90 microwave ovens for $9,000 on credit with terms of 1/10, n/30. The seller paid the freight. White paid for the microwave ovens on August 21. On August 12, White sold 10 dishwashers to customers for $550 each. White paid $200 each for these dishwashers when it purchased them from the supplier on August 1. On August 15, customers returned two of these dishwashers for a cash refund. Record the journal entries for this sale and sales return. 161. The following inventory transactions occurred at Zapata, Inc., which uses a perpetual inventory system: Oct. 2

Purchased 50 units of inventory from a supplier on credit. The goods cost $30 each and the credit terms were 2/10, n/15. The shipping costs were $100 under the terms F.O.B. destination. Returned 5 units of inventory to the supplier for credit on account. Sold 15 units for $50 each to customers for cash. Accepted a return of 1 unit of inventory from the customer for a cash refund. Paid the supplier for one-half of the inventory purchased on October 2. Paid the remaining balance owed to the supplier.

4 6 7 11 17

Record the appropriate journal entry for each of these transactions. 162. L.A. Sports Novelties has the following information related to purchases and sales of one of its popular products, autographed photographs of the local lacrosse star, Christian Chance. Each photograph is unique, so the inventory is accounted for under the specific identification method. Dec.

1 3 11 20 27 29

Beginning inventory, 4 units at $50 each Purchase, 6 units at $52 each Sale, 8 units for $77 each Purchase, 5 units for $54 each Purchase, 5 units for $55 each Sale, 8 units for $77 each

A review of purchase and sales information reveals that the following units remain in ending inventory at the end of the month: Description Beginning inventory Dec. 3 purchase Dec. 20 purchase Dec. 27 purchase Total

Units Sold 4 4 4 4 16

Units Remaining 0 2 1 1 4

Compute cost of goods sold and cost of ending inventory. 163. The following data are available for one of the products sold by Chancet Company, which uses a perpetual inventory Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory system: Apr.

1 On hand, 10 units at $8.00 each 5 Purchased 30 units at $7.80 each 18 Purchased 40 units at $8.25 each 20 Sold 75 units for $13.00 each 24 Purchased 20 units for $8.25 each Chancet Company's ending inventory for April was 25 units.

$ 80 234 330 165

Complete the following table by determining the amounts of April 30 inventory, cost of goods sold, and gross margin under each of the inventory costing methods. Ending Inventory

Cost of Goods Sold

Gross Margin

A) FIFO B) LIFO C) Moving average cost 164. The following data are available for one of the products sold by Paschal Exports, which uses a perpetual inventory system: July

1 5 10 15 25 31

Beginning inventory, 1,000 units at $2.00 each $2,000 Purchased 2,000 units at $2.75 each 5,500 Sold 2,500 units for $16.00 each Purchased 2,000 units at $4.00 each 8,000 Sold 1,500 units for $12.00 each Ending inventory, 1,000 units

If the LIFO method of inventory costing is used, determine the following amounts: A) Cost of goods sold for the units sold on July 10 B) Ending inventory on July 31 165. The following data are available for one of the products sold by Paschal Exports, which uses a perpetual inventory system: July

1 5 10 15 25 31

If the FIFO method of inventory costing is used, determine the following amounts: A) Cost of goods sold for the units sold on July 10 B) Ending inventory on July 31 166. The following data are available for one of the products sold by Paschal Exports, which uses a perpetual inventory system: July

1 5

Beginning inventory, 1,000 units at $2.00 each $2,000 Purchased 2,000 units at $2.75 each 5,500

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Ch 06 Cost of Goods Sold and Inventory 10 15 25 31

Sold 2,500 units for $16.00 each Purchased 2,000 units at $4.00 each Sold 1,500 units for $12.00 each Ending inventory, 1,000 units

8,000

If the moving average cost method of inventory costing is used, determine the following amounts: A) Cost of goods sold for the units sold on July 10 B) Ending inventory on July 31 167. The following data are available for one of the products sold by Robey Company, which uses a perpetual inventory system: February

1 8 14 25

On hand, 10 units at $2 each Sold, 6 units for $10 each Purchased, 30 units at $3 each Sold, 24 units for $10 each

If the company uses the FIFO method, determine the following amounts: A) Ending inventory on February 28 B) Cost of goods sold for the month of February 168. The following data are available for one of the products sold by Robey Company, which uses a perpetual inventory system: Feb.

1 8 14 25

On hand, 10 units at $2 each Sold, 6 units for $10 each Purchased, 30 units at $3 each Sold, 24 units for $10 each

If the LIFO method is used, determine the following amounts: A) Ending inventory on February 28 B) Cost of goods sold for the month of February 169. The following data are available for one of the products sold by Robey Company, which uses a perpetual inventory system: Feb.

1 8 14 25

On hand, 10 units at $2 each Sold, 6 units for $10 each Purchased, 30 units at $3 each Sold, 24 units for $10 each

If the moving average cost method is used, determine the following amounts: A) Cost of goods sold for the month of February B) Ending inventory on February 28 170. Realco Company prepared the following analysis of its year-end inventory on June 30:

Product A Powered by Cognero

Quantity 17

Historical Cost Net Realizable Value per Unit per Unit $430 $499 Page 32

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Ch 06 Cost of Goods Sold and Inventory B C

140 38

325 75

299 69

Determine the lower of cost or net realizable value for each product in Realco Company's inventory and prepare the journal entry needed at year-end to value the inventory at LCNRV. 171. The following information is available for Porter Company for its current fiscal year-end: Net sales Cost of goods sold Inventory, previous year-end Inventory, current year-end

$745,400 614,320 80,690 81,440

Compute the following financial ratios for Porter Company: A) Gross profit ratio B) Inventory turnover ratio C) Average days to sell inventory 172. Selected data from the financial statements of Tarpley & Underwood are as follows: Net sales Cost of goods sold Selling, general, and administrative expenses Other operating expenses Income tax expense Beginning inventory Ending inventory Ending retained earnings

$170,000 136,000 63,000 600 3,000 13,000 11,000 39,000

What is the gross profit ratio? 173. Xu, Inc. reported the following information for the previous and current years: Previous Year Current Year Sales $890,000 $850,000 Sales discounts 23,000 15,000 Purchases 600,000 500,000 Ending inventory 40,000 50,000 Transportation-in 19,000 10,000 Purchase discounts 5,000 5,000 Determine the following amounts for Xu, Inc. for the current year: A) Net cost of inventory purchases B) Cost of goods available for sale C) Cost of goods sold D) Net sales E) Gross profit ratio F) Inventory turnover ratio G) Average days to sell inventory 174. Roesel Fashions completed a physical inventory at the end of the current year. A review of the physical inventory procedures and records uncovered several errors. In the columns of the following table, indicate the effect of the errors, if any, on the four financial statement items listed. Use the following codes for your answers: Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory O = Overstatement; U = Understatement; NE = No Effect Ending Retained Error Inventory Earnings One batch of goods was A) counted twice One page of items was misplaced when the B) inventory was calculated Goods sold F.O.B. shipping point were C) included in Roesel's inventory Goods in transit from a supplier, shipped F.O.B. D) shipping point, were not included in Roesel's inventory

Cost of Goods Sold

Net Income

175. On September 1, Serrano Company purchased 70 units of Product A for $35,000 cash and also paid $1,500 transportation costs related to this purchase. On the same date, Serrano Company purchased 100 units of Product B for $10,000 on credit; however, the seller paid the $1,200 freight. The credit terms for Product B were 2/10, n/30. On September 3, Serrano Company determined that five units of Product A were defective, so they were returned to the seller. Serrano Company paid for its purchase of Product B on September 9. On September 10, Serrano Company purchased 90 units of Product C for $8,000 on credit with terms of 1/10, n/30. The seller paid the freight. Serrano Company paid for its purchase of Product C on September 21. Prepare all of Serrano Company's journal entries for September assuming the company uses a periodic inventory system. 176. On September 1, Serrano Company purchased 70 units of Product A for $35,000 cash and also paid $1,500 transportation costs related to this purchase. On the same date, Serrano Company purchased 100 units of Product B for $10,000 on credit; however, the seller paid the $1,200 freight. The credit terms for Product B were 2/10, n/30. On September 3, Serrano Company determined that five units of Product A were defective, so they were returned to the seller. Serrano Company paid for its purchase of Product B on September 9. On September 10, Serrano Company purchased 90 units of Product C for $8,000 on credit with terms of 1/10, n/30. The seller paid the freight. Serrano Company paid for its purchase of Product C on September 21. Record the journal entries for this sale and sales return assuming the company uses a periodic inventory system. 177. The following data are available for one item of merchandise sold by Jocque Fabrics, which uses a periodic inventory system: Feb.

1 8 14 25

On hand, 100 units at $12 each Sold, 60 units for $30 each Purchased, 30 units at $13 each Sold, 24 units for $30 each

If the company uses the FIFO method, determine the following amounts: A) Ending inventory on February 28 B) Cost of goods sold for the month of February C) Gross margin for February Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory 178. The following data are available for one item of merchandise sold by Jocque Fabrics, which uses a periodic inventory system: Feb.

1 8 14 25

On hand, 100 units at $12 each Sold, 60 units for $30 each Purchased, 30 units at $13 each Sold, 24 units for $30 each

If the LIFO method is used, determine the following amounts: A) Ending inventory on February 28 B) Cost of goods sold for the month of February C) Gross margin for February 179. The following data are available for one item of merchandise sold by Jocque Fabrics, which uses a periodic inventory system: Feb.

1 8 14 25

On hand, 100 units at $12 each Sold, 60 units for $30 each Purchased, 30 units at $13 each Sold, 24 units for $30 each

If the average cost method is used, determine the following amounts: A) Ending inventory on February 28 B) Cost of goods sold for the month of February C) Gross margin for February 180. Zellenger uses a periodic inventory system and had the following data for inventory during the most recent year: Cost Date Units per Unit January 1 Beginning inventory 400 $7.00 January 22 Purchase 1,200 7.15 March 14 Purchase 1,100 7.20 May 24 Purchase 1,000 7.30 October 2 Purchase 1,800 7.35 Various Sales 4,300 December 31 Ending inventory 1,200 Calculate the company's ending inventory and cost of goods sold under the following inventory cost flow methods: A) FIFO B) LIFO C) Average cost

181. Describe how the inventories of manufacturers differ from the inventories of retailers. 182. Several sales transactions and purchasing activities for Yu Company follow. Yu Company uses a perpetual inventory system. A)

Yu Company purchased merchandise from Mia Company on credit.

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Ch 06 Cost of Goods Sold and Inventory B)

Yu Company returned to Mia Company defective merchandise before payment is made.

Yu Company pays for the merchandise purchased from Mia Company.

Yu Company sells merchandise to its customers for cash and on credit.

Credit customers returned merchandise to Yu Company for a refund.

Credit customers pay their account balances to Yu Company.

Explain the advantages to Yu Company for using the perpetual inventory system. Assume that Yu Company uses a computer system that is linked to its cash registers and that all products have bar codes that are read by bar code readers attached to the cash registers. 183. Explain the relationship between the valuation of inventory and income measurement as it relates to the balance sheet and income statement. 184. You are the Orlando store manager for Kruge Enterprises. When you came in this morning, you found the front door ajar. Once security arrived and you eventually got inside, you discovered that most of your inventory had been stolen. In order to file a claim with your insurance company, you need to estimate the amount of inventory you had yesterday at closing time. Unfortunately, Kruge Enterprises uses a periodic inventory system. How can you estimate your lost inventory amount? 185. Distinguish between the terms freight-in and freight-out. 186. Several sales transactions and purchasing activities for Yu Company follow. Yu Company uses a perpetual inventory system. A)

Yu Company purchased merchandise from Mia Company on credit.

Yu Company returned to Mia Company defective merchandise before payment is made.

Yu Company pays for the merchandise purchased from Mia Company.

Yu Company sells merchandise to its customers for cash and on credit.

Credit customers returned merchandise to Yu Company for a refund.

Credit customers pay their account balances to Yu Company.

For each of the given items, describe its economic effects on the company's accounting equation. 187. Buyer Company purchased a large shipment of luggage from Seller Company on credit near the end of its accounting period. Seller Company shipped the luggage in January and Buyer Company received the luggage in February. Assume that Buyer Company's accounting period ends on January 31, while Seller Company's accounting period ends on May 31. Answer each independent question. A)

If the luggage was shipped F.O.B. destination, who will pay the freight costs?

If the luggage was shipped F.O.B. destination, when should Buyer Company record the purchase?

If the luggage was shipped F.O.B. shipping point, who will pay the freight costs?

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Ch 06 Cost of Goods Sold and Inventory D)

If the luggage was shipped F.O.B. shipping point, when should Buyer Company record the purchase?

Under what shipping terms would Buyer Company include the luggage as part of inventory on its January 31 balance sheet?

188. The following information is from the balance sheets of Kayla Enterprises, and all amounts have been rounded to millions of dollars:

Raw materials Work-in-process Finished goods Inventories at FIFO Adjustment to LIFO Answer the following questions:

May 31, Current Year $ 25.8 44.8 1,132.70 1,203.30 5.6

May 31, Previous Year $ 52.1 34.7 1,303.8 1,390.6 21.9

Describe what costs are included in each of the three types of inventories listed for Kayla Enterprises.

Even though a footnote describing the inventory costing method(s) used by the company is not provided here, what can you conclude about the inventory costing methods(s) used by the company?

Explain what the amount "Adjustment to LIFO" represents. What effect does this adjustment have on the company's net earnings in the previous and current years?

189. What is a LIFO liquidation? Why is it important to disclose the effects of a LIFO inventory liquidation? 190. If a company overstates its ending inventory for the current year, what are the effects on assets, cost of goods sold, income before taxes, and retained earnings for the current year? 191. You are the inventory accounting manager at XB Tools. Your company is considering the purchase of software that would allow the company to switch from the periodic inventory system to a perpetual system. Prepare a compare and contrast table to summarize the similarities and differences between the two systems. (Use the following table that has been started for you.) a. b. c. d. e. f.

Characteristic/System Entry to record credit purchases How purchase discounts are recorded Entry to record sale Entry to record cost of goods sold Up-to-date inventory balance? Physical inventory required?

Perpetual System

Periodic System

192. Differentiate between the record keeping required for sales and cost of goods sold under a perpetual versus a periodic inventory system. Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory Answer Key 1. True 2. True 3. False 4. True 5. True 6. True 7. False 8. False 9. False 10. False 11. True 12. True 13. True 14. False 15. False 16. False 17. True 18. True 19. False 20. True 21. True 22. False 23. True 24. True 25. False Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory 26. True 27. False 28. False 29. True 30. False 31. d 32. b 33. a 34. c 35. c 36. c 37. b 38. c 39. d 40. c 41. d 42. a 43. a 44. c 45. d 46. b 47. d 48. a 49. a 50. c 51. a Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory 52. b 53. b 54. a 55. d 56. c 57. d 58. c 59. b 60. c 61. a 62. c 63. c 64. a 65. a 66. c 67. d 68. b 69. b 70. b 71. a 72. a 73. b 74. d 75. a 76. b Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory 77. a 78. d 79. c 80. a 81. a 82. b 83. d 84. d 85. d 86. c 87. a 88. b 89. d 90. b 91. c 92. a 93. b 94. b 95. c 96. c 97. d 98. b 99. c 100. d 101. a 102. c Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory 103. b 104. b 105. b 106. d 107. b 108. c 109. d 110. d 111. b 112. c 113. d 114. d 115. b 116. b 117. a 118. b 119. a 120. d 121. b 122. c 123. d 124. a 125. c 126. a 127. d Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory 128. c 129. d 130. a 131. c 132. d 133. d 134. b 135. b 136. d 137. b 138. b 139. c 140. b 141. d 142. b 143. b 144. d 145. c 146. d 147. a 148. b 149. b 150. A)

$250,000 − $30,000 = $220,000

$250,000 − $40,000 = $210,000

$490,000 − $210,000 = $280,000

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Ch 06 Cost of Goods Sold and Inventory D)

$600,000 − $580,000 = $20,000

$380,000 − $340,000 = $40,000

$380,000 − $30,000 = $350,000

$580,000 − $350,000 = $230,000

151. Cost of purchases: $136,000 Cost of Goods Sold + $11,000 Ending Inventory – $13,000 Beginning Inventory = $134,000 Cost of Goods Purchased Cost of goods sold schedule: Beginning inventory $ 13,000 Add: Cost of purchases 134,000 Goods available for sale $ 147,000 Less: Ending inventory (11,000) Cost of goods sold $136,000 152. $100,000 Beginning Inventory + $800,000 Purchases – $5,000 Purchase Returns – $7,000 Purchase Discounts – $750,000 Cost of Goods Sold = $138,000 153. $30,000 Beginning Inventory + $350,000 Purchases – $5,000 Purchase Returns + $10,000 Transportation-In – $40,000 Ending Inventory = $345,000 154. A)

$125,000 Cost of Goods Sold + $75,000 Gross Profit = $200,000

$160,000 Cost of Goods Available for Sale − $140,000 Net Purchases = $20,000

$160,000 Cost of Goods Available for Sale − $125,000 Cost of Goods Sold = $35,000

$75,000 Gross Profit − $10,000 Operating Income = $65,000

155. $40,000 Beginning Inventory + $660,000 Purchases = $700,000 Cost of Goods Available for Sale $700,000 Cost of Goods Available for Sale – $50,000 Ending Inventory = $650,000 Cost of Goods Sold 156. Payment within discount period: Payment after discount period: Total purchases:

$634,000 × 1/2 × 98% = $310,660 $634,000 × 1/2 = $317,000 $310,660 + $317,000 = $627,660

157. Payment within discount period: $634,000 × 1/2 × 98% = $310,660 Payment after discount period: $634,000 × 1/2 = $317,000 Total purchases: $310,660 + $317,000 = $627,660 $32,000 Beginning Inventory + $627,660 Purchases + $1,000 Transportation-In = $660,660

158. Payment within discount period: Powered by Cognero

$634,000 × 1/2 × 98% = $310,660 Page 44

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Ch 06 Cost of Goods Sold and Inventory Payment after discount period: $634,000 × 1/2 = $317,000 Total purchases: $310,660 + $317,000 = $627,660 $32,000 Beginning Inventory + $627,660 Purchases + $1,000 Transportation-In = $660,660 $660,660 Cost of Goods Available for Sale – $45,000 Ending Inventory = $615,660 159. Date Aug. 1

Account and Explanation Merchandise Inventory

Debit 45,000 Cash (Purchased inventory for cash)

Aug. 1

45,000

Merchandise Inventory

1,500 Cash (Recorded payment of freight costs)

Aug. 1

1,500

Merchandise Inventory

20,000 Accounts Payable (Purchased inventory on credit)

August 3

20,000

Cash

3,000 Merchandise Inventory (Returned defective goods for cash refund)

Aug. 9

Aug. 10

Accounts Payable

20,000 Cash Merchandise Inventory (Paid for goods within discount period)

Merchandise Inventory

160. Date Aug. 12

Accounts Payable

Account and Explanation Cash

9,000

Debit 5,500

Credit

Sales Revenue (Recorded sale of goods to customer)

5,500

2,000 Merchandise inventory (Recorded the cost of goods sold)

Sales Revenue

2,000

1,100 Cash (Recorded the return of goods)

Merchandise Inventory

1,100 400

Cost of Goods Sold Powered by Cognero

19,600 400

9,000

9,000 Cash (Paid for goods—not within discount period)

Cost of Goods Sold

Aug. 15

3,000

9,000 Accounts Payable (Purchased inventory on credit)

Aug. 21

Credit

400 Page 45

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Ch 06 Cost of Goods Sold and Inventory (Recorded cost of goods returned)

161. Date Oct. 2

Account and Explanation Merchandise Inventory

Debit 1,500 Accounts Payable (Purchased inventory on credit)

Oct. 4

Oct. 6

Accounts Payable

1,500

150 Merchandise Inventory (Returned merchandise for credit on account)

Cash

Cost of Goods Sold

750 450

Merchandise Inventory (Recorded cost of goods sold) Sales Revenue

450 50

Cash (Recorded sales return from customer for cash) Merchandise Inventory

30 Cost of Goods Sold (Recorded cost of goods returned)

Oct. 11

Oct. 17

150

750 Sales Revenue (Recorded cash sales to customers)

Oct. 7

Credit

Accounts Payable

675 Cash Merchandise inventory (Paid for one-half of purchase, net of return, within discount period) 675 Cash (Paid for remaining purchase, net of return, not within discount period)

661.50 13.50

675

162. Cost of goods sold: (4 × $50) + (4 × $52) + (4 × $54) + (4 × $55) = $844 Cost of ending inventory: (2 × $52) + (1 × $54) + (1 × $55) = $213 163. A)

FIFO

Ending Inventory (20 × $8.25) + (5 × $8.25)

Cost of Goods Sold (10 × $8.00) + (30 × $7.80) + (35 × $8.25)

Gross Margin (75 × $13.00) − $602.75 = $372.25 Page 46

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Ch 06 Cost of Goods Sold and Inventory = $206.25 B)

LIFO

(5 × $8.00) + (20 × $8.25) = $205

Moving average cost

[($644/80) × 5] + $165 = $205.25

= $602.75 (40 × $8.25) + (30 × $7.80) + (5 × $8.00) = $604

(75 × $13.00) − $604 = $371

($644/80.00) × 75 = $603.75

(75 × $13.00) − $603.75 = $371.25

164. A) (2,000 × $2.75) + (500 × $2.00) = $6,500 B) (500 × $2.00) + (500 × $4.00) = $3,000 165. A) (1,000 × $2.00) + (1,500 × $2.75) = $6,125 B) 1,000 × $4.00 = $4,000 166. A) B)

2,500 × ($7,500 ÷ 3,000) = $6,250 Ending inventory on July 10: ($7,500 ÷ 3,000) × (3,000 − 2,500) = $1,250, or 500 units at $2.50 each Ending inventory on July 31: {[(500 × $2.50) + (2,000 × $4.00)] ÷ 2,500} × 1,000 = $3,700

167. A)

10 units × $3 = $30

(6 × $2) + [(4 × $2) + (20 × $3)] = $80

168. A)

(4 × $2) + (6 × $3) = $26

(6 × $2) + (24 × $3) = $84

169. A)

(6 × $2) + ({[(4 × $2) + (30 × $3)] ÷ 34} × 24) = $81.18

[10 × ($98 ÷ 34)] = $28.82* *Possible difference due to rounding

170. Extended Extended Historical Cost Net Realizable Value $430 × 17 = $7,310 $499 × 17 = $8,483 $325 × 140 = 45,500 $299 × 140 = 41,860 $75 × 38 = 2,850 $69 × 38 = 2,622 $55,660

Product A B C Totals Date

Account and Explanation

LCM $7,310 41,860 2,622 $51,792 Debit

Adjustment Needed

$3,868 Credit Page 47

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Ch 06 Cost of Goods Sold and Inventory June 30

Cost of Goods Sold Merchandise Inventory This entry reduces inventory to its NRV and increases cost of goods sold in the period the selling price of the item declined.

171. A)

($745,400 − $614,320) ÷ $745,400 = 0.1759, or 17.59%

$614,320 ÷ [($80,690 + $81,440) ÷ 2] = 7.578 times

365 ÷ 7.578 = 48.166 days

3,868 3,868

172. ($170,000 – $136,000) ÷ $170,000 = 20% 173. A)

$500,000 Purchases − $5,000 Purchase Discounts + $10,000 Transportation-In = $505,000

$40,000 beginning inventory + $505,000 net cost of purchases = $545,000

$545,000 Cost of Goods Available for Sale − $50,000 Ending Inventory = $495,000

$850,000 Sales − $15,000 Sales Discounts = $835,000

($835,000 Net Sales − $495,000 Cost of Goods Sold) ÷ $835,000 = 40.72%

$495,000 Cost of Goods Sold ÷ [($40,000 Beginning Inventory + $50,000 Ending Inventory) ÷ 2] = 11 times

365 ÷ 11 = 33.18 days

174.

Error One batch of goods was counted twice One page of items was misplaced when the inventory was calculated Goods sold F.O.B. shipping point were included in Roesel's inventory Goods in transit from a supplier, shipped F.O.B. shipping point, were not included in Roesel's

Ending Inventory

Retained Earnings

Cost of Goods Sold

Net Income

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Ch 06 Cost of Goods Sold and Inventory inventory 175. Date Sept. 1

Account and Explanation Purchases

Debit 35,000 Cash (Purchased inventory for cash)

Sept. 1

Transportation-In

35,000 1,500

Cash (Recorded payment of freight costs) Sept. 1

Purchases

1,500 10,000

Accounts Payable (Purchased inventory on credit) Sept. 3

Cash

Sept. 9

Accounts Payable

Sept. 10

10,000

2,500 Purchase Returns and Allowances (Returned defective goods for cash refund)

2,500

10,000 Cash Purchase Discounts (Paid for goods within discount period)

9,800 200

Purchases

8,000 Accounts Payable (Purchased inventory on credit)

Sept. 21

176. Date Sept. 12

Sept. 15

Accounts Payable

Credit

Sales Revenue (Recorded sale of goods to customer)

1,800

360 Cash (Recorded the return of goods)

(60 + 24) × $12 = $1,008

[(60 + 24) × $30] − $1,008 = $1,512

8,000

Debit 1,800

Sales Revenue

[(100 − 84) × $12] + (30 × $13) = $582

8,000

8,000 Cash (Paid for goods—not within discount period)

Account and Explanation Cash

177. A)

Credit

360

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Ch 06 Cost of Goods Sold and Inventory

178. A)

(130 − 84) × $12 = $552

(30 × $13) + (54 × $12) = $1,038

[(60 + 24) × $30] − $1,038 = $1,482

179. A)

[($1,200 + $390) ÷ (100 + 30)] × 46 = $562.62

[($1,200 + $390) ÷ (100 + 30)] × 84 = $1,027.38

[(60 + 24) × $30] − $1,027.38 = $1,492.62

180. Date January 1 January 22 March 14 May 24 October 2 Various December 31

Beginning inventory Purchase Purchase Purchase Purchase Sales Ending inventory

Units 400 1,200 1,100 1,000 1,800 4,300 1,200

Cost per Unit $7.00 7.15 7.20 7.30 7.35

Extension $2,800 8,580 7,920 7,300 13,230

$39,830 A)

FIFO ending inventory: 1,200 × $7.35 = $8,820 FIFO cost of goods sold: $2,800 + $8,580 + $7,920 + $7,300 + (600 × $7.35) = $31,010

LIFO ending inventory: $2,800 + (800 × $7.15) = $8,520 LIFO cost of goods sold: $13,230 + $7,300 + $7,920 + (400 × $7.15) = $31,310

Average cost: $39,830 ÷ 5,500 units = $7.242 Average cost ending inventory: 1,200 × $7.242 = $8,690.40* Average cost of goods sold: 4,300 × $7.242 = $31,140.60* *Possible difference due to rounding Could use $7.24218 or $7.24

181. Manufacturers have to produce the products they sell, whereas retailers purchase products that are ready to sell (i.e., the retailers purchase finished goods from manufacturers). Inventories of manufacturers, therefore, will consist of raw materials, work-in-process, and finished goods. 182. If Yu Company uses a perpetual system, it will have better control of its inventory. Losses due to theft, shrinkage, etc., can be identified at the end of the accounting period when a physical inventory count is taken. Also, information will be available on inventory balances and cost of goods sold for interim financial statements. These items must be estimated under a periodic system. The perpetual system would also allow Yu Company to determine which items sell well and to Powered by Cognero

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Ch 06 Cost of Goods Sold and Inventory keep sufficient quantities on hand to meet customer demands. When the perpetual inventory system is linked to the computer, the cost of maintaining a perpetual inventory can be decreased and the efficiency of the system can be improved. Yu Company will have information that is more current and will obtain that information more quickly with the computer system. 183. Cost or other values must be assigned to merchandise that makes up a company's inventory. As the merchandise is sold, these costs are assigned to cost of goods sold (expense). Since expenses are deducted from revenues to determine the net income or net loss for the period, inventory valuation affects the amount of income or loss measured. 184. One way to estimate the company's lost inventory is to use its historical gross profit percentage. You can subtract that percentage from 100% to find the cost of goods sold percentage. For example, if the company's gross profit percentage has historically averaged 40%, then the CGS percentage would be 60%. Multiplying the CGS % by sales during the period will estimate the company's cost of goods sold to date. You can then use the cost of goods sold model to estimate the ending inventory. Ending Inventory = Beginning Inventory + Net Purchases – CGS 185. Under F.O.B. shipping point terms, the buyer normally pays the transportation costs, commonly termed freight-in. Under F.O.B. destination shipping terms, the seller is usually responsible for paying the transportation costs, commonly termed freight-out. 186. A)

Assets and liabilities increase.

Assets and liabilities decrease.

Assets and stockholders' equity increase. In addition, assets and stockholders' equity decrease (through an increase in expenses).

Assets and stockholders' equity decrease. In addition, assets and stockholders' equity increase (through a decrease in expenses).

Assets increase and decrease by the same amount.

187. A)

If the luggage was shipped F.O.B. destination by Seller Company, Seller Company will pay the freight charges.

If the luggage was shipped F.O.B. destination, Buyer Company should record the purchase when the luggage is received (in February). Title passes when the goods are received.

If the luggage was shipped F.O.B. shipping point, the freight charges will be paid by Buyer Company.

If the luggage was shipped F.O.B. shipping point, Buyer Company should record the purchase when the luggage is shipped (in January). Title passes when the goods are shipped.

Buyer Company will include the cost of the luggage in its January 31 balance sheet only if title to the luggage has been passed from Seller Company to Buyer Company. This occurs if the items are sent F.O.B. shipping point.

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Ch 06 Cost of Goods Sold and Inventory

188.

Raw materials consist of materials and supplies that have not yet been placed into process to produce the company's products. Work-in-process includes materials and supplies and direct labor and other costs for products started but not completed during the period. Finished goods include costs to produce products that were completed but not sold during the period.

Kayla Enterprises must be using the LIFO inventory method for at least some, if not all, of its inventories because the company has disclosed the amount of the adjustment that converts its inventories at FIFO to LIFO. There is a significant difference in the "Adjustment to LIFO" in the inventories for the current year from the previous year.

The "Adjustment to LIFO" of inventories is the amount by which current replacement cost of inventories exceeds the actual cost assigned to inventory under the LIFO method. Through the use of the LIFO method, Kayla Enterprises has been able to assign recent, higher costs to the cost of products sold and retain older, lower costs in its asset balances for inventories. Thus, Kayla Enterprises has reported lower amounts for net income than it would if the FIFO method had been used.

189. A LIFO liquidation means that some of the inventory items included in inventory under the LIFO method have been sold; that is, the company sold more units of merchandise than it purchased during the year. If the units sold in the LIFO liquidation had been carried in inventory at older, lower prices, these lower prices will have been assigned to cost of goods sold. Thus, income will be higher than it would have been if the company had purchased enough units at current prices to maintain its inventory at the lower prices. If the effects of this unexpected LIFO liquidation are material, the information may be relevant to some of the users of the financial statements. 190. An overstatement of ending inventory for the current period results in an understatement of cost of goods sold and an overstatement of income before taxes for the same period. Cost of goods sold is understated because the overstated ending inventory figure is deducted from the cost of goods available for sale to determine cost of goods sold. Thus, a larger portion of the cost of goods available for sale is assigned to inventory and a smaller portion is assigned to cost of goods sold than should be. The overstated inventory figure also overstates the amount reported as an asset on the balance sheet. The overstatement of income results in an overstatement of retained earnings when net income is transferred to retained earnings through a closing entry. 191. a. b. c. d. e. f.

Characteristic/System Entry to record credit purchases How purchase discounts are recorded

Perpetual System Inventory XXX A/P XXX Subtracted from inventory account Cash XXX Entry to record sale Sales XXX Entry to record cost of goods CGS XXX sold Inventory XXX Up-to-date inventory Yes balance? Physical inventory required? Yes

Periodic System Purchases XXX A/P XXX Recorded in purchase discounts contra-account Cash XXX Sales XXX No entry is made. No Yes Page 52

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Ch 06 Cost of Goods Sold and Inventory 192. Under both inventory systems, an entry is made to credit Sales when a sale occurs. Both inventory systems will record the sales revenue; however, only under the perpetual system is a second entry required. The second entry debits Cost of Goods Sold and credits the perpetual inventory. Under the periodic system, the cost of goods sold and changes in the inventory account are determined only at the end of the period by applying the cost of goods sold model.

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Ch 07 Operating Assets

Indicate whether the statement is true or false. 1. When making lending decisions, lenders generally are not interested in the company's operating assets. a. True b. False 2. Property, plant, and equipment are tangible assets. a. True b. False 3. Acquisition cost includes all the costs that are normal and necessary to acquire and maintain a plant asset over its useful life. a. True b. False 4. When a plant asset is purchased, the relevant plant asset account is debited for the fair market value of the asset at the time of acquisition. a. True b. False 5. If new equipment purchased during the year is reported on the balance sheet at December 31 as a long-term asset, there will be no related item on the income statement for the year ended December 31. a. True b. False 6. On the balance sheet, a company reports plant assets by subtracting residual value from the original cost of the plant asset. a. True b. False 7. If a company uses the same depreciation method as other firms in the same industry, investors will have enhanced comparability of the financial reporting results. a. True b. False 8. If a company is concerned about minimizing its income tax burden, it would use the straight-line depreciation method to accomplish this objective. a. True b. False 9. Double-declining-balance depreciation is most commonly used by businesses for financial reporting purposes. a. True b. False 10. When plant assets are reported, the current period's depreciation expense is shown as a deduction from the original cost on the balance sheet. a. True Powered by Cognero

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Ch 07 Operating Assets b. False 11. Depreciation has an effect on the company's income taxes. a. True b. False 12. One reason management may choose the straight-line method of depreciation is because it is easy to compute. a. True b. False 13. The FASB allows companies to use different depreciation methods so they can capture the declining service potential of an operating asset. a. True b. False 14. Costs incurred to keep plant assets in normal operating condition are called revenue expenditures. a. True b. False 15. Costs incurred related to plant assets that are already in use are called revenue expenditures if the cost increases the useful life or the asset's productivity. a. True b. False 16. An expenditure that does not increase the future economic benefits of the asset is referred to as a capital expenditure. a. True b. False 17. A company determined that it had incorrectly estimated the useful life of the equipment it had purchased 2 years ago. It must now depreciate the asset's remaining book value over the current and future accounting periods. a. True b. False 18. To revise depreciation expense, the accountant should compute depreciation expense using the asset's remaining book value, revised useful life, and new residual value. a. True b. False 19. The more efficiently a company uses its fixed assets, the lower the fixed asset turnover ratio will be. a. True b. False 20. The reason that some major intangible assets are not in the financial statements is because they cannot be accurately measured. a. True b. False Powered by Cognero

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Ch 07 Operating Assets 21. All intangible assets are subject to amortization. a. True b. False 22. Research and development costs should be added to the cost of patents. a. True b. False 23. Natural resources can be replaced or restored only by an act of nature. a. True b. False 24. An impairment is a temporary decline in the future benefit or service potential of an asset. a. True b. False

Indicate the answer choice that best completes the statement or answers the question. 25. Which of the following statements is true concerning operating assets? a. Operating assets have no physical properties. b. A company's operating assets are important to its short-term liquidity. c. Operating assets are used over two or more periods to generate revenues. d. All operating assets are reported on the income statement. 26. Land is not depreciated because it a. appreciates in value. b. has a high possibility of fluctuations in value. c. has a useful life that is limited to the period of time a company is in business d. will provide future benefits for a company for an unlimited period of time. 27. Salcom Inc. is in the process of establishing its publishing business. It incurred costs on land and land improvements. Salcom would a. provide depreciation on land improvements but no depreciation on land. b. report land as an asset and expense the cost of land improvements in the year the cost was incurred. c. classify land as a tangible asset and land improvements as an intangible asset. d. depreciate land on a straight-line basis and land improvements using an accelerated depreciation method. 28. Fitness Depot purchased a building on a tract of land and allocated the entire cost of the purchase to the building. Normally, the company depreciates buildings over 40 years using the straight-line method with zero residual value and does not depreciate land. Because of the improper accounting treatment of the purchase, the company's income for the next 20 years a. will be overstated. b. will be understated. c. will be unaffected. d. cannot be determined from this limited information. Powered by Cognero

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Ch 07 Operating Assets 29. A company purchased land and incurred the following costs: Purchase price Excavation costs Razing old building Broker fees Cost of a parking lot

$500,000 50,000 12,500 10,000 25,000

What is the cost of the land? a. $550,000 b. $597,500 c. $572,500 d. $562,500 30. Fresh n' Fit Cuisine purchased land and a building for $320,000 so that it could open a new restaurant. The building's fair market value at the time of purchase was $220,000. In addition, the following costs were incurred prior to the restaurant's opening: Property transfer taxes Interest incurred on the mortgage loan taken out to make the purchase Attorney and real estate agent's fees Repaving the parking lot How much will be recorded as land improvements? a. $25,000 b. $6,000 c. $106,000 d. $125,000

$10,000 4,000 15,000 6,000

31. The following costs were incurred to acquire and prepare land for a new business: purchase price of land, $900,000; cost to clear the land, $40,000; cost of fencing, $35,000; and cost of making the parking lot, $20,000. How much should be recorded in the land improvements account? a. $95,000 b. $35,000 c. $55,000 d. $40,000 32. Which of the following accounts would not be reported in the property, plant, and equipment section of a balance sheet? a. Accumulated Depreciation—Buildings b. Buildings c. Depreciation Expense—Buildings d. Land 33. A company purchased a building for $900,000 on January 1. The building is being depreciated over 40 years with an estimated residual value of $100,000. Using the straight-line method, what will be the book value of the building in 10 years (assuming a December 31 year-end)? a. $575,000 b. $600,000 Powered by Cognero

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Ch 07 Operating Assets c. $675,000 d. $700,000 34. Fabian Woodworks purchased a truck for $12,000. The truck has an estimated residual value of $2,000 and an estimated life of 5 years, or 100,000 hours of operation. The truck was purchased on January 1, Year 1, and was used for 27,000 hours in Year 1. The truck was used for 26,000 hours in Year 2. Based on the given information, what method of depreciation will maximize depreciation expense in Year 1? a. straight-line method b. double-declining-balance method c. units-of-production method d. All methods produce the same expense in Year 1. 35. Fabian Woodworks purchased a truck for $12,000. The truck has an estimated residual value of $2,000 and an estimated life of 5 years, or 100,000 hours of operation. The truck was purchased on January 1, Year 1, and was used for 27,000 hours in Year 1 and for 26,000 hours in Year 2. What method of depreciation will maximize depreciation expense in Year 2? a. straight-line method b. double-declining-balance method c. units-of-production method d. methods produce the same expense in Year 2. 36. Floors 4 U uses straight-line depreciation for its equipment. The company purchased equipment for $250,000 and estimated its useful life at 8 years. The bookkeeper failed to consider the residual value of $25,000. What is the impact on net income and operating income of failing to consider the residual value? a. Net income will be overstated, while operating income will be understated. b. Net income will be understated, while operating income will be overstated. c. Both net income and operating income will be overstated. d. Both net income and operating income will be understated. 37. On the balance sheet, the cumulative amount of plant and equipment already expensed is reported in an account called a. Accumulated Amortization. b. Accumulated Depreciation. c. Amortization Expense. d. Depreciation Expense. 38. Company A has equipment that costs $5,250,000 and accumulated depreciation of $500,000, while Company B has equipment that costs $4,600,000 and accumulated depreciation of $4,400,000. Assuming both companies use straight-line depreciation and estimated useful lives of 40 years with $100,000 residual values, which of the following statements is true? a. Both companies have similarly aged equipment. b. Both companies have the same annual depreciation expense. c. Company A's equipment is newer than Company B's. d. Company B's equipment has a higher book value than Company A's. 39. Depreciation is a process by which a. replacement funds are accumulated for plant and equipment. Powered by Cognero

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Ch 07 Operating Assets b. the decline in the market value of plant and equipment is determined and recorded. c. the cost of plant and equipment is allocated to expense over the time periods that benefit from the use of the asset. d. the difference between the current market value and the historical cost of plant and equipment is determined. 40. Which of the following sets of factors is needed to calculate depreciation on plant and equipment? a. the asset's acquisition cost, its replacement cost, and its estimated residual value b. the estimated residual value of the asset, its replacement cost, and its market value c. the asset's replacement cost, its estimated life, and its estimated residual value d. the estimated life of the asset, its acquisition cost, and its estimated residual value 41. Assets classified as property, plant, and equipment are reported at a. each asset's estimated market value at the balance sheet date less depreciation. b. each asset's estimated market value at the balance sheet date. c. the estimated salvage value at the balance sheet date. d. each asset's original cost less depreciation since acquisition. 42. Depreciation expense is a. an effort to achieve proper matching of the cost of operating assets with related revenues. b. an accumulation of funds to replace the related plant asset. c. the difference between the original cost and the fair value of an asset. d. the cash allocated each period to maintain a plant asset. 43. For preparing its financial statements, a company should choose a depreciation method that a. best allocates the original cost of the asset to the periods benefited by the use of the asset. b. saves tax expense. c. minimizes net income. d. shows the highest amount of net income. 44. Plant assets are depreciated because the a. accrual basis of accounting requires matching of costs to revenues. b. cash basis of accounting requires depreciation. c. book values equal market values. d. replacement cost of plant assets may fluctuate over time. 45. The effect of recording depreciation for the year is a(n) a. decrease in assets and a decrease in net income. b. decrease in assets but no change in owners' equity. c. increase in assets and an increase in net income. d. decrease in net income and no change in assets. 46. Fabian Woodworks purchased a truck for $12,000. The truck has an estimated residual value of $2,000 and an estimated life of 5 years, or 100,000 hours of operation. The truck was purchased on January 1, Year 1, and was used for 27,000 hours in Year 1 and for 26,000 hours in Year 2. What amount will be reported as depreciation expense over the 5-year life of the equipment? Powered by Cognero

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Ch 07 Operating Assets a. $12,000 b. $8,000 c. $10,000 d. $4,000 47. Fabian Woodworks purchased a truck for $12,000. The truck has an estimated residual value of $2,000 and an estimated life of 5 years, or 100,000 hours of operation. The truck was purchased on January 1, Year 1, and was used for 27,000 hours in Year 1 and for 26,000 hours in Year 2. If the company uses the straight-line method of depreciation, what is the book value at the end of Year 3? a. $8,000 b. $6,000 c. $10,000 d. $4,000 48. Fabian Woodworks purchased a truck for $12,000. The truck has an estimated residual value of $2,000 and an estimated life of 5 years, or 100,000 hours of operation. The truck was purchased on January 1, Year 1, and was used for 27,000 hours in Year 1 and for 26,000 hours in Year 2. If the company uses the units-of-production method, what is the depreciation rate per hour for the equipment? a. $1.00 b. $1.10 c. $0.10 d. $0.12 49. Fabian Woodworks purchased a truck for $12,000. The truck has an estimated residual value of $2,000 and an estimated life of 5 years, or 100,000 hours of operation. The truck was purchased on January 1, Year 1, and was used for 27,000 hours in Year 1 and for 26,000 hours in Year 2. If the company uses the double-declining-balance depreciation method, what amount is the depreciation expense for Year 2? a. $4,800 b. $2,880 c. $1,728 d. $2,000 50. A company's management is in the process of determining the depreciation method for its newly acquired assets. The management is most concerned about preserving its current year bonus plans, which are directly related to the company's current profitability. For this purpose, which of the depreciation methods would management prefer? a. straight-line depreciation method b. declining-balance depreciation method c. impairment method d. units-of-production depreciation method 51. Furniture Barn and Furniture World purchased identical equipment having an estimated useful life of 5 years. Furniture Barn uses the straight-line depreciation method, whereas Furniture World uses the double-declining-balance method of depreciation. Assuming the two entities are similar in all other respects, which of the following statements is correct concerning the equipment? a. Furniture Barn's depreciation expense will be greater than Furniture World's in the second year. Powered by Cognero

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Ch 07 Operating Assets b. Furniture World's equipment book value will be greater than Furniture Barn's at the end of Year 1. c. Furniture Barn's total depreciation expense over the useful life will be less than Furniture World's. d. Furniture World's equipment book value will be less than Furniture Barn's at the end of Year 2. 52. Using the straight-line depreciation method will cause a company to incur ____ tax expense in the early years of an asset's life than it would experience using an accelerated method of depreciation. a. more b. less c. equal d. cannot be determined from this limited information 53. Falling Leaves Lawn Care purchased new excavating equipment at the beginning of Year 1. The equipment has a cost of $37,000, an estimated life of 5 years, and an estimated residual value of $7,000. A full year's depreciation expense is to be recorded in Year 1. The equipment was used for 20,000 hours during Year 1 and for 24,000 hours during Year 2. The number of expected hours over 5 years is 100,000. The company is comparing the straight-line and double-declining-balance depreciation methods. Of these two methods, which method creates the larger expense and which method creates the larger tax savings in Year 1? a. Straight-line depreciation creates the larger expense, while double-declining-balance depreciation creates the larger tax savings. b. Straight-line depreciation creates both the larger expense and the larger tax savings. c. Double-declining-balance depreciation creates both the larger expense and the larger tax savings. d. Double-declining-balance depreciation creates the larger expense, while straight-line depreciation creates the larger tax savings. 54. Falling Leaves Lawn Care purchased new excavating equipment at the beginning of Year 1. The equipment has a cost of $37,000, an estimated life of 5 years, and an estimated residual value of $7,000. A full year's depreciation expense is to be recorded in Year 1. The equipment was used for 20,000 hours during Year 1 and for 24,000 hours during Year 2. The number of expected hours over 5 years is 100,000. By what amount would the total double-declining-balance depreciation exceed the total straight-line depreciation over the 5-year life of the equipment? a. the residual value, $7,000 b. cost less residual value c. cost plus residual value d. Total depreciation expenses under double-declining-balance and straight-line depreciation are equal. 55. Falling Leaves Lawn Care purchased new excavating equipment at the beginning of Year 1. The equipment has a cost of $37,000, an estimated life of 5 years, and an estimated residual value of $7,000. A full year's depreciation expense is to be recorded in Year 1. The equipment was used for 20,000 hours during Year 1 and for 24,000 hours during Year 2. The number of expected hours over 5 years is 100,000. What is the amount by which the total double-declining-balance depreciation exceeds the total straight-line depreciation over the 5-year life of the equipment? a. $0 b. $7,000 c. $37,000 d. $6,000 56. Falling Leaves Lawn Care purchased new excavating equipment at the beginning of Year 1. The equipment has a cost of $37,000, an estimated life of 5 years, and an estimated residual value of $7,000. A full year's depreciation expense is to Powered by Cognero

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Ch 07 Operating Assets be recorded in Year 1. The equipment was used for 20,000 hours during Year 1 and for 24,000 hours during Year 2. The number of expected hours over 5 years is 100,000. Which depreciation method will result in the highest net income for Year 1? a. the straight-line method only b. the units-of-production method only c. the double-declining-balance method d. both the straight-line method and the units-of-production method 57. A constant rate of decline in a fixed asset's service potential is the underlying assumption of the a. impairment method. b. declining balance depreciation method. c. straight-line depreciation method. d. units-of-production depreciation method. 58. Which of the following factors is not related to the decline in the usefulness of plant and equipment assets and therefore does not need to be considered in selecting an appropriate depreciation method? a. physical deterioration b. obsolescence c. repair and maintenance policies d. current replacement cost 59. A company uses plant assets that are subject to rapid decreases in value due to obsolescence and physical deterioration. Which of the following depreciation methods is most appropriate to measure the decline in the usefulness of this company's assets? a. double-declining-balance method b. revenue expenditure method c. straight-line method d. units-of-production method 60. Flying High Air acquires a new aircraft. It has an estimated life of 10 years and should last for at least 20,000 hours of flight. What is the most appropriate method of depreciation to properly match revenues and expenses? a. double-declining-balance method b. revenue expenditure method c. straight-line method d. units-of-production method 61. If technology is changing rapidly, a firm should a. expense plant assets immediately because of the uncertainty of future benefits. b. depreciate plant assets over long periods of time. c. consider an accelerated rate of depreciation. d. use the straight-line method of depreciation as it is the easiest. 62. A company purchased equipment at the beginning of the year for $21,000 and decided to depreciate it over a 5-year period using the straight-line method. The equipment's residual value was estimated at $1,000. The estimated fair market value at the end of the year was $20,000. Which of the following statements is correct at the end of the year? Powered by Cognero

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Ch 07 Operating Assets a. The depreciation expense is $4,200. b. The book value of the equipment is $17,000. c. The total accumulated depreciation is $4,200. d. The equipment will be reported on the balance sheet at its fair market value of $20,000. 63. Equipment purchased at the beginning of the year for $200,000 with a residual value of $20,000 is being depreciated over a 5-year period using the double-declining-balance method. Which of the following statements is correct concerning the financial statements at the end of the year? a. The reported cost of the equipment is now $120,000. b. The book value of the equipment is now $80,000. c. The accumulated depreciation account balance is now $80,000. d. Depreciation expense for the year is $72,000. 64. Many companies use MACRS (Modified Accelerated Cost Recovery System) depreciation for a. financial reporting purposes and a different method for tax purposes. b. financial reporting purposes because depreciation is not allowed for tax purposes. c. tax purposes because it results in a larger net income in the early years of a plant asset's life. d. tax purposes because of a desire to report higher expenses in early years in order to pay lower taxes. 65. Using different depreciation methods for book purposes versus tax purposes for the same asset is a. not allowed since the amount can only be calculated one way, not both. b. the direct result of the differing goals of financial and tax accounting. c. contrary to GAAP. d. against the Internal Revenue Code and as such against the law. 66. Equipment with a residual value of $50,000 at the end of 10 years was acquired at the beginning of Year 1 for $500,000. Assuming the use of the straight-line depreciation method, the journal entry to record depreciation expense for Year 3 will have a debit to a. Depreciation Expense and a credit to Accumulated Depreciation for $50,000. b. Accumulated Depreciation and a credit to Equipment for $50,000. c. Depreciation Expense and a credit to Equipment for $45,000. d. Depreciation Expense and a credit to Accumulated Depreciation for $45,000. 67. Fantasy Cruise Lines purchased a ship on January 1, Year 1, for $1,000,000. It has a 10-year useful life and a residual value of $100,000. The company uses the double-declining-balance method. Compute the amount of depreciation expense for Year 1. a. $90,000 b. $100,000 c. $180,000 d. $200,000 68. Fantasy Cruise Lines purchased a ship on January 1, Year 1, for $1,000,000. It has a 10-year useful life and a residual value of $100,000. The company uses the double-declining-balance method. What is the depreciation expense for the year ended December 31, Year 2? a. $0 Powered by Cognero

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Ch 07 Operating Assets b. $180,000 c. $160,000 d. $200,000 69. Fantasy Cruise Lines purchased a ship on January 1, Year 1, for $1,000,000. It has a 10-year useful life and a residual value of $100,000. The company uses the double-declining-balance method. What will be the book value of the ship after 10 years? a. $200,000 b. $400,000 c. $0 d. $100,000 70. A company would choose one of the accelerated depreciation methods in order to a. minimize its net income in the initial years of an asset's life. b. maximize its tax expenses in the initial years of an asset's life. c. minimize the depreciation expense. d. maximize the asset residual value at the end of the asset’s useful life. 71. Fernbank Farms purchased a semitruck at the beginning of Year 1 at a cost of $100,000. The truck has an estimated life of 5 years and an estimated residual value of $20,000 and will be depreciated using the straight-line method. On January 1, Year 3, the company made major repairs of $30,000 to the truck that extended its remaining useful life. Thus, starting with Year 3, the truck has a remaining life of 5 years and a new salvage value of $8,000. When calculating depreciation for Year 3, the company's accountant should a. add the $30,000 to the book value at December 31, Year 2, and then allocate the revised amount over the remaining adjusted useful life of 5 years. b. report the effect of the change in useful life as an expense on the income statement in Year 3. c. continue depreciating the original cost over the original useful life and depreciate the additional $30,000 cost separately over the addition's useful life. d. expense the $30,000 and depreciate the original cost of $100,000 over its revised estimated total life. 72. During the year, Fisher Apartments purchased an apartment building to rent to university students. It cost the company $250 to repair the damage done by a tenant to one of its units. How should this cost be recorded? a. It should be recorded as part of the asset account. b. It should be recorded as a repair and maintenance expense. c. It should not be recorded as the tenant will be charged for the damage. d. It should not be recorded since this is an immaterial amount to the landlord. 73. Fernbank Farms purchased a semitruck at the beginning of Year 1 for $100,000. The truck has an estimated life of 5 years and an estimated residual value of $20,000 and will be depreciated using the straight-line method. On January 1, Year 3, the company made major repairs of $30,000 to the truck that extended its remaining useful life. Thus, starting with Year 3, the truck has a remaining life of 5 years and a new salvage value of $8,000. What amount should be recorded as depreciation expense each year starting in Year 3? a. $16,000 b. $18,000 c. $13,600 d. $12,400 Powered by Cognero

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Ch 07 Operating Assets 74. Fernbank Farms purchased a semitruck at the beginning of Year 1 for $100,000. The truck has an estimated life of 5 years and an estimated residual value of $20,000 and will be depreciated using the straight-line method. On January 1, Year 3, the company made major repairs of $30,000 to the truck that extended its remaining useful life. Thus, starting with Year 3, the truck has a remaining life of 5 years and a new salvage value of $8,000. What is the truck's book value at December 31, Year 3? a. $68,000 b. $98,000 c. $80,000 d. $62,000 75. Incorrectly capitalizing an expenditure rather than recording it as a revenue expenditure a. impacts the total book value of plant assets reported on the balance sheet and the amount of net income reported during a period. b. impacts the total book value of plant assets on the balance sheet but has no effect on the amount of net income reported during an accounting period. c. impacts the amount of net income reported during an accounting period but has no effect on the total book value of plant assets on the balance sheet. d. has no impact on the book value of plant assets on the balance sheet or the amount of income reported on the income statement. 76. Which of the following costs related to production equipment would be considered a revenue expenditure? a. installation costs for the equipment b. purchase price of the equipment less the cash discount c. repair and maintenance costs during the equipment's first year of service d. transportation charges for getting the equipment delivered to the business 77. Which of the following is not a reason to revise the amount of depreciation expense? a. change in estimated useful life b. permanent decline of an asset's fair market value below the book value c. change in estimated residual value d. incurrence of a capital expenditure associated with a plant asset 78. Flag Financial uses straight-line depreciation for its equipment with an estimated useful life of 10 years and zero residual value. The CEO points out that the equipment will last much shorter than 10 years, perhaps 5 years. What is the impact of this change on the tax expenses and net income for the remaining years of the useful life? a. Both tax expenses and net income will decrease. b. Both tax expenses and net income will increase. c. Tax expenses will decrease, while net income will increase. d. Tax expenses will increase, while net income will decrease. 79. A company sold equipment at a loss. What is the impact on the balance sheet of removing the equipment account and its related accumulated depreciation account? a. reduces total assets and total equity b. reduces total assets and no impact on total equity c. has no effect on total assets Powered by Cognero

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Ch 07 Operating Assets d. increases total assets and decreases total equity 80. Equipment with an estimated residual value at acquisition of $15,000 was sold on December 31 for $20,000 cash. The following data were available at the time of sale: Acquisition cost Accumulated depreciation on December 31, after adjustment

$100,000 85,000

When this transaction is recorded, it should include a a. debit of $80,000 to the loss on disposal account. b. credit of $20,000 to the equipment account. c. credit of $5,000 to the gain on disposal account. d. debit of $20,000 to the accumulated depreciation account. 81. On January 1, Year 1, a machine with an estimated life of 5 years and an estimated residual value of $5,000 was acquired for $40,000. On July 1, Year 3, the machine was sold for $7,000 cash. The journal entry to record the sale of the machine a. decreases stockholder's equity. b. increases total assets. c. decreases total expenses. d. increases net income. 82. On January 1 (the beginning of the year), a company sold a piece of equipment for $30,000 that it had used for several years. The equipment had cost $45,000, and its accumulated depreciation amounted to $20,000 at the time of the sale. What are the net effects on the accounting equation of selling the equipment for the year? a. Assets and shareholders' equity increase by $30,000. b. Assets decrease and shareholders' equity increases by $5,000. c. Assets and shareholders' equity increase by $5,000. d. Assets and shareholders' equity decrease by $5,000. 83. Information for 2 years for Fireworks City, which uses the straight-line depreciation method, is as follows:

Property, plant, and equipment Accumulated depreciation Depreciation expense Net sales Total assets

Current Year $ 250,000 100,000 62,500 1,000,000 625,000

Prior Year $190,000 85,000 47,500 900,000 475,000

During the current year, the company sold some equipment that had an original cost of $60,000. Which statement is true concerning transactions that must have occurred during the period? a. The company purchased additional equipment during the year. b. The selling price of the equipment sold was reported with net sales. c. The company did not purchase additional equipment during the year. d. The equipment sold had not been reported with the company’s property, plant, and equipment. 84. On January 1, a company sold a machine for $5,000 that it had used for several years. The machine originally cost $11,000 and had accumulated depreciation of $4,500 at the time of sale. What gain or loss will be reported on the income Powered by Cognero

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Ch 07 Operating Assets statement for the sale of the machine for the year ended December 31? a. gain of $5,000 b. loss of $6,500 c. loss of $1,500 d. gain of $1,500 85. If a company's asset turnover ratio decreased from the prior year to the current year, which of the following conclusions can be made? a. The company was more efficient during the current year in using its assets to produce profits. b. The company was less efficient during the current year in using its assets to produce profits. c. The company was less profitable in the prior year. d. The company did not make any investment in assets in the current year. 86. Information for 2 years for Fireworks City, which uses the straight-line depreciation method, is as follows:

Property, plant, and equipment Accumulated depreciation Depreciation expense Net sales Total assets

Current Year $ 250,000 100,000 62,500 1,000,000 625,000

Prior Year $190,000 85,000 47,500 900,000 475,000

Using the data for the current year, determine the useful life of the company's property, plant, and equipment, rounded to one decimal place. a. 1.6 years b. 2.5 years c. 4.0 years d. 10.0 years 87. Information for 2 years for Fireworks City, which uses the straight-line depreciation method, is as follows:

Property, plant, and equipment Accumulated depreciation Depreciation expense Net sales Total assets

Current Year $ 250,000 100,000 62,500 1,000,000 625,000

Prior Year $190,000 85,000 47,500 900,000 475,000

Determine the asset turnover ratio for the current year, rounded to two decimal places. a. 7.84 times b. 1.60 times c. 4.00 times d. 4.55 times 88. Information for 2 years for Fireworks City, which uses the straight-line depreciation method, is as follows:

Property, plant, and equipment Powered by Cognero

Current Year $ 250,000

Prior Year $190,000 Page 14

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Ch 07 Operating Assets Accumulated depreciation Depreciation expense Net sales Total assets

100,000 62,500 1,000,000 625,000

85,000 47,500 900,000 475,000

Using the data for the current year, determine the average age of the company's property, plant, and equipment, rounded to two decimal places. a. 1.60 years b. 2.50 years c. 4.00 years d. 10.00 years 89. Magpie Creations has a fixed asset turnover of 2.30 times. The ratio indicates that a. Magpie generates revenue of $2.30 for each dollar invested in fixed assets. b. Magpie has $2.30 worth of assets for each dollar of revenue generated. c. Magpie has $2.30 worth of assets for each dollar of cost of goods sold. d. Magpie's cost of goods sold is $2.30 for each dollar invested in fixed assets. 90. Research and development costs are a. treated as an expense when incurred. b. capitalized but not amortized. c. capitalized and amortized over the periods that will probably benefit from the research and development. d. included with the cost of the patent resulting from the research and development. 91. Which of the following is an intangible asset? a. land improvements b. goodwill c. retained earnings d. accounts receivable 92. Current accounting standards indicate that the costs of intangible assets with an indefinite life, such as goodwill, should a. not be amortized but should be reviewed annually for impairment. b. be reported on the statement of retained earnings in the year in which they are acquired. c. be amortized over a reasonable period of time not exceeding 40 years. d. be debited to an expense account entirely in the year in which they are acquired. 93. Focal Point Engineering purchased a trademark at the beginning of the year for $200,000. Although the trademark's legal life is 20 years, economic benefits were expected for only 10 years. Also, during the year, the company incurred research and development costs of $200,000. The book value of the trademark at the end of the year is a. $200,000. b. $180,000. c. $175,000. d. $280,000. 94. A business can record goodwill as an asset when Powered by Cognero

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Ch 07 Operating Assets a. it has above normal profitability compared to other businesses in its industry. b. it can determine that it has created customer goodwill and name recognition. c. the fair value of its net assets is more than their book value. d. it purchases another business at a price that exceeds the market value of the acquired net assets. 95. Accounting standards require that research and development costs incurred to develop a new intangible asset be a. capitalized in the patents account. b. expensed in the period incurred. c. capitalized in the research and development costs account. d. amortized over the expected economic life of the new asset. 96. The accounting life of intangible assets is determined by a. their legal lives only. b. their useful lives only. c. their legal lives or useful lives, whichever is shorter. d. the tax life mandated by the IRS. 97. Operating assets with no physical properties are called a. current assets. b. intangible assets. c. plant assets. d. property, plant, and equipment. 98. How should intangible assets be disclosed on the balance sheet? a. as a reduction of stockholders' equity b. at cost in the current assets section c. at the estimated market value at the balance sheet date d. net of the costs already amortized 99. A company purchased a patent for $100,000 at the beginning of the current year. The company believes the patent has an expected useful life of 5 years. Fortunately, the patent has a legal life of 20 years. How much amortization expense should be recorded in the current year? a. $0 b. $5,000 c. $20,000 d. $100,000 100. An oil company purchased 10,000 acres of land on January 1, Year 1, for $5,000,000. It developed an underground oil site on the land. The company spent $11,000,000 to prepare the site for operation but believes that 500,000 barrels of oil can be extracted from the site over 5 years after drilling begins. The land has a residual value of $250,000. Assuming 50,000 barrels of oil were extracted from the land in Year 3, how much depletion would be recorded? a. $1,600,000 b. $1,575,000 c. $160,000 d. $157,500 Powered by Cognero

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Ch 07 Operating Assets 101. A company bought machinery on January 1, Year 1, for $200,000. On January 2, Year 3, the machinery had a book value of $100,000. It is estimated that the machine will generate future cash flows of $70,000 and its current fair value is $60,000. How much impairment loss should be recorded? a. $0 b. $30,000 c. $40,000 d. $100,000 102. When a company determines that an asset is impaired, the book value of the asset should be reduced to the a. fair value of the asset. b. future cash flows from the asset. c. residual value of the asset. d. accumulated depreciation of the asset. 103. Which of the following best describes Accumulated Depreciation? a. current liability account b. contra-asset account c. current asset account d. expense account 104. Which two items must be estimated with respect to a plant asset in order to properly allocate the cost to the affected accounting periods? a. salvage value and useful life b. historical cost and salvage value c. historical cost and useful life d. depreciation method and historical cost 105. Which GAAP-accepted depreciation method is used most frequently? a. declining balance b. sum-of-the-years’ digits c. straight-line d. units-of-production 106. A cost that improves the performance of an operating asset and is therefore added to the asset’s cost is known as a. accumulated depreciation. b. a revenue expenditure. c. residual value. d. a capital expenditure. 107. Costs that are incurred in the discovery of new knowledge and the translation of research into a design or plan for a new product are called a. accumulated depreciation. b. research and development costs. c. discovery costs. Powered by Cognero

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Ch 07 Operating Assets d. goodwill. 108. Which of the following is an intangible asset that can only exist if one company purchases another business, and the cost exceeds the fair market values of the identifiable net assets at the time acquired? a. patent b. trademark c. goodwill d. franchise 109. The right to publish a literary or artistic work is called a(n) a. trademark. b. copyright. c. patent. d. artistic license. 110. Which account is used when writing off natural resources? a. Accumulated Depletion b. Depreciation Expense c. Accumulated Depreciation d. Cost of Goods Sold

111. Future Foundations purchased equipment on January 1, Year 1, for $50,000. The equipment has an estimated useful life of 5 years and an estimated residual value of $5,000. The company uses the straight-line method of depreciation. On July 1, Year 3, the equipment was sold for $17,500 cash. Prepare journal entries for the following: A) Depreciation expense for Year 1 B) Depreciation expense for Year 2 C) Sale of the equipment in Year 3 112. Consider the following account details and balances: Accumulated depreciation Gain on the disposal of plant assets Equipment (Equipment with book value of $36,875 was sold) Land Cash received from the sale of the plant asset

Year 2 $278,125 28,125 893,750 250,000 65,000

Year 1 $258,750 993,750 250,000

A) Prepare the property, plant, and equipment section of the balance sheet on December 31, Year 2 in the following space. Balance Sheet

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Ch 07 Operating Assets

B) By how much will net income increase or decrease during Year 2 as a result of the given information? 113. The following accounts and balances are from the current year financial statements of Fripp, Inc. Prepare the intangible assets section of the company's balance sheet as well as a partial income statement in the space provided using the accounts provided. Amortization expense Amortization since inception Loss on sale of trademark Patents Land Goodwill Research and development costs Balance Sheet

$ 22,000 88,000 31,000 270,200 180,000 250,000 320,000 Income Statement

114. Several costs were incurred during Years 1 and 2 by a company that follows the policy of decreasing the intangible asset account directly as amortized. Research was conducted to discover a new product, and costs of $400,000 in Year 1 and $800,000 in Year 2 were incurred. After several months, a product was created and a patent secured for a cost of $180,000, effective as of July 1 of Year 2. The company expects to have an increase of $500,000 in revenues over the next several years. The patent is expected to be useful for the next 10 years. A)

Prepare a partial income statement for the year ended December 31 of Year 2.

How should the $800,000 cost incurred in Year 2 be reported on the financial statements?

115. Finicky Freight purchased a truck at the beginning of Year 1 for $80,000. The company decided to depreciate the truck over a 5-year period using the double-declining-balance method. The company estimated the equipment's salvage value at $8,000. Show how the costs should be presented on the balance sheet and the income statement on December 31, Year 2. Label the statements properly. 116. Fields of Green, a turf farm, purchased equipment at the beginning of Year 1 for $175,000. In addition, the company paid $6,000 for the delivery of the equipment and $4,000 for setup charges. The equipment has an estimated residual value of $5,000 and an estimated life of 10 years or 50,000 hours of operation. The equipment was operated for 5,200 hours in Year 1 and 5,000 hours in Year 2. A)

Compute the depreciation expense for Year 1 using the straight-line method, units-ofproduction method, and double-declining-balance method.

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Ch 07 Operating Assets

Compute the depreciation expense for Year 2 using the straight-line method, units-ofproduction method, and double-declining-balance method.

Which method of depreciation produces the greatest total amount of depreciation?

Which method of depreciation is considered accelerated?

What are the advantages of using an accelerated depreciation method as compared to the straight-line method?

117. Fleet Rentals purchased equipment with a cost of $200,000 at the beginning of the year. The equipment has an estimated life of 10 years or 100,000 units of the product. The estimated residual value is $20,000. During the year, 11,000 units of the product were produced with this machinery. Determine the following: A)

Amount of total accumulated depreciation at the end of the year using units-of-production depreciation

Book value at the end of the year using straight-line depreciation

Why would the company choose units-of-production depreciation instead of straightline?

118. The assets sections of Fabulous Creations’ balance sheets for Years 1 and 2 are as follows Fabulous Creations Assets Section of Consolidated Balance Sheets (in millions) Assets Current assets Cash and equivalents Short-term investments Receivables, less allowances of $1,889 and $97 Inventories Prepaid expenses and other current assets Total current assets Noncurrent inventories and film costs Investments Land and buildings Cable television equipment Furniture, fixtures, and equipment Powered by Cognero

December 31, Year 2

December 31, Year 1

719 0

886

6,054

464

1,791

1,710

711

$ 10,274

$ 4,671

$ 6,853

6,886 $ 2,107

2,610

0 3,824

440

9,966

4,329

1,297 Page 20

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Ch 07 Operating Assets Property, plant, and equipment Less: Accumulated depreciation Property, plant, and equipment (net) Music catalog and copyrights Cable television and sports franchises Brands and trademarks Goodwill and other intangibles Other assets Total assets

$ 16,402

$ 1,737

(3,718)

(696) $ 12,684

$ 1,041

2,927

27,109

10,684

128,338

713

2,804 $208,559

578 $ 10,827

Determine the book value of the company's property, plant, and equipment on December 31, Year 1 and Year 2. What types of transaction(s) could have caused the change in the book value of the property, plant, and equipment during Year 2? 119. Futronics purchased a truck at the beginning of Year 1 for $41,500 and decided to depreciate it over a 6-year period using the straight-line method. The estimated residual value was $5,500. At the beginning of Year 2, the company determined that a 4-year life should have been used to depreciate the truck. The estimated residual value was not affected by the revision in the asset's life. A)

Determine the amounts to be recorded as depreciation expense for Years 1 and 2.

What factors may have influenced the change in useful life?

120. The assets sections of Fabulous Creations’ balance sheets for the years ended December 31, Year 2 and Year 1, are as follows: Fabulous Creations Assets Section of Consolidated Balance Sheets (in millions) December 31, Year 2

December 31, Year 1

719

$ 2,610

886

6,054

464

1,791

1,710

711

$ 10,274

$ 4,671 Page 21

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Ch 07 Operating Assets Noncurrent inventories and film costs Investments Land and buildings Cable television equipment Furniture, fixtures, and equipment Property, plant, and equipment Less: Accumulated depreciation Property, plant, and equipment (net) Music catalog and copyrights Cable television and sports franchises Brands and trademarks Goodwill and other intangibles Other assets Total assets

$ 6,853

6,886 $ 2,107

0 3,824

440

9,966

4,329

1,297

$ 16,402

$ 1,737

(3,718)

(696) $ 12,684

$ 1,041

2,927

27,109

10,684

128,338

713

2,804 $208,559

578 $ 10,827

Explain the impact on net income and cash flows of using straight-line depreciation for financial reporting and accelerated depreciation methods for income tax purposes. 121. The assets sections of Fabulous Creations’ balance sheets for the years ended December 31, Year 2 and Year 1, are as follows: Fabulous Creations Assets Section of Consolidated Balance Sheets (in millions) Assets Current assets Cash and equivalents Short-term investments Receivables, less allowances of $1,889 and $97 Inventories Prepaid expenses and other current assets Total current assets Noncurrent inventories and film costs Powered by Cognero

December 31, Year 2

December 31, Year 1

719

2,610

886

6,054

464

1,791

1,710

711

$ 10,274

$ 4,671

6,853

0 Page 22

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Ch 07 Operating Assets Investments Land and buildings Cable television equipment Furniture, fixtures, and equipment Property, plant, and equipment Less: Accumulated depreciation Property, plant, and equipment (net) Music catalog and copyrights Cable television and sports franchises Brands and trademarks Goodwill and other intangibles Other assets Total assets

6,886 $ 2,107

3,824 $

440

9,966

4,329

1,297

$ 16,402

$ 1,737

(3,718)

(696) $ 12,684

$ 1,041

2,927

27,109

10,684

128,338

713

2,804 $208,559

578 $10,827

In the notes to the financial statements, the company indicates that it uses different depreciation methods for different types of plant and equipment assets. Explain why the company might follow this policy. 122. Finnegan's Fixtures purchased molding machines at the beginning of Year 1 for $10,000. The machines have an estimated residual value of $2,000 and an estimated life of 5 years or 50,000 hours of operation. The company is considering alternative depreciation methods. Calculate the following: A)

Accumulated depreciation at December 31, Year 2, using the straight-line depreciation method.

Depreciation expense for Year 1 using the units-of-production depreciation method. Assume that the machines are operated for 5,000 hours in Year 1 and 8,000 hours in Year 2.

The book value of the equipment at December 31, Year 2, using the double-decliningbalance depreciation method.

What are the advantages of using straight-line depreciation for financial reporting purposes?

123. Fiona's Italian Market purchased a delivery truck for $25,000 at the beginning of Year 1. The truck has an estimated life of 5 years and an estimated residual value of $5,000. The company plans to use the straight-line depreciation method. At the beginning of Year 2, the company spent $4,000 to replace the truck's transmission. This resulted in a 2-year extension of useful life but no change in residual value. A)

What type of cost is the $4,000? What should be its accounting treatment?

Calculate the asset's book value at the end of Year 1.

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Ch 07 Operating Assets C)

Calculate depreciation expense for Year 2.

124. Farley Mills purchased new machinery at the beginning of Year 1 for $200,000. The machinery had an estimated life of 5 years and an estimated residual value of $25,000 and was depreciated using the straight-line method. At the beginning of Year 2, the machinery was sold for $150,000 because management was unhappy with its performance. Determine the following amounts: A)

Book value of the machinery at the end of Year 1

Gain (loss) on the disposal of the machinery at the beginning of Year 1 (Indicate the amount and whether it is a gain or loss.)

125. The assets sections of Fabulous Creations’ balance sheets for the years ended December 31, Year 2 and Year 1, are as follows: Fabulous Creations Assets Section of Consolidated Balance Sheets (in millions) December 31, Year 2

Assets Current assets Cash and equivalents Short-term investments Receivables, less allowances of $1,889 and $97 Inventories Prepaid expenses and other current assets Total current assets Noncurrent inventories and film costs Investments Land and buildings Cable television equipment Furniture, fixtures, and equipment Property, plant, and equipment Less: Accumulated depreciation Property, plant, and equipment (net) Music catalog and copyrights Cable television and sports franchises Brands and Powered by Cognero

December 31, Year 1

719

$ 2,610

886

6,054

464

1,791

1,710

711

$ 10,274

$ 4,671

6,853 6,886

$ 2,107

0 3,824

440

9,966

4,329

1,297

$16,402

$1,737

(3,718)

(696) $ 12,684

$ 1,041

2,927

27,109

10,684

0 Page 24

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Ch 07 Operating Assets trademarks Goodwill and other intangibles Other assets Total assets

128,338

713

2,804 $208,559

578 $10,827

The company recorded depreciation expense of $344 million for Year 1. Calculate the following ratios. A)

If net sales were $60,000 for Year 2, what would be the fixed asset turnover ratio for Year 2, rounded to two decimal places?

Average age of the property, plant, and equipment for Year 1, rounded to two decimal places.

126. The assets sections of Fabulous Creations’ balance sheets for the years ended December 31, Year 2 and Year 1, are as follows: Fabulous Creations Assets Section of Consolidated Balance Sheets (in millions) December 31, Year 2

December 31, Year 1

719

$ 2,610

886

6,054

464

1,791

1,710

711

$ 10,274

$ 4,671

6,853 6,886

$ 2,107

0 3,824

440

9,966

4,329

1,297

$ 16,402

$ 1,737

(3,718)

(696) $ 12,684

$ 1,041

2,927

27,109

0 Page 25

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Ch 07 Operating Assets Brands and 10,684 0 trademarks Goodwill and other 128,338 713 intangibles Other assets 2,804 578 Total assets $208,559 $10,827 The company spends significant dollars on research and development initiatives each year to develop new products that allow it to remain competitive. Yet, the company's balance sheet does not reflect these costs. Why?

127. Fanatics Company purchased a patent at the beginning of the year for $450,000. Economic benefits were expected for only 10 years, but the patent's legal life is 20 years. Also, during the year, the company incurred research and development costs of $185,000. A)

Determine the following amounts: 1.

Research and development expense for the year

Patent amortization expense for the year

Prepare the intangible assets section of the balance sheet at the end of the year.

128. The assets sections of Fabulous Creations’ balance sheets for the years ended December 31, Year 2 and Year 1, are as follows: Fabulous Creations Assets Section of Consolidated Balance Sheets (in millions) December 31, Year 2

December 31, Year 1

719

$ 2,610

886

6,054

464

1,791

1,710

711

$ 10,274

$ 4,671

$ 6,853

6,886 $ 2,107

0 3,824

440

9,966

4,329

1,297

$ 16,402

$ 1,737 Page 26

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Ch 07 Operating Assets Less: Accumulated depreciation Property, plant, and equipment (net) Music catalog and copyrights Cable television and sports franchises Brands and trademarks Goodwill and other intangibles Other assets Total assets

(3,718)

(696) $ 12,684

$ 1,041

2,927

27,109

10,684

128,338

713

2,804 $208,559

578 $10,827

Which items on the company's balance sheet could be considered intangible assets? Explain the nature of each of these. 129. Fuzziwig's Candles has two intangible assets. Information concerning each is provided in the following table: Goodwill Date of purchase June 30 Cost $500,000 Legal life None Useful life Infinite Calculate the amount of amortization expense that should be reported for the year.

Trademark January 1 $250,000 10 years 5 years

130. Flossil Fossils Company purchased a tract of land containing coal in the current year for $20,000,000 and then spent $30,000,000 to get a mine ready for operation. The company estimates that there will be 10,000,000 tons of coal available over the next 10 years. The land has a residual value of $500,000. During the current year, 1,000,000 tons of coal were mined. The data about the amount of coal sold are not available. A)

Compute the cost of the natural resource and the depletion rate.

Record the journal entry as of December 31 for the current year depletion.

131. Distinguish between current assets and operating assets. 132. Distinguish between tangible and intangible operating assets. 133. Explain how operating assets are reported on the balance sheet. 134. Explain what costs are included in the acquisition cost of operating assets. 135. You are an entrepreneur with a great idea for a new business. In order to obtain financing, the loan officer at First Second Third National Bank has requested a budgeted set of financial statements. An accountant friend of yours has mentioned that there are several options associated with the accounting of plant assets that are available to help you improve your budgeted income. Describe several decisions concerning property, plant, and equipment that have an impact on reported net income. Are there any ethical concerns in this area? Powered by Cognero

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Ch 07 Operating Assets 136. Explain the book value, market value, and salvage value of a plant asset. 137. Describe the process that allocates the costs of the operating assets as an expense to the relevant accounting periods. 138. A research consortium has a large portion of its plant assets concentrated in an area where technology is rapidly changing. The organization wants to minimize taxable income and maximize net income reported to shareholders. Recommend a course of action for accomplishing this objective and provide support for your recommendation. 139. A company wants to minimize the amount of time and effort its bookkeepers spend on calculating depreciation. Since the company has not been profitable, taxes are not an issue but minimizing reported losses is its major objective. Recommend a course of action for this company and provide support for your recommendation. 140. Why do many companies use MACRS (Modified Accelerated Cost Recovery System) depreciation for tax purposes? If a company uses MACRS for depreciation for tax purposes, can it use a different method for financial reporting? Explain why or why not. 141. Distinguish between capital and revenue expenditures. 142. What impact does materiality have on the determination of how a cost related to a plant asset is reported on the financial statements? 143. You are the chief financial officer for Five Star Resorts, Inc. You are reviewing the following transactions: 1. Adding a new patio deck to the resort's upscale restaurant, $180,000 2. Painting 10 ocean front beach houses, $75,000 3. Purchasing additional golf carts for the club house, $25,000 4. Rebuilding the engine in the resort's airport shuttle bus, $10,000 5. Replacing the golf shop’s old air conditioning unit with a more efficient one, $20,000 Your accountant has capitalized all of these items and intends to depreciate them over the appropriate asset's remaining useful life as originally estimated. Indicate whether you agree or disagree with your accountant's treatment of each item. In those cases where you disagree, state the proper treatment of that expenditure. Use the following table: Expenditure 1. Adding a new patio deck to the resort's upscale restaurant, $180,000 2. Painting 10 ocean front beach houses, $75,000 3. Purchasing additional golf carts for the club house, $25,000 4. Rebuilding the engine in the resort's airport shuttle bus, $10,000 5. Replacing the golf shop's old air conditioning unit with a more efficient one, $20,000

Agree or Disagree?

Proper Treatment, if Disagree

144. Explain the meaning of the following ratios: Powered by Cognero

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Ch 07 Operating Assets A)

Fixed asset turnover ratio

Average age of property, plant, and equipment

145. How are research and development costs reported in the financial statements? Why is this treatment required? 146. How does goodwill arise? How is it accounted for and reported on the financial statements?

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Ch 07 Operating Assets Answer Key 1. False 2. True 3. False 4. False 5. False 6. False 7. True 8. False 9. False 10. False 11. True 12. True 13. True 14. True 15. False 16. False 17. True 18. True 19. False 20. True 21. False 22. False 23. True 24. False 25. c Powered by Cognero

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Ch 07 Operating Assets 26. d 27. a 28. b 29. c 30. b 31. c 32. c 33. d 34. b 35. b 36. d 37. b 38. c 39. c 40. d 41. d 42. a 43. a 44. a 45. a 46. c 47. b 48. c 49. b 50. a 51. d Powered by Cognero

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Ch 07 Operating Assets 52. a 53. c 54. d 55. a 56. d 57. c 58. d 59. a 60. d 61. c 62. b 63. c 64. d 65. b 66. d 67. d 68. c 69. d 70. b 71. a 72. b 73. b 74. c 75. a 76. c Powered by Cognero

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Ch 07 Operating Assets 77. b 78. a 79. a 80. c 81. a 82. c 83. a 84. c 85. b 86. c 87. a 88. a 89. a 90. a 91. b 92. a 93. b 94. d 95. b 96. c 97. b 98. d 99. c 100. b 101. c 102. a Powered by Cognero

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Ch 07 Operating Assets 103. b 104. a 105. c 106. d 107. b 108. c 109. b 110. a 111. A)

Depreciation Expense [($50,000 − $5,000) ÷ 5 years]

9,000 Accumulated Depreciation

Depreciation Expense

9,000

9,000 Accumulated Depreciation

Cash Accumulated Depreciation ($9,000 + $9,000 + $4,500) Loss on Disposal of Plant Assets ($17,500 – $27,500 book value) Equipment

9,000 17,500 22,500 10,000 50,000

112. A) Balance Sheet Property, plant, and equipment: Equipment Less: Accumulated depreciation Land Net property, plant, and equipment

$893,750 (278,125)

$615,625 250,000 $865,625

B) Net income will be reduced by depreciation expense and increased by the gain. Depreciation expense: $258,750 Beginning Accumulated Depreciation – ($100,000 – $36,875) Accumulated Depreciation of Equipment Sold + X Depreciation Expense = $278,125 Ending Accumulated Depreciation $258,750 – $63,125 + X = $278,125 X = $278,125 – $195,625 X = $82,500 Powered by Cognero

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Ch 07 Operating Assets Therefore, net income will be reduced by $82,500 (depreciation expense) and increased by $28,125 (gain), representing a net decrease of $54,375. 113. Balance Sheet Intangible assets: Patents Less: Amortization since inception Book value Goodwill Total intangible assets (net)

$270,200 (88,000) $182,200 250,000 $432,200

Amortization expense Research and development costs

$ 22,000 320,000 $342,000

Loss on sale of trademark

$(31,000)

Income Statement Operating expenses:

Other expenses and losses

114. A) Income Statement: Operating expenses: Research and development costs Patent amortization expense [($180,000 cost ÷ 10 years) × 1/2 year]

115. Year 1 Depreciation: Year 2 Depreciation: Accumulated depreciation

$800,000 9,000

The costs to discover the new product are considered research and development costs, which are reported on the income statement as an expense. These costs should be expensed when incurred since future benefits are not predictable.

$80,000 × 0.40 = $48,000 × 0.40 =

$32,000 19,200 $51,200

Truck Less: Accumulated depreciation Net property, plant, and equipment

$80,000 (51,200) $28,800

Depreciation expense

$19,200

Balance Sheet Property, plant, and equipment:

Income Statement Operating expenses:

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Ch 07 Operating Assets 116. A)

Straight-line: ($175,000 + $6,000 + $4,000 − $5,000) ÷ 10 = $18,000 Units-of-production: ($175,000 + $6,000 + $4,000 – $5,000) ÷ 50,000 = $3.60 per hour $3.60 × 5,200 = $18,720 Double-declining-balance: 2 × (1/10) = 20%; $185,000 × 0.20 = $37,000

Straight-line: $185,000 − $18,000 – $18,000 = $149,000 Units-of-production: $185,000 – $18,720 – ($3.60 × 5,000) = $148,280 Double-declining-balance: $185,000 – $37,000 – [($185,000 – $37,000) × 0.20] = $118,400

All depreciation methods yield the same amount of total depreciation.

The double-declining balance method is an accelerated method.

Accelerated depreciation allocates more expense to the earlier accounting periods than straight-line depreciation. Accelerated depreciation causes net income in the earlier years to be lower, so lower taxes are paid and cash flow is increased than if the straight-line method was used.

117. A)

($200,000 − $20,000) ÷ 100,000 × 11,000 = $19,800

($200,000 − $20,000) ÷ 10 = $18,000 $200,000 − $18,000 = $182,000

A company may use units-of-production when the usage of the plant asset is a better indicator of the cost used up as compared to a time allocation. This situation exists primarily when production is erratic or seasonal.

118. Book value at December 31, Year 2 $12,684 million Book value at December 31, Year 1 $1,041 million The transactions that could cause the change in the book value of the property, plant, and equipment in Year 2 would be mainly the purchase of assets, investments, and acquisitions. The increase in accumulated depreciation would also impact the book value of the assets. 119. A)

2021: 2022:

($41,500 − $5,500) ÷ 6 = $6,000 [($41,500 − $5,500) − $6,000] ÷ 3 = $10,000

The factors that may influence the change in useful life are the same factors that influence the initial selection of a useful life. These factors are anticipated decline in usefulness due to physical deterioration such as wear and tear, obsolescence due to new technology, and the company's repair and maintenance policy.

120. Accelerated depreciation allows a company to minimize its net income and hence save income taxes in the early years because depreciation is considered a tax shield (i.e., more expense lowers taxes paid). Straight-line depreciation creates a smaller expense as compared to accelerated depreciation methods in the early years of life, which causes net Powered by Cognero

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Ch 07 Operating Assets income to be higher. A company prefers to use straight-line depreciation for financial reporting purposes and an accelerated depreciation method for tax purposes. Any saving in income taxes in the early years provides additional cash flows since the amount paid for taxes will be less than if straight-line was used. Depreciation itself does not use cash. 121. Depreciation is a cost allocation process whose purpose is to allocate the original acquisition cost to the periods benefited by the asset. The method chosen should be based on the decline in the asset's usefulness. Some assets decline in usefulness more rapidly than others, which causes management to select the best method for each asset. 122. A)

Depreciation per year: Total December 31, Year 2: *Years 1 and 2

($10,000 − $2,000) ÷ 5 = $1,600 $1,600 × 2 years* = $3,200

Expense per hour:

($10,000 − $2,000) ÷ 50,000 = $0.16 per hour $0.16 × 5,000 = $800

Depreciation for Year 1: Depreciation for Year 2: Total accumulated depreciation: Book value:

$10,000 × (1/5 × 2) = $4,000 $6,000 × 0.40 = $2,400 $4,000 + $2,400 = $6,400 $10,000 − $6,400 = $3,600

Straight-line is an easy, simple method. Because of this, it is also the most popular. It helps report more net profit in the earlier years as compared to the accelerated methods.

123. A)

The $4,000 cost is a capital expenditure. It increases the plant asset's useful life, so it must be capitalized. ($25,000 − $5,000) ÷ 5 = $4,000 per year $25,000 − $4,000 = $21,000

Depreciation: Book value:

($21,000 + $4,000 − $5,000) ÷ 6 years = $3,333

124. A)

B) 125. A) B)

Depreciation expense: Book value:

($200,000 − $25,000) ÷ 5 years = $35,000 $200,000 − $35,000 = $165,000

$150,000 (proceeds) − $165,000 (book value) = $15,000 loss

Fixed Asset Turnover = Net Sales ÷ Average Fixed Assets $60,000 ÷ ($12,684 + $1,041) ÷ 2 = 8.74 Average Age = Accumulated Depreciation ÷ Depreciation Expense $696 ÷ $344 = 2.02 years

126. Amounts expended for research and development costs are not capitalized and reported as assets on the balance sheet because of the uncertainty of future benefits and the association of the benefits with specific time periods. Instead, such costs appear on the income statement in the period in which they are incurred. 127. Powered by Cognero

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Ch 07 Operating Assets A)

Expense amounts for the year Research and development expense Patent amortization expense

$185,000 45,000

Intangible assets section of the balance sheet at the end of the year Patents $450,000 − $45,000

$405,000

128. Intangible assets are music catalog and copyrights, cable television and sports franchises, brands and trademarks, and goodwill and other intangibles. Music catalogs are rights to play certain music created by particular artists. Contracts give the company the right to perform a particular act or other rights. Copyrights represent the right to use a published work. Cable television franchises give the company the right to use particular cable television rights. Goodwill is the amount paid in excess of the fair market value of a company or business acquired. 129. Goodwill $0

Amortization expense 130. A)

Trademark $250,000 ÷ 5 years = $50,000

Cost of natural resource ($20,000,000 + $30,000,000) = $50,000,000 Depletion rate ($50,000,000 − $500,000) ÷ 10,000,000 tons = $4.95 per ton Dec. 31

Inventory

4,950,000 Accumulated Depletion—Coal Mine 1,000,000 × $4.95 = $4,950,000

4,950,000

131. Operating assets are used by a company in the normal course of operations to generate revenue. Operating assets constitute the major percentage of total assets of many companies. Current assets such as cash, inventory, and short-term investments are important to a company's short-term liquidity. Operating assets are reported as long-term assets on the balance sheet and are absolutely essential to its long-term future. 132. Tangible operating assets have physical existence, while intangible assets have no physical existence. Intangibles represent a right and provide future benefits relative to that right. All operating assets are essential to a company's longterm future. 133. Tangible plant assets and natural resources are reported on the balance sheet as property, plant, and equipment. Tangible plant assets are shown at historical cost less accumulated depreciation. Natural resources are reported at cost less accumulated depletion. Intangible assets are reported in a separate asset section called intangible assets and are reported net of amortization since inception. A separate accumulated amortization account is not necessary with intangibles. 134. Acquisition costs should include all the costs that are normal and necessary to acquire the asset and prepare it for its intended use. This generally includes purchase price, taxes paid at the time of purchase, transportation charges, and installation costs. 135. Estimates are used when computing depreciation, depletion, and amortization expenses. Of course, all of these items impact profit. Estimates include the length of an asset's useful life, its residual value, its total productive life (e.g., in hours), the total amount of output expected from a natural resource, and the impact of capital and revenue expenditures on Powered by Cognero

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Ch 07 Operating Assets an asset's remaining useful life and residual value. In addition, the method of depreciation also impacts the profit reported in any given year. For example, the straight-line method will produce smaller depreciation expense amounts (and, therefore, greater profit) in early years than will the declining-balance method. Finally, ethical issues will be raised if the entrepreneur were to choose unreasonably long useful lives or unrealistically high residual values, for example, to minimize the reported depreciation expense amount and therefore maximize net profit. 136. The book value of a plant asset is the asset's original cost less accumulated depreciation. The amount of accumulated depreciation depends on the depreciation method chosen. The market value of a plant asset is the amount for which the asset can be sold in the market. Book value does not follow the market value. The residual value of a plant asset is an estimate of the amount for which the asset can be sold at the end of its useful life. 137. There are three categories of operating assets that require different allocation procedures. Tangible plant assets costs are allocated using one of several depreciation methods, while the costs of intangible assets are allocated to accounting periods using straight-line amortization. The costs of natural resources are allocated using an appropriate depletion rate. 138. When technology is changing rapidly, more cost should be allocated during the early years of life when the plant asset is more productive. This is achieved by using an accelerated depreciation method like MACRS or double-decliningbalance. These methods create a larger expense in the early years of life and reduce the income for the period, which reduces the amount of taxes paid. A company should select the method for financial reporting that maximizes net income such as straight-line, and the method that creates the lowest taxes for tax reporting such as MACRS. 139. The company should use the straight-line method to minimize the time spent in calculating depreciation. This method also creates the smallest expense in the early years of a plant asset's life and reports the largest amount of net income to please shareholders or, as in this case, reports the smallest amount of net loss. 140. Many companies use MACRS because it is an approved accelerated tax method of depreciation that allocates more cost in the earlier years of useful life than other methods. This results in lower taxes. Yes, a company can use one method for accounting purposes and another method for tax purposes. For accounting purposes, the goal of depreciation is to properly allocate the cost of the plant asset to the accounting periods benefited. A company should select a tax depreciation method that allows it to pay the least possible taxes in the early years, thus increasing available cash flow. 141. Capital expenditures are added to the acquisition cost of a plant asset because they either extend the useful life or make the asset more productive. Revenue expenditures are reported on the income statement as expenses because they help maintain the level of benefits provided by the asset and relate only to the current period. 142. When an expenditure is incurred, a determination must be made as to whether the cost is a capital or revenue expenditure. Capital expenditures are reported as assets, whereas revenue expenditures are reported as expenses. If the dollar amount of the expenditure is small, the cost of accounting for the item as a capital expenditure (and subsequent depreciation) may outweigh the benefits. A company may create a company policy that treats expenditures below a certain amount as expenses. 143. Agree or Expenditure Proper Treatment, if Disagree Disagree? 1. Adding a new patio deck to the resort's upscale Capitalize, but depreciate over the shorter Disagree restaurant, $180,000 of the life of the restaurant or the patio deck 2. Painting 10 ocean front beach houses, $75,000 Disagree Expense in the current period Powered by Cognero

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Ch 07 Operating Assets 3. Purchasing additional golf carts for the club house, $25,000 4. Rebuilding the engine in the resort's airport shuttle bus, $10,000 5. Replacing the golf shop's old air conditioning unit with a more efficient one, $20,000

Agree Agree Disagree

Capitalize but depreciate over the improved asset's useful life

144. A)

The fixed asset turnover ratio measures how efficiently a company is using its fixed assets.

The average age indicates how old the plant assets are and assists managers in estimating future capital expenditures.

145. Research and development costs should be expensed immediately in the period incurred because of the uncertainty of predicting whether any future benefits will result and in determining which accounting period the benefits will impact. 146. Goodwill arises when a company purchases a business and the amount of the purchase price paid exceeds the market value of the individual net assets at the time of purchase. It is reported as an intangible asset on the balance sheet at historical cost. It has an indefinite life and should not be amortized. It should be reviewed annually for impairment.

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Ch 08 Current and Contingent Liabilities

Indicate whether the statement is true or false. 1. Interest on a note payable can be calculated by multiplying the amount owed by the interest rate and by the fraction of year that represents the time elapsed since borrowing. a. True b. False 2. An example of a current liability is a note payable that is due in 2 years. a. True b. False 3. An example of a current liability is the current maturity of a long-term debt. a. True b. False 4. An example of a current liability is a note payable that is due in 8 months. a. True b. False 5. A liability must be recognized when a business is required to transfer assets or provide services to another entity at some point in the future for activities that have already occurred. a. True b. False 6. When accrual basis accounting matches an expense to a period before it is actually paid, an adjusting entry is necessary to record the accrued expense and corresponding liability. a. True b. False 7. Sales taxes collected from customers should be recorded in a liability account until the cash is passed along to the taxing authority. a. True b. False 8. Employers withhold taxes from their employees' gross pay and later pay these amounts withheld to the taxing authority. a. True b. False 9. When a company sells goods or provides services for a customer, but the customer intends to pay later, the company must record a current liability. a. True b. False 10. Federal excise taxes payable is not a current liability. a. True b. False Powered by Cognero

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Ch 08 Current and Contingent Liabilities 11. Federal income taxes payable is not a current liability. a. True b. False 12. Current liabilities should include any amounts that have been accrued as expenses and have to be paid within 1 year or one operating cycle, whichever is longer. a. True b. False 13. The proceeds from advance ticket sales for a concert to be held next month should be recorded as a current liability. a. True b. False 14. For any given contingent liability, a company must choose between recording it on the accounting records or disclosing it in the footnotes to the financial statements. a. True b. False 15. A company is involved in a lawsuit and attorneys determine it is probable they will lose the case in court. However, at this point there is no reasonable estimate of the expected loss. Thus, the company does not need to record the contingent liability nor mention it in the notes to the financial statements. a. True b. False 16. A probable loss from a lawsuit that can be reasonably estimated should not be reported on the balance sheet as a liability. a. True b. False 17. A contingent liability must be recorded if it is reasonably possible, and the amount can be reasonably estimated. a. True b. False 18. Contingent liabilities must be recorded in the accounting records if they are probable, and the amount can be reasonably estimated. a. True b. False 19. When a company uses its past experience to estimate the amount of likely warranty claims in the future, a current liability account must be created. a. True b. False 20. A company's management expects to incur future expenses related to the repair or replacement of defective products sold. Those expenses must be matched to revenues in the period of the repair or replacement. a. True b. False Powered by Cognero

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Ch 08 Current and Contingent Liabilities 21. Warranty expenses result when a company sells products and then estimates the units and cost per unit for repairs and replacements that may occur during the warranty period. a. True b. False 22. A company provides a 1-year warranty for its products. The estimated cost of parts and labor required to satisfy warranty claims should be recorded as a current liability in the period the products are sold. a. True b. False 23. The current ratio is calculated as follows: Current Assets ÷ Current Liabilities. a. True b. False 24. The cash ratio is calculated by dividing current liabilities by the total of cash and marketable securities. a. True b. False 25. The cash ratio is calculated as follows: (Cash + Marketable Securities) ÷ Current Liabilities. a. True b. False 26. The cash ratio is calculated by dividing cash flows from operating activities by current liabilities. a. True b. False 27. The operating cash flow ratio is calculated by dividing the cash flows from operating activities by current liabilities. a. True b. False 28. The operating cash flow ratio is calculated by dividing current assets by cash flows from operating activities. a. True b. False 29. The quick ratio is calculated as follows: (Cash + Marketable Securities + Accounts Receivable) ÷ Current Liabilities. a. True b. False 30. Liquidity relates to a company's ability to sell its assets for the amounts that exceed the assets' book values. a. True b. False

Indicate the answer choice that best completes the statement or answers the question. 31. A company has a note payable that is due on December 31, Year 2. In its December 31, Year 1 balance sheet, this note Powered by Cognero

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Ch 08 Current and Contingent Liabilities payable should be classified as a a. current asset. b. current liability. c. long-term liability. d. long-term asset. 32. Commitments that represent probable future sacrifices of economic benefits are called a. revenues. b. assets. c. notes receivable. d. liabilities. 33. An adjusting entry to record accrued interest on a note payable includes a debit to Interest Expense and a credit to a. Cash. b. Interest Payable. c. Notes Payable. d. Accounts Payable. 34. A flour mill orders sacks of grain from a local farmer. When the company places an order for grain on account, the corresponding journal entry includes a debit to Supplies and a credit to a. Accounts Receivable. b. Cash. c. Supplies Expense. d. Accounts Payable. 35. Accounts payable represent amounts owed to outside suppliers of goods and services, whereas amounts owed in formal, signed agreements or contracts are a. Notes Payable. b. Notes Receivable. c. Supplies Expense. d. Accounts Receivable. 36. Federal and state unemployment taxes are paid by a. employees. b. the Internal Revenue Service. c. employers. d. the Social Security Administration. 37. A liability created when customers pay for goods or services in advance is called a. a long-term liability. b. a note payable. c. unearned revenue. d. a prepaid asset. 38. Employer contributions to retirement accounts and health insurance are called Powered by Cognero

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Ch 08 Current and Contingent Liabilities a. earned benefits. b. fringe benefits. c. employee bonuses. d. predefined benefits contributions. 39. A current liability includes obligations that must be repaid a. within 1 year. b. within 1 year or within the operating cycle, whichever is shorter. c. within 1 year or within the operating cycle, whichever is longer. d. by the end of the operating cycle. 40. When a company purchases goods or services on credit, it creates a(n) a. account receivable. b. account payable. c. interest payable. d. note payable. 41. A fast-food restaurant sells gift cards that may be redeemed at any time. However, they expire in 1 year. At the time these gift cards are sold, the account to be credited is a. Accounts Receivable. b. Accounts Payable. c. Unearned Sales Revenue. d. Accrued Liabilities. 42. When a company records the accrual of wages to its employees, which of the following taxes payable accounts is not included in the journal entry? a. Sales Taxes Payable b. Federal Income Taxes Payable c. State Income Taxes Payable d. Social Security Taxes Payable 43. When a retail company sells products to customers for the amount of the sales price plus the applicable sales tax, the related journal entry includes a debit to Cash or Accounts Receivable, a credit to Sales Revenue, and a credit to a. Sales Tax Expense. b. State Income Taxes Payable. c. Sales Taxes Payable. d. Cost of Goods Sold. 44. An obligation that involves an existing condition for which the outcome is not known with certainty and depends upon some event that will occur in the future is a called a(n) a. unearned revenue. b. current liability. c. conditional liability. d. contingent liability. Powered by Cognero

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Ch 08 Current and Contingent Liabilities 45. A contingent liability must be recognized in the accounting records if a reasonable estimate of the loss can be made and its occurrence is a. probable. b. reasonably possible. c. unlikely. d. remote. 46. Assuming no reasonable estimate of a loss can be made, a contingent liability should be recognized in a. a journal entry. b. neither a journal entry nor the footnotes to the financial statements. c. the footnotes to the financial statements. d. both a journal entry and the footnotes to the financial statements. 47. A guarantee to repair or replace defective goods during a period ranging from a few days to several years following a sale is called a a. sales allowance. b. refund. c. warranty. d. sales adjustment. 48. When a company estimates the amount of expected warranty expenses to be incurred in the future pertaining to past product sales, the account to be credited is a. Warranty Expense. b. Warranty Liability. c. Prepaid Warranty Costs. d. Warranties Payable. 49. The ability of a company to meet its short-term obligations is known as a. its current ratio. b. operating cash flow. c. credit risk. d. liquidity. 50. Acceptable current ratios vary from industry to industry, but a general rule of thumb is that an appropriate current ratio is greater than a. 2.00. b. 1.00 c. 0. d. –1.00. 51. The current ratio is computed by dividing current assets by a. current portion of long-term debt. b. net income. c. average cash balance. d. current liabilities. Powered by Cognero

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Ch 08 Current and Contingent Liabilities 52. The operating cash flow ratio is computed by dividing cash flows from operating activities by a. current assets. b. average cash balance. c. current liabilities. d. average assets. 53. Which of the following statements regarding liabilities is true? a. Liabilities must be legally enforceable to a known recipient. b. Liabilities arise from past activities that require some future sacrifice of economic benefits. c. The accounting principles followed in the United States require that current liabilities be listed in order of decreasing amounts on the balance sheet. d. The accounting principles followed in the United States differ substantially from those of other countries, especially with respect to current liabilities. 54. Which of the following is not classified as a current liability account? a. Accounts Payable b. Notes Payable due in 2 years c. Salaries and Wages Payable d. Income Taxes Payable 55. A current liability is defined as a commitment or obligation that requires a company to transfer assets, create a new current liability, or provide services to another entity at some point in the future that must occur a. within 1 year. b. within 1 year or within the operating cycle, whichever is shorter. c. within 1 year or within the operating cycle, whichever is longer. d. by the end of the operating cycle. 56. A current liability includes obligations that must be repaid a. within 1 year. b. within 1 year or within the operating cycle, whichever is shorter. c. within 1 year or within the operating cycle, whichever is longer. d. by the end of the operating cycle. 57. The amount of a current liability reported on the balance sheet for interest payable includes all interest a. to be paid within 1 year into the future related to amounts borrowed in past transactions. b. to be paid in the future related to amounts borrowed in past transactions. c. currently owed related to amounts borrowed in past transactions. d. paid to date related to amounts borrowed in past transactions. 58. Which of the following statements regarding accounts payable is false? a. Accounting for accounts payable is really just the flip side of accounts receivable. b. Accounts payable arise when a business purchases goods or services on credit. c. Accounts payable arise when a business promises to purchase goods or services in the future. d. Accounts payable seldom require the payment of interest. Powered by Cognero

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Ch 08 Current and Contingent Liabilities 59. What is the impact on the accounting equation of recording a payment to a supplier on account? a. Both assets and liabilities decrease. b. Both assets and stockholders' equity decrease. c. Liabilities decrease and stockholders' equity increases. d. Liabilities increase and stockholders' equity decreases. 60. What is the impact on the accounting equation of recording the accrual of wages expense? a. Both assets and liabilities decrease. b. Both assets and stockholders' equity decrease. c. Liabilities decrease and stockholders' equity increases. d. Liabilities increase and stockholders' equity decreases. 61. What is the impact on the accounting equation of recording the accrual of interest expense? a. Both assets and liabilities decrease. b. Both assets and stockholders' equity decrease. c. Liabilities decrease and stockholders' equity increases. d. Liabilities increase and stockholders' equity decreases. 62. The payment of accounts payable results in a(n) a. decrease in both liabilities and assets. b. decrease in liabilities and an increase in assets. c. decrease in liabilities and an increase in stockholders' equity. d. increase in liabilities and a decrease in stockholders' equity. 63. What is the impact on the accounting equation of recording the issuance of a short-term note payable? a. Both assets and liabilities increase. b. Both assets and stockholders' equity decrease. c. Both assets and stockholders' equity increase. d. Liabilities increase and stockholders' equity decreases. 64. Gainesville Truck Center has a weekly payroll of $10,000 for its employees who work Monday through Friday. Federal and state income taxes are withheld in the amounts of $1,700 and $400, respectively, and FICA taxes are withheld at a mandatory rate of 7.65% (6.2% for Social Security and 1.45% for Medicare). In addition, the federal and state unemployment taxes are applied at rates of 2% and 5%, respectively. The company's year-end is December 31. When the company journal entry is recorded for the payment of these wages and related liabilities, which of the following statements is true regarding the impact on the accounting equation? a. Both assets and liabilities will decrease. b. Assets, liabilities, and stockholders' equity will all decrease. c. Assets and stockholders' equity will decrease, while liabilities will increase. d. Both assets and liabilities will increase. 65. Giff Services Company experienced some difficulties with cash flow, so it approached one of its vendors about a payment extension. The vendor agreed to the extension on the condition that the company sign a note that includes 9% interest. What is the impact on the accounting equation of recording a note payable in exchange for the account payable? Powered by Cognero

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Ch 08 Current and Contingent Liabilities a. Both assets and liabilities increase. b. Both assets and liabilities decrease. c. Liabilities increase and stockholders' equity decreases. d. There is no net impact as there are corresponding increases and decreases in liability accounts. 66. Gainesville Truck Center has a weekly payroll of $10,000 for its employees who work Monday through Friday. Federal and state income taxes are withheld in the amounts of $1,700 and $400, respectively, and FICA taxes are withheld at a mandatory rate of 7.65% (6.2% for Social Security and 1.45% for Medicare). In addition, the federal and state unemployment taxes are applied at rates of 2% and 5%, respectively. The company's year-end is December 31. Which of the following expense accounts will be recorded as a result of this payroll transaction? 1 2 3 4 5

Wages Expense Federal Unemployment Taxes Expense State Unemployment Taxes Expense Social Security Taxes Expense Medicare Taxes Expense a. 1, 2, and 3 b. 1, 4, and 5 c. 2, 3, 4, and 5 d. All of the accounts are needed to record the company's payroll.

67. A manufacturing company's weekly payroll is $80,000 for a 5-day work week beginning each Monday and ending each Friday. The last time salaries and wages were recorded was Friday, December 26. What adjustment is needed on December 31, the last day of the company's fiscal period? a. increase wages expense by $48,000 b. decrease wages payable by $48,000 c. decrease cash by $48,000 d. No adjustment is necessary since the next payday will not occur until the following year. 68. Gainesville Truck Center has a weekly payroll of $10,000 for its employees who work Monday through Friday. Federal and state income taxes are withheld in the amounts of $1,700 and $400, respectively, and FICA taxes are withheld at a mandatory rate of 7.65% (6.2% for Social Security and 1.45% for Medicare). In addition, the federal and state unemployment taxes are applied at rates of 2% and 5%, respectively. The company's year-end is December 31. Assuming December 31 falls on a Thursday, the year-end adjusting entry would a. increase wages expense by $8,000. b. decrease wages payable by $2,000. c. decrease cash by $8,000. d. increase wages payable by $2,000. 69. Gainesville Truck Center has a weekly payroll of $10,000 for its employees who work Monday through Friday. Federal and state income taxes are withheld in the amounts of $1,700 and $400, respectively, and FICA taxes are withheld at a mandatory rate of 7.65% (6.2% for Social Security and 1.45% for Medicare). In addition, the federal and state unemployment taxes are applied at rates of 2% and 5%, respectively. The company's year-end is December 31. Which of the following statements is true regarding the entry to record wages and the related liabilities? a. FICA Taxes Expense will be debited in the amount of $765. Powered by Cognero

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Ch 08 Current and Contingent Liabilities b. Social Security Taxes Payable will be debited in the amount of $620. c. Medicare Taxes Payable will be credited in the amount of $145. d. Federal Income Taxes Payable will be credited in the amount of $2,100. 70. A landlord records the collection of a tenant's security deposit as a a. prepaid expense. b. liability. c. contingent liability. d. contra liability. 71. Gainesville Truck Center has a weekly payroll of $10,000 for its employees who work Monday through Friday. Federal and state income taxes are withheld in the amounts of $1,700 and $400, respectively, and FICA taxes are withheld at a mandatory rate of 7.65% (6.2% for Social Security and 1.45% for Medicare). In addition, the federal and state unemployment taxes are applied at rates of 2% and 5%, respectively. The company's year-end is December 31. Which of the following statements is true regarding the entry to record wages and the related liabilities? a. Social Security Taxes Payable will be debited in the amount of $765. b. Social Security Taxes Payable will be credited in the amount of $620. c. Medicare Taxes Payable will be debited in the amount of $145. d. Federal Income Taxes Payable will be credited in the amount of $2,100. 72. An example of a current liability that must be accrued is a. accounts payable. b. current maturity of long-term debt. c. revenue received in advance. d. wages payable. 73. On October 1, a company borrowed $60,000 from Eighth National Bank on a 1-year, 7% note. If the company's fiscal year ends on December 31, a year-end adjusting entry is required to increase a. interest expense by $4,200. b. notes payable by $1,050. c. interest payable by $1,050. d. prepaid interest by $3,150. 74. A company's employees earn $5,000 per day, work 5 days per week (Monday through Friday), and get paid each Friday. If the previous payday was January 26 and the accounting period ends on January 31, what is the ending balance in the wages payable account? a. $9,000 b. $10,000 c. $15,000 d. $25,000 75. On May 1, a company borrowed $30,000 from First National Bank on a 1-year, 6% note. Assuming the company keeps its records on a calendar year, an entry is needed on December 31 to increase a. interest expense by $600. Powered by Cognero

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Ch 08 Current and Contingent Liabilities b. interest expense by $1,800. c. interest payable by $900. d. interest payable by $1,200. 76. A company whose fiscal year ends on December 31 has a weekly payroll of $100,000. Employees work 5 days per week, Monday through Friday, and payday is every Friday. How much wages expense will be recorded on the Friday, January 3 payday? a. $0 b. $40,000 c. $60,000 d. $100,000 77. Gainesville Truck Center has a weekly payroll of $10,000 for its employees who work Monday through Friday. Federal and state income taxes are withheld in the amounts of $1,700 and $400, respectively, and FICA taxes are withheld at a mandatory rate of 7.65% (6.2% for Social Security and 1.45% for Medicare). In addition, the federal and state unemployment taxes are applied at rates of 2% and 5%, respectively. The company's year-end is December 31. Which of the following statements is true regarding the unemployment taxes to be recorded? a. $700 of unemployment taxes will be withheld from employee paychecks. b. $700 of unemployment tax expenses will be included on the income statement. c. $1,400 of unemployment taxes payable will be included on the balance sheet. d. $1,400 of unemployment tax expenses will be included on the income statement. 78. Gainesville Truck Center has a weekly payroll of $10,000 for its employees who work Monday through Friday. Federal and state income taxes are withheld in the amounts of $1,700 and $400, respectively, and FICA taxes are withheld at a mandatory rate of 7.65% (6.2% for Social Security and 1.45% for Medicare). In addition, the federal and state unemployment taxes are applied at rates of 2% and 5%, respectively. The company's year-end is December 31. What is the impact on the accounting equation of the journal entry for the employer's tax expenses and related liabilities for this payroll transaction? a. Assets and liabilities will increase. b. Assets and stockholders' equity will increase. c. Assets and liabilities will decrease. d. Liabilities will increase and stockholders' equity will decrease. 79. Which of the following would appear on the balance sheet as a current liability? a. a loss that could be expected upon the occurrence of a strike by employees. b. potential damages from the risk of explosions in a fireworks factory. c. payments that are likely to occur for pension benefits to employees. d. a possible loss from a threatened lawsuit. 80. Gainesville Truck Center has a weekly payroll of $10,000 for its employees who work Monday through Friday. Federal and state income taxes are withheld in the amounts of $1,700 and $400, respectively, and FICA taxes are withheld at a mandatory rate of 7.65% (6.2% for Social Security and 1.45% for Medicare). In addition, the federal and state unemployment taxes are applied at rates of 2% and 5%, respectively. The company's year-end is December 31. Which of the following statements is true regarding the FICA taxes that must be recorded? a. Social Security Taxes Expense will be debited in the amount of $1,240. Powered by Cognero

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Ch 08 Current and Contingent Liabilities b. Medicare Taxes Expense will be debited in the amount of $290. c. Social Security Taxes Expense will be debited in the amount of $620. d. Medicare Taxes Payable will be credited in the amount of $1,530. 81. The total amount of interest that will be paid on a 5-year, $90,000 note payable at 11% simple annual interest is a. $1,980. b. $9,900. c. $49,500. d. $139,500. 82. During the first quarter of the current year, General Lighting sold 4,000 batteries on credit for $150 each plus state sales tax of 6%. Sales taxes are required to be paid to the state taxing authority at the end of the quarter. Which of the following correctly records the sale of the batteries? a. Accounts Receivable 636,000 Sales Revenue 600,000 Sales Tax Payable 36,000 b. Accounts Receivable 600,000 Sales Revenue 600,000 c. Accounts Receivable 600,000 Sales Revenue 564,000 Sales Tax Payable 36,000 d. Accounts Receivable 636,000 Sales Revenue 636,000 83. During the first quarter of the current year, General Lighting sold 4,000 batteries on credit for $150 each plus state sales tax of 6%. Sales taxes are required to be paid to the state taxing authority at the end of the quarter. What is the amount of the current liability related to this transaction? a. $36,000 b. $600,000 c. $636,000 d. $150,000 84. During the first quarter of the current year, General Lighting sold 4,000 batteries on credit for $150 each plus state sales tax of 6%. What is the amount of the accounts receivable as a result of this transaction? a. $36,000 b. $600,000 c. $636,000 d. $150,000 85. During the first quarter of the current year, General Lighting sold 4,000 batteries on credit for $150 each plus state sales tax of 6%. Powered by Cognero

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Ch 08 Current and Contingent Liabilities The $150 price of each battery includes a $3 federal excise tax. Which of the following statements is true regarding the proper accounting treatment for the taxes related to this transaction? a. They are recorded as additions to revenue. b. They are recorded as unearned revenues on the company's balance sheet. c. They are recorded as a current liability owed to the taxing authority. d. They are recorded as expenses in the same period as the corresponding sales revenue. 86. During the first quarter of the current year, General Lighting sold 4,000 batteries on credit for $150 each plus state sales tax of 6%. When the company records this transaction, what is the impact on the accounting equation? a. Both assets and liabilities decrease. b. Assets decrease and liabilities increase. c. Assets, liabilities, and stockholders' equity will all increase. d. Assets increase and stockholders' equity decreases. 87. During the first quarter of the current year, General Lighting sold 4,000 batteries on credit for $150 each plus state sales tax of 6%. The price of each battery includes a $1.95 federal excise tax. Any taxes collected must be paid to the appropriate governmental units at the end of the quarter. Which of the following is the proper journal entry to record the sale of the batteries? a. Accounts Receivable 643,800 Sales Revenue 600,000 Sales Tax Payable 36,000 Federal Excise Taxes Payable 7,800 b. Accounts Receivable 636,000 Sales Revenue 592,200 Sales Tax Payable 36,000 Federal Excise Taxes Payable 7,800 c. Accounts Receivable 636,000 Excise Taxes Expense 7,800 Sales Revenue 607,800 Sales Tax Payable 36,000 d. Accounts Receivable 600,000 Sales Tax Expense 36,000 Excise Taxes Expense 7,800 Sales Revenue 643,800 88. On April 1 of the current year, Guyton Sails accepted a $12,000 advance payment for maintaining a customer's fleet of sail boats. The contract is for a 12-month period. In May of the current year, the company performed $1,200 worth of repairs. What is the remaining liability that would appear on the company's balance sheet at the end of May? a. $12,000 b. $10,000 c. $10,800 d. $1,200 89. Georgia’s Salon sold $50,000 of gift cards in May. These gift cards may be used any time before their expiration on May 31 in 1 year from now. Powered by Cognero

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Ch 08 Current and Contingent Liabilities Which of the following is the correct journal entry to record the sale of the gift cards? a. Cash 50,000 Accounts Payable 50,000 b. Cash 50,000 Unearned Sales Revenue 50,000 c. Cash 50,000 Sales Revenue 50,000 d. Cash 50,000 Prepaid Sales Revenue 50,000 90. Georgia’s Salon sold $50,000 of gift cards in May of the current year. These gift cards may be used any time before their expiration on May 31 in 1 year from now. During the current month of May, $10,000 of the gift cards were redeemed for salon services. Which of the following is the correct journal entry to record the redemption of the gift cards? a. Unearned Sales Revenue 10,000 Accounts Payable 10,000 b. Unearned Sales Revenue 10,000 Cash 10,000 c. Prepaid Sales Revenue 10,000 Sales Revenue 10,000 d. Unearned Sales Revenue 10,000 Sales Revenue 10,000 91. Georgia’s Salon sold $50,000 of gift cards in May of the current year. These gift cards may be used any time before their expiration on May 31 in 1 year from now. On May 31, in 1 year from now, all but $1,500 of the gift cards had been redeemed for salon services. Which of the following is the correct journal entry to record for the expired gift cards? a. Unearned Sales Revenue 1,500 Accounts Payable 1,500 b. Unearned Sales Revenue 1,500 Sales Revenue 1,500 c. Loss on Gift Cards 1,500 Sales Revenue 1,500 d. No entry is necessary. 92. Georgia’s Salon sold $50,000 of gift cards in May of the current year. These gift cards may be used any time before their expiration on May 31 in 1 year from now. On May 31, in 1 year from now, all but $1,500 of the gift cards had been redeemed for salon services. What is the impact on the accounting equation of recording the expired gift cards? a. Assets and liabilities increase. b. Assets and liabilities decrease. c. Liabilities increase and stockholders' equity decreases. d. Liabilities decrease and stockholders' equity increases. Powered by Cognero

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Ch 08 Current and Contingent Liabilities 93. During January, Gaston Wholesalers experienced some difficulties with cash flow, so it approached one of its vendors about a payment extension. The vendor agreed to the extension on the condition that the company sign a 30-day note that includes 9% interest. What journal entry is needed to record the retirement of the note on the maturity date? a. debit Notes Payable, credit Cash b. debit Notes Payable, credit Interest Expense, credit Cash c. debit Notes Payable, debit Interest Expense, credit Cash d. debit Accounts Payable, debit Interest Expense, credit Notes Payable 94. On August 1, Genuine Services accepted a $6,000 advance payment from a customer for services to be provided in the future. The contract requires the company to review operations at each of the customer's six locations over the next 6 months. What is the impact on the accounting equation of recording this transaction on August 1? a. Assets and liabilities increase. b. Assets and liabilities decrease. c. Liabilities decrease, and stockholders' equity increases. d. Liabilities increase, and stockholders' equity decreases. 95. A cookie company includes one premium coupon in every cookie package. Upon returning 10 such coupons to the company, the customer will be sent a free cookie jar. In a recent year, the company sold 200,000 packages of cookies for $1 per package. It is estimated that 20% of the coupons will be redeemed. If the cookie jars cost the company $3 each, what amount of liability should be recorded? a. $6,000 b. $12,000 c. $120,000 d. $200,000 96. Which of the following would appear only in the footnotes accompanying the financial statements? a. a probable loss in the amount of $4 million from a pending lawsuit b. a loss that is almost certain to occur in the amount of $4 million related to a pending lawsuit c. a probable loss from a pending lawsuit, the amount of which is not yet determinable d. a liability resulting from a recent lawsuit settlement 97. Which of the following would appear on the balance sheet as a current liability? a. a probable loss in the amount of $4 million from a pending lawsuit. b. a possible loss in the amount of $4 million from a pending lawsuit. c. a probable loss from a pending lawsuit, the amount of which is not yet determinable. d. a lawsuit for $4 million for which the likelihood of loss is remote. 98. A retail company issues numerous discount coupons throughout the year. A balance in the estimated liability account indicates a. that an error has been made in posting. b. the amount of coupons that are expected to be redeemed in the future. c. the amount of coupons already redeemed. d. that more coupons were redeemed than estimated. 99. Which of the following statements regarding contingent liabilities is true? Powered by Cognero

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Ch 08 Current and Contingent Liabilities a. If they are probable and estimable, then they must be recorded even before the outcome of the future event. b. If they are probable and estimable, then they should be disclosed in the notes to the financial statements. c. The historical cost accounting principle determines whether a contingent liability is to be recorded. d. Contingencies that are not estimable should not be recorded nor disclosed in the financial statements even if they are probable. 100. German Auto Parts is a defendant in a multimillion-dollar lawsuit that was filed in a prior year. The lawsuit was not previously disclosed in the financial statements or accompanying footnotes, as the company has vigorously defended its position, and its attorneys initially indicated that the claim was not valid. During the current year, however, the facts and circumstances have changed such that the likelihood of a loss approximating $5 million is now considered reasonably possible. How should the company recognize this lawsuit in its current year financial statements? a. do nothing since it was not recognized in previous periods b. do nothing until the matter is settled or a judgment or verdict is obtained c. disclose the matter in the footnotes accompanying the financial statements d. record a contingent liability in the amount of $5 million 101. There are some liabilities, such as income taxes payable and the estimated warranty liability, for which the amounts must be estimated so they can be recorded in the same period as the related revenues. Failure to record these amounts in the same period as the related revenues is a violation of the a. historical cost principle. b. going concern assumption. c. limitation of materiality. d. expense recognition principle. 102. A company is required to estimate a liability for repairs for products sold with a warranty. In the year following the sale, the firm's accountants find that the estimated amount for repairs has been overstated. The correct accounting procedure in the year following the sale is to a. make an adjusting entry to reduce the amount of the estimate. b. make a correcting entry because the overstatement is an error. c. show the amount of overstatement on the income statement as a loss. d. do nothing because the misstatement related to the prior year. 103. During the year, Great Adventures sold 150 dune buggies for $4,000 each. The dune buggies carry a 5-year warranty for defects. Estimates suggest that repair costs will average 4% of the total selling price. The estimated warranty liability at the beginning of the year was $14,000, and $20,000 in claims was actually incurred during the year to honor the warranty. What was the warranty expense at the end of the year? a. $10,000 b. $18,000 c. $20,000 d. $24,000 104. Geiss Motorsports sold 50 motorbikes for $1,000 each. The bikes carry a 2-year warranty for repairs. Estimates indicate that repair costs will average 2% of the total selling price. What is the amount that would be recorded in the estimated warranty liability account as a result of selling the bikes? a. $1,000 b. $500 Powered by Cognero

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Ch 08 Current and Contingent Liabilities c. $20 d. No liability should be recorded until the bikes are returned for repairs. 105. During the year, Going, Going, Gone sold 100 hot air balloons for $4,000 each. The balloons carry a 5-year warranty for defects. Estimates indicate that repair costs will average 4% of the total selling price. The estimated warranty liability at the beginning of the year was $42,000. $11,000 in claims was actually incurred during the year to honor their warranty. What was the balance in the estimated warranty liability at the end of the year? a. $47,000 b. $42,000 c. $37,000 d. $5,000 106. During the current year, Gardner Home Center sold 800 power washers for $350 each. The power washers carry a 2year warranty for repairs. Estimates indicate that repair costs will average 2% of sales. How much warranty expense should be accrued at the end of the current year as a result of the sales of this product? a. $8,400 b. $5,600 c. $2,800 d. No liability should be recorded until units are brought in for repairs. 107. Which of the following statements about current liabilities is true? a. Current liabilities are listed in order of decreasing amounts in the current liabilities section of a classified balance sheet. b. The amount of current liabilities has little implication for a company's liquidity. c. Current liabilities is the denominator in the formula for the current ratio. d. The current liabilities section of a classified balance sheet will never contain any portion of long-term liabilities. 108. GTO Division has $14,000 in current assets, $2,000 in accounts payable, and $2,000 in unearned sales revenue. What is the division's current ratio? a. 1.75 b. 2.25 c. 3.00 d. 3.50 109. GTX Corp. has $100,000 in cash, $40,000 in inventory, $25,000 in accounts payable, and $15,000 in accrued liabilities (salaries, interest, taxes, etc.). If the company has $280,000 in cash flows from operating activities, what is its operating cash flow ratio? a. 0.50 b. 2.00 c. 7.00 d. 3.50 110. GT Company has $200 in cash, $500 in accounts receivable, and $700 in inventory. The company also has $200 in accounts payable and $200 in unearned sales revenue. What is the company's quick ratio? a. 1.75 Powered by Cognero

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Ch 08 Current and Contingent Liabilities b. 2.25 c. 3.00 d. 3.50 111. Go Cars has $200 in cash, $500 in accounts receivable, $400 in marketable securities, and $700 in inventory. Assuming the company also has $200 in accounts payable and $200 in unearned sales revenue, what is its cash ratio? a. 4.50 b. 3.00 c. 2.75 d. 1.50 112. A company has total assets of $350,000 consisting of current assets of $115,000, property, plant, and equipment of $200,000, and other assets of $35,000. The company has total liabilities of $100,000 consisting of current liabilities of $65,000 and other liabilities of $35,000. What is the current ratio? a. 3.50 b. 1.15 c. 1.77 d. 5.38 113. A company has long-term assets of $2,000, current liabilities of $1,250, and long-term liabilities of $1,500. If the current ratio is 2.50, then current assets must be a. $5,000. b. $3,125. c. $1,563. d. $500. 114. A company has cash of $800, current liabilities of $500, and long-term liabilities of $600. If the cash ratio is 2.50, then marketable securities must be a. $700. b. $800. c. $450. d. $2,000. 115. A company has current assets of $4,400, current liabilities of $2,750, and long-term liabilities of $5,500. If the operating cash flow ratio is 1.50, then cash flows from operating activities must be a. $4,125. b. $6,600. c. $8,250. d. $12,375. 116. Assume a company has a current ratio of 2.00. Payment of accrued wages payable would cause the current ratio to a. decrease. b. increase. c. be unchanged since the effects offset one another. d. be unchanged since it has no impact on any current asset or liability accounts. Powered by Cognero

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Ch 08 Current and Contingent Liabilities 117. Assume that a company has an operating cash flow ratio of 0.75. Payment of accrued wages payable would cause the operating cash flow ratio to a. decrease. b. increase. c. be unchanged since the effects offset one another. d. be unchanged since it has no impact on any current liability or operating cash flow accounts. 118. Assume a company has a current ratio of 0.75. The purchase of inventory on account would cause the current ratio to a. decrease. b. increase. c. be unchanged since the effects offset one another. d. be unchanged since it has no impact on any current asset or liability accounts. 119. Assume that a company has a current ratio of 3.00. Failure to record estimated warranty costs will cause the current ratio to be a. overstated. b. understated. c. unchanged since the effects offset one another. d. unchanged since it has no impact on any current asset or liability accounts. 120. Assume that a company has a cash ratio of 0.45. Recording the estimated warranties expense on the period's sales would cause the cash ratio to a. decrease. b. increase. c. be unchanged since the current liabilities and assets change by the same amount. d. be unchanged since it has no impact on any current asset or liability accounts. 121. A company has $8,000 in cash, $9,250 in accounts receivable, and $19,500 in inventory. If current liabilities are $14,350, then the quick ratio will be a. 5.00. b. 2.60. c. 2.00. d. 1.20. 122. If a business has current assets of $62,000, total assets of $350,000, current liabilities of $31,000, and total liabilities of $125,000, then its current ratio will be a. 0.50. b. 2.00. c. 2.80. d. 3.00. 123. A company has property, plant, and equipment of $500,000, current liabilities of $70,000, and long-term liabilities are $300,000. If the company's current ratio is 3.00, what are the current assets? a. $900,000 Powered by Cognero

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Ch 08 Current and Contingent Liabilities b. $690,000 c. $430,000 d. $210,000 124. If long-term assets are $5,000, current liabilities are $700, long-term liabilities are $3,000, and the operating cash flow ratio is 1.10, then the company's cash flows from operating activities will be a. $700. b. $770. c. $3,300. d. $5,500.

125. Selected information from Glass Doctor’s consolidated balance sheet follows. Assume that all of the account balances on the balance sheet are normal balances. Glass Doctor Selected Information from the Consolidated Balance Sheet (in millions) Assets (in alphabetical order): Dec. 31, Year 2 Dec. 31, Year 1 Accounts receivable $ 214.2 $ 124.9 Cash and cash equivalents 100.0 99.5 Inventories 72.1 75.6 Marketable securities 44.7 40.3 Other current assets 10.8 12.0 Property, plant, and equipment 5,006.6 5,001.2 Liabilities: Accounts payable and accrued expenses Current portion of long-term debt Income taxes payable Long-term debt Long-term deferred income taxes Notes payable due in 8 months Other long-term liabilities

14.4 44.6 30.8 350.0 29.9 101.0 12.5

15.4 31.5 35.3 246.8 31.7 105.4 16.9

Compute the total current liabilities for December 31, Year 2, and December 31, Year 1. 126. Every month, Glacier Distributors orders shipping supplies from a particular vendor. On February 13, the company orders supplies amounting to $21,000 of accounts payable on March 15. Due to an unexpected decline in business, the company is unable to pay its vendor on March 15 and asked for a payment extension. The vendor granted the extension but requires the company to sign a note that specifies 7.5% interest beginning March 15 with a due date of July 15. The company pays the amount in full on July 15. Prepare the necessary journal entries for Glacier Distributors on February 13, March 15, and July 15. 127. Gospel Ministries purchases two pianos on account on April 3 for $6,600. The company agrees to pay an extra $100 to have the seller deliver the pianos. Unfortunately, one of the pianos is damaged during transit. The seller agrees to deduct $200 from the amount owed. Gospel Ministries pays for the pianos in full on May 3. Prepare the journal entries that Gospel Ministries should make on April 3 and May 3. Powered by Cognero

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Ch 08 Current and Contingent Liabilities 128. Groovy Swing is a retail store specializing in golf equipment and apparel. On February 1, the company borrows $250,000 cash from the bank with a 6-month, 6% note payable. The note is used to finance the acquisition of inventory for the spring selling season. Prepare the company's necessary journal entries on February 1 and the note's maturity date. 129. A company pays wages of $12,500 at the end of each 5-day work week. A)

What is the standard entry for wages paid on each pay date?

Assuming the company's year-end falls on a Wednesday, prepare the necessary journal entries on December 31 and on the January 2 pay date.

130. A company borrowed $50,000 on November 1, Year 1, at 9% interest. The interest and principal are due on October 31, Year 2. Prepare the company's journal entries on November 1, Year 1, December 31, Year 1, and October 31, Year 2. 131. Grayson Flowers borrowed $400,000 from the bank on a 6-month, 7% interest-bearing note on October 1, Year 1. The company's year-end is December 31. The note and all related interest were repaid to the bank on April 1, Year 2. A)

Prepare the company's entry for this note on October 1, Year 1.

Record the adjusting entry for this note on December 31, Year 1.

Indicate how the note and the accrued interest would be reported on the balance sheet on December 31, Year 1.

Prepare the entry to record the repayment of the note on April 1, Year 2.

132. Graphic Designs, Inc. engaged in the following transactions during the current year: Date Feb. 10

Transaction Purchased $10,000 of merchandise on credit.

Feb. 27

Paid for the merchandise purchased on February 10.

May 1

Borrowed $100,000 on a 9-month, 9% interest-bearing note.

May 15

Received a $5,000 deposit from a customer for custom-made products to be manufactured and delivered next month.

June 30

Remitted quarterly installments of FICA and income tax withholdings of $106,000 and $417,000, respectively. The payroll entries, including the employer's payroll taxes, have already been recorded.

Dec. 31 Recorded accrued interest on the note payable. Prepare journal entries for each of these transactions.

133. During May of the current year, Grant Park Refinery sold, on credit, 1,200,000 gallons of motor fuel at $1.89 each plus Georgia sales tax of 6%. Included in the price per gallon was a $0.42 federal excise tax. All taxes collected are paid to the appropriate taxing authority at the end of the quarter. Powered by Cognero

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Ch 08 Current and Contingent Liabilities Prepare the appropriate journal entries on May 31 and June 30. 134. Grand Strand Power & Light provides utilities to a gulf coast community. On November 30, the utility billed 1,500 residential customers a total of $118,500 for electricity. In addition, the company is required to collect state taxes of 1.5% and federal excise taxes of 0.95%. Both of these taxes are used to fund the energy commission. A)

What total amount should be billed to customers for the month ending November 30? (Round answer to the nearest whole dollar.)

Provide the journal entry to record the November billings. (Round answer to the nearest whole dollar.)

Record the remittance of the taxes to the appropriate governmental units on December 31. (Round answer to the nearest whole dollar.)

135. Great Dane Trailers has the following data available for its March 31 payroll: Gross pay* $180,000 Federal income taxes withheld 43,200 State income taxes withheld 7,200 *All subject to FICA matching and withholding at 7.65%. Federal unemployment tax and state unemployment tax are also applicable at rates of 0.8% and 3.5%, respectively. All wages are subject to these taxes. Prepare the journal entries to record the wages earned and payroll taxes. 136. Grady Company's hourly employees earned $55,600 in the pay period ending March 31. Assume further that federal and state income taxes withheld are $9,452 and $2,224, respectively. In addition, Social Security and Medicare taxes are applicable at rates of 6.2% and 1.45%, respectively, and federal and state unemployment taxes are applicable at rates of 4.5% and 3.0%, respectively. All wages are subject to these taxes. Prepare the journal entry related to the $55,600 gross pay earned by the company's A) employees. (Round all amounts to the nearest dollar, if necessary.) B)

Prepare the journal entry for the company's payroll taxes over and above gross pay. (Round all amounts to the nearest dollar, if necessary.)

137. During January, a travel company sold 40 cruise vacation packages for $147,960. Customers are required to pay in advance, but the package price is refundable until the date the cruise departs. The cruises begin in February. A)

Record the entry on January 31 to book the amounts collected from customers.

What journal entry should be made each time a customer departs on the cruise vacation?

138. Gottlieb Pool n' Pub, Inc. sold $25,000 in gift cards during December, Year 1. The expiration date on these gift cards is December 31, Year 2. During Year 2, $23,940 of the gift cards were redeemed by customers. A) Record the sale of the gift cards. B)

Record the redemption of the gift cards.

Record the expiration of the remaining gift cards.

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Ch 08 Current and Contingent Liabilities 139. On August 3, Year 1, Grace Electric Supply agreed to manufacture and supply 650 electrical control units for a particular customer who deposited $136,500 toward the purchase price upon signing the 1-year purchase agreement, which set the selling price of each control unit at $1,050. In December, Year 1, 125 units were delivered to the customer and the remaining units were delivered in January, Year 2. The customer paid in cash upon delivery for any units not covered by the deposit. A)

Record the journal entry to record the receipt of the customer deposit in Year 1.

Record the journal entry for the delivery of 125 units to the customer in Year 1. How would the customer's deposit be reported in the financial statements at the end of Year 1?

Record the entry for the delivery of the remaining units to the customer in Year 2.

140. A partial balance sheet for Gibraltar, Inc. follows. Assume that all of the account balances on the balance sheet are normal balances. Gibraltar, Inc. Partial Balance Sheet (in millions) Assets (in order of liquidity): Dec. 31, Year 2 Cash $1,780 Marketable securities 1,000 Accounts receivable 2,644 Inventories 3,010 Prepaid rent 500 Supplies 494 $9,428 Total current assets Liabilities: Long-term debt Other noncurrent liabilities Long-term income taxes payable Accounts payable Other current liabilities Accrued compensation and benefits Short-term borrowing Estimated warranty liability Income taxes payable

Dec. 31, Year 1 $1,649 750 2,700 2,950 500 76

$14,465 4,421 3,504 2,556 2,066 1,538 1,200 793 658

$8,625

$15,001 3,148 3,543 2,468 1,738 1,082 1,126 928 1,142

Compute the total current liabilities for December 31, Year 2, and December 31, Year 1. 141. Good Time Carts offers a 1-year warranty on all its golf carts. Estimates suggest that 2% of carts sold will require warranty service and that the average warranty claim will cost $215. During Year 1, the company sold 450 golf carts. A)

Record the entry at the end of Year 1 for warranty expenses.

Assume the company incurred costs of $280 in inventory and $680 in cash paid for wages in connection with warranty work performed during the first quarter of Year 2. Record the proper entry to recognize these costs.

142. Golden Sound sells premium car stereo systems and various equipment for home sound systems as well. Sales and expected warranty claims for the year ended December 31 are as follows: Powered by Cognero

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Ch 08 Current and Contingent Liabilities Product Unit Expected Warranty Claims Cost per Group Sales for Warranty Period Claim Receivers $14,700 1 claim per 100 sold $150 CD changers 19,500 3 claims per 100 sold 125 Speakers 7,500 2 claims per 100 sold 100 Prepare the journal entry to record warranty expense for the year ended December 31. 143. For each of the following transactions, indicate the impact on the accounting equation as a result of recording the related journal entry. Include an entry in each column for each transaction, whether an increase (+), decrease (−), or no effect (NE). The first transaction is shown as an example. Transaction:

Assets

Purchased inventory on credit Issued a note payable Repaid a note and interest at maturity Record accrual of interest expense Record accrual of wages expense Collect in advance for sales of gift cards Record redemption of gift cards Record warranty expense Record costs incurred for warranty work

Liabilities

Equity

144. A partial balance sheet for Gibraltar, Inc. follows. Assume that all of the account balances on the balance sheet are normal balances.

Assets: Cash Marketable securities Accounts receivable Inventories Prepaid rent Supplies Total Current Assets

Gibraltar, Inc. Partial Balance Sheet (in millions) Dec. 31, Year 2 $1,780 1,000 2,644 3,010 500 494 $9,428

Liabilities: Long-term debt Other noncurrent liabilities Long-term income taxes payable Accounts payable Other current liabilities Accrued compensation and benefits Short-term borrowing Estimated warranty liability Income taxes payable

$14,465 4,421 3,504 2,556 2,066 1,538 1,200 793 658

Dec. 31, Year 1 $1,649 750 2,700 2,950 500 76 $8,625 $15,001 3,148 3,543 2,468 1,738 1,082 1,126 928 1,142

Compute the following liquidity ratios for Year 2 and Year 1: Current ratio Quick ratio Powered by Cognero

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Ch 08 Current and Contingent Liabilities Cash ratio 145. Selected information from Glass Doctor’s consolidated balance sheet follows. Assume that all of the account balances on the balance sheet are normal balances. Glass Doctor Selected Information from the Consolidated Balance Sheet (in millions) Assets: Dec. 31, Year 2 Dec. 31, Year1 Accounts receivable $ 214.2 $ 124.9 Cash and cash equivalents 100.0 99.5 Inventories 72.1 75.6 Marketable securities 44.7 40.3 Other current assets 10.8 12.0 Property, plant, and equipment 5,006.6 5,001.2 Liabilities: Accounts payable and accrued expenses Current portion of long-term debt Income taxes payable Long-term debt Long-term deferred income taxes Notes payable due in 8 months Other long-term liabilities

14.4 44.6 30.8 350.0 29.9 101.0 12.5

15.4 31.5 35.3 246.8 31.7 105.4 16.9

Compute the following liquidity ratios for Year 2 and Year 1: Current ratio Quick ratio Cash ratio Operating cash flow ratio Assume that Glass Doctor's statement of cash flows presented cash flows from operating activities of $204.6 million and $201.1 million for Year 2 and Year 1 on December 31, respectively. Comment on the direction and significance of the change in the ratios from Year 1 to Year 2.

146. What is meant by the term "current maturities of long-term debt" in the current liabilities section of a balance sheet? 147. Describe withholding and payroll taxes. 148. What are accrued liabilities, and what are some examples of accounts that would be classified as accrued liabilities in the current liabilities section of a balance sheet? 149. You are the owner of a small chain of sporting goods stores. Currently, you pay a media company to maintain the company's website and Internet sales processing software system. You are considering bringing that operation in-house by hiring an information technology (IT) employee. What factors should you consider in making this decision? 150. List several employee withholdings that impact an employee's net pay. Describe the types of payroll taxes that an employer might be required to pay. Powered by Cognero

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Ch 08 Current and Contingent Liabilities 151. Why are unearned revenues considered current liabilities? 152. The following footnote accompanied Precious Metal Fabrications’ financial statements: Note 7−Litigation On December 2 of the current year, the Company was served with a class action complaint filed in federal court in Covington, Kentucky. The complaint, captioned Bradford Haynes vs. The Company, was filed by a shareholder of the Company on behalf of himself and other shareholders who purchased the Company's common stock during the period of March 31 through December 31 of the previous year. The plaintiff alleges that the Company violated federal securities laws by making untrue statements of material facts and omitting material facts concerning the Company's construction and start-up of its new manufacturing facility in Plano, Texas. Also named as defendants in the complaint are certain officers and directors of the Company. The Plaintiff is seeking an unspecified amount of monetary damages. While this action is in its preliminary stages, management believes that the allegations are without merit and the Company intends to defend the lawsuit vigorously. What type of liability is presented in this disclosure? 153. The following footnote accompanied Precious Metal Fabrications’ financial statements: Note 7−Litigation On December 2 of the current year, the Company was served with a class action complaint filed in federal court in Covington, Kentucky. The complaint, captioned Bradford Haynes vs. The Company, was filed by a shareholder of the Company on behalf of himself and other shareholders who purchased the Company's common stock during the period of March 31 through December 31 of the previous year. The plaintiff alleges that the Company violated federal securities laws by making untrue statements of material facts and omitting material facts concerning the Company's construction and start-up of its new manufacturing facility in Plano, Texas. Also named as defendants in the complaint are certain officers and directors of the Company. The Plaintiff is seeking an unspecified amount of monetary damages. While this action is in its preliminary stages, management believes that the allegations are without merit and the Company intends to defend the lawsuit vigorously. Should the company record a liability in the current year for this litigation? Why or why not? 154. Why is the liability for warranties recognized during the period when products are sold rather than the period when warranty claims are satisfied? 155. What type of entry is made to create a credit balance in the estimated warranty liability account on the balance sheet? What account would be debited in this entry? 156. You are the owner and operator of a growing small business. You would like to expand your product offerings but need $25,000 in short-term financing in order to do so. You have an appointment to see your banker tomorrow. The banker has asked you to bring certain financial information with you to the meeting. That information is as follows:

Balance Sheet Information Total current assets Accounts payable Short-term notes payable Income taxes payable Income Statement Information Sales Net income Powered by Cognero

Year 2

At December 31 Year 1

$66,000 2,610 12,010 380

$75,000 1,500 8,885 560

$842,000 10,275

$765,000 4,670 Page 26

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Ch 08 Current and Contingent Liabilities Use your financial information to make a case for the loan. 157. What is the purpose of the current ratio? How does it differ from the quick ratio?

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Ch 08 Current and Contingent Liabilities Answer Key 1. True 2. False 3. True 4. True 5. True 6. True 7. True 8. True 9. False 10. False 11. False 12. True 13. True 14. False 15. False 16. False 17. False 18. True 19. True 20. False 21. True 22. True 23. True 24. False 25. True Powered by Cognero

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Ch 08 Current and Contingent Liabilities 26. False 27. True 28. False 29. True 30. False 31. b 32. d 33. b 34. d 35. a 36. c 37. c 38. b 39. c 40. b 41. c 42. a 43. c 44. d 45. a 46. c 47. c 48. b 49. d 50. a 51. d Powered by Cognero

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Ch 08 Current and Contingent Liabilities 52. c 53. b 54. b 55. c 56. c 57. c 58. c 59. a 60. d 61. d 62. a 63. a 64. c 65. d 66. d 67. a 68. a 69. c 70. b 71. b 72. d 73. c 74. c 75. d 76. c Powered by Cognero

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Ch 08 Current and Contingent Liabilities 77. b 78. d 79. c 80. c 81. c 82. a 83. a 84. c 85. c 86. c 87. b 88. b 89. b 90. d 91. b 92. d 93. c 94. a 95. b 96. c 97. a 98. b 99. a 100. c 101. d 102. a Powered by Cognero

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Ch 08 Current and Contingent Liabilities 103. d 104. a 105. a 106. b 107. c 108. d 109. c 110. a 111. d 112. c 113. b 114. c 115. a 116. b 117. a 118. b 119. a 120. a 121. d 122. b 123. d 124. b 125. Current liabilities include the following accounts and amounts: Accounts payable and accrued expenses Current portion of long-term debt Income taxes payable Powered by Cognero

Dec. 31, Year 2 $ 14.4 44.6 30.8

Dec. 31, Year 1 $ 15.4 31.5 35.3 Page 32

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Ch 08 Current and Contingent Liabilities Notes payable due in 8 months

126. Date Feb. 13

101.0 $190.8

Accounts Supplies

105.4 $187.6

Debit 21,000 Accounts Payable

Mar. 15

Accounts Payable

21,000 21,000

Notes Payable July 15

Notes Payable Interest Expense ($21,000 × 0.075 × 4/12)

21,000 21,000 525

Cash

127. Date Apr. 3

Accounts Equipment

21,525

Debit 6,700 Accounts Payable

May 3

Accounts Payable

6,700

Accounts Cash

200 6,500

Debit 250,000 Notes Payable

Aug. 1

Credit 6,700

Equipment Cash 128. Date Feb. 1

Credit

Notes Payable Interest Expense ($250,000 × 0.06 × 6/12)

Credit 250,000

250,000 7,500 Cash

257,500

129. A)

Date XXX

Accounts Wages Expense

Debit 12,500 Cash

Dec. 31

Wages Expense ($12,500 × 3/5)

12,500 7,500

Wages Payable Wages Expense ($12,500 × 2/5) Wages Payable

Jan. 2

7,500 5,000 7,500

Cash 130. Date Nov. 1

Accounts Cash

Credit

12,500

Debit 50,000

Credit Page 33

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Ch 08 Current and Contingent Liabilities Notes Payable Dec. 31

50,000

Interest Expense ($50,000 × 0.09 × 2/12)

750 Interest Payable

Oct. 31

750

Interest Expense ($50,000 × 0.09 × 10/12) Interest Payable Notes Payable

3,750 750 50,000 Cash

54,500

131. A)

Date

Accounts

Oct. 1

Cash

Debit

Credit

400,000 Notes Payable

Dec. 31

Interest Expense ($400,000 × 0.07 × 3/12)

400,000 7,000

Interest Payable

The note payable in the amount of $400,000 will be reported in the current liabilities section of the balance sheet. The accrued interest will be reported as interest payable in the amount of $7,000 in the current liabilities section of the balance sheet.

7,000

Apr. 1

Interest Expense ($400,000 × 0.07 × 3/12) Interest Payable Notes Payable

7,000 7,000 400,000 Cash

132. Date Feb. 10

Accounts Merchandise Inventory

414,000

Debit 10,000 Accounts Payable

Feb. 27

Accounts Payable

10,000 10,000

Cash May 1

Cash

10,000 100,000

Notes Payable May 15

Cash

100,000 5,000

Unearned Sales Revenue June 30

FICA Taxes Payable (employee) FICA Taxes Payable (employer) Federal Income Taxes Payable

5,000 106,000 106,000 417,000

Cash Powered by Cognero

Credit

629,000 Page 34

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Ch 08 Current and Contingent Liabilities Dec. 31

133. Date May 31

Interest Expense

6,000 Interest Payable ($100,000 × 9% × 9/12) = $6,750 × 8/9

Accounts Accounts Receivable

Debit 2,404,080 Sales Revenue* Georgia Sales Tax Payable** Federal Excise Taxes Payable***

June 30

Georgia Sales Tax Payable Federal Excise Taxes Payable

6,000

Credit 1,764,000 136,080 504,000

136,080 504,000 Cash

640,080

*1,200,000 × ($1.89 − $0.42) **1,200,000 × $1.89 × 6% ***1,200,000 × $0.42 134. A)

Total amount billed: ($118,500 × 1.0245) = $121,404 Date Nov. 30

Dec. 31

Accounts Accounts Receivable

Debit 121,404

Credit

Sales Revenue State Taxes Payable ($118,500 × 0.015) Federal Excise Taxes Payable ($118,500 × 0.0095)

118,500 1,778

State Taxes Payable Federal Excise Taxes Payable

1,778 1,126 Cash

135. Date Mar. 31

Mar. 31

Accounts Wages Expense

Federal Unemployment Taxes Expense State Unemployment Taxes Expense Employer FICA Expense

2,904

Debit 180,000 Federal Income Taxes Payable State Income Taxes Payable FICA Taxes Payable Cash

Credit 43,200 7,200 13,770 115,830

1,440 6,300 13,770 Federal Unemployment Taxes Payable State Unemployment Taxes Payable FICA Taxes Payable

1,126

1,440 6,300 13,770 Page 35

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Ch 08 Current and Contingent Liabilities 136. Date Mar. 31

Mar. 31

Accounts Wages Expense

Debit 55,600 Federal Income Taxes Payable State Income Taxes Payable Social Security Taxes Payable Medicare Taxes Payable Cash

Federal Unemployment Taxes Expense State Unemployment Taxes Expense Employer Social Security Taxes Expense Employer Medicare Taxes Expense

Credit 9,452 2,224 3,447 806 39,671

2,502 1,668 3,447 806 Federal Unemployment Taxes Payable State Unemployment Taxes Payable Employer Social Security Taxes Payable Employer Medicare Taxes Payable

2,502 1,668 3,447 806

137. Date Jan. 31

Feb. X

Accounts Cash

Debit 147,960 Unearned Sales Revenue

Unearned Sales Revenue

3,699

Accounts Cash

Debit 25,000 Unearned Sales Revenue

Year 2

Unearned Sales Revenue

Credit 25,000

23,940 Sales Revenue

Dec. 31, Year 2

147,960

3,699 Sales Revenue

138. Date Dec, Year 1

Credit

23,940

Unearned Sales Revenue

1,060 Sales Revenue

1,060

139. A)

Date Accounts Aug. 3, Year Cash 1

Debit 136,500 Unearned Sales Revenue

Credit

Dec. Year 1 Unearned Sales Revenue

136,500

131,250 Sales Revenue (125 × $1,050)

131,250

The deposit would be reported as unearned sales revenue of $5,250 ($136,500 − $131,250) in the current liabilities section of the yearPowered by Cognero

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Ch 08 Current and Contingent Liabilities end balance sheet. C)

Year 2

Cash [(650 × $1,050) − $136,500] Unearned Sales Revenue

546,000 5,250 Sales Revenue

551,250

140. Current liabilities include the following accounts and amounts: Dec. 31, Year 2 $2,556 2,066 1,538 1,200 793 658 $8,811

Accounts payable Other current liabilities Accrued compensation and benefits Short-term borrowing Estimated warranty liability Income taxes payable

Dec. 31, Year 1 $2,468 1,738 1,082 1,126 928 1,142 $8,484

141. A)

Date Accounts Dec. 31, Year 1 Warranty Expense

Debit 1,935 Estimated Warranty Liability (450 × 2% × $215)

Mar. 31, Year 2 Estimated Warranty Liability

1,935

960 Inventory Cash

142. Accounts Warranty Expense

Credit

280 680

Debit 110,175 Estimated Warranty Liability

Credit 110,175

$14,700 ÷ 100 = 147 × $150 = $22,050 ($19,500 ÷ 100) × 3 = 585 × $125 = $73,125 ($7,500 ÷ 100) × 2 = 150 × $100 = $15,000

Receivers: CD Changers: Speakers: 143. Transaction:

Assets

+ + − NE NE + NE NE −

Liabilities

+ + − + + + − + −

Equity

NE NE − − − NE + − NE Page 37

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Ch 08 Current and Contingent Liabilities

144. The current ratio is computed by dividing current assets by current liabilities: Year 2: $9,428 ÷ $8,811 = 1.07 Year 1: $8,625 ÷ $8,484 = 1.02 The current ratio has improved from Year 1 to Year 2. As a general rule of thumb, a current ratio greater than 2.00 is appropriate, so Gibraltar's current ratio is still deemed low despite the current year increase. The quick ratio is computed by dividing (cash + marketable securities + accounts receivable) / current liabilities: Year 2: ($1,780 + $1,000 + $2,644) ÷ $8,811 = 0.6156 Year 1: ($1,649 + $750 + $2,700) ÷ $8,484 = 0.6010 The quick ratio improved from Year 1 to Year 2; however, Gibraltar's quick assets are not sufficient to cover its current liabilities. The cash ratio is computed by dividing (cash + marketable securities) by current liabilities: Year 2: ($1,780 + $1,000) ÷ $8,811 = 0.32 Year 1: ($1,649 + $750) ÷ $8,484 = 0.28 The cash ratio has also improved from Year 1 to Year 2; yet, Gibraltar's cash and marketable securities are not sufficient to cover its current liabilities.

145. The current ratio is computed by dividing current assets by current liabilities: Year 2: ($214.2 + $100.0 + $72.1 + $44.7 + $10.8) ÷ $190.8 = 2.32 Year 1: ($124.9 + $99.5 + $75.6 + $40.3 + $12.0) ÷ $187.6 = 1.88 The current ratio has improved from Year 1 to Year 2. As a general rule of thumb, a current ratio greater than 2.00 is appropriate, so Glass Doctor's current ratio is fine as of December 31 of Year 2. The quick ratio is computed by dividing (cash + marketable securities + accounts receivable) by current liabilities: Year 2: ($100.0 + $44.7 + $214.2) ÷ $190.8 = 1.88 Year 1: ($99.5 + $40.3 + $124.9) ÷ $187.6 = 1.41 The quick ratio improved from Year 1 to Year 2. Glass Doctor's quick assets are more than sufficient to cover its current liabilities. The cash ratio is computed by dividing (cash + marketable securities) by current liabilities: Year 2: $100.0 + $44.7) ÷ $190.8 = 0.76 Year 1: ($99.5 + $40.3) ÷ $187.6 = 0.75 The cash ratio has also improved slightly from Year 1 to Year 2; yet, Glass Doctor's cash and marketable securities are not sufficient to cover its current liabilities. The operating cash flow ratio is computed by dividing cash from operating activities by current liabilities: Year 2: $204.6 ÷ $190.8 = 1.07 Year 1: $201.1 ÷ $187.6 = 1.07 The cash ratio has remained constant between Year 1 and Year 2. Glass Doctor's cash flows from operating activities are sufficient to cover its current liabilities. 146. Current maturities of long-term debt represent the portion of long-term debt principal that is due to be paid in the next year. If any long-term debt is to be paid with cash in the coming year, it must be classified as a current liability and presented in the current liabilities section of the balance sheet. Powered by Cognero

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Ch 08 Current and Contingent Liabilities 147. Businesses are required to withhold taxes from employees' earnings and to pay taxes based on wages and salaries paid to employees. These withholding and payroll taxes are liabilities until they are paid to the taxing authority. Note that there are really two sources for these taxes: employees and employers. Employees: Employees must pay certain taxes that are "withheld" from their paycheck. This is the difference between gross pay and net pay. The business does not have any rights to this money; instead, as with sales tax, it must pay these amounts to the proper authority. The standard withholdings are federal, state, and possibly city or county income taxes, as well as Social Security and Medicare. Employees may also have amounts withheld for such things as retirement accounts (e.g., 401-K), parking, and health insurance, among other things, but these are not taxes. Employers: The business itself must pay certain taxes based on employee payrolls. These amounts are not withheld from employee pay; they are additional amounts that must be paid over and above gross pay. For example, employers match employee contributions to Social Security and Medicare (together these are called FICA). Employers also pay federal and state unemployment taxes (these are used to fund unemployment benefits) based on their history of firing employees (because fired employees are eligible to collect unemployment benefits). Finally, employers do have other costs— typically called fringe benefits—associated with employees, but these are not taxes. Examples of fringe benefits include employer contributions to retirement accounts and health insurance. 148. Accrued liabilities, or accrued payables, represent the completed portion of activities that are in process at the end of the period, so adjusting entries are required for their proper recognition. Examples of accounts that would be classified as accrued liabilities in the current liabilities section of the balance sheet include Wages Payable, Interest Payable, Income Taxes Payable, Social Security Taxes Payable, Unemployment Taxes Payable, and Medicare Taxes Payable. 149. Of course, the primary concern is which approach will perform the function better. In addition, you should take into consideration that a new employee will cost you more than just salary. You will also have to match their Social Security taxes and possibly pay unemployment taxes as well. Finally, you will have to consider additional costs such as fringe benefit costs (e.g., medical insurance, retirement plan, vacation pay, etc.) in order to attract the best employees. 150. Employee withholdings include a variety of items including federal and state income taxes, Social Security and Medicare (FICA) taxes, retirement plan contributions, medical insurance premiums, union dues, and charitable contributions, to name a few. Employers must pay a matching portion of FICA taxes, federal unemployment taxes, and depending on the states in which they operate, they may also have to pay state unemployment taxes. 151. Unearned revenues represent amounts collected from customers in advance. This creates a current liability, as the seller has an obligation to provide goods or services for this customer in the amount of the advance receipt. If the seller does not fulfill the obligation, then a refund of the amount of the advance payment would be required. 152. This is an example of a contingent liability. The company has a possible loss, but it is not clear whether there will be an actual loss. 153. A journal entry is not needed for this litigation because the likelihood of loss is not yet determinable, and no reasonable estimate of a monetary loss can be made at this time. The litigation has just started and may be in the court system for years to come. A contingent liability should be recorded only when its occurrence is probable and the amount of damages can be reasonably estimated. 154. Since warranty costs are sales-related, the matching concept requires that they be recorded in the sales period. An end-of-period adjusting entry is typically required for warranties whereby the company makes an estimate of warranty costs based on past experience. Powered by Cognero

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Ch 08 Current and Contingent Liabilities 155. The entry that is made to create an estimate of the expected costs of repairs and replacements under a company's warranty program will create a credit balance in the estimated warranty liability account. The account that will be debited at the same time is the warranty expense account. 156. There are several points you should make to your banker: 1. Discuss your ability to repay your existing short-term debt and the short-term loan for which you are applying. Do this by pointing out how you have a very strong current ratio. Specifically, you have $4.40 in current assets available to repay each dollar of your short-term debt. 2. Point out that sales increased by approximately 10% over the 2 years, but your income increased by approximately 120%. This is an indication that you controlled your expenses quite well. 3. Describe how you expect your new product offerings to further strengthen your ability to repay the loan and contribute to your bottom line. 157. The current ratio is calculated by dividing current assets by current liabilities, whereas the quick ratio is calculated by dividing the sum of cash, marketable securities, and accounts receivable by current liabilities. Both ratios measure a company's ability to satisfy its current liabilities, but the quick ratio presents a more conservative measure of liquidity because it excludes inventory and prepaid expenses from the numerator. Accordingly, the quick ratio is always lower than the current ratio.

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Ch 09 Long-Term Liabilities

Indicate whether the statement is true or false. 1. Long-term debt generally refers to obligations that extend beyond 1 year. a. True b. False 2. Bonds are generally issued in denominations of $1,000. a. True b. False 3. Mortgage bonds are secure bonds. a. True b. False 4. Debenture bonds are backed by specific collateral of the issuing company. a. True b. False 5. Convertible bonds normally allow bondholders to convert the bond into another security. a. True b. False 6. If a bondholder has the right to retire the bonds, they are referred to as callable. a. True b. False 7. Callable bonds may be retired by the issuer before their specified due date. a. True b. False 8. The relative cost of issuing debt (interest payments) is often lower than the cost of issuing equity. a. True b. False 9. The contract rate is also called the coupon or stated rate. a. True b. False 10. When the yield rate of interest is greater than the stated rate, the bond will be issued at a discount. a. True b. False 11. When a bond is issued at a discount, the amortization of the bond interest increases each year using the straight-line method. a. True b. False Powered by Cognero

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Ch 09 Long-Term Liabilities 12. The interest rate used to calculate the interest expense with the effective interest method of amortization is equal to the market rate of interest at the time the bonds are issued. a. True b. False 13. The effective interest rate method will record amortization of a bond discount or premium in a manner that produces a constant rate of interest expense from period to period. a. True b. False 14. The amortization of a bond premium increases the effective interest expense incurred each period for the issuer. a. True b. False 15. A significant disadvantage of financing with debt rather than stock is the fact that the interest expense on debt is not tax deductible. a. True b. False 16. A potential advantage of debt financing over equity financing is that it fixes the amount of compensation to the lender. a. True b. False 17. In periods of inflation, debt financing is preferable to equity financing because the company is able to repay the lender in dollars that have declined in purchasing power. a. True b. False 18. In a short-term lease, the party leasing the asset retains the risks and obligations of ownership. a. True b. False 19. If a lease term is less than 1 year, an asset and liability must be recorded on the balance sheet. a. True b. False 20. The debt-to-equity ratio is defined as total liabilities divided by total stockholders' equity. a. True b. False 21. When understanding a company's solvency, an investor's major concern is whether all debt has been properly recorded. a. True b. False 22. A bond issue price is the present value of the cash flows that the bond will produce. Powered by Cognero

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Ch 09 Long-Term Liabilities a. True b. False 23. The market value of a bond is determined by calculating its present value, which is based on the face amount, the number of periods, and the market rate of interest. a. True b. False

Indicate the answer choice that best completes the statement or answers the question. 24. Obligations that extend beyond 1 year are referred to as a. bonds payable. b. long-term debt. c. current liabilities. d. short-term debt. 25. For notes and bonds payable, the amount of money a borrower agrees to repay at maturity is usually referred to as the a. face value. b. interest. c. stated rate. d. installment. 26. Bonds that may be retired by the issuing company before their specified due date are a. convertible bonds. b. junk bonds. c. debenture bonds. d. callable bonds. 27. If the yield rate of interest is greater than the stated rate, then the bonds are issued at a. a premium. b. par. c. a discount. d. market rate. 28. Unsecured bonds are also known as a. junk bonds. b. discounted bonds. c. callable bonds. d. debenture bonds. 29. Because junk bonds are relatively risky, the interest rate offered will be a. lower than for less risky bonds. b. the same as for less risky bonds. c. higher than for less risky bonds. d. determined by the bond market. Powered by Cognero

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Ch 09 Long-Term Liabilities 30. All of the following terms refer to the rate of interest paid on the face value of a bond, except for the a. stated rate of interest. b. market rate of interest. c. coupon rate of interest. d. contract rate of interest. 31. A bond that has some collateral pledged against the corporation’s ability to pay is called a a. debenture bond. b. junk bond. c. convertible bond. d. secured bond. 32. Premium on Bonds Payable and Discount on Bonds Payable are known as a. valuation accounts. b. issuance accounts. c. amortization accounts. d. adjustment accounts. 33. Bonds issued at a price that exceeds the face value are sold at a. par. b. the market rate. c. a discount. d. a premium. 34. Under the straight-line method, there is no premium or discount to amortize when a bond is sold a. at a discount. b. at a premium. c. at par. d. as a junk bond. 35. The amortization method of transferring the same amount from the bond discount or premium each period to adjust interest expense is known as the a. par method. b. GAAP method. c. effective interest rate method. d. straight-line method. 36. A bond’s face value less any unamortized discount or plus any unamortized premium is known as its a. face value. b. stated value. c. cash value. d. carrying value. 37. The effective interest rate and straight-line methods are identical when a bond is issued at Powered by Cognero

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Ch 09 Long-Term Liabilities a. the carrying value. b. a discount. c. par. d. a premium. 38. Under the effective interest rate of amortization, the interest expense for each period is calculated as a. Carrying Value × Yield Rate × Time (in years). b. Face Value × Stated Rate × Time (in years). c. Face Value × Yield Rate × Time (in years). d. Carrying Value × Stated Rate × Time (in years). 39. Which of the following is not considered a classic installment debt? a. car loans b. bonds payable c. home mortgages d. student loans 40. Using borrowed funds to produce more income than is needed to pay interest on the debt is known as a. generation of capital. b. a burden. c. leverage. d. at-risk borrowing. 41. As asset and liability are recognized at the time a lease is signed when a. the lease term is less than 1 year. b. any lease is attained. c. a lease amount is greater than $10,000. d. the lease term is 1 year or more. 42. Which of the following statements regarding leases is not true? a. Leases offer protection against obsolescence. b. More cash is needed to sign a lease than to purchase an asset. c. Leases may offer greater tax advantages than purchasing an asset. d. Long-term leases are very similar to purchasing. 43. Which of the following is not an advantage to leasing versus purchasing an asset? a. more flexibility b. lower cost financing c. protection again obsolescence d. Lease payments are avoided if the leased asset is not being used. 44. Ratios that focus on a company’s ability to make interest payments are called a. solvency ratios. b. coverage ratios. Powered by Cognero

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Ch 09 Long-Term Liabilities c. liquidity ratios. d. profitability ratios. 45. Long-term creditors are primarily concerned with a company’s a. ability to pay its operating expenses. b. net income trends. c. use of hybrid securities. d. long-term solvency. 46. Which of the following describes a callable bond? a. The borrower has the right to pay off the bonds prior to their due date. b. The borrower has the right to issue more bonds prior to the due date of the existing bonds. c. The borrower has the right to call off the interest payments on the bonds. d. The investor has the right to call off the interest payments on the bonds. 47. Long-term debt generally includes a. obligations that will be satisfied within 1 year. b. accounts payable because they are interest-bearing. c. obligations that extend beyond 1 year. d. accrued expenses. 48. Which of the following best describes a convertible bond? a. The bond issuer can convert the interest rate from a fixed rate to a floating rate. b. The bondholder can convert the bond from long-term to short-term. c. The bond issuer can retire the bond before its specified maturity date. d. The bondholder can convert the bond into common stock at a future time. 49. A company issued $10,000,000 of bonds. Assuming the most common denomination of bonds, the number of bonds sold was a. 10,000. b. 100,000. c. 1,000,000. d. 10,000,000. 50. The current portion of long-term debt would appear on the balance sheet as a a. current liability. b. long-term liability. c. current asset. d. long-term debt. 51. Which of the following statements regarding bonds payable is true? a. Generally, bonds are issued in denominations of $100. b. When an issuing company's bonds are traded in the "secondary" market, the company will receive part of the proceeds when the bonds are sold from the first purchaser to the second purchaser. c. A debenture bond is backed by specific assets of the issuing company. Powered by Cognero

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Ch 09 Long-Term Liabilities d. The interest rate in the bond contract is called the stated rate. 52. Bonds sell at a premium when the a. issuing company has a better reputation than other companies in the same business. b. market rate of interest is less than the stated interest rate at the time of issue. c. yield rate of interest is more than the stated rate at the time of issue. d. issuing company agrees to repay the maturity before the due date. 53. Kiss Greetings planned to raise $500,000 by issuing bonds. The bond certificates were printed bearing a stated interest rate of 6%, which was equal to the yield rate of interest. However, before the bonds could be issued, economic conditions forced the yield rate up to 7%. If the life of the bonds is 10 years and interest is paid annually on December 31, how much will the company receive from the sale of the bonds? a. exactly $500,000 because the company would still pay interest at the stated rate b. less than $500,000 because the 7% yield rate of interest was higher than the stated rate c. more than $500,000 because the 6% stated rate of interest was less than the yield rate d. The 6% bonds will not be sold at all. The company will be required to have the certificates reprinted bearing the new yield rate of 7%. 54. If a company's bonds are callable, a. the bondholder has the right to sell an option on the bond. b. the issuing company is likely to retire the bonds before maturity if the bonds are paying 8% interest while the market rate of interest is 4%. c. the bonds are never allowed to remain outstanding until the maturity date. d. the investor never knows what the redemption price will be until the bonds are actually called. 55. Convertible bonds are attractive to bondholders because a. they usually carry a higher rate of interest than nonconvertible bonds. b. they carry a convertible interest rate that can be increased when the market rate of interest increases. c. they can be converted into stock at the bondholder's option. d. the issuing company cannot retire the bonds before maturity. 56. Bonds will sell at a discount when the a. credit standing of the issuing company is not as good as other companies in a similar line of business. b. stated rate of interest is less than the yield rate of interest at the time of issue. c. stated rate of interest is more than the yield rate of interest at the time of issue. d. issuing company will be able to retire the bonds at less than face value at maturity. 57. Bonds are a popular source of financing because a. the relative cost of issuing debt is often lower than the cost of issuing equity. b. financial analysts tend to downgrade a company that has raised large amounts of cash by frequent issues of stock. c. a company having cash flow problems can postpone payment of interest to bondholders. d. bondholders can always convert their bonds into stock if they choose. 58. Which of the following terms does not describe the interest rate printed on the bond certificate? Powered by Cognero

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Ch 09 Long-Term Liabilities a. coupon rate b. yield rate c. contract rate d. stated rate 59. When bonds are sold for less than the par amount, this means the a. maturity value will be less than the par amount. b. maturity value will be greater than the par amount. c. bonds are sold at a premium. d. stated rate of interest is less than the yield rate of interest. 60. Unsecured bonds that are relatively risky and pay a high rate of interest to compensate the lender for the added risk are called a. junk bonds. b. government bonds. c. mortgage bonds. d. collateral bonds. 61. A bond issuing at 101.25 means the a. bond sold for $101.25. b. bond sold at a discount. c. bond sold for $1,012.50. d. bond's stated rate is lower than the market rate of interest. 62. When bonds are issued by a company, the accounting entry shows an increase in a. liabilities and a decrease in stockholders' equity. b. both liabilities and stockholders' equity. c. both assets and liabilities. d. both assets and stockholders' equity. 63. Discount on Bonds Payable is a(n) a. asset account as it balances the accounting equation. b. nonoperating expense account that is expensed in the year the bond is issued. c. long-term liability account as it is part of long-term bonds. d. valuation account that reduces the value of the bond to market value at the issue date. 64. Premium on Bonds Payable would appear on the balance sheet as a(n) a. increase to a long-term liability. b. revenue. c. long-term asset. d. decrease to a long-term liability. 65. Premium on Bonds Payable is shown on the balance sheet as a. a long-term liability account that is repaid in the year the bond matures. Powered by Cognero

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Ch 09 Long-Term Liabilities b. nonoperating income that is recognized in the year the bond is issued. c. a separate valuation account that increases the bond liability to market value at the issue date. d. a short-term liability that is repaid to the borrower after 12 months from the issue date. 66. Discount on Bonds Payable is called a a. current liability account. b. long-term liability account. c. current asset account. d. valuation account. 67. A graphics design company issued bonds in the amount of $1,000,000 with a stated interest rate of 8%. If the interest is paid semiannually and the bonds are due in 10 years, what total amount of interest would be paid over the life of the bonds? a. $1,000,000 b. $400,000 c. $800,000 d. $80,000 68. A company issued $500,000 of bonds for $498,351. Interest is paid semiannually. The bond markets and the financial press are likely to report the bond issue price as a. $498.35. b. $100.00. c. $99.67. d. $49.84. 69. On the issuance date, Bonds Payable has a balance of $55,000,000 and Premium on Bonds Payable has a balance of $5,000,000. These bonds are issued at a. $50,000,000. b. $55,000,000. c. $60,000,000. d. a price that cannot be determined without knowing the stated and market interest rates. 70. When determining the amount of interest to be paid on a bond, which of the following types of information is necessary? a. the value of the bond in 1 year b. the selling price of the bond c. the stated rate of interest on the bond d. the effective rate of interest on the bond 71. A company issued 10-year, 9%, $1,000,000 bonds paying interest on an annual basis at a premium. Which of the following statements is true? a. The annual interest expense on the bonds will be greater than the amount of interest payments to bondholders each year. b. The annual interest expense on the bonds will be less than the amount of interest payments to bondholders each year. Powered by Cognero

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Ch 09 Long-Term Liabilities c. The issue price will be less than $1,000,000. d. The cash paid to bondholders will be based on the market rate of interest. 72. On January 1, current year, Kaiser Associates issued $2,000,000 of 8% bonds at par. These bonds are due in 10 years with interest payable semiannually on June 30 and December 31. What is the amount of the interest expense in the current year assuming the use of the effective interest amortization method? a. $16,000 b. $160,000 c. $1,600,000 d. $2,000,000 73. On January 1, current year, Kangaroo Convenience Stores issued $5,000,000 of 7.5% bonds at par. These bonds are due in 10 years with semiannual interest payable on June 30 and December 31. What is the amount of interest expense recorded in the current year using the straight-line amortization method? a. $500,000 b. $37,500 c. $75,000 d. $375,000 74. If bonds were initially issued at a discount, the carrying value of the bonds on the issuer's books will a. decrease as the bonds approach their maturity date. b. increase as the bonds approach their maturity date. c. remain constant throughout the bonds' life. d. fluctuate throughout the bonds' life. 75. A corporation issued $150,000 of 10-year bonds at the stated rate of 8% with interest payable semiannually. How much cash will the bond investors receive at the end of the first interest period? a. $3,000 b. $6,000 c. $12,000 d. $24,000 76. Which of the following statements regarding amortization is true? a. Amortization of a premium causes the premium on bonds payable account to increase. b. Amortization of a premium causes the amount of interest expense to increase. c. Cash interest payments on bonds equal interest expense on the income statement when there is amortization of a bond premium. d. Amortization of a premium continues over the life of the bond until the balance in the account is reduced to zero. 77. The Kaplan Group sold $200,000 of 10-year bonds for $190,000. The face rate on the bonds was 8%, and interest is paid annually on December 31. What entry would be made on December 31 when the interest is paid? (Numbers are omitted.) a. Interest Expense Cash b. Interest Expense Powered by Cognero

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Ch 09 Long-Term Liabilities Discount on Bonds Payable Cash c. Interest Expense Discount on Bonds Payable Cash d. Interest Expense Bonds Payable Cash 78. Under the effective interest method, the cash paid on each interest payment date will a. decrease if bonds are issued at a premium. b. increase if bonds are issued at a premium. c. remain constant regardless of the issuance price. d. increase if bonds are issued at a discount. 79. Which of the following statements about bond accounting under the effective interest method is correct? a. The cash interest paid is calculated as the bond face value is multiplied by the yield rate. b. The interest expense is calculated as the carrying value is multiplied by the yield rate. c. The difference between the cash interest paid and the interest expense is added to the carrying value of bonds sold at a premium. d. The difference between the interest expense and the interest paid is deducted from the carrying value of bonds sold at a discount. 80. If bonds were initially issued at a discount, the interest expense on the bonds calculated using the effective interest method will a. decrease as the bonds approach their maturity date. b. increase as the bonds approach their maturity date. c. remain constant throughout the bonds' life. d. fluctuate throughout the bonds' life. 81. On January 2, Kalahari Limited issued $1,000,000, 10-year bonds for $1,150,000. The bonds pay interest on June 30 and December 31. The stated rate is 10%, and the market rate is 8%. The company plans to use the effective interest method of amortizing bond discounts and premiums. The interest expense on the bonds on June 30 is a. $50,000. b. $46,000. c. $40,000. d. $42,400. 82. On January 2, Kalahari Limited issued $1,000,000, 10-year bonds for $1,150,000. The bonds pay interest on June 30 and December 31. The stated rate is 10%, and the market rate is 8%. The company plans to use the effective interest method of amortizing bond discounts and premiums. The semiannual cash payment on the bonds is a. $50,000. b. $40,000. c. $42,400. d. $46,000. Powered by Cognero

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Ch 09 Long-Term Liabilities 83. On January 2, Kalahari Limited issued $1,000,000, 10-year bonds for $1,150,000. The bonds pay interest on June 30 and December 31. The stated rate is 10%, and the market rate is 8%. The company plans to use the effective interest method of amortizing bond discounts and premiums. What is the carrying value of the bonds after the first interest payment is made on June 30? a. $1,154,000 b. $1,146,000 c. $1,142,400 d. $1,000,000 84. On January 2, Kalahari Limited issued $1,000,000, 10-year bonds for $1,150,000. The bonds pay interest on June 30 and December 31. The stated rate is 10%, and the market rate is 8%. The company plans to use the effective interest method of amortizing bond discounts and premiums. What is the carrying value of the bonds at the end of 10 years before the final maturity payment is made? a. $850,000 b. $1,200,000 c. $1,000,000 d. $1,150,000 85. On January 2, Kalahari Limited issued $1,000,000, 10-year bonds for $1,150,000. The bonds pay interest on June 30 and December 31. The stated rate is 10%, and the market rate is 8%. The company plans to use the effective interest method of amortizing bond discounts and premiums. At the maturity date, besides an interest payment, the company would repay the bondholders a. $850,000. b. $1,150,000. c. $1,000,000. d. $1,050,000. 86. On January 1, Kaleidoscope Paint issued $500,000, 10-year, 9% bonds for $480,745. The bonds pay interest on June 30 and December 31. The market rate is 10%. The company plans to use the effective interest method of amortizing bond discounts and premiums. The interest expense on the bonds on June 30 is a. $22,500. b. $24,037. c. $21,634. d. $43,267. 87. On January 1, Kaleidoscope Paint issued $500,000, 10-year, 9% bonds for $480,745. The bonds pay interest on June 30 and December 31. The market rate is 10%. The company plans to use the effective interest method of amortizing bond discounts and premiums. What is the carrying value of the bonds after the first interest payment is made on June 30? a. $480,745 b. $482,282 c. $503,245 d. $500,000 88. On January 1, Kaleidoscope Paint issued $500,000, 10-year, 9% bonds for $480,745. The bonds pay interest on June 30 and December 31. The market rate is 10%. The company plans to use the effective interest method of amortizing bond discounts and premiums. The cash payment on June 30 is Powered by Cognero

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Ch 09 Long-Term Liabilities a. $25,000. b. $22,500. c. $45,000. d. $50,000. 89. On January 1, Kaleidoscope Paint issued $500,000, 10-year, 9% bonds for $480,745. The bonds pay interest on June 30 and December 31. The market rate is 10%. The company plans to use the effective interest method of amortizing bond discounts and premiums. What is the carrying value of the bonds on the maturity date? a. $0 b. $19,255 c. $480,745 d. $500,000 90. On January 1, Kale Farms purchased a tractor for $20,000. The company signed a 6% installment note to pay off the debt with 48 monthly payments over 4 years. Each payment is $469.70. How much interest must be paid over the life of the loan? a. $4,800.00 b. $2,545.60 c. $1,200.00 d. $0 since all of the interest was paid at the time the loan was recorded 91. With the effective interest method of amortization, the amortization of a bond discount results in a(n) a. increase in stockholders' equity. b. decrease in liabilities. c. increase in interest expense. d. decrease in interest expense. 92. With the effective interest method of amortization, the amortization of a bond premium results in a(n) a. increase in liabilities. b. decrease of stockholders' equity. c. increase in interest expense. d. decrease in interest expense. 93. On January 2, Kampai Sushi Bar sold $800,000 of bonds for $785,000. The bonds will mature in 10 years and pay interest annually on December 31. The company properly recorded the payment of interest and amortization of the discount using the effective interest method. Which of the following statements is true about the carrying value of the bonds and/or the unamortized discount at the end of the current year? a. The carrying value will be less than $785,000. b. The carrying value will be $785,000. c. The carrying value will be greater than $785,000. d. The unamortized discount will be more than $15,000. 94. During the current year, Karaoke Tunes issued $200,000 of bonds for $190,200. If the stated rate of interest was 6.5% and the market rate of interest was 7.1%, how would the company calculate the discount at the time the bonds were issued using the effective interest method? Powered by Cognero

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Ch 09 Long-Term Liabilities a. $190,200 × 7.1% b. $190,200 × 6.5% c. $200,000 × 7.1% d. $200,000 × 6.5% 95. Kid Karate issued $100,000 of 6%, 10-year bonds when the market rate of interest was 5%. The proceeds from this bond issue were $107,000. Using the effective interest method of amortization, which of the following statements is true? Assume interest is paid annually. a. Interest payments to bondholders each period will be $5,000. b. Interest payments to bondholders each period will be $5,350. c. Amortization of the premium for the first interest period will be $5,000. d. Amortization of the premium for the first interest period will be $650. 96. The result of using the effective interest method of amortization for bond discounts is that the a. interest expense for each amortization period is constant. b. effective interest rate for each amortization period is constant. c. amount of interest expense decreases each period. d. cash interest payment is greater than the interest expense. 97. A company issued $1,000,000 of 10% notes that resulted in interest expense of $100,000 per year. What is the company's net cash outflow if the effective tax rate is 21%? a. $100,000 b. $79,000 c. $21,000 d. $121,000 98. Which of the following statements regarding leases is false? a. Lease agreements are a popular form of financing the purchase of assets because leases do not require a large initial outlay of cash. b. Leases offer protection against obsolescence. c. If a lease term is 1 year or more, an asset and liability are recognized at the time the lease is signed. d. If a lease term is under 1 year, an asset and liability are recognized at the time the lease is signed. 99. Karuna Consulting leased a machine on January 2. The annual payments are $25,000, and the life of the lease is 10 years. What entry would the company make on January 2? (Ignore the amounts.) a. Machine Lease Obligation b. Lease Obligation Machine c. Accrued Rent Lease Obligation d. No entry is necessary. 100. When a lease has a term of 1 year or more, a. no assets or liabilities are recognized on the balance sheet. Powered by Cognero

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Ch 09 Long-Term Liabilities b. an asset and liability are recognized on the balance sheet. c. an asset is recognized on the balance sheet and a rent expense is recorded on the income statement. d. a liability is recognized on the balance sheet and a rent expense is recorded on the income statement. 101. If a lease term is under 1 year, a. an asset will be recognized on the balance sheet. b. no assets or liabilities will be recognized on the balance sheet. c. a journal entry will be recorded for an asset and liability to be added to the balance sheet. d. a liability will be recognized on the balance sheet. 102. A 20-year lease obligation would appear on the balance sheet as a. rent expense. b. a liability. c. a current asset. d. stockholders' equity. 103. Leases create an obligation to make lease payments a. regardless of whether or not the asset is used. b. only if the asset is in use. c. based on the percentage of the asset’s use. d. at the end of the asset’s useful life. 104. One way analysts measure the ability of a company to meet its obligations is to calculate the times interest earned ratio for any outstanding debt the company may have. How would a company with $100,000 of outstanding bonds paying 8.5% annually and operating income of $50,000 calculate the interest coverage (accrual basis) ratio? a. operating income divided by interest expense b. operating income divided by carrying value of the bonds outstanding c. operating income divided by face value of the bonds d. face value of the bonds divided by operating income 105. Keystone Corporation's balance sheet showed the following liability and stockholders' equity amounts: current liabilities, $100,000; bonds payable, $150,000; long-term lease obligations, $20,000; deferred income taxes, $5,000; and total stockholders' equity, $500,000. The debt-to-equity ratio is a. 0.20. b. 0.35. c. 1.22. d. 0.55. 106. A company's balance sheet showed the following amounts for liabilities and stockholders' equity accounts: current liabilities, $50,000; bonds payable, $600,000; long-term lease obligations, $120,000; and deferred income taxes, $20,000. Total stockholders' equity was $520,000. What is the debt-to-equity ratio? a. 0.66 b. 0.70 c. 1.42 d. 1.52 Powered by Cognero

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Ch 09 Long-Term Liabilities 107. A company with operating income of $200,000, cash flows from operating activities of $75,000, and gross profit of $380,000 has paid interest of $25,000 in the current year. What is the company's interest coverage ratio (cash basis)? a. 4.0, or 4.0 to 1 b. 3.0, or 3.0 to 1 c. 15.2, or 15.2 to 1 d. 2.67, or 2.67 to 1 108. Current assets are $200,000, long-term assets are $300,000, current liabilities are $100,000, long-term liabilities are $200,000, paid-in capital is $150,000, and retained earnings total $50,000. What is the debt to total assets ratio? a. 0.4, or 0.4 to 1 b. 0.6, or 0.6 to 1 c. 0.2, or 0.2 to 1 d. 0.9, or 0.9 to 1 109. A company wishes to issue $600,000 of 10-year, 6.8% bonds with interest paid annually at the end of the year. The market rate of interest is currently 5%. What information is needed in order to determine the selling price? a. the market rate of interest, the stated rate of interest, the bond rating, and the bond life b. the face value of the bonds, the stated rate of interest, the market rate of interest, and the bond life c. the life of the bonds, the market rate of interest, the bond rating, and the face value of the bonds d. the face value of the bonds, the market rate of interest, the purpose of the issue, and the bond life 110. The bond issue price is determined by calculating the a. present value of the stream of interest payments and the future value of the maturity amount. b. future value of the stream of interest payments and the future value of the maturity amount. c. future value of the stream of interest payments and the present value of the maturity amount. d. present value of the stream of interest payments and the present value of the maturity amount. 111. Keller Company issued $1,000,000, 8%, 7-year bonds with interest payable semiannually. The yield rate was 8%. The market value of the bond is a. $887,037. b. $1,000,000. c. $1,112,963. d. This question cannot be answered without the time value of money tables.

112. Selected data from the comparative financial statements are as follows: Kids R Kids Company Balance Sheet Accounts (all accounts have normal balances) (in thousands)

Accounts payable and accrued expenses Accrued income taxes Powered by Cognero

December 31, Current Year Prior Year $ 3,141 $ 3,249 1,037 1,056 Page 16

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Ch 09 Long-Term Liabilities Accumulated depreciation Buildings Cash and cash equivalents Common stock Containers Current maturities of long-term debt Deferred income taxes (long-term liability) Goodwill and other intangible assets Inventories Land Loans payable (short-term) Long-term investments Machinery and equipment Marketable securities Other long-term liabilities Other fixed assets Retained earnings Trade accounts receivable

2,016 1,507 1,648 865 124 3 424 547 890 19 4,459 8,549 3,855 159 991 21,952 7,608 1,666

2,028 1,535 1,737 861 157 397 426 668 959 183 2,677 6,501 3,896 106 1,001 20,919 6,773 1,639

Kids R Kids Company Income Statement Selected amounts (in thousands)

Net sales Interest expense (all paid with cash) Income before income taxes Income taxes Net income

Year ended December 31, Current Year Prior Year $18,813 $18,868 277 258 5,198 6,055 1,665 1,926 3,533 4,129

Kids R Kids Company Statement of Cash Flows Selected amounts (in thousands)

Net cash provided by operating activities Financing activities: Cash dividends paid Purchase of treasury stock Issuance of debt Repayment of long-term debt Issuances of stock

Year ended December 31, Current Prior Year Year $ 3,433 $ 4,033 (1,480) (1,563) 1,818 (410) 302

(1,387) (1,262) 155 (751) 150

The total long-term liabilities at December 31, current year, are (in thousands): 113. The liabilities section of King Cotton Company's most recent consolidated balance sheets is as follows: King Cotton Company Consolidated Balance Sheets Powered by Cognero

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Ch 09 Long-Term Liabilities (in millions) December 31, Current Year Prior Year Current liabilities: Short-term borrowings Accounts payable and other current liabilities Income taxes payable Total current liabilities

$ 250 4,500 200 $4,950

$ 200 4,450 50 $4,700

Long-term debt Other long-term liabilities Deferred income taxes

$2,700 3,800 1,500

$3,000 3,950 1,400

Which long-term liability would also be listed in the short-term liability section? Why? 114. The liabilities section of King Cotton Company's most recent consolidated balance sheets is as follows: King Cotton Company Consolidated Balance Sheets (in millions) December 31, Current Year Prior Year Current liabilities: Short-term borrowings Accounts payable and other current liabilities Income taxes payable Total current liabilities

$ 250 4,500 200 $4,950

Long-term debt Other long-term liabilities Deferred income taxes

$2,700 3,800 1,500

$3,000 3,950 1,400

200 4,450 50 $4,700

What are the total long-term liabilities for each of the 2 years presented? (Show your answers in millions of dollars.) 115. The liabilities section of King Cotton Company's most recent consolidated balance sheets is as follows: King Cotton Company Consolidated Balance Sheets (in millions) December 31, Current Year Prior Year Current liabilities: Short-term borrowings Accounts payable and other current liabilities Income taxes payable Total current liabilities

$ 250 4,500 200 $4,950

$ 200 4,450 50 $4,700

Long-term debt Other long-term liabilities Deferred income taxes

$2,700 3,800 1,500

$3,000 3,950 1,400

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Ch 09 Long-Term Liabilities What percent of the total liabilities for the current year and the prior year are long-term liabilities? What implication does this have? (Round percentages to one decimal place.) 116. The liabilities section of King Cotton Company's most recent consolidated balance sheets is as follows: King Cotton Company Consolidated Balance Sheets (in millions) December 31, Current Year Prior Year Current liabilities Short-term borrowings Accounts payable and other current liabilities Income taxes payable Total current liabilities

$ 250 4,500 200 $4,950

$ 200 4,450 50 $4,700

Long-term debt Other long-term liabilities Deferred income taxes

$2,700 3,800 1,500

$3,000 3,950 1,400

Describe briefly how each of the following long-term liabilities arise; that is, what kind of transaction produces the resulting long-term liability? You may want to include the appropriate journal entry (ignore amounts) in your description. 117. On January 1, Year 1, Krammer Company issued 5-year, $50,000,000, 10% notes at 103. The premium was $1,500,000. Interest is paid semiannually on June 30 and December 31. A) Record the issuance of the bonds on January 1, Year 1. B)

Record the journal entry required on December 31, Year 1, assuming the use of straight-line amortization.

Record the repayment of the loan principal on December 31, Year 5.

118. On January 1, Year 1, a company issued $5,000,000 of 8% bonds at par. These bonds are due in 5 years with interest payable annually on December 31, Year 1. A)

Record the issuance of the bonds.

Record the journal entry needed on December 31, Year 1.

Record the journal entry needed on January 1, Year 5.

119. On January 1, Year 1, Kitchen Concepts, Inc. issued 5-year, $10,000,000, 9% notes at 98 ($9,800,000). The discount at the time of issuance was $200,000. Interest is paid semiannually on June 30 and December 31. A) Provide the journal entry to record the issuance of the bonds on January 1, Year 1. B)

What journal entry would have to be recorded each June 30 and December 31 assuming the use of straight-line amortization?

Give the journal entry to record the repayment of the loan principal on December 31, Year 5.

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Ch 09 Long-Term Liabilities 120. On January 1, Year 1, a company issued $5,000,000 of a 10-year, zero coupon bonds at 55. A)

Record the issuance of the bonds on January 1, Year 1.

Record interest expense for Year 1 assuming the use of the straight-line amortization method.

Record the retirement of the bonds on January 1, Year 10.

121. On January 1, Year 1, Arya Inc. issues 3-year, $750,000, 7% bonds at 103 ($772,500). The premium at the time of the sale is $22,500. Interest is paid semiannually on June 30 and December 31. Complete an amortization table for 6 semiannual periods using the straight-line amortization method in the following format:

Semiannual Period

Cash Payment

Interest Expense

Premium on Bonds Payable

Premium on Bonds Payable Balance

Carrying Value

At issue June 30, Year 1 December 31, Year 1 June 30, Year 2 December 31, Year 2 June 30, Year 3 December 31, Year 3 122. On January 1, Year 1, Rui Inc. issues 3-year, $600,000, 9% bonds at 98 ($588,000). The discount at the time of the sale is $12,000. Interest is paid semiannually on June 30 and December 31. Complete an amortization table for 6 semiannual periods using the straight-line amortization method in the following format:

Semiannual Period

Cash Payment

Interest Expense

Discount on Bonds Payable

Discount on Bonds Payable Balance

Carrying Value

At issue June 30, Year 1 December 31, Year 1 June 30, Year 2 December 31, Year 2 June 30, Year 3 December 31, Year 3 123. A company issued 5-year bonds with a par value of $5,000,000 and a 7% annual stated rate of interest on January 2, Year 1. The issue price of the bond issue was $4,431,850, which reflected a 10% effective interest rate. Interest payments are made annually. Any premiums or discounts should be amortized using the effective interest rate method. A) Record the issuance of the bonds. Powered by Cognero

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Ch 09 Long-Term Liabilities B)

Record the interest expense on December 31, Year 1. (Round final answer to the nearest whole number.)

Record the interest paid to the bondholders on January 2, Year 2.

D) Record the interest expense on December 31, Year 2. (Round intermediate and final answers to the nearest whole number.)

124. A company issued 10-year bonds with a par value of $20,000,000 and an 8% annual face rate of interest on January 2, Year 1. The issue price of the bond issue was $19,866,397, which reflected an 8.1% effective interest rate. Interest payments are made annually. A) Give the journal entry to record the issuance of the bonds. B) Give the journal entry to record the recognition of the interest expense on December 31, Year 1. Any premium or discount should be amortized using the effective interest rate method. (Round final answer to the nearest whole number.) C) Give the journal entry to record the interest paid to the bondholders on January 2, Year 2. D) Give the journal entry to record the recognition of the interest expense on December 31, Year 2. Any premium or discount should be amortized using the effective interest rate method. (Round final answer to the nearest whole number.) 125. On January 1, a company buys equipment for $666,633 with a 14% installment note to pay off the debt with 6 semiannual payments over 3 years. The payments are $139,857. A) Provide the journal entry to record the purchase of the equipment. B)

Give the journal entries for June 30 and December 31. (Round final answer to the nearest whole number.)

126. On January 1, Year 1, Daisy Co. issued $500,000 of 8% bonds, due in 5 years with interest payable annually on December 31. The market rate of interest is 9%. Assume the bond was issued at $480,552. Complete an amortization table for each of the 5 annual periods using the effective interest rate method. (Do not round intermediate calculations. Round final answer to the nearest whole dollar.) Use the following table format:

Annual Payment

Cash Payment

Interest Expense

Discount on Bonds Payable

Discount on Bonds Payable Balance

Carrying Value

At issue December 31, Year 1 December 31, Year 2 December 31, Year 3 December 31, Year 4 December 31, Year 5 127. On January 1, Year 1, Misty Co. issued $200,000 of 8.5% bonds, due in 5 years with interest payable annually on December 31. The market rate of interest is 7%. Assume the bond was issued at $212,301. Complete an amortization table Powered by Cognero

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Ch 09 Long-Term Liabilities for each of the 5 annual periods using the effective interest rate method in the given table format. (Do not round intermediate calculations. Round final answer to the nearest whole dollar.)

Annual Payment

Cash Payment

Interest Expense

Premium on Bonds Payable

Premium on Bonds Payable Balance

Carrying Value

At issue December 31, Year 1 December 31, Year 2 December 31, Year 3 December 31, Year 4 December 31, Year 5 128. Knox Jewelers issued $1,000,000 of 8% interest-bearing debt at the beginning of the year. The company reported net income before interest and taxes of $2,000,000 for the current year. Assuming a 21% tax rate, what is the company's net income for the year? 129. Selected data from the comparative financial statements are as follows: Kids R Kids Company Balance Sheet Accounts (all accounts have normal balances) (in thousands)

Accounts payable and accrued expenses Accrued income taxes Accumulated depreciation Buildings Cash and cash equivalents Common stock Containers Current maturities of long-term debt Deferred income taxes (long-term liability) Goodwill and other intangible assets Inventories Land Loans payable (short-term) Long-term investments Machinery and equipment Marketable securities Other long-term liabilities Other fixed assets Retained earnings Trade accounts receivable

December 31, Current Year Prior Year $ 3,141 $ 3,249 1,037 1,056 2,016 2,028 1,507 1,535 1,648 1,737 865 861 124 157 3 397 424 426 547 668 890 959 19 183 4,459 2,677 8,549 6,501 3,855 3,896 159 106 991 1,001 21,952 20,919 7,608 6,773 1,666 1,639

Kids R Kids Company Income Statement Selected amounts Powered by Cognero

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Ch 09 Long-Term Liabilities (in thousands)

Net sales Interest expense (all paid with cash) Income before income taxes Income taxes Net income

Year ended December 31, Current Year Prior Year $18,813 $18,868 277 258 5,198 6,055 1,665 1,926 3,533 4,129

Kids R Kids Company Statement of Cash Flows Selected amounts (in thousands)

Net cash provided by operating activities Financing activities: Cash dividends paid Purchase of treasury stock Issuance of debt Repayment of long-term debt Issuances of stock

Year ended December 31, Current Prior Year Year $ 3,433 $ 4,033 (1,480) (1,563) 1,818 (410) 302

(1,387) (1,262) 155 (751) 150

The total liabilities at December 31, current year, are (in thousands):

The debt-to-equity ratio at December 31, current year, is: (Round final answer to two decimal places.)

130. Selected data from the comparative financial statements are as follows: Kids R Kids Company Balance Sheet Accounts (all accounts have normal balances) (in thousands)

December 31, Current Year Prior Year $ 3,141 $ 3,249 1,037 1,056 2,016 2,028 1,507 1,535 1,648 1,737 865 861 124 157 3 397 424 426 547 668 890 959 19 183 4,459 2,677 8,549 6,501 Page 23

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Ch 09 Long-Term Liabilities Machinery and equipment Marketable securities Other long-term liabilities Other fixed assets Retained earnings Trade accounts receivable

3,855 159 991 21,952 7,608 1,666

3,896 106 1,001 20,919 6,773 1,639

Kids R Kids Company Income Statement Selected amounts (in thousands)

Net sales Interest expense (all paid with cash) Income before income taxes Income taxes Net income

Year ended December 31, Current Year Prior Year $18,813 $18,868 277 258 5,198 6,055 1,665 1,926 3,533 4,129

Kids R Kids Company Statement of Cash Flows Selected amounts (in thousands)

Net cash provided by operating activities Financing activities: Cash dividends paid Purchase of treasury stock Issuance of debt Repayment of long-term debt Issuances of stock

Year ended December 31, Current Prior Year Year $ 3,433 $ 4,033 (1,480) (1,563) 1,818 (410) 302

(1,387) (1,262) 155 (751) 150

The interest coverage (accrual basis) ratio at December 31, current year, is: (Round final answer to two decimal places.) 131. Selected data from the comparative financial statements are as follows: Kids R Kids Company Balance Sheet Accounts (all accounts have normal balances) (in thousands)

Accounts payable and accrued expenses Accrued income taxes Accumulated depreciation Buildings Cash and cash equivalents Common stock Containers Current maturities of long-term debt Powered by Cognero

December 31, Current Year Prior Year $ 3,141 $ 3,249 1,037 1,056 2,016 2,028 1,507 1,535 1,648 1,737 865 861 124 157 3 397 Page 24

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Ch 09 Long-Term Liabilities Deferred income taxes (long-term liability) Goodwill and other intangible assets Inventories Land Loans payable (short-term) Long-term investments Machinery and equipment Marketable securities Other long-term liabilities Other fixed assets Retained earnings Trade accounts receivable

424 547 890 19 4,459 8,549 3,855 159 991 21,952 7,608 1,666

426 668 959 183 2,677 6,501 3,896 106 1,001 20,919 6,773 1,639

Kids R Kids Company Income Statement Selected amounts (in thousands)

Net sales Interest expense (all paid with cash) Income before income taxes Income taxes Net income

Year ended December 31, Current Year Prior Year $18,813 $18,868 277 258 5,198 6,055 1,665 1,926 3,533 4,129

Kids R Kids Company Statement of Cash Flows Selected amounts (in thousands) Year ended December 31, Current Prior Year Year $ 3,433 $ 4,033

Net cash provided by operating activities Financing activities: Cash dividends paid Purchase of treasury stock Issuance of debt Repayment of long-term debt Issuances of stock

(1,480) (1,563) 1,818 (410) 302

(1,387) (1,262) 155 (751) 150

The interest coverage (cash basis) ratio at December 31, current year, is: (Round final answer to two decimal places.) 132. The liabilities section of King Cotton Company's most recent consolidated balance sheets is as follows: King Cotton Company Consolidated Balance Sheets (in millions) December 31, Current Year Prior Year Current liabilities: Short-term borrowings Accounts payable and other current liabilities Powered by Cognero

$ 250 4,500

$ 200 4,450 Page 25

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Ch 09 Long-Term Liabilities Income taxes payable Total current liabilities

200 $4,950

50 $4,700

Long-term debt Other long-term liabilities Deferred income taxes

$2,700 3,800 1,500

$3,000 3,950 1,400

What is the percent increase/decrease of long-term liabilities from the prior year to the current year? Which liability appears to have caused the greatest change? (Round percentage answer to two decimal places. Show answers in millions of dollars.) 133. The liabilities section of King Cotton Company's most recent consolidated balance sheets is as follows: King Cotton Company Consolidated Balance Sheets (in millions) December 31, Current Year Prior Year Current liabilities: Short-term borrowings Accounts payable and other current liabilities Income taxes payable Total current liabilities

$ 250 4,500 200 $4,950

$ 200 4,450 50 $4,700

Long-term debt Other long-term liabilities Deferred income taxes

$2,700 3,800 1,500

$3,000 3,950 1,400

Which of the liabilities shown in the balance sheets is used in the calculation of the debt-to-equity ratio? If we can assume that the stockholders' equity total remained relatively constant for the 2 years, how would the ratio change (increase/decrease) from the prior year to the current year? What would this say about the company's financial position? 134. On January 1, Kramer Corporation issued $10,000,000 of 8% bonds, due in 5 years with interest payable annually on December 31. The market yield rate is 9%. Calculate the present value (market value) of the bonds. The following table shows the present value (PV) of $1 at the fifth year and the PV annuity value for the 5 years when the interest rate is 8% and 9%. Rate 8% 9%

PV($1) 0.68058 0.64993

PV(annuity) 3.99271 3.88965

135. You own a thriving bookstore in a major college town. You have been talking with your CPA about borrowing $5,000,000 to finance a larger and more modern building. One option is to issue 20-year bonds with a fixed rate of 8%, while another option is to issue 20-year bonds with a variable rate of 1-year LIBOR (London Interbank Offered Rate) plus 5%. For the first year, this will result in a 6.2% rate, but the rate will be adjusted annually. The current market interest rate is 8%. What things should you consider in making the decision about which borrowing option is better for your company? 136. You are the chief financial officer of Kyoto Mining Company. Your company issued $10,000,000 in bonds payable at the beginning of the year at a sizable discount. You are getting ready to make your December 31 adjusting entries. The Powered by Cognero

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Ch 09 Long-Term Liabilities owners, who are worried about their tax bill for the year, have asked you to select whichever method of amortizing bond discounts that will maximizes interest expense. Respond to the owners. 137. Describe at least two advantages of leasing over purchasing assets. 138. How does accounting for short- and long-term leases differ?

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Ch 09 Long-Term Liabilities Answer Key 1. True 2. True 3. True 4. False 5. True 6. False 7. True 8. True 9. True 10. True 11. False 12. True 13. True 14. False 15. False 16. True 17. True 18. True 19. False 20. True 21. True 22. True 23. True 24. b 25. a Powered by Cognero

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Ch 09 Long-Term Liabilities 26. d 27. c 28. d 29. c 30. b 31. d 32. a 33. d 34. c 35. d 36. d 37. c 38. a 39. b 40. c 41. d 42. b 43. d 44. b 45. d 46. a 47. c 48. d 49. a 50. a 51. d Powered by Cognero

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Ch 09 Long-Term Liabilities 52. b 53. b 54. b 55. c 56. b 57. a 58. b 59. d 60. a 61. c 62. c 63. d 64. a 65. c 66. d 67. c 68. c 69. c 70. c 71. b 72. b 73. d 74. b 75. b 76. d Powered by Cognero

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Ch 09 Long-Term Liabilities 77. b 78. c 79. b 80. b 81. b 82. a 83. b 84. c 85. c 86. b 87. b 88. b 89. d 90. b 91. c 92. d 93. c 94. a 95. d 96. b 97. b 98. d 99. a 100. b 101. b 102. b Powered by Cognero

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Ch 09 Long-Term Liabilities 103. a 104. a 105. d 106. d 107. b 108. b 109. b 110. d 111. b 112. $424 Deferred Income Taxes + $991 Other Long-Term Liabilities = $1,415 113. The long-term liability, which is also listed in the short-term liability section, is the portion of long-term debt due within 1 year of the balance sheet date. The portion due in a period longer than 1 year is classified as long-term debt. 114. Current Year: $8,000 (in millions) $2,700 Long-Term Debt + $3,800 Other Long-Term Liabilities + $1,500 Deferred Income Taxes = $8,000 Prior Year:

$8,350 (in millions) $3,000 Long-Term Debt + $3,950 Other Long-Term Liabilities + $1,400 Deferred Income Taxes = $8,350

115. The percent of the total liabilities that are long-term liabilities for the 2 years is as follows: 61.8% [($2,700 + $3,800 + $1,500) ÷ ($4,950 + $2,700 + $3,800 + $1,500)] in the current year and 64.0% [($3,000 + $3,950 + $1,400) ÷ ($4,700 + $3,000 + $3,950 + $1,400)] in the prior year. The implication is that there were large amounts of long-term liabilities that matured in the current year. The percent decreased from the prior year to the current year because of the large increase in short-term borrowings as compared with the other liability accounts. Management needs to take steps to assure that the corporation will be able to generate the cash necessary to retire the debt as it matures. 116. Long-term debt: Long-term debt arises from the issue of bonds, which, in fact, is a long-term loan. If the debt is interest-bearing, periodic interest payments are required. The entry would be as follows: Cash Bonds Payable 117. A) Jan. 1, Year 1 Cash

XXX

51,500,000 Bond Payable Premium on Bonds Payable

XXX

50,000,000 1,500,000 Page 32

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Ch 09 Long-Term Liabilities B)

Dec. 31, Year 1 Interest Expense Premium on Bonds Payable Cash $1,500,000 ÷ 10 periods = $150,000

2,350,000 150,000

Dec. 31, Year 5 Bonds Payable Cash

50,000,000

118. A) Jan. 1, Year 1 Cash Bonds Payable B)

119. A) Jan. 1, Year 1

B) June 30/Dec. 31

C) Dec. 31, Year 5

120. A) Jan. 1, Year 1

B) C)

50,000,000

5,000,000 5,000,000

Dec. 31, Year Interest Expense 1 Cash Jan. 1, Year 5 Bonds Payable Cash

Dec. 31, Year 1 Dec. 31, Year 10

2,500,000

400,000 400,000 5,000,000 5,000,000

Cash Discount on Bonds Payable Bonds Payable

9,800,000 200,000

Interest Expense Cash Discount on Bonds Payable (Discount = $200,000 ÷ 10 periods)

4,520,000

Bonds Payable Cash

10,000,000

10,000,000 4,500,000 20,000

10,000,000

Cash ($5,000,000 × 0.55) Discount on Bonds Payable Bonds Payable

2,750,000 2,250,000 5,000,000

Interest Expense ($2,250,000 ÷ 10) Discount on Bonds Payable Bonds Payable Cash

225,000 225,000 5,000,000 5,000,000

121. Semiannual Period At issue June 30, Year 1 Powered by Cognero

Cash Payment

$60,000

Interest Expense

$56,250

Premium on Bonds Payable Balance $22,500 $3,750 18,750

Premium on Bonds Payable

Carrying Value $772,500 768,750 Page 33

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Ch 09 Long-Term Liabilities December 31, Year 1 June 30, Year 2 December 31, Year 2 June 30, Year 3 December 31, Year 3

60,000 60,000 60,000 60,000 60,000

56,250 56,250 56,250 56,250 56,250

3,750 3,750 3,750 3,750 3,750

Interest Expense

Discount on Bonds Payable

15,000 11,250 7,500 3,750 0

765,000 761,250 757,500 753,750 750,000

122. Semiannual Period At issue June 30, Year 1 December 31, Year 1 June 30, Year 2 December 31, Year 2 June 30, Year 3 December 31, Year 3

123. A) Jan. 2, Year 1

Cash Payment

$54,000 54,000 54,000 54,000 54,000 54,000

$52,000 52,000 52,000 52,000 52,000 52,000

Cash Discount on Bonds Payable Bonds Payable

$2,000 2,000 2,000 2,000 2,000 2,000

Discount on Bonds Payable Balance $12,000 10,000 8,000 6,000 4,000 2,000 0

Carrying Value $588,000 590,000 592,000 594,000 596,000 598,000 600,000

4,431,850 568,150 5,000,000

B) Dec. 31, Year 1

Interest Expense 443,185 Discount on Bonds Payable 93,185 Interest Payable 350,000 ($4,431,850 × 0.10) = $443,185 − $350,000 = $93,185

C) Jan. 2, Year 2

Interest Payable Cash

D) Dec. 31, Year 2

124. A) Jan. 2, Year 1

350,000 350,000

Interest Expense 433,867 Discount on Bonds Payable 83,867 Interest Payable 350,000 ($4,431,850 – $93,185) × 0.10 = $433,867 − $350,000 = $83,867

Cash Discount on Bonds Payable Bonds Payable

19,866,397 133,603 20,000,000

B) Dec. 31, Year 1

Interest Expense 1,609,178 Discount on Bonds Payable 9,178 Interest Payable 1,600,000 ($19,866,397 × 0.081) = $1,609,178 − $1,600,000 = $9,178

C) Jan. 2, Year 2

Interest Payable

1,600,000 Page 34

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Ch 09 Long-Term Liabilities Cash D) Dec. 31, Year 2

125. A) Jan. 1 B)

June 30

Dec. 31

1,600,000

Interest Expense 1,609,922 Discount on Bonds Payable 9,922 Interest Payable 1,600,000 ($19,866,397 + $9,178) × 0.081 = $1,609,922 − $1,600,000 = $9,922

Equipment Notes Payable

666,633

Notes Payable Interest Expense Cash $666,633 × 0.07 = $46,664

93,193 46,664

Notes Payable Interest Expense Cash ($666,633 − $93,193) × 0.07 = $40,141

99,716 40,141

666,633

139,857

126. Annual Payment At issue December 31, Year 1 December 31, Year 2 December 31, Year 3 December 31, Year 4 December 31, Year 5

Cash Payment

Interest Expense

Discount on Bonds Payable

$40,000 40,000 40,000 40,000 40,000

$43,250 43,542 43,861 44,208 44,587

$ 3,250 3,542 3,861 4,208 4,587

Cash Payment

Interest Expense

Premium on Bonds Payable

Discount on Bonds Payable Balance $19,448 16,198 12,656 8,795 4,587 0

Carrying Value $480,552 483,802 487,344 491,205 495,413 500,000

127. Annual Payment At issue December 31, Year 1 December 31, Year 2 December 31, Year 3 December 31, Year 4 December 31,

$17,000 17,000 17,000 17,000 17,000

$14,861 14,711 14,551 14,380 14,196

$2,139 2,289 2,449 2,620 2,804

Premium on Bonds Payable Balance $12,301 10,162 7,873 5,425 2,805 1*

Carrying Value $212,301 210,162 207,873 205,425 202,805 200,001*

*Note that on December 31, Year 5, Premium on Bonds Payable Balance is more than 0 and Carrying Value is more than the face value of the bond due to rounding of the issue price to the nearest whole number in the question data. 128. Powered by Cognero

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Ch 09 Long-Term Liabilities Net income before interest and tax Interest expense Net income before tax Tax expense (21%) Net income

129. A)

$2,000,000 (80,000) $1,920,000 (403,200) $1,516,800

$10,055. $3,141 Accounts Payable and Accrued Expenses + $1,037 Accrued Income Taxes + $3 Current Maturities of Long-Term Debt + $424 Deferred Income Taxes + $4,459 Loans Payable (short-term)) + $991 Other Long-Term Liabilities = $10,055 1.19 to 1 (rounded) Total Liabilities = $10,055 (from part A) Total Stockholders' Equity = $8,473 $865 Common Stock + $7,608 Retained Earnings = $8,473 $10,055 Total Liabilities ÷ $8,473 Total Stockholders' Equity = 1.19 to 1

130. 19.77 (rounded) Operating Income = $5,475 = $5,198 Income before Income Taxes + $277 Interest Expense Operating Income ÷ Interest Expense = $5,475 ÷ $277 = 19.77 (rounded) 131. 12.39 times (rounded) Cash Flows from Operations = $3,433 Interest and Principal Payments = $277 Interest Expense $3,433 ÷ $277 = 12.39 times (rounded) 132. A decrease of 4.19% (rounded) $8,350 ($3,000 + $3,950 + $1,400) $8,000 ($2,700 + $3,800 + Long-term liabilities for the current year: $1,500) [($8,000 − $8,350) ÷ $8,350] × 100 = –4.19% (rounded) The long-term liability that appears to have caused the greatest change is long-term debt. (Prior Year: $3,000, Current Year: $2,700) Long-term liabilities for the prior year:

133. All liabilities are used in the calculation of the debt-to-equity ratio: total liabilities/total stockholders' equity. Total liabilities for the 2 years were as follows: $12,950 ($4,950 + $2,700 + $3,800 + $1,500) in the current year and $13,050 ($4,700 + $3,000 + $3,950 + $1,400) in the prior year. If it is assumed that stockholders' equity remained relatively constant for the 2 years, then the company's financial position would have improved slightly since debt-to-equity ratio decreased. 134. Interest = $10,000,000 × 0.08 = $800,000 × 3.88965 present value of annuity = Principal = $10,000,000 × 0.64993 present value of single sum = Present (market) value of the bonds =

$3,111,720 6,499,300 $9,611,020

135. You must trade off the potential benefit of lower rates with the risk of the rate increasing in the future. With a fixed Powered by Cognero

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Ch 09 Long-Term Liabilities rate, the lender bears all the risk of changing rates. If fixed rates increase dramatically, the lender is stuck with a belowmarket return. If rates were to drop, however, the lender would have an above-market return. This uncertainty is the definition of risk. With a variable rate, on the other hand, you bear the risk (and rewards) of changing rates. The shift of risk from the lender to you, the borrower, is why the lender is willing to accept a lower rate initially. You must also consider the terms of the contract, such as how frequently the rate is adjusted, the length of the loan, limits on how much the rate can increase each year or how high the rate can go, etc. Additionally, you must consider your ability to handle increased interest payments should the rate adjust up. In this case, you should only opt for the lower variable rate if you believe you can absorb the higher interest payments should the rate adjust up. 136. The straight-line method will result in higher discount amortization in the early years and thus a higher reported interest expense and consequently a lower taxable income. However, generally accepted accounting principles require the use of the effective interest rate method unless the results obtained from the use of the straight-line method do not materially differ. 137. Leasing requires less or no cash while signing to acquire an asset, which is not the case in purchasing. Purchasing an asset requires a huge lump-sum amount at the date of purchase. Lease contracts also offer protection against obsolescence and flexibility. Leasing can provide tax advantage and lower the financing cost. 138. For a short-term lease, or a lease whose term is under 1 year, no asset or liability is recognized on the balance sheet at the time the lease is signed. This means that no journal entry is made when the lease is signed. Instead, the lessee will record the rent expense as the lease payments are made. On the other hand, a long-term lease, or a lease whose term is 1 year or more, requires the lessee to recognize an asset and a liability at the time the lease is signed. The lessee will debit the asset account to recognize the benefits that the leased asset will provide in the future and will credit a liability account to recognize the obligation to make future lease payments.

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Ch 10 Stockholders' Equity

Indicate whether the statement is true or false. 1. All authorized stock is issued. a. True b. False 2. Shares outstanding may be less than shares issued. a. True b. False 3. The stockholders' equity section of the balance sheet shows all changes in stockholders' equity for the period. a. True b. False 4. Accumulated other comprehensive income is not considered to be a source of stockholders' equity. a. True b. False 5. Private corporations typically issue their stock to management and employees rather than the general public. a. True b. False 6. A corporation may become chartered by applying to the federal government. a. True b. False 7. The corporate charter is sometimes called the articles of incorporation. a. True b. False 8. The preemptive right entitles a common stockholder to a proportionate share of any dividend payouts. a. True b. False 9. The residual claim entitles a common stockholder to a proportionate share of a liquidating payout before preferred stockholders are paid. a. True b. False 10. Cumulative and participating dividend features are typically associated with preferred stock. a. True b. False 11. A call provision sets forth provisions for a corporation to redeem its preferred stock at a fixed price on or after a specified date. a. True Powered by Cognero

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Ch 10 Stockholders' Equity b. False 12. Preferred stockholders typically do not have the right to vote at stockholders' meetings. a. True b. False 13. If preferred stock is convertible, then the preferred shareholders have the option to trade voting privileges for the dividend payment preference. a. True b. False 14. Par value is adjusted annually to reflect the current market value of the stock. a. True b. False 15. When true no-par stock is sold for cash, the amount credited to the stock account is the par value times the number of shares sold. a. True b. False 16. When a company issues no-par stock with no stated value, there is no need for an account titled Additional Paid-In Capital. a. True b. False 17. Stated capital is the amount of capital that, under law, cannot be returned to the corporation's owners except upon liquidation. a. True b. False 18. A stock option is the same as a stock warrant. a. True b. False 19. The stated value is the price at which employees can exercise stock options. a. True b. False 20. A corporation may extend a tender offer when it desires to acquire treasury stock. a. True b. False 21. Treasury stock is reported as a reduction of stockholders' equity. a. True b. False Powered by Cognero

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Ch 10 Stockholders' Equity 22. If preferred stock is participating, then the preferred shareholders have the right to share in excess dividends above their stated dividend. a. True b. False 23. Treasury stock is stock that has been issued but is no longer outstanding. a. True b. False 24. When treasury stock is reissued at a price that is greater than its cost, the difference should be credited to the treasury stock account. a. True b. False 25. The par value of stock is reduced when stock dividends are issued. a. True b. False 26. Large corporations are profitable enough to maintain their own stockholder lists and arrange for the issuance of their stock certificates to stockholders rather than having to retain an independent stock transfer agent to do those things. a. True b. False 27. Since stock dividends are paid with shares of stock instead of cash, no reduction in Retained Earnings is recorded. a. True b. False 28. Dividend-related dates follow this chronological order: declaration date, record date, and payment date. a. True b. False 29. All treasury stock is outstanding. a. True b. False 30. When a corporation declares a dividend, a liability must be recorded. a. True b. False 31. Liquidating dividends must be charged against the capital stock accounts because the corporation's retained earnings are appropriated for future business expansion. a. True b. False 32. Capitalization of retained earnings occurs when a corporation's stock is split. a. True Powered by Cognero

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Ch 10 Stockholders' Equity b. False 33. Both stock dividends and stock splits increase the number of a corporation's outstanding shares without altering the proportionate ownership of the corporation. a. True b. False 34. A stock split has the effect of reducing the par value per share and the number of shares outstanding. a. True b. False 35. No formal journal entry is required to record a stock split. a. True b. False 36. When treasury stock is reissued at a price that is less than its cost, the difference should be credited to Retained Earnings. a. True b. False 37. Dividends in arrears are associated with the cumulative preferred stock only. a. True b. False 38. Restricted earnings are usually disclosed in the footnotes to the financial statements, but they may sometimes be disclosed in a reserve account in the equity section of the balance sheet. a. True b. False 39. Comprehensive income represents the increase in net assets resulting from all transactions occurring during the accounting period except transactions with owners. a. True b. False 40. In general, retained earnings represent accumulated earnings of the corporation less dividends paid. a. True b. False 41. When computing earnings per share, the numerator includes net income minus any dividends paid to common stockholders. a. True b. False 42. When computing the dividend yield, net income is divided by the common stock price. a. True Powered by Cognero

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Ch 10 Stockholders' Equity b. False 43. When computing the dividend payout ratio, the net income is divided by the common stock dividends. a. True b. False 44. When computing the total payout ratio, common stock dividends plus common stock repurchases are included in the numerator. a. True b. False

Indicate the answer choice that best completes the statement or answers the question. 45. Owners’ claims against the assets of a corporation after deducting all liabilities are known as a. net assets. b. stockholders’ equity. c. retained earnings. d. net income. 46. The rights of common stockholders to keep the same percentage of ownership when new stock is issued are called a. preemptive rights. b. stock appreciation rights. c. conversion rights. d. liquidation rights. 47. The number of shares sold to stockholders are called a. voting shares. b. authorized shares. c. outstanding shares. d. issued shares. 48. Which legal document authorizes the creation of a corporation? a. Form 10-K b. articles of incorporation c. statement of retained earnings d. Securities and Exchange Commission incorporation form 49. The maximum number of shares a corporation may issue in accordance with its corporate charter is known as a. outstanding shares. b. issued shares. c. treasury shares. d. authorized shares. 50. Which of the following is an arbitrary monetary amount that has a stated value on each share of stock and establishes a minimum price for the stock it is issued? Powered by Cognero

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Ch 10 Stockholders' Equity a. market price b. par value c. preferred price d. intrinsic value 51. Which account is credited when a corporation issues common stock for a price greater than par? a. Retained Earnings b. Gain on Sale of Common Stock c. Additional Paid-In Capital—Common Stock d. Treasury Stock 52. The designated price for which employees may exercise stock options is called the a. par value. b. stated value. c. strike price. d. option price. 53. Which feature of preferred stock allows it to be changed to common stock? a. liquidation preference b. dividend preference c. call provision d. conversion privilege 54. The number of shares issued minus the number of shares of treasury stock are called a. issued shares. b. outstanding shares. c. authorized shares. d. capital shares. 55. Issued stock that is repurchased by the corporation but not retired is called a. common stock. b. outstanding stock. c. treasury stock. d. authorized stock. 56. Which action has occurred when stockholders exchange their shares of stock for additional shares and there is a corresponding reduction in the par value of the stock? a. a resale of treasury stock b. a stock split c. a conversion of preferred stock to common stock d. a liquidation of the company 57. What action occurs when stockholders receive a distribution of additional shares of stock and there is a corresponding capitalization of retained earnings? a. A stock split has been announced. Powered by Cognero

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Ch 10 Stockholders' Equity b. A cash dividend has been declared. c. Stock options are offered as a benefit. d. A stock dividend has been declared. 58. Which feature of preferred stock provides for the current stated dividends to be paid to preferred stockholders before they are paid to common stockholders? a. current dividend preference b. participating dividend preference c. stock split preference d. voting rights preference 59. Which preferred stock preference feature provides for the current stated dividends plus dividends in arrears to be paid to preferred stockholders before any dividends are paid to common stockholders? a. participating dividend preference b. current dividend preference c. cumulative dividend preference d. voting rights preference 60. Which preferred stock preference feature provides for preferred stock to partake in the current stated dividends plus a share of dividends available for distribution to other classes of stockholders? a. participating dividend preference b. cumulative dividend preference c. cumulative dividend preference d. dividends in arrears 61. The date on which a corporation announces it will pay a dividend is known as the date of a. record. b. payment. c. declaration. d. distribution. 62. When a corporation is in the process of being dissolved, any additional dividends are known as a. liquidating dividends. b. dividends in arrears. c. preferred dividends. d. cumulative dividends. 63. If the stated cash dividend on cumulative preferred stock has been unpaid for a period of 1 year or more, it is referred to as a. liquidating dividends. b. dividends in arrears. c. current dividends. d. participating dividends. 64. Which of the following is the formula for determining the period ending retained earnings balance? Powered by Cognero

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Ch 10 Stockholders' Equity a. Beginning Retained Earnings – Net Income + Current Year Dividends b. Beginning Retained Earnings + Net Income + Current Year Dividends c. Beginning Retained Earnings – Net Income – Current Year Dividends d. Beginning Retained Earnings + Net Income – Current Year Dividends 65. A correction of retained earnings resulting from a previous error that affected net income is known as a. a prior period adjustment. b. accumulated other comprehensive income. c. a retained earnings deficit. d. a retained earnings restriction. 66. The corporation’s accumulated net income that has not been paid out as dividends is part of a. treasury stock. b. retained earnings. c. total dividends declared. d. total gains and losses. 67. The formula for return on common equity is a. (Net Income + Preferred Dividends) × Average Common Stockholders’ Equity. b. (Net Income – Preferred Dividends) × Average Common Stockholders’ Equity. c. (Net Income + Preferred Dividends) ÷ Average Common Stockholders’ Equity. d. (Net Income – Preferred Dividends) ÷ Average Common Stockholders’ Equity. 68. The ratio computed by subtracting the dividend payout ratio from the total payout ratio is the a. total payout. b. dividend payout. c. dividend yield. d. stock repurchase payout. 69. Which of the following measures the ratio of dividends paid to stock price? a. dividends per common share b. dividend yield c. dividend payout d. stock repurchase payout 70. Which of the following is one of the elements of stockholders' equity? a. net income b. dividends payable c. retained earnings d. loss on sale of equipment 71. The following information relates to LaFarge North America's stockholders' equity accounts: Common stock, $7 par, 200,000 shares authorized Additional paid-in capital—common stock Powered by Cognero

$700,000 160,000 Page 8

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Ch 10 Stockholders' Equity Retained earnings Treasury stock, 2,000 shares at cost Total stockholders' equity

?? 15,000 $975,000

How many shares of common stock are outstanding? a. 68,000 b. 78,000 c. 98,000 d. 100,000 72. Which of the following statements is true with regard to equity capital? a. The number of shares actually in the hands of stockholders is called outstanding shares. b. It is unusual for corporations to have more than one class of stock outstanding at any point in time. c. Preferred stock represents the shares of stock that have been permanently retired. d. Outstanding shares represent the maximum number of shares that can be issued by a corporation. 73. Common stock usually has all of the following features except a. voting rights. b. the preemptive right. c. the residual claim to net assets. d. the conversion privilege. 74. Authorized stock represents the a. number of previously issued shares that have been repurchased by the corporation. b. number of shares that the corporation has sold. c. number of shares that are currently held by stockholders. d. maximum number of shares that can be issued for each class of stock. 75. Issued shares represent the a. number of previously issued shares that have been repurchased by the corporation. b. number of shares that the corporation has sold. c. number of shares that are currently held by stockholders. d. maximum number of shares that can be sold by the corporation. 76. Outstanding shares represent the a. number of previously issued shares that have been repurchased by the corporation. b. number of shares that the corporation has sold. c. number of shares that are currently held by stockholders. d. maximum number of shares that can be sold by the corporation. 77. Total stockholders' equity includes $50,000 of common stock with a stated value of $0.50 and 5,000 shares of treasury stock with a total cost of $25,000. How many total shares of common stock are outstanding? a. 95,000 b. 100,000 c. 105,000 Powered by Cognero

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Ch 10 Stockholders' Equity d. 150,000 78. The stockholders' equity section of a balance sheet on December 31 is as follows: Common stock, $0.50 par value Additional paid-in capital—common stock Total capital stock Retained earnings Less: Treasury stock (at cost, $20 per share) Total stockholders' equity

$10,000 40,000 $50,000 25,000 (2,000) $73,000

How many shares of common stock are issued? a. 18,000 b. 19,800 c. 20,000 d. 20,200 79. Which of the following types of information is not set forth within the corporate charter? a. name and purpose of the corporation b. names of those responsible for incorporating the business c. dates of future dividend distributions d. provisions describing how stock may be issued 80. Which of the following preferred stock features authorizes the corporation to redeem shares at a fixed price on or after a specified date? a. call provision b. preemptive right c. conversion privilege d. residual claim 81. Many stockholders choose to invest in preferred stock because a. preferred stock can always be converted into common stock at the stockholders' option. b. the preferred dividend distributions are generally increased each year. c. dividends are distributed to preferred stockholders before common stockholders. d. preferred stock includes the right to participate in management decisions through voting privileges. 82. Lanier Tech was incorporated as a new business on January 1. The company is authorized to issue 50,000 shares of $5 par common stock and 10,000 shares of 6%, $10 par, cumulative, participating preferred stock. On January 1, the company issued 8,000 shares of the common stock for $15 per share and 2,000 shares of the preferred stock for $30 per share. Net income for the year ended December 31 was $375,000. What is the number of the company's unissued shares of common stock on December 31? a. 6,000 b. 8,000 c. 40,000 d. 42,000 83. Par value represents the Powered by Cognero

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Ch 10 Stockholders' Equity a. arbitrary amount that establishes a minimum price for the stock when it is first issued. b. current market price of the stock. c. amount for which any treasury shares have been acquired by the corporation. d. amount for which treasury shares may be reissued. 84. An addition to employee compensation whereby the corporation provides a right to purchase stock at a set price is called a. treasury stock. b. a stock option. c. the conversion privilege. d. a call option. 85. Suppose a corporation issues 5,000 shares of $1 par common stock for $30 per share. In addition to the increase in cash, what effect does this transaction have on the accounting equation? a. Retained earnings increases by $150,000. b. Additional paid-in capital—common stock increases by $145,000. c. Common stock increases by $150,000. d. Gain on stock issuance increases by $145,000. 86. Landmark Company reported the following information in the stockholders' equity section of its December 31 balance sheet: 7% Cumulative, nonparticipating preferred stock, $100 par, 500 shares authorized, issued, and outstanding, callable at par value Common stock, $12 par, 100,000 shares authorized Additional paid-in capital—common stock Retained earnings

$ 50,000 600,000 25,000 825,000

What is the number of shares of common stock issued and outstanding? a. 50,000 b. 100,000 c. 6,000 d. 5,000 87. Lakeshore Industries reported the following information on its recent balance sheet: Common stock, $10 par, 100,000 shares authorized, 75,000 shares issued and outstanding What is the effect on the company's accounting equation of issuing 1,000 additional shares of common stock at $15 per share? a. Assets increase by $10,000. b. Stockholders' equity increases by $15,000. c. Stockholders' equity increases by $10,000. d. Assets decrease by $15,000. 88. Landmark Company reported the following information in the stockholders' equity section of its December 31 balance sheet: Powered by Cognero

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Ch 10 Stockholders' Equity 7% Cumulative, nonparticipating preferred stock, $100 par, 500 shares authorized, issued, and outstanding, callable at par value Common stock, $12 par, 100,000 shares authorized Additional paid-in capital—common stock Retained earnings

$ 50,000 600,000 25,000 825,000

The company's total capital stock is a. $650,000. b. $675,000. c. $625,000. d. $1,500,000. 89. A particular balance sheet includes the following information within the stockholders' equity section: Common stock, $5 par value Additional paid-in capital—common stock

$ 300,000 1,740,000

Assume that common stock is the only class of stock that has been issued and that there have been two issues of stock since the corporation began business. What is the average issue price per share of stock? a. $5.00 b. $6.80 c. $29.00 d. $34.00 90. Which of the following is true for a corporation that issues 1,000 shares of $2 par common stock at $5 per share? a. Common stock will increase by $5,000. b. The maximum selling price for these shares of stock is $2 per share. c. Total stockholders' equity will increase by $5,000. d. The per-share dividend amount on these shares is $2. 91. What will be the increase in the additional paid-in capital—common stock account if a corporation issues 20,000 shares of $1 par common stock for $6 per share? a. $140,000 b. $120,000 c. $100,000 d. $20,000 92. Lanier Tech was incorporated as a new business on January 1. The company is authorized to issue 50,000 shares of $5 par common stock and 10,000 shares of 6%, $10 par, cumulative, participating preferred stock. On January 1, the company issued 8,000 shares of the common stock for $15 per share and 2,000 shares of the preferred stock for $30 per share. Net income for the year ended December 31 was $375,000. What is the amount of the company's total capital stock on December 31? a. $60,000 b. $120,000 c. $180,000 d. $350,000 93. Lanier Tech was incorporated as a new business on January 1. The company is authorized to issue 50,000 shares of $5 Powered by Cognero

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Ch 10 Stockholders' Equity par common stock and 10,000 shares of 6%, $10 par, cumulative, participating preferred stock. On January 1, the company issued 8,000 shares of the common stock for $15 per share and 2,000 shares of the preferred stock for $30 per share. Net income for the year ended December 31 was $375,000. Assume that no dividends were declared or paid during the first year of operations. What is the dollar amount of total stockholders' equity reported on the balance sheet on December 31? a. $60,000 b. $120,000 c. $555,000 d. $725,000 94. Which of the following statements is false regarding stock warrants? a. They are frequently considered "equity kickers." b. They are typically a means of providing existing stockholders a means of maintaining their relative level of ownership. c. They provide an option to purchase shares of stock at a stated price and within a stated period of time. d. They are typically provided as a form of compensation for services performed. 95. Lanthier's Heating & Air Company began business on June 1. The articles of incorporation authorize issuance of 10,000 shares of $2 par common stock and 5,000 shares of $8 par, 6% cumulative preferred stock. On June 5, the company issued 2,400 shares of common stock for $20 per share. What effect does the entry to record the stock issuance have on total stockholders' equity? a. increase of $4,800 b. decrease of $4,800 c. increase of $48,000 d. decrease of $48,000 96. Lanthier's Heating & Air Company began business on June 1. The articles of incorporation authorize issuance of 10,000 shares of $2 par common stock and 5,000 shares of $8 par, 6% cumulative preferred stock. What is the maximum amount that can be reported on the balance sheet for common stock and preferred stock, respectively, if all of the stock is issued? Common Stock Preferred Stock a. $20,000 $2,400 b. $20,000 $40,000 c. $10,000 $40,000 d. $10,000 $2,400 97. Lasik Vision, Inc. began business on June 1, Year 1. The corporate charter authorized issuance of 1,000 shares of nopar common stock and 4,000 shares of $6 par, 6% cumulative preferred stock. As of the beginning of Year 2, 200 shares of common stock had been issued and none of the preferred stock had been issued. If the company issues 400 shares of common stock on March 1, Year 2, for $10 per share, the journal entry would include a a. $4,000 credit to Additional Paid-In Capital—Common Stock. b. $4,000 credit to Common Stock. c. $2,400 credit to Additional Paid-In Capital—Common Stock. d. $2,400 credit to Common Stock. 98. Treasury shares represent the Powered by Cognero

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Ch 10 Stockholders' Equity a. number of previously issued shares that have been repurchased by the corporation. b. number of shares that the corporation has sold. c. number of shares that are currently held by stockholders. d. maximum number of shares that can be sold by the corporation. 99. On January 1, Year 1, a company issued 10,000 shares of 10%, $10 par value cumulative preferred stock. No dividends were declared in Year 1 or Year 2. In Year 3, the company declared a dividend of $200,000. How much of the Year 3 dividend should be paid to common stockholders? a. $170,000 b. $190,000 c. $197,000 d. $200,000 100. A corporation has 5,000 shares of $5 par, 6% cumulative preferred stock outstanding, and 25,000 shares of $2 par common stock outstanding. No dividends have been paid for the past 2 years. If the company wishes to distribute $2 per share to the common stockholders this year, what is the total amount of dividends that must be paid? a. $4,500 b. $50,000 c. $51,500 d. $54,500 101. Which of the following statements is true with regard to 7% cumulative participating preferred stock? a. Stockholders who hold this type of stock are guaranteed a dividend each year. b. The issue price of this stock is reported in the preferred stock account on the balance sheet. c. If the corporation pays a per-share dividend in excess of 7% of the preferred stock's par value and there are no dividends in arrears, the preferred shares will receive a share of the amounts available for distribution as dividends to other classes of stock. d. If dividends are not declared, they accumulate, and a liability must be reported on the balance sheet for any amount in arrears that is owed to the preferred stockholders. 102. Which of the following statements is true pertaining to participating preferred stock? a. Its issuance provides no flexibility to the issuing company because its terms always mandate a regular, annual dividend. b. There is a legal requirement for a corporation to declare a regular annual dividend. c. It includes the right to share in dividends in excess of the regular annual dividend. d. It includes the right to participate in management decisions through voting privileges. 103. The stockholders' equity section of Ladder Distributors’ December 31, Year 1, balance sheet is as follows: Common stock, $30 par, 20,000 shares issued and outstanding Additional paid-in capital—common stock Retained earnings Total stockholders' equity

$ 600,000 240,000 700,000 $1,540,000

Assume that all of the 20,000 shares of stock that were issued as of December 31, Year 1, were issued for $42 per share. On March 1, Year 2, the company reacquired 4,000 shares of its common stock for $50 per share. How much should be reported on the company’s March 31, Year 2, balance sheet for treasury stock? Powered by Cognero

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Ch 10 Stockholders' Equity a. $32,000 b. $128,000 c. $168,000 d. $200,000 104. The stockholders' equity section of Ladder Distributors’ December 31, Year 2, balance sheet is as follows: Common stock, $30 par, 20,000 shares issued and outstanding Additional paid-in capital—common stock Retained earnings Total stockholders' equity

$ 600,000 240,000 700,000 $1,540,000

Assume that all of the 20,000 shares of stock that were issued as of December 31, Year 1, were issued for $42 per share. On March 1, Year 2, the company reacquired 4,000 shares of its common stock for $50 per share. What is the total amount of stockholders' equity that will be presented on the company's March 31, Year 2, balance sheet? a. $1,340,000 b. $1,372,000 c. $1,708,000 d. $1,740,000 105. The stockholders' equity section of Ladder Distributors’ December 31, Year 1, balance sheet is as follows: Common stock, $30 par, 20,000 shares issued and outstanding Additional paid-in capital—common stock Retained earnings Total stockholders' equity

$ 600,000 240,000 700,000 $1,540,000

Assume that all of the 20,000 shares of stock that were issued as of December 31, Year 1, were issued for $42 per share. On March 1, Year 2, the company reacquired 4,000 shares of its common stock for $50 per share. Suppose the company reissued 1,000 shares of its treasury stock on June 1, Year 2, for $44 each. Which of the following is true regarding the entry required to record this transaction? a. A debit to Treasury Stock is required for $44,000. b. A credit to Treasury Stock is required for $50,000. c. A credit to Retained Earnings is required for $6,000. d. A debit to Additional Paid-In Capital—Treasury Stock is required for $6,000. 106. The stockholders' equity section of Ladder Distributors’ December 31, Year 1, balance sheet is as follows: Common stock, $30 par, 20,000 shares issued and outstanding Additional paid-in capital—common stock Retained earnings Total stockholders' equity

$ 600,000 240,000 700,000 $1,540,000

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Ch 10 Stockholders' Equity c. A debit to Retained Earnings is required for $11,000. d. A debit to Paid-In Capital—Treasury Stock is required for $3,000. 107. A corporation began operations on October 1, Year 1, with 3,000 shares of $2 par common stock authorized. The company issued common stock on several occasions during Year 1 and Year 2. On December 31, Year 2, the company repurchased 1,000 shares of its outstanding shares and then reissued 500 of these shares on March 1, Year 3. On June 1, Year 3, the company's board of directors declared a 2-for-1 stock split. As a result of this stock split, which of the following is true? a. Assets decreased. b. The number of shares issued decreased. c. Total liabilities decreased. d. Total stockholders' equity remained the same. 108. The stockholders' equity section of the December 31, Year 1, balance sheet for Lake Lanier Grill, Inc. is as follows: Common stock, $3 par, 2,000 shares issued and outstanding Additional paid-in capital—common stock Retained earnings Total stockholders' equity

$ 6,000 1,000 5,400 $12,400

Assume that all 2,000 shares of stock were issued as of December 31, Year 1, for $3.50 per share. On March 1, Year 2, the company reacquired 1,000 shares of its common stock for $4.50 per share. The journal entry to record the transaction on March 1, Year 2, includes a credit to what account and for what amount? a. $3,000 to Additional Paid-In Capital—Treasury Stock b. $4,500 to Treasury Stock c. $3,000 to Common Stock d. $4,500 to Cash 109. The stockholders' equity section of the December 31, Year 1, balance sheet for Lake Lanier Grill, Inc. is as follows: Common stock, $3 par, 2,000 shares issued and outstanding Additional paid-in capital—common stock Retained earnings Total stockholders' equity

$ 6,000 1,000 5,400 $12,400

Assume that all 2,000 shares of stock were issued as of December 31, Year 1, for $3.50 per share. On March 1, Year 2, the company reacquired 1,000 shares of its common stock for $4.50 per share. If all of the 1,000 shares that Lake Lanier Grill repurchased on March 1, Year 2, were later reissued for $4.00 per share, the journal entry to record this transaction includes a debit to what account and for what amount? a. $4,000 to Additional Paid-In Capital—Treasury Stock b. $2,000 to Treasury Stock c. $500 to Retained Earnings d. $4,500 to Cash 110. All of the following are reasons that a corporation may purchase treasury stock except a. it needs the stock for its employee stock bonus program. b. it desires to make an investment in its own stock. c. to buy out the ownership of stockholders. Powered by Cognero

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Ch 10 Stockholders' Equity d. to increase the reported amount of earnings per share. 111. Which of the following statements is true regarding a corporation's purchase of treasury stock? a. The cost of treasury stock is a reduction in stockholders' equity. b. Dividends must still be paid on treasury stock because it is still issued. c. Treasury stock is reported as an asset because it is considered an investment in the corporation's own stock. d. Treasury stock is no longer considered issued once it is back in the hands of the issuer. 112. If a corporation repurchases 500 shares of its previously issued common stock for $5,000 and then reissues it for $4,000, which of the following statements is true regarding the difference in the amounts of the repurchase and reissuance? a. It is reported as a loss on the sale of treasury stock. b. It is reported as a gain on the sale of treasury stock. c. It is a decrease in stockholders' equity. d. It is an increase in stockholders' equity. 113. If a corporation repurchases 500 shares of its previously issued common stock and then retires these shares, which of the following is true? a. A new class of stock must be issued in place of the 500 retired shares. b. Approval from the state is required for this type of transaction. c. A gain or loss must be recorded, depending on the difference between the repurchase cost and the original issue price. d. The common stock and additional paid-in capital accounts must be decreased by the amount of the original issue price. 114. If a corporation declares a 2-for-1 stock split, which of the following is true? a. A new class of stock must be authorized with twice the number of issued shares. b. The number of outstanding shares is half the number that was previously outstanding before the split. c. The number of outstanding shares is twice the number that was previously outstanding before the split. d. The number of outstanding shares is doubled, while the number of issued shares is reduced to half of the amount before the split. 115. If a corporation declares a 2-for-1 stock split, which of the following is true? a. The amount of stockholders' equity is doubled as a result of the split. b. The amount of capital stock is doubled as a result of the split. c. The price of each will be doubled as a result of the split. d. A stockholder who previously held 100 shares will have 200 shares after the split. 116. If a corporation declares a 2-for-1 stock split, which of the following is true? a. A journal entry is required to show the effect on the stockholders' equity accounts. b. The stockholders will have a higher proportionate ownership share after the split. c. The par value will be reduced to half of the presplit par value. d. The market price of the stock is expected to increase after the split. 117. A growing corporation had $180,000 of its $30 par common stock issued before its recent 3-for-1 stock split. The Powered by Cognero

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Ch 10 Stockholders' Equity market price of the stock was $120 per share before the split. Which of the following is true as a result of the split? a. There were 24,000 shares (6,000 + 18,000) of common stock issued after the split. b. The balance in the common stock account increased to $540,000. c. The market price of the stock tripled. d. The par value of the stock decreased to $10 per share. 118. If a corporation issues cumulative, participating preferred stock, which of the following is true regarding the rights of the preferred stockholders? a. They must forego dividends for any periods when no dividends are declared. b. They will share the dividends that exceed a specified amount. c. They will receive a fixed dividend regardless of the amount of dividends declared. d. They will have an option to convert their shares to common stock at a specified date. 119. When a corporation decides to pay a cash dividend, which of the following is an important consideration? a. the balances in the corporation's cash and retained earnings accounts b. the number of authorized shares of the corporation's stock c. the book value of the corporation's stock d. the balance of additional paid-in capital on the corporation's stock accounts 120. When a corporation declares a cash dividend, which of the following is true? a. Cash decreases. b. Liabilities decrease. c. Stockholders' equity decreases. d. No entry is necessary. 121. After a corporation declares a cash dividend, what takes place on the date of record? a. Cash decreases. b. Liabilities decrease. c. Stockholders' equity decreases. d. No entry is necessary. 122. When a corporation pays a previously declared cash dividend, which of the following is true? a. Cash increases. b. Liabilities decrease. c. Stockholders' equity decreases. d. No entry is necessary. 123. When a corporation issues a stock dividend, which of the following is true? a. Cash decreases. b. Total stockholders' equity remains the same. c. Total stockholders' equity decreases. d. Retained earnings is increased. 124. When a corporation issues a small stock dividend, which of the following is false? a. Cash decreases. Powered by Cognero

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Ch 10 Stockholders' Equity b. Total stockholders' equity remains the same. c. The capital stock accounts increase. d. Retained earnings is decreased. 125. A company plans to distribute $134,000 in dividends. It has outstanding 200,000 shares of 7%, $10 par preferred stock (noncumulative and nonparticipating) and 60,000 shares of $2 par common stock. How much will be distributed per share on preferred and common stock? Preferred Stock Common Stock a. $0.52 $0.52 b. $0.67 $0.00 c. $0.00 $2.23 d. $0.60 $2.00 126. The stockholders' equity section of the balance sheet immediately before a recent stock dividend is as follows: Common stock, $5 par, 100,000 shares issued and outstanding Additional paid-in capital—common stock Retained earnings Total stockholders' equity

$ 500,000 100,000 725,000 $1,325,000

A 10% stock dividend was declared and paid when the market price per share was $12. Immediately after the stock dividend, the components of stockholders' equity section were: Common Stock a. $620,000 b. $550,000 c. $620,000 d. $550,000

Additional Paid-in Capital—Common Stock Retained Earnings $100,000 $605,000 $170,000 $725,000 $100,000 $725,000 $170,000 $605,000

127. Lakeshore Industries reported the following information on its recent balance sheet: Common stock, $10 par, 100,000 shares authorized, 75,000 shares issued and outstanding What is the effect of a 10% stock dividend if the market price of the common stock is $30 per share when the stock dividend is declared? a. A stock dividend has no impact on any of the stockholders' equity accounts. b. Total stockholders' equity increases by $75,000. c. Cash increases by $300,000. d. $225,000 of retained earnings is transferred to the capital stock accounts. 128. Lakeshore Industries reported the following information on its recent balance sheet: Common stock, $10 par, 100,000 shares authorized, 75,000 shares issued and outstanding What is the effect of a 2-for-1 stock split if the market value of the common stock is $20 per share at the time the stock split is declared? a. A stock split has no impact on any of the stockholders' equity account balances. Powered by Cognero

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Ch 10 Stockholders' Equity b. Total stockholders' equity increases by $750,000. c. Cash increases by $750,000. d. $1,500,000 of retained earnings is transferred to the capital stock accounts. 129. Which of the following statements is true about large stock dividends? a. They increase the number of outstanding shares by 15% or more. b. They are capitalized using the stock's market value just before the dividend. c. They are capitalized using the stock's market value just after the dividend. d. They increase the number of outstanding shares by 25% or more. 130. Which of the following statements is true about small stock dividends? a. They increase the number of outstanding shares by less than 40%. b. They are capitalized using the stock's market value just before the dividend. c. They are capitalized using the stock's par value. d. They increase the number of outstanding shares by less than 35%. 131. Landmark Company reported the following information in the stockholders' equity section of its December 31 balance sheet: 7% Cumulative, nonparticipating preferred stock, $100 par, 500 shares authorized, issued, and outstanding, callable at par value Common stock, $12 par, 100,000 shares authorized Additional paid-in capital—common stock Retained earnings

$ 50,000 600,000 25,000 825,000

If the company repurchased 500 shares of its common stock for $20 per share, what is the amount of total stockholders' equity after this transaction? a. $1,510,000 b. $1,500,000 c. $1,494,000 d. $1,490,000 132. On June 1, the board of directors declared a $100,000 cash dividend to be distributed to common stockholders of record on June 15. The dividend will be paid on July 1. The required journal entry on June 1 includes a a. $100,000 debit to Dividends Declared. b. $100,000 debit to Dividends Payable. c. $100,000 credit to Cash. d. $100,000 credit to Common Stock. 133. On January 15, a corporation paid a cash dividend that had been declared prior to the end of its previous fiscal year. The entry to pay the dividends includes a debit to a. Cash and a credit to Dividends Payable. b. Dividends Payable and a credit to Cash. c. Dividends Declared and a credit to Dividends Payable. d. Dividends Payable and a credit to Retained Earnings.

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Ch 10 Stockholders' Equity 134. On June 1, a board of directors declared a $3 per share cash dividend payable on June 30 to all common stockholders of record on June 15. The company has 10,000 shares of common stock authorized, 1,000 shares issued, and 200 shares in the treasury. The entry to record the dividend declaration increases a(n) a. liability account by $2,400. b. asset account by $3,000. c. expense account by $2,400. d. stockholders' equity account by $3,000. 135. What types of accounts are Treasury Stock and Additional Paid-in Capital—Treasury Stock? Treasury Stock a. contra equity b. contra equity c. stockholders' equity d. retained earnings

Additional Paid-in Capital—Treasury Stock stockholders' equity contra equity stockholders' equity retained earnings

136. When is a liability for dividends created? a. at the end of each fiscal year b. at the date of declaration c. at the date of record d. at the date of payment 137. What is the primary reason for a stock split? a. to distribute cash to the investor b. to decrease the market value of the stock c. to decrease the number of shares outstanding d. to increase the capital stock of the corporation 138. Dividends in arrears are required to be reported in a. a liability account. b. a contra-equity account. c. a stockholders' equity account. d. the footnotes accompanying the financial statements. 139. Which of the following statements is false regarding the issuance of stock versus bonds to raise capital for a corporation? a. The declaration of dividends reduces the amount of the corporation's taxable income. b. Interest accrues, whereas dividends do not accrue. c. The payment of bond interest is a contractual requirement. d. The payment of dividends is at the discretion of the board of directors. 140. When a corporation makes a cash distribution despite having no retained earnings, this is called a a. dividend in arrears. b. call provision. c. conversion privilege. Powered by Cognero

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Ch 10 Stockholders' Equity d. liquidating dividend. 141. A corporation reported net income of $60,000, declared and paid cash dividends of $80,000, and issued 3,000 shares of $2 par common stock at $15 per share during the year. What total effects would these transactions have on the following stockholders' equity accounts? Retained Earnings Common Stock a. increase increase b. increase decrease c. decrease decrease d. decrease increase 142. Which of the following items is included as part of comprehensive income but not as part of net income? a. income tax expense b. unrealized holding gains or losses c. gains or losses on the sale of equipment d. gains or losses on the sale of investments 143. The FASB's concept of comprehensive income a. allows items that are not necessarily under management's control, such as currency translation adjustments, to be shown as an appropriation of retained earnings. b. has a primary drawback because it allows management considerable flexibility in determining the net income figure. c. excludes transactions that involve the payment of dividends and other transactions affecting owners. d. requires that all transactions representing changes in asset and liability accounts must be shown on the income statement. 144. The statement of stockholders' equity shows an $8,000 increase in the common stock account, a $22,000 increase in the additional paid-in capital—common stock account, and a $100,000 increase in retained earnings. If the common stock has a par value of $3 and dividends of $10,000 were declared and paid during the year, what is the amount of net income for the year? a. $90,000 b. $100,000 c. $110,000 d. $140,000 145. The following information relates to LaFarge North America's stockholders' equity accounts: Common stock, $7 par, 200,000 shares authorized Additional paid-in capital—common stock Retained earnings Treasury stock, 2,000 shares at cost Total stockholders' equity

$700,000 160,000 ? 15,000 $975,000

What is the amount of retained earnings? a. $98,000 b. $114,000 c. $130,000 Powered by Cognero

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Ch 10 Stockholders' Equity d. $860,000 146. Which of the following is not a reason why a corporation's ability to pay dividends may be restricted? a. An agreement with bondholders may require that the balance of retained earnings be maintained at a minimum level. b. The board of directors may set aside designated amounts for future expansion or other business purposes. c. State laws may require that the retained earnings balance cannot fall below the cost of treasury stock. d. The corporate charter may require that transactions with nonowners be excluded from retained earnings. 147. An appropriation of retained earnings is best described as a(n) a. reserve established for a specific business purpose. b. allowance for future treasury stock transactions. c. allowance for future preferred stock redemptions. d. reserve for possible declines in the market value of the corporation's capital stock. 148. Appropriations of retained earnings must be reported a. in a separate account in the equity section of the balance sheet. b. in the "unrestricted retained earnings" section on the balance sheet, with footnote disclosure to describe the appropriation. c. as a prior period adjustment on the statement of changes in retained earnings. d. only within the footnotes accompanying the financial statements. 149. Error corrections that involve restatement of prior period income must be reported a. in a separate account within the equity section of the balance sheet. b. in the "unrestricted retained earnings" section on the balance sheet, with footnote disclosure to describe the appropriation. c. as a prior period adjustment on the statement of changes in retained earnings. d. only within the footnotes accompanying the financial statements. 150. The balance in the retained earnings account represents a. cash in the bank. b. the amount of cash available for dividends. c. the accumulated revenues from all prior years of operations. d. the accumulated earnings that have not been distributed to stockholders. 151. Selected data from Labor Finders, Inc.'s financial statements are as follows:

Net income Cash dividends paid on preferred stock Cash dividends paid on common stock Common stock price Preferred stock price Purchases of treasury stock Total stockholders' equity Common stockholders' equity Powered by Cognero

Year 2 $150,000 $15,000 $42,000 $15 $31 $100,000 $2,300,000 $1,780,000

Year 1 $120,000 $15,000 $38,000 $14 $26 $0 $2,157,000 $1,637,000 Page 23

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Ch 10 Stockholders' Equity Average number of preferred shares outstanding Average number of common shares outstanding

20,000 104,000

20,000 95,000

The company's Year 2 earnings per share is reported as a. $1.08. b. $1.20. c. $1.30. d. $1.43. 152. Selected data from Labor Finders, Inc.'s financial statements are as follows:

Year 2 $150,000 $15,000 $42,000 $15 $31 $100,000 $2,300,000 $1,780,000 20,000 104,000

Year 1 $120,000 $15,000 $38,000 $14 $26 $0 $2,157,000 $1,637,000 20,000 95,000

The company's Year 2 return on common equity is reported as a. 7.58%. b. 7.90%. c. 8.43%. d. 8.78%. 153. Selected data from Labor Finders, Inc.'s financial statements are as follows:

Year 2 $150,000 $15,000 $42,000 $15 $31 $100,000 $2,300,000 $1,780,000 20,000 104,000

Year 1 $120,000 $15,000 $38,000 $14 $26 $0 $2,157,000 $1,637,000 20,000 95,000

The company's Year 2 dividend yield is reported as a. 2.69%. b. 2.80%. c. 26.67%. d. 28.00%.

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Ch 10 Stockholders' Equity 154. Selected data from Labor Finders, Inc.'s financial statements are as follows:

Year 2 $150,000 $15,000 $42,000 $15 $31 $100,000 $2,300,000 $1,780,000 20,000 104,000

Year 1 $120,000 $15,000 $38,000 $14 $26 $0 $2,157,000 $1,637,000 20,000 95,000

The company's Year 2 dividend payout ratio is reported as a. 2.67%. b. 2.80%. c. 26.67%. d. 28.00%. 155. Selected data from Labor Finders, Inc.'s financial statements are as follows:

Year 2 $150,000 $15,000 $42,000 $15 $31 $100,000 $2,300,000 $1,780,000 20,000 104,000

Year 1 $120,000 $15,000 $38,000 $14 $26 $0 $2,157,000 $1,637,000 20,000 95,000

The company's Year 2 total payout ratio is reported as a. 94.67%. b. 105.19%. c. 28.00%. d. 9.47%. 156. Selected data from Labor Finders, Inc.'s financial statements are as follows: Net income Cash dividends paid on preferred stock Cash dividends paid on common stock Common stock price Preferred stock price Purchases of treasury stock Total stockholders' equity Powered by Cognero

Year 2 $150,000 $15,000 $42,000 $15 $31 $100,000 $2,300,000

Year 1 $120,000 $15,000 $38,000 $14 $26 $0 $2,157,000 Page 25

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Ch 10 Stockholders' Equity Common stockholders' equity Average number of preferred shares outstanding Average number of common shares outstanding

$1,780,000 20,000 104,000

$1,637,000 20,000 95,000

The company's Year 2 stock repurchase payout ratio is reported as a. 6.67%. b. 77.19%. c. 28.00%. d. 66.67%. 157. Selected data from La Paz Restaurants' financial statements are as follows: Net income Cash dividends paid on common stock Year-end market price per share of common stock

Year 2 $110,000 $21,000 $12

Year 1 $123,000 $38,000 $13

Shares of common stock outstanding

140,000

The Year 2 dividend yield ratio is reported as a. 1.25%. b. 1.59%. c. 0.057%. d. 2.09%. 158. Earnings per share is an indication of how much a. cash the company has for each share of outstanding common stock. b. the company earned for each share of outstanding common stock. c. the company paid as dividends for each share of common stock held by stockholders. d. the company earned for each share of outstanding common and preferred stock.

159. A corporation was incorporated on January 1 of the current year. Its corporate charter provided for a maximum of 1,000,000 shares of common stock to be sold in the future of the corporation. In January, 150,000 shares were sold to the public, and an additional 100,000 shares were sold in October. In November, 15,000 of the issued shares were bought back by the corporation. Complete the following table as of the end of the current year. Quantities Authorized shares Issued shares Outstanding shares Treasury shares 160. A corporation is authorized by its corporate charter to issue 50,000 shares of preferred stock with a 7% dividend rate and a par value of $10 per share and 750,000 shares of common stock with a par value of $2 per share. On January 15 of the current year, 2,000 shares of preferred stock were issued for $14 per share along with 10,000 shares of common stock for $2.50 per share. A)

Record these stock issues.

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Ch 10 Stockholders' Equity B)

How much total cash was raised through stock issuances?

161. The following information comes from a balance sheet on December 31: Common stock, $1 par, 1,000,000 shares authorized Additional paid-in capital—common stock Total capital stock Retained earnings Less: Treasury stock (4,000 common shares at cost) Total stockholders' equity

$160,000 120,000 280,000 80,000 (40,000) $320,000

A) How many shares of common stock are issued? B)

How many shares of common stock are outstanding?

Assuming that all shares were sold at the same price, what was the original selling price per share?

D) If the company declares a 2-for-1 stock split on December 31, describe the resulting change, if any, in the balances in capital stock accounts and the par value of the common stock. 162. A corporation reported the following information on December 31: 12% Cumulative, nonparticipating preferred stock, $10 par, 50,000 shares authorized; callable at par value Common stock, $2 par, 30,000 shares authorized Additional paid-in capital: Preferred stock Common stock Total capital stock Retained earnings Less: Treasury stock (500 common shares at cost) Total stockholders' equity A) B) C) D) E) F) G) H) I) J)

$500,000 40,000 50,000 50,000 $640,000 30,000 (5,000) $665,000

How many shares of preferred stock are issued? How many shares of common stock are issued? How many shares of preferred stock are outstanding? How many shares of common stock are outstanding? How many of the preferred shares will receive dividends if they are paid? How many of the common shares will receive dividends if they are paid? What is the stated dividend per share on the preferred stock? What is the total amount of dividends to be paid to preferred stockholders this year? If all of the preferred stock was issued at the same price, what was the issue price per share? If all of the common stock were issued at the same price, what was the issue price per share?

163. The following information pertains to Leapfrog Academy on December 31: Retained earnings Treasury stock, at cost (500 shares) Additional paid-in capital—treasury stock Powered by Cognero

$52,000 1,500 900 Page 27

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Ch 10 Stockholders' Equity Common stock, $1 par, 10,000 shares authorized, 4,500 shares issued Additional paid-in capital—common stock Cash dividends payable—common stock

4,500 9,000 6,000

Prepare the stockholders' equity section of the balance sheet at December 31.

164. A corporation had several transactions affecting its stockholders' equity accounts during the year. The transactions are presented in chronological order. In the space provided, indicate the impact on the equity accounts shown by placing the respective dollar amounts along with a plus sign (+) for an increase in the account balance, minus sign (−) for a decrease, or N/A if there is no impact on the account balance.

Transactions Received authorization to issue 10,000 shares of $2 par common stock. Issued 500 shares of common stock for $15 per share. Issued 400 shares of $2 par common stock for $16 per share. Declared and paid a 10% stock dividend when the market price of the common stock was $17 per share. Declared and paid a cash dividend of $0.50 per share. Issued additional shares in a 2-for-1 stock split.

Common Stock

Additional Paid-In Capital— Common Stock

Retained Earnings

165. A corporation had several transactions affecting its stockholders' equity accounts during the year. In the space provided, show the impact on the accounting equation by placing a plus sign (+) for an increase, a minus sign (−) for a decrease, or N/A for no impact or no total net impact. Transactions

Assets =

Liabilities +

Stockholders' Equity

Issued 2,000 shares of $2 par common stock for an amount greater than par. Issued 500 shares of $10 par preferred stock for an amount greater than par. Repurchased 100 shares of common stock for $5 per share. Reissued 50 shares of treasury stock for $6 per share. Declared a cash dividend. Paid a cash dividend. 166. A corporation had several transactions affecting its stockholders' equity accounts during the year. In the space provided, show the impact on the accounting equation by placing a plus sign (+) for an increase, a minus sign (−) for a decrease, or N/A for no impact or no total net impact. Stockholders' Powered by Cognero

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Ch 10 Stockholders' Equity Transactions

Assets =

Liabilities +

Equity

Received authorization to issue 10,000 shares of $5 par common stock. Issued 5,000 shares of common stock for $15 per share. Declared and paid a 5% stock dividend when the market price of the common stock was $18 per share. Declared a cash dividend of $1 per share. Issued additional shares in a 2-for-1 stock split. 167. The following stockholders' equity information was available on January 1, Year 2: Common stock, $10 par, 1,000,000 shares authorized, 50,000 shares issued Treasury stock, 1,000 common shares at cost

$500,000 80,000

Record the purchase of the treasury stock on November 30, Year 1, and the January 10, Year 2, sale of 500 shares of treasury stock for $70 per share. 168. The following information is available on January 1: Common stock, $1 par, 100,000 shares authorized, 50,000 shares issued and outstanding

$50,000

During the year, the following transactions occurred: June 10 July 1 Sept. 1

Repurchased 1,000 shares of its outstanding common stock for $10 per share. Reissued 500 shares of treasury stock for $11 per share. Reissued 500 shares of treasury stock for $8.50 per share.

Record journal entries for each of these transactions. 169. The following information is available on January 1: Common stock, $1 par, 100,000 shares authorized, issued and outstanding Additional paid-in capital—common stock

$100,000 450,000

On June 10, the company repurchased and retired 1,000 shares of its outstanding common stock for $10 per share. Record this transaction.

170. An electric utility issued 3,000 shares of common stock, all of the same class; 2,800 shares are outstanding and 200 are held in the treasury. On August 15, the board of directors declared a cash dividend of $2.10 per share payable on September 15 to stockholders of record on August 31. Prepare the required journal entries for August 15, August 31, and September 15. 171. From Year 1 to Year 3, Lumber Liquidators had the following capital structure: 8% Preferred stock, $10 par, 10,000 shares authorized, 5,000 shares issued and outstanding Common stock, $2 par, 25,000 shares authorized, 20,000 Powered by Cognero

$ 50,000 Page 29

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Ch 10 Stockholders' Equity shares issued and outstanding Additional paid-in capital: Preferred stock Common stock Total capital stock

40,000 60,000 80,000 $230,000

The board of directors determined the total amount available for dividends in each year from Year 1 through Year 3 as shown in the following table. Complete the table to indicate the portion of the dividend allocated to preferred and common stockholders in each year. Assume that the preferred stock is noncumulative and nonparticipating. Year Year 1 Year 2 Year 3

Amount Available for Dividends $8,000 $5,000 $3,000

Preferred Dividends

Common Dividends

172. Information from the stockholders' equity section of the balance sheet on December 31, Year 1, is as follows: 10% Nonparticipating preferred stock, $10 par, 2,000 shares authorized, 1,000 shares issued Common stock, $1 par, 10,000 shares authorized, 6,000 shares issued Additional paid-in capital: Preferred stock Common stock Total contributed capital Retained earnings Less: treasury stock (100 common shares at cost) Total stockholders' equity

$ 10,000 6,000 50,000 30,000 $ 96,000 70,000 (1,300) $164,700

This company has been in business for over 10 years but has paid no dividends for the past 2 years due to a temporary decline in business. During Year 2, the company has net income of $30,000 and plans to pay a dividend. Complete the table indicating the amount of dividends that each class of stockholder will receive under the following preferred stock dividend assumptions: Total Amount Available Preferred Common Dividend Preference for Dividend Dividend Dividend Cumulative $4,000 Noncumulative $4,000 173. A regional chain of medical clinics had the following information pertaining to its stockholders' equity accounts at December 1: Common stock, $5 par, 100,000 shares authorized, 30,000 shares issued and outstanding Additional paid-in capital—common stock Retained earnings

$150,000 120,000 300,000

No dividends were paid during the year. On December 15, the clinic repurchased 3,000 shares of its common stock for $8 per share. On December 31, the bookkeeper closed the books, reporting net income of $25,000. A) What amount will be reported on the balance sheet for Treasury Stock on December 31? B) How many shares of stock are outstanding on December 31? Powered by Cognero

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Ch 10 Stockholders' Equity C) Prepare the stockholders' equity section of the balance sheet at December 31. 174. The equity section of a balance sheet at December 31, Year 1, is as follows: Common stock, $10 par, 10,000 shares issued and outstanding Additional paid-in capital—common stock Retained earnings Total stockholders' equity

$100,000 50,000 100,000 $250,000

On May 15, Year 2, the company reacquired 1,000 shares of its common stock at $15 per share. Then, on July 1, Year 2, 500 shares of treasury stock were sold for $20 per share. A) B)

What journal entries will be required to record the May 15 and July 1, Year 2, transactions? How many shares of the company's stock are outstanding on July 1, Year 2, immediately following the sale of the treasury stock?

175. A corporation reported the following information on December 31, Year 1: Common stock, $3 par, 10,000 shares authorized, issued and outstanding $ 30,000 Additional paid-in capital—common stock 80,000 Total capital stock $110,000 Retained earnings 40,000 Total stockholders' equity $150,000 A)

On December 31, Year 1, the board of directors issues a 3-for-1 stock split. What impact will the split have on the stock’s par value?

What journal entry is required to record the split?

Record the declaration of a cash dividend of $1 per share on January 10, Year 2. The dividend will be paid on January 31, Year 2, to shareholders of record on January 24, Year 2.

176. The equity section of a balance sheet on December 31, current year, is as follows: 5% Preferred stock, $10 par, 2,000 shares issued and outstanding Common stock, $1 par, 10,000 shares issued and outstanding Additional paid-in capital—common stock Total capital stock Retained earnings Total stockholders' equity

$ 20,000 10,000 12,500 $42,500 74,500 $117,000

No dividends were paid during the previous 2 years, but the company plans to issue a cash dividend of $2,000 on December 31, current year. Determine the total dividend for each class of stock under each of the following assumptions: A)

The preferred stock is noncumulative and nonparticipating.

The preferred stock is cumulative and nonparticipating.

177. A corporation reported the following information in the stockholders' equity section of its balance sheet before its recent stock dividend: Powered by Cognero

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Ch 10 Stockholders' Equity Common stock, $3 par, 100,000 shares issued and outstanding Additional paid-in capital—common stock Total capital stock Retained earnings Total stockholders' equity

$300,000 150,000 $450,000 425,000 $875,000

Record a 10% stock dividend assuming that the market price of its stock was $7 per share on the declaration date.

Following distribution of the stock dividend, what are the updated balances in the common stock and retained earnings accounts?

178. A corporation reported the following amounts on its balance sheet on December 1: 8% Preferred stock, $10 par, 400 shares issued and outstanding Common stock, $2 par, 3,000 shares issued and outstanding Additional paid-in capital—common stock Total capital stock Retained Earnings Total stockholders' equity

$ 4,000 6,000 22,000 $32,000 48,000 $80,000

During December, the following transactions occurred: Declared and paid a 20% preferred stock dividend when the market price of the preferred stock was $12 per share. Distributed a 2-for-1 stock split of the common stock when the market price of the common stock was $10 per share.

Dec. 5 21 A)

What journal entries are required to record these stock transactions?

How many preferred shares are outstanding on December 31?

How many common shares are outstanding on December 31?

What effect did the stock dividend have on the par value of the preferred stock?

What effect did the stock split have on the par value of the common stock?

179. Leather Creations has been in business for 2 years. On December 31, Year 2, the company had the following capital stock account balances immediately prior to a meeting of its board of directors: 10% Cumulative, nonparticipating preferred stock, $10 par, 2,000 shares authorized, 1,000 shares issued and outstanding Common stock, $1 par, 10,000 shares authorized, 6,000 shares issued

$10,000 6,000

No dividends were paid during Year 1. Net income for Year 2 is $110,000. At its December 31, Year 2, meeting, the board declares a cash dividend. Complete the table to indicate the amount of dividends that would be distributed to each class of stockholder if the following amounts of dividends are available:

Total Amount Available for Dividend $ 2,000

Preferred Dividend

Common Dividend Page 32

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Ch 10 Stockholders' Equity B)

$ 4,000

$10,000

180. The stockholders' equity section of the balance sheet on January 1 appeared as follows: Common stock, $2 par, 50,000 shares authorized, 20,000 shares issued Additional paid-in capital—common stock Total capital stock Retained earnings Less: Treasury stock (10,000 shares at cost) Total stockholders' equity

$ 40,000 120,000 $160,000 300,000 (80,000) $380,000

On March 1, the company sold 800 shares of treasury stock at $25 per share. A)

Prepare the journal entry to record the March 1 transaction.

Is the excess sale price over the cost of the treasury stock reported on the income statement? Why or why not?

181. The stockholders' equity section of the balance sheet appears as follows on January 1: Common stock, $2 par, 2,000 shares issued and outstanding Additional paid-in capital—common stock Total capital stock Retained earnings Total stockholders' equity

$ 4,000 1,600 $ 5,600 5,400 $11,000

On March 1, the company repurchased 800 shares of its common stock at $12 per share, but on April 6, it reissued 600 of the shares at $20 per share. A)

Prepare the journal entries to record the March 1 and April 6 transactions.

How many shares of common stock are outstanding on March 31 and April 30, respectively?

182. Lending Branch, Inc. was incorporated as a new business on May 1. The company is authorized to issue 50,000 shares of $1 par common stock and 10,000 shares of 4%, $5 par, cumulative, participating preferred stock. On May 1, the company issued 15,000 shares of common stock for $8 per share. Net income for the period ended December 31 was $115,000. Cash dividends in the amount of $30,000 were declared, but only $25,000 were paid as of year-end. Prepare the stockholders' equity section of the balance sheet on December 31. 183. Use this statement of stockholders' equity for Lee's TV Company to answer the questions that follow. Lee’s T.V. Company Statement of Stockholders' Equity For the year ended December 31

Common Powered by Cognero

Additional Paid-In Retained

Accumulated Other Compprehensive Page 33

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Ch 10 Stockholders' Equity Balance, January 1

Exercise of stock options Issuance of common stock Conversion of convertible bonds Net income Unrealized holding gains Currency translation adjustment Balance, December 31

Stock $57,937 946 12,050 7

Capital Earnings $ 31,924 $19,027 6,965 151,823

Income $1,010

Total $109,898 7,911 163,873

93 141

100 26,102 141

272 $1,423

272 $308,297

26,102

_______ $70,940

_______ $190,805

_______ $45,129

What is the primary reason for the increase in total stockholders' equity during the year?

Did the board of directors declare any dividends during the year? How can you tell?

Did the company repurchase any of its own shares during the year? How can you tell?

184. On March 31, Year 1, Legends Entertainment, Inc. had common stock of $230,000, additional paid-in capital— common stock of $540,000, and retained earnings of $65,000. During Year 2, 500 shares of stock were sold for $60,000 of which $40,000 represented additional paid-in capital—common stock. The company reported net income of $140,000 for the year ended March 31, Year 2. Also, during Year 2, $80,000 of dividends were declared and paid. Prepare the statement of stockholders' equity on March 31, Year 2. 185. The stockholders' equity section of a balance sheet on December 31 is as follows: 7% Preferred stock, $1 par, 10,000 shares authorized, 3,000 shares issued Common stock, $1 par, 150,000 shares authorized, 10,000 shares issued Additional paid-in capital: Preferred stock Common stock Total capital stock Retained earnings Less: Treasury stock (1,000 common shares at cost) Total stockholders' equity

3,000 10,000

9,000 20,000 $ 42,000 150,000 (6,000) $186,000

What was the average issue price of the preferred stock?

What was the average issue price of the common stock?

What will be the retained earnings account balance immediately following a 2-for-1 stock split?

If the company's board of directors declares a cash dividend consisting of the annual stated dividend rate for preferred stockholders plus $1 per share for common stockholders, what is the total amount of dividends to be paid, and what would be the remaining balance in the retained earnings account immediately following the declaration of this cash dividend?

186. A corporation has 10,000 shares of $5 par common stock authorized but only 8,000 shares issued and outstanding. In Powered by Cognero

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Ch 10 Stockholders' Equity the space provided, indicate the effect of the following dividend transactions (shown in chronological order) on each account listed by writing the amount and whether the account would be debited or credited. For any instances where there is no effect on the account, place N/A in the space.

Common Stock

Transactions

Additional Paid-In Capital — Common Stock

Retained Earnings

Dividends Payable

Declared a cash dividend totaling $4,000. Paid the cash dividend declared previously. Declared and paid a 10% stock dividend when the market price of the stock was $8. Declared a 3-for-1 stock split. 187. In the space provided, indicate whether the journal entry for the transaction described includes an entry to a stockholders' equity account and, if so, whether the account(s) should be debited or credited as a result of the entry. Included in a Stockholders' Equity Account? (yes or no)

Items

Account Debited or Credited?

Issued preferred stock. Paid a dividend that was declared last year. Purchased treasury stock. Received an amount in excess of cost for the reissuance of treasury stock. Acknowledged dividends in arrears on preferred stock. Declared a cash dividend that will be paid next year. Issued additional shares in a 2for-1 stock split. 188. Lakeside Properties, Inc. had 50,000 shares of 5%, $20 par preferred stock and 400,000 shares of $8 par common stock issued and outstanding at the beginning of the year. Indicate the effect each of the following items has directly on retained earnings by writing the amount in the space provided. Use a plus sign (+) in front of the amount to indicate increases in retained earnings, and use parentheses ( ) around the amount to indicate decreases in retained earnings. If the transaction results in no direct change in retained earnings, place N/A in the space. A)

Issued a 2-for-1 preferred stock split when the market price of the preferred stock was $44 per share.

Earned net income of $650,000 during the year.

Declared and paid the annual stated cash dividend to its preferred stockholders.

Declared and paid a 10% common stock dividend when the market price of the common stock was $11 per share.

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Ch 10 Stockholders' Equity 189. The stockholders' equity accounts on December 31 are as follows: Common stock, $1 par, 20,000 shares authorized, 4,000 shares issued and outstanding Additional paid-in capital—common stock Retained earnings

$4,000 20,000 50,000

The market price of the stock was $8 per share on December 31. A)

What journal entry will be required to record the distribution of a 20% stock dividend on December 31?

What balance will be in the retained earnings account immediately following the stock dividend?

Prepare the stockholders' equity section of the balance sheet.

190. In July of the current year, the accountant discovered an error affecting the prior year computation of amortization expense related to the company's patent. As a result of this error, the prior year's amortization expense was understated by $21,000 and the prior year's net income after taxes (which are paid at a rate of 30%) was overstated by $14,700. A)

What journal entry is needed to record this prior period adjustment?

How is this prior period adjustment reported in the financial statements?

191. Consider the following financial statement information: Preferred stock Total stockholders' equity Net income Stock price per common share Common dividends Preferred dividends Purchases of treasury stock Dividends per common share

Current Year $4,500 $49,050 $10,002 $113 $521 $140 $8,061 $1.30

Average common shares outstanding

Prior Year $4,000 $45,900

400

Calculate the return on common equity and earnings per share ratios. (Round final answers to two decimal places.) 192. The following information is from the stockholders' equity section of a balance sheet: 8% Preferred stock Common stock Additional paid-in capital—common stock Retained earnings Accumulated other comprehensive income/(loss) Treasury stock Total stockholders' equity

Current Year $ 750,000 1,968,000 560,000 1,404,000 27,200 (900,000) $3,809,200

Prior Year $ 750,000 1,312,000 450,000 1,003,000 (400) (750,000) $2,764,600

Additional Information: Powered by Cognero

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Ch 10 Stockholders' Equity Net income Stock price per common share Common dividends Preferred dividends Dividends per common share Average common shares outstanding

Current Year $525,000 $62.50 $101,000 $60,000 $0.64 164,000

Calculate the following financial ratios. (Round final answers to two decimal places.) A) B) C) D) E) F)

Return on common equity Earnings per share Dividend yield Dividend payout Total payout Stock repurchase payout

193. Consider the following financial statement information: Preferred stock Total stockholders' equity Net income Stock price per common share Common dividends Preferred dividends Purchases of treasury stock Dividends per common share

Current Year $4,500 $49,050 $10,002 $113 $521 $140 $8,061 $1.30

Prior Year $4,000 $45,900

Average common shares outstanding 400 Calculate the following ratios. (Round percentage answers to two decimal places.) A) Dividend yield B) Dividend payout C) Total payout D) Stock repurchase payout 194. Consider the following information from the financial statements of a retail company: Preferred stock Total stockholders' equity Net income Stock price per common share Common dividends Preferred dividends Purchases of treasury stock Dividends per common share Average common shares outstanding

Current Year $6,500 $69,500 $20,402 $93 $621 $190 $5,060 $0.78

Prior Year $6,040 $65,200

800

Calculate the following financial ratios. (Round final answers to two decimal places.) Powered by Cognero

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Ch 10 Stockholders' Equity A) B) C) D) E) F)

Return on common equity Earnings per share Dividend yield Dividend payout Total payout Stock repurchase payout

195. What is the difference between authorized, issued, and outstanding shares? 196. Identify and describe the four primary rights for the owners of common stock. 197. You are the chief financial officer of Laser Craft Technology. Your company needs to raise capital to pursue an expansion project, but the company does not want to sell additional common stock. What factors should you consider in deciding whether to issue debt or preferred stock? 198. When a corporation issues stock to stockholders, explain the use of the account Additional Paid-In Capital. 199. Distinguish between par value and market value. Which measure is the better indicator of the true value of stock? 200. Distinguish between stock warrants and stock options. 201. You are the chief accountant for Laureate Medical Group. The board of directors has decided to distribute $1,000,000 in excess cash to common shareholders. In what ways can this distribution be accomplished? What factors should be considered when determining the best way? 202. Compare and contrast stock dividends and stock splits. 203. What is treasury stock, and how is it reported in the financial statements? 204. Differentiate a cumulative dividend preference from a participating dividend preference. Describe the circumstances under which these preferences would be utilized. 205. If a corporation desires to reacquire some of its issued shares of stock, how would it accomplish this; that is, how would the corporation determine which of its shares to buy back or from which stockholders? 206. The following stockholders' equity appeared on a balance sheet on December 31: Common stock $1 par, 1,000,000 shares authorized Additional paid-in capital—common stock Retained earnings Total stockholders' equity

$ 200,000 800,000 (450,000) $ 550,000

A) Has the company been profitable since its inception? How do you know? B)

What is the meaning of the balance in a retained earnings account? What causes this balance to change from period to period?

Can you tell from the balance sheet whether a company paid a dividend during the current period?

D) How many shares of common stock are issued and outstanding and how can these amounts be Powered by Cognero

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Ch 10 Stockholders' Equity determined?

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Ch 10 Stockholders' Equity Answer Key 1. False 2. True 3. False 4. False 5. True 6. False 7. True 8. False 9. False 10. True 11. True 12. True 13. False 14. False 15. False 16. True 17. True 18. False 19. False 20. True 21. True 22. True 23. True 24. False 25. False Powered by Cognero

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Ch 10 Stockholders' Equity 26. False 27. False 28. True 29. False 30. True 31. False 32. False 33. True 34. False 35. True 36. False 37. True 38. True 39. True 40. True 41. False 42. False 43. False 44. True 45. b 46. a 47. d 48. b 49. d 50. b 51. c Powered by Cognero

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Ch 10 Stockholders' Equity 52. c 53. d 54. b 55. c 56. b 57. d 58. a 59. c 60. a 61. c 62. a 63. b 64. d 65. a 66. b 67. a 68. d 69. b 70. c 71. c 72. a 73. d 74. d 75. b 76. c Powered by Cognero

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Ch 10 Stockholders' Equity 77. a 78. c 79. c 80. a 81. c 82. d 83. a 84. b 85. b 86. a 87. b 88. b 89. d 90. c 91. c 92. c 93. c 94. b 95. c 96. b 97. b 98. a 99. a 100. d 101. c 102. c Powered by Cognero

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Ch 10 Stockholders' Equity 103. d 104. a 105. b 106. c 107. d 108. d 109. c 110. b 111. a 112. c 113. d 114. c 115. d 116. c 117. d 118. b 119. a 120. c 121. d 122. b 123. b 124. a 125. b 126. d 127. d Powered by Cognero

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Ch 10 Stockholders' Equity 128. a 129. d 130. b 131. d 132. a 133. b 134. a 135. a 136. b 137. b 138. d 139. a 140. d 141. d 142. b 143. c 144. c 145. c 146. d 147. a 148. a 149. c 150. d 151. c 152. b 153. a Powered by Cognero

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Ch 10 Stockholders' Equity 154. d 155. a 156. d 157. a 158. b 159. Authorized shares Issued shares Outstanding shares Treasury shares

Quantities 1,000,000 250,000 235,000 15,000

160. A) Cash (2,000 × $14) Preferred Stock (2,000 × $10) Additional Paid-In Capital—Preferred Stock Cash (10,000 × $2.50) Common Stock (10,000 × $2) Additional Paid-In Capital—Common Stock B)

28,000 20,000 8,000 25,000 20,000 5,000

$28,000 from Preferred Stock + $25,000 from Common Stock = $53,000

161. A)

$160,000 ÷ $1 par = 160,000 shares

160,000 Shares Issued − 4,000 Treasury Shares = 156,000 shares

$280,000 Contributed Capital ÷ 160,000 Shares Issued = $1.75 per share

A stock split results in no change in the amounts of the capital stock accounts; however, the par value of the stock would be reduced by half because there are more shares outstanding, so the new par value would be $0.50 per share.

162. A) B) C) D) E) F) G) H) I) J)

$500,000 ÷ $10 par = 50,000 $40,000 ÷ $2 par = 20,000 50,000 20,000 − 500 in treasury = 19,500 50,000 19,500 12% × $10 par = $1.20/share $1.20 × 50,000 shares = $60,000 ($500,000 Preferred Stock + $50,000 Additional Paid-In Capital—Preferred Stock) ÷ 50,000 Shares = $11/Preferred Share ($40,000 Common Stock + $50,000 Additional Paid-In Capital—Common Stock) ÷

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Ch 10 Stockholders' Equity 20,000 Shares = $4.50/Common Share 163. Leapfrog Academy Partial Balance Sheet At December 31 Common stock, $1 par, 10,000 shares authorized, 4,500 shares issued, 4,000 shares outstanding Additional paid-in capital—common stock Additional paid-in capital—treasury stock Total capital stock Retained earnings Less: Treasury stock (500 shares at cost) Total stockholders' equity

$ 4,500 9,000 900 $14,400 52,000 (1,500) $64,900

164.

Common Transactions Received authorization to issue 10,000 shares of $2 par common stock. Issued 500 shares of common stock for $15 per share. Issued 400 shares of $2 par common stock for $16 per share. Declared and paid a 10% stock dividend when the market price of the common stock was $17 per share. Declared and paid a cash dividend of $0.50 per share. Issued additional shares in a 2-for-1 stock split.

Stock

Additional Paid-In Capital— Common Stock

Retained Earnings

N/A

+1,000

+6,500

N/A

+800

+5,600

N/A

+180

+1,350

−1,530

N/A

−495

N/A

Assets =

Liabilities +

Stockholders' Equity

N/A

−

N/A

−

N/A

N/A −

+ −

− N/A

165. Transactions

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Ch 10 Stockholders' Equity Transactions

Assets =

Liabilities +

Stockholders' Equity

N/A

N/A N/A

+ N/A

− N/A

167. Nov. 30, Year 1 Treasury Stock (1,000 × $80) Cash

80,000 80,000

Jan. 10, Year 2 Cash (500 × $70) Retained Earnings Treasury Stock (500 × $80)

35,000 5,000 40,000

168. June 10 Treasury Stock Cash

10,000

July 1 Cash

5,500

10,000

Treasury Stock Additional Paid-In Capital—Treasury Stock Sept. 1 Cash Additional Paid-In Capital—Treasury Stock Retained Earnings Treasury Stock 169. June 10 Common Stock (1,000 shares × $1 par) Additional Paid-In Capital—Common Stock Cash 170. Aug. 15

Dividends Declared ($2.10 × 2,800) Dividends Payable

Aug. 31

No entry is required on the record date.

Sept. 15

Dividends Payable Cash

5,000 500 4,250 500 250 5,000

1,000 9,000 10,000

5,880 5,880

171. Year Year 1 Powered by Cognero

Amount Available for Dividends $8,000

Preferred Dividends* $4,000

Common Dividends $4,000 Page 48

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Ch 10 Stockholders' Equity Year 2 Year 3

$5,000 $3,000

$4,000 $3,000

$1,000 0

* The stated annual dividend on the preferred stock is (8% × $10 par) × 5,000 shares = $4,000. This is the limit on the preferred stock dividend. Any remainder is paid to common stockholders. 172. Dividend Preference Cumulative* Noncumulative**

Total Amount Available for Dividend $4,000 $4,000

Preferred Dividend $3,000 $1,000

Common Dividend $1,000 $3,000

*Stated dividend is (10% × $10 par) × 1,000 shares outstanding = $1,000 per year 2 years in arrears plus the current dividend = $1,000 × 3 = $3,000 to preferred stockholders Remaining $1,000 to common stockholders **$1,000 current year stated dividend only to preferred stockholders Remaining $3,000 to common stockholders 173. A) 3,000 Shares × $8 cost = $24,000 B)

300,000 Shares Issued − 3,000 Treasury Shares = 297,000 Shares Outstanding

Stockholders' Equity Common stock, $5 par, 100,000 shares authorized, 30,000 shares issued, 27,000 shares outstanding Additional paid-in capital—common stock Retained earnings ($300,000 + $25,000) Less: Treasury stock at cost (3,000 shares) Total stockholders’ equity

174. A) May 15 July 1

$150,000 120,000 325,000 (24,000) $571,000

Treasury Stock (1,000 × $15) Cash

15,000

Cash (500 × $20) Treasury Stock (500 × $15) Additional Paid-In Capital—Treasury Stock

10,000

15,000 7,500 2,500

B) 10,000 − 1,000 + 500 = 9,500 shares 175. A) Par value would be cut in thirds because the number of shares would triple. The resulting (new) par value would be $1 per share. B) No formal entry is required but a note should be entered as a reminder that the par value is now $1 and the number of shares issued is 30,000. C) Retained Earnings (30,000 shares × $1 dividend) Cash Dividends Payable

30,000 30,000

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Ch 10 Stockholders' Equity 176. A)

Preferred: (5% × $10 par) × 2,000 shares = $1,000 annual stated dividend Remainder to Common = $2,000 − $1,000 = $1,000 Preferred: $1,000 annual stated dividend × 3 years = $3,000 Therefore, the entire $2,000 goes to the preferred shareholders.

177. A) Retained Earnings* Common Stock** Additional Paid-In Capital—Common Stock

70,000 30,000 40,000

*(100,000 × 10%) × $7 market price = $70,000 capitalization of retained earnings **(100,000 × 10%) × $3 par = $30,000 B)

Common stock: $300,000 + $30,000 = $330,000 Additional paid-in capital—common stock: $150,000 + $40,000 = $190,000 Retained earnings: $425,000 − $70,000 = $355,000

178. A) Dec. 5

Retained Earnings* Preferred Stock** Additional Paid-In Capital—Preferred Stock Dec. 21 No entry is required for stock split transactions.

960 800 160

*(400 × 20%) × $12 market value = $960 **(400 × 20%) × $10 value = $800 B) 400 + (400 × 20%) = 480 shares C) 3,000 × 2 = 6,000 shares D) The par value of the preferred stock will remain the same at $10 per share following the stock dividend. E) Stock splits cause par value to decrease in proportion to the split. Therefore, the par value of the common stock will be $1 per share following the stock split. 179.

Total Amount Available for Dividend $2,000

Preferred Dividend $2,000

Common Dividend 0

$4,000

$2,000

$10,000

$2,000

$8,000

Stated dividend is (10% × $10 par) × 1,000 shares = $1,000 per year. 1 year in arrears. Preferred stockholders receive $1,000 for arrearage plus $1,000 for Year 2 = $2,000 and nothing remaining for common stockholders.

Preferred stockholders receive $1,000 for arrearage plus $1,000 for Year 2 = $2,000 and remaining $2,000 for common stockholders.

Preferred stockholders receive $1,000 for arrearage plus $1,000 for Year 2 = $2,000 and

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Ch 10 Stockholders' Equity remaining $8,000 for common stockholders. 180. A) Mar. 1 Cash

20,000

Treasury Stock* Additional Paid-In Capital—Treasury Stock *800 shares × $8 cost = $6,400

6,400 13,600

No, the excess sale price over the cost of the treasury stock is not reported on the income statement. A corporation cannot generate income by buying and selling its B) own stock. Transactions with owners are not part of the earnings process; therefore, treasury stock is not an asset and any excess proceeds over cost realized from treasury stock transactions are not considered gains. 181. A) Mar. 1 Apr. 6

Treasury Stock Cash

9,600

Cash

12,000

9,600

Treasury Stock* Additional Paid-In Capital—Treasury Stock *600 shares × $12 cost = $7,200

7,200 4,800

B) March 31: 2,000 shares issued − 800 treasury shares = 1,200 shares April 30: 1,200 shares outstanding as of March 31 + 600 shares reissued = 1,800 shares 182. Lending Branch, Inc. Partial Balance Sheet At December 31 4% Cumulative, participating preferred stock, $5 par, 10,000 shares authorized Common stock, $1 par, 50,000 shares authorized, 15,000 shares issued and outstanding Additional paid-in capital—common stock Total capital stock Retained earnings Total stockholders' equity

15,000 105,000 $120,000 85,000 $205,000

183. Stockholders' equity increased from $109,898 to $308,297 during the year. The most A) significant component of this increase was the issuance of common stock. Net income also accounted for a less significant portion of the increase.

No dividends were declared during the year, as can be determined by reviewing the Retained Earnings column of the stockholders' equity statement. If dividends had been declared, they would appear as a deduction to retained earnings.

No treasury stock transactions took place during the year, as can be determined by the absence of a column for Treasury Stock in the stockholders' equity statement.

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Ch 10 Stockholders' Equity 184. Legends Entertainment, Inc. Statement of Stockholders' Equity For the year ended March 31, Year 2

Balance, April 1, Year 1 Issuance of common stock Net income Dividends Balance, March 31, Year 2

Common Stock

Additional Paid-In Capital —Common Stock

$230,000 20,000

$540,000 40,000

$250,000

$580,000

185. A)

($3,000 + $9,000) ÷ 3,000 shares = $4 per share

($10,000 + $20,000) ÷ 10,000 = $3 per share

Retained earnings balance would remain the same.

Preferred: Common: Total dividend: Retained earnings:

Retained Earnings

$65,000 140,000 (80,000) $125,000

Total

$835,000 60,000 140,000 (80,000) $955,000

(7% × $1 par) × 3,000 shares = $210 preferred dividend (10,000 issued shares − 1,000 treasury shares) × $1 = $9,000 common stock cash dividend $210 + $9,000 = $9,210 $150,000 − $9,210 = $140,790

186.

Transactions

Declared a cash dividend totaling $4,000. Paid the cash dividend declared previously. Declared and paid a 10% stock dividend when the market price of the stock was $8. Declared a 3-for-1 stock split.

Common Stock

Additional Paid-In Capital — Common Stock

N/A

Retained Earnings

Dividends Payable

N/A

$4,000 Debit

N/A

$4,000 Credit $4,000 Debit

$4,000 Credit

$2,400 Credit

$6,400 Debit

N/A

187. Items

Issued preferred stock. Paid a dividend that was declared last year. Purchased treasury stock. Powered by Cognero

Included in a Stockholders' Equity Account? (yes or no)

Account Debited or Credited?

yes

credited

no yes

debited Page 52

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Ch 10 Stockholders' Equity Received an amount in excess of cost for the reissuance of treasury stock. Acknowledged dividends in arrears on preferred stock. Declared a cash dividend that will be paid next year. Issued additional shares in a 2for-1 stock split.

yes

credited

no yes

debited

188. A) N/A B)

+650,000

($50,000) ($20 par × 5%) × 50,000 shares = $50,000

($440,000) (400,000 shares × 10%) × $11 = $440,000

189. A) Retained Earnings* Common Stock** Additional Paid-In Capital—Common Stock***

6,400 800 5,600

*(4,000 × 20%) × $8 market value = $6,400 capitalization of retained earnings **(4,000 × 20%) × $1 par = $800 ***(4,000 × 20%) × ($8 market − $1 par) = $5,600 B) $50,000 − $6,400 = $43,600 C)

Stockholders' Equity Common stock, $1 par, 20,000 shares authorized, 4,800 shares issued and outstanding Additional paid-in capital—common stock Total capital stock Retained earnings Total stockholders' equity

190. A) July, current year Retained Earnings Tax Refund Receivable Patent

$ 4,800 25,600 $30,400 43,600 $74,000

14,700 6,300 21,000

B) The $14,700 net of tax amount is shown as a reduction of the beginning retained earnings on the statement of changes in retained earnings or on the statement of stockholders' equity for the year ended December 31, current year. 191. Return on common equity: ($10,002 − $140) ÷ [($49,050 − $4,500) + ($45,900 − $4,000) ÷ 2] = 0.2282, or 22.82% EPS: ($10,002 − $140) ÷ 400 = $24.66 per share Powered by Cognero

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Ch 10 Stockholders' Equity 192. A) B) C) D) E) F)

($525,000 − $60,000) ÷ [($3,809,200 − $750,000) + ($2,764,600 − $750,000) ÷ 2] = 0.1833, or 18.33% ($525,000 − $60,000) ÷ 164,000 = $2.84 per share $0.64 ÷ $62.50 = 0.0102, or 1.02% $101,000 ÷ $525,000 = 0.1924, or 19.24% ($101,000 + $150,000) ÷ $525,000 = 0.4781, or 47.81% 47.81% − 19.24% = 28.57%

193. A) Dividend yield: B) Dividend payout: C) Total payout: D) Stock repurchase payout:

$1.30 ÷ $113 = 0.0115, or 1.15% $521 ÷ $10,002 = 0.0521, or 5.21% ($521 + $8,061) ÷ $10,002 = 0.8580, or 85.80% 85.80% − 5.21% = 80.59%

194. A) ($20,402 − $190) ÷ [($69,500 − $6,500) + ($65,200 − $6,040) ÷ 2] = 0.3309, or 33.09% B) ($20,402 − $190) ÷ 800 = $25.27 per share C) $0.78 ÷ $93 = 0.0084, or 0.84% D) $621 ÷ $20,402 = 0.0304, or 3.04% E) ($621 + $5,060) ÷ $20,402 = 0.2785, or 27.85% F) 27.85% − 3.04% = 24.81% 195. The articles of incorporation specify the maximum number of shares that the company may sell; these are the authorized shares. Issued shares are those that have been sold or transferred to stockholders. Outstanding shares are those that have been issued and are still in the hands of stockholders. 196. The primary rights for common stockholders include voting rights, the right to share in profits and dividends, the preemptive right, and the residual claim. Common stockholders can vote on certain corporate matters, including the election of the board of directors. Common stockholders have the right to share in the profits and dividends of the company after preferred shareholders receive their distributions. Common stockholders have the right to purchase a proportionate share of new stock that is issued so that they can maintain their ownership percentage. Common stockholders have the right to share in the assets of the corporation upon liquidation after the creditors and preferred shareholders receive their distributions. 197. Although preferred stock and debt have many similarities, they have some important differences. An advantage of debt is that interest payments are tax deductible, while preferred dividends are not. However, preferred stock has several advantages: - Preferred stock is historically classified as equity, rather than debt, on the balance sheet, so if your company needs to show lower debt totals, preferred stock is advantageous. - Preferred stock is less risky than debt because, unlike interest payments, missing a preferred dividend payment does not trigger bankruptcy. - Companies with a history of operating losses typically do not pay income taxes. If your company has these so-called “net operating loss carryforwards,” then debt no longer has the tax advantage. Powered by Cognero

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Ch 10 Stockholders' Equity - Preferred stock is generally sold to other corporations because these corporations do not pay taxes on the full amount of the dividends. You will need to consider all of these factors before making a recommendation to the board of directors. 198. The amount recorded in the account Additional Paid-In Capital represents the difference between the issue price of the stock and its par value. This account is considered a component of capital stock. When stock is issued for an amount in excess of its par value, the journal entry for this transaction involves a debit to Cash for the total amount collected from stockholders, a credit to the stock account for the number of shares issued times their par, and a credit to Additional PaidIn Capital for the excess proceeds over the par value.

199. Par value is an arbitrary monetary amount that is established as a minimum price for the stock, whereas market value is the monetary amount for which the stock is to be issued to stockholders. Market value indicates the true value of the stock, which is determined by stockholders' willingness to pay. 200. Stock warrants are rights to purchase a specified number of shares of a corporation's capital stock at a stated price and within a stated time period. These rights are granted by a corporation to bondholders or potential stockholders as a feature to make the securities more attractive, or they may be granted to existing stockholders as an incentive for maintaining their relative level of ownership in the corporation. Stock options are also rights to purchase a specified number of shares of a corporation's capital stock at a stated price and within a stated time period. However, stock options, unlike stock warrants, are granted to existing employees of the corporation as compensation for their services. 201. You could either declare and pay a cash dividend or enter a stock repurchase plan. The primary difference between the two methods relates to tax consequences. First, the tax rate for dividends is higher than the rate on gains from selling stock. Second, while all common shareholders participate in dividends and, thus, incur tax consequences, only those shareholders that choose to sell their stock back to the company will experience tax consequences. Additionally, you should consider the future of any such distributions to shareholders. Generally, companies do not like to lower dividends. Therefore, if this distribution is a one-time event, a stock repurchase would be the way to go; however, if excess cash is anticipated in future periods, instituting a cash dividend would make sense. Finally, you should also consider the price of the stock. Stock repurchases are most attractive when you believe your stock is undervalued. 202. Both stock dividends and stock splits involve transferring shares of stock from the corporation to the stockholders, and both result in an increased number of outstanding shares without altering the proportionate ownership of the corporation. Both of these transactions tend to result in a decrease in the market price of the corporation's stock. However, stock dividends and stock splits differ in their accounting treatment. Stock dividends are transfers of new shares of stock to stockholders through the process of capitalization of retained earnings. In other words, the equity section of the balance sheet will be rearranged as Retained Earnings is reduced (debited) by the market value of the shares issued and the capital stock accounts are increased (credited). Stock splits involve an exchange of existing shares of stock for an increased number of new shares of stock, with the new shares having a proportionately lower par value. However, no journal entries are required for a stock split; rather, the transaction is merely disclosed in the footnotes accompanying the financial statements and the new par value and number of shares are noted on the balance sheet within the description of the stock account. 203. Treasury stock is issued stock that is repurchased by the company. It is reported as a deduction from stockholders' equity on the balance sheet. 204. A cumulative dividend preference requires the eventual payment of all stated dividends, both current annual Powered by Cognero

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Ch 10 Stockholders' Equity dividends and dividends in arrears, before any dividends are paid to the common stockholders. This becomes a significant advantage for preferred stockholders during a period when the corporation declares a dividend after a previous period of no dividend payments. Under these circumstances, the preferred stockholders would receive their dividends in arrears for past years, then preferred stockholders would be paid their current stated dividend, and only after the preferred stockholders are brought up to date with respect to those cumulative distributions are the common stockholders paid a dividend. A participating dividend preference provides for payment of preferred dividends in excess of the stated amount during any periods when the corporation declares dividends. This becomes a significant advantage for preferred stockholders during a period when the corporation pays a large dividend. After the preferred stockholders receive their current stated dividend, they can share in any additional dividend amounts available for distribution to other classes of stock. 205. There are three ways in which the corporation may approach a stock repurchase: through a purchased transaction in the open market, by a tender offer to the existing stockholders, or through direct negotiation with designated stockholders. Any of these approaches could result in shares of stock becoming available for repurchase by the corporation. 206. A) It is not possible to say. The company has a negative balance in its retained earnings account that indicates that the sum of its net losses and dividend payments have exceeded its profits. Therefore, we need to know the dividend amount in order to answer the question. B) Retained earnings represents the accumulation of earnings (net income) that the corporation has not paid out in dividends. It is accumulated over the life of the corporation. Each period, the balance increases because of net income earned during the period, and it decreases by any net losses and dividends declared. C) No, the information presented in the stockholders' equity section of the balance sheet is not sufficient to determine whether the company paid a dividend during the year. Information about the changes in retained earnings is needed. D) The company has 200,000 shares issued, as determined by dividing the total amount of common stock by the par value. All 200,000 of these shares are also outstanding; outstanding shares are determined by subtracting treasury shares from issued shares. Since no treasury stock is indicated, all of the issued shares remain outstanding.

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CH 11 The Statement of Cash Flows

Indicate whether the statement is true or false. 1. The statement of cash flows is considered to be a good indicator of current cash inflows and outflows. a. True b. False 2. The statement of cash flows helps users understand the reasons for the differences between net income and related cash receipts and payments. a. True b. False 3. Significant noncash transactions are not reported on the statement of cash flows, but in a separate schedule shown either at the bottom of the statement of cash flows or in a note to the financial statements. a. True b. False 4. The statement of cash flows summarizes the operating, investing, and financing activities of a business for a period of time. a. True b. False 5. In terms of the statement of cash flows, cash includes actual cash items minus certain cash equivalents such as commercial paper, money market funds, and treasury bills. a. True b. False 6. To be classified as a cash equivalent, an item must be readily convertible to a known amount of cash and have an original maturity to the investor of 3 months or more. a. True b. False 7. An investment in common stock is not considered to be a cash equivalent. a. True b. False 8. For the statement of cash flows, companies are required to classify their cash activities into three categories: operating, investing, and financing. a. True b. False 9. The issuance of common stock in exchange for a building would appear both as a cash inflow in the financing activities section of the cash flow statement and also as a cash outflow in the investing activities section. a. True b. False 10. Cash flows from operating activities often relate to an increase or decrease in either a current asset or a current liability. Powered by Cognero

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CH 11 The Statement of Cash Flows a. True b. False 11. Operating cash flows generally involve income statement items (which are reflected in retained earnings) and balance sheet items (such as changes in current assets and current liabilities). a. True b. False 12. If the beginning balance in accounts receivable is $11,000 and the ending balance is $9,000, then credit sales must have exceeded collections on account. a. True b. False 13. Increases in Cash = Increases in Liabilities + Increases in Stockholders' Equity + Decreases in Noncash Assets. a. True b. False 14. Depreciation is a noncash expense that is subtracted from net income in determining cash provided by operating activities under the indirect method. a. True b. False 15. If the December 31 balance of accounts receivable is lower than the January 1 balance, then the amount of cash collections will be more than the sales on account for the year. a. True b. False 16. Operating activities involve the acquiring and selling of goods and services for cash or on account. a. True b. False 17. The indirect method of reporting cash flows from operating activities involves reconciling net income and cash flows from operations. a. True b. False 18. Under the indirect method, the first line in the operating activities section of the statement of cash flows is the net income or loss for the period. a. True b. False 19. Both the indirect and direct methods arrive at an identical amount of net cash provided (used) by operating activities. a. True b. False 20. If the December 31 balance of accounts payable is lower than the January 1 balance, then the amount of cash payments will exceed the purchases on account for the year. Powered by Cognero

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CH 11 The Statement of Cash Flows a. True b. False 21. Because the cash received from the sale of long-term assets is reported in the investing activities section of the statement of cash flows, any gain or loss is ignored when reporting the cash flow from operating activities under the indirect method. a. True b. False 22. Under the indirect method, instead of reporting cash receipts and payments, net income is reconciled with net cash from operating activities. a. True b. False 23. Cash flows from selling machinery would be classified as investing activities. a. True b. False 24. Cash flows from purchases, sales, and maturities of investments are classified as financing activities. a. True b. False 25. Issuing stock increases the company's cash flows from investing activities. a. True b. False 26. Companies can use two different methods to report the amount of cash flow from their investing and financing activities. a. True b. False 27. An increase in retained earnings indicates that a cash dividend has been paid. a. True b. False 28. Free cash flow is equal to net cash flow from operating activities minus capital expenditures and dividends. a. True b. False 29. Unlike the income statement, no financial ratios are reported on the statement of cash flows. a. True b. False 30. The cash flow adequacy ratio is defined as free cash flow divided by average amount of debt maturing over the next 5 years. a. True Powered by Cognero

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CH 11 The Statement of Cash Flows b. False 31. Determining the cash flows from operating activities generally requires analyzing each item on the income statement as well as the current asset (except cash) and current liability accounts. a. True b. False 32. Some companies use a worksheet approach as a tool to aid in preparing the statement of cash flows. a. True b. False 33. Many companies use software such as Microsoft PowerPoint to construct their cash flow statements. a. True b. False

Indicate the answer choice that best completes the statement or answers the question. 34. The information in a statement of cash flows helps investors, creditors, and others judge a company’s ability to meet its obligations and pay a. cash dividends. b. stock dividends. c. stock options. d. earnings per share. 35. Which financial statement summarizes the operating, investing, and financing activities of a business over a period of time? a. balance sheet b. statement of retained earnings c. income statement d. statement of cash flows 36. Items that are readily convertible into a known amount of cash that have an original maturity to the investor of 3 months or less are known as a. cash equivalents. b. long-term assets. c. notes payable. d. accounts payable. 37. Cash flows from operating activities correspond to the cash effects of items that determine a. investing activities. b. net income. c. financing activities. d. total liabilities. 38. On the statement of cash flows, the purchase of inventory is a(n) Powered by Cognero

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CH 11 The Statement of Cash Flows a. payment activity. b. financing activity. c. operating activity. d. investing activity. 39. On the statement of cash flows, activities involving long-term liabilities and stockholders’ equity are a. operating activities. b. investing activities. c. balance sheet activities. d. financing activities. 40. Which of the following is not needed to prepare a statement of cash flows? a. comparative balance sheets b. most recent statement of retained earnings c. a current income statement d. additional information about selected accounts 41. Which of the following statements regarding the preparation of the statement of cash flows is incorrect? a. The accrual-basis numbers in the balance sheet and income statement must be adjusted to a cash basis. b. Each item on the balance sheet and income statement must be analyzed to explain why cash changed by the amount it did. c. The adjusted trial balance is needed to prepare the statement of cash flows. d. All cash receipts and payments are associated with changes in other balance sheet accounts. 42. Which of the following activities would cause a cash inflow in the operating activities section of the statement of cash flows? a. decrease in current assets and increase in current liabilities b. increase in current assets and decrease in current liabilities c. increase in current assets and increase in current liabilities d. decrease in current assets and decrease in current liabilities 43. In the preparation of the statement of cash flows, the investing activities section is based on changes in a. current assets. b. long-term liabilities. c. current liabilities. d. long-term assets. 44. Which of the following statements is incorrect regarding the preparation of the operating activities section of the statement of cash flows? a. The operating activities section can be prepared using either the direct or indirect method. b. The FASB prefers the use of the direct method. c. The direct and indirect methods will arrive at different results. d. The direct and indirect methods differ in how the net cash amount is computed. 45. Which of the following sections of the statement of cash flows is prepared differently depending on if the direct Powered by Cognero

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CH 11 The Statement of Cash Flows method or indirect method is used? a. investing activities b. operating activities c. selling activities d. financing activities 46. The indirect method of preparing a statement of cash flows begins with net income and then adjusts it for noncash items to produce net cash flow from a. investing activities. b. purchasing activities. c. operating activities. d. financing activities. 47. Under the indirect method of preparing a statement of cash flows, which of the following is not one of the adjustments necessary in the operating activities section? a. Add any losses to net income. b. Subtract any noncash revenues from net income. c. Add any noncash expenses to net income. d. Add any gains to net income. 48. Jonas Company uses the indirect method of preparing its statement of cash flows. A gain from the sale of land is subtracted from a. net income. b. depreciation expense. c. the total investing activities. d. the total financing activities. 49. The investing activities portion of the statement of cash flows is based on changes in a. investments and long-term assets. b. current and long-term assets. c. current assets and investments. d. cash and total assets. 50. The sale of a company’s common stock is shown on the statement of cash flows as a(n) a. financing activity. b. operating activity. c. stockholders’ equity activity. d. investing activity. 51. Which of the following statements regarding the preparation of the financing activities section of the statement of cash flows is incorrect? a. Changes in long-term debt should be analyzed for their effect on financing activities. b. The financing activities section identifies cash flows that produce or repay capital. c. The payment of interest in long-term debt is included in the operating activities section. d. Because treasury stock is common stock repurchased by the company, it is not reported in the financing Powered by Cognero

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CH 11 The Statement of Cash Flows activities section. 52. The cash flows that a company can generate after considering the maintenance or expansion of its assets (capital expenditures) and payment of cash dividends is called a. net income. b. free cash flow. c. operating income. d. net revenue. 53. Which ratio provides a measure of the company’s ability to meet its maturing debt obligations with its operating cash flow? a. net cash flow from operating activities b. net profit margin c. free cash flow d. cash flow adequacy 54. Which of the following statements is incorrect regarding the use of a spreadsheet in the preparation of the statement of cash flows? a. A spreadsheet provides a systematic approach to analyze the data. b. A spreadsheet guarantees the accuracy of each section of the statement of cash flows. c. A spreadsheet shows cash inflows as debits and cash outflows as credits. d. A spreadsheet can be used for either the indirect or direct methods of preparing the statement of cash flows. 55. Which of the following statements is not true? The information in the statement of cash flows helps investors, creditors, and others a. assess a company's ability to produce future cash inflows. b. judge a company's ability to meet its obligations and pay dividends. c. estimate the company's needs for external financing. d. show the inflows and outflows of net income on an accrual basis. 56. A company reported net income of $150,000 for the current year, but its cash balance decreased by $40,000. Which financial statement should the management refer to for an explanation of this situation? a. balance sheet b. income statement c. statement of retained earnings d. statement of cash flows 57. A company reported a net loss of $30,000 for the current year, yet its cash balance increased during the year. Which financial statement should the management refer to for an explanation of this situation? a. balance sheet b. income statement c. statement of retained earnings d. statement of cash flows 58. The primary purpose of the statement of cash flows is to provide information about the Powered by Cognero

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CH 11 The Statement of Cash Flows a. financial position of the company. b. profitability of the company. c. investing and financing activities of the company. d. cash inflows and outflows of the company. 59. The statement of cash flows a. along with the balance sheet and income statement is prepared on the accrual basis. b. along with the balance sheet and statement of retained earnings is dated as of a specific year-end date. c. along with the balance sheet is used to analyze liquidity. d. ties the balance sheet to the statement of retained earnings. 60. Which of the following statements is false? a. A balance sheet reports a company's cash balance at a specific date. b. An income statement reports the amounts of revenue and expense on an accrual basis. c. A statement of retained earnings reports the amount of cash received from operating activities and the amount of cash paid for dividends. d. A statement of cash flows explains the changes in cash from operating, investing, and financing activities. 61. Which of the following is not a current reporting requirement for a statement that reports changes in cash over a period of time? a. This statement must classify cash flows into three categories: operating, investing, and financing activities. b. Cash equivalents must be combined with cash in preparing this statement. c. Working capital may be used as a substitute for cash in preparing this statement. d. The title for this statement is "Statement of Cash Flows." 62. Which of the following is not an operating activity? a. cash collections from credit customers b. cash payments for operating expenses c. cash receipts for interest earned d. cash payments for dividends to stockholders 63. Occasionally, companies engage in important investing and financing activities that do not affect cash. If the amount of the transaction is significant, how should it be disclosed when financial statements are prepared? a. in a separate section in the cash flow statement with a corresponding zero balance b. in investing activities c. in a note to the financial statements or in a supplemental schedule d. in both investing and financing activities 64. A company acquired land by issuing its common stock. How should this transaction be disclosed when a statement of cash flows is prepared? a. It should be reported in a supplemental schedule of noncash investing and financing activities or in a note. b. The acquisition of land should be reported as an investing activity and the issuance of the stock as a financing activity. c. It should be reported in a separate section of the statement of cash flows. d. The transaction does not need to be disclosed. Powered by Cognero

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CH 11 The Statement of Cash Flows 65. Which of the following transactions is not a significant noncash investing and financing activity? a. Land is purchased by issuing a 20-year mortgage note payable. b. Bonds are issued to purchase a building. c. Cash equivalents are purchased. d. Buildings are acquired by issuing common stock. 66. Each of the following transactions would be classified as an investing activity except a. acquiring an investment in the stock of another company. b. lending money to a supplier. c. receiving dividends on an investment in the stock of another company. d. disposing of land. 67. A company reported the following information: Year 2 Year 1 Land $350,000 $100,000 Common stock 450,000 200,000 An analysis of records indicated that there were no cash flow effects resulting from the changes in these two accounts. How should the changes in these accounts be reported on a statement of cash flows? a. The company should report $250,000 for the sale of land as an investing activity and $250,000 for the issuance of stock as a financing activity. b. The company should report $250,000 as a noncash investing and financing activity for the acquisition of land by issuing common stock. c. The company should report the issuance of common stock to acquire land in the financing activity section with a net cash flow effect of zero. d. The company should report the acquisition of land by issuing common stock in the investing activity section with a net cash flow effect of zero. 68. Which of the following financing activities results in a cash inflow? a. buying treasury stock b. issuing bonds c. repaying a bank loan d. paying cash dividends 69. Which of the following operating activities results in a cash outflow? a. paying creditors for merchandise b. collecting accounts receivable c. making cash sales d. receiving deposits recorded as unearned revenue 70. Which of the following activities is most likely to have a cash flow effect? a. investing in money market funds b. declaring cash dividends c. reissuing treasury stock d. issuing stock to acquire a patent Powered by Cognero

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CH 11 The Statement of Cash Flows 71. When using the indirect method to determine operating cash flows, how is the issuance of stock to retire a long-term debt shown on a statement of cash flows? a. as an operating activity b. as an investing activity c. as a financing activity d. as a noncash investing or financing activity 72. Which of the following statements regarding the statement of cash flows is true? a. The statement of cash flows analyzes the cash balance changes in consecutive balance sheets in conjunction with the income statement. b. The statement of cash flows is also known as the statement of revenue and expense. c. The statement of cash flows analyzes only the changes in current assets and current liabilities. d. The statement of cash flows is an optional financial statement. 73. Which balance sheet accounts are most affected by operating activities? a. current assets and current liabilities b. long-term assets c. long-term liabilities d. stockholders' equity 74. During the current year, the accounts receivable balance increased. a. This indicates that credit sales exceeded collections on account during the period. b. This increase is added to net income in the operating activities section of a statement of cash flows prepared under the indirect method. c. This increase is added to credit sales to determine the collections on account during the period. d. This indicates that there were no cash sales during the period. 75. A company reported the following information: Accounts receivable, December 31, Year 2 Accounts receivable, December 31, Year 1 Sales (all on credit) for Year 2 How much cash was collected from customers during Year 2? a. $972,000 b. $841,000 c. $859,000 d. $963,000

$122,000 113,000 850,000

76. During the current year, the accounts payable balance decreased. a. This decrease indicates that payments on account were less during the period than credit purchases. b. This decrease is added to net income in the operating activities section of a statement of cash flows prepared under the direct method. c. This decrease is deducted from net income in the operating activities section of a statement of cash flows prepared under the direct method. d. This decrease indicates that payments on account exceeded credit purchases during the period. Powered by Cognero

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CH 11 The Statement of Cash Flows 77. Metz Vets’ accountant prepared this reminder for his intern: Cash = CL + LTL + CS + RE − NCCA − LTA where:

CL = Current liabilities LTL = Long-term liabilities CS = Common stock RE = Retained earnings NCCA = Noncash current assets LTA = Long-term assets

Which of the following activities results in a cash inflow? a. increases in noncash current assets (NCCA) b. decreases in current liabilities (CL) c. increases in common stock (CS) d. decreases in retained earnings (RE) 78. Metz Vets’ accountant prepared this reminder for his intern: Cash = CL + LTL + CS + RE − NCCA − LTA where:

CL = Current liabilities LTL = Long-term liabilities CS = Common stock RE = Retained earnings NCCA = Noncash current assets LTA = Long-term assets

Which of the following activities results in a cash outflow? a. decreases in noncash current assets (NCCA) b. decreases in long-term assets (LTA) c. increases in long-term liabilities (LTL) d. decreases in retained earnings (RE) 79. A used car dealer reported the following information: Accounts payable, December 31, Year 2 $ 95,000 Accounts payable, December 31, Year 1 50,000 Cost of goods sold for Year 2 560,000 Assuming there was no change in inventory during the period, how much cash was paid for merchandise purchases during Year 2? a. $655,000 b. $610,000 c. $515,000 d. $605,000 80. A company reported the following information: Prepaid insurance, December 31, Year 2 Prepaid insurance, December 31, Year 1 Powered by Cognero

$14,000 11,500 Page 11

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CH 11 The Statement of Cash Flows Insurance expense for Year 2 How much cash was paid for insurance during Year 2? a. $22,700 b. $27,700 c. $39,200 d. $36,700

25,200

81. A company reported the following information: Interest receivable, December 31, Year 2 Interest receivable, December 31, Year 1 Interest revenue for Year 2 How much cash was received for interest during Year 2? a. $12,500 b. $19,500 c. $8,000 d. $3,500

$ 8,000 11,500 16,000

82. A company reported the following information: Salaries payable, December 31, Year 2 Salaries payable, December 31, Year 1 Salaries expense for Year 2 How much cash was paid for salaries during Year 2? a. $60,000 b. $65,000 c. $75,000 d. $85,000

$20,000 15,000 80,000

83. A company reported the following information: Interest payable, December 31, Year 2 Interest payable, December 31, Year 1 Interest expense for Year 2 How much cash was paid for interest during Year 2? a. $15,000 b. $29,000 c. $30,200 d. $25,200

$ 3,200 10,200 22,000

84. A company reported net income for the current year. Which of the following business transactions would cause its cash from operating activities to be higher than its net income? a. Cash dividends were paid to stockholders during the year. b. Depreciation expense was recorded for the year. c. A bank loan was repaid during the year. d. Equipment was purchased for cash during the year. 85. A company reported net income of $950,000. Cash from operations Powered by Cognero

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CH 11 The Statement of Cash Flows a. will always be more than $950,000. b. will always be less than $950,000. c. will be equal to $950,000. d. cannot be determined without more information. 86. Cash flows from acquiring and selling products are classified as a. operating activities. b. investing activities. c. financing activities. d. distribution activities. 87. Midtown Diner, Inc. purchased $10,000 of paper napkins for its restaurants. At the end of the period, three-fourths of the bill for the napkins is unpaid, while an inventory revealed that 40% of the napkins were still on hand. What combination of amounts would affect the income statement and statement of cash flows? Statement of Cash Flow Income Statement a. $6,000 $6,000 b. $7,500 $4,000 c. $2,500 $6,000 d. $6,000 $2,500 88. Which method of preparing the operating activities section of a statement of cash flows adjusts net income to remove the effects of deferrals and accruals for revenues and expenses? a. the direct method b. the indirect method c. both the direct and indirect methods d. neither the direct method nor the indirect method 89. The operating activities section of a statement of cash flows for the current year is as follows: Cash flows from operating activities Net income Add: Depreciation Decrease in accounts receivable Deduct:

Decrease in accounts payable Net cash provided by operating activities Which method of preparing the operating activities section was used? a. the direct method b. the indirect method c. either method d. cannot be determined from this limited information

$120,000 10,000 5,000 $135,000 (15,000) $120,000

90. The following items were obtained from the financial records: Accounts receivable, December 31, Year 2 Accounts receivable, December 31, Year 1 Powered by Cognero

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CH 11 The Statement of Cash Flows Sales for Year 2 945,000 How would the change in accounts receivable be reported in the operating activities section of the statement of cash flows under the indirect method? a. as an addition to sales b. as a deduction from sales c. as an addition to net income d. as a deduction from net income 91. The following information was taken from the financial records of Mr. Transmission: Accounts payable, December 31, Year 2 $ 88,000 Accounts payable, December 31, Year 1 99,000 Operating expenses for Year 2 999,000 How would the change in accounts payable be reported in the operating activities section of the statement of cash flows under the indirect method? a. as an addition to operating expenses b. as a deduction from operating expenses c. as an addition to net income d. as a deduction from net income 92. When using the indirect method to determine operating cash flows, how is the gain from selling a long-term investment recognized? (The proceeds from selling the investment are considered separately.) a. as an operating activity b. as an investing activity c. as a financing activity d. as a noncash investing or financing activity 93. Selected information from Metalcrafts Inc.’s financial records is as follows: Equipment, December 31, Year 1 $300,000 Equipment, December 31, Year 2 400,000 Accumulated depreciation, December 31, Year 1 80,000 Accumulated depreciation, December 31, Year 2 60,000 During Year 2, the company sold equipment with a cost of $50,000 and accumulated depreciation of $30,000. A gain of $10,000 was recognized on the sale of the equipment. This was the only equipment sale during the year. What was depreciation expense for Year 2? a. $30,000 b. $10,000 c. $40,000 d. $50,000 94. Information from Medstar Ambulance Service’s financial records is as follows: Notes payable, December 31, Year 1 Notes payable, December 31, Year 2 Loss on note retirement— Year 2 Powered by Cognero

$1,000,000 1,200,000 45,000 Page 14

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CH 11 The Statement of Cash Flows Interest expense on bonds— 75,000 Year 2 At the end of Year 2, the company issued notes at par value for $1,200,000 cash. The proceeds were used to retire the $1,000,000 note issue outstanding at the end of Year 1 (before their maturity date). All interest expense was paid in cash during Year 2. The following statements describe how the company reported the cash flow effects of these items on its Year 2 statement of cash flows. The indirect method is used to prepare the operating activities section. Which of the following has been reported incorrectly? a. Proceeds of $1,200,000 from the issuance of notes were reported as a cash inflow in the financing activities section. b. The loss on note retirement of $45,000 was added to net income in the operating activities section. c. Payments of $1,260,000 were reported as a cash outflow in the investing activities section. d. Interest expense of $75,000 was not reported separately because it is included in net income in the operating activities section. 95. Which of the following statements is false regarding how the cash flow effects of the changes in the equipment and accumulated depreciation accounts would be reported on a statement of cash flows if the indirect method is used to prepare the operating activities section? a. Cash proceeds from the sale of equipment would be reported as a cash inflow in the investing activities section. b. The cash paid to purchase equipment would be reported as a cash outflow in the investing activities section. c. Depreciation expense would be added to net income in the operating activities section. d. A loss on the sale of equipment would be subtracted from net income in the operating activities section. 96. A company reported the following information: Accounts receivable Inventories Accounts payable Net income Depreciation expense

Year 2 $ 50,000 43,000 29,000 100,000 11,000

Year 1 $65,000 40,000 39,000

If the indirect method is used to prepare the operating activities section of the statement of cash flows, what amount will be reported as net cash inflow from operating activities for Year 2? a. $92,000 b. $109,000 c. $111,000 d. $113,000 97. Mercury Corporation reported the following information on its financial statements: Accounts receivable Prepaid expenses Accounts payable Salaries payable Net income Depreciation expense Powered by Cognero

Year 2 $150,000 9,000 65,000 12,000 200,000 14,000

Year 1 $120,000 10,000 80,000 5,000

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CH 11 The Statement of Cash Flows Gain on sale of equipment 6,000 If the company uses the indirect method to prepare the operating activities section of the statement of cash flows, what amount will be reported as net cash inflow from operating activities for Year 2? a. $171,000 b. $215,000 c. $245,000 d. $183,000 98. When using the indirect method to determine operating cash flows, how is depreciation expense recorded on the statement of cash flows? a. as an operating activity b. as an investing activity c. as a financing activity d. as a noncash investing and financing activity 99. When using the indirect method to determine operating cash flows, how is an increase in accounts receivable during the year shown on the statement of cash flows? a. as an operating activity b. as an investing activity c. as a financing activity d. as a noncash investing and financing activity 100. When using the indirect method to determine operating cash flows, how is the decrease in accounts payable shown on the statement of cash flows? a. as an operating activity b. as an investing activity c. as a financing activity d. as a noncash investing and financing activity 101. When preparing the statement of cash flows using the indirect method, the issuance of stock to buy a building is classified as a(n) a. operating activity. b. investing activity. c. noncash investing and financing activity. d. stockholders’ equity activity. 102. Cash flows from acquiring and disposing of long-term assets are classified as a. operating activities. b. investing activities. c. financing activities. d. purchasing activities. 103. Which of the following is not an investing activity? a. purchase of investments for cash b. purchase of equipment for cash Powered by Cognero

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CH 11 The Statement of Cash Flows c. sale of merchandise for cash d. sale of land for cash 104. Which balance sheet accounts are most affected by investing activities? a. current assets and current liabilities b. long-term assets c. long-term liabilities d. stockholders' equity 105. On December 31 of the current year, a restaurant purchased a $19,000 truck to be used for catering. It made a down payment of one-fourth of the purchase price. What combination of amounts would affect the current year income statement and statement of cash flows for the purchase of the truck? Statement of Cash Flow Income Statement a. $0 $19,000 b. $19,000 $0 c. $4,750 $19,000 d. $4,750 $0 106. Mustard Seed Gifts had the following results for December 31, Year 2 and Year 1, respectively: Year 2 Cash $ 50,000 Noncash current assets 190,000 Cash flows from financing activities 200,000 Cash flows from operating activities 90,000 What was the amount of cash flows from investing activities for Year 2? a. cash inflow of $290,000 b. cash outflow of $290,000 c. cash outflow of $10,000 d. cash outflow of $30,000

Year 1 $ 40,000 160,000

107. Selected information from Metalcrafts Inc.’s financial records is as follows: Equipment, December 31, Year 1 $300,000 Equipment, December 31, Year 2 400,000 Accumulated depreciation, December 31, Year 1 80,000 Accumulated depreciation, December 31, Year 2 60,000 During Year 2, the company sold equipment with a cost of $50,000 and accumulated depreciation of $30,000. A gain of $10,000 was recognized on the sale of the equipment. This was the only equipment sale during the year. Assume that all purchases of equipment were paid with cash. How much cash was paid to purchase equipment during Year 2? a. $50,000 b. $200,000 c. $150,000 d. $250,000 Powered by Cognero

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CH 11 The Statement of Cash Flows 108. Selected information from Metalcrafts Inc.’s financial records is as follows: Equipment, December 31, Year 1 $300,000 Equipment, December 31, Year 2 400,000 Accumulated depreciation, December 31, Year 1 80,000 Accumulated depreciation, December 31, Year 2 60,000 During Year 2, the company sold equipment with a cost of $50,000 and accumulated depreciation of $30,000. A gain of $10,000 was recognized on the sale of the equipment. This was the only equipment sale during the year. What amount would be reported as the cash proceeds from the sale of equipment? a. $50,000 b. $20,000 c. $10,000 d. $30,000 109. When using the direct method to determine operating cash flows, how is the sale of long-term investments for cash reported on the statement of cash flows? a. as an operating activity b. as an investing activity c. as a financing activity d. as a noncash investing and financing activity 110. A company completed the following transactions involving investments during the current year: Purchased money market funds $50,000 Sold available-for-sale securities (cost $60,000) $70,000 Purchased trading securities $55,000 The company uses the indirect method to prepare the operating activities section of the statement of cash flows. The following statements describe how the company reported the cash flow effects of the given transactions. Which of the following has been reported incorrectly? a. Payments of $50,000 for money market funds were reported as a cash outflow in the investing activities section. b. Proceeds of $70,000 were reported as a cash inflow in the investing activities section. c. Payments of $55,000 for trading securities were reported as a cash outflow in the operating activities section. d. A gain of $10,000 on the sale of available-for-sale securities was deducted from net income in the operating activities section. 111. When using the indirect method to determine operating cash flows, how is the purchase of equipment for cash shown on the statement of cash flows? a. as an operating activity b. as an investing activity c. as a financing activity d. as a noncash investing and financing activity 112. When preparing the statement of cash flows using the indirect method, the purchase of land for cash is reported as a(n) a. operating activity. b. investing activity. Powered by Cognero

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CH 11 The Statement of Cash Flows c. financing activity. d. building activity. 113. When using the indirect method to determine operating cash flows, how is the receipt of cash from the sale of longterm investments treated on the statement of cash flows? a. as an operating activity b. as an investing activity c. as a financing activity d. as a noncash investing or financing activity 114. When using the direct method to determine operating cash flows, how is the purchase of equipment for cash shown on the statement of cash flows? a. as an operating activity b. as an investing activity c. as a financing activity d. as a noncash investing and financing activity 115. Cash flows from borrowing and paying off a 90-day bank loan are classified as a. operating activities. b. investing activities. c. financing activities. d. purchasing activities. 116. Cash flows from issuing and repurchasing stock or issuing and repaying debt are classified as a. operating activities. b. investing activities. c. financing activities. d. borrowing activities. 117. Which of the following is not a financing activity? a. issuing bonds for cash b. selling an investment in IBM stock for cash c. purchasing a company's own stock (treasury stock) for cash d. making a cash payment to repay a bank loan 118. Information from Memorial Corporation’s financial records is as follows: Retained earnings, December 31, Year 2 Retained earnings, December 31, Year 1 Dividends payable, December 31, Year 2 Dividends payable, December 31, Year 1 Net income for Year 2

$400,000 250,000 20,000 30,000 200,000

Assume that there were no retained earnings transactions other than those dealing with dividends and net income. Dividends declared during Year 2 totaled a. $150,000. Powered by Cognero

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CH 11 The Statement of Cash Flows b. $350,000. c. $30,000. d. $50,000. 119. Information from Memorial Corporation’s financial records is as follows: Retained earnings, December 31, Year 2 Retained earnings, December 31, Year 1 Dividends payable, December 31, Year 2 Dividends payable, December 31, Year 1 Net income for Year 2

$400,000 250,000 20,000 30,000 200,000

How much cash was paid for dividends during Year 2? a. $40,000 b. $50,000 c. $60,000 d. $80,000 120. Information from Medstar Ambulance Service’s financial records is as follows: Notes payable, December 31, Year 1 $1,000,000 Notes payable, December 31, Year 2 1,200,000 Loss on note retirement— 45,000 Year 2 Interest expense on bonds— 75,000 Year 2 At the end of Year 2, the company issued notes at par value for $1,200,000 cash. The proceeds were used to retire the $1,000,000 note issue outstanding at the end of Year 1 (before their maturity date). All interest expense was paid in cash during Year 2. How much was paid to retire the $1,000,000 note issue during Year 2? a. $800,000 b. $1,200,000 c. $1,045,000 d. $1,075,000 121. Which balance sheet accounts are most affected by financing activities? a. current assets b. current liabilities c. long-term assets d. long-term liabilities and stockholders' equity 122. When using the indirect method to determine operating cash flows, how is the issuing of stock for cash shown on the statement of cash flows? a. as an operating activity b. as an investing activity c. as a financing activity Powered by Cognero

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CH 11 The Statement of Cash Flows d. as a noncash investing and financing activity 123. When using the indirect method to determine operating cash flows, how would the retirement of bonds payable at their maturity date be shown on the statement of cash flows? a. as an operating activity b. as an investing activity c. as a financing activity d. as a noncash investing and financing activity 124. When using the indirect method to determine operating cash flows, how would the declaration and payment of cash dividends be shown on the statement of cash flows? a. as operating activities b. as investing activities c. as financing activities d. as a noncash investing and financing activity 125. When using the direct method to determine operating cash flows, how is the retirement of bonds payable at their maturity date shown on the statement of cash flows? a. as an operating activity b. as an investing activity c. as a financing activity d. as a noncash investing and financing activity 126. When using the direct method to determine operating cash flows, how is the payment of a cash dividend shown on the statement of cash flows? a. as an operating activity b. as an investing activity c. as a financing activity d. as a noncash investing and financing activity 127. When using the direct method to determine operating cash flows, how is the issuance of stock for cash shown on the statement of cash flows? a. as an operating activity b. as an investing activity c. as a financing activity d. as a noncash investing and financing activity 128. Upon reviewing Mack's Truck Stop's statement of cash flows, the following was noted: Cash flows from operating activities $ 15,000 Cash flows from investing activities 70,000 Cash flows from financing activities (50,000) From this information, the most likely explanation is that this company is using a. cash from operations and selling long-term assets to pay back debt. b. cash from operations and borrowing to purchase long-term assets. c. its profits to expand its business. Powered by Cognero

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CH 11 The Statement of Cash Flows d. cash from investors to provide for operations. 129. Upon reviewing Myert Company's statement of cash flows, the following was noted: Cash flows from operating activities $ 60,000 Cash flows from investing activities (125,000) Cash flows from financing activities 115,000 From this information, the most likely explanation is that this company is using a. cash from operations and selling long-term assets to pay back debt. b. cash from operations and borrowing to purchase long-term assets. c. its profits to expand growth. d. cash from investors to provide for operations. 130. Upon review of a statement of cash flows, the following was noted: Cash flows from operating activities $ 30,000 Cash flows from investing activities 80,000 Cash flows from financing activities (130,000) From this information, it is likely that the company is using a. cash from operations and selling long-term assets to pay back debt b. cash from operations and borrowing to purchase long-term assets. c. its profits to expand growth. d. cash from investors to provide for operations. 131. A company reported the following information in its current year annual report: Cash flows from operating activities Additions to property, plant, and equipment Proceeds from disposals of property, plant, and equipment Total payments expected to retire long-term debt over the next 5 years What is the cash flow adequacy ratio for the current year? a. 6.96 b. 5.90 c. 3.70 d. 0.74

$295,000 110,000 57,000 250,000

132. A company reported the following information in its annual report for the current year: Cash flows from operating activities Additions to property, plant, and equipment Total payments expected to retire long-term debt over the next 5 years Compute the cash flow adequacy ratio for the current year. a. 1.10 b. 2.00 c. 5.50 d. 7.50

$1,000,000 450,000 500,000

133. Which of the following measures can be used to evaluate a company's ability to meet future debt obligations after Powered by Cognero

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CH 11 The Statement of Cash Flows paying operating expenses and dividends and making capital expenditures? a. earnings per share b. net income c. cash flow adequacy ratio d. net increase or decrease in cash and cash equivalents 134. Which method of preparing the operating activities section of a statement of cash flows reports major classes of gross cash receipts and cash payments for revenues and expenses? a. the direct method b. the indirect method c. both the direct and indirect methods d. neither the direct method nor the indirect method 135. Which of the following statements is most likely to be right? a. The method of preparing the operating activities section of a statement of cash flows that adjusts net income to remove the effects of deferrals and accruals for revenues and expenses is the direct method. b. The method of preparing the operating activities section of a statement of cash flows that reports major classes of gross cash receipts and cash payments for revenues and expenses is the indirect method. c. The FASB prefers the indirect method of preparing the operating activities section of the statement of cash flows. d. Most companies use the indirect method of preparing the operating activities section of the statement of cash flows. 136. Which of the following statements is false? a. The method of preparing the operating activities section of a statement of cash flows that adjusts net income to remove the effects of deferrals and accruals for revenues and expenses is the indirect method. b. The method of preparing the operating activities section of a statement of cash flows that reports major classes of gross cash receipts and cash payments for revenues and expenses is the direct method. c. The FASB prefers the direct method of preparing the operating activities section of the statement of cash flows. d. Most companies use the direct method of preparing the operating activities section of the statement of cash flows. 137. The operating activities section of a statement of cash flows for the current year is as follows: Cash flows from operating activities Cash collected from customers Cash payments for merchandise Cash payments for operating expenses Net cash provided by operating activities Which method of preparing the operating activities section was used? a. the direct method b. the indirect method c. either method d. cannot be determined from this limited information

$ 550,000 (150,000) (275,000) $ 125,000

138. The following items were reported by Morris Plumbing Company: Powered by Cognero

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CH 11 The Statement of Cash Flows Accounts receivable, December 31, Year 2 $ 250,000 Accounts receivable, December 31, Year 1 225,000 Sales for Year 2 1,000,000 What amount would be reported in the operating activities section of the statement of cash flows for collections from customers under the direct method, assuming that all sales are on credit? a. $975,000 b. $1,025,000 c. $1,225,000 d. $1,250,000 139. The following information was reported by a catering company: Accrued liabilities, December 31, Year 2 $ 92,000 Accrued liabilities, December 31, Year 1 55,000 Operating expenses for Year 2 200,000 What amount would be reported in the operating activities section of the statement of cash flows for payments for operating expenses under the direct method? a. $237,000 b. $163,000 c. $200,000 d. $292,000 140. A company reported the following information: Accounts payable, December 31, Year 1 Accounts payable, December 31, Year 2 Inventory, December 31, Year 1 Inventory, December 31, Year 2 Cost of goods sold, Year 2

60,000 80,000 45,000 60,000 1,000,000

Assuming all merchandise purchases were on account, how much cash was paid to suppliers for merchandise purchases during Year 2? a. $1,005,000 b. $1,050,000 c. $995,000 d. $1,020,000 141. When using the direct method to determine operating cash flows, how is depreciation expense recorded on the statement of cash flows? a. as an operating activity b. as an investing activity c. as a financing activity d. It is not reported on the statement of cash flows. 142. When using the direct method to determine operating cash flows, how is the collection of cash from customers shown on the statement of cash flows? a. as an operating activity Powered by Cognero

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CH 11 The Statement of Cash Flows b. as an investing activity c. as a financing activity d. as a noncash investing and financing activity 143. When using the direct method to determine operating cash flows, how are salaries paid to employees reported on the statement of cash flows? a. as an operating activity b. as an investing activity c. as a financing activity d. as a noncash investing and financing activity

144. Selected data and additional information from Mary Beth Cosmetics’ records are as follows: Balance Sheet Data Cash Accounts receivable Inventories Accounts payable Salaries payable Equipment Accumulated depreciation Bonds payable Common stock Retained earnings

Year 2 $235,000 120,000 56,000 38,000 10,000 110,000 28,000 100,000 300,000 76,000

Income Statement Data Net sales Cost of goods sold Operating expenses (excluding depreciation expense) Net income (including depreciation expense and gain) Gain on sale of equipment

Year 1 $246,000 150,000 50,000 70,000 5,000 70,000 32,000 200,000 200,000 40,000 Year 2 $920,000 700,000 160,000 56,000 4,000

Additional information: Equipment with a cost of $30,000 and a book value of $18,000 was sold for $22,000 during 1. Year 2. 2.

Common stock was issued to retire bonds payable during Year 2.

The only items affecting retained earnings in Year 2 were net income and dividends declared and paid.

How would the transaction to acquire a building by signing a 20-year mortgage note payable be reported on the statement of cash flows for Year 2? 145. Selected data from the financial statements of Mars & Venus Counseling Center for the years ended December 31, Year 2 and Year 1, are as follows: (In thousands) Cash and cash equivalents Total current assets (except cash) Powered by Cognero

Year 2 $ ? 180,000

Year 1 $ 4,500 150,000 Page 25

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CH 11 The Statement of Cash Flows Income taxes paid Interest paid Net cash provided by operating activities Net cash used by investing activities Net cash provided by financing activities Depreciation and amortization Total stockholders' equity Net income What is the amount of cash and cash equivalents at the end of Year 2?

5,000 5,100 9,500 5,100 1,500 7,000 115,000 4,000

2,000 7,200 6,400 6,300 7,400 5,000 105,000 2,000

146. Selected data and additional information from Mary Beth Cosmetics’ records are as follows: Balance Sheet Data Cash Accounts receivable Inventories Accounts payable Salaries payable Equipment Accumulated depreciation Bonds payable Common stock Retained earnings

Year 2 $235,000 120,000 56,000 38,000 10,000 110,000 28,000 100,000 300,000 76,000

Income Statement Data Net sales Cost of goods sold Operating expenses (excluding depreciation expense) Net income (including depreciation expense and gain) Gain on sale of equipment

Year 1 $246,000 150,000 50,000 70,000 5,000 70,000 32,000 200,000 200,000 40,000 Year 2 $920,000 700,000 160,000 56,000 4,000

Additional information: Equipment with a cost of $30,000 and a book value of $18,000 was sold for $22,000 during 1. Year 2. 2.

Common stock was issued to retire bonds payable during Year 2.

The only items affecting retained earnings in Year 2 were net income and dividends declared and paid.

Prepare the operating activities section of a statement of cash flows for Year 2 assuming the use of the indirect method of determining net cash flow from operating activities. 147. Selected data and additional information from Mary Beth Cosmetics’ records are as follows: Balance Sheet Data Cash Accounts receivable Inventories Accounts payable Salaries payable Equipment Powered by Cognero

Year 2 $235,000 120,000 56,000 38,000 10,000 110,000

Year 1 $246,000 150,000 50,000 70,000 5,000 70,000 Page 26

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CH 11 The Statement of Cash Flows Accumulated depreciation Bonds payable Common stock Retained earnings

28,000 100,000 300,000 76,000

Income Statement Data Net sales Cost of goods sold Operating expenses (excluding depreciation expense) Net income (including depreciation expense and gain) Gain on sale of equipment

32,000 200,000 200,000 40,000 Year 2 $920,000 700,000 160,000 56,000 4,000

Additional information: Equipment with a cost of $30,000 and a book value of $18,000 was sold for $22,000 during 1. Year 2. 2.

Common stock was issued to retire bonds payable during Year 2.

The only items affecting retained earnings in Year 2 were net income and dividends declared and paid.

What amount was paid to acquire equipment during Year 2? 148. Selected data and additional information from Mary Beth Cosmetics’ records are as follows: Balance Sheet Data Cash Accounts receivable Inventories Accounts payable Salaries payable Equipment Accumulated depreciation Bonds payable Common stock Retained earnings Income Statement Data Net sales Cost of goods sold Operating expenses (excluding depreciation expense) Net income (including depreciation expense and gain) Gain on sale of equipment

Year 2 $235,000 120,000 56,000 38,000 10,000 110,000 28,000 100,000 300,000 76,000

Year 1 $246,000 150,000 50,000 70,000 5,000 70,000 32,000 200,000 200,000 40,000 Year 2 $920,000 700,000 160,000 56,000 4,000

Additional information: Equipment with a cost of $30,000 and a book value of $18,000 was sold for $22,000 during 1. Year 2. 2.

Common stock was issued to retire bonds payable during Year 2.

The only items affecting retained earnings in Year 2 were net income and dividends declared and paid.

Prepare the investing activities section of the company's statement of cash flows for Year 2. Powered by Cognero

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CH 11 The Statement of Cash Flows 149. Selected data from the Maritime Marine Services’ financial statements for the years ended December 31, Year 2 and Year 1, are as follows: (In millions) Year 2 Year 1 Property, plant, and equipment $14,100 $12,200 Accumulated depreciation 4,900 4,700 Investments 450 240 Short-term debt 55 57 Long-term debt 1,500 1,200 Common stock 597 567 Treasury— (21) (21) common stock Retained earnings 3,522 3,426 Net income 770 713 The following additional information was obtained from the company's records: Cash additions to property, plant, and equipment during Year 2 were $2,300. An additional $250 of plant assets were acquired through debt in a noncash transaction. Depreciation 1. expense for Year 2 was $400. Gains on disposals of property, plant, and equipment during Year 2 were $40. 2.

The cash proceeds from the sale of investments in Year 2 were $120. There was a $30 gain on the sale of the investments.

Proceeds from long-term debt issued during Year 2 were $200.

The issuance of common stock totaled $30 in Year 2.

What was the cost of the property, plant, and equipment that was disposed of during Year 2? 150. Selected data from Maritime Marine Services’ financial statements for the years ended December 31, Year 2 and Year 1, are as follows: (In millions) Property, plant, and equipment Accumulated depreciation Investments Short-term debt Long-term debt Common stock Treasury— common stock Retained earnings Net income

Year 2 $14,100 4,900 450 55 1,500 597

Year 1 $12,200 4,700 240 57 1,200 567

(21)

3,522 770

3,426 713

The following additional information was obtained from the company's records: Cash additions to property, plant, and equipment during Year 2 were $2,300. An additional $250 of plant assets were acquired through debt in a noncash transaction. Depreciation 1. expense for Year 2 was $400. Gains on disposals of property, plant, and equipment during Year 2 were $40. 2.

The cash proceeds from the sale of investments in Year 2 were $120. There was a $30 gain on the sale of the investments.

Proceeds from long-term debt issued during Year 2 were $200.

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CH 11 The Statement of Cash Flows 4.

The issuance of common stock totaled $30 in Year 2.

What was the amount of accumulated depreciation on the property, plant, and equipment disposed of during Year 2? 151. Selected data from Maritime Marine Services’ financial statements for the years ended December 31, Year 2 and Year 1, are as follows: (In millions) Property, plant, and equipment Accumulated depreciation Investments Short-term debt Long-term debt Common stock Treasury— common stock Retained earnings Net income

Year 2 $14,100 4,900 450 55 1,500 597

Year 1 $12,200 4,700 240 57 1,200 567

(21)

3,522 770

3,426 713

The cash proceeds from the sale of investments in Year 2 were $120. There was a $30 gain on the sale of the investments.

Proceeds from long-term debt issued during Year 2 were $200.

The issuance of common stock totaled $30 in Year 2.

Assuming that the book value of the property, plant, and equipment disposed of during Year 2 was $90, what were the cash proceeds from the disposal? 152. Selected data from Maritime Marine Services’ financial statements for the years ended December 31, Year 2 and Year 1, are as follows: (In millions) Property, plant, and equipment Accumulated depreciation Investments Short-term debt Long-term debt Common stock Treasury— common stock Retained earnings Net income

Year 2 $14,100 4,900 450 55 1,500 597

Year 1 $12,200 4,700 240 57 1,200 567

(21)

3,522 770

3,426 713

The following additional information was obtained from the company's records: Cash additions to property, plant, and equipment during Year 2 were $2,300. An additional 1. $250 of plant assets were acquired through debt in a noncash transaction. Depreciation Powered by Cognero

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CH 11 The Statement of Cash Flows expense for Year 2 was $400. Gains on disposals of property, plant, and equipment during Year 2 were $40. 2.

The cash proceeds from the sale of investments in Year 2 were $120. There was a $30 gain on the sale of the investments.

Proceeds from long-term debt issued during Year 2 were $200.

The issuance of common stock totaled $30 in Year 2.

What was the cost of investments purchased during Year 2? 153. Selected data and additional information from Mary Beth Cosmetics’ records are as follows: Balance Sheet Data Cash Accounts receivable Inventories Accounts payable Salaries payable Equipment Accumulated depreciation Bonds payable Common stock Retained earnings

Year 2 $235,000 120,000 56,000 38,000 10,000 110,000 28,000 100,000 300,000 76,000

Income Statement Data Net sales Cost of goods sold Operating expenses (excluding depreciation expense) Net income (including depreciation expense and gain) Gain on sale of equipment

Year 1 $246,000 150,000 50,000 70,000 5,000 70,000 32,000 200,000 200,000 40,000 Year 2 $920,000 700,000 160,000 56,000 4,000

Additional information: Equipment with a cost of $30,000 and a book value of $18,000 was sold for $22,000 during 1. Year 2. 2.

Common stock was issued to retire bonds payable during Year 2.

The only items affecting retained earnings in Year 2 were net income and dividends declared and paid.

What amount was declared and paid for dividends during Year 2? 154. Selected data and additional information from Mary Beth Cosmetics’ records are as follows: Balance Sheet Data Cash Accounts receivable Inventories Accounts payable Salaries payable Equipment Accumulated depreciation Powered by Cognero

Year 2 $235,000 120,000 56,000 38,000 10,000 110,000 28,000

Year 1 $246,000 150,000 50,000 70,000 5,000 70,000 32,000 Page 30

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CH 11 The Statement of Cash Flows Bonds payable Common stock Retained earnings

100,000 300,000 76,000

Income Statement Data Net sales Cost of goods sold Operating expenses (excluding depreciation expense) Net income (including depreciation expense and gain) Gain on sale of equipment

200,000 200,000 40,000 Year 2 $920,000 700,000 160,000 56,000 4,000

Additional information: Equipment with a cost of $30,000 and a book value of $18,000 was sold for $22,000 during 1. Year 2. 2.

Common stock was issued to retire bonds payable during Year 2.

The only items affecting retained earnings in Year 2 were net income and dividends declared and paid.

What amount was paid to retire bonds payable during Year 2? 155. Selected data and additional information from Mary Beth Cosmetics’ records are as follows: Balance Sheet Data Cash Accounts receivable Inventories Accounts payable Salaries payable Equipment Accumulated depreciation Bonds payable Common stock Retained earnings Income Statement Data Net sales Cost of goods sold Operating expenses (excluding depreciation expense) Net income (including depreciation expense and gain) Gain on sale of equipment

Year 2 $235,000 120,000 56,000 38,000 10,000 110,000 28,000 100,000 300,000 76,000

Year 1 $246,000 150,000 50,000 70,000 5,000 70,000 32,000 200,000 200,000 40,000 Year 2 $920,000 700,000 160,000 56,000 4,000

Additional information: Equipment with a cost of $30,000 and a book value of $18,000 was sold for $22,000 during 1. Year 2. 2.

Common stock was issued to retire bonds payable during Year 2.

The only items affecting retained earnings in Year 2 were net income and dividends declared and paid.

Prepare the financing activities section of the company's statement of cash flows for Year 2. Powered by Cognero

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CH 11 The Statement of Cash Flows 156. Selected data from Maritime Marine Services’ financial statements for the years ended December 31, Year 2 and Year 1, are as follows: (In millions) Year 2 Year 1 Property, plant, and equipment $14,100 $12,200 Accumulated depreciation 4,900 4,700 Investments 450 240 Short-term debt 55 57 Long-term debt 1,500 1,200 Common stock 597 567 Treasury— (21) (21) common stock Retained earnings 3,522 3,426 Net income 770 713 The following additional information was obtained from the company's records: Cash additions to property, plant, and equipment during Year 2 were $2,300. An additional $250 of plant assets were acquired through debt in a noncash transaction. Depreciation 1. expense for Year 2 was $400. Gains on disposals of property, plant, and equipment during Year 2 were $40. 2.

The cash proceeds from the sale of investments in Year 2 were $120. There was a $30 gain on the sale of the investments.

Proceeds from long-term debt issued during Year 2 were $200.

The issuance of common stock totaled $30 in Year 2.

What was the amount paid to retire long-term debt during Year 2? 157. Selected data from Maritime Marine Services’ financial statements for the years ended December 31, Year 2 and Year 1, are as follows: (In millions) Property, plant, and equipment Accumulated depreciation Investments Short-term debt Long-term debt Common stock Treasury— common stock Retained earnings Net income

Year 2 $14,100 4,900 450 55 1,500 597

Year 1 $12,200 4,700 240 57 1,200 567

(21)

3,522 770

3,426 713

The cash proceeds from the sale of investments in Year 2 were $120. There was a $30 gain on the sale of the investments.

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CH 11 The Statement of Cash Flows 3.

Proceeds from long-term debt issued during Year 2 were $200.

The issuance of common stock totaled $30 in Year 2.

What was the amount of cash dividends paid during Year 2? 158. Selected data and additional information from Mary Beth Cosmetics’ records are as follows: Balance Sheet Data Cash Accounts receivable Inventories Accounts payable Salaries payable Equipment Accumulated depreciation Bonds payable Common stock Retained earnings

Year 2 $235,000 120,000 56,000 38,000 10,000 110,000 28,000 100,000 300,000 76,000

Income Statement Data Net sales Cost of goods sold Operating expenses (excluding depreciation expense) Net income (including depreciation expense and gain) Gain on sale of equipment

Year 1 $246,000 150,000 50,000 70,000 5,000 70,000 32,000 200,000 200,000 40,000 Year 2 $920,000 700,000 160,000 56,000 4,000

Additional information: Equipment with a cost of $30,000 and a book value of $18,000 was sold for $22,000 during 1. Year 2. 2.

Common stock was issued to retire bonds payable during Year 2.

The only items affecting retained earnings in Year 2 were net income and dividends declared and paid.

Prepare the company's statement of cash flows for the year ended December 31, Year 2. Use the indirect method of determining net cash flows from operating activities. 159. During the current year, the operations of a shipping company provided net cash flows of $600,000. The company made capital expenditures of $270,000 and paid dividends of $130,000. A)

Compute the company's free cash flow.

Compute the company's cash flow adequacy ratio assuming the average maturity value of its long-term debt over the next 5 years is $650,000.

160. Selected data and additional information from Mary Beth Cosmetics’ records are as follows: Balance Sheet Data Cash Accounts receivable Inventories Powered by Cognero

Year 2 $235,000 120,000 56,000

Year 1 $246,000 150,000 50,000 Page 33

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CH 11 The Statement of Cash Flows Accounts payable Salaries payable Equipment Accumulated depreciation Bonds payable Common stock Retained earnings

38,000 10,000 110,000 28,000 100,000 300,000 76,000

Income Statement Data Net sales Cost of goods sold Operating expenses (excluding depreciation expense) Net income (including depreciation expense and gain) Gain on sale of equipment

70,000 5,000 70,000 32,000 200,000 200,000 40,000 Year 2 $920,000 700,000 160,000 56,000 4,000

Additional information: Equipment with a cost of $30,000 and a book value of $18,000 was sold for $22,000 during 1. Year 2. 2.

Common stock was issued to retire bonds payable during Year 2.

The only items affecting retained earnings in Year 2 were net income and dividends declared and paid.

What amount of cash was collected from customers during Year 2? 161. Maytab Corporation's balance sheets for the last 2 years are as follows: Balance Sheets Cash Accounts receivable Inventory Equipment Accumulated depreciation Total assets

Year 2 $82 180 170 200 (72) $560

Year 1 $40 150 200 140 (60) $470

Accounts payable Long-term notes payable Common stock Retained earnings Total liabilities and stockholders’ equity

$100 100 250 110

$80 50 250 90

$560

$470

The company's income statement for Year 2 is as follows: Income Statement Sales Expenses:

Year 2 $345 Cost of goods sold Operating expenses Depreciation expense Interest expense

Operating income Powered by Cognero

$(120) (58) (20) (2) $145 Page 34

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CH 11 The Statement of Cash Flows Gain on sale— equipment* Income before taxes Tax expense Net income

5 $150 (30) $120

*The company sold equipment for $57, which had a cost of $60. A) Prepare the company's statement of cash flows for Year 2. Use the direct method of computing cash flows from operating activities. B) Prepare the cash flows from operating activities section of the cash flow statement using the indirect method. 162. Selected data and additional information from Mary Beth Cosmetics’ records are as follows: Balance Sheet Data Cash Accounts receivable Inventories Accounts payable Salaries payable Equipment Accumulated depreciation Bonds payable Common stock Retained earnings

Year 2 $235,000 120,000 56,000 38,000 10,000 110,000 28,000 100,000 300,000 76,000

Income Statement Data Net sales Cost of goods sold Operating expenses (excluding depreciation expense) Net income (including depreciation expense and gain) Gain on sale of equipment

Year 1 $246,000 150,000 50,000 70,000 5,000 70,000 32,000 200,000 200,000 40,000 Year 2 $920,000 700,000 160,000 56,000 4,000

Additional information: Equipment with a cost of $30,000 and a book value of $18,000 was sold for $22,000 during 1. Year 2. 2.

Common stock was issued to retire bonds payable during Year 2.

The only items affecting retained earnings in Year 2 were net income and dividends declared and paid.

What is the amount paid to suppliers for purchases of merchandise during Year 2? 163. Selected data and additional information from Mary Beth Cosmetics’ records are as follows: Balance Sheet Data Cash Accounts receivable Inventories Accounts payable Powered by Cognero

Year 2 $235,000 120,000 56,000 38,000

Year 1 $246,000 150,000 50,000 70,000 Page 35

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CH 11 The Statement of Cash Flows Salaries payable Equipment Accumulated depreciation Bonds payable Common stock Retained earnings

10,000 110,000 28,000 100,000 300,000 76,000

Income Statement Data Net sales Cost of goods sold Operating expenses (excluding depreciation expense) Net income (including depreciation expense and gain) Gain on sale of equipment

5,000 70,000 32,000 200,000 200,000 40,000 Year 2 $920,000 700,000 160,000 56,000 4,000

Additional information: Equipment with a cost of $30,000 and a book value of $18,000 was sold for $22,000 during 1. Year 2. 2.

Common stock was issued to retire bonds payable during Year 2.

The only items affecting retained earnings in Year 2 were net income and dividends declared and paid.

What is the amount paid for operating expenses during Year 2? 164. Selected data and additional information from Mary Beth Cosmetics’ records are as follows: Balance Sheet Data Cash Accounts receivable Inventories Accounts payable Salaries payable Equipment Accumulated depreciation Bonds payable Common stock Retained earnings

Year 2 $235,000 120,000 56,000 38,000 10,000 110,000 28,000 100,000 300,000 76,000

Year 1 $246,000 150,000 50,000 70,000 5,000 70,000 32,000 200,000 200,000 40,000

Income Statement Data Year 2 Net sales $920,000 Cost of goods sold 700,000 Operating expenses (excluding depreciation expense) 160,000 Net income (including depreciation expense and gain) 56,000 Gain on sale of equipment 4,000 Additional information: Equipment with a cost of $30,000 and a book value of $18,000 was sold for $22,000 during 1. Year 2. 2.

Common stock was issued to retire bonds payable during Year 2.

The only items affecting retained earnings in Year 2 were net income and dividends declared and paid.

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CH 11 The Statement of Cash Flows What amount was recorded as depreciation expense during Year 2? 165. Selected data and additional information from Mary Beth Cosmetics’ records are as follows: Balance Sheet Data Cash Accounts receivable Inventories Accounts payable Salaries payable Equipment Accumulated depreciation Bonds payable Common stock Retained earnings

Year 2 $235,000 120,000 56,000 38,000 10,000 110,000 28,000 100,000 300,000 76,000

Income Statement Data Net sales Cost of goods sold Operating expenses (excluding depreciation expense) Net income (including depreciation expense and gain) Gain on sale of equipment

Year 1 $246,000 150,000 50,000 70,000 5,000 70,000 32,000 200,000 200,000 40,000 Year 2 $920,000 700,000 160,000 56,000 4,000

Additional information: Equipment with a cost of $30,000 and a book value of $18,000 was sold for $22,000 during 1. Year 2. 2.

Common stock was issued to retire bonds payable during Year 2.

The only items affecting retained earnings in Year 2 were net income and dividends declared and paid.

Prepare the operating activities section of the statement of cash flows for Year 2 assuming the direct method is used to determine net cash flow from operating activities. 166. Selected data and additional information from Mary Beth Cosmetics’ records are as follows: Balance Sheet Data Cash Accounts receivable Inventories Accounts payable Salaries payable Equipment Accumulated depreciation Bonds payable Common stock Retained earnings Income Statement Data Net sales Cost of goods sold Operating expenses (excluding depreciation expense) Powered by Cognero

Year 2 $235,000 120,000 56,000 38,000 10,000 110,000 28,000 100,000 300,000 76,000

Year 1 $246,000 150,000 50,000 70,000 5,000 70,000 32,000 200,000 200,000 40,000 Year 2 $920,000 700,000 160,000 Page 37

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CH 11 The Statement of Cash Flows Net income (including depreciation expense and gain) 56,000 Gain on sale of equipment 4,000 Additional information: Equipment with a cost of $30,000 and a book value of $18,000 was sold for $22,000 during 1. Year 2. 2.

Common stock was issued to retire bonds payable during Year 2.

The only items affecting retained earnings in Year 2 were net income and dividends declared and paid.

Prepare the company's statement of cash flows for the year ended December 31, Year 2. Use the direct method of determining net cash flows from operating activities.

167. You are the controller for McBride & Associates. Your accounting intern from the local university has been assigned the task of preparing your company's statement of cash flows. The intern has come to you with a question. She is not sure how to report some dividends the company received during the year. She explains that on first thought, it seems like dividends represent a financing activity since they are related to shares of stock that companies issue to finance their businesses. But, she is having second thoughts. Explain to your intern how dividends (both received and paid) should be classified on the cash flow statement. 168. Happy Maids Company began Year 1 with a cash and cash equivalents balance of $7,670. Consolidated statements of cash flows for the years ended December 31, Year 2 and Year 1, are as follows: (in thousands) Year 2 Year 1 Operating activities: Net income $6,300 $6,000 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation 4,500 4,020 Amortization of software 520 980 Effect of restructuring charges (350) (440) Deferred income taxes (600) 360 Gain on the disposal of fixed (260) (270) assets and other assets Changes in assets and liabilities (net of businesses acquired): Accounts receivable (2,740) (3,730) Inventories 75 430 Other assets 880 (1,090) Accounts payable and 362 700 accrued liabilities Other liabilities 595 1,815 Net cash provided by operating $ 9,282 $ 8,775 activities Net cash used for investing $(6,131) $(6,155) activities Net cash provided by financing $(4,993) $(3,090) activities Cash and cash equivalents at end $ 5,358 $ 7,200 of year Powered by Cognero

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CH 11 The Statement of Cash Flows

What method is used to calculate the net cash provided by operating activities?

169. Happy Maids Company began Year 1 with a cash and cash equivalents balance of $7,670. Consolidated statements of cash flows for the years ended December 31, Year 2 and Year 1, are as follows: (in thousands) Year 2 Year 1 Operating activities: Net income $6,300 $6,000 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation 4,500 4,020 Amortization of software 520 980 Effect of restructuring charges (350) (440) Deferred income taxes (600) 360 Gain on the disposal of fixed (260) (270) assets and other assets Changes in assets and liabilities (net of businesses acquired): Accounts receivable (2,740) (3,730) Inventories 75 430 Other assets 880 (1,090) Accounts payable and 362 700 accrued liabilities Other liabilities 595 1,815 Net cash provided by operating $ 9,282 $ 8,775 activities Net cash used for investing $(6,131) $(6,155) activities Net cash provided by financing $(4,993) $(3,090) activities Cash and cash equivalents at end $ 5,358 $ 7,200 of year In Year 1, why are depreciation and amortization expenses added back to net income in the operating activities section of the statement of cash flows?

170. Happy Maids Company began Year 1 with a cash and cash equivalents balance of $7,670. Consolidated statements of cash flows for the years ended December 31, Year 2 and Year 1, are as follows: (in thousands) Year 2 Operating activities: Net income $6,300 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation Amortization of software Effect of restructuring charges Powered by Cognero

Year 1 $6,000 4,500 520 (350)

4,020 980 (440) Page 39

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CH 11 The Statement of Cash Flows Deferred income taxes Gain on the disposal of fixed assets and other assets

(600)

360

(260)

(270)

Changes in assets and liabilities (net of businesses acquired): Accounts receivable (2,740) (3,730) Inventories 75 430 Other assets 880 (1,090) Accounts payable and 362 700 accrued liabilities Other liabilities 595 1,815 Net cash provided by operating activities Net cash used for investing activities Net cash provided by financing activities Cash and cash equivalents at end of year

$ 9,282

$ 8,775

$(6,131)

$(6,155)

$(4,993)

$(3,090)

$ 5,358

$ 7,200

What is the significance of the positive amounts shown in both years for accounts payable and accrued liabilities?

171. Happy Maids Company began Year 1 with a cash and cash equivalents balance of $7,670. Consolidated statements of cash flows for the years ended December 31, Year 2 and Year 1, are as follows: (in thousands) Year 2 Year 1 Operating activities: Net income $6,300 $6,000 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation 4,500 4,020 Amortization of software 520 980 Effect of restructuring charges (350) (440) Deferred income taxes (600) 360 Gain on the disposal of fixed (260) (270) assets and other assets Changes in assets and liabilities (net of businesses acquired): Accounts receivable (2,740) (3,730) Inventories 75 430 Other assets 880 (1,090) Accounts payable and 362 700 accrued liabilities Other liabilities 595 1,815 Net cash provided by operating $ 9,282 $ 8,775 activities Net cash used for investing $(6,131) $(6,155) activities Net cash provided by financing $(4,993) $(3,090) activities Cash and cash equivalents at end $ 5,358 $ 7,200 Powered by Cognero

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CH 11 The Statement of Cash Flows of year At the end of each year, the company's cash balance was approximately $5 to $7 million. What does this indicate about its cash management techniques? 172. Happy Maids Company began Year 1 with a cash and cash equivalents balance of $7,670. Consolidated statements of cash flows for the years ended December 31, Year 2 and Year 1, are as follows: (in thousands) Year 2 Year 1 Operating activities: Net income $6,300 $6,000 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation 4,500 4,020 Amortization of software 520 980 Effect of restructuring charges (350) (440) Deferred income taxes (600) 360 Gain on the disposal of fixed (260) (270) assets and other assets Changes in assets and liabilities (net of businesses acquired): Accounts receivable (2,740) (3,730) Inventories 75 430 Other assets 880 (1,090) Accounts payable and 362 700 accrued liabilities Other liabilities 595 1,815 Net cash provided by operating $ 9,282 $ 8,775 activities Net cash used for investing $(6,131) $(6,155) activities Net cash provided by financing $(4,993) $(3,090) activities Cash and cash equivalents at end $ 5,358 $ 7,200 of year Describe the link(s) between the statement of cash flows, the balance sheet, and the income statement if a company uses the indirect method to prepare the operating activities section of the statement of cash flows. 173. Happy Maids Company began Year 1 with a cash and cash equivalents balance of $7,670. Consolidated statements of cash flows for the years ended December 31, Year 2 and Year 1, are as follows: (in thousands) Year 2 Operating activities: Net income $6,300 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation Amortization of software Effect of restructuring charges Deferred income taxes Gain on the disposal of fixed assets and other assets Powered by Cognero

Year 1 $6,000 4,500 520 (350) (600)

4,020 980 (440) 360

(260)

(270) Page 41

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CH 11 The Statement of Cash Flows Changes in assets and liabilities (net of businesses acquired): Accounts receivable (2,740) (3,730) Inventories 75 430 Other assets 880 (1,090) Accounts payable and 362 700 accrued liabilities Other liabilities 595 1,815 Net cash provided by operating activities Net cash used for investing activities Net cash provided by financing activities Cash and cash equivalents at end of year

$ 9,282

$ 8,775

$(6,131)

$(6,155)

$(4,993)

$(3,090)

$ 5,358

$ 7,200

Give some examples of circumstances that would result in net cash used for investing activities as shown. 174. A firm's financial analyst is assessing the performance of three particular companies whose cash flow statements for the last 3 years are as follows: All amounts are in millions of dollars. Company A Net cash provided by operating activities Net cash used for investing activities Net cash provided by financing activities

Year 3

Year 2

Year 1

$5,000 $(13,000) $8,000

$4,000 $(2,300) $(300)

$2,800 $(2,900) $(100)

Company B Net cash provided by operating activities Net cash used for investing activities Net cash provided by financing activities

$2,000 $(2,200) $ 400

$1,500 $(1,400) $(30)

$1,000 $(700) $(100)

Company C Net cash provided by operating activities Net cash used for investing activities Net cash provided by financing activities

$ 290 $(500) $ 250

$ 210 $(200) $10

$ 130 $(100) $5

Ignoring the differences in magnitude, comment on the similarities and differences in the cash flows of the three companies. 175. A firm's financial analyst is assessing the performance of three particular companies whose cash flow statements for the last 3 years are as follows: All amounts are in millions of dollars. Company A Net cash provided by operating activities Net cash used for investing activities Net cash provided by financing activities

Year 3

Year 2

Year 1

$5,000 $(13,000) $8,000

$4,000 $(2,300) $(300)

$2,800 $(2,900) $(100)

Company B Net cash provided by operating activities

$2,000

$1,500

$1,000

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CH 11 The Statement of Cash Flows Net cash used for investing activities Net cash provided by financing activities

$(2,200) $ 400

$(1,400) $(30)

$(700) $(100)

Company C Net cash provided by operating activities Net cash used for investing activities Net cash provided by financing activities

$ 290 $(500) $ 250

$ 210 $(200) $10

$ 130 $(100) $5

What is meant by the term "cash flow adequacy"? What other financial information would be necessary in order to make a determination of the cash flow adequacy for these three companies? 176. You are the financial news reporter for the Wall Street Journal. During a recent press conference with the chief financial officer (CFO) of Lackluster Video, Inc., the executive stated that the company's financial health was excellent and that she expected their recent history of successful and strategic growth to continue to generate significant profits in the future as they expanded their video stores into several new major geographical markets. To corroborate the CFO's statements, you examined the statement of cash flows and found that the company has reported negative operating cash flows, positive investing cash flows, and positive financing cash flows for each of the last 5 years. Does the statement of cash flows support the CFO's statements?

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CH 11 The Statement of Cash Flows Answer Key 1. True 2. True 3. True 4. True 5. False 6. False 7. True 8. True 9. False 10. True 11. True 12. False 13. True 14. False 15. True 16. True 17. True 18. True 19. True 20. True 21. False 22. True 23. True 24. False 25. False Powered by Cognero

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CH 11 The Statement of Cash Flows 26. False 27. False 28. True 29. True 30. True 31. True 32. True 33. False 34. a 35. d 36. a 37. b 38. c 39. d 40. b 41. c 42. a 43. d 44. c 45. b 46. c 47. d 48. a 49. a 50. a 51. d Powered by Cognero

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CH 11 The Statement of Cash Flows 52. b 53. d 54. b 55. d 56. d 57. d 58. d 59. c 60. c 61. c 62. d 63. c 64. a 65. c 66. c 67. b 68. b 69. a 70. c 71. d 72. a 73. a 74. a 75. b 76. d Powered by Cognero

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CH 11 The Statement of Cash Flows 77. c 78. d 79. c 80. b 81. b 82. c 83. b 84. b 85. d 86. a 87. c 88. b 89. b 90. c 91. d 92. a 93. b 94. c 95. d 96. d 97. a 98. a 99. a 100. a 101. c 102. b Powered by Cognero

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CH 11 The Statement of Cash Flows 103. c 104. b 105. d 106. b 107. c 108. d 109. b 110. a 111. b 112. b 113. b 114. b 115. c 116. c 117. b 118. d 119. c 120. c 121. d 122. c 123. c 124. c 125. c 126. c 127. c Powered by Cognero

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CH 11 The Statement of Cash Flows 128. a 129. b 130. a 131. c 132. c 133. c 134. a 135. d 136. d 137. a 138. a 139. b 140. c 141. d 142. a 143. a 144. The transaction should be shown as a noncash investing and financing activity. This would be shown in a separate schedule at the bottom of the statement of cash flows or within the notes to the financial statements. 145. Net cash provided by operating activities Net cash used by investing activities Net cash provided by financing activities Net increase in cash Cash and cash equivalents— beginning of year Cash and cash equivalents— end of year 146. Cash flows from operating activities Net income Adjustments to net income: Add: Powered by Cognero

$ 9,500 (5,100) 1,500 $ 5,900 4,500 $10,400

$ 56,000 Depreciation Decrease in accounts receivable

8,000 30,000 Page 49

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CH 11 The Statement of Cash Flows Deduct:

Increase in salaries payable Gain on sale equipment Increase in inventories Decrease in accounts payable

Net cash provided by operating activities Calculations: Decrease in accounts receivable ($150,000 − $120,000) Increase in salaries payable ($10,000 − $5,000) Gain on sale of equipment ($22,000 − $18,000) Increase in inventories ($56,000 − $50,000) Decrease in accounts payable ($70,000 − $38,000)

5,000 (4,000) (6,000) (32,000) $ 57,000

$ 30,000 $ 5,000 $ 4,000 $ 6,000 $ 32,000

147. $70,000 $110,000 Equipment—Year 2 – ($70,000 Equipment—Year 1 − $30,000 Equipment Sold during Year 2) = $70,000 148. Cash flows from investing activities Proceeds from selling equipment Purchase of equipment Net cash used for investing activities

$ 22,000 (70,000) $(48,000)

149. $650 $12,200 Property, Plant, and Equipment—Year 1 + $2,300 Additions during Year 2 + $250 Noncash Plant Assets Acquisitions − $14,100 Property, Plant, and Equipment—Year 2 = $650 150. $200 $4,700 Accumulated Depreciation—Year 1 + $400 Depreciation Expense—Year 2 − $4,900 Accumulated Depreciation— Year 2 = $200 151. $130 $90 Book Value of Disposed Equipment + $40 Gain on Disposal = $130 152. $300 $240 Investments Balance—Year 1 + X − $90 Year 2 Investments Sales = $450 Investment Balance—Year 2 X = $300 153. $20,000 $40,000 Retained Earnings—Year 1 + $56,000 Net Income—Year 2 − $76,000 Retained Earnings—Year 2 = $20,000 154. $0 Cash was not paid to retire the bonds; stock was issued to retire the bonds. Both the bonds payable and common stock accounts changed by $100,000 ($200,000 − $100,000 = $100,000; $300,000 − $200,000 = $100,000). 155. Cash flows from financing activities Paid dividends Net cash provided by financing activities

$(20,000) $(20,000)

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CH 11 The Statement of Cash Flows 156. $150 $1,200 Long-Term Debt Balance—Year 1 + $200 Proceeds—Year 2 + $250 Additional Long-Term Debt Issued − $1,500 Long-Term Debt—Year 2 = $150 157. $308 $3,426 Retained Earnings—Year 1 + $770 Net Income—Year 2 − X = $3,522 Retained Earnings—Year 2 X = $674 158. Mary Beth Cosmetics Statement of Cash Flows For the year ended December 31, 2023 Cash flows from operating activities Net income Adjustments to net income: Add: Depreciation Decrease in accounts receivable Increase in salaries payable 5,000 Less: Gain on sale of equipment Increase in inventories Decrease in accounts payable (32,000) Net cash provided by operating activities

$ 56,000 $ 8,000 30,000 43,000 (4,000) (6,000) (42,000) $ 57,000

Cash flows from investing activities Proceeds from selling equipment Purchase of equipment Net cash used for investing activities

$ 22,000 (70,000)

Cash flows from financing activities Paid dividends Net cash provided by financing activities

$(20,000)

$(48,000)

$(20,000)

Net increase (decrease) in cash Cash and cash equivalents, Year 1 Cash and cash equivalents, Year 2

$(11,000) 246,000 $235,000

Calculations: Decrease in accounts receivable ($150,000 − $120,000) $30,000 Increase in salaries payable ($10,000 − $5,000) $5,000 Gain on sale of equipment ($22,000 − $18,000) $4,000 Increase in inventories ($56,000 − $50,000) $6,000 Decrease in accounts payable ($70,000 − $38,000) $32,000 159. A)

Free Cash = Flow $200,000 =

Net Cash Flow from Operating Activities $600,000

−

Capital Expenditures

−

Cash Dividends

−

$270,000

−

$130,000 Page 51

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CH 11 The Statement of Cash Flows

160. $950,000 $920,000 Net Sales + $150,000 Beginning Accounts Receivable − $120,000 Ending Accounts Receivable = $950,000 161. A) Maytab Corporation Statement of Cash Flows For the year ended December 31, Year 2 DIRECT METHOD Cash flows from operating activities Cash collections from customers Cash paid to suppliers Cash paid for operations Cash paid for interest Cash paid for taxes Net cash provided by operating activities

$315 (70) (58) (2) (30)

Cash flows from investing activities Sold equipment Purchased equipment Cash outflow from Investing Activities

$57 (120)

Cash flows from financing activities Issued long-term notes payable Paid dividends Net cash provided by financing activities

$50 (100)

$155

(63)

(50)

Net increase (decrease) in cash Cash and cash equivalents, Year 1 Cash and cash equivalents, Year 2

$42 40 $82

B) Indirect Method Cash flows from operating activities Net income Depreciation expense Gain on sale of equipment Increase in accounts receivable Decrease in inventory Increase in accounts payable Net cash provided by operating activities

$120 20 (5) (30) 30 20 $155

162. $738,000 $700,000 Cost of Goods Sold + $56,000 Ending Inventories − $50,000 Beginning Inventories + $70,000 Beginning Accounts Payable − $38,000 Ending Accounts Payable = $738,000 Powered by Cognero

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CH 11 The Statement of Cash Flows 163. $155,000 $160,000 Operating Expenses + $5,000 Beginning Salaries Payable − $10,000 Ending Salaries Payable = $155,000 164. $8,000 $30,000 − $18,000 = $12,000 Accumulated Depreciation on Equipment Sold; $12,000 − ($32,000 − $28,000) = $8,000 165. Cash flows from operating activities Collections from customers Payments for merchandise Payments for operating expenses Net cash provided by operating activities

$ 950,000 (738,000) (155,000) $ 57,000

166. Mary Beth Cosmetics Statement of Cash Flows For the year ended December 31, Year 2 Cash flows from operating activities Collections from customers Payments for merchandise Payments for operating expenses Net cash provided by operating activities

$ 950,000 (738,000) (155,000) $ 57,000

Cash flows from investing activities: Proceeds from selling equipment Purchase of equipment Net cash used by investing activities

$ 22,000 (70,000) $ (48,000)

Cash flows from financing activities: Paid dividends Net cash provided by financing activities

$(20,000) $(20,000)

Net increase (decrease) in cash Cash and cash equivalents Cash and cash equivalents

$(11,000) 246,000 $235,000

167. The FASB states that operating cash flows should reflect the cash effects of transactions that enter into the determination of income. Because dividends received represent income, their receipt should be classified as an operating activity. Dividend payments are paid for the use of equity capital. They do not represent an expense but are a reduction of retained earnings. Therefore, dividends paid are classified as a financing activity. The proper classification of items in the statement of cash flows is critical for financial statement users. 168. Indirect method 169. These items are noncash expenses that were deducted in the determination of net income but do not use (or provide) cash flows. Therefore, they must be "added back" as part of the process of calculating the net cash flow from operating Powered by Cognero

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CH 11 The Statement of Cash Flows activities. 170. Under the indirect method, net income must be adjusted for the change in the current accounts (other than cash). The positive amounts indicate that for both years, the year-end balances for accounts payable and accrued liabilities have increased over that of the previous year. It is added to net income because this means that some of its expenses were not paid in cash by the end of each year. 171. Companies employ various cash management techniques. Cash balances are often kept to a minimum and excess funds are temporarily invested to generate interest income. Very short-term temporary investments might qualify as cash equivalents, but any temporary investment of more than 90 days would not. Such investments would be included in the current assets that are not shown. Another factor is the nature of the business. For 2 years, it has generated approximately $9 million in net cash from operating activities. This would indicate that it has a fairly steady cash flow and therefore may not have to keep large amounts on hand. This has allowed the company to make additional long-term investments to grow its business as shown by the net cash used for investing activities. 172. The net increase or decrease on the statement of cash flows is linked to the change in the cash balance from 1 year to the next on comparative balance sheets. Under the indirect method, net income (loss) from the income statement is the starting point for the determination of net cash flow from operating activities on the statement of cash flows. 173. Both years have net cash outflows from investing activities. This means that the purchases of long-term assets exceeded their disposals. These purchases could include additions to property, plant, and equipment as well as investment securities. Additional examples include the acquisition of other businesses, patents, trademarks, or other noncurrent assets such as notes receivable. 174. All three companies are generating increasingly positive amounts of cash from their operating activities. All three companies are making significant cash investments into various assets or other long-term assets. It would appear that Company A made a very substantial investment in Year 3, judging by the amount as compared with the 2 prior years. The trend in the financing activities is not identical for the three companies. In Year 1 and Year 2, Companies A and B used cash in their financing activities for things like the payment of dividends, repurchase of stock, or net repayment of debt. In Year 3, financing activities, such as the issuance of stock or debt, provided substantial amounts of cash to Companies A and B. Such actions were probably needed to fund the investing activities for the year. For Company C, financing activities have provided cash for all 3 years although the amount increased significantly in Year 3, again probably to fund the investing activities for the year. 175. The cash flow adequacy is a measure of a company's ability to generate cash to meet future debt obligations after paying income taxes and interest and making capital expenditures. Because capital expenditures for new plant and equipment are necessary for most companies, analysts are concerned with the amount of cash available for dividends and debt repayments after the company has replaced and updated its existing base of long-term assets. A ratio for cash flow adequacy can be computed as follows:

To calculate the ratio for these companies, you would need the amount of capital expenditures from the detail of investing activities and the debt maturities for the next 5 years. Information on debt maturities would be readily available in the notes to each company's financial statements. To make proper use of the cash flow adequacy ratio, the results for each company should be compared with that of prior years to look for possible trends. The ratio for each company should also be compared to the ratios for companies of similar size and in similar lines of business. Powered by Cognero

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CH 11 The Statement of Cash Flows 176. It does not appear that the CFO's statements are supported by the company's cash flows. An expanding company should exhibit negative investing cash flows as it invests in the long-term assets necessary for expansion. The positive investing cash flows shown by the company indicate that it is a net seller of its fixed assets—not a purchaser. In addition, one would like to see any expansion supported by positive operating cash flows to at least partially fund the growth. Instead of being an expanding company, the pattern of cash flows exhibited by the company suggest a company that is experiencing problems in generating operating cash flows. Further, it appears the company may be selling its fixed assets and obtaining capital through borrowing or stockholder contributions in order to cover the operating cash flow shortfall. Finally, the success of stand-alone video rental stores is certainly questionable given continued advances in technology. Careful analyzing of the patterns and interrelationships of a company's cash flows can provide users with insights into the company's operations.

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Ch 12 Financial Statement Analysis

Indicate whether the statement is true or false. 1. As a general rule, all users of financial statements seek answers to the same questions. a. True b. False 2. When trying to predict future profits, analysts often take a top-down approach that starts with gathering economic and industry data to supplement what they are able to find out about the specific corporations they follow. a. True b. False 3. A company that is considering selling goods or providing services to another company wants to know whether its customers will provide competitive salary and benefits, experiences that will prepare employees to assume increased responsibility, and a secure job for the foreseeable future. a. True b. False 4. Investors who buy stock in a corporation expect to earn returns on their investment from dividends and an increase in the value of the stock (a capital gain). a. True b. False 5. Along with its other financial statements, a public corporation must present its most recent 2 years of income statements in Item 1 of its Form 10-K. a. True b. False 6. Management's Discussion and Analysis is a key part of the 10-K because it provides investors with information management believes necessary to understand the company and forecast future performance. a. True b. False 7. Many companies assist users of financial statements by providing information about the company's accounting policy choices in the first note to the financial statements. a. True b. False 8. Form 8-K is the "current report" companies must file with the SEC to announce major events that are important to investors and creditors. a. True b. False 9. Time series analysis compares a company's financial data with industry averages. a. True b. False Powered by Cognero

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Ch 12 Financial Statement Analysis 10. Comparing two companies in the same industry should cause no problem since both companies are required to use the same accounting principles. a. True b. False 11. The analysis of common size financial statements may be included in horizontal or vertical analysis. a. True b. False 12. An example of vertical analysis is that the cost of goods sold for the current year is 129% of the amount from the prior year. a. True b. False 13. An increase in a company's revenue and expense accounts will always cause an increase in net income for the period. a. True b. False 14. Common size financial statements exclude the dollar amount as a relevant variable in the analysis, which makes comparison of one period with the next more meaningful. a. True b. False 15. When using vertical analysis of the income statement, the base upon which all items are compared is net income. a. True b. False 16. The net profit margin percentage reflects the amount of income for each dollar of sales. a. True b. False 17. Three measures of liquidity include working capital, the acid test ratio, and the current ratio. a. True b. False 18. Inventory is more liquid than accounts receivable because receivables must be collected and some customers may not be willing to pay, while inventory need only be sold in a retail store. a. True b. False 19. The length of the operating cycle is always considered to be a 1-year period, although that 1 year does not have to begin on January 1. a. True b. False 20. The return on equity ratio measures the profit earned by a company through the use of capital supplied by its bondholders. Powered by Cognero

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Ch 12 Financial Statement Analysis a. True b. False 21. Return on assets is computed by adding the after-tax interest expense to net income and then dividing by the average total assets. a. True b. False 22. The stock repurchase payout ratio is calculated by adding the dividend payout ratio to the total payout ratio. a. True b. False 23. The least liquid of all assets is cash. a. True b. False 24. The amount of working capital is more meaningful to users than the current ratio because working capital provides information on the composition of the current accounts. a. True b. False 25. The acid test ratio is a stricter measure than the current ratio regarding a company's ability to pay its current obligations as they are due. a. True b. False 26. Ratios that focus on cash are more useful than those that focus on income in the evaluation of a company's liquidity. a. True b. False 27. Riverdale Drugs has an inventory turnover of 15.00 times, while RJ's Drugs has an inventory turnover of 14.00 times. RJ's is less efficient in managing its inventory. a. True b. False 28. Liquidity refers to a company's ability to pay its current obligations when they come due. a. True b. False 29. The best source of information about a particular company is Standard & Poor's industry guide. a. True b. False 30. A company with a capital structure that shifts more toward debt financing will appear to be in a stronger position to pay interest and any principal amount that may be maturing by using its cash flows generated by operating activities. a. True Powered by Cognero

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Ch 12 Financial Statement Analysis b. False

Indicate the answer choice that best completes the statement or answers the question. 31. Public companies file their annual reports on Form a. 10-Q. b. 10-K. c. S-1. d. 8-K. 32. Public companies file their quarterly reports on Form a. 8-K. b. 10-K. c. S-1. d. 10-Q. 33. Corporate officers, directors, and 10+ percent stockholders are collectively known as a. outsiders. b. investors. c. insiders. d. corporate management. 34. Which form notifies stockholders of issues that will be voted on at the annual stockholders’ meeting? a. Form 10-K b. Form 8-K c. Proxy Statement Form DEF 14A d. Rule 424 Prospectus 35. Trend analysis is also known as a. ratio analysis. b. cross sectional analysis. c. cross time analysis. d. time series analysis. 36. Which type of financial statement analysis compares one corporation to another corporation and to industry averages? a. cross sectional analysis b. time series analysis c. trend analysis d. competitive analysis 37. Which financial statement analysis compares a single corporation across time? a. cross sectional analysis b. time series analysis c. segment analysis Powered by Cognero

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Ch 12 Financial Statement Analysis d. self-focused analysis 38. Which financial statement analysis method highlights the differences on each financial statement item in percentage terms? a. common size analysis b. financial size analysis c. time series analysis d. cross sectional analysis 39. Which financial statement analysis method shows each financial statement line item as a percentage of a base year, which is typically the earliest year shown? a. trend analysis b. vertical analysis c. horizontal analysis d. cross sectional analysis 40. Which financial statement analysis method shows each line item as a percent of the largest amount on the financial statement, which is net sales for the income statement and total assets for the balance sheet? a. vertical analysis b. horizontal analysis c. time series analysis d. trend analysis 41. Which of the following is not a short-term liquidity ratio? a. times interest earned ratio b. current ratio c. operating cash flow ratio d. cash ratio 42. The likelihood that a company will be able to pay its current obligations as they come due is known as a. profitability. b. solvency. c. liquidity. d. efficiency. 43. Which short-term liquidity ratio includes only cash, accounts receivable, and short-term investments? a. current ratio b. cash ratio c. operating cash flow ratio d. quick ratio 44. A company’s relative mix of debt and equity financing is known as its a. debt structure. b. capital structure. c. operational structure. Powered by Cognero

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Ch 12 Financial Statement Analysis d. assets management structure. 45. Which of the following is a measure of the profit earned by a corporation through the use of all its capital? a. net profit margin b. asset turnover c. return on assets d. stockholders' equity 46. Financial ratios, such as earnings per share, return on common equity, and various payout ratios, are categorized as a. profitability ratios. b. operating ratios. c. liquidity ratios. d. stockholder ratios. 47. Financial ratios, such as operating margin percentage, gross profit percentage, and various return ratios, are categorized as a. profitability ratios. b. efficiency ratios. c. liquidity ratios. d. stockholder ratios. 48. Use of debt to help a company earn a higher return is called a. capitalizing. b. turnover. c. leveraging. d. efficiency. 49. When an investor is evaluating whether to purchase stock in a company, which of the following considerations is most important? a. Will working capital be sufficient to support growth? b. Will the key ratios be reported on the balance sheet? c. Will cash flows from operations exceed net income in the coming years? d. Will the company earn a satisfactory return on the amount invested by stockholders? 50. The working capital of a company is equal to a. current assets less current liabilities. b. total assets less current assets. c. long-term assets less current assets. d. stockholders' equity. 51. All of the following are examples of questions that a financial analyst would ask about a company's use of estimates in the recording of expenses except a. Do warranty provisions cover actual expenditures? b. What expected lives and residual values are used for depreciation computations? c. Are sales taxes included in revenues? Powered by Cognero

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Ch 12 Financial Statement Analysis d. Is the allowance for uncollectible accounts sufficient to cover bad debts? 52. In evaluating a company's financial statements, the least useful information would be derived from a comparison of the current period data with a. economic and industry data. b. another company in the same industry for the same period. c. the same company's data from 5 years ago. d. the same company's data from the prior year. 53. A banker is analyzing a company that operates in the automotive industry. Which of the following will likely be the banker's most important consideration in determining whether the company should receive a loan? a. The automotive industry suffers from political pressures concerning environmental regulation of products. b. Inflation has been consistently high for several years. c. The company has state-of-the-art automated equipment that enhances the efficiency of its operating process. d. The company has a large amount of interest payments related to other outstanding loans. 54. A financial analyst is comparing two companies using a top-down approach. Which of the following would cause problems in the evaluation process? a. One company's fiscal year-end is October 31, while the other company's fiscal year-end is December 31. b. One company has been in business significantly longer than the other company. c. Inflation has been low for several years. d. The companies operate in different industries. 55. Which of the following would report the market price of the company's stock? a. balance sheet b. income statement c. statement of cash flows d. Item 5 in Form 10-K 56. Annual reports are filed with the SEC on a. Form 8-K. b. Form 10-Q. c. Form 10-K. d. the MD&A section. 57. The auditor's opinions regarding effectiveness of a public company's internal controls and appropriateness of its financial statements are found in the Form 10-K on a. Item 1. b. Item 7. c. Item 8. d. Item 9. 58. Each of the following is included in the MD&A section of a public company's Form 10-K except a. material trends, events, or known uncertainties. b. statements about what management expects to occur in the future. Powered by Cognero

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Ch 12 Financial Statement Analysis c. management's views of the financial condition and performance of the company. d. names and experience of the company's managers, directors, and officers. 59. Form 10-K for a public company is required to include the following financial statements for the most recent period of time including Income Statements and Statement of Cash Flows Balance Sheets a. 2 years 3 years b. 2 years 2 years c. 3 years 3 years d. 3 years 2 years 60. Which of the following should a company file with the SEC to register its securities prior to offering them to investors? a. Forms 10-K and 8-K b. Forms DEF 14A and Rule 424 c. Forms 3, 4, and 5 d. Forms S-1 and S-2 and Rule 424 61. David purchases 1,000 shares of common stock of Delta Inc., a public company. As a result, he holds 12% ownership of the company. As per the SEC requirement, he must file which of the following form(s)? a. Forms 10-K and 10-Q b. Form DEF 14A c. Forms 3 and 4 d. Form S-1 62. Time series (or trend) analysis is analysis in which a. dollar changes and percentage changes in a company's financial statement lines are compared over several years. b. all items are presented as a percentage of one selected item on a financial statement. c. a statistic is calculated for the relationship between two items on a single financial statement or for two items on different financial statements. d. ratio increases and decreases are presented for the past two accounting periods. 63. When a financial analyst determines the percentage change in operating income for the 5-year period from Year 1 to Year 5, they are performing a a. time series analysis. b. vertical analysis. c. profitability analysis. d. cross sectional analysis. 64. Horizontal analysis is analysis in which a. financial statement lines are expressed as a percent of the base (earliest) year. b. all items are presented as a percentage of one selected item on the financial statement. c. a statistic is calculated for the relationship between two items on a single financial statement or for two items Powered by Cognero

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Ch 12 Financial Statement Analysis on different financial statements. d. ratio increases and decreases are presented for the past two accounting periods. 65. Which of the following statements is true regarding horizontal analysis? a. It can only be used with balance sheet accounts. b. It can only be used with income statement accounts. c. It expresses each financial statement line item as a percent of the largest amount on the statement. d. It expresses each financial statement line item as a percent of an earlier year amount. 66. Selected data from the financial statements of Rags to Riches are as follows:

Accounts receivable Inventory Total assets Net sales Cost of goods sold

Current Year $120,000 24,000 900,000 760,000 320,000

Prior Year $ 76,000 32,000 760,000 540,000 420,000

Which of the following would result from horizontal analysis of the company's balance sheet? a. Accounts receivable increased by $44,000 or 57.89% during the current year. b. Accounts receivable is five times larger than inventory in the current year. c. Accounts receivable is 13.30% of total assets in the current year. d. The accounts receivable turnover ratio is 7.76 in the current year. 67. Selected data from the financial statements of Rags to Riches are as follows:

Accounts receivable Inventory Total assets Net sales Cost of goods sold

Current Year $120,000 24,000 900,000 760,000 320,000

Prior Year $ 76,000 32,000 760,000 540,000 420,000

Which of the following would result from horizontal analysis of the company's income statement? a. Net sales in the current year increased to 140.74% of the prior year amount. b. Gross profit is 57.89% of net sales for the current year. c. Accounts receivable is 13.30% of total assets in the current year. d. The accounts receivable turnover ratio is 7.76 in the current year. 68. Selected data from the financial statements of Rags to Riches are as follows:

Accounts receivable Inventory Total assets Net sales Powered by Cognero

Current Year $120,000 24,000 900,000 760,000

Prior Year $ 76,000 32,000 760,000 540,000 Page 9

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Ch 12 Financial Statement Analysis Cost of goods sold

320,000

420,000

Which of the following would result from horizontal analysis of the company's income statement? a. Cost of goods sold is 42.10% of net sales for the current year. b. Gross profit is 57.89% of net sales for the current year. c. Cost of goods sold decreased by 23.81% from the prior year to the current year. d. Inventory decreased by $4,000 or 20.00% during the prior year. 69. Selected data from the financial statements of Rags to Riches are as follows:

Accounts receivable Inventory Total assets Net sales Cost of goods sold

Current Year $120,000 24,000 900,000 760,000 320,000

Prior Year $ 76,000 32,000 760,000 540,000 420,000

Which of the following would result from vertical analysis of the company's income statement? a. The accounts receivable turnover ratio is 7.76 in the current year. b. Gross profit is 57.89% of net sales for the current year. c. Cost of goods sold decreased by $50,000 or 23.81% during the current year. d. Net sales are 84.4% of total assets for the current year. 70. To perform vertical analysis, a. cross sectional analysis is used as it compares financial data for a single entity over time. b. common size financial statements are used to compare companies of different sizes. c. trend analysis is performed as it compares a company's financial data to industry averages. d. time series analysis is used to effectively compare different companies' financial statements over time. 71. Which of the following profitability ratios would be determined through a common size vertical analysis of the income statement? a. gross profit percentage b. return on assets c. return on equity d. earnings per share 72. In a common size income statement to be used in vertical analysis, the 100% amount is a. net income. b. operating income. c. gross profit. d. net sales. 73. In a common size balance sheet to be used in vertical analysis, the 100% amount is a. current assets. b. working capital. c. total assets. Powered by Cognero

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Ch 12 Financial Statement Analysis d. total stockholders' equity. 74. Selected data from the financial statements of Rags to Riches are as follows: Current Year $120,000 24,000 900,000 760,000 320,000

Accounts receivable Inventory Total assets Net sales Cost of goods sold

Prior Year $ 76,000 32,000 760,000 540,000 420,000

Which of the following would be found through ratio analysis of the company's financial statements? a. The accounts receivable turnover ratio is 7.76 in the current year. b. Cost of goods sold increased by $50,000 or 23.8% in the current year. c. Accounts receivable increased by $22,000 during the current year. d. The inventory turnover ratio is 5.76 in the current year. 75. The gross profit percentage decreased from 36.5% in the prior year to 24.8% in the current year. What is the trend in this change? a. This decrease represents an upward, or favorable, trend. b. This decrease represents a downward, or negative, trend. c. The answer depends upon whether net sales increased or decreased during the period. d. The trend cannot be determined unless the dollar amount of the change is also known. 76. Which of the following is considered a measure of short-term liquidity? a. gross profit percentage b. quick ratio c. dividend yield ratio d. return on assets ratio 77. Which of the following ratios is least useful in evaluating a company's ability to pay its current obligations when they come due? a. current ratio b. quick ratio c. cash ratio d. return on assets ratio 78. Which of the following is a measure of liquidity? a. operating cash flows ratio b. earnings per share c. accounts receivable turnover ratio d. return on common equity 79. Selected data from the financial statements of Rainsoft Company are as follows: Year 3 Powered by Cognero

Year 2

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Ch 12 Financial Statement Analysis Cash Accounts receivable Inventory Prepaid expenses Total current assets

$ 44,000 84,000 44,000 46,000 $218,000

$ 28,000 32,000 166,000 36,000 $262,000

Total current liabilities Net credit sales Cost of goods sold Net cash flows from operating activities

$130,000 442,000 336,000 32,000

$144,000 652,000 598,000 58,000

$ 14,000 114,400 100,000 41,600 $270,000

What is the current ratio for Year 3? a. 0.60 b. 0.99 c. 1.34 d. 1.68 80. Selected data from the financial statements of Rainsoft Company are as follows:

Cash Accounts receivable Inventory Prepaid expenses Total current assets

Year 3 $ 44,000 84,000 44,000 46,000 $218,000

Year 2 $ 28,000 32,000 166,000 36,000 $262,000

Total current liabilities Net credit sales Cost of goods sold Net cash flows from operating activities

$130,000 442,000 336,000 32,000

$144,000 652,000 598,000 58,000

Year 1 $ 14,000 114,400 100,000 41,600 $270,000

What is the operating cash flow ratio for Year 3? a. 4.06 b. 0.25 c. 0.15 d. 0.07 81. Selected data from the financial statements of Rainsoft Company are as follows:

Cash Accounts receivable Inventory Prepaid expenses Total current assets

Year 3 $ 44,000 84,000 44,000 46,000 $218,000

Year 2 $ 28,000 32,000 166,000 36,000 $262,000

Total current liabilities Net credit sales Cost of goods sold Net cash flows from operating activities

$130,000 442,000 336,000 32,000

$144,000 652,000 598,000 58,000

Year 1 $ 14,000 114,400 100,000 41,600 $270,000

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Ch 12 Financial Statement Analysis Which of the following statements is true regarding the company's liquidity? a. Based on the current ratio and operating cash flow ratio, the company appears to be in a worse position to pay its current obligations at the end of Year 3 compared to Year 2. b. The quick ratio decreased from Year 2 to Year 3. c. The operating cash flow ratio increased from Year 2 to Year 3. d. Based on the quick ratio and cash ratio, the company appears to be in a better position to pay its current obligations at the end of Year 3 compared to Year 2. 82. Selected data from the financial statements of Rainsoft Company are as follows:

Cash Accounts receivable Inventory Prepaid expenses Total current assets

Year 3 $ 44,000 84,000 44,000 46,000 $218,000

Year 2 $ 28,000 32,000 166,000 36,000 $262,000

Total current liabilities Net credit sales Cost of goods sold Net cash flows from operating activities

$130,000 442,000 336,000 32,000

$144,000 652,000 598,000 58,000

Year 1 $ 14,000 114,400 100,000 41,600 $270,000

Assume that competitors in the industry have an average accounts receivable turnover ratio of 7.80 times in Year 3. What is the company's accounts receivable turnover ratio for Year 3? a. 5.26 b. 7.62 c. 7.80 d. 8.91 83. Selected data from the financial statements of Rainsoft Company are as follows:

Cash Accounts receivable Inventory Prepaid expenses Total current assets

Year 3 $ 44,000 84,000 44,000 46,000 $218,000

Year 2 $ 28,000 32,000 166,000 36,000 $262,000

Total current liabilities Net credit sales Cost of goods sold Net cash flows from operating activities

$130,000 442,000 336,000 32,000

$144,000 652,000 598,000 58,000

Year 1 $ 14,000 114,400 100,000 41,600 $270,000

Assume that competitors in the industry have an average inventory turnover ratio of 20.80 times in Year 3. Rainsoft's inventory turnover ratio for Year 3 indicates that the company a. has too little inventory on hand at the end of Year 3. b. is pricing its products too low. c. is selling its inventory much more quickly than the industry average. d. may have obsolete inventory or problems with sales. Powered by Cognero

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Ch 12 Financial Statement Analysis 84. Short-term liquidity ratios a. evaluate a company's profitability. b. compare some combination of current assets or operations to current liabilities. c. are reported in the financial statements for all publicly traded companies. d. provide information about a company's capital structure. 85. Which of the following is an example of a short-term liquidity ratio? a. Total liabilities are divided by total assets. b. Net income is divided by average total assets. c. Net income is divided by the average number of common shares outstanding. d. Quick assets are divided by current liabilities. 86. Which of the following results is generally considered favorable? a. a large decrease in the accounts receivable turnover ratio b. an increase in the inventory turnover ratio c. an increase in sales along with a larger decrease in the gross profit percentage d. a decrease in the operating cash flow ratio 87. Which of the following would be generally viewed as a negative change? a. Earnings per share increases. b. The debt to total assets ratio decreases. c. The acid test ratio increases. d. The return on common equity decreases. 88. Inventory turned over 7.00 times during the year at Rockdale Electronics. Similar electronics retailers have an inventory turnover equal to 12.00 times per year. Which of the following best explains the state of Rockdale's inventory management? a. The company sold too much inventory during the year. b. The company needs to increase sales and decrease the amount of inventory on hand. c. The company is performing much better than its competitors. d. The company should increase the amount of goods on hand to accommodate the growth in inventory demand. 89. A company reported the following amounts in its financial statements:

Average inventory Cost of goods sold

Current Year $ 100,000 2,000,000

Prior Year $ 60,000 1,500,000

From the prior year to the current year, the company's efficiency in managing inventory was a. declining, because the inventory turnover ratio is decreasing. b. improving, because the inventory turnover ratio is increasing. c. declining, because the inventory turnover ratio is increasing. d. improving, because the inventory turnover ratio is decreasing. 90. The quick ratio Powered by Cognero

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Ch 12 Financial Statement Analysis a. is generally larger than the current ratio. b. decreases when a company's assets become more liquid. c. increases when a company has more cash sales than credit sales. d. is larger when a company's assets are more liquid. 91. The current assets of Rock Garden Gifts were considered very liquid at the end of the current year. This means that the company a. has a larger quick ratio than current ratio. b. must decrease its liquidity in order to appear more favorable to potential investors. c. should attempt to borrow money in order to remain in business. d. is able to pay its current obligations using its current assets. 92. Most companies a. agree that a current ratio of 0.75 is sufficient for business operations. b. try to maintain protection from creditors by keeping only a small amount of cash available. c. are not concerned with the debt management ratios when cash flows are good. d. strive for an appropriate balance between debt and equity financing. 93. The quick ratio differs from the current ratio in that it a. represents the amount of cash on hand instead of the total current assets. b. excludes inventories and accounts receivable from the numerator of the fraction because of obsolescence and possible collection problems. c. is a stricter measure of a company's ability to pay its current obligations. d. signals the need to liquidate short-term investments when it drops below 2.00. 94. Turnover ratios differ from the current and quick ratios in that they a. are based on net sales instead of cash. b. are based on a point in time rather than a period of time. c. measure the efficiency with which a company uses its assets. d. measure the profitability of a company instead of its liquidity. 95. The operating cycle of a retail company is the length of time between the a. purchase of inventory and the sale of the inventory to customers. b. sale of inventory and the collection of any outstanding receivables from those sales. c. purchase of inventory and the collection of any outstanding receivables from the sales of those items. d. purchase of inventory and the time of sending sales invoices to customers. 96. The inventory turnover ratio is represented by which of the following formulas? a. Net Credit Sales ÷ Average Inventory b. Average Inventory ÷ Net Credit Sales c. Cost of Goods Sold ÷ Average Inventory d. Average Inventory ÷ Cost of Goods Sold 97. Which of the following ratios is used to analyze a company's asset efficiency? a. return on assets Powered by Cognero

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Ch 12 Financial Statement Analysis b. inventory turnover ratio c. earnings per share d. debt to total assets ratio 98. If a company's current ratio is 1.50 and the current liabilities are $150,000, then the current assets are a. $300,000. b. $225,000. c. $100,000. d. $75,000. 99. Which of the following statements is true regarding the relationship of the current ratio and the acid test ratio? a. The current ratio is based on a more conservative measure of liquidity. b. Both ratios focus on the relationship between all or part of a company's current assets and all of its current liabilities. c. Both ratios focus on the relationship between all of a company's current assets and all or part of its current liabilities. d. For a company that carries no inventories, the current ratio and acid test ratio will be significantly different. 100. Assume that a company's current ratio is 2.00. If the company purchases inventory on credit, which of the following is true? a. The current ratio will increase. b. The current ratio will decrease. c. There will be no net impact on the current ratio. d. The current ratio will change, but there will be no effect on the quick ratio. 101. Which of the following will decrease the quick ratio? a. collection of accounts receivable b. sale of inventory on credit c. sale of inventory for cash d. purchase of a computer with cash 102. Selected data from the financial statements of Rent Center are as follows:

Current assets Long-term assets Current liabilities Long-term liabilities Stockholders' equity Net sales Net income

Current Prior Year Year $12,000 $ 6,000 14,000 8,000 4,000 6,000 14,000 0 8,000 8,000 19,000 18,200 2,000 1,000

Which of the following statements is true regarding the debt management ratios between the prior and current years? a. The debt to equity and debt to total assets ratios both increased. b. The debt to equity and total debt to total assets ratios both decreased. c. The debt to equity and long-term debt to equity ratios both decreased. Powered by Cognero

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Ch 12 Financial Statement Analysis d. The debt to equity ratio decreased, and the debt to total assets ratios increased. 103. Selected data from the financial statements of Rent Center are as follows:

Current assets Long-term assets Current liabilities Long-term liabilities Stockholders' equity Net sales Net income

Current Prior Year Year $12,000 $ 6,000 14,000 8,000 4,000 6,000 14,000 0 8,000 8,000 19,000 18,200 2,000 1,000

What is the company's asset turnover ratio for the current year? a. 0.73 b. 0.95 c. 1.30 d. 2.40 104. The following information was included in a note to the current year financial statements of Romeo Productions: The company has a loan agreement with First National Bank that states: 1. 2. 3. 4.

The current ratio must be 2.00 or higher at all times. The debt to equity ratio must not exceed 0.70 at any time. The times interest earned ratio must be 5.00 or higher. The inventory turnover ratio must be 4.00 or higher.

The company's ratios are current ratio, 2.30; debt to equity ratio, 0.60; times interest earned ratio, 7.10; and inventory turnover ratio, 3.70. Based on this information, the company was in default of its loan agreement because of the a. current ratio. b. debt to equity ratio. c. times interest earned ratio. d. inventory turnover ratio. 105. Information from the financial statements of Rio Imports is as follows:

Current liabilities Long-term liabilities Stockholders' equity Net cash flows from operating activities Interest and principal payments Net sales Net income Interest expense Income taxes Dividends paid to common stockholders Powered by Cognero

Current Year $460,000 240,000 840,000 160,000 24,000 950,000 180,000 17,000 32,000 30,000

Prior Year $ 320,000 640,000 1,080,000 102,000 16,000 900,000 144,000 23,000 29,000 60,000 Page 17

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Ch 12 Financial Statement Analysis The debt to equity ratio for the current year is a. an indicator that the company's ability to meet current interest payments to creditors is increasing. b. increasing slightly from the prior year to the current year. c. an indicator that for every $1 of capital that has been provided by stockholders, creditors provided $0.83. d. an indicator that the company's reliance on stockholders for funding increased from the prior year to the current year. 106. Information from the financial statements of Rio Imports is as follows:

Current Year $460,000 240,000 840,000 160,000 24,000 950,000 180,000 17,000 32,000 30,000

Prior Year $320,000 640,000 1,080,000 102,000 16,000 900,000 144,000 23,000 29,000 60,000

The times interest earned ratio for the current year a. increased, which indicates that the company's creditors will be pleased. b. decreased, which indicates that the company has less cash to pay interest on its debt. c. indicates a decline in the company's ability to pay its liabilities when they come due. d. indicates that the company cannot meet its current year interest payments out of current year earnings. 107. Information from the financial statements of Rio Imports is as follows:

Current Year $460,000 240,000 840,000 160,000 24,000 950,000 180,000 17,000 32,000 30,000

Prior Year $320,000 640,000 1,080,000 102,000 16,000 900,000 144,000 23,000 29,000 60,000

The net profit margin percentage for the current year is a. 14.32%. b. 16.00%. c. 18.95%. d. 24.11%. Powered by Cognero

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Ch 12 Financial Statement Analysis 108. Information from the financial statements of Rio Imports is as follows:

Current Year $460,000 240,000 840,000 160,000 24,000 950,000 180,000 17,000 32,000 30,000

Prior Year $320,000 640,000 1,080,000 102,000 16,000 900,000 144,000 23,000 29,000 60,000

Return on equity for the current year is a. 18.75%. b. 21.43%. c. 23.85%. d. 27.26%. 109. Information from the financial statements of Rio Imports is as follows:

Current Year $460,000 240,000 840,000 160,000 24,000 950,000 180,000 17,000 32,000 30,000

Prior Year $320,000 640,000 1,080,000 102,000 16,000 900,000 144,000 23,000 29,000 60,000

The dividend payout ratio for the current year is a. 16.67%. b. 18.50%. c. 25.00%. d. 27.80%. 110. Information from the financial statements of Rio Imports is as follows:

Current liabilities Long-term liabilities Stockholders' equity Net cash flows from operating activities Powered by Cognero

Current Year $460,000 240,000 840,000 160,000

Prior Year $320,000 640,000 1,080,000 102,000 Page 19

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Ch 12 Financial Statement Analysis Interest and principal payments Net sales Net income Interest expense Income taxes Dividends paid to common stockholders

24,000 950,000 180,000 17,000 32,000 30,000

16,000 900,000 144,000 23,000 29,000 60,000

The operating margin percentage for the current year is an indicator that the company has a. experienced setbacks concerning the effectiveness of its purchasing, production, pricing, and marketing activities. b. increased profits by $33,000. c. improved profitability in relation to sales. d. net income that is more than it would have been if dividends of $30,000 had been paid. 111. Information from the financial statements of Rio Imports is as follows:

Current Year $460,000 240,000 840,000 160,000 24,000 950,000 180,000 17,000 32,000 30,000

Prior Year $320,000 640,000 1,080,000 102,000 16,000 900,000 144,000 23,000 29,000 60,000

Which of the following statements is true concerning the company's debt management activities? a. The company has a smaller percentage of capital from stockholders at the end of the current year than at the end of the prior year. b. The company relied more on creditors for financing during the current year than in the prior year. c. The company improved its debt to equity ratio. d. Relative to the prior year, the company is in a weaker position at the end of the current year to finance capital expenditures from cash flow generated by operating activities. 112. Which of the following debt management ratios is the most inclusive for measuring the degree to which a company relies on outsiders for financing? a. debt to equity ratio b. times interest earned ratio c. long-term debt to equity ratio d. long-term debt to total assets ratio 113. Which of the following ratios is the best measure for analyzing a company's efficiency in using assets to produce sales revenues? a. current ratio b. return on assets Powered by Cognero

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Ch 12 Financial Statement Analysis c. asset turnover ratio d. debt to total assets ratio 114. Selected financial data for Rescue Rooter are as follows: Total liabilities Common stock Additional paid-in capital—common stock Retained earnings

Current Year $1,205,000 250,000 150,000 155,000

Prior Year $952,000 225,000 135,000 145,000

The company's debt to equity ratio for the current year is a. increasing, which may be a cause of concern for the company. b. increasing, which is always a good sign from the viewpoint of investors. c. decreasing, which may be a cause of concern for the company. d. decreasing, which is always a good sign from the viewpoint of investors. 115. Return ratios are measures of the relationship between the a. profit earned and the investment made in the company by the various groups of creditors and investors. b. revenue earned and the total equity of a company. c. total equity of a company and its cash flows for the period. d. profitability and liquidity aspects of a company. 116. In considering equity and debt financing, which of the following statements is generally true? a. The lower the measure of the long-term debt to equity ratio, the greater the likelihood the company will have difficulty in meeting its obligation in some future period. b. Interest and dividend payments are required to be made by the issuing company. c. The higher the measure of the debt to equity ratio, the greater the likelihood the company will have difficulty in meeting its obligation in some future period. d. Most companies prefer to have no debt and rely exclusively on equity financing. 117. A company issued additional shares of stock. Which of the following is true with regard to the effect of the stock issuance transaction on the company's ratio computations? a. Earnings per share decreased. b. The debt to equity ratio increased. c. The asset turnover ratio decreased. d. Return on equity remained unchanged. 118. A company declared and paid $1 million in dividends to its common stockholders. The effect of this transaction is that the a. earnings per share decreased. b. earnings per share increased. c. current ratio increased. d. debt to equity ratio increased. 119. A company purchased inventory on credit. The effect of this transaction is that the Powered by Cognero

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Ch 12 Financial Statement Analysis a. earnings per share decreased. b. earnings per share increased. c. working capital increased. d. debt to equity ratio increased. 120. A company sold inventory on credit. Its gross profit percentage is 23.00%. The effect of this transaction is that the a. current ratio was unchanged. b. earnings per share increased. c. working capital decreased. d. debt to equity ratio increased. 121. A company paid off a $100,000 2-year note payable. The effect of this transaction is that the a. current ratio decreased. b. earnings per share increased. c. working capital increased. d. debt to equity ratio increased. 122. Which of the following is considered a profitability ratio? a. return on equity b. acid test ratio c. inventory turnover ratio d. debt to equity ratio 123. Which stockholder ratio requires the use of dividends per share and the current market price? a. return on common equity b. dividend payout ratio c. earnings per share d. dividend yield ratio 124. Which of the following ratios is most useful in indicating a company's profitability? a. operating cash flow ratio b. operating margin percentage c. dividend payout ratio d. dividend yield ratio 125. The return on assets ratio a. considers the investments made by all creditors and stockholders of the company. b. reflects investments made only by the creditors of the company. c. is based on average stockholders' equity as compared to net income for the period. d. is a measure of the company's liquidity. 126. When calculating the return on common equity ratio, dividends to preferred stockholders are deducted from net income because a. the ratio is an indicator of the return on common stockholders' equity rather than the return on total equity. Powered by Cognero

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Ch 12 Financial Statement Analysis b. dividends are not expenses on the current period income statement. c. conservatism indicates that stockholders prefer a smaller numerator. d. dividends are only available for distribution to common stockholders after the preferred stockholders have received their dividends. 127. A company that uses leverage is attempting to earn an overall return that is higher than the cost of funds received from a. preferred and common stockholders. b. common stockholders only. c. customers. d. borrowing. 128. Information from the financial statements of Randstad, Inc. is as follows:

Net income Cash dividends paid on preferred stock Cash dividends paid on common stock Average number of preferred shares outstanding Average number of common shares outstanding Market price per share of common stock at year-end

Current Year $150,000 $15,000 $42,000 20,000 105,000 $25.10

Prior Year $120,000 $15,000 $38,000 20,000 95,000 $22.70

Earnings per share for the current year would be reported as a. $1.08. b. $1.20. c. $1.29. d. $1.43. 129. Information from the financial statements of Randstad, Inc. is as follows:

Current Year $150,000 $15,000 $42,000 20,000 105,000 $25.10

Prior Year $120,000 $15,000 $38,000 20,000 95,000 $22.70

The dividend payout ratio for the current year is a. 10.00%. b. 28.00%. c. 32.00%. d. 38.00%. 130. Information from the financial statements of Randstad, Inc. is as follows:

Net income Powered by Cognero

Current Year $150,000

Prior Year $120,000 Page 23

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Ch 12 Financial Statement Analysis Cash dividends paid on preferred stock Cash dividends paid on common stock Average number of preferred shares outstanding Average number of common shares outstanding Market price per share of common stock at year-end

$15,000 $42,000 20,000 105,000 $25.10

$15,000 $38,000 20,000 95,000 $22.70

The dividend yield ratio for the current year is a. 1.59%. b. 1.80%. c. 2.65%. d. 3.00%. 131. Selected data from the financial statements of Rapid Sign Corporation are as follows: Net income Cash dividends paid on common stock Average number of common shares outstanding Treasury stock Market price per share of common stock at year-end

Current Year $110,000 $42,000 140,000 $70,000 $16.00

Prior Year $123,000 $38,000 145,000 $0 $13.00

What is the dividend payout ratio for the current year? a. 30.00% b. 30.95% c. 36.30% d. 38.18% 132. Selected data from the financial statements of Rapid Sign Corporation are as follows: Net income Cash dividends paid on common stock Average number of common shares outstanding Treasury stock Market price per share of common stock at year-end

Current Year $110,000 $42,000 140,000 $70,000 $16.00

Prior Year $123,000 $38,000 145,000 $0 $13.00

What is the total payout ratio for the current year? a. 101.82% b. 88.33% c. 66.00% d. 30.05% 133. Selected data from the financial statements of Rapid Sign Corporation are as follows: Net income Cash dividends paid on common stock Average number of common shares outstanding Treasury stock Market price per share of common stock at year-end Powered by Cognero

Current Year $110,000 $42,000 140,000 $70,000 $16.00

Prior Year $123,000 $38,000 145,000 $0 $13.00 Page 24

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Ch 12 Financial Statement Analysis What is the stock repurchase payout ratio for the current year? a. 63.64% b. 51.50% c. 35.11% d. 0.00% 134. Which of the following combinations of ratios will best analyze a company's income statement performance? a. gross profit percentage, return on common equity, and debt to equity b. gross profit percentage, earnings per share, and net profit margin percentage c. gross profit percentage, current ratio, and return on common equity d. gross profit percentage, net profit margin percentage, and debt to equity 135. Earnings per share is an indication of how much a. cash the company has for each share of all outstanding stock. b. earnings the company has for each share of outstanding common stock. c. earnings the company has for each share of all outstanding stock. d. dividends the company paid for each share of outstanding common stock. 136. If a financial analyst wants to measure the relationship between profitability and the investment made by stockholders, the analyst should use the a. return on equity ratio. b. earnings per share. c. net profit margin percentage. d. operating margin percentage. 137. Identify the ratio for which a year-on-year decrease would be preferred over an increase. a. current ratio b. operating cash flow ratio c. debt to equity ratio d. asset turnover ratio 138. Because of its relationship to dividends and market price, which of the following ratios is most important to investors? a. current ratio b. debt to equity ratio c. dividend yield ratio d. asset turnover ratio 139. For which of the following groups of ratios would an increase be preferred over a decrease? a. current ratio, dividend yield ratio, and asset turnover ratio b. current ratio, dividend yield ratio, and debt to equity ratio c. dividend yield ratio, debt to equity ratio, and times interest earned ratio d. asset turnover ratio, current ratio, and debt to equity ratio 140. DuPont analysis recognizes that the return on equity can be broken down into three aspects, which include all of the Powered by Cognero

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Ch 12 Financial Statement Analysis following except a. net profit percentage. b. total leverage. c. total liquidity. d. the asset turnover ratio. 141. The following information for Red Oak Manufacturing is available for the current year: Net income Net sales Average total assets Average stockholders' equity

$ 844,200 6,809,000 5,911,000 2,575,000

As per DuPont analysis, return on equity is a. 32.79%. b. 34.18%. c. 35.82%. d. 38.95%. 142. The following information for Red Oak Manufacturing is available for the current year: Net income Net sales Average total assets Average stockholders' equity

$ 844,200 6,809,000 5,911,000 2,575,000

The total leverage as per the DuPont analysis computation is a. 2.30. b. 2.64. c. 12.40. d. 15.20.

143. The following information was taken from the income statements of RPG Co. and RPM Co.: RPG Co. Net sales Cost of goods sold Gross profit

Year 3 $152,000 115,000 $ 37,000

Year 2 $146,000 110,000 $ 36,000

Year 1 $140,000 107,000 $ 33,000

RPM Co. Net sales Cost of goods sold Gross profit

$84,000 70,000 $14,000

$83,000 69,000 $14,000

$80,000 68,000 $12,000

Using time series (or trend) analysis, comment on the trend of RPG's cost of goods sold and gross profit.

Using cross sectional analysis, compare RPG's gross profit to that of RPM. Your answers

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Ch 12 Financial Statement Analysis should be expressed as percentages and rounded to two decimal places. 144. The data from the current assets section of Regency Lighting's two most recent balance sheets are as follows: Cash Accounts receivable, net Inventory Other current assets Total current assets Total assets

Current Year $ 37,500 78,750 104,100 9,200 $ 229,550 $1,325,000

Prior Year $ 29,400 96,600 126,700 7,750 $ 260,450 $1,715,000

Complete a common size horizontal analysis of the current assets section of the balance sheet for the current year. Your answers should be expressed as percentages and rounded to two decimal places. Provide a short explanation of this analysis. 145. The data from the current assets section of Regency Lighting's two most recent balance sheets are as follows: Cash Accounts receivable, net Inventory Other current assets Total current assets Total assets

Current Year $ 37,500 78,750 104,100 9,200 $ 229,550 $1,325,000

Prior Year $ 29,400 96,600 126,700 7,750 $ 260,450 $1,715,000

Complete a common size vertical analysis of the current assets section of the balance sheet for the current year. Your answers should be expressed as percentages and rounded to two decimal places. 146. Three recent income statements for Qwik Mix are as follows: Net sales Cost of goods sold Gross profit Selling, general, and administrative expenses Other income, net Income from operations Interest expense Income before taxes Income taxes Net income

Year 3 Year 2 Year 1 $861,400 $762,200 $680,000 430,200 410,400 400,000 $431,200 $351,800 $280,000 316,600 280,000 240,000 2,800 1,600 0 $117,400 $73,400 $40,000 8,400 7,800 6,200 $109,000 $65,600 $33,800 40,200 22,200 12,000 $ 68,800 $ 43,400 $ 21,800

Complete a common size horizontal analysis of the company's income statements. Your answers should be expressed as percentages and rounded to two decimal places. Provide a short explanation of this analysis. 147. Three recent income statements for Qwik Mix are as follows: Net sales Cost of goods sold Gross profit Selling, general, and administrative expenses Powered by Cognero

Year 3 Year 2 Year 1 $861,400 $762,200 $680,000 430,200 410,400 400,000 $431,200 $351,800 $280,000 316,600 280,000 240,000 Page 27

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Ch 12 Financial Statement Analysis Other income, net Income from operations Interest expense Income before taxes Income taxes Net income

2,800 $117,400 8,400 $109,000 40,200 $ 68,800

1,600 $73,400 7,800 $65,600 22,200 $ 43,400

0 $40,000 6,200 $33,800 12,000 $ 21,800

Complete a common size vertical analysis of the company's income statement for the 3 years. Your answers should be expressed as percentages and rounded to two decimal places. 148. The balance sheets taken from Rhodes Bakery's 10-K for the current and prior years are as follows: December 31, Assets: Current assets: Cash Accounts receivable Inventory Other current assets Total current assets Long-term assets: Property, plant, and equipment, net Intangible assets Total assets Liabilities and Stockholders' Equity Current liabilities: Accounts payable Interest payable Current portion of long-term debt Income tax payable Total current liabilities Long-term liabilities: Notes payable Total liabilities Stockholders' equity: Common stock Additional paid-in capital Retained earnings Treasury stock Total stockholders' equity Total liabilities and stockholders' equity

Current Year $

Prior Year

61,100 22,500 8,500 6,500 98,600

$ 54,000 17,500 7,000 5,500 $ 84,000

744,900 211,250 $1,054,75

25,00 225,000 $334,000

5,500 500 15,000 18,500 $ 39,500

$ 4,500 500 0 23,000 $ 28,000

246,250 $ 285,750

15,000 $ 43,000

60,000 $ 35,000 654,000 186,000 92,500 70,000 (37,500) 0 $ 769,000 $291,000 $1,054,750 $334,000

Prepare a common size balance sheet to be used in vertical analysis. Your answers should be expressed as percentages and rounded to two decimal places, and the negative percentage should be expressed within parentheses. 149. Use the following selected financial information to compare these two companies at December 31, current year, and to answer the questions that follow. Russell Co. Powered by Cognero

Ryland Co. Page 28

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Ch 12 Financial Statement Analysis Cash Short-term investments Accounts receivable Inventories Other current assets Total current assets

$ 340,800 12,000 413,300 200,000 7,400 $ 973,500

$ 100,200 7,600 60,000 39,000 1,000 $ 207,800

Total current liabilities Long-term liabilities Stockholders' equity

$ 860,900 5,000,400 2,400,300

$ 150,000 300,500 800,700

750,000

290,000

Cash flows from operating activities

Calculate working capital and the short-term liquidity ratios for these two companies for the current year and comment on their relative liquidity. Round your answers for short-term liquidity ratios to two decimal places. 150. The balance sheets taken from Rhodes Bakery's 10-K for the current and prior years are as follows: December 31, Assets: Current Assets: Cash Accounts receivable Inventory Other current assets Total current assets Long-term assets: Property, plant, and equipment, net Intangible assets Total assets Liabilities and Stockholders' Equity Current liabilities: Accounts payable Interest payable Current portion of long-term debt Income tax payable Total current liabilities Long-term liabilities: Notes payable Total liabilities Stockholders' equity: Common stock Additional paid-in capital Retained earnings Treasury stock Total stockholders' equity Total liabilities and stockholders' equity

Current Year

Prior Year

$ 61,100 22,500 8,500 6,500 $98,600

$ 54,000 17,500 7,000 5,500 $84,000

744,900 211,250 $1,054,75

25,00 225,000 $334,000

$ 5,500 500 15,000 18,500 $39,500

$4,500 500 0 23,000 $28,000

246,250 $285,750

15,000 $43,000

$60,000 654,000 92,500 (37,500) $769,000

$35,000 186,000 70,000 0 $291,000

$1,054,750 $334,000

Calculate the following short-term liquidity ratios for the current and prior years: current ratio, quick ratio, cash ratio, Powered by Cognero

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Ch 12 Financial Statement Analysis and operating cash flow ratio. Cash flows from operations were $75,500 and $50,500 for the current year and the prior year, respectively. Round your answers to two decimal places. Comment on the company's short-term liquidity. 151. The balance sheets taken from Rhodes Bakery's 10-K for the current and prior years are as follows: December 31, Assets: Current Assets: Cash Accounts receivable Inventory Other current assets Total current assets Long-term assets: Property, plant, and equipment, net Intangible assets Total assets Liabilities and Stockholders' Equity Current liabilities: Accounts payable Interest payable Current portion of long-term debt Income tax payable Total current liabilities Long-term liabilities: Notes payable Total liabilities Stockholders' equity: Common stock Additional paid-in capital Retained earnings Treasury stock Total stockholders' equity Total liabilities and stockholders' equity

Current Year

Prior Year

$ 61,100 22,500 8,500 6,500 $98,600

$ 54,000 17,500 7,000 5,500 $84,000

744,900 25,00 211,250 225,000 $1,054,75 $334,000

$ 5,500 500 15,000 18,500 $39,500

$4,500 500 0 23,000 $28,000

246,250 $285,750

15,000 $43,000

$60,000 $35,000 654,000 186,000 92,500 70,000 (37,500) 0 $769,000 $291,000 $1,054,750 $334,000

Calculate the following debt management ratios for the current and prior years: times interest earned ratio, long-term debt to equity ratio, debt to equity ratio, long-term debt to assets ratio, and debt to assets ratio. Operating income was $65,000 and $49,000, and interest expense was $26,000 and $1,750 for the current and prior years, respectively. Round your answers to two decimal places. Comment on the company's debt management. 152. The balance sheets taken from Rhodes Bakery's 10-K for the current and prior years are as follows: December 31, Assets: Current Assets: Cash Accounts receivable Inventory Other current assets Powered by Cognero

Current Year

Prior Year

$ 61,100 22,500 8,500 6,500

$ 54,000 17,500 7,000 5,500 Page 30

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Ch 12 Financial Statement Analysis Total current assets Long-term assets: Property, plant, and equipment, net Intangible assets Total assets Liabilities and Stockholders' Equity Current liabilities: Accounts payable Interest payable Current portion of long-term debt Income tax payable Total current liabilities Long-term liabilities: Notes payable Total liabilities Stockholders' equity: Commons tock Additional paid-in capital Retained earnings Treasury stock Total stockholders' equity Total liabilities and stockholders' equity

$98,600

$84,000

744,900 211,250 $1,054,75

25,00 225,000 $334,000

$ 5,500 500 15,000 18,500 $39,500

$4,500 500 0 23,000 $28,000

246,250 $285,750

15,000 $43,000

$60,000 654,000 92,500 (37,500) $769,000

$35,000 186,000 70,000 0 $291,000

$1,054,750 $334,000

Calculate the following asset efficiency ratios for the current and prior years: accounts receivable turnover ratio, inventory turnover ratio, and asset turnover ratio. Also, determine the operating cycle. Use 365 days to calculate the operating cycle. Round your answers to two decimal places. Comment on the company's asset efficiency ratios. A portion of the company's income statements follows. At January 1, of the prior year, accounts receivable, inventory, and total assets were $18,500, $6,500, and $325,000, respectively.

Net sales Cost of goods sold Gross profit

For the years ended Current Year Prior Year $475,000 $387,500 (240,000) (200,000) $235,000 $187,500

153. The balance sheets taken from Rhodes Bakery's 10-K for the current and prior years are as follows: December 31, Assets: Current assets: Cash Accounts receivable Inventory Other current assets Total current assets Long-term assets: Property, plant, and equipment, net Intangible assets Powered by Cognero

Current Year

Prior Year

$ 61,100 22,500 8,500 6,500 $98,600

$ 54,000 17,500 7,000 5,500 $84,000

744,900 211,250

25,00 225,000 Page 31

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Ch 12 Financial Statement Analysis Total assets Liabilities and Stockholders' Equity Current liabilities: Accounts payable Interest payable Current portion of long-term debt Income tax payable Total current liabilities Long-term liabilities: Notes payable Total liabilities Stockholders' equity: Common stock Additional paid-in capital Retained earnings Treasury stock Total stockholders' equity Total liabilities and stockholders' equity

$1,054,75 $334,000

$ 5,500 500 15,000 18,500 $39,500

$4,500 500 0 23,000 $28,000

246,250 $285,750

15,000 $43,000

$60,000 $35,000 654,000 186,000 92,500 70,000 (37,500) 0 $769,000 $291,000 $1,054,750 $334,000

Calculate the following profitability ratios for the current year and the prior year: gross profit percentage, operating margin percentage, net profit margin percentage, return on assets, and return on equity. Express each ratio as a percentage, do not round your intermediate calculations, and round your answers to two decimal places. Then, comment on the company's performance in terms of profitability. The company's income statements follow. At January 1, of the prior year, total assets and total stockholders' equity were $325,000 and $287,500, respectively. For the years ended Current Year Prior Year Net sales $475,000 $387,500 Cost of goods sold (240,000) (200,000) Gross profit $235,000 $187,500 Operating expenses (170,000) (138,500) Income from operations $65,000 $49,000 Interest expense (26,000) (1,750) Income before taxes $39,000 $47,250 Income taxes (15,000) (18,500) Net income $ 24,000 $ 28,750

154. The balance sheets taken from Rhodes Bakery's 10-K for the current and prior years are as follows: December 31, Assets: Current assets: Cash Accounts receivable Inventory Other current assets Total current assets Powered by Cognero

Current Year

Prior Year

$ 61,100 22,500 8,500 6,500 $98,600

$ 54,000 17,500 7,000 5,500 $84,000 Page 32

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Ch 12 Financial Statement Analysis Long-term assets: Property, plant, and equipment, net Intangible assets Total assets Liabilities and Stockholders' Equity Current liabilities: Accounts payable Interest payable Current portion of long-term debt Income tax payable Total current liabilities Long-term liabilities: Notes payable Total liabilities Stockholders' equity: Common stock Additional paid-in capital Retained earnings Treasury stock Total stockholders' equity Total liabilities and stockholders' equity

744,900 25,00 211,250 225,000 $1,054,75 $334,000

$ 5,500 500 15,000 18,500 $39,500

$4,500 500 0 23,000 $28,000

246,250 $285,750

15,000 $43,000

$60,000 $35,000 654,000 186,000 92,500 70,000 (37,500) 0 $769,000 $291,000 $1,054,750 $334,000

Calculate the following stockholder ratios for the current and prior years: earnings per share, return on common equity, dividend yield, dividend payout, total payout, and stock repurchase payout. Round your answers to two decimal places and then comment on the company's stockholder performance. Additional information is as follows: Net income Dividends paid Average number of shares outstanding Closing market price per share

Current Year $24,000 $1,500 22,812 $24.00

Prior Year $28,750 $875 17,500 $18.00

The company had no preferred stock. At January 1, of the prior year, total stockholders' equity was $287,500. 155. The balance sheets taken from Rhodes Bakery's 10-K for the current and prior years are as follows: December 31, Assets: Current assets: Cash Accounts receivable Inventory Other current assets Total current assets Long-term assets: Property, plant, and equipment, net Intangible assets Total assets Powered by Cognero

Current Year

Prior Year

$ 61,100 22,500 8,500 6,500 $98,600

$ 54,000 17,500 7,000 5,500 $84,000

744,900 25,00 211,250 225,000 $1,054,75 $334,000 Page 33

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Ch 12 Financial Statement Analysis Liabilities and Stockholders' Equity Current liabilities: Accounts payable Interest payable Current portion of long-term debt Income tax payable Total current liabilities Long-term liabilities: Notes payable Total liabilities Stockholders' equity: Common stock Additional paid-in capital Retained earnings Treasury stock Total stockholders' equity Total liabilities and stockholders' equity

$ 5,500 500 15,000 18,500 $39,500

$4,500 500 0 23,000 $28,000

246,250 $285,750

15,000 $43,000

$60,000 $35,000 654,000 186,000 92,500 70,000 (37,500) 0 $769,000 $291,000 $1,054,750 $334,000

Perform a DuPont analysis for the current and prior years, including the three components of return on equity (ROE). Do not round your intermediate calculations. Round your answers to two decimal places and then comment on the company's relative ROE from the prior year to the current year. Additional information is as follows: Current Year $500,000 $ 24,000

Total sales Net income

Prior Year $410,000 $ 28,750

At January 1, of the prior year, the company's total assets and total stockholders' equity were $325,000 and $287,500, respectively. 156. Use this selected financial information to answer the questions that follow: Inventory Total assets Cost of goods sold Net income A)

Year 3 56,000 1,205,000 360,000 65,000

Year 2 $ 64,000 952,000 420,000 25,000

Year 1 $ 53,000 945,000 440,000 16,000

Calculate this company's inventory turnover ratio for Year 3 and Year 2. Round your answer to two decimal places.

B) Determine the number of days it would take to turn over the entire inventory at December 31, Year 3 and Year 2. Use 365 days in your calculation. Round your answer to two decimal places. C) What problems are apparent with the company's inventory management? 157. Use this selected financial information provided below to answer the following questions: Accounts receivable Total assets Powered by Cognero

Year 3 $ 63,750 487,500

Year 2 $ 60,000 615,750

Year 1 $ 55,500 600,000 Page 34

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Ch 12 Financial Statement Analysis Net credit sales Net income

600,000 11,250

487,500 65,000

540,000 9,000

A) Calculate the company's accounts receivable turnover ratio for Year 3 and Year 2. Round your answer to two decimal places. B) Determine the number of days it would take to turn over accounts receivable at December 31, Year 3 and Year 2. Use 365 days in your calculation. Round your answer to two decimal places. C) What could have caused the change? 158. Use this selected financial information to compare these three companies and answer the questions that follow: Accounts receivable: December 31, current year December 31, prior year Inventory: December 31, current year December 31, prior year Net credit sales: Current year Prior year Cost of goods sold: Current year Prior year

Rabbit Co. $ 22,000 12,800 12,600 32,800 320,000 310,000 406,000 200,000

Reptile Co. Rhino Co. $ 33,000 $ 41,500 30,000 42,600 22,600 54,200 23,900 44,000 620,000 510,000 610,000 760,000 211,000 311,000 156,000 310,000

Calculate the accounts receivable turnover ratio for each company for the current year. Round your answer to two decimal places.

Which company appears to be in the best position regarding asset efficiency based solely on the accounts receivable turnover?

Calculate the inventory turnover ratio for each company for the current year. Round your answer to two decimal places.

Which company appears to be in the best position regarding asset efficiency based solely on the inventory turnover?

Calculate and interpret each company's operating cycle. Use 365 days in your calculation. Round your answer to two decimal places.

159. Use this selected financial information to compare these two companies on December 31, current year, and to answer the questions that follow: Cash Short-term investments Accounts and notes receivable Inventories Prepaid expenses Total current assets Total current liabilities Long-term liabilities Stockholders' equity Powered by Cognero

Robin's Co. $ 1,100 100 11,700 1,200 1,400 $15,500

Ruth's Co. $ 300 900 12,400 1,000 600 $15,200

$ 5,000 2,300 5,300

$ 4,000 12,000 7,300 Page 35

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Ch 12 Financial Statement Analysis A)

Compute the current ratios for the two companies. Round your answers to two decimal places.

Compute the quick ratios for the two companies. Round your answers to two decimal places.

C) Which company appears to be more liquid? D)

What other ratios would help to more fully assess the liquidity of these two companies?

160. Royal Dunes Company is a retailer of specialty beachwear. During the current year, the company expanded its retail business by adding 30 new retail stores. The following information is obtained from the comparative financial statements included in the company's current year Form 10-K (all amounts in thousands of dollars).

Current liabilities Total liabilities Total stockholders' equity Total assets

January 31, Current Year $ 6,000 26,000 34,000 60,000

January 31, Prior Year $ 8,000 18,000 38,000 56,000

Depreciation expense Interest expense Income tax expense Net income Net cash flows from operations Total dividends paid

For the fiscal years ended January 31, Current Year Prior Year $ 2,000 $ 6,000 3,400 3,200 12,600 18,100 6,000 15,000 41,000 (400) 2,000 12,000

Using the information provided, address the following questions for both the current year and prior years: A) What is the debt to equity ratio? Round your answer to two decimal places. B) What is the times interest earned ratio? Round your answer to two decimal places. C)

What is the long-term debt to equity ratio, assuming that there is no current portion of longterm debt? Round your answer to two decimal places.

What is the long-term debt to total assets ratio, assuming that there is no current portion of long-term debt? Round your answer to two decimal places.

E) What is the debt to total assets ratio? F) Comment briefly on the company's debt management position. 161. Use the following selected financial data from the balance sheet at the end of the current and prior years:

Total current liabilities Bonds payable Powered by Cognero

June 30, Current Year $ 495,000 600,000

June 30, Prior Year $ 320,000 500,000 Page 36

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Ch 12 Financial Statement Analysis Common stock, $5 par Retained earnings Total stockholders' equity Total liabilities and stockholders' equity

$ 800,000 200,000 $1,000,000 $2,095,000

$ 800,000 100,000 $ 900,000 $1,720,000

Net income for the current year was $120,000 and for the prior year was $460,000. No stock was issued during either year, but dividends of $20,000 and $16,000 were paid in the current and prior years, respectively. A)

What is the return on common equity ratio for the current year? Round your percentage answer to two decimal places.

What is the dividend payout ratio for the current year? Round your percentage answer to two decimal places.

What is the earnings per share measure for the current year? Round your answer to two decimal places.

What other stockholder ratios would be helpful in assessing information of interest to stockholders?

162. Use the following selected financial data from the balance sheet at the end of the current and prior years: Current Year Prior Year Net income $110,000 $123,000 Cash dividends paid on preferred stock $12,000 $15,000 Cash dividends paid on common stock $42,000 $38,000 Common stock repurchases $10,000 $14,000 Weighted average number of common shares outstanding 105,000 95,000 Year-end market price per share of common stock $16.00 $13.00 Using the information provided, address the following questions for both the current and prior years: A) What is the dividend yield ratio? Round your percentage answer to two decimal places. B) What is the earnings per share measure? Round your answer to two decimal places. C) What is the dividend payout ratio? Round your percentage answer to two decimal places. D) What is the total payout ratio? Round your percentage answer to two decimal places. E)

What is the stock repurchase payout ratio? Round your percentage answer to two decimal places.

F) Comment on the change in the stockholder ratios from the prior year to the current year. 163. Comparative financial statements for Recovery Solutions, Inc. are as follows:

Net sales Other income Total revenues Cost of goods sold Powered by Cognero

Statements of Income and Retained Earnings For the fiscal years ended June 30, Year June 30, Year 2 June 30, Year 1 3 $2,004,719 $1,937,021 $1,835,987 18,636 17,153 14,614 $2,023,355 $1,954,174 $1,850,601 $ 848,363 $ 847,366 $ 814,483 Page 37

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Ch 12 Financial Statement Analysis Selling, general, and administrative expenses Interest expense Total costs and expenses Income before taxes Income taxes Net income Retained earnings at beginning of year Dividends declared Retained earnings at end of year

733,498 615 $1,582,476 $ 440,879 136,378 $ 304,501 1,032,139 (152,023) $1,184,617

711,610 958 $1,559,934 $ 394,240 122,614 $ 271,626 898,512 (137,999) $1,032,139

666,909 1,097 $1,482,489 $ 368,112 128,840 $ 239,272 746,541 (87,301) $ 898,512

$2.63 $1.30

$2.34 $1.17

$1.99 $1.02

Per-average share amounts: Net income per share of common stock Dividends per share of common stock Balance Sheets

June 30, Year June 30, Year 2 3 $ 214,572 $ 206,627 137,112 120,728 194,877 175,967 256,108 247,392 40,403 46,959 $ 843,072 $ 797,673 39,888 26,375 92,183 59,566 25,522 29,038 36,013 26,298 310,212 277,808 642,656 566,766 (432,050) (401,279) $1,557,496 $1,382,245

Accounts payable Accrued expenses Dividend payable Income and other taxes payable Total current liabilities Bonds payable Other noncurrent liabilities Total liabilities

76,691 67,848 23,222 50,865 $ 218,626 104,885 40,312 $ 363,823

Preferred stock, no par Common stock, $1 par Additional paid-in capital Retained earnings Treasury stock (common shares at cost) Total stockholders' equity Total liabilities and stockholders' equity

3,157 12,339 272 1,184,617 (6,712) $1,193,673 $1,557,496

71,001 78,378 22,034 54,403 $ 225,816 101,057 30,874 $ 357,747 3,157 2,339 226 1,032,139 (13,363) $1,024,498 $1,382,245

Calculate the current ratio, quick ratio, and cash ratio for Year 3. If you were a banker, would you lend money to this company under a short-term note payable? 164. Comparative financial statements for Recovery Solutions, Inc. are as follows: Powered by Cognero

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Ch 12 Financial Statement Analysis Statements of Income and Retained Earnings For the fiscal years ended June 30, Year June 30, Year 2 June 30, Year 1 3 Net sales $2,004,719 $1,937,021 $1,835,987 Other income 18,636 17,153 14,614 Total revenues $2,023,355 $1,954,174 $1,850,601 Cost of goods sold $848,363 $847,366 $814,483 Selling, general, and administrative expenses 733,498 711,610 666,909 Interest expense 615 958 1,097 Total costs and expenses $1,582,476 $1,559,934 $1,482,489 Income before taxes $440,879 $394,240 $368,112 Income taxes 136,378 122,614 128,840 Net income $304,501 $271,626 $239,272 Retained earnings at beginning of year 1,032,139 898,512 746,541 Dividends declared (152,023) (137,999) (87,301) Retained earnings at end of year $1,184,617 $1,032,139 $898,512 Per-average share amounts: Net income per share of common stock Dividends per share of common stock

$2.63 $1.30

$2.34 $1.17

$1.99 $1.02

Balance Sheets

Cash Short-term investments Accounts receivable Inventory Other current assets Total current assets Long-term investments Other non current assets Note receivable Land Buildings and building equipment Machinery and equipment Less: accumulated depreciation Total assets Accounts payable Accrued expenses Dividend payable Income and other taxes payable Total current liabilities Bonds payable Other noncurrent liabilities Total liabilities Preferred stock, no par Common stock, $1 par Powered by Cognero

June 30, Year June 30, Year 2 3 $214,572 $206,627 137,112 120,728 194,877 175,967 256,108 247,392 40,403 46,959 $843,072 $797,673 39,888 26,375 92,183 59,566 25,522 29,038 36,013 26,298 310,212 277,808 642,656 566,766 (432,050) (401,279) $1,557,496 $1,382,245 $76,691 67,848 23,222 50,865 $218,626 104,885 40,312 $363,823

$71,001 78,378 22,034 54,403 $225,816 101,057 30,874 $357,747

$3,157 12,339

$3,157 2,339 Page 39

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Ch 12 Financial Statement Analysis Additional paid-in capital Retained earnings Treasury stock (common shares at cost) Total stockholders' equity

272 1,184,617 (6,712) $1,193,673 $1,557,496

Total liabilities and stockholders' equity

226 1,032,139 (13,363) $1,024,498

$1,382,245

Assuming the company's cash flow from operations for Year 3 is $323,847, calculate the operating cash flow ratio for Year 3. Is the company in danger of liquidity problems? 165. Comparative financial statements for Recovery Solutions, Inc. are as follows: Statements of Income and Retained Earnings For the fiscal years ended June 30, Year June 30, Year 2 June 30, Year 1 3 Net sales $2,004,719 $1,937,021 $1,835,987 Other income 18,636 17,153 14,614 Total revenues $2,023,355 $1,954,174 $1,850,601 Cost of goods sold $848,363 $847,366 $814,483 Selling, general, and administrative expenses 733,498 711,610 666,909 Interest expense 615 958 1,097 Total costs and expenses $1,582,476 $1,559,934 $1,482,489 Income before taxes $440,879 $394,240 $368,112 Income taxes 136,378 122,614 128,840 Net income $304,501 $271,626 $239,272 Retained earnings at beginning of year 1,032,139 898,512 746,541 Dividends declared (152,023) (137,999) (87,301) Retained earnings at end of year $1,184,617 $1,032,139 $898,512 Per-average share amounts: Net income per share of common stock Dividends per share of common stock

$2.63 $1.30

$2.34 $1.17

$1.99 $1.02

Balance Sheets

June 30, Year June 30, Year 2 3 $214,572 $206,627 137,112 120,728 194,877 175,967 256,108 247,392 40,403 46,959 $843,072 $797,673 39,888 26,375 92,183 59,566 25,522 29,038 36,013 26,298 310,212 277,808 642,656 566,766 (432,050) (401,279) $1,557,496 $1,382,245 $76,691

$71,001 Page 40

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Ch 12 Financial Statement Analysis Accrued expenses Dividend payable Income and other taxes payable Total current liabilities Bonds payable Other non current liabilities Total liabilities Preferred stock, no par Common stock, $1 par Additional paid-in capital Retained earnings Treasury stock(common shares at cost) Total stockholders' equity Total liabilities and stockholders' equity

67,848 23,222 50,865 $218,626 104,885 40,312 $363,823

78,378 22,034 54,403 $225,816 101,057 30,874 $357,747

$3,157 12,339 272 1,184,617 (6,712) $1,193,673

$3,157 2,339 226 1,032,139 (13,363) $1,024,498

$1,557,496

$1,382,245

Evaluate the company's asset efficiency ratios for Year 3, including accounts receivable turnover, inventory turnover, and asset turnover. Round your answers to two decimal places. Use 365 days for the calculation. 166. Comparative financial statements for Recovery Solutions, Inc. are as follows: Statements of Income and Retained Earnings For the fiscal years ended June 30, Year June 30, Year 2 June 30, Year 1 3 Net sales $2,004,719 $1,937,021 $1,835,987 Other income 18,636 17,153 14,614 Total revenues $2,023,355 $1,954,174 $1,850,601 Cost of goods sold $848,363 $847,366 $814,483 Selling, general, and administrative expenses 733,498 711,610 666,909 Interest expense 615 958 1,097 Total costs and expenses $1,582,476 $1,559,934 $1,482,489 Income before taxes $440,879 $394,240 $368,112 Income taxes 136,378 122,614 128,840 Net income $304,501 $271,626 $239,272 Retained earnings at beginning of year 1,032,139 898,512 746,541 Dividends declared (152,023) (137,999) (87,301) Retained earnings at end of year $1,184,617 $1,032,139 $898,512 Per-average share amounts: Net income per share of common stock Dividends per share of common stock

$2.63 $1.30

$2.34 $1.17

$1.99 $1.02

Balance Sheets

Cash Short-term investments Accounts receivable Inventory Other current assets Total current assets Powered by Cognero

June 30, Year June 30, Year 2 3 $214,572 $206,627 137,112 120,728 194,877 175,967 256,108 247,392 40,403 46,959 $843,072 $797,673 Page 41

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Ch 12 Financial Statement Analysis Long-term investments Other non current assets Note receivable Land Buildings and building equipment Machinery and equipment Less: accumulated depreciation Total assets

39,888 92,183 25,522 36,013 310,212 642,656 (432,050) $1,557,496

26,375 59,566 29,038 26,298 277,808 566,766 (401,279) $1,382,245

Accounts payable Accrued expenses Dividend payable Income and other taxes payable Total current liabilities Bonds payable Other non current liabilities Total liabilities

$76,691 67,848 23,222 50,865 $218,626 104,885 40,312 $363,823

$71,001 78,378 22,034 54,403 $225,816 101,057 30,874 $357,747

$3,157 12,339 272 1,184,617 (6,712) $1,193,673

$3,157 2,339 226 1,032,139 (13,363) $1,024,498

$1,557,496

$1,382,245

Preferred stock, no par Common stock, $1 par Additional paid-in capital Retained earnings Treasury stock(common shares at cost) Total stockholders' equity Total liabilities and stockholders' equity

Evaluate the company's profitability ratios for Year 3 and Year 2, including the gross profit percentage, operating margin percentage, net profit margin percentage, return on assets, and return on equity. Assume that total assets and total stockholders' equity at June 30, Year 1, were $1,250,000 and $969,000, respectively. Also, assume that the tax rate is 30% for all periods presented. Round your percentage answers to two decimal places. 167. Comparative financial statements for Recovery Solutions, Inc. are as follows: Statements of Income and Retained Earnings For the fiscal years ended June 30, Year June 30, Year 2 June 30, Year 1 3 Net sales $2,004,719 $1,937,021 $1,835,987 Other income 18,636 17,153 14,614 Total revenues $2,023,355 $1,954,174 $1,850,601 Cost of goods sold $848,363 $847,366 $814,483 Selling, general, and administrative expenses 733,498 711,610 666,909 Interest expense 615 958 1,097 Total costs and expenses $1,582,476 $1,559,934 $1,482,489 Income before taxes $440,879 $394,240 $368,112 Income taxes 136,378 122,614 128,840 Net income $304,501 $271,626 $239,272 Retained earnings at beginning of year 1,032,139 898,512 746,541 Dividends declared (152,023) (137,999) (87,301) Retained earnings at end of year $1,184,617 $1,032,139 $898,512 Powered by Cognero

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Ch 12 Financial Statement Analysis Per-average share amounts: Net income per share of common stock Dividends per share of common stock

$2.63 $1.30

$2.34 $1.17

$1.99 $1.02

Balance Sheets

Cash Short-term investments Accounts receivable Inventory Other current assets Total current assets Long-term investments Other non current assets Note receivable Land Buildings and building equipment Machinery and equipment Less: accumulated depreciation Total assets Accounts payable Accrued expenses Dividend payable Income and other taxes payable Total current liabilities Bonds payable Other non current liabilities Total liabilities Preferred stock, no par Common stock, $1 par Additional paid-in capital Retained earnings Treasury stock(common shares at cost) Total stockholders' equity Total liabilities and stockholders' equity

June 30, Year June 30, Year 2 3 $214,572 $206,627 137,112 120,728 194,877 175,967 256,108 247,392 40,403 46,959 $843,072 $797,673 39,888 26,375 92,183 59,566 25,522 29,038 36,013 26,298 310,212 277,808 642,656 566,766 (432,050) (401,279) $1,557,496 $1,382,245 $76,691 67,848 23,222 50,865 $218,626 104,885 40,312 $363,823

$71,001 78,378 22,034 54,403 $225,816 101,057 30,874 $357,747

$3,157 12,339 272 1,184,617 (6,712) $1,193,673

$3,157 2,339 226 1,032,139 (13,363) $1,024,498

$1,557,496

$1,382,245

Calculate the return on common equity ratio for Year 3 and Year 2. Assume that preferred stock and total stockholders' equity at June 30, Year 1, were $3,157 and $969,000, respectively. Round your percentage answers to two decimal places 168. Comparative financial statements for Recovery Solutions, Inc. are as follows:

Net sales Other income Total revenues Powered by Cognero

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Ch 12 Financial Statement Analysis Cost of goods sold Selling, general, and administrative expenses Interest expense Total costs and expenses Income before taxes Income taxes Net income Retained earnings at beginning of year Dividends declared Retained earnings at end of year

$848,363 733,498 615 $1,582,476 $440,879 136,378 $304,501 1,032,139 (152,023) $1,184,617

$847,366 711,610 958 $1,559,934 $394,240 122,614 $271,626 898,512 (137,999) $1,032,139

$814,483 666,909 1,097 $1,482,489 $368,112 128,840 $239,272 746,541 (87,301) $898,512

$2.63 $1.30

$2.34 $1.17

$1.99 $1.02

Per-average share amounts: Net income per share of common stock Dividends per share of common stock Balance Sheets

Cash Short-term investments Accounts receivable Inventory Other current assets Total current assets Long-term investments Other non current assets Note receivable Land Buildings and building equipment Machinery and equipment Less: accumulated depreciation Total assets Accounts payable Accrued expenses Dividend payable Income and other taxes payable Total current liabilities Bonds payable Other non current liabilities Total liabilities Preferred stock, no par Common stock, $1 par Additional paid-in capital Retained earnings Treasury stock(common shares at cost) Total stockholders' equity Total liabilities and stockholders' equity

June 30, Year June 30, Year 2 3 $214,572 $206,627 137,112 120,728 194,877 175,967 256,108 247,392 40,403 46,959 $843,072 $797,673 39,888 26,375 92,183 59,566 25,522 29,038 36,013 26,298 310,212 277,808 642,656 566,766 (432,050) (401,279) $1,557,496 $1,382,245 $76,691 67,848 23,222 50,865 $218,626 104,885 40,312 $363,823

$71,001 78,378 22,034 54,403 $225,816 101,057 30,874 $357,747

$3,157 12,339 272 1,184,617 (6,712) $1,193,673

$3,157 2,339 226 1,032,139 (13,363) $1,024,498

$1,557,496

$1,382,245

Perform a DuPont analysis for Year 3 and Year 2 showing all three components. Assume that total assets and total stockholders' equity at June 30, Year 1, were $1,250,000 and $969,000, respectively. Powered by Cognero

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Ch 12 Financial Statement Analysis 169. Show the effect of each of the given transactions on total assets and the current ratio by using one of the symbols in each box to complete the table. If the numerator and denominator of a ratio both increase or both decrease by the same amount, the effect of the event on the ratio is "N" or no effect. Effect Increase Decrease No effect

Symbol + − N Effect on Total Assets

Effect on Current Ratio

Cash received from customers for accounts receivable balances due Cash sales of long-term assets for an amount in excess of cost Declaration and payment of cash dividends Payment of interest expense Purchase of long-term assets for cash Purchase of office supplies for cash 170. Show the effect of each of the given transactions on total liabilities and the debt to equity ratio by using one of the symbols in each box to complete the table. If the numerator and denominator of a ratio both increase or both decrease by the same amount, the effect of the event on the ratio is "N" or no effect. Effect Symbol Increase + Decrease − No effect N Effect on Total Liabilities

Effect on Debt to Equity Ratio

Cash received from customers for accounts receivable balances due Declaration and payment of cash dividends Purchase of long-term assets for cash

171. What are some weaknesses of performing time series analysis alone? 172. What is the primary weakness of using raw financial statement numbers in cross sectional analysis? How can the problem be solved? 173. For what purpose is horizontal analysis used by financial analysts? 174. Would a banker be more interested in the liquidity or profitability of a company? Explain. 175. You are a financial analyst for R&B Communications. One of your current assignments is to prepare an end-of-year analysis of your employer's financial health. Today, you want to assess the company's working capital. You note that the end-of-year working capital is $15,000 greater than the working capital at the beginning of the year. End of Year Powered by Cognero

Beginning of Year Page 45

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Ch 12 Financial Statement Analysis Current assets: Cash Marketable securities Accounts receivables Inventories Total current assets

$ 28,000 50,000 24,000 153,000 $255,000

$ 33,000 27,000 30,000 97,500 $187,500

Current liabilities

127,500

75,000

Working capital

$127,500

$112,500

Has your company's current position improved? Explain. 176. Use this selected financial information to compare these three companies and answer the questions that follow:

Current ratio Quick ratio Inventory turnover ratio

Ratio Results at December 31: Current year Prior year Current year Prior year Current year Prior year

RBC Co. 3.30 2.50 2.10 2.00 5.40 5.50

Rama Co. 2.80 2.80 1.50 1.30 6.80 7.60

Rock Co. 1.80 3.20 0.50 1.20 6.00 12.60

Which company appears to be in the best position regarding asset efficiency based solely on the inventory turnover ratio?

Which company has the best short-term liquidity?

Which company appears to be heading in the wrong direction in terms of its ability to pay current obligations as they come due?

177. Why is liquidity important for businesses? 178. What is meant by the concept of asset efficiency as it relates to turnover ratios? Explain. 179. What importance is placed on a company's stock price in the ratio analysis of a company? Explain. 180. What do profitability ratios measure? 181. Agrefeld, Inc. has a return on assets of 12% and a return on common equity of 15%. What causes the difference in these two returns? 182. A couple of years ago, you inherited a substantial sum of money. This morning, one of your second cousins approached you about her struggling day spa business that caters to college students. She would like to borrow $20,000 for a state-of-the-art tanning room for her business. She assures you that the business is steadily growing and promises that you will have your money back in 6 to 9 months at the latest. You are concerned about the day spa's ability to generate sufficient resources to repay the loan. What financial ratios can you examine to assess the short-term liquidity of your cousin's day spa? Provide the formula for each ratio.

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Ch 12 Financial Statement Analysis Answer Key 1. False 2. True 3. False 4. True 5. False 6. True 7. True 8. True 9. False 10. False 11. True 12. False 13. False 14. True 15. False 16. True 17. True 18. False 19. False 20. False 21. True 22. False 23. False 24. False 25. True Powered by Cognero

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Ch 12 Financial Statement Analysis 26. True 27. True 28. True 29. False 30. False 31. b 32. d 33. c 34. c 35. d 36. a 37. b 38. a 39. c 40. a 41. a 42. c 43. d 44. b 45. c 46. d 47. a 48. c 49. d 50. a 51. c Powered by Cognero

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Ch 12 Financial Statement Analysis 52. c 53. d 54. d 55. d 56. c 57. c 58. d 59. d 60. d 61. c 62. a 63. a 64. a 65. d 66. a 67. a 68. c 69. b 70. b 71. a 72. d 73. c 74. a 75. b 76. b Powered by Cognero

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Ch 12 Financial Statement Analysis 77. d 78. a 79. d 80. b 81. d 82. b 83. d 84. b 85. d 86. b 87. d 88. b 89. a 90. d 91. d 92. d 93. c 94. c 95. c 96. c 97. b 98. b 99. b 100. b 101. d 102. a Powered by Cognero

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Ch 12 Financial Statement Analysis 103. b 104. d 105. c 106. a 107. c 108. a 109. a 110. c 111. c 112. a 113. c 114. a 115. a 116. c 117. a 118. d 119. d 120. b 121. a 122. a 123. d 124. b 125. a 126. a 127. d Powered by Cognero

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Ch 12 Financial Statement Analysis 128. c 129. b 130. a 131. d 132. a 133. a 134. b 135. b 136. a 137. c 138. c 139. a 140. c 141. a 142. a 143. A) RPG's cost of goods sold increased by $5,000 ($115,000 − $110,000) from Year 2 to Year 3 and by $3,000 ($110,000−$107,000) from Year 1 to Year 2. This may be viewed as a negative trend; however, the primary reason for the increase is that sales are also increasing. RPG also has a positive trend in gross profit, which increased by $1,000 ($37,000−$36,000) between Year 2 and Year 3 and by $3,000 ($36,000−$33,000) between Year 1 and Year 2. Other measures of financial statement analysis should be considered. B)

RPG also has a positive trend in gross profit, which increased by $1,000 ($37,000 − $36,000) between Year 2 and Year 3 and by $3,000 ($36,000 − $33,000) between Year 1 and Year 2. RPM's gross profit was flat between Year 2 and Year 3, but there was an increase in gross profit of $2,000 ($14,000 − $12,000) from Year 1 to Year 2. When these amounts are analyzed in terms of percentages, it appears that RPM had a far better Year 2, while RPG had a better Year 3. Growth in Gross Profit RPG Co. RPM Co.

Year 2 to Year 3* Year 1 to Year 2** 2.78% 9.09% 0.00% 16.67%

*(Year 3 Gross Profit – Year 2 Gross Profit) ÷ Year 2 Gross Profit **(Year 2 Gross Profit – Year 1 Gross Profit) ÷ Year 1 Gross Profit Powered by Cognero

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Ch 12 Financial Statement Analysis 144. Cash Accounts receivable, net Inventory Other current assets Total current assets

Current Year 127.55% 81.52% 82.16% 118.71% 88.14%

The company experienced a significant increase in cash, which indicates that the company is more liquid than in the previous year. Accounts receivable decreased, which may be the result of decreased sales or improved collections by the credit department. Inventory declined, which may be the result of increased sales. The percentage increase in other current assets is large but not significant due to its relatively small dollar amount. 145. Cash Accounts receivable, net Inventory Other current assets Total current assets Total Assets *Difference due to rounding

Current Year 2.83% 5.94% 7.86% 0.69% 17.32% 100.00%

Prior Year 1.71% 5.63% 7.39% 0.45% 15.19%* 100.00%

146. Net sales Cost of goods sold Gross profit Selling, general, and administrative expenses Other income, net Income from operations Interest expense Income before taxes Income taxes Net income

Year 3 126.68% 107.55% 154.00% 131.92% 0.00% 293.50% 135.48% 322.49% 335.00% 315.60%

Year 2 Year 1 112.09% 100.00% 102.60% 100.00% 125.64% 100.00% 116.67% 100.00% 0.00% 100.00% 183.50% 100.00% 125.81% 100.00% 194.08% 100.00% 185.00% 100.00% 199.08% 100.00%

Sales have been increasing at a greater rate than cost of goods sold, which has accounted for a significant increase in gross profit. Selling, general, and administrative expenses are growing at a greater rate than sales, as are expenses for interest and taxes; however, these expenses are not having such a significant impact because of their smaller dollar amounts. The increases in net income are large and the trend is fairly consistent between the years. Because the base year value for other income was $0, the common size value is technically infinite. The MD&A section of the company's 10-K should state the nature of this item. 147. Net sales Cost of goods sold Gross profit Selling, general, and administrative expenses Other income, net Powered by Cognero

Year 3 100.00% 49.94% 50.06% 36.75% 0.33%

Year 2 Year 1 100.00% 100.00% 53.84% 58.82% 46.16% 41.18% 36.74% 35.29% 0.21% 0.00% Page 53

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Ch 12 Financial Statement Analysis Income from operations Interest expense Income before taxes Income taxes Net income

13.63% 0.98% 12.65% 4.67% 7.99%

9.63% 1.02% 8.61% 2.91% 5.69%

5.89% 0.91% 4.97% 1.76% 3.21%

Note: There may be slight differences due to rounding. 148. Assets: Current assets: Cash Accounts receivable Inventory Other current assets Total current assets Long-term Assets: Property, plant, and equipment, net Intangible assets Total assets Liabilities and Stockholders' Equity Current liabilities: Accounts payable Interest payable Current portion of long-term debt Income tax payable Total current liabilities Long-term liabilities: Notes payable Total liabilities Stockholders' equity: Common stock Additional paid-in capital Retained earnings Treasury stock Total stockholders' equity Total liabilities and stockholders' equity

December 31, Current Year Prior Year 5.79% 2.13% 0.81% 0.62% 9.35%

16.17% 5.24% 2.10% 1.65% 25.15%

70.62% 20.03% 100.00%

7.49% 67.37% 100.00%

0.52% 0.15% 1.42% 1.75% 3.74%

1.35% 0.15% 0.00% 6.89% 8.38%

23.35% 27.09%

4.49% 12.87%

5.69% 62.01% 8.77% (3.56%) 72.91% 100.00%

10.48% 55.69% 20.96% 0.00% 87.13% 100.00%

Note: There may be slight differences due to rounding. 149. Working capital: Russell: $973,500 Current Assets − $860,900 Current Liabilities = $112,600 Ryland: $207,800 Current Assets − $150,000 Current Liabilities = $57,800 Current ratio: Russell: $973,500 Current Assets ÷ $860,900 Current Liabilities = 1.13 Ryland: $207,800 Current Assets ÷ $150,000 Current Liabilities = 1.39 Quick ratio: Russell: ($340,800 Cash + $12,000 Short-Term Investments + $413,300 Receivables) ÷ Powered by Cognero

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Ch 12 Financial Statement Analysis $860,900 Current Liabilities = 0.89 ($100,200 Cash + $7,600 Short-Term Investments + $60,000 Receivables) ÷ $150,000 Ryland: Current Liabilities = 1.12 Cash ratio: ($340,800 Cash + $12,000 Short-Term Investments) ÷ $860,900 Current Liabilities = Russell: 0.41 ($100,200 Cash + $7,600 Short-Term Investments) ÷ $150,000 Current Liabilities = Ryland: 0.72 Operating Cash Flow Ratio: Russell: $750,000 Cash Flows from Operations ÷ $860,900 Current Liabilities = 0.87 Ryland: $290,000 Cash Flows from Operations ÷ $150,000 Current Liabilities = 1.93 Ryland Co. is more liquid than Russell Co. Even though Ryland Co. has less working capital, all of its short-term liquidity measures are more favorable. All of the ratio computations indicate that Russell Co. may have difficulty paying its current obligations. 150. Current year: Current ratio: Quick ratio: Cash ratio: Operating cash flow ratio: Prior year: Current ratio: Quick ratio: Cash ratio: Operating cash flow ratio:

$98,600 Current Assets ÷ $39,500 Current Liabilities = 2.50 ($61,100 Cash + $0 Short-Term Investments + $22,500 Accounts Receivable) ÷ $39,500 Current Liabilities = 2.12 ($61,100 Cash + $0 Short-Term Investments) ÷ $39,500 Current Liabilities = 1.55 $75,500 Cash Flows from Operations ÷ $39,500 Current Liabilities = 1.91 $84,000 Current Assets ÷ $28,000 Current Liabilities = 3.00 ($54,000 Cash + $0 Short-Term Investments + $17,500 Accounts Receivable) ÷ $28,000 Current Liabilities = 2.55 ($54,000 Cash + $0 Short-Term Investments) ÷ $28,000 Current Liabilities = 1.93 $50,500 Cash Flows from Operations ÷ $28,000 Current Liabilities = 1.80

Other than the operating cash flow ratio, all the other liquidity ratios have declined from the prior year to the current year, yet the company is still very liquid and should not have difficulty paying its current obligations as they come due. 151. Current year: Times interest earned ratio: Long-term debt to equity ratio: Debt to equity ratio: Long-term debt to assets ratio: Debt to assets ratio: Powered by Cognero

$65,000 Operating Income ÷ $26,000 Interest Expense = 2.50 ($246,250 Long-Term Debt + $15,000 Current Portion) ÷ $769,000 Total Equity = 0.34 $285,750 Total Liabilities ÷ $769,000 Total Equity = 0.37 ($246,250 Long-Term Debt + $15,000 Current Portion) ÷ $1,054,750 Total Assets = 0.25 $285,750 Total Liabilities ÷ $1,054,750 Total Assets = 0.27 Page 55

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Ch 12 Financial Statement Analysis Prior year: Times interest earned ratio: Long-term debt to equity ratio: Debt to equity ratio: Long-term debt to assets ratio: Debt to assets ratio:

$49,000 Operating Income ÷ $1,750 Interest Expense = 28.00 ($15,000 Long-Term Debt + $0 Current Portion) ÷ $291,000 Total Equity = 0.05 $43,000 Total Liabilities ÷ $291,000 Total Equity = 0.15 ($15,000 Long-Term Debt + $0 Current Portion) ÷ $334,000 Total Assets = 0.04 $43,000 Total Liabilities ÷ $334,000 Total Assets = 0.13

Other than the times interest earned ratio, the rest of the debt management ratios have increased from the prior year to the current year; this was because the company had significant borrowings during the current year. From the times interest earned ratio, you can see that the company's operating income was sufficient to cover interest expense. Both the long-term debt to equity ratio and debt to equity ratio indicate that the company had much more equity financing than debt, even after the company borrowed nearly $250,000 in the current year. 152. Current year: Accounts receivable turnover: Inventory turnover: Asset turnover: Operating cycle:

$475,000 Net Sales ÷ [($22,500 + $17,500) ÷ 2] Average Accounts Receivable = 23.75 $240,000 ÷ [($8,500 + $7,000) ÷ 2] Average Inventory = 30.97 $475,000 Net Sales ÷ [($1,054,750 + $334,000) ÷ 2] Average Total Assets = 0.68 (365 Days ÷ 23.75 Accounts Receivable Turnover) + (365 Days ÷ 30.97 Inventory Turnover) = Approximately 27 Days

Prior year: Accounts receivable turnover: Inventory turnover: Asset turnover: Operating cycle:

$387,500 Net Sales ÷ [($17,500 + $18,500) ÷ 2] Average Accounts Receivable = 21.53 $200,000 ÷ [($7,000 + $6,500) ÷ 2] Average Inventory = 29.63 $387,500 Net Sales ÷ [($334,000 + $325,000) ÷ 2] Average Total Assets = 1.18 (365 Days ÷ 21.53 Accounts Receivable Turnover) + (365 Days ÷ 29.63 Inventory Turnover) = Approximately 29 Days

The accounts receivable and inventory turnover ratios each improved slightly from the prior year to the current year, which indicates that the company is using its accounts receivable and inventory more efficiently. The operating cycle also improved from 29 to 27 days, which indicates strength in terms of asset efficiency. With regard to the asset turnover ratio, however, there was a sharp decline in the current year as a result of the company's significant investment in property, plant, and equipment. The company needs to improve its efficiency with regard to the use of these new assets. 153. Current year: Gross profit percentage: Operating margin percentage: Net profit margin percentage: Return on assets: Powered by Cognero

$235,000 Gross Profit ÷ $475,000 Net Sales = 49.47% $65,000 Income from Operations ÷ $475,000 Net Sales = 13.68% $24,000 Net Income ÷ $475,000 Net Sales = 5.05% {$24,000 Net Income + [$26,000 Interest Expense × (1 − Page 56

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Ch 12 Financial Statement Analysis 0.3846 Tax Rate*)]} ÷ [($1,054,750 + $334,000) ÷ 2] Average Total Assets = 5.76% $24,000 Net Income ÷ [($769,000 + $291,000) ÷ 2] Average Equity = 4.53% *Tax Rate = $15,000 Income Taxes ÷ $39,000 Income before Taxes = 38.46%

Return on equity:

Prior year: Gross profit percentage: Operating margin percentage: Net profit margin percentage: Return on assets: Return on equity:

$187,500 Gross Profit ÷ $387,500 Net Sales = 48.39% $49,000 Income from Operations ÷ $387,500 Net Sales = 12.65% $28,750 Net Income ÷ $387,500 Net Sales = 7.42% {$28,750 Net Income + [$1,750 Interest Expense × (1 − 0.3915 Tax Rate**)]} ÷ [($334,000 + $325,000) ÷ 2] Average Total Assets = 9.05% $28,750 Net Income ÷ [($291,000 + $287,500) ÷ 2] Average Equity = 9.94% **Tax Rate = $18,500 Income Taxes ÷ $47,250 Income before Taxes = 39.15%

The company's gross profit percentage and operating margin percentage increased slightly from the prior year to the current year, which indicates improvement in profitability. However, the other profitability ratios decreased from the prior year to the current year. The most significant decline was in the return on equity ratio. 154. Current year: Earnings per share: Return on common equity: Dividend yield: Dividend payout: Total payout: Stock repurchase payout:

($24,000 Net Income − $0 Preferred Dividends) ÷ 22,812 Average Number of Shares Outstanding = $1.05 $24,000 Net Income ÷ [($769,000 + $291,000) ÷ 2] Average Stockholders' Equity = 4.53% ($1,500 ÷ 22,812) Dividends per Common Share ÷ $24.00 Closing Market Price per Share = 0.27% $1,500 Common Dividends ÷ $24,000 Net Income = 6.25% ($1,500 Common Dividends + $37,500 Common Stock Repurchases) ÷ $24,000 Net Income = 162.50% 162.50% Total Payout − 6.25% Dividend Payout = 156.25%

Prior year: Earnings per share: Return on common equity: Dividend yield: Dividend payout: Total payout: Stock repurchase payout:

($28,750 Net Income − $0 Preferred Dividends) ÷ 17,500 Average Number of Shares Outstanding = $1.64 $28,750 Net Income ÷ [($291,000 + $287,500) ÷ 2] Average Stockholders' Equity = 9.94% ($875 ÷ 17,500) Dividends per Common Share ÷ $18.00 Closing Market Price per Share = 0.28% $875 Common Dividends ÷ $28,750 Net Income = 3.04% ($875 Common Dividends + $0 Common Stock Repurchases) ÷ $28,750 Net Income = 3.04% 3.04% Total Payout − 3.04% Dividend Payout = 0.00%

All of the company's profitability ratios decreased from the prior year to the current year with the exception of the dividend payout ratio, total payout ratio, and stock repurchase payout ratio, which increased. This indicates a decline in stockholder performance. However, the improved dividend payout ratio coupled with the increase in the number of shares outstanding and change in treasury stock activity account for these fluctuations. Powered by Cognero

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Ch 12 Financial Statement Analysis

155. Current year: ROE =

($24,000 Net Income ÷ $500,000 Sales) × {$500,000 Sales ÷ [($1,054,750 + $334,000) ÷ 2 Average Total Assets]} × {[($1,054,750 + $334,000) ÷ 2 Average Total Assets] ÷ [($769,000 + $291,000) ÷ 2 Average Equity]} = 4.80% × 0.72 × 1.31 = 4.53%

Prior year: ROE =

($28,750 Net Income ÷ $410,000 Sales) × {$410,000 Sales ÷ [($334,000 + $325,000) ÷ 2 Average Total Assets]} × {[($334,000 + $325,000) ÷ 2 Average Total Assets] ÷ [($291,000 + $287,500) ÷ 2 Average Equity]} = 7.01% × 1.24 × 1.14 = 9.91%

The DuPont analysis shows that the company had a better prior year than the current year in terms of net profit margin and asset turnover; thus, asset turnover declined from 8.69% (7.01% × 1.24) in the prior year to 3.46% (4.80% × 0.72) in the current year. However, the current year was higher in terms of leverage, which means that there was a higher proportion of debt financing in the current year to leverage the return on assets. Overall, the return on equity still declined from the prior year to the current year. 156. A) Inventory turnover ratio $360,000 Cost of Goods Sold ÷ [($56,000 + $64,000) ÷ 2] Average Inventory = Year 3: 6.00 $420,000 Cost of Goods Sold ÷ [($64,000 + $53,000) ÷ 2] Average Inventory = Year 2: 7.18 B) Number of days to turn over inventory Year 3: 365 Days ÷ 6.00 Inventory Turnover = 60.83 Days Year 2: 365 Days ÷ 7.18 Inventory Turnover = 50.84 Days Inventory turnover has slowed during Year 3. It is taking 10 days longer to turn C) overinventory during Year 3 as compared with Year 2. This could indicate the presence of obsolete inventory or problems generating sales. 157. A) Accounts receivable turnover ratio: Year $600,000 Net Credit Sales ÷ [($63,750 + $60,000) ÷ 2] Average Accounts Receivable = 3: 9.70 Year $487,500 Net Credit Sales ÷ [($60,000 + $55,500) ÷ 2] Average Accounts Receivable = 2: 8.44 B) Number of days to turn over receivables: Year 365 Days ÷ 9.70 Accounts Receivable Turnover = 37.63 Days 3: Year 365 Days ÷ 8.44 Accounts Receivable Turnover = 43.25 Days 2: Accounts receivable is turning over more quickly during Year 3. It is taking 5.62 fewer days C) to turn over inventory during Year 3 as compared with Year 2. This could indicate an increase in credit sales or a decrease in receivables balances, perhaps from increased collection efforts. Powered by Cognero

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Ch 12 Financial Statement Analysis 158. A) Accounts receivable turnover ratio: $320,000 Net Credit Sales ÷ [($22,000 + $12,800) ÷ 2] Average Accounts Rabbit: Receivable = 18.39 $620,000 Net Credit Sales ÷ [($33,000 + $30,000) ÷ 2] Average Accounts Reptile: Receivable = 19.68 $510,000 Net Credit Sales ÷ [($41,500 + $42,600) ÷ 2] Average Accounts Rhino: Receivable = 12.13 B) Reptile appears to be in the best position regarding the efficient management of its accounts receivable. Reptile collects its receivables 19.68 times per year, while Rabbit collects its receivables 18.39 times per year and Rhino collects its receivables 12.13 times per year. C) Inventory turnover ratio: $406,000 Cost of Goods Sold ÷ [($12,600 + $32,800) ÷ 2] Average Inventory = Rabbit: 17.89 $211,000 Cost of Goods Sold ÷ [($22,600 + $23,900) ÷ 2] Average Inventory = Reptile: 9.08 $311,000 Cost of Goods Sold ÷ [($54,200 + $44,000) ÷ 2] Average Inventory = Rhino: 6.33 D) Rabbit appears to be in the best position regarding the efficient management of inventories. Rabbit collects its inventory sales 17.89 times per year, while Reptile collects 9.08 times per year and Rhino collects 6.33 times per year. E) Operating cycle: (365 Days ÷ 18.39 Receivables Turnover) + (365 Days ÷ 17.89 Inventory Turnover) = 40.25 Days This is the shortest operating cycle of the three companies, which indicates that it is the best in terms of efficiency of timing between purchase of inventory and the Rabbit: collection of cash from customers for the sales of this inventory. This is the shortest operating cycle of the three companies, which indicates that it is the best in terms of efficiency of timing between purchase of inventory and the collection of cash from customers for the sales of this inventory. (365 Days ÷ 19.68 Receivables Turnover) + (365 Days ÷ 9.08 Inventory Reptile: Turnover) = 58.74 Days (365 Days ÷ 12.13 Receivables Turnover) + (365 Days ÷ 6.33 Inventory Turnover) = 87.75 Days Rhino: This is the longest operating cycle of the three companies, which indicates that Rhino is taking longer to convert inventory into sales and collections.

159. A) Current ratio: Robin: $15,500 Current Assets ÷ $5,000 Current Liabilities = 3.10 Ruth: $15,200 Current Assets ÷ $4,000 Current Liabilities = 3.80 B) Quick ratio: ($1,100 Cash + $100 Short-Term Investments + $11,700 Receivables) ÷ $5,000 Robin: Current Liabilities = 2.58 Ruth: ($300 Cash + $900 Short-Term Investments + $12,400 Receivables) ÷ $4,000 Powered by Cognero

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Ch 12 Financial Statement Analysis Current Liabilities = 3.40 C) Ruth Co. is more liquid than Robin Co. Both of these short-term liquidity measures are more favorable for Ruth Co.; however, it appears that both companies are well positioned to be able to pay their current obligations as they come due. D) The other short-term liquidity ratios include the cash ratio and the operating cash flow ratio. The cash ratio helps determine whether the company's cash and short-term investments are sufficient to cover its current obligations. The operating cash flow ratio helps determine whether the company's cash flows from operating activities are sufficient to cover its current obligations. 160. A) Debt to equity ratio: Current year: $26,000 Total Liabilities ÷ $34,000 Stockholders' Equity = 0.76 Prior year: $18,000 Total Liabilities ÷ $38,000 Stockholders' Equity = 0.47 B) Times interest earned ratio: ($6,000 + $12,600 + $3,400) Operating Income ÷ $3,400 Interest Expense Current year: = 6.47 ($15,000 + $18,100 + $3,200) Operating Income ÷ $3,200 Interest Prior year: Expense = 11.34 C) Long-term debt to equity ratio: ($26,000 − $6,000 Long-Term Debt) ÷ $34,000 Stockholders' Equity = Current year: 0.59 ($18,000 − $8,000 Long-Term Debt) ÷ $38,000 Stockholders' Equity = Prior year: 0.26 D) Long-term debt to total assets ratio: Current year: ($26,000 − $6,000 Long-Term Debt) ÷ $60,000 Total Assets = 0.33 Prior year: ($18,000 − $8,000 Long-Term Debt) ÷ $56,000 Total Assets = 0.18 E) Debt to total assets ratio: Current year: $26,000 Total Liabilities ÷ $60,000 Total Assets = 0.43 Prior year: $18,000 Total Liabilities ÷ $56,000 Total Assets = 0.32 F) The long-term debt to equity, debt to equity, long-term debt to total assets, and debt to total asset ratios for the current year have increased when compared with the same for the prior year. This suggests that, in the current year, the company's sources of finance have shifted more toward debt than equity. 161. A) Return on common equity: $120,000 Net Income ÷ [($1,000,000 + $900,000) ÷ 2] Average Common Equity = 12.63% B) Dividend payout ratio: $20,000 Dividends ÷ $120,000 Net Income = 16.67% C) Earnings per share: ($120,000 Net Income − $0 Preferred Dividends) ÷ ($800,000 ÷ $5 par) Average Common Shares Outstanding = $0.75 D) The other stockholder ratios would include the dividend yield ratio, the total payout ratio, Powered by Cognero

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Ch 12 Financial Statement Analysis and the stock repurchase payout ratio. Since this company had no common stock repurchases, its total payout ratio is equal to its dividend payout ratio and its stock repurchase payout ratio is 0. 162. A) Dividend yield ratio: ($42,000 Common Dividends ÷ 105,000 Common Shares Outstanding) Current year: Dividends per Common Share ÷ $16.00 Closing Market Price per Share = 2.50% ($38,000 Common Dividends ÷ 95,000 Common Shares Outstanding) Prior year: Dividends per Common Share ÷ $13.00 Closing Market Price per Share = 3.08% B) Earnings per share: ($110,000 Net Income − $12,000 Preferred Dividends) ÷ 105,000 Current year: Average Common Shares Outstanding = $0.93 ($123,000 Net Income − $15,000 Preferred Dividends) ÷ 95,000 Average Prior year: Common Shares Outstanding = $1.14 C) Dividend payout ratio: Current year: $42,000 Common Dividends ÷ $110,000 Net Income = 38.18% Prior year: $38,000 Common Dividends ÷ $123,000 Net Income = 30.89% D) Total payout ratio: ($42,000 Common Dividends + $10,000 Common Stock Repurchases) ÷ Current year: $110,000 Net Income = 47.27% ($38,000 Common Dividends + $14,000 Common Stock Repurchases) ÷ Prior year: $123,000 Net Income = 42.28% E) Stock repurchase payout ratio: Current year: 47.27% Total Payout Ratio − 38.18% Dividend Payout Ratio = 9.09% Prior year: 42.28% Total Payout Ratio − 30.89% Dividend Payout Ratio = 11.39% F) The dividend yield ratio, earnings per share, and stock repurchase payout ratio all decreased from the prior year to the current year, but the dividend payout and total payout ratios improved. 163. Current ratio:

$843,072 Current Assets ÷ $218,626 Current Liabilities = 3.86 ($214,572 Cash + $137,112 Short-Term Investments + $194,877 Receivables) ÷ Quick ratio: $218,626 Current Liabilities = 2.50 ($214,572 Cash + $137,112 Short-Term Investments) ÷ $218,626 Current Cash ratio: Liabilities = 1.61 The company has very strong liquidity ratios, which indicate the company's ability to pay its current obligations when they come due. A banker would likely lend money to this company. 164. $323,847 Cash Flows from Operations ÷ $218,626 Current Liabilities = 1.48 No, the company is not in danger of liquidity problems. The operating cash flow ratio indicates that its cash flows from operations are nearly 150% of current liabilities. This is a healthy indicator of the company's ability to generate cash to pay its current obligations. Operating cash flow ratio:

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Ch 12 Financial Statement Analysis 165. Accounts receivable turnover:

Inventory turnover:

Asset turnover:

$2,004,719 Net Sales ÷ [($194,877 + $175,967) ÷ 2] Average Accounts Receivable = 10.81 It will take 33.77 days (365 ÷ 10.81) to collect receivables. $848,363 Cost of Goods Sold ÷ [($256,108 + $247,392) ÷ 2] Average Inventory = 3.37 It will take 108.31 days (365 ÷ 3.37) to sell its inventory, which is an indicator of problems with obsolete inventory or sales. $2,004,719 Net Sales ÷ [($1,557,496 + $1,382,245) ÷ 2] Average Total Assets = 1.36 It will take 268.38 days (365 ÷ 1.36) to produce sales revenue.

166. Gross profit percentage: ($2,004,719 Net Sales − $848,636 Cost of Goods Sold) ÷ $2,004,719 Net Sales = Year 3: 57.67% ($1,937,021 Net Sales − $847,366 Cost of Goods Sold) ÷ $1,937,021 Net Sales = Year 2: 56.25% Operating margin percentage: ($440,879 Income before Taxes + $615 Interest Expense) Income from Operations ÷ Year 3: $2,004,719 Net Sales = 22.02% ($394,240 Income before Taxes + $958 Interest Expense) Income from Operations ÷ Year 2: $1,937,021 Net Sales = 20.40% Net profit margin percentage: Year 3: $304,501 Net Income ÷ $2,004,719 Net Sales = 15.19% Year 2: $271,626 Net Income ÷ $1,937,021 Net Sales = 14.02% Return on assets: [$304,501 Net Income + ($615 Interest Expense × 0.70)] ÷ [($1,557,496 + Year 3: $1,382,245) ÷ 2] Average Total Assets = 20.75% [$271,626 Net Income + ($958 Interest Expense × 0.70)] ÷ [($1,382,245 + Year 2: $1,250,000) ÷ 2] Average Total Assets = 20.69% Return on equity: Year 3: $304,501 Net Income ÷ [($1,193,673 + $1,024,498) ÷ 2] Average Equity = 27.46% Year 2: $271,626 Net Income ÷ [($1,024,498 + $969,000) ÷ 2] Average Equity = 27.25% All of the company's profitability ratios have improved from Year 2 to Year 3. 167. Return on common equity: Year $304,501 Net Income ÷ {[($1,193,673 − $3,157) + ($1,024,498 − $3,157)] ÷ 2} 3: Average Common Equity = 27.53% Year $271,626 Net Income ÷ {[($1,024,498 − $3,157) + ($969,000 − $3,157)] ÷ 2} 2: Average Equity = 27.34% There is a slight increase in the return on common equity ratio from Year 2 to Year 3. 168. Year 3 ROE: $304,501 Net Income ÷ $2,004,719 Net Sales = 15.19% Powered by Cognero

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Ch 12 Financial Statement Analysis $2,004,719 Net Sales ÷ [($1,557,496 + $1,382,245) ÷ 2] Average Total Assets = 1.36 [($1,557,496 + $1,382,245) ÷ 2] Average Total Assets ÷ [($1,193,673 + $1,024,498) ÷ 2] Average Equity = 1.33 15.19% × 1.36 × 1.33 = 27.48% Year 2 ROE: $271,626 Net Income ÷ $1,937,021 Net Sales = 14.02% $1,937,021 Net Sales ÷ [($1,382,245 + $1,250,000) ÷ 2] Average Total Assets = 1.47 [($1,382,245 + $1,250,000) ÷ 2] Average Total Assets ÷ [($1,024,498 + $969,000) ÷ 2] Average Equity = 1.32 14.02% × 1.47 × 1.32 = 27.20% According to the DuPont analysis, there is a slight increase in the return on equity ratio from Year 2 to Year 3. 169.

Effect on Total Assets

Effect on Current Ratio

− − N N

− − − N

Effect on Total Liabilities

Effect on the Debt to Equity Ratio

N N

+ N

170.

Cash received from customers for accounts receivable balances due Declaration and payment of cash dividends Purchase of long-term assets for cash

171. There are two primary weaknesses of performing time series analysis exclusively. First, it is difficult to analyze changes without knowing the relative change. Second, it is difficult to evaluate the changes without knowing how the competition or industry is performing. 172. The primary weakness is difficulty in analyzing changes without knowing the relative change. It is nearly impossible to compare companies using raw financial statement numbers because even the closest competitors may be vastly different in size. Using percentage changes from year to year or between two financial statement line items controls for differences in the relative sizes of items of interest. This can be accomplished through horizontal analysis, vertical analysis, and ratio analysis. Powered by Cognero

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Ch 12 Financial Statement Analysis 173. Horizontal analysis is used to track the relative behavior in changes of percentages of financial statement items from one period to the next. It can flag increases or decreases that need to be examined more closely. It may also help with controlling expenses. 174. A banker is more interested in liquidity, which relates to the likelihood that a loan will be repaid. Liquidity indicates a company's ability to pay obligations on a current basis, whereas profitability measures the company's success in earnings results. 175. The amount of working capital and the change in working capital are just two indicators of the strength of the current position. A comparison of the current ratio and the quick ratio, along with the amount of working capital, gives a better analysis of the current position. See the following comparison:

Working capital Current ratio Quick ratio

Current Year $127,500 2.00 0.80

Prior Year $112,500 2.50 1.20

It is apparent that, although working capital has increased, the current ratio has fallen from 2.50 to 2.00 and the quick ratio has fallen from 1.20 to 0.80. 176. A)

Rama Co. appears to have the best inventory management. Compared to the other companies, Rama sells its entire inventory about 7.00 times per year, whereas RBC sells its inventory about 5.50 times per year and Rock Co. experienced a large decline from 12.60 times to 6.00 times per year.

RBC has the best short-term liquidity, as indicated by its relatively high measures for the current ratio and quick ratio. In addition to having the highest results for these two liquidity ratios, RBC's ratios are improving since the prior year. Rama Co. also has strong liquidity measures, with steady or improved results from the prior year to the current year.

Rock Co. has experienced decline in its liquidity measures from the prior year to the current year, and its quick ratio indicates that the company does not have sufficient quick assets to cover its current obligations.

177. Liquidity is a relative measure of the nearness to cash of the assets and liabilities of a company. It is an indicator of the likelihood of the company's ability to pay its current obligations. 178. Asset efficiency ratios or operating ratios are measures of how efficiently a company uses its assets. The principal asset efficiency ratios are measures of turnover, that is, the average length of time required for assets to be consumed or replaced. In turnover ratios, the activity (the income statement amount) is divided by the base asset to which it relates (such as inventory to cost of goods sold, accounts receivable to sales, or total assets to sales). 179. The desire of the investors to relate the earnings of a company to the market price of the stock affects the market price directly. When earnings per share increase, it is an indicator that the company is profitable. When earnings per share decline, it is an indicator that the company is not profitable. Investors will react to these increases and decreases. When earnings are up, more shares of stock are sold on the market, which causes the market price of the stock to increase. 180. Profitability ratios measure how profitable a company is. These ratios measure two aspects of a company's profit. The first aspect is the elements of operations that contribute to the company's profit. The profitability ratios that measure Powered by Cognero

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Ch 12 Financial Statement Analysis the first element include gross profit (or gross margin) percentage, operating margin percentage, and net profit margin percentage. This group of ratios expresses income statement elements as percentages of net sales. The second aspect is the relationship of the company's profit to its total investment and investment by its stockholders. The profitability ratios that measure the second aspect include return on assets and return on equity. This group of ratios divides measures of income by measures of investment. 181. The return on assets considers the investment by both creditors and stockholders. The return on common equity provides a return on the investment by common stockholders only. Because most companies have total assets that exceed common stockholders' equity, the return on assets will be lower than the return on common equity. 182. Short-term liquidity ratios, which compare some combination of current assets or operations to current liabilities, include the current and quick ratios, the cash ratio, and the operating cash flow ratio. The formulas are as follows: 1. 2. 3. 4.

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Appendix 1: Investments

Indicate whether the statement is true or false. 1. A debt security represents a creditor relationship with another company. a. True b. False 2. If an investor owns over 50% of the outstanding common stock, the investor is deemed to have control over the operating and financial policies of the investee. a. True b. False 3. Held-to-maturity securities are equity and debt investments that management intends to sell in the future, but not necessarily in the near term. a. True b. False 4. For all debt investments classified as trading or available-for-sale securities, the initial purchase of the investment is recorded at cost. At each subsequent reporting date, the fair value method is used to account for the investment. a. True b. False 5. On the balance sheet, held-to-maturity securities are classified as noncurrent assets unless the date of maturity is within 1 year or one operating cycle, whichever is longer. a. True b. False 6. Securities issued by a corporation as a form of ownership in the business, such as common stock and preferred stock, are called equity securities. a. True b. False 7. The equity method of accounting is used if an investor owns between 20% and 50% of another company and the investor is able to exert influence over the other company. a. True b. False 8. An advantage of the equity method over the fair value method is that it prevents an investor from manipulating its own income by exerting influence over the amount and timing of investee dividends. a. True b. False 9. If an investor holds enough common stock to control the investee (50% or more common stock ownership), then the two corporations are no longer separate accounting entities. In such cases, the investor must prepare consolidated financial statements, which combine its financial statements with those of the investee as if they were a single company. a. True b. False Powered by Cognero

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Appendix 1: Investments 10. If the parent owns 90% of the subsidiary's stock, then 90% of the subsidiary's assets and liabilities are included in the consolidated balance sheet. a. True b. False 11. If an investor holds 50% or more of the investee's outstanding common stock, then the investor is referred to as the parent and the investee is called the subsidiary. a. True b. False 12. Minority (or noncontrolling) interest is disclosed when the parent owns more than 50%, but less than 100% of the outstanding common stock. a. True b. False 13. Any transaction or set of transactions that brings together two or more previously separate entities to form a single accounting entity is called a business combination. a. True b. False 14. The excess of acquisition cost over the current value of the investee's identifiable net assets, referred to as goodwill, may not be recorded by the investor under current generally accepted accounting principles. a. True b. False 15. A purchased company must be recorded at the value of the cash and other consideration given by the acquiring company. a. True b. False 16. If the acquisition cost exceeds the current value of the net assets (assets minus liabilities) acquired, the investor must also be purchasing an intangible asset arising from attributes that are not separable from the business—such as customer satisfaction, product quality, skilled employees, and business location. a. True b. False

Indicate the answer choice that best completes the statement or answers the question. 17. Debt securities include all of the following except a. accounts payable. b. corporate bonds. c. U.S. treasury securities. d. municipal bonds. 18. Debt securities that are accounted for on an amortized cost basis because management intends to hold the investment until the debt contract requires the borrower to completely repay the debt are known as a. available-for-sale securities. Powered by Cognero

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Appendix 1: Investments b. trading securities. c. held-to-maturity securities. d. U.S. treasury securities. 19. Debt securities that are bought and sold frequently with the intent to profit on short-term changes in prices are called a. held-to-maturity securities. b. trading securities. c. available-for-sale securities. d. corporate bond securities. 20. Which method of accounting is used when an investor is able to exert significant influence over another company? a. passive method b. fair value method c. equity method d. control method 21. Ownership in a corporation is represented by shares of common or preferred stock called a. acquired securities. b. stock securities. c. passive securities. d. equity securities. 22. If an investor owns 20% to 50% of the outstanding common stock of an investee, the investor is assumed to possess a. passive influence over the investee. b. control over the investee. c. significant influence over the investee. d. parental oversight over the investee. 23. If an investor holds 50% of more of the common stock of an investee, the investor is assumed to a. be the parent company. b. be the subsidiary company. c. have passive influence over the company. d. have fair value ownership over the company. 24. A company is referred to as having significant influence if it owns a. 33% of the debt securities of another company. b. 100% of the debt securities of another company. c. 15% of the outstanding stock of another company. d. 20% to 50% of the outstanding stock of another company. 25. The excess of the purchase cost of a company’s identifiable net assets over their fair value is called a. fair market value. b. net appreciation. c. goodwill. Powered by Cognero

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Appendix 1: Investments d. a business combination. 26. Goodwill is classified on the balance sheet as a(n) a. current asset. b. intangible asset. c. intangible liability. d. depreciable asset. 27. Goodwill can likely arise from all the following attributes except for a. customer satisfaction. b. business location. c. product quality. d. competitive product pricing. 28. If a parent company acquires between 50% and 100% of a subsidiary’s stock, the remaining voting stock not held by the parent is called a. unpurchased stock. b. noncontrolling interest. c. unpurchased interest. d. outstanding stock. 29. What are the effects on the accounting equation from the recognition of an unrealized loss on trading securities? a. Assets and stockholders' equity will decrease. b. There are no effects, as unrealized gains and losses should not be recorded. c. Assets and liabilities will decrease. d. Stockholders' equity will decrease and liabilities will increase. 30. What are the effects on the accounting equation from the purchase of a short-term investment? a. Assets and stockholders' equity will increase. b. There are no effects, as assets will increase and decrease by the same amount. c. Assets and liabilities will decrease. d. Stockholders' equity will increase and liabilities will decrease. 31. Which method of accounting for investments results in unrealized gains and losses because the investments must be marked to market? a. equity method b. amortized cost method c. fair value method d. trading method 32. The investments in both trading and available-for-sale securities must be written up or down to fair value at the balance sheet date. Such practice is often called a. consolidation. b. marking to market. c. passive investing. Powered by Cognero

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Appendix 1: Investments d. segregation of investments. 33. An investor's available-for-sale securities increased in market value from $50,000 to $55,000 as of the balance sheet date. Which of the following journal entries would be required? a. Realized Gain on Investments 5,000 Allowance to Adjust Investments to Market 5,000 b. Allowance to Adjust Investments to Market 5,000 Realized Gain on Investments 5,000 c. Unrealized Gain on Investments 5,000 Allowance to Adjust Investments to Market 5,000 d. Allowance to Adjust Investments to Market 5,000 Unrealized Gain on Investments 5,000 34. Allowance to Adjust Trading Securities to Market is a(n) a. asset account. b. contra asset account. c. liability account. d. unrealized gain or loss account. 35. Investments in debt securities that are classified as held-to-maturity are accounted for by the a. fair value method. b. amortized cost method. c. DuPont method. d. equity method. 36. When a company purchases less than 50% of the equity securities of another company, which of the following statements is true? a. Both companies' financial statements must be combined in consolidation. b. The equity method of accounting will be required if the company's investment is at least 20%. c. The fair value method of accounting will be used only if the securities are classified as available-for-sale. d. The fair value method of accounting will be used only if they are trading securities. 37. The equity method of accounting for an investment is used when a company purchases a. more than 20% of the debt securities of another company. b. 100% of the debt securities of another company. c. 15% of the equity securities of another company. d. between 20% and 50% of the equity securities of another company. 38. A passive investment is one in which the owner a. is not attempting to exert influence over the company. b. owns between 15% and 25% of the company's outstanding stock. c. uses the equity method of accounting for the investment. d. is gradually attempting to gain control over the company. 39. A company is referred to as a parent if it owns Powered by Cognero

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Appendix 1: Investments a. 33% of the debt securities of another company. b. 100% of the debt securities of another company. c. 15% of the stock of another company. d. more than 50% of the stock of another company. 40. On January 1, Year 1, P Company purchased all of the outstanding common stock of S Company. The consolidation of the two balance sheets requires a a. credit adjustment to eliminate P Company's investment in S Company account. b. debit adjustment to eliminate S Company's investment in P Company account. c. debit adjustment to eliminate P Company's investment in S Company account. d. credit adjustment to eliminate S Company's investment in P Company account. 41. On January 1, Year 1, P Company purchased all of the outstanding common stock of S Company. Which of the following represents the journal entry needed to consolidate the balance sheets of the two companies? a. Investment in S XXX Common Stock XXX Retained Earnings XXX b. Investment in S XXX Retained Earnings XXX c. Common Stock XXX Retained Earnings XXX Investment in S XXX d. Retained Earnings XXX Investment in S XXX 42. Which of the following statements is incorrect? a. Adjustments are required to eliminate any transactions between the parent and the subsidiary (e.g., selling or other transfer of assets). b. Even when the parent owns less than 100% of the subsidiary's stock, 100% of the subsidiary's assets and liabilities are included on the consolidated balance sheet. c. Any consolidated net income attributable to minority interest must be clearly identified and shown on the consolidated income statement. d. Consolidated net income is equal to the sum of the parent's net income and the sub's net income. 43. The journal entry required to record the receipt of dividends under the fair value method of accounting for investments includes a a. credit to the investment account. b. debit to the investment account. c. credit to Dividend Income. d. debit to Retained Earnings. 44. Which method of accounting for investments recognizes income when income is earned by the investee? a. fair value method b. amortized cost method c. trading method d. equity method Powered by Cognero

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Appendix 1: Investments 45. Any transaction or set of transactions that brings together two or more previously separate entities to form a single accounting entity is called a a. business plan. b. business combination. c. corporation. d. joint venture. 46. A transaction that brings together two or more previously separate entities to form a single legal entity can take the form of a(n) a. stock acquisition or a debt acquisition. b. debt acquisition or an asset acquisition. c. asset acquisition or a stock acquisition. d. asset acquisition or a liabilities acquisition. 47. P Company paid $500,000 for 100% of the net assets (assets less liabilities) of S Company. The current value of S Company's net assets was only $475,000. As a result of this acquisition, P Company must recognize a. negative goodwill. b. goodwill. c. a gain. d. a loss. 48. Which of the following statements is incorrect? a. The financial statements for a 100% asset acquisition will be different from the consolidated financial statements for a 100% stock acquisition. b. Business combinations usually, but not always, transfer ownership of the acquired business entity from one stockholder group to another. c. Purchased assets are recorded at their current value to the purchaser, without regard for their recorded value to the seller. d. The excess of acquisition cost over the current value of the investee's identifiable net assets is recorded as goodwill.

49. Thomkin Enterprises purchased the following debt securities on November 1: Acquisition Security Type Cost Trading Securities: Today's Bank & Trust Debt $5,000 Tommy's Wholesale Debt 4,300 Available-for-Sale Securities: Time Saver Tug Boat Inc.

Debt Debt

$8,000 1,500

Additional information: On December 31, the company collected interest totaling $800 from its four debt securities. Powered by Cognero

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Appendix 1: Investments Prepare the journal entries to record the purchase of the securities and the receipt of the interest payment. 50. Tail Winds Corporation acquired the following equity securities during the year: TICO Industries capital stock, 150 shares $11,250 Thankful Products capital stock, 400 shares 10,200 The company's investment in these two companies is passive. During the year, TICO paid a dividend of $1.10 per share, and Thankful paid a dividend of $1.75 per share. On December 31, the fair value of these securities was $79 per share for TICO and $23 per share for Thankful. A)

Prepare journal entries to record the purchase of these two investments and the receipt of dividends.

Prepare the necessary journal entry on December 31

How should these investments be disclosed in the company's December 31 financial statements?

51. On February 1, Tidewater Management Inc. purchased 30% of the common stock of a supplier, Excellent Inc., for $5,000,000 of cash to assure itself of access to high-quality raw materials. On October 15, Excellent declared and paid a cash dividend of $70,000. For the year ended December 31, Excellent reported net income of $600,000. A)

Record the journal entry that Tidewater should make for its purchase of Excellent Inc's common stock.

Show the journal entry that Tidewater should prepare to record the receipt of dividends.

What journal entry should Tidewater make to record its share of Excellent Inc.'s net income?

52. On January 1, Teddy Bear Company purchased 25% of the common stock of one of its major suppliers, Fluff n' Stuff, for $1,000,000 cash. On November 1, Fluff n' Stuff declared and paid a cash dividend of $50,000. Further, for the year ended December 31, Fluff n' Stuff reported net income of $200,000. A) Which method of accounting for investments should be used for the Fluff n' Stuff stock? B) Record all of the necessary journal entries for this investment during the year. C) What will be the balance in the investment account on December 31? 53. On January 1, Parent Inc. purchases all the outstanding common stock of Sub Corporation for $750,000. Since Parent has control over Sub, a consolidated balance sheet must be prepared from the individual balance sheets of both companies. Complete the following worksheet to prepare the consolidated balance sheet on January 1. Parent Assets: Current assets Investment in Sub Property, plant, and equipment Total assets Powered by Cognero

Subsidiary

$ 250,000 750,000

$ 700,000

8,000,000

300,000

$9,000,000

$1,000,000

Adjustments Debit Credit

Consolidated

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Appendix 1: Investments Liabilities

$1,000,000

$ 250,000

Stockholders' Equity Common stock Retained earnings

4,000,000 4,000,000

100,000 650,000

Total liabilities and stockholders' equity

$9,000,000

$1,000,000

54. On January 1, Parent Inc. purchased 80% of the outstanding common stock of Sub Corporation for $750,000. Since Parent has control over Sub, a consolidated balance sheet must be prepared from the individual balance sheets of both companies. Complete the following worksheet to prepare the consolidated balance sheet on January 1. Parent Assets: Current assets Investment in Sub Property, plant, and equipment Total assets

Subsidiary

$ 250,000 750,000

$ 700,000

8,000,000

300,000

$9,000,000

$1,000,000

Liabilities

1,000,000

$ 250,000

Stockholders' Equity Common stock Retained earnings

4,000,000 4,000,000

100,000 650,000

Total liabilities and stockholders' equity

$9,000,000

$1,000,000

Adjustments Debit Credit

Consolidated

55. Tusk Company acquired all of the assets of Tinsel Company for $1,000,000. With the approval of Tinsel's stockholders and creditors, Tinsel transferred all of its assets and liabilities to Tusk Company and distributed the cash to Tinsel's stockholders. On the acquisition date, Tinsel's stockholders' equity was $500,000. Tusk Company determined that Tinsel's liabilities of $500,000 are correctly valued, but its identifiable assets are worth $300,000 more than their book value of $1,000,000. Determine the amount of goodwill to be recognized by Tusk Company as a result of its acquisition of Tinsel Company. 56. Tipper Company acquires Tacoma Company for $1,000,000. On the acquisition date, Tacoma has the following balances: Assets Liabilities

$1,500,000 600,000

A) Record the journal entry Tipper Company will make to acquire Tacoma Company under each of the following assumptions: 1. Tacoma Company sells Tipper Company its net assets and goes out of existence as a corporation. 2. Tacoma Company sells Tipper Company its stock but continues as a legal entity. B) Explain the difference in the consolidated financial statements for these two assumptions. Powered by Cognero

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Appendix 1: Investments

57. What is the difference between trading securities and available-for-sale securities? What are the similarities in terms of their accounting treatment? 58. You are the owner of a company that produces an energy drink that has unique properties. Its primary ingredient, a berry found only in the South American rain forest, causes a significant prolonged increase in the drinker's metabolism rate. You have found only a single supplier of this berry, Tropical Supplies Inc., a publicly traded company. What are some things you can do to assure your company of access to this important raw material? 59. You are the accounting manager for a midsized electronics retailer. Your accounting intern is having trouble understanding how your company accounts for its investments in the stock of other companies. You just spent the better part of the morning reviewing in detail all of the recording and reporting requirements, but the intern is still fuzzy. Complete the following table to compare and contrast for your intern the requirements for the different types of stock investments that your company might make. Be sure to use the legend provided. Investments in Equity Securities Passive (own <20% of the stock) Significant Influence (own 20% to 50% of the stock) Control (own >50% of the stock)

Accounting Method

Reporting of Dividends

Reporting of Unrealized Gains/Losses

Legend: Accounting Method: Equity method, Equity method plus consolidation, or Fair value method Reporting of Dividends: Reduces investment account, Eliminated, or Net income Reporting of Unrealized Gains/Losses: Net income or Not recognized

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Appendix 1: Investments Answer Key 1. True 2. True 3. False 4. True 5. True 6. True 7. True 8. True 9. True 10. False 11. True 12. True 13. True 14. False 15. True 16. True 17. a 18. c 19. b 20. c 21. d 22. c 23. a 24. d 25. c Powered by Cognero

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Appendix 1: Investments 26. b 27. d 28. b 29. a 30. b 31. c 32. b 33. d 34. b 35. b 36. b 37. d 38. a 39. d 40. a 41. c 42. d 43. c 44. d 45. b 46. c 47. b 48. a 49. Date Nov. 1

Accounts Investments—Trading Securities Investments—Available-for-

Debit

Credit

9,300 9,500 Page 12

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Appendix 1: Investments Sale Securities Cash

18,800

Dec. 31 Cash

800 Interest Income

50. A)

Accounts Investments in Equity Securities

800

Debit 21,450

Credit

Cash

21,450

Cash

865 Dividend Income [(150 × $1.10) + (400 × $1.75)]

Accounts Unrealized Loss on Equity Securities

865

Debit

Credit

400 Investment in Equity Securities

400

Minority passive equity investments are reported at fair value on the balance sheet. Any unrealized gains or losses are reported in “Other Income and Expenses” on the income statement.

51. A) Date Feb. 1

Accounts Investments— Equity Method

Debit 5,000,000 Cash

B) Oct. 15

Accounts Cash

C) Dec. 31

Accounts Investments— Equity Method

Credit

5,000,000

Debit 21,000 Investments—Equity Method

Credit

Debit

Credit

21,000

180,000 Investment Income— Equity Method

52. A) The equity method B) Journal entries: Date Account Jan. 1 Investment in Fluff n' Stuff Cash Nov. 1

Cash (25% × $50,000) Investment in Fluff n' Stuff

180,000

Debit 1,000,000

Credit 1,000,000

12,500 12,500 Page 13

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Appendix 1: Investments Dec. 31

Investment in Fluff n' Stuff (25% × $200,000) Income from Investment in Fluff n' Stuff

50,000 50,000

C) $1,000,000 – $12,500 + $50,000 = $1,037,500 53. Parent

Subsidiary

Adjustments Debit Credit

Consolidated

Assets: Current assets Investment in Sub Property, plant, and equipment Total assets

$ 250,000 750,000 8,000,000 $9,000,000

300,000 $1,000,000

$ 950,000 — 8,300,000 $9,250,000

Liabilities

$1,000,000

$ 250,000

$1,250,000

4,000,000 4,000,000

100,000 650,000

$9,000,000

$1,000,000

Stockholders' Equity Common stock Retained earnings Total liabilities and stockholders' equity

$ 700,000 750,000

100,000 650,000

4,000,000 4,000,000 $9,250,000

54. The minority/noncontrolling interest is $150,000 [20% × ($100,000 + $650,000)], and this amount must be shown as a component of stockholders' equity on the consolidated balance sheet. Adjustments Debit Credit

Parent

Sub

Assets: Current assets Investment in Sub Property, plant, and equipment Total assets

$ 250,000 750,000 8,000,000 $9,000,000

$ 700,000 300,000 $1,000,000

$ 950,000 — 8,300,000 $9,250,000

Liabilities

$1,000,000

$ 250,000

$1,250,000

4,000,000 4,000,000

100,000 650,000

$9,000,000

$1,000,000

Stockholders' Equity Common stock Retained earnings Minority/noncontrolling interest Total liabilities and stockholders' equity

750,000

80,000 520,000 150,000

Consolidated

4,020,000 4,130,000 (150,000) $9,250,000

55. The acquisition cost exceeds the current value of the net assets (assets minus liabilities) acquired by $200,000: Acquisition cost Current value of identifiable net assets acquired: Book value of assets acquired $1,000,000 Adjustment to current value 300,000 Powered by Cognero

$1,000,000

$1,300,000 Page 14

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Appendix 1: Investments Less: Book value of liabilities acquired $500,000 Adjustment to current value 0 Excess of acquisition cost over current value (goodwill)

(500,000)

(800,000) $200,000

56. A) 1. Tipper Company's recording of the acquisition would be recorded with the following journal entry: Account Debit Credit Assets 1,500,000 Goodwill 100,000 Liabilities 600,000 Cash 1,000,000 2. Tipper Company's recording of the acquisition would be recorded with the following journal entry: Account Debit Credit Investments— Equity Method 1,000,000 Cash 1,000,000 B) The financial statements for a 100% asset acquisition will be identical to the consolidated financial statements for a 100% stock acquisition. 57. Trading securities are debt investments that management intends to sell in the near term. Trading securities are bought and sold frequently with the intent to profit on short-term changes in price. Trading securities are always classified as current assets on the balance sheet. Available-for-sale securities are debt investments that management intends to sell in the future, but not necessarily in the very short term. Therefore, debt investments that do not warrant inclusion as trading securities or held-to-maturity securities are considered available-for-sale. On the balance sheet, available-for-sale securities are classified as current or noncurrent assets depending on whether they are expected to be sold within 1 year or one operating cycle, whichever is longer. In both cases, the fair value method of accounting is used. This means that the investments are recorded at their fair value, which results in marking to market any investments that meet the criteria of trading and available-for-sale securities. Any resulting unrealized holding, gain or loss, is reported on the income statement for trading securities and as part of other comprehensive income in stockholders' equity for available-for-sale securities. 58. There are several things you can do to ensure the availability of this unique berry. You can offer a premium price to provide additional incentive for the supplier to sell to your company. You can also make it easy for the supplier to sell to your company by removing any red tape associated with the purchase transaction. Finally, your company should consider purchasing the common stock of the supplier. The more common stock you purchase, the more influence that can be exerted. 59. Investments in Equity Securities

Accounting Method

Passive (own <20% of the stock) Significant Influence (own 20% to 50% of the stock) Control (own >50% of the stock)

Fair value method

Equity method Equity method plus consolidation

Reporting of Dividends

Reporting of Unrealized Gains/Losses Net income

Net income Reduces investment Not recognized account Eliminated

Not recognized

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Appendix 1: Investments

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Appendix 2: Time Value of Money

Indicate whether the statement is true or false. 1. Compound interest is a method of calculating the time value of money in which interest is earned on the previous periods' interest. a. True b. False 2. The interest period is the time interval between interest calculations. a. True b. False 3. The future value of a single amount is the original cash flow plus simple interest as of a specific future date. a. True b. False 4. The future value is the amount to which an account may grow when interest is compounded. a. True b. False 5. Interest is the time value of money. a. True b. False 6. The initial amount of money borrowed or loaned is also known as the future value of cash flows. a. True b. False 7. The interest rate is the percentage that is multiplied by the future value to yield the amount of interest for that period. a. True b. False 8. Interest may only be charged to a borrower by a bank. a. True b. False 9. Cash flows that are equal and occur multiple times one period apart are called annuities. a. True b. False 10. The present value of an annuity is the discounted future value of cash flows made at regular intervals. a. True b. False

Indicate the answer choice that best completes the statement or answers the question. 11. The amount to which an account will grow when interest is compounded is its Powered by Cognero

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Appendix 2: Time Value of Money a. present value. b. intrinsic value. c. future value. d. real value. 12. The time interval between interest calculations is called the a. interest period. b. compound period. c. interest rate. d. future value. 13. In present value problems, the interest rate is also called the a. compound rate. b. discount rate. c. present value rate. d. annuity. 14. A series of equal cash flows one period apart is known as a(n) a. interest period. b. loan repayment schedule. c. annuity. d. discount. 15. When a contract establishes a relationship between an amount borrowed and one or more future cash flows, the initial amount is known as a. the future value. b. the present value. c. an annuity. d. the interest rate. 16. In transactions involving the borrowing or lending of money, as interest is paid, the balance in the liability account of the borrower a. decreases. b. increases. c. remains unchanged. d. is transferred to interest income. 17. Compound interest is computed on which of the following? a. only the original amount b. the original amount and any undistributed interest earned in prior periods c. the original amount and any distributed or undistributed interest earned in prior periods d. only the distributed and undistributed interest earned in prior periods 18. The present value of cash flows is treated as the receivable balance that will be exactly satisfied by the future receipts by the: Powered by Cognero

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Appendix 2: Time Value of Money a. lender. b. borrower. c. broker. d. debtor. 19. Merlin is saving money to purchase a new car. If he deposits $5,000 into a saving account that pays 8% interest, compounded semiannually, how much will he have in his account at the end of the first year? a. $5,400 b. $5,200 c. $5,408 d. $5,008 20. The first cash flow in the future value of an annuity occurs a. at the start of the first period. b. at the maturity date of the loan. c. when interest is collected. d. at the end of the first period. 21. When the present value of an annuity is calculated, which of the following is not required? a. the number of cash flows b. the interest of discount rate per period c. the future value of the cash flows d. the amount of each repeating cash flow 22. If the stated interest rate is 12% per year, but it is compounded semiannually, then the adjusted rate used for present or future value calculations will be a. 12% per year. b. 3% per quarter. c. 6% per 6-month period. d. 1% per 6-month period. 23. Calculations of future values are projections of the future balance based upon a. past cash flows. b. future cash flows. c. past and future cash flows. d. expected future cash flows. 24. The journal entry to record the interest income from an annuity would include a a. debit to Interest Income. b. credit to Interest Income. c. debit to Interest Expense. d. credit to Interest Expense. 25. When determining the future value of an annuity, cash flows are presumed to occur a. at the start of the first period. Powered by Cognero

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Appendix 2: Time Value of Money b. at the end of the first period. c. when the interest is received. d. at the maturity date. 26. When the calculated present value is reversed, the resulting figure is the a. interest accrued. b. future value. c. total interest earned. d. total interest paid. 27. An investor expects to receive 10 payments of $5,000 each made at the end of each period. If interest is compounded at 5% annually, what is the future value of these payments? a. $3,069.55 b. $7,387.30 c. $38,608.65 d. $62,889.45 28. An investor expects to receive payments of $3,000 every 6 months for the next 7 years. If the market rate of interest is 4% per year compounded semiannually, what is the future value of these payments? a. $22,302.84 b. $23,694.87 c. $47,921.82 d. $54,875.73 29. Manatee Manufacturing sells a piece of equipment to make room for new machinery. Manatee will receive the sales price of $50,000 at the end of 4 years. Assuming interest at a rate of 6% per year, the present value of this future cash flow is how much? a. $39,604.50 b. $39,515.50 c. $63,124.00 d. $173,255.50 30. Tom liquidates an investment, and his proceeds will be received in 8 annual payments of $10,000 each with interest computed at 7%. What is the present value of this annuity? a. $89,228.00 b. $59,713.00 c. $17,181.90 d. $5,820.10 31. Mark is planning on making an investment in a new computer system. He wants to know how much he must invest to have $9,000 in 4 years if the interest rate is 5% per year? a. $10,939.59 b. $2,479.41 c. $7,826.83 d. $7,404.30 Powered by Cognero

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Appendix 2: Time Value of Money 32. What is the interest rate of a single $20,000 cash flow in 3 years if the present value is $15,443.60? a. 7% b. 8% c. 9% d. 10% 33. Harlan Fuller needs $2,000 in 7 years. What amount must he invest in a 6% savings bond? a. $1,425.98 b. $1,330.12 c. $9,533.08 d. $8,200.40 34. Chris Hines invested $12,000 in a municipal bond. The bond pays 8% interest and matures in 3 years. How much money will Chris have at maturity? a. $22,211,16 b. $15,116.52 c. $36,960.00 d. $38,596.80 35. Tom Nelson invested $9,000 in an account yielding 6%. How long must he leave the money in the account to obtain $12,044.07? a. 2 years b. 3 years c. 4 years d. 5 years 36. Jay has made a deal with his daughter to start a car fund for when she graduates from college in 6 years. He has found an investment that will yield an interest rate of 8% per year. If he wants to have $25,000 to spend on the car for his daughter, how much must he initially invest? a. $15,754.25 b. $16,113.45 c. $13,772.55 d. $14,038.95 37. Jack and Jill are saving for a house. How much will they have saved if they make 8 deposits of $5,000 each (one at the end of each year) in an account that earns 4% interest compounded annually? a. $51,169.86 b. $63,732.74 c. $46,071.15 d. $49,506.11 38. Tom is saving for an engagement ring. If he deposits $500 payments in an account (one at the end of each year) that earns 6% interest compounded annually, how much will he have saved by the end of the tenth year? a. $895.42 Powered by Cognero

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Appendix 2: Time Value of Money b. $13,435.18 c. $6,590.40 d. $6,554.39 39. Julie expects to receive payments of $1,200 at the end of the year for the next 3 years. Assuming Julie invests the payments in an account earning 8%, how much will she have at the end of the 3 years? a. $3,895.68 b. $3,600.00 c. $10,670.81 d. $3,092.52 40. Eric is considering buying a car. He can either purchase the car outright or make 5 annual payments of $10,000 at the end of each year. If the interest rate is 7%, how much is the outright purchase price? a. $14,025.50 b. $7,129.90 c. $41,002.00 d. $57,863.70 41. Mark would like to retire in 25 years. If he deposits $10,000 at the end of each of the next 25 years in an account earning 7% interest, how much will he have in this account at the end of 25 years? a. $250,000 b. $758,292.17 c. $632,490.40 d. $291,339.50 42. Betty has received an inheritance from her uncle. She would like to invest some of the inheritance to pay for her son's college. To pay for college, she will need to withdraw $25,000 per year for 4 years beginning 1 year from today. How much must she invest if she can earn 5%? a. $77,397.37 b. $20,567.50 c. $31,913.55 d. $88,648.75 43. Chuck is looking to invest $15,000 now so that he can purchase a new car in 4 years. The expected price of the car, after tax, title, and registration, is expected to be $18,232.65. What is the interest rate required on Chuck's investment to achieve this amount? a. 4% b. 5% c. 6% d. 7% 44. Hanson's Pilings is planning to purchase a new dredge pump in 4 years. Billy Hanson, the owner, invests $11,800 in an account that pays 8% interest compounded quarterly. How much will Mr. Hanson have in the account at the end of 4 years? a. $14,864.58 Powered by Cognero

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Appendix 2: Time Value of Money b. $16,198.92 c. $16,053.78 d. $21,840.97 45. Which of the following is the correct formula to calculate the future value of a single amount? (Assume that FV is the future value, f is the cash flow, i is the interest rate, and n is the number of periods.) a. FV = (f) (1 + n)i b. FV = (f + i)n c. FV = (f) (1 + i)n d. FV = (f) / (1 + i)n 46. Which of the following is the correct formula to calculate the present value of a single amount? (Assume that PV is the present value, f is the future cash flow, i is the interest rate, and n is the number of periods.) a. PV = (f) (1 + n)i b. PV = (f + i)n c. PV = (f) (1 + i)n d. PV = (f) / (1 + i)n 47. Which of the following is the correct formula to calculate the future value of an annuity? (Assume that FV is the future value, f is the cash flows, i is the interest rate, and n is the number of periods.) a. FV = (f) [(1 + i)n − 1] / i b. FV = (f) [(1 + n)i − 1] / n c. FV = [(f) (1 + i)n] / n d. FV = (f) / (1 + i)n 48. Which of the following is the correct formula to calculate the present value of an annuity? (Assume that PV is the present value, f is the future cash flows, i is the interest rate, and n is the number of periods.) a. PV = (f) [1 + {1 / (1 – i)n}] / i b. PV = (f) [(1 + n)i − 1] / n c. PV = [(f) (1 + i)n] / n d. PV = (f) [1 – {1 / (1 + i)n}] / i 49. You just won the lottery and have elected to receive 10 annual payments instead of the lump sum of $74,818.59. Calculate the amount of your annual payment assuming a 6% interest rate. a. $17,178.90 b. $10,165.45 c. $18,000.00 d. $10,832.11

50. Wanda Ward makes an investment of $11,800, which pays 8% interest that is compounded quarterly. How much interest will have accrued at the end of 48 months? Powered by Cognero

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Appendix 2: Time Value of Money 51. Marvin's Manufacturing can invest in a new process but will need to purchase new equipment. The cost of the equipment is $75,000 and needs to be in place in 8 years. The company invests the money at 8% interest compounded semiannually. How much will it need to invest in order to have $75,000 in 8 years? 52. Beach Catering sold its business for $75,000 under an asset purchase agreement. Under the agreement, the buyer made an initial payment of $35,000, which Beach Catering invested at 6% compounded semiannually. At the beginning of the fourth year, the balance of the purchase price was paid by the buyer. Beach Catering places this $40,000 in the same investment with interest compounded semiannually at 6%. At the end of 6 years, how much does Beach Catering have in its investment account? 53. On January 1, Gigi Corporation purchased a new piece of equipment for which it issued an installment note to the bank. As per the agreement in the note, the company is required to make 5 annual installments of $45,000 at the end of each year. The interest rate is 7% per year. 1.

On January 1, what cost will the company record for the purchase of new equipment in its accounting books? Round your answer to the nearest whole dollar.

2. Prepare a journal entry to record the purchase of equipment on January 1.

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Appendix 2: Time Value of Money Answer Key 1. True 2. True 3. False 4. True 5. True 6. False 7. False 8. False 9. True 10. True 11. c 12. a 13. b 14. c 15. b 16. a 17. b 18. a 19. c 20. d 21. c 22. c 23. c 24. b 25. b Powered by Cognero

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Appendix 2: Time Value of Money 26. b 27. d 28. c 29. a 30. b 31. d 32. c 33. b 34. b 35. d 36. a 37. c 38. c 39. a 40. c 41. c 42. d 43. b 44. b 45. c 46. d 47. a 48. d 49. b 50. $4,398.92 (or $4,398.78) This problem will typically be solved using the Future Value of a Single Amount table for 16 periods at 2%. The problem Powered by Cognero

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Appendix 2: Time Value of Money can also be solved using the Present Value of a Single Amount table for 16 periods at 2%. Although the latter is less conventional, it will produce the correct answer. However, the answers will differ slightly due to rounding of the tables to five decimal places. Periods: 4 years × 4 = 16 periods Rate Future Value of a Single Amount: $11,800 × (FV of a Single Amount, 16 periods, 2%) $11,800 × 1.37279 = $16,198.92 $16,198.92 – $11,800 = $4,398.92 Present Value of a Single Amount: $11,800 × (PV of a Single Amount, 16 periods, 2%) $11,800 ÷ 0.72845 = $16,198.78 $16,198.78 – $11,800 = $4,398.78 51. $40,043.25 (or $40,043.14) This problem will typically be solved using the Present Value of a Single Amount table for 16 periods at 4%. The problem can also be solved using the Future Value of a Single Amount table for 16 periods at 4%. Although the latter is less conventional, it will produce the correct answer. However, the answers will differ slightly due to rounding of the tables to five decimal places. Periods: 8 years × 2 = 16 periods Rate: Present Value of a Single Amount: $75,000 × (PV of a Single Amount, 16 periods, 4%) $75,000 × 0.53391 = $40,043.25 Future Value of a Single Amount: $75,000 ÷ (FV of a Single Amount, 16 periods, 4%) $75,000 ÷ 1.87298 = $40,043.14 52. $97,663.44 (or $97,664.47, or $97,663.60, or $97,663.96) Due to the nature of the problem, most students will solve it using the Future Value of a Single Amount table. However, technically the correct answer could be derived from the Present Value of a Single Amount table. Note: If the present value table is used, there will be slight differences due to rounding. Periods: 3 years × 2 = 6 periods Rate Option A Using Future Value of a Single Amount $35,000 × (FV of a Single Amount, 6 periods, 3%) $35,000 × 1.19405 = $41,791.75 Powered by Cognero

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Appendix 2: Time Value of Money $41,791.75 + $40,000.00 = $81,791.75 $81,791.75 × (FV of a Single Amount, 6 periods, 3%) $81,791.75 × 1.19405 = $97,663.44 Using Present Value of a Single Amount $35,000 ÷ (PV of a Single Amount, 6 periods, 3%) $35,000 ÷ 0.83748 = $41,792.04 $41,792.04 + $40,000.00 = $81,792.04 $81,792.04 ÷ (PV of a Single Amount, 6 periods, 3%) $81,792.04 ÷ 0.83748 = $97,664.47 Option B Using Future Value of a Single Amount $35,000 × (FV of a Single Amount, 12 periods, 3%) $35,000 × 1.42576 = $49,901.60 $40,000 × (FV of a Single Amount, 6 periods, 3%) $40,000 × 1.19405 = $47,762.00 $49,901.60 + $47,762.00 = $97,663.60 Using Present Value of a Single Amount $35,000 ÷ (PV of a Single Amount, 12 periods, 3%) $35,000 ÷ 0.70138 = $49,901.62 $40,000 ÷ (PV of a Single Amount, 6 periods, 3%) $40,000 ÷ 0.83748 = $47,762.34 $49,901.62 + $47,762.34 = $97,663.96 53. 1. The cost of the equipment is the present value of the 5 annual installments of $45,000 that are to be made at the end of each year. Present Value = Installment Amount (PV of an Annuity, 5 periods, 7%) = $45,000 × 4.10020 = $184,509 2. Following is the journal entry to record the purchase of equipment: Jan. 1

Equipment Notes Payable

184,509 184,509

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