Chương 14: Statement of cash flow

Which statement is not correct about the usefulness of the statement of cash flows?
a)It helps users assess the entity's ability to generate future cash flows.
b)It helps users assess the entity's ability to pay its obligations.
c)It helps users assess investing and financing activities during the period.
d)It helps users assess the profitability of a company.
 d)It helps users assess the profitability of a company.

Which of the following statements is correct?

a)Significant financing and investing activities that do not affect cash are reported in either a
separate schedule at the bottom of the statement of cash flows, or in a separate note or
supplementary schedule to the financial statements.
b)Significant noncash financing and investing activities are reported on the company's income
statement.
c)Significant financing and investing activities that do not affect cash are not reported since they
don't affect cash.
d)Only financing and investing activities that directly affect cash are reported in a company's
statement of cash flows.
 a)Significant financing and investing activities that do not affect cash are reported in
either a separate schedule at the bottom of the statement of cash flows, or in a separate
note or supplementary schedule to the financial statements.

What type of activity is the purchase of equipment for cash?

a)A non-cash investing activity that goes into a separate schedule of the notes of the statement of
cash flows
b)Investing activity
c)Financing activity
d)Operating activity
 b)Investing activity

Hanover, Inc. purchased land through the issuance of long-term bonds. How is this reported on
the statement of cash flows?
a)Operating activity
b)Financing outflow
c)Investing inflow
d)Significant noncash investing and financing activity that merits disclosure
 d)Significant noncash investing and financing activity that merits disclosure

With which of the following does the indirect method of preparing the statement of cash flows
begin?
a)Cash sales
b)Adjustments to reconcile net income to net cash provided by operating activities
c)Collections from customers
d)Net income
 d)Net income
Under the indirect method of preparing the statement of cash flows, how is an increase in
accounts receivable handled?
a)It is deducted from net income.
b)It is added to net sales.
c)It is deducted from net sales.
d)It is added to net income.
 a)It is deducted (khấu trừ) from net income.

Under the indirect method of preparing the statement of cash flows, which of the following is
added to net income in the operating activities section?
a)Depreciation expense
b)Increase in accounts receivable
c)Gain on sale of equipment
d)Decrease in accounts payable
 a)Depreciation expense

Under the indirect method of preparing the statement of cash flows, which of the following is
deducted from net income in the operating activities section?
a)Decrease in inventory
b)Amortization expense
c)Increase in wages payable
d)Gain on sale of land
 d)Gain on sale of land

A company's prepaid expenses are $15,000 at the beginning of the year and $8,000 at the end of
the year. What adjustment to net income should be made if the indirect method is used?
a)No adjustment should be made.
b)Add to net income $7,000
c)Deduct from net income $8,000
d)Deduct from net income $7,000
 b)Add to net income $7,000

In what section of the statement of cash flows will the issuance of bonds payable to acquire a
building be reported?
a)Cash flows from operating activities
b)Noncash investing and financing activities
c)Cash flows from investing activities
d)Cash flows from financing activities
 b) Noncash investing and financing activities

The following data are available for Allen Clapp Corporation:

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
How much is cash provided by operating activities using the indirect method?
a)$160,000
b)$220,000
c)$240,000
d)$280,000
 b)$220,000
$200,000 + $40,000 - $10,000 + $20,000 - $30,000 = $220,000

The following are data concerning cash received or paid from various transactions for Orange
Peels Corporation:
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
How much is net cash provided by investing activities?
a)$150,000
b)$130,000
c)$190,000
d)$120,000
 d)$120,000
$100,000 + $50,000 - $30,000 = $120,000

During which phase of the corporate life cycle are cash from operations and net income
approximately equal?
a)Decline
b)Maturity
c)Introductory
d)Growth
 b)Maturity

In which stage of the corporate life cycle will cash flows from the operations and from investing
activities be negative, and the cash flows from financing be positive?
a)Decline phase
b)Growth phase
c)Maturity phase
d)Introductory phase
 d)Introductory phase

What information is provided by free cash flow?

a)An indication if a company is able to generate cash to pay dividends.
b)An indication is a company is able to generate cash to invest in new capital expenditures.
c)An indication of both a company's ability to generate cash to pay dividends and to invest in
new capital expenditures.
d)An indication of a company's ability to generate net income.
  c)An indication of both a company's ability to generate cash to pay dividends and to
invest in new capital expenditures.

Simpson Inc. reported $100,000 provided by operating activities. The company invested $30,000
in production equipment and it paid $10,000 in dividends. How much is its free cash flow?
a)$70,000
b)$60,000
c)$100,000
d)$140,000
 b)$60,000
$100,000 - $30,000 - $10,000 = $60,000

The following data are available for Something Strange:

Issuance of bonds payable 100,000
Sale of investment 50,000
Issuance of common stock 60,000
Payment of cash dividends 30,000
How much is net cash provided by financing activities?
a)$190,000
b)$90,000
c)$130,000
d)$160,000
 c)$130,000
$100,000 + $60,000 - $30,000 = $130,000

Chương 9: Plant assets, Natural Resources, and Intangible Assets

Harrington Corporation recently leased a number of trucks from Andre Corporation. In

inspecting the books of Harrington Corporation, you notice that the trucks have not been
recorded as assets on its balance sheet. From this, you can conclude that Harrington is
accounting for this transaction as a/an:
(a)operating lease.
(b)capital lease.
(c)purchase.
(d)None of the above.
 (a)operating lease.

A company would minimize its depreciation expense in the first year of owning an asset if it
used:
(a)a high estimated life, a high salvage value, and declining-balance depreciation.
(b)a low estimated life, a high salvage value, and straight-line depreciation.
(c)a high estimated life, a high salvage value, and straight-line depreciation.
(d)a low estimated life, a low salvage value, and declining-balance depreciation.
 (c)a high estimated life, a high salvage value, and straight-line depreciation.
Pierce Company incurred $150,000 of research and development costs in its laboratory to
develop a new product. It spent $20,000 in legal fees for a patent granted on January 2, 2017. On
July 31, 2017, Pierce paid $15,000 for legal fees in a successful defense of the patent. What is
the total amount that should be debited to
Patents through July 31, 2017?
(a)$150,000.
(b)$35,000.
(c)$185,000.
(d)$170,000.
 (b)$35,000.

If a company reports goodwill as an intangible asset on its books, what is the one thing you know
with certainty?
(a)The company is a valuable company worth investing in.
(b)The company has a well-established brand name.
(c)The company purchased another company.
(d)The goodwill will generate a lot of positive business for the company for many years to come.
 (c)The company purchased another company.

Which of the following statements is false?

(a)If an intangible asset has a finite life, it should be amortized.
(b)The amortization period of an intangible asset can exceed 20 years.
(c)Goodwill is recorded only when a business is purchased.
(d)Research and development costs are expensed when incurred, except when the research and
development expenditures result in a successful patent.
 (d)Research and development costs are expensed when incurred, except when the
research and development expenditures result in a successful patent.

Which of the following measures provides an indication of how efficient a company is in

employing its assets?
(a)Current ratio.
(b)Profit margin.
(c)Debt to assets ratio.
(d)Asset turnover.
 (d)Asset turnover.

Jefferson Company purchased a piece of equipment on January 1, 2017. The equipment cost
$60,000 and has an estimated life of 8 years and a salvage value of $8,000. What was the
depreciation expense for the asset for 2018 under the double-declining-balance method?
(a)$6,500.
(b)$11,250.
(c)$15,000.
(d)$6,562.
 (b)$11,250.
For the double-declining method, the depreciation rate would be 25% or (1/8×2). For
2017, annual depreciation expense is $15,000 ($60,000 book value×25%); for 2018,
annual depreciation expense is $11,250 [($60,000−$15,000)×25%], not (a) $6,500, (c)
$15,000, or (d) $6,562.
Chương 7: Fraud, Internal Control and Cash

All of the following would involve a debit memorandum except

 interest earned

Cash equivalents include each of the following except

 petty cash

The Sarbanes Oxley Act (SOX) internal control standards apply only to companies listed on the
U.S. exchanges.
 True

Cash is the asset most susceptible to fraudulent activities.

 true

Counting of daily cash receipts by a supervisor is an application of which internal control

principle?
 Independent internal verification

An employee authorized to sign checks should not record

 cash disbursement transactions.

Entries are made to the Petty Cash account when

 establishing the fund

A bank may issue a credit memorandum for

 the collection of a note receivable by the bank for the depositor.

Which of the following items at November 30 is not cash or cash equivalent?

 treasury bond

High-quality international accounting requires both high-quality accounting standards and high-
quality controls standards.
 false

Chương 6: Inventories
Cecil gives goods on consignment to Jerry who agrees to try to sell them for a 20% commission.
At the end of the accounting period, which of the following parties includes the consigned goods
in its inventory?
a.Cecil
b. Jerry
c. Both Cecil and Jerry
d. Neither Cecil nor Jerry
 a. Cecil
Goods in transit should be included in the inventory of the buyer when the
a. goods reach the buyer.
b. terms of sale are FOB shipping point.
c. terms of sale are FOB destination.
d. public carrier accepts the goods from the seller.
 b. Terms of sale are FOB shipping point.

When the terms of sale are FOB destination, ownership of the goods remains with the seller until
the goods
a. are accepted by the public carrier.
b. are shipped.
c. reach the buyer.
d. are paid for by the buyer.
 c. reach the buyer.

Inventory costing methods place primary reliance on assumptions about the flow of
a. resale prices.
b. values.
c. goods.
d. costs.
 d. Costs.

Which of the following statements is correct with respect to inventories?

a. FIFO seldom coincides with the actual physical flow of inventory.
b. It is generally good business management to sell the most recently acquired goods first.
c. The FIFO method assumes that the costs of the earliest goods acquired are the last to be sold.
d. Under FIFO, the ending inventory is based on the latest units purchased.
 d. Under FIFO, the ending inventory is based on the latest units purchased.

The first costs assigned to ending inventory are the costs of the beginning inventory under the
a. FIFO method.
b. gross profit method.
c. average-cost method.
d. LIFO method.
 d. LIFO method

Hudson Company started its year with 600 units of beginning inventory at a cost of $4 per unit.
During the year, the company made the following purchases: May, 900 units at $5 per unit and
July, 500 units at $6 per unit. A physical count of inventory at year-end indicates that there are
700 units in ending inventory. What is the cost of the ending inventory if Hudson Company uses
the FIFO method for valuing inventory?
a. $5,900
b. $4,000
c. $3,465
d. $2,900
 b. $4,000

Sheldon's Jewelers uses the specific identification method of inventory costing. During May,
Sheldon purchased 3 gemstones for $4,000, $5,000, and $6,000 respectively. During May,
Sheldon sold two of the gemstones for $6,500 each. At the end of May, Sheldon determined that
the $6,000 gemstone was still in his inventory. What is Sheldon's gross profit for the month of
May?
a. $3,000
b. $2,000
c. $500
d. $4,000
 d. $4,000

In periods of rising prices, LIFO will produce

a. higher net income than average costing.
b. higher net income than FIFO.
c. the same net income as FIFO.
d. lower net income than FIFO.
 d. Lower net income than FIFO

In a period of inflation, which cost flow method produces the highest net income?
a. FIFO method
b. Average-cost method
c. LIFO method
d. Gross profit method
 a. FIFO method

Euler Company made an inventory count on December 31, 2014. During the count, one of the
clerks made the error of counting an inventory item twice. For the balance sheet at December 31,
the effects of this error are Assets Liabilities Stockolders' Equity
a. overstated understated overstated
b. understated no effect understated
c. overstated overstated understated
d. overstated no effect overstated
 d. overstated no effect overstated
Chương 5: Accounting for Merchandise Operations
Arbor Corporation had reported the following amounts at December 31, 2010: Sales $184,000;
ending inventory $11,600; beginning inventory $17,200; purchases $60,400; purchases discounts
$3,000; purchase returns and allowances $1,100; freight-in $600; freight-out $900. Calculate the
cost of goods available for sale.
 $74,100.

Which of the following would affect the gross profit rate? (Assume sales remains constant.)
(a)An increase in advertising expense.
(b)A decrease in depreciation expense.
(c)An increase in cost of goods sold.
(d)A decrease in insurance expense.
 (c)An increase in cost of goods sold.

The gross profit rate is equal to:

(a)Net income divided by sales.
(b)Cost of goods sold divided by sales.
(c)Net sales minus cost of goods sold, divided by net sales.
(d)Sales minus cost of goods sold, divided by cost of goods sold.
 (c)Net sales minus cost of goods sold, divided by net sales.

Which factor would not affect the gross profit rate?

 An increase in the cost of heating the store.

Which of the following statements about a periodic inventory system is true?

(a)Companies determine cost of goods sold only at the end of the accounting period.
(b)Companies continuously maintain detailed records of the cost of each inventory purchase and
sale.
(c)The periodic system provides better control over inventories than a perpetual system.
(d)The increased use of computerized systems has increased the use of the periodic system.
 (a)Companies determine cost of goods sold only at the end of the accounting period.

Which of the following items does not result in an adjustment in the Inventory account under a
perpetual system?
(a)A purchase of merchandise.
(b)A return of merchandise to the supplier.
(c)Payment of freight costs for goods shipped to a customer.
(d)Payment of freight costs for goods received from a supplier.
 (c)Payment of freight costs for goods shipped to a customer.

A quality of earnings ratio:

(a)Is computed as net income divided by net cash provided by operating activities.
(b)That is less than 1 indicates that a company might be using aggressive accounting tactics.
(c)That is greater than 1 indicates that a company might be using aggressive accounting tactics.
(d)Is computed as net cash provided by operating activities divided by total assets.
 (b)That is less than 1 indicates that a company might be using aggressive accounting tactics.
Which is true about a wholesaler?
(a)It sells only to manufacturing companies.
(b)It conducts large sales for consumers on a recurring basis.
(c)It is a company that sells to consumers at a discount.
(d)It sells to another business, which will sell to a consuming customer.
 (d)It sells to another business, which will sell to a consuming customer.

On what amount is a sales discount based?

(a)Invoice price less returns and allowances.
(b)Invoice price plus freight-in.
(c)Invoice price plus freight-out.
(d)Invoice less discount.
 (a)Invoice price less returns and allowances.

Gross profit is the difference between net sales and cost of goods sold.
(a)True.
(b)False.
 (a)True.

The multiple-step income statement for a merchandising company shows each of the following
features except:
a.gross profit
b.cost of goods sold.
c.a sales revenue section.
d.investing activities section.
 D.investing activities section.

A single-step income statement:

a.reports gross profit
b.does not report cost of goods sold.
c.reports sales revenues and "other revenues and gains" in the revenues section of the income
statement.
 C. reports sales revenues and "other revenues and gains" in the revenues section of the income
statement.

which of the following appears on both a single-step and a multiple-step income statement?
a.inventory
b.gross profit
c.income from operations
d.cost of goods sold
 D.cost of goods sold.