won (on) (2) wor) ws wa wo wo ‘PLU J's Self-Test, Brief Exercises, Exercises, Problem Set A, and many = lsd sec elon: more resources are available for practice in WileyPLUS. the Preface tothe textbook. owing the purpose ofthe Gilferentypes of omewerk wall Self-Test Questions Answers are on page 43. 1. Which is mot one of the three forms of business 3, 8, Which is an advantage of corporations relative to - Which statement about users of accounting informa- Which of the following did not result from the /- Which of the following is an example of a financing . Net income will result during a time period when: organization? (a) Sole proprictorship. (b) Creditorship. (©) Partnership. (@ Corporation. partnerships and sole proprietorships? (a) Lower taxes. (b) Harder to transfer ownership. (©) Reduced legal liability for investors. (@) Most common form of organization. tion is ineorreet? (a) Management Sarbanes-Oxley Act? (@) Top management must now certify the accuracy of financial information, vonsidered an internal user (b) Taxing authorities are considered external users. (©) Present creditors are considered external users. (@) Regulatory authorities are considered internal (b) Penalties for fraudulent activity increased. (©) Independence of auditors increased. (@) Tax rates on corporations increased. Which is not one of the three primary business activities? (@) Financing, (b) Operating, activity? (©) Advertising. (a) Investing. (a) Issuing shares of common stock. (b) Selling goods on account. (©) Buying delivery equipment. (@) Buying inventory. (a) assets exceed liabilities, (b) assets exceed revenues. (©) expenses exceed revenues, (@) revenues exceed expenses. ‘The financial statements for Joseph Corporation contained the following information. Accounts receivable Sales revenue Cash $5,000 75,000 15,000 Salaries and wages expense 20,000 Rent expense 10,000 What was Joseph Corporation's net income? (a) $60,000. (b) $15,000. (©) $65,000, (@ $45,000, Ihelp you understand what each contributes © your accounting sills {and competencies, (CS What section of a statement of cash flows (L045) indicates the cash spent on new equipment during the past accounting period? (a) The investing activities section. (b) The operating activities section. (©) The financing activities section. (d) The statement of cash flows does not give this information. 10, Which statement presents information as of a spe- (W045) cific point in time? (a) Income statement. (b) Balance sheet. (©) Statement of cash flows. (@) Retained earnings statement. 11, Which financial statement reports assets, liabilities, (105) and stockholders’ equity? (a) Income statement. (b) Retained earnings statement (©) Balance sheet. {(@) Statement of cash flows. 12, Stockholders’ equity represents: wo {a) claims of creditors (b) claims of employees. (©) the difference between revenues and expenses. (d) claims of owners, 13. As of December 31, 2014, Stoneland Corporation has (05) assets of $3,500 and stockholders’ equity of $1,500. ‘What are the liabilities for Stoneland Corporation as of December 31, 2014? {a) $1,500. (©) $2,500. (b) $1,000. (@) $2,000. 14, The element of a corporation's annual report that (00) describes the corporation's accounting methods is! are the: (a) notes to the financial statements. (b) management discussion and analysis (©) auditor's report. (d) income statement. 15. The clement of the annual report that presents an (0) opinion regarding the fairness of the presentation of the financial position and results of operations islare the: a) income statement. (b) auditor's opinion, (©) balance sheet. (a) comparative statements. Go to the book's companion website, ‘warwaviley.com/collegefkimmel, to access additional Self-Test Questions. Des01 ao ‘Answers are on page 95. 1. In a classified balance sheet, assets are usually classi- fied as: (a) current assets; long-term assets; property, plant, and equipment; and intangible assets (b) current assets; long-term investments; property, plant, and equipment; and common stock. (©) current assets; long-term investments; tangible assets; and intangible assets, (@) current assets; long-term investments; property, plant, and equipment; and intangible assets. 2. Current assets are listed: (a) by order of expected conversion to cash, (©) by longevity. (@) alphabetically . The correct order of presentation in a classified bal- (10!) ance sheet for the following current assets is: (a) accounts receivable, cash, prepaid insurance, (&) cath, inventory, accounts receivable, prepaid (€) cash, accounts recelvable, inventory, prepaid (a) inventory, cash, accounts recevable, prepaid (b) by importance (01) 4.A company has purchased a tract of land. It ex- pects to build a production plant on the land in approximately 5 years, During the 5 years before construction, the land will be idle. The land should be reported as: (@) property, plant, and equipment (b) land expense. (©) along-term investment. (@) an intangible asset. (09. $, CSG hich is an indicator of profitability? (a) Current ratio. (b) Earnings per shave. (c) Debt to assets ratio. (@) Free cash flow. (02 6, C= For 2014, Ganos Corporation reported net income $26,000; net sales $400,000; and average shares ‘outstanding 4,000, There were preferred dividends of $2,000. What was the 2014 earnings per share? (a) $6.00. (c) $99.50. (b) $6.50. (a) $100.00. (09 7. The balance in retained earnings is not affected by: (a) net income. (b) net loss. (c) issuance of common stock. (@) dividends. (00 8. CG Which of these measures is an evaluation of ‘a company’s ability to pay current liabilities? (a) Earnings per shave. () Current ratio (c) Both (a) and (b). (@) None of the above. (024) 9, The following ratios are available for Bachus Inc. and Newton Inc. Debtto Earnings Assets Ratio per Share Bachus Inc. 2:1 75% $3. Newton Inc. 15:1 40% $2.75 ‘Compared to Newton Inc., Bachus Inc, has: (@) higher lig higher solvency, and higher profitability. (b) lower liquidity, higher solvency, and higher profitability Questions 73 (©) higher liquidity, lower solvency, and higher profitabilit (d) higher liquidity and lower solvency, but profita- bility cannot be compared based on information provided, 10. Companies can use free cash flow to (a) pay additional dividends. (b) acquire property, plant, and equipment. (©) pay off debts. (@) Allof the above. 11, Generally accepted accounting principles are: (@) a set of standards and rules that are recognized as a general guide for financial reporting, established by the Internal Revenue om (oH (©) the guidelines used to resolve ethical dilemmas, (@) fundamental truths that can be derived from the laws of nature, 12, What organization issues U.S, accounting standards? (0) (a) Financial Accounting Standards Board, (b) International Accounting Standards Committee, (©) International Auditing Standards Committee. (@) None of the above. 13. What is the primary criterion by which accounting (0 1) information can be judged? (a) Consistency. (b) Predictive value. (0) Usefulness for decision-making. (@ Comparability. 14, Neutrality is an ingredient of: won Faithful representation Relevance (a) Yes Yes ) No No © Yes No @ No Yes 15. The characteristic of information that evaluates (0) ‘whether itis large enough to impact a decision. (a) Comparability. (©) Cost (b) Materiality. (@) Consistency. Go to the book’s companion website, (TIN wwwstileycomvcollegerkimmel, o access SAPPHT additional Self-Test Questions,Self-Test Questions Answers are on page 159. 1. The effects on the basic accounting equation of per- forming services for eash are to (a) increase assets and decrease stockholders’ equity (b) increase assets and increase stockholders’ equity. (©) increase assets and increase liabilities. (@) increase liabilities and increase stockholders’ 2. Genesis Company buys a $900 machine on credit. (10!) ‘This transaction will affect the: a) income statement only. {(b) balance sheet only. (©) income statement and retained earnings state- ‘ment only (@) income statement, retained earnings statement, and balance shect. wn equity. 136 chapter 8 The Accounting Information System (\01)_ 3. Which of the following events is not recorded in the _(@)_ Decreases assets and increases stockholders’ equity accounting records? (d) Decreases assets and decreases lisbiltics. (2) Equipments purchased on acount 10, Which is not part ofthe recording process? wo ss employee is terminat {@) Analyzing transactions (©) Acath investment ie made int the busines, (b) Proparng ral alone (@) Company pays dividend to stockholders. (6) Entering transactions in a journal (1) 4 During 2014, Gibson Company assets decreased (dl) Posting transactions. $50,000 and its liabilities decreased $90,000. Its 11, Which of these statements about a journal is false? (05) stockholders’ equity therefore: (@) Tteontains only revenue and expense accounts. (@) increased $40,000. () It provides a chronological record of transactions (b) decreased $140,000. (c)_Ithelps to locate errors because the debit and credit (©) decreased $40,000. amounts for each entry can be readily compared, (€) increased $140,000. (@) Itdiseloses in one place the complete effect of a (025. Which statement about an account is true? transaction. (@) In its simplest form, an account consists of wo 12, A edger: wn Parts visant {@) contains only asset and liability accounts. (b) An account is an individual accounting record of (b) should show accounts in alphabetical order. increases and decreases inspec ase abit, (@) ja colueien of the aie group of enous and stockholders’ equity items, maintained by a company. (©) There are separate accounts for specific assets (@) provides a chronological record of transactions. mute Y 13, Posting: won holders’ equity items. (a) normally occurs before journalizing. (@ Theleftsdeofanascountisthecreditordecrease ff) TAT Soe ean dt oh journal (6) isan optional step inthe recording process. WD 6 OP iccase both assata and liabilities, (d) transfers journal entries to ledger accounts. () decrease both assets and liabilities. 14, OSS A tral balance: oo Oe a os (@) isa list of accounts with their balances ata given * time, oy 7 Meerease asses and Increase Tables (©) proves that proper account titles were used. wa +A revenue econ debit (©) will not balance if a correct journal entry is posted (a) is increased by debits. twice. Ce) decreased by ered, (@) proves that all transactions have been recorded Baa paneer seh 15, == A trial balance will not balance if wa y (a) a correct journal entry is posted twice. (05) 8. Which accounts normally have debit balances? (b) the purchase of supplies on account is debited to @ Ac cp ani co 2 ie a Da ts, expensca, retained carnings. () a cash divic is debited to lends for (6) Assets, liabilities, and dividends. $1,000 and credited to Cash for $100. (2) Assets, dividends, and expenses. (@) a$450paymenton account is debited to Accounts (9) 9 Paying an account payable with cash affects the com- Payable for $45 and credited to Cash for $45 ponents of the accounting equation in the following (@) Decreases stockholders’ equity and decreases liabilities, (b) Increases assets and decreases liabilities. Go to the book’s companion website, ‘wwruwiley.com/college/kimmel, to access additional Self-Test Questions. G The Nees007) 13. Which account will have a zero balance after a com= 0) 14. Which types of accounts will appear in the post: Self-Test Questions Answers are on page 225. (WO) 1 Whats the periodicity assumption? (a) Companies should recognize revenue in the accounting period in which services are performed. (b) Companies should match expenses with revenues, (©) ‘The economic life of a business can be divided into artificial time periods. (@) The fiscal year should correspond with the calen- dar year, (W1) 2. Which principle dictates that efforts (expenses) be recorded with accomplishments (revenues)? (a) Expense recognition principle. (b) Historical cost principle. (©) Periodicity principle. (@) Revenue recognition principle. (0 3,@=—CWhich one of these statements about the accrual basis of accounting is false? (a) Companies record events that change their finan- cial statements in the period in which events occur, even if cash was not exchanged, (b) Companies recognize revenue in the period in which the performance obligation is satisfied, (©) This basis is in accord with generally accepted accounting principles. (@) Companies record revenue only when they receive cash, and record expense only when they ay out cash. (9. 4, Adjusting entries are made to ensure that: a) expenses are recognized in the period in which they are incurred, (b) revenues are recorded in the period in which the performance obligation is satisfied, (©) balance sheet and income statement accounts have correct balances at the end of an accounting period. @) Allof the above. (W065. Each of the following is a major type (or category) of 5) adjusting entry except: (a) prepaid expenses. (c) accrued expenses, (b) accrued revenues. (d) unearned expenses. (\00 6."The trial balance shows Supplies $1,350 and Sup- plies Expense $0. If $600 of supplies are on hand at the end of the period, the adjusting entry is: (@) Supplies yes" | Supplies Expense 00 6 Suppies 0 | (0 Supplies Experse 70 Supplies 730 (@) Supplies Expense joo | Supplies 00 200 chapter 4 Accrual Accounting Concepts (@) The company prepares the adjusted trial balance after it has journalized and posted the adjusting pany has journalized and posted closing entries? {a) Service Revenue. (b) Supplies. (©) Prepaid Insurance. (@) Accumulated Depreciation. closing trial balance? (a) Permanent accounts. (®) Temporary accounts. 7. Adjustments for unearned revenues: 4) 8, Adjustments for prepaid expenses: uy (d) decrease revenues and increase assets. (a) Depreciation Expense 1,000 (b) Depreciation Expense og Se | (a) increase assets and increase liabilities. (b) increase assets and increase revenues. (c) decrease assets and decrease revenues. (a) decrease liabilities and increase revenues. war 00 | 1,000 1,000 | 1,000 | 1,000 | 1,000 (0) Salaries and Wages Espeme [400 | Salaries and Wages Payable 400 (©) Salaries and Wages Expense | 400 | Cash, 400 (@ Salaries and Wages Payable | 400 | Cash, 400 12, Which statement is incorrect concerning the adjusted (05) ‘rial balance? (@) An adjusted trial balance proves the equality of the total debit balances and the total credit balances in the ledger alter all adjustments are made. (b) The adjusted trial balance provides the primary basis for the preparation of financial state- ments. (©) The adjusted trial balance does not list temporary accounts. (©) Expense accounts. (@) None of the above. 15. All ofthe following are required steps in the account- (108) ing cycle except: (@) journalizing and posting closing entries (b) preparing an adjusted trial balance. (©) preparing a post-closing trial balance. (@) reversing entries. swlleycom/collegefkimmel,o access SYASelf-Test Questions Answers are on page 279. |.01) 1. Which of the following statements about a periodic 7 IF sales revenues are $400,000, cost of goods sold is (10) inventory system is true? $310,000, and operating expenses are $60,000, what () Companies determine cost of goods sold only at isthe gross profit? the end of the accounting period. (a) $30,000. ©) $340,000. (b) Companies continuously maintain detailed ©) $90,000. (€) $400,000. records of the cost of each inventory purchase 8, The multiplestep income statement for a merchan- (0) and sale. dising company shows each ofthese features except: (© The periodic system provides better control over (a) gross profit, inventories than a perpetual system (©) cost of goods sold. (@ The inereased use of computerized systems has (6) asales section. increased the use of the periodic system. (@) All of these are present. [\0.) 2. Which of the following items does not result in an 9. If beginning inventory is $60,000, cost of goods (\)®) adjustment in the Inventory account under a perpet- "purchased is. $380,000, and ending inventory is wal system? $50,000, what is cost of goods sold under a periodic {@) A purchase of merchandise. system? () Aretum of merchandise to the supplies (@) $390,000. (©) Payment of freight costs for goods shipped toa —_(b) $370,000. customer (©) $330,000. (@ Payment of freight costs for goods received from (@) $420,000. a supplies 10. Bufford Corporation had reported the follow (105) J.0: 3. Which sales accounts normally have a debit balance? "ing amounts at December 31, 2014: sales reventie () Sales discounts, $184,000; ending inventory $11,600; beginning inven- (b) Sales returns and allowances. tory $17,200; purchases $60,400; purchase discounts (6) Both (a) and (b). $3,000; purchase returns and allowances $1,100; (@ Neither (a) nor () freight in $600; freight-out $900. Calculate the cost of 0054. A company makes a credit sale of $750 on June 13, goods available for sale terms 2/10, 2/30, on which it grants a return of $50 on (a) $69,400. (©) $56,900. June 16. What amount is received as payment in full ©) $74,100. (@ $197,700. ‘on June 23? 11.€==8 Which of the following would affect the (0) {a) $700. (©) $685, _gross profit rate? (Assume sales remains constant.) () So8e, (@) S050. (@) An increase in advertising expense 103) 5. To record the sale of goods for cash in a perpetual (b) A decrease in depreciation expense inventory system: (6) An increase in cost of goods sold. (@) only one journal entry is necessary to record cost (@) A decrease in insurance expense ‘of goods sold and reduction of inventory. 12, @==6 The gross profit rate is equal to: wo (©) only one journal entry is necessary to record the (@) net income divided by sales. receipt of cash and the sales revenue ©) east of goods sold divided by sales. (©) two journal entries are necessary: one to record the (©) net sales minus cost of goods sold, divided by receipt of cash and sales revenue, and one to record net sales. the cost of goods sold and reduction of inventory (2) sales minus cost of goods sold, divided by cost of (@) journal eis are esr: one record the goods sold. receipt of reduction of inventory. ad one 43, puring the year ended December 31, 2014, Bjornstad (8) ta record the cost of goods sold and salerrevenwe. 7 Core stoa had the following results cals reve 00) 6. Gross profit will result i $267,000; cost of good sold $107,000; net income (@) operating expenses are less than net income. (b) sales revenues are greater than operating expenses. (©) sales revenues are greater than cost of goods sold. (@) operating expenses are greater than cost of goods, sold, $92,400; operating expenses $55,400; net cash pro- vided by operating activities $108,950, What was the ‘company’s profit margin? (a) 40%. (b) 60%, (0) 20.5%. (a) 34.6%, (01) 14, A quality of earnings ratio: (@) is computed as net income divided by net cash. provided by operating activities. (b) that isless than 1 indicates that a company might be using aggressive accounting tactics, (©) that is greater than 1 indicates that a company right be using aggressive accounting tactics. (2) is computed as net cash provided by operating Questions 259 "15. When goods are purchased for resale by a company (\08) using a periodic inventory system: (a) purchases on account are debited to Inventory: (b) purchases on account are debited to Purchases. (©) purchase returns are debited to Purchase Returns and Allowances, (@) freight costs are debited to Purchases. Go to the book’ companion website, ‘www.miley.com/college/kimmel, to access additional Self-Test Questions. activities divided by total assets. Vu epan wo 5. wa 6 wa TE wo wn wn Self-Test Questions Answers are on page 331 1. When isa physical inventory usually taken? (@) When the company has its greatest amount of inventory, (6) When a limited number of goods are being sold or received, (6) Atthe end of the company’s fiscal year: (@) Both (b) and (c). 2, Which of the following should not be included in the physical inventory of a company? (@) Goods held on consignment from another company. ©) Goods shipped on consignment to another company. 312 chapter 6 Reporting and Analyzing Inventory 4 2. 3. FOB shipping point. (2) All ofthe above should be included. 3. As a result of a thorough physical inventory, Rail- way Company determined that it had inventory worth $180,000 at December 31, 2014. This count did not take into consideration the following facts. Rogers Consignment store currently has goods worth $35,000 on its sales floor that belong to Rail- way but are being sold on consignment by Rogers. The selling price of these goods is $50,000. Rail way purchased $13,000 of goods that were shipped fon December 27, FOB destination, that will be received by Railway on January 3, Determine the correct amount of inventory that Railway should (3) $230.00 (9 s228000, thy s21500, {@) 8193000, Kam Company hs the folowing units and cot Units Unit Cost Inventory. Jan. 8.000 AIL Puhase.june 9130001 Ruhase.Nov 300013 19,000 units are on hand at December 31, whatis the ‘cost of the ending inventory under FIFO? (@) $99,000. {e) $113,000. @) $108,000, (@ $117,000. From the data in Question 4, what is the cost of the ‘ending inventory under LIFO? (@) $113,000. fe) $99,000. () $108,000. (a) $100,000. Davidson Blectronies has the following: Units Unit Cost Inventory, Jan. 1 5,000, $8 Purchase, April2 15,000 10 Purchase, Aug. 28 20,000 2 1fDavidson has 7000 units on hand at December 3, the cost of ending inventory under the average-coxt method x (=) $84,000, 2) $56,000 (&) $70,000, (a) 75250. =F tn perio ofrising prices, LIFO wil rodce: (@) higher net income than FIFO. (b) the same net income as FIFO. (©) lower net income than FIFO. (G) higher net income than average-cost. Considerations that affect the selection ofan inven- tory costing method do not incind 6) tax effects (b) balance sheet effects. (©) income statement effects (@) perpetual vers periodic inventory system The lowerof-costormarket rule for inventory isan example ofthe application of {@) the conservatism convention (6) the historical coat principle (©) the materiality concept. (@) the economic entity sumption © Which ofthese would cause inventory tam- ‘overt increase the most? {@) Increasing the amount of inventory on hand (b) Keeping the amount of inventory om hand con fant but increasing sales (©) Keeping the amount of inventory on hand con: stant but decreasing sales, (@) Decreasing the amount of inventory on hand and increasing sales. at December 31, 2014. It did not correct the error in 2014 or 2015. As a result, Harolds stockholders equity was G@) overstated at December 31, 2014, and under Stated at December 31, 2015. (©) overstated at December 31, 2014, and properly Stated at December 31,2015 (©) understated at December 31, 2014, and under stated at December 31, 2015 (@ overstated at December 31, 2014, and overstated st December 31,2015, Go to the book’ companion website, FAT ‘eww. wilexccom/college/kinmel, 0 access additional Self-Test Questions, os 11, Catlos Company had beginning inventory of $80,000, 05) ending inventory of $110,000, cost of goods sold of $285,000, and sales of $475,000, Carlos's days in inventory is: (a) 73 days. (©) 1025 days. (b) 121.7 days (@) 845 days 12, The LIFO reserve is: wo (a) the difference between the value of the inventory ‘under LIFO and the value under FIFO. (b) an amount used to adjust inventory to the lower. of-cost-onmarket, (©) the difference between the value of the inventory ‘under LIFO and the vale under average-cost (@) an amount used to adjust inventory to historical +13, Ina perpetual inventory system, wr (@) LIPO cost of goods sold will be the same as in a periodic inventory system, (b) average costs are based entirely on unit-costsim- ple averages. (©) a now average is computed under the average- cost method alter each sale, (2) FIFO cost of goods sold will be the same as in a periodic inventory system. *14. Fran Companys ending inventory is understated (0!) by $4,000. The effects of this error on the current year’s cost of goods sold and net income, respec- tively, are: (a) understated and overstated, () overstated and understated, (©) overstated and overstated. (@) understated and understated "15, Harold Company overstated its inventory by $15,000 (0) woSelf-Test Questions Answers are on page 393, (1) 1. Which of the following is mot an element of the fraud _() segregation of duties. triangle? (©) phusical controls. {@) Rationalization. (4) documentation procedures. (b) Financial pressure. 8, The control features of a bank account do not include: (Li §) (6) Segregation of duties. (a) having bank auditors verify the corectness of the (@) Opportunity. bank balance per books. {0 t) 2. Internal control is used in a business to enhance the (b) minimizing the amount of cash that must be kept accuracy and reliability of fts accounting records ‘on hand, and to (©) providing a double record of all bank transactions (G) safeguard its assets (@) Safeguarding cash by using a bank asa depository (b) create fraud. 9. Which of the following control activities is not rele- (\0 2) (6) analyze financial statements vant when a company’ uses a computerized (eather (@) determine employee bonuses than manual) recounting system? (02) 3.556 The principles of internal control do mot (a) Establishment of responsibility ‘include: (b) Segregation of duties. (a) establishment of responsibility. (c) Independent internal verification. (©) documentation procedures. (@) all af these control activities are relevant to = (6) financial performance measures. ‘computerized system, (d) independent internal verification. 10. In a bank reconciliation, deposits in transit are: os) (2) 4. Physical controls do not include: (a) deducted from the book balance. (@) safes and vaults to store cash. (&) added tothe book balance. (©) independent bank reconciliations (©) added tothe bank balance. (c) locked warehouses for inventories. (d) deducted from the bank balance. {@) bank safety deposit boxes for important papers. 11, Which of the following items in a cash drawer at (08) (01) 5. Which of the following was not a result of the November 30 is not cash? Sarbanes-Oxley Act? {@) Money orders. {a) Companies must file financial statements with (b) Coins and currency. the Internal Revenue Service. (© Acustomer check dated December L (&) All publicly traded companies must maintain (@) A customer check dated November 28 adequate internal controls 12,@==G Which statement correctly describes the (06) {6) The Public Company Accounting Oversight Board" reporting of eash? was created to establish auditing standards and —_(@) Cash cannot be combined with cash equivalents, regulate auditor activity, / (@) Restricted cash funds may be combined with cash, (2) Corponate executives and boards of dizectors mst (c) Cash is listed first in the current assets section. ensure that controls are reliable and effective, and (@) Restricted cash funds cannot be reported as a they can be fined or imprisoned fr failure to doso. cuneate (03) 6. Permitting only designated personnel such as cash- 13. Which of the following would not be an example of (ll) !) fers to handle cash receipts is an application of the "good cash management? principle of {@) Provide discounts to customers to encourage {@) documentation procedures carly payment. () establishment of responsibilty. (6) Invest temporary excess cash in stock ofa small (c) independent internal verification. company. - (d) other controls. (©) Carefully monitor payments so that payments are 8 7. The use of prenumbered checks in dish not made early. an application of the principle of: {a) establishment of responsibility: (@) Employ just-in-time inventory methods to keep Inventory low. 372. chapter 7 Fraud, Internal Control, and Cash 08) 14, €5B Which of the following is not one of the see- tions of a cash budget? (a) Cash receipts section. (b) Cash disbursements section. (©) Financing section, (@ Cash from operations section. (109) *15. A check is written to replenish a $100 petty cash fund ‘when the fund contains receipts of $94 and $2 in cash. In recording the check: (a) Cash Over and Short should be debited for $4. (b) Petty Cash should be debited for $94, (©) Cash should be credited for $94, (@) Petty Cash should be credited for $4 Go to the book’ companion website, FYE woresilxcomicollegefkimmel, to access FAME additional Self-Test QuestionsSelf-Test Questions Answers are on page 444 (!) 1A receivable that Is evidenced by a formal instru- ‘ment and that normally requires the payment of (@) an account receivable. () a trade receivable (6) a note receivable (@) a classified receivable (2 2.Kersee Company on June 15 sells merchandise on aceaunt to S00 Eng Co. for $1,000, terms 2/10, 1/30. (On June 20, Eng Co. returns merchandise worth $300 to Kersce Company. On June 24, payment is received from Eng Co, forthe balance due. What isthe amount cof eash received? (@) $700. (e) $686, () S680. (@ None of the above. (WA) & Accounts and notes receivable are reported in the ‘aurrent assets section of the balance sheet a (@) cash (net) realizable value () net book valu. (6) lowerof-eastonmarket value Gi) invoice cost (9) 4.Net credit sales for the month are $800,000. The accounts receivable balance is $160,000. The allow- lance is calculated as 7.5% of the receivables balance Using the percentage-ofrecelvables basis. If Allow $5,000 before adjustment, what isthe balance after ‘adjustment? (a) $12,000, (©) 17,000. () $7,000. (a) $31,000. In 2014, Patterson Wholesale Company had net credit (0), sales of $750,000. On January 1, 2014, allowance for Doubtful Accounts had a credit balance of $18,000. During 2014, §30,000 “of “uncellecttbleaconunts receivable were written olf. Past experience indicates thatthe allowance should be 109% of the balance in receivables (percentage-ofteceivables basis). If the ‘accounts receivable balance at December 31 was $200,000, what isthe required adjustment to Allow tance for Doubitul Accounts at Decembec 31, 2014? (a) $20,000. (©) $22,000. () $75,000, (@) $30,000. An analysis and aging of the accounts receivable of (05), Raja Company at December 31 reveal these dats Accounts receivable $800,000, ‘Allowance for doubtful accounts per books before adjustment (credit) 0,000 Amounts expected to become ‘uncollectible 65,000 What {s the cash realizable value of the accounts receivable at December 31, after adjustment? (a) $685,000. (2) $800 000. lance for Doubtful Accounts has a credit balance of () $750,000. (2) $735,000. 426 chapier 8 Reporting and Analyzing Receivables any 7. avy 8. ay 9. Jann 10. ‘Which of these statements about promissory notes is incorrect? () The party making the promise to pay is called the maker (8) The party to whom payment is to be made is called the payee. (@) Apromissory note isnot a negotiable instrument. (@) promissory ote ore guid han an aecout recelvable ‘Michael Co. accepts a $1,000, 3-month, 12% promis 2 (©S ruddy Corporation had net credit sales during (05) the year of $800,000 and cas of goods sold of $500,000. ‘The balance in receivables atthe beginning of the year ‘was $100,000 and at the end of the year was $150,000 ‘What was the accounts receivable timover? (a) 64 53 @) 80 @ 40 (@$ Prall Corporation sells ts goods on terms of (5) 2/10, 1/30, Ithas an accounts receivable turnover of 7 ‘What is its average collection period (days)? sory note in settlement of an account with Tani Ca, Ge) 2555, (oa ‘The entry o record this transaction i: 30 @ 210 (2) Notes Receivable jo | 13, Which of these statements about Visa creditcard (08 ‘Accounts Receivable 1,030 sales is incorreet? () Notes Receivable | 1900 | (a) The credit card issuer conducts the credit investi- ‘Accounts Receivable 1,000 gation ofthe customer (6) Notes Receivable j ano | () The retailer is not involved in. the colle Sales Revenue 4,000 process. (2) Notes Receivable j smo | (©) The retailer must wait to receive payment from ‘Accounts Receivable 1.020 the issuer Schleis Co. holds Murphy Ines $10,000, 120-day, 946 note, The entry made by Schlels Co, when the note is collected, assuming no interest has previously been 14 accrued, is () Cash | 19300 | ‘Notes Receivable 10,300 ©) Cash | 000 | ‘Notes Receivable 10,000 (©) Accounts Receivable | 10,300 evneciate” —| | vac Interest Revenue 300 (8) cash 10,300 | ‘Notes Receivable 10,000 Interest Revenue 3005 1a company is concerned about extending credit toa risky customer, could do any of the following exeep () require the customer to pay cash in advance. () require the customer to provide a letter of eredit fora bank guarantee (© contact references provided by the customer, such as bunks and other suppliers, (2) provide the customer a lengthy payment period to increase the chance of paying. (@) The retailer receives cash more quickly than it ‘Would from individual customers. Gond Stulf Retailers accepted $50,000 of Citibank (0°) Visa credit card charzes for merchandise sold on July 1. Citibank charges 46 for its eredit card use, The entry to record this transaction by Good Stuff Retail rs will include a eredit to Sales Revenue of $50,000 and a debit(s) to () Cash $48,000 andl Service Charge Expense §2,000 (@) Accounts Receivable $48,000 and Service Charge Expense $2,000. (©) Cash $50,000, (@) Accounts Receivable $50,000, ‘A-company can accelerate its cash receipts by all of (05) the following except: (@) offering discounts for early payment. () accepting national credit canls for customer purchases (6) Selling receivables to a factor. (@) wrhting off receivables. Go 1 the bn conpanen vce, Sty ctnencem es Sooper oo EGAcre are pee 500, Able Tensing Company purchased a tow truck for vinten onspanyyachanedepipmentandincuved $80 0'on famnary 12018 Ir wa originally depo (0 Genie Commer rechmeegspmentantineuned Son's sigh a ok 10 far scsured salvage valu of $12.00. On Decembor 31 Cash price $24,000 30ne, belive adjusting entries bad ben made, the Sale tars 300 Company decided to change therein etna Insurance dusing wansit "200 Iioto 4 years Ginciing 2016) andthe sales vale to Installation and testing. 400 ‘$2,000. What was the depreciation expense for 2016? Total costs 25.800 ia) Se 000. ) $1300 (b S4.800 $1200. What amount shoul be recorded asthe cost ofthe 8 Addins a plant aes cquipment? (a) decreas habits. Ge) £24000. () $25.00. (©) increases ropa expense account. (0) $25.00. (3) $25.00. {@) Increases purchase account (0) 2. Hasingion Corporation wecelly eased a (8) ate capital expences. numberof truco Avie Corporation. Inimepeci> 9. Rennie Razor Company has decided o sell one ot ing the books of Harrington Corporation, you notice old manufacturing machines on June 30,2014 The thatthe nucks ave notboen recordedassrctson te machine was purchased for $80,000 on Tanury I, talance sheet Prom this youcan conclade that Har 2010 and was deprecated on a staghtdine bal fr fing acting fer tis eansaction a a {o years suming no salvage val the machine GG) operating ease (6) purchase “ead sold for 82600, shat was the amon of the (©) capitallease.—(@) None of the above. seiner cored tthe oh ls? Depreciation ea process {@)'si8.000, (6) 822000 san a) ea acculaton (B S8dnon ine S800 pin @) contallcation. (8) appeal 10, Which hells measure proves a indication (694. Cuso Company purchased equipment on January 1, of how efcent company in employing ts sss? 2015, sa foal invoice cost of $400,000, The aqui. (a) Currentratio. fhent han erdinated savage value of 310000 and (©) Profi margin. Sivetiated wef it Syenry What ithe monn (6) Debi to sets atin ‘faccumslsted depreciation at December 3, 2014, st (@) Asst turnover thestsight line method of deprecation isused? 11, Lake Coffe Company reported net sales of $180,000, {@) $80.00. (e) 78000. det income of $5800, beginning total assets of {&) Heoon, (3) $155000. $200 00, an ening tual ses of $800,000, What (09 5. @SC A company would minimize itx depreciation Was the company’s asset turnover? jense in the first year of owning an asset if it us (@) 0.90 &) 072 @. he Set chosing used (b) 0.20 (d) 139 9 (ea high estimated life, a high salvage value, and ‘eclining balance deprecation (b) a low estimated life,» high salvage value, and Straightline depreciation. (©) a high estimated life, a high salvage value, and Straightline depreciation (2) a low estimated Ife, a low salvage value, and eclining-balance depreciation, 6. When there is change in estimated depreciation: () previous depreciation should be corrected. () current and future years depreciation should be revised. (0) only future years depreciation shoul! be revised, G) None of the above, Perce Company incurred $150,000 of research and evelopment cont in its laboratry to develop 2 new product. It spent $20,000 in legal fees for @ patent ranted on January 2, 2014. On July 31. 2014, Pieree ald $15,000 for legal fees in a suecessil defense of the patent. What isthe total amount that should be debited to Patents through July 31, 20147 (a) $150,000. () $185,000 (@) $35,000. (@) Some other amount. Indicate which one ofthese statements is true (@) Since intangible assets lack physical substance, they need tobe dselosed ony inthe notes to the finoncial statements, aos) aos) ws) aw) wo, wn wn 482. chapter 9 Reporting and Anelyzing Long-Lived Assets jan 14, jun as. (6) Goodwill should be reported asa comtza account inthe stockholders equity section, (6) Totals of major classes of assets can be shown in the balance shest, with aset deals disclosed in ‘the notes to the financial statements (8) Intangible assets ave typically combined with lant sets and inpentny anal them shew nthe Droperts, plant, and eqtipment section Ha company reports goodwill as an intangible asset ‘nits books, what fe the one thing you Know with (0) The company is 2 valuable company worth ime vesting in (®) Tho company has a well-established brand name. (6) The company purchased another company. (8) The geodall will yonerale alo positive bus: ness for the company for many years to come. ‘Which ofthe following statements s false? () Ifan intangible asset has aint life it should be aioe (6) The amortization period of an infangible axel ‘can exceed 20 yours (©) Goodwill recorded only when 2 business is purchased. (@) Research and development conts are expemed when incurred, except wshen the research and evelopment expenditures result in a successful patent 16, Kant Enterprises purchased a tuck for $11,000 on January 1, 2013. The truck wil have an eximated sage value of $1,000 the end of 5 years If you Use the units oF activity method, the balance in accu. ‘mulated depreciation at December 31, 2014, can be ‘computed by the following formula (G) (311,000 > Total estimated activity) Units of activity for 2014 () ($10,000 ~ Tora estimated activity) x Units of activity for 2014. (©) ($11,000 = Toca! estimated activity) x Units of activity for 2013 and 2014, (@ ($10}000"+ Tosa estimated activity) x Units of activity for 2013 and 2014. Che ad Go to the books companion websits, ‘wwetileycomveollege/kimme, 9 acess ‘ddllonal Self-Test Questions ooSelf-Test Questions Answers are on page 564 12%, one-year note. What is the accrued interest at December 31, 2014? (W1) 1, The time period for classifying a liability as current is (a) $2655 (© $4425. ot aggre sung wateis Bee 8 Hs, @) shorter: (@ possible 4. 3D Company borrowed $70,000 on December 1 ona (\02) (1) 2, To be classified as a current liability, a debt must be expected to be paid: (a) out of existing current assets. (b) by creating other current liabilities. (©) within 2 years. (d) Either (a) or (b), (2 3, Ottman Company borrows $88,500 on September 1, 2014, from Farley State Bank by signing an $88,500, 6-month, 12% note. At December 31 (a) neither the note payable nor the interest payable isa current liability. (b) the note payable is a current liability but the in terest payable is not. (©) the interest payable is a current liability but the note payable is not. (@) both the note payable and the interest payable are current liabilities. 540 chapter 10 Reporting and Analyzing Liabilities (W9) 5. Alexis Company has total proceeds from sales of $4,515. IF the proceeds include sales taxes of 5%, what is the amount to be credited to Sales Revenue? (a) $4,000. (b) $4,300. (©) $4,289.25. (@) The correct answer is not given. ‘When recording payroll: (a) gross earnings are recorded as salaries and wages payable. (b) net pay'is recorded as salaries and wages expense. (©) payroll deductions are recorded as liabilities. (@) More than one of the above. (09) 7, No Fault Insurance Company collected a premium of $18,000 for a 1-year insurance policy on April 1. What amount should No Fault report as a current liability for Unearned Insurance Premiums at December 31? (a) $0. (©) $13,500. (b) $4,500. (a) $18,000. (09 8 What term is used for bonds that have specific assets pledged as collateral? (a) Callable bonds. (b) Convertible bonds. (W099 The market interest rate: () is the contractual interest rate used to determine ‘the amount of cash interest paid by the borrower. (b) is listed in the bond indenture. (©) is the rate investors demand for loaning funds. (@) More than one of the above is true. 10. Laurel Inc. issues 10-year bonds with a maturity wa 6 (©) Secured bonds. (@) Discount bonds. (uo 5) (a) credit of $3,745 to Loss on Bond Redemption. (b) debit of $3,745 to Premium on Bonds Payable. (6) credit of $1,255 to Gain on Bond Redemption. (d) debit of $5,000 to Premium on Bonds Payable. 14, == In a recent year, Derek Corporation had net (107) income of $150,000, interest expense of $30,000, and income tax expense of $20,000, What was Derek Cor poration’ times interest earmed for the year? (a) 5.00. (c) 6.67. (b) 4.00. (a) 7.50. GSC which of the following is not a measure of (107) liquidity? (a) Debt to assets ratio. (b) Working capital. (©) Current ratio, (@) Current cash debt coverage. “16. On January 1, Xiang Corporation issues $500,000, S.year, 12% bonds at 96 with interest payable on Jan- uuary 1. The entry on December 31 to record accrued bond interest and the amortization of bond discount using the straight-line method will include a (a) debit to Interest Expense, $57,600. (b) debit to Interest Expense, $60,000, (©) credit to Discount on Bonds Payable, $4,000. (@) credit to Discount on Bonds Payable, $2,000. “17. For the bonds issued in Question 16, what is the car (09) rying value of the bonds at the end of the third interest 0H) period? (a) $492,000. (©) $472,000. (b) $488,000. (a) $464,000.wy 8B wo) 9% (4) 10. wy i. (os) 12. (08) 13. What term is used for bonds that have specific assets pledged as collateral? (a) Callable bonds. (b) Convertible bonds. The market interest rate: (a) is the contractual interest rate used to determine the amount of cash interest paid by the borrower. (b) is listed in the bond indenture. (c) is the rate investors demand for loaning funds (d) More than one of the above is true. Laurel Inc. issues 10-year bonds with a maturit value of $200,000. If the bonds are issued at a pre- mium, this indicates that: (a) the contractual interest rate exceeds the market interest rate. the market interest rate exceeds the contractual interest rate. the contractual interest rate and the market in- terest rate are the same. (d) no relationship exists between the two rates. On January 1, 2014, Kelly Corp. issues $200,000, 5-year, 7% bonds at face value. The entry to record the issuance of the bonds would include a: (a) debit to Cash for $14,000. (b) debit to Bonds Payable for $200,000. (c) credit to Bonds Payable for $200,000. (d) credit to Interest Expense of $14,000. Prescher Corporation issued bonds that pay interest every July 1 and January 1. The entry to accrue bond interest at December 31 includes a: (a) debit to Interest Payable. (b) credit to Cash. (©) credit to Interest Expense. (d) credit to Interest Payable. Goethe Corporation redeems its $100,000 face value bonds at 105 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $103,745. The entry to record the redemption will include a: (c) Secured bonds. (@) Discount bonds. (b) © ary *; Ae entry on Mecember 21 to recorded accrued bond interest and the amortization of bond discount using the straight-line method will include a: (a) debit to Interest Expense, $57,600. (b) debit to Interest Expense, $60,000. (©) credit to Discount on Bonds Payable, $4,000. (d) credit to Discount on Bonds Payable, $2,000. “17. For the bonds issued in Question 16, what is the car- rying value of the bonds at the end of the third interest period? (a) $492,000. (c) $472,000. (b) $488,000. (d) $464,000. “18. On January 1, Holly Ester Inc. issued $1,000,000, 10-year, 9% bonds for $938,554. The market rate of interest for these bonds is 10%. Interest is pay- able annually on December 31. Holly Ester uses the effective-interest method of amortizing bond discount. At the end of the first year, Holly Ester should report unamortized bond discount of: (a) $54,900. (©) $51,610. (b) $57,591. (d) $51,000. “19.0n January 1, Nicholas Corporation issued $1,000,000, 14%, 5-year bonds with interest payable on December 31, The bonds sold for $1,072,096. The market rate of interest for these bonds was 12%. On the first interest date, using the effective-interest method, the debit entry to Interest Expense is for: (a) $120,000. (c) $128,652. (b) $125,581. (d) $140,000. *20. Sampson Corp. purchased a piece of equipment by issuing a $20,000, 6% installment note payable. Quar- terly payments on the note are $1,165. What will be the reduction in the principal portion of the note pay- able that results from the first payment? (a) $1,165. (c) $865. (b) $300. (d)_ $1,200. Go to the book's companion website, www.wiley.com/college/kimmel, to acce: additional SelfTest Questions. (VA (08) 08) qos) wo)wn Answers are on page 620. 1. Which of these is not a major advantage of a corpo: ration? (a) Separate legal existence. (b) Continuous life (©) Government regulations. (@) ‘Transferable ownership rights. 2. A major disadvantage of a corporation is: stockholders’ equity section begins with in capital (©) The authorization of capital stock does not result ina formal accounting entry. (@) Legal capital is intended to protect stockholders. 4, ABC Corp. issues 1,000 shares of $10 par value com mon stock at $12 per share. When the transaction is, recorded, credits are made to: (@) Common Stock $10,000 and Paid-in Capital in (2) limited liability of stockholders. (b) additional taxes. (©) transferable ownership rights. (@) None of the above. . Which of these statements is false? (a) Ownership of common stock gives the owner a voting right. Excess of Stated Value §2,000. (b) Common Stock $12,000. (©) Common Stock $10,000 and Ps Excess of Par Value $2,000. $2,000, in Capi (@ Common Stock $10,000 and Retained Earnings wn 09) 5. Treasury stock may be repurchased: oH) on 05) 05) 05) 10. (a) to reissue the shares to officers and employees under bonus and stock compensation plans. to signal to the stock market that management believes the stock is underpriced. (©) to have additional shares available for use in the acquisition of other companies. More than one of the above. () @ Preferred stock may have which of the following features? (a) Dividend preference (b) Preference to assets in the event of liquidation, (c) Cumulative dividends. (@) All ofthe above. U-Bet Corporation has 10,000 shares of 8%, $100 par value, cumulative preferred stock outstanding at December 31, 2014. No dividends were declared in 2012 or 2013. If U-Bet wants to pay $375,000 of divi- ‘ends in 2014, common stockholders will receive: (a) $0. (©) $215,000. (b) $295,000, (a) $135,000, Entries for cash dividends are required on the: (a) declaration date and the record date. (b) record date and the payment date. (c) declaration date, record date, and payment date. (@) declaration date and the payment date. Which of these statements about stock dividends is true? (a) Stock dividends reduce a company's cash balance (b) A stock dividend has no effect on total stock: holders’ equity: (©) A stock dividend decreases total stockholders! equity (@) A stock dividend ordinarily will increase total stockholders’ equity: Zealot Inc. has retained earnings of $500,000 and total stockholders’ equity of $2,000,000. It has 100,000, shares of $8 par value common stock outstanding, which is currently selling for $30 per share. If Zealot declares 2 10% stock dividend on its common stock: (a) net income will decrease by $80,000. (b) retained earnings will decrease by $80,000 and to- tal stockholders’ equity will increase by $80,000. () retained earnings will decrease by $300,000 and total stockholders’ equity will nerease by $300,000 (a) retained earnings will decrease by $300,000 and total paid-in capital will increase by $300,000. 802 chapter 11 Reporting and Analyzing Stockholders’ Equity 11. In thestockholders equity section ofthe balance sheet, common stock {@) is listed before preferred stock. (b) is listed after retained earnings (©) is part of paid-in capital. (@) is subtracted from treasury stock, 12, Inthe stockholders’ equity section, the cost of treasury stock is deducted from: (a) total paid-in capital and retained earnings (b) retained earnings. (©) total stockholders’ equity. (@) common stock in paid-in capital. 13, €==6 The return on common stockholders equity is usually increased by all of the following, exeept: (a) an increase in the return on assets ratio, () an increase in the use of debt financing. {©) an increase in the company’s stock price. (@) an increase in the company's net income 14, €=G Thomas is nearing retirement and would like to invest ina stock that will provide a good steady income. Thomas should choose a stock with a (@) high current ratio. (b) high dividend payest (©) high earnings per shave. (@) high price-carnings ratio. 15. Jackson Inc. reported net income of $186,000 dur ing 2014 and paid dividends of $26,000 on common stock. It also paid dividends on its 10,000 shares of £%, $100 par value, noncumulative preferred stock Common stockholders’ equity was $1,200,000 on January 1, 2014, and $1,600,000 on December 31, 2014, The company’s return on common stockhold. rs! equity for 2014 i: (a) 10.0%. © 7.1% (b) 9.08, (a) 13.3%. 16, If everything else is held constant, earnings per share is increased by: (a) the payment of acash dividend to common share- holders. (@) the payment of a cash dividend to preferred sharcholders (© the issuance of new shares of common stock. () the purchase of treasury stock iM De Go to the book’: companion website, ‘wwniwiley.com/college/kimmel, to access additional Self-Test Questions, To) oz) woe we a awy wn wn wn won wn wn Self-Test Questions Answers are on page 684, 1. Which of the following is incorrect about the state- ment of cash flows? (a) Iisa fourth basic financial statement. (b) Tt provides information about cash receipts and cash payments of an entity during a period, (©) It reconciles the ending cash account balance to the balance per the bank statement, (@) Itprovides information about the operating, invest- ing, and financing activities of the business. 2. Which of the following will not be reported in the statement of cash flows? (a) The net change in plant assets during the year: (b) Cash payments for plant assets during the year (©) Cash receipts from sales of plant assets during the year, (@) Sources of financing during the period. 3. The statement of cash flows classifies cash receipts and cash payments by these activities: (a) operating and nonoperating. (b) operating, investing, and financing. (©) financing, operating, and nonoperating. (@) investing, financing, and nonoperating. 4, Which is an example of a cash flow from an operating activity? (@) Payment of cash to lenders for interest. (b) Receipt of cash from the sale of capital stock. (©) Payment of cash dividends to the company’s stockholders. (@) None of the above, 5. Which is an example of a cash flow from an investing activity? (a) Receipt of cash from the issuance of bonds payable. (b) Payment of cash to repurchase outstanding capital stock. (©) Receipt of cash from the sale of equipment. (@) Payment of cash to suppliers for inventory. 6. Cash dividends paid to stockholders are classified on the statement of cash flows as: (a) operating activities. (b) investing activities (©) a combination of (a) and (b). (@) financing activities. 7. Which is an example of a cash flow from a financing activity? (a) Receipt of cash from sale of land, (b) Issuance of debt for cash. (©) Purchase of equipment for cash. @) None of the above 8. Which of the following is ineorrect about the state- ment of cash flows? (a) The direct method may be used to report cash provided by operating activities (b) The statement shows the net cash provided (used) for three categories of activity. (©) The operating activities section is the last section of the statement (@) The indirect method may be used to report net cash provided by operating activities SE During the introductory phase of a com- pany's life cycle, one would normally expect to see: (@) negative cash from operations, negative cash from investing, and positive cash from financing. (b) negative cash from operations, positive cash from investing, and positive cash from financing. (©) positive cash from operations, negative cash from investing, and negative cash from financing. (@) positive cash from operations, negative cash from investing, and positive cash from financing. Questions 10 through 12 apply only to the indirect method. 10. Net income is $132,000, accounts payable increased $10,000 during the year, inventory decreased $6,000 during the year, and accounts receivable increased $12,000 during the year. Under the indirect method, ‘what is net cash provided by operating activities? (a) $102,000. (©) $124,000, (b) $112,000. (a) $136,000. 11. Ttems that are added back to net income in determin- ing net cash provided by operating activities under the indirect method do not include: (a) depreciation expense. (b) an increase in inventory. (©) amortization expense (@) loss on sale of equipment. 12, The following data are available for Bill Mack Corpo- ration, Net income $200,000 Depreciation expense 40,000 Dividends paid 60,000 Gain on sale of land 10,000 Decrease in accounts receivable 20,000 Decrease in accounts payable 30,000 Net cash provided by operating activities is: (a) $160,000. (©) $240,000. (b) $220,000. (@ $280,000. wa) wa) wo) wa) wo)662 chapter 12 Statement of Cash Flows (04, 13. The following are data concerning cash received or 5) paid from various transactions for Orange Peels Cor- poration. Sale of land $100,000 Sale of equipment 50,000 Issuance of common stock 70,000 Purchase of equipment 30,000 Payment of cash dividends 60,000 Net cash provided by investing activities is: (a) $120,000. (c) $150,000. (b) $130,000. (d) $190,000. (04, 14. The following data are available for Retique! 6) Increase in bonds payable $100,000 Sale of investment 50,000 Issuance of common stock 60,000 Payment of cash dividends 30,000 Net cash provided by financing activities is: (a) $90,000. (c) $160,000. (b) $130,000. (a) $170,000. (05) 15. @=—=—=E The cash debt coverage is: (a) a measure of liquidity. (b) a measure of profitability. (c) net income divided by average total liabi (d) a measure of solvency. 16, © Free cash flow provides an indication of a ((()5) company’s ability to: (a) generate net income. (b) generate cash to pay dividends. (c) generate cash to invest in new capital expenditures. (d) Both (b) and (c). Questions 17 and 18 apply only to the direct method. *17.The beginning balance in accounts receivable is $44,000, the ending balance is $42,000, and sales dur- ing the period are $129,000. What are cash receipts from customers? (a) $127,000. (c) $131,000. (b) $129,000 (d) $141,000 *18. Which of the following items is reported on a state- ment of cash flows prepared by the direct method? (a) Loss on disposal of plant asset. (Vis Navigator (06) (06) (b) Increase in accounts receivable. (c) Depreciation expense. (d) Cash payments to suppliers. Go to the book's companion website, www.wiley.com/college/kimmel, to access additional Self-Test Questions.aoa) aos) aos) aos aos) aos) aoe aos) Jane Self-Test Questions ‘Answers are on page 748. OF ail of the SeIRTESOWESHIONS in this chapter (@) gains on the disposal of the discontinued component, losses on the disposal of the discontinued employ decision tools. wa, statement should show in a special section: 726 chapter 1 Financial Analysis: The Big Picture 2. Cool Stools Corporation has income before taxes of $400,000 and an extraordinary loss of $100,000. Ifthe income tax rate is 25% on all tems, the income state- ‘ment should show income before irregular items and an extraordinary loss, respectively, of, (a) $325,000 and $100,000. (b) $325,000 and §75,000, (©) $300,000 and $100,000. (2) $300,000 and $75,000. Which of the following would be considered an ‘Other comprehensive income” item? (a) Gain on disposal of discontinued operations. (b) Unrealized loss on available-forsale securities. (©) Extraordinary loss related to flood. (@) Netincome. 4. In horizontal analysis, each item is expressed as a perventage of the: {@) net income amount (b) stockholders’ equity amount (©) total assets amount. (2) base-year amount ‘5. Adams Corporation reported net sales of $300,000, $330,000, and $360,000 in the years 2012, 2013, and 2014, respectively. 1F 2012 is the base year, what per- ‘centage do 2014 sales represent of the basc? (a) 77%. (©) 120%, (b) 108%, (@) 0%. 6. The following schedule is a display of what type of analysis? 3 Amount Percent Current assets $200,000 25% Property plant, and equipment 600,000 75% Total assets $800,000 (@) Horizontal analysis. (¢) Vertical analysis. (b) Differential analysis, (@) Ratio analysis, 7. In vertical analysis, the base amount for depreciation expense is generally (a) net sales. (b) depreciation expense in a previous year, (©) gross profit (2) Fixed assets. '&, Which measure is an evaluation of a company’s abil ity to pay current liabilities? (a) Current cash debt coverage. (b) Current ratio, (©) Both (a) and (b). (@) None of the above. ‘9, Which measure is useful in evaluating the efficiency {in managing inventories? (a) Inventory turnover. (b) Days in inventory. (©) Both (@) and (b) (2) None ofthe abou. 110, Which of these is not a liquidity ratio? (a) Current ratio, (b) Asset turnover 1. In reporting discontinued operations, the income component. Neither (a) nor (b), Both (a) and (b). © @ (©) Inventory tumover, (@) Accounts receivable turnover: Plano Corporation reported net income $24,000; net sales $400,000; and average assets $600,000 for 2014, ‘What is the 2014 profit margin? (2) 6%. (©) 40%. () 12%, (a) 200%, Use the following financial statement information as of | the end of each year to answer Self-Test Questions 1216. a 204 281s Inventory $54,000 $ 48,000 Current assets 51,000 ‘Tal assets 382,000 Current liabilities 27,000 ‘Total liabilities 102,000 Common stockholders’ equity 240,000 Net sales “784,000 Cost of goods sold 306,000 Net income 138,000 ‘Tax expense 22,000 Interest expense 12,000 Dividends paid to preferred stockholders 4,000 4,000 Dividends paid to common ‘stockholders 15,000 10,000 12. Compute the days in inventory for 2014. (a) 644 days. (©) 6 days (b) 60.8 days. (€) 24 days. 13. Compute the current ratio for 2014. G@) 12621 (¢) see. () 3001 (@) 3.78: 14, Compute the profit margin for 2014 (a) 17.19%, (c) 37.9%. (b) 181%. @) 39% 18, Compre the return on common stockholders’ equity’ for 2014 (a) 542%, (©) 61.2%. (b) 52.5%, (@) 59.4%. 16. Compute the times interest earned for 2014, (a) 11.2 times. (©) 14.0 times. (b) 653 times. (@) 13.0 times. 117, Which situation below might indicate a company has alow quality of earnings? (a) The same accounting principles are used cach year (b) Revenue is recognized when the performance “obligation is satisfied (©) Maintenance costs are capitalized and then de preciated. (a) The company's PLE ratio is high relative to com- petitors. Go to the books companion website, (ATES vwomwwileycomicollegetbimmel,o access PTANHY sulditinal Self-Test Questions wow qos co wow qos wow wn401) (oy) 02) (oy) (oy) Self-Test Questions Answers are atthe end of the appendix 41, Which of the following is not a primary reason why corporations invest in debt and equity securities? (a) They wish to gain control of a competitor, (&) They have excess cash (6) They wish to move into a nev line of business. (@) They are required toby la. 2, Debt investments are intially recorded at: (a) cost (b) cost plus accrued interest. (6) book value (6) None ofthe above 3. Stan Free Company sells debt investments costing $26,000 for $28,000 plus accrued interest that has been recorded. In journalizing the sale, cred are (@) Debt Investments and Lass on Sale of Debt In- (&) Debt Investments, Gain on Sale of Debt Invest- rents, and Bond Interest Receivable. (©) Stock investments and Bond Interest Receivable, (@) The correct answer isnot given 4.Karen Duffy Company receives. net proceeds of $42,000 on the sale of stock investments that cost $39,500, This transaction will result in reporting in the income statement at (a) loss of §2,500 under "Other expenses and losses.” (6) lass of §2,500 under "Operating expenses.” (©) gain of $2,500 under "Other revenues and gains.” (6) gain of §2.500 under “Operating revenues” 5. The equity method of accounting for long-term invest- ments in stock should be used when the invesor has significant influence over an investee and owns! 6, Assume that Horicon Corp. acquired 25% of the com- 1. Which of these statements is false? (2) between 20% and 50% of the investec’s common stock. (b) 20% or more of the investee's bonds (c) more than 50% of the investee's common stock. (4) less than 20% of the investees common stock wo ‘mon stock of Sheboygan Corp. on January 1, 2014, for $300,000, During 2014, Sheboygan Corp. reported net income of $160,000 and paid total dividends of '$60,000. If Horicon uses the equity method to account for its investment, the balance in the investment account on December 31, 2014, will be: (a) $300,000, () $400,000. (b) $325,000, (a) $340,000. Using the information in Question 6, what entry would Horicon make to record the receipt of the dividend from Sheboygan? (@) Debit Cash and credit Revenue from Stock Investments. (®) Debit Dividends and credit Revenue from Stock Investments, (©) Debit Cash and eredit Stock Investments (@) Debit Cash and eredlt Dividend Revenue. ‘You have a controlling interest if (@) you own more than 20% of a company’s stock. (®) you are the president of the company. (©) you use the equity method. (2) you own more than 50% of a company’s stock. wa wa wo Consolidated financial statements are useful to (@) determine the profitability of specific subsidiaries, (b) determine the aggregate profitability of companies ‘under common control E-15 appendix E Reporting and Analyzing Investments jw 10. (5 1 jun 1. (©) determine the breadth of a parent company’s operations. (@ determine the full extent of aggregate obligations ‘of companies under common control A the end of the first year of operations, the total cost of the trading securities portfolio is $120,000 and the total fair vahie is $115,000, What should the financial statements show? (a) A reduction of an asset of $5,000 and a realized loss of $5,000. (b) Areduction of an asset of $5,000 and an unrealized Joss of $5,000 in the stockholders’ equity section, (©) A reduction of an asset of $5,000 in the current assets section and an unrealized loss of $5,000 under “Other expenses and losses.” (@ A reduction of an asset of $5,000 in the current assets section and a realized loss of $5,000 under “Other expenses and losses.” In the balance sheet, Unrealized Gain or Loss—Equity is reported as a (a) contra asset account. (b) contra stockholders’ equity account, (©) loss in the income statement (2) loss in the retained earnings statement. Ifa company wants to increase its reported income by manipulating its investment accounts, which should it do? (a) Sell its “winner” trading securities and hold its “loser” trading securities. (b) Hold its “winner” trading securities and sell its “loser” trading securities. (© Sell its “winner” availablefor-sale securities and hold its “loser” available-forsale secutities, (@) Hold its “winner” availablefor-sale securities and. sel its “loser” available-forsale securities 413. At December 31, 2014, the fair value of available-for- ‘sale securities is $41,300 and the cost is $39,800. At January 1, 2014, there was a eredit balance of $900 in the Fair Value Adjastment—Available-for Sale ‘account. The required adjusting entry would be: (@) Debit Fair Value Adjustment—Available-for'Sale for $1,500, and credit Unrealized Gain or Loss— Equity for $1,500, (b) Debit Fair Value Adjustment—Available-forSale for $600, and credit Unrealized Gain or Loss— Equity for $600, (© Debit Fair Value Adjustment—Available-forSale for $2,400, and credit Unrealized Gain or Loss— Equity for $2,400, (@) Debit Unrealized Gain or Loss—Bquity for $2,400, ‘and credit Fair Value Adjustment Available for Sale for $2,400. 14, To be classified as short-term Investments, debt investments must be teadily marketable and be ‘expected to be sold within: (a) 3 months from the date of purchase. () the next year or operating cycle, whichever is shorter (© the next year or operating cycle, whichever is longer. (2) the operating cycle. ws we