Principles Of Accounting 12th Edition By Needles - Powers - Test Bank

Principles Of Accounting 12th Edition By Needles – Powers – Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

Chapter 5: Foundations of Financial Reporting and the Classified Balance Sheet

Student: ___________________________________________________________________________

1. The objective of financial reporting established by the FASB is to provide information that is useful to potential customers.
   True    False

 

2. To be useful for decision making, financial reporting must enable the user to assess cash flow prospects and assess management’s stewardship.
   True    False

 

3. Financial statements are often audited by management to increase confidence in the statements’ reliability.
   True    False

 

4. Investors and creditors use financial statements to evaluate a company’s ability to pay dividends and interest.
   True    False

 

5. In practice, accounting information is quite simple and precise.
   True    False

 

6. A different set of financial statements usually is prepared for each user.
   True    False

 

7. The relevance of accounting information means that the information has a direct bearing on a decision.
   True    False

 

8. An advantage of accounting information is that it provides exact and completely reliable measures.
   True    False

 

9. Even when no errors have been made, accounting is never 100 percent accurate because of the extensive use of estimates.
   True    False

 

10. Accounting information contains numerous estimates, classifications, summarizations, judgments, and allocations.
    True    False

 

11. For accounting information to be useful, it must be both relevant and conservative.
    True    False

 

12. The Sarbanes-Oxley Act requires a company to guarantee that its financial statements are 100 percent accurate.
    True    False

 

13. Only the chief financial officer and the company’s CPAs must certify that, to their knowledge, the statements are accurate and complete.
    True    False

 

14. The use of the lower-of-cost-or-market method for inventory is an application of the convention of conservatism.
    True    False

 

15. The convention of consistency has led to an increase in the notes to financial statements.
    True    False

 

16. The conservatism convention should not be used when the accountant is certain of a particular measure.
    True    False

 

17. To understand accounting information, users must be familiar with the accounting conventions, or rules of thumb, used in preparing financial statements.
    True    False

 

18. Full disclosure of all important facts aids in overcoming the limitations of accounting information.
    True    False

 

19. Consistency in accounting means that a company uses the same generally accepted accounting principles from one accounting period to the next accounting period.
    True    False

 

20. The convention of consistency pertains to the use of the same accounting principles by firms in the same industry.
    True    False

 

21. A material item is one that is likely to affect a user’s decision.
    True    False

 

22. In accounting, $1,000 is generally considered the dividing line between material and immaterial amounts.
    True    False

 

23. Although a garbage can that costs $25 is a long-term asset, it can be expensed because the amount is immaterial and will not affect anyone’s decision making.
    True    False

 

24. The cost-benefit convention holds that the benefits to be gained from providing accounting information should be greater than the costs of providing it.
    True    False

 

25. Illegal acts of a small dollar amount can be ignored because they are immaterial.
    True    False

 

26. The conventions of consistency and conservatism require that financial statements present all the information relevant to users’ understanding of the statements.
    True    False

 

27. General-purpose external financial statements that are divided into subcategories are called classified financial statements.
    True    False

 

28. Classified balance sheets list accounts in alphabetical order.
    True    False

 

29. Natural resources, such as coal mines and oil wells, are classified as intangible assets.
    True    False

 

30. It is possible for an asset to be a current asset even though the expected conversion of that asset into cash is to be longer than one year.
    True    False

 

31. The investments category on the balance sheet normally includes investments that are intended to be held for a long period of time.
    True    False

 

32. The main difference between intangible assets and property, plant, and equipment is physical substance.
    True    False

 

33. The main differences among the balance sheets of the sole proprietorship, the partnership, and the corporation are found in the current assets and current liabilities sections.
    True    False

 

34. The two parts of a corporation’s stockholders’ equity section are contributed capital and retained earnings.
    True    False

 

35. The Retained Earnings portion of a corporation represents the initial contribution of capital to the business.
    True    False

 

36. Contributed capital is shown on a corporate balance sheet as two amounts: the par value of the issued stock and retained earnings.
    True    False

 

37. The term owner’s equity is preferred over the term net worth because most assets are carried at original cost rather than at current value.
    True    False

 

38. Return on assets is a measure of liquidity.
    True    False

 

39. Return on assets is a better measure of profitability than profit margin because it takes into account the assets invested in the business.
    True    False

 

40. Profitability means having enough cash on hand to pay bills when they become due.
    True    False

 

41. Asset turnover measures how efficiently assets are used to produce revenues.
    True    False

 

42. A company with a current ratio of 1.0 is considered more liquid than a company with a current ratio of 2.0.
    True    False

 

43. A debt to equity ratio of 1.0 means that half of the company’s assets are financed by creditors.
    True    False

 

44. A company with a low debt to equity ratio is in a more vulnerable position during poor economic times than a company with a high debt to equity ratio.
    True    False

 

45. Profit margin and gross margin are the same thing.
    True    False

 

46. A company with a profit margin of 6 percent earns sixty cents profit for every dollar of net sales.
    True    False

 

47. A debt to equity ratio of 0.5 means that one-third of a company’s total assets are financed by creditors.
    True    False

 

48. A company’s management can improve overall profitability by decreasing the profit margin,
    the asset turnover, or both.
    True    False

 

49. Return on assets is a combination of the profit margin and the asset turnover.
    True    False

 

50. A company with a low asset turnover uses its assets more productively than one with a high asset turnover.
    True    False

 

51. Working capital is the amount by which current liabilities exceed current assets and measures how efficiently liabilities are used to produce sales.
    True    False

 

52. All of the following must certify that a public company’s financial statements are accurate, complete, and not misleading, except for the
    A. chief financial officer.
    B. director of human resources.
    C. chief executive officer.
    D. independent auditor.

 

53. General-purpose external financial statements are not primarily intended for
    A. management.
    B. investors.
    C. suppliers of goods and services.
    D. lending institutions.

 

54. Financial statements are audited by outside accountants
    A. because it is a requirement stated in the Internal Revenue Code.
    B. only when fraudulent financial reporting is suspected.
    C. who then report on whether or not the company is a good investment.
    D. to increase the users’ confidence in the statements’ reliability.

 

55. Financial statements have faithful representation when the information has all of the following except
    A. Complete information.
    B. Information that is free from error.
    C. Neutral information.
    D. Material information.

 

56. According to the FASB, the usefulness of accounting is judged by which of the following two qualitative characteristics of accounting information?
    A. Comparability and neutrality
    B. Understandability and comparability
    C. Verifiability and timeliness
    D. Relevance and faithful representation

 

57. The qualitative characteristic of faithful representation includes
    A. materiality
    B. confirmative value.
    C. timeliness.
    D. neutral information.

 

58. Accounting information should make a difference to the outcome of a decision, according to the qualitative characteristic of
    A. faithful representation.
    B. relevance.
    C. consistency.
    D. understandability.

 

59. The user can depend on the accuracy of financial information when which of the following qualitative characteristics has been followed?
    A. Relevance
    B. Faithful representation
    C. Understandability
    D. Timeliness

 

60. The Securities and Exchange Commission instituted rules requiring the chief executive officers and chief financial officers of all publicly traded companies to certify that, to their knowledge, the quarterly and annual statements that their companies file with the SEC are
    A. 100 percent accurate and contain no misstatements, errors, or mistakes.
    B. accurate and complete.
    C. subject to interpretation due to the many accounting rules and regulations.
    D. not to be used except by individuals working for the company.

 

61. The lower-of-cost-or-market method of accounting for inventories follows the convention of
    A. full disclosure.
    B. materiality.
    C. conservatism.
    D. cost-benefit.

 

62. The convention of consistency refers to consistent use of accounting principles
    A. among firms.
    B. within a given accounting period.
    C. within industries.
    D. among accounting periods.

 

63. A practical decision to expense a $120 printer rather than record it as property, plant, and equipment and depreciate it probably is made on the basis of the convention of
    A. conservatism.
    B. consistency.
    C. materiality.
    D. full disclosure.

 

64. The accounting convention that is most responsible for the increase in the number of notes to financial statements is
    A. materiality.
    B. full disclosure.
    C. consistency.
    D. conservatism.

 

65. __________ is the quality that different knowledgeable and independent observers could reach concensus that a particular depiction is a faithful representation.
    A. Verifiability.
    B. Consistency.
    C. Comparability.
    D. Neutrality.

 

66. Which of the following accounting conventions would an accountant most likely apply when facing major uncertainties?
    A. Understandability
    B. Conservatism
    C. Materiality
    D. Verifiability

 

67. Expensing a building in the year of purchase represents an abuse of which of the following accounting conventions?
    A. Full disclosure
    B. Cost-benefit
    C. Conservatism
    D. Consistency

 

68. Which accounting convention could cause an overload of information for the financial statement user?
    A. Consistency
    B. Conservatism
    C. Full disclosure
    D. Materiality

 

69. Which accounting convention requires a note to the financial statements explaining the company’s method of revenue recognition?
    A. Comparability and consistency
    B. Materiality
    C. Conservatism
    D. Full disclosure

 

70. Which of the following is not an enhancing qualitative characteristic?
    A. Verifiability
    B. Timeliness
    C. Understandability
    D. Neutrality

 

71. Faithful representation is comprised of all of the following except
    A. Verifiability
    B. Completeness
    C. Neutrality
    D. Free from error

 

72. Relevance is comprised of all of the following except
    A. Neutrality
    B. Materiality
    C. Predictive value
    D. Confirmative value

 

73. ___________ is related to both the nature of an item and its size.
    A. Neutrality
    B. Materiality
    C. Verifiability
    D. Timeliness

 

74. Which of the following statements best describes predictive value?
    A. Helps capital providers make decisions about future actions.
    B. Provides all information necessary for a reliable decision.
    C. Enables users to identify similarities and differences.
    D. Enables users to comprehend the meaning of the information.

 

75. A company should classify land held for a planned manufacturing facility as
    A. an intangible asset.
    B. an investment.
    C. a current asset.
    D. property, plant, and equipment.

 

76. Which of the following should be classified as an intangible asset?
    A. Land held for future use
    B. Long-term notes receivable
    C. Special funds established to pay off a debt
    D. Copyright

 

77. Which of the following would not appear in the owner’s equity section of a corporation?
    A. I. Muller, Capital
    B. Retained earnings
    C. Additional paid-in capital
    D. Common stock

 

78. On a corporate balance sheet, earned capital is also known as
    A. common stock.
    B. paid-in capital.
    C. retained earnings.
    D. contributed capital.

 

79. Use this information to answer the following question.

Sunshine Travel
Balance Sheet
December 31, 20×5
Assets
Cash		$ 40,000
Short-term investments		20,000
Notes receivable (due in ten months)		15,000
Accounts receivable		10,000
Merchandise inventory		35,000
Land held for future use		40,000
Land		45,000
Building	$50,000
	Less accumulated depreciation	10,000	40,000
Trademark		35,000
Total assets			$280,000
Liabilities
Notes payable (due in six months)		$ 25,000
Accounts payable		10,000
Salaries payable		5,000
Mortgage payable (due in seven years)		45,000
Total liabilities			$85,000
Owner’s Equity
Jennifer More, Capital			195,000
Total liabilities and owner’s equity			$280,000

The total dollar amount of assets to be classified as current assets is
A. $105,000.
B. $145,000.
C. $95,000.
D. $120,000.

 

80. Use this information to answer the following question.

Sunshine Travel
Balance Sheet
December 31, 20×5
Assets
Cash		$ 40,000
Short-term investments		20,000
Notes receivable (due in ten months)		15,000
Accounts receivable		10,000
Merchandise inventory		35,000
Land held for future use		40,000
Land		45,000
Building	$50,000
	Less accumulated depreciation	10,000	40,000
Trademark		35,000
Total assets			$280,000
Liabilities
Notes payable (due in six months)		$ 25,000
Accounts payable		10,000
Salaries payable		5,000
Mortgage payable (due in seven years)		45,000
Total liabilities			$85,000
Owner’s Equity
Jennifer More, Capital			195,000
Total liabilities and owner’s equity			$280,000

The total dollar amount of assets to be classified as investments is
A. $125,000.
B. $95,000.
C. $60,000.
D. $40,000.

 

81. Use this information to answer the following question.

Sunshine Travel
Balance Sheet
December 31, 20×5
Assets
Cash		$ 40,000
Short-term investments		20,000
Notes receivable (due in ten months)		15,000
Accounts receivable		10,000
Merchandise inventory		35,000
Land held for future use		40,000
Land		45,000
Building	$50,000
	Less accumulated depreciation	10,000	40,000
Trademark		35,000
Total assets			$280,000
Liabilities
Notes payable (due in six months)		$ 25,000
Accounts payable		10,000
Salaries payable		5,000
Mortgage payable (due in seven years)		45,000
Total liabilities			$85,000
Owner’s Equity
Jennifer More, Capital			195,000
Total liabilities and owner’s equity			$280,000

The total dollar amount of assets to be classified as property, plant, and equipment is
A. $135,000.
B. $125,000.
C. $95,000.
D. $85,000.

 

82. An investment is classified as short term or long term based on
    A. whether the investment can be sold immediately.
    B. the length of time the investor expects to hold it.
    C. the purpose for which it is held.
    D. the dollar amount of the investment.

 

83. Which of the following accounts is most likely to appear on the balance sheet as a current liability?
    A. Accumulated Depreciation
    B. Bonds Payable
    C. Mortgage Payable
    D. Wages Payable

 

84. Which accounting term does not mean the same as the others?
    A. Retained earnings
    B. Net worth
    C. Capital
    D. Owner’s equity

 

85. Which of the following should be classified as a current asset?
    A. Supplies
    B. Trademark
    C. Equipment
    D. Land held for future use

 

86. Goodwill would appear in which balance sheet section?
    A. Investments
    B. Property, plant, and equipment
    C. Current assets
    D. Intangible assets

 

87. Stephanie Cape purchased a franchise for dry cleaning services.  Stephanie is running the dry cleaning business as her primary occupation.  Where on the balance sheet is the franchise reported?
    A. Property, plant, and equipment
    B. Investments
    C. Current assets
    D. Intangible assets

 

88. The normal operating cycle helps define which of the following balance sheet sections?
    A. Owner’s equity
    B. Current liabilities
    C. Intangible assets
    D. Property, plant, and equipment

 

89. Liabilities have which of the following two major categories?
    A. Accounts payable and notes payable
    B. Contributed capital and retained earnings
    C. Current and long term
    D. Unearned revenues and other payables

 

90. Use this information to answer the following question.

Coyle Company
Balance Sheet
December 31, 20×5
Assets
Cash		$ 70,000
Short-term investments		56,000
Accounts receivable		28,000
Notes receivable (due in six months)		42,000
Merchandise inventory		98,000
Special fund for purchasing a building		112,000
Land		140,000
Building	$150,000
	Less accumulated depreciation	28,000	122,000
Trademark		92,000
Total assets			$760,000
Liabilities
Notes payable (due in one year)		$ 70,000
Accounts payable		30,000
Salaries payable		14,000
Mortgage payable (due in seven years)		146,000
Total liabilities			$260,000
Owner’s Equity
Eddie Coyle, Capital			500,000
Total liabilities and owner’s equity			$760,000

The total dollar amount of assets to be classified as current assets is
A. $252,000.
B. $238,000.
C. $294,000.
D. $406,000.

 

91. Use this information to answer the following question.

Coyle Company
Balance Sheet
December 31, 20×5
Assets
Cash		$ 70,000
Short-term investments		56,000
Accounts receivable		28,000
Notes receivable (due in six months)		42,000
Merchandise inventory		98,000
Special fund for purchasing a building		112,000
Land		140,000
Building	$150,000
	Less accumulated depreciation	28,000	122,000
Trademark		92,000
Total assets			$760,000
Liabilities
Notes payable (due in one year)		$ 70,000
Accounts payable		30,000
Salaries payable		14,000
Mortgage payable (due in seven years)		146,000
Total liabilities			$260,000
Owner’s Equity
Eddie Coyle, Capital			500,000
Total liabilities and owner’s equity			$760,000

The total dollar amount of assets to be classified as investments is
A. $168,000.
B. $0.
C. $112,000.
D. $56,000.

 

92. Use this information to answer the following question.

Coyle Company
Balance Sheet
December 31, 20×5
Assets
Cash		$ 70,000
Short-term investments		56,000
Accounts receivable		28,000
Notes receivable (due in six months)		42,000
Merchandise inventory		98,000
Special fund for purchasing a building		112,000
Land		140,000
Building	$150,000
	Less accumulated depreciation	28,000	122,000
Trademark		92,000
Total assets			$760,000
Liabilities
Notes payable (due in one year)		$ 70,000
Accounts payable		30,000
Salaries payable		14,000
Mortgage payable (due in seven years)		146,000
Total liabilities			$260,000
Owner’s Equity
Eddie Coyle, Capital			500,000
Total liabilities and owner’s equity			$760,000

The total dollar amount of assets to be classified as property, plant, and equipment is
A. $374,000.
B. $262,000.
C. $354,000.
D. $122,000.

 

93. Intangible assets could include all except
    A. Trademark
    B. Land held for future use
    C. Patent
    D. Goodwill

 

94. The debt to equity ratio equals
    A. owner’s equity divided by total liabilities.
    B. owner’s equity divided by long-term liabilities.
    C. total liabilities divided by owner’s equity.
    D. current liabilities divided by average owner’s equity.

 

95. The profit margin equals
    A. net sales divided by net income.
    B. gross margin divided by net income.
    C. net income divided by gross margin.
    D. net income divided by revenues.

 

96. The asset turnover ratio equals
    A. revenues divided by average total assets.
    B. average total assets divided by net income.
    C. average total assets divided by total liabilities.
    D. net income divided by average total assets.

 

97. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios.

National Textile
Balance Sheet
December 31, 20×5
Assets	Liabilities
Current assets	$ 12,000		Current liabilities	$ 8,000
Investments	2,000		Long-term liabilities	2,000
Property, plant, and equipment	16,000		Total liabilities	$ 10,000
Intangible assets	10,000
		Owner’s Equity
			Jonah Jones, Capital	30,000
			Total liabilities and
Total assets	$40,000		owner’s equity	$40,000

 

National Textile
Income Statement
For the Year Ended December 31, 20×5
Net sales	$48,000
Cost of goods sold	16,000
Gross margin	$32,000
Operating expenses	22,400
Net income	$  9,600

The total amount of working capital for National Textile is
A. $2,000.
B. $6,000.
C. $4,000.
D. $30,000.

 

98. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios.

National Textile
Balance Sheet
December 31, 20×5
Assets	Liabilities
Current assets	$ 12,000		Current liabilities	$ 8,000
Investments	2,000		Long-term liabilities	2,000
Property, plant, and equipment	16,000		Total liabilities	$ 10,000
Intangible assets	10,000
		Owner’s Equity
			Jonah Jones, Capital	30,000
			Total liabilities and
Total assets	$40,000		owner’s equity	$40,000

 

National Textile
Income Statement
For the Year Ended December 31, 20×5
Net sales	$48,000
Cost of goods sold	16,000
Gross margin	$32,000
Operating expenses	22,400
Net income	$  9,600

The current ratio for National Textile is
A. 1.20.
B. 1.75.
C. .67.
D. 1.50.

 

99. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios.

National Textile
Balance Sheet
December 31, 20×5
Assets	Liabilities
Current assets	$ 12,000		Current liabilities	$ 8,000
Investments	2,000		Long-term liabilities	2,000
Property, plant, and equipment	16,000		Total liabilities	$ 10,000
Intangible assets	10,000
		Owner’s Equity
			Jonah Jones, Capital	30,000
			Total liabilities and
Total assets	$40,000		owner’s equity	$40,000

 

National Textile
Income Statement
For the Year Ended December 31, 20×5
Net sales	$48,000
Cost of goods sold	16,000
Gross margin	$32,000
Operating expenses	22,400
Net income	$  9,600

The profit margin for National Textile is
A. 60 percent.
B. 25 percent.
C. 20 percent.
D. 12 percent.

 

100. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios.

National Textile
Balance Sheet
December 31, 20×5
Assets	Liabilities
Current assets	$ 12,000		Current liabilities	$ 8,000
Investments	2,000		Long-term liabilities	2,000
Property, plant, and equipment	16,000		Total liabilities	$ 10,000
Intangible assets	10,000
		Owner’s Equity
			Jonah Jones, Capital	30,000
			Total liabilities and
Total assets	$40,000		owner’s equity	$40,000

 

National Textile
Income Statement
For the Year Ended December 31, 20×5
Net sales	$48,000
Cost of goods sold	16,000
Gross margin	$32,000
Operating expenses	22,400
Net income	$  9,600

The return on assets for National Textile is
A. 30 percent.
B. 150 percent.
C. 33-1/3 percent.
D. 24 percent.

 

101. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios.

National Textile
Balance Sheet
December 31, 20×5
Assets	Liabilities
Current assets	$ 12,000		Current liabilities	$ 8,000
Investments	2,000		Long-term liabilities	2,000
Property, plant, and equipment	16,000		Total liabilities	$ 10,000
Intangible assets	10,000
		Owner’s Equity
			Jonah Jones, Capital	30,000
			Total liabilities and
Total assets	$40,000		owner’s equity	$40,000

 

National Textile
Income Statement
For the Year Ended December 31, 20×5
Net sales	$48,000
Cost of goods sold	16,000
Gross margin	$32,000
Operating expenses	22,400
Net income	$  9,600

The return on equity for National Textile is
A. 40 percent.
B. 67 percent.
C. 47 percent.
D. 32 percent.

 

102. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios.

National Textile
Balance Sheet
December 31, 20×5
Assets	Liabilities
Current assets	$ 12,000		Current liabilities	$ 8,000
Investments	2,000		Long-term liabilities	2,000
Property, plant, and equipment	16,000		Total liabilities	$ 10,000
Intangible assets	10,000
		Owner’s Equity
			Jonah Jones, Capital	30,000
			Total liabilities and
Total assets	$40,000		owner’s equity	$40,000

 

National Textile
Income Statement
For the Year Ended December 31, 20×5
Net sales	$48,000
Cost of goods sold	16,000
Gross margin	$32,000
Operating expenses	22,400
Net income	$  9,600

The debt to equity ratio for National Textile is
A. 67 percent.
B. 75 percent.
C. 25 percent.
D. 33-1/3 percent.

 

103. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios.

National Textile
Balance Sheet
December 31, 20×5
Assets	Liabilities
Current assets	$ 12,000		Current liabilities	$ 8,000
Investments	2,000		Long-term liabilities	2,000
Property, plant, and equipment	16,000		Total liabilities	$ 10,000
Intangible assets	10,000
		Owner’s Equity
			Jonah Jones, Capital	30,000
			Total liabilities and
Total assets	$40,000		owner’s equity	$40,000

 

National Textile
Income Statement
For the Year Ended December 31, 20×5
Net sales	$48,000
Cost of goods sold	16,000
Gross margin	$32,000
Operating expenses	22,400
Net income	$  9,600

The asset turnover for National Textile is
A. 1.00 times.
B. 1.33 times.
C. 0.83 times.
D. 1.20 times.

 

104. Which of the following is not a measure of profitability?
     A. Current ratio
     B. Return on assets
     C. Return on equity
     D. Debt to equity ratio

 

105. Which of the following is a measure of liquidity?
     A. Return on equity
     B. Return on assets
     C. Working capital
     D. Profit margin

 

106. Current assets divided by current liabilities is known as the
     A. profit margin.
     B. current ratio.
     C. working capital.
     D. capital structure.

 

107. Which of the following is not expressed in terms of a percentage?
     A. Return on equity
     B. Debt to equity ratio
     C. Current ratio
     D. Profit margin

 

108. Which of the following is expressed in terms of a percentage?
     A. Return on equity
     B. Current ratio
     C. Asset turnover
     D. Working capital

 

109. Which of the following does not include net income in its computation?
     A. Debt to equity ratio
     B. Return on assets
     C. Return on equity
     D. Profit margin

 

110. Use this balance sheet and income statement for the first year of operations for Cane Construction to answer the following question. Use ending balances whenever average balances are required for computing ratios.

Cane Construction
Balance Sheet
December 31, 20×5
Assets	Liabilities
Current assets	$ 14,000		Current liabilities	$  8,000
Investments	6,000		Long-term liabilities	2,000
Property, plant, and equipment	24,000		Total liabilities	$  10,000
Intangible assets	16,000
		Owner’s Equity
			Carlton Cane, Capital	50,000
			Total liabilities and
Total assets	$60,000		owner’s equity	$60,000

Cane Construction
Income Statement
For the Year Ended December 31, 20×5
Net sales	$80,000
Cost of goods sold	32,000
Gross margin	$48,000
Operating expenses	26,400
Net income	$21,600

The total amount of working capital for Cane Construction is
A. $4,000.
B. $14,000.
C. $6,000.
D. $2,000.

 

111. Use this balance sheet and income statement for the first year of operations for Cane Construction to answer the following question. Use ending balances whenever average balances are required for computing ratios.

Cane Construction
Balance Sheet
December 31, 20×5
Assets	Liabilities
Current assets	$ 14,000		Current liabilities	$  8,000
Investments	6,000		Long-term liabilities	2,000
Property, plant, and equipment	24,000		Total liabilities	$  10,000
Intangible assets	16,000
		Owner’s Equity
			Carlton Cane, Capital	50,000
			Total liabilities and
Total assets	$60,000		owner’s equity	$60,000

Cane Construction
Income Statement
For the Year Ended December 31, 20×5
Net sales	$80,000
Cost of goods sold	32,000
Gross margin	$48,000
Operating expenses	26,400
Net income	$21,600

The current ratio for Cane Construction is
A. 1.75.
B. 0.57.
C. 1.4.
D. 2.0.

 

112. Use this balance sheet and income statement for the first year of operations for Cane Construction to answer the following question. Use ending balances whenever average balances are required for computing ratios.

Cane Construction
Balance Sheet
December 31, 20×5
Assets	Liabilities
Current assets	$ 14,000		Current liabilities	$  8,000
Investments	6,000		Long-term liabilities	2,000
Property, plant, and equipment	24,000		Total liabilities	$  10,000
Intangible assets	16,000
		Owner’s Equity
			Carlton Cane, Capital	50,000
			Total liabilities and
Total assets	$60,000		owner’s equity	$60,000

Cane Construction
Income Statement
For the Year Ended December 31, 20×5
Net sales	$80,000
Cost of goods sold	32,000
Gross margin	$48,000
Operating expenses	26,400
Net income	$21,600

The profit margin for Cane Construction is
A. 30 percent.
B. 75 percent.
C. 60 percent.
D. 27 percent.

 

113. Use this balance sheet and income statement for the first year of operations for Cane Construction to answer the following question. Use ending balances whenever average balances are required for computing ratios.

Cane Construction
Balance Sheet
December 31, 20×5
Assets	Liabilities
Current assets	$ 14,000		Current liabilities	$  8,000
Investments	6,000		Long-term liabilities	2,000
Property, plant, and equipment	24,000		Total liabilities	$  10,000
Intangible assets	16,000
		Owner’s Equity
			Carlton Cane, Capital	50,000
			Total liabilities and
Total assets	$60,000		owner’s equity	$60,000

Cane Construction
Income Statement
For the Year Ended December 31, 20×5
Net sales	$80,000
Cost of goods sold	32,000
Gross margin	$48,000
Operating expenses	26,400
Net income	$21,600

The return on assets for Cane Construction is
A. 80 percent.
B. 70 percent.
C. 36 percent.
D. 133 percent.

 

114. Use this balance sheet and income statement for the first year of operations for Cane Construction to answer the following question. Use ending balances whenever average balances are required for computing ratios.

Cane Construction
Balance Sheet
December 31, 20×5
Assets	Liabilities
Current assets	$ 14,000		Current liabilities	$  8,000
Investments	6,000		Long-term liabilities	2,000
Property, plant, and equipment	24,000		Total liabilities	$  10,000
Intangible assets	16,000
		Owner’s Equity
			Carlton Cane, Capital	50,000
			Total liabilities and
Total assets	$60,000		owner’s equity	$60,000

Cane Construction
Income Statement
For the Year Ended December 31, 20×5
Net sales	$80,000
Cost of goods sold	32,000
Gross margin	$48,000
Operating expenses	26,400
Net income	$21,600

The return on equity for Cane Construction is
A. 62.5 percent.
B. 43.2 percent.
C. 84 percent.
D. 60 percent.

 

115. Use this balance sheet and income statement for the first year of operations for Cane Construction to answer the following question. Use ending balances whenever average balances are required for computing ratios.

Cane Construction
Balance Sheet
December 31, 20×5
Assets	Liabilities
Current assets	$ 14,000		Current liabilities	$  8,000
Investments	6,000		Long-term liabilities	2,000
Property, plant, and equipment	24,000		Total liabilities	$  10,000
Intangible assets	16,000
		Owner’s Equity
			Carlton Cane, Capital	50,000
			Total liabilities and
Total assets	$60,000		owner’s equity	$60,000

Cane Construction
Income Statement
For the Year Ended December 31, 20×5
Net sales	$80,000
Cost of goods sold	32,000
Gross margin	$48,000
Operating expenses	26,400
Net income	$21,600

The debt to equity ratio for Cane Construction is
A. 16-2/3 percent.
B. 20 percent.
C. 80 percent.
D. 83-1/3 percent.

 

116. Use this information to answer the following question.

J. & B. Auto Parts
Balance Sheet
December 31, 20×5
Assets
Cash		$ 60,000
Short-term investments		40,000
Notes receivable (due in ten months)		30,000
Accounts receivable		20,000
Merchandise inventory		70,000
Long-term investments		80,000
Land		90,000
Building	$100,000
	Less accumulated depreciation	20,000	80,000
Trademark		70,000
Total assets			$540,000
Liabilities
Notes payable (due in six months)		$ 50,000
Accounts payable		20,000
Salaries payable		10,000
Mortgage payable (due in seven years)		90,000
Total liabilities			$170,000
Owner’s Equity
Cheryl Stein, Capital			370,000
Total liabilities and owner’s equity			$540,000

The debt to equity ratio is
A. 0.46.
B. 0.67.
C. 2.18.
D. 0.33.

 

117. Use this information to answer the following question.

J. & B. Auto Parts
Balance Sheet
December 31, 20×5
Assets
Cash		$ 60,000
Short-term investments		40,000
Notes receivable (due in ten months)		30,000
Accounts receivable		20,000
Merchandise inventory		70,000
Long-term investments		80,000
Land		90,000
Building	$100,000
	Less accumulated depreciation	20,000	80,000
Trademark		70,000
Total assets			$540,000
Liabilities
Notes payable (due in six months)		$ 50,000
Accounts payable		60,000
Salaries payable		10,000
Mortgage payable (due in seven years)		50,000
Total liabilities			$170,000
Owner’s Equity
Cheryl Stein, Capital			370,000
Total liabilities and owner’s equity			$540,000

The total amount of working capital is
A. $150,000.
B. $370,000.
C. $100,000.
D. $60,000.

 

118. Use this information to answer the following question.

Coyle Company
Balance Sheet
December 31, 20×5
Assets
Cash		$ 70,000
Short-term investments		56,000
Accounts receivable		28,000
Notes receivable (due in six months)		42,000
Merchandise inventory		98,000
Special fund for purchasing a building		112,000
Land		140,000
Building	$150,000
	Less accumulated depreciation	28,000	122,000
Trademark		92,000
Total assets			$760,000
Liabilities
Notes payable (due in one year)		$ 70,000
Accounts payable		30,000
Salaries payable		14,000
Mortgage payable (due in seven years)		146,000
Total liabilities			$260,000
Owner’s Equity
Eddie Coyle, Capital			500,000
Total liabilities and owner’s equity			$760,000

The debt to equity ratio is
A. 0.48.
B. 0.34.
C. 0.52.
D. 1.92.

 

119. Use this information to answer the following question.

Coyle Company
Balance Sheet
December 31, 20×5
Assets
Cash		$ 70,000
Short-term investments		56,000
Accounts receivable		28,000
Notes receivable (due in six months)		42,000
Merchandise inventory		98,000
Special fund for purchasing a building		112,000
Land		140,000
Building	$150,000
	Less accumulated depreciation	28,000	122,000
Trademark		92,000
Total assets			$760,000
Liabilities
Notes payable (due in one year)		$ 70,000
Accounts payable		130,000
Salaries payable		14,000
Mortgage payable (due in seven years)		46,000
Total liabilities			$260,000
Owner’s Equity
Eddie Coyle, Capital			500,000
Total liabilities and owner’s equity			$760,000

The total amount of working capital is
A. ($30,000.)
B. $80,000.
C. $24,000.
D. $400,000.

 

120. Working capital measures
     A. the excess of current assets over current liabilities—what is on hand to fund business operations.
     B. the ability to earn a satisfactory income.
     C. the amount of debt in the company.
     D. the profitability of the business.

 

121. The asset turnover ratio measures
     A. how quickly the company uses assets to pay debt.
     B. how efficiently assets are used to produce sales.
     C. the income produced by selling inventory.
     D. how efficiently equity is used to produce revenue.

 

122. Each of the following statements is justified by a concept or convention of accounting. Write the letter in the blank next to each statement corresponding to the concept or convention involved.

a. Consistency	d. Full disclosure
b. Materiality	e. Cost-benefit
c. Conservatism

_____ 1. This convention best enhances comparability of financial statements between years.
_____ 2. A merger agreed on just after the balance sheet date nevertheless is reported in the notes to the financial statements.
_____ 3. A company forgoes hiring another full-time accountant, which would add only slightly to the financial statements’ accuracy.
_____ 4. A company uses lower-of-cost-or-market to value inventory.
_____ 5. A large company rounds its financial statement figures to the nearest $10,000.

 

 

 

 

 

123. Each of the following statements violates a concept or convention of accounting. Write the letter in the blank next to each statement corresponding to the concept or convention violated.

a. Consistency	d. Full disclosure
b. Materiality	e. Cost-benefit
c. Conservatism

_____ 1. A note to the financial statements indicating a change in inventory methods is omitted.
_____ 2. When management is unsure of which estimates to use in a given situation, the estimate resulting in the largest net income is always used.
_____ 3. In 20×5, a company uses straight-line depreciation and in 20×6 the company uses declining-balance depreciation.
_____ 4. A small company expenses all expenditures under $10,000.
_____ 5. A small company purchases a $50,000 computer to save $3,000 per year in bookkeeping wages.

 

 

 

 

 

124. Bill Pierce owns several ice cream shops all within 50 miles of his home. He has plans to expand the number of shops he owns. This planned expansion will require a large bank loan. Bill has always done his own accounting work and has prepared a set of financial statements for each of the past five years of operations to present to the bank. Because some periods were more profitable than others, Bill attempted to streamline his earnings by switching depreciation and inventory valuation methods frequently. This created the appearance that his company earnings were very consistent over the years. Discuss the merits of Bill’s financial statements with regard to his streamlining decisions.

 

 

 

 

 

125. Why is it important for a company to maintain the same accounting methods and practices from period to period?

 

 

 

 

 

126. The following lettered items represent a classification scheme for a balance sheet, and the numbered items represent accounts. In the blank next to each account, write the letter indicating to which category it belongs.

a. Current assets	e. Current liabilities
b. Investments	f. Long-term liabilities
c. Plant and equipment	g. Owner’s equity
d. Intangible assets	h. Not on balance sheet

 

_____ 1. Accumulated Depreciation	_____ 7. Trademark
_____ 2. Revenues Received in Advance	_____ 8. Notes Payable (in five years)
_____ 3. Interest Expense	_____ 9. Depreciation Expense
_____ 4. Wages Payable	_____ 10. Prepaid Interest
_____ 5. Owner’s Capital	_____ 11. Land Held for Future Use
_____ 6. Inventory

 

 

 

 

 

 

127. State the definition of a current asset.

 

 

 

 

 

128. Match the following financial statement ratios with their definition.

     1. Working capital _____
     2. Current ratio _______
     3. Profit margin ______
     4. Return on assets______
     5. Debt to equity ratio________
     6. Return on equity_______
     7. Asset turnover_________

     a. A measure of profitability that shows the proportion of a company’s assets that is financed by creditors and the proportion financed by owners
     b. A measure of liquidity that shows the net current assets on hand to continue business operations
     c. A measure of profitability that relates the amount earned by a business to the owner’s investment in the business
     d. A measure of profitability that shows the percentage of each sales dollar that results in net income
     e. A measure of liquidity; current assets divided by current liabilities
     f. A measure of profitability that shows how efficiently a company uses its assets to produce income
     g. A measure of how efficiently assets are used to produce sales

 

 

 

 

 

129. The profit margin and asset turnover ratios are important measures, but they have a limitation.  Describe these limitations and discuss the ratio that can be used to overcome these deficiencies.

 

 

 

 

 

130. Describe how the current ratio is calculated.  If a company has a very low current ratio, what might this mean?  If a company has a very high current ratio, what might this mean?

 

 

 

 

 

1. Quality that enables users to identify similarities and differences between two sets of financial data.	Qualitative characteristics.	____
2. Related to both the nature of an item and its size.	Predictive value.	____
3. Quality that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation.	Materiality.	____
4. Requires that once a company has adopted an accounting procedure, it must use it from one period to the next unless a note to the financial statements informs users of a change.	Neutrality.	____
5. Free from bias intended to achieve a certain result or to bring about a particular behavior.	Comparability.	____
6. Helps capital providers make decisions about future actions.	Verifiability.	____
7. Relevance and faithful representation.	Consistency.	____
8. When faced with choosing between two equally acceptable procedures or estimates, accountants should choose the one that is least likely to overstate assets and income.	Conservatism	____

 

1. The percentage of each sales dollar that results in net income.	Current assets.	____
2. Measures how efficiently assets are used to produce sales.	Investments..	____
3. Current assets divided by current liabilities.	Net worth.	____
4. Cash and other assets that a company can reasonably expect to convert to cash, sell, or consume within one year or its normal operating cycle, whichever is longer.	Earned capital.	____
5. A less-preferred term for “owner’s equity.”	Current ratio.	____
6. Another name for retained earnings.	Profit margin.	____
7. Measures how much income did each dollar of assets generate.	Asset turnover.	____
8. Include assets, usually long-term, that are not used in normal business operations and that management does not plan to convert to cash within the next year.	Return on assets.	____

 

133. Using the following data, prepare a classified balance sheet for Blanchard Company as of December 31, 20×5.

Cash	$   200		Accumulated Depreciation– Building	$  1,000
Investments in Short-Term Government Securities	400		Franchise	1,800
Accounts Receivable	800		Accounts Payable	1,600
Inventory	3,000		Revenues Received in Advance	400
Prepaid Rent	100		Notes Payable (in two years)	4,000
Investment in Land Held for future use	2,700		John Blanchard, Capital	12,000
Land	2,000
Building	8,000

 

 

 

 

 

 

134. Using the following data, prepare a classified balance sheet as of December 31, 20×5, for Paula’s Picture Frame Company.

Accounts Payable	$ 4,800		Accounts Receivable	$  9,000
Building Not Currently Used	57,000		Cash	15,600
Accumulated Depreciation– Equipment	24,000		Unearned Revenue	2,400
				Short-Term Investments	6,000
Paula West, Capital	127,800		Land	48,000
Copyright	15,000		Equipment	45,000
Notes Payable (due in 5 years)	39,000		Long-Term Investments	2,400

 

 

 

 

 

 

135. Use the following information to calculate the liquidity and profitability ratios listed below. Round to two decimal places.

Average owner’s equity	$  13,875		Net income	$  2,250
Average total assets	27,000		Net sales	23,437.50
Current assets	16,875		Total liabilities	13,125
Current liabilities	11,250

1. Current ratio
   b. Working capital
   c. Return on equity
   d. Profit margin
   e. Debt to equity ratio
   f. Return on assets
   g. Asset turnover

 

 

 

 

 

136. Use the following information to calculate the liquidity and profitability ratios listed below. Round to two decimal places.

Average owner’s equity	$14,000		Net income	$ 2,100
Average total assets	21,000		Net sales	17,500
Current assets	15,000		Total liabilities	10,500
Current liabilities	10,000

1. Current ratio
   b. Working capital
   c. Return on equity
   d. Profit margin
   e. Debt to equity ratio
   f.  Return on assets
   g. Asset turnover

 

 

 

 

 

137. Using the following amounts taken from the balance sheet and income statement of a business, compute the measures listed below. After each answer, write “L” if it is a measure of liquidity or “P” if it is a measure of profitability. Round to two decimal places.

Current assets	$  12,000		Average owner’s equity	$30,000
Average total assets	60,000		Net sales	39,000
Current liabilities	9,000		Net income	4,800
Long-term liabilities	21,000

1. Return on assets
   b. Working capital
   c. Return on equity
   d. Current ratio

 

 

 

 

 

138. Using the following amounts taken from the balance sheet and income statement of a business, compute the measures listed below. After each answer, write “L” if it is a measure of liquidity or “P” if it is a measure of profitability. Round to two decimal places.

Current assets	$  30,000		Average owner’s equity	$60,000
Average total assets	120,000		Net sales	64,000
Current liabilities	20,000		Net income	3,000
Long-term liabilities	40,000

1. Current ratio
   b. Return on equity
   c. Return on assets
   d. Working capital

 

 

 

 

 

139. A. From the simplified balance sheet and income statement of the business below, compute the following ratios. Assume that the June 30 amounts for total assets and owner’s equity also represent their average amounts for the period. Round percentages to the nearest whole percent.

     a. Working capital
     b. Current ratio
     c. Profit margin
     d. Return on assets
     e. Debt to equity ratio
     f.  Return on equity
     g. Asset turnover

Keene Industries
Balance Sheet
June 30, 20×5
Assets	Liabilities
Current assets	$ 8,000	Current liabilities		$  8,000
Investments	4,000	Long-term liabilities		12,000
Property, plant, and		Total liabilities		$20,000
	equipment	24,000
Intangible assets	4,000	Owner’s Equity
		Kathy Keene, Capital		20,000
		Total liabilities and
Total assets	$40,000		owner’s equity	$40,000

 

Keene Industries
Income Statement
For the Year Ended June 30, 20×5
Net sales	$48,000
Cost of goods sold	24,000
Gross margin	$24,000
Operating expenses	19,200
Net income	$ 4,800

1. Discuss the liquidity and profitability of Keene Industries.

 

 

 

 

 

140. A. From the simplified balance sheet and income statement of the business below, compute the following ratios. Assume that the April 30 amounts for total assets and owner’s equity also represent their average amounts for the period. Round percentages to the nearest whole percent.

     a. Working capital
     b. Current ratio
     c. Profit margin
     d. Return on assets
     e. Debt to equity ratio
     f.  Return on equity
     g. Asset turnover

TG Manufacturing
Balance Sheet
April 30, 20×5
Assets	Liabilities
Current assets	$ 4,000	Current liabilities		$  2,000
Investments	6,000	Long-term liabilities		8,000
Property, plant, and		Total liabilities		$10,000
	equipment	16,000
Intangible assets	4,000	Owner’s Equity
		Ted Gruen, Capital	20,000
		Total liabilities and
Total assets	$30,000		owner’s equity	$30,000

 

TG Manufacturing
Income Statement
For the Year Ended April 30, 20×5
Net sales	$40,000
Cost of goods sold	22,000
Gross margin	$18,000
Operating expenses	14,400
Net income	$  3,600

1. Discuss the liquidity and profitability of TG Manufacturing.

 

 

 

 

 

 

 

Chapter 5: Foundations of Financial Reporting and the Classified Balance Sheet Key

1. The objective of financial reporting established by the FASB is to provide information that is useful to potential customers.
   FALSE

 

2. To be useful for decision making, financial reporting must enable the user to assess cash flow prospects and assess management’s stewardship.
   TRUE

 

3. Financial statements are often audited by management to increase confidence in the statements’ reliability.
   FALSE

 

4. Investors and creditors use financial statements to evaluate a company’s ability to pay dividends and interest.
   TRUE

 

5. In practice, accounting information is quite simple and precise.
   FALSE

 

6. A different set of financial statements usually is prepared for each user.
   FALSE

 

7. The relevance of accounting information means that the information has a direct bearing on a decision.
   TRUE

 

8. An advantage of accounting information is that it provides exact and completely reliable measures.
   FALSE

 

9. Even when no errors have been made, accounting is never 100 percent accurate because of the extensive use of estimates.
   TRUE

 

10. Accounting information contains numerous estimates, classifications, summarizations, judgments, and allocations.
    TRUE

 

11. For accounting information to be useful, it must be both relevant and conservative.
    FALSE

 

12. The Sarbanes-Oxley Act requires a company to guarantee that its financial statements are 100 percent accurate.
    FALSE

 

13. Only the chief financial officer and the company’s CPAs must certify that, to their knowledge, the statements are accurate and complete.
    FALSE

 

14. The use of the lower-of-cost-or-market method for inventory is an application of the convention of conservatism.
    TRUE

 

15. The convention of consistency has led to an increase in the notes to financial statements.
    FALSE

 

16. The conservatism convention should not be used when the accountant is certain of a particular measure.
    TRUE

 

17. To understand accounting information, users must be familiar with the accounting conventions, or rules of thumb, used in preparing financial statements.
    TRUE

 

18. Full disclosure of all important facts aids in overcoming the limitations of accounting information.
    TRUE

 

19. Consistency in accounting means that a company uses the same generally accepted accounting principles from one accounting period to the next accounting period.
    TRUE

 

20. The convention of consistency pertains to the use of the same accounting principles by firms in the same industry.
    FALSE

 

21. A material item is one that is likely to affect a user’s decision.
    TRUE

 

22. In accounting, $1,000 is generally considered the dividing line between material and immaterial amounts.
    FALSE

 

23. Although a garbage can that costs $25 is a long-term asset, it can be expensed because the amount is immaterial and will not affect anyone’s decision making.
    TRUE

 

24. The cost-benefit convention holds that the benefits to be gained from providing accounting information should be greater than the costs of providing it.
    TRUE

 

25. Illegal acts of a small dollar amount can be ignored because they are immaterial.
    FALSE

 

26. The conventions of consistency and conservatism require that financial statements present all the information relevant to users’ understanding of the statements.
    TRUE

 

27. General-purpose external financial statements that are divided into subcategories are called classified financial statements.
    TRUE

 

28. Classified balance sheets list accounts in alphabetical order.
    FALSE

 

29. Natural resources, such as coal mines and oil wells, are classified as intangible assets.
    FALSE

 

30. It is possible for an asset to be a current asset even though the expected conversion of that asset into cash is to be longer than one year.
    TRUE

 

31. The investments category on the balance sheet normally includes investments that are intended to be held for a long period of time.
    TRUE

 

32. The main difference between intangible assets and property, plant, and equipment is physical substance.
    TRUE

 

33. The main differences among the balance sheets of the sole proprietorship, the partnership, and the corporation are found in the current assets and current liabilities sections.
    FALSE

 

34. The two parts of a corporation’s stockholders’ equity section are contributed capital and retained earnings.
    TRUE

 

35. The Retained Earnings portion of a corporation represents the initial contribution of capital to the business.
    FALSE

 

36. Contributed capital is shown on a corporate balance sheet as two amounts: the par value of the issued stock and retained earnings.
    FALSE

 

37. The term owner’s equity is preferred over the term net worth because most assets are carried at original cost rather than at current value.
    TRUE

 

38. Return on assets is a measure of liquidity.
    FALSE

 

39. Return on assets is a better measure of profitability than profit margin because it takes into account the assets invested in the business.
    TRUE

 

40. Profitability means having enough cash on hand to pay bills when they become due.
    FALSE

 

41. Asset turnover measures how efficiently assets are used to produce revenues.
    TRUE

 

42. A company with a current ratio of 1.0 is considered more liquid than a company with a current ratio of 2.0.
    FALSE

 

43. A debt to equity ratio of 1.0 means that half of the company’s assets are financed by creditors.
    TRUE

 

44. A company with a low debt to equity ratio is in a more vulnerable position during poor economic times than a company with a high debt to equity ratio.
    FALSE

 

45. Profit margin and gross margin are the same thing.
    FALSE

 

46. A company with a profit margin of 6 percent earns sixty cents profit for every dollar of net sales.
    FALSE

 

47. A debt to equity ratio of 0.5 means that one-third of a company’s total assets are financed by creditors.
    TRUE

 

48. A company’s management can improve overall profitability by decreasing the profit margin,
    the asset turnover, or both.
    FALSE

 

49. Return on assets is a combination of the profit margin and the asset turnover.
    TRUE

 

50. A company with a low asset turnover uses its assets more productively than one with a high asset turnover.
    FALSE

 

51. Working capital is the amount by which current liabilities exceed current assets and measures how efficiently liabilities are used to produce sales.
    FALSE

 

52. All of the following must certify that a public company’s financial statements are accurate, complete, and not misleading, except for the
    A.chief financial officer.
    B. director of human resources.
    C. chief executive officer.
    D. independent auditor.

 

53. General-purpose external financial statements are not primarily intended for
    A.management.
    B. investors.
    C. suppliers of goods and services.
    D. lending institutions.

 

54. Financial statements are audited by outside accountants
    A.because it is a requirement stated in the Internal Revenue Code.
    B. only when fraudulent financial reporting is suspected.
    C. who then report on whether or not the company is a good investment.
    D. to increase the users’ confidence in the statements’ reliability.

 

55. Financial statements have faithful representation when the information has all of the following except
    A. Complete information.
    B. Information that is free from error.
    C. Neutral information.
    D. Material information.

 

56. According to the FASB, the usefulness of accounting is judged by which of the following two qualitative characteristics of accounting information?
    A.Comparability and neutrality
    B. Understandability and comparability
    C. Verifiability and timeliness
    D. Relevance and faithful representation

 

57. The qualitative characteristic of faithful representation includes
    A.materiality
    B. confirmative value.
    C. timeliness.
    D. neutral information.

 

58. Accounting information should make a difference to the outcome of a decision, according to the qualitative characteristic of
    A.faithful representation.
    B. relevance.
    C. consistency.
    D. understandability.

 

59. The user can depend on the accuracy of financial information when which of the following qualitative characteristics has been followed?
    A.Relevance
    B. Faithful representation
    C. Understandability
    D. Timeliness

 

60. The Securities and Exchange Commission instituted rules requiring the chief executive officers and chief financial officers of all publicly traded companies to certify that, to their knowledge, the quarterly and annual statements that their companies file with the SEC are
    A.100 percent accurate and contain no misstatements, errors, or mistakes.
    B. accurate and complete.
    C. subject to interpretation due to the many accounting rules and regulations.
    D. not to be used except by individuals working for the company.

 

61. The lower-of-cost-or-market method of accounting for inventories follows the convention of
    A.full disclosure.
    B. materiality.
    C. conservatism.
    D. cost-benefit.

 

62. The convention of consistency refers to consistent use of accounting principles
    A.among firms.
    B. within a given accounting period.
    C. within industries.
    D. among accounting periods.

 

63. A practical decision to expense a $120 printer rather than record it as property, plant, and equipment and depreciate it probably is made on the basis of the convention of
    A.conservatism.
    B. consistency.
    C. materiality.
    D. full disclosure.

 

64. The accounting convention that is most responsible for the increase in the number of notes to financial statements is
    A.materiality.
    B. full disclosure.
    C. consistency.
    D. conservatism.

 

65. __________ is the quality that different knowledgeable and independent observers could reach concensus that a particular depiction is a faithful representation.
    A.Verifiability.
    B. Consistency.
    C. Comparability.
    D. Neutrality.

 

66. Which of the following accounting conventions would an accountant most likely apply when facing major uncertainties?
    A.Understandability
    B. Conservatism
    C. Materiality
    D. Verifiability

 

67. Expensing a building in the year of purchase represents an abuse of which of the following accounting conventions?
    A.Full disclosure
    B. Cost-benefit
    C. Conservatism
    D. Consistency

 

68. Which accounting convention could cause an overload of information for the financial statement user?
    A.Consistency
    B. Conservatism
    C. Full disclosure
    D. Materiality

 

69. Which accounting convention requires a note to the financial statements explaining the company’s method of revenue recognition?
    A.Comparability and consistency
    B. Materiality
    C. Conservatism
    D. Full disclosure

 

70. Which of the following is not an enhancing qualitative characteristic?
    A.Verifiability
    B. Timeliness
    C. Understandability
    D. Neutrality

 

71. Faithful representation is comprised of all of the following except
    A. Verifiability
    B. Completeness
    C. Neutrality
    D. Free from error

 

72. Relevance is comprised of all of the following except
    A. Neutrality
    B. Materiality
    C. Predictive value
    D. Confirmative value

 

73. ___________ is related to both the nature of an item and its size.
    A.Neutrality
    B. Materiality
    C. Verifiability
    D. Timeliness

 

74. Which of the following statements best describes predictive value?
    A.Helps capital providers make decisions about future actions.
    B. Provides all information necessary for a reliable decision.
    C. Enables users to identify similarities and differences.
    D. Enables users to comprehend the meaning of the information.

 

75. A company should classify land held for a planned manufacturing facility as
    A.an intangible asset.
    B. an investment.
    C. a current asset.
    D. property, plant, and equipment.

 

76. Which of the following should be classified as an intangible asset?
    A.Land held for future use
    B. Long-term notes receivable
    C. Special funds established to pay off a debt
    D. Copyright

 

77. Which of the following would not appear in the owner’s equity section of a corporation?
    A.I. Muller, Capital
    B. Retained earnings
    C. Additional paid-in capital
    D. Common stock

 

78. On a corporate balance sheet, earned capital is also known as
    A.common stock.
    B. paid-in capital.
    C. retained earnings.
    D. contributed capital.

 

79. Use this information to answer the following question.

Sunshine Travel
Balance Sheet
December 31, 20×5
Assets
Cash		$ 40,000
Short-term investments		20,000
Notes receivable (due in ten months)		15,000
Accounts receivable		10,000
Merchandise inventory		35,000
Land held for future use		40,000
Land		45,000
Building	$50,000
	Less accumulated depreciation	10,000	40,000
Trademark		35,000
Total assets			$280,000
Liabilities
Notes payable (due in six months)		$ 25,000
Accounts payable		10,000
Salaries payable		5,000
Mortgage payable (due in seven years)		45,000
Total liabilities			$85,000
Owner’s Equity
Jennifer More, Capital			195,000
Total liabilities and owner’s equity			$280,000

The total dollar amount of assets to be classified as current assets is
A. $105,000.
B. $145,000.
C. $95,000.
D. $120,000.

 

80. Use this information to answer the following question.

Sunshine Travel
Balance Sheet
December 31, 20×5
Assets
Cash		$ 40,000
Short-term investments		20,000
Notes receivable (due in ten months)		15,000
Accounts receivable		10,000
Merchandise inventory		35,000
Land held for future use		40,000
Land		45,000
Building	$50,000
	Less accumulated depreciation	10,000	40,000
Trademark		35,000
Total assets			$280,000
Liabilities
Notes payable (due in six months)		$ 25,000
Accounts payable		10,000
Salaries payable		5,000
Mortgage payable (due in seven years)		45,000
Total liabilities			$85,000
Owner’s Equity
Jennifer More, Capital			195,000
Total liabilities and owner’s equity			$280,000

The total dollar amount of assets to be classified as investments is
A. $125,000.
B. $95,000.
C. $60,000.
D. $40,000.

 

81. Use this information to answer the following question.

Sunshine Travel
Balance Sheet
December 31, 20×5
Assets
Cash		$ 40,000
Short-term investments		20,000
Notes receivable (due in ten months)		15,000
Accounts receivable		10,000
Merchandise inventory		35,000
Land held for future use		40,000
Land		45,000
Building	$50,000
	Less accumulated depreciation	10,000	40,000
Trademark		35,000
Total assets			$280,000
Liabilities
Notes payable (due in six months)		$ 25,000
Accounts payable		10,000
Salaries payable		5,000
Mortgage payable (due in seven years)		45,000
Total liabilities			$85,000
Owner’s Equity
Jennifer More, Capital			195,000
Total liabilities and owner’s equity			$280,000

The total dollar amount of assets to be classified as property, plant, and equipment is
A. $135,000.
B. $125,000.
C. $95,000.
D. $85,000.

 

82. An investment is classified as short term or long term based on
    A.whether the investment can be sold immediately.
    B. the length of time the investor expects to hold it.
    C. the purpose for which it is held.
    D. the dollar amount of the investment.

 

83. Which of the following accounts is most likely to appear on the balance sheet as a current liability?
    A.Accumulated Depreciation
    B. Bonds Payable
    C. Mortgage Payable
    D. Wages Payable

 

84. Which accounting term does not mean the same as the others?
    A.Retained earnings
    B. Net worth
    C. Capital
    D. Owner’s equity

 

85. Which of the following should be classified as a current asset?
    A.Supplies
    B. Trademark
    C. Equipment
    D. Land held for future use

 

86. Goodwill would appear in which balance sheet section?
    A.Investments
    B. Property, plant, and equipment
    C. Current assets
    D. Intangible assets

 

87. Stephanie Cape purchased a franchise for dry cleaning services.  Stephanie is running the dry cleaning business as her primary occupation.  Where on the balance sheet is the franchise reported?
    A.Property, plant, and equipment
    B. Investments
    C. Current assets
    D. Intangible assets

 

88. The normal operating cycle helps define which of the following balance sheet sections?
    A.Owner’s equity
    B. Current liabilities
    C. Intangible assets
    D. Property, plant, and equipment

 

89. Liabilities have which of the following two major categories?
    A.Accounts payable and notes payable
    B. Contributed capital and retained earnings
    C. Current and long term
    D. Unearned revenues and other payables

 

90. Use this information to answer the following question.

Coyle Company
Balance Sheet
December 31, 20×5
Assets
Cash		$ 70,000
Short-term investments		56,000
Accounts receivable		28,000
Notes receivable (due in six months)		42,000
Merchandise inventory		98,000
Special fund for purchasing a building		112,000
Land		140,000
Building	$150,000
	Less accumulated depreciation	28,000	122,000
Trademark		92,000
Total assets			$760,000
Liabilities
Notes payable (due in one year)		$ 70,000
Accounts payable		30,000
Salaries payable		14,000
Mortgage payable (due in seven years)		146,000
Total liabilities			$260,000
Owner’s Equity
Eddie Coyle, Capital			500,000
Total liabilities and owner’s equity			$760,000

The total dollar amount of assets to be classified as current assets is
A. $252,000.
B. $238,000.
C. $294,000.
D. $406,000.

 

91. Use this information to answer the following question.

Coyle Company
Balance Sheet
December 31, 20×5
Assets
Cash		$ 70,000
Short-term investments		56,000
Accounts receivable		28,000
Notes receivable (due in six months)		42,000
Merchandise inventory		98,000
Special fund for purchasing a building		112,000
Land		140,000
Building	$150,000
	Less accumulated depreciation	28,000	122,000
Trademark		92,000
Total assets			$760,000
Liabilities
Notes payable (due in one year)		$ 70,000
Accounts payable		30,000
Salaries payable		14,000
Mortgage payable (due in seven years)		146,000
Total liabilities			$260,000
Owner’s Equity
Eddie Coyle, Capital			500,000
Total liabilities and owner’s equity			$760,000

The total dollar amount of assets to be classified as investments is
A. $168,000.
B. $0.
C. $112,000.
D. $56,000.

 

92. Use this information to answer the following question.

Coyle Company
Balance Sheet
December 31, 20×5
Assets
Cash		$ 70,000
Short-term investments		56,000
Accounts receivable		28,000
Notes receivable (due in six months)		42,000
Merchandise inventory		98,000
Special fund for purchasing a building		112,000
Land		140,000
Building	$150,000
	Less accumulated depreciation	28,000	122,000
Trademark		92,000
Total assets			$760,000
Liabilities
Notes payable (due in one year)		$ 70,000
Accounts payable		30,000
Salaries payable		14,000
Mortgage payable (due in seven years)		146,000
Total liabilities			$260,000
Owner’s Equity
Eddie Coyle, Capital			500,000
Total liabilities and owner’s equity			$760,000

The total dollar amount of assets to be classified as property, plant, and equipment is
A. $374,000.
B. $262,000.
C. $354,000.
D. $122,000.

 

93. Intangible assets could include all except
    A. Trademark
    B. Land held for future use
    C. Patent
    D. Goodwill

 

94. The debt to equity ratio equals
    A.owner’s equity divided by total liabilities.
    B. owner’s equity divided by long-term liabilities.
    C. total liabilities divided by owner’s equity.
    D. current liabilities divided by average owner’s equity.

 

95. The profit margin equals
    A.net sales divided by net income.
    B. gross margin divided by net income.
    C. net income divided by gross margin.
    D. net income divided by revenues.

 

96. The asset turnover ratio equals
    A.revenues divided by average total assets.
    B. average total assets divided by net income.
    C. average total assets divided by total liabilities.
    D. net income divided by average total assets.

 

97. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios.

National Textile
Balance Sheet
December 31, 20×5
Assets	Liabilities
Current assets	$ 12,000		Current liabilities	$ 8,000
Investments	2,000		Long-term liabilities	2,000
Property, plant, and equipment	16,000		Total liabilities	$ 10,000
Intangible assets	10,000
		Owner’s Equity
			Jonah Jones, Capital	30,000
			Total liabilities and
Total assets	$40,000		owner’s equity	$40,000

 

National Textile
Income Statement
For the Year Ended December 31, 20×5
Net sales	$48,000
Cost of goods sold	16,000
Gross margin	$32,000
Operating expenses	22,400
Net income	$  9,600

The total amount of working capital for National Textile is
A. $2,000.
B. $6,000.
C. $4,000.
D. $30,000.

 

98. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios.

National Textile
Balance Sheet
December 31, 20×5
Assets	Liabilities
Current assets	$ 12,000		Current liabilities	$ 8,000
Investments	2,000		Long-term liabilities	2,000
Property, plant, and equipment	16,000		Total liabilities	$ 10,000
Intangible assets	10,000
		Owner’s Equity
			Jonah Jones, Capital	30,000
			Total liabilities and
Total assets	$40,000		owner’s equity	$40,000

 

National Textile
Income Statement
For the Year Ended December 31, 20×5
Net sales	$48,000
Cost of goods sold	16,000
Gross margin	$32,000
Operating expenses	22,400
Net income	$  9,600

The current ratio for National Textile is
A. 1.20.
B. 1.75.
C. .67.
D. 1.50.

 

99. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios.

National Textile
Balance Sheet
December 31, 20×5
Assets	Liabilities
Current assets	$ 12,000		Current liabilities	$ 8,000
Investments	2,000		Long-term liabilities	2,000
Property, plant, and equipment	16,000		Total liabilities	$ 10,000
Intangible assets	10,000
		Owner’s Equity
			Jonah Jones, Capital	30,000
			Total liabilities and
Total assets	$40,000		owner’s equity	$40,000

 

National Textile
Income Statement
For the Year Ended December 31, 20×5
Net sales	$48,000
Cost of goods sold	16,000
Gross margin	$32,000
Operating expenses	22,400
Net income	$  9,600

The profit margin for National Textile is
A. 60 percent.
B. 25 percent.
C. 20 percent.
D. 12 percent.

 

100. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios.

National Textile
Balance Sheet
December 31, 20×5
Assets	Liabilities
Current assets	$ 12,000		Current liabilities	$ 8,000
Investments	2,000		Long-term liabilities	2,000
Property, plant, and equipment	16,000		Total liabilities	$ 10,000
Intangible assets	10,000
		Owner’s Equity
			Jonah Jones, Capital	30,000
			Total liabilities and
Total assets	$40,000		owner’s equity	$40,000

 

National Textile
Income Statement
For the Year Ended December 31, 20×5
Net sales	$48,000
Cost of goods sold	16,000
Gross margin	$32,000
Operating expenses	22,400
Net income	$  9,600

The return on assets for National Textile is
A. 30 percent.
B. 150 percent.
C. 33-1/3 percent.
D. 24 percent.

 

101. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios.

National Textile
Balance Sheet
December 31, 20×5
Assets	Liabilities
Current assets	$ 12,000		Current liabilities	$ 8,000
Investments	2,000		Long-term liabilities	2,000
Property, plant, and equipment	16,000		Total liabilities	$ 10,000
Intangible assets	10,000
		Owner’s Equity
			Jonah Jones, Capital	30,000
			Total liabilities and
Total assets	$40,000		owner’s equity	$40,000

 

National Textile
Income Statement
For the Year Ended December 31, 20×5
Net sales	$48,000
Cost of goods sold	16,000
Gross margin	$32,000
Operating expenses	22,400
Net income	$  9,600

The return on equity for National Textile is
A. 40 percent.
B. 67 percent.
C. 47 percent.
D. 32 percent.

 

102. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios.

National Textile
Balance Sheet
December 31, 20×5
Assets	Liabilities
Current assets	$ 12,000		Current liabilities	$ 8,000
Investments	2,000		Long-term liabilities	2,000
Property, plant, and equipment	16,000		Total liabilities	$ 10,000
Intangible assets	10,000
		Owner’s Equity
			Jonah Jones, Capital	30,000
			Total liabilities and
Total assets	$40,000		owner’s equity	$40,000

 

National Textile
Income Statement
For the Year Ended December 31, 20×5
Net sales	$48,000
Cost of goods sold	16,000
Gross margin	$32,000
Operating expenses	22,400
Net income	$  9,600

The debt to equity ratio for National Textile is
A. 67 percent.
B. 75 percent.
C. 25 percent.
D. 33-1/3 percent.

 

103. Use this balance sheet and income statement to answer the following question. Use ending balances whenever average balances are required for computing ratios.

National Textile
Balance Sheet
December 31, 20×5
Assets	Liabilities
Current assets	$ 12,000		Current liabilities	$ 8,000
Investments	2,000		Long-term liabilities	2,000
Property, plant, and equipment	16,000		Total liabilities	$ 10,000
Intangible assets	10,000
		Owner’s Equity
			Jonah Jones, Capital	30,000
			Total liabilities and
Total assets	$40,000		owner’s equity	$40,000

 

National Textile
Income Statement
For the Year Ended December 31, 20×5
Net sales	$48,000
Cost of goods sold	16,000
Gross margin	$32,000
Operating expenses	22,400
Net income	$  9,600

The asset turnover for National Textile is
A. 1.00 times.
B. 1.33 times.
C. 0.83 times.
D. 1.20 times.

 

104. Which of the following is not a measure of profitability?
     A.Current ratio
     B. Return on assets
     C. Return on equity
     D. Debt to equity ratio

 

105. Which of the following is a measure of liquidity?
     A.Return on equity
     B. Return on assets
     C. Working capital
     D. Profit margin

 

106. Current assets divided by current liabilities is known as the
     A.profit margin.
     B. current ratio.
     C. working capital.
     D. capital structure.

 

107. Which of the following is not expressed in terms of a percentage?
     A.Return on equity
     B. Debt to equity ratio
     C. Current ratio
     D. Profit margin

 

108. Which of the following is expressed in terms of a percentage?
     A.Return on equity
     B. Current ratio
     C. Asset turnover
     D. Working capital

 

109. Which of the following does not include net income in its computation?
     A.Debt to equity ratio
     B. Return on assets
     C. Return on equity
     D. Profit margin

 

110. Use this balance sheet and income statement for the first year of operations for Cane Construction to answer the following question. Use ending balances whenever average balances are required for computing ratios.

Cane Construction
Balance Sheet
December 31, 20×5
Assets	Liabilities
Current assets	$ 14,000		Current liabilities	$  8,000
Investments	6,000		Long-term liabilities	2,000
Property, plant, and equipment	24,000		Total liabilities	$  10,000
Intangible assets	16,000
		Owner’s Equity
			Carlton Cane, Capital	50,000
			Total liabilities and
Total assets	$60,000		owner’s equity	$60,000

Cane Construction
Income Statement
For the Year Ended December 31, 20×5
Net sales	$80,000
Cost of goods sold	32,000
Gross margin	$48,000
Operating expenses	26,400
Net income	$21,600

The total amount of working capital for Cane Construction is
A. $4,000.
B. $14,000.
C. $6,000.
D. $2,000.

 

111. Use this balance sheet and income statement for the first year of operations for Cane Construction to answer the following question. Use ending balances whenever average balances are required for computing ratios.

Cane Construction
Balance Sheet
December 31, 20×5
Assets	Liabilities
Current assets	$ 14,000		Current liabilities	$  8,000
Investments	6,000		Long-term liabilities	2,000
Property, plant, and equipment	24,000		Total liabilities	$  10,000
Intangible assets	16,000
		Owner’s Equity
			Carlton Cane, Capital	50,000
			Total liabilities and
Total assets	$60,000		owner’s equity	$60,000

Cane Construction
Income Statement
For the Year Ended December 31, 20×5
Net sales	$80,000
Cost of goods sold	32,000
Gross margin	$48,000
Operating expenses	26,400
Net income	$21,600

The current ratio for Cane Construction is
A. 1.75.
B. 0.57.
C. 1.4.
D. 2.0.

 

112. Use this balance sheet and income statement for the first year of operations for Cane Construction to answer the following question. Use ending balances whenever average balances are required for computing ratios.

Cane Construction
Balance Sheet
December 31, 20×5
Assets	Liabilities
Current assets	$ 14,000		Current liabilities	$  8,000
Investments	6,000		Long-term liabilities	2,000
Property, plant, and equipment	24,000		Total liabilities	$  10,000
Intangible assets	16,000
		Owner’s Equity
			Carlton Cane, Capital	50,000
			Total liabilities and
Total assets	$60,000		owner’s equity	$60,000

Cane Construction
Income Statement
For the Year Ended December 31, 20×5
Net sales	$80,000
Cost of goods sold	32,000
Gross margin	$48,000
Operating expenses	26,400
Net income	$21,600

The profit margin for Cane Construction is
A. 30 percent.
B. 75 percent.
C. 60 percent.
D. 27 percent.

 

113. Use this balance sheet and income statement for the first year of operations for Cane Construction to answer the following question. Use ending balances whenever average balances are required for computing ratios.

Cane Construction
Balance Sheet
December 31, 20×5
Assets	Liabilities
Current assets	$ 14,000		Current liabilities	$  8,000
Investments	6,000		Long-term liabilities	2,000
Property, plant, and equipment	24,000		Total liabilities	$  10,000
Intangible assets	16,000
		Owner’s Equity
			Carlton Cane, Capital	50,000
			Total liabilities and
Total assets	$60,000		owner’s equity	$60,000

Cane Construction
Income Statement
For the Year Ended December 31, 20×5
Net sales	$80,000
Cost of goods sold	32,000
Gross margin	$48,000
Operating expenses	26,400
Net income	$21,600

The return on assets for Cane Construction is
A. 80 percent.
B. 70 percent.
C. 36 percent.
D. 133 percent.

 

114. Use this balance sheet and income statement for the first year of operations for Cane Construction to answer the following question. Use ending balances whenever average balances are required for computing ratios.

Cane Construction
Balance Sheet
December 31, 20×5
Assets	Liabilities
Current assets	$ 14,000		Current liabilities	$  8,000
Investments	6,000		Long-term liabilities	2,000
Property, plant, and equipment	24,000		Total liabilities	$  10,000
Intangible assets	16,000
		Owner’s Equity
			Carlton Cane, Capital	50,000
			Total liabilities and
Total assets	$60,000		owner’s equity	$60,000

Cane Construction
Income Statement
For the Year Ended December 31, 20×5
Net sales	$80,000
Cost of goods sold	32,000
Gross margin	$48,000
Operating expenses	26,400
Net income	$21,600

The return on equity for Cane Construction is
A. 62.5 percent.
B. 43.2 percent.
C. 84 percent.
D. 60 percent.

 

115. Use this balance sheet and income statement for the first year of operations for Cane Construction to answer the following question. Use ending balances whenever average balances are required for computing ratios.

Cane Construction
Balance Sheet
December 31, 20×5
Assets	Liabilities
Current assets	$ 14,000		Current liabilities	$  8,000
Investments	6,000		Long-term liabilities	2,000
Property, plant, and equipment	24,000		Total liabilities	$  10,000
Intangible assets	16,000
		Owner’s Equity
			Carlton Cane, Capital	50,000
			Total liabilities and
Total assets	$60,000		owner’s equity	$60,000

Cane Construction
Income Statement
For the Year Ended December 31, 20×5
Net sales	$80,000
Cost of goods sold	32,000
Gross margin	$48,000
Operating expenses	26,400
Net income	$21,600

The debt to equity ratio for Cane Construction is
A. 16-2/3 percent.
B. 20 percent.
C. 80 percent.
D. 83-1/3 percent.

 

116. Use this information to answer the following question.

J. & B. Auto Parts
Balance Sheet
December 31, 20×5
Assets
Cash		$ 60,000
Short-term investments		40,000
Notes receivable (due in ten months)		30,000
Accounts receivable		20,000
Merchandise inventory		70,000
Long-term investments		80,000
Land		90,000
Building	$100,000
	Less accumulated depreciation	20,000	80,000
Trademark		70,000
Total assets			$540,000
Liabilities
Notes payable (due in six months)		$ 50,000
Accounts payable		20,000
Salaries payable		10,000
Mortgage payable (due in seven years)		90,000
Total liabilities			$170,000
Owner’s Equity
Cheryl Stein, Capital			370,000
Total liabilities and owner’s equity			$540,000

The debt to equity ratio is
A. 0.46.
B. 0.67.
C. 2.18.
D. 0.33.

 

117. Use this information to answer the following question.

J. & B. Auto Parts
Balance Sheet
December 31, 20×5
Assets
Cash		$ 60,000
Short-term investments		40,000
Notes receivable (due in ten months)		30,000
Accounts receivable		20,000
Merchandise inventory		70,000
Long-term investments		80,000
Land		90,000
Building	$100,000
	Less accumulated depreciation	20,000	80,000
Trademark		70,000
Total assets			$540,000
Liabilities
Notes payable (due in six months)		$ 50,000
Accounts payable		60,000
Salaries payable		10,000
Mortgage payable (due in seven years)		50,000
Total liabilities			$170,000
Owner’s Equity
Cheryl Stein, Capital			370,000
Total liabilities and owner’s equity			$540,000

The total amount of working capital is
A. $150,000.
B. $370,000.
C. $100,000.
D. $60,000.

 

118. Use this information to answer the following question.

Coyle Company
Balance Sheet
December 31, 20×5
Assets
Cash		$ 70,000
Short-term investments		56,000
Accounts receivable		28,000
Notes receivable (due in six months)		42,000
Merchandise inventory		98,000
Special fund for purchasing a building		112,000
Land		140,000
Building	$150,000
	Less accumulated depreciation	28,000	122,000
Trademark		92,000
Total assets			$760,000
Liabilities
Notes payable (due in one year)		$ 70,000
Accounts payable		30,000
Salaries payable		14,000
Mortgage payable (due in seven years)		146,000
Total liabilities			$260,000
Owner’s Equity
Eddie Coyle, Capital			500,000
Total liabilities and owner’s equity			$760,000

The debt to equity ratio is
A. 0.48.
B. 0.34.
C. 0.52.
D. 1.92.

 

119. Use this information to answer the following question.

Coyle Company
Balance Sheet
December 31, 20×5
Assets
Cash		$ 70,000
Short-term investments		56,000
Accounts receivable		28,000
Notes receivable (due in six months)		42,000
Merchandise inventory		98,000
Special fund for purchasing a building		112,000
Land		140,000
Building	$150,000
	Less accumulated depreciation	28,000	122,000
Trademark		92,000
Total assets			$760,000
Liabilities
Notes payable (due in one year)		$ 70,000
Accounts payable		130,000
Salaries payable		14,000
Mortgage payable (due in seven years)		46,000
Total liabilities			$260,000
Owner’s Equity
Eddie Coyle, Capital			500,000
Total liabilities and owner’s equity			$760,000

The total amount of working capital is
A. ($30,000.)
B. $80,000.
C. $24,000.
D. $400,000.

 

120. Working capital measures
     A.the excess of current assets over current liabilities—what is on hand to fund business operations.
     B. the ability to earn a satisfactory income.
     C. the amount of debt in the company.
     D. the profitability of the business.

 

121. The asset turnover ratio measures
     A.how quickly the company uses assets to pay debt.
     B. how efficiently assets are used to produce sales.
     C. the income produced by selling inventory.
     D. how efficiently equity is used to produce revenue.

 

122. Each of the following statements is justified by a concept or convention of accounting. Write the letter in the blank next to each statement corresponding to the concept or convention involved.

a. Consistency	d. Full disclosure
b. Materiality	e. Cost-benefit
c. Conservatism

_____ 1. This convention best enhances comparability of financial statements between years.
_____ 2. A merger agreed on just after the balance sheet date nevertheless is reported in the notes to the financial statements.
_____ 3. A company forgoes hiring another full-time accountant, which would add only slightly to the financial statements’ accuracy.
_____ 4. A company uses lower-of-cost-or-market to value inventory.
_____ 5. A large company rounds its financial statement figures to the nearest $10,000.

 

1. a		4. c
2. d		5. b
3. e

 

123. Each of the following statements violates a concept or convention of accounting. Write the letter in the blank next to each statement corresponding to the concept or convention violated.

a. Consistency	d. Full disclosure
b. Materiality	e. Cost-benefit
c. Conservatism

_____ 1. A note to the financial statements indicating a change in inventory methods is omitted.
_____ 2. When management is unsure of which estimates to use in a given situation, the estimate resulting in the largest net income is always used.
_____ 3. In 20×5, a company uses straight-line depreciation and in 20×6 the company uses declining-balance depreciation.
_____ 4. A small company expenses all expenditures under $10,000.
_____ 5. A small company purchases a $50,000 computer to save $3,000 per year in bookkeeping wages.

 

1. d		4. b
2. c		5. e
3. a

 

124. Bill Pierce owns several ice cream shops all within 50 miles of his home. He has plans to expand the number of shops he owns. This planned expansion will require a large bank loan. Bill has always done his own accounting work and has prepared a set of financial statements for each of the past five years of operations to present to the bank. Because some periods were more profitable than others, Bill attempted to streamline his earnings by switching depreciation and inventory valuation methods frequently. This created the appearance that his company earnings were very consistent over the years. Discuss the merits of Bill’s financial statements with regard to his streamlining decisions.

Bill’s attempt to streamline his earnings by frequently changing depreciation and inventory methods is a violation of the accounting conventions of comparability and consistency. Once the selection of accounting methods for such areas as depreciation and inventory are made, the company should continue to apply these methods from one period to the next. To vacillate between different methods greatly diminishes the usefulness of the financial statements in providing meaningful information. The true picture of somewhat erratic earnings is hidden by his efforts to present his operations in a more favorable light in order to receive a loan from the bank.

 

125. Why is it important for a company to maintain the same accounting methods and practices from period to period?

An important aspect of financial analysis is comparing financial information about a company from one period to another. The only way to make a valid comparison is if the same set of rules (standards) have been used each period.

 

126. The following lettered items represent a classification scheme for a balance sheet, and the numbered items represent accounts. In the blank next to each account, write the letter indicating to which category it belongs.

a. Current assets	e. Current liabilities
b. Investments	f. Long-term liabilities
c. Plant and equipment	g. Owner’s equity
d. Intangible assets	h. Not on balance sheet

 

_____ 1. Accumulated Depreciation	_____ 7. Trademark
_____ 2. Revenues Received in Advance	_____ 8. Notes Payable (in five years)
_____ 3. Interest Expense	_____ 9. Depreciation Expense
_____ 4. Wages Payable	_____ 10. Prepaid Interest
_____ 5. Owner’s Capital	_____ 11. Land Held for Future Use
_____ 6. Inventory

 

 

1. c		7. d
2. e		8.  f
3. h		9. h
4. e		10. a
5. g		11. b
6. a

 

127. State the definition of a current asset.

A current asset is cash or another asset that is expected to be converted into cash or consumed within one year or the normal operating cycle, whichever is longer.

 

128. Match the following financial statement ratios with their definition.

     1. Working capital _____
     2. Current ratio _______
     3. Profit margin ______
     4. Return on assets______
     5. Debt to equity ratio________
     6. Return on equity_______
     7. Asset turnover_________

     a. A measure of profitability that shows the proportion of a company’s assets that is financed by creditors and the proportion financed by owners
     b. A measure of liquidity that shows the net current assets on hand to continue business operations
     c. A measure of profitability that relates the amount earned by a business to the owner’s investment in the business
     d. A measure of profitability that shows the percentage of each sales dollar that results in net income
     e. A measure of liquidity; current assets divided by current liabilities
     f. A measure of profitability that shows how efficiently a company uses its assets to produce income
     g. A measure of how efficiently assets are used to produce sales

129. b
     2. e
     3. d
     4. f
     5. a
     6. c
     7. g

 

129. The profit margin and asset turnover ratios are important measures, but they have a limitation.  Describe these limitations and discuss the ratio that can be used to overcome these deficiencies.

The profit margin ratio does not consider the assets necessary to produce income, and the asset turnover ratio does not take into account the amount of income produced. The return on assetsratio overcomes these deficiencies by relating net income to average total assets.

 

130. Describe how the current ratio is calculated.  If a company has a very low current ratio, what might this mean?  If a company has a very high current ratio, what might this mean?

The current ratio is the ratio of current assets to current liabilities (current assets/current liabilities).  A very low current ratio can be unfavorable, indicating that a company will not be able to pay its debts on time. A very high current ratio may indicate that a company is not using its assets to the best advantage. In other words, it could probably use its excess funds more effectively to increase its overall profit.

 

1. Quality that enables users to identify similarities and differences between two sets of financial data.	Qualitative characteristics.	7
2. Related to both the nature of an item and its size.	Predictive value.	6
3. Quality that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation.	Materiality.	2
4. Requires that once a company has adopted an accounting procedure, it must use it from one period to the next unless a note to the financial statements informs users of a change.	Neutrality.	5
5. Free from bias intended to achieve a certain result or to bring about a particular behavior.	Comparability.	1
6. Helps capital providers make decisions about future actions.	Verifiability.	3
7. Relevance and faithful representation.	Consistency.	4
8. When faced with choosing between two equally acceptable procedures or estimates, accountants should choose the one that is least likely to overstate assets and income.	Conservatism	8

 

1. The percentage of each sales dollar that results in net income.	Current assets.	4
2. Measures how efficiently assets are used to produce sales.	Investments..	8
3. Current assets divided by current liabilities.	Net worth.	5
4. Cash and other assets that a company can reasonably expect to convert to cash, sell, or consume within one year or its normal operating cycle, whichever is longer.	Earned capital.	6
5. A less-preferred term for “owner’s equity.”	Current ratio.	3
6. Another name for retained earnings.	Profit margin.	1
7. Measures how much income did each dollar of assets generate.	Asset turnover.	2
8. Include assets, usually long-term, that are not used in normal business operations and that management does not plan to convert to cash within the next year.	Return on assets.	7

 

133. Using the following data, prepare a classified balance sheet for Blanchard Company as of December 31, 20×5.

Cash	$   200		Accumulated Depreciation– Building	$  1,000
Investments in Short-Term Government Securities	400		Franchise	1,800
Accounts Receivable	800		Accounts Payable	1,600
Inventory	3,000		Revenues Received in Advance	400
Prepaid Rent	100		Notes Payable (in two years)	4,000
Investment in Land Held for future use	2,700		John Blanchard, Capital	12,000
Land	2,000
Building	8,000

 

 

Blanchard Company
Balance Sheet
December 31, 20×5
Assets
Current assets
	Cash		$     200
	Investments in short-term government securities		400
	Accounts receivable		800
	Inventory		3,000
	Prepaid rent		100
	Total current assets			$ 4,500
Investments
	Land held for future use			2,700
Property, plant, and equipment
	Land		$ 2,000
	Building	$8,000
	Less accumulated depreciation	1,000	7,000
	Total property, plant, and equipment			9,000
Intangible assets
	Franchise			1,800
Total assets			$18,000
Liabilities
Current liabilities
	Accounts payable	$1,600
	Revenues received in advance	400
	Total current liabilities		$ 2,000
Long-term liabilities
	Notes payable (in two years)		4,000
Total liabilities			$ 6,000
Owner’s Equity
John Blanchard, Capital			12,000
Total liabilities and owner’s equity			$18,000

 

134. Using the following data, prepare a classified balance sheet as of December 31, 20×5, for Paula’s Picture Frame Company.

Accounts Payable	$ 4,800		Accounts Receivable	$  9,000
Building Not Currently Used	57,000		Cash	15,600
Accumulated Depreciation– Equipment	24,000		Unearned Revenue	2,400
				Short-Term Investments	6,000
Paula West, Capital	127,800		Land	48,000
Copyright	15,000		Equipment	45,000
Notes Payable (due in 5 years)	39,000		Long-Term Investments	2,400

 

 

Paula’s Picture Frame Company
Balance Sheet
December 31, 20×5
Assets
Current assets
	Cash		$ 15,600
	Short-term investments		6,000
	Accounts receivable		9,000
	Total current assets			$ 30,600
Investments
	Building not currently used		$57,000
	Long-term investments		2,400
	Total investments			59,400
Property, plant, and equipment
	Land		$48,000
	Equipment	$45,000
	Less accumulated depreciation	24,000	21,000
	Total property, plant, and equipment			69,000
Intangible assets
	Copyrights			15,000
Total assets			$174,000
Liabilities
Current liabilities
	Accounts payable	$4,800
	Unearned revenue	2,400
	Total current liabilities		$ 7,200
Long-term liabilities
	Notes payable (due in 5 years)		39,000
Total liabilities			$46,200
Owner’s Equity
Paula West, Capital			127,800
Total liabilities and owner’s equity			$174,000

 

135. Use the following information to calculate the liquidity and profitability ratios listed below. Round to two decimal places.

Average owner’s equity	$  13,875		Net income	$  2,250
Average total assets	27,000		Net sales	23,437.50
Current assets	16,875		Total liabilities	13,125
Current liabilities	11,250

1. Current ratio
   b. Working capital
   c. Return on equity
   d. Profit margin
   e. Debt to equity ratio
   f. Return on assets
   g. Asset turnover
2. 1.5 ($16,875 ¸ $11,250)
   b. $5,625 ($16,875 – $11,250)
   c. 0.16 (16%) ($2,250 ¸ $13,875)
   d. 0.096 (9.6%) ($2,250 ¸ $23,437.50)
   e. 0.95 (95%) ($13,125 ¸ $13,875)
   f.  0.08 (8%) ($2,250 ¸ $27,000)
   g. 0.87 times ($23,437.50 ¸ $27,000)

 

136. Use the following information to calculate the liquidity and profitability ratios listed below. Round to two decimal places.

Average owner’s equity	$14,000		Net income	$ 2,100
Average total assets	21,000		Net sales	17,500
Current assets	15,000		Total liabilities	10,500
Current liabilities	10,000

1. Current ratio
   b. Working capital
   c. Return on equity
   d. Profit margin
   e. Debt to equity ratio
   f.  Return on assets
   g. Asset turnover
2. 1.5 ($15,000 ¸ $10,000)
   b. $5,000 ($15,000 – $10,000)
   c. 0.15 (15%) ($2,100 ¸ $14,000)
   d. 0.12 (12%) ($2,100 ¸ $17,500)
   e. 0.75 (75%) ($10,500 ¸ $14,000)
   f.  0.10 (10%) ($2,100 ¸ $21,000)
   g. 0.83 times ($17,500 ¸ $21,000)

 

137. Using the following amounts taken from the balance sheet and income statement of a business, compute the measures listed below. After each answer, write “L” if it is a measure of liquidity or “P” if it is a measure of profitability. Round to two decimal places.

Current assets	$  12,000		Average owner’s equity	$30,000
Average total assets	60,000		Net sales	39,000
Current liabilities	9,000		Net income	4,800
Long-term liabilities	21,000

1. Return on assets
   b. Working capital
   c. Return on equity
   d. Current ratio
2. 8% P ($4,800 ¸ $60,000)
   b. $3,000 L ($12,000 – $9,000)
   c. 16% P ($4,800 ¸ $30,000)
   d. 1.33 L ($12,000 ¸ $9,000)

 

138. Using the following amounts taken from the balance sheet and income statement of a business, compute the measures listed below. After each answer, write “L” if it is a measure of liquidity or “P” if it is a measure of profitability. Round to two decimal places.

Current assets	$  30,000		Average owner’s equity	$60,000
Average total assets	120,000		Net sales	64,000
Current liabilities	20,000		Net income	3,000
Long-term liabilities	40,000

1. Current ratio
   b. Return on equity
   c. Return on assets
   d. Working capital
2. 1.5 L ($30,000 ¸ $20,000)
   b. 5% P ($3,000 ¸ $60,000)
   c. 3% P ($3,000 ¸ $120,000)
   d. $10,000 L ($30,000 – $20,000)

 

139. A. From the simplified balance sheet and income statement of the business below, compute the following ratios. Assume that the June 30 amounts for total assets and owner’s equity also represent their average amounts for the period. Round percentages to the nearest whole percent.

     a. Working capital
     b. Current ratio
     c. Profit margin
     d. Return on assets
     e. Debt to equity ratio
     f.  Return on equity
     g. Asset turnover

Keene Industries
Balance Sheet
June 30, 20×5
Assets	Liabilities
Current assets	$ 8,000	Current liabilities		$  8,000
Investments	4,000	Long-term liabilities		12,000
Property, plant, and		Total liabilities		$20,000
	equipment	24,000
Intangible assets	4,000	Owner’s Equity
		Kathy Keene, Capital		20,000
		Total liabilities and
Total assets	$40,000		owner’s equity	$40,000

 

Keene Industries
Income Statement
For the Year Ended June 30, 20×5
Net sales	$48,000
Cost of goods sold	24,000
Gross margin	$24,000
Operating expenses	19,200
Net income	$ 4,800

1. Discuss the liquidity and profitability of Keene Industries.

 

A. a. $0 ($8,000 – $8,000) b. 1.0 ($8,000 ¸ $8,000) c. 0.10 (10%) ($4,800 ¸ $48,000) d. 0.12 (12%) ($4,800 ¸ $40,000) e. 1.0 (100%) ($20,000 ¸ $20,000) f.  0.24 (24%) ($4,800 ¸ $20,000) g. 1.2 times ($48,000 ¸ $40,000) B. Keene’s liquidity is not adequate as the current liabilities equal the current assets.  A ratio above 1 indicates healthy liquidity.  Return on equity (24%) is good when compared to return on assets (12%). However, to assess liquidity and profitability adequately, we need several years of data for Keene Industries and several years of industry data.

 

140. A. From the simplified balance sheet and income statement of the business below, compute the following ratios. Assume that the April 30 amounts for total assets and owner’s equity also represent their average amounts for the period. Round percentages to the nearest whole percent.

     a. Working capital
     b. Current ratio
     c. Profit margin
     d. Return on assets
     e. Debt to equity ratio
     f.  Return on equity
     g. Asset turnover

TG Manufacturing
Balance Sheet
April 30, 20×5
Assets	Liabilities
Current assets	$ 4,000	Current liabilities		$  2,000
Investments	6,000	Long-term liabilities		8,000
Property, plant, and		Total liabilities		$10,000
	equipment	16,000
Intangible assets	4,000	Owner’s Equity
		Ted Gruen, Capital	20,000
		Total liabilities and
Total assets	$30,000		owner’s equity	$30,000

 

TG Manufacturing
Income Statement
For the Year Ended April 30, 20×5
Net sales	$40,000
Cost of goods sold	22,000
Gross margin	$18,000
Operating expenses	14,400
Net income	$  3,600

1. Discuss the liquidity and profitability of TG Manufacturing.
2. a. $2,000 ($4,000 – $2,000)
   b. 2.0 ($4,000 ¸ $2,000)
   c. 0.09 (9%) ($3,600 ¸ $40,000)
   d. 0.12 (12%) ($3,600 ¸ $30,000)
   e. 0.50 (50%) ($10,000 ¸ $20,000)
   f.  0.18 (18%) ($3,600 ¸ $20,000)
   g. 1.33 times ($40,000 ¸ $30,000)

   B. TG’s liquidity is strong as the current assets are double the current liabilities. Return on equity (18%) is good when compared to return on assets (12%). However, to assess liquidity and profitability adequately, we need several years of data for TG Manufacturing and several years of industry data.