MCQs of chapter two

1) All the statements below represent the Common-Size Balance Sheet except:
a. Expresses each item on the balance sheet as a percentage of total assets
b. Useful for evaluating trends within a firm
c. Is a part of proxy statement
d. Allows for making industry comparisons

2) Cost allocation of fixed assets other than land is:

a. Prepaid expenses
b. Depreciation
c. Deferred tax
d. Capital lease

3) Which one is not applicable for Current Assets?

a. Prepaid expenses
b. Unearned Revenue
c. Accounts receivable
d. Financial Securities of thirteen months

4) During a period of inflation, the LIFO method typically produces

a. The highest cost of goods sold expense
b. The lowest ending valuation of inventory
c. Cost of goods sold values at base year cost of inventory items
d. A and B only

5) During a period of inflation, the FIFO method typically produces

a. The lowest cost of goods sold expense
b. The highest ending valuation of inventory
c. Cost of goods sold must be below the average cost
d. A and B only

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True or False

1. Operating cycle: Time required to purchase or manufacture inventory, sell the product,
and collect the cash True

2. Net realizable value: is the actual amount of account less an allowance for doubtful
accounts. True
3. Straight-line method allocates an equal amount of expense to each year of the
depreciation period. True

4. Accelerated methods apportion larger amounts of expense to earlier years of the asset’s
depreciable life. True

5. Liabilities are what the firm owes to insiders. False

6. Stockholders’ equity is what the firm owes to external owners. False

7. Consolidation is the parent company owns more than 60% of voting stock. False

8. LIFO generates a larger cost of goods sold expense and lower earnings in a period of
deflation. False

9. FIFO generates a larger cost of goods sold expense and lower earnings in a period of
deflation. True

10. FIFO generates a larger cost of goods sold expense and lower earnings in a period of
inflation. False

11. LIFO generates a larger cost of goods sold expense and lower earnings in a period of
inflation. True

12. Deferred taxes arise from the use of the same method of depreciation for tax and
reporting purposes. False

13. Deferred taxes are the product of temporary differences in the recognition of revenue and
expense for taxable income in relative to reported income. True