ch1 Key1. A business entity's accounting system creates financial accounting reports which are provided toexternal decision makers.TRUEThe accounting system collects financial data and produces reports used by both internal decisionmakers and external decision makers.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #1Topic Area: Understanding the Business

2. Business managers utilize managerial accounting reports to plan and manage the daily operations.TRUEManagerial accounting reports are for internal use to assist managers with day-to-day operations.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #2Topic Area: Understanding Business

3. The balance sheet includes assets, liabilities and stockholders' equity as of a point in time.TRUEThe balance sheet reports the amount of assets, liabilities, and stockholders' equity of an entity at a pointin time.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #3Topic Area: The Four Basic Financial Statements: An Overview

4. Revenue is recognized within the income statement during the period in which cash is collected.FALSERevenue is recognized within the income statement during the period in which revenue is earned.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting

Blooms: RememberDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #4Topic Area: The Four Basic Financial Statements: An Overview

5. Total assets are $37,500, total liabilities are $20,000 and contributed capital is $10,000; therefore,retained earnings are $7,500.TRUE$37,500 = $20,000 + $10,000 + X, X = $7,500AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #5Topic Area: The Four Basic Financial Statements: An Overview

6. The income statement is a measure of an entity's economic performance for a period of time.TRUEThe income statement reports the performance of a business during the accounting period.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #6Topic Area: The Four Basic Financial Statements: An Overview

7. The accounting equation states that Assets = Liabilities + Stockholders' Equity.TRUEThe accounting equation, also known as the balance sheet equation, states that Assets = Liabilities +Stockholders' Equity.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #7Topic Area: The Four Basic Financial Statements: An Overview

8. A decision maker who wants to understand a company's financial statements must carefully read thenotes to the financial statements because the notes provide useful supplemental information.TRUEThe notes provide supplemental information necessary to fully understand the financial statements.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #8Topic Area: The Four Basic Financial Statements: An Overview

9. The financial statement that shows an entity's economic resources and claims against those resources isthe balance sheet.TRUEBalance sheet contains assets (economic resources), liabilities (claims against those resources), andstockholders' equity.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #9Topic Area: The Four Basic Financial Statements: An Overview

10. Assets are initially recorded on the balance sheet at the total cost paid to acquire the asset.TRUEAssets on the balance sheet are reported at the cost incurred to acquire them.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #10Topic Area: The Four Basic Financial Statements: An Overview

11. Stockholders' equity on the balance sheet consists of contributed capital and retained earnings.TRUEThe stockholders' equity section of the balance sheet represents financing provided by owners of thebusiness (contributed capital) and earnings (retained earnings).AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #11Topic Area: The Four Basic Financial Statements: An Overview

12. The amount of cash paid by a business for dividends would be reported on the statement of cash flowsas an operating activity.

FALSEDividends are reported on the statement of retained earnings. On the statement of cash flows, dividendsshow up as a financing activity.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #12Topic Area: The Four Basic Financial Statements: An Overview

13. A company's retained earnings balance increased $50,000 last year; therefore, net income last year musthave been $50,000.FALSERetained earnings is increased by net income and decreased by dividends, we would need to know thedividend amount was zero in this situation to make the above statement true.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #13Topic Area: The Four Basic Financial Statements: An Overview

14. The statement of retained earnings explains the change in the retained earnings balance caused bystockholder investments and dividend declarations.FALSEBeginning retained earnings + net income - dividends = ending retained earningsAACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #14Topic Area: The Four Basic Financial Statements: An Overview

15. The Financial Accounting Standards Board (FASB) has been given the authority by the Securities andExchange Commission (SEC) to develop generally accepted accounting principles.TRUEPreviously the Securities and Exchange Commission worked with organizations of professionalaccountants to develop generally accepted accounting principles; today this is handled by the FinancialAccounting Standards Board.AACSB: Reflective ThinkingAICPA BB: Critical Thinking

AICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-02 Identify the role of generally accepted accounting principles (GAAP) in determining the content of financial statements.Libby - Chapter 01 #15Topic Area: Responsibilities for the Accounting Communication Process

16. In the United States, the Securities and Exchange Commission (SEC) is considering the adoption ofInternational Financial Reporting Standards (IFRS).TRUESince 2002 there has been a significant movement in the United States to adopt the InternationalFinancial Reporting Standards.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-02 Identify the role of generally accepted accounting principles (GAAP) in determining the content of financial statements.Libby - Chapter 01 #16Topic Area: Responsibilities for the Accounting Communication Process

17. The primary responsibility for the content of the financial statements lies with the external auditor.FALSEPrimary responsibility for the information in the financial statements lies with management.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-03 Distinguish the roles of managers and auditors in the accounting communication process.Libby - Chapter 01 #17Topic Area: Management Responsibility and the Demand for Auditing

18. An audit examines the financial statements provided by management to ensure that they representwhat they claim and to make sure that they are in compliance with Generally Accepted AccountingPrinciples.TRUEThis is the definition of an audit.AACSB: Reflective ThinkingAICPA BB: LegalAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-03 Distinguish the roles of managers and auditors in the accounting communication process.Libby - Chapter 01 #18Topic Area: Management Responsibility and the Demand for Auditing

19. The auditor can be held liable for malpractice in situations where the investors suffered losses whilerelying on the financial statements.TRUEIf it is determined that the independent CPA committed malpractice, they may be held liable for losses

suffered by investors who relied on the financial statements.AACSB: Reflective ThinkingAICPA BB: LegalAICPA FN: Risk AnalysisBlooms: RememberDifficulty: EasyLearning Objective: 01-04 Appreciate the importance of ethics; reputation; and legal liability in accounting.Libby - Chapter 01 #19Topic Area: Ethics, Reputation and Legal Liability

20. One of the advantages of a corporation when compared to a partnership is the limited liability of theowners.TRUEIn a partnership each partner has unlimited liability, in a corporation the stockholders have limitedliability.AACSB: Reflective ThinkingAICPA BB: LegalAICPA FN: Decision ModelingBlooms: RememberDifficulty: EasyLearning Objective: Supplement ALibby - Chapter 01 #20Topic Area: Types of Business Entities

21. Which of the following describes the primary objective of the balance sheet?A. To measure the net income of a business up to a particular point in time.B. To report the difference between cash inflows and cash outflows for the period.C. To report the financial position of the reporting entity at a particular point in time.D. To report the market value of assets, liabilities and stockholders' equity at a particular point in time.The balance sheet reports the amount of assets, liabilities, and stockholders' equity (financial position)of an accounting entity at a particular point in time. These positions are reported at historical cost, notmarket value.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #21Topic Area: The Four Basic Financial Statements: An Overview

22. During the fiscal year ended 2010, a company had revenues of $400,000, expenses of $280,000, and anincome tax rate of 30 percent. What was the company's 2010 net income?A. $120,000B. $36,000C. $84,000D. $400,000($400,000 - $280,000) (1 - .30) = $84,000AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, Measurement

Blooms: ApplyDifficulty: MediumLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #22Topic Area: The Four Basic Financial Statements: An Overview

23. Atlantic Corporation reported the following amounts at the end of the first year of operations:contributed capital $200,000; sales revenue $800,000; total assets $600,000; dividends declared$40,000; and total liabilities $320,000. What are Atlantics' retained earnings at the end of the year andhow much expenses were incurred during the year?A. Retained earnings are $80,000 and expenses incurred totaled $680,000.B. Retained earnings are $80,000 and expenses incurred totaled $720,000.C. Retained earnings are $280,000 and expenses incurred totaled $480,000.D. Retained earnings are $280,000 and expenses incurred totaled $520,000.Stockholders' equity ($600,000 -$320,000) = Contributed capital ($200,000) +Retained earnings($80,000).Retained earnings ($80,000) = Net income ($120,000 - Dividends ($40,000.)Net income ($120,000) = Sales Revenue ($800,000) - Expenses ($680,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #23Topic Area: The Four Basic Financial Statements: An Overview

24. Which of the following best describes the balance sheet?A. It includes a listing of assets at their market values.B. It includes a listing of assets, liabilities, and stockholders' equity at their market values.C. It provides information pertaining to a company's assets and the providers of the assets.D. It provides information pertaining to a company's liabilities for a period of time.The balance sheet reports the assets, liabilities, and stockholders' equity at their historical costs.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #24Topic Area: The Four Basic Financial Statements: An Overview

25. Which of the following statements is correct?A. Assets on the balance sheet include retained earnings.B. Retained earnings include contributed capital.

C. The balance sheet equation states that assets equal contributed capital.D. A corporation's net income does not necessarily equal its cash flow from operations.Revenue is recorded as it is earned, not necessarily when the cash from the sales is collected. Expensesare recorded when incurred in generating revenue regardless of when cash is expended.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #25Topic Area: The Four Basic Financial Statements: An Overview

26. Which of the following correctly describes the various financial statements?A. An income statement covers a period of time.B. The cash flow statement is a point in time financial statement.C. The balance sheet is a period of time financial statement.D. The statement of retained earnings is a point in time financial statement.The income statement reports the performance of a business during the accounting period.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #26Topic Area: The Four Basic Financial Statements: An Overview

27. Which of the following accounts would not be reported on the balance sheet?A. Retained earningsB. InventoryC. Accounts payableD. DividendsDividends are reported on the statement of retained earnings.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #27Topic Area: The Four Basic Financial Statements: An Overview

28. Which of the following would not be found on the statement of cash flows?A. Cost flow from manufacturing activitiesB. Cash flow from operating activitiesC. Cash flow from investing activitiesD. Cash flow from financing activitiesThe statement of cash flows includes cash flows from operating, investing, and financing activities.AACSB: Reflective ThinkingAICPA BB: Critical Thinking

AICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #28Topic Area: The Four Basic Financial Statements: An Overview

29. Which of the following accounts is not a liability on the balance sheet?A. Retained earningsB. Notes payableC. Taxes payableD. Interest payableRetained earnings is reported on the balance sheet as a component of stockholders' equity.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #29Topic Area: The Four Basic Financial Statements: An Overview

30. What financial statement would you look at to determine the dividends declared by a business?A. Income statementB. Statement of retained earningsC. Statement of cash flowsD. Balance sheetBeginning retained earnings + net income - dividends = ending retained earningsAACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #30Topic Area: The Four Basic Financial Statements: An Overview

31. Which financial statement would you utilize to determine whether a company will be able to payliabilities which are due in 30 days?A. Income statementB. Balance sheetC. Statement of retained earningsD. Statement of cash flowsThe balance sheet includes the current assets and current liabilities account balances.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #31

Topic Area: The Four Basic Financial Statements: An Overview

32. Which of the following is considered to be an expense on the income statement?A. Accounts payableB. Notes payableC. Wages payableD. Cost of goods soldIncome statements begin with sales less cost of goods sold. Payables are liabilities not expenses.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #32Topic Area: The Four Basic Financial Statements: An Overview

33. Which of the following best describes assets?A. They are equal to liabilities minus stockholders' equity.B. They are considered to be the economic resources of the business.C. They are all reported on the balance sheet at their current market value.D. They equal contributed capital.Assets include but are not limited to cash, inventory, and land. These are considered to be economicresources of a business.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #33Topic Area: The Four Basic Financial Statements: An Overview

34. Which of the following accounts would be reported as assets on the balance sheet?A. Cash, accounts payable, and notes payable.B. Cash, retained earnings, and accounts receivable.C. Cash, accounts receivable, and inventory.D. Inventories, property and equipment, and contributed capital.Assets are considered the economic resources of a business. Cash, accounts receivable, and inventoryare all considered economic resources.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #34Topic Area: The Four Basic Financial Statements: An Overview

35. Which of the following statements describes the balance sheet?A. It reports a company's revenues and expenses.B. Assets are generally reported on the balance sheet at their historical cost.

C. Stockholders' equity includes only retained earnings.D. It reports a company's cash flow from operations.The balance sheet reports assets, liabilities, and stockholders' equity all at historical costs.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #35Topic Area: The Four Basic Financial Statements: An Overview

36. Which of the following best describes liabilities and stockholders' equity?A. They are the sources of financing an entity's assets.B. They are the economic resources used by a business entity.C. They are reported on the income statement.D. They both increase when assets increase.Liabilities are a source of financing from creditors. Stockholders' equity is a source of financing fromstockholders.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #36Topic Area: The Four Basic Financial Statements: An Overview

37. Which of the following equations is the balance sheet equation?A. Assets + Liabilities = Stockholders' EquityB. Assets + Stockholder's Equity = LiabilitiesC. Assets = Liabilities + Stockholders' EquityD. Assets = Liabilities + Contributed CapitalA balance sheet has two sides, the left side is assets and the right side has both liabilities andstockholders' equity. The total balance from each side must equal each other. Thus Assets = Liabilities +Stockholders' Equity.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #37Topic Area: The Four Basic Financial Statements: An Overview

38. Willie Company's retained earnings increased $20,000 during 2010. What was Willie's 2010 net incomeor loss given that Willie declared $25,000 of dividends during 2010?A. Net income was $5,000.B. Net income was $45,000.

C. Net loss was $45,000.D. Net loss was $5,000.The increase in retained earnings ($20,000) equals net income ($45,000) less dividends ($25,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #38Topic Area: The Four Basic Financial Statements: An Overview

39. Which of the following are the components of stockholders' equity on the balance sheet?A. Contributed capital and long-term liabilities.B. Contributed capital and property, plant, and equipment.C. Retained earnings and notes payable.D. Contributed capital and retained earnings.Stockholders' equity indicates the amount of financing provided by owners of the business and earnings.Investments from owners are called contributed capital; the amount of earnings reinvested in thebusiness is called retained earnings.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #39Topic Area: The Four Basic Financial Statements: An Overview

40. Which financial statement would you use to determine a company's earnings performance during anaccounting period?A. Balance sheetB. Statement of retained earningsC. Income statementD. Statement of cash flowsThe income statement reports the company's financial performance over an accounting period.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #40Topic Area: The Four Basic Financial Statements: An Overview

41. Which of the following equations best describes the income statement?A. Assets - Liabilities = Stockholders' Equity

B. Net income = Revenues + ExpensesC. Net income = Revenues - Expenses.D. Retained earnings = Net Income + DividendsThe income statement equation is revenues - expenses = net incomeAACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #41Topic Area: The Four Basic Financial Statements: An Overview

42. Lena Company has provided the following data (ignore income taxes):2010 revenues were $99,000.2010 expenses were $47,800.Dividends declared and paid during 2010 totaled $9,500.Total assets on December 31, 2010 were $177,000.Total liabilities on December 31, 2010 were $89,000.Contributed capital on December 31, 2010 was $28,000.Which of the following is correct?A. 2010 net income was $41,700.B. Total stockholders' equity on December 31, 2010 was $236,000.C. Retained earnings on December 31, 2010 were $60,000.D. Retained earnings on December 31, 2010 were $41,700.Stockholders' equity ($177,000 - $89,000) = Contributed capital ($28,000) + Retained earnings($60,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #42Topic Area: The Four Basic Financial Statements: An Overview

43. Lena Company has provided the following data (ignore income taxes):2010 revenues were $99,000.2010 expenses were $47,800.Dividends declared and paid during 2010 totaled $9,500.Total assets on December 31, 2010 were $177,000.Total liabilities on December 31, 2010 were $89,000.Contributed capital on December 31, 2010 was $28,000.Which of the following is not correct?A. 2010 net income was $51,200.B. Total stockholders' equity on December 31, 2010 was $88,000.C. Retained earnings increased $41,700 during 2010.D. Retained earnings on December 31, 2010 were $41,700.Stockholders' equity ($177,000 - $89,000) = Contributed capital ($28,000) + Retained earnings

($60,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #43Topic Area: The Four Basic Financial Statements: An Overview

44. Madrid Company has provided the following data (ignore income taxes):2010 revenues were $77,500.2010 net income was $33,900.Dividends declared and paid during 2010 totaled $5,700.Total assets on December 31, 2010 were $217,000.Total stockholders' equity on December 31, 2010 was $123,000.Retained earnings on December 31, 2010 were $83,000.Which of the following is not correct?A. 2010 expenses were $43,600.B. Total liabilities on December 31, 2010 were $94,000.C. Retained earnings increased $33,900 during 2010.D. Contributed capital on December 31, 2010 was $40,000.Retained earnings increased $28,200 because net income ($33,900) was greater than dividends ($5,700).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #44Topic Area: The Four Basic Financial Statements: An Overview

45. Madrid Company has provided the following data (ignore income taxes):2010 revenues were $77,500.2010 net income was $33,900.Dividends declared and paid during 2010 totaled $5,700.Total assets on December 31, 2010 were $217,000.Total stockholders' equity on December 31, 2010 was $123,000.Retained earnings on December 31, 2010 were $83,000.Which of the following is correct?A. 2010 expenses were $37,900.B. Total liabilities on December 31, 2010 were $11,000.C. Retained earnings increased $28,200 during 2010.D. Contributed capital on December 31, 2010 was $206,000.Retained earnings increased $28,200 because net income ($33,900) was greater than dividends ($5,700).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is

used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #45Topic Area: The Four Basic Financial Statements: An Overview

46. Which of the following is the amount of revenue reported on the income statement of a retail company?A. The cash collected from customers during the current period.B. Both cash and credit sales for the period.C. Cash sales for the period.D. Cash sales and stockholders' investments.Revenue for a retail company includes all sales earned during the accounting period, both cash andcredit.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #46Topic Area: The Four Basic Financial Statements: An Overview

47. On January 1, 2010 Miller Corporation had retained earnings of $8,000,000. During 2010, Millerreported net income of $1,500,000, declared dividends of $500,000, and issued stock for $1,000,000.What were Miller's retained earnings on December 31, 2010?A. $7,000,000B. $9,500,000C. $9,000,000D. $7,500,000Ending retained earnings ($9,000,000) = Beginning retained earnings ($8,000,000) + Net income($1,500,000) - Dividends ($500,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #47Topic Area: The Four Basic Financial Statements: An Overview

48. What are the categories of cash flows that appear on a statement of cash flows?A. Cash flows from investing, financing, and service activities.B. Cash flows from operating, production, and internal activities.C. Cash flows from financing, production, and growth activities.D. Cash flows from operating, investing, and financing activities.The statement of cash flows has three sections: cash flows from 1) Operations 2) Investing and 3)Financing.AACSB: Reflective ThinkingAICPA BB: Critical Thinking

AICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #48Topic Area: The Four Basic Financial Statements: An Overview

49. When would a company report a net loss on the income statement?A. When revenues are less than the sum of expenses plus dividends during an accounting period.B. If assets decreased during an accounting period.C. If liabilities increased during an accounting period.D. When expenses exceeded revenues for an accounting period.Net income or loss is equal to revenues less expenses. If expenses exceed revenues, a business wouldreport a net loss.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #49Topic Area: The Four Basic Financial Statements: An Overview

50. Which of the following describes the amount of insurance expense reported on the income statement?A. The amount of cash paid for insurance in the current period.B.The amount of cash paid for insurance in the current period less any unpaid insurance at the end ofthe period.C. The amount of insurance used up (incurred) in the current period to help generate revenue.D. The amount of cash paid for insurance that is reported within the statement of cash flows.The income statement reports expenses as they are incurred for the accounting period.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #50Topic Area: The Four Basic Financial Statements: An Overview

51. Which of the following would immediately cause a change in a corporation's retained earnings?A. Net income or net loss and declaration of dividends.B. Declaration of dividends and issuance of stock to new stockholders.C. Net income and issuance of stock to new stockholders.D. Declaration of dividends and purchase of new machinery.Beginning retained earnings + net income - dividends = ending retained earningsAACSB: Reflective Thinking

AICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #51Topic Area: The Four Basic Financial Statements: An Overview

52. Which of the following describes the operations section of a cash flow statement?A. It provides information about how operations have been financed.B. It provides information pertaining to dividend payments to stockholders.C. It provides information with respect to a company's ability to generate cash flow to pay for goods andservices.D. It provides the net increase or decrease in cash during the period.Cash flows from operating activities are cash flows directly related to earning income.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #52Topic Area: The Four Basic Financial Statements: An Overview

53. Within which of the following would you find the inventory method(s) being used by a business entity?A. Balance sheetB. Income statementC. Notes to the financial statementsD. Headings of the financial statementsThe notes provide information behind the numbers that allow the user to completely understand thefinancial statements.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #53Topic Area: The Four Basic Financial Statements: An Overview

54. At the beginning of 2010, a corporation had assets of $270,000 and liabilities of $160,000. During 2010,assets increased $25,000 and liabilities increased $5,000. What was stockholders' equity on December31, 2010?A. $140,000B. $130,000C. $190,000D. $80,000Stockholders' equity ($130,000) on December 31, 2010 = Beginning stockholders' equity

($270,000 -$160,000) + increase in stockholders' equity ($25,000 - $5,000) during 2010.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #54Topic Area: The Four Basic Financial Statements: An Overview

55. During 2011, Canton Company's assets increased $95,500 and their liabilities decreased $17,300.Canton Company's stockholders' equity on December 31, 2011 was $211,500. How much wasstockholders' equity on January 1, 2011?A. $98,700B. $324,300C. $133,300D. $289,700Stockholders' equity ($98,700) on January 1, 2010 = Stockholders equity ($211,500) on December 31,2010 - the increase in stockholders' equity ($95,500 + 17,300) during 2010.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #55Topic Area: The Four Basic Financial Statements: An Overview

56. How are creditor and investor claims reported on a balance sheet?A. The claims of creditors are liabilities and those of investors are assets.B.The claims of both creditors and investors are liabilities, but only the claims of investors areconsidered to be long-term.C.The claims of creditors are reported as liabilities while the claims of investors are recorded asstockholders' equity.D. The claims of creditors and investors are considered to be essentially equivalent.Liabilities and Stockholders' Equity are the sources of financing for the firm's economic resources.Creditors' claims are reported as liabilities while investors' claims are reported as stockholders' equity.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #56

Topic Area: The Four Basic Financial Statements: An Overview

57. In what order would the items on the balance sheet appear?A. Assets, retained earnings, liabilities, and contributed capital.B. Contributed capital, retained earnings, liabilities, and assets.C. Assets, liabilities, contributed capital, and retained earnings.D. Contributed capital, assets, liabilities, and retained earnings.The balance sheet order is assets, liabilities, and stockholders' equity. Stockholders' equity includescontributed capital and retained earnings.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #57Topic Area: The Four Basic Financial Statements: An Overview

58. Which of the following would increase retained earnings?A. An increase in expenses.B. An increase in revenues.C. Declaring a cash dividend.D. Issuing additional common stock.Net income increases retained earnings. Increased revenue, given a fixed expense amount, wouldincrease net income.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #58Topic Area: The Four Basic Financial Statements: An Overview

59. A company's retained earnings increased $375,000 last year and its assets increased $973,000. Thecompany declared a $79,000 cash dividend during the year. What was last year's net income?A. $296,000B. $375,000C. $454,000D. $519,000The $375,000 increase in retained earnings = Net income ($454,000) - Dividends ($79,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #59Topic Area: The Four Basic Financial Statements: An Overview

60. Which of the following items is reported as an expense on the income statement?A. Dividends declaredB. Cost of goods soldC. Dividends paidD. Accounts payableIncome statements begin with sales less cost of goods sold. Cost of goods sold is an expense.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #60Topic Area: The Four Basic Financial Statements: An Overview

61. Which of the following has primary responsibility to develop Generally Accepted AccountingPrinciples?A. Financial Accounting Standards BoardB. American Accounting AssociationC. Securities & Exchange CommissionD. Public Company Accounting Oversight BoardThe Securities and Exchange Commission have charged the Financial Accounting Standards Board withdeveloping Generally Accepted Accounting Principles.AACSB: Reflective ThinkingAICPA BB: LegalAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-02 Identify the role of generally accepted accounting principles (GAAP) in determining the content of financial statements.Libby - Chapter 01 #61Topic Area: Responsibilities for the Accounting Communication Process

62. Which of the following has the legal authority to determine financial reporting in the United States?A. Financial Accounting Standards BoardB. American Accounting AssociationC. Securities & Exchange CommissionD. Public Company Accounting Oversight BoardThe Securities and Exchange Commission is the government agency that determines the financialstatements that public companies must provide to stockholders.AACSB: Reflective ThinkingAICPA BB: LegalAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-02 Identify the role of generally accepted accounting principles (GAAP) in determining the content of financial statements.Libby - Chapter 01 #62Topic Area: Responsibilities for the Accounting Communication Process

63. Which of the following is not reported as a liability on a balance sheet?A. Income taxes payable

B. Contributed capitalC. Accounts payableD. Dividends declaredContributed capital is a component of stockholders' equity on the balance sheet.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #63Topic Area: The Four Basic Financial Statements: An Overview

64. Which of the following transactions increases both cash and net income?A. Cash receipts from a bank loan.B. Cash receipts from sale of stock.C. Cash receipts from customers for services provided.D. Cash receipts from a bond issue.Net income is the result of revenues less expenses. Cash receipts from customers increases revenue,which flows through to an increase in net income. The cash receipt aspect also increases the cashaccount.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #64Topic Area: The Four Basic Financial Statements: An Overview

65. Which of the following properly describes the impact on the financial statements when a companyreports wage expense of $7,500, of which $2,500 remains unpaid?A. Net income decreased $9,000.B. Cash decreased $2,500.C. Net income decreased $7,500.D. Cash decreased $7,500.The expense portion is reported on the income statement as it is incurred. This increases expenses, thusdecreasing net income. The unpaid portion is classified a liability on the balance sheet.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #65Topic Area: The Four Basic Financial Statements: An Overview

66. Which of the following properly describes the impact on the financial statements when a company

purchases and pays $8,000 for supplies inventory, of which $2,000 remains unused at the end of theperiod?A. Net income decreased $6,000.B. Cash decreased $6,000.C. Net income decreased $8,000.D. Cash decreased $2,000.The amount used during the period ($8,000 - $2,000 = $6,000) is reported on the income statement asan expense.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #66Topic Area: The Four Basic Financial Statements: An Overview

67. Which of the following properly describes the impact on the financial statements when a companyincurs operating expenses of $9,000, of which $3,000 remains unpaid?A. Net income decreased $9,000.B. Cash increased $6,000.C. Net income decreased $3,000.D. Cash decreased $9,000.Expenses are reported on the income statement as they are incurred regardless of whether they havebeen paid or not. The entire $9,000 is reported on the income statement and thus decreases net income.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #67Topic Area: The Four Basic Financial Statements: An Overview

68. Which of the following properly describes the impact on the financial statements when a companyborrows $20,000 from a local bank?A. Net income decreased $20,000.B. Assets decreased $20,000.C. Stockholders' equity increased $20,000.D. Liabilities increased $20,000.The amount borrowed needs to be repaid, and the local bank is a creditor, therefore liabilities areincreased by the amount of the loan.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, Measurement

Blooms: ApplyDifficulty: MediumLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #68Topic Area: The Four Basic Financial Statements: An Overview

69. Which of the following would not be reported in the operating activities section of a cash flowstatement?A. Cash paid for dividends to stockholders.B. Cash paid for interest expense.C. Cash paid for employee wages.D. Cash received from customers.Cash paid for dividends to stockholders is not a cash flow directly related to earning income, therefore itis not reported in the operating activities section of the cash flow statement.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #69Topic Area: The Four Basic Financial Statements: An Overview

70. Which of the following would be reported in the financing section of a cash flow statement?A. Cash paid for dividends to stockholders.B. Cash paid for interest expense.C. Cash paid to acquire equipment.D. Cash received from sale of investments.The financing section of the statement of cash flows reflects cash received and paid out as a resultof financing the business. Cash paid for dividends to stockholders is part of this section becausestockholders are a component of the financing of a business.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #70Topic Area: The Four Basic Financial Statements: An Overview

71. Which of the following would be reported in the investing section of a cash flow statement?A. Cash received from customers.B. Cash received from the issue of stock.C. Cash paid to repay a bank loan.D. Cash paid to acquire stock of another company.Cash flows from investing include cash flows related to the purchase and sale of a

company's assets.Stock of another company is considered an asset.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #71Topic Area: The Four Basic Financial Statements: An Overview

72. Which of the following statements is correct?A. The payment of a cash dividend reduces net income.B.Cash received from an issuance of stock to stockholders is reported as a financing cash flow withinthe statement of cash flows.C. Providing services to a customer on account doesn't impact net income.D. Interest payments are reported within the statement of cash flows as a financing activity.Issuance of stock is a financing activity and the cash received as a result of this is reported in thefinancing section of the statement of cash flows.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #72Topic Area: The Four Basic Financial Statements: An Overview

73. Husky Company has provided the following information for its most recent year of operation:Cash collected from customers totaled $89,300.Cash borrowed from banks totaled $31,700.Cash paid to employees totaled $32,100.Cash paid for interest totaled $2,900.Cash received from selling Husky stock to stockholders totaled $41,000.Cash payments to banks for repayment of money borrowed totaled $7,500.Cash paid for operating expenses totaled $9,600.Land costing $25,000 was sold for $25,000 cash.Cash paid for dividends to stockholders totaled $3,300.How much was Husky's cash flow from operating activities?A. $47,600B. $44,700C. $41,400D. $37,200$44,700 = $89,300 - $32,100 - $2,900 - $9,600AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: Medium

Learning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #73Topic Area: The Four Basic Financial Statements: An Overview

74. Husky Company has provided the following information for its most recent year of operation:Cash collected from customers totaled $89,300.Cash borrowed from banks totaled $31,700.Cash paid to employees totaled $32,100.Cash paid for interest totaled $2,900.Cash received from selling Husky stock to stockholders totaled $41,000.Cash payments to banks for repayment of money borrowed totaled $7,500.Cash paid for operating expenses totaled $9,600.Land costing $25,000 was sold for $25,000 cash.Cash paid for dividends to stockholders totaled $3,300.How much was Husky's cash flow from financing activities?A. $72,700B. $59,000C. $65,200D. $61,900$61,900 = $31,700 + $41,000 - $7,500 - $3,300AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #74Topic Area: The Four Basic Financial Statements: An Overview

75. Sparty Corporation has provided the following information for its most recent year of operation:Revenues earned were $97,000, of which $9,000 were uncollected at the end of the year.Operating expenses incurred were $39,000, of which $7,000 were unpaid at the end of the year.Dividends declared were $11,000, of which $3,000 were unpaid at the end of the year.Income tax expense is 30% of pretax income.How much net income was reported on Sparty's income statement?A. $32,900B. $39,300C. $33,600D. $40,600$40,600 = ($97,000 - $39,000) (1 - .30)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #75Topic Area: The Four Basic Financial Statements: An Overview

76. Which of the following statements is correct?A.Revenues are reported on the income statement regardless of whether the customer has paid for thegoods or services.B. Expenses are reported within the income statement during the period that they are paid for.C. Net income includes a deduction for dividend payments made to stockholders.D. Net income normally equals the net cash generated by operations.Accrual accounting requires revenues to be reported when they are earned.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #76Topic Area: The Four Basic Financial Statements: An Overview

77. During 2010, Rock Company's cash balance increased from $79,000 to $91,300. Rock's net cash flowfrom operating activities was $37,300 and its net cash flow from financing activities was $11,100. Howmuch was Rock's net cash flow from investing activities?A. A net cash flow of $42,900.B. A net cash flow of ($36,100).C. A net cash flow of $60,700.D. A net cash flow of ($60,700).The increase in cash ($91,300 - $79,000) = Net cash flow from operating activities ($37,300) + Net cashflow from investing activities (-$36,100) + Net cash flow from financing activities ($11,100).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #77Topic Area: The Four Basic Financial Statements: An Overview

78. Which of the following statements is false?A. A positive net income results in an increase in retained earnings.B.The ending retained earnings balance from the statement of retained earnings is reported on thebalance sheet.C.The change in the cash balance on the statement of cash flows added to the beginning cash balanceequals the ending cash balance.D.The dividends reported on the statement of retained earnings are also reported as dividend expense onthe income statement.

Dividends are not an expense and therefore are not reported on the income statement.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #78Topic Area: The Four Basic Financial Statements: An Overview

79. Which of the following is not a consequence to a company resulting from the issue of their financialstatements?A. The effect on the selling price of their stock.B. The providing of information to their competitors.C. The effect on bonus payments to its employees.D. The providing of information to their auditors.Providing information to their auditors is a step towards the issue of their financial statements and not aconsequence of issuing their financial statements.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-02 Identify the role of generally accepted accounting principles (GAAP) in determining the content of financial statements.Libby - Chapter 01 #79Topic Area: Responsibilities for the Accounting Communication Process

80. Which of the following statements pertaining to the audit function is incorrect?A. The primary responsibility for the information in the financial statements lies with the auditors.B. The audit report describes the auditor's opinion of the fairness of the financial statements.C. An audit ensures that the financial statements conform to generally accepted accounting principles.D. The auditor doesn't examine all of the transactions an entity incurred.The primary responsibility for the information in the financial statements lies with the management.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-03 Distinguish the roles of managers and auditors in the accounting communication process.Libby - Chapter 01 #80Topic Area: Management Responsibility and the Demand for Auditing

81. The International Accounting Standards Board has worked to develop global accounting standardsknown asA. generally accepted accounting principles.B. globally accepted financial standards.C. international financial reporting standards.D. worldwide financial standards.

Global convergence of accounting standards is being facilitated by the adoption of InternationalFinancial Reporting Standards. These standards are developed by the International AccountingStandards Board.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-02 Identify the role of generally accepted accounting principles (GAAP) in determining the content of financial statements.Libby - Chapter 01 #81Topic Area: Responsibilities for the Accounting Communication Process

82. An examination of the financial statements of a business to ensure that they conform to generallyaccepted accounting principles is calledA. a certification.B. an audit.C. a verification.D. a validation.The technical term for the examination of the financial statements to ensure that they represent whatthey claim to and conform with generally accepted accounting principles is an audit.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-03 Distinguish the roles of managers and auditors in the accounting communication process.Libby - Chapter 01 #82Topic Area: Management Responsibility and the Demand for Auditing

83. Which of the following best describes the purpose of an audit?A. To prove the accuracy of an entity's financial statements.B. To lend credibility to an entity's financial statements.C. To audit every transaction that an entity entered into.D. To establish that a corporation's stock is a sound investment.An audit is an independent review of an entity's financial statements. The result of an audit is an auditreport that lends credibility to these financial statements.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 01-03 Distinguish the roles of managers and auditors in the accounting communication process.Libby - Chapter 01 #83Topic Area: Management Responsibility and the Demand for Auditing

84. Why does a company hire independent auditors?A. To guarantee the accuracy of both annual and quarterly financial statements.B. To verify the accounting accuracy of every transaction entered into.C. To report on the fairness of financial statement presentation.D. The auditors are responsible for the content of the financial statements.The role of auditors is to review the financial statements and issue an opinion on the fairness of these

statements.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-03 Distinguish the roles of managers and auditors in the accounting communication process.Libby - Chapter 01 #84Topic Area: Management Responsibility and the Demand for Auditing

85. Why is the CPA's role in performing audits important to our economic system?A. The auditors provide direct financial advice to potential investors.B. The auditors have the primary responsibility for the information contained in financial statements.C. The auditors issue reports on the accuracy of each financial transaction.D.The audit of financial statements helps investors and others to know that they can rely on theinformation presented in the financial statements.The CPA conducting the audit, and issuing the report, is independent of the firm and therefore allowsthe users of financial statements to rely on these statements.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 01-03 Distinguish the roles of managers and auditors in the accounting communication process.Libby - Chapter 01 #85Topic Area: Management Responsibility and the Demand for Auditing

86. Which of the following is not one of the three steps taken by a corporation to assure the accuracy of itsrecords?A. Implementing a system of internal controls.B. The hiring of an independent auditor to report on the fairness of the financial statements.C. The hiring of a financial analyst.D.The formation of a committee made up of board of directors' members to oversee the integrity of itssafeguards utilized.The three steps to ensure the accuracy of records include implementing a system of controls, hiringexternal auditors, and having a board of directors. A financial analyst does not provide services that helpa corporation assure the accuracy of its records.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 01-03 Distinguish the roles of managers and auditors in the accounting communication process.Libby - Chapter 01 #86Topic Area: Management Responsibility and the Demand for Auditing

87. Which of the following groups has primary responsibility for the information

contained in the financialstatements?A. The company's managementB. The company's auditorsC. The company's investorsD. The company's internal auditorsThe primary responsibility for the information in the financial statements lies with management.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 01-03 Distinguish the roles of managers and auditors in the accounting communication process.Libby - Chapter 01 #87Topic Area: Management Responsibility and the Demand for Auditing

88. Which private sector body was given the primary responsibility to determine detailed auditingstandards?A. Financial Accounting Standards BoardB. Securities & Exchange CommissionC. Public Company Accounting Oversight BoardD. American Institute of Certified Public AccountantsThe Public Company Accounting Oversight Board in consultation with the SEC sets standards for theaudits of public companies.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-03 Distinguish the roles of managers and auditors in the accounting communication process.Libby - Chapter 01 #88Topic Area: Management Responsibility and the Demand for Auditing

89. Which group maintains the professional code of ethics to which CPAs must adhere?A. American Institute of Certified Public AccountantsB. Financial Accounting Standards BoardC. Securities & Exchange CommissionD. Public Company Accounting Oversight BoardThe American Institute of Certified Public Accountants requires all of its members to adhere to aprofessional code of ethics and professional auditing standards.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-04 Appreciate the importance of ethics; reputation; and legal liability in accounting.Libby - Chapter 01 #89Topic Area: Ethics, Reputation, and Legal Liability

90. Which of the following is a disadvantage of a corporation when compared to a partnership?A. The stockholders have limited liability.B. The corporation is treated as a separate legal entity from the stockholders.

C. The corporation and its stockholders are subject to double taxation.D.The corporation must account for the business's transactions separate and apart from those of theowners.A corporation's income is subject to double taxation, it is taxed when it is earned and again when it isdistributed to stockholders as dividends.AACSB: Reflective ThinkingAICPA BB: LegalBlooms: RememberDifficulty: EasyLearning Objective: Supplement ALibby - Chapter 01 #90Topic Area: Types of Business Entities

91. Which of the following statements is true about a sole proprietorship?A. The owner and the business are separate legal entities but not separate accounting entities.B. The owner and the business are separate accounting entities but not separate legal entities.C. The owner and the business are separate legal entities and separate accounting entities.D. Most large businesses in this country are organized as sole proprietorships.A sole proprietorship is an unincorporated business owned by one person. Legally, the business and theowner are not separate entities; however, the owner and business are separate accounting entities.AACSB: Reflective ThinkingAICPA BB: LegalBlooms: RememberDifficulty: EasyLearning Objective: Supplement ALibby - Chapter 01 #91Topic Area: Types of Business Entities

92. For a business organized as a general partnership, which statement is true?A. The owners and the business are separate legal entities.B. Each partner is potentially responsible for the debts of the business.C. Formation of a partnership requires getting a charter from the state of incorporation.D. A partnership is not considered to be a separate accounting entity.Legally, each partner in a general partnership is responsible for the debts of the business. In this case,each general partner has unlimited liability.AACSB: Reflective ThinkingAICPA BB: LegalBlooms: RememberDifficulty: EasyLearning Objective: Supplement ALibby - Chapter 01 #92Topic Area: Types of Business Entities

93. Which of the following would not be reported on a statement of retained earnings?A. Dividend paymentsB. Net incomeC. Beginning retained earningsD. Ending retained earningsThe statement of retained earnings reports dividends declared. The statement of cash

flows reportsdividend payments.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #93Topic Area: The Four Basic Financial Statements: An Overview

94. Which of the following statements is correct?A.The statement of retained earnings always reports the same amount of dividend payments as does thestatement of cash flows.B. The statement of cash flows has a relationship with the balance sheet.C.Dividends paid are reported on the statement of cash flows as an operating cash flow and on theincome statement as a financing cash flow.D. Net income is reported on the income statement but not on the statement of retained earnings.The change in cash on the statement of cash flows is added to the beginning balance of cash on thebalance sheet. The result will equal the end-of-year balance in cash.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #94Topic Area: The Four Basic Financial Statements: An Overview

95. Which of the following is not provided within the notes that accompany the financial statements?A. A description of the accounting rules applied.B. A description of the terms of a lease agreement.C. A description pertaining to a particular line on the financial statements.D. A description of net income for each of the prior three years.A description of net income for previous years is not one of the three basic types of notes thataccompany the financial statements.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #95Topic Area: The Four Basic Financial Statements: An Overview

96. Which of the following transactions affects both retained earnings and net income?A. The payment of a cash dividend.

B. The recording of revenue for services provided.C. The issue of stock in exchange for cash.D. The borrowing of money from a bank.Recording of revenue increases net income which in turn increases retained earnings.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #96Topic Area: The Four Basic Financial Statements: An Overview

97. Which of the following transactions affects both the income statement and the statement of cash flows?A. Selling stock in exchange for cash.B. Declaring and paying a cash dividend.C. Selling a product to a customer which creates an account receivable.D. Paying employee wages as they are earned.Paying an employee wages as they are earned results in an expense being recognized (incomestatement) and a cash outflow (statement of cash flows).AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #97Topic Area: The Four Basic Financial Statements: An Overview

98. Which of the following would not be found within the investing section of the statement of cash flows?A. Cash paid to purchase a manufacturing building.B. Cash received from the sale of stock to stockholders.C. Cash received from the sale of manufacturing equipment.D. Cash paid to purchase land.Cash received from the sale of stock is a financing activity. Investing activities involve the purchase ofthe company's productive assets.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 01-01 Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers(investors; creditors; and managers).Libby - Chapter 01 #98Topic Area: The Four Basic Financial Statements: An Overview

99. Which of the following is primarily responsible for the information provided in the financialstatements?A. Chief Executive Officer

B. External AuditorsC. Board of DirectorsD. Internal Accounting StaffPrimary responsibility for the information in the financial statements lies with management.Management is represented by the highest officer of the company and the highest financial officer.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 01-03 Distinguish the roles of managers and auditors in the accounting communication process.Libby - Chapter 01 #99Topic Area: Management Responsibility and the Demand for Auditing

100. Which of the following doesn't represent a professional accounting certification?A. Certified Management AccountantB. Certified Public AccountantC. Certified Internal AuditorD. Certified Tax Accountant

ch2 Key1. The primary objective of financial reporting is to provide relevant information to external decisionmakers.TRUEThe primary objective of external financial reporting is to provide useful economic information about abusiness to help external decision makers.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 02-01 Define the objective of financial reporting; the elements of the balance sheet; and the related key accounting assumptions and principles.Libby - Chapter 02 #1Topic Area: Overview of Accounting Concepts

2. In order for information to be reliable the information needs to be provided on a timely basis.FALSEReliable information is accurate, unbiased, and verifiable.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 02-01 Define the objective of financial reporting; the elements of the balance sheet; and the related key accounting assumptions and principles.Libby - Chapter 02 #2Topic Area: Overview of Accounting Concepts

3. In order for information to be relevant the information should have both predictive and feedback value.TRUE

Relevant information provides feedback and predictive value on a timely basis.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 02-01 Define the objective of financial reporting; the elements of the balance sheet; and the related key accounting assumptions and principles.Libby - Chapter 02 #3Topic Area: Overview of Accounting Concepts

4. The continuity assumption assumes that a business will continue to operate into the foreseeable future.TRUEThe continuity assumption assumes that a business will continue operating long enough to meet itscontractual commitments and plans. This is also called the going-concern assumption.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 02-01 Define the objective of financial reporting; the elements of the balance sheet; and the related key accounting assumptions and principles.Libby - Chapter 02 #4Topic Area: Overview of Accounting Concepts

5. The current assets section of a balance sheet includes both inventory and accounts receivable.TRUECurrent assets are resources that a business will use or turn into cash within one year.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 02-01 Define the objective of financial reporting; the elements of the balance sheet; and the related key accounting assumptions and principles.Libby - Chapter 02 #5Topic Area: Overview of Accounting Concepts

6. The stockholders' equity section of a balance sheet includes contributed capital and retained earnings.TRUEThe stockholders' equity section reports the financing provided by the owners and by its businessoperations.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 02-01 Define the objective of financial reporting; the elements of the balance sheet; and the related key accounting assumptions and principles.Libby - Chapter 02 #6Topic Area: Overview of Accounting Concepts

7. Assets are reported on the balance sheet in the order of their liquidity.TRUEAssets are reported in order of liquidity. The asset section of the balance sheet begins with cash.AACSB: Reflective ThinkingAICPA BB: Critical Thinking

AICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 02-01 Define the objective of financial reporting; the elements of the balance sheet; and the related key accounting assumptions and principles.Libby - Chapter 02 #7Topic Area: Overview of Accounting Concepts

8. Many valuable assets such as trademarks and copyrights are not reported within a company's balancesheet.TRUEThese intangible assets are not purchased but developed inside a company, thus they are not reported onthe balance sheet.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 02-01 Define the objective of financial reporting; the elements of the balance sheet; and the related key accounting assumptions and principles.Libby - Chapter 02 #8Topic Area: Overview of Accounting Concepts

9. Stockholders' equity includes the financing provided by owners.TRUEThe stockholders' equity section of the balance sheet includes financing provided by owners and netincome retained from business operations.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 02-01 Define the objective of financial reporting; the elements of the balance sheet; and the related key accounting assumptions and principles.Libby - Chapter 02 #9Topic Area: Overview of Accounting Concepts

10. Financial reporting focuses on reporting the impact of transactions on an entity's financial position.TRUEAccounting focuses on certain events that have an economic impact on the entity. Those events that arerecorded as part of the accounting process are called transactions.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: EasyLearning Objective: 02-02 Identify what constitutes a business transaction and recognize common balance sheet account titles used in business.Libby - Chapter 02 #10Topic Area: What Business Activities Cause Changes in Financial Statement Amounts

11. Unearned revenue is reported on the balance sheet as a liability and represents amounts paid to an entityfor which the entity has an obligation to provide future services and/or goods.TRUEAccounts with unearned in the title are always liabilities representing amounts paid in the past to the

company by others with the promise of future goods and/or services.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 02-02 Identify what constitutes a business transaction and recognize common balance sheet account titles used in business.Libby - Chapter 02 #11Topic Area: What Business Activities Cause Changes in Financial Statement Amounts

12. A business transaction consists of an exchange of assets or services for assets, services, or promises topay between a business and an external party to the business.TRUEA transaction is an exchange of assets or services for assets, services, or promises to pay between abusiness and one or more external parties to a business or a measurable internal event such as the use ofassets in operations.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: EasyLearning Objective: 02-02 Identify what constitutes a business transaction and recognize common balance sheet account titles used in business.Libby - Chapter 02 #12Topic Area: What Business Activities Cause Changes in Financial Statement Amounts

13. The dual effects concept implies that every transaction has at least two effects on the accountingequation.TRUEEvery accounting transaction has at least two effects on the accounting equation, this concept is knownas dual effects.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 02-03 Apply transaction analysis to simple business transactions in terms of the accounting model: Assets = Liabilities + Stockholders' Equity.Libby - Chapter 02 #13Topic Area: How Do Transactions Affect Accounts

14. The accounting equation doesn't have to be in balance after the recording of each transaction.FALSEOne of the underlying principles of an accounting transaction is that the accounting equation must be inbalance after recording the transaction.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: EasyLearning Objective: 02-03 Apply transaction analysis to simple business transactions in terms of the accounting model: Assets = Liabilities + Stockholders' Equity.Libby - Chapter 02 #14

Topic Area: How Do Transactions Affect Accounts

15. A company's assets and stockholders' equity both increase when the company sells additional shares ofstock in exchange for cash.TRUEReceiving cash increases assets, selling stock increases stockholders' equity. Both sides of the balancesheet equation are increased with this transaction.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: EasyLearning Objective: 02-03 Apply transaction analysis to simple business transactions in terms of the accounting model: Assets = Liabilities + Stockholders' Equity.Libby - Chapter 02 #15Topic Area: How Do Transactions Affect Accounts

16. Purchasing stock of another company for cash doesn't result in an increase in total assets for thepurchasing company.TRUEThis transaction has zero effect on the total asset amount. Cash is decreased by the amount that theinvestment in the other company is increased.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 02-03 Apply transaction analysis to simple business transactions in terms of the accounting model: Assets = Liabilities + Stockholders' Equity.Libby - Chapter 02 #16Topic Area: How Do Transactions Affect Accounts

17. The normal balance for an asset account is a debit and the normal balance for a liability account is acredit.TRUEThe normal balance refers to what is usual or what increases an account. Assets have debit balances andliabilities have credit balances.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 02-04 Determine the impact of business transactions on the balance sheet using two basic tools; journal entries and T-accounts.Libby - Chapter 02 #17Topic Area: How Do Companies Keep Track of Account Balances

18. The recording of a journal entry precedes the posting to the general ledger.TRUEThe accounting cycle during the period starts with analyzing a transaction, recording journal entries inthe general journal, and finally posting the amounts to the general ledger.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting

Bloom's: RememberDifficulty: EasyLearning Objective: 02-04 Determine the impact of business transactions on the balance sheet using two basic tools; journal entries and T-accounts.Libby - Chapter 02 #18Topic Area: How Do Companies Keep Track of Account Balances

19. Asset accounts have a debit balance and are increased by debiting the account.TRUEThe normal account balance for an asset is a debit balance; accounts are increased by their normalbalance. Assets are increased with debits.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 02-04 Determine the impact of business transactions on the balance sheet using two basic tools; journal entries and T-accounts.Libby - Chapter 02 #19Topic Area: How Do Companies Keep Track of Account Balances

20. Liability and stockholders' equity accounts have credit balances and are decreased by debiting theaccount.TRUEThe normal balance for liabilities and stockholders' equity is a credit balance; this means that theseaccounts are decreased with a debit.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 02-04 Determine the impact of business transactions on the balance sheet using two basic tools; journal entries and T-accounts.Libby - Chapter 02 #20Topic Area: How Do Companies Keep Track of Account Balances

21. A journal entry is an expression of the effects of a transaction on accounts which has equal debits andcredits.TRUEA journal entry is an accounting method for expressing the effects of a transaction on separate accounts.The journal entry must have equal debit and credit amounts.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: EasyLearning Objective: 02-04 Determine the impact of business transactions on the balance sheet using two basic tools; journal entries and T-accounts.Libby - Chapter 02 #21Topic Area: How Do Companies Keep Track of Account Balances

22. The T-account is useful for summarizing account balances and is found in the general ledger.FALSEThe T-account is used to summarize transaction effects for each account, determining balances, and

drawing inferences about a company's activities.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 02-04 Determine the impact of business transactions on the balance sheet using two basic tools; journal entries and T-accounts.Libby - Chapter 02 #22Topic Area: How Do Companies Keep Track of Account Balances

23. The T-account is very useful for accumulating the effects of transactions on account balances and fordetermining individual account balances.TRUEThe T-account is a very useful tool for summarizing the transaction effects, determining the balances forindividual accounts, and drawing inferences about a company's activities.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: EasyLearning Objective: 02-04 Determine the impact of business transactions on the balance sheet using two basic tools; journal entries and T-accounts.Libby - Chapter 02 #23Topic Area: How Do Companies Keep Track of Account Balances

24. Current assets include accounts receivable and prepaid expenses.TRUECurrent assets are those to be used or turned into cash within the upcoming year.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 02-05 Prepare a simple classified balance sheet and analyze the company using the current ratio.Libby - Chapter 02 #24Topic Area: How is the Balance Sheet Prepared and Analyzed

25. The current ratio is current assets divided by current liabilities.TRUEThe current ratio shows an entity's ability to cover its short-term liabilities. It is equal to current assetsdivided by current liabilities.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: RememberDifficulty: EasyLearning Objective: 02-05 Prepare a simple classified balance sheet and analyze the company using the current ratio.Libby - Chapter 02 #25Topic Area: How is the Balance Sheet Prepared and Analyzed

26. Current liabilities are defined as obligations to be paid within six months.Bloom's RememberFALSECurrent liabilities are those obligations to be paid within the next twelve months.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingDifficulty: EasyLearning Objective: 02-05 Prepare a simple classified balance sheet and analyze the company using the current ratio.Libby - Chapter 02 #26

Topic Area: How is the Balance Sheet Prepared and Analyzed

27. The current ratio measures the ability of a company to pay its short-term obligations with short-termassets.TRUEThe current ratio is current assets divided by current liabilities. This measures a company's ability to payits current liabilities with current assets.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: UnderstandDifficulty: EasyLearning Objective: 02-05 Prepare a simple classified balance sheet and analyze the company using the current ratio.Libby - Chapter 02 #27Topic Area: How is the Balance Sheet Prepared and Analyzed

28. A company with a high current ratio should never have liquidity problems.FALSEA company with its current assets tied up in slow-moving inventory may have a high current ratio butstill have liquidity problems.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 02-05 Prepare a simple classified balance sheet and analyze the company using the current ratio.Libby - Chapter 02 #28Topic Area: How is the Balance Sheet Prepared and Analyzed

29. When a company borrows money from a bank, it leads to a cash inflow from an investing activity.FALSEBorrowing cash from a bank leads to a cash inflow from a financing activity.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 02-06 Identify investing and financing transactions and demonstrate how they are reported on the statement of cash flows.Libby - Chapter 02 #29Topic Area: Focus on Cash Flows

30. Issuing stock in exchange for cash creates a financing activity cash flow.TRUEStock issuance is a financing activity. Issuing stock for cash results in a financing cash inflow.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 02-06 Identify investing and financing transactions and demonstrate how they are reported on the statement of cash flows.Libby - Chapter 02 #30Topic Area: Focus on Cash Flows

31. Which of the following statements about stockholders' equity is false?A.Stockholders' equity is the shareholders' residual interest in the company resulting from the difference

in assets and liabilities.B. Stockholders' equity accounts are increased with credits.C. Stockholders' equity results only from contributions of the owners.D. The purchase of land for cash has no effect on stockholders' equity.Retained earnings from business operations are also a component of stockholders' equity.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 02-01 Define the objective of financial reporting; the elements of the balance sheet; and the related key accounting assumptions and principles.Libby - Chapter 02 #31Topic Area: Overview of Accounting Concepts

32. Assets, liabilities, and stockholders' equity are found within which of the following financialstatements?A. Balance sheetB. Income statementC. Statement of retained earningsD. Statement of cash flowsThe balance sheet contains three parts 1) Assets 2) Liabilities and 3) Stockholders' Equity.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 02-01 Define the objective of financial reporting; the elements of the balance sheet; and the related key accounting assumptions and principles.Libby - Chapter 02 #32Topic Area: Overview of Accounting Concepts

33. An account payable would be reported within which of the following financial statements?A. Statement of cash flowsB. Income statementC. Balance sheetD. Statement of retained earningsAn account payable is a liability reported on the balance sheet.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 02-01 Define the objective of financial reporting; the elements of the balance sheet; and the related key accounting assumptions and principles.Libby - Chapter 02 #33Topic Area: Overview of Accounting Concepts

34. Which of the following assumptions implies that a business can continue to remain in operation into theforeseeable future?A. Historical cost principleB. Unit-of-measure assumptionC. Continuity assumptionD. Separate-entity assumption

The continuity, also known as going-concern, assumption states that a business will continue operatinglong enough to meet its contractual commitments and plans.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 02-01 Define the objective of financial reporting; the elements of the balance sheet; and the related key accounting assumptions and principles.Libby - Chapter 02 #34Topic Area: Overview of Accounting Concepts

35. Which of the following best describes assets?A. Resources with possible future economic benefits owed by an entity as a result of past transactions.B. Resources with probable future economic benefits owned by an entity as a result of past transactions.C.Resources with probable future economic benefits owned by an entity as a result of futuretransactions.D. Resources with possible future economic benefits owed by an entity as a result of future transactions.Assets are economic resources with probably future benefits owned or controlled by an entity as a resultof past transactions.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 02-01 Define the objective of financial reporting; the elements of the balance sheet; and the related key accounting assumptions and principles.Libby - Chapter 02 #35Topic Area: Overview of Accounting Concepts

36. Which of the following assumptions implies that the assets and liabilities of the business are accountedfor separately from the assets and liabilities of the owners?A. Unit-of-measure assumptionB. Continuity assumptionC. Historical cost principleD. Separate entity assumptionThe separate entity assumption states that each business's activities must be accounted for separatelyfrom the activities of its owners, all other persons, and other entities.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 02-01 Define the objective of financial reporting; the elements of the balance sheet; and the related key accounting assumptions and principles.Libby - Chapter 02 #36Topic Area: Overview of Accounting Concepts

37. Which of the following best describes liabilities?A.Possible debts or obligations of an entity as a result of future transactions which will be

paid withassets or services.B.Possible debts or obligations of an entity as a result of past transactions which will be paid withassets or services.C.Probable debts or obligations of an entity as a result of future transactions which will be paid withassets or services.D.Probable debts or obligations of an entity as a result of past transactions which will be paid withassets or services.Liabilities are probable debts or obligations that result from a company's past transactions and will bepaid with assets or services.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 02-01 Define the objective of financial reporting; the elements of the balance sheet; and the related key accounting assumptions and principles.Libby - Chapter 02 #37Topic Area: Overview of Accounting Concepts

38. Which of the following is included within current assets on a balance sheet?A. Land used in daily operations.B. A truck used in daily operations.C. Inventory which takes two years to manufacture.D. Intangible assets.Inventory is always considered a current asset, regardless of how long it takes to produce and sell.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 02-01 Define the objective of financial reporting; the elements of the balance sheet; and the related key accounting assumptions and principles.Libby - Chapter 02 #38Topic Area: Overview of Accounting Concepts

39. Chad Jones is the sole owner and manager of Jones Glass Repair Shop. Jones purchased a truck for$30,000 to be used in the business. Which of the following fundamentals requires Jones to record thetruck at the price paid to buy it?A. Separate-entity assumptionB. Revenue principleC. Unit-of-measure assumptionD. Historical cost principleThe historical cost principle requires assets to be recorded at cost equal to cash paid plus the dollarvalue of all noncash considerations received in the exchange.AACSB: Reflective ThinkingAICPA BB: Critical Thinking

AICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 02-01 Define the objective of financial reporting; the elements of the balance sheet; and the related key accounting assumptions and principles.Libby - Chapter 02 #39Topic Area: Overview of Accounting Concepts

40. In what order are current assets listed on a balance sheet?A. By dollar amount (largest first).B. By date of acquisition (earliest first).C. By liquidity.D. By relevance to the operation of the business.Assets are listed on the balance sheet in order of liquidity with the most liquid assets listed first.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 02-01 Define the objective of financial reporting; the elements of the balance sheet; and the related key accounting assumptions and principles.Libby - Chapter 02 #40Topic Area: Overview of Accounting Concepts

41. In what order would the following assets be listed on a balance sheet?A. Cash, Accounts Receivable, Inventory, Plant and Equipment.B. Cash, Intangible Assets, Accounts Receivable, Plant and Equipment.C. Cash, Accounts Receivable, Plant and Equipment, Inventory.D. Cash, Inventory, Intangible Assets, Accounts Receivable.Assets are listed in order of liquidity. Cash is always first, and Plant and Equipment is listed as a noncurrentasset. Accounts Receivable is more liquid than Inventory.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 02-01 Define the objective of financial reporting; the elements of the balance sheet; and the related key accounting assumptions and principles.Libby - Chapter 02 #41Topic Area: Overview of Accounting Concepts

42. Where would changes in stockholders' equity resulting from operations be reported?A. Within a long-term asset account.B. Within the contributed capital account.C. Within a liability account.D. Within the retained earnings account.Stockholders' equity has two parts; financing from contributed capital and business operations. Retainedearnings are the result of business operations, and therefore changes in stockholders' equity fromoperations are reported in retained earnings.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 02-01 Define the objective of financial reporting; the elements of the balance sheet; and the related key accounting assumptions and principles.

Libby - Chapter 02 #42Topic Area: Overview of Accounting Concepts

43. Which of the following events will cause retained earnings to increase?A. Dividends declared by the Board of Directors.B. Net income reported for the period.C. Net loss reported for the period.D. Issuance of stock in exchange for cash.Beginning Retained Earnings + Net Income - Dividends = Ending Retained EarningsAACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: EasyLearning Objective: 02-01 Define the objective of financial reporting; the elements of the balance sheet; and the related key accounting assumptions and principles.Libby - Chapter 02 #43Topic Area: Overview of Accounting Concepts

44. Which of the following correctly describes retained earnings?A. It is the cumulative net income of a company.B. It represents the investments by stockholders in a company.C. It equals total assets minus total liabilities.D. It is the cumulative net income of a company less dividend declarations.Retained earnings are the cumulative profits not distributed to investors. That is the cumulative netincome less dividend declarations.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 02-01 Define the objective of financial reporting; the elements of the balance sheet; and the related key accounting assumptions and principles.Libby - Chapter 02 #44Topic Area: Overview of Accounting Concepts

45. Which of the following statements is false?A. An item considered immaterial can be accounted for in the most cost-beneficial manner.B. An item is considered relevant if it has the ability to influence a decision.C. Information is considered to be reliable when it is accurate, unbiased, and verifiable.D. Conservatism suggests that assets and revenues should be overstated when possible.Conservatism suggests that care should be taken not to overstate assets and revenues or understateliabilities and expenses.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 02-01 Define the objective of financial reporting; the elements of the balance sheet; and the related key accounting assumptions and principles.Libby - Chapter 02 #45Topic Area: Overview of Accounting Concepts

46. Which of the following describes the primary objective of financial accounting?A. To provide useful economic information only to stockholders.B. To provide information about a business' future business strategies.C.To provide useful economic information about a business to help external parties make

informeddecisions.D.To provide useful economic information about a business to help internal parties make informeddecisions.The primary objective of external financial reporting is to provide useful economic information about abusiness to help external parties, primarily investors and creditors, make sound financial decisions.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 02-01 Define the objective of financial reporting; the elements of the balance sheet; and the related key accounting assumptions and principles.Libby - Chapter 02 #46Topic Area: Overview of Accounting Concepts

47. Which of the following would not be considered a current asset?A. Inventory.B. Prepaid expenses.C. Land used in daily operations.D. Accounts receivable.Land is part of property, plant, and equipment and is listed as a part of long-term assets.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 02-01 Define the objective of financial reporting; the elements of the balance sheet; and the related key accounting assumptions and principles.Libby - Chapter 02 #47Topic Area: Overview of Accounting Concepts

48. Which of the following does not correctly describe a business transaction?A.They include exchanges of assets or services by one business for assets, services, or liabilities fromanother business.B. They include the using up of insurance paid for in advance.C. They have an economic impact on a business entity.D. They do not include measurable internal events such as the use of assets in operations.A business transaction includes measurable internal events such as the use of assets in operations.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 02-02 Identify what constitutes a business transaction and recognize common balance sheet account titles used in business.Libby - Chapter 02 #48Topic Area: What Business Activities Cause Changes in Financial Statement Amounts

49. Which of the following would not be currently reported as an expense on the income statement?A. Cost of goods soldB. Interest expense

C. Prepaid insurance expenseD. Income tax expenseExpenses listed as prepaid are classified as assets.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 02-02 Identify what constitutes a business transaction and recognize common balance sheet account titles used in business.Libby - Chapter 02 #49Topic Area: What Business Activities Cause Changes in Financial Statement Amounts

50. Which of the following liability accounts does not usually require a future cash payment?A. Accounts payableB. Unearned revenuesC. Taxes payableD. Notes payableUnearned revenue relates to payments that have been received in the past for future goods or services.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 02-02 Identify what constitutes a business transaction and recognize common balance sheet account titles used in business.Libby - Chapter 02 #50Topic Area: What Business Activities Cause Changes in Financial Statement Amounts

51. Which of the following transactions wouldn't be considered an external exchange?A. The purchase of inventory on credit from a supplier.B. Cash received from a credit customer.C. Cash paid for wages to employees.D. Using up insurance which was paid for in advance.Using up prepaid assets is an internal event.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: EasyLearning Objective: 02-02 Identify what constitutes a business transaction and recognize common balance sheet account titles used in business.Libby - Chapter 02 #51Topic Area: What Business Activities Cause Changes in Financial Statement Amounts

52. Which of the following reflects the impact of a transaction where $200,000 cash was invested bystockholders in exchange for stock?A. Assets and liabilities each increased $200,000.B. Assets and revenues each increased $200,000.C. Stockholders' equity and revenues each increased $200,000.D. Stockholders' equity and assets each increased $200,000.Receiving $200,000 cash in exchange for stock increases assets (cash) and stockholders' equity (issuingstock).AACSB: Reflective ThinkingAICPA BB: Critical Thinking

AICPA FN: ReportingBloom's: UnderstandDifficulty: EasyLearning Objective: 02-03 Apply transaction analysis to simple business transactions in terms of the accounting model: Assets = Liabilities + Stockholders' Equity.Libby - Chapter 02 #52Topic Area: How Do Transactions Affect Accounts

53. A corporation purchased factory equipment using cash. Which of the following statements regardingthis purchase is false?A. The current year's net income for will be reduced by the cost of the factory equipment.B. The total assets will not change.C. The total liabilities will not change.D. The current stockholders' equity will not change.The purchase of equipment has no affect on the income statement.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 02-03 Apply transaction analysis to simple business transactions in terms of the accounting model: Assets = Liabilities + Stockholders' Equity.Libby - Chapter 02 #53Topic Area: How Do Transactions Affect Accounts

54. Which of the following direct effects on the accounting equation isn't possible as a result of a singlebusiness transaction which impacts only two accounts?A. An increase in a liability and a decrease in an asset.B. An increase in stockholders' equity and an increase in an asset.C. An increase in an asset and a decrease in an asset.D. A decrease in stockholders' equity and a decrease in an asset.With one transaction impacting only two accounts, the accounting equation would not be in balance ifthere was an increase in a liability and a decrease in an asset.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 02-03 Apply transaction analysis to simple business transactions in terms of the accounting model: Assets = Liabilities + Stockholders' Equity.Libby - Chapter 02 #54Topic Area: How Do Transactions Affect Accounts

55. Which of the following direct effects on the accounting equation isn't possible as a result of a singlebusiness transaction?A. An increase in an asset and a decrease in another asset.B. An increase in an asset and an increase in stockholders' equity.C. A decrease in stockholders' equity and an increase in an asset.D. An increase in a liability and an increase in an asset.A single transaction that results in a decrease in stockholders' equity and an increase in an asset is notpossible because the accounting equation would not be in balance.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting

Bloom's: UnderstandDifficulty: EasyLearning Objective: 02-03 Apply transaction analysis to simple business transactions in terms of the accounting model: Assets = Liabilities + Stockholders' Equity.Libby - Chapter 02 #55Topic Area: How Do Transactions Affect Accounts

56. A company's January 1, 2010 balance sheet reported total assets of $150,000 and total liabilities of$60,000. During January 2010, the company completed the following transactions: (A) paid a notepayable using $10,000 cash (no interest was paid); (B) collected a $9,000 accounts receivable; (C)paid a $5,000 accounts payable; and (D) purchased a truck for $5,000 cash and by signing a $20,000note payable from a bank. The company's January 31, 2010 balance sheet would report which of thefollowing?A. Option AB. Option BC. Option CD. Option DAssets = $155,000 = $150,000 - $10,000 - $5,000 - $5,000 + $25,000Liabilities = $65,000 = $60,000 - $10,000 -$5,000 + $20,000Stockholders' equity = $90,000 = Assets ($155,000) - Liabilities ($65,000)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementAICPA FN: ReportingBloom's: ApplyDifficulty: HardLearning Objective: 02-03 Apply transaction analysis to simple business transactions in terms of the accounting model: Assets = Liabilities + Stockholders' Equity.Libby - Chapter 02 #56Topic Area: How Do Transactions Affect Accounts

57. Which of the following happens when equipment is purchased using cash?A. Total assets decrease.B. Current assets don't change.C. Current assets increase.D. Stockholders' equity doesn't change.A purchase of equipment with cash decreases current assets and increases equipment; there is no changein stockholders' equity.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 02-03 Apply transaction analysis to simple business transactions in terms of the accounting model: Assets = Liabilities + Stockholders' Equity.Libby - Chapter 02 #57Topic Area: How Do Transactions Affect Accounts

58. Which of the following describes the impact of purchasing supplies for cash on the balance sheet?A. Current assets will decrease.B. Current assets will increase.

C. Stockholders' equity will decrease.D. Total assets remain the same.Total assets are unchanged because cash is decreased by the same amount supplies are increased.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: EasyLearning Objective: 02-03 Apply transaction analysis to simple business transactions in terms of the accounting model: Assets = Liabilities + Stockholders' Equity.Libby - Chapter 02 #58Topic Area: How Do Transactions Affect Accounts

59. Which of the following describes the impact of paying a current liability using cash on the balancesheet?A. Current assets will decrease.B. Current liabilities will increase.C. Stockholders' equity will decrease.D. Total assets will remain the same.Paying a current liability with cash decreases the cash account thus decreasing current assets.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: EasyLearning Objective: 02-03 Apply transaction analysis to simple business transactions in terms of the accounting model: Assets = Liabilities + Stockholders' Equity.Libby - Chapter 02 #59Topic Area: How Do Transactions Affect Accounts

60. Which of the following describes the impact on the balance sheet when cash is received from thecollection of an account receivable?A. Current assets will not change.B. Current assets will increase.C. Stockholders' equity will increase.D. Total assets will increase.Current assets do not change because cash is increased by the same amount the accounts receivabledecreases. Both cash and accounts receivable are current assets.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: EasyLearning Objective: 02-03 Apply transaction analysis to simple business transactions in terms of the accounting model: Assets = Liabilities + Stockholders' Equity.Libby - Chapter 02 #60Topic Area: How Do Transactions Affect Accounts

61. A corporation has $80,000 in total assets, $36,000 in total liabilities, and a $12,000 credit balance inretained earnings. What is the balance in the contributed capital account?A. $56,000B. $44,000

C. $48,000D. $32,000Stockholders' equity ($44,000) = Assets ($80,000) - Liabilities ($36,000)Stockholders' equity ($44,000) = Contributed capital ($32,000) + Retained earnings ($12,000)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementAICPA FN: ReportingBloom's: ApplyDifficulty: MediumLearning Objective: 02-03 Apply transaction analysis to simple business transactions in terms of the accounting model: Assets = Liabilities + Stockholders' Equity.Libby - Chapter 02 #61Topic Area: How Do Transactions Affect Accounts

62. The duality (or duality of effects) concept states thatA. both the income statement and balance sheet are impacted by every transaction.B. every transaction has an impact on assets and stockholders' equity.C. there are two entities involved in every transaction.D. every transaction has at least two effects on the accounting equation.Every accounting transaction has at least two effects on the accounting equation, this concept is knownas dual effects.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 02-03 Apply transaction analysis to simple business transactions in terms of the accounting model: Assets = Liabilities + Stockholders' Equity.Libby - Chapter 02 #62Topic Area: How Do Transactions Affect Accounts

63. Which of the following is not considered to be a recordable transaction?A. Signing a contract to have an outside cleaning service clean offices nightly.B. Paying employees their wages.C. Selling stock to investors.D. Buying equipment and agreeing to pay a note payable and interest at the end of a year.Signing a contract involving the exchange of two promises to perform does not result in an accountingtransaction that is recorded.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 02-03 Apply transaction analysis to simple business transactions in terms of the accounting model: Assets = Liabilities + Stockholders' Equity.Libby - Chapter 02 #63Topic Area: How Do Transactions Affect Accounts

64. Which of the following transactions will cause both the left and right side of the accounting equation todecrease?A. Collecting cash from a customer who owed us money.B. Paying a supplier for inventory we previously purchased on account.C. Borrowing money from a bank.D. Purchasing equipment using cash.

Paying a supplier for inventory purchased on account reduces assets and reduces accounts payable.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: EasyLearning Objective: 02-03 Apply transaction analysis to simple business transactions in terms of the accounting model: Assets = Liabilities + Stockholders' Equity.Libby - Chapter 02 #64Topic Area: How Do Transactions Affect Accounts

65. When a company buys equipment for $150,000 and pays for one third in cash and the other two thirds isfinanced by a note payable, which of the following are the effects on the accounting equation?A. Total assets decrease $50,000.B. Total liabilities increase $150,000.C. Total liabilities decrease $50,000.D. Total assets increase $100,000.Equipment increases $150,000 and cash decreases $50,000 for a net asset increase of $100,000.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementAICPA FN: ReportingBloom's: ApplyDifficulty: MediumLearning Objective: 02-03 Apply transaction analysis to simple business transactions in terms of the accounting model: Assets = Liabilities + Stockholders' Equity.Libby - Chapter 02 #65Topic Area: How Do Transactions Affect Accounts

66. Which of the following describes the impact on the balance sheet when a company uses cash topurchase the stock of another company?A. Total assets increase.B. Stockholders' equity increases.C. Stockholders' equity decreases.D. Total assets remain the same.Cash decreases by the same amount the investment in the other company increases.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 02-03 Apply transaction analysis to simple business transactions in terms of the accounting model: Assets = Liabilities + Stockholders' Equity.Libby - Chapter 02 #66Topic Area: How Do Transactions Affect Accounts

67. Which of the following statements is incorrect?A. Stockholders' equity accounts normally have credit balances.B. Liability accounts are decreased by credits.C. Stockholders' equity accounts are increased by credits.D. Asset accounts are increased by debits.Liability accounts are increased by credits.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting

Bloom's: RememberDifficulty: MediumLearning Objective: 02-04 Determine the impact of business transactions on the balance sheet using two basic tools; journal entries and T-accounts.Libby - Chapter 02 #67Topic Area: How Do Companies Keep Track of Account Balances

68. Selling stock to investors for cash would result in which of the following?A. A debit to contributed capital and a credit to cash.B. A credit to both cash and contributed capital.C. A debit to cash and a credit to contributed capital.D. A debit to cash and a credit to retained earnings.This transaction results in an increase in cash with a debit, contributed capital is a stockholders' equityaccount and increased with a credit.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 02-04 Determine the impact of business transactions on the balance sheet using two basic tools; journal entries and T-accounts.Libby - Chapter 02 #68Topic Area: How Do Companies Keep Track of Account Balances

69. Borrowing cash from a bank would result in which of the following?A. A debit to cash and a credit to notes payable.B. A debit to notes payable and a credit to cash.C. A debit to both cash and notes payable.D. A debit to cash and a credit to contributed capital.Cash is received and increased with a debit; the loan from the bank is recognized with a credit to notespayable.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 02-04 Determine the impact of business transactions on the balance sheet using two basic tools; journal entries and T-accounts.Libby - Chapter 02 #69Topic Area: How Do Companies Keep Track of Account Balances

70. A company purchases a delivery van by paying $5,000 cash and by signing a $25,000 note payable.Which of the following correctly describes the recording of the delivery van purchase?A. The delivery van account is debited for $25,000.B. Notes payable is debited for $25,000.C. The delivery van account is debited for $30,000.D. Cash is debited for $5,000.The cost of the asset is recorded at cash paid plus all noncash considerations. The delivery van accountis debited for $30,000. ($5,000 + $25,000 = $30,000)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementAICPA FN: ReportingBloom's: ApplyDifficulty: MediumLearning Objective: 02-04 Determine the impact of business transactions on the balance sheet using two basic tools; journal entries

and T-accounts.Libby - Chapter 02 #70Topic Area: How Do Companies Keep Track of Account Balances

71. Cadet Company paid an accounts payable of $1,000. This transaction should be recorded as follows onthe payment date.A.B.C.D.Accounts Payable is reduced with a debit, and cash is reduced with a credit.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: EasyLearning Objective: 02-04 Determine the impact of business transactions on the balance sheet using two basic tools; journal entries and T-accounts.Libby - Chapter 02 #71Topic Area: How Do Companies Keep Track of Account Balances

72. Which of the following correctly describes the recording of a dividend declaration by a company'sboard of directors?A. A debit to retained earnings and a credit to cash.B. A debit to contributed capital and a credit to dividends payable.C. A debit to cash and a credit to retained earnings.D. A debit to retained earnings and a credit to dividends payable.Dividends are a reduction to retained earnings. A debit to retained earnings decreases this account, anddeclaring dividends is recorded with a credit to dividends payable.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 02-04 Determine the impact of business transactions on the balance sheet using two basic tools; journal entries and T-accounts.Libby - Chapter 02 #72Topic Area: How Do Companies Keep Track of Account Balances

73. Which of the following statements is correct?A. Assets have a credit balance and are increased with debits.B. Assets have a debit balance and are increased with credits.C. Liability accounts have debit balances and are increased with debits.D. Stockholders' equity accounts normally have credit balances and are increased with credits.An accounts balance, or normal balance, is the same as how that account is increased. Stockholders'equity accounts have a normal credit balance and are increased with credits.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 02-04 Determine the impact of business transactions on the balance sheet using two basic tools; journal entries and T-accounts.Libby - Chapter 02 #73

Topic Area: How Do Companies Keep Track of Account Balances

74. Which of the following journal entries is correct when a business entity purchases land costing $30,000by signing a one-year note payable?A.B.C.D.The transaction results in the company receiving an asset, land, and a liability, notes payable. Thisresults in a debit to land to increase the land account, and a credit to notes payable to recognize andrecord the liability.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: EasyLearning Objective: 02-04 Determine the impact of business transactions on the balance sheet using two basic tools; journal entries and T-accounts.Libby - Chapter 02 #74Topic Area: How Do Companies Keep Track of Account Balances

75. Which of the following journal entries is correct when a business entity issues stock to stockholders inexchange for cash?A.B.C.D.Cash is received in the transaction; the cash account is increased with a debit. Stock is being issued inexchange for the cash so a credit to contributed capital is required.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: EasyLearning Objective: 02-04 Determine the impact of business transactions on the balance sheet using two basic tools; journal entries and T-accounts.Libby - Chapter 02 #75Topic Area: How Do Companies Keep Track of Account Balances

76. Which of the following journal entries is correct when a business entity purchases a building by payingcash and signing a note payable?A.B.C.D.The company receives an asset, the building, and to record this asset a debit to the building accountis required. To acquire the building the company gives up an asset, cash, and credits this account. Tocomplete the transaction the company also took on a liability and needs to record this

with a credit tonotes payable.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 02-04 Determine the impact of business transactions on the balance sheet using two basic tools; journal entries and T-accounts.Libby - Chapter 02 #76Topic Area: How Do Companies Keep Track of Account Balances

77. Which of the following journal entries is correct when a business entity builds an addition to the factorybuilding by paying cash to a contractor?A.B.C.D.The two accounts related to the transaction are Building and Cash. The Building account needs to beincreased with a debit; cash is paid to the contractor and recorded with a credit to cash.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: EasyLearning Objective: 02-04 Determine the impact of business transactions on the balance sheet using two basic tools; journal entries and T-accounts.Libby - Chapter 02 #77Topic Area: How Do Companies Keep Track of Account Balances

78. Which of the following journal entries is correct when a business entity uses cash to pay an accountpayable?A.B.C.D.Both the accounts payable and cash accounts need to be decreased as a result of this transaction. This isdone with a debit to accounts payable and a credit to cash.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: EasyLearning Objective: 02-04 Determine the impact of business transactions on the balance sheet using two basic tools; journal entries and T-accounts.Libby - Chapter 02 #78Topic Area: How Do Companies Keep Track of Account Balances

79. Which of the following transactions would result in an increase in the current ratio?A. Collection of cash from an account receivable.B. Selling shares of stock to stockholders in exchange for cash.C. Purchasing a building by signing a long-term note payable.D. Declaration of a cash dividend by the board of directors.The current ratio is current assets divided by current liabilities. Receiving cash increases

currentassets and increases the current ratio. Issuing stock does not impact current assets or current liabilities;stockholders' equity is increased.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: UnderstandDifficulty: HardLearning Objective: 02-05 Prepare a simple classified balance sheet and analyze the company using the current ratio.Libby - Chapter 02 #79Topic Area: How is the Balance Sheet Prepared and Analyzed

80. Which of the following transactions would result in a decrease in the current ratio?A. Collection of cash from an account receivable.B. Selling shares of stock to stockholders in exchange for cash.C. Purchasing a delivery vehicle by signing a long-term note payable.D. Declaration of a cash dividend by the board of directors.The current ratio is current assets divided by current liabilities. A cash dividend reduces current assets,and decreases the current ratio.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 02-05 Prepare a simple classified balance sheet and analyze the company using the current ratio.Libby - Chapter 02 #80Topic Area: How is the Balance Sheet Prepared and Analyzed

81. Which of the following account balances would not be included in the calculation of the current ratio?A. Accounts receivableB. Short-term notes payableC. Contributed capitalD. InventoryThe current ratio is current assets divided by current liabilities. Contributed capital is a component ofstockholders' equity.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 02-05 Prepare a simple classified balance sheet and analyze the company using the current ratio.Libby - Chapter 02 #81Topic Area: How is the Balance Sheet Prepared and Analyzed

82. Which of the following statements does not properly describe the current ratio?A. It measures the ability of a firm to pay its debts in the short-run.B. It is current assets divided by current liabilities.C. It is a measure of a firm's short-run liquidity.D. It measures a firm's ability to pay its long-term debts as they mature.The current ratio is a measure of short term liquidity. It does not measure a firm's ability to pay its longtermdebt.AACSB: Reflective ThinkingAICPA BB: Critical Thinking

AICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 02-05 Prepare a simple classified balance sheet and analyze the company using the current ratio.Libby - Chapter 02 #82Topic Area: How is the Balance Sheet Prepared and Analyzed

83. The Pioneer Company has provided the following account balances:Cash $38,000;Short-term investments $4,000;Accounts receivable $6,000;Inventory $48,000;Long-term notes receivable $2,000;Equipment $96,000;Factory Building $180,000;Intangible assets $6,000;Accounts payable $30,000;Accrued liabilities payable $4,000;Short-term notes payable $14,000;Long-term notes payable $92,000;Contributed capital $180,000;Retained earnings $60,000.What is Pioneer's current ratio?A. 2.00B. 2.17C. 2.71D. 1.00Current assets = $96,000 = $38,000 + $4,000 + $6,000 + $48,000Current liabilities = $48,000 = $30,000 + $4,000 + $14,000Current ratio = 2 = $96,000 ÷ $48,000AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 02-05 Prepare a simple classified balance sheet and analyze the company using the current ratio.Libby - Chapter 02 #83Topic Area: How is the Balance Sheet Prepared and Analyzed

84. The Pioneer Company has provided the following account balances:Cash $38,000;Short-term investments $4,000;Accounts receivable $6,000;Inventory $48,000;Long-term notes receivable $2,000;Equipment $96,000;Factory Building $180,000;Intangible assets $6,000;Accounts payable $30,000;Accrued liabilities payable $4,000;Short-term notes payable $14,000;Long-term notes payable $92,000;Contributed capital $180,000;

Retained earnings $60,000.What are Pioneer's total current assets?A. $48,000B. $96,000C. $50,000D. $42,000Current assets = $96,000 = $38,000 + $4,000 + $6,000 + $48,000AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementAICPA FN: ReportingBloom's: ApplyDifficulty: MediumLearning Objective: 02-05 Prepare a simple classified balance sheet and analyze the company using the current ratio.Libby - Chapter 02 #84Topic Area: How is the Balance Sheet Prepared and Analyzed

85. The Pioneer Company has provided the following account balances:Cash $38,000;Short-term investments $4,000;Accounts receivable $6,000;Inventory $48,000;Long-term notes receivable $2,000;Equipment $96,000;Factory Building $180,000;Intangible assets $6,000;Accounts payable $30,000;Accrued liabilities payable $4,000;Short-term notes payable $14,000;Long-term notes payable $92,000;Contributed capital $180,000;Retained earnings $60,000.What are Pioneer's total current liabilities?A. $44,000B. $34,000C. $48,000D. $140,000Current liabilities = $48,000 = $30,000 + $4,000 + $14,000AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementAICPA FN: ReportingBloom's: ApplyDifficulty: MediumLearning Objective: 02-05 Prepare a simple classified balance sheet and analyze the company using the current ratio.Libby - Chapter 02 #85Topic Area: How is the Balance Sheet Prepared and Analyzed

86. At the beginning of April, Warren Corporation's assets totaled $240,000 and liabilities totaled $60,000.During April the following summarized transactions occurred:Additional shares of stock were sold for $20,000 cash.A building costing $95,000 was purchased using $10,000 cash and by signing an $85,000 long-term

note payable.Short-term investments costing $9,000 were purchased using cash.$10,000 was lent to an employee; the employee signed a six-month note in exchange for the loan.How much are Warren's total assets at the end of April?A. $335,000B. $249,000C. $345,000D. $250,000Total assets = $345,000 = $240,000 + $20,000 + $95,000 - $10,000 (building payment)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementAICPA FN: ReportingBloom's: ApplyDifficulty: HardLearning Objective: 02-05 Prepare a simple classified balance sheet and analyze the company using the current ratio.Libby - Chapter 02 #86Topic Area: How is the Balance Sheet Prepared and Analyzed

87. At the beginning of April, Warren Corporation's assets totaled $240,000 and liabilities totaled $60,000.During April the following summarized transactions occurred:Additional shares of stock were sold for $20,000 cash.A building costing $95,000 was purchased using $10,000 cash and by signing an $85,000 long-termnote payable.Short-term investments costing $9,000 were purchased using cash.$10,000 was lent to an employee; the employee signed a six-month note in exchange for the loan.How much are Warren's total liabilities at the end of April?A. $145,000B. $155,000C. $165,000D. $135,000Total liabilities = $145,000 = $60,000 + $85,000AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementAICPA FN: ReportingBloom's: ApplyDifficulty: HardLearning Objective: 02-05 Prepare a simple classified balance sheet and analyze the company using the current ratio.Libby - Chapter 02 #87Topic Area: How is the Balance Sheet Prepared and Analyzed

88. Tiger Company's stockholders' equity at the beginning of the year was $175,000. During the year Tigerreported the following:Net income of $79,000.Dividend declarations totaling $17,000.Issued stock to stockholders in exchange for $42,000 cash.Stockholders sold some of their stock to other stockholders for $11,000 cash.What is Tiger's stockholders' equity at the end of the year?

A. $296,000B. $279,000C. $290,000D. $273,000Stockholders' equity = $279,000 = $175,000 + $79,000 - $17,000 + $42,000AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementAICPA FN: ReportingBloom's: ApplyDifficulty: HardLearning Objective: 02-05 Prepare a simple classified balance sheet and analyze the company using the current ratio.Libby - Chapter 02 #88Topic Area: How is the Balance Sheet Prepared and Analyzed

89. Which of the following transactions will not change a company's total stockholders' equity?A. Reporting of net income.B. Issuing stock to stockholders in exchange for cash.C. The declaration of a cash dividend.D. The payment of a previously declared cash dividend.The payment of a previously declared cash dividend reduces cash, and reduces or eliminates thedividend payable account.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 02-03 Apply transaction analysis to simple business transactions in terms of the accounting model: Assets = Liabilities + Stockholders' Equity.Libby - Chapter 02 #89Topic Area: How Do Transactions Affect Accounts

90. Which of the following transactions would create a cash inflow from a financing activity?A. Issuing shares of stock to stockholders in exchange for cash.B. Selling a short-term stock investment in exchange for cash.C. Selling used equipment which was a part of property, plant, and equipment.D. The payment of an account payable.Financing cash flow activities include borrowing and repaying debt, issuing and repurchasing stock, andpaying dividends.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 02-06 Identify investing and financing transactions and demonstrate how they are reported on the statement of cash flows.Libby - Chapter 02 #90Topic Area: Focus on Cash Flows

91. Which of the following best describe financing activities?A. They primarily deal with securing money by bank loans or selling stock to investors.B.They primarily are connected to the income producing activities of the company as reported on theincome statement.

C. They primarily deal with buying and building facilities used over many years by the business.D. They primarily deal with selling facilities once used by the business.Financing cash flow activities include borrowing and repaying debt, issuing and repurchasing stock, andpaying dividends.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 02-06 Identify investing and financing transactions and demonstrate how they are reported on the statement of cash flows.Libby - Chapter 02 #91Topic Area: Focus on Cash Flows

92. Which of the following would cause a cash outflow from investing activities?A. Purchasing shares of stock of another company.B. Paying a cash dividend to stockholders.C. Issuing additional shares a company's stock.D. Using cash to purchase inventory.Investing cash flow activities include buying and selling noncurrent assets and investments.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 02-06 Identify investing and financing transactions and demonstrate how they are reported on the statement of cash flows.Libby - Chapter 02 #92Topic Area: Focus on Cash Flows

93. Which of the following would result when a company borrows cash and signs a note payable due in twoyears?A. A noncurrent liability and an investing cash flow are created.B. A noncurrent liability and a financing cash flow are created.C. A current liability and an investing cash flow are created.D. A current liability and a financing cash flow are created.The note is noncurrent because it is due in two years. The cash flow is created from borrowing money,and categorized as a financing cash flow.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: EasyLearning Objective: 02-06 Identify investing and financing transactions and demonstrate how they are reported on the statement of cash flows.Libby - Chapter 02 #93Topic Area: Focus on Cash Flows

94. Which of the following would result when a company sells additional shares of stock for cash?A. A noncurrent liability and a financing cash flow are created.B. Contributed capital increases and a financing cash flow results.C. A noncurrent liability and an investing cash flow are created.

D. Contributed capital increases and an investing cash flow results.Selling additional shares of stock increases contributed capital. Financing cash flow activities includeissuing stock.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: EasyLearning Objective: 02-06 Identify investing and financing transactions and demonstrate how they are reported on the statement of cash flows.Libby - Chapter 02 #94Topic Area: Focus on Cash Flows

95. Which of the following would result when a company purchases a factory building using cash?A. A noncurrent asset and an investing cash flow are created.B. A noncurrent asset and a financing cash flow are created.C. A current asset and an investing cash flow are created.D. A current asset and a financing cash flow are created.Buildings are classified as noncurrent assets. Investing cash flows are created with the purchase or saleof noncurrent assets.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: EasyLearning Objective: 02-06 Identify investing and financing transactions and demonstrate how they are reported on the statement of cash flows.Libby - Chapter 02 #95Topic Area: Focus on Cash Flows

96. Which of the following would result when a company lends cash to a franchisee in exchange for a tenmonthnote receivable?A. A noncurrent asset and an investing cash flow are created.B. A noncurrent asset and a financing cash flow are created.C. A current asset and a financing cash flow are created.D. A current asset and an investing cash flow are created.A ten-month note receivable is classified as a current asset. Investing cash flows include lending cash toothers.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: EasyLearning Objective: 02-06 Identify investing and financing transactions and demonstrate how they are reported on the statement of cash flows.Libby - Chapter 02 #96Topic Area: Focus on Cash Flows

97. Which of the following would result when a company pays a previously declared cash dividend?A. Current liabilities are reduced and a financing cash flow is created.B. Stockholders' equity is reduced and a financing cash flow is created.C. Current assets are reduced and an investing cash flow is created.

D. Stockholders' equity is reduced and an investing cash flow is created.Declaring a dividend creates a dividend payable. Paying the dividend reduces this current liabilityaccount. Paying dividends are classified as financing cash flows.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: EasyLearning Objective: 02-06 Identify investing and financing transactions and demonstrate how they are reported on the statement of cash flows.Libby - Chapter 02 #97Topic Area: Focus on Cash Flows

98. Which of the following would be classified as financing cash flows on a cash flow statement?1. Paying cash dividends.2. Lending cash to others.3. Issuing stock for cash.4. Purchasing long-term assets for cash.5. Repurchasing stock with cash.A. 1, 2, 5B. 2, 3, 4C. 1, 3, 5D. 2, 4, 5Financing cash flow activities include issuing and repurchasing stock and paying dividends.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 02-06 Identify investing and financing transactions and demonstrate how they are reported on the statement of cash flows.Libby - Chapter 02 #98Topic Area: Focus on Cash Flows

99. Which of the following would be classified as investing cash flows on a cash flow statement?1. Acquired a building by signing a long-term mortgage payable.2. Lending cash to others.3. Issuing stock for cash.4. Purchasing long-term assets for cash.5. Selling stock investments for cash.A. 1, 4, 5B. 1, 2, 4C. 1, 3, 5D. 2, 4, 5Investing cash flows include lending cash to others, purchasing and selling noncurrent assets andinvestments.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: Medium

Learning Objective: 02-06 Identify investing and financing transactions and demonstrate how they are reported on the statement of cash flows.Libby - Chapter 02 #99Topic Area: Focus on Cash Flows

100. Which of the following statements is false?A. Investing cash flows include the cash flows associated with lending money to others.B. Financing cash flows include the cash flows associated with issuing and repurchasing stock.C.Financing cash flows include the cash flows associated with borrowing and repaying debt excludingshort-term bank loans.D. Investing cash flows include the cash flows associated with buying and selling noncurrent assets.

ch3 Key1. The operating cycle is the time that elapses between a company's cash payment to suppliers forinventory purchases and the collection of cash from sale of inventory to customers.TRUEThe operating cycle is the time it takes for a company to pay cash to suppliers, sell goods and servicesto customers, and collect cash from customers.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 03-01 Describe a typical business operating cycle and explain the necessity for the time period assumption.Libby - Chapter 03 #1Topic Area: How do Business Activities Affect the Income Statement

2. A retail store would likely have a shorter operating cycle than an automotive manufacturer.TRUEThe operating cycle is the time it takes for a company to pay cash to suppliers, sell goods and servicesto customers, and collect cash from customers. The length of time for completion of the operating cycledepends on the nature of the business. Companies with high volume and lower prices generally have ashorter operating cycle than companies with low volume and higher prices.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 03-01 Describe a typical business operating cycle and explain the necessity for the time period assumption.Libby - Chapter 03 #2Topic Area: How do Business Activities Affect the Income Statement

3. The time period assumption implies that the life of a business entity can be reported in time periodssuch as quarters and years.TRUEA company's operating cycle repeats itself continuously. The time period assumption

indicates that thelong life of a company can be reported in shorter time periods.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 03-01 Describe a typical business operating cycle and explain the necessity for the time period assumption.Libby - Chapter 03 #3Topic Area: How do Business Activities Affect the Income Statement

4. An example of operating revenues would be the revenue created by the sale of an automobile by a cardealership.TRUEOperating revenues result from an entity's sale of goods or services.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 03-02 Explain how business activities affect the elements of the income statement.Libby - Chapter 03 #4Topic Area: Elements on the Income Statement

5. Revenue is recognized at the time that cash is collected from a customer for services to be provided inthe future.FALSERevenue is recognized when earned, usually at the time the company provides the promised goods orservices to its customer.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 03-02 Explain how business activities affect the elements of the income statement.Libby - Chapter 03 #5Topic Area: Elements on the Income Statement

6. Unearned revenues are reported as liabilities on the balance sheet.TRUEUnearned revenues are payments provided to a company before the goods or services are provided.Unearned revenues are liabilities reported on the balance sheet.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 03-02 Explain how business activities affect the elements of the income statement.Libby - Chapter 03 #6Topic Area: Elements on the Income Statement

7. Interest expense is reported on the income statement as an operating expense.FALSEInterest expense results from the cost of borrowing money. Borrowing money is a financing activity;thus the expenses resulting from this are not classified as operating expenses.AACSB: Reflective ThinkingAICPA BB: Critical Thinking

AICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 03-02 Explain how business activities affect the elements of the income statement.Libby - Chapter 03 #7Topic Area: Elements on the Income Statement

8. Earnings per share must be either reported on the income statement or disclosed in the notes to thefinancial statements.TRUEEarnings per share is a ratio widely used in evaluating a company's operating performance. This ratio isrequired to be reported on the income statement or in the notes to the financial statements.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 03-02 Explain how business activities affect the elements of the income statement.Libby - Chapter 03 #8Topic Area: Elements on the Income Statement

9. Investment income is reported on the income statement as operating revenues and therefore increasesoperating income.FALSEInvestment income (or revenue) is a result from investing activities. Investing activities are notconsidered part of central operations; therefore any income generated is not part of operating revenues.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 03-02 Explain how business activities affect the elements of the income statement.Libby - Chapter 03 #9Topic Area: Elements on the Income Statement

10. Expenses are decreases in assets or increases in liabilities incurred in order to generate revenues.TRUEExpenses are defined as decreases in assets or increases in liabilities from ongoing operations incurredto generate revenues during the period.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 03-02 Explain how business activities affect the elements of the income statement.Libby - Chapter 03 #10Topic Area: Elements on the Income Statement

11. Salary expense is recognized on the income statement when the salaries are paid rather than when theemployee provides the services.FALSE

Expenses are recognized when incurred.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 03-02 Explain how business activities affect the elements of the income statement.Libby - Chapter 03 #11Topic Area: Elements on the Income Statement

12. A gain resulting from the sale of plant and equipment does not create operating income on the incomestatement.TRUEGains resulting from the sale of assets are peripheral activities that do not create operating income.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 03-02 Explain how business activities affect the elements of the income statement.Libby - Chapter 03 #12Topic Area: Elements on the Income Statement

13. Under accrual accounting, interest expense would be recognized on the income statement when theinterest has accrued with the passage of time even though cash has not been paid.TRUEIn accrual accounting expenses are recognized when they are incurred.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue and matching principles to measure income.Libby - Chapter 03 #13Topic Area: How are Operating Activities Recognized and Measured

14. Under accrual accounting, revenues are recognized when earned and expenses are recognized whenincurred.TRUEIn accrual basis accounting, revenues and expenses are recognized when the transaction that causesthem occurs.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue and matching principles to measure income.Libby - Chapter 03 #14Topic Area: How are Operating Activities Recognized and Measured

15. Application of generally accepted accounting principles requires that the accrual basis of accounting beused for reporting revenues and expenses on the income statement.TRUEFinancial statements issued under cash basis accounting are not very useful to external users, therefore

GAAP requires accrual basis accounting for financial reporting purposes.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue and matching principles to measure income.Libby - Chapter 03 #15Topic Area: How are Operating Activities Recognized and Measured

16. The matching principle requires expenses to be recorded on the income statement when incurred ingenerating revenues.TRUEThe matching principle requires that expenses incurred to generate revenues be recognized in the sameperiod.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue and matching principles to measure income.Libby - Chapter 03 #16Topic Area: How are Operating Activities Recognized and Measured

17. The revenue principle recognizes revenue from the sale of goods when ownership passes from the sellerto the buyer regardless of the timing of the cash collection from customers.TRUEUnder the accrual accounting basis the revenue principle states that revenues are recognized whenearned, which usually occurs at the time goods or services are delivered.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue and matching principles to measure income.Libby - Chapter 03 #17Topic Area: How are Operating Activities Recognized and Measured

18. Selling inventory to a customer on account results in an increase in both assets and revenues.TRUEInventory sold on account increases accounts receivable, an asset, and sales revenue.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue and matching principles to measure income.Libby - Chapter 03 #18Topic Area: How are Operating Activities Recognized and Measured

19. Cash collected prior to the providing of the good or service results in an increase in both assets andliabilities.TRUECollecting cash increases assets, and if it is done before services are provided, a liability titled unearned

revenue is recorded.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue and matching principles to measure income.Libby - Chapter 03 #19Topic Area: How are Operating Activities Recognized and Measured

20. Using cash to purchase office supplies which will be consumed later results in an increase in expensesand a decrease in assets as of the time of purchase.FALSETotal assets remain unchanged from this transaction and no expense is recorded. The supplies are tobe used later, thus the asset account of cash decreases by the same amount that the asset account ofsupplies increases. An expense is recorded as the supplies are consumed.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue and matching principles to measure income.Libby - Chapter 03 #20Topic Area: How are Operating Activities Recognized and Measured

21. Revenue accounts have credit balances because they result in increases in stockholders' equity.TRUERevenues increase stockholders' equity through the account retained earnings and therefore have creditbalances.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 03-04 Apply transaction analysis to examine and record the effects of operating activities on the financial statements.Libby - Chapter 03 #21Topic Area: The Expanded Transaction Analysis Model

22. Expense accounts have debit balances because they result in decreases in net income, retained earningsand stockholders' equity.TRUEExpenses decrease net income, thus decreasing retained earnings and stockholders' equity. Therefore,they have debit balances.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 03-04 Apply transaction analysis to examine and record the effects of operating activities on the financial statements.Libby - Chapter 03 #22Topic Area: The Expanded Transaction Analysis Model

23. Purchasing a six-month insurance policy results in a debit to insurance expense and a

credit to cash as ofthe date of purchase.FALSEAt the date of purchase a six month insurance policy does not result in a debit to insurance expense, buta debit to prepaid insurance, an asset account.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 03-04 Apply transaction analysis to examine and record the effects of operating activities on the financial statements.Libby - Chapter 03 #23Topic Area: The Expanded Transaction Analysis Model

24. Recording revenues on the income statement which were previously reported as unearned revenues onthe balance sheet results in a decrease in liabilities and an increase in net income, retained earnings andstockholders' equity.TRUERecording revenues increases net income which flows through the financial statements to increaseretained earnings and stockholders' equity. When unearned revenue is earned, the liability accountdecreases.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 03-04 Apply transaction analysis to examine and record the effects of operating activities on the financial statements.Libby - Chapter 03 #24Topic Area: The Expanded Transaction Analysis Model

25. When the board of directors declares a cash dividend either retained earnings or the dividends accountcan be debited.FALSEThe account that is debited when a cash dividend is declared is retained earnings.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 03-04 Apply transaction analysis to examine and record the effects of operating activities on the financial statements.Libby - Chapter 03 #25Topic Area: The Expanded Transaction Analysis Model

26. The income statement needs to be prepared prior to preparation of the balance sheet.TRUEBecause net income is a component of retained earnings on the balance sheet, it is necessary to computenet income first by preparing the income statement.AACSB: Reflective ThinkingAICPA BB: Critical Thinking

AICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 03-05 Prepare financial statements.Libby - Chapter 03 #26Topic Area: How are Financial Statements Prepared and Analyzed

27. The statement of stockholders' equity links the income statement to the balance sheet.TRUENet income is recorded on the statement of stockholders' equity as an increase in retained earnings. Theending retained earnings balance is reported on the balance sheet.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 03-05 Prepare financial statements.Libby - Chapter 03 #27Topic Area: How are Financial Statements Prepared and Analyzed

28. The statement of cash flows is prepared last and is the only financial statement which shows the cashinflows and outflows from transactions.TRUEAny transaction involving cash will be reflected in the statement of cash flows, which is the fourth andfinal statement prepared.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 03-05 Prepare financial statements.Libby - Chapter 03 #28Topic Area: How are Financial Statements Prepared and Analyzed

29. The total asset turnover ratio is computed by dividing sales revenue by average total assets.TRUETotal Asset Turnover = Sales (or Operating) Revenues ÷ Average Total AssetsAACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: RememberDifficulty: EasyLearning Objective: 03-06 Compute and interpret the total asset turnover ratio.Libby - Chapter 03 #29Topic Area: Total Asset Turnover Ratio

30. The total asset turnover ratio measures sales dollars generated per dollar of assets and is a measure ofefficient management of assets.TRUETotal Asset Turnover = Sales (or Operating) Revenues ÷ Average Total Assets. This ratio is often usedto assess managers' use of all company's assets to improve earnings.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: RememberDifficulty: Easy

Learning Objective: 03-06 Compute and interpret the total asset turnover ratio.Libby - Chapter 03 #30Topic Area: Total Asset Turnover Ratio

31. Which of the following best describes the operating cycle?A. It is the length of the manufacturing process.B.It is the time that elapses from the purchase of inventory on account to the sale of inventory onaccount.C.It is the time that elapses from the completion of the manufacturing process to the cash collectionfrom sale of the manufactured goods.D. It is the time that elapses from the cash payment to suppliers to collection of cash from customers.The operating cycle can be described as cash-to-cash. It is the time it takes for a company to pay cash tosuppliers, sell goods and services to customers, and collect cash from customers.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 03-01 Describe a typical business operating cycle and explain the necessity for the time period assumption.Libby - Chapter 03 #31Topic Area: How do Business Activities Affect the Income Statement

32. Which of the following would lengthen the operating cycle?A. Faster collection of accounts receivables.B. Selling inventory in a shorter period of time.C. Increasing the number of customers who paid cash.D. Relaxing credit terms and allowing customers more time to pay.The operating cycle can be described as cash-to-cash. Allowing customers more time to pay increasesthe time it takes to collect cash and finish the operating cycle.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 03-01 Describe a typical business operating cycle and explain the necessity for the time period assumption.Libby - Chapter 03 #32Topic Area: How do Business Activities Affect the Income Statement

33. The primary difference between revenues and gains isA.gains are increases in net assets from peripheral activities while revenues are increases from ongoingactivities.B. revenues increase operating income and gains have no impact on net income.C.revenues cause increases in net assets as a result of peripheral activities and gains cause increasesthrough ongoing activities.D. gains result in an increase in operating income whereas revenues do not impact operating income.Revenues are defined as increases in assets or settlements of liabilities from ongoing operations. Gainsare a result of an increase in assets or decrease in liabilities from peripheral activities.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 03-02 Explain how business activities affect the elements of the income statement.Libby - Chapter 03 #33Topic Area: Elements on the Income Statement

34. Which of the following best describes the time period assumption?A. It assumes we value a business as of the end of every month.B. It is the cutoff point for asset and liability recognition.C. It implies that financial statements are prepared at the end of a business entity's operating cycle.D. It assumes we divide the long life of a business into a series of shorter time periods for accountingand reporting purposes.The time period assumption indicates that the long life of a company can be reported in shorter timeperiods such as months, quarters, and years.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 03-01 Describe a typical business operating cycle and explain the necessity for the time period assumption.Libby - Chapter 03 #34Topic Area: How do Business Activities Affect the Income Statement

35. Which of the following costs is most likely to be the largest expense reported on the income statementof a merchandiser such as Wal-Mart?A. Salaries expenseB. Cost of goods soldC. Advertising expenseD. Income tax expenseIn companies with a merchandising focus, cost of goods sold, is usually the most significant expense onthe income statement.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 03-02 Explain how business activities affect the elements of the income statement.Libby - Chapter 03 #35Topic Area: Elements on the Income Statement

36. Which of the following businesses would most likely not report cost of goods sold on their incomestatement?A. A law firmB. An automobile dealershipC. A pizza restaurantD. A computer chip manufacturerIn purely service-oriented companies in which no products are produced or sold, the cost of using

employees to generate revenue is usually the largest expense. This is recorded as a salaries expense.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 03-02 Explain how business activities affect the elements of the income statement.Libby - Chapter 03 #36Topic Area: Elements on the Income Statement

37. Which of the following describes the reporting of interest expense on the income statement?A. It is reported as an operating expense.B. It is a component of operating income.C. It is deducted from operating income.D. It is added to operating income.Interest expense is a cost resulting from financing activities, not operating activities, and thus areduction from operating income.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 03-02 Explain how business activities affect the elements of the income statement.Libby - Chapter 03 #37Topic Area: Elements on the Income Statement

38. Which of the following statements is false?A. The income statement covers a period of time.B.A loss on the sale of plant and equipment is considered a peripheral activity and is not reported on theincome statement.C. Rent expense is a component of operating income.D. Interest expense isn't a component of operating income.Peripheral activities include gains or losses on the sale of assets, and are reported on the incomestatement.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 03-02 Explain how business activities affect the elements of the income statement.Libby - Chapter 03 #38Topic Area: Elements on the Income Statement

39. Which of the following is not reported as an operating expense on the income statement?A. Salaries expenseB. Rent expenseC. Interest expenseD. Advertising expenseInterest expense is the result of financing activities, not operating activities, therefore it is not listed asan operating expense.AACSB: Reflective Thinking

AICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 03-02 Explain how business activities affect the elements of the income statement.Libby - Chapter 03 #39Topic Area: Elements on the Income Statement

40. Which of the following statements is correct?A. Dividend income is a component of operating income.B. Operating income is decreased by the loss from the sale of plant assets.C. A gain on the sale of a stock investment doesn't increase operating income.D. Income before taxes doesn't change when a gain results from the sale of plant assets.Gain or losses from the sale of investments are not the central focus of the business and do not increaseoperating income.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 03-02 Explain how business activities affect the elements of the income statement.Libby - Chapter 03 #40Topic Area: Elements on the Income Statement

41. Which of the following best describes operating revenues?A. They are increases in net assets as a result of peripheral transactions.B. They are decreases in net assets as a result of ongoing operations.C. They are increases in net assets as a result of ongoing operations.D. They are decreases in net assets as a result of peripheral transactions.Operating revenues are increases in assets or settlements of liabilities from ongoing operations.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 03-02 Explain how business activities affect the elements of the income statement.Libby - Chapter 03 #41Topic Area: Elements on the Income Statement

42. Which of the following transactions will result in an increase in operating income as of the date of thetransaction?A. The sale of plant and equipment at a gain.B. Collection of cash from a customer for services to be provided at a later date.C. Providing a service to a customer on account.D. The receipt of cash dividends from an investment.Operating income is increased by operating revenue. Operating revenues result from the sale of goodsor services to a customer.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 03-02 Explain how business activities affect the elements of the income statement.Libby - Chapter 03 #42Topic Area: Elements on the Income Statement

43. Which of the following expenses has no impact on operating income?

A. Income tax expenseB. Cost of goods soldC. Depreciation expenseD. Rent expenseIncome tax expense is not classified as an operating expense and is deducted below the calculation ofoperating income.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 03-02 Explain how business activities affect the elements of the income statement.Libby - Chapter 03 #43Topic Area: Elements on the Income Statement

44. Which of the following statements is false?A. An expense is a cost incurred to generate revenues.B. Expenses are reported on the income statement as they are incurred.C. Revenues are reported on the income statement as they are earned.D. Revenues result in an increase in net assets, net income, and contributed capital.Revenues result in an increase in net assets, net income, and retained earnings. There is no impact oncontributed capital from revenue.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 03-02 Explain how business activities affect the elements of the income statement.Libby - Chapter 03 #44Topic Area: Elements on the Income Statement

45. The following information has been provided by Hable Company:Advertising expense $9,900;Interest expense $3,700;Rent expense $12,000;Loss on sale of plant and equipment $5,700;Cost of goods sold $21,300;Depreciation expense $7,100.How much were Hable's operating expenses?A. $50,300B. $54,000C. $59,700D. $43,200Operating expenses = $50,300 = $9,900 + $12,000 + 21,300 + $7,100AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 03-02 Explain how business activities affect the elements of the income statement.Libby - Chapter 03 #45Topic Area: Elements on the Income Statement

46. Smith Corporation has provided the following information:• Cash sales totaled $125,000.

• Credit sales totaled $279,000.• Cash collections from customers for services yet to be provided totaled $38,000.• An $11,000 gain from the sale of plant and equipment occurred.• Interest income totaled $7,700.How much were Smith's operating revenues?A. $404,000B. $411,700C. $442,000D. $460,700Operating revenues = $404,000 = $125,000 + $279,000AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 03-02 Explain how business activities affect the elements of the income statement.Libby - Chapter 03 #46Topic Area: Elements on the Income Statement

47. Lantz Company has provided the following information:• Cash sales totaled $255,000.• Credit sales totaled $479,000.• Cash collections from customers for services yet to be provided totaled $88,000.• A $22,000 loss from the sale of plant and equipment occurred.• Interest income was $7,700.• Interest expense was $19,900.• Cost of goods sold was $336,000.• Rent expense was $36,000.• Salaries expense was $49,000.• Other operating expenses totaled $79,000.How much was Lantz's operating income?A. $221,800B. $322,000C. $199,800D. $234,000Operating revenues = $734,000 = $255,000 + $479,000AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 03-02 Explain how business activities affect the elements of the income statement.Libby - Chapter 03 #47Topic Area: Elements on the Income Statement

48. Lantz Company has provided the following information:• Cash sales totaled $255,000.• Credit sales totaled $479,000.• Cash collections from customers for services yet to be provided totaled $88,000.• A $22,000 loss from the sale of plant and equipment occurred.• Interest income was $7,700.• Interest expense was $19,900.• Cost of goods sold was $336,000.• Rent expense was $36,000.

• Salaries expense was $49,000.• Other operating expenses totaled $79,000.How much was Lantz's income before income taxes?A. $553,800B. $465,800C. $487,800D. $531,800Operating revenues = $734,000 = $255,000 + $479,000AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 03-02 Explain how business activities affect the elements of the income statement.Libby - Chapter 03 #48Topic Area: Elements on the Income Statement

49. Which of the following correctly describes the impact of collecting cash from customers for services tobe provided in the future?A. Assets and stockholders' equity increase.B. Assets and revenues increase.C. Assets and liabilities increase.D. Assets and operating income increase.Collecting cash from customers increases assets. For services to be provided in the future, an increase inthe unearned revenue (a liability) account is also recorded.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 03-02 Explain how business activities affect the elements of the income statement.Libby - Chapter 03 #49Topic Area: Elements on the Income Statement

50. Colby Corporation has provided the following information:Operating revenues were $199,700.Operating expenses were $111,000.Interest expense was $9,200.Gain from sale of plant and equipment was $3,300.Dividend payments to Colby's stockholders were $7,700.Income tax expense was $36,000.How much was Colby's net income?A. $39,100B. $48,300C. $52,700D. $46,800Net income = $46,800 = $199,700 - $111,000 - $9,200 + $3,300 - $36,000AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 03-02 Explain how business activities affect the elements of the income statement.Libby - Chapter 03 #50

Topic Area: Elements on the Income Statement

51. Which of the following does not correctly describe the cash basis of accounting?A. It is not accepted for external reporting purposes.B. Revenues are recognized when cash is collected from customers.C. Expenses are recognized when they are paid for.D. Cash payments for long-term assets are recognized as an expense at the time of payment.Cash basis accounting results in revenues being recorded when cash is received and expenses arerecorded when cash is paid. This method is not acceptable for external reporting purposes. Cashpayments for long-term assets result in assets being reported on the balance sheet; there isn't immediateexpense recognition.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue and matching principles to measure income.Libby - Chapter 03 #51Topic Area: How are Operating Activities Recognized and Measured

52. A landlord collected $5,000 cash from a tenant for December 2011's rent but the tenant's rent forDecember is $8,000. Which of the following is true with respect to the landlord's financial statements?A. $8,000 would be reported on the statement of cash flows.B. $8,000 would appear on the balance sheet as rent receivable.C. $8,000 would appear on the income statement as rent revenue earned.D. $5,000 would appear on the balance sheet as prepaid rent.Revenue is recognized on the income statement once it has been earned.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue and matching principles to measure income.Libby - Chapter 03 #52Topic Area: How are Operating Activities Recognized and Measured

53. Which of the following is not criteria pertaining to the revenue principle?A. The goods or services have been delivered.B. The selling price is fixed or determinable.C. Collection is reasonably assured.D. The cash payment has been received.Under accrual accounting, the revenue principle states that revenues are recognized when goods orservices are delivered, there is persuasive evidence of an arrangement for customer payment, the price isfixed or determinable, and collection is reasonably assured.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: Easy

Learning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue and matching principles to measure income.Libby - Chapter 03 #53Topic Area: How are Operating Activities Recognized and Measured

54. Which of the following statements does not properly describe the accrual basis of accounting?A. Expenses are recognized when incurred regardless of the timing of cash flows.B. Revenues are recognized when incurred regardless of the timing of cash flows.C. Generally accepted accounting principles require use of the accrual basis.D. It should not be used when providing financial statements to external decision makers.Accrual basis accounting is required by GAAP for use when providing financial statements to externaldecision makers.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue and matching principles to measure income.Libby - Chapter 03 #54Topic Area: How are Operating Activities Recognized and Measured

55. Which of the following statements is false?A. A liability is created when cash is received prior to delivery of the goods or services.B. Revenue is recognized at the time of delivery of the goods or services if cash is received.C.Revenue isn't recognized at the time of delivery of goods and services if cash is received afterdelivery of the goods and services.D.Collecting cash after delivery of a good or service does not create revenue on the income statement asof the date of collection.Revenue is recognized at the time of delivery of goods and services regardless of when the cash isreceived.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue and matching principles to measure income.Libby - Chapter 03 #55Topic Area: How are Operating Activities Recognized and Measured

56. Which of the following journal entries is prepared when a customer pays cash prior to delivery of thegoods or services?A. Option AB. Option BC. Option CD. Option DWhen cash is received before goods or services have been provided, cash is debited and unearnedrevenue (a liability account) is credited.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting

Blooms: UnderstandDifficulty: MediumLearning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue and matching principles to measure income.Libby - Chapter 03 #56Topic Area: How are Operating Activities Recognized and Measured

57. Which of the following journal entries is prepared when a customer pays cash subsequent to delivery ofgoods or services?A. Option AB. Option BC. Option CD. Option DWhen goods are sold to a customer on account, an accounts receivable (an asset) is created at the time ofsale. At the time of collection from the customer, cash is debited and accounts receivable is credited.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue and matching principles to measure income.Libby - Chapter 03 #57Topic Area: How are Operating Activities Recognized and Measured

58. Yelena Company received cash from a customer in advance of providing the service to the customer.Which of the following does not accurately describe the impact on the financial statements when Yelenalater provides the service?A. Liabilities are decreased.B. Operating income increases.C. Retained earnings increases.D. Assets are increased.When Yelena provides the service revenue is recognized and the unearned revenue account is reduced,neither increases assets.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue and matching principles to measure income.Libby - Chapter 03 #58Topic Area: How are Operating Activities Recognized and Measured

59. Which of the following best describes the matching principle?A. It requires expenses to be recorded when they are paid for.B. It requires expenses to be recorded when incurred to generate revenues.C. It requires expenses to be recorded consistent with the cash basis of accounting.D. It does not allow expenses to be recorded if they are incurred prior to being paid for.The matching principle requires that expenses be recorded when incurred in earning revenue.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: Remember

Difficulty: MediumLearning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue and matching principles to measure income.Libby - Chapter 03 #59Topic Area: How are Operating Activities Recognized and Measured

60. During 2010, Sigma Company earned service revenues amounting to $700,000, of which $630,000 wascollected in cash; the balance will be collected in January 2011. What amount should the 2010 incomestatement report for service revenues?A. $630,000B. $700,000C. $70,000D. $570,000$700,000 of service revenue was earned during 2010; therefore that amount should be recorded on theincome statement.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: EasyLearning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue and matching principles to measure income.Libby - Chapter 03 #60Topic Area: How are Operating Activities Recognized and Measured

61. A company purchased supplies for cash which will be consumed during future months. Which of thefollowing correctly describes the impact of the supplies purchase on the financial statements?A. Total assets will remain unchanged.B. Total assets will decrease.C. Operating expenses will increase.D. Operating income will decrease.Cash decreases by the same amount supplies increase, both are asset accounts and therefore total assetsremain unchanged.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue and matching principles to measure income.Libby - Chapter 03 #61Topic Area: How are Operating Activities Recognized and Measured

62. A company purchased supplies for cash which will be consumed during future months. Which of thefollowing does not correctly describe the impact on the financial statements when the supplies are usedduring future months?A. Total assets will remain unchanged.B. Total assets will decrease.C. Operating expenses will increase.D. Operating income will decrease.When supplies are consumed during the course of business, supplies expense is

recognized and thesupplies account is reduced; thus increasing expenses and reducing assets.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue and matching principles to measure income.Libby - Chapter 03 #62Topic Area: How are Operating Activities Recognized and Measured

63. The revenue principle requires four conditions to be met. Which of the following is one of the fourconditions?A. The customer has paid for the goods or services.B. Delivery of goods or performance of service has occurred or is scheduled to occur.C. The price is fixed or determinable.D. The customer has signed a contract.The four conditions for revenue to be recognized according to the revenue principle are: 1) goods orservices are delivered 2) there is persuasive evidence of an arrangement for customer payment 3) theprice is fixed or determinable and 4) collection is reasonably assured.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue and matching principles to measure income.Libby - Chapter 03 #63Topic Area: How are Operating Activities Recognized and Measured

64. Which of the following journal entries is correct when a company has incurred interest expense but hasnot yet paid the interest?A. Option AB. Option BC. Option CD. Option DExpenses are recorded (with a debit entry) when incurred. When they have been incurred and not paid,the interest payable account needs to be increased with a credit entry.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue and matching principles to measure income.Libby - Chapter 03 #64Topic Area: How are Operating Activities Recognized and Measured

65. McNeil Company owed its employees for services performed and recorded a liability for the wagesowed the employees. Which of the following correctly describes the impact on the financial statementswhen the employee wages are subsequently paid?A. Operating expenses are increased.

B. Retained earnings decreases.C. Operating income does not change.D. Total assets remain the same.When the wages are paid, the liability account is reduced as is the cash account. Neither has an impacton operating income.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue and matching principles to measure income.Libby - Chapter 03 #65Topic Area: How are Operating Activities Recognized and Measured

66. Which of the following journal entries correctly records the receipt of a utility bill which will be paidfor in later weeks?A. Option AB. Option BC. Option CD. Option DThe utility expense account needs to be increased with a debit, and because the bill will be paid at alater date, the utility payable account needs to be increased with a credit. An expense is recognized anda liability is recorded.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue and matching principles to measure income.Libby - Chapter 03 #66Topic Area: How are Operating Activities Recognized and Measured

67. Which of the following is not a proper application of the revenue principle?A. Recording the sale of merchandise on credit as sales revenue.B. Recording rent received in advance as unearned rent revenue.C. Recording interest revenue when cash is collected rather than when earned.D.Reducing the unearned service revenue account for service revenue performed at the end of theaccounting period.Revenue is recorded when earned, not upon the collection of cash.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue and matching principles to measure income.Libby - Chapter 03 #67Topic Area: How are Operating Activities Recognized and Measured

68. Which of the following is an example of revenue or expense to be recognized in the current period'sincome statement?A. Cash received from a client before the service is provided.

B. Inventory being held by a retail store.C. Wages owed to employees who worked during the period.D. Cash collected from an accounts receivable.Expenses are recorded when incurred and revenues are recorded when earned. Wages owed toemployees for work during a period need to be recorded as an expense during that period.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue and matching principles to measure income.Libby - Chapter 03 #68Topic Area: How are Operating Activities Recognized and Measured

69. Which of the following liability accounts is likely to be satisfied without a future cash payment?A. Wages payableB. Unearned subscriptions revenueC. Accounts payableD. Taxes payableReduction of the liability account, unearned revenue, occurs once goods or services have been providedand does not require a cash payment.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue and matching principles to measure income.Libby - Chapter 03 #69Topic Area: How are Operating Activities Recognized and Measured

70. A company receives a $50,000 cash deposit from a customer on October 15 but will not deliver thegoods until November 20. Which of the following statements is true?A. Cash will be reported on the statement of cash flows for the month of November.B. Revenue will be recorded and reported on the income statement for October.C. A liability will be reported on the balance sheet at the end of October.D. A prepaid asset will be reported on the balance sheet at the end of October.Upon the receipt of the cash deposit, a liability (unearned revenue) must be reported on the balancesheet. This liability exists until the goods have been delivered, in this case until November 20.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue and matching principles to measure income.Libby - Chapter 03 #70Topic Area: How are Operating Activities Recognized and Measured

71. A company purchased $20,000 of inventory during February and will pay for it during March. Which ofthe following statements is false assuming the inventory was sold during March?A. The company's accounts payable will include the $20,000 on the February month-end

balance sheet.B. The statement of cash flows will report an operating cash outflow of $20,000 during March.C. The income statement will report cost of goods sold of $20,000 during February.D. The company's inventory will include the $20,000 on the February month-end balance sheet.The matching principle requires that expenses be recorded when incurred in earning revenue. Cost ofgoods sold should be recorded when the inventory is sold, which in this case is during March.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue and matching principles to measure income.Libby - Chapter 03 #71Topic Area: How are Operating Activities Recognized and Measured

72. Which of the following correctly applies the revenue recognition principle?A. Recording revenue in December 2009 for units manufactured but not yet sold to customers.B. Recording cash received in advance from customers as revenue when the product is not yet shipped.C. Not recording interest earned in 2009 until the cash is received in 2010.D. Recording revenue in December 2009 for units sold but not yet paid for in full.The revenue recognition principle requires that revenue be recorded once goods have been sold.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue and matching principles to measure income.Libby - Chapter 03 #72Topic Area: How are Operating Activities Recognized and Measured

73. Which of the following accounts normally have a credit balance?A. Unearned revenues; Prepaid rent; Revenues.B. Revenues; Expenses; Contributed capital.C. Revenues; Inventory; Unearned revenue.D. Notes payable; Retained earnings; Revenues.Liability, retained earnings, and revenue accounts are all on the right side of the accounting equation,are all increased with a credit, and thus have a normal credit balance.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 03-04 Apply transaction analysis to examine and record the effects of operating activities on the financial statements.Libby - Chapter 03 #73Topic Area: The Expanded Transaction Analysis Model

74. During 2010, Sensa Corporation incurred operating expenses amounting to $100,000 of which $75,000was paid in cash; the balance will be paid during 2011. Which of the following is correct

for the 2010year-end balance sheet?A. Stockholders' equity decreases $75,000 and assets decrease $75,000.B. Assets decrease $100,000 and stockholders' equity decreases $100,000.C. Assets decrease $100,000, liabilities increase $25,000, and stockholders' equity decreases $100,000.D. Stockholders' equity decreases $100,000, assets decrease $75,000, and liabilities increase $25,000.The full operating expense amount reduces net income, which reduces stockholders' equity through theretained earnings account. The portion paid in cash reduces assets and the unpaid portion of the expensemust be recognized as an increase to liabilities.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 03-04 Apply transaction analysis to examine and record the effects of operating activities on the financial statements.Libby - Chapter 03 #74Topic Area: The Expanded Transaction Analysis Model

75. Which of the following accounts normally have a debit balance?A. Prepaid expenses, wages payable, and dividends.B. Cash, utilities expense, and accounts receivable.C. Retained earnings, cost of goods sold, and wages expense.D. Utilities expense, prepaid expenses, and wages payable.Assets and expenses have normal debit balances. Cash, utilities expense, and accounts receivable are allclassified as either assets or expenses.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 03-04 Apply transaction analysis to examine and record the effects of operating activities on the financial statements.Libby - Chapter 03 #75Topic Area: The Expanded Transaction Analysis Model

76. Which of the following statements is false?A. Expense accounts have a debit balance.B. Revenue accounts have a credit balance.C. Gain accounts have a credit balance.D. Loss accounts have a credit balance.Losses reduce stockholders' equity and therefore have a debit balance.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 03-04 Apply transaction analysis to examine and record the effects of operating activities on the financial statements.Libby - Chapter 03 #76Topic Area: The Expanded Transaction Analysis Model

77. Which of the following statements is correct?

A.Expense accounts result in decreases in net income and stockholders' equity and therefore have creditbalances.B.Revenue accounts result in increases in net income and stockholders' equity and therefore have debitbalances.C.Loss accounts result in decreases in net income and stockholders' equity and therefore have debitbalances.D.Gain accounts result in increases in net income and stockholders' equity and therefore have debitbalances.Losses reduce net income and stockholders' equity and therefore have a debit balance.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 03-04 Apply transaction analysis to examine and record the effects of operating activities on the financial statements.Libby - Chapter 03 #77Topic Area: The Expanded Transaction Analysis Model

78. Which of the following journal entries correctly records a transaction where services were provided to acustomer on account?A. Option AB. Option BC. Option CD. Option DWhen services are provided to a customer on account, a debit to accounts receivable is required. Theservices have been provided so it is appropriate to credit revenue.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 03-04 Apply transaction analysis to examine and record the effects of operating activities on the financial statements.Libby - Chapter 03 #78Topic Area: The Expanded Transaction Analysis Model

79. Which of the following is correct when land costing $20,000 is sold for $29,000? The land was acomponent of plant and equipment on the balance sheet.A. Revenues are debited for $29,000.B. Cost of goods sold is credited for $20,000.C. Gain on sale of land is credited for $9,000.D. Operating income increases $29,000.When an asset is sold for more than it cost, a gain on the sale is reported. This is done by crediting thegain on sale of land account for the amount the sales price exceeded cost.AACSB: AnalyticAICPA BB: Critical Thinking

AICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 03-04 Apply transaction analysis to examine and record the effects of operating activities on the financial statements.Libby - Chapter 03 #79Topic Area: The Expanded Transaction Analysis Model

80. Boone's Cleaning Service performed cleaning services during December, 2010, but had not collectedany cash from its customers as of December 31, 2010. What impact did performing these services haveon the accounting equation?A. The service increased assets and increased liabilities.B. The service increased assets and increased stockholders' equity.C. The service increased assets and decreased stockholders' equity.D. The service decreased liabilities and decreased stockholders' equity.Performing the services generated revenue, increasing net income and stockholders' equity. Even thoughcash was not collected, assets increased (through an account receivable) because the services have beenperformed.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 03-02 Explain how business activities affect the elements of the income statement.Libby - Chapter 03 #80Topic Area: Elements on the Income Statement

81. On December 31, 2010, Avery Corporation paid $10,000 for next year's insurance policy. Thistransaction should be recorded as follows by Avery:A. Option AB. Option BC. Option CD. Option DThe insurance is for future periods, so it is considered prepaid insurance, an asset account increasedwith a debit. This is paid for with cash resulting in a cash outflow, recorded with a credit to the cashaccount.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 03-04 Apply transaction analysis to examine and record the effects of operating activities on the financial statements.Libby - Chapter 03 #81Topic Area: The Expanded Transaction Analysis Model

82. Mama June Pizza Company sold land costing $39,000 for $51,000 cash. Which of the followingstatements concerning the land sale is correct?A. The land account was credited for $51,000.

B. The revenue account was debited for $51,000.C. Operating income increased $12,000.D. Income before income taxes increased $12,000.The excess cash received over the cost of the land is recognized as a gain on sale of land. This isrecorded as a peripheral income activity before income taxes.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 03-02 Explain how business activities affect the elements of the income statement.Learning Objective: 03-04 Apply transaction analysis to examine and record the effects of operating activities on the financial statements.Libby - Chapter 03 #82Topic Area: Elements on the Income Statement, The Expanded Transaction Analysis Model

83. Which of the following statements is false when Mama June Pizza Company paid $47,000 cash onaccounts owed to suppliers?A. The cash account was credited for $47,000.B. Accounts payable was debited for $47,000.C. Supplies expense was increased by $47,000.D. Operating income was not changed by the payment to the suppliers.Paying suppliers cash owed on account do not result in an incurred expense but a reduction in assets(cash) and liabilities (accounts payable).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 03-02 Explain how business activities affect the elements of the income statement.Learning Objective: 03-04 Apply transaction analysis to examine and record the effects of operating activities on the financial statements.Libby - Chapter 03 #83Topic Area: Elements on the Income Statement, The Expanded Transaction Analysis Model

84. Which of the following journal entries is correct assuming that Mama June Pizza Company receivedcash for interest earned on investments?A. Option AB. Option BC. Option CD. Option DThe cash account is increase with a debit, because cash is received. Interest earned on investments issynonymous with investment income, an account increased with a credit.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 03-04 Apply transaction analysis to examine and record the effects of operating activities on the financial statements.Libby - Chapter 03 #84Topic Area: The Expanded Transaction Analysis Model

85. Mama June Pizza Company determined that dough, sauce, cheese and other

ingredients costing $8,700were used to make pizzas during July. Which of the following statements is false with respect to the useof the ingredients?A. Cost of goods sold was debited for $8,700.B. Operating expenses increased $8,700.C. Operating income decreased $8,700.D. Supplies inventory was debited for $8,700.Supplies inventory is an asset account reduced with a credit for $8,700.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 03-04 Apply transaction analysis to examine and record the effects of operating activities on the financial statements.Libby - Chapter 03 #85Topic Area: The Expanded Transaction Analysis Model

86. Zeppelin Company received cash during January for services to be provided in February. Which of thefollowing statements does not accurately describe the impact on the financial statements when Zeppelinprovides the services during February?A. Unearned revenues decreased and were debited.B. Revenues increased and were credited.C. Stockholders' equity will increase.D. Total assets will increase.In February, the unearned revenue account is reduced with a debit and revenue is increased with acredit. Neither of these transactions increases total assets.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 03-02 Explain how business activities affect the elements of the income statement.Learning Objective: 03-04 Apply transaction analysis to examine and record the effects of operating activities on the financial statements.Libby - Chapter 03 #86Topic Area: Elements on the Income Statement, The Expanded Transaction Analysis Model

87. Which of the following describes the transaction resulting in a journal entry with a debit to Salariespayable and a credit to Cash?A. Salaries expense has been incurred but is unpaid.B. Cash was used to pay for salaries that were previously recorded as an expense.C. Cash was used to pay for salaries that were not previously recorded as an expense.D. Cash was used to prepay employee wages.Salaries payable is recorded when a salaries expense has been incurred but not yet paid. The credit tocash indicates these salaries have been paid and to reduce the payable a debit is required.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: Understand

Difficulty: MediumLearning Objective: 03-04 Apply transaction analysis to examine and record the effects of operating activities on the financial statements.Libby - Chapter 03 #87Topic Area: The Expanded Transaction Analysis Model

88. Which of the following statements is correct?A. Recording revenues results in an increase in assets or a decrease in liabilities.B. Recording revenues results in an increase in assets or a decrease in stockholders' equity.C. Recording expenses results in a decrease in assets or a decrease in liabilities.D. Recording expenses results in an increase in assets or an increase in liabilities.Recording revenues results in an increase in either cash or accounts receivable (both asset accounts) orthe reduction of unearned revenue (a liability account).AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 03-04 Apply transaction analysis to examine and record the effects of operating activities on the financial statements.Libby - Chapter 03 #88Topic Area: The Expanded Transaction Analysis Model

89. Which of the following statements is false?A. The unearned revenue account has a credit balance.B. The revenue account has a credit balance.C. An expense account has a debit balance.D. A prepaid expense account has a credit balance.A prepaid expense is an asset account with a debit balance.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 03-04 Apply transaction analysis to examine and record the effects of operating activities on the financial statements.Libby - Chapter 03 #89Topic Area: The Expanded Transaction Analysis Model

90. Which of the following accounts doesn't have a debit balance?A. Prepaid insuranceB. Insurance expenseC. Unearned revenuesD. Salaries expenseUnearned revenues are liability accounts with a credit balance.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 03-04 Apply transaction analysis to examine and record the effects of operating activities on the financial statements.Libby - Chapter 03 #90Topic Area: The Expanded Transaction Analysis Model

91. Which of the following accounts doesn't have a credit balance?A. Gain on sale of landB. Investment incomeC. Unearned revenues

D. Rent expenseExpense accounts decrease net income, retained earnings, and stockholders' equity and thus have debitbalances.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 03-04 Apply transaction analysis to examine and record the effects of operating activities on the financial statements.Libby - Chapter 03 #91Topic Area: The Expanded Transaction Analysis Model

92. On January 1, 2011 Gucci Brothers Inc. had a $500,000 credit balance in retained earnings and$600,000 balance in contributed capital. During 2011, the company earned net income of $100,000,declared a dividend of $15,000, and issued additional stock for $25,000. What is total stockholders'equity on December 31, 2011?A. $1,100,000B. $1,210,000C. $1,225,000D. $1,240,000Stockholders' equity on December 31, 2011 = $1,210,000 = $500,000 + $600,000 + $100,000 - $15,000+ $25,000AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 03-05 Prepare financial statements.Libby - Chapter 03 #92Topic Area: How are Financial Statements Prepared and Analyzed

93. On January 1, 2010, Denmark Inc., started the year with a $200,000 credit balance in its retainedearnings account. During 2010, the company earned net income of $70,000 and declared and paiddividends of $10,000. Also, the company received cash of $15,000 as an additional investment by itsowners. What is the balance in retained earnings on December 31, 2010?A. $200,000B. $270,000C. $245,000D. $260,000Retained earnings on December 31, 2010 = $260,000 = $200,000 + $70,000 - $10,000AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 03-05 Prepare financial statements.Libby - Chapter 03 #93Topic Area: How are Financial Statements Prepared and Analyzed

94. Blazon Corporation's retained earnings increased $79,000 during 2011. Blazon declared $19,000 ofdividends and paid $15,000 of the dividends declared during 2011. How much was Blazon's 2011 netincome assuming that Blazon's stockholders invested an additional $30,000 during 2011?A. $98,000B. $94,000C. $68,000D. $64,0002011 net income = $98,000 = $79,000 + $19,000 The change in retained earnings equals net income($98,000) minus dividends declared ($19,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 03-05 Prepare financial statements.Libby - Chapter 03 #94Topic Area: How are Financial Statements Prepared and Analyzed

95. Beemer Corporation has provided the following information pertaining to the year ended December 31,2011:• Stockholders' equity as of January 1 was $789,000.• Dividends declared during the year totaled $71,000 of which $60,000 were paid during the year.• Stockholders invested $113,000 cash into the business in exchange for new shares of stock.• Stockholders' equity as of December 31 was $1,030,000.How much was Beemer's 2011 net income?A. $210,000B. $199,000C. $312,000D. $323,000Beginning stockholders' equity ($789,000) + net income - dividends declared ($71,000) + stockholderinvestments ($113,000) = Ending Stockholders equity ($1,030,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 03-05 Prepare financial statements.Libby - Chapter 03 #95Topic Area: How are Financial Statements Prepared and Analyzed

96. Which of the following transactions would not be reported as cash flow from operations on a cash flowstatement?A. Cash collected from customersB. Cash paid to suppliersC. Cash paid for employee wagesD. Cash paid for dividends

Cash paid for dividends is a cash flow from financing activities, not operating activities.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 03-05 Prepare financial statements.Libby - Chapter 03 #96Topic Area: How are Financial Statements Prepared and Analyzed

97. Which of the following transactions would be reported as cash flow from operations on a cash flowstatement?A. Cash paid to purchase equipmentB. Cash paid to acquire landC. Cash paid for interestD. Cash paid for rentOperations cash flows are that result from operations, rent is included in this category.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 03-05 Prepare financial statements.Libby - Chapter 03 #97Topic Area: How are Financial Statements Prepared and Analyzed

98. Garret Company has provided the following selected information for the year ended December 31,2011:• Cash collected from customers was $783,000.• Cash received from stockholders in exchange for stock totaled $91,000.• Cash paid to suppliers was $361,000.• Cash paid to employees was $204,000.• Cash to stockholders for dividends was $33,000.• Cash received from sale of a building was $250,000.• Cash paid for rent was $39,000.• Cash received for interest and dividends was $7,000.• Cash paid for income taxes was $55,000.Based on the selected information provided, how much was Garret's cash flow from operations?A. $131,000B. $98,000C. $381,000D. $222,000Cash flow from operations = $131,000 = $783,000 - $361,000 - $204,000 - $39,000 + $7,000 - $55,000AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 03-05 Prepare financial statements.Libby - Chapter 03 #98Topic Area: How are Financial Statements Prepared and Analyzed

99. Which of the following statements is inaccurate with respect to the total asset

turnover ratio?A. It is calculated as sales revenues divided by total assets at year-end.B. It is decreased when additional plant and equipment is purchased.C. A high ratio implies efficient management of assets.D. It is decreased when additional inventory is purchased.Total Asset Turnover = Sales (or Operating) Revenues/Average Total AssetsAACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: RememberDifficulty: MediumLearning Objective: 03-06 Compute and interpret the total asset turnover ratio.Libby - Chapter 03 #99Topic Area: Total Asset Turnover Ratio

100. Top Company's 2011 sales revenue was $200,000 and 2010 sales revenue was $180,000. Top's totalassets as of December 31, 2011 were $150,000 and total assets as of January 1, 2011 were $130,000.What is Top's total asset turnover ratio?A. 1.48B. 1.33C. 1.36D. 1.43

ch4 Key1. The trial balance is similar to the balance sheet in that it is a listing of assets, liabilities, andstockholders' equity and is provided to external decision makers.FALSEA trial balance is a list of all accounts with their balances to provide a check on the equality of thedebits and credits and is not provided to external users.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 04-01 Explain the purpose of a trial balance.Libby - Chapter 04 #1Topic Area: Unadjusted Trial Balance

2. The trial balance is a listing of account balances that are found in the general ledger.TRUEA trial balance is a list of all accounts with their balances to provide a check on the equality of thedebits and credits.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 04-01 Explain the purpose of a trial balance.Libby - Chapter 04 #2Topic Area: Unadjusted Trial Balance

3. An objective of preparing the trial balance is to test the equality of debits and credits.TRUEA trial balance is a list of all accounts with their balances to provide a check on the equality of thedebits and credits.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 04-01 Explain the purpose of a trial balance.Libby - Chapter 04 #3Topic Area: Unadjusted Trial Balance

4. Prepaid expenses are reported as assets at the time of the initial cash flow and when they are consumedin the future, both expenses and liabilities increase.FALSEPrepaid expenses are initially recorded as assets. When they are consumed in the future, expensesincrease and assets decrease.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #4Topic Area: Purpose of Adjustments

5. Income taxes incurred but not yet paid at the end of the accounting period is an example of an accruedexpense.TRUEAccrued expenses are previously unrecorded expenses that need to be adjusted at the end of theaccounting period to reflect the amount incurred and the related payable.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #5Topic Area: Purpose of Adjustments

6. Cash collected from customers in advance of providing the goods or services creates a liability which isreduced when the goods or services are later provided.TRUECash collected in advance of goods or services being provided create an unearned revenue account.Unearned revenue is classified as a liability account that is only reduced once the goods or services havebeen provided.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #6Topic Area: Purpose of Adjustments

7. Accrued revenues are revenues that have been earned, but the customer has not yet paid for the goods orservices.TRUEAccrued revenues are revenues that have been earned but because the customer has not been billed andhas not paid for the goods or services. This revenue has however been recorded because it has beenearned.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #7Topic Area: Purpose of Adjustments

8. An accrued expense has been both incurred and paid for using cash.FALSEAccrued Expenses are previously unrecorded expenses that have been incurred without being paid.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #8Topic Area: Purpose of Adjustments

9. A deferred expense such as prepaid insurance is created when cash is paid in advance of the expenseincurrence and is reduced when the expense is actually incurred.TRUEDeferred expenses are previously acquired assets that need to be adjusted to reflect the amount ofexpense incurred in using the asset to generate revenue.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #9Topic Area: Purpose of Adjustments

10. The adjusting entry to record an accrued expense increases liabilities.TRUEAccrued expenses have yet to be paid; therefore when the adjusting entry is recorded, a payable iscreated.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #10Topic Area: Purpose of Adjustments

11. The adjusting entry to adjust the unearned revenue account for revenues earned results in an increase inassets and a decrease in liabilities.FALSEThe adjusting entry to recognize revenue previously recorded as unearned revenue results in a decreasein liabilities and an increase in stockholders' equity (revenue).AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #11Topic Area: Purpose of Adjustments

12. The adjusting entry to adjust the prepaid rent account for rent expired during the period results in anincrease in expenses and a decrease in stockholders' equity.TRUEThe adjusting entry to recognize an expense previously recorded as prepaid results in assets decreasing,expenses increasing, and as a result of expenses increasing, stockholders' equity also decreases.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #12Topic Area: Purpose of Adjustments

13. The adjusting entry to record accrued revenues results in an increase in assets and stockholders' equity.TRUEThe adjusting entry to record accrued revenues recognizes revenues that are earned but not yet paid for.The result of this is an increase in assets (accounts receivable) and an increase in revenue;

the increasein revenue results in an increase to stockholders' equity.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #13Topic Area: Purpose of Adjustments

14. The adjusting entry to record an accrued expense results in a decrease in both assets and stockholders'equity.FALSEThe adjusting entry to record an accrued expense results in a decrease to stockholders' equity and anincrease in liabilities.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #14Topic Area: Purpose of Adjustments

15. Rent of $4,000 collected in advance was recorded as unearned rent revenue. At the end of theaccounting period, half the rent was earned. The related adjusting entry should be a credit to rentrevenue for $2,000 and a debit to unearned rent revenue for $2,000.TRUEThe adjusting entry to recognize unearned rent revenue results in revenue being recognized and theresulting liability being decreased. This is done with a debit to unearned rent revenue for $2,000 and acredit to rent revenue for $2,000.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #15Topic Area: Purpose of Adjustments

16. Depreciation expense is an estimated allocation of the cost of long-term assets and is recorded in acontra-asset called accumulated depreciation.TRUEDepreciation expense, the basis of which is the matching principle, is an allocation of an asset's cost

over its estimated useful life. Depreciation expense is recorded in accumulated depreciation, a contraassetaccount.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #16Topic Area: Purpose of Adjustments

17. Accounts which retain their balance from one period to the next are referred to as permanent accountsand include balance sheet accounts.TRUEBalance sheet accounts retain their balances from one accounting period to the next, these areconsidered permanent accounts.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 04-03 Present an income statement with earnings per shareLearning Objective: statement of stockholders' equity; balance sheet; and statement of cash flows.Libby - Chapter 04 #17Topic Area: Preparing Financial Statements

18. Accounts which start a new accounting period with zero balances are referred to as temporary accountsand include both balance sheet and income statement accounts.FALSETemporary accounts accumulate their balance for a period, but begin new accounting periods with azero balance. These types of accounts are found on the income statement.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 04-03 Present an income statement with earnings per shareLearning Objective: statement of stockholders' equity; balance sheet; and statement of cash flows.Libby - Chapter 04 #18Topic Area: Preparing Financial Statements

19. Earnings per share are calculated by dividing net income minus preferred dividends by the averagenumber of shares of common stock outstanding.TRUEEarnings per share = (Net Income - Preferred Dividends) ÷ Average number of shares of common stockoutstanding during the period.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 04-03 Present an income statement with earnings per share

Learning Objective: statement of stockholders' equity; balance sheet; and statement of cash flows.Libby - Chapter 04 #19Topic Area: Preparing Financial Statements

20. Adjusting entries do not involve a cash flow and therefore do not impact the cash flow statement.TRUEThe statement of cash flows is unaffected by adjusting entries because the adjusting entries do notinvolve the cash account.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 04-03 Present an income statement with earnings per shareLearning Objective: statement of stockholders' equity; balance sheet; and statement of cash flows.Libby - Chapter 04 #20Topic Area: Preparing Financial Statements

21. The net profit margin ratio is calculated by dividing net sales by net income.FALSENet Profit Margin = Net Income/Net SalesAACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: RememberDifficulty: EasyLearning Objective: 04-05 Explain the closing process. Explain the closing process. Compute and interpret the net profit margin.Libby - Chapter 04 #21Topic Area: Key Ratio Analysis

22. The net profit margin ratio is a measure of how much profit was created per sales dollar.TRUEIn general, the net profit margin measures how much of every sales dollar generated during the period isprofit.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: RememberDifficulty: EasyLearning Objective: 04-05 Explain the closing process. Explain the closing process. Compute and interpret the net profit margin.Libby - Chapter 04 #22Topic Area: Key Ratio Analysis

23. Income statement accounts often are called temporary accounts because their balances are closed out atthe end of the accounting year.TRUERevenue, expense, gain, and loss accounts are used to accumulate data for the current accounting periodonly; these accounts are closed out at the end of the accounting period and are found on the incomestatement.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 04-05 Explain the closing process.

Libby - Chapter 04 #23Topic Area: End of the Accounting Cycle

24. At the end of the accounting period, the balances in the nominal accounts are closed while the balancesin the real accounts are carried forward to the next accounting period.TRUENominal (temporary) accounts, found on the income statement, are closed at the end of accountingperiods. Real (permanent) accounts, found on the balance sheet, are carried forward to the nextaccounting period.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 04-05 Explain the closing process.Libby - Chapter 04 #24Topic Area: End of the Accounting Cycle

25. Closing the revenue and gain accounts at year-end requires that these accounts be debited.TRUERevenue and gain accounts have credit balances; closing accounts at year-end with credit balancesrequires a debit.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 04-05 Explain the closing process.Libby - Chapter 04 #25Topic Area: End of the Accounting Cycle

26. The year-end closing process transfers net income to retained earnings.TRUEThe balances in temporary accounts, income statement accounts, are transferred to retained earningsat the end of the period. Net income is a summed figure of these accounts, so in effect net income istransferred to retained earnings.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 04-05 Explain the closing process.Libby - Chapter 04 #26Topic Area: End of the Accounting Cycle

27. Closing the expense and loss accounts at year-end requires that these accounts be debited.FALSEExpense and loss accounts have debit balances, therefore to close these accounts a credit is required.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting

Bloom's: RememberDifficulty: EasyLearning Objective: 04-05 Explain the closing process.Libby - Chapter 04 #27Topic Area: End of the Accounting Cycle

28. Which of the following is a false statement about the unadjusted trial balance?A. It is not a financial statement for external reporting purposes.B. It provides data in a convenient form for preparing the adjusting entries and financial statements.C.It provides a check of the equality of the debits and credits of the ledger accounts after transactionshave been journalized and posted.D. It provides a listing of balance sheet accounts only.An unadjusted trial balance is a list of all accounts with their balances, including income statementaccounts, to provide a check on the equality of the debits and credits and determine what adjustingentries need to be made.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 04-01 Explain the purpose of a trial balance.Libby - Chapter 04 #28Topic Area: Unadjusted Trial Balance

29. Morgan Company purchased supplies inventory for $2,000. Due to an error in posting to the generalledger, the inventory account was debited for only $200 while accounts payable was credited for$2,000. During which phase of the accounting cycle would this error be first discovered?A. Recording the transaction in the general journal.B. Preparation of the financial statements.C. Preparation of the trial balance.D. Preparation of the income statement.The trial balance is a list of all accounts with their balances to provide a check on the equality of thedebit and credits.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 04-01 Explain the purpose of a trial balance.Libby - Chapter 04 #29Topic Area: Unadjusted Trial Balance

30. Which is the correct sequential order of the following steps in the accounting cycle?A. Transaction analysis, journal entries, trial balanceB. Transaction analysis, posting to the ledger, journal entriesC. Transaction analysis, posting to the ledger, adjusting the accountsD. Transaction analysis, journal entries, posting to the ledgerThe accounting cycle starts with analyzing transactions, recording journal entries in the general ledger,

and posting amounts to the general ledger.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 04-01 Explain the purpose of a trial balance.Libby - Chapter 04 #30Topic Area: Unadjusted Trial Balance

31. Which is the correct order of the following steps in the accounting cycle?A.Prepare financial statements, journalize and post adjusting entries, journalize and post the closingentries, and prepare a post-closing trial balance.B.Prepare an unadjusted trial balance, journalize and post adjusting entries, journalize and post theclosing entries, and prepare financial statements.C.Journalize and post adjusting entries, journalize and post the closing entries, prepare financialstatements, and prepare an adjusted trial balance.D.Prepare an unadjusted trial balance, journalize and post adjusting entries, prepare financial statements,and journalize and post the closing entries.At the end of the accounting period, the accounting cycle begins with preparing an unadjusted trialbalance. The next step is to journalize and post adjusting entries for balance sheet and income statementaccounts. The next step is to prepare financial statements, and finally journalize and post the closingentries for the income statement accounts.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 04-01 Explain the purpose of a trial balance.Libby - Chapter 04 #31Topic Area: Unadjusted Trial Balance

32. On October 1, 2010, Adams Company paid $4,000 for a two-year insurance policy with the insurancecoverage beginning on that date. As of December 31, 2010, which of the following account balances arecorrect after adjusting entries have been made?A. Prepaid insurance, $4,000 and Insurance expense, $0.B. Prepaid insurance, $0 and Insurance expense, $4,000.C. Prepaid insurance, $2,000 and Insurance expense, $2,000.D. Prepaid insurance, $3,500 and Insurance expense, $500.$4,000/24 = $166.67 per month. Three months have been used (Oct, Nov, and Dec) so $166.67 * 3 =

$500. This needs to be recorded as the expense and the balance in prepaid insurance is $4,000 - $500 =$3,500.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #32Topic Area: Purpose of Adjustments

33. On April 1, 2011, the premium on a one-year insurance policy was purchased for $3,000 cash with theinsurance coverage beginning on that date. Which of the following correctly describes the effect of theDecember 31, 2011 adjusting entry on the financial statements?A. (Assume that no adjusting entries have been made during the year.)B. Prepaid insurance will decrease $750.C. Insurance expense will increase $750.D. Insurance expense will increase $2,250.E. Prepaid insurance will increase $2,250.$3,000/12 = $250 a month. 9 months of coverage has been consumed, $250 * 9 = $2,250.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #33Topic Area: Purpose of Adjustments

34. The CHS Company paid $30,000 cash to its landlord on November 1, 2011 for rent covering the sixmonthperiod from November 1, 2011 through April 30, 2012. Which of the following doesn't correctlydescribe the effect of the December 31, 2011 adjusting entry on CHS Company's financial statements?(Assume that no adjusting entries have been made during the year.)A. Net income decreases $10,000.B. Prepaid rent decreases $10,000.C. Rent expense increases $10,000.D. Stockholders' equity increases $10,000.The time period from November 1, 2011 to December 31, 2011 consumes two months of rent expense($10,000) which results in a decrease to stockholders' equity.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.

Libby - Chapter 04 #34Topic Area: Purpose of Adjustments

35. Which of the following journal entries was created as the result of an accrual?A. Option AB. Option BC. Option CD. Option DAccruals recognize the expense (or revenue) and the resulting payable (or receivable).AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #35Topic Area: Purpose of Adjustments

36. Which of the following journal entries was created as the result of a deferral?A. Option AB. Option BC. Option CD. Option DUnearned or prepaid accounts are created with deferrals. Debiting cash and crediting unearned revenueis a result of receiving cash for goods or services to be provided in the future.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #36Topic Area: Purpose of Adjustments

37. Which of the following journal entries was created as the result of a deferral?A. Option AB. Option BC. Option CD. Option DUnearned or prepaid accounts are created with deferrals. Debiting unearned revenue and creditingrevenue recognizes deferred revenue when cash was previously received and recorded.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #37Topic Area: Purpose of Adjustments

38. Which of the following journal entries was created as the result of an accrual?A. Option AB. Option B

C. Option CD. Option DAccruals recognize either revenues or expenses that were previously unrecognized and the resultingreceivable or payable.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #38Topic Area: Purpose of Adjustments

39. On July 1, 2011, Allen Company signed a $100,000, one-year, 6 percent note payable. The principaland interest will be paid on June 30, 2012. How much interest expense should be reported on theincome statement for the year ended December 31, 2011?A. $6,000B. $3,000C. $1,500D. $0Interest expense = $3,000 = $100,000 Å~ .06 Å~ 6/12AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #39Topic Area: Purpose of Adjustments

40. Which of the following doesn't correctly describe a journal entry which debits interest expense andcredits interest payable?A. It increases expenses and decreases retained earnings.B. It decreases net income and decreases stockholders' equity.C. It increases expenses and increases liabilities.D. It decreases assets and decreases stockholders' equity.This journal entry increases expenses and increases liabilities; there is no impact on assets.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #40Topic Area: Purpose of Adjustments

41. Which of the following doesn't correctly describe a journal entry which debits rent expense and credits

prepaid rent?A. It increases expenses and decreases retained earnings.B. It decreases net income and decreases assets.C. It increases expenses and decreases assets.D. It decreases net income and decreases liabilities.This journal entry increases expenses and decreases assets; there is no impact on liabilities.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #41Topic Area: Purpose of Adjustments

42. Which of the following doesn't correctly describe a journal entry which debits supplies expense andcredits supplies?A. It increases expenses and decreases assets.B. It decreases net income and decreases assets.C. It increases expenses and increases retained earnings.D. It decreases net income and decreases stockholders' equity.This journal entry increases expenses and decreases assets; so retained earnings are decreased.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #42Topic Area: Purpose of Adjustments

43. Which of the following doesn't correctly describe a journal entry which debits depreciation expense andcredits accumulated depreciation?A. It increases expenses and does not affect assets.B. It decreases net income and decreases assets.C. It increases expenses and decreases retained earnings.D. It decreases assets and decreases net income.This journal entry increases expenses and increases accumulated depreciation. Accumulateddepreciation is a contra-asset account and thus decreases assets.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #43Topic Area: Purpose of Adjustments

44. Which of the following correctly describes the effects of accruing income tax expense at year-end?A. A cash payment is made to pay the taxes due.B. Liabilities are not affected.C. Retained earnings decreases.D. Net income is not affected.Accruing income tax expense increases expenses at year end and as a result decreases net income, thusdecreasing retained earnings. The accrual also increases liabilities.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #44Topic Area: Purpose of Adjustments

45. Which of the following correctly describes the effects of recording deferred revenues when cash isreceived from a customer?A. Revenues are increased.B. Liabilities are not affected.C. Retained earnings increases.D. Net income is not affected.Deferred revenues recorded when cash is received from a customer increases the unearned revenueaccount and increases cash. These are balance sheet accounts that do not impact net income.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #45Topic Area: Purpose of Adjustments

46. Which of the following correctly describes the effects of recording prepaid insurance when cash is paidto purchase an insurance policy?A. Total assets do not change.B. Net income decreases.C. Liabilities are decreased.D. Stockholders' equity decreases.Prepaid insurance increases and cash decreases so total assets don't change.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.

Libby - Chapter 04 #46Topic Area: Purpose of Adjustments

47. Which of the following does not correctly describe the following journal entry?SuppliesCashA. Total assets do not change.B. The transaction is an example of a deferral.C. Stockholders' equity decreases.D. Net income is not affected.This journal entry increases and decreases two different asset accounts; there is no impact onstockholders' equity.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #47Topic Area: Purpose of Adjustments

48. Which of the following does not correctly describe the following journal entry?Salaries expenseSalaries payableA. Total assets do not change.B. The transaction is an example of an accrual.C. Stockholders' equity decreases.D. Net income is not affected.This journal entry increases expenses and liabilities; the increase in expenses decreases net income.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #48Topic Area: Purpose of Adjustments

49. Which of the following does not correctly describe the following journal entry?A. Total assets increase.B. The transaction is an example of an accrual.C. Stockholders' equity is not affected.D. Net income increases.The credit to interest income increases net income; thus increasing stockholders' equity.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #49Topic Area: Purpose of Adjustments

50. Which of the following correctly describes the following journal entry?A. Total assets do not change.B. The transaction is an example of an accrual.C. Stockholders' equity is not affected.D. Net income is not affected.Accrued revenues are previously unrecorded revenues that need to be adjusted at the end of theaccounting period to reflect the amount earned and the related receivable account.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #50Topic Area: Purpose of Adjustments

51. Which of the following does not correctly describe the following journal entry?A. Total assets decrease.B. Retained earnings are not affected.C. Stockholders' equity decreases.D. Net income decreases.This journal entry increases expenses; resulting in a decrease in net income and a subsequent decreasein retained earnings.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #51Topic Area: Purpose of Adjustments

52. Which of the following correctly describes the following journal entry?A. Total assets decrease.B. Liabilities will increase.C. Stockholders' equity is not affected.D. Net income is not affected.This journal entry increases accumulated depreciation, a contra-asset account, resulting in a decrease intotal assets.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #52Topic Area: Purpose of Adjustments

53. Which of the following correctly describes the following journal entry?A. Total assets decrease and net income decreases.

B. Stockholders' equity decreases and liabilities increase.C. The transaction is an example of a deferral.D. Net income decreases and stockholders' equity doesn't change.This journal entry increases expenses and liabilities. The increase in expenses decreases net income,which results in a decrease in stockholders' equity.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #53Topic Area: Purpose of Adjustments

54. On January 1, 2011, the general ledger of Global Corporation included supplies inventory of $1,000.During 2011, supplies purchases amounted to $5,000. A physical count of inventory on hand atDecember 31, 2011 determined that the supplies inventory was $1,200. How much is the 2011 suppliesexpense?A. $6,000B. $5,200C. $4,800D. $1,000Supplies expense = $4,800 = $1,000 + $5,000 - $1,200AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #54Topic Area: Purpose of Adjustments

55. Which of the following journal entries was created as the result of an accrual?A. Option AB. Option BC. Option CD. Option DAccrual journal entries recognize expenses (revenues) that have been incurred (earned) and a subsequentpayable (receivable) for the transaction.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #55Topic Area: Purpose of Adjustments

56. Which of the following journal entries was not created as the result of an accrual?A. Option AB. Option BC. Option CD. Option DAccrual journal entries recognize expenses (revenues) that have been incurred (earned) and a subsequentpayable (receivable) for the transaction. Cash is not an aspect of journal entries created by accruals.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #56Topic Area: Purpose of Adjustments

57. Which of the following accounts was created as the result of an accrual for expenses?A. Prepaid rentB. Unearned revenuesC. Accounts receivableD. Interest payableExpense accrual journal entries recognize expenses that have been incurred but will be paid in thesubsequent accounting period, with a credit to a liability.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #57Topic Area: Purpose of Adjustments

58. Which of the following journal entries was created as the result of a deferral?A. Option AB. Option BC. Option CD. Option DDeferred revenue journal entries recognize cash received for goods or services before these goods orservices have been provided, with a credit to a liability (unearned revenue).AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #58Topic Area: Purpose of Adjustments

59. Which of the following journal entries was not created as the result of a deferral?

A. Option AB. Option BC. Option CD. Option DDeferrals do not recognize revenues or expenses that have been earned or incurred. Deferrals are journalentries to record transactions for revenues or expenses that will occur in the future. Service revenue isnot a deferred revenue account.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #59Topic Area: Purpose of Adjustments

60. Which of the following accounts was created as the result of a deferral?A. Interest payableB. Interest revenueC. Supplies inventoryD. Accounts receivableDeferrals are created for previously acquired assets or previously recorded liabilities that need to beadjusted at the end of the accounting period to reflect the amount of expense incurred or the amount ofrevenue earned.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #60Topic Area: Purpose of Adjustments

61. Which of the following transactions results in a decrease in both total assets and net income?A. The accrual of salaries expense at year-end.B. Collecting cash from an account receivable.C. Recognizing revenue which was previously recorded as unearned revenue.D. Adjustment of the prepaid rent account for rent which expired during the period.Adjusting prepaid rent for rent which expired during the period reduces the prepaid rent (asset) accountand recognizes a rent expense. The rent expense decreases net income.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.

Libby - Chapter 04 #61Topic Area: Purpose of Adjustment

62. Which of the following transactions results in an increase in liabilities and a decrease in net income?A. The accrual of salaries expense at year-end.B. Collecting cash from a customer for services to be provided in the future.C. The accrual of revenue earned at year-end.D. Adjustment of the unearned revenue account for revenue earned during the period.The accrual of salaries expense at year-end recognizes an expense that decreases net income, andcreates a salaries payable that increases liabilities.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #62Topic Area: Purpose of Adjustments

63. Which of the following transactions results in an increase in both net income and stockholders' equity?A. Paying cash to acquire a six-month insurance policy.B. Collecting cash from a customer for services to be provided in the future.C. The accrual of interest expense year-end.D. Adjustment of the unearned revenue account for revenue earned during the period.Adjusting unearned revenue for revenue earned results in a credit to revenue and a debit to unearnedrevenue. This decreases liabilities and increases net income and stockholders' equity.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #63Topic Area: Purpose of Adjustments

64. Which of the following transactions does not create a deferral?A. Paying cash to purchase a three-month insurance policy.B. Receiving cash from a customer for services to be provided in the future.C. Paying cash to employees for wages they have earned.D. Paying cash to purchase a two-month supply of office supplies.Paying cash to employees for earned wages is not an example of incurring an expense with theexpectation of paying for the expense in a subsequent accounting period.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #64

Topic Area: Purpose of Adjustments

65. Which of the following is not an accrual?A. Crediting salaries payable for salaries earned to date.B. Debiting interest receivable for interest earned to date.C. Debiting interest expense for interest incurred to date.D. Debiting depreciation expense for depreciation incurred during the period.Depreciation expense is classified as a deferred expense; it is the amount of expense incurred in usingthe asset to generate revenue.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #65Topic Area: Purpose of Adjustments

66. What is the effect on the financial statements when a company fails to accrue salaries expense at yearend?A. Net income is overstated and liabilities are understated.B. Expenses are understated and stockholders' equity is understated.C. Expenses and liabilities are both overstated.D. Net income is overstated and liabilities are not affected.Salary expenses that are not accrued result in expenses and liabilities being under reported. Underreported expenses result in overstated net income.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: ApplyDifficulty: HardLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #66Topic Area: Purpose of Adjustments

67. What is the effect on the financial statements when a company fails to record depreciation expense atyear-end?A. Net income is overstated and stockholders' equity is understated.B. Expenses are understated and stockholders' equity is understated.C. Expenses are understated and liabilities are overstated.D. Net income is overstated and assets are overstated.Failure to record depreciation results in expenses being too low, net income being overstated and assetsbeing overstated. Not recording depreciations understates accumulated depreciation thus the impact onassets.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: ApplyDifficulty: Hard

Learning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #67Topic Area: Purpose of Adjustments

68. What is the effect on the financial statements when a company fails to adjust the prepaid insuranceaccount at year-end for insurance coverage which has expired?A. Net income is overstated and stockholders' equity is understated.B. Expenses are understated and stockholders' equity is understated.C. Expenses are understated and net income is understated.D. Net income is overstated and assets are overstated.Failure to reduce prepaid insurance to reflect insurance coverage that has expired results in the prepaidasset account being overstated and the insurance expense account being understated. The outcome isthat net income and assets are overstated.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: ApplyDifficulty: HardLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #68Topic Area: Purpose of Adjustments

69. What is the effect on the financial statements when a company fails to adjust the unearned revenueaccount for revenues earned at year-end?A. Net income is understated and assets are understated.B. Revenues are understated and liabilities are understated.C. Revenues are understated and stockholders' equity is overstated.D. Net income is understated and liabilities are overstated.Failure to recognize revenues that were previously reported as unearned results in lower revenues =lower net income figure, overstated unearned revenue = overstated liabilities.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: ApplyDifficulty: HardLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #69Topic Area: Purpose of Adjustments

70. What is the effect on the financial statements when a company fails to accrue interest expense at yearend?A. Net income is overstated and assets are overstated.B. Expenses are understated and liabilities are understated.C. Expenses are understated and stockholders' equity is understated.D. Net income is overstated and liabilities are overstated.Failure to accrue interest expense results in expenses being understated and the resulting interest

payable is not increased to reflect the obligation to pay this expense.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: ApplyDifficulty: HardLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #70Topic Area: Purpose of Adjustments

71. What is the effect on the financial statements when a company fails to accrue revenue earned at yearend?A. Net income is understated and assets are understated.B. Revenue is understated and stockholders' equity is overstated.C. Revenue is understated and assets aren't affected.D. Net income is understated and liabilities are overstated.Failure to accrue earned revenue results in revenues being understated and thus net income beingunderstated. The resulting receivable is not increased to reflect the future payment for the earnedrevenue.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: ApplyDifficulty: HardLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #71Topic Area: Purpose of Adjustments

72. On December 31, 2011, Krug Company reported pretax income of $120,000 prior to the followingadjusting entries:• Depreciation expense was $31,000;• Accrued service revenues totaled $29,000;• Accrued expenses totaled $12,000;• Expired insurance which was prepaid totaled $9,000;• Rent revenue earned was $7,000; the rent was prepaid by the tenant and credited to unearned rentrevenue.How much is Krug's pretax income after adjusting entries?A. $113,000B. $104,000C. $106,000D. $128,000Pretax income = $104,000 = $120,000 - $31,000 + $29,000 - $12,000 - $9,000 + $7,000AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.

Libby - Chapter 04 #72Topic Area: Purpose of Adjustments

73. On December 31, 2011, Krug Company reported total assets of $390,000 prior to the followingadjusting entries:• Depreciation expense was $31,000;• Accrued service revenues totaled $29,000;• Accrued expenses totaled $12,000;• Expired insurance which was prepaid totaled $9,000;• Rent revenue earned was $7,000; the rent was prepaid by the tenant and credited to unearned rentrevenue.How much are Krug's total assets after adjusting entries?A. $350,000B. $386,000C. $379,000D. $374,000Total assets = $379,000 = $390,000 - $31,000 + $29,000 - $9,000AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Learning Objective: 04-03 Present an income statement with earnings per shareLearning Objective: and statement of cash flows.Learning Objective: balance sheetLearning Objective: statement of stockholders' equityLibby - Chapter 04 #73Topic Area: Purpose of Adjustments, Preparing Financial Statements

74. On December 31, 2011, Krug Company reported total liabilities of $110,000 prior to the followingadjusting entries:• Depreciation expense was $31,000;• Accrued service revenues totaled $29,000;• Accrued expenses totaled $12,000;• Expired insurance which was prepaid totaled $9,000;• Rent revenue earned was $7,000; the rent was prepaid by the tenant and credited to unearned rentrevenue.How much are Krug's total liabilities after adjusting entries?A. $115,000B. $141,000C. $86,000D. $110,000Total liabilities = $115,000 = $110,000 + $12,000 - $7,000AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to

update balance sheet and incomestatement accounts.Learning Objective: 04-03 Present an income statement with earnings per shareLearning Objective: and statement of cash flows.Learning Objective: balance sheetLearning Objective: statement of stockholders' equityLibby - Chapter 04 #74Topic Area: Purpose of Adjustments, Preparing Financial Statements

75. On December 31, 2011, Krug Company reported stockholders' equity of $280,000 prior to the followingadjusting entries:• Depreciation expense was $31,000;• Accrued service revenues totaled $29,000;• Accrued expenses totaled $12,000;• Expired insurance which was prepaid totaled $9,000;• Rent revenue earned was $7,000; the rent was prepaid by the tenant and credited to unearned rentrevenue.How much is Krug's stockholders' equity after adjusting entries?A. $280,000B. $262,000C. $295,000D. $264,000Stockholders' equity = $264,000 = $280,000 - $31,000 + $29,000 - $12,000 - $9,000 + $7,000AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Learning Objective: 04-03 Present an income statement with earnings per shareLearning Objective: and statement of cash flows.Learning Objective: balance sheetLearning Objective: statement of stockholders' equityLibby - Chapter 04 #75Topic Area: Purpose of Adjustments, Preparing Financial Statements

76. On July 1, 2011, Goode Company borrowed $100,000. The company signed a note payable withinterest at 6 percent per year. The note and interest are due on December 31, 2011. On December 31,2011, Goode paid $103,000 to settle the debt in full. Assuming no accruals for interest have been madeduring the year, transaction analysis of the $103,000 cash payment on December 31, 2011 should reflectwhich of the following?A. A decrease in assets of $103,000 and a decrease in liabilities of $103,000.B.A decrease in assets of $100,000, a decrease in stockholders' equity of $3,000, and a decrease inliabilities of $103,000.C.A decrease in stockholders' equity of $100,000, a decrease in liabilities of $3,000, and a decrease in

assets of $103,000.D.A decrease in liabilities of $100,000, a decrease in stockholders' equity of $3,000 and a decrease inassets of $103,000.Liabilities decrease by the face value of the loan, $100,000. Interest expense is $3,000 for the period,thus net income and stockholders' equity decreases by this amount. To recognize the payment of theloan and interest, assets must decrease by $103,000.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Learning Objective: 04-03 Present an income statement with earnings per shareLearning Objective: and statement of cash flows.Learning Objective: balance sheetLearning Objective: statement of stockholders' equityLibby - Chapter 04 #76Topic Area: Purpose of Adjustments, Preparing Financial Statements

77. On January 1, 2011, Ryan Company paid the premium on a three-year insurance policy in the amountof $6,000. At that time, the full amount paid was recorded as prepaid insurance. After recording theadjusting entry for the insurance policy on December 31, 2011, Ryan Company's records would reflectwhat balance in the prepaid insurance account?A. $6,000B. $2,000C. $3,000D. $4,000Prepaid insurance = $4,000 = $6,000 - $2,000 (insurance expense for 2011 = $6,000 ÷ 3)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Learning Objective: 04-03 Present an income statement with earnings per shareLearning Objective: and statement of cash flows.Learning Objective: balance sheetLearning Objective: statement of stockholders' equityLibby - Chapter 04 #77Topic Area: Purpose of Adjustments, Preparing Financial Statements

78. Assume Idaho Company recorded the following adjusting journal entry at year-end:If the beginning balance in prepaid insurance was $500 and $2,500 was paid for an insurance premiumduring the year, what is the ending balance in the prepaid insurance account after the above adjustingentry?A. $1,200

B. $700C. $2,200D. $1,000Prepaid insurance = $1,000 = $500 + $2,500 - $2,000AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Learning Objective: 04-03 Present an income statement with earnings per shareLearning Objective: and statement of cash flows.Learning Objective: balance sheetLearning Objective: statement of stockholders' equityLibby - Chapter 04 #78Topic Area: Purpose of Adjustments, Preparing Financial Statements

79. Failure to make an adjusting entry to recognize rent revenue receivable would cause which of thefollowing?A. An understatement of assets, net income, and stockholders' equity.B. An overstatement of assets and stockholders' equity and an understatement of net income.C. No effect on assets, liabilities, net income, or stockholders' equity.D. An overstatement of assets, net income, and stockholders' equity.Failure to recognize a receivable results in assets being understated. The corresponding effect of notrecognizing rent revenue receivable is that rent revenue is not recognized; therefore net income andsubsequently stockholders' equity are also understated.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: ApplyDifficulty: HardLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #79Topic Area: Purpose of Adjustments

80. Which of the following best describes the difference between an unadjusted trial balance and anadjusted trial balance?A.An unadjusted trial balance is prepared at the start of the accounting period and is not provided toexternal decision makers, while an adjusted trial balance is prepared at the end of the period and isprovided to external decision makers.B.An unadjusted trial balance is prepared by companies that make adjusting entries, while an adjusted

trial balance is prepared by companies that do not make adjusting entries.C.An unadjusted trial balance is prepared before the adjusting entries have been made, while an adjustedtrial balance is prepared after the adjusting entries have been made.D. An unadjusted trial balance is prepared after the post-closing trial balance.A trial balance is a list of all accounts with their balances to provide a check on the equality of thedebits and credits. An unadjusted trial balance is prepared before adjusting entries while an adjustedtrial balance is prepared after the adjusting entries.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #80Topic Area: Purpose of Adjustments

81. Which of the following accounts would most likely not require an adjusting entry in the future?A. Unearned subscriptions revenueB. Office suppliesC. Utilities payableD. Prepaid rentThe utilities payable account was created by an accrual and doesn't require an adjusting entry at yearend.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: EasyLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Libby - Chapter 04 #81Topic Area: Purpose of Adjustments

82. On December 31, 2011, The Bates Company's revenues total $300,000 and expenses total $160,000before consideration of the following:• Accrued wages total $11,000;• Accrued revenues total $36,000;• Depreciation expense is $17,000;• Rental revenue of $9,000 was earned; the rent was prepaid by a tenant and was recorded by Bates asunearned rent revenue;• The income tax rate is 40%.What is Bates' net income after consideration of the above information?A. $94,200B. $157,000

C. $140,000D. $88,800Revenues $345,000 = $300,000 + $36,000 + $9,000 Expenses 188,000 = $160,000 + $11,000 + $17,000Income before taxes 157,000 Income tax expense 62,800 = $157,000 Å~ .40 Net Income $94,200AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 04-02 Explain the purpose of adjustments and analyze the adjustments necessary at the end of the period to update balance sheet and incomestatement accounts.Learning Objective: 04-03 Present an income statement with earnings per shareLearning Objective: and statement of cash flows.Learning Objective: balance sheetLearning Objective: statement of stockholders' equityLibby - Chapter 04 #82Topic Area: Purpose of Adjustments, Preparing Financial Statements

83. Which of the following statements is correct?A.Balance sheet accounts are permanent accounts and do not retain their balances from one period tothe next.B.Balance sheet accounts are temporary accounts and do retain their balances from one period to thenext.C.Income statement accounts are permanent accounts and do retain their balances from one period tothe next.D. Income statement accounts are temporary accounts and do not retain their balances from one periodto the next.Revenue, expense, gain, and loss accounts are temporary accounts that begin each accounting periodwith a zero balance. These are income statement accounts that are known as temporary accounts.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 04-03 Present an income statement with earnings per shareLearning Objective: statement of stockholders' equity; balance sheet; and statement of cash flows.Libby - Chapter 04 #83Topic Area: Preparing Financial Statements

84. Which of the following will result in an increase in earnings per share?A. Accruing expenses at year-end.B. Selling additional shares of common stock during the year.C. Accruing revenue at year-end.D. Receiving cash from a tenant which was recorded as unearned revenue.Earnings per share = Net income ÷ average number of shares of common stock outstanding. Accruingrevenue at year-end increases both net income and earnings per share.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-03 Present an income statement with earnings per shareLearning Objective: statement of stockholders' equity; balance sheet; and statement of cash flows.Libby - Chapter 04 #84Topic Area: Preparing Financial Statements

85. Which of the following statements regarding earnings per share is not correct?A. It can be reported on the income statement.B. The numerator is net income.C. The denominator is the average number of shares of common stock outstanding.D. It doesn't have to be disclosed on the income statement or the notes to the financial statements.The only ratio required to be disclosed on the income statement or notes to the financial statements isearnings per share.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 04-03 Present an income statement with earnings per shareLearning Objective: statement of stockholders' equity; balance sheet; and statement of cash flows.Libby - Chapter 04 #85Topic Area: Preparing Financial Statements

86. Which of the following statements does not correctly describe the relationship between the incomestatement and the ending retained earnings balance?A. Net income increases the ending balance of retained earnings.B. A net loss decreases the ending retained earnings balance.C. A net loss does not affect the ending retained earnings balance.D. Net income and net loss both affect the ending retained earnings balance.Net income (loss) is added (subtracted) to the beginning retained earning balance as a step towardscalculating ending retained earnings.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: EasyLearning Objective: 04-03 Present an income statement with earnings per shareLearning Objective: statement of stockholders' equity; balance sheet; and statement of cash flows.Libby - Chapter 04 #86Topic Area: Preparing Financial Statements

87. Which of the following statements regarding the balance sheet is false?A. Property and equipment is reported at book value.B. Assets are reported in the order of liquidity.C. Current liabilities are obligations to be paid with current assets.D. It is a period of time financial statement.The balance sheet is a snap shot of a company's assets, liabilities, and stockholders' equity at a specificpoint in time.AACSB: Reflective ThinkingAICPA BB: Critical Thinking

AICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 04-03 Present an income statement with earnings per shareLearning Objective: statement of stockholders' equity; balance sheet; and statement of cash flows.Libby - Chapter 04 #87Topic Area: Preparing Financial Statements

88. A calendar year reporting company preparing its annual financial statements should use the phrase "Asof December 31, 2011" in the heading of which financial statements?A. On all of the required financial statements.B. On only the income statement.C. On the income statement and balance sheet, but not the statement of cash flows.D. On the balance sheet only.The balance sheet is a snap shot of a company's assets, liabilities, and stockholders' equity at a specificpoint in time.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 04-03 Present an income statement with earnings per shareLearning Objective: statement of stockholders' equity; balance sheet; and statement of cash flows.Libby - Chapter 04 #88Topic Area: Preparing Financial Statements

89. The declaration and payment of a $5,000 dividend by JLH Company would be reported on which ofJLH's financial statements?A. The income statement only.B. The statement of stockholders' equity and statement of cash flows.C. The balance sheet only.D. The statement of stockholders' equity only.Dividends declared are reported on the statement of stockholders' equity, as a component of retainedearnings, and the payment of dividends is reported under the financing section of the statement of cashflows.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 04-03 Present an income statement with earnings per shareLearning Objective: statement of stockholders' equity; balance sheet; and statement of cash flows.Libby - Chapter 04 #89Topic Area: Preparing Financial Statements

90. Which of the following transactions will not decrease the net profit margin ratio?A. Accruing interest expense at year-end.B. The recording of depreciation expense.C. Using cash to pay for previously accrued salaries.D. Accruing utilities expense at year-end.Net profit margin = Net income ÷ Net sales (operating revenues). Previously accrued expenses havealready been recognized and factored into net income, paying for these expenses impacts

the balancesheet and not the income statement.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 04-05 Explain the closing process. Explain the closing process. Compute and interpret the net profit margin.Libby - Chapter 04 #90Topic Area: Net Profit Margin

91. Which of the following statements regarding the net profit margin ratio is false?A. The numerator is net income.B. The denominator is net sales or operating revenues.C. It measures how much of every sales dollar is gross profit.D. Financial analysts expect well-run businesses to maintain or improve their profit margin over time.The numerator is net income not gross margin.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 04-05 Explain the closing process. Explain the closing process. Compute and interpret the net profit margin.Libby - Chapter 04 #91Topic Area: Net Profit Margin

92. Which of the following correctly describes the closing entry process?A. The closing process reduces the balances in the permanent accounts to zero at the end of each period.B. The closing entries are usually prepared prior to adjusting entries.C. The closing process creates a zero balance in all temporary accounts at the end of each period.D.The closing process creates a zero balance at the end of each period for all accounts on the year-endtrial balance.Income statement (temporary) accounts begin each accounting cycle with a zero balance; thereforethe final step of the accounting cycle is to close out these accounts and create a zero balance for thebeginning of the next period.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 04-05 Explain the closing process.Libby - Chapter 04 #92Topic Area: End of the Accounting Cycle

93. Which of the following account balances would not be affected by closing journal entries?A. Interest expenseB. Accumulated depreciationC. DividendsD. Retained earningsClosing journal entries impact income statement accounts, dividend accounts and

retained earnings.Balance sheet accounts, other than retained earnings, are not affected by closing entries.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 04-05 Explain the closing process.Libby - Chapter 04 #93Topic Area: End of the Accounting Cycle

94. Which of the following account balances would be closed at year-end?A. Interest expenseB. Accumulated depreciationC. Retained earningsD. Unearned revenuesIncome statement accounts are closed at the end of the accounting cycle, interest expense is an incomestatement account.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 04-05 Explain the closing process.Libby - Chapter 04 #94Topic Area: End of the Accounting Cycle

95. Which of the following account balances would not be closed at year-end by debiting the account?A. Interest revenueB. Gain on sale of buildingC. Sales revenuesD. Unearned revenuesUnearned revenues are a liability account that is not closed at year-end.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 04-05 Explain the closing process.Libby - Chapter 04 #95Topic Area: End of the Accounting Cycle

96. Which of the following account balances would be closed at year-end by crediting the account?A. Investment revenueB. Loss on sale of buildingC. Sales revenuesD. Unearned revenuesLoss accounts have a normal debit balance and are closed with credit entries at year-end.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 04-05 Explain the closing process.Libby - Chapter 04 #96Topic Area: End of the Accounting Cycle

97. Which one of the following accounts would not be closed at the end of the accounting

year?A. Utilities expenseB. Sales revenueC. Prepaid rent expenseD. Wages expensePrepaid rent expense is an asset account, only income statement accounts are closed at year-end.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 04-05 Explain the closing process.Libby - Chapter 04 #97Topic Area: End of the Accounting Cycle

98. A trial balance prepared after the closing entries have been posted would show a zero balance in whichone of the following accounts?A. InventoryB. Accounts receivableC. Accumulated depreciationD. Income tax expenseClosing entries create zero balances in temporary accounts. Interest expense is a temporary account andtherefore would show a zero balance after closing entries have been posted.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 04-05 Explain the closing process.Libby - Chapter 04 #98Topic Area: End of the Accounting Cycle

99. Which of the following correctly describes the accounts reported on the post-closing trial balance?A. It includes permanent and temporary accounts with non-zero balances.B. The ending retained earnings balance includes the current period net income.C. It includes only temporary account balances.D. It doesn't include stockholders' equity account balances.After closing the temporary accounts, the ending retained earnings balance includes the current period'snet income.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 04-05 Explain the closing process.Libby - Chapter 04 #99Topic Area: End of the Accounting Cycle

100. Which of the following isn't a correct closing entry?A. Option AB. Option BC. Option C

D. Option D

ch5 Key1. External users of accounting information include decision makers such as investors, creditors, andfinancial analysts.TRUEEach of the identified decision makers uses accounting information in their decision making process.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #1Topic Area: Players In The Accounting Communication Process

2. The mission of the Securities & Exchange Commission (SEC) is to develop generally acceptedaccounting principles.FALSEThe mission of the SEC is to protect investors and maintain the integrity of the securities markets.AACSB: Reflective ThinkingAICPA BB: LegalAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #2Topic Area: Players In The Accounting Communication Process

3. Independent auditors are advisors who analyze financial statements and other economic information toformulate forecasts and stock recommendations.FALSEIndependent auditors provide an opinion with respect to the overall fairness of the financial statements.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #3Topic Area: Players In The Accounting Communication Process

4. The Securities & Exchange Commission (SEC) oversees the work of the Financial AccountingStandards Board (FASB).TRUE

The SEC has delegated the responsibility for setting GAAP to the FASB.AACSB: Reflective ThinkingAICPA BB: LegalAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #4Topic Area: Players In The Accounting Communication Process

5. The Financial Accounting Standards Board (FASB) oversees the work of the Public CompanyAccounting Oversight Board (PCAOB).FALSEThe Securities & Exchange Commission (SEC) oversees the work of the Public Company AccountingOversight Board (PCAOB).AACSB: Reflective ThinkingAICPA BB: LegalAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #5Topic Area: Players In The Accounting Communication Process

6. The Public Company Accounting Oversight Board (PCAOB) sets auditing standards for independentauditors.TRUEThe Public Company Accounting Oversight Board (PCAOB) is responsible for setting auditingstandards for independent auditors.AACSB: Reflective ThinkingAICPA BB: LegalAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #6Topic Area: Players In The Accounting Communication Process

7. The primary responsibility for the information in a corporation's financial statements lies with the chiefexecutive officer (CEO) and the chief financial officer (CFO).TRUEThe CEO and the CFO are primarily responsible for the content of the financial statements.AACSB: Reflective ThinkingAICPA BB: LegalAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.

Libby - Chapter 05 #7Topic Area: Players In The Accounting Communication Process

8. The board of directors is responsible for maintaining the integrity of a company's financial statementsand financial reporting.TRUEThe board of directors is responsible for ensuring that processes are in place for maintaining theintegrity of the company's accounting, financial statement preparation, and financial reporting.AACSB: Reflective ThinkingAICPA BB: LegalAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #8Topic Area: Players In The Accounting Communication Process

9. The Securities & Exchange Commission requires publically traded companies to have their financialstatements audited by their internal auditors.FALSEThe Securities & Exchange Commission requires publically traded companies to have their financialstatements audited by an independent registered public accounting firm.AACSB: Reflective ThinkingAICPA BB: LegalAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #9Topic Area: Players In The Accounting Communication Process

10. Financial analysts utilize a company's financial reports to assist them in making earnings projectionsand earnings per share projections.TRUEFinancial analysts utilize a company's financial reports to assist them in making earnings projections,earnings per share projections, share price predictions, as well buy and sell recommendations.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #10Topic Area: Players In The Accounting Communication Process

11. For financial information to be relevant it must be verifiable and accurate.FALSE

For financial information to be relevant it must be timely and have both predictive value and feedbackvalue.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #11Topic Area: Players In The Accounting Communication Process

12. In order for financial information to be consistent, similar accounting methods need to be used from oneperiod to the next.TRUEConsistency refers to the use of the same or similar accounting methods from one period to the next.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #12Topic Area: Players In The Accounting Communication Process

13. In order for financial information to be reliable, it should be timely and verifiable.FALSEIn order for financial information to be reliable it should be accurate, unbiased, and verifiable.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #13Topic Area: Players In The Accounting Communication Process

14. In order for financial information to be relevant, it should be timely and accurate.FALSEFor financial information to be relevant it must be timely and have both predictive value and feedbackvalue.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #14Topic Area: Players In The Accounting Communication Process

15. The form 10-Q contains an unaudited set of quarterly financial statements containing a condensed

income statement and balance sheet.TRUEThe form 10-Q is the quarterly report containing a condensed income statement and balance sheet thatpublically traded companies must file with the SEC.AACSB: Reflective ThinkingAICPA BB: LegalAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-02 Identify the steps in the accounting communication process; including the issuance of press releases; annual reports; quarterly reports; andSEC filings; as well as the role of electronic information services in this process.Libby - Chapter 05 #15Topic Area: The Disclosure Process

16. The form 10-K is the annual report that publically traded companies must file with the Securities &Exchange Commission (SEC).TRUEThe form 10-K is the annual report that publically traded companies must file with the SEC.AACSB: Reflective ThinkingAICPA BB: LegalAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-02 Identify the steps in the accounting communication process; including the issuance of press releases; annual reports; quarterly reports; andSEC filings; as well as the role of electronic information services in this process.Libby - Chapter 05 #16Topic Area: The Disclosure Process

17. Recent stock price information is a financial statement disclosure.TRUEFinancial statement disclosures include recent stock price information, summaries of unauditedquarterly financial data, as well as a listing of officers and directors, etc.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-02 Identify the steps in the accounting communication process; including the issuance of press releases; annual reports; quarterly reports; andSEC filings; as well as the role of electronic information services in this process.Libby - Chapter 05 #17Topic Area: The Disclosure Process

18. A listing of a company's directors and officers is a financial statement disclosure.TRUEFinancial statement disclosures include recent stock price information, summaries of unauditedquarterly financial data, as well as a listing of officers and directors, etc.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-02 Identify the steps in the accounting communication process; including the issuance of press releases; annual reports; quarterly reports; andSEC filings; as well as the role of electronic information services in this process.

Libby - Chapter 05 #18Topic Area: The Disclosure Process

19. Inventories are reported on the balance sheet as a current asset.TRUECurrent assets include cash, accounts receivable, inventories, etc.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #19Topic Area: A Closer Look At Financial Statement Formats And Notes

20. Intangible assets are reported on the balance sheet as a current asset.FALSECurrent assets include cash, accounts receivable, inventories, etc. Intangible assets are reported asnoncurrent assets.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #20Topic Area: A Closer Look At Financial Statement Formats And Notes

21. Intangible assets are reported on the balance sheet as a noncurrent asset and include goodwill.TRUEIntangible assets are reported as noncurrent assets and include patents, trademarks, franchises,copyrights, and goodwill.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #21Topic Area: A Closer Look At Financial Statement Formats And Notes

22. Additional-paid in capital is reported on the balance sheet as a component of shareholders' equity.TRUEShareholders' equity includes common stock, additional paid-in capital, and retained earnings.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #22Topic Area: A Closer Look At Financial Statement Formats And Notes

23. Common stock and additional-paid in capital are both reported on the balance sheet as a component of

shareholders' equity.TRUEShareholders' equity includes common stock, additional paid-in capital, and retained earnings.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #23Topic Area: A Closer Look At Financial Statement Formats And Notes.

24. Common stock and additional-paid in capital represent the capital contributed by shareholders.TRUEContributed capital consists of common stock and additional paid-in capital.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #24Topic Area: A Closer Look At Financial Statement Formats And Notes

25. Net sales less cost of goods sold is reported on the income statement as income from continuingoperations.FALSENet sales less cost of goods sold is gross profit and is a component of income from continuingoperations.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #25Topic Area: A Closer Look At Financial Statement Formats And Notes

26. Discontinued operations and extraordinary items are reported on the income statement as a componentof income from continuing operations.FALSEDiscontinued operations and extraordinary items are reported on the income statement as a deductionfrom income from operations.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #26Topic Area: A Closer Look At Financial Statement Formats And Notes

27. The summary of significant accounting policies is a required financial statement disclosure.TRUEOne of the first disclosures is the summary of significant accounting policies.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #27Topic Area: A Closer Look At Financial Statement Formats And Notes

28. The return on assets ratio is calculated by dividing income from continuing operations by average totalassets.FALSEThe return on assets ratio is calculated by dividing net income by average total assets.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #28Topic Area: Return On Assets Analysis

29. The return on assets ratio will increase when sales increase.TRUEThe return on assets ratio calculation increases when asset turnover (net sales divided by average totalassets) increases.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: RememberDifficulty: MediumLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #29Topic Area: Return On Assets Analysis

30. The return on assets ratio is affected by both the net profit margin ratio and the asset turnover ratio.TRUEThe return on assets ratio is calculated by multiplying the net profit margin ratio times the asset turnoverratio.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #30Topic Area: Return On Assets Analysis

31. Which of the following tasks does the Securities & Exchange Commission (SEC) not perform?A. Overseeing the work of the Financial Accounting Standards Board (FASB).B. Overseeing the work of the Public Company Accounting Oversight Board (PCAOB).

C. The responsibility for protecting investors and maintaining the integrity of the securities markets.D. The development of generally accepted accounting principles.The FASB develops generally accepted accounting principles.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #31Topic Area: Players In The Accounting Communication Process

32. Which of the following tasks does the Financial Accounting Standards Board (FASB) perform?A. Overseeing the work of the Securities & Exchange Commission (SEC).B. Overseeing the work of the Public Company Accounting Oversight Board (PCAOB).C. The responsibility for protecting investors and maintaining the integrity of the securities markets.D. The development of generally accepted accounting principles.The FASB develops generally accepted accounting principles.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #32Topic Area: Players In The Accounting Communication Process

33. Which of the following are primarily responsible for the information provided in a company's financialstatements?A. The internal and external auditors.B. The Securities & Exchange Commission (SEC) and the external auditors.C. The chief executive officer (CEO) and the chief financial officer (CFO).D. The external auditors and the board of directors.The CEO and CFO are primarily responsible for the content of a company's financial statements.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #33Topic Area: Players In The Accounting Communication Process

34. Which of the following is not a responsibility of the chief executive officer (CEO) and the chief financialofficer (CFO)?A. The responsibility to oversee the financial statement external audit.B.To ensure the accuracy and completeness of all reports provided to the Securities &

ExchangeCommission (SEC).C. The certification of the strength of the internal control system.D. The disclosure to the auditor committee of any frauds they are aware of.The external auditors are hired by the board of directors and are responsible for overseeing their ownaudit.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #34Topic Area: Players In The Accounting Communication Process

35. Which of the following is not true about the board of directors?A. They are elected by stockholders.B.They ensure the accuracy and completeness of all reports provided to the Securities & ExchangeCommission (SEC).C.They are responsible for ensuring that processes are in place for maintaining the integrity of thefinancial statements.D. They are responsible for hiring the company's external auditors.The CEO and CFO ensure the accuracy and completeness of all reports provided to the Securities &Exchange Commission (SEC).AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #35Topic Area: Players In The Accounting Communication Process

36. Which of the following statements is false?A.The board of directors meets with the external auditors to discuss management's compliance withtheir financial reporting obligations.B. The external auditors are selected by the Securities & Exchange Commission (SEC).C.The Securities & Exchange Commission (SEC) requires publically traded companies to have theirfinancial statements audited by an independent accountant.D.The external auditors assume some responsibility with respect to the fairness of the financialstatements.The external auditors are selected by the board of directors.AACSB: Reflective ThinkingAICPA BB: Critical Thinking

AICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #36Topic Area: Players In The Accounting Communication Process

37. For accounting information to be useful, it must be which of the following?A. It must be consistent and comparable.B. It must be relevant and reliable.C. It must be comparable and reliable.D. It must be relevant and consistent.Relevance and reliability are the characteristics which allow accounting information to be useful.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #37Topic Area: Players In The Accounting Communication Process

38. Conservatism requires that special care must be taken to avoid which of the following?A. Overstating assets and liabilities and understating revenues and expenses.B. Understating assets and liabilities and overstating revenues and expenses.C. Overstating assets and revenues and understating liabilities and expenses.D. Understating assets and revenues and overstating liabilities and expenses.Conservatism is concerned with overstating revenues and assets and with understating expenses andliabilities.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #38Topic Area: Players In The Accounting Communication Process

39. Which of the following is an objective of the external audit of a company's financial statements?A. To provide a forecast of the company's future earnings.B. To assure no fraud has been committed by the company's management.C.To provide credibility and assurance that the financial statement information conforms with generallyaccepted accounting principles in all material respects.D. To detect all accounting errors made by the accounting system and employees.The external audit lends credibility to the financial statements and assesses whether the financialstatements are in compliance with generally accepted accounting principles.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #39Topic Area: Players In The Accounting Communication Process

40. Which of the following describes the conservatism constraint?A.A business should avoid overstating assets and revenues and avoid understating expenses andliabilities.B. The benefits of accounting for and reporting information should outweigh the costs.C.If the dollar amounts involved are large enough to influence a user's decisions the data is consideredto be relevant.D. The conservatism constraint produces a higher net income and stockholders' equity.Conservatism is concerned with overstating revenues and assets and with understating expenses andliabilities.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #40Topic Area: Players In The Accounting Communication Process

41. Which of the following is false?A.Relevance is the characteristic of accounting information that says the information would make adifference in a user's decision.B. Accounts receivable would normally be classified as a current asset.C. Accumulated depreciation would normally appear on the income statement.D.The matching principle holds that all expenses incurred in the generation of revenue should berecognized in the same period as the revenue is earned.Accumulated depreciation is a balance sheet account.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #41Topic Area: Players In The Accounting Communication Process

42. The Securities and Exchange Commission's (SEC) report that is required to be filed if any special eventoccurs is which of the following?

A. Form 10KB. Form 8KC. Form 10QD. Form 8QThe form 8-K is used to disclose material events not reported previously which are relevant to investors.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-02 Identify the steps in the accounting communication process; including the issuance of press releases; annual reports; quarterly reports; andSEC filings; as well as the role of electronic information services in this process.Libby - Chapter 05 #42Topic Area: The Disclosure Process

43. In what order are current assets usually reported on the balance sheet?A. From the most liquid to the least liquid.B. From the least liquid to the most liquid.C. In alphabetical order of accounts.D. From the largest balance to the smallest balance.Current assets are reported on the balance sheet in order of liquidity.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #43Topic Area: A Closer Look At Financial Statement Format And Notes

44. Which of the following would not be classified as a current asset?A. Accounts receivableB. PatentsC. Merchandise inventoryD. CashA patent is an intangible asset.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #44Topic Area: A Closer Look At Financial Statement Format And Notes

45. What account is credited when a corporation issues stock at an amount over the stock's par value?A. Gain on sale of stockB. Loss on sale of stockC. Additional paid- in capitalD. Retained earningsAdditional paid-in capital is credited when a company sells its stock for more than par value.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting

Blooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #45Topic Area: A Closer Look At Financial Statement Format And Notes

46. Contributed capital consists of which of the following two accounts?A. Common stock and Additional paid in capitalB. Common stock and Retained earningsC. Additional paid in capital and Retained earningsD. Retained earnings and CashContributed capital consists of common stock and additional paid-in capital.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #46Topic Area: A Closer Look At Financial Statement Format And Notes

47. Which of the following are the criteria used to determine whether an item is extraordinary?A. It is unusual in nature and occurs frequently.B. It is unusual in nature and occurs infrequently.C. It is unusual in nature or occurs infrequently.D. It is infrequent in occurrence only.Extraordinary items occur infrequently and are unusual in nature.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #47Topic Area: A Closer Look At Financial Statement Format And Notes

48. Which of the following journal entries is correct when common stock is sold for cash at a price greaterthan par value?A. Option AB. Option BC. Option CD. Option DCommon stock and additional paid-in capital are both credited when common stock is sold for morethan par value.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #48Topic Area: A Closer Look At Financial Statement Format And Notes

49. Which of the following statements is false?

A. The common stock account has a credit balance.B. The additional paid-in capital account has a credit balance.C. Contributed capital consists of common stock and additional paid-in capital.D. The par value of a stock represents the stock's fair value.The par value represents the minimum amount a stockholder must contribute.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #49Topic Area: A Closer Look At Financial Statement Format And Notes

50. Which of the following is true about gross profit (gross margin)?A. It is net sales minus operating expenses.B. It is net sales minus cost of goods sold.C. It is the same as income from continuing operations.D. It is net sales minus cost of goods sold and operating expenses.Gross profit equals net sales minus cost of goods sold.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #50Topic Area: A Closer Look At Financial Statement Format And Notes

51. Which of the following best describes income from operations?A. It includes the results of discontinued operations.B. It includes extraordinary items.C. It is sales minus cost of goods sold and income tax expense.D. It is net sales minus cost of goods sold and operating expenses.Income from operations equals net sales minus cost of goods sold and operating expenses.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #51Topic Area: A Closer Look At Financial Statement Format And Notes

52. The Callie Company has provided the following information:• Operating expenses were $231,000;• Cost of goods sold was $376,000;• Net sales were $940,000;• Interest expense was $32,000;• Gain on sale of a building was $76,000;• Income tax expense was $151,000.What was Callie's gross profit?A. $564,000B. $188,000

C. $333,000D. $232,000Gross profit ($564,000) equals net sales ($940,000) minus cost of goods sold ($376,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #52Topic Area: A Closer Look At Financial Statement Format And Notes

53. The Callie Company has provided the following information:• Operating expenses were $231,000;• Cost of goods sold was $376,000;• Net sales were $940,000;• Interest expense was $32,000;• Gain on sale of a building was $76,000;• Income tax expense was $151,000.What was Callie's income from operations?A. $333,000B. $188,000C. $156,000D. $232,000Income from operations ($333,000) equals net sales ($940,000) minus the sum of cost of goods sold($376,000) and operating expenses ($231,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #53Topic Area: A Closer Look At Financial Statement Format And Notes

54. The Callie Company has provided the following information:• Operating expenses were $231,000;• Cost of goods sold was $376,000;• Net sales were $940,000;• Interest expense was $32,000;• Gain on sale of a building was $76,000;• Income tax expense was $151,000.What was Callie's income before taxes?A. $564,000B. $188,000C. $377,000D. $232,000Income before taxes ($377,000) equals net sales ($940,000) minus cost of goods sold ($376,000), minusoperating expenses ($231,000), minus interest expense ($32,000), plus gain on sale ($76,000).AACSB: Analytic

AICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #54Topic Area: A Closer Look At Financial Statement Format And Notes

55. Which of the following is not reported as an operating expense on the income statement?A. Administrative expensesB. Research and development expenseC. Interest expenseD. Selling expensesInterest expense is a deduction from income from continuing operations.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #55Topic Area: A Closer Look At Financial Statement Format And Notes

56. The Nellie Company has provided the following information:• Operating expenses were $115,000;• Gross profit was $629,000;• Cost of goods sold was $470,000• Interest expense was $17,000;• Extraordinary loss was $29,000;• Income tax expense was $199,000.What was Nellie's operating income?A. $514,000B. $54,000C. $497,000D. $298,000Operating income ($514,000) equals gross profit ($629,000) minus operating expenses ($115,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #56Topic Area: A Closer Look At Financial Statement Format And Notes

57. The Nellie Company has provided the following information:• Operating expenses were $115,000;• Gross profit was $629,000;• Cost of goods sold was $470,000• Interest expense was $17,000;• Extraordinary loss was $29,000;• Income tax expense was $199,000.What was Nellie's income before taxes?

A. $514,000B. $54,000C. $497,000D. $298,000Income before taxes ($497,000) equals gross profit ($629,000) minus operating expenses ($115,000) andinterest expense ($17,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #57Topic Area: A Closer Look At Financial Statement Format And Notes

58. The Willie Company has provided the following information:• Operating expenses were $345,000;• Income from operations was $215,000;• Net sales were $1,100,000;• Interest expense was $71,000;• Discontinued operations loss was $87,000;• Income tax expense was $58,000.What was Willie's cost of gross profit?A. $540,000B. $469,000C. $618,000D. $560,000Gross profit ($560,000) equals operating expenses ($345,000) plus income from operations ($215,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #58Topic Area: A Closer Look At Financial Statement Format And Notes

59. The Willie Company has provided the following information:• Operating expenses were $345,000;• Income from operations was $215,000;• Net sales were $1,100,000;• Interest expense was $71,000;• Discontinued operations loss was $87,000;• Income tax expense was $58,000.What was Willie's income before taxes?A. $144,000B. $57,000C. $215,000D. $539,000Income before taxes ($144,000) equals income from operations ($215,000) minus interest

expense($71,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #59Topic Area: A Closer Look At Financial Statement Format And Notes

60. Which of the following would not be a component of income from operations?A. Gross profitB. Selling and administrative expensesC. Dividend incomeD. Research and development expenseDividend income is reported as nonoperating revenue.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #60Topic Area: A Closer Look At Financial Statement Format And Notes

61. Which of the following statements regarding earnings per share is false?A. It can be reported on the income statement.B. It increases when net income increases.C. It is based on the average number of common shares outstanding.D. It would not be affected by an extraordinary loss.Extraordinary losses reduce net income and therefore earnings per share.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #61Topic Area: A Closer Look At Financial Statement Format And Notes

62. Which of the following would not typically be disclosed in the notes to the financial statements?A. Additional detail regarding reported numbers.B. A summary of significant accounting policies.C. Revenues reported by business segments.D. The net income earned by the business to date.The net income earned by the business to date is included within retained earnings.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #62Topic Area: A Closer Look At Financial Statement Format And Notes

63. Which of the following statements is false?

A. Relevant information has the ability to influence an investor's decision.B. Reliable information is accurate, verifiable and unbiased.C. Consistency refers to the use of the same accounting principles from one period to the next.D.Comparability refers to the use of conservatism within different time periods by a particularbusiness.Comparability refers to the use of similar accounting methods across businesses.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #63Topic Area: Players In The Accounting Communication Process

64. In which of the following classifications would cash dividend payments to stockholders be reported?A. Operating activitiesB. Financing activitiesC. Investing activitiesD. Stockholder activitiesFinancing activities include dividend payments to stockholders.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #64Topic Area: A Closer Look At Financial Statement Format And Notes

65. A company issued 1,000 shares of $10 par value common stock in exchange for $15,000. Which of thefollowing correctly describes the impact of this transaction on the financial statements?A. A $15,000 gain is reported on the income statement.B. Contributed capital in the amount of $10,000 is reported on the balance sheet.C. Common stock is reported on the balance sheet at $15,000.D. Additional paid-in capital of $5,000 is reported on the balance sheet.Additional paid-in capital ($5,000) represents the excess of the selling price ($15,000) above the stock'spar value ($10,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #65Topic Area: A Closer Look At Financial Statement Format And Notes

66. Where are stock issues in exchange for cash reported on a statement of cash flows?A. Operating activitiesB. Financing activities

C. Investing activitiesD. Stockholder activitiesFinancing cash flows include the sale of common stock in exchange for cash.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #66Topic Area: A Closer Look At Financial Statement Format And Notes

67. Where are acquisitions of previously issued stock for cash reported on a statement of cash flows?A. Operating activitiesB. Financing activitiesC. Investing activitiesD. Stockholder activitiesFinancing cash flows include the acquisition of previously issued stock.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #67Topic Area: A Closer Look At Financial Statement Format And Notes

68. Which of the following statements is false when a company sells inventory costing $700 for $1,200?A. Cost of goods sold increases $700.B. Gross profit increases $500.C. Stockholders' equity increases $500.D. Net sales increases $500.Net sales will increase $1,200.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #68Topic Area: A Closer Look At Financial Statement Format And Notes

69. Which of the following statements is false when a company sells inventory costing $900 for $1,500cash?A. Current assets increase $600.B. Gross profit increases $1,500.C. Stockholders' equity increases $600.D. Net sales increases $1,500.Gross profit ($600) is the difference between net sales ($1,500) and cost of goods sold ($900).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: Apply

Difficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #69Topic Area: A Closer Look At Financial Statement Format And Notes

70. Superior has provided the following information for its recent year of operation:• The common stock account balance at the beginning of the year was $20,000 and the year-end balancewas $25,000.• The additional paid-in capital account balance increased $2,500 during the year.• The retained earnings balance at the beginning of the year was $75,000 and the year-end balance was$91,000.• Net income was $26,000.How much were Superior's dividend declarations during its recent year of operation?A. $10,000.B. $42,000.C. $26,000.D. The dividend declarations can't be determined given the above information.Ending retained earnings ($91,000) = Beginning retained earnings ($75,000) + Net income ($26,000) -Dividends declared ($10,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #70Topic Area: A Closer Look At Financial Statement Format And Notes

71. Superior has provided the following information for its recent year of operation:• The common stock account balance at the beginning of the year was $20,000 and the year-end balancewas $25,000.• The additional paid-in capital account balance increased $2,500 during the year.• The retained earnings balance at the beginning of the year was $75,000 and the year-end balance was$91,000.• Net income was $26,000.How much did Superior sell its common stock for during the year?A. $5,000.B. $2,500.C. $7,500.D. $25,000.The increase in the common stock account ($5,000) plus the increase in additional paid-in capital($2,500) equals the selling price of the common stock ($7,500).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: Medium

Learning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #71Topic Area: A Closer Look At Financial Statement Format And Notes

72. Huron has provided the following year-end balances:• Cash, $25,000• Patents, $7,900• Accounts receivable, $9,300• Property, plant, and equipment, $98,700• Prepaid insurance, $3,600• Accumulated depreciation, $10,000• Inventory, $37,000• Trademarks, $12,600• Goodwill, $11,000How much are Huron's current assets?A. $85,900.B. $71,300.C. $74,900.D. $102,100.Huron's current assets ($74,900) include cash ($25,000), accounts receivable ($9,300), prepaidinsurance ($3,600), and inventory ($37,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #72Topic Area: A Closer Look At Financial Statement Format And Notes

73. Huron has provided the following year-end balances:• Cash, $25,000• Patents, $7,900• Accounts receivable, $9,300• Property, plant, and equipment, $98,700• Prepaid insurance, $3,600• Accumulated depreciation, $10,000• Inventory, $37,000• Trademarks, $12,600• Goodwill, $11,000How much are Huron's net noncurrent assets?A. $122,300.B. $120,200.C. $123,800.D. $112,300.Huron's net noncurrent assets ($120,200) include patents ($7,900), property, plant, and equipment($98,700), accumulated depreciation (-$10,000), trademarks ($12,600), and goodwill ($11,000).AACSB: Analytic

AICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #73Topic Area: A Closer Look At Financial Statement Format And Notes

74. Which of the following would not be included on an income statement?A. Accumulated depreciationB. Insurance expenseC. Cost of goods soldD. Extraordinary lossAccumulated depreciation is a balance sheet account.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #74Topic Area: A Closer Look At Financial Statement Formats And Notes

75. Which of the following would not be included within the operations section of a cash flow statement?A. Cash paid for research and development.B. Cash paid for insurance.C. Cash paid for interest expense.D. Cash paid to legalize a patent.The cash paid to legalize a patent would be an investing cash flow.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #75Topic Area: A Closer Look At Financial Statement Formats And Notes

76. Which of the following would not be added to net income in the determination of net cash flow fromoperations?A. An increase in accounts payable.B. A decrease in accounts receivable.C. A decrease in prepaid expenses.D. An increase in inventory.An increase in inventory is deducted from net income to arrive at net cash flow from operations.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #76Topic Area: A Closer Look At Financial Statement Formats And Notes

77. Which of the following statements is true?

A.Accumulated depreciation is the amount of depreciation on the income statement for the current yearonly.B. Current liabilities are debts expected to be paid within the next year.C. Current assets are resources of a company that might include cash and copyrights.D.Patents, copyrights, and research and development expense are classified as intangible assets on thebalance sheet.Current liabilities are debts expected to be paid within the next year and expected to consume currentassets.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #77Topic Area: A Closer Look At Financial Statement Formats And Notes

78. Which of the following statements is false?A. Accumulated depreciation is a contra-account on the balance sheet.B. A stock's par value represents the minimum selling price of the stock.C. Retained earnings is the accumulated net income less the accumulated dividends declared.D. Research and development costs for a patent are reported on the balance sheet.Research and development costs are expenses and are reported on the income statement.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #78Topic Area: A Closer Look At Financial Statement Formats And Notes

79. Centex, Inc. issued 50,000 shares of its $1 par value common stock for $20 per share. The journal entryto record the stock issue would include which of the following?A. A credit to cash for $1,000,000.B. A credit to additional paid-in capital for $1,000,000.C. A credit to additional paid-in capital for $50,000.D. A credit to common stock for $50,000.The credit to common stock is for the par value of the shares issued.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #79Topic Area: A Closer Look At Financial Statement Formats And Notes

80. Which of the following transactions results in a decrease in the return on assets ratio?A. Increasing the sales price of the products sold.

B. An increase in the net profit margin ratio.C. Purchasing land by signing a long-term note payable.D. Collecting cash from an account receivable.Return on assets is net income divided by average total assets. Total assets increase and the return onassets ratio therefore decreases.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #80Topic Area: Return On Assets Analysis

81. Which of the following results in an increase in the return on assets ratio?A. A decrease in the asset turnover ratio.B. An increase in the net profit margin ratio.C. Purchasing a building by signing a long-term mortgage payable.D. Using cash to purchase land.Return on assets is net income divided by average total assets or net profit margin ratio times assetturnover ratio. An increase in the net profit margin ratio therefore increases return on assets.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #81Topic Area: Return On Assets Analysis

82. Marino Company has provided the following information:• Net sales, $480,000• Net income, $24,000• Average total assets, $200,000What is Marino's net profit margin ratio?A. 75%B. 12%C. 42%D. 5%The net profit margin ratio (5%) is net income ($24,000) divided by net sales ($480,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #82Topic Area: Return On Assets Analysis

83. Marino Company has provided the following information:• Net sales, $480,000• Net income, $24,000• Average total assets, $200,000What is Marino's asset turnover ratio?

A. 12.0B. 8.33C. .42D. 2.4The asset turnover ratio (2.4) is net sales ($480,000) divided by average total assets ($200,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #83Topic Area: Return On Assets Analysis

84. Marino Company has provided the following information:• Net sales, $480,000• Net income, $24,000• Average total assets, $200,000What is Marino's return on assets ratio?A. 240%B. 12%C. 5%D. 42%Return on assets (12%) equals net income ($24,000) divided by average total assets ($200,000). Returnon assets (12%) can also be calculated by multiplying the net profit margin ratio (5%) times the assetturnover ratio (2.4).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #84Topic Area: Return On Assets Analysis

85. Which of the following transactions will decrease both the return on assets ratio and the asset turnoverratio?A. Purchasing land by signing a note payable.B. Accruing interest expense at year-end.C. Accruing interest revenue at year-end.D. Collecting cash from an account receivable.The denominator in both ratios is average total assets. Purchasing land increases average total assets andtherefore decreases both ratios.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #85Topic Area: Return On Assets Analysis

86. Which of the following statements is false?A. A decrease in the asset turnover ratio results in a decrease in the return on assets ratio.B.An increase in average total assets results in a decrease in both the asset turnover ratio and return onassets ratio.C. A decrease in the asset turnover ratio results in a decrease in the net profit margin ratio.D. An increase in the net profit margin ratio results in an increase in the return on assets ratio.The asset turnover ratio and net profit margin ratio aren't directly related to each other.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #86Topic Area: Return On Assets Analysis

87. Which of the following statements is true?A. A decrease in net income decreases both the net profit margin ratio and the asset turnover ratio.B.An increase in average total assets results in a decrease in both the asset turnover ratio and the netprofit margin ratio.C.A decrease in average total assets results in an increase in the asset turnover ratio and a decrease inthe net profit margin ratio.D. An increase in net income increases both the net profit margin ratio and the return on assets ratio.The numerator for both ratios is net income. Therefore an increase in net income results in an increasein both ratios.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #87Topic Area: Return On Assets Analysis

88. Which of the following would most likely increase the net profit margin ratio?A. An increase in the unit selling price.B. A decrease in the overall sales volume.C. An increase in operating expenses.D. An increase in cost of goods sold.An increase in the unit selling price will increase net income by a greater amount proportionatelyrelative to the increase in net sales.AACSB: AnalyticalAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.

Libby - Chapter 05 #88Topic Area: Return On Assets Analysis

89. Which of the following is true?A. An extraordinary gain would increase income before taxes.B.Discontinued operations would be shown as a component of continuing operations on the incomestatement.C. Discontinued operations are shown on the income statement net of income tax effects.D. Results from discontinued operations may be used to predict future company results.Both extraordinary items and discontinued operations are reported on the income statement net of tax.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-SLibby - Chapter 05 #89Topic Area: Chapter Supplement

90. Polk Company suffered a loss from earthquake damage at its plant in Nebraska. The loss meets thecriteria for an extraordinary item. Where will the company present the extraordinary item on the incomestatement?A. As a component of income from continuing operations.B. As a component of gross profit.C. After income from continuing operations but before net income.D. Prior to income from continuing operations before taxes.Both extraordinary items and discontinued operations are reported on the income statement net of taxafter income from continuing operations.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-SLibby - Chapter 05 #90Topic Area: Chapter Supplement

91. Which of the following statements regarding international financial reporting standards (IFRS) is false?A. The reporting of extraordinary items is prohibited.B.Property, plant, and equipment can be reported on the balance sheet at either fair value or historicalcost.C. The last-in first-out inventory method is permitted.D. Inventory write-downs are permitted.The last-in first-out inventory method is prohibited under IFRS.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; information

intermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #91Topic Area: Players In The Accounting Communication Process

92. Which of the following statements does not accurately describe the affect of the sale of inventory at aprofit on the financial statements?A. Income from operations and current assets both increase.B. Operating income and gross profit both increase.C. Net income and earnings per share both increase.D. Current assets don't change and stockholders' equity increases.Current assets increase because the increase in either cash or accounts receivable is greater than thedecrease in inventory.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #92Topic Area: A Closer Look At Financial Statement Formats And Notes

93. Which of the following statements regarding international financial reporting standards (IFRS) is false?A. Research and development costs are expensed.B. Research costs are expensed and development costs are capitalized.C.Cash payments for interest are reported on the cash flow statement either an operating or financingcash flow.D. Reversal of inventory write-downs is permitted.Development costs are capitalized.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #93Topic Area: Players In The Accounting Communication Process

94. Which of the following statements is correct?A. Income from operations increases when common stock is sold for more than par value.B. The accrual of research and development costs does not affect the net profit margin ratio.C. The payment of an accrued liability decreases asset turnover.D. The declaration and payment of a cash dividend increases the return on assets ratio.The cash payment decreases average total assets which increases the asset turnover ratio.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Learning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #94

Topic Area: A Closer Look At Financial Statement Formats And Notes, Return On Assets Analysis

95. Which of the following statements correctly describe the effect of accruing interest revenue at year-end?A. Income from operations increases.B. The net profit margin ratio does not change.C. The asset turnover ratio increases.D. The return on assets ratio is affected.

ch5 Key1. External users of accounting information include decision makers such as investors, creditors, andfinancial analysts.TRUEEach of the identified decision makers uses accounting information in their decision making process.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #1Topic Area: Players In The Accounting Communication Process

2. The mission of the Securities & Exchange Commission (SEC) is to develop generally acceptedaccounting principles.FALSEThe mission of the SEC is to protect investors and maintain the integrity of the securities markets.AACSB: Reflective ThinkingAICPA BB: LegalAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #2Topic Area: Players In The Accounting Communication Process

3. Independent auditors are advisors who analyze financial statements and other economic information toformulate forecasts and stock recommendations.FALSEIndependent auditors provide an opinion with respect to the overall fairness of the financial statements.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #3

Topic Area: Players In The Accounting Communication Process

4. The Securities & Exchange Commission (SEC) oversees the work of the Financial AccountingStandards Board (FASB).TRUEThe SEC has delegated the responsibility for setting GAAP to the FASB.AACSB: Reflective ThinkingAICPA BB: LegalAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #4Topic Area: Players In The Accounting Communication Process

5. The Financial Accounting Standards Board (FASB) oversees the work of the Public CompanyAccounting Oversight Board (PCAOB).FALSEThe Securities & Exchange Commission (SEC) oversees the work of the Public Company AccountingOversight Board (PCAOB).AACSB: Reflective ThinkingAICPA BB: LegalAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #5Topic Area: Players In The Accounting Communication Process

6. The Public Company Accounting Oversight Board (PCAOB) sets auditing standards for independentauditors.TRUEThe Public Company Accounting Oversight Board (PCAOB) is responsible for setting auditingstandards for independent auditors.AACSB: Reflective ThinkingAICPA BB: LegalAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #6Topic Area: Players In The Accounting Communication Process

7. The primary responsibility for the information in a corporation's financial statements lies with the chiefexecutive officer (CEO) and the chief financial officer (CFO).TRUEThe CEO and the CFO are primarily responsible for the content of the financial statements.AACSB: Reflective Thinking

AICPA BB: LegalAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #7Topic Area: Players In The Accounting Communication Process

8. The board of directors is responsible for maintaining the integrity of a company's financial statementsand financial reporting.TRUEThe board of directors is responsible for ensuring that processes are in place for maintaining theintegrity of the company's accounting, financial statement preparation, and financial reporting.AACSB: Reflective ThinkingAICPA BB: LegalAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #8Topic Area: Players In The Accounting Communication Process

9. The Securities & Exchange Commission requires publically traded companies to have their financialstatements audited by their internal auditors.FALSEThe Securities & Exchange Commission requires publically traded companies to have their financialstatements audited by an independent registered public accounting firm.AACSB: Reflective ThinkingAICPA BB: LegalAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #9Topic Area: Players In The Accounting Communication Process

10. Financial analysts utilize a company's financial reports to assist them in making earnings projectionsand earnings per share projections.TRUEFinancial analysts utilize a company's financial reports to assist them in making earnings projections,earnings per share projections, share price predictions, as well buy and sell recommendations.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors;

auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #10Topic Area: Players In The Accounting Communication Process

11. For financial information to be relevant it must be verifiable and accurate.FALSEFor financial information to be relevant it must be timely and have both predictive value and feedbackvalue.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #11Topic Area: Players In The Accounting Communication Process

12. In order for financial information to be consistent, similar accounting methods need to be used from oneperiod to the next.TRUEConsistency refers to the use of the same or similar accounting methods from one period to the next.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #12Topic Area: Players In The Accounting Communication Process

13. In order for financial information to be reliable, it should be timely and verifiable.FALSEIn order for financial information to be reliable it should be accurate, unbiased, and verifiable.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #13Topic Area: Players In The Accounting Communication Process

14. In order for financial information to be relevant, it should be timely and accurate.FALSEFor financial information to be relevant it must be timely and have both predictive value and feedbackvalue.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors;

auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #14Topic Area: Players In The Accounting Communication Process

15. The form 10-Q contains an unaudited set of quarterly financial statements containing a condensedincome statement and balance sheet.TRUEThe form 10-Q is the quarterly report containing a condensed income statement and balance sheet thatpublically traded companies must file with the SEC.AACSB: Reflective ThinkingAICPA BB: LegalAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-02 Identify the steps in the accounting communication process; including the issuance of press releases; annual reports; quarterly reports; andSEC filings; as well as the role of electronic information services in this process.Libby - Chapter 05 #15Topic Area: The Disclosure Process

16. The form 10-K is the annual report that publically traded companies must file with the Securities &Exchange Commission (SEC).TRUEThe form 10-K is the annual report that publically traded companies must file with the SEC.AACSB: Reflective ThinkingAICPA BB: LegalAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-02 Identify the steps in the accounting communication process; including the issuance of press releases; annual reports; quarterly reports; andSEC filings; as well as the role of electronic information services in this process.Libby - Chapter 05 #16Topic Area: The Disclosure Process

17. Recent stock price information is a financial statement disclosure.TRUEFinancial statement disclosures include recent stock price information, summaries of unauditedquarterly financial data, as well as a listing of officers and directors, etc.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-02 Identify the steps in the accounting communication process; including the issuance of press releases; annual reports; quarterly reports; andSEC filings; as well as the role of electronic information services in this process.Libby - Chapter 05 #17Topic Area: The Disclosure Process

18. A listing of a company's directors and officers is a financial statement disclosure.TRUEFinancial statement disclosures include recent stock price information, summaries of unauditedquarterly financial data, as well as a listing of officers and directors, etc.AACSB: Reflective Thinking

AICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-02 Identify the steps in the accounting communication process; including the issuance of press releases; annual reports; quarterly reports; andSEC filings; as well as the role of electronic information services in this process.Libby - Chapter 05 #18Topic Area: The Disclosure Process

19. Inventories are reported on the balance sheet as a current asset.TRUECurrent assets include cash, accounts receivable, inventories, etc.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #19Topic Area: A Closer Look At Financial Statement Formats And Notes

20. Intangible assets are reported on the balance sheet as a current asset.FALSECurrent assets include cash, accounts receivable, inventories, etc. Intangible assets are reported asnoncurrent assets.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #20Topic Area: A Closer Look At Financial Statement Formats And Notes

21. Intangible assets are reported on the balance sheet as a noncurrent asset and include goodwill.TRUEIntangible assets are reported as noncurrent assets and include patents, trademarks, franchises,copyrights, and goodwill.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #21Topic Area: A Closer Look At Financial Statement Formats And Notes

22. Additional-paid in capital is reported on the balance sheet as a component of shareholders' equity.TRUEShareholders' equity includes common stock, additional paid-in capital, and retained earnings.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: Easy

Learning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #22Topic Area: A Closer Look At Financial Statement Formats And Notes

23. Common stock and additional-paid in capital are both reported on the balance sheet as a component ofshareholders' equity.TRUEShareholders' equity includes common stock, additional paid-in capital, and retained earnings.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #23Topic Area: A Closer Look At Financial Statement Formats And Notes.

24. Common stock and additional-paid in capital represent the capital contributed by shareholders.TRUEContributed capital consists of common stock and additional paid-in capital.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #24Topic Area: A Closer Look At Financial Statement Formats And Notes

25. Net sales less cost of goods sold is reported on the income statement as income from continuingoperations.FALSENet sales less cost of goods sold is gross profit and is a component of income from continuingoperations.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #25Topic Area: A Closer Look At Financial Statement Formats And Notes

26. Discontinued operations and extraordinary items are reported on the income statement as a componentof income from continuing operations.FALSEDiscontinued operations and extraordinary items are reported on the income statement as a deductionfrom income from operations.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting

Blooms: RememberDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #26Topic Area: A Closer Look At Financial Statement Formats And Notes

27. The summary of significant accounting policies is a required financial statement disclosure.TRUEOne of the first disclosures is the summary of significant accounting policies.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #27Topic Area: A Closer Look At Financial Statement Formats And Notes

28. The return on assets ratio is calculated by dividing income from continuing operations by average totalassets.FALSEThe return on assets ratio is calculated by dividing net income by average total assets.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #28Topic Area: Return On Assets Analysis

29. The return on assets ratio will increase when sales increase.TRUEThe return on assets ratio calculation increases when asset turnover (net sales divided by average totalassets) increases.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: RememberDifficulty: MediumLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #29Topic Area: Return On Assets Analysis

30. The return on assets ratio is affected by both the net profit margin ratio and the asset turnover ratio.TRUEThe return on assets ratio is calculated by multiplying the net profit margin ratio times the asset turnoverratio.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #30Topic Area: Return On Assets Analysis

31. Which of the following tasks does the Securities & Exchange Commission (SEC) not perform?A. Overseeing the work of the Financial Accounting Standards Board (FASB).B. Overseeing the work of the Public Company Accounting Oversight Board (PCAOB).C. The responsibility for protecting investors and maintaining the integrity of the securities markets.D. The development of generally accepted accounting principles.The FASB develops generally accepted accounting principles.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #31Topic Area: Players In The Accounting Communication Process

32. Which of the following tasks does the Financial Accounting Standards Board (FASB) perform?A. Overseeing the work of the Securities & Exchange Commission (SEC).B. Overseeing the work of the Public Company Accounting Oversight Board (PCAOB).C. The responsibility for protecting investors and maintaining the integrity of the securities markets.D. The development of generally accepted accounting principles.The FASB develops generally accepted accounting principles.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #32Topic Area: Players In The Accounting Communication Process

33. Which of the following are primarily responsible for the information provided in a company's financialstatements?A. The internal and external auditors.B. The Securities & Exchange Commission (SEC) and the external auditors.C. The chief executive officer (CEO) and the chief financial officer (CFO).D. The external auditors and the board of directors.The CEO and CFO are primarily responsible for the content of a company's financial statements.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #33Topic Area: Players In The Accounting Communication Process

34. Which of the following is not a responsibility of the chief executive officer (CEO)

and the chief financialofficer (CFO)?A. The responsibility to oversee the financial statement external audit.B.To ensure the accuracy and completeness of all reports provided to the Securities & ExchangeCommission (SEC).C. The certification of the strength of the internal control system.D. The disclosure to the auditor committee of any frauds they are aware of.The external auditors are hired by the board of directors and are responsible for overseeing their ownaudit.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #34Topic Area: Players In The Accounting Communication Process

35. Which of the following is not true about the board of directors?A. They are elected by stockholders.B.They ensure the accuracy and completeness of all reports provided to the Securities & ExchangeCommission (SEC).C.They are responsible for ensuring that processes are in place for maintaining the integrity of thefinancial statements.D. They are responsible for hiring the company's external auditors.The CEO and CFO ensure the accuracy and completeness of all reports provided to the Securities &Exchange Commission (SEC).AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #35Topic Area: Players In The Accounting Communication Process

36. Which of the following statements is false?A.The board of directors meets with the external auditors to discuss management's compliance withtheir financial reporting obligations.B. The external auditors are selected by the Securities & Exchange Commission (SEC).C.The Securities & Exchange Commission (SEC) requires publically traded companies to have theirfinancial statements audited by an independent accountant.D.The external auditors assume some responsibility with respect to the fairness of the

financialstatements.The external auditors are selected by the board of directors.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #36Topic Area: Players In The Accounting Communication Process

37. For accounting information to be useful, it must be which of the following?A. It must be consistent and comparable.B. It must be relevant and reliable.C. It must be comparable and reliable.D. It must be relevant and consistent.Relevance and reliability are the characteristics which allow accounting information to be useful.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #37Topic Area: Players In The Accounting Communication Process

38. Conservatism requires that special care must be taken to avoid which of the following?A. Overstating assets and liabilities and understating revenues and expenses.B. Understating assets and liabilities and overstating revenues and expenses.C. Overstating assets and revenues and understating liabilities and expenses.D. Understating assets and revenues and overstating liabilities and expenses.Conservatism is concerned with overstating revenues and assets and with understating expenses andliabilities.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #38Topic Area: Players In The Accounting Communication Process

39. Which of the following is an objective of the external audit of a company's financial statements?A. To provide a forecast of the company's future earnings.B. To assure no fraud has been committed by the company's management.C.To provide credibility and assurance that the financial statement information conforms with generally

accepted accounting principles in all material respects.D. To detect all accounting errors made by the accounting system and employees.The external audit lends credibility to the financial statements and assesses whether the financialstatements are in compliance with generally accepted accounting principles.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #39Topic Area: Players In The Accounting Communication Process

40. Which of the following describes the conservatism constraint?A.A business should avoid overstating assets and revenues and avoid understating expenses andliabilities.B. The benefits of accounting for and reporting information should outweigh the costs.C.If the dollar amounts involved are large enough to influence a user's decisions the data is consideredto be relevant.D. The conservatism constraint produces a higher net income and stockholders' equity.Conservatism is concerned with overstating revenues and assets and with understating expenses andliabilities.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #40Topic Area: Players In The Accounting Communication Process

41. Which of the following is false?A.Relevance is the characteristic of accounting information that says the information would make adifference in a user's decision.B. Accounts receivable would normally be classified as a current asset.C. Accumulated depreciation would normally appear on the income statement.D.The matching principle holds that all expenses incurred in the generation of revenue should berecognized in the same period as the revenue is earned.Accumulated depreciation is a balance sheet account.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.

Libby - Chapter 05 #41Topic Area: Players In The Accounting Communication Process

42. The Securities and Exchange Commission's (SEC) report that is required to be filed if any special eventoccurs is which of the following?A. Form 10KB. Form 8KC. Form 10QD. Form 8QThe form 8-K is used to disclose material events not reported previously which are relevant to investors.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-02 Identify the steps in the accounting communication process; including the issuance of press releases; annual reports; quarterly reports; andSEC filings; as well as the role of electronic information services in this process.Libby - Chapter 05 #42Topic Area: The Disclosure Process

43. In what order are current assets usually reported on the balance sheet?A. From the most liquid to the least liquid.B. From the least liquid to the most liquid.C. In alphabetical order of accounts.D. From the largest balance to the smallest balance.Current assets are reported on the balance sheet in order of liquidity.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #43Topic Area: A Closer Look At Financial Statement Format And Notes

44. Which of the following would not be classified as a current asset?A. Accounts receivableB. PatentsC. Merchandise inventoryD. CashA patent is an intangible asset.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #44Topic Area: A Closer Look At Financial Statement Format And Notes

45. What account is credited when a corporation issues stock at an amount over the stock's par value?A. Gain on sale of stockB. Loss on sale of stockC. Additional paid- in capital

D. Retained earningsAdditional paid-in capital is credited when a company sells its stock for more than par value.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #45Topic Area: A Closer Look At Financial Statement Format And Notes

46. Contributed capital consists of which of the following two accounts?A. Common stock and Additional paid in capitalB. Common stock and Retained earningsC. Additional paid in capital and Retained earningsD. Retained earnings and CashContributed capital consists of common stock and additional paid-in capital.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #46Topic Area: A Closer Look At Financial Statement Format And Notes

47. Which of the following are the criteria used to determine whether an item is extraordinary?A. It is unusual in nature and occurs frequently.B. It is unusual in nature and occurs infrequently.C. It is unusual in nature or occurs infrequently.D. It is infrequent in occurrence only.Extraordinary items occur infrequently and are unusual in nature.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #47Topic Area: A Closer Look At Financial Statement Format And Notes

48. Which of the following journal entries is correct when common stock is sold for cash at a price greaterthan par value?A. Option AB. Option BC. Option CD. Option DCommon stock and additional paid-in capital are both credited when common stock is sold for morethan par value.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: Remember

Difficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #48Topic Area: A Closer Look At Financial Statement Format And Notes

49. Which of the following statements is false?A. The common stock account has a credit balance.B. The additional paid-in capital account has a credit balance.C. Contributed capital consists of common stock and additional paid-in capital.D. The par value of a stock represents the stock's fair value.The par value represents the minimum amount a stockholder must contribute.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #49Topic Area: A Closer Look At Financial Statement Format And Notes

50. Which of the following is true about gross profit (gross margin)?A. It is net sales minus operating expenses.B. It is net sales minus cost of goods sold.C. It is the same as income from continuing operations.D. It is net sales minus cost of goods sold and operating expenses.Gross profit equals net sales minus cost of goods sold.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #50Topic Area: A Closer Look At Financial Statement Format And Notes

51. Which of the following best describes income from operations?A. It includes the results of discontinued operations.B. It includes extraordinary items.C. It is sales minus cost of goods sold and income tax expense.D. It is net sales minus cost of goods sold and operating expenses.Income from operations equals net sales minus cost of goods sold and operating expenses.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #51Topic Area: A Closer Look At Financial Statement Format And Notes

52. The Callie Company has provided the following information:• Operating expenses were $231,000;• Cost of goods sold was $376,000;• Net sales were $940,000;• Interest expense was $32,000;• Gain on sale of a building was $76,000;

• Income tax expense was $151,000.What was Callie's gross profit?A. $564,000B. $188,000C. $333,000D. $232,000Gross profit ($564,000) equals net sales ($940,000) minus cost of goods sold ($376,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #52Topic Area: A Closer Look At Financial Statement Format And Notes

53. The Callie Company has provided the following information:• Operating expenses were $231,000;• Cost of goods sold was $376,000;• Net sales were $940,000;• Interest expense was $32,000;• Gain on sale of a building was $76,000;• Income tax expense was $151,000.What was Callie's income from operations?A. $333,000B. $188,000C. $156,000D. $232,000Income from operations ($333,000) equals net sales ($940,000) minus the sum of cost of goods sold($376,000) and operating expenses ($231,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #53Topic Area: A Closer Look At Financial Statement Format And Notes

54. The Callie Company has provided the following information:• Operating expenses were $231,000;• Cost of goods sold was $376,000;• Net sales were $940,000;• Interest expense was $32,000;• Gain on sale of a building was $76,000;• Income tax expense was $151,000.What was Callie's income before taxes?A. $564,000B. $188,000C. $377,000D. $232,000

Income before taxes ($377,000) equals net sales ($940,000) minus cost of goods sold ($376,000), minusoperating expenses ($231,000), minus interest expense ($32,000), plus gain on sale ($76,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #54Topic Area: A Closer Look At Financial Statement Format And Notes

55. Which of the following is not reported as an operating expense on the income statement?A. Administrative expensesB. Research and development expenseC. Interest expenseD. Selling expensesInterest expense is a deduction from income from continuing operations.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #55Topic Area: A Closer Look At Financial Statement Format And Notes

56. The Nellie Company has provided the following information:• Operating expenses were $115,000;• Gross profit was $629,000;• Cost of goods sold was $470,000• Interest expense was $17,000;• Extraordinary loss was $29,000;• Income tax expense was $199,000.What was Nellie's operating income?A. $514,000B. $54,000C. $497,000D. $298,000Operating income ($514,000) equals gross profit ($629,000) minus operating expenses ($115,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #56Topic Area: A Closer Look At Financial Statement Format And Notes

57. The Nellie Company has provided the following information:• Operating expenses were $115,000;• Gross profit was $629,000;

• Cost of goods sold was $470,000• Interest expense was $17,000;• Extraordinary loss was $29,000;• Income tax expense was $199,000.What was Nellie's income before taxes?A. $514,000B. $54,000C. $497,000D. $298,000Income before taxes ($497,000) equals gross profit ($629,000) minus operating expenses ($115,000) andinterest expense ($17,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #57Topic Area: A Closer Look At Financial Statement Format And Notes

58. The Willie Company has provided the following information:• Operating expenses were $345,000;• Income from operations was $215,000;• Net sales were $1,100,000;• Interest expense was $71,000;• Discontinued operations loss was $87,000;• Income tax expense was $58,000.What was Willie's cost of gross profit?A. $540,000B. $469,000C. $618,000D. $560,000Gross profit ($560,000) equals operating expenses ($345,000) plus income from operations ($215,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #58Topic Area: A Closer Look At Financial Statement Format And Notes

59. The Willie Company has provided the following information:• Operating expenses were $345,000;• Income from operations was $215,000;• Net sales were $1,100,000;• Interest expense was $71,000;• Discontinued operations loss was $87,000;• Income tax expense was $58,000.What was Willie's income before taxes?

A. $144,000B. $57,000C. $215,000D. $539,000Income before taxes ($144,000) equals income from operations ($215,000) minus interest expense($71,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #59Topic Area: A Closer Look At Financial Statement Format And Notes

60. Which of the following would not be a component of income from operations?A. Gross profitB. Selling and administrative expensesC. Dividend incomeD. Research and development expenseDividend income is reported as nonoperating revenue.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #60Topic Area: A Closer Look At Financial Statement Format And Notes

61. Which of the following statements regarding earnings per share is false?A. It can be reported on the income statement.B. It increases when net income increases.C. It is based on the average number of common shares outstanding.D. It would not be affected by an extraordinary loss.Extraordinary losses reduce net income and therefore earnings per share.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #61Topic Area: A Closer Look At Financial Statement Format And Notes

62. Which of the following would not typically be disclosed in the notes to the financial statements?A. Additional detail regarding reported numbers.B. A summary of significant accounting policies.C. Revenues reported by business segments.D. The net income earned by the business to date.The net income earned by the business to date is included within retained earnings.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: Remember

Difficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #62Topic Area: A Closer Look At Financial Statement Format And Notes

63. Which of the following statements is false?A. Relevant information has the ability to influence an investor's decision.B. Reliable information is accurate, verifiable and unbiased.C. Consistency refers to the use of the same accounting principles from one period to the next.D.Comparability refers to the use of conservatism within different time periods by a particularbusiness.Comparability refers to the use of similar accounting methods across businesses.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #63Topic Area: Players In The Accounting Communication Process

64. In which of the following classifications would cash dividend payments to stockholders be reported?A. Operating activitiesB. Financing activitiesC. Investing activitiesD. Stockholder activitiesFinancing activities include dividend payments to stockholders.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #64Topic Area: A Closer Look At Financial Statement Format And Notes

65. A company issued 1,000 shares of $10 par value common stock in exchange for $15,000. Which of thefollowing correctly describes the impact of this transaction on the financial statements?A. A $15,000 gain is reported on the income statement.B. Contributed capital in the amount of $10,000 is reported on the balance sheet.C. Common stock is reported on the balance sheet at $15,000.D. Additional paid-in capital of $5,000 is reported on the balance sheet.Additional paid-in capital ($5,000) represents the excess of the selling price ($15,000) above the stock'spar value ($10,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.

Libby - Chapter 05 #65Topic Area: A Closer Look At Financial Statement Format And Notes

66. Where are stock issues in exchange for cash reported on a statement of cash flows?A. Operating activitiesB. Financing activitiesC. Investing activitiesD. Stockholder activitiesFinancing cash flows include the sale of common stock in exchange for cash.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #66Topic Area: A Closer Look At Financial Statement Format And Notes

67. Where are acquisitions of previously issued stock for cash reported on a statement of cash flows?A. Operating activitiesB. Financing activitiesC. Investing activitiesD. Stockholder activitiesFinancing cash flows include the acquisition of previously issued stock.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #67Topic Area: A Closer Look At Financial Statement Format And Notes

68. Which of the following statements is false when a company sells inventory costing $700 for $1,200?A. Cost of goods sold increases $700.B. Gross profit increases $500.C. Stockholders' equity increases $500.D. Net sales increases $500.Net sales will increase $1,200.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #68Topic Area: A Closer Look At Financial Statement Format And Notes

69. Which of the following statements is false when a company sells inventory costing $900 for $1,500cash?A. Current assets increase $600.B. Gross profit increases $1,500.C. Stockholders' equity increases $600.D. Net sales increases $1,500.

Gross profit ($600) is the difference between net sales ($1,500) and cost of goods sold ($900).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #69Topic Area: A Closer Look At Financial Statement Format And Notes

70. Superior has provided the following information for its recent year of operation:• The common stock account balance at the beginning of the year was $20,000 and the year-end balancewas $25,000.• The additional paid-in capital account balance increased $2,500 during the year.• The retained earnings balance at the beginning of the year was $75,000 and the year-end balance was$91,000.• Net income was $26,000.How much were Superior's dividend declarations during its recent year of operation?A. $10,000.B. $42,000.C. $26,000.D. The dividend declarations can't be determined given the above information.Ending retained earnings ($91,000) = Beginning retained earnings ($75,000) + Net income ($26,000) -Dividends declared ($10,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #70Topic Area: A Closer Look At Financial Statement Format And Notes

71. Superior has provided the following information for its recent year of operation:• The common stock account balance at the beginning of the year was $20,000 and the year-end balancewas $25,000.• The additional paid-in capital account balance increased $2,500 during the year.• The retained earnings balance at the beginning of the year was $75,000 and the year-end balance was$91,000.• Net income was $26,000.How much did Superior sell its common stock for during the year?A. $5,000.B. $2,500.C. $7,500.D. $25,000.The increase in the common stock account ($5,000) plus the increase in additional paid-in

capital($2,500) equals the selling price of the common stock ($7,500).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #71Topic Area: A Closer Look At Financial Statement Format And Notes

72. Huron has provided the following year-end balances:• Cash, $25,000• Patents, $7,900• Accounts receivable, $9,300• Property, plant, and equipment, $98,700• Prepaid insurance, $3,600• Accumulated depreciation, $10,000• Inventory, $37,000• Trademarks, $12,600• Goodwill, $11,000How much are Huron's current assets?A. $85,900.B. $71,300.C. $74,900.D. $102,100.Huron's current assets ($74,900) include cash ($25,000), accounts receivable ($9,300), prepaidinsurance ($3,600), and inventory ($37,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #72Topic Area: A Closer Look At Financial Statement Format And Notes

73. Huron has provided the following year-end balances:• Cash, $25,000• Patents, $7,900• Accounts receivable, $9,300• Property, plant, and equipment, $98,700• Prepaid insurance, $3,600• Accumulated depreciation, $10,000• Inventory, $37,000• Trademarks, $12,600• Goodwill, $11,000How much are Huron's net noncurrent assets?A. $122,300.B. $120,200.C. $123,800.

D. $112,300.Huron's net noncurrent assets ($120,200) include patents ($7,900), property, plant, and equipment($98,700), accumulated depreciation (-$10,000), trademarks ($12,600), and goodwill ($11,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #73Topic Area: A Closer Look At Financial Statement Format And Notes

74. Which of the following would not be included on an income statement?A. Accumulated depreciationB. Insurance expenseC. Cost of goods soldD. Extraordinary lossAccumulated depreciation is a balance sheet account.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #74Topic Area: A Closer Look At Financial Statement Formats And Notes

75. Which of the following would not be included within the operations section of a cash flow statement?A. Cash paid for research and development.B. Cash paid for insurance.C. Cash paid for interest expense.D. Cash paid to legalize a patent.The cash paid to legalize a patent would be an investing cash flow.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #75Topic Area: A Closer Look At Financial Statement Formats And Notes

76. Which of the following would not be added to net income in the determination of net cash flow fromoperations?A. An increase in accounts payable.B. A decrease in accounts receivable.C. A decrease in prepaid expenses.D. An increase in inventory.An increase in inventory is deducted from net income to arrive at net cash flow from operations.AACSB: AnalyticAICPA BB: Critical Thinking

AICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #76Topic Area: A Closer Look At Financial Statement Formats And Notes

77. Which of the following statements is true?A.Accumulated depreciation is the amount of depreciation on the income statement for the current yearonly.B. Current liabilities are debts expected to be paid within the next year.C. Current assets are resources of a company that might include cash and copyrights.D.Patents, copyrights, and research and development expense are classified as intangible assets on thebalance sheet.Current liabilities are debts expected to be paid within the next year and expected to consume currentassets.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #77Topic Area: A Closer Look At Financial Statement Formats And Notes

78. Which of the following statements is false?A. Accumulated depreciation is a contra-account on the balance sheet.B. A stock's par value represents the minimum selling price of the stock.C. Retained earnings is the accumulated net income less the accumulated dividends declared.D. Research and development costs for a patent are reported on the balance sheet.Research and development costs are expenses and are reported on the income statement.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #78Topic Area: A Closer Look At Financial Statement Formats And Notes

79. Centex, Inc. issued 50,000 shares of its $1 par value common stock for $20 per share. The journal entryto record the stock issue would include which of the following?A. A credit to cash for $1,000,000.B. A credit to additional paid-in capital for $1,000,000.C. A credit to additional paid-in capital for $50,000.D. A credit to common stock for $50,000.The credit to common stock is for the par value of the shares issued.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: Apply

Difficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #79Topic Area: A Closer Look At Financial Statement Formats And Notes

80. Which of the following transactions results in a decrease in the return on assets ratio?A. Increasing the sales price of the products sold.B. An increase in the net profit margin ratio.C. Purchasing land by signing a long-term note payable.D. Collecting cash from an account receivable.Return on assets is net income divided by average total assets. Total assets increase and the return onassets ratio therefore decreases.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #80Topic Area: Return On Assets Analysis

81. Which of the following results in an increase in the return on assets ratio?A. A decrease in the asset turnover ratio.B. An increase in the net profit margin ratio.C. Purchasing a building by signing a long-term mortgage payable.D. Using cash to purchase land.Return on assets is net income divided by average total assets or net profit margin ratio times assetturnover ratio. An increase in the net profit margin ratio therefore increases return on assets.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #81Topic Area: Return On Assets Analysis

82. Marino Company has provided the following information:• Net sales, $480,000• Net income, $24,000• Average total assets, $200,000What is Marino's net profit margin ratio?A. 75%B. 12%C. 42%D. 5%The net profit margin ratio (5%) is net income ($24,000) divided by net sales ($480,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #82Topic Area: Return On Assets Analysis

83. Marino Company has provided the following information:• Net sales, $480,000• Net income, $24,000• Average total assets, $200,000What is Marino's asset turnover ratio?A. 12.0B. 8.33C. .42D. 2.4The asset turnover ratio (2.4) is net sales ($480,000) divided by average total assets ($200,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #83Topic Area: Return On Assets Analysis

84. Marino Company has provided the following information:• Net sales, $480,000• Net income, $24,000• Average total assets, $200,000What is Marino's return on assets ratio?A. 240%B. 12%C. 5%D. 42%Return on assets (12%) equals net income ($24,000) divided by average total assets ($200,000). Returnon assets (12%) can also be calculated by multiplying the net profit margin ratio (5%) times the assetturnover ratio (2.4).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #84Topic Area: Return On Assets Analysis

85. Which of the following transactions will decrease both the return on assets ratio and the asset turnoverratio?A. Purchasing land by signing a note payable.B. Accruing interest expense at year-end.C. Accruing interest revenue at year-end.D. Collecting cash from an account receivable.The denominator in both ratios is average total assets. Purchasing land increases average total assets andtherefore decreases both ratios.AACSB: Analytic

AICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #85Topic Area: Return On Assets Analysis

86. Which of the following statements is false?A. A decrease in the asset turnover ratio results in a decrease in the return on assets ratio.B.An increase in average total assets results in a decrease in both the asset turnover ratio and return onassets ratio.C. A decrease in the asset turnover ratio results in a decrease in the net profit margin ratio.D. An increase in the net profit margin ratio results in an increase in the return on assets ratio.The asset turnover ratio and net profit margin ratio aren't directly related to each other.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #86Topic Area: Return On Assets Analysis

87. Which of the following statements is true?A. A decrease in net income decreases both the net profit margin ratio and the asset turnover ratio.B.An increase in average total assets results in a decrease in both the asset turnover ratio and the netprofit margin ratio.C.A decrease in average total assets results in an increase in the asset turnover ratio and a decrease inthe net profit margin ratio.D. An increase in net income increases both the net profit margin ratio and the return on assets ratio.The numerator for both ratios is net income. Therefore an increase in net income results in an increasein both ratios.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #87Topic Area: Return On Assets Analysis

88. Which of the following would most likely increase the net profit margin ratio?A. An increase in the unit selling price.B. A decrease in the overall sales volume.C. An increase in operating expenses.D. An increase in cost of goods sold.An increase in the unit selling price will increase net income by a greater amount proportionately

relative to the increase in net sales.AACSB: AnalyticalAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #88Topic Area: Return On Assets Analysis

89. Which of the following is true?A. An extraordinary gain would increase income before taxes.B.Discontinued operations would be shown as a component of continuing operations on the incomestatement.C. Discontinued operations are shown on the income statement net of income tax effects.D. Results from discontinued operations may be used to predict future company results.Both extraordinary items and discontinued operations are reported on the income statement net of tax.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-SLibby - Chapter 05 #89Topic Area: Chapter Supplement

90. Polk Company suffered a loss from earthquake damage at its plant in Nebraska. The loss meets thecriteria for an extraordinary item. Where will the company present the extraordinary item on the incomestatement?A. As a component of income from continuing operations.B. As a component of gross profit.C. After income from continuing operations but before net income.D. Prior to income from continuing operations before taxes.Both extraordinary items and discontinued operations are reported on the income statement net of taxafter income from continuing operations.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-SLibby - Chapter 05 #90Topic Area: Chapter Supplement

91. Which of the following statements regarding international financial reporting standards (IFRS) is false?A. The reporting of extraordinary items is prohibited.B.Property, plant, and equipment can be reported on the balance sheet at either fair value or historicalcost.C. The last-in first-out inventory method is permitted.D. Inventory write-downs are permitted.

The last-in first-out inventory method is prohibited under IFRS.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #91Topic Area: Players In The Accounting Communication Process

92. Which of the following statements does not accurately describe the affect of the sale of inventory at aprofit on the financial statements?A. Income from operations and current assets both increase.B. Operating income and gross profit both increase.C. Net income and earnings per share both increase.D. Current assets don't change and stockholders' equity increases.Current assets increase because the increase in either cash or accounts receivable is greater than thedecrease in inventory.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #92Topic Area: A Closer Look At Financial Statement Formats And Notes

93. Which of the following statements regarding international financial reporting standards (IFRS) is false?A. Research and development costs are expensed.B. Research costs are expensed and development costs are capitalized.C.Cash payments for interest are reported on the cash flow statement either an operating or financingcash flow.D. Reversal of inventory write-downs is permitted.Development costs are capitalized.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #93Topic Area: Players In The Accounting Communication Process

94. Which of the following statements is correct?A. Income from operations increases when common stock is sold for more than par value.B. The accrual of research and development costs does not affect the net profit margin ratio.C. The payment of an accrued liability decreases asset turnover.D. The declaration and payment of a cash dividend increases the return on assets ratio.The cash payment decreases average total assets which increases the asset turnover ratio.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Learning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #94Topic Area: A Closer Look At Financial Statement Formats And Notes, Return On Assets Analysis

95. Which of the following statements correctly describe the effect of accruing interest revenue at year-end?A. Income from operations increases.B. The net profit margin ratio does not change.C. The asset turnover ratio increases.D. The return on assets ratio is affected.

ch5 Key1. External users of accounting information include decision makers such as investors, creditors, andfinancial analysts.TRUEEach of the identified decision makers uses accounting information in their decision making process.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #1Topic Area: Players In The Accounting Communication Process

2. The mission of the Securities & Exchange Commission (SEC) is to develop generally acceptedaccounting principles.FALSEThe mission of the SEC is to protect investors and maintain the integrity of the securities markets.AACSB: Reflective ThinkingAICPA BB: LegalAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #2Topic Area: Players In The Accounting Communication Process

3. Independent auditors are advisors who analyze financial statements and other economic information toformulate forecasts and stock recommendations.FALSEIndependent auditors provide an opinion with respect to the overall fairness of the financial statements.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #3Topic Area: Players In The Accounting Communication Process

4. The Securities & Exchange Commission (SEC) oversees the work of the Financial AccountingStandards Board (FASB).TRUEThe SEC has delegated the responsibility for setting GAAP to the FASB.AACSB: Reflective ThinkingAICPA BB: LegalAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #4Topic Area: Players In The Accounting Communication Process

5. The Financial Accounting Standards Board (FASB) oversees the work of the Public CompanyAccounting Oversight Board (PCAOB).FALSEThe Securities & Exchange Commission (SEC) oversees the work of the Public Company AccountingOversight Board (PCAOB).AACSB: Reflective ThinkingAICPA BB: LegalAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #5Topic Area: Players In The Accounting Communication Process

6. The Public Company Accounting Oversight Board (PCAOB) sets auditing standards for independentauditors.TRUEThe Public Company Accounting Oversight Board (PCAOB) is responsible for setting auditingstandards for independent auditors.AACSB: Reflective ThinkingAICPA BB: LegalAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #6Topic Area: Players In The Accounting Communication Process

7. The primary responsibility for the information in a corporation's financial statements

lies with the chiefexecutive officer (CEO) and the chief financial officer (CFO).TRUEThe CEO and the CFO are primarily responsible for the content of the financial statements.AACSB: Reflective ThinkingAICPA BB: LegalAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #7Topic Area: Players In The Accounting Communication Process

8. The board of directors is responsible for maintaining the integrity of a company's financial statementsand financial reporting.TRUEThe board of directors is responsible for ensuring that processes are in place for maintaining theintegrity of the company's accounting, financial statement preparation, and financial reporting.AACSB: Reflective ThinkingAICPA BB: LegalAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #8Topic Area: Players In The Accounting Communication Process

9. The Securities & Exchange Commission requires publically traded companies to have their financialstatements audited by their internal auditors.FALSEThe Securities & Exchange Commission requires publically traded companies to have their financialstatements audited by an independent registered public accounting firm.AACSB: Reflective ThinkingAICPA BB: LegalAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #9Topic Area: Players In The Accounting Communication Process

10. Financial analysts utilize a company's financial reports to assist them in making earnings projectionsand earnings per share projections.TRUEFinancial analysts utilize a company's financial reports to assist them in making earnings projections,

earnings per share projections, share price predictions, as well buy and sell recommendations.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #10Topic Area: Players In The Accounting Communication Process

11. For financial information to be relevant it must be verifiable and accurate.FALSEFor financial information to be relevant it must be timely and have both predictive value and feedbackvalue.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #11Topic Area: Players In The Accounting Communication Process

12. In order for financial information to be consistent, similar accounting methods need to be used from oneperiod to the next.TRUEConsistency refers to the use of the same or similar accounting methods from one period to the next.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #12Topic Area: Players In The Accounting Communication Process

13. In order for financial information to be reliable, it should be timely and verifiable.FALSEIn order for financial information to be reliable it should be accurate, unbiased, and verifiable.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #13Topic Area: Players In The Accounting Communication Process

14. In order for financial information to be relevant, it should be timely and accurate.FALSEFor financial information to be relevant it must be timely and have both predictive value

and feedbackvalue.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #14Topic Area: Players In The Accounting Communication Process

15. The form 10-Q contains an unaudited set of quarterly financial statements containing a condensedincome statement and balance sheet.TRUEThe form 10-Q is the quarterly report containing a condensed income statement and balance sheet thatpublically traded companies must file with the SEC.AACSB: Reflective ThinkingAICPA BB: LegalAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-02 Identify the steps in the accounting communication process; including the issuance of press releases; annual reports; quarterly reports; andSEC filings; as well as the role of electronic information services in this process.Libby - Chapter 05 #15Topic Area: The Disclosure Process

16. The form 10-K is the annual report that publically traded companies must file with the Securities &Exchange Commission (SEC).TRUEThe form 10-K is the annual report that publically traded companies must file with the SEC.AACSB: Reflective ThinkingAICPA BB: LegalAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-02 Identify the steps in the accounting communication process; including the issuance of press releases; annual reports; quarterly reports; andSEC filings; as well as the role of electronic information services in this process.Libby - Chapter 05 #16Topic Area: The Disclosure Process

17. Recent stock price information is a financial statement disclosure.TRUEFinancial statement disclosures include recent stock price information, summaries of unauditedquarterly financial data, as well as a listing of officers and directors, etc.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-02 Identify the steps in the accounting communication process; including the issuance of press releases; annual reports; quarterly reports; andSEC filings; as well as the role of electronic information services in this process.Libby - Chapter 05 #17Topic Area: The Disclosure Process

18. A listing of a company's directors and officers is a financial statement disclosure.TRUEFinancial statement disclosures include recent stock price information, summaries of unauditedquarterly financial data, as well as a listing of officers and directors, etc.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-02 Identify the steps in the accounting communication process; including the issuance of press releases; annual reports; quarterly reports; andSEC filings; as well as the role of electronic information services in this process.Libby - Chapter 05 #18Topic Area: The Disclosure Process

19. Inventories are reported on the balance sheet as a current asset.TRUECurrent assets include cash, accounts receivable, inventories, etc.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #19Topic Area: A Closer Look At Financial Statement Formats And Notes

20. Intangible assets are reported on the balance sheet as a current asset.FALSECurrent assets include cash, accounts receivable, inventories, etc. Intangible assets are reported asnoncurrent assets.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #20Topic Area: A Closer Look At Financial Statement Formats And Notes

21. Intangible assets are reported on the balance sheet as a noncurrent asset and include goodwill.TRUEIntangible assets are reported as noncurrent assets and include patents, trademarks, franchises,copyrights, and goodwill.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #21Topic Area: A Closer Look At Financial Statement Formats And Notes

22. Additional-paid in capital is reported on the balance sheet as a component of shareholders' equity.TRUE

Shareholders' equity includes common stock, additional paid-in capital, and retained earnings.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #22Topic Area: A Closer Look At Financial Statement Formats And Notes

23. Common stock and additional-paid in capital are both reported on the balance sheet as a component ofshareholders' equity.TRUEShareholders' equity includes common stock, additional paid-in capital, and retained earnings.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #23Topic Area: A Closer Look At Financial Statement Formats And Notes.

24. Common stock and additional-paid in capital represent the capital contributed by shareholders.TRUEContributed capital consists of common stock and additional paid-in capital.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #24Topic Area: A Closer Look At Financial Statement Formats And Notes

25. Net sales less cost of goods sold is reported on the income statement as income from continuingoperations.FALSENet sales less cost of goods sold is gross profit and is a component of income from continuingoperations.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #25Topic Area: A Closer Look At Financial Statement Formats And Notes

26. Discontinued operations and extraordinary items are reported on the income statement as a componentof income from continuing operations.

FALSEDiscontinued operations and extraordinary items are reported on the income statement as a deductionfrom income from operations.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #26Topic Area: A Closer Look At Financial Statement Formats And Notes

27. The summary of significant accounting policies is a required financial statement disclosure.TRUEOne of the first disclosures is the summary of significant accounting policies.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #27Topic Area: A Closer Look At Financial Statement Formats And Notes

28. The return on assets ratio is calculated by dividing income from continuing operations by average totalassets.FALSEThe return on assets ratio is calculated by dividing net income by average total assets.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #28Topic Area: Return On Assets Analysis

29. The return on assets ratio will increase when sales increase.TRUEThe return on assets ratio calculation increases when asset turnover (net sales divided by average totalassets) increases.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: RememberDifficulty: MediumLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #29Topic Area: Return On Assets Analysis

30. The return on assets ratio is affected by both the net profit margin ratio and the asset turnover ratio.TRUEThe return on assets ratio is calculated by multiplying the net profit margin ratio times the asset turnoverratio.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #30Topic Area: Return On Assets Analysis

31. Which of the following tasks does the Securities & Exchange Commission (SEC) not perform?A. Overseeing the work of the Financial Accounting Standards Board (FASB).B. Overseeing the work of the Public Company Accounting Oversight Board (PCAOB).C. The responsibility for protecting investors and maintaining the integrity of the securities markets.D. The development of generally accepted accounting principles.The FASB develops generally accepted accounting principles.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #31Topic Area: Players In The Accounting Communication Process

32. Which of the following tasks does the Financial Accounting Standards Board (FASB) perform?A. Overseeing the work of the Securities & Exchange Commission (SEC).B. Overseeing the work of the Public Company Accounting Oversight Board (PCAOB).C. The responsibility for protecting investors and maintaining the integrity of the securities markets.D. The development of generally accepted accounting principles.The FASB develops generally accepted accounting principles.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #32Topic Area: Players In The Accounting Communication Process

33. Which of the following are primarily responsible for the information provided in a company's financialstatements?A. The internal and external auditors.B. The Securities & Exchange Commission (SEC) and the external auditors.C. The chief executive officer (CEO) and the chief financial officer (CFO).D. The external auditors and the board of directors.The CEO and CFO are primarily responsible for the content of a company's financial statements.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: Remember

Difficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #33Topic Area: Players In The Accounting Communication Process

34. Which of the following is not a responsibility of the chief executive officer (CEO) and the chief financialofficer (CFO)?A. The responsibility to oversee the financial statement external audit.B.To ensure the accuracy and completeness of all reports provided to the Securities & ExchangeCommission (SEC).C. The certification of the strength of the internal control system.D. The disclosure to the auditor committee of any frauds they are aware of.The external auditors are hired by the board of directors and are responsible for overseeing their ownaudit.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #34Topic Area: Players In The Accounting Communication Process

35. Which of the following is not true about the board of directors?A. They are elected by stockholders.B.They ensure the accuracy and completeness of all reports provided to the Securities & ExchangeCommission (SEC).C.They are responsible for ensuring that processes are in place for maintaining the integrity of thefinancial statements.D. They are responsible for hiring the company's external auditors.The CEO and CFO ensure the accuracy and completeness of all reports provided to the Securities &Exchange Commission (SEC).AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #35Topic Area: Players In The Accounting Communication Process

36. Which of the following statements is false?A.The board of directors meets with the external auditors to discuss management's compliance withtheir financial reporting obligations.B. The external auditors are selected by the Securities & Exchange Commission (SEC).

C.The Securities & Exchange Commission (SEC) requires publically traded companies to have theirfinancial statements audited by an independent accountant.D.The external auditors assume some responsibility with respect to the fairness of the financialstatements.The external auditors are selected by the board of directors.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #36Topic Area: Players In The Accounting Communication Process

37. For accounting information to be useful, it must be which of the following?A. It must be consistent and comparable.B. It must be relevant and reliable.C. It must be comparable and reliable.D. It must be relevant and consistent.Relevance and reliability are the characteristics which allow accounting information to be useful.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #37Topic Area: Players In The Accounting Communication Process

38. Conservatism requires that special care must be taken to avoid which of the following?A. Overstating assets and liabilities and understating revenues and expenses.B. Understating assets and liabilities and overstating revenues and expenses.C. Overstating assets and revenues and understating liabilities and expenses.D. Understating assets and revenues and overstating liabilities and expenses.Conservatism is concerned with overstating revenues and assets and with understating expenses andliabilities.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #38Topic Area: Players In The Accounting Communication Process

39. Which of the following is an objective of the external audit of a company's financial statements?

A. To provide a forecast of the company's future earnings.B. To assure no fraud has been committed by the company's management.C.To provide credibility and assurance that the financial statement information conforms with generallyaccepted accounting principles in all material respects.D. To detect all accounting errors made by the accounting system and employees.The external audit lends credibility to the financial statements and assesses whether the financialstatements are in compliance with generally accepted accounting principles.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #39Topic Area: Players In The Accounting Communication Process

40. Which of the following describes the conservatism constraint?A.A business should avoid overstating assets and revenues and avoid understating expenses andliabilities.B. The benefits of accounting for and reporting information should outweigh the costs.C.If the dollar amounts involved are large enough to influence a user's decisions the data is consideredto be relevant.D. The conservatism constraint produces a higher net income and stockholders' equity.Conservatism is concerned with overstating revenues and assets and with understating expenses andliabilities.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #40Topic Area: Players In The Accounting Communication Process

41. Which of the following is false?A.Relevance is the characteristic of accounting information that says the information would make adifference in a user's decision.B. Accounts receivable would normally be classified as a current asset.C. Accumulated depreciation would normally appear on the income statement.D.The matching principle holds that all expenses incurred in the generation of revenue should berecognized in the same period as the revenue is earned.Accumulated depreciation is a balance sheet account.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #41Topic Area: Players In The Accounting Communication Process

42. The Securities and Exchange Commission's (SEC) report that is required to be filed if any special eventoccurs is which of the following?A. Form 10KB. Form 8KC. Form 10QD. Form 8QThe form 8-K is used to disclose material events not reported previously which are relevant to investors.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-02 Identify the steps in the accounting communication process; including the issuance of press releases; annual reports; quarterly reports; andSEC filings; as well as the role of electronic information services in this process.Libby - Chapter 05 #42Topic Area: The Disclosure Process

43. In what order are current assets usually reported on the balance sheet?A. From the most liquid to the least liquid.B. From the least liquid to the most liquid.C. In alphabetical order of accounts.D. From the largest balance to the smallest balance.Current assets are reported on the balance sheet in order of liquidity.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #43Topic Area: A Closer Look At Financial Statement Format And Notes

44. Which of the following would not be classified as a current asset?A. Accounts receivableB. PatentsC. Merchandise inventoryD. CashA patent is an intangible asset.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #44Topic Area: A Closer Look At Financial Statement Format And Notes

45. What account is credited when a corporation issues stock at an amount over the stock's par value?A. Gain on sale of stockB. Loss on sale of stockC. Additional paid- in capitalD. Retained earningsAdditional paid-in capital is credited when a company sells its stock for more than par value.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #45Topic Area: A Closer Look At Financial Statement Format And Notes

46. Contributed capital consists of which of the following two accounts?A. Common stock and Additional paid in capitalB. Common stock and Retained earningsC. Additional paid in capital and Retained earningsD. Retained earnings and CashContributed capital consists of common stock and additional paid-in capital.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #46Topic Area: A Closer Look At Financial Statement Format And Notes

47. Which of the following are the criteria used to determine whether an item is extraordinary?A. It is unusual in nature and occurs frequently.B. It is unusual in nature and occurs infrequently.C. It is unusual in nature or occurs infrequently.D. It is infrequent in occurrence only.Extraordinary items occur infrequently and are unusual in nature.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #47Topic Area: A Closer Look At Financial Statement Format And Notes

48. Which of the following journal entries is correct when common stock is sold for cash at a price greaterthan par value?A. Option AB. Option BC. Option CD. Option D

Common stock and additional paid-in capital are both credited when common stock is sold for morethan par value.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #48Topic Area: A Closer Look At Financial Statement Format And Notes

49. Which of the following statements is false?A. The common stock account has a credit balance.B. The additional paid-in capital account has a credit balance.C. Contributed capital consists of common stock and additional paid-in capital.D. The par value of a stock represents the stock's fair value.The par value represents the minimum amount a stockholder must contribute.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #49Topic Area: A Closer Look At Financial Statement Format And Notes

50. Which of the following is true about gross profit (gross margin)?A. It is net sales minus operating expenses.B. It is net sales minus cost of goods sold.C. It is the same as income from continuing operations.D. It is net sales minus cost of goods sold and operating expenses.Gross profit equals net sales minus cost of goods sold.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #50Topic Area: A Closer Look At Financial Statement Format And Notes

51. Which of the following best describes income from operations?A. It includes the results of discontinued operations.B. It includes extraordinary items.C. It is sales minus cost of goods sold and income tax expense.D. It is net sales minus cost of goods sold and operating expenses.Income from operations equals net sales minus cost of goods sold and operating expenses.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #51Topic Area: A Closer Look At Financial Statement Format And Notes

52. The Callie Company has provided the following information:• Operating expenses were $231,000;• Cost of goods sold was $376,000;• Net sales were $940,000;• Interest expense was $32,000;• Gain on sale of a building was $76,000;• Income tax expense was $151,000.What was Callie's gross profit?A. $564,000B. $188,000C. $333,000D. $232,000Gross profit ($564,000) equals net sales ($940,000) minus cost of goods sold ($376,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #52Topic Area: A Closer Look At Financial Statement Format And Notes

53. The Callie Company has provided the following information:• Operating expenses were $231,000;• Cost of goods sold was $376,000;• Net sales were $940,000;• Interest expense was $32,000;• Gain on sale of a building was $76,000;• Income tax expense was $151,000.What was Callie's income from operations?A. $333,000B. $188,000C. $156,000D. $232,000Income from operations ($333,000) equals net sales ($940,000) minus the sum of cost of goods sold($376,000) and operating expenses ($231,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #53Topic Area: A Closer Look At Financial Statement Format And Notes

54. The Callie Company has provided the following information:• Operating expenses were $231,000;• Cost of goods sold was $376,000;• Net sales were $940,000;• Interest expense was $32,000;• Gain on sale of a building was $76,000;

• Income tax expense was $151,000.What was Callie's income before taxes?A. $564,000B. $188,000C. $377,000D. $232,000Income before taxes ($377,000) equals net sales ($940,000) minus cost of goods sold ($376,000), minusoperating expenses ($231,000), minus interest expense ($32,000), plus gain on sale ($76,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #54Topic Area: A Closer Look At Financial Statement Format And Notes

55. Which of the following is not reported as an operating expense on the income statement?A. Administrative expensesB. Research and development expenseC. Interest expenseD. Selling expensesInterest expense is a deduction from income from continuing operations.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #55Topic Area: A Closer Look At Financial Statement Format And Notes

56. The Nellie Company has provided the following information:• Operating expenses were $115,000;• Gross profit was $629,000;• Cost of goods sold was $470,000• Interest expense was $17,000;• Extraordinary loss was $29,000;• Income tax expense was $199,000.What was Nellie's operating income?A. $514,000B. $54,000C. $497,000D. $298,000Operating income ($514,000) equals gross profit ($629,000) minus operating expenses ($115,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: Medium

Learning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #56Topic Area: A Closer Look At Financial Statement Format And Notes

57. The Nellie Company has provided the following information:• Operating expenses were $115,000;• Gross profit was $629,000;• Cost of goods sold was $470,000• Interest expense was $17,000;• Extraordinary loss was $29,000;• Income tax expense was $199,000.What was Nellie's income before taxes?A. $514,000B. $54,000C. $497,000D. $298,000Income before taxes ($497,000) equals gross profit ($629,000) minus operating expenses ($115,000) andinterest expense ($17,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #57Topic Area: A Closer Look At Financial Statement Format And Notes

58. The Willie Company has provided the following information:• Operating expenses were $345,000;• Income from operations was $215,000;• Net sales were $1,100,000;• Interest expense was $71,000;• Discontinued operations loss was $87,000;• Income tax expense was $58,000.What was Willie's cost of gross profit?A. $540,000B. $469,000C. $618,000D. $560,000Gross profit ($560,000) equals operating expenses ($345,000) plus income from operations ($215,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #58Topic Area: A Closer Look At Financial Statement Format And Notes

59. The Willie Company has provided the following information:• Operating expenses were $345,000;• Income from operations was $215,000;

• Net sales were $1,100,000;• Interest expense was $71,000;• Discontinued operations loss was $87,000;• Income tax expense was $58,000.What was Willie's income before taxes?A. $144,000B. $57,000C. $215,000D. $539,000Income before taxes ($144,000) equals income from operations ($215,000) minus interest expense($71,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #59Topic Area: A Closer Look At Financial Statement Format And Notes

60. Which of the following would not be a component of income from operations?A. Gross profitB. Selling and administrative expensesC. Dividend incomeD. Research and development expenseDividend income is reported as nonoperating revenue.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #60Topic Area: A Closer Look At Financial Statement Format And Notes

61. Which of the following statements regarding earnings per share is false?A. It can be reported on the income statement.B. It increases when net income increases.C. It is based on the average number of common shares outstanding.D. It would not be affected by an extraordinary loss.Extraordinary losses reduce net income and therefore earnings per share.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #61Topic Area: A Closer Look At Financial Statement Format And Notes

62. Which of the following would not typically be disclosed in the notes to the financial statements?A. Additional detail regarding reported numbers.B. A summary of significant accounting policies.

C. Revenues reported by business segments.D. The net income earned by the business to date.The net income earned by the business to date is included within retained earnings.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #62Topic Area: A Closer Look At Financial Statement Format And Notes

63. Which of the following statements is false?A. Relevant information has the ability to influence an investor's decision.B. Reliable information is accurate, verifiable and unbiased.C. Consistency refers to the use of the same accounting principles from one period to the next.D.Comparability refers to the use of conservatism within different time periods by a particularbusiness.Comparability refers to the use of similar accounting methods across businesses.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #63Topic Area: Players In The Accounting Communication Process

64. In which of the following classifications would cash dividend payments to stockholders be reported?A. Operating activitiesB. Financing activitiesC. Investing activitiesD. Stockholder activitiesFinancing activities include dividend payments to stockholders.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #64Topic Area: A Closer Look At Financial Statement Format And Notes

65. A company issued 1,000 shares of $10 par value common stock in exchange for $15,000. Which of thefollowing correctly describes the impact of this transaction on the financial statements?A. A $15,000 gain is reported on the income statement.B. Contributed capital in the amount of $10,000 is reported on the balance sheet.C. Common stock is reported on the balance sheet at $15,000.D. Additional paid-in capital of $5,000 is reported on the balance sheet.Additional paid-in capital ($5,000) represents the excess of the selling price ($15,000) above the stock's

par value ($10,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #65Topic Area: A Closer Look At Financial Statement Format And Notes

66. Where are stock issues in exchange for cash reported on a statement of cash flows?A. Operating activitiesB. Financing activitiesC. Investing activitiesD. Stockholder activitiesFinancing cash flows include the sale of common stock in exchange for cash.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #66Topic Area: A Closer Look At Financial Statement Format And Notes

67. Where are acquisitions of previously issued stock for cash reported on a statement of cash flows?A. Operating activitiesB. Financing activitiesC. Investing activitiesD. Stockholder activitiesFinancing cash flows include the acquisition of previously issued stock.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #67Topic Area: A Closer Look At Financial Statement Format And Notes

68. Which of the following statements is false when a company sells inventory costing $700 for $1,200?A. Cost of goods sold increases $700.B. Gross profit increases $500.C. Stockholders' equity increases $500.D. Net sales increases $500.Net sales will increase $1,200.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #68Topic Area: A Closer Look At Financial Statement Format And Notes

69. Which of the following statements is false when a company sells inventory costing

$900 for $1,500cash?A. Current assets increase $600.B. Gross profit increases $1,500.C. Stockholders' equity increases $600.D. Net sales increases $1,500.Gross profit ($600) is the difference between net sales ($1,500) and cost of goods sold ($900).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #69Topic Area: A Closer Look At Financial Statement Format And Notes

70. Superior has provided the following information for its recent year of operation:• The common stock account balance at the beginning of the year was $20,000 and the year-end balancewas $25,000.• The additional paid-in capital account balance increased $2,500 during the year.• The retained earnings balance at the beginning of the year was $75,000 and the year-end balance was$91,000.• Net income was $26,000.How much were Superior's dividend declarations during its recent year of operation?A. $10,000.B. $42,000.C. $26,000.D. The dividend declarations can't be determined given the above information.Ending retained earnings ($91,000) = Beginning retained earnings ($75,000) + Net income ($26,000) -Dividends declared ($10,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #70Topic Area: A Closer Look At Financial Statement Format And Notes

71. Superior has provided the following information for its recent year of operation:• The common stock account balance at the beginning of the year was $20,000 and the year-end balancewas $25,000.• The additional paid-in capital account balance increased $2,500 during the year.• The retained earnings balance at the beginning of the year was $75,000 and the year-end balance was$91,000.• Net income was $26,000.

How much did Superior sell its common stock for during the year?A. $5,000.B. $2,500.C. $7,500.D. $25,000.The increase in the common stock account ($5,000) plus the increase in additional paid-in capital($2,500) equals the selling price of the common stock ($7,500).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #71Topic Area: A Closer Look At Financial Statement Format And Notes

72. Huron has provided the following year-end balances:• Cash, $25,000• Patents, $7,900• Accounts receivable, $9,300• Property, plant, and equipment, $98,700• Prepaid insurance, $3,600• Accumulated depreciation, $10,000• Inventory, $37,000• Trademarks, $12,600• Goodwill, $11,000How much are Huron's current assets?A. $85,900.B. $71,300.C. $74,900.D. $102,100.Huron's current assets ($74,900) include cash ($25,000), accounts receivable ($9,300), prepaidinsurance ($3,600), and inventory ($37,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #72Topic Area: A Closer Look At Financial Statement Format And Notes

73. Huron has provided the following year-end balances:• Cash, $25,000• Patents, $7,900• Accounts receivable, $9,300• Property, plant, and equipment, $98,700• Prepaid insurance, $3,600• Accumulated depreciation, $10,000• Inventory, $37,000

• Trademarks, $12,600• Goodwill, $11,000How much are Huron's net noncurrent assets?A. $122,300.B. $120,200.C. $123,800.D. $112,300.Huron's net noncurrent assets ($120,200) include patents ($7,900), property, plant, and equipment($98,700), accumulated depreciation (-$10,000), trademarks ($12,600), and goodwill ($11,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #73Topic Area: A Closer Look At Financial Statement Format And Notes

74. Which of the following would not be included on an income statement?A. Accumulated depreciationB. Insurance expenseC. Cost of goods soldD. Extraordinary lossAccumulated depreciation is a balance sheet account.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #74Topic Area: A Closer Look At Financial Statement Formats And Notes

75. Which of the following would not be included within the operations section of a cash flow statement?A. Cash paid for research and development.B. Cash paid for insurance.C. Cash paid for interest expense.D. Cash paid to legalize a patent.The cash paid to legalize a patent would be an investing cash flow.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #75Topic Area: A Closer Look At Financial Statement Formats And Notes

76. Which of the following would not be added to net income in the determination of net cash flow fromoperations?A. An increase in accounts payable.

B. A decrease in accounts receivable.C. A decrease in prepaid expenses.D. An increase in inventory.An increase in inventory is deducted from net income to arrive at net cash flow from operations.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #76Topic Area: A Closer Look At Financial Statement Formats And Notes

77. Which of the following statements is true?A.Accumulated depreciation is the amount of depreciation on the income statement for the current yearonly.B. Current liabilities are debts expected to be paid within the next year.C. Current assets are resources of a company that might include cash and copyrights.D.Patents, copyrights, and research and development expense are classified as intangible assets on thebalance sheet.Current liabilities are debts expected to be paid within the next year and expected to consume currentassets.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #77Topic Area: A Closer Look At Financial Statement Formats And Notes

78. Which of the following statements is false?A. Accumulated depreciation is a contra-account on the balance sheet.B. A stock's par value represents the minimum selling price of the stock.C. Retained earnings is the accumulated net income less the accumulated dividends declared.D. Research and development costs for a patent are reported on the balance sheet.Research and development costs are expenses and are reported on the income statement.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #78Topic Area: A Closer Look At Financial Statement Formats And Notes

79. Centex, Inc. issued 50,000 shares of its $1 par value common stock for $20 per share. The journal entryto record the stock issue would include which of the following?A. A credit to cash for $1,000,000.

B. A credit to additional paid-in capital for $1,000,000.C. A credit to additional paid-in capital for $50,000.D. A credit to common stock for $50,000.The credit to common stock is for the par value of the shares issued.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: EasyLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #79Topic Area: A Closer Look At Financial Statement Formats And Notes

80. Which of the following transactions results in a decrease in the return on assets ratio?A. Increasing the sales price of the products sold.B. An increase in the net profit margin ratio.C. Purchasing land by signing a long-term note payable.D. Collecting cash from an account receivable.Return on assets is net income divided by average total assets. Total assets increase and the return onassets ratio therefore decreases.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #80Topic Area: Return On Assets Analysis

81. Which of the following results in an increase in the return on assets ratio?A. A decrease in the asset turnover ratio.B. An increase in the net profit margin ratio.C. Purchasing a building by signing a long-term mortgage payable.D. Using cash to purchase land.Return on assets is net income divided by average total assets or net profit margin ratio times assetturnover ratio. An increase in the net profit margin ratio therefore increases return on assets.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #81Topic Area: Return On Assets Analysis

82. Marino Company has provided the following information:• Net sales, $480,000• Net income, $24,000• Average total assets, $200,000What is Marino's net profit margin ratio?A. 75%B. 12%C. 42%D. 5%

The net profit margin ratio (5%) is net income ($24,000) divided by net sales ($480,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #82Topic Area: Return On Assets Analysis

83. Marino Company has provided the following information:• Net sales, $480,000• Net income, $24,000• Average total assets, $200,000What is Marino's asset turnover ratio?A. 12.0B. 8.33C. .42D. 2.4The asset turnover ratio (2.4) is net sales ($480,000) divided by average total assets ($200,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #83Topic Area: Return On Assets Analysis

84. Marino Company has provided the following information:• Net sales, $480,000• Net income, $24,000• Average total assets, $200,000What is Marino's return on assets ratio?A. 240%B. 12%C. 5%D. 42%Return on assets (12%) equals net income ($24,000) divided by average total assets ($200,000). Returnon assets (12%) can also be calculated by multiplying the net profit margin ratio (5%) times the assetturnover ratio (2.4).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #84Topic Area: Return On Assets Analysis

85. Which of the following transactions will decrease both the return on assets ratio and the asset turnoverratio?A. Purchasing land by signing a note payable.

B. Accruing interest expense at year-end.C. Accruing interest revenue at year-end.D. Collecting cash from an account receivable.The denominator in both ratios is average total assets. Purchasing land increases average total assets andtherefore decreases both ratios.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #85Topic Area: Return On Assets Analysis

86. Which of the following statements is false?A. A decrease in the asset turnover ratio results in a decrease in the return on assets ratio.B.An increase in average total assets results in a decrease in both the asset turnover ratio and return onassets ratio.C. A decrease in the asset turnover ratio results in a decrease in the net profit margin ratio.D. An increase in the net profit margin ratio results in an increase in the return on assets ratio.The asset turnover ratio and net profit margin ratio aren't directly related to each other.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #86Topic Area: Return On Assets Analysis

87. Which of the following statements is true?A. A decrease in net income decreases both the net profit margin ratio and the asset turnover ratio.B.An increase in average total assets results in a decrease in both the asset turnover ratio and the netprofit margin ratio.C.A decrease in average total assets results in an increase in the asset turnover ratio and a decrease inthe net profit margin ratio.D. An increase in net income increases both the net profit margin ratio and the return on assets ratio.The numerator for both ratios is net income. Therefore an increase in net income results in an increasein both ratios.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #87Topic Area: Return On Assets Analysis

88. Which of the following would most likely increase the net profit margin ratio?A. An increase in the unit selling price.B. A decrease in the overall sales volume.C. An increase in operating expenses.D. An increase in cost of goods sold.An increase in the unit selling price will increase net income by a greater amount proportionatelyrelative to the increase in net sales.AACSB: AnalyticalAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #88Topic Area: Return On Assets Analysis

89. Which of the following is true?A. An extraordinary gain would increase income before taxes.B.Discontinued operations would be shown as a component of continuing operations on the incomestatement.C. Discontinued operations are shown on the income statement net of income tax effects.D. Results from discontinued operations may be used to predict future company results.Both extraordinary items and discontinued operations are reported on the income statement net of tax.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-SLibby - Chapter 05 #89Topic Area: Chapter Supplement

90. Polk Company suffered a loss from earthquake damage at its plant in Nebraska. The loss meets thecriteria for an extraordinary item. Where will the company present the extraordinary item on the incomestatement?A. As a component of income from continuing operations.B. As a component of gross profit.C. After income from continuing operations but before net income.D. Prior to income from continuing operations before taxes.Both extraordinary items and discontinued operations are reported on the income statement net of taxafter income from continuing operations.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-SLibby - Chapter 05 #90Topic Area: Chapter Supplement

91. Which of the following statements regarding international financial reporting

standards (IFRS) is false?A. The reporting of extraordinary items is prohibited.B.Property, plant, and equipment can be reported on the balance sheet at either fair value or historicalcost.C. The last-in first-out inventory method is permitted.D. Inventory write-downs are permitted.The last-in first-out inventory method is prohibited under IFRS.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #91Topic Area: Players In The Accounting Communication Process

92. Which of the following statements does not accurately describe the affect of the sale of inventory at aprofit on the financial statements?A. Income from operations and current assets both increase.B. Operating income and gross profit both increase.C. Net income and earnings per share both increase.D. Current assets don't change and stockholders' equity increases.Current assets increase because the increase in either cash or accounts receivable is greater than thedecrease in inventory.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #92Topic Area: A Closer Look At Financial Statement Formats And Notes

93. Which of the following statements regarding international financial reporting standards (IFRS) is false?A. Research and development costs are expensed.B. Research costs are expensed and development costs are capitalized.C.Cash payments for interest are reported on the cash flow statement either an operating or financingcash flow.D. Reversal of inventory write-downs is permitted.Development costs are capitalized.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; informationintermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.Libby - Chapter 05 #93Topic Area: Players In The Accounting Communication Process

94. Which of the following statements is correct?A. Income from operations increases when common stock is sold for more than par value.B. The accrual of research and development costs does not affect the net profit margin ratio.C. The payment of an accrued liability decreases asset turnover.D. The declaration and payment of a cash dividend increases the return on assets ratio.The cash payment decreases average total assets which increases the asset turnover ratio.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Learning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #94Topic Area: A Closer Look At Financial Statement Formats And Notes, Return On Assets Analysis

95. Which of the following statements correctly describe the effect of accruing interest revenue at year-end?A. Income from operations increases.B. The net profit margin ratio does not change.C. The asset turnover ratio increases.D. The return on assets ratio is affected.

ch6 Key1. When goods are shipped FOB shipping point, title passes to the buyer on the shipment date.TRUEWhen goods are shipped FOB shipping point, the title passes to the buyer when the goods are shipped.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 06-01 Apply the revenue principle to determine the accepted time to record sales revenue for typical retailers; wholesalers; manufacturers; andservice companies.Libby - Chapter 06 #1Topic Area: Accounting For Sales Revenue

2. When goods are shipped FOB destination, the revenue from the sale is recognized on the shipment date.FALSEWhen goods are shipped FOB destination, the revenue is recognized when the goods are delivered.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 06-01 Apply the revenue principle to determine the accepted time to record sales revenue for typical retailers; wholesalers; manufacturers; andservice companies.Libby - Chapter 06 #2Topic Area: Accounting For Sales Revenue

3. Credit card discounts are reported as operating expenses on an income statement.

FALSECredit card discounts are deducted from sales to calculate net sales.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #3Topic Area: Accounting For Sales Revenue

4. Sales discounts are deducted from sales in the calculation of net sales.TRUESales discounts are deducted from sales to calculate net sales.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #4Topic Area: Accounting For Sales Revenue

5. Sales returns and allowances is a contra-revenue account.TRUESales returns and allowances are deducted from sales to calculate net sales. They are therefore a contrarevenueaccount.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #5Topic Area: Accounting For Sales Revenue

6. Credit terms of "2/10, n/30" mean that if payment is made in two days, a 10% discount will be given; ifnot paid within two days, the full invoice price will be due in thirty days.FALSEThe "2/10" means that a 2% discount is given if the payment is made within 10 days.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #6Topic Area: Accounting For Sales Revenue

7. A company is thinking of borrowing money at an 18% annual interest rate in order to pay a $30,000invoice within the discount period. The invoice terms are 2/10, n/30. They should borrow the moneybecause they will have a net savings of 19.2%.TRUEThe annual interest rate associated with the credit terms is 37.2% and is calculated by

multiplyingthe 20-day interest rate ($600 ÷ $29,400) by the number of 20-day periods during a year (365 ÷ 20).Borrowing at 18% will save the company 19.2% (37.2% - 18%).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #7Topic Area: Accounting For Sales Revenue

8. The gross profit percentage is calculated by dividing net sales by gross profit.FALSEThe gross profit percentage is calculated by dividing gross profit by net sales.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: RememberDifficulty: EasyLearning Objective: 06-03 Analyze and interpret the gross profit percentage.Libby - Chapter 06 #8Topic Area: Measuring And Reporting Receivables

9. The gross profit percentage decreases when operating expenses increase.FALSEThe gross profit percentage is calculated by dividing gross profit by net sales. Operating expenses donot affect either gross profit or net sales.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: RememberDifficulty: EasyLearning Objective: 06-03 Analyze and interpret the gross profit percentage.Libby - Chapter 06 #9Topic Area: Measuring And Reporting Receivables

10. The journal entry to record bad debt expense is made during the year that it is determined that aparticular receivable is uncollectible.FALSEBad debt expense is recorded during the year of sale, not during the year the receivable is determined tobe uncollectible.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #10Topic Area: Measuring And Reporting Receivables

11. When a particular account receivable is determined to be uncollectible, the journal entry to write-off theaccount reduces net income.FALSEThe entry to write-off an account receivable includes a debit to the allowance for doubtful

accounts anda credit to accounts receivable; this entry does not affect the income statement.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #11Topic Area: Measuring And Reporting Receivables

12. The allowance for doubtful accounts is reported as a contra-asset on the balance sheet.TRUEAllowance for doubtful accounts is deducted from accounts receivable on the balance sheet. It istherefore a contra-asset account.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #12Topic Area: Measuring And Reporting Receivables

13. The journal entry to write-off an uncollectible account does not change the net realizable value (bookvalue) of accounts receivable.TRUEThe journal entry to write-off an account receivable includes a debit to allowance for doubtful accountsand a credit to accounts receivable; this entry reduces both accounts equally and therefore doesn'tchange net realizable value (accounts receivable minus allowance for doubtful accounts).AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #13Topic Area: Measuring And Reporting Receivables

14. The year-end journal entry to record bad debt expense reduces current assets and net income.TRUEThe journal entry increases the allowance for doubtful accounts balance which decreases current assetsand the journal entry increases expenses which decreases net income.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #14

Topic Area: Measuring And Reporting Receivables

15. Net sales multiplied by an historical percentage for bad debt expense, equals bad debt expense whenusing the percentage of credit sales method.TRUEThe percentage of credit sales method estimates bad debt expense by multiplying net credit sales timesan historical bad debt percentage.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #15Topic Area: Measuring And Reporting Receivables

16. The accounts receivable aging schedule determines the dollar amount of uncollectible accountsreceivable at year-end; this dollar amount of uncollectible accounts receivable is the bad debt expensethat is recorded for the year regardless of the allowance for doubtful accounts balance.FALSEThe bad debt expense for the year takes into consideration the existing allowance for doubtful accountsbalance.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #16Topic Area: Measuring And Reporting Receivables

17. Prior year financial statements are adjusted when it is determined that prior year bad debt expense wastoo low.FALSEPrior year financial statements aren't adjusted; the current and/or future financial statements howeverwill be adjusted.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #17Topic Area: Measuring And Reporting Receivables

18. If the accounts receivable turnover ratio increases, the number of days it takes to collect the receivablesalso increases.FALSEThe average collection period is calculated by dividing 365 by the receivables turnover

ratio. Thereforethe higher the receivable turnover ratio, the lower the number of days to collect the receivable will be.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: RememberDifficulty: MediumLearning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows.Libby - Chapter 06 #18Topic Area: Measuring And Reporting Receivables

19. When preparing the statement of cash flows, the reason that we must adjust net sales revenue for thechange in accounts receivables to convert net sales to cash collected from customers is that accountsreceivable represents sales revenue not collected from customers at the beginning and end of theaccounting year.TRUEThe change in the accounts receivable balance represents the difference between cash collections andnet sales revenue.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: RememberDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #19Topic Area: Measuring And Reporting Receivables

20. Cash equivalents such as treasury bills are reported as investments on the balance sheet.FALSECash and cash equivalents are combined and reported on the balance sheet as a current asset. Cashequivalents are not reported as an investment on the balance sheet.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #20Topic Area: Reporting And Safeguarding Cash

21. Cash equivalents on the balance sheet include certificates of deposit with maturities of 60 days or more.FALSECash equivalents have maturities of less than 90 days.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #21Topic Area: Reporting And Safeguarding Cash

22. Effective internal control of cash should include the separation of the duties for receiving and disbursingcash.TRUESeparation of the responsibilities for receiving and disbursing cash is a basic internal control for cash.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #22Topic Area: Reporting And Safeguarding Cash

23. If a check received from a customer that has been deposited by the seller is returned with the bankstatement as a nonsufficient funds (NSF) check, it would appear on the seller's bank reconciliation as adeduction from the ending bank statement balance.FALSEThe NSF check would be deducted from the book balance not the bank balance.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: RememberDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #23Topic Area: Reporting And Safeguarding Cash

24. Deposits in transit are deducted from the book balance when preparing the bank reconciliation.FALSEDeposits in transit are added to the bank balance when preparing the bank reconciliation.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: RememberDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #24Topic Area: Reporting And Safeguarding Cash

25. An objective of preparing the bank reconciliation is to reconcile the bank balance at the end of theperiod with the company's book balance at the end of the period.TRUEThe bank reconciliation is an internal control device with the intent being to test the equality of thebank statement balance with the book balance after the applicable adjustments have been made to bothbalances.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: RememberDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #25

Topic Area: Reporting And Safeguarding Cash

26. When completing the bank reconciliation, bank service charges should be deducted from the company'scash balance.TRUEBank service charges are deducted from the book cash balance because they were unrecorded prior toreceipt of the bank statement.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: RememberDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #26Topic Area: Reporting And Safeguarding Cash

27. Which of the following statements is correct?A. Revenue is recognized at the time of shipment when goods are shipped FOB destination.B. Sales returns and allowances are reported as operating expenses on an income statement.C. Revenue is recorded when title and risks of ownership transfer to the buyer.D. Sales discounts are reported as operating expenses on an income statement.Most businesses recognize revenue when the product is delivered and/or service is provided.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-01 Apply the revenue principle to determine the accepted time to record sales revenue for typical retailers; wholesalers; manufacturers; andservice companies.Libby - Chapter 06 #27Topic Area: Accounting For Sales Revenue

28. A company sells magazines and collects subscription fees prior to the publication and distribution of themagazine. Which of the following correctly describes the impact on the financial statements when cashis received in advance from customers?A. Current assets increase and gross profit increases.B. Current liabilities aren't affected and stockholders' equity isn't affected.C. Current assets increase and stockholders' equity increases.D. Current liabilities increase and gross profit is not affected.Receiving payments in advance of providing goods and/or services creates and liability and does notcreate revenue or gross profit.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #28Topic Area: Accounting For Sales Revenue

29. Newark Company has provided the following information:• Cash sales, $450,000• Credit sales, $1,350,000• Selling and administrative expenses, $330,000• Sales returns and allowances, $90,000• Depreciation expense, $101,000• Gross profit, $1,360,000• Increase in accounts receivable, $55,000• Bad debt expense, $33,000• Sales discounts, $43,000How much is Newark's cost of goods sold?A. $307,000B. $252,000C. $440,000D. $340,000Net sales ($450,000 + $1,350,000 - $90,000 - $43,000) minus cost of goods sold ($307,000) equals grossprofit ($1,360,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Learning Objective: 06-03 Analyze and interpret the gross profit percentage.Libby - Chapter 06 #29Topic Area: Accounting For Sales Revenue, Measuring And Reporting Receivables.

30. Newark Company has provided the following information:• Cash sales, $450,000• Credit sales, $1,350,000• Selling and administrative expenses, $330,000• Sales returns and allowances, $90,000• Depreciation expense, $101,000• Gross profit, $1,360,000• Increase in accounts receivable, $55,000• Bad debt expense, $33,000• Sales discounts, $43,000How much is Newark's gross profit percentage?A. 75.5%B. 81.6%C. 53.7%D. 83.2%The gross profit percentage (81.6%) equals gross profit ($1,360,000) divided by net sales ($450,000 +$1,350,000 - $90,000 - $43,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net

sales.Learning Objective: 06-03 Analyze and interpret the gross profit percentage.Libby - Chapter 06 #30Topic Area: Accounting For Sales Revenue, Measuring And Reporting Receivables

31. Newark Company has provided the following information:• Cash sales, $450,000• Credit sales, $1,350,000• Selling and administrative expenses, $330,000• Sales returns and allowances, $90,000• Depreciation expense, $101,000• Gross profit, $1,360,000• Increase in accounts receivable, $55,000• Bad debt expense, $33,000• Sales discounts, $43,000How much are Newark's net sales?A. $1,634,000B. $1,800,000C. $1,667,000D. $1,745,000Net sales ($1,667,000) equals ($450,000 + $1,350,000 - $90,000 - $43,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #31Topic Area: Accounting For Sales Revenue

32. Flyer Company has provided the following information:• Cash sales, $150,000• Credit sales, $450,000• Selling and administrative expenses, $110,000• Sales returns and allowances, $30,000• Gross profit, $490,000• Accounts receivable, $110,000• Sales discounts, $14,000• Allowance for doubtful accounts credit balance, $1,200How much is bad debt expense assuming that 5% of accounts receivable is estimated to beuncollectible?A. $5,500B. $6,700C. $4,240D. $4,300Bad debt expense ($4,300) = 5% of accounts of accounts receivable (5% Å~ $110,000) - allowance fordoubtful accounts credit balance ($1,200).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: Apply

Difficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #32Topic Area: Measuring And Reporting Receivables

33. Flyer Company has provided the following information:• Cash sales, $150,000• Credit sales, $450,000• Selling and administrative expenses, $110,000• Sales returns and allowances, $30,000• Gross profit, $490,000• Accounts receivable, $110,000• Sales discounts, $14,000• Allowance for doubtful accounts credit balance, $1,200Flyer estimates bad debt expense assuming that 5% of accounts receivable is estimated to beuncollectible. What is the balance in the allowance for doubtful accounts after bad debt expense isrecorded?A. $5,500B. $6,700C. $4,240D. $4,300The allowance for doubtful accounts balance ($5,500) equals 5% of accounts of accounts receivable(5% Å~ $110,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #33Topic Area: Measuring And Reporting Receivables

34. Flyer Company has provided the following information:• Cash sales, $150,000• Credit sales, $450,000• Selling and administrative expenses, $110,000• Sales returns and allowances, $30,000• Gross profit, $290,000• Accounts receivable, $110,000• Sales discounts, $14,000• Allowance for doubtful accounts credit balance, $1,200Flyer estimates bad debt expense assuming that 1.5% of credit sales are uncollectible. What is thebalance in the allowance for doubtful accounts after bad debt expense is recorded?A. $7,950B. $6,750C. $5,550D. $7,800

The allowance for doubtful accounts ($7,950) = Bad debt expense (1.5% Å~ $450,000) plus the allowancefor doubtful accounts credit balance ($1,200).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #34Topic Area: Measuring And Reporting Receivables

35. Flyer Company has provided the following information:• Cash sales, $150,000• Credit sales, $450,000• Selling and administrative expenses, $110,000• Sales returns and allowances, $30,000• Gross profit, $290,000• Accounts receivable, $110,000• Sales discounts, $14,000• Allowance for doubtful accounts credit balance, $1,200How much is Flyer's bad debt expense assuming that 1.5% of credit sales have historically beenuncollectible.A. $7,950B. $6,750C. $5,550D. $7,800Bad debt expense ($6,750) =1.5% Å~ $450,000AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #35Topic Area: Measuring And Reporting Receivables

36. Which of the following is correct when bad debt expense is recorded at year-end?A. Current assets are not affected.B. Gross profit will decrease.C. Income from operations will decrease.D. Current liabilities will increase.Bad debt expense is an operating expense. An increase in operating expenses decreases income fromoperations.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #36Topic Area: Measuring And Reporting Receivables

37. Which of the following statements is false?A. The journal entry to record bad debt expense decreases current assets.B. The journal entry to record bad debt expense decreases retained earnings.C. The journal entry to write-off an uncollectible account receivable decreases operating income.D. The journal entry to write-off an uncollectible account receivable does not affect current assets.The journal entry to write-off an uncollectible account receivable decreases accounts receivable and theallowance for uncollectible accounts balances and does not affect operating income.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #37Topic Area: Measuring And Reporting Receivables

38. Which of the following journal entries correctly records bad debt expense?A. Option AB. Option BC. Option CD. Option DThe journal entry to record bad debt expense involves a debit to bad debt expense and a credit toallowance for doubtful accounts.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #38Topic Area: Measuring And Reporting Receivables

39. Which of the following journal entries correctly records the write-off of an uncollectible accountreceivable?A. Option AB. Option BC. Option CD. Option DThe journal entry to write-off an account receivable requires a debit to allowance for doubtful accountsand a credit to accounts receivable.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #39Topic Area: Measuring And Reporting Receivables

40. The CHS Company has provided the following information:• Accounts receivable written-off as uncollectible during the year amounted to $11,500.• The accounts receivable balance at the beginning of the year was $150,000.• The accounts receivable balance at the end of the year was $210,000.• The allowance for doubtful accounts balance at the beginning of the year was $14,000.• The allowance for doubtful accounts balance at the end of the year after the recording of bad debtexpense was $12,900.• Credit sales during the year totaled $900,000.How much was CHS Company's bad debt expense?A. $11,500B. $12,900C. $10,400D. $14,000Ending allowance for doubtful accounts ($12,900) = Beginning allowance for doubtful accounts($14,000) - Accounts receivable write-offs ($11,500) + Bad debt expense ($10,400).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #40Topic Area: Measuring And Reporting Receivables

41. The CHS Company has provided the following information:• Accounts receivable written-off as uncollectible during the year amounted to $11,500.• The accounts receivable balance at the beginning of the year was $150,000.• The accounts receivable balance at the end of the year was $210,000.• The allowance for doubtful accounts balance at the beginning of the year was $14,000.• The allowance for doubtful accounts balance at the end of the year after the recording of bad debtexpense was $12,900.• Credit sales during the year totaled $900,000.How much cash was received from collections of accounts receivable?A. $888,500B. $828,500C. $690,000D. $701,500Ending accounts receivable ($210,000) = Beginning accounts receivable ($150,000) - Accountsreceivable write-offs ($11,500) + Credit sales ($900,000) - Cash collections ($828,500).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #41Topic Area: Measuring And Reporting Receivables

42. Which of the following statements is correct?A.The journal entry to record bad debt expense requires a debit to bad debt expense and a credit toaccounts receivable.B.The journal entry to record bad debt expense requires a debit to bad debt expense and a credit toallowance for doubtful accounts.C.The journal entry to record the write-off of an uncollectible account receivable requires a debit to baddebt expense and a credit to accounts receivable.D.The journal entry to record the write-off of an uncollectible account receivable requires a debit to baddebt expense and a credit to allowance for doubtful accounts.The journal entry to record bad debt expense requires a debit to bad debt expense (an operatingexpense) and a credit to allowance for doubtful accounts (a contra-asset account).AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #42Topic Area: Measuring And Reporting Receivables

43. Clark Company estimated the net realizable value of their accounts receivable as of December 31,2011, based on an aging schedule of accounts receivable, to be $165,000. Clark has also provided thefollowing information:• The accounts receivable balance on December 31, 2011 was $175,000.• Uncollectible accounts receivable written-off during 2011 totaled $12,000.• The allowance for doubtful accounts balance on January 1, 2011 was $15,000.How much is Clark's 2011 bad debt expense?A. $10,000B. $7,000C. $13,000D. $3,000The December 31, 2011 balance in allowance for uncollectible accounts ($10,000) equals the accountsreceivable balance on December 31, 2011 ($175,000) minus the December 31, 2011 net realizablevalue of accounts receivable ($165,000). The December 31, 2011 balance in allowance for uncollectibleaccounts ($10,000) equals the balance in allowance for doubtful accounts on January 1, 2011 ($15,000)

minus accounts receivable write-offs ($12,000) during 2011 plus the 2011bad debt expense ($7,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #43Topic Area: Measuring And Reporting Receivables

44. Which of the following statements correctly describes the effect of recording the collection of a $10,000account receivable for which a 2% sales discount was recorded at the time of collection?A. Current assets will remain the same.B. Gross profit will decrease $200.C. Accounts receivable will decrease $9,800.D. Net sales will increase $9,800.The $200 sales discount ($10,000 x 2%) reduces net sales and therefore gross profit.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #44Topic Area: Accounting For Sales Revenue

45. Which of the following journal entries correctly records the collection of an account receivable forwhich a 1% sales discount was recorded at the time of collection?A. Option AB. Option BC. Option CD. Option DThe journal entry involves a debit to both cash and sales discounts and a credit to accounts receivable.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #45Topic Area: Accounting For Sales Revenue

46. Which of the following correctly describes the effect of a journal entry involving the recording of asales return?A. Gross profit is not affected.B. Net sales increases.C. Current assets remain the same.D. Operating income decreases.The journal entry involves a debit to sales returns and allowances which reduces gross profit and

therefore operating income.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #46Topic Area: Accounting For Sales Revenue

47. Which of the following doesn't correctly describe the effect of a journal entry involving the recording ofa credit card discount?A. Net sales decrease and gross profit decreases.B. Net sales decrease and operating income decreases.C. Operating expenses remain the same and operating income decreases.D. Neither operating expenses nor operating income is affected.The credit card discount account is a contra-sales account which reduces net sales, gross profit, andtherefore operating income.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #47Topic Area: Accounting For Sales Revenue

48. Which of the following correctly describes credit terms of 2/10, n/30?A.A two percent discount for early payment is available if the invoice is paid before the tenth day of themonth following the month the sale.B. A two percent discount for early payment is available within ten days of the date of sale.C.A ten percent discount for early payment is available if the invoice is paid within two days of the dateof the invoice.D.A two percent discount for early payment is available if the invoice is paid after the tenth day, butbefore the thirtieth day of the invoice date.The credit term 2/10 implies that a 2% discount is available within ten days of the date of sale and theterm n/30 implies that the full sales price is due within 30 days of the sale.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #48Topic Area: Accounting For Sales Revenue

49. A customer purchased and received $5,000 of goods on credit from Discount Paper Supply onSeptember 1. The customer received the bill on September 13 and mailed a $5,000 check on September30. Discount Paper Supply received the check on October 4. On which of the following dates shouldDiscount Paper Supply record sales revenue?A. September 1B. September 13C. September 30D. October 4Sales revenue should be recorded on the date of sale.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-01 Apply the revenue principle to determine the accepted time to record sales revenue for typical retailers; wholesalers; manufacturers; andservice companies.Libby - Chapter 06 #49Topic Area: Accounting For Sales Revenue

50. When a credit sale is made with terms of 2/10, n/30 on May 10 and the customer's check is received onMay 19, which of the following is true about the May 19 journal entry?A.The debit to cash will equal the credit to accounts receivable because the discount was recorded onMay 10.B. There will be a debit to sales discounts on May 10.C. The debit to cash will be less than the credit to accounts receivable on May 19.D. There will be a credit to sales discounts on May 19.The customer paid within the discount period so the discount is recognized on May 19. The discountreduces the cash received so therefore the debit to cash is less than the credit to accounts receivable.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #50Topic Area: Accounting For Sales Revenue

51. A company had the following partial list of account balances at year-end:How much is net sales revenue?A. $91,900B. $90,700C. $89,900D. $88,600Net sales revenue ($91,900) equals sales revenue ($95,000) minus both sales discounts ($2,100) andsales returns and allowances ($1,000).

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #51Topic Area: Accounting For Sales Revenue

52. A company purchased goods on credit with credit terms of 3/15, n/45. Although the company doesnot have cash available to pay within the discount period, the manager of the company is consideringborrowing money to take advantage of the discount. In order to make the appropriate decision, themanager computed the annual interest rate associated with the sales discount. Which of the following isthe annual interest rate (rounded)?A. 56%.B. 38%.C. 25%.D. 18%.30-day interest rate (.031) = Amount saved ($3) ÷ Amount paid ($97)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #52Topic Area: Accounting For Sales Revenue

53. When credit terms for a sale are 2/15, n/40, the customer saves by paying early. What percent (rounded)would this savings amount to on an annual basis?A. 18%.B. 20%.C. 30%.D. 37%.25-day interest rate (.02) = Amount saved ($2) ÷ Amount paid ($98)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #53Topic Area: Accounting For Sales Revenue

54. Which of the following accounts is not a contra-revenue?A. Sales discountsB. Credit card discountsC. Sales returns and allowancesD. Allowance for doubtful accountsAllowance for doubtful accounts is a contra-asset account.AACSB: Reflective Thinking

AICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #54Topic Area: Accounting For Sales Revenue

55. Which of the following is the most likely cause of a decrease in a company's gross profit percentage?A. The selling price decreased.B. The product cost as a percentage of sales decreased.C. The operating expenses increased.D. Fewer products were sold.Net sales - Cost of goods sold = Gross profit. Gross profit divided by net sales equals the gross profitpercentage. A decrease in the selling price results in a decrease in net sales, gross profit, and thereforethe gross profit percentage.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplyDifficulty: EasyLearning Objective: 06-03 Analyze and interpret the gross profit percentage.Libby - Chapter 06 #55Topic Area: Accounting For Sales Revenue

56. Dillon Company uses the allowance method to account for bad debts. The entry to write-off a badaccount (one that will never be collected) should be:A. Option AB. Option BC. Option CD. Option DWriting-off an uncollectible account involves a debit to allowance for doubtful accounts and a credit toaccounts receivable.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #56Topic Area: Measuring And Reporting Receivables

57. When using the allowance method for accounting for bad debts, accounts receivable is reported onthe balance sheet at the expected net realizable value. When a particular receivable from a customerultimately is determined to be uncollectible and is written off, the recording of this event willA. decrease the net realizable value of the accounts receivable.B. have an effect that is not determinable from the information given.C. increase the net realizable value of the accounts receivable.

D. have no effect on the net realizable value of the accounts receivable.Writing-off an uncollectible account involves a debit to allowance for doubtful accounts (a contraassetaccount) and a credit to accounts receivable (an asset account). Therefore the net realizable value(accounts receivable minus allowance for doubtful accounts) does not change.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #57Topic Area: Measuring And Reporting Receivables

58. Oakwood Company had accounts receivable of $750,000 and an allowance for doubtful accounts ofthe $21,500 just prior to writing off as worthless an account receivable for Hyland Company of $5,000.The net realizable value of accounts receivable as shown by the accounting records before and after thewrite-off was as follows:A. Option AB. Option BC. Option CD. Option DWriting-off an uncollectible account involves a debit to allowance for doubtful accounts (a contraassetaccount) and a credit to accounts receivable (an asset account). Therefore the net realizable value(accounts receivable minus allowance for doubtful accounts) does not change; it is $728,500 bothbefore and after the write-off.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #58Topic Area: Measuring And Reporting Receivables

59. Woodland Company uses the allowance method to account for bad debts. During 2009, a customerbecame bankrupt and a receivable of $10,000 was deemed uncollectible. Which of the following journalentries records the uncollectible account write-off?A. Option AB. Option BC. Option CD. Option DWriting-off an uncollectible account involves a debit to allowance for doubtful accounts

(a contra-assetaccount) and a credit to accounts receivable (an asset account).AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #59Topic Area: Measuring And Reporting Receivables

60. At year end, Chief Company has a balance of $10,000 in accounts receivable of which $1,000 is morethan 30 days overdue. Chief has a credit balance of $100 in the allowance for doubtful accounts beforeany year-end adjustments. Chief estimates that 1% of current accounts and 10% of accounts over thirtydays are uncollectible. How much is bad debt expense?A. $90B. $190C. $290D. $100Allowance for doubtful accounts desired balance ($190) = ($1,000 Å~ .10) + ($9,000 Å~ .01). Bad debtexpense ($90) = Allowance for doubtful accounts desired balance ($190) - Allowance for doubtfulaccounts current balance ($100).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #60Topic Area: Measuring And Reporting Receivables

61. Upon completing an aging analysis of accounts receivable, the accountant for Rosco Works agedthe accounts receivable and estimated that $5,000 of the $98,000 accounts receivable balance wouldbe uncollectible. The allowance for doubtful accounts had a $400 debit balance at year-end prior toadjustment. How much is bad debt expense?A. $5,000B. $5,400C. $4,600D. $400Bad debt expense ($5,400) = Allowance for doubtful accounts desired credit balance ($5,000) +Allowance for doubtful accounts current debit balance ($400).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: Apply

Difficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #61Topic Area: Measuring And Reporting Receivables

62. Which of the following statements does not correctly describe the allowance for doubtful accountsbalance?A. It is reported on the balance sheet as a component of current assets.B. It is a contra-asset account.C. It is reported on the balance sheet as a current liability.D. It is created as a result of the adjusting entry to record bad debt expense.Allowance for doubtful accounts is a contra-asset account and is not a current liability.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #62Topic Area: Measuring And Reporting Receivables

63. The Roscoe Company's March 1, 2010 bank statement balance was $70,000. As of March 1,outstanding checks total $22,000 and deposits in transit total $15,000. How much was Roscoe's March1, 2010 cash balance on their books?A. $63,000B. $77,000C. $70,000D. $107,000Book cash balance ($63,000) = Bank balance ($70,000) - Outstanding checks ($22,000) + Deposits intransit ($15,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #63Topic Area: Reporting And Safeguarding Cash

64. The Tanner Company's April 1, 2010 pre-reconciliation cash balance on their books was $35,000.While preparing the April 1 bank reconciliation, Tanner determined that outstanding checks total$11,000, deposits in transit total $7,000, and bank service charges are $50. How much was Tanner'sApril 1, 2010 cash balance per the bank statement?A. $31,000B. $30,950C. $38,950D. $39,000Bank cash balance ($38,950) = Corrected book balance ($35,000 - $50) + Outstanding

checks ($11,000)- Deposits in transit ($7,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #64Topic Area: Reporting And Safeguarding Cash

65. The Conner Company's August 1, 2010 cash balance on their books was $90,000. As of August 1,outstanding checks total $44,000 and deposits in transit total $30,000. How much was Conner's August1, 2010 cash balance on their bank statement?A. $76,000B. $90,000C. $13,000D. $104,000Bank cash balance ($104,000) = Book balance ($90,000) + Outstanding checks ($44,000) - Deposits intransit ($30,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #65Topic Area: Reporting And Safeguarding Cash

66. Which of the following statements pertaining to bank reconciliations is false?A. Outstanding checks are deducted from the bank cash balance.B. Deposits in transit are added to the bank cash balance.C. Bank service charges are deducted from the bank cash balance.D.Non-sufficient funds checks identified in the bank statement are deducted from the book cashbalance, not the bank cash balance.Bank service charges are deducted from the book cash balance, not the bank cash balance.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: RememberDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #66Topic Area: Reporting And Safeguarding Cash

67. When a depositor receives a bank statement indicating that there was a "NSF check", the depositorshould do which of the following?A. Reduce the cash account per the books for the amount of the "NSF check".B. Reduce the cash account per the bank statement for the amount of the "NSF check".C. Credit allowance for doubtful accounts for the amount of the check.D. Increase the sales returns and allowances account.

NSF checks are deducted from the book cash balance when preparing a bank reconciliation.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: RememberDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #67Topic Area: Reporting And Safeguarding Cash

68. A deposit in transit on a bank reconciliation should beA. added to the depositor's book cash balance.B. subtracted from the depositor's book cash balance.C. added to the bank statement balance.D. subtracted from the bank statement balance.Deposits in transit represent deposits recorded on the books which have not yet been recorded on thebank statement. They are therefore added to the bank statement balance.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: RememberDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #68Topic Area: Reporting And Safeguarding Cash

69. Linetech Company's bank statement showed an ending balance of $8,000. Items appearing in the bankreconciliation included: outstanding checks, $500; deposits in transit, $1,000; bank service charges, $50;and Driver Company's $250 check erroneously deducted from Linetech's bank account by the bank.How much is the correct cash balance at the end of the month?A. $10,600B. $8,750C. $8,500D. $8,250Book cash balance ($8,750) = Bank balance ($8,000) - Outstanding checks ($500) + Deposits in transit($1,000) + Bank error ($250).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #69Topic Area: Reporting And Safeguarding Cash

70. Which of the following demonstrates a poor internal control procedure?A.The bookkeeper makes cash deposits and records journal entries related to cash, while the treasurerprepares the bank reconciliation.B. The president, who does no bookkeeping, prepares the bank reconciliation each month.

C. The treasurer signs all checks after the bookkeeper prepares the supporting documents.D.One bookkeeper prepares cash deposits and the other bookkeeper enters the collections in the journaland ledger.The bookkeeper's cash record keeping and cash handling responsibilities need to be separated.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: RememberDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #70Topic Area: Reporting And Safeguarding Cash

71. The cash records and the bank statement of Frankel Company showed the following at the end ofFebruary 2010: Outstanding checks as of the beginning of February 2010, $8,000; checks written byFrankel Company according to their books during February 2010, $50,000; and checks cleared by thebank during February 2010, $54,000. How much were the outstanding checks at the end of February2010?A. $2,000B. $4,000C. $6,000D. $8,000Outstanding checks at the end of February ($4,000) = Outstanding checks at the beginning of February($8,000) + Checks written per the books during February ($50,000) - Checks clearing the bank duringFebruary ($54,000)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #71Topic Area: Reporting And Safeguarding Cash

72. The cash account and the December bank statement of Gomez Company showed the following:deposits made by Gomez Company during December $90,000; deposits reflected on the December bankstatement, $88,000; and deposits in transit on December 1, $5,000. How much were the deposits intransit at the end of December?A. $10,000B. $7,000C. $5,000D. $2,000Deposits in transit at the end of December ($7,000) = Deposits made per the books during

December($90,000) - {Deposits per the December bank statement ($88,000) - December 1 deposits in transit($5,000)}.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #72Topic Area: Reporting And Safeguarding Cash

73. When preparing the monthly bank reconciliation, the accountant for Farris Corporation discovered thata check correctly written to one of Farris' suppliers for $159 had been incorrectly recorded in the booksas $195. Which of the following statements is correct with respect to the bank reconciliation process?A. The cash balance per the books will be decreased.B. The cash balance per the bank statement will be increased.C. The cash balance per the bank statement will be decreased.D. The cash balance per the books will be increased.The error incorrectly decreases the cash balance per the books. To correct the books, the difference($195 - $159) is added back to the book balance.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: RememberDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #73Topic Area: Reporting And Safeguarding Cash

74. When preparing a bank reconciliation, which of the following would be deducted from the company'scash balance?A. Interest income paid by the bank.B. The dollar amount of deposits in transit.C. The dollar amount of outstanding checks.D. The bank service charges included on the bank statement.The bank service charges are recorded on the bank statement and need to be deducted from the bookbalance.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: RememberDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #74Topic Area: Reporting And Safeguarding Cash

75. Merchandise was sold on credit for $10,000, terms 2/10, n/30. Which of the following journal entrydescriptions correctly describes the cash collection?

A.Cash is debited for $10,000 and accounts receivable is credited for $10,000 if the collection is withinthe discount period.B.Cash is debited for $10,000, accounts receivable is credited for $9,800 and sales discounts is creditedfor $200 if the collection is within the discount period.C.Cash is debited for $10,000, accounts receivable is credited for $9,800, and sales discounts is creditedfor $200 if the collection is after the discount period.D.Cash is debited for $10,000, accounts receivable is credited for $10,000 if the collection is after thediscount period.When the payment is received after the discount period, a sales discount is not recorded and cash isdebited and accounts receivable is credited for the selling price.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S)Libby - Chapter 06 #75Topic Area: Accounting For Sales Revenue

76. Merchandise was sold on credit for $30,000, terms 3/15, n/30. Which of the following journal entrydescriptions correctly describes the cash collection?A.Cash is debited for $29,100 and accounts receivable is credited for $29,100 if the collection is withinthe discount period.B.Cash is debited for $29,100, sales discounts is debited for $900, and accounts receivable is creditedfor $30,000 if the collection is within the discount period.C.Cash is debited for $30,000, accounts receivable is credited for $29,100, and sales discounts iscredited for $900 if the collection is within the discount period.D.Cash is debited for $29,100 and accounts receivable is credited for $29,100 if the collection is afterthe discount period.When the payment is received within the discount period, a sales discount ($900) is recorded via a debitand cash is debited for the selling price less the discount ($30,000 - $900) and accounts receivable is

credited for the selling price ($30,000).AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S)Libby - Chapter 06 #76Topic Area: Accounting For Sales Revenue

77. Which of the following does not correctly describe the following journal entry?A. Current assets increase.B. Gross profit decreases.C. Net sales decreases.D. Operating income is not affected.The debit to the credit card discount account is a contra-revenue account which reduces both grossprofit and operating income.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S)Libby - Chapter 06 #77Topic Area: Accounting For Sales Revenue

78. Which of the following correctly describes the following journal entry?A. The gross profit percentage remains the same.B. Operating income decreases.C. Current assets increase.D. Net sales increases.The debit to the credit card discount account is a contra-revenue account which reduces both grossprofit and operating income.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S)Libby - Chapter 06 #78Topic Area: Accounting For Sales Revenue

79. Which of the following does not correctly describe the following journal entry?A. Current assets decrease.B. Gross profit decreases.C. Net sales decreases.D. Operating expenses increase.The debit to the sales returns and allowances account is a contra-revenue account which reduces bothgross profit and operating income. Sales returns and allowances is not an operating expense.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: Remember

Difficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S)Libby - Chapter 06 #79Topic Area: Accounting For Sales Revenue

80. The Ward Company has provided the following information:• Net sales totaled $750,000.• Beginning net accounts receivable was $65,000.• Ending net accounts receivable was $85,000.What was Ward's receivable turnover ratio?A. 10.0B. 8.8C. 11.54D. 5.0Receivable turnover ratio (10) = Net sales ($750,000) ÷ Average accounts receivable ($75,000*).*Average net accounts receivable ($75,000) = [beginning net accounts receivable ($65,000) + ending netaccounts receivable ($85,000)] ÷ 2AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows.Libby - Chapter 06 #80Topic Area: Measuring And Reporting Receivables

81. The Ward Company has provided the following information:• Net sales totaled $750,000.• Beginning net accounts receivable was $65,000.• Ending net accounts receivable was $85,000.What was Ward's average collection period?A. 73 daysB. 41.8 daysC. 31.6 daysD. 36.5 daysReceivable turnover ratio (10) = Net sales ($750,000) ÷ Average net accounts receivable ($75,000*).*Average accounts receivable ($75,000) = [beginning net accounts receivable ($65,000) + ending netaccounts receivable ($85,000)] ÷ 2.Average collection period (36.5 days) = 365 ÷ receivables turnover (10).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows.Libby - Chapter 06 #81Topic Area: Measuring And Reporting Receivables

82. The Rye Corporation has provided the following information:• Total sales were $1,200,000.• Beginning net accounts receivable was $45,000.

• Ending net accounts receivable was $65,000.Sales returns and allowances totaled $100,000.What was Rye's receivable turnover ratio?A. 21.8B. 18.5C. 10.0D. 20.0Receivable turnover ratio (20) = Net sales ($1,200,000 - $100,000) ÷ Average net accounts receivable($55,000*). Average net accounts receivable ($55,000) = [beginning net accounts receivable ($45,000) +ending net accounts receivable ($65,000)] ÷ 2.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows.Libby - Chapter 06 #82Topic Area: Measuring And Reporting Receivables

83. The Rye Corporation has provided the following information:• Total sales were $1,200,000.• Beginning net accounts receivable was $45,000.• Ending net accounts receivable was $65,000.• Sales returns and allowances totaled $100,000.What was Rye's average collection period?A. 16.7B. 19.7C. 36.5D. 18.3Receivable turnover ratio (20) = Net sales ($1,200,000 - $100,000) ÷ Average net accounts receivable($55,000*). *Average net accounts receivable ($55,000) = [beginning net accounts receivable ($45,000)+ ending net accounts receivable ($65,000)] ÷ 2.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows.Libby - Chapter 06 #83Topic Area: Measuring And Reporting Receivables

84. Which of the following transactions will result in a decrease in the receivable turnover ratio?A. The journal entry to record bad debt expense.B. Writing off an uncollectible account receivable.C. Selling inventory on account.D. Collecting an account receivable.Selling inventory on account results in an increase in both net sales (numerator) and average netreceivables (denominator). However, the increase in the denominator is greater relative to

the increasein the numerator. Therefore the receivable turnover ratio decreases.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows.Libby - Chapter 06 #84Topic Area: Accounting For Sales Revenue

85. Which of the following transactions will result in an increase in the receivable turnover ratio?A. The journal entry to record bad debt expense.B. Writing off an uncollectible account receivable.C. Selling inventory on account.D. Purchasing inventory on account.The journal entry to record bad debt expense involves a credit to allowance for doubtful accounts,which decreases net accounts receivable and therefore increases the receivable turnover ratio.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S)Libby - Chapter 06 #85Topic Area: Accounting For Sales Revenue

86. Which of the following statements is correct?A.A decrease in the accounts receivable balance means that credit sales exceeded cash collections fromcustomers.B. The accounts receivable balance increases when cash collected from customers exceeds credit sales.C.A decrease in accounts receivable is deducted from net income when determining cash flow fromoperations.D.An increase in accounts receivable is deducted from net income when determining cash flow fromoperations.An increase in accounts receivable is added to net income, rather than deducted from net income, whendetermining cash flow from operations.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows.Libby - Chapter 06 #86Topic Area: Measuring And Reporting Revenues

87. Which of the following does not correctly describe the effect of recording a credit sale of inventory for aprofit?

A. The receivables turnover ratio decreases.B. Current assets increase.C. Gross profit increases.D. Operating expenses increase.Cost of goods sold is not an operating expense.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-03 Analyze and interpret the gross profit percentage.Learning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows.Libby - Chapter 06 #87Topic Area: Accounting For Revenues, Measuring And Reporting Revenues

88. The Soft Company has provided the following information:• Allowance for doubtful accounts increased $19,000 and accounts receivable increased • $390,000during the year.• Accounts written off as uncollectible totaled $20,000.• Net sales totaled $2,700,000.• The gross profit percentage was 40%.• Sales discounts were $100,000.How much was Soft's bad debt expense?A. $39,000B. $1,000C. $19,000D. $20,000Bad debt expense ($39,000) = Increase in allowance for uncollectible accounts ($19,000) + Accountswritten off as uncollectible ($20,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #88Topic Area: Measuring And Reporting Receivables

89. The Soft Company has provided the following information:• Allowance for doubtful accounts increased $19,000 and accounts receivable increased $390,000during the year.• Accounts written off as uncollectible totaled $20,000.• Net sales totaled $2,700,000.• The gross profit percentage was 40%.• Sales discounts were $100,000.How much was Soft's gross profit?A. $1,040,000B. $1,072,400C. $1,032,400D. $1,080,000

Gross profit ($1,080,000) = Net sales ($2,700,000) Å~ Gross profit percentage (40%)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: EasyLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #89Topic Area: Measuring And Reporting Receivables

90. Redwing Company sold inventory costing $500 to a customer on account for $700. Which of thefollowing correctly describes the collection of $686 cash when the customer takes advantage of adiscount?A. Operating expenses increase $14.B. Accounts receivable decreases $686.C. Current assets decrease $14.D. Gross profit is not affected.Cash increases $686 and accounts receivable decreases $700.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S)Libby - Chapter 06 #90Topic Area: Accounting For Sales Revenue

91. Redwing Company sold inventory costing $500 to a customer on account for $700. Which of thefollowing does not correctly describe the collection of $686 cash when the customer takes advantage ofa discount?A. Gross profit decreases $14.B. Accounts receivable decreases $700.C. Current assets decrease $14.D. Operating income is not affected.The sales discount decreases net sales, gross profit, and operating income.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S)Libby - Chapter 06 #91Topic Area: Accounting For Sales Revenue

92. Sabre Company sold inventory costing $600 to a customer on account for $900 with terms of 3/10, n/30. Which of the following is not correct?A. Gross profit increases $300 on the date of sale.B.Total current assets aren't affected on the date of cash collection if the customer pays 15 days afterthe date of sale.

C.Total current assets increase $27 on the date of cash collection if the customer pays within 15 days ofthe date of sale.D.Gross profit and net sales both decrease $27 on the date of cash collection if the customer pays within15 days of the date of sale.Cash increases $873 and accounts receivable decreases $900, therefore total current assets decrease $27.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S)Libby - Chapter 06 #92Topic Area: Accounting For Sales Revenue

93. One of Hawk Company's customers returned products that cost Hawk $300, which was sold on accountfor $450. Which of the following does not correctly describe the affect of the return on the financialstatements?A. Gross profit decreases $150.B. Total current assets decrease $150.C. Sales returns and allowances increase $150.D. Operating expenses increase $150.Sales returns are not operating expenses.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #93Topic Area: Accounting For Sales Revenue

94. One of Hawk Company's customers returned products that cost Hawk $500, which was sold on accountfor $800. Which of the following correctly describes the affect of the return on the financial statements?A. Gross profit decreases $800.B. Total current assets decrease $300.C. Sales returns and allowances increase $300.D. Net sales increase $300.Inventory increases $500 and accounts receivable decreases $800.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #94Topic Area: Accounting For Sales Revenue

95. Which of the following transactions does not affect gross profit?

A. A customer returning merchandise that was sold for a profit.B.The collection of cash on an account receivable which was paid for by the customer within thediscount period.C. The journal entry to record bad debt expense.D. Selling inventory for less than its cost.Bad debt expense is an operating expense which does not affect gross profit.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Learning Objective: 06-03 Analyze and interpret the gross profit percentage.Libby - Chapter 06 #95Topic Area: Accounting For Sales Revenue

96. Which of the following is not a component of the gross profit calculation?A. Cost of goods soldB. Sales returns and allowancesC. Allowance for doubtful accountsD. Credit card discountsAllowance for doubtful accounts is a contra-asset account on the balance sheet.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: EasyLearning Objective: 06-03 Analyze and interpret the gross profit percentage.Libby - Chapter 06 #96Topic Area: Accounting For Sales Revenue

97. The following data were taken from the records of Lilo Corporation for the year ended December 31,2010:Answers will varyFeedback:The following items have not been included in above amounts:Estimated bad debt expense is 1% of credit sales.The income tax rate is 35%.10,000 of shares of common stock are outstanding.Requirements:A. Based on the above data, prepare a multiple-step income statement (including gross profit, pretaxincome, and earnings per share).B. 1. What was the gross profit ratio?2. Explain what gross profit and the gross profit ratio mean.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Learning Objective: 06-03 Analyze and interpret the gross profit percentage.Libby - Chapter 06 #97Topic Area: Accounting For Sales Revenue

98. A portion of the income statement for Oscar Company is shown below. Provide the missing accounttitles and amounts.Answers will varyFeedback: A. Sales revenueB. $350,000 - $348,000 = $2,000C. Net salesD. Cost of goods sold; $348,000 - $90,000 = $258,000AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: EasyLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #98Topic Area: Accounting For Sales Revenue

99. A portion of the income statement for Lone Star Company is shown below. Provide the missing accounttitles and amounts.Answers will varyFeedback: A. Sales revenueB. $380,000 - $20,000 = $360,000C. Gross profitD. $360,000 - $100,000 = $260,000AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Learning Objective: 06-03 Analyze and interpret the gross profit percentage.Libby - Chapter 06 #99Topic Area: Accounting For Sales Revenue

100. Indicate whether each of the accounts listed below normally will have a debit or a credit balance.Record your answer to the left of each account by entering either Dr or Cr.Answers will varyFeedback: 1. Cr; 2. Dr; 3. Dr; 4. Cr; 5. Dr; 6. Dr; 7. Cr; 8. DrAACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: EasyLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #100Topic Area: Accounting For Sales Revenue

101. Anthony Inc. reported the following amounts on their 2011 and 2010 income statements:Requirements:A. Compute the gross profit percentage for both years.B. Provide at least two potential causes for the change in Anthony's gross profit percentage.Answers will vary

Feedback: A. 2011 = 61.1% ($12,495/$20,438)2010 = 59.7% ($12,169/$20,367)B. Anthony may have higher sales prices, lower costs of producing their product, or a change in thesales mix of their products toward selling more of the higher margin products.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-03 Analyze and interpret the gross profit percentage.Libby - Chapter 06 #101Topic Area: Accounting For Sales Revenue

102. Hill Company has reported the following information on their income statements for the years 2008through 2012:A. Compute the gross profit percentage for each year.B. Has the gross profit ratio for Hill improved over time or worsened? Explain your answer.Answers will varyFeedback: A. 2012 = 31.0% ($3,517/$11,332), 2011 = 29.9% ($3,541/$11,862), 2010 = 26.7% ($2,979/$11,170), 2009 = 30.2% ($3,328/$11,038), 2008 = 30.6% ($3,040/$9,932).B. The gross profit margin was eroding from 2008 through 2010 but then it recovered from the low of26.7% in 2010 to its highest level in 2012 of 31.0%.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-03 Analyze and interpret the gross profit percentage.Libby - Chapter 06 #102Topic Area: Accounting For Sales Revenue

103. Hickory Corporation recorded sales revenue during the year of $350,000 of which $100,000 was oncredit. The company has experienced an average loss rate of 2% of credit sales. Give the adjustingjournal entry at the end of the year to record bad debt expense.Answers will varyFeedback:AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplyDifficulty: EasyLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #103Topic Area: Measuring And Reporting Receivables

104. Prior to the year-end adjustment to record bad debt expense the ledger of Stickler Company included thefollowing accounts and balances:Cash collections on accounts receivable during 2010 amounted to $450,000. Sales revenue during 2010

amounted to $800,000, of which 75% was on credit, and it was estimated that 2% of the credit salesmade in 2010 would ultimately become uncollectible.Determine the balances of the allowance for doubtful accounts and bad debt expense after the adjustingentry to record bad debt expense was made. The allowance for doubtful accounts has a credit balanceprior to the adjusting entry.Answers will varyFeedback: Allowance for doubtful accounts $13,000 ($1,000 + $12,000)Bad debt expense $12,000 debit [($800,000 x 75%) x 2%)]AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #104Topic Area: Measuring And Reporting Receivables

105. On December 31, 2011, Colonial Corporation had the following account balances related to credit salesand receivables prior to recording adjusting entries:Requirements:Present the necessary year-end adjusting entry related to uncollectible accounts for each of thefollowing independent assumptions:A. An aging of accounts receivable is completed. It is estimated that $2,150 of the receivablesoutstanding at year-end will be uncollectible.B. It is estimated that 1% of credit sales for the year will prove to be uncollectible.C. Assume the same information presented in part A. Except that prior to adjustment, the allowance fordoubtful accounts had a debit balance of $200 rather than a credit balance of $200.Answers will varyFeedback:AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #105Topic Area: Measuring And Reporting Receivables

106. On January 1, American Company's allowance for doubtful accounts had a credit balance of $3,000.The balance in the Accounts Receivable account on that date was $75,000. On January 2, prior to anycredit sales, a $500 account from National Company was deemed to be uncollectible and written off.Required:

A. Compute the net realizable value of American's receivables on January 1.B. Present the journal entry American would record on January 2 related to the write-off of National'saccount.C. Compute the net realizable value of American's receivables on January 2, immediately following thewrite-off of National's account.Answers will varyFeedbackAACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplyDifficulty: EasyLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #106Topic Area: Measuring And Reporting Receivables

107. Cyclone Inc. reported the following figures from their financial statements for the years 2009 through2011:Describe how the change in accounts receivable will affect the calculation of cash flow from operationsfor 2011 and 2010.Answers will varyFeedback: The decrease [$90,561 - $68,648] in accounts receivable of $21,913 results in an increasein cash flow from operations during 2011. The increase [$90,561 - $56,454] in accounts receivable of$34,107 results in a decrease in cash flow from operations during 2010.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows.Libby - Chapter 06 #107Topic Area: Measuring And Reporting Revenues

108. Cyclone Inc. reported the following figures from their financial statements for the years 2009 through2011:Calculate the accounts receivable turnover for 2011 and 2010:Answer: Answers will varyFeedback: 2011 = 9.01 ($717,422/$79,604.5)2010 = 15.1 ($1,110,178/$73,507.5)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows.Libby - Chapter 06 #108Topic Area: Measuring And Reporting Revenues

109. Cyclone Inc. reported the following figures from their financial statements for the years 2009 through

2011:Calculate the days' sales in receivables for 2011 and 2010:Answers will varyFeedback: 2011 = 40.5 days, (365/9.01)2010 = 24.2 days (365/15.1)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows.Libby - Chapter 06 #109Topic Area: Measuring And Reporting Revenues

110. A recent annual report for Kirova Company contained the following data:Requirements:A. Calculate the accounts receivable turnover ratio and average days' sales in receivables for 2011.B. Explain the meaning of each number.Answers will varyFeedback: A. Accounts receivable turnover ratio (9.6) = Net sales ($18,158) ÷ Average net accountsreceivable ($1,814 + $1,973) ÷ 2Average days' sales in receivables (38 days) = 365 days ÷ Accounts receivable turnover (9.6)B. The turnover ratio indicates the number of times on average that the receivables are collectedwhile the days sales in receivables shows the length of time in days it takes the company to collect itsreceivables from the credit customers. The higher the turnover ratio, the fewer days it takes to collectour receivables, thereby increasing liquidity of the receivables.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows.Libby - Chapter 06 #110Topic Area: Measuring And Reporting Revenues

111. During 2011, Charles Inc. recorded credit sales of $2,000,000. Based on prior experience, it estimatesa 1 percent bad debt rate on credit sales. At the beginning of the year, the balance in net accountsreceivable was $150,000. At the end of the year, but before the bad debt expense adjustment wasrecorded and before any bad debts had been written off, the balance in net accounts receivable was$125,000.A. Assume that on December 31, 2011, the appropriate bad debt expense adjustment was recordedfor the year 2011 and accounts receivable totaling $10,000 were written off for the year, what was the

receivables turnover ratio for the year?B. Assume that on December 31, 2011, the appropriate bad debt expense adjustment was recordedfor the year 2011 and accounts receivable totaling $12,000 were written off for the year, what was thereceivables turnover ratio for the year?C. Explain why the answers to parts 1 and 2 differ or do not differ.Answers will varyFeedback: A. Receivables Turnover (15.7) = Net sales ($2,000,000) ÷ Average net accounts receivable($150,000 + $105,000) ÷ 2B. Receivables Turnover (15.7) = Net sales ($2,000,000) ÷ Average net accounts receivable ($150,000+ $105,000) ÷ 2C. The ratio stayed the same because only the adjusting entry affects the balance of net accountsreceivable while the actual write off of customer accounts simply offsets the asset against the contraassetaccount so that net accounts receivable doesn't change.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows.Libby - Chapter 06 #111Topic Area: Measuring And Reporting Revenues

112. Where, if at all, do items A through G (listed below) belong in the following bank reconciliation?Items:A. Checks written during June that had not cleared the bank by June 30.B. Bank service charges for June which were not known until the June 30th bank statement arrived.C. Deposit made on June 30 that did not reach the bank until July 1.D. Upon reviewing the company's cash receipts book after June 30, it was discovered the accountingclerk had neglected to post one receipt to the cash account.E. The bank statement reported a "NSF check" during June.F. The bank incorrectly deducted the check of another company to the bank account during June.G. The company was paid interest on its account by the bank.Answers will varyFeedback :(1.) C, F; (2.) A; (3.) D, G; (4.) B, E.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: RememberDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #112Topic Area: Reporting And Safeguarding Cash

113. Why is the reconciliation of a company's cash account to the bank statement so

important for effectiveinternal control for cash?Answers will varyFeedback: The reconciliation of the cash account is very important in determining the correct, up-todatebalance for cash to be presented on the company's balance sheet. It is also a good tool for detectingerrors in the cash account.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: RememberDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #113Topic Area: Reporting And Safeguarding Cash

114. Illinois Company prepared the following bank reconciliation at May 31:Prepare the necessary journal entries for Illinois Company required by the May 31 bank reconciliation.Answers will varyFeedback:AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #114Topic Area: Reporting And Safeguarding Cash

115. Chicago Company has hired you to reconcile its bank statement and cash account. For June, the Cashaccount showed the following:There were neither outstanding checks nor deposits in transit at May 31.A. Prepare the bank reconciliation.B. Prepare the adjusting journal entries needed due to the bank reconciliation.C. What is the June 30 ending cash balance?Answers will varyFeedback:AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: RememberDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #115Topic Area: Reporting And Safeguarding Cash

116. A comparison of the balance in Cottonwood Company's cash account (per its books) as of April 30,2009, and the bank statement dated April 30, 2009, revealed the following information:Required:Prepare a bank reconciliation using the format below. Indicate the proper handling of each of theitems given above by listing the appropriate item code (letter) and amount under each section of the

reconciliation statement form below. Then determine the correct cash balance.Note: If one or more of the items given above should not appear on the reconciliation statement, do notinclude the item(s).Answers will varyFeedback:AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: RememberDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #116Topic Area: Reporting And Safeguarding Cash

117. Burke Company has just received its June 30 bank statement from Urban Bank. The bank statement andthe cash account, summarized below, are to be reconciled for the month of June.Required:A. Prepare the June 30 bank reconciliation.B. Prepare the journal entries that should be made in the accounts of Burke Company as a result of thebank reconciliation.Answers will varyFeedback:AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: RememberDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #117Topic Area: Reporting And Safeguarding Cash

118. What are "cash equivalents"? Specifically where would they appear on the financial statements?Answers will varyFeedback: Cash equivalents are short-term investments that can be readily converted into cash andwhose value is unlikely to change. They normally have maturities of three months or less. They usuallyappear with cash on the balance sheet as the first listed current asset.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #118Topic Area: Reporting And Safeguarding Cash

119. You are the new manager of West Coast Company. The company distributes goods throughout theRocky Mountain area. Customers are billed after the shipments are sent. Most customers pay within twoweeks. You notice that one employee is responsible for opening all incoming payments, recording them

in the accounting records, and depositing all receipts in the bank daily. When asked why this one personperformed all of these duties, you were told that it was more efficient for one person to handle cash andto keep track of things. If any cash was missing, responsibility could be easily determined. Do you agreewith this arrangement? What changes would you make, and why?Answers will varyFeedback: Note: Answers may vary. This is definitely not a good system. One person should not beresponsible for the receipt of cash, accounting for cash, and depositing in the bank. The duties ofhandling cash and accounting for cash should definitely be separated. This person could be stealingfrom the firm; since he/she is the only one handling the receipt of cash, the theft could easily beconcealed. For example, when a customer pays cash on account, the employee could debit sales returnsand allowances instead of the cash account. To prevent such an occurrence, different employees shouldhave the responsibility of receiving cash, accounting for cash, and depositing cash in the bank on a dailybasis.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #119Topic Area: Reporting And Safeguarding Cash

120. Asia Company sold $10,000 of goods to Euro Company on credit on May 1. At the time of the sale,Asia recorded a debit to Accounts Receivable and a credit to Sales Revenue for $10,000. Terms were 2/10, n/30.Required: Present the entries Asia Company would record for each of the following independentsituations:A. Euro paid the balance due, less the discount, on May 10.B. Euro returned half of the goods for credit on May 4. Euro paid the balance due, less the discount, onMay 10.C. Euro paid their bill on May 30 (there were no returns).Answers will varyFeedback:AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: Medium

Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S)Libby - Chapter 06 #120Topic Area: Accounting For Sales Revenue

121. On July 10, 2010, Rex Company sold merchandise at an invoice price of $5,000 with terms of 2/10, n/30. Give the journal entries required below by indicating the account code of the appropriate account foreach debit and credit and the amounts involved.Answers will varyFeedback:AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S)Libby - Chapter 06 #121Topic Area: Accounting For Sales Revenue

122. On June 1, 2010, Concorde Company sold merchandise on credit at an invoice price of $1,000; terms 2/10, n/30. Give the journal entries to record the following:A. To record the sale.B. Assumption A: To record collection on June 28, 2010.C. Assumption B: To record collection on June 9, 2010.Answers will varyFeedback:AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S)Libby - Chapter 06 #122Topic Area: Accounting For Sales Revenue

123. Determine the effect of the following transactions on the financial statement components identified.Code your answers as follows:A. If the transaction results in an increase in the financial statement component.B. If the transaction results in a decrease in the financial statement component.C. If the transaction does not affect the financial statement component.Transaction 1: The adjusting entry to record bad debt expense was made.Gross profit ______ Current assets ______ Stockholders' equity ______ Transaction 2: An accountreceivable was collected for which the customer took advantage of a 2% discount and remitted thepayment less the discount.Net sales ______ Gross Profit ______ Current assets ______AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial

statements.Libby - Chapter 06 #123Topic Area: Measuring And Reporting Receivables.

124. When goods are shipped FOB shipping point, title passes to the buyer on the shipment date.TRUEWhen goods are shipped FOB shipping point, the title passes to the buyer when the goods are shipped.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 06-01 Apply the revenue principle to determine the accepted time to record sales revenue for typical retailers; wholesalers; manufacturers; andservice companies.Libby - Chapter 06 #1Topic Area: Accounting For Sales Revenue

125. When goods are shipped FOB destination, the revenue from the sale is recognized on the shipment date.FALSEWhen goods are shipped FOB destination, the revenue is recognized when the goods are delivered.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 06-01 Apply the revenue principle to determine the accepted time to record sales revenue for typical retailers; wholesalers; manufacturers; andservice companies.Libby - Chapter 06 #2Topic Area: Accounting For Sales Revenue

126. Credit card discounts are reported as operating expenses on an income statement.FALSECredit card discounts are deducted from sales to calculate net sales.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #3Topic Area: Accounting For Sales Revenue

127. Sales discounts are deducted from sales in the calculation of net sales.TRUESales discounts are deducted from sales to calculate net sales.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #4Topic Area: Accounting For Sales Revenue

128. Sales returns and allowances is a contra-revenue account.TRUESales returns and allowances are deducted from sales to calculate net sales. They are

therefore a contrarevenueaccount.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #5Topic Area: Accounting For Sales Revenue

129. Credit terms of "2/10, n/30" mean that if payment is made in two days, a 10% discount will be given; ifnot paid within two days, the full invoice price will be due in thirty days.FALSEThe "2/10" means that a 2% discount is given if the payment is made within 10 days.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #6Topic Area: Accounting For Sales Revenue

130. A company is thinking of borrowing money at an 18% annual interest rate in order to pay a $30,000invoice within the discount period. The invoice terms are 2/10, n/30. They should borrow the moneybecause they will have a net savings of 19.2%.TRUEThe annual interest rate associated with the credit terms is 37.2% and is calculated by multiplyingthe 20-day interest rate ($600 ÷ $29,400) by the number of 20-day periods during a year (365 ÷ 20).Borrowing at 18% will save the company 19.2% (37.2% - 18%).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #7Topic Area: Accounting For Sales Revenue

131. The gross profit percentage is calculated by dividing net sales by gross profit.FALSEThe gross profit percentage is calculated by dividing gross profit by net sales.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: RememberDifficulty: EasyLearning Objective: 06-03 Analyze and interpret the gross profit percentage.Libby - Chapter 06 #8Topic Area: Measuring And Reporting Receivables

132. The gross profit percentage decreases when operating expenses increase.FALSE

The gross profit percentage is calculated by dividing gross profit by net sales. Operating expenses donot affect either gross profit or net sales.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: RememberDifficulty: EasyLearning Objective: 06-03 Analyze and interpret the gross profit percentage.Libby - Chapter 06 #9Topic Area: Measuring And Reporting Receivables

133. The journal entry to record bad debt expense is made during the year that it is determined that aparticular receivable is uncollectible.FALSEBad debt expense is recorded during the year of sale, not during the year the receivable is determined tobe uncollectible.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #10Topic Area: Measuring And Reporting Receivables

134. When a particular account receivable is determined to be uncollectible, the journal entry to write-off theaccount reduces net income.FALSEThe entry to write-off an account receivable includes a debit to the allowance for doubtful accounts anda credit to accounts receivable; this entry does not affect the income statement.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #11Topic Area: Measuring And Reporting Receivables

135. The allowance for doubtful accounts is reported as a contra-asset on the balance sheet.TRUEAllowance for doubtful accounts is deducted from accounts receivable on the balance sheet. It istherefore a contra-asset account.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #12Topic Area: Measuring And Reporting Receivables

136. The journal entry to write-off an uncollectible account does not change the net realizable value (bookvalue) of accounts receivable.TRUEThe journal entry to write-off an account receivable includes a debit to allowance for doubtful accountsand a credit to accounts receivable; this entry reduces both accounts equally and therefore doesn'tchange net realizable value (accounts receivable minus allowance for doubtful accounts).AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #13Topic Area: Measuring And Reporting Receivables

137. The year-end journal entry to record bad debt expense reduces current assets and net income.TRUEThe journal entry increases the allowance for doubtful accounts balance which decreases current assetsand the journal entry increases expenses which decreases net income.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #14Topic Area: Measuring And Reporting Receivables

138. Net sales multiplied by an historical percentage for bad debt expense, equals bad debt expense whenusing the percentage of credit sales method.TRUEThe percentage of credit sales method estimates bad debt expense by multiplying net credit sales timesan historical bad debt percentage.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #15Topic Area: Measuring And Reporting Receivables

139. The accounts receivable aging schedule determines the dollar amount of uncollectible accountsreceivable at year-end; this dollar amount of uncollectible accounts receivable is the bad debt expensethat is recorded for the year regardless of the allowance for doubtful accounts balance.FALSE

The bad debt expense for the year takes into consideration the existing allowance for doubtful accountsbalance.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #16Topic Area: Measuring And Reporting Receivables

140. Prior year financial statements are adjusted when it is determined that prior year bad debt expense wastoo low.FALSEPrior year financial statements aren't adjusted; the current and/or future financial statements howeverwill be adjusted.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #17Topic Area: Measuring And Reporting Receivables

141. If the accounts receivable turnover ratio increases, the number of days it takes to collect the receivablesalso increases.FALSEThe average collection period is calculated by dividing 365 by the receivables turnover ratio. Thereforethe higher the receivable turnover ratio, the lower the number of days to collect the receivable will be.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: RememberDifficulty: MediumLearning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows.Libby - Chapter 06 #18Topic Area: Measuring And Reporting Receivables

142. When preparing the statement of cash flows, the reason that we must adjust net sales revenue for thechange in accounts receivables to convert net sales to cash collected from customers is that accountsreceivable represents sales revenue not collected from customers at the beginning and end of theaccounting year.TRUEThe change in the accounts receivable balance represents the difference between cash collections andnet sales revenue.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: RememberDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #19Topic Area: Measuring And Reporting Receivables

143. Cash equivalents such as treasury bills are reported as investments on the balance sheet.FALSECash and cash equivalents are combined and reported on the balance sheet as a current asset. Cashequivalents are not reported as an investment on the balance sheet.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #20Topic Area: Reporting And Safeguarding Cash

144. Cash equivalents on the balance sheet include certificates of deposit with maturities of 60 days or more.FALSECash equivalents have maturities of less than 90 days.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #21Topic Area: Reporting And Safeguarding Cash

145. Effective internal control of cash should include the separation of the duties for receiving and disbursingcash.TRUESeparation of the responsibilities for receiving and disbursing cash is a basic internal control for cash.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #22Topic Area: Reporting And Safeguarding Cash

146. If a check received from a customer that has been deposited by the seller is returned with the bankstatement as a nonsufficient funds (NSF) check, it would appear on the seller's bank reconciliation as adeduction from the ending bank statement balance.FALSEThe NSF check would be deducted from the book balance not the bank balance.AACSB: Reflective ThinkingAICPA BB: Critical Thinking

AICPA FN: MeasurementBloom's: RememberDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #23Topic Area: Reporting And Safeguarding Cash

147. Deposits in transit are deducted from the book balance when preparing the bank reconciliation.FALSEDeposits in transit are added to the bank balance when preparing the bank reconciliation.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: RememberDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #24Topic Area: Reporting And Safeguarding Cash

148. An objective of preparing the bank reconciliation is to reconcile the bank balance at the end of theperiod with the company's book balance at the end of the period.TRUEThe bank reconciliation is an internal control device with the intent being to test the equality of thebank statement balance with the book balance after the applicable adjustments have been made to bothbalances.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: RememberDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #25Topic Area: Reporting And Safeguarding Cash

149. When completing the bank reconciliation, bank service charges should be deducted from the company'scash balance.TRUEBank service charges are deducted from the book cash balance because they were unrecorded prior toreceipt of the bank statement.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: RememberDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #26Topic Area: Reporting And Safeguarding Cash

150. Which of the following statements is correct?A. Revenue is recognized at the time of shipment when goods are shipped FOB destination.B. Sales returns and allowances are reported as operating expenses on an income statement.C. Revenue is recorded when title and risks of ownership transfer to the buyer.

D. Sales discounts are reported as operating expenses on an income statement.Most businesses recognize revenue when the product is delivered and/or service is provided.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-01 Apply the revenue principle to determine the accepted time to record sales revenue for typical retailers; wholesalers; manufacturers; andservice companies.Libby - Chapter 06 #27Topic Area: Accounting For Sales Revenue

151. A company sells magazines and collects subscription fees prior to the publication and distribution of themagazine. Which of the following correctly describes the impact on the financial statements when cashis received in advance from customers?A. Current assets increase and gross profit increases.B. Current liabilities aren't affected and stockholders' equity isn't affected.C. Current assets increase and stockholders' equity increases.D. Current liabilities increase and gross profit is not affected.Receiving payments in advance of providing goods and/or services creates and liability and does notcreate revenue or gross profit.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #28Topic Area: Accounting For Sales Revenue

152. Newark Company has provided the following information:• Cash sales, $450,000• Credit sales, $1,350,000• Selling and administrative expenses, $330,000• Sales returns and allowances, $90,000• Depreciation expense, $101,000• Gross profit, $1,360,000• Increase in accounts receivable, $55,000• Bad debt expense, $33,000• Sales discounts, $43,000How much is Newark's cost of goods sold?A. $307,000B. $252,000C. $440,000D. $340,000Net sales ($450,000 + $1,350,000 - $90,000 - $43,000) minus cost of goods sold ($307,000) equals grossprofit ($1,360,000).AACSB: Analytic

AICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Learning Objective: 06-03 Analyze and interpret the gross profit percentage.Libby - Chapter 06 #29Topic Area: Accounting For Sales Revenue, Measuring And Reporting Receivables.

153. Newark Company has provided the following information:• Cash sales, $450,000• Credit sales, $1,350,000• Selling and administrative expenses, $330,000• Sales returns and allowances, $90,000• Depreciation expense, $101,000• Gross profit, $1,360,000• Increase in accounts receivable, $55,000• Bad debt expense, $33,000• Sales discounts, $43,000How much is Newark's gross profit percentage?A. 75.5%B. 81.6%C. 53.7%D. 83.2%The gross profit percentage (81.6%) equals gross profit ($1,360,000) divided by net sales ($450,000 +$1,350,000 - $90,000 - $43,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Learning Objective: 06-03 Analyze and interpret the gross profit percentage.Libby - Chapter 06 #30Topic Area: Accounting For Sales Revenue, Measuring And Reporting Receivables

154. Newark Company has provided the following information:• Cash sales, $450,000• Credit sales, $1,350,000• Selling and administrative expenses, $330,000• Sales returns and allowances, $90,000• Depreciation expense, $101,000• Gross profit, $1,360,000• Increase in accounts receivable, $55,000• Bad debt expense, $33,000• Sales discounts, $43,000How much are Newark's net sales?A. $1,634,000B. $1,800,000C. $1,667,000D. $1,745,000Net sales ($1,667,000) equals ($450,000 + $1,350,000 - $90,000 - $43,000).

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #31Topic Area: Accounting For Sales Revenue

155. Flyer Company has provided the following information:• Cash sales, $150,000• Credit sales, $450,000• Selling and administrative expenses, $110,000• Sales returns and allowances, $30,000• Gross profit, $490,000• Accounts receivable, $110,000• Sales discounts, $14,000• Allowance for doubtful accounts credit balance, $1,200How much is bad debt expense assuming that 5% of accounts receivable is estimated to beuncollectible?A. $5,500B. $6,700C. $4,240D. $4,300Bad debt expense ($4,300) = 5% of accounts of accounts receivable (5% Å~ $110,000) - allowance fordoubtful accounts credit balance ($1,200).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #32Topic Area: Measuring And Reporting Receivables

156. Flyer Company has provided the following information:• Cash sales, $150,000• Credit sales, $450,000• Selling and administrative expenses, $110,000• Sales returns and allowances, $30,000• Gross profit, $490,000• Accounts receivable, $110,000• Sales discounts, $14,000• Allowance for doubtful accounts credit balance, $1,200Flyer estimates bad debt expense assuming that 5% of accounts receivable is estimated to beuncollectible. What is the balance in the allowance for doubtful accounts after bad debt expense isrecorded?A. $5,500

B. $6,700C. $4,240D. $4,300The allowance for doubtful accounts balance ($5,500) equals 5% of accounts of accounts receivable(5% Å~ $110,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #33Topic Area: Measuring And Reporting Receivables

157. Flyer Company has provided the following information:• Cash sales, $150,000• Credit sales, $450,000• Selling and administrative expenses, $110,000• Sales returns and allowances, $30,000• Gross profit, $290,000• Accounts receivable, $110,000• Sales discounts, $14,000• Allowance for doubtful accounts credit balance, $1,200Flyer estimates bad debt expense assuming that 1.5% of credit sales are uncollectible. What is thebalance in the allowance for doubtful accounts after bad debt expense is recorded?A. $7,950B. $6,750C. $5,550D. $7,800The allowance for doubtful accounts ($7,950) = Bad debt expense (1.5% Å~ $450,000) plus the allowancefor doubtful accounts credit balance ($1,200).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #34Topic Area: Measuring And Reporting Receivables

158. Flyer Company has provided the following information:• Cash sales, $150,000• Credit sales, $450,000• Selling and administrative expenses, $110,000• Sales returns and allowances, $30,000• Gross profit, $290,000• Accounts receivable, $110,000• Sales discounts, $14,000• Allowance for doubtful accounts credit balance, $1,200

How much is Flyer's bad debt expense assuming that 1.5% of credit sales have historically beenuncollectible.A. $7,950B. $6,750C. $5,550D. $7,800Bad debt expense ($6,750) =1.5% Å~ $450,000AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #35Topic Area: Measuring And Reporting Receivables

159. Which of the following is correct when bad debt expense is recorded at year-end?A. Current assets are not affected.B. Gross profit will decrease.C. Income from operations will decrease.D. Current liabilities will increase.Bad debt expense is an operating expense. An increase in operating expenses decreases income fromoperations.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #36Topic Area: Measuring And Reporting Receivables

160. Which of the following statements is false?A. The journal entry to record bad debt expense decreases current assets.B. The journal entry to record bad debt expense decreases retained earnings.C. The journal entry to write-off an uncollectible account receivable decreases operating income.D. The journal entry to write-off an uncollectible account receivable does not affect current assets.The journal entry to write-off an uncollectible account receivable decreases accounts receivable and theallowance for uncollectible accounts balances and does not affect operating income.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #37Topic Area: Measuring And Reporting Receivables

161. Which of the following journal entries correctly records bad debt expense?A. Option A

B. Option BC. Option CD. Option DThe journal entry to record bad debt expense involves a debit to bad debt expense and a credit toallowance for doubtful accounts.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #38Topic Area: Measuring And Reporting Receivables

162. Which of the following journal entries correctly records the write-off of an uncollectible accountreceivable?A. Option AB. Option BC. Option CD. Option DThe journal entry to write-off an account receivable requires a debit to allowance for doubtful accountsand a credit to accounts receivable.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #39Topic Area: Measuring And Reporting Receivables

163. The CHS Company has provided the following information:• Accounts receivable written-off as uncollectible during the year amounted to $11,500.• The accounts receivable balance at the beginning of the year was $150,000.• The accounts receivable balance at the end of the year was $210,000.• The allowance for doubtful accounts balance at the beginning of the year was $14,000.• The allowance for doubtful accounts balance at the end of the year after the recording of bad debtexpense was $12,900.• Credit sales during the year totaled $900,000.How much was CHS Company's bad debt expense?A. $11,500B. $12,900C. $10,400D. $14,000Ending allowance for doubtful accounts ($12,900) = Beginning allowance for doubtful accounts($14,000) - Accounts receivable write-offs ($11,500) + Bad debt expense ($10,400).AACSB: AnalyticAICPA BB: Critical Thinking

AICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #40Topic Area: Measuring And Reporting Receivables

164. The CHS Company has provided the following information:• Accounts receivable written-off as uncollectible during the year amounted to $11,500.• The accounts receivable balance at the beginning of the year was $150,000.• The accounts receivable balance at the end of the year was $210,000.• The allowance for doubtful accounts balance at the beginning of the year was $14,000.• The allowance for doubtful accounts balance at the end of the year after the recording of bad debtexpense was $12,900.• Credit sales during the year totaled $900,000.How much cash was received from collections of accounts receivable?A. $888,500B. $828,500C. $690,000D. $701,500Ending accounts receivable ($210,000) = Beginning accounts receivable ($150,000) - Accountsreceivable write-offs ($11,500) + Credit sales ($900,000) - Cash collections ($828,500).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #41Topic Area: Measuring And Reporting Receivables

165. Which of the following statements is correct?A.The journal entry to record bad debt expense requires a debit to bad debt expense and a credit toaccounts receivable.B.The journal entry to record bad debt expense requires a debit to bad debt expense and a credit toallowance for doubtful accounts.C.The journal entry to record the write-off of an uncollectible account receivable requires a debit to baddebt expense and a credit to accounts receivable.D.The journal entry to record the write-off of an uncollectible account receivable requires a debit to baddebt expense and a credit to allowance for doubtful accounts.The journal entry to record bad debt expense requires a debit to bad debt expense (an operatingexpense) and a credit to allowance for doubtful accounts (a contra-asset account).

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #42Topic Area: Measuring And Reporting Receivables

166. Clark Company estimated the net realizable value of their accounts receivable as of December 31,2011, based on an aging schedule of accounts receivable, to be $165,000. Clark has also provided thefollowing information:• The accounts receivable balance on December 31, 2011 was $175,000.• Uncollectible accounts receivable written-off during 2011 totaled $12,000.• The allowance for doubtful accounts balance on January 1, 2011 was $15,000.How much is Clark's 2011 bad debt expense?A. $10,000B. $7,000C. $13,000D. $3,000The December 31, 2011 balance in allowance for uncollectible accounts ($10,000) equals the accountsreceivable balance on December 31, 2011 ($175,000) minus the December 31, 2011 net realizablevalue of accounts receivable ($165,000). The December 31, 2011 balance in allowance for uncollectibleaccounts ($10,000) equals the balance in allowance for doubtful accounts on January 1, 2011 ($15,000)minus accounts receivable write-offs ($12,000) during 2011 plus the 2011bad debt expense ($7,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #43Topic Area: Measuring And Reporting Receivables

167. Which of the following statements correctly describes the effect of recording the collection of a $10,000account receivable for which a 2% sales discount was recorded at the time of collection?A. Current assets will remain the same.B. Gross profit will decrease $200.C. Accounts receivable will decrease $9,800.D. Net sales will increase $9,800.The $200 sales discount ($10,000 x 2%) reduces net sales and therefore gross profit.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: Medium

Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #44Topic Area: Accounting For Sales Revenue

168. Which of the following journal entries correctly records the collection of an account receivable forwhich a 1% sales discount was recorded at the time of collection?A. Option AB. Option BC. Option CD. Option DThe journal entry involves a debit to both cash and sales discounts and a credit to accounts receivable.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #45Topic Area: Accounting For Sales Revenue

169. Which of the following correctly describes the effect of a journal entry involving the recording of asales return?A. Gross profit is not affected.B. Net sales increases.C. Current assets remain the same.D. Operating income decreases.The journal entry involves a debit to sales returns and allowances which reduces gross profit andtherefore operating income.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #46Topic Area: Accounting For Sales Revenue

170. Which of the following doesn't correctly describe the effect of a journal entry involving the recording ofa credit card discount?A. Net sales decrease and gross profit decreases.B. Net sales decrease and operating income decreases.C. Operating expenses remain the same and operating income decreases.D. Neither operating expenses nor operating income is affected.The credit card discount account is a contra-sales account which reduces net sales, gross profit, andtherefore operating income.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: Apply

Difficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #47Topic Area: Accounting For Sales Revenue

171. Which of the following correctly describes credit terms of 2/10, n/30?A.A two percent discount for early payment is available if the invoice is paid before the tenth day of themonth following the month the sale.B. A two percent discount for early payment is available within ten days of the date of sale.C.A ten percent discount for early payment is available if the invoice is paid within two days of the dateof the invoice.D.A two percent discount for early payment is available if the invoice is paid after the tenth day, butbefore the thirtieth day of the invoice date.The credit term 2/10 implies that a 2% discount is available within ten days of the date of sale and theterm n/30 implies that the full sales price is due within 30 days of the sale.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #48Topic Area: Accounting For Sales Revenue

172. A customer purchased and received $5,000 of goods on credit from Discount Paper Supply onSeptember 1. The customer received the bill on September 13 and mailed a $5,000 check on September30. Discount Paper Supply received the check on October 4. On which of the following dates shouldDiscount Paper Supply record sales revenue?A. September 1B. September 13C. September 30D. October 4Sales revenue should be recorded on the date of sale.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-01 Apply the revenue principle to determine the accepted time to record sales revenue for typical retailers; wholesalers; manufacturers; andservice companies.Libby - Chapter 06 #49Topic Area: Accounting For Sales Revenue

173. When a credit sale is made with terms of 2/10, n/30 on May 10 and the customer's

check is received onMay 19, which of the following is true about the May 19 journal entry?A.The debit to cash will equal the credit to accounts receivable because the discount was recorded onMay 10.B. There will be a debit to sales discounts on May 10.C. The debit to cash will be less than the credit to accounts receivable on May 19.D. There will be a credit to sales discounts on May 19.The customer paid within the discount period so the discount is recognized on May 19. The discountreduces the cash received so therefore the debit to cash is less than the credit to accounts receivable.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #50Topic Area: Accounting For Sales Revenue

174. A company had the following partial list of account balances at year-end:How much is net sales revenue?A. $91,900B. $90,700C. $89,900D. $88,600Net sales revenue ($91,900) equals sales revenue ($95,000) minus both sales discounts ($2,100) andsales returns and allowances ($1,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #51Topic Area: Accounting For Sales Revenue

175. A company purchased goods on credit with credit terms of 3/15, n/45. Although the company doesnot have cash available to pay within the discount period, the manager of the company is consideringborrowing money to take advantage of the discount. In order to make the appropriate decision, themanager computed the annual interest rate associated with the sales discount. Which of the following isthe annual interest rate (rounded)?A. 56%.B. 38%.C. 25%.D. 18%.

30-day interest rate (.031) = Amount saved ($3) ÷ Amount paid ($97)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #52Topic Area: Accounting For Sales Revenue

176. When credit terms for a sale are 2/15, n/40, the customer saves by paying early. What percent (rounded)would this savings amount to on an annual basis?A. 18%.B. 20%.C. 30%.D. 37%.25-day interest rate (.02) = Amount saved ($2) ÷ Amount paid ($98)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #53Topic Area: Accounting For Sales Revenue

177. Which of the following accounts is not a contra-revenue?A. Sales discountsB. Credit card discountsC. Sales returns and allowancesD. Allowance for doubtful accountsAllowance for doubtful accounts is a contra-asset account.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #54Topic Area: Accounting For Sales Revenue

178. Which of the following is the most likely cause of a decrease in a company's gross profit percentage?A. The selling price decreased.B. The product cost as a percentage of sales decreased.C. The operating expenses increased.D. Fewer products were sold.Net sales - Cost of goods sold = Gross profit. Gross profit divided by net sales equals the gross profitpercentage. A decrease in the selling price results in a decrease in net sales, gross profit, and thereforethe gross profit percentage.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: Apply

Difficulty: EasyLearning Objective: 06-03 Analyze and interpret the gross profit percentage.Libby - Chapter 06 #55Topic Area: Accounting For Sales Revenue

179. Dillon Company uses the allowance method to account for bad debts. The entry to write-off a badaccount (one that will never be collected) should be:A. Option AB. Option BC. Option CD. Option DWriting-off an uncollectible account involves a debit to allowance for doubtful accounts and a credit toaccounts receivable.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #56Topic Area: Measuring And Reporting Receivables

180. When using the allowance method for accounting for bad debts, accounts receivable is reported onthe balance sheet at the expected net realizable value. When a particular receivable from a customerultimately is determined to be uncollectible and is written off, the recording of this event willA. decrease the net realizable value of the accounts receivable.B. have an effect that is not determinable from the information given.C. increase the net realizable value of the accounts receivable.D. have no effect on the net realizable value of the accounts receivable.Writing-off an uncollectible account involves a debit to allowance for doubtful accounts (a contraassetaccount) and a credit to accounts receivable (an asset account). Therefore the net realizable value(accounts receivable minus allowance for doubtful accounts) does not change.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #57Topic Area: Measuring And Reporting Receivables

181. Oakwood Company had accounts receivable of $750,000 and an allowance for doubtful accounts ofthe $21,500 just prior to writing off as worthless an account receivable for Hyland Company of $5,000.The net realizable value of accounts receivable as shown by the accounting records before and after thewrite-off was as follows:

A. Option AB. Option BC. Option CD. Option DWriting-off an uncollectible account involves a debit to allowance for doubtful accounts (a contraassetaccount) and a credit to accounts receivable (an asset account). Therefore the net realizable value(accounts receivable minus allowance for doubtful accounts) does not change; it is $728,500 bothbefore and after the write-off.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #58Topic Area: Measuring And Reporting Receivables

182. Woodland Company uses the allowance method to account for bad debts. During 2009, a customerbecame bankrupt and a receivable of $10,000 was deemed uncollectible. Which of the following journalentries records the uncollectible account write-off?A. Option AB. Option BC. Option CD. Option DWriting-off an uncollectible account involves a debit to allowance for doubtful accounts (a contra-assetaccount) and a credit to accounts receivable (an asset account).AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #59Topic Area: Measuring And Reporting Receivables

183. At year end, Chief Company has a balance of $10,000 in accounts receivable of which $1,000 is morethan 30 days overdue. Chief has a credit balance of $100 in the allowance for doubtful accounts beforeany year-end adjustments. Chief estimates that 1% of current accounts and 10% of accounts over thirtydays are uncollectible. How much is bad debt expense?A. $90B. $190C. $290D. $100

Allowance for doubtful accounts desired balance ($190) = ($1,000 Å~ .10) + ($9,000 Å~ .01). Bad debtexpense ($90) = Allowance for doubtful accounts desired balance ($190) - Allowance for doubtfulaccounts current balance ($100).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #60Topic Area: Measuring And Reporting Receivables

184. Upon completing an aging analysis of accounts receivable, the accountant for Rosco Works agedthe accounts receivable and estimated that $5,000 of the $98,000 accounts receivable balance wouldbe uncollectible. The allowance for doubtful accounts had a $400 debit balance at year-end prior toadjustment. How much is bad debt expense?A. $5,000B. $5,400C. $4,600D. $400Bad debt expense ($5,400) = Allowance for doubtful accounts desired credit balance ($5,000) +Allowance for doubtful accounts current debit balance ($400).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #61Topic Area: Measuring And Reporting Receivables

185. Which of the following statements does not correctly describe the allowance for doubtful accountsbalance?A. It is reported on the balance sheet as a component of current assets.B. It is a contra-asset account.C. It is reported on the balance sheet as a current liability.D. It is created as a result of the adjusting entry to record bad debt expense.Allowance for doubtful accounts is a contra-asset account and is not a current liability.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #62Topic Area: Measuring And Reporting Receivables

186. The Roscoe Company's March 1, 2010 bank statement balance was $70,000. As of

March 1,outstanding checks total $22,000 and deposits in transit total $15,000. How much was Roscoe's March1, 2010 cash balance on their books?A. $63,000B. $77,000C. $70,000D. $107,000Book cash balance ($63,000) = Bank balance ($70,000) - Outstanding checks ($22,000) + Deposits intransit ($15,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #63Topic Area: Reporting And Safeguarding Cash

187. The Tanner Company's April 1, 2010 pre-reconciliation cash balance on their books was $35,000.While preparing the April 1 bank reconciliation, Tanner determined that outstanding checks total$11,000, deposits in transit total $7,000, and bank service charges are $50. How much was Tanner'sApril 1, 2010 cash balance per the bank statement?A. $31,000B. $30,950C. $38,950D. $39,000Bank cash balance ($38,950) = Corrected book balance ($35,000 - $50) + Outstanding checks ($11,000)- Deposits in transit ($7,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #64Topic Area: Reporting And Safeguarding Cash

188. The Conner Company's August 1, 2010 cash balance on their books was $90,000. As of August 1,outstanding checks total $44,000 and deposits in transit total $30,000. How much was Conner's August1, 2010 cash balance on their bank statement?A. $76,000B. $90,000C. $13,000D. $104,000Bank cash balance ($104,000) = Book balance ($90,000) + Outstanding checks ($44,000) - Deposits in

transit ($30,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #65Topic Area: Reporting And Safeguarding Cash

189. Which of the following statements pertaining to bank reconciliations is false?A. Outstanding checks are deducted from the bank cash balance.B. Deposits in transit are added to the bank cash balance.C. Bank service charges are deducted from the bank cash balance.D.Non-sufficient funds checks identified in the bank statement are deducted from the book cashbalance, not the bank cash balance.Bank service charges are deducted from the book cash balance, not the bank cash balance.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: RememberDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #66Topic Area: Reporting And Safeguarding Cash

190. When a depositor receives a bank statement indicating that there was a "NSF check", the depositorshould do which of the following?A. Reduce the cash account per the books for the amount of the "NSF check".B. Reduce the cash account per the bank statement for the amount of the "NSF check".C. Credit allowance for doubtful accounts for the amount of the check.D. Increase the sales returns and allowances account.NSF checks are deducted from the book cash balance when preparing a bank reconciliation.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: RememberDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #67Topic Area: Reporting And Safeguarding Cash

191. A deposit in transit on a bank reconciliation should beA. added to the depositor's book cash balance.B. subtracted from the depositor's book cash balance.C. added to the bank statement balance.D. subtracted from the bank statement balance.Deposits in transit represent deposits recorded on the books which have not yet been recorded on thebank statement. They are therefore added to the bank statement balance.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: RememberDifficulty: Medium

Learning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #68Topic Area: Reporting And Safeguarding Cash

192. Linetech Company's bank statement showed an ending balance of $8,000. Items appearing in the bankreconciliation included: outstanding checks, $500; deposits in transit, $1,000; bank service charges, $50;and Driver Company's $250 check erroneously deducted from Linetech's bank account by the bank.How much is the correct cash balance at the end of the month?A. $10,600B. $8,750C. $8,500D. $8,250Book cash balance ($8,750) = Bank balance ($8,000) - Outstanding checks ($500) + Deposits in transit($1,000) + Bank error ($250).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #69Topic Area: Reporting And Safeguarding Cash

193. Which of the following demonstrates a poor internal control procedure?A.The bookkeeper makes cash deposits and records journal entries related to cash, while the treasurerprepares the bank reconciliation.B. The president, who does no bookkeeping, prepares the bank reconciliation each month.C. The treasurer signs all checks after the bookkeeper prepares the supporting documents.D.One bookkeeper prepares cash deposits and the other bookkeeper enters the collections in the journaland ledger.The bookkeeper's cash record keeping and cash handling responsibilities need to be separated.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: RememberDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #70Topic Area: Reporting And Safeguarding Cash

194. The cash records and the bank statement of Frankel Company showed the following at the end ofFebruary 2010: Outstanding checks as of the beginning of February 2010, $8,000; checks written byFrankel Company according to their books during February 2010, $50,000; and checks cleared by thebank during February 2010, $54,000. How much were the outstanding checks at the end of February

2010?A. $2,000B. $4,000C. $6,000D. $8,000Outstanding checks at the end of February ($4,000) = Outstanding checks at the beginning of February($8,000) + Checks written per the books during February ($50,000) - Checks clearing the bank duringFebruary ($54,000)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #71Topic Area: Reporting And Safeguarding Cash

195. The cash account and the December bank statement of Gomez Company showed the following:deposits made by Gomez Company during December $90,000; deposits reflected on the December bankstatement, $88,000; and deposits in transit on December 1, $5,000. How much were the deposits intransit at the end of December?A. $10,000B. $7,000C. $5,000D. $2,000Deposits in transit at the end of December ($7,000) = Deposits made per the books during December($90,000) - {Deposits per the December bank statement ($88,000) - December 1 deposits in transit($5,000)}.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #72Topic Area: Reporting And Safeguarding Cash

196. When preparing the monthly bank reconciliation, the accountant for Farris Corporation discovered thata check correctly written to one of Farris' suppliers for $159 had been incorrectly recorded in the booksas $195. Which of the following statements is correct with respect to the bank reconciliation process?A. The cash balance per the books will be decreased.B. The cash balance per the bank statement will be increased.C. The cash balance per the bank statement will be decreased.D. The cash balance per the books will be increased.

The error incorrectly decreases the cash balance per the books. To correct the books, the difference($195 - $159) is added back to the book balance.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: RememberDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #73Topic Area: Reporting And Safeguarding Cash

197. When preparing a bank reconciliation, which of the following would be deducted from the company'scash balance?A. Interest income paid by the bank.B. The dollar amount of deposits in transit.C. The dollar amount of outstanding checks.D. The bank service charges included on the bank statement.The bank service charges are recorded on the bank statement and need to be deducted from the bookbalance.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: RememberDifficulty: MediumLearning Objective: 06-06 Report; control; and safeguard cash.Libby - Chapter 06 #74Topic Area: Reporting And Safeguarding Cash

198. Merchandise was sold on credit for $10,000, terms 2/10, n/30. Which of the following journal entrydescriptions correctly describes the cash collection?A.Cash is debited for $10,000 and accounts receivable is credited for $10,000 if the collection is withinthe discount period.B.Cash is debited for $10,000, accounts receivable is credited for $9,800 and sales discounts is creditedfor $200 if the collection is within the discount period.C.Cash is debited for $10,000, accounts receivable is credited for $9,800, and sales discounts is creditedfor $200 if the collection is after the discount period.D.Cash is debited for $10,000, accounts receivable is credited for $10,000 if the collection is after thediscount period.When the payment is received after the discount period, a sales discount is not recorded and cash isdebited and accounts receivable is credited for the selling price.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: Remember

Difficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S)Libby - Chapter 06 #75Topic Area: Accounting For Sales Revenue

199. Merchandise was sold on credit for $30,000, terms 3/15, n/30. Which of the following journal entrydescriptions correctly describes the cash collection?A.Cash is debited for $29,100 and accounts receivable is credited for $29,100 if the collection is withinthe discount period.B.Cash is debited for $29,100, sales discounts is debited for $900, and accounts receivable is creditedfor $30,000 if the collection is within the discount period.C.Cash is debited for $30,000, accounts receivable is credited for $29,100, and sales discounts iscredited for $900 if the collection is within the discount period.D.Cash is debited for $29,100 and accounts receivable is credited for $29,100 if the collection is afterthe discount period.When the payment is received within the discount period, a sales discount ($900) is recorded via a debitand cash is debited for the selling price less the discount ($30,000 - $900) and accounts receivable iscredited for the selling price ($30,000).AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S)Libby - Chapter 06 #76Topic Area: Accounting For Sales Revenue

200. Which of the following does not correctly describe the following journal entry?A. Current assets increase.B. Gross profit decreases.C. Net sales decreases.D. Operating income is not affected.The debit to the credit card discount account is a contra-revenue account which reduces both grossprofit and operating income.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S)Libby - Chapter 06 #77

Topic Area: Accounting For Sales Revenue

201. Which of the following correctly describes the following journal entry?A. The gross profit percentage remains the same.B. Operating income decreases.C. Current assets increase.D. Net sales increases.The debit to the credit card discount account is a contra-revenue account which reduces both grossprofit and operating income.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S)Libby - Chapter 06 #78Topic Area: Accounting For Sales Revenue

202. Which of the following does not correctly describe the following journal entry?A. Current assets decrease.B. Gross profit decreases.C. Net sales decreases.D. Operating expenses increase.The debit to the sales returns and allowances account is a contra-revenue account which reduces bothgross profit and operating income. Sales returns and allowances is not an operating expense.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S)Libby - Chapter 06 #79Topic Area: Accounting For Sales Revenue

203. The Ward Company has provided the following information:• Net sales totaled $750,000.• Beginning net accounts receivable was $65,000.• Ending net accounts receivable was $85,000.What was Ward's receivable turnover ratio?A. 10.0B. 8.8C. 11.54D. 5.0Receivable turnover ratio (10) = Net sales ($750,000) ÷ Average accounts receivable ($75,000*).*Average net accounts receivable ($75,000) = [beginning net accounts receivable ($65,000) + ending netaccounts receivable ($85,000)] ÷ 2AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: Apply

Difficulty: MediumLearning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows.Libby - Chapter 06 #80Topic Area: Measuring And Reporting Receivables

204. The Ward Company has provided the following information:• Net sales totaled $750,000.• Beginning net accounts receivable was $65,000.• Ending net accounts receivable was $85,000.What was Ward's average collection period?A. 73 daysB. 41.8 daysC. 31.6 daysD. 36.5 daysReceivable turnover ratio (10) = Net sales ($750,000) ÷ Average net accounts receivable ($75,000*).*Average accounts receivable ($75,000) = [beginning net accounts receivable ($65,000) + ending netaccounts receivable ($85,000)] ÷ 2.Average collection period (36.5 days) = 365 ÷ receivables turnover (10).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows.Libby - Chapter 06 #81Topic Area: Measuring And Reporting Receivables

205. The Rye Corporation has provided the following information:• Total sales were $1,200,000.• Beginning net accounts receivable was $45,000.• Ending net accounts receivable was $65,000.Sales returns and allowances totaled $100,000.What was Rye's receivable turnover ratio?A. 21.8B. 18.5C. 10.0D. 20.0Receivable turnover ratio (20) = Net sales ($1,200,000 - $100,000) ÷ Average net accounts receivable($55,000*). Average net accounts receivable ($55,000) = [beginning net accounts receivable ($45,000) +ending net accounts receivable ($65,000)] ÷ 2.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows.Libby - Chapter 06 #82Topic Area: Measuring And Reporting Receivables

206. The Rye Corporation has provided the following information:• Total sales were $1,200,000.• Beginning net accounts receivable was $45,000.

• Ending net accounts receivable was $65,000.• Sales returns and allowances totaled $100,000.What was Rye's average collection period?A. 16.7B. 19.7C. 36.5D. 18.3Receivable turnover ratio (20) = Net sales ($1,200,000 - $100,000) ÷ Average net accounts receivable($55,000*). *Average net accounts receivable ($55,000) = [beginning net accounts receivable ($45,000)+ ending net accounts receivable ($65,000)] ÷ 2.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows.Libby - Chapter 06 #83Topic Area: Measuring And Reporting Receivables

207. Which of the following transactions will result in a decrease in the receivable turnover ratio?A. The journal entry to record bad debt expense.B. Writing off an uncollectible account receivable.C. Selling inventory on account.D. Collecting an account receivable.Selling inventory on account results in an increase in both net sales (numerator) and average netreceivables (denominator). However, the increase in the denominator is greater relative to the increasein the numerator. Therefore the receivable turnover ratio decreases.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows.Libby - Chapter 06 #84Topic Area: Accounting For Sales Revenue

208. Which of the following transactions will result in an increase in the receivable turnover ratio?A. The journal entry to record bad debt expense.B. Writing off an uncollectible account receivable.C. Selling inventory on account.D. Purchasing inventory on account.The journal entry to record bad debt expense involves a credit to allowance for doubtful accounts,which decreases net accounts receivable and therefore increases the receivable turnover ratio.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: Apply

Difficulty: HardLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S)Libby - Chapter 06 #85Topic Area: Accounting For Sales Revenue

209. Which of the following statements is correct?A.A decrease in the accounts receivable balance means that credit sales exceeded cash collections fromcustomers.B. The accounts receivable balance increases when cash collected from customers exceeds credit sales.C.A decrease in accounts receivable is deducted from net income when determining cash flow fromoperations.D.An increase in accounts receivable is deducted from net income when determining cash flow fromoperations.An increase in accounts receivable is added to net income, rather than deducted from net income, whendetermining cash flow from operations.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows.Libby - Chapter 06 #86Topic Area: Measuring And Reporting Revenues

210. Which of the following does not correctly describe the effect of recording a credit sale of inventory for aprofit?A. The receivables turnover ratio decreases.B. Current assets increase.C. Gross profit increases.D. Operating expenses increase.Cost of goods sold is not an operating expense.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-03 Analyze and interpret the gross profit percentage.Learning Objective: 06-05 Analyze and interpret the receivable turnover ratio and the effects of accounts receivable on cash flows.Libby - Chapter 06 #87Topic Area: Accounting For Revenues, Measuring And Reporting Revenues

211. The Soft Company has provided the following information:• Allowance for doubtful accounts increased $19,000 and accounts receivable increased • $390,000during the year.• Accounts written off as uncollectible totaled $20,000.• Net sales totaled $2,700,000.• The gross profit percentage was 40%.• Sales discounts were $100,000.How much was Soft's bad debt expense?

A. $39,000B. $1,000C. $19,000D. $20,000Bad debt expense ($39,000) = Increase in allowance for uncollectible accounts ($19,000) + Accountswritten off as uncollectible ($20,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #88Topic Area: Measuring And Reporting Receivables

212. The Soft Company has provided the following information:• Allowance for doubtful accounts increased $19,000 and accounts receivable increased $390,000during the year.• Accounts written off as uncollectible totaled $20,000.• Net sales totaled $2,700,000.• The gross profit percentage was 40%.• Sales discounts were $100,000.How much was Soft's gross profit?A. $1,040,000B. $1,072,400C. $1,032,400D. $1,080,000Gross profit ($1,080,000) = Net sales ($2,700,000) Å~ Gross profit percentage (40%)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: EasyLearning Objective: 06-04 Estimate; report; and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements.Libby - Chapter 06 #89Topic Area: Measuring And Reporting Receivables

213. Redwing Company sold inventory costing $500 to a customer on account for $700. Which of thefollowing correctly describes the collection of $686 cash when the customer takes advantage of adiscount?A. Operating expenses increase $14.B. Accounts receivable decreases $686.C. Current assets decrease $14.D. Gross profit is not affected.Cash increases $686 and accounts receivable decreases $700.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: Medium

Learning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S)Libby - Chapter 06 #90Topic Area: Accounting For Sales Revenue

214. Redwing Company sold inventory costing $500 to a customer on account for $700. Which of thefollowing does not correctly describe the collection of $686 cash when the customer takes advantage ofa discount?A. Gross profit decreases $14.B. Accounts receivable decreases $700.C. Current assets decrease $14.D. Operating income is not affected.The sales discount decreases net sales, gross profit, and operating income.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S)Libby - Chapter 06 #91Topic Area: Accounting For Sales Revenue

215. Sabre Company sold inventory costing $600 to a customer on account for $900 with terms of 3/10, n/30. Which of the following is not correct?A. Gross profit increases $300 on the date of sale.B.Total current assets aren't affected on the date of cash collection if the customer pays 15 days afterthe date of sale.C.Total current assets increase $27 on the date of cash collection if the customer pays within 15 days ofthe date of sale.D.Gross profit and net sales both decrease $27 on the date of cash collection if the customer pays within15 days of the date of sale.Cash increases $873 and accounts receivable decreases $900, therefore total current assets decrease $27.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales. (S)Libby - Chapter 06 #92Topic Area: Accounting For Sales Revenue

216. One of Hawk Company's customers returned products that cost Hawk $300, which was sold on accountfor $450. Which of the following does not correctly describe the affect of the return on the financialstatements?A. Gross profit decreases $150.B. Total current assets decrease $150.

C. Sales returns and allowances increase $150.D. Operating expenses increase $150.Sales returns are not operating expenses.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #93Topic Area: Accounting For Sales Revenue

217. One of Hawk Company's customers returned products that cost Hawk $500, which was sold on accountfor $800. Which of the following correctly describes the affect of the return on the financial statements?A. Gross profit decreases $800.B. Total current assets decrease $300.C. Sales returns and allowances increase $300.D. Net sales increase $300.Inventory increases $500 and accounts receivable decreases $800.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Libby - Chapter 06 #94Topic Area: Accounting For Sales Revenue

218. Which of the following transactions does not affect gross profit?A. A customer returning merchandise that was sold for a profit.B.The collection of cash on an account receivable which was paid for by the customer within thediscount period.C. The journal entry to record bad debt expense.D. Selling inventory for less than its cost.Bad debt expense is an operating expense which does not affect gross profit.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 06-02 Analyze the impact of credit card sales; sales discounts; and sales returns on the amounts reported as net sales.Learning Objective: 06-03 Analyze and interpret the gross profit percentage.Libby - Chapter 06 #95Topic Area: Accounting For Sales Revenue

219. Which of the following is not a component of the gross profit calculation?A. Cost of goods soldB. Sales returns and allowancesC. Allowance for doubtful accountsD. Credit card discounts

ch7 Key1. The use of raw materials in the manufacturing process is reported as an operating expense on theincome statement.FALSEThey become part of work in process inventory.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 07-01 Apply the cost principle to identify the ammounts that should be included in inventory and the matching principle to determine cost of goodssold for typical retailers; wholesalers; and manufacturers.Libby - Chapter 07 #1Topic Area: Nature Of Inventory And Cost Of Goods Sold

2. Manufactured goods transferred out of work in process are reported as finished goods on the balancesheet.TRUEItems transferred from work in process inventory become finished goods inventory.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 07-01 Apply the cost principle to identify the ammounts that should be included in inventory and the matching principle to determine cost of goodssold for typical retailers; wholesalers; and manufacturers.Libby - Chapter 07 #2Topic Area: Nature Of Inventory And Cost Of Goods Sold

3. Inventory inspection costs incurred at the time of purchase are reported as operating expenses on theincome statement.FALSEThey are recorded as a component of the cost of the inventory.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 07-01 Apply the cost principle to identify the ammounts that should be included in inventory and the matching principle to determine cost of goodssold for typical retailers; wholesalers; and manufacturers.Libby - Chapter 07 #3Topic Area: Nature Of Inventory And Cost Of Goods Sold

4. Factory overhead manufacturing costs are a component of the cost of the work-in process inventory.TRUEWork in process inventory includes direct materials, direct labor, and factory overhead.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 07-01 Apply the cost principle to identify the ammounts that should be included in inventory and the matching principle to determine cost of goodssold for typical retailers; wholesalers; and manufacturers.Libby - Chapter 07 #4

Topic Area: Nature Of Inventory And Cost Of Goods Sold

5. A decrease in the merchandise inventory account occurs when inventory purchases are greater than costof goods sold.FALSEAn increase in the merchandise inventory account occurs when inventory purchases are greater thancost of goods sold.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 07-01 Apply the cost principle to identify the ammounts that should be included in inventory and the matching principle to determine cost of goodssold for typical retailers; wholesalers; and manufacturers.Libby - Chapter 07 #5Topic Area: Nature Of Inventory And Cost Of Goods Sold

6. Costs of goods available for sale ends up being allocated to both ending inventory and cost of goodssold.TRUECost of goods available for sale minus ending inventory equals cost of goods sold.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 07-01 Apply the cost principle to identify the ammounts that should be included in inventory and the matching principle to determine cost of goodssold for typical retailers; wholesalers; and manufacturers.Libby - Chapter 07 #6Topic Area: Nature Of Inventory And Cost Of Goods Sold

7. The LIFO inventory method will result in the highest gross margin when costs are increasing incomparison to the specific identification, FIFO and weighted average inventory methods.TRUELIFO reports the highest cost of goods sold and therefore the lowest gross margin during periods ofincreasing prices.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods.Libby - Chapter 07 #7Topic Area: Inventory Costing Methods

8. A company can use the LIFO inventory method for income tax purposes and the FIFO inventorymethod for financial reporting purposes during a given year.FALSEThe LIFO conformity rule requires the use of LIFO for financial statement preparation if LIFO is usedfor tax purposes.AACSB: Reflective ThinkingAICPA BB: Critical Thinking

AICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods.Libby - Chapter 07 #8Topic Area: Inventory Costing Methods

9. A large retail department store probably would use the specific identification inventory costing methodfor most of the items in its inventory.FALSEThe specific identification method is used when expensive unique items are sold.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods.Libby - Chapter 07 #9Topic Area: Inventory Costing Methods

10. The FIFO inventory method allocates the most recent inventory purchase costs to ending inventory.TRUEFIFO ending inventory consists of the most recent inventory acquisitions.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods.Libby - Chapter 07 #10Topic Area: Nature Of Inventory And Cost Of Goods Sold

11. The LIFO inventory method allocates the most recent inventory purchase costs to cost of goods sold.TRUELIFO cost of goods sold consists of the most recent inventory acquisitions.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods.Libby - Chapter 07 #11Topic Area: Inventory Costing Methods

12. During periods of decreasing prices, use of the LIFO inventory method will result in a larger amount ofinventory than will the use of the FIFO inventory method.TRUELIFO ending inventory consists of the older inventory acquisitions which were at higher prices.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 07-03 Decide when the use of different inventory costing methods is beneficial to a company.Libby - Chapter 07 #12Topic Area: Inventory Costing Methods

13. During periods of increasing prices, use of the LIFO inventory method will result in a lower inventory

amount on the balance sheet and a lower net income than will use of the FIFO inventory method.TRUELIFO ending inventory consists of the older inventory acquisitions which were at lower prices. LIFOcost of goods sold reports a lower net income because of the higher cost of goods sold.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 07-03 Decide when the use of different inventory costing methods is beneficial to a company.Libby - Chapter 07 #13Topic Area: Inventory Costing Methods

14. During periods of increasing prices, the LIFO inventory method results in lower income taxes.TRUELIFO cost of goods sold reports a lower taxable income and therefore lower income taxes because ofhigher cost of goods sold.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 07-03 Decide when the use of different inventory costing methods is beneficial to a company.Libby - Chapter 07 #14Topic Area: Inventory Costing Methods

15. During periods of decreasing prices, use of the FIFO inventory method results in lower gross profit thanwould use of the LIFO method.TRUEFIFO cost of goods sold is the highest among the inventory choices when prices are decreasing. Ahigher cost of goods sold results in a lower gross profit.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 07-03 Decide when the use of different inventory costing methods is beneficial to a company.Libby - Chapter 07 #15Topic Area: Inventory Costing Methods

16. The lower-of-cost-or-market (LCM) rule is used because of the conservatism constraint, which allows adeparture from the historical cost principle.TRUEGAAP requires inventories to be valued at the lower-of-cost-or-market.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 07-04 Report inventory at the lower of cost of market (LCM).Libby - Chapter 07 #16Topic Area: Valuation At Lower Of Cost Or Market

17. The journal entry to write-down inventory under the lower-of-cost-or-market (LCM)

rule results in adecrease in both ending inventory and cost of goods sold.FALSECost of goods increases when inventory is written down.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 07-04 Report inventory at the lower of cost of market (LCM).Libby - Chapter 07 #17Topic Area: Valuation At Lower Of Cost Or Market

18. The journal entry to write-down inventory under the lower-of-cost-or-market (LCM) rule results in adebit to cost of goods sold and a credit to inventory.TRUECost of goods sold increases and inventory decreases when inventory is written down.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 07-04 Report inventory at the lower of cost of market (LCM).Libby - Chapter 07 #18Topic Area: Valuation At Lower Of Cost Or Market

19. Inventory turnover is calculated as cost of goods sold divided by average inventory.TRUECost of goods sold divided by average inventory equals inventory turnover.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 07-05 Evaluate inventory management using the inventory turnover ratio and analyze the effects of inventory on cash flows.Libby - Chapter 07 #19Topic Area: Evaluating Inventory Management

20. Inventory turnover under LIFO is greater than inventory turnover under FIFO when prices areincreasing.TRUECost of goods sold divided by average inventory equals inventory turnover. LIFO has the highest cost ofgoods sold and the lowest inventory and therefore the greater inventory turnover.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 07-05 Evaluate inventory management using the inventory turnover ratio and analyze the effects of inventory on cash flows.Libby - Chapter 07 #20Topic Area: Evaluating Inventory Management

21. The average days to sell inventory decreases as inventory turnover increases.TRUEAverage days to sell inventory is calculated by dividing 365 by inventory turnover. So an increasinginventory turnover will result in a decreased average days to sell inventory.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 07-05 Evaluate inventory management using the inventory turnover ratio and analyze the effects of inventory on cash flows.Libby - Chapter 07 #21Topic Area: Evaluating Inventory Management

22. An increase in inventory is deducted from net income when determining operating activities cash flows.TRUEAn increase in inventory means that inventory purchases exceed cost of goods sold.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 07-05 Evaluate inventory management using the inventory turnover ratio and analyze the effects of inventory on cash flows.Libby - Chapter 07 #22Topic Area: Evaluating Inventory Management

23. An increase in accounts payable is added to net income when determining operating activities cashflows.TRUEAn increase in accounts payable means that some inventory purchases haven't been paid for.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 07-05 Evaluate inventory management using the inventory turnover ratio and analyze the effects of inventory on cash flows.Libby - Chapter 07 #23Topic Area: Evaluating Inventory Management

24. Cash flow from operations increases by $1,000,000 when there is a $3,000,000 decrease in inventoryand a $2,000,000 decrease in accounts payable.TRUEThe decrease in inventory ($3,000,000) is added to net income and the decrease in accounts payable($2,000,000) is subtracted from net income when calculating cash flow from operations.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 07-05 Evaluate inventory management using the inventory turnover ratio and analyze the effects of inventory on cash flows.Libby - Chapter 07 #24Topic Area: Evaluating Inventory Management

25. The LIFO Reserve is a contra-asset account which represents the excess of FIFO inventory costs overLIFO inventory costs.TRUEThe LIFO Reserve is reported in the notes to the financial statements and is the

adjustment to the LIFOinventory reported on the balance sheet.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 07-06 Compare companies that use different inventory costing methods.Libby - Chapter 07 #25Topic Area: Evaluating Inventory Management

26. In a period of rising costs, the LIFO Reserve account would be deducted from the ending inventoryunder LIFO costing to convert it to ending inventory under FIFO costing.FALSELIFO's ending inventory is less than FIFO's ending inventory when prices are increasing. Therefore theLIFO Reserve would be added to the FIFO ending inventory.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: ApplyDifficulty: MediumLearning Objective: 07-06 Compare companies that use different inventory costing methods.Libby - Chapter 07 #26Topic Area: Evaluating Inventory Management

27. An understatement of ending inventory results in an overstatement of net income.FALSEAn understatement of ending inventory results in an increase in cost of goods sold and therefore adecrease in net income.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 07-07 Understand methods for controlling and keeping track of inventory and analyze the effects of inventory errors on financial statements.Libby - Chapter 07 #27Topic Area: Control Of Inventory

28. When a company using the LIFO inventory method reduces its inventory levels at the end of the year, itcan lead to LIFO liquidation.TRUELIFO liquidation will occur when inventory levels decrease and older inventory becomes a part of costof goods sold.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods. (S)Libby - Chapter 07 #28Topic Area: Inventory Costing Methods

29. An overstatement of the 2011 ending inventory results in an understatement of net income during 2012.FALSE

The overstatement of the 2011 ending inventory causes the 2012 beginning inventory and cost of goodssold to be overstated and 2012 net income to be understated.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 07-07 Understand methods for controlling and keeping track of inventory and analyze the effects of inventory errors on financial statements.Libby - Chapter 07 #29Topic Area: Control Of Inventory

30. An overstatement of the 2011 ending inventory results in an overstatement of stockholders' equity as ofthe end of 2012.FALSEThe overstatement of the 2011 ending inventory causes the 2011 net income to be overstated, the 2012beginning inventory to be overstated and the 2012 net income to be understated. Stockholders' equityas of the end of 2012 is correct because the 2011 net income overstatement is counter-balanced by theunderstatement of the 2012 net income.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 07-07 Understand methods for controlling and keeping track of inventory and analyze the effects of inventory errors on financial statements.Libby - Chapter 07 #30Topic Area: Control Of Inventory

31. A company reported the following information for its most recent year of operation: purchases,$100,000; beginning inventory, $20,000; and cost of goods sold, $110,000. How much was thecompany's ending inventory?A. $10,000B. $20,000C. $15,000D. $30,000Cost of goods sold ($110,000) = Beginning inventory ($20,000) + Purchases ($100,000) - Endinginventory ($10,000)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 07-01 Apply the cost principle to identify the ammounts that should be included in inventory and the matching principle to determine cost of goodssold for typical retailers; wholesalers; and manufacturers.Libby - Chapter 07 #31Topic Area: Nature Of Inventory And Cost Of Goods Sold

32. Coleman Company has provided the following information: beginning inventory, $100,000; cost of

goods sold, $450,000; and ending inventory, $80,000. How much were Coleman's inventory purchases?A. $450,000B. $410,000C. $430,000D. $420,000Cost of goods sold ($450,000) = Beginning inventory ($100,000) + Purchases ($430,000) - Endinginventory ($80,000)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 07-01 Apply the cost principle to identify the ammounts that should be included in inventory and the matching principle to determine cost of goodssold for typical retailers; wholesalers; and manufacturers.Libby - Chapter 07 #32Topic Area: Nature Of Inventory And Cost Of Goods Sold

33. Which of the following statements is incorrect?A. Ending inventory exceeds beginning inventory when purchases are greater than cost of goods sold.B. Cost of goods sold exceeds purchases when ending inventory is less than beginning inventory.C. Cost of goods available for sale will always be equal to or greater than cost of goods sold.D.Ending inventory is greater than beginning inventory when purchases are less than cost of goodssold.Ending inventory decreases when purchases are less than cost of goods sold.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 07-01 Apply the cost principle to identify the ammounts that should be included in inventory and the matching principle to determine cost of goodssold for typical retailers; wholesalers; and manufacturers.Libby - Chapter 07 #33Topic Area: Nature Of Inventory And Cost Of Goods Sold

34. Which of the following costs is not included as inventory on the balance sheet?A. Raw materials currently being used in the manufacturing process.B. Work in process.C. Finished goods.D. Storage costs for finished goods.Finished goods storage costs are not reported as inventory. They are a component of operatingexpenses.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 07-01 Apply the cost principle to identify the ammounts that should be included in inventory and the matching principle to determine cost of goodssold for typical retailers; wholesalers; and manufacturers.

Libby - Chapter 07 #34Topic Area: Nature Of Inventory And Cost Of Goods Sold

35. Which of the following costs will not affect cost of goods sold?A. Inventory inspection costs.B. Inventory preparation costs.C. Inventory related selling costs.D. Freight charges incurred to acquire inventory.Selling costs are operating costs and don't affect cost of goods sold.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 07-01 Apply the cost principle to identify the ammounts that should be included in inventory and the matching principle to determine cost of goodssold for typical retailers; wholesalers; and manufacturers.Libby - Chapter 07 #35Topic Area: Nature Of Inventory And Cost Of Goods Sold

36. Which of the following statements is incorrect for a manufacturing entity?A. Inventory is transferred from work in process to finished goods.B. Raw materials used are transferred to work in process.C. Finished goods inventory eventually becomes cost of goods sold.D. Cost of goods sold is recognized when the manufacturing process is complete.Cost of goods sold is recognized when the inventory is taken from finished goods and sold to thecustomer.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: UnderstandDifficulty: MediumLearning Objective: 07-01 Apply the cost principle to identify the ammounts that should be included in inventory and the matching principle to determine cost of goodssold for typical retailers; wholesalers; and manufacturers.Libby - Chapter 07 #36Topic Area: Nature Of Inventory And Cost Of Goods Sold

37. A company provided the following data: sales, $500,000; beginning inventory, $40,000; endinginventory, $45,000; and gross margin, $150,000. What was the amount of inventory purchased duringthe year?A. $370,000B. $355,000C. $348,000D. $341,000Sales ($500,000) - Cost of goods sold ($350,000) = Gross margin ($150,000)Cost of goods sold ($350,000) = Beginning inventory ($40,000) + Purchases ($355,000) - Endinginventory ($45,000)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 07-01 Apply the cost principle to identify the ammounts that should be included in inventory and the matching principle to determine cost of goods

sold for typical retailers; wholesalers; and manufacturers.Libby - Chapter 07 #37Topic Area: Nature Of Inventory And Cost Of Goods Sold

38. Lauer Corporation uses the periodic inventory system and has provided the following information aboutone of their laptop computers:During the year, 750 laptop computers were sold.What was ending inventory using the FIFO cost flow assumption?A. $60,000B. $52,500C. $52,000D. $40,000Ending inventory ($52,500) = ($1,050 Å~ 50)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods.Libby - Chapter 07 #38Topic Area: Inventory Costing Methods

39. Lauer Corporation uses the periodic inventory system and has provided the following information aboutone of their laptop computers:During the year, 750 laptop computers were sold.What was cost of goods sold using the FIFO cost flow assumption?A. $717,500B. $730,000C. $703,125D. $725,500Cost of goods sold ($717,500) = (100 Å~ $800) + (200 Å~ $900) + (300 Å~ $1,000) + (150 Å~ $1,050)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods.Libby - Chapter 07 #39Topic Area: Inventory Costing Methods

40. Lauer Corporation uses the periodic inventory system and has provided the following information aboutone of their laptop computers:During the year, 750 laptop computers were sold.What was cost of goods sold using the LIFO cost flow assumption?A. $717,500B. $730,000C. $703,125D. $725,500Cost of goods sold ($730,000) = (200 Å~ $1,050) + (300 Å~ $1,000) + (200 Å~ $900) + (50 Å~ $800)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, Measurement

Blooms: ApplyDifficulty: MediumLearning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods.Libby - Chapter 07 #40Topic Area: Inventory Costing Methods

41. Lauer Corporation uses the periodic inventory system and has provided the following information aboutone of their laptop computers:During the year, 750 laptop computers were sold.What was ending inventory using the LIFO cost flow assumption?A. $40,000B. $52,500C. $60,000D. $55,000Ending inventory ($40,000) = ($800 Å~ 50)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods.Libby - Chapter 07 #41Topic Area: Inventory Costing Methods

42. Under the FIFO cost flow assumption during a period of inflation, which of the following is false?A. Income tax expense will be higher than under LIFO.B. Gross margin will be higher than under LIFO.C. Ending inventory will be lower than under LIFO.D. Cost of goods sold will be lower than under LIFO.Ending inventory comes from recent inventory purchases and is therefore higher.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods.Libby - Chapter 07 #42Topic Area: Inventory Costing Methods

43. Under the LIFO cost flow assumption during a period of inflation, which of the following is false?A. Cost of goods sold will be lower than under FIFO.B. Gross margin will be lower than under FIFO.C. Income tax expense will be lower than under FIFO.D. Ending inventory will be lower than under FIFO.Cost of goods sold comes from recent inventory purchases and is therefore higher.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods.Libby - Chapter 07 #43Topic Area: Inventory Costing Methods

44. Which of the following statements is correct when inventory prices are increasing?A. LIFO will result in lower net income and a higher inventory valuation than will FIFO.B. LIFO will result in higher net income and lower inventory valuation than will FIFO.

C. FIFO will result in lower net income and a lower inventory valuation than will LIFO.D. FIFO will result in higher net income and a higher inventory valuation than will LIFO.FIFO reports a lower cost of goods sold and a higher net income when prices are increasing.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods.Libby - Chapter 07 #44Topic Area: Inventory Costing Methods

45. Which of the following statements is correct when inventory prices are decreasing?A. LIFO will result in lower net income and a higher inventory valuation than will FIFO.B. LIFO will result in higher net income and a higher inventory valuation than will FIFO.C. FIFO will result in higher net income and a higher inventory valuation than will LIFO.D. FIFO will result in higher net income and a lower inventory valuation than will LIFO.LIFO reports a lower cost of goods sold and a higher net income when prices are decreasing.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods.Libby - Chapter 07 #45Topic Area: Inventory Costing Methods

46. Which of the following statements is correct?A. FIFO reports lower income amounts than LIFO when prices are increasing.B. LIFO reports a higher income amount than FIFO when prices are increasing.C. LIFO reports a higher income amount than FIFO when prices are decreasing.D. LIFO reports the same amount of income as FIFO when prices are increasing.LIFO reports a lower cost of goods sold and a higher net income when prices are decreasing.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods.Libby - Chapter 07 #46Topic Area: Inventory Costing Methods

47. Which of the following statements is correct?A.The choice of an inventory costing method is dependent upon the actual physical flow of theinventory.B.LIFO should be used during a period of increasing prices when the objective is to maximize theending inventory value on the balance sheet.C.FIFO should be used during a period of decreasing prices when the objective is to maximize the grossprofit reported on the balance sheet.D.

The average cost method will result in an ending inventory balance which is somewhere betweenLIFO and FIFO when inventory prices are changing.Use of the average cost method results in cost of goods sold and ending inventory being reported atamounts between the LIFO and FIFO extremes.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: ApplyDifficulty: MediumLearning Objective: 07-03 Decide when the use of different inventory costing methods is beneficial to a company.Libby - Chapter 07 #47Topic Area: Inventory Costing Methods

48. A corporation has provided the following information about one of their products:During the year, 400 units were sold.What is ending inventory using the average cost method?A. $48,000B. $64,000C. $50,000D. $62,000Average cost ($160) = {(200 Å~ $140) + (400 Å~ $160) + (100 Å~ $200)} ÷ 700 units Ending inventory($48,000) = Average cost ($160) Å~ 300 unitsAACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods.Libby - Chapter 07 #48Topic Area: Inventory Costing Methods

49. A corporation has provided the following information about one of their products:During the year, 400 units were sold.What is cost of goods sold using the average cost method?A. $48,000B. $64,000C. $50,000D. $62,000Average cost ($160) = {(200 Å~ $140) + (400 Å~ $160) + (100 Å~ $200)} ÷ 700 units Cost of goods sold($64,000) = Average cost ($160) Å~ 400 unitsAACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods.Libby - Chapter 07 #49Topic Area: Inventory Costing Methods

50. Which of the following statements is false?A. Companies do not have to use the same inventory method for all items of inventory.B. Companies do not have to consistently use the same inventory costing methods.C.Use of the LIFO inventory method during a period of increasing prices may create a

conflict ofinterest between the owners and managers.D.A company choosing to maximize stockholders' equity during a period of increasing prices shoulduse the FIFO inventory method.GAAP requires companies to consistently apply their inventory costing methods.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 07-03 Decide when the use of different inventory costing methods is beneficial to a company.Libby - Chapter 07 #50Topic Area: Inventory Costing Methods

51. Moore Company purchased an item for inventory that cost $20 per unit and was priced to sell at $30. Itwas determined that the replacement cost is $18 per unit. Using the lower-of-cost-or- market rule, whatamount should be reported on the balance sheet for inventory?A. $18B. $20C. $12D. $30Inventory is reported on the balance sheet at replacement cost when it is less than cost.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: RememberDifficulty: EasyLearning Objective: 07-04 Report inventory at the lower of cost of market (LCM).Libby - Chapter 07 #51Topic Area: Valuation At Lower Of Cost Or Market

52. On December 31, 2010, Cruise Company has 10,000 units of an inventory item which cost $40 perunit when purchased on June 15, 2010. The selling price was $70 per unit. On December 30, 2010, thereplacement cost was $38 per unit. At what amount should the 10,000 units of inventory be reported aton the December 31, 2010 balance sheet?A. $100,000B. $120,000C. $350,000D. $380,000Inventory is reported on the balance sheet at replacement cost ($38) when it is less than cost ($40). Theinventory cost ($380,000) equals replacement cost ($38) multiplied by 10,000 units.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 07-04 Report inventory at the lower of cost of market (LCM).Libby - Chapter 07 #52Topic Area: Valuation At Lower Of Cost Or Market

53. Which of the following statements does not accurately describe the lower of cost or market (LCM)valuation method?A. The journal entry to write-down inventory decreases gross profit.B. The journal entry to write-down inventory decreases current assets.C. The journal entry to write-down inventory does not affect income from operations.D. The journal entry to write-down inventory increases cost of goods sold.The journal entry increases cost of goods sold and therefore decreases income from operations. Thejournal entry also decreases inventory.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 07-04 Report inventory at the lower of cost of market (LCM).Libby - Chapter 07 #53Topic Area: Valuation At Lower Of Cost Or Market

54. Which of the following statements does not accurately describe the effects of a write-down of inventoryon December 31, 2010 using the lower of cost or market (LCM) valuation method?A. The 2010 gross profit decreases.B. The 2011 cost of goods sold is effectively decreased if the inventory was sold during 2011.C. The 2010 ending inventory is decreased.D. The 2011 gross profit is not affected when the inventory was sold during 2011.The 2011 cost of goods sold is decreased because of the write-down of the inventory cost during 2010.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: ApplyDifficulty: MediumLearning Objective: 07-04 Report inventory at the lower of cost of market (LCM).Libby - Chapter 07 #54Topic Area: Valuation At Lower Of Cost Or Market

55. Tinker's 2011 cost of goods sold was $750,000 and 2010 cost of goods sold was $770,000. Theinventory at the end of 2011 was $188,000 and $208,000 at the end of 2010. What was Tinker'sinventory turnover during 2011?A. 3.79B. 3.99C. 3.84D. 3.89Inventory turnover (3.79) = Cost of goods sold ($750,000) ÷ Average inventory ($188,000 + $208,000)÷ 2AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 07-05 Evaluate inventory management using the inventory turnover ratio and analyze the effects of inventory on

cash flows.Libby - Chapter 07 #55Topic Area: Evaluating Inventory Management

56. Tinker's 2011 cost of goods sold was $750,000 and 2010 cost of goods sold was $770,000. Theinventory at the end of 2011 was $188,000 and $208,000 at the end of 2010. What is Tinker's averagenumber of days to sell their inventory during 2011?A. 96.3B. 91.5C. 95.1D. 93.8Inventory turnover (3.79) = Cost of goods sold ($750,000) ÷ Average inventory ($188,000 + $208,000)÷ 2Average days to sell inventory (96.3) = 365 days ÷ Inventory turnover (3.79)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 07-05 Evaluate inventory management using the inventory turnover ratio and analyze the effects of inventory on cash flows.Libby - Chapter 07 #56Topic Area: Evaluating Inventory Management

57. QV-TV, Inc. provided the following items in their footnotes for the year-end 2010: Cost of goods soldwas $22 billion under FIFO costing and their inventory value under FIFO costing was $2.1 billion. TheLIFO Reserve for year-end 2009 was a $0.6 billion credit balance and at year-end 2010 it had increasedto a credit balance of $0.8 billion. How much is LIFO inventory value at year-end 2010?A. $1.9 billionB. $2.9 billionC. $2.3 billionD. $1.3 billionLIFO inventory ($1.3 billion) = FIFO inventory ($2.1 billion) - LIFO reserve ($0.8 billion)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 07-06 Compare companies that use different inventory costing methods.Libby - Chapter 07 #57Topic Area: Evaluating Inventory Management

58. QV-TV, Inc. provided the following items in their footnotes for the year-end 2010: Cost of goods soldwas $22 billion under FIFO costing and their inventory value under FIFO costing was $2.1 billion. TheLIFO Reserve for year-end 2009 was a $0.6 billion credit balance and at year-end 2010 it had increasedto a credit balance of $0.8 billion. How much is the 2010 LIFO cost of goods sold?

A. $22.2 billionB. $19.8 billionC. $22.8 billionD. $19.2 billionLIFO cost of goods sold ($22.2 billion) = FIFO cost of goods sold ($22 billion) + the increase in LIFOreserve ($0.2 billion)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 07-06 Compare companies that use different inventory costing methods.Libby - Chapter 07 #58Topic Area: Evaluating Inventory Management

59. A $25,000 overstatement of the 2010 ending inventory was discovered after the financial statementsfor 2010 were prepared. Which of the following describes the effect of the inventory error on the 2010financial statements?A. Current assets were overstated and net income was understated.B. Current assets were understated and net income was understated.C. Current assets were overstated and net income was overstated.D. Current assets were understated and net income was overstated.An overstatement of ending inventory overstates current assets and understates cost of goods sold andtherefore overstates net income.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 07-07 Understand methods for controlling and keeping track of inventory and analyze the effects of inventory errors on financial statements.Libby - Chapter 07 #59Topic Area: Control Of Inventory

60. A $25,000 overstatement of the 2010 ending inventory was discovered after the financial statementsfor 2010 were prepared. Which of the following describes the effect of the inventory error on the 2011financial statements?A. Net income and stockholders' equity are both understated.B. Net income is understated and stockholders' equity is not affected.C. Net income and stockholders' equity are both overstated.D. Net income and stockholders' equity are both unaffected.The overstatement of the 2010 ending inventory causes the 2010 net income to be overstated and the2011 net income to be understated. Stockholders' equity at the end of 2011 is not affected becauseinventory errors are counter-balancing.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, Measurement

Blooms: ApplyDifficulty: HardLearning Objective: 07-07 Understand methods for controlling and keeping track of inventory and analyze the effects of inventory errors on financial statements.Libby - Chapter 07 #60Topic Area: Control Of Inventory

61. Wilmington Company reported pretax income of $25,000 during 2010 and $30,000 during 2011. Laterit was discovered that the ending inventory for 2010 was understated by $2,000 (and not corrected in2011). What is the correct pretax income for each year?A. Option AB. Option BC. Option CD. Option D2010 Net income ($27,000) = Reported pretax income ($25,000) + Understatement of ending inventory($2,000).2011 Net income ($28,000) = Reported pretax income ($30,000) - Understatement of beginninginventory ($2,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 07-07 Understand methods for controlling and keeping track of inventory and analyze the effects of inventory errors on financial statements.Libby - Chapter 07 #61Topic Area: Control Of Inventory

62. At the end of 2010, a $5,000 understatement was discovered in the amount of the 2010 ending inventoryas reflected in the perpetual inventory records. What were the 2010 effects of the $5,000 inventory error(before correction)?A. Assets were understated by $5,000 and pretax income was understated by $5,000.B. Assets were understated by $5,000 and pretax income was overstated by $5,000.C. Cost of goods sold was understated by $5,000 and pretax income was understated by $5,000.D. Cost of goods sold was overstated by $5,000 and pretax income was overstated by $5,000.The understatement of the 2010 ending inventory causes the 2010 cost of goods sold to be overstatedand the 2010 pretax income is therefore understated.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 07-07 Understand methods for controlling and keeping track of inventory and analyze the effects of inventory errors on financial statements.Libby - Chapter 07 #62Topic Area: Control Of Inventory

63. An understatement of the ending inventory in Year 1, if not corrected, will cause

which of thefollowing?A. The year 1 net income to be understated and Year 2 net income to be overstated.B. The year 1 net income to be overstated and Year 2 net income to be overstated.C. The year 1 net income to be overstated and Year 2 net income will be correct.D. The year 1 net income to be overstated and Year 2 net income to be understated.The understatement of the year 1 ending inventory causes the year 1 cost of goods sold to be overstatedand the year 1 net income is therefore understated. The year 2 cost of goods sold is understated becausebeginning inventory is understated, which causes the year 2 net income to be overstated.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 07-07 Understand methods for controlling and keeping track of inventory and analyze the effects of inventory errors on financial statements.Libby - Chapter 07 #63Topic Area: Control Of Inventory

64. Which of the following is correct when beginning inventory is understated by $1,300 and endinginventory is understated by $700?A. Net income is understated by $600.B. Net income is understated by $2,000.C. Net income is overstated by $600.D. Net income is overstated by $2,000.The understatement of the beginning inventory causes net income to be overstated by $1,300 and theunderstatement of the ending inventory causes net income to be understated by $700.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 07-07 Understand methods for controlling and keeping track of inventory and analyze the effects of inventory errors on financial statements.Libby - Chapter 07 #64Topic Area: Control Of Inventory

65. On December 15, 2010, Transport Company accepted delivery of merchandise which it purchased oncredit. As of December 31, 2010, the company had neither recorded the transaction nor included themerchandise in its ending inventory amount because the seller's invoice had not been received. Theeffect of this omission on its balance sheet at December 31, 2010, (end of the accounting period) wasthatA. assets and stockholder's equity were overstated but liabilities were not affected.B. stockholder's equity was the only item affected by the omission.C. assets and liabilities were understated but stockholders' equity was not affected.D. assets and stockholders' equity were understated but liabilities were not affected.

The understatement of the ending inventory causes cost of goods sold to be overstated. However, theunderstatement of purchases causes cost of goods sold to be understated. Therefore, cost of goods soldis not affected, but inventory (assets) and accounts payable (liabilities) are understated.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 07-07 Understand methods for controlling and keeping track of inventory and analyze the effects of inventory errors on financial statements.Libby - Chapter 07 #65Topic Area: Control Of Inventory

66. A company using the periodic inventory system correctly recorded a purchase of merchandise, but themerchandise was not included in the physical inventory count at the end of the accounting period. Theerror caused which of the following?A. An understatement of both net income and assets.B. An overstatement of inventory, purchases, and accounts payable.C. An understatement of inventory, purchases, and accounts payable.D. An overstatement of net income and assets.The understatement of the ending inventory causes both net income and assets to be understated.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 07-07 Understand methods for controlling and keeping track of inventory and analyze the effects of inventory errors on financial statements.Libby - Chapter 07 #66Topic Area: Control Of Inventory

67. Hollander Company hired some students to help count inventory during their semester break.Unfortunately, the students added incorrectly and the 2010 ending inventory was overstated by $5,000.What would be the effect of this error in ending inventory?A. 2010 net income would be overstated.B. 2010 net income would be understated.C. 2010 ending retained earnings would be understated.D. 2010 cost of goods sold would be overstated.The overstatement of the ending inventory causes cost of goods sold to be understated and net incometo be overstated.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 07-07 Understand methods for controlling and keeping track of inventory and analyze the effects of inventory errors on financial statements.Libby - Chapter 07 #67Topic Area: Control Of Inventory

68. During the audit of Montane Company's 2010 financial statements, the auditors discovered that the2010 ending inventory had been overstated by $8,000 and that the 2010 beginning inventory wasoverstated by $5,000. Before the effect of these errors, 2010 pretax income had been computed as$100,000. What should be reported as the correct 2010 pretax income before taxes?A. $113,000B. $87,000C. $105,000D. $97,000The overstatement of the beginning inventory causes cost of goods sold to be overstated by $5,000; theoverstatement of the ending inventory causes cost of goods sold to be overstated by $8,000. Thereforecost of goods sold is understated by $3,000 and net income is overstated by $3,000.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 07-07 Understand methods for controlling and keeping track of inventory and analyze the effects of inventory errors on financial statements.Libby - Chapter 07 #68Topic Area: Control Of Inventory

69. RJ Corporation has provided the following information about one of their inventory items:During the year, 3,000 units were sold.What was ending inventory using the LIFO cost flow assumption?A. $640,000B. $840,000C. $770,000D. $880,000Ending inventory ($640,000) = ($3,200 Å~ 200)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods.Libby - Chapter 07 #69Topic Area: Inventory Costing Methods

70. RJ Corporation has provided the following information about one of their inventory items:During the year, 3,000 units were sold.What was ending inventory using the FIFO cost flow assumption?A. $640,000B. $840,000C. $960,000D. $880,000Ending inventory ($840,000) = ($4,200 Å~ 200)AACSB: AnalyticAICPA BB: Critical Thinking

AICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods.Libby - Chapter 07 #70Topic Area: Inventory Costing Methods

71. RJ Corporation has provided the following information about one of their inventory items:During the year, 3,000 units were sold.What was ending inventory using the average cost flow assumption?A. $640,000B. $840,000C. $770,000D. $880,000Average unit cost ($3,850) = {(400 Å~ $3,200) + (800 Å~ $3,600) + (1,200 Å~ $4,000) + (800 Å~ $4,200)} ÷3,200 units. Ending inventory ($770,000) = $3,850 Å~ 200 units.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods.Libby - Chapter 07 #71Topic Area: Inventory Costing Methods

72. RJ Corporation has provided the following information about one of their inventory items:During the year, 3,000 units were sold.What was cost of goods sold using the average cost flow assumption?A. $11,680,000B. $11,590,000C. $11,480,000D. $11,550,000Average unit cost ($3,850) = {(400 Å~ $3,200) + (800 Å~ $3,600) + (1,200 Å~ $4,000) + (800 Å~ $4,200)} ÷3,200 units. Cost of goods sold ($11,550,000) = 3,000 Å~ $3,850.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods.Libby - Chapter 07 #72Topic Area: Inventory Costing Methods

73. RJ Corporation has provided the following information about one of their inventory items:During the year, 3,000 units were sold.What was cost of goods sold using the LIFO cost flow assumption?A. $11,680,000B. $11,590,000C. $11,480,000D. $11,550,000Cost of goods sold ($11,680,000) = (800 Å~ $4,200) + (1,200 Å~ $4,000) + (800 Å~ $3,600) + (200 Å~

$3,200).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods.Libby - Chapter 07 #73Topic Area: Inventory Costing Methods

74. RJ Corporation has provided the following information about one of their inventory items:During the year, 3,000 units were sold.What was cost of goods sold using the FIFO cost flow assumption?A. $11,680,000B. $11,590,000C. $11,480,000D. $11,550,000Cost of goods sold ($11,480,000) = (400 Å~ $3,200) + (800 Å~ $3,600) + (1,200 Å~ $4,000) + (600 Å~$4,200).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods.Libby - Chapter 07 #74Topic Area: Inventory Costing Methods

75. On March 15, 2010, Ryan Company purchased $10,000 of merchandise on credit subject to terms of 2/10, n/30. Ryan Company records its purchases using the gross amount. The periodic inventory systemis used. Which of the following journal entries is correct when Ryan Company pays for these goods onMarch 30, 2010?A. Accounts payable 9,800B. Cash 9,800C. Accounts payable 10,000D. Cash 10,000E. Accounts payable 10,000F. Cash 9,800G. Purchase discounts 200H. Accounts payable 9,800I. Purchase discounts 200J. cash 10,000The payment was after 10 days, so the discount isn't available.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 07-01 Apply the cost principle to identify the ammounts that should be included in inventory and the matching principle to determine cost of goodssold for typical retailers; wholesalers; and manufacturers. (S)Libby - Chapter 07 #75

Topic Area: Nature Of Inventory And Cost Of Goods Sold

76. On March 15, 2010, Ryan Company purchased $10,000 of merchandise on credit subject to terms of 2/10, n/30. Ryan Company records its purchases using the gross amount. The periodic inventory systemis used. Which of the following journal entries is correct when Ryan Company pays for these goods onMarch 20, 2010?A. Accounts payable 9,800B. Cash 9,800C. Accounts payable 10,000D. Cash 10,000E. Accounts payable 10,000F. Cash 9,800G. Purchase discounts 200H. Accounts payable 9,800I. Purchase discounts 200J. cash 10,000The payment was within 10 days, so the 2% discount can be taken.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 07-01 Apply the cost principle to identify the ammounts that should be included in inventory and the matching principle to determine cost of goodssold for typical retailers; wholesalers; and manufacturers. (S)Libby - Chapter 07 #76Topic Area: Nature Of Inventory And Cost Of Goods Sold

77. Which of the following journal entries is not consistent with the use of a perpetual inventory system?A. InventoryB. Accounts payableC. Cost of goods soldD. InventoryE. PurchasesF. Accounts payableG. Accounts receivableH. sales revenueThe purchases account is used with a periodic inventory system.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 07-01 Apply the cost principle to identify the ammounts that should be included in inventory and the matching principle to determine cost of goodssold for typical retailers; wholesalers; and manufacturers. (S)Libby - Chapter 07 #77Topic Area: Nature Of Inventory And Cost Of Goods Sold

78. Which of the following journal entries is not consistent with the use of a periodic inventory system?A. Purchases

B. Accounts payableC. InventoryD. Accounts payableE. Accounts payableF. CashG. Accounts receivableH. Sales revenueThe inventory account is not debited when there is an inventory purchase using the periodic inventorysystem.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 07-01 Apply the cost principle to identify the ammounts that should be included in inventory and the matching principle to determine cost of goodssold for typical retailers; wholesalers; and manufacturers. (S)Libby - Chapter 07 #78Topic Area: Nature Of Inventory And Cost Of Goods Sold

79. Which of the following statements is correct regarding either the perpetual or periodic inventorysystems?A. In a perpetual inventory system, the inventory account is not changed for each purchase during theaccounting period.B.In a perpetual inventory system, cost of goods sold is recorded at the time of each sale during theaccounting period.C.In a periodic inventory system, cost of goods sold is developed from a comparison of beginninginventory and ending inventory only.D. In a periodic inventory system, the inventory account is increased for each purchase during theaccounting period.Cost of goods sold is debited when inventory is sold when using a perpetual inventory system.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 07-01 Apply the cost principle to identify the ammounts that should be included in inventory and the matching principle to determine cost of goodssold for typical retailers; wholesalers; and manufacturers. (S)Libby - Chapter 07 #79Topic Area: Nature Of Inventory And Cost Of Goods Sold

80. When a company uses the periodic inventory system, which of the following is true?A. Purchases are recorded in the cost of goods sold account.B. The inventory account is updated after each sale.C. Cost of goods sold is computed at the end of the accounting period rather than at each sale date.D. The inventory account is updated throughout the year as purchases are made.

Cost of goods sold is recorded periodically, at the end of the accounting period, under a periodicinventory system.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 07-01 Apply the cost principle to identify the ammounts that should be included in inventory and the matching principle to determine cost of goodssold for typical retailers; wholesalers; and manufacturers. (S)Libby - Chapter 07 #80Topic Area: Nature Of Inventory And Cost Of Goods Sold

81. Carrie Company sold merchandise with an invoice price of $1,000 to Underwood, Inc., with termsof 2/10, n/30. Which of the following is the correct entry to record the payment by Underwood Inc.,within the 10 days if the company uses the periodic inventory system and the gross method to recordpurchases?A. Option AB. Option BC. Option CD. Option DThe purchase discount is applicable given that payment was within the ten-day period.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 07-01 Apply the cost principle to identify the ammounts that should be included in inventory and the matching principle to determine cost of goodssold for typical retailers; wholesalers; and manufacturers. (S)Libby - Chapter 07 #81Topic Area: Nature Of Inventory And Cost Of Goods Sold

82. Iris Company has provided the following information regarding two of its items of inventory at yearend:• There are 100 units of Item A having a cost of $20 per unit and a replacement cost of $18 per unit.• There are 50 units of Item B having a cost of $50 per unit and a replacement cost of $55 per unit.How much is the ending inventory using lower of cost or market on an item-by-item basis?A. $4,300B. $4,500C. $4,750D. $4,550Ending inventory ($4,300) = (100 Å~ $18) + (50 Å~ $50)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 07-04 Report inventory at the lower of cost of market (LCM).Libby - Chapter 07 #82Topic Area: Valuation At Lower Of Cost Or Market

83. Carr Corporation has provided the following information for its most recent month of operation: sales$8,000; beginning inventory $1,000; ending inventory $2,000 and gross profit $5,000. How much wereCarr's inventory purchases during the period?A. $9,000B. $5,000C. $6,000D. $4,000Sales ($8,000) - Cost of goods sold ($3,000) = Gross profit ($5,000)Beginning inventory ($1,000) + Purchases ($4,000) - Ending inventory ($2,000) = Cost of goods sold($3,000)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 07-01 Apply the cost principle to identify the ammounts that should be included in inventory and the matching principle to determine cost of goodssold for typical retailers; wholesalers; and manufacturers.Libby - Chapter 07 #83Topic Area: Nature Of Inventory And Cost Of Goods Sold

84. Carp Corporation has provided the following information for its most recent month of operation: sales$16,000; ending inventory $4,000, purchases $8,000 and gross profit $10,000. How much was Carp'sbeginning inventory?A. $2,000B. $18,000C. $6,000D. $12,000Sales ($16,000) - Cost of goods sold ($6,000) = Gross profit ($10,000)Beginning inventory ($2,000) + Purchases ($8,000) - Ending inventory ($4,000) = Cost of goods sold($6,000)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 07-01 Apply the cost principle to identify the ammounts that should be included in inventory and the matching principle to determine cost of goodssold for typical retailers; wholesalers; and manufacturers.Libby - Chapter 07 #84Topic Area: Nature Of Inventory And Cost Of Goods Sold

85. Cassie Corporation has provided the following information for its most recent month of operation: sales$32,000, beginning inventory $8,000, purchases $16,000 and gross profit $20,000. How much wasCassie's ending inventory?A. $4,000B. $8,000

C. $6,000D. $12,000Sales ($32,000) - Cost of goods sold ($12,000) = Gross profit ($20,000)Beginning inventory ($8,000) + Purchases ($16,000) - Ending inventory ($12,000) = Cost of goods sold($12,000)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 07-01 Apply the cost principle to identify the ammounts that should be included in inventory and the matching principle to determine cost of goodssold for typical retailers; wholesalers; and manufacturers.Libby - Chapter 07 #85Topic Area: Nature Of Inventory And Cost Of Goods Sold

86. Which of the following would not be included in Latimer Company's ending inventory?A. Goods shipped from a supplier with terms of FOB shipping point.B. Goods shipped to customers with terms of FOB destination.C.Samples provided to a customer with the understanding that they would be returned to Latimer at thebeginning of the next year.D. Goods shipped to customers with terms of FOB shipping point.Title passes to the customer when the goods are shipped FOB shipping point.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 07-01 Apply the cost principle to identify the ammounts that should be included in inventory and the matching principle to determine cost of goodssold for typical retailers; wholesalers; and manufacturers.Libby - Chapter 07 #86Topic Area: Nature Of Inventory And Cost Of Goods Sold

87. Atomic Company incorrectly recorded a December 2009 credit purchase of inventory during January2010. Assuming that the December 31, 2009 ending inventory was correctly determined, what is theeffect of this error on the financial statements for the year ended December 31, 2009?A. Net income is not affected.B. Stockholders' equity is not affected.C. Net income is overstated.D. Current assets are understated.The 2009 purchases are understated, which causes cost of goods sold to be understated and net incometo be overstated.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 07-07 Understand methods for controlling and keeping track of inventory and analyze the effects of inventory errors on financial statements.Libby - Chapter 07 #87Topic Area: Control Of Inventory

88. Atomic Company incorrectly recorded a December 2009 credit purchase of inventory during January2010. Assuming that the December 31, 2009 ending inventory was correctly determined, what is theeffect of this error on the financial statements for the year ended December 31, 2010?A. Net income is not affected.B. Stockholders' equity is not affected.C. Net income is overstated.D. Stockholders' equity is overstatedInventory related errors including purchase cutoff errors are self-correcting on the balance sheet aftertwo periods.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 07-07 Understand methods for controlling and keeping track of inventory and analyze the effects of inventory errors on financial statements.Libby - Chapter 07 #88Topic Area: Control Of Inventory

89. Which of the following statements is incorrect?A.An increase in raw materials inventory means that raw materials purchases exceed raw materialsused.B.An increase in work in process inventory means that costs put into work in process exceed cost ofgoods manufactured.C.A decrease in work in process inventory means that cost of goods sold exceed cost of goodsmanufactured.D.An increase in finished goods inventory means that cost of goods manufactured exceeds cost ofgoods sold.Finished goods inventory is increased by cost of goods manufactured and decreased by cost of goodssold.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 07-01 Apply the cost principle to identify the ammounts that should be included in inventory and the matching principle to determine cost of goodssold for typical retailers; wholesalers; and manufacturers.Libby - Chapter 07 #89Topic Area: Nature Of Inventory And Cost Of Goods Sold

90. Which of the following costs does not become a part of cost of goods manufactured?A. The cost of raw materials used.B. The cost of factory overhead.C. The cost of rent on the factory building.D. The salary of the company president.The president's salary is an operating expense and is not considered a manufacturing cost.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 07-01 Apply the cost principle to identify the ammounts that should be included in inventory and the matching principle to determine cost of goodssold for typical retailers; wholesalers; and manufacturers.Libby - Chapter 07 #90Topic Area: Nature Of Inventory And Cost Of Goods Sold

91. Which of the following would not be a component of the year-end inventory balance?A. Freight-in costsB. Inventory inspection costsC. Inventory preparation costsD. Inventory related selling costsInventory selling costs are considered to be selling, general and administrative expenses.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 07-01 Apply the cost principle to identify the ammounts that should be included in inventory and the matching principle to determine cost of goodssold for typical retailers; wholesalers; and manufacturers.Libby - Chapter 07 #91Topic Area: Nature Of Inventory And Cost Of Goods Sold

92. Which of the following statements is correct?A. Cost of goods available for sale is allocated between costs of goods sold and inventory at year-end.B.A purchase of inventory on credit increases both cost of goods available for sale and cost of goodssold.C.Purchases of inventory during a period less that period's cost of goods sold equals ending inventoryregardless of the beginning inventory amount.D. Cost of goods available for sale equals ending inventory plus purchases.Cost of goods available for sale minus ending inventory equals cost of goods sold.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 07-01 Apply the cost principle to identify the ammounts that should be included in inventory and the matching principle to determine cost of goodssold for typical retailers; wholesalers; and manufacturers.Libby - Chapter 07 #92Topic Area: Nature Of Inventory And Cost Of Goods Sold

93. Which of the following businesses would not be as likely to use the specific identification method ofinventory valuation?A. An automobile dealerB. A custom jewelry storeC. A hardware storeD. An art dealerA hardware store likely has many large quantities of similar items, which makes it

impractical to use thespecific identification method.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods.Libby - Chapter 07 #93Topic Area: Inventory Costing Methods

94. Which of the following statements is incorrect?A.A year-end purchase of inventory increases the LIFO cost of goods sold when prices are increasingand a periodic inventory system is used.B.A year-end purchase of inventory increases the FIFO ending inventory when prices are increasing anda periodic inventory system is used.C.The choice of an inventory costing method is dependent on the actual flow of goods when inventoryis sold.D.A year-end purchase of inventory doesn't affect the weighted-average ending inventory when pricesare increasing and a periodic inventory system is used.The actual flow of goods is irrelevant when choosing an inventory costing method.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods.Libby - Chapter 07 #94Topic Area: Inventory Costing Methods

95. Which of the following statements is incorrect when inventory prices are increasing?A. LIFO's cost of goods sold will be the largest among the inventory costing methods.B. LIFO's income tax will be the lowest among the inventory costing methods.C.Ending inventory using the average cost method will be larger than the ending inventory when theLIFO method is used.D.Cost of goods sold using the average cost method will be less than cost of goods sold when the FIFOmethod is used.FIFO has the lowest cost of goods sold during a period of increasing prices.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods.Libby - Chapter 07 #95Topic Area: Inventory Costing Methods

96. Which of the following statements is correct when inventory prices are decreasing?

A. FIFO's cost of goods sold will be the largest among the inventory costing methods.B. LIFO's income tax will be the lowest among the inventory costing methods.C.Ending inventory using the average cost method will be less than the ending inventory when theLIFO method is used.D.Cost of goods sold using the average cost method will be greater than cost of goods sold when theLIFO method is used.FIFO has the largest cost of goods sold during a period of decreasing prices.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods.Libby - Chapter 07 #96Topic Area: Inventory Costing Methods

97. Which of the following statements is correct when inventory prices are increasing?A. LIFO's ending inventory will be the largest among the inventory costing methods.B. FIFO's gross profit will be the lowest among the inventory costing methods.C. Inventory turnover will be the largest when the LIFO inventory method is used.D. Use of the LIFO method will result in lower cash flows due to an increased cost of goods sold.LIFO has the largest cost of goods sold and the lowest ending inventory and therefore the largestinventory turnover ratio.AACSB: ApplicationAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods.Learning Objective: 07-05 Evaluate inventory management using the inventory turnover ratio and analyze the effects of inventory on cash flows.Libby - Chapter 07 #97Topic Area: Inventory Costing Methods, Evaluating Inventory Management

98. Which of the following statements is correct when inventory prices are decreasing?A. Inventory turnover will be the greatest when the average cost inventory method is used.B. FIFO's gross profit will be the highest among the inventory costing methods.C. Inventory turnover will be the largest when the LIFO inventory method is used.D. Use of the LIFO method will result in lower cash flows due to a decreased cost of goods sold.LIFO has the lowest cost of goods sold, the highest gross profit and taxable income. LIFO will thereforeresult in a higher tax burden and lower cash flows.AACSB: ApplicationAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: HardLearning Objective: 07-02 Report inventory and cost of goods sold using the four inventory costing methods.Learning Objective: 07-05 Evaluate inventory management using the inventory turnover ratio and analyze the effects of inventory on cash flows.Libby - Chapter 07 #98Topic Area: Inventory Costing Methods, Evaluating Inventory Management

99. Which of the following statements is correct with respect to the determination of operating cash flows?A. A decrease in inventory is deducted from net income.B. An increase in accounts payable is deducted from net income.C. An increase in inventory is deducted from net income.D. A decrease in accounts payable is added to net income.An increase in inventory is deducted from net income because purchases exceed cost of goods sold.AACSB: ApplicationAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 07-05 Evaluate inventory management using the inventory turnover ratio and analyze the effects of inventory on cash flows.Libby - Chapter 07 #99Topic Area: Evaluating Inventory Management

100. What is the net adjustment to net income with respect to the determination of operating cash flows wheninventory increases $100,000 and accounts payable increases $20,000?A. An increase of $120,000.B. A decrease of $120,000.C. An increase of $80,000.D. A decrease of $80,000

ch8 Key1. Tangible long-lived productive assets differ from intangible long-lived productive assets in that tangibleassets have physical substance whereas intangible assets have no physical substance.TRUETangible assets have physical substance, whereas intangible assets lack physical substance.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 08-01 Define; classify; and explain the nature of long-lived productive assets and interpret the fixed asset turnover ratio.Libby - Chapter 08 #1Topic Area: Acquisition And Maintenance Of Plant And Equipment

2. Patents, trademarks, and franchises are examples of tangible assets.FALSEIntangible assets lack physical substance and include patents, copyrights, franchises, licenses, andtrademarks.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 08-01 Define; classify; and explain the nature of long-lived productive assets and interpret the fixed asset turnover ratio.Libby - Chapter 08 #2

Topic Area: Acquisition And Maintenance Of Plant And Equipment

3. The fixed asset turnover ratio measures the amount of operating income generated per dollar of averagefixed assets.FALSEThe fixed asset turnover ratio measures the amount of sales dollars generated per dollar of average fixedassets.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: RememberDifficulty: EasyLearning Objective: 08-01 Define; classify; and explain the nature of long-lived productive assets and interpret the fixed asset turnover ratio.Libby - Chapter 08 #3Topic Area: Acquisition And Maintenance Of Plant And Equipment

4. The equipment cost initially reported on the balance sheet includes the equipment related installationcosts.TRUEThe equipment cost reported on the balance sheet includes the purchase price, transportation costs,installation costs, etc.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 08-02 Apply the cost principle to measure the acquisition and maintenance of property; plant; and equipment.Libby - Chapter 08 #4Topic Area: Acquisition And Maintenance Of Plant And Equipment

5. An expenditure is capitalized when it is reported as an expense on the income statement.FALSEAn expenditure is capitalized when it is reported as an asset on the balance sheet.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 08-02 Apply the cost principle to measure the acquisition and maintenance of property; plant; and equipment.Libby - Chapter 08 #5Topic Area: Acquisition And Maintenance Of Plant And Equipment

6. The land cost initially reported on the balance sheet includes legal fees and title insurance.TRUEThe land cost reported on the balance sheet includes the purchase price, legal fees, title insurance, etc.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 08-02 Apply the cost principle to measure the acquisition and maintenance of property; plant; and equipment.Libby - Chapter 08 #6Topic Area: Acquisition And Maintenance Of Plant And Equipment

7. The cash-equivalent cost of an asset received is measured as any cash paid plus the

current market valueof the non-cash consideration given up. If this value is not determinable, the current market value ofwhat is received should be used instead.TRUEThe market value of the asset received is used in situations where the market value of the asset given upis not known.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 08-02 Apply the cost principle to measure the acquisition and maintenance of property; plant; and equipment.Libby - Chapter 08 #7Topic Area: Acquisition And Maintenance Of Plant And Equipment

8. If a second-hand machine is purchased for productive use in a business, all renovation and repair costson the used machine incurred by the purchaser prior to its productive use should be reported as anexpense on the income statement.FALSECosts incurred to get an asset ready for its intended use are capitalized and are reported on the balancesheet as a component of the asset's cost.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 08-02 Apply the cost principle to measure the acquisition and maintenance of property; plant; and equipment.Libby - Chapter 08 #8Topic Area: Acquisition And Maintenance Of Plant And Equipment

9. Ordinary repairs and maintenance costs are incurred to maintain a long-lived asset and are expensed asincurred.TRUECosts incurred to maintain an asset are reported on the income statement as an expense as they areincurred.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 08-02 Apply the cost principle to measure the acquisition and maintenance of property; plant; and equipment.Libby - Chapter 08 #9Topic Area: Acquisition And Maintenance Of Plant And Equipment

10. In accounting for depreciation, acquisition cost and useful life usually are known quantities, whereasresidual value is an estimate because it relates to an amount in the future.FALSEThe useful life is an estimate.AACSB: Reflective ThinkingAICPA BB: Critical Thinking

AICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Libby - Chapter 08 #10Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

11. Depreciation is the process of allocating a long-lived asset's cost over its productive life.TRUEDepreciation is an allocation process.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: EasyLearning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Libby - Chapter 08 #11Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

12. Depreciation is the process of estimating a long-lived asset's current market value.FALSEDepreciation is an allocation process, not a valuation process.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Libby - Chapter 08 #12Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

13. If depreciation expense is calculated without taking into account the asset's residual value, depreciationexpense will be higher than it should have been.TRUEAn asset's depreciable basis is equal to the cost of the asset minus residual value. Ignoring the residualvalue increases the depreciable basis and therefore depreciation expense.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Libby - Chapter 08 #13Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

14. The book value of a depreciable asset equals its acquisition cost minus the depreciation expenserecorded to date.TRUEAn asset's book value equals the cost of the asset minus accumulated depreciation. Accumulateddepreciation is the depreciation expense recorded to date.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Libby - Chapter 08 #14Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

15. On January 1, 2010 equipment was purchased for $80,000; the equipment's estimated residual value is$15,000 and its estimated useful life is 8 years. During 2010, the depreciation expense under the doubledecliningbalance method is $16,250.FALSE2010 depreciation expense ($20,000) = $80,000 Å~ 2/8AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Libby - Chapter 08 #15Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

16. On January 1, 2010 equipment was purchased for $100,000; the equipment's estimated residual valueis $20,000 and its estimated useful life is 8 years. On December 31, 2010, the book value using thestraight-line method of depreciation is $90,000.TRUE2010 depreciation expense ($10,000) = ($100,000 - $20,000) ÷ 8 yearsDecember 31, 2010 book value ($90,000) = Cost ($100,000) - Accumulated depreciation ($10,000)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Libby - Chapter 08 #16Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

17. Use of the double-declining-balance method of depreciation results in higher depreciation expenseduring the first year of an asset's life relative to use of the straight-line depreciation method.TRUEThe double-declining-balance method is an accelerated depreciation method which results in higheramounts of depreciation expense in the earlier years of an asset's life.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: EasyLearning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Libby - Chapter 08 #17Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

18. Use of the double-declining-balance method of depreciation results in decreasing amounts ofdepreciation expense over an asset's life.TRUEThe double-declining-balance method is an accelerated depreciation method which results in decreasing

amounts of depreciation expense due to the decrease in the underlying asset's book value.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Libby - Chapter 08 #18Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

19. The units-of-production method of depreciation allocates an asset's cost over its useful life based on thecurrent period's production relative to its total estimated production.TRUEThe units-of-production method of depreciation calculates unit depreciation expense by dividing thedepreciable basis (cost minus residual value) by estimated total production.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: EasyLearning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Libby - Chapter 08 #19Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

20. The depreciation method chosen for financial reporting purposes (GAAP) must also be utilized forincome tax reporting (IRS).FALSEGAAP depreciation accounting differs from IRS depreciation accounting.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Libby - Chapter 08 #20Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

21. If a long-lived asset has been impaired, the journal entry will require a debit to a loss account and acredit to the long-lived asset account.TRUEAn asset impairment results in a loss and reduces the book value of the impaired asset.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 08-04 Explain the effect of asset impairment on the financial statements. Explain the effect of asset impairment on the financial statements.Libby - Chapter 08 #21Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

22. If a company has an asset with a book value of $5.0 million and estimates the future cash flows to bereceived over the asset's remaining life to be $5.5 million, no impairment has occurred and no losswould be recognized.TRUE

The first step in the determination of asset impairment is to compare the asset's book value to its futureestimated cash flows. If cash flows exceed book value, there isn't impairment.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: EasyLearning Objective: 08-04 Explain the effect of asset impairment on the financial statements. Explain the effect of asset impairment on the financial statements.Libby - Chapter 08 #22Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

23. The first step in recording the disposal of a long-lived asset is to update its book value by recognizingdepreciation expense for the period of time since the last depreciation adjustment was made.TRUEDepreciation expense has to be recorded up to the date of sale.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: EasyLearning Objective: 08-05 Analyze the disposal of property; plant; and equipment.Libby - Chapter 08 #23Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

24. Gains and losses on a long-lived asset disposal are determined by comparing the asset's cost to itsselling price.FALSEGains and losses on a long-lived asset disposal are determined by comparing the asset's book value to itsselling price.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 08-05 Analyze the disposal of property; plant; and equipment.Libby - Chapter 08 #24Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

25. Selling a depreciable asset for a gain results in an increase in both stockholders' equity and assets.TRUESelling a depreciable asset for a gain increases net income and therefore stockholders' equity; assetsincrease because the selling price exceeds book value.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: EasyLearning Objective: 08-05 Analyze the disposal of property; plant; and equipment.Libby - Chapter 08 #25Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

26. The systematic and rational allocation of the acquisition cost of natural resources to those periods in

which the resources contribute to revenue is called depletion.TRUEThe allocation of a natural resource cost to future periods is referred to as depletion.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 08-06 Apply measurement and reporting concepts for natural resources and intangible assets.Libby - Chapter 08 #26Topic Area: Natural Resources And Intangible Assets

27. The method of depletion used to allocate the cost of natural resources to future periods is most similar tothe straight-line depreciation method.FALSEThe method is most similar to the units-of-production method of depreciation.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: EasyLearning Objective: 08-06 Apply measurement and reporting concepts for natural resources and intangible assets.Libby - Chapter 08 #27Topic Area: Natural Resources And Intangible Assets

28. Natural resource depletion expense is recognized on the income statement for all resources removedduring the period whether they are sold or not.FALSEIf the resources aren't sold, they are reported as inventory on the balance sheet.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 08-06 Apply measurement and reporting concepts for natural resources and intangible assets.Libby - Chapter 08 #28Topic Area: Natural Resources And Intangible Assets

29. Goodwill is recorded only when an existing company is bought by another company and the purchaseprice exceeds the fair value of the purchased company's net assets.TRUEGoodwill is recognized when the amount paid for an existing company exceeds the company's assets atfair value.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 08-06 Apply measurement and reporting concepts for natural resources and intangible assets.Libby - Chapter 08 #29Topic Area: Natural Resources And Intangible Assets

30. Research and development costs are capitalized under GAAP once a product or process has beendeveloped.FALSEResearch and Development costs are expensed as incurred under GAAP.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 08-06 Apply measurement and reporting concepts for natural resources and intangible assets.Libby - Chapter 08 #30Topic Area: Natural Resources And Intangible Assets

31. When determining cash flow from operations using the direct method, depreciation and amortizationexpense are deducted from net income.FALSEDepreciation and amortization expense are added to net income.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 08-07 Explain how the acquisition; use; and disposal of long-lived assets impact cash flows.Libby - Chapter 08 #31Topic Area: Focus On Cash Flows

32. Which of the following would not be classified as property, plant and equipment on a balance sheet?A. Land being held for resale.B. Equipment used in the manufacturing process.C. A building used as corporate headquarters.D. A natural resource being mined.Land being held for resale would be reported on a balance sheet as either an investment or a currentasset.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 08-01 Define; classify; and explain the nature of long-lived productive assets and interpret the fixed asset turnover ratio.Libby - Chapter 08 #32Topic Area: Acquisition And Maintenance Of Plant And Equipment

33. Which of the following accounts would not be considered a tangible asset?A. BuildingsB. LandC. EquipmentD. PatentsTangible assets have physical substance, whereas intangible assets lack physical substance.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 08-01 Define; classify; and explain the nature of long-lived productive assets and interpret the fixed asset turnover ratio.Libby - Chapter 08 #33Topic Area: Acquisition And Maintenance Of Plant And Equipment

34. Which of the following accounts would not be considered an intangible asset?A. GoodwillB. Patents

C. Research and development costsD. TrademarksTangible assets have physical substance, whereas intangible assets lack physical substance. Researchand development costs are expensed as incurred.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 08-01 Define; classify; and explain the nature of long-lived productive assets and interpret the fixed asset turnover ratio.Libby - Chapter 08 #34Topic Area: Acquisition And Maintenance Of Plant And Equipment

35. Which of the following transactions would not increase the fixed asset turnover ratio?A. A profitable sale of inventory on account.B. A profitable sale of inventory for cash.C. Selling equipment used in the manufacturing process for a loss.D. A decrease in cash-based operating expenses.Fixed asset turnover is calculated by dividing net sales by average net fixed assets. A decrease inoperating expenses does not affect net sales or average net fixed assets.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 08-01 Define; classify; and explain the nature of long-lived productive assets and interpret the fixed asset turnover ratio.Libby - Chapter 08 #35Topic Area: Acquisition And Maintenance Of Plant And Equipment

36. Which of the following includes only tangible assets?A. Land, buildings and natural resources.B. Land, buildings and leaseholds.C. Natural resources, buildings, and franchises.D. Licenses, trademarks, and land.Tangible assets have physical substance; each of these assets has physical substance.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 08-01 Define; classify; and explain the nature of long-lived productive assets and interpret the fixed asset turnover ratio.Libby - Chapter 08 #36Topic Area: Acquisition And Maintenance Of Plant And Equipment

37. Which of the following includes only intangible assets?A. Natural resources, patents, and trademarks.B. Research and development costs, franchises, and trademarks.C. Copyrights, licenses, and land.D. Leaseholds, patents and copyrights.Intangible assets have physical form; each of these assets lacks physical substance.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: Medium

Learning Objective: 08-01 Define; classify; and explain the nature of long-lived productive assets and interpret the fixed asset turnover ratio.Libby - Chapter 08 #37Topic Area: Acquisition And Maintenance Of Plant And Equipment

38. Which of the following statements regarding the fixed asset turnover ratio is incorrect?A. The numerator is net operating income.B. The denominator is average net fixed assets.C. It is used to assess a company's effectiveness in generating sales from its fixed assets.D. It increases when a company sells a factory building for its book value.The numerator is net sales or operating revenues and the denominator is average net fixed assets.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 08-01 Define; classify; and explain the nature of long-lived productive assets and interpret the fixed asset turnover ratio.Libby - Chapter 08 #38Topic Area: Acquisition And Maintenance Of Plant And Equipment

39. The Wilson Company has provided the following information:• Net sales, $100,000;• Net operating income, $40,000;• Net income, $20,000;• Average total assets, $120,000;• Average net fixed assets; $80,000.What is Wilson's fixed asset turnover ratio?A. 0.83B. 1.25C. 0.25D. 0.50.Fixed asset turnover ratio (1.25) = Net sales ($100,000) ÷ Average net fixed assets ($80,000)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 08-01 Define; classify; and explain the nature of long-lived productive assets and interpret the fixed asset turnover ratio.Libby - Chapter 08 #39Topic Area: Acquisition And Maintenance Of Plant And Equipment

40. Which statement is false?A. Shortening the estimated useful lives of depreciable assets will lead to a higher fixed asset turnover.B.Using an accelerated depreciation method instead of the straight-line depreciation method will lead toreporting a higher fixed asset turnover during the earlier years of an asset's life.C.Acquiring more long-lived, productive assets when a company is growing will lead to a lower fixedasset turnover.D.Selling off long-lived, productive assets while maintaining sales will lead to a lower

fixed assetturnover.Selling long-lived assets results in a decrease in the fixed asset turnover ratio denominator and thereforean increase in the fixed asset turnover ratio.AACSB: AnalyzeAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: ApplyDifficulty: HardLearning Objective: 08-01 Define; classify; and explain the nature of long-lived productive assets and interpret the fixed asset turnover ratio.Libby - Chapter 08 #40Topic Area: Acquisition And Maintenance Of Plant And Equipment

41. On March 1, Wright Company purchased new equipment for $50,000 by paying cash. Other costsassociated with the equipment were: transportation costs, $1,000; sales tax paid $3,000; and installationcost, $2,500. At what amount will the equipment be recorded at on a balance sheet?A. $56,500B. $54,000C. $51,000D. $50,000$56,500 = $50,000 + $1,000 + $3,000 + $2,500AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 08-02 Apply the cost principle to measure the acquisition and maintenance of property; plant; and equipment.Libby - Chapter 08 #41Topic Area: Acquisition And Maintenance Of Plant And Equipment

42. On August 1, Red Company purchased computer equipment for $10,000 cash and also gave 100 sharesof White common stock held by Red Company as an investment. The White common stock cost RedCompany $5,000 and on August 1 had a market value of $4,200. Installation costs were $700 andshipping costs were $500. What amount should be the total amount debited to the computer equipmentaccount?A. $14,200B. $15,000C. $15,400D. $16,200$15,400 = $10,000 + $4,200 + $700 + $500AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 08-02 Apply the cost principle to measure the acquisition and maintenance of property; plant; and equipment.Libby - Chapter 08 #42Topic Area: Acquisition And Maintenance Of Plant And Equipment

43. Salvia Company recently purchased a truck. The price negotiated with the dealer was

$40,000. Salviaalso paid sales tax of $2,000 on the purchase, shipping and preparation costs of $3,000, and insurancefor the first year of operation of $4,000. At what amount should the truck be recorded on the balancesheet prior to recording depreciation expense?A. $40,000B. $42,000C. $43,000D. $45,000$45,000 = $40,000 + $2,000 + $3,000AACSB: ApplicationAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 08-02 Apply the cost principle to measure the acquisition and maintenance of property; plant; and equipment.Libby - Chapter 08 #43Topic Area: Acquisition And Maintenance Of Plant And Equipment

44. Which of the following equipment related costs is not capitalized on a balance sheet?A. Equipment installation costs.B. Transportation costs associated with the equipment purchase.C. Equipment maintenance costs.D. The equipment's purchase price.Equipment maintenance costs are expensed as incurred.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: RememberDifficulty: MediumLearning Objective: 08-02 Apply the cost principle to measure the acquisition and maintenance of property; plant; and equipment.Libby - Chapter 08 #44Topic Area: Acquisition And Maintenance Of Plant And Equipment

45. Which of the following costs associated with a land purchase is not a component of the land costreported on a balance sheet?A. The payment of delinquent property taxes.B. The incurrence of legal fees.C. The cost of title insurance.D. The land's appraised value.The purchase price of the land is capitalized, not its appraised value.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: RememberDifficulty: MediumLearning Objective: 08-02 Apply the cost principle to measure the acquisition and maintenance of property; plant; and equipment.Libby - Chapter 08 #45Topic Area: Acquisition And Maintenance Of Plant And Equipment

46. Which of the following is correct for Smith Company when Smith issues 10,000 shares of $10 par valuecommon stock and pays $20,000 cash in exchange for a building? The market price of the Smith stockon the exchange date was $35 per share and the building's book value on the books of the

seller was$200,000.A. Total assets increase $350,000.B. Stockholders' equity increases $200,000.C. Stockholders' equity increases $330,000.D. Total assets increase $330,000.The building account increases $370,000 {(10,000 Å~ $35) + $20,000} and the cash account decreases$20,000.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 08-02 Apply the cost principle to measure the acquisition and maintenance of property; plant; and equipment.Libby - Chapter 08 #46Topic Area: Acquisition And Maintenance Of Plant And Equipment

47. Which of the following is incorrect for Smith Company when Smith issues 10,000 shares of $10 parvalue common stock and pays $20,000 cash in exchange for a building? The market price of the Smithstock on the exchange date was $35 per share and the building's book value on the books of the sellerwas $200,000.A. The common stock account increases by $100,000.B. The building account increases by $350,000.C. Stockholders' equity increases $350,000.D. The additional paid-in capital account increases by $250,000.The building account increases $370,000 {(10,000 Å~ $35) + $20,000}.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 08-02 Apply the cost principle to measure the acquisition and maintenance of property; plant; and equipment.Libby - Chapter 08 #47Topic Area: Acquisition And Maintenance Of Plant And Equipment

48. Which of the following journal entries is correct for Smith Company when Smith issues 10,000 sharesof $20 par value common stock and pays $20,000 cash in exchange for a building? The market price ofthe Smith stock on the exchange date was $35 per share and the building's book value on the books ofthe seller was $200,000.A. Building 220,000Cash 20,000 Common stock 200,000B. Building 370,000Cash 20,000 Common Stock 350,000C. Building 370,000Cash 20,000 Common stock 200,000 Additional paid-in capital 150,000D. Building 200,000Common stock 200,000

The building account is debited for $370,000 {(10,000 Å~ $35) + $20,000}; the common stock is creditedfor the par value of the stock issued (10,000 Å~ $20); additional paid-in capital is credited for the excessof the stock's market price over the par value {($35 - $20) Å~ 10,000}, and cash is credited for $20,000.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 08-02 Apply the cost principle to measure the acquisition and maintenance of property; plant; and equipment.Libby - Chapter 08 #48Topic Area: Acquisition And Maintenance Of Plant And Equipment

49. If an expenditure related to a depreciable asset is incorrectly treated as a capital expenditure, instead ofas a revenue expenditure, which of the following statements is true?A. The current year's net income will be lower and future depreciation expense will be higher.B. The current year's net income will be higher and future depreciation expense will be lower.C. The current year's net income will be higher and future depreciation expense will be higher.D. The current year's net income will be lower and future depreciation expense will be lower.Capitalizing an expenditure means that the expenditure in this case is added to the depreciable assetaccount rather than being immediately expensed.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: AnalyzeDifficulty: MediumLearning Objective: 08-02 Apply the cost principle to measure the acquisition and maintenance of property; plant; and equipment.Libby - Chapter 08 #49Topic Area: Acquisition And Maintenance Of Plant And Equipment

50. Which of the following statements is incorrect?A. Revenue expenditures decrease net income.B. Capital expenditures decrease assets.C. Ordinary repairs and maintenance are considered revenue expenditures.D. Additions and improvements are considered capital expenditures.Capital expenditures increase assets.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 08-02 Apply the cost principle to measure the acquisition and maintenance of property; plant; and equipment.Libby - Chapter 08 #50Topic Area: Acquisition And Maintenance Of Plant And Equipment

51. A company acquires land by issuing 10,000 shares of its $10 par value common stock currently tradingat $20 per share and the appraised value of the land is $250,000. Which of the following statements

correctly describes the recording of the land?A.Record the land at its appraised value of $250,000 and recognize a gain of $50,000 since the issuedstock is currently worth $200,000.B. Record the land at the value of the consideration given up, $200,000.C.Record the land at the average of its appraised value of $250,000 and the $200,000 value of the stockissued, thereby recognizing a $25,000 gain.D. Record the land at the par value of the stock given up, $100,000.The land should be recorded at the market value of the stock issued (10,000 Å~ $20).In addition, the appraised value doesn't necessarily indicate the land's market value.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 08-02 Apply the cost principle to measure the acquisition and maintenance of property; plant; and equipment.Libby - Chapter 08 #51Topic Area: Acquisition And Maintenance Of Plant And Equipment

52. Which of the following statements is incorrect?A. Replacement of a truck's tires would be treated as a capital expenditure.B. The cost of replacing carpet in a building would be a revenue expenditure.C.Cost of replacing a roof on a newly purchased building before using it as a store would be a capitalexpenditure.D. The cost of repainting a hallway would be a revenue expenditure.Replacing the tires would be considered ordinary maintenance and repairs and is considered to be arevenue expenditure.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 08-02 Apply the cost principle to measure the acquisition and maintenance of property; plant; and equipment.Libby - Chapter 08 #52Topic Area: Acquisition And Maintenance Of Plant And Equipment

53. Gilbert Company made an ordinary repair to a delivery truck during 2010 at a cost of $500 andcapitalized the repair cost. What will be the effect on the 2010 financial statements as a result of thecapitalization?A. The financial statements aren't affected.B. Assets and net income are both overstated.C. Assets are overstated and net income was understated.D. Assets and stockholders' equity are both understated.The repair should have been expensed during 2010 rather than be capitalized. As a result, net income isoverstated because expenses are understated; assets are overstated because of the capitalization.AACSB: Analytic

AICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: AnalyzeDifficulty: HardLearning Objective: 08-02 Apply the cost principle to measure the acquisition and maintenance of property; plant; and equipment.Libby - Chapter 08 #53Topic Area: Acquisition And Maintenance Of Plant And Equipment

54. Which of the following would most likely not be a revenue expenditure?A. Repairing the carpet in the sales department offices.B. Repairing a leaky roof.C. Putting a hydraulic lift on a delivery truck making it easier and quicker to deliver appliances.D. Painting the exterior of the factory building.The hydraulic lift would be considered a capital expenditure since the lift increases the truck's operatingefficiency.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 08-02 Apply the cost principle to measure the acquisition and maintenance of property; plant; and equipment.Libby - Chapter 08 #54Topic Area: Acquisition And Maintenance Of Plant And Equipment

55. What is the effect on the 2010 financial statements when a capital expenditure during 2010 wasincorrectly recorded as a revenue expenditure?A. The financial statements aren't affected.B. Assets and net income are both overstated.C. Assets are overstated and net income was understated.D. Assets and stockholders' equity are both understated.Assets are understated because the expenditure should have been capitalized; stockholders' equity isunderstated because net income is understated due to the expense overstatement.AACSB: ApplyAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: AnalyzeDifficulty: HardLearning Objective: 08-02 Apply the cost principle to measure the acquisition and maintenance of property; plant; and equipment.Libby - Chapter 08 #55Topic Area: Acquisition And Maintenance Of Plant And Equipment

56. Which of the following best describes the objective of depreciation?A. To allocate the cost of a tangible asset to the periods in which its use contributes to earning revenue.B. To estimate the remaining useful life of the asset.C.To report the asset on the balance sheet at the estimated amount for which the asset could be sold onthe balance sheet date.D. To estimate the current replacement cost of the asset.Depreciation is an allocation process, not a valuation process.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: Medium

Learning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Libby - Chapter 08 #56Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

57. Which of the following doesn't properly describe the depreciation process?A. It is an allocation process.B. It is consistent with the matching principle.C. It involves the use of estimates.D. It attempts to determine an asset's market value.Depreciation is an allocation process, not a valuation process.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Libby - Chapter 08 #57Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

58. Which of the following describes the effect of recording depreciation expense at year-end?A. Net income decreases and total assets aren't affected.B. Total assets decrease and stockholders' equity is not affected.C. Net income decreases and total assets decrease.D. Stockholders' equity is not affected and net income decreases.The journal entry increases expenses, which decreases both net income and total assets. Total assetsdecrease because the contra-account accumulated depreciation is increased.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Libby - Chapter 08 #58Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

59. Why is the continuity assumption important with respect to the accounting for long-lived tangibleassets?A. It helps a company decide whether to use straight-line depreciation or an accelerated depreciationmethod.B.It justifies depreciating the asset over its expected useful life, without anticipating that the businesswill liquidate in the near future.C. It provides justification for including residual values in calculating depreciation.D. It is consistent with maintaining assets in the accounting records at market value rather thanacquisition cost.The justification for allocating an asset's cost over its useful life is that the business entity is a goingconcern.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: Remember

Difficulty: MediumLearning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Libby - Chapter 08 #59Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

60. On January 1, 2010, Woodstock, Inc. purchased a machine costing $40,000. Woodstock also paid$1,000 for transportation and installation. The expected useful life of the machine is 6 years and theresidual value is $5,000. How much is the annual depreciation expense assuming use of the straight-linedepreciation method?A. $6,100B. $6,000C. $5,950D. $5,750Annual depreciation expense ($6,000) = ($40,000 + $1,000 - $5,000) ÷ 6AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Libby - Chapter 08 #60Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

61. On January 1, 2010, Woodstock, Inc. purchased a machine costing $40,000. Woodstock also paid$1,000 for transportation and installation. The expected useful life of the machine is 6 years and theresidual value is $5,000. Which of the following statements is incorrect?A. The annual depreciation expense is $6,000.B. The December 31, 2010 book value was $35,000.C. The December 31, 2012 accumulated depreciation balance was $18,000.D. The December 31, 2011 book value was $24,000.Annual depreciation expense ($6,000) = ($40,000 + $1,000 - $5,000) ÷ 6December 31, 2011 book value ($29,000) = $41,000 - ($6,000 Å~ 2)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Libby - Chapter 08 #61Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

62. A machine, acquired for a cash cost of $15,000, is being depreciated on a straight-line basis of $2,700per year. The residual value was estimated to be 10% of cost. The estimated useful life isA. 3 years.B. 4 years.C. 5 years.D. 6 years.Annual depreciation expense ($2,700) = ($15,000 - $1,500) ÷ N, N = 5AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, Measurement

Bloom's: ApplyDifficulty: MediumLearning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Libby - Chapter 08 #62Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

63. Warren Company plans to depreciate a new building using the double declining-balance depreciationmethod. The building cost $800,000. The estimated residual value of the building is $50,000 and ithas an expected useful life of 25 years. Assuming the first year's depreciation expense was recordedproperly, what would be the amount of depreciation expense for the second year?A. $30,720B. $32,000C. $58,880D. $64,000Year 1 depreciation expense ($64,000) = $800,000 Å~ 2/25Year 2 depreciation expense ($58,880) = ($800,000 - $64,000) Å~ 2/25AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Libby - Chapter 08 #63Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

64. Warren Company plans to depreciate a new building using the double declining-balance depreciationmethod. The building cost $800,000. The estimated residual value of the building is $50,000 and it hasan expected useful life of 25 years. What is the building's book value at the end of the first year?A. $736,000B. $768,000C. $686,000D. $690,000Year 1 depreciation expense ($64,000) = $800,000 Å~ 2/25End of the first year book value ($736,000) = $800,000 - $64,000AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Libby - Chapter 08 #64Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

65. Which method of depreciation results in periodic depreciation expense that fluctuates from one periodto the next, not necessarily in a steadily upward or downward direction?A. Straight-lineB. Units-of-productionC. Modified accelerated cost recovery systemD. Declining balance

Depreciation expense under the units-of-production method fluctuates directly with production levels.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Libby - Chapter 08 #65Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

66. Hill Inc. purchased an asset on January 1, 2009. Hill chose an accelerated depreciation method todepreciate the asset. Which of the following is correct if Hill would have chosen the straight-linedepreciation method instead?A. Depreciation expense would have been lower in 2009.B. The book value of the asset would have been lower at the end of 2009.C. The net income would have been lower during 2009.D. The accumulated depreciation balance would have been higher at the end of 2009.An accelerated depreciation method has higher amounts of depreciation expense in earlier years relativeto the straight-line method.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: AnalyzeDifficulty: MediumLearning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Libby - Chapter 08 #66Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

67. On January 1, 2010, Pyle Company purchased an asset that cost $50,000 (no estimated residual value,estimated useful life 8 years, straight-line depreciation is used). An error was made because the totalcost amount was debited to an expense account for 2010 and no depreciation on it was recorded. Pretaxincome for 2010 was $42,000. How much is the correct 2010 pretax income?A. $35,750B. $48,250C. $85,750D. $92,0002010 pretax income ($85,750) = $42,000 + $50,000 - $6,250**Straight-line depreciation expense ($6,250) = $50,000 ÷ 8AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Libby - Chapter 08 #67Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

68. Schager Company purchased a computer system on January 1, 2010, at a cash cost of $25,000. Theestimated useful life is 10 years, and the estimated residual value is $3,000. The company

will use thedouble declining-balance depreciation method. How much is the 2011 depreciation expense?A. $5,000B. $4,000C. $3,800D. $2,2002010 depreciation expense ($5,000) = $25,000 Å~ 2/102011 depreciation expense ($4,000) = ($25,000 - $5,000) Å~ 2/10AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Libby - Chapter 08 #68Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

69. Schager Company purchased a computer system on January 1, 2010, at a cash cost of $25,000. Theestimated useful life is 10 years, and the estimated residual value is $3,000. The company will use thedouble declining-balance depreciation method. What is the accumulated depreciation balance as ofDecember 31, 2011?A. $9,000B. $4,000C. $5,000D. $10,9202010 depreciation expense ($5,000) = $25,000 Å~ 2/102011 depreciation expense ($4,000) = ($25,000 - $5,000) Å~ 2/10December 31, 2011 accumulated depreciation balance ($9,000) = $5,000 + $4,000AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Libby - Chapter 08 #69Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

70. On January 1, 2010, Wasson Company purchased a delivery vehicle costing $40,000. The vehicle hasan estimated 6-year life and a $4,000 residual value. What is the vehicle's book value as of December31, 2011 assuming Wasson uses the straight-line depreciation method?A. $12,000B. $24,000C. $30,000D. $28,000Annual straight-line depreciation expense ($6,000) = ($40,000 - $4,000) ÷ 6December 31, 2011 book value ($28,000) = $40,000 - ($6,000 Å~ 2)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, Measurement

Bloom's: ApplyDifficulty: MediumLearning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Libby - Chapter 08 #70Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

71. On January 1, 2010, Wasson Company purchased a delivery vehicle costing $40,000. The vehicle hasan estimated 6-year life and a $4,000 residual value. Wasson estimates that the vehicle will be driven100,000 miles. What is the vehicle's book value as of December 31, 2011 assuming Wasson uses theunits-of-production depreciation method and the vehicle was driven 10,000 miles during 2010 and18,000 miles during 2011?A. $29,920B. $28,800C. $24,800D. $25,920Depreciation expense per mile ($0.36) = ($40,000 - $4,000) ÷ 100,000December 31, 2011 accumulated depreciation balance ($10,080) = $0.36 Å~ 28,000December 31, 2011 book value ($29,920) = $40,000 - $10,080AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Libby - Chapter 08 #71Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

72. Which of the following statements is false?A.The book value at the end of an asset's useful life will be the same under all the depreciation methodsallowed under GAAP.B.The balance in the accumulated depreciation account will be the same at the end of an asset's usefullife under all the methods allowed under GAAP.C. Once you select a depreciation method, then you must use this method for all depreciable assets.D.The annual depreciation expense and year-end book values will differ under the various depreciationmethods over the life of the asset.A company can utilize different depreciation methods for various assets.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Libby - Chapter 08 #72Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

73. Under what conditions would a company most likely adopt the double-declining-balance method for

financial reporting?A.They have high technology, robotic equipment in their plant that becomes obsolete quickly anddeclines in utility to the company more rapidly in the early years of the assets' lives.B. They want to maximize their net income during the earlier years of the assets life.C. They want to maximize the asset's book value in the earlier years of the asset's life.D. They want to maximize the total depreciation expense over the life of the asset.The double-declining-balance depreciation method results in more depreciation in the earlier years of anasset's life which will best fit the robotic equipment scenario.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Libby - Chapter 08 #73Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

74. Which of the following statements is correct?A. Companies can change the method of depreciating assets from one year to the next.B.Companies can affect the book value at the end of an asset's life by choosing one method ofdepreciation over another.C.Companies can use one method of depreciation for some of their long-lived, productive assets but thenuse a different method for another group or type of long-lived, productive assets.D.Companies can minimize an asset's book value in the first year of use by selecting the straight-linedepreciation method rather than the double-declining-balance method.Different depreciation methods can be chosen for various assets.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Libby - Chapter 08 #74Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

75. Which of the following statements is correct?A.Using straight-line depreciation in comparison to an accelerated depreciation method will result in alower reported amount of total assets at end of the first year of an asset's life.B.Using accelerated depreciation in the first year of an asset's life will result in a higher net incomeduring the first year compared to using the straight-line depreciation method.

C.Using an accelerated depreciation method will lead to a higher fixed asset turnover ratio for the firstyear.D.Using straight-line depreciation in comparison to an accelerated depreciation method will lead to ahigher book value at the end of an asset's life.An accelerated depreciation method results in more depreciation expense during the first year and alower book value at the end of the first year. The lower book value means that the fixed asset turnoverratio denominator is smaller; therefore the fixed asset turnover ratio is increased.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: AnalyzeDifficulty: MediumLearning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Libby - Chapter 08 #75Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

76. Which of the following statements about the Modified Accelerated Cost Recovery System (MACRS) iscorrect?A. It is similar to the units-of-production depreciation method.B. It is applied using longer asset lives than the estimated useful lives required by GAAP.C. It provides a short-term tax benefit because of the higher depreciation expense reported in the earlyyears of an asset's life.D. It is acceptable for use when preparing financial statements.MACRS is an accelerated depreciation method, which results in higher amounts of depreciation expenseand less taxable income during the earlier years of an asset's life.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 08-03 Apply various cost allocation methods as assets are held and used over time.Libby - Chapter 08 #76Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

77. Which of the following statements about asset impairment is false?A.Asset impairment loss is the difference between an asset's net book value and its estimated futurecash flows.B. If an asset is impaired, a loss would be recognized in the period it can be estimated.C. Impairment will lead to writing down the asset's net book value.D.Asset impairment occurs when the estimated future cash flows are less than the asset's net bookvalue.An impairment is equal to an asset's net book value less its fair value.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting

Bloom's: UnderstandDifficulty: MediumLearning Objective: 08-04 Explain the effect of asset impairment on the financial statements. Explain the effect of asset impairment on the financial statements.Libby - Chapter 08 #77Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

78. A company has some bottling equipment which cost $8.5 million, has a net book value of $4.1 million,estimated future cash flows of $3.7 million, and a fair value of $3.1 million. How much is the assetimpairment loss?A. $5.4 millionB. $4.1 millionC. $0.4 millionD. $1.0 millionAn impairment loss occurs when the asset's net book value ($4.1 million) exceeds its fair value ($3.1million).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: EasyLearning Objective: 08-04 Explain the effect of asset impairment on the financial statements.Libby - Chapter 08 #78Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

79. A company has some bottling equipment which cost $8.5 million, has a net book value of $4.1 million,estimated future cash flows of $3.7 million, and a fair value of $3.1 million. Which of the followingcorrectly describes the recording of the asset impairment loss?A. The loss account is debited for $1.0 million and the asset account is credited for $1.0 million.B. The loss account is debited for $0.4 million and the asset account is credited for $0.4 million.C. The loss account is debited for $5.4 million and the asset account is credited for $5.4 million.D. The loss account is debited for $4.8 million and the asset account is credited for $4.8 million.An impairment loss occurs when the asset's net book value ($4.1 million) exceeds its fair value ($3.1million). When an impairment loss is recorded, a loss account is debited and the asset account iscredited.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: EasyLearning Objective: 08-04 Explain the effect of asset impairment on the financial statements.Libby - Chapter 08 #79Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

80. On December 31, 2010, Hamilton Inc. sold a used industrial crane for $600,000 cash. The original cost

of the crane was $5.0 million and its accumulated depreciation equaled $4.2 million on December 31,2010. What is the gain or loss from the December 31, 2010 equipment sale?A. $800,000 gainB. $800,000 lossC. $200,000 lossD. $200,000 gainA $200,000 loss occurs because the book value ($5.0 million - $4.2 million) exceeds the $600,000selling price.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 08-05 Analyze the disposal of property; plant; and equipment.Libby - Chapter 08 #80Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

81. Which of the following is correct when recording the disposal of equipment for a gain?A. A debit to a gain account.B. A credit to the equipment account for the asset's book value.C. A debit to accumulated depreciation for the depreciation accumulated to the date of disposal.D. A decrease in total assets occurs.The accumulated depreciation account normally has a credit balance and is therefore debited when anasset is disposed of.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: EasyLearning Objective: 08-05 Analyze the disposal of property; plant; and equipment.Libby - Chapter 08 #81Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

82. Which of the following statements is incorrect with respect to the sale of a depreciable asset?A. A gain occurs when the selling price exceeds book value.B. A sale for a gain results in an increase in total assets.C. A sale for a loss results in an increase in total assets.D. A loss occurs when the selling price is less than book value.Total assets decrease when an asset is sold at a loss because the proceeds (selling price) are less thanbook value.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: EasyLearning Objective: 08-05 Analyze the disposal of property; plant; and equipment.Libby - Chapter 08 #82Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

83. Carter Company disposed of an asset at the end of the eighth year of its estimated life

for $10,000 cash.The asset's life was originally estimated to be 10 years. The original cost was $50,000 with an estimatedresidual value of $5,000. The asset was being depreciated using the straight-line method. What was thegain or loss on the disposal?A. $1,000 lossB. $4,000 lossC. $5,500 gainD. $10,000 gainAnnual straight-line depreciation expense ($4,500) = ($50,000 - $5,000) ÷ 10;End of year eight book value ($14,000) = $50,000 - ($4,500 Å~ 8); A $4,000 loss occurs because theselling price ($10,000) is less than book value ($14,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 08-05 Analyze the disposal of property; plant; and equipment.Libby - Chapter 08 #83Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

84. Which of the following journal entries is correct when a depreciable asset (building) is sold for cashsubsequent to acquisition?A.B.C.D.When the building is sold, the building account is credited, cash is debited, accumulated depreciation isdebited, and a loss account is debited when the sale results in a loss.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: EasyLearning Objective: 08-05 Analyze the disposal of property; plant; and equipment.Libby - Chapter 08 #84Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

85. Which of the following statements is incorrect with respect to the sale of a depreciable asset for a loss?A. Net income deceases and total assets decrease.B. Net income and stockholders' equity both decrease.C. Total assets and stockholders' equity both decrease.D. Total assets increase and stockholders' equity decreases.Total assets decrease when an asset is sold at a loss because the proceeds (selling price) are less thanbook value. Stockholders' equity decreases because the decrease in net income reduces retainedearnings.AACSB: Apply

AICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: AnalyzeDifficulty: EasyLearning Objective: 08-05 Analyze the disposal of property; plant; and equipment.Libby - Chapter 08 #85Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

86. Amanda Company purchased a computer that cost $10,000. It had an estimated useful life of five yearsand a residual value of $1,000. The computer was depreciated by the straight-line method and was soldat the end of the third year of use for $5,000 cash. How much of a gain or loss should Amanda record?A. A gain of $1,000.B. A loss of $5,000.C. A gain of $400.D. A loss of $400.Annual straight-line depreciation expense ($1,800) = ($10,000 - $1,000) ÷ 5;End of year three book value ($4,600) = $10,000 - ($1,800 Å~ 3); A $400 gain occurs because the sellingprice ($5,000) is greater than book value ($4,600).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 08-05 Analyze the disposal of property; plant; and equipment.Libby - Chapter 08 #86Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

87. Amanda Company purchased a computer that cost $10,000. It had an estimated useful life of five yearsand a residual value of $1,000. The computer was depreciated by the straight-line method and was soldat the end of the third year of use for $5,000 cash. Which of the following statements correctly describesthe computer sale?A. Assets and stockholders' equity both increase by $5,000.B. Assets decrease $5,000 and stockholders' equity is not affected.C. Assets and stockholders' equity both decrease by $400.D. Assets and stockholders' equity both increase by $400.Annual straight-line depreciation expense ($1,800) = ($10,000 - $1,000) ÷ 5;End of year three book value ($4,600) = $10,000 - ($1,800 Å~ 3); A $400 gain occurs because the sellingprice ($5,000) is greater than book value ($4,600). Assets increase because the cash received exceedsthe book value by $400 and stockholders' equity increases because the gain increases net income andtherefore retained earnings.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: Medium

Learning Objective: 08-05 Analyze the disposal of property; plant; and equipment.Libby - Chapter 08 #87Topic Area: Use, Impairment, And Disposal Of Plant And Equipment

88. On March 1, 2010, Anniston Company purchased an oil well at a cost of $1,000,000. It is estimatedthat 150,000 barrels of oil can be produced over the remaining life of the well and the residual valueof the well will be $100,000. During 2010, 15,000 barrels of oil were produced and sold. Which of thefollowing statements is incorrect with respect to the accounting for the oil well?A. The 2010 cost of goods sold was $90,000.B. The book value of the oil well decreased $90,000 during 2010.C. The inventory of oil increased $90,000 during 2010.D. The depletion rate is $6.00 per barrel of oil.If the resources are sold, they are not reported as inventory on the balance sheet.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 08-06 Apply measurement and reporting concepts for natural resources and intangible assets.Libby - Chapter 08 #88Topic Area: Natural Resources And Intangible Assets

89. On March 1, 2010, Anniston Company purchased an oil well at a cost of $1,000,000. It is estimated that150,000 barrels of oil can be produced over the remaining life of the well and the residual value of thewell will be $100,000. During 2010, 15,000 barrels of oil were produced and 10,000 barrels were sold.Which of the following statements is correct with respect to the accounting for the oil well?A. The 2010 cost of goods sold was $90,000.B. The book value of the oil well decreased $60,000 during 2010.C. The inventory of oil increased $30,000 during 2010.D. The 2010 cost of goods sold was $30,000.If the resources are not sold, they are reported as inventory (5,000 Å~ $6) on the balance sheet.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 08-06 Apply measurement and reporting concepts for natural resources and intangible assets.Libby - Chapter 08 #89Topic Area: Natural Resources And Intangible Assets

90. During 2010, a company purchased a mine at a cost of $3,000,000. The company spent an additional$600,000 getting the mine ready for its intended use. It is estimated that 300,000 tons of mineral can beremoved from the mine and the residual value of the mine will be $600,000. During 2010, 45,000 tonsof mineral were removed from the mine and 35,000 tons were sold. Which of the following statements

is correct with respect to the accounting for the mine?A. The 2010 net income decreased $450,000 as a result of the mining during the year.B. The book value of the mine decreased $350,000 during 2010.C. The inventory of minerals increased $450,000 during 2010.D. The 2010 cost of goods sold was $350,000.Depletion rate per ton ($10) = ($3,000,000 + $600,000 - $600,000) ÷ 300,000Cost of goods sold ($350,000) = $10 Å~ 35,000AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 08-06 Apply measurement and reporting concepts for natural resources and intangible assets.Libby - Chapter 08 #90Topic Area: Natural Resources And Intangible Assets

91. During 2010, a company purchased a mine at a cost of $3,000,000. The company spent an additional$600,000 getting the mine ready for its intended use. It is estimated that 300,000 tons of mineral can beremoved from the mine and the residual value of the mine will be $600,000. During 2010, 45,000 tonsof mineral were removed from the mine and 35,000 tons were sold. Which of the following statementsis incorrect with respect to the accounting for the mine?A. The book value of the mine on December 31, 2010 was $2,640,000.B. The book value of the mine decreased $450,000 during 2010.C. The inventory of minerals increased $100,000 during 2010.D. The 2010 cost of goods sold was $350,000.Depletion rate per ton ($10) = ($3,000,000 + $600,000 - $600,000) ÷ 300,000.The December 31, 2010 book value ($3,150,000) = ($3,000,000 + $600,000) - ($10 Å~ 45,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 08-06 Apply measurement and reporting concepts for natural resources and intangible assets.Libby - Chapter 08 #91Topic Area: Natural Resources And Intangible Assets

92. Which of the following is most likely to be an intangible asset with an indefinite life?A. LeaseholdB. FranchiseC. PatentD. GoodwillA successful business will theoretically create goodwill rather than deplete it. Therefore goodwill mostlikely has an indefinite life.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 08-06 Apply measurement and reporting concepts for natural resources and intangible assets.Libby - Chapter 08 #92

Topic Area: Natural Resources And Intangible Assets

93. Which one of the following would not be recorded as an intangible asset?A. LeaseholdsB. CopyrightsC. Internally generated goodwillD. FranchisesGoodwill is only recorded when a business entity is acquired and goodwill is a component of thetransaction cost.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 08-06 Apply measurement and reporting concepts for natural resources and intangible assets.Libby - Chapter 08 #93Topic Area: Natural Resources And Intangible Assets

94. Failure to record amortization expense on a patent during the current year will result in which of thefollowing?A. Net income will be overstated, but there would be no affect on total assets.B. Net income for the year and total assets would both be overstated.C. Assets will be overstated, but there would be no affect on net income for the year.D. Net income and assets will both be understated.Failure to record patent amortization results in an understatement of expenses and therefore anoverstatement of net income. Assets are overstated because the patent account was not reduced by theamortization which was not recorded.AACSB: ApplyAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: AnalyzeDifficulty: MediumLearning Objective: 08-06 Apply measurement and reporting concepts for natural resources and intangible assets.Libby - Chapter 08 #94Topic Area: Natural Resources And Intangible Assets

95. Which of the following properly describes the accounting for goodwill?A. Goodwill is created when it is internally generated.B. Goodwill is amortized over its useful life.C.Goodwill is the difference between the amounts paid for a company relative to the book value of thecompany's net assets.D. Goodwill is written-down when it has been determined to be impaired.Goodwill is not amortized, but is written-down when it has been determined to be impaired.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 08-06 Apply measurement and reporting concepts for natural resources and intangible assets.Libby - Chapter 08 #95Topic Area: Natural Resources And Intangible Assets

96. Which of the following properly describes the accounting for a patent?

A. Research and development costs associated with a patent are capitalized.B. The patent will be amortized over its useful life.C. Patent amortization expense is accounted for within the accumulated depreciation account.D. Their legal life extends to 70 years after the death of the inventor.Patents are amortized over their useful life.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 08-06 Apply measurement and reporting concepts for natural resources and intangible assets.Libby - Chapter 08 #96Topic Area: Natural Resources And Intangible Assets

97. Which of the following statements is correct?A. A copyright has a legal life not exceeding 70 years.B.A trademark is recorded on the balance sheet at an amount equal to the related research anddevelopment costs incurred.C. A patent's legal life is 20 years.D. A franchise's amortization is a function of the underlying contract.Research and development costs are expensed as incurred rather than capitalized.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 08-06 Apply measurement and reporting concepts for natural resources and intangible assets.Libby - Chapter 08 #97Topic Area: Natural Resources And Intangible Assets

98. During 2010, the Bowtie Company reported net income of $1,872 million, depreciation expense of$1,412 million and $978 million paid for purchases of property, plant and equipment. What would bethe effect on cash flows from operating activities during 2010?A.Depreciation expense would increase cash flows from operations and the property, plant andequipment purchases would decrease cash flow from operations.B.Depreciation would increase cash flow from operations and property, plant and equipment purchaseswould increase cash flows from operations.C.Depreciation would increase cash flow from operations but the property, plant and equipmentpurchases would have no effect on cash flow from operations.D. Depreciation is a non-cash expense and would not be used to calculate cash flow from operations.Depreciation expense is a noncash expense and is therefore added back to net income in

thedetermination of cash flows from operations. The property, plant and equipment purchases are reportedas an investing cash flow.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 08-07 Explain how the acquisition; use; and disposal of long-lived assets impact cash flows.Libby - Chapter 08 #98Topic Area: Focus On Cash Flows

99. Landmark Restaurants reported net income in 2008 of $45.9 million and depreciation expense of $48.8million. They also report additions to property and equipment of $162.9 million. Which of the followingdisclosures would appear on the 2008 statement of cash flows?A.Depreciation of $48.8 million would be deducted from net income under operating activities and the$162.9 million would be added under investing activities.B.Depreciation of $48.8 million would be added to net income under operating activities and the $162.9million would be added under investing activities.C.Depreciation of $48.8 million would be added to net income under operating activities and the $162.9million would be deducted under investing activities.D.

ch9 Key1. When a liability is initially recorded, it is recorded at the future amount of all payments.FALSELiabilities are initially recorded in terms of their current cash equivalent.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 09-01 Define; measure; and report current liabilitiesLibby - Chapter 09 #1Topic Area: Liabilities Defined And Classified

2. A current liability is always a short-term obligation expected to be paid within one year of the balancesheet date.FALSE

A current liability is due within one year or the operating cycle, whichever is longer.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 09-01 Define; measure; and report current liabilitiesLibby - Chapter 09 #2Topic Area: Liabilities Defined And Classified

3. A quick ratio that is high according to an industry average might mean the company may haveexcessive inventory levels or slow moving inventory items.FALSEInventory is not a quick asset.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: RememberDifficulty: EasyLearning Objective: 09-02 Use the quick ratio.Libby - Chapter 09 #3Topic Area: Liabilities Defined And Classified

4. The quick ratio can be manipulated by management through paying off current liabilities before the endof the accounting period.TRUEThe quick ratio can be manipulated through transactions involving quick assets and current liabilities.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: RememberDifficulty: EasyLearning Objective: 09-02 Use the quick ratio.Libby - Chapter 09 #4Topic Area: Liabilities Defined And Classified

5. Many strong companies intentionally create low quick ratios.TRUEMany strong companies use sophisticated management techniques to minimize their current assetinvestment, and as a result, have low quick ratios.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: RememberDifficulty: EasyLearning Objective: 09-02 Use the quick ratio.Libby - Chapter 09 #5Topic Area: Liabilities Defined And Classified

6. Quick assets include cash, accounts receivable, and inventory.FALSEQuick assets include cash, marketable securities, and accounts receivable.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: RememberDifficulty: EasyLearning Objective: 09-02 Use the quick ratio.Libby - Chapter 09 #6Topic Area: Liabilities Defined And Classified

7. Selling inventory on account increases the quick ratio.TRUEQuick assets include cash, marketable securities, and accounts receivable. Selling inventory on accountincreases accounts receivable and therefore increases the numerator of the quick ratio.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: EasyLearning Objective: 09-02 Use the quick ratio.Libby - Chapter 09 #7Topic Area: Liabilities Defined And Classified

8. Purchasing inventory on account decreases the quick ratio.FALSEPurchasing inventory on account increases current liabilities (the denominator) and therefore decreasesthe quick ratio.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: EasyLearning Objective: 09-02 Use the quick ratio.Libby - Chapter 09 #8Topic Area: Liabilities Defined And Classified

9. A current liability is created when a customer pays cash for services to be provided in the future.TRUECurrent liabilities include unearned (deferred) revenues.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 09-01 Define; measure; and report current liabilitiesLibby - Chapter 09 #9Topic Area: Liabilities Defined And Classified

10. Purchasing inventory on account increases the accounts payable turnover ratio.FALSEPurchasing inventory on account increases accounts payable, the accounts payable turnover ratiodenominator, which therefore decreases the ratio.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: EasyLearning Objective: 09-03 Analyze the accounts payable turnover ratio.Libby - Chapter 09 #10Topic Area: Liabilities Defined And Classified

11. The choice of inventory method has an impact on the accounts payable turnover ratio.FALSEThe accounts payable turnover numerator ratio is cost of goods sold, which is impacted by the choice ofinventory method.AACSB: Reflective ThinkingAICPA BB: Critical Thinking

AICPA FN: MeasurementBlooms: UnderstandDifficulty: EasyLearning Objective: 09-03 Analyze the accounts payable turnover ratio.Libby - Chapter 09 #11Topic Area: Liabilities Defined And Classified

12. The accounts payable turnover ratio is calculated by dividing accounts payable by cash payments tosuppliers.FALSEThe accounts payable turnover ratio is cost of goods sold divided by average accounts payable.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: EasyLearning Objective: 09-03 Analyze the accounts payable turnover ratio.Libby - Chapter 09 #12Topic Area: Liabilities Defined And Classified

13. Income taxes payable is an example of an accrued liability.TRUEAn accrued liability is created by an expense that has been incurred, but has yet to be paid.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 09-01 Define; measure; and report current liabilitiesLibby - Chapter 09 #13Topic Area: Liabilities Defined And Classified

14. The accounts payable turnover ratio is difficult to manipulate.FALSEThe accounts payable turnover ratio can be manipulated by paying accounts payable at year-end and canalso be manipulated by the choice of inventory method.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: EasyLearning Objective: 09-03 Analyze the accounts payable turnover ratio.Libby - Chapter 09 #14Topic Area: Liabilities Defined And Classified

15. The accrual of interest on a short-term note payable decreases both the quick ratio and current assets.FALSEThe interest accrual increases current liabilities and therefore decreases the quick ratio. The interestaccrual does not affect current assets.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: UnderstandDifficulty: EasyLearning Objective: 09-02 Use the quick ratio.Learning Objective: 09-04 Report notes payable and explain the time value of money.Libby - Chapter 09 #15

Topic Area: Liabilities Defined And Classified

16. The FICA (social security) tax is a matching tax with a portion paid by both the employer and theemployee.TRUEThe social security tax is equally shared by the employer and employee.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: EasyLearning Objective: 09-01 Define; measure; and report current liabilitiesLibby - Chapter 09 #16Topic Area: Liabilities Defined And Classified

17. A company borrowed $100,000 at 6% interest on September 1, 2009. Assuming no adjusting entrieshave been made during the year, the entry to record interest accrued on December 31, 2009 wouldinclude a debit to interest expense and a credit to interest payable for $2,000.TRUEInterest expense ($2,000) = Amount borrowed ($100,000) Å~ Interest rate (6%) Å~ Number of monthsborrowed relative to a year (4 ÷ 12)AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: EasyLearning Objective: 09-01 Define; measure; and report current liabilitiesLibby - Chapter 09 #17Topic Area: Liabilities Defined And Classified

18. An estimated liability can't be reported on the balance sheet.FALSEEstimated liabilities, such as warranty liabilities, are reported on the balance sheet.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 09-01 Define; measure; and report current liabilitiesLibby - Chapter 09 #18Topic Area: Liabilities Defined And Classified

19. A contingent liability is reported on the balance sheet if it is probable and can be estimated.TRUEContingent liabilities are reported on the balance sheet when they are both probable and can beestimated.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 09-05 Report contingent liabilitiesLibby - Chapter 09 #19Topic Area: Liabilities Defined And Classified

20. A contingent liability is disclosed in a note to the financial statements when the

liability is reasonablypossible and can be estimated.TRUEContingent liabilities are disclosed via a note when they are reasonably possible.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 09-05 Report contingent liabilitiesLibby - Chapter 09 #20Topic Area: Liabilities Defined And Classified

21. The journal entry to record a contingent liability creates an accrued liability on the balance sheet and aloss on the income statement.TRUEThe recording of a contingent liability debits a loss account and credits accrued contingency liability.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 09-05 Report contingent liabilitiesLibby - Chapter 09 #21Topic Area: Liabilities Defined And Classified

22. A contingent liability can't be disclosed in a note to the financial statements unless it can be estimated.FALSEContingent liabilities are disclosed via a note when they are reasonably possible, regardless of whetherthey can be estimated.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 09-05 Report contingent liabilitiesLibby - Chapter 09 #22Topic Area: Liabilities Defined And Classified

23. Working capital is a measure of short-run liquidity and is measured by dividing current assets by currentliabilities.FALSEWorking capital is current assets minus current liabilities.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: EasyLearning Objective: 09-06 Explain the importance of working capital and its impact on cash flows.Libby - Chapter 09 #23Topic Area: Focus On Cash Flows

24. Working capital decreases when accrued wages expense is recorded at year-end.TRUEWorking capital is current assets minus current liabilities. Accruing wages expense at year-end

increases current liabilities and therefore decreases working capital.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: EasyLearning Objective: 09-06 Explain the importance of working capital and its impact on cash flows.Libby - Chapter 09 #24Topic Area: Focus On Cash Flows

25. Working capital decreases when a company pays taxes payable.FALSEWorking capital is current assets minus current liabilities. Paying taxes payable decreases both currentassets and current liabilities, therefore working capital remains the same.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: EasyLearning Objective: 09-06 Explain the importance of working capital and its impact on cash flows.Libby - Chapter 09 #25Topic Area: Focus On Cash Flows

26. Working capital increases when a company accrues revenues at year-end.TRUEWorking capital is current assets minus current liabilities. Accruing revenues increases current assets,therefore working capital increases.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: EasyLearning Objective: 09-06 Explain the importance of working capital and its impact on cash flows.Libby - Chapter 09 #26Topic Area: Focus On Cash Flows

27. Long-term liabilities are reported on the balance sheet at an amount equal to the future cash flows.FALSELong-term liabilities are reported on the balance sheet at the present value of the future cash flows.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: EasyLearning Objective: 09-07 Report long-term liabilities.Libby - Chapter 09 #27Topic Area: Long-Term Liabilities

28. Operating leases are reported on the balance sheet at an amount equal to the present value of the futurecash flows.FALSEOperating leases do not meet the criteria to be included on the balance sheet.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: EasyLearning Objective: 09-07 Report long-term liabilities.

Libby - Chapter 09 #28Topic Area: Long-Term Liabilities

29. For the present value of a single amount, the compounding period may only be once a year.FALSECompounding can be many times during a year when finding the present value of a single sum.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: EasyLearning Objective: 09-08 Compute present values.Libby - Chapter 09 #29Topic Area: Present Value

30. An annuity is a series of consecutive payments, each one increasing by a fixed dollar amount over thepayment amount of the prior year.FALSEAn annuity has equal payments over equal time intervals.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: EasyLearning Objective: 09-08 Compute present values.Libby - Chapter 09 #30Topic Area: Present Value

31. Which of the following statements is correct?A. Current liabilities are initially recorded at the amount of their principal plus interest.B. Current liabilities are those liabilities due within one year.C. Liquidity refers to the ability to pay all debts within one year.D. Current liabilities affect both the quick ratio and working capital.Current liabilities are the denominator in the quick ratio and are deducted from current assets whencalculating working capital.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 09-01 Define; measure; and report current liabilitiesLearning Objective: 09-02 Use the quick ratio.Learning Objective: 09-06 Explain the importance of working capital and its impact on cash flows.Libby - Chapter 09 #31Topic Area: Liabilities Defined And Classified

32. Which of the following is not a current liability?A. A liability due within one-year for a business with a fifteen-month operating cycle.B. A liability due within three months for a business with a two-month operating cycle.C. A liability due within one-year for a business with a nine-month operating cycle.D. A liability due within fifteen months for a business with a one-year operating cycle.A current liability is due within one-year or the operating cycle whichever is longer.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 09-01 Define; measure; and report current liabilities

Libby - Chapter 09 #32Topic Area: Liabilities Defined And Classified

33. Which of the following is incorrect?A.Current liabilities are those that will be satisfied within one year or the operating cycle, whichever islonger.B. Liquidity is the ability of the company to meet its total obligations.C. Current liabilities impact a company's liquidity.D. Working capital is equal to current assets minus current liabilities.Liquidity is the ability to pay current liabilities.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 09-01 Define; measure; and report current liabilitiesLibby - Chapter 09 #33Topic Area: Liabilities Defined And Classified

34. How is the quick ratio calculated?A. It is current assets minus current liabilities.B. It is current assets divided by current liabilities.C. It is quick assets divided by current liabilities.D. It is current liabilities divided by current assets.The quick ratio is quick assets divided by current liabilities.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: MediumLearning Objective: 09-02 Use the quick ratio.Libby - Chapter 09 #34Topic Area: Liabilities Defined And Classified

35. Which of the following accounts would not be considered when calculating the quick ratio?A. Marketable securities.B. Inventory.C. Accounts receivable.D. Accounts payable.Quick assets include cash, marketable securities, and accounts receivable.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: MediumLearning Objective: 09-02 Use the quick ratio.Libby - Chapter 09 #35Topic Area: Liabilities Defined And Classified

36. Which of the following accounts would not be considered when calculating the quick ratio?A. Taxes payableB. Accounts receivableC. CashD. Prepaid rentQuick assets include cash, marketable securities, and accounts receivable.AACSB: Reflective ThinkingAICPA BB: Critical Thinking

AICPA FN: MeasurementBlooms: UnderstandDifficulty: MediumLearning Objective: 09-02 Use the quick ratio.Libby - Chapter 09 #36Topic Area: Liabilities Defined And Classified

37. A company has a quick ratio of 1.9 before paying off a large current liability with cash. As a result,what happens to the quick ratio?A. It is greater than 1.9.B. It is less than 1.9.C. It remains equal to 1.9.D. It is either greater than 1.9 or less than 1.9 depending upon the dollar amount involved.The decrease in the numerator (quick assets) is less percentage wise relative to the decrease in thedenominator, therefore the ratio increases.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-02 Use the quick ratio.Libby - Chapter 09 #37Topic Area: Liabilities Defined And Classified

38. A company has a quick ratio of 0.9 before paying off a large current liability with cash. As a result,what happens to the quick ratio?A. It is greater than 0.9.B. It is less than 0.9.C. It remains equal to 0.9.D. It is either greater than 0.9 or less than 0.9 depending upon the dollar amount involved.The decrease in the numerator (quick assets) is greater percentage wise relative to the decrease in thedenominator, therefore the ratio decreases.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-02 Use the quick ratio.Libby - Chapter 09 #38Topic Area: Liabilities Defined And Classified

39. The following is a partial list of account balances from the books of Probst Enterprise at the end of2010:Based solely upon these balances, what is the quick ratio?A. 0.76B. 1.15C. 0.26D. 0.79The quick ratio (0.76) equals quick assets ($6,500 + $12,300) divided by current liabilities ($20,500 +

$1,200 + $1,300 + $1,900).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-02 Use the quick ratio.Libby - Chapter 09 #39Topic Area: Liabilities Defined And Classified

40. At year-end 2010, General Tech reported a quick ratio of 2.75 and at year-end 2009 it was 3.10. Whichof the following is a potential cause of the decrease in this ratio?A. An increase in accounts payable and a decrease in inventories.B. A decrease in inventories and an increase in long-term notes payable.C. A decrease in short-term borrowings and an increase in cash.D. An increase in accounts payable and a decrease in cash.The decrease in the numerator (cash) and the increase in the denominator (accounts payable), eachwould cause the quick ratio to decrease.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-02 Use the quick ratio.Libby - Chapter 09 #40Topic Area: Liabilities Defined And Classified

41. If the quick ratio has been increasing over the past several years, which of the following would causethe ratio to continue to increase?A. An increase in accounts payable.B. An increase in inventories.C. An increase in short-term borrowings.D. A decrease in taxes payable.The decrease in the denominator (taxes payable), would cause the quick ratio to increase.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-02 Use the quick ratio.Libby - Chapter 09 #41Topic Area: Liabilities Defined And Classified

42. Chavez Chocolates had a quick ratio of 1.74 at year-end 2009. Which of the following would cause theratio to decrease during 2010?A. A decrease in both cash and marketable securities.B. An increase in both cash and marketable securities.C. An increase in current assets that exceeded the increase in current liabilities.D.Current assets as a percentage of total assets increased while current liabilities as a percentage of totalliabilities and stockholders' equity decreased.The increase in the numerator (cash and marketable securities) would cause the quick

ratio to increase.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 09-02 Use the quick ratio.Libby - Chapter 09 #42Topic Area: Liabilities Defined And Classified

43. Which of the following statements is correct?A. Social Security tax is employer paid only.B. The pay period always ends in conjunction with the company's fiscal year end.C.Many fringe benefits such as sick and vacation leave benefits should be recognized when theemployee earns the benefit not when they take the leave.D. Unemployment taxes are paid by the employee only.Expenses should be recognized when they are incurred.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 09-01 Define; measure; and report current liabilitiesLibby - Chapter 09 #43Topic Area: Liabilities Defined And Classified

44. Which of the following describes an accrued liability?A. It is an expense that has been both incurred and paid.B. It is an expense that has been incurred but not yet paid.C. It is an expense that has been prepaid but not yet consumed.D. It is a liability where the cash flow has taken place but the revenue has yet to be earned.An accrued liability is recorded when an expense is incurred but not yet paid.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 09-01 Define; measure; and report current liabilitiesLibby - Chapter 09 #44Topic Area: Liabilities Defined And Classified

45. Miranda Company borrowed $100,000 cash on September 1, 2010, and signed a one-year 6%, interestbearingnote payable. Assuming no adjusting entries have been made during the year, the requiredadjusting entry at the end of the accounting period, December 31, 2010, would be which of thefollowing?A. Option AB. Option BC. Option CD. Option DInterest expense ($2,000) = Amount borrowed ($100,000) Å~ Interest rate (6%) Å~

Number of monthsborrowed relative to a year (4 ÷ 12)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-04 Report notes payable and explain the time value of money.Libby - Chapter 09 #45Topic Area: Liabilities Defined And Classified

46. Miranda Company borrowed $100,000 cash on September 1, 2010, and signed a one-year 6%, interestbearingnote payable. The interest and principal are both due on August 31, 2011. Assume that theappropriate adjusting entry was made on December 31, 2010 and that no adjusting entries have beenmade during 2011. The required journal entry to pay the note on August 31, 2011 would be which of thefollowing?A. Option AB. Option BC. Option CD. Option DDecember 31, 2010: Interest expense ($2,000) = Amount borrowed ($100,000) Å~ Interest rate (6%) Å~Number of months borrowed relative to a year (4 ÷ 12).August 31, 2011: Interest expense ($4,000) = Amount borrowed ($100,000) Å~ Interest rate (6%) Å~Number of months borrowed relative to a year (8 ÷ 12).The credit to cash ($106,000) equals the amount borrowed ($100,000) plus the interest for one-year($6,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-04 Report notes payable and explain the time value of money.Libby - Chapter 09 #46Topic Area: Liabilities Defined And Classified

47. Landseeker's Restaurants reported cost of goods sold of $322 million and accounts payable of $83million for 2011. In 2010, cost of goods sold was $258 million and accounts payable was $72 million.What was Landseeker's accounts payable turnover ratio in 2011?A. 4.23B. 4.15C. 4.04D. 3.91Accounts payable turnover (4.15) = Cost of goods sold ($322 million) ÷ Average accounts payable ($83million + $72 million) ÷ 2

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-03 Analyze the accounts payable turnover ratio.Libby - Chapter 09 #47Topic Area: Liabilities Defined And Classified

48. Which of the following transactions will decrease the accounts payable turnover ratio?A. Using cash to pay an accounts payable balance.B. Selling inventory on account.C. Selling inventory for cash.D. A customer returning inventory purchased on account.Accounts payable turnover = Cost of goods sold ÷ Average accounts payable; a return of inventorypurchased by a customer decreases cost of goods sold.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-03 Analyze the accounts payable turnover ratio.Libby - Chapter 09 #48Topic Area: Liabilities Defined And Classified

49. Which of the following statements incorrectly describes the accounts payable turnover ratio?A. A high ratio indicates that suppliers are being paid in a timely manner.B. It increases when inventory is sold on account regardless of the sales price.C. It can be manipulated by aggressively paying off accounts payable at year-end.D. It is not affected by the choice of inventory accounting methods.Accounts payable turnover = Cost of goods sold ÷ Average accounts payable; the choice of inventorymethod affects cost of goods sold and therefore affects the ratio as well.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-03 Analyze the accounts payable turnover ratio.Libby - Chapter 09 #49Topic Area: Liabilities Defined And Classified

50. On September 1, 2010, Donna Equipment signed a one-year, 8% interest-bearing note payable for$50,000. Assuming that Donna Equipment maintains its books on a calendar year basis, how muchinterest expense that should be reported in the 2011 income statement?A. $2,667B. $4,000C. $1,333D. $3,0002011 interest expense ($2,667) = Amount borrowed ($50,000) Å~ Interest rate (8%) Å~ Number of monthsborrowed relative to a year (8 ÷ 12)AACSB: Analytic

AICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-04 Report notes payable and explain the time value of money.Libby - Chapter 09 #50Topic Area: Liabilities Defined And Classified

51. Phipps Company borrowed $25,000 cash on October 1, 2010, and signed a six-month, 8% interestbearingnote payable with interest payable at maturity. Assuming that no adjusting entries have beenmade during the year, the amount of accrued interest payable to be reported on the December 31, 2010balance sheet is which of the following?A. $250B. $300C. $500D. $750December 31, 2010 interest payable ($500) = Amount borrowed ($25,000) Å~ Interest rate (8%) Å~Number of months borrowed during 2010 relative to a year (3 ÷ 12)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-04 Report notes payable and explain the time value of money.Libby - Chapter 09 #51Topic Area: Liabilities Defined And Classified

52. Phipps Company borrowed $25,000 cash on October 1, 2010, and signed a six-month, 8% interestbearingnote payable with interest payable at maturity. The amount of interest expense to be reportedduring 2011 is which of the following?A. $1,000B. $300C. $500D. $7502011 interest expense ($500) = Amount borrowed ($25,000) Å~ Interest rate (8%) Å~ Number of monthsborrowed during 2011 relative to a year (3 ÷ 12)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-04 Report notes payable and explain the time value of money.Libby - Chapter 09 #52Topic Area: Liabilities Defined And Classified

53. Failure to make a necessary adjusting entry for accrued interest on a note payable would result in whichof the following?A. An understatement of both liabilities and stockholders' equity.B. Net income to be overstated and assets to be understated.

C. Net income to be understated and liabilities to be understated.D.An overstatement of net income, an understatement of liabilities, and an overstatement ofstockholders' equity.The adjusting entry increases interest payable and interest expense, which decreases both net incomeand stockholders' equity. Failure to make the entry causes both net income and stockholders' equity tobe overstated, and liabilities to be understated.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-04 Report notes payable and explain the time value of money.Libby - Chapter 09 #53Topic Area: Liabilities Defined And Classified

54. The adjusting entry to record accrued interest on a note payable would not result in which of thefollowing?A. A decrease in net income.B. A decrease in stockholders' equity.C. An increase in liabilities.D. A decrease in current assets.The adjusting entry increases interest payable and interest expense, which decreases both net incomeand stockholders' equity. An accrual doesn't involve a cash flow and doesn't affect current assets.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-04 Report notes payable and explain the time value of money.Libby - Chapter 09 #54Topic Area: Liabilities Defined And Classified

55. Which of the following statements is incorrect?A. The currently maturing portion of long-term debt must be classified as a current liability.B. The non-current portion of long-term debt will remain reported as a long-term liability.C.When a company plans to refinance the currently maturing debt on a long-term basis, it must stillreport the currently maturing debt as a current liability.D.The currently maturing portion of long-term debt is a current liability if it is due within the longer ofone-year or the operating cycle.If the currently maturing debt is to be refinanced on a long-term basis, it is excluded from currentliabilities.AACSB: Reflective Thinking

AICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 09-04 Report notes payable and explain the time value of money.Libby - Chapter 09 #55Topic Area: Liabilities Defined And Classified

56. Purdum Farms borrowed $10 million by signing a five year note on January 1, 2010 and repayments ofthe principal are payable annually in $2 million installments. Purdum Farms makes the first paymentDecember 31, 2010 and then prepares its balance sheet. What amount will be reported as current andlong-term liabilities respectively in connection with the note at December 31, 2010?A. $2 million in current liabilities and $8 million in long-term liabilities.B. $2 million in current liabilities and $6 million in long-term liabilities.C. Zero in current liabilities and $8 million in long-term liabilities.D. Zero in current liabilities and $10 million in long-term liabilities.The $2,000,000 payment due on December 31, 2011 is a current liability and the three later (2012,2013, and 2014) payments ($2,000,000 Å~ 3) are reported as long-term liabilities.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-04 Report notes payable and explain the time value of money.Libby - Chapter 09 #56Topic Area: Liabilities Defined And Classified

57. How should a contingent liability that is "reasonably possible" but "cannot reasonably be estimated" bereported within the financial statements?A. It must be recorded and reported as a liability.B. It does not need to be recorded or reported as a liability.C. It must only be disclosed as a note to the financial statements.D. It must be reported as a liability, but not disclosed in a note.A contingent liability that is reasonably possible but cannot reasonably be estimated is disclosed in thenotes to the financial statements.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 09-05 Report contingent liabilitiesLibby - Chapter 09 #57Topic Area: Liabilities Defined And Classified

58. Young Company is involved in a lawsuit. When would the lawsuit be recorded as a liability on thebalance sheet?A. When the loss probability is remote and the amount can be reasonably estimated.B. When the loss is probable and the amount can be reasonably estimated.C. When the loss probability is reasonably possible and the amount can be reasonably estimated.

D. When the loss is probable regardless of whether the loss can be reasonably estimated.A contingent liability that is probable and can be reasonably estimated is reported as a liability on thebalance sheet.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 09-05 Report contingent liabilitiesLibby - Chapter 09 #58Topic Area: Liabilities Defined And Classified

59. Houston Company is involved in a lawsuit. In which of the following situations is only footnotedisclosure of the contingent liability reported within the financial statements?A. When the loss is remote and the amount cannot be reasonably estimated.B. When the loss is probable and the amount can be reasonably estimated.C. When the loss is reasonably possible and the amount can be reasonably estimated.D. When the loss is remote and the amount can be reasonably estimated.A contingent liability that is reasonably possible and can reasonably be estimated is disclosed in thenotes to the financial statements.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 09-05 Report contingent liabilitiesLibby - Chapter 09 #59Topic Area: Liabilities Defined And Classified

60. Which of the following statements about contingent liabilities is incorrect?A.A disclosure note is required when the loss is reasonably possible and the amount cannot bereasonably estimated.B. A disclosure note is required when the loss is probable and the amount can be reasonably estimated.C.A disclosure note is required when the loss is reasonably possible and the amount can be reasonablyestimated.D. A disclosure note is required when the loss is remote and the amount can be reasonably estimated.A disclosure note is not required when the loss probability is remote.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 09-05 Report contingent liabilitiesLibby - Chapter 09 #60Topic Area: Liabilities Defined And Classified

61. Rice Corporation's attorney has provided the following summaries of three lawsuits against Rice:• Lawsuit A: The loss is probable, but the loss can't be reasonably estimated.• Lawsuit B: The loss is reasonably possible, but the loss can't be reasonably estimated.

• Lawsuit C: The loss is reasonably possible and can be reasonably estimated.Which of the following statements is correct?A. A disclosure note is required for each of the three lawsuits.B. A disclosure note is required only for lawsuits A & C.C. A disclosure note is required only for lawsuit A.D. A disclosure note is required only for lawsuits B & C.Contingent losses which are either probable or reasonably possible must be disclosed.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: ApplyDifficulty: MediumLearning Objective: 09-05 Report contingent liabilitiesLibby - Chapter 09 #61Topic Area: Liabilities Defined And Classified

62. Rice Corporation's attorney has provided the following summaries of three lawsuits against Rice:• lawsuit A: The loss is probable, but the loss can't be reasonably estimated.• lawsuit B: The loss is reasonably possible, but the loss can't be reasonably estimated.• lawsuit C: The loss is reasonably possible and can be reasonably estimated.Which of the following statements is incorrect?A. A disclosure note is required for Lawsuit A.B. A disclosure note is required for lawsuit B.C. A disclosure note is required for lawsuit C.D. Lawsuit A is reported on the balance sheet as a liability.To be reported as a liability on the balance sheet, contingent losses must be both probable andreasonably estimated.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: ApplyDifficulty: MediumLearning Objective: 09-05 Report contingent liabilitiesLibby - Chapter 09 #62Topic Area: Liabilities Defined And Classified

63. Darwin Corporation's attorney has provided the following summaries of three lawsuits against Darwin:• lawsuit A: The loss is probable and the loss can be reasonably estimated.• lawsuit B: The loss is reasonably possible and the loss can't be reasonably estimated.• lawsuit C: The loss is reasonably possible and the loss can be reasonably estimated.Which of the following statements is incorrect?A. A disclosure note is required for lawsuit A.B. A disclosure note is required for lawsuit C.C. A disclosure note is not required for lawsuit B.D. Lawsuit A is reported on the balance sheet as a liability.A contingent liability that is reasonably possible is disclosed in the notes to the financial statementsregardless of whether it can be reasonably estimated.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: Apply

Difficulty: MediumLearning Objective: 09-05 Report contingent liabilitiesLibby - Chapter 09 #63Topic Area: Liabilities Defined And Classified

64. Smith Corporation entered into the following transactions:• Purchased inventory on account.• Collected an account receivable.• Purchased equipment using cash.Which of the following statements is correct?A. The inventory purchase on account increased working capital.B. Collecting an account receivable increases working capital.C. The equipment purchase decreases working capital.D. The inventory purchase on account increased the quick ratio.The cash payment decreases current assets and therefore working capital. The equipment is a long-termasset.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: ApplyDifficulty: MediumLearning Objective: 09-06 Explain the importance of working capital and its impact on cash flows.Libby - Chapter 09 #64Topic Area: Focus On Cash Flows

65. Smith Corporation entered into the following transactions:• Purchased inventory on account.• Collected an account receivable.• Purchased equipment using cash.Which of the above transactions resulted in an increase in working capital?A. The inventory purchase on account.B. Collecting an account receivable.C. The purchase of equipment using cash.D. None of the transactions resulted in an increase in working capital.The inventory purchase and the collection of the receivable didn't affect working capital. The cashpayment decreases current assets and therefore working capital.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: ApplyDifficulty: MediumLearning Objective: 09-06 Explain the importance of working capital and its impact on cash flows.Libby - Chapter 09 #65Topic Area: Focus On Cash Flows

66. SRJ Corporation entered into the following transactions:• The accrual of interest expense on a six-month note payable.• Collected cash for services to be provided within the next six months.• The accrual of revenue.Which of the above transactions resulted in a decrease in working capital?A. The accrual of interest expense.B. Collecting cash for services to be provided in the future.C. The accrual of revenue.D. Both the accrual of interest expense and the accrual of revenue.

The interest accrual increases interest payable, which increases current liabilities and decreases workingcapital.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: ApplyDifficulty: MediumLearning Objective: 09-06 Explain the importance of working capital and its impact on cash flows.Libby - Chapter 09 #66Topic Area: Focus On Cash Flows

67. SRJ Corporation entered into the following transactions:• The accrual of interest expense on a six-month note payable.• Collected cash for services to be provided within the next six months.• The accrual of revenue.Which of the above transactions resulted in an increase in working capital?A. The accrual of interest expense.B. Collecting cash for services to be provided in the future.C. The accrual of revenue.D. Both the accrual of revenue and the collection of cash for future services.The accrual of revenue increases accounts receivable which increases current assets and increasesworking capital.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: ApplyDifficulty: MediumLearning Objective: 09-06 Explain the importance of working capital and its impact on cash flows.Libby - Chapter 09 #67Topic Area: Focus On Cash Flows

68. SRJ Corporation entered into the following transactions:• The accrual of interest expense on a six-month note payable.• Collected cash for services to be provided within the next six months.• The accrual of revenue.Which of the following statements is correct with respect to determining the net cash flow fromoperating activities on a statement of cash flows?A. The accrual of interest expense is added to net income.B. Collecting cash for services to be provided in the future is deducted from net income.C. The accrual of revenue is added to net income.D. Collecting cash for services to be provided in the future doesn't require an adjustment to net income.Accruing interest expense reduces income but doesn't involve a cash flow; therefore it is added to netincome.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: ApplyDifficulty: MediumLearning Objective: 09-06 Explain the importance of working capital and its impact on cash flows.Libby - Chapter 09 #68Topic Area: Focus On Cash Flows

69. Rocket Corporation entered into the following transactions:• The accrual of wages and salaries expense.• The cash payment of a six-month note payable.• The cash payment in advance for a one-year insurance policy.Which of the following statements is correct with respect to determining Rocket's working capital?Assume that Rocket's operating cycle is four months.A. The accrual of wages and salaries expense decreases working capital.B. The cash payment of the note payable decreases working capital.C. The purchase of the insurance policy increases working capital.D. The cash payments for the note and insurance both decrease working capital.Accruing wages and salaries expense increases current liabilities which decreases working capital.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: ApplyDifficulty: MediumLearning Objective: 09-06 Explain the importance of working capital and its impact on cash flows.Libby - Chapter 09 #69Topic Area: Focus On Cash Flows

70. Rocket Corporation entered into the following transactions:• The accrual of wages and salaries expense.• The cash sale of equipment for a loss.• The cash payment in advance for a one-year insurance policy.Which of the following statements is correct with respect to determining Rocket's cash flows fromoperating activities on the statement of cash flows?A. The accrual of wages and salaries expense is deducted from net income.B. The loss on the equipment sale is deducted from net income.C. The cash payment to purchase the insurance policy is deducted from net income.D. The accrual of wages and the equipment loss are both deducted from net income.The purchase of the insurance policy creates a deferral which is not reported in net income. Thereforethe cash payment is deducted from net income.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: ApplyDifficulty: MediumLearning Objective: 09-06 Explain the importance of working capital and its impact on cash flows.Libby - Chapter 09 #70Topic Area: Focus On Cash Flows

71. Short Company purchased land by paying $10,000 cash on the purchase date and agreeing to pay$10,000 for each of the next ten years beginning one-year from the purchase date. Short's incrementalborrowing rate is 10%. What amount of liability would be reported on the balance sheet as of thepurchase date, after the initial $10,000 payment was made?A. $100,000B. $38,550

C. $61,446D. $71,446The liability ($61,446) is equal to the present value of the ten remaining payments [$10,000 Å~ 6.1446(present value of a 10% ordinary annuity)]AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-08 Compute present values.Libby - Chapter 09 #71Topic Area: Present Value Concepts

72. Short Company purchased land by paying $10,000 cash on the purchase date and agreeing to pay$10,000 for each of the next ten years beginning one-year from the purchase date. Short's incrementalborrowing rate is 10%. At what amount would the land be reported at on the balance sheet?A. $100,000B. $38,550C. $110,000D. $71,446The land cost ($71,446) is equal to the present value of the ten remaining payments [$10,000 Å~ 6.1446(present value of a 10%, 10-period ordinary annuity)] plus the initial payment ($10,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-08 Compute present values.Libby - Chapter 09 #72Topic Area: Present Value Concepts

73. Libby Company purchased equipment by paying $5,000 cash on the purchase date and agreeing topay $5,000 every six months during the next four years; the first payment is due six months after thepurchase date. Libby's incremental borrowing rate is 8%. At what amount would the equipment bereported at on the balance sheet as of the purchase date?A. $45,000B. $38,664C. $33,664D. $40,000The equipment cost ($38,664) is equal to the present value of the eight remaining payments [$5,000 Å~6.7327 (present value of a 4%, 8-period ordinary annuity)] plus the initial payment ($5,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: Apply

Difficulty: MediumLearning Objective: 09-09 Apply present value concepts to liabilities. Apply present value concepts to liabilities.Libby - Chapter 09 #73Topic Area: Present Value Concepts

74. Libby Company purchased equipment by paying $5,000 cash on the purchase date and agreeing topay $5,000 every six months during the next four years; the first payment is due six months afterthe purchase date. Libby's incremental borrowing rate is 8%. At what amount would the liability bereported on the balance sheet as of the purchase date, after the initial $5,000 payment was made?A. $45,000B. $33,664C. $38,664D. $40,000The liability ($33,664) is equal to the present value of the eight remaining payments [$5,000 Å~ 6.7327(present value of a 4%, 8-period ordinary annuity)].AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-09 Apply present value concepts to liabilities. Apply present value concepts to liabilities.Libby - Chapter 09 #74Topic Area: Present Value Concepts

75. Rae Company purchased a new vehicle by paying $10,000 cash on the purchase date and agreeing topay $3,000 every three months during the next five years; the first payment is due three months after thepurchase date. Rae's incremental borrowing rate is 12%. At what amount would the liability be reportedat on the balance sheet as of the purchase date, after the initial $10,000 payment was made?A. $44,633B. $50,000C. $54,633D. $60,000The liability ($44,633) is equal to the present value of the twenty remaining payments [$3,000 Å~14.8775 (present value of a 3%, 20-period ordinary annuity)].AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-09 Apply present value concepts to liabilities. Apply present value concepts to liabilities.Libby - Chapter 09 #75Topic Area: Present Value Concepts

76. Rae Company purchased a new vehicle by paying $10,000 cash on the purchase date and agreeing topay $3,000 every three months during the next five years; the first payment is due three

months after thepurchase date. Rae's incremental borrowing rate is 12%. At what amount would the vehicle be reportedat on the balance sheet as of the purchase date?A. $44,633B. $50,000C. $54,633D. $60,000The vehicle ($54,633) is equal to the present value of the twenty remaining payments [$3,000 Å~ 14.8775(present value of a 3%, 20-period ordinary annuity)] plus the initial $10,000 payment.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-08 Compute present values.Libby - Chapter 09 #76Topic Area: Present Value Concepts

77. Rusty Corporation purchased a rust-inhibiting machine by paying $50,000 cash on the purchase dateand agreeing to pay $10,000 every three months during the next two years; the first payment is duethree months after the purchase date. Rusty's incremental borrowing rate is 8%. At what amount wouldthe machine be reported at on the balance sheet as of the purchase date?A. $123,255B. $130,000C. $80,000D. $73,255The machine ($123,255) is equal to the present value of the eight remaining payments [$10,000 Å~7.3255 (present value of a 2%, 8-period ordinary annuity)] plus the initial $50,000 payment.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-08 Compute present values.Libby - Chapter 09 #77Topic Area: Present Value Concepts

78. Rusty Corporation purchased a rust-inhibiting machine by paying $50,000 cash on the purchase dateand agreeing to pay $10,000 every three months during the next two years; the first payment is duethree months after the purchase date. Rusty's incremental borrowing rate is 8%. At what amount wouldthe liability be reported at on the balance sheet as of the purchase date, after the initial $50,000 paymentwas made?A. $123,255

B. $130,000C. $80,000D. $73,255The liability ($73,255) is equal to the present value of the eight remaining payments [$10,000 Å~ 7.3255(present value of a 2%, 8-period ordinary annuity)].AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-09 Apply present value concepts to liabilities. Apply present value concepts to liabilities.Libby - Chapter 09 #78Topic Area: Present Value Concepts

79. Rachel Corporation purchased a building by paying $90,000 cash on the purchase date, agreeing topay $50,000 every year for the next nine years and $100,000 ten years from the purchase date; the firstpayment is due one year after the purchase date. Rachel's incremental borrowing rate is 10%. At whatamount would the building be reported at on the balance sheet as of the purchase date?A. $326,500B. $460,000C. $287,950D. $416,500The building ($416,500) is equal to the present value of the nine annual payments [$50,000 Å~ 5.7590(present value of a 10%, 9-period ordinary annuity)], plus the present value of the payment due tenyears from today [$100,000 Å~ .3855 (present value of a 10-period, 10% single sum)], plus the initial$90,000 cash payment.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-08 Compute present values.Libby - Chapter 09 #79Topic Area: Present Value Concepts

80. Rachel Corporation purchased a building by paying $90,000 cash on the purchase date, agreeing topay $50,000 every year for the next nine years and $100,000 ten years from the purchase date; the firstpayment is due one year after the purchase date. Rachel's incremental borrowing rate is 10%. At whatamount would the liability be reported at on the balance sheet as of the purchase date, after the initial$90,000 payment was made?A. $326,500B. $460,000C. $287,950

D. $416,500The liability ($326,500) is equal to the present value of the nine annual payments [$50,000 Å~ 5.7590(present value of a 10%, 9-period ordinary annuity)] plus the present value of the payment due ten yearsfrom today [$100,000 Å~ .3855 (present value of a 10-period, 10% single sum)].AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-09 Apply present value concepts to liabilities. Apply present value concepts to liabilities.Libby - Chapter 09 #80Topic Area: Present Value Concepts

81. Rudy Corporation is looking to purchase a building costing $500,000 by paying $100,000 cash on thepurchase date, and agreeing to make annual payments for the next ten years; the first payment is dueone year after the purchase date. Rudy's incremental borrowing rate is 10%. How much will each of theannual payments be?A. $65,098B. $86,821C. $55,098D. $44,000The annual payment ($69,457) is equal to the amount financed ($400,000) divided by the present valueof a 10%, 10-period ordinary annuity factor (6.1446).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-08 Compute present values.Libby - Chapter 09 #81Topic Area: Present Value Concepts

82. Grant Corporation is looking to purchase a building costing $900,000 by paying $300,000 cash onthe purchase date, and agreeing to make payments every three months for the next five years; the firstpayment is due three months after the purchase date. Grant's incremental borrowing rate is 8%. Howmuch will each of the payments be?A. $55,041B. $61,112C. $36,694D. $32,400The annual payment ($36,694) is equal to the amount financed ($600,000) divided by the present valueof a 2%, 20-period ordinary annuity factor (16.3514).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Measurement

Blooms: ApplyDifficulty: MediumLearning Objective: 09-08 Compute present values.Libby - Chapter 09 #82Topic Area: Present Value Concepts

83. Husky Corporation is looking to purchase a building costing $500,000 by agreeing to make paymentsevery three months for the next five years; the first payment is due three months after the purchase date.Husky's incremental borrowing rate is 12%. How much will each of the payments be?A. $28,000B. $66,940C. $37,981D. $33,608The annual payment ($33,608) is equal to the amount financed ($500,000) divided by the present valueof a 3%, 20-period ordinary annuity factor (14.8775).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-08 Compute present values.Libby - Chapter 09 #83Topic Area: Present Value Concepts

84. Huck Corporation is looking to purchase a truck costing $49,000 by agreeing to make payments everythree months for the next two years; the first payment is due three months after the purchase date.Huck's incremental borrowing rate is 8%. How much will each of the payments be?A. $6,248B. $6,689C. $8,527D. $5,709The annual payment ($6,689) is equal to the amount financed ($49,000) divided by the present value ofa 2%, 8-period ordinary annuity factor (7.3255).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-08 Compute present values.Libby - Chapter 09 #84Topic Area: Present Value Concepts

85. You have been asked to compute the cash equivalent price of a machine assuming the cost (includingprincipal and interest) is to be paid in two unequal payments after the acquisition date. Which of thefollowing table values would be used to find the cost of the machine?A. Present value of a single amount.B. Present value of an annuity.C. Future value of a single amount.

D. Future value of an annuity.The two unequal payments must be discounted using the present value of a single amount table values.The payments are unequal, so therefore the annuity table values can't be used.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: MediumLearning Objective: 09-08 Compute present values.Libby - Chapter 09 #85Topic Area: Present Value Concepts

86. Straight Industries purchased a large piece of equipment from Curvy Company on January 1, 2010.Straight Industries signed a note, agreeing to pay Curvy Company $400,000 for the equipment onDecember 31, 2012. The market rate of interest for similar notes was 8%. The present value of$400,000 discounted at 8% for three years was $317,520. On January 1, 2010, Straight Industriesrecorded the purchase with a debit to equipment for $317,520 and a credit to notes payable for$317,520. On December 31, 2010, Straight recorded an adjusting entry to account for interest that hadaccrued on the note. Assuming no adjusting entries have been made during the year, how much interestexpense would have accrued at December 31, 2010?A. $25,402B. $32,000C. $29,693D. $27,4932010 interest expense ($25,402) = Note payable liability at the beginning of 2010 ($317,520) Å~ Interestrate (8%)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-07 Report long-term liabilities.Libby - Chapter 09 #86Topic Area: Long-Term Liabilities

87. Straight Industries purchased a large piece of equipment from Curvy Company on January 1, 2010.Straight Industries signed a note, agreeing to pay Curvy Company $400,000 for the equipment onDecember 31, 2012. The market rate of interest for similar notes was 8%. The present value of$400,000 discounted at 8% for three years is $317,520. On January 1, 2010, Straight recorded thepurchase with a debit to equipment for $317,520 and a credit to notes payable for $317,520. On Straight

Industries' balance sheet for the year ended December 31, 2010, the book value of the liability for notespayable, including accrued interest would be which of the following?A. $342,922B. $349,520C. $345,013D. $347,2132010 interest expense ($25,402) = Note payable liability at the beginning of 2010 ($317,520) Å~ Interestrate (8%)December 31, 2010 liability book value ($342,922) = January 1, 2010 balance ($317,520) + 2010accrued interest expense ($25,402)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-07 Report long-term liabilities.Libby - Chapter 09 #87Topic Area: Long-Term Liabilities

88. Straight Industries purchased a large piece of equipment from Curvy Company on January 1, 2010.Straight Industries signed a note, agreeing to pay Curvy Company $400,000 for the equipment onDecember 31, 2012. The market rate of interest for similar notes was 8%. The present value of$400,000 discounted at 8% for three years is $317,520. On January 1, 2010, Straight recorded thepurchase with a debit to equipment for $317,520 and a credit to notes payable for $317,520. How muchis the 2011 interest expense, assuming that the December 31, 2010 adjusting entry was made?A. $27,434B. $27,962C. $32,000D. $29,6932010 interest expense ($25,402) = Note payable liability at the beginning of 2010 ($317,520) Å~ Interestrate (8%).December 31, 2010 liability book value ($342,922) = January 1, 2010 balance ($317,520) + 2010accrued interest expense ($25,402).2011 interest expense ($27,434) = Note payable liability at the beginning of 2011 ($342,922) Å~ Interestrate (8%).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: Medium

Learning Objective: 09-07 Report long-term liabilities.Libby - Chapter 09 #88Topic Area: Long-Term Liabilities

89. Alden Trucking Company is replacing part of their fleet of trucks by purchasing them under a noteagreement with Kenworthy on January 1, 2010. Alden financed $37,908,000, the note agreement willrequire $10 million in annual payments starting on December 31, 2010 and continuing for a total of fiveyears (final payment December 31, 2014). Kenworthy will charge Alden Trucking Company the marketinterest rate of 10% compounded annually. What is the note and interest payable liability on December31, 2010 after the first payment was made?A. $32,908,000B. $31,698,800C. $40,000,000D. $27,908,000December 31, 2010 note payable liability ($31,698,800) = Initial debt ($37,908,000) + Interest expense($37,908,000 Å~ 10%) - First annual payment ($10,000,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-07 Report long-term liabilities.Libby - Chapter 09 #89Topic Area: Long-Term Liabilities

90. Alden Trucking Company is replacing part of their fleet of trucks by purchasing them under a noteagreement with Kenworthy on January 1, 2010. Alden financed $37,908,000, the note agreement willrequire $10 million in annual payments starting on December 31, 2010 and continuing for a total of fiveyears (final payment December 31, 2014). Kenworthy will charge Alden Trucking Company the marketinterest rate of 10% compounded annually. How much is the 2011 interest expense?A. $3,169,880B. $3,290,800C. $4,000,000D. $2,790,800December 31, 2010 note payable liability ($31,698,800) = Initial debt ($37,908,000) + 2010 interestexpense ($37,908,000 Å~ 10%) - First annual payment ($10,000,000).2011 interest expense ($3,169,880) = January 1, 2011 book value ($31,698,800) Å~ 10%AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-07 Report long-term liabilities.

Libby - Chapter 09 #90Topic Area: Long-Term Liabilities

91. A company's income statement reported net income of $40,000 during 2010. The income tax returnexcluded a revenue item of $3,000 (reported on the income statement) because under the tax laws the$3,000 would not be reported for tax purposes until 2011. Which of the following statements is correctassuming a 35% tax rate?A. A $3,000 deferred tax liability is reported as of December 31, 2010.B. A $3,000 deferred tax asset is reported as of December 31, 2010.C. A $1,050 deferred tax liability is reported as of December 31, 2010.D. A $1,050 deferred tax asset is reported as of December 31, 2010.The $3,000 future taxable amount creates a $1,050 deferred tax liability ($3,000 Å~ .35).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-07 Report long-term liabilities. (S)Libby - Chapter 09 #91Topic Area: Long-Term Liabilities

92. A company's income statement reported net income of $80,000 during 2010. The income tax returnexcluded a revenue item of $6,000 (reported on the income statement) because under the tax lawsthe $6,000 would not be reported for tax purposes until 2011. Which of the following statements isincorrect assuming a 35% tax rate?A. Income tax expense on the income statement exceeds the tax liability to the IRS.B. The $6,000 of revenue creates a deferred tax liability.C. A $2,100 deferred tax liability is reported as of December 31, 2010.D. Income tax expense on the income statement is $25,900.The income tax expense ($80,000 Å~ .35) on the income statement is $28,000.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-07 Report long-term liabilities. (S)Libby - Chapter 09 #92Topic Area: Long-Term Liabilities

93. A company's 2010 income tax return reported a $75,000 tax liability. During 2010, the deferred incometax liability account increased $9,000. Which of the following statements is correct?A. Income tax expense on the 2010 income statement was $75,000.B. Income tax expense on the 2010 income statement was $64,000.C. Income tax expense on the 2010 income statement was $9,000.D. Income tax expense on the 2010 income statement was $84,000.The income tax expense ($84,000) on the 2010 income statement equals the IRS tax liability ($75,000)plus the increase in the deferred income tax liability ($9,000).AACSB: Analytic

AICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-07 Report long-term liabilities. (S)Libby - Chapter 09 #93Topic Area: Long-Term Liabilities

94. If income tax expense reported on the income statement is $45,000 for 2010, and the tax return for 2010(the first year) shows an income tax liability of $42,000, the deferred income tax on the balance sheet atthe end of 2010 will be which of the following? Assume a 40% tax rate.A. A $3,000 liability.B. A $3,000 asset.C. A $7,500 liability.D. A $7,500 asset.The income tax expense ($45,000) on the 2010 income statement equals the IRS tax liability ($42,000)plus the deferred income tax liability ($3,000) that was created during 2010.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-07 Report long-term liabilities. (S)Libby - Chapter 09 #94Topic Area: Long-Term Liabilities

95. How much needs to be invested today if your goal is to have $100,000 five years from today? The returnon the investment is expected to be 10% and will be compounded semi-annually.A. $61,390B. $62,090C. $66,667D. $50,000The investment ($61,391) is equal to the future amount ($100,000) multiplied by the present value of$1, 10-period, 5% table value (.6139).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-08 Compute present values.Libby - Chapter 09 #95Topic Area: Compute Present Value

96. Which of the following correctly describes the accounting for leases?A. A capital lease is not reported on the balance sheet as a liability.B. A capital lease reports an asset on the balance sheet.C. An operating lease reports an operating asset on the balance sheet.D. An operating lease reports a liability on the balance sheet.A capital lease reports both an asset and a liability on the balance sheet.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: Medium

Learning Objective: 09-07 Report long-term liabilities.Libby - Chapter 09 #96Topic Area: Long-Term Liabilities

97. Which of the following questions is asked with respect to determining the accounting for leases?A. Is the lease term greater than 90% of the asset's estimated life?B. Is the present value of the payments greater than 75% of the asset's fair market value?C.Does the lease provide for an opportunity for the lessee to purchase the leased asset during the leaseterm at fair market value?D.Does the lease provide for a transfer of title of the leased asset at the end of the lease term to thelessee?One of the four questions is with respect to the transfer of title.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 09-07 Report long-term liabilities.Libby - Chapter 09 #97Topic Area: Long-Term Liabilities

98. Which of the following questions is incorrect with respect to determining the accounting for leases?A. Is the lease term greater than 75% of the asset's expected economic life?B. Is the present value of the payments greater than 75% of the asset's fair market value?C.Does the lease provide for an opportunity for the lessee to purchase the leased asset for a price lessthan fair market value?D.Does the lease provide for a transfer of title of the leased asset at the end of the lease term to thelessee?The present value test uses 90% rather than 75%.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 09-07 Report long-term liabilities.Libby - Chapter 09 #98Topic Area: Long-Term Liabilities

99. How much needs to be invested today if your goal is to be able to withdraw $5,000 for each of the nextten years beginning one year from today? The return on the investment is expected to be 12%.A. $44,645B. $36,291C. $28,251D. $50,000The investment ($28,251) is equal to the payments ($5,000) multiplied by the present value of a $1annuity, 10-period, 12% table value (5.6502).AACSB: Analytic

AICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 09-08 Compute present values.Libby - Chapter 09 #99Topic Area: Computing Present Value

100. How much needs to be invested today if your goal is to be able to withdraw $10,000 for each of thenext nine years beginning one year from today and $50,000 ten years from today? The return on theinvestment is expected to be 6%.A. $68,017B. $95,937C. $78,176D. $132,075

ch10 Key1. An advantage of issuing a bond relative to stock is that the bond interest payments are tax deductible.TRUEBond interest payments are tax deductible whereas cash dividend payments are not.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 10-01 Describe the characteristics of bonds.Libby - Chapter 10 #1Topic Area: Characteristics Of Bonds Payable

2. Issuing bonds dilutes the voting power of the common shareholders because bonds have preferentialvoting rights.FALSEBondholders do not have voting rights.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 10-01 Describe the characteristics of bonds.Libby - Chapter 10 #2Topic Area: Characteristics Of Bonds Payable

3. The major disadvantages of issuing a bond are the risk of bankruptcy and the negative impact on cashflow because debt must be repaid at a specified date in the future.TRUEBond interest payments are fixed charges that must be paid at specified dates.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBloom's: RememberDifficulty: EasyLearning Objective: 10-01 Describe the characteristics of bonds.Libby - Chapter 10 #3

Topic Area: Characteristics Of Bonds Payable

4. A bond's interest payments are determined by multiplying the bond's principal amount by the statedinterest rate.TRUEBond interest payments are determined by multiplying the bond's principal amount by the stated rate ofinterest.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: RememberDifficulty: EasyLearning Objective: 10-01 Describe the characteristics of bonds.Libby - Chapter 10 #4Topic Area: Characteristics Of Bonds Payable

5. A convertible bond can be called for early retirement at the option of the issuing company.FALSEA callable bond can be called for early retirement at the option of the issuing company. A convertiblebond is convertible into common stock at the option of the investor.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 10-01 Describe the characteristics of bonds.Libby - Chapter 10 #5Topic Area: Characteristics Of Bonds Payable

6. The issuing company and the bond underwriter determine the selling price of a bond.FALSEThe selling price of a bond is determined by the market rate of interest at the time of issue.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: RememberDifficulty: MediumLearning Objective: 10-02 Report bonds payable and interest expense for bonds sold at par and analyze the times interest earned ratio.Libby - Chapter 10 #6Topic Area: Reporting Bond Transactions

7. The issuance price of a bond is the present value of both the principal plus the cash interest to bereceived over the life of the bond discounted by the stated (coupon) rate.FALSEThe selling price of a bond is determined by the market rate of interest at the time of issue, not the statedrate.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: RememberDifficulty: EasyLearning Objective: 10-02 Report bonds payable and interest expense for bonds sold at par and analyze the times interest earned ratio.Libby - Chapter 10 #7Topic Area: Reporting Bond Transactions

8. When the market rate of interest is greater than the stated interest rate, the bond will sell at a discount.TRUEThe selling price of a bond is determined by the market rate of interest at the time of issue. When themarket rate exceeds the stated rate, the bond will sell at a discount.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: RememberDifficulty: EasyLearning Objective: 10-02 Report bonds payable and interest expense for bonds sold at par and analyze the times interest earned ratio.Libby - Chapter 10 #8Topic Area: Reporting Bond Transactions

9. A bond will sell for a premium when the market rate of interest is greater than the stated rate of interest.FALSEThe selling price of a bond is determined by the market rate of interest at the time of issue. When themarket rate exceeds the stated rate, the bond will sell at a discount.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: RememberDifficulty: EasyLearning Objective: 10-02 Report bonds payable and interest expense for bonds sold at par and analyze the times interest earned ratio.Libby - Chapter 10 #9Topic Area: Reporting Bond Transactions

10. The proceeds received from a bond issue will be greater than the bond maturity value when the statedinterest rate exceeds the market rate of interest.TRUEThe selling price of a bond is determined by the market rate of interest at the time of issue. When thestated rate exceeds the market rate, the bond will sell at a premium.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: RememberDifficulty: MediumLearning Objective: 10-02 Report bonds payable and interest expense for bonds sold at par and analyze the times interest earned ratio.Libby - Chapter 10 #10Topic Area: Reporting Bond Transactions

11. Increases in the market rate of interest subsequent to a bond issue increase the discount on the bond.FALSEThe selling price of a bond is determined by the market rate of interest at the time of issue; subsequentchanges in the market rate of interest do not impact a bond discount or premium.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 10-02 Report bonds payable and interest expense for bonds sold at par and analyze the times interest earned ratio.Libby - Chapter 10 #11Topic Area: Reporting Bond Transactions

12. A bond will sell at its par value when the market rate of interest equals the stated rate of interest.TRUEThe selling price of a bond is determined by the market rate of interest at the time of issue; the presentvalue of a bond's cash flows equal its par value when the stated rate and market rate are the same.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: RememberDifficulty: EasyLearning Objective: 10-02 Report bonds payable and interest expense for bonds sold at par and analyze the times interest earned ratio.Libby - Chapter 10 #12Topic Area: Reporting Bond Transactions

13. A company has a December 31 fiscal year-end. If the interest is paid annually on December 31, thebond interest expense on the income statement is the amount of the interest cash payment when thebond initially sells at par value.TRUEBond interest expense equals the cash payment for interest when the bond initially sells for par value.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 10-02 Report bonds payable and interest expense for bonds sold at par and analyze the times interest earned ratio.Libby - Chapter 10 #13Topic Area: Reporting Bond Transactions

14. The payment of bond interest on the interest payment date, for bonds issued at par value, reduces boththe bond liability and assets, assuming that interest expense is recorded at the time of the cash payment.FALSEThe payment of bond interest increases interest expense and decreases assets.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 10-02 Report bonds payable and interest expense for bonds sold at par and analyze the times interest earned ratio.Libby - Chapter 10 #14Topic Area: Reporting Bond Transactions

15. Amortization of discount on bonds payable will make the amount of interest expense reported on theincome statement less than the cash paid for that year.FALSEWhen a bond is sold at a discount, the interest expense on the income statement exceeds the cashpayment by the amortization of the bond discount.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: Remember

Difficulty: MediumLearning Objective: 10-03 Report bonds payable and interest expense for bonds sold at a discount.Libby - Chapter 10 #15Topic Area: Reporting Bond Transactions

16. Amortization of a discount on a bond payable will result in an increase in the book value of the bondliability on the balance sheet.TRUEWhen a bond is sold at a discount, the subsequent amortization of the discount results in an increase inthe book value of the bond because the discount on bonds payable is a contra-liability account.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 10-03 Report bonds payable and interest expense for bonds sold at a discount.Libby - Chapter 10 #16Topic Area: Reporting Bond Transactions

17. A bond issued at a discount will pay total cash payments for interest that is more than the total interestexpense recognized over the life of the bond.FALSEWhen a bond initially sells at a discount, the interest expense over the life of the bond equals the cashinterest payments plus the initial amount of discount on bonds payable.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 10-03 Report bonds payable and interest expense for bonds sold at a discount.Libby - Chapter 10 #17Topic Area: Reporting Bond Transactions

18. The journal entry to record the interest cash payment for a bond issued at a discount results in anincrease in the book value of the bond liability.TRUEThe discount on bonds payable is a contra-liability account; amortization of the discount on bondspayable account therefore increases the book value of the bond.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 10-03 Report bonds payable and interest expense for bonds sold at a discount.Libby - Chapter 10 #18Topic Area: Reporting Bond Transactions

19. Either straight-line or effective-interest amortization may be used for bond premiums or discountsregardless of the amounts involved.FALSEThe straight-line method can only be used when the amounts involved aren't material.AACSB: Reflective Thinking

AICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 10-03 Report bonds payable and interest expense for bonds sold at a discount.Learning Objective: 10-04 Report bonds payable and interest expense for bonds sold at a premium.Libby - Chapter 10 #19Topic Area: Reporting Bond Transactions

20. The journal entry to record the interest cash payment for a bond issued at a premium results in adecrease in the bond.TRUEPremium on bonds payable is an adjunct-liability account; amortization of the premium on bondspayable account therefore decreases the bond.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 10-04 Report bonds payable and interest expense for bonds sold at a premium.Libby - Chapter 10 #20Topic Area: Reporting Bond Transactions

21. A bond issued at a premium will pay cash interest in excess of the amount of interest expenserecognized for accounting purposes.TRUEWhen a bond initially sells at a premium, the interest expense over the life of the bond equals the cashinterest payments minus the initial amount of premium on bonds payable.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 10-04 Report bonds payable and interest expense for bonds sold at a premium.Libby - Chapter 10 #21Topic Area: Reporting Bond Transactions

22. Interest expense decreases over time when a bond is initially issued at a premium and the effectiveinterestmethod is used.TRUEWhen a bond initially sells at a premium, the interest expense decreases over time because the bookvalue decreases due to amortization of the premium on bonds payable.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: RememberDifficulty: MediumLearning Objective: 10-04 Report bonds payable and interest expense for bonds sold at a premium.Libby - Chapter 10 #22Topic Area: Reporting Bond Transactions

23. The journal entry to record the issue of a bond when the stated interest rate exceeds the market rate ofinterest debits premium on bonds payable.FALSE

When a bond sells at a premium, the premium on bonds payable account is credited.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 10-04 Report bonds payable and interest expense for bonds sold at a premium.Libby - Chapter 10 #23Topic Area: Reporting Bond Transactions

24. The debt-to-equity ratio is calculated by dividing total liabilities by total liabilities plus stockholders'equity.FALSEThe debt-to-equity ratio is calculated by dividing total liabilities by stockholders' equity.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: RememberDifficulty: EasyLearning Objective: 10-05 Analyze the debt-to-equity ratio.Libby - Chapter 10 #24Topic Area: Reporting Bond Transactions

25. The debt-to-equity ratio assesses the amount of capital provided by creditors relative to stockholders'equity.TRUEThe debt-to-equity ratio is calculated by dividing total liabilities by stockholders' equity and assesses theamount of debt relative to equity.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: RememberDifficulty: EasyLearning Objective: 10-05 Analyze the debt-to-equity ratio.Libby - Chapter 10 #25Topic Area: Reporting Bond Transactions

26. Issuing bonds rather than stock will result in an increase in the debt-to-equity ratio.TRUEThe debt-to-equity ratio is calculated by dividing total liabilities by stockholders' equity; issuing bondsincreases liabilities and therefore the debt-to-equity ratio.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: UnderstandDifficulty: EasyLearning Objective: 10-05 Analyze the debt-to-equity ratio.Libby - Chapter 10 #26Topic Area: Reporting Bond Transactions

27. If a company repurchases bonds with a $1,000,000 maturity value for $1,020,000 when their book valueis $950,000, a loss of $20,000 will be reported.FALSEThe loss on the bond retirement ($70,000) is the difference between the amount paid for the bond($1,020,000) and the book value of the bond ($950,000). A loss occurs when the payment

exceeds thebond's book value.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 10-06 Report the early retirement of bonds.Libby - Chapter 10 #27Topic Area: Reporting Bond Transactions

28. When a company purchases and retires their outstanding bonds payable for an amount less than theirbook value, an increase in stockholders' equity results.TRUEWhen a company purchases their bonds for an amount less than book value, a gain results, whichincreases net income and therefore stockholders' equity.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: ApplyDifficulty: MediumLearning Objective: 10-06 Report the early retirement of bonds.Libby - Chapter 10 #28Topic Area: Reporting Bond Transactions

29. Issues of bonds in exchange for cash are reported as a cash flow from financing activities on thestatement of cash flows.TRUEThe financing classification reports those cash flows related to the issuance and retirement of debt andequity.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: EasyLearning Objective: 10-07Libby - Chapter 10 #29Topic Area: Reporting Bond Transactions

30. The cash payment for interest on a bond payable is reported as a cash flow from financing activities onthe statement of cash flows.FALSECash interest payments are reported on the statement of cash flows as cash flows from operatingactivities.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 10-07Libby - Chapter 10 #30Topic Area: Reporting Bond Transactions

31. When a company prepares a bond indenture, certain provisions of the bonds are included. Which of the

following is/are not specified in the indenture?A. Dates of each interest payment.B. The stated interest rate.C. The maturity date.D. The market rate of interest.The market rate of interest is determined at the time of the bond issue and is not specified in the bondindenture.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBloom's: RememberDifficulty: EasyLearning Objective: 10-01 Describe the characteristics of bonds.Libby - Chapter 10 #31Topic Area: Characteristics Of Bonds Payable

32. Which of the following bonds does not have specific assets pledged to guarantee repayment?A. Debenture bondB. Callable bondC. Discount bondD. Convertible bondAn unsecured (debenture) bond does not have any assets pledged to secure it.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBloom's: RememberDifficulty: EasyLearning Objective: 10-01 Describe the characteristics of bonds.Libby - Chapter 10 #32Topic Area: Characteristics Of Bonds Payable

33. Which of the following is not a reason that a corporation would want to issue bonds instead of stock?A. Interest payments can be deducted for income tax purposes.B. Stockholders maintain control.C. The impact on earnings may be positive.D. There is less risk associated with a bond issue.Bond issues are more risky because of the fixed dates for payment of interest and principal.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBloom's: RememberDifficulty: EasyLearning Objective: 10-01 Describe the characteristics of bonds.Libby - Chapter 10 #33Topic Area: Characteristics Of Bonds Payable

34. The annual interest rate specified within a bond indenture is called which of the following?A. The stated rate of interest.B. The market rate of interest.C. The effective rate of interest.D. The actual rate of interest.The stated interest rate is specified in the bond indenture.AACSB: Reflective Thinking

AICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBloom's: RememberDifficulty: EasyLearning Objective: 10-01 Describe the characteristics of bonds.Libby - Chapter 10 #34Topic Area: Characteristics Of Bonds Payable

35. Which of the following statements best describes callable bonds?A. They can be turned in for early retirement at the option of the bondholder.B. They can be converted to common stock at the option of the bondholder.C. They can be called for early retirement at the option of the issuer.D. They can be called for early retirement at the option of the lien holder.A callable bond may be retired early by the issuer.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBloom's: RememberDifficulty: EasyLearning Objective: 10-01 Describe the characteristics of bonds.Libby - Chapter 10 #35Topic Area: Characteristics Of Bonds Payable

36. Which of the following statements best describes convertible bonds?A. They can be turned in for early retirement at the option of the bondholder.B. They can be converted to common stock at the option of the bondholder.C. They can be called for early retirement at the option of the issuer.D. They can be converted to common stock at the option of the issuer.A convertible bond may be converted into common stock at the option of the bondholder.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBloom's: RememberDifficulty: EasyLearning Objective: 10-01 Describe the characteristics of bonds.Libby - Chapter 10 #36Topic Area: Characteristics Of Bonds Payable

37. Which of the following is not an advantage of issuing bonds versus issuing stock to finance expansion?A. Stockholders remain in control as bondholders cannot vote or share in the company's earnings.B. Interest expense is tax deductible but dividends are not.C. Money can usually be borrowed at a lower rate and then invested to earn a higher return on assets.D. The fixed payment dates for the interest and maturity value.The fixed payment dates create inflexibility and therefore increases bankruptcy risk.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBloom's: RememberDifficulty: MediumLearning Objective: 10-01 Describe the characteristics of bonds.Libby - Chapter 10 #37Topic Area: Characteristics Of Bonds Payable

38. Which of the following statements is not correct?A. The bond principal is the amount due at the maturity date of the bond.B. The stated interest rate is used to determine the cash interest payments.C. The bond principal is used to determine the cash interest payments.D. The market rate of interest is used to determine the cash interest payments.

The market rate of interest is used to determine the selling price of the bond, not the cash interestpayments.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: RememberDifficulty: MediumLearning Objective: 10-01 Describe the characteristics of bonds.Libby - Chapter 10 #38Topic Area: Characteristics Of Bonds Payable

39. Which of the following statements is correct?A. A secured bond has specific assets pledged as collateral to secure it.B. An unsecured bond can be paid at the option of the issuer.C. A bond trustee is appointed to represent the issuing company.D. The bond indenture specifies the market rate of interest the investors will earn.A secured bond is secured by specific pledged assets.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBloom's: RememberDifficulty: MediumLearning Objective: 10-01 Describe the characteristics of bonds.Libby - Chapter 10 #39Topic Area: Characteristics Of Bonds Payable

40. Halverson's times interest earned ratio was 2.98 in 2010, 2.79 in 2009, and 2.31 in 2008. Which of thefollowing statements about their ratio is possibly correct?A. Their increasing ratio indicates decreasing levels of debt on which interest is incurred.B.Their increasing ratio indicates their strategy of pursuing growth by investment in other companieswhich has increased debt but their profits have not yet increased from those investments.C. The increasing ratio implies increased long-term debt financing.D. Their increasing ratio would be considered by creditors to be an indicator of higher risk.A decreasing level of debt will decrease interest expense and therefore increase the times interest earnedratio.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 10-02 Report bonds payable and interest expense for bonds sold at par and analyze the times interest earned ratio.Libby - Chapter 10 #40Topic Area: Reporting Bond Transactions

41. Which of the following statements doesn't correctly describe the accounting for bonds that were issuedat their maturity value?A. The market rate of interest equals the stated interest rate.B. The interest expense over the life of the bonds will equal the cash interest payments.C. The present value of the bonds' future cash flows equals the bonds' maturity value.D. The book value of the bond liability decreases when interest payments are made on the

due dates.The payment of interest expense on the due date results in a decrease in assets and an increase ininterest expense.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 10-03 Report bonds payable and interest expense for bonds sold at a discount.Libby - Chapter 10 #41Topic Area: Reporting Bond Transactions

42. The journal entry to record the sale of bonds at their par value results in which of the following?A. An increase in assets and liabilities equal to the par value of the bonds.B.An increase in assets and liabilities equal to the par value of the bonds and their associated interestpayments.C.An increase in assets equal to the par value of the bonds and an increase in liabilities equal to thebonds' future cash flows.D. An increase in assets and liabilities equal to the bonds' future cash flows.When a bond sells at par value, the cash proceeds and bond liability equals the par value of the bond.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 10-03 Report bonds payable and interest expense for bonds sold at a discount.Libby - Chapter 10 #42Topic Area: Reporting Bond Transactions

43. Assuming no adjusting journal entries have been made, the journal entry to record the cash interestpayment on the due date for bonds issued at their par value results in which of the following?A. An increase in expenses and a decrease in liabilities.B. An increase in expenses and a decrease in assets.C. A decrease in both liabilities and stockholders' equity.D. A decrease in both assets and liabilities.When a bond sells for par value, the cash interest payments result in an increase in interest expense anda decrease in assets (cash).AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 10-03 Report bonds payable and interest expense for bonds sold at a discount.Libby - Chapter 10 #43Topic Area: Reporting Bond Transactions

44. Which of the following statements correctly describes the accounting for bonds that were issued at adiscount?

A. The market rate of interest is less than the stated interest rate.B. The interest expense over the life of the bonds will be less than the cash interest payments.C. The present value of the bonds' future cash flows is greater than the bonds' maturity value.D. The book value of the bond liability increases when interest payments are made on the due dates.The payment of interest expense on the due date results in amortization of the discount on bondspayable account, a contra-liability account. Amortizing (reducing) a contra-liability account increasesthe book value of the bond liability.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 10-03 Report bonds payable and interest expense for bonds sold at a discount.Libby - Chapter 10 #44Topic Area: Reporting Bond Transactions

45. Which of the following statements doesn't correctly describe the accounting for bonds that were issuedat a discount?A. The interest expense over the life of the bond exceeds the cash interest payments.B.The interest expense over the life of the bonds increases as the bonds mature when the effectiveinterest method is used.C.The amortization of the discount on bonds payable account decreases as the bonds mature when theeffective interest method is used.D.The book value of the bond liability increases when interest payments are made on the due dateswhen the effective interest method of amortization is used.When bonds are issued at a discount, their book value increases over time and eventually reach thebonds' maturity value. Interest expense increases because the book value increases. The amortizationof discount on bonds payable is the difference between the increasing interest expense and the constantcash interest payment.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 10-03 Report bonds payable and interest expense for bonds sold at a discount.Libby - Chapter 10 #45Topic Area: Reporting Bond Transactions

46. Assuming no adjusting journal entries have been made, the journal entry to record the cash interestpayment on the due date for bonds issued at a discount results in which of the following?

A. An increase in expenses and a decrease in liabilities.B. An increase in expenses and an increase in liabilities.C. A decrease in both liabilities and stockholders' equity.D. A decrease in both assets and liabilities.The journal entry to record the cash payment of interest on the due date increases interest expenseand decreases the discount on bonds payable account, a contra-liability account. Decreasing a contraliabilityaccount increases the book value of the bonds.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 10-03 Report bonds payable and interest expense for bonds sold at a discount.Libby - Chapter 10 #46Topic Area: Reporting Bond Transactions

47. On November 1, 2009, Davis Company issued $30,000, ten-year, 7% bonds for $29,100. The bondswere dated November 1, 2009, and interest is payable each November 1 and May 1. How much is theamount of straight-line discount amortization on each semi-annual interest date?A. $90B. $45C. $900D. $450The straight-line discount amortization ($45) = Discount on bonds payable ($30,000 - $29,100) ÷ 20semi-annual interest payments.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: EasyLearning Objective: 10-03 Report bonds payable and interest expense for bonds sold at a discount.Libby - Chapter 10 #47Topic Area: Reporting Bond Transactions

48. On November 1, 2009, Davis Company issued $30,000, ten-year, 7% bonds for $29,100. The bondswere dated November 1, 2009, and interest is payable each November 1 and May 1. How much is thesemi-annual interest expense when the straight-line method is utilized?A. $2,010B. $2,190C. $1,095D. $2,055The straight-line discount amortization ($45) = Discount on bonds payable ($30,000 - $29,100) ÷ 20semi-annual interest payments.Semi-annual interest expense ($1,095) = Semi-annual cash payment ($30,000 Å~ .07 Å~ 6/12) + Discounton bonds payable amortization ($45).

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 10-03 Report bonds payable and interest expense for bonds sold at a discount.Libby - Chapter 10 #48Topic Area: Reporting Bond Transactions

49. On November 1, 2009, Davis Company issued $30,000, ten-year, 7% bonds for $29,100. The bondswere dated November 1, 2009, and interest is payable each November 1 and May 1. How much isthe book value of the bonds after the November 1, 2010 interest payment was recorded, assuming thestraight-line method of amortization is utilized?A. $29,010B. $29,100C. $29,190D. $29,280The straight-line discount amortization ($45) = Discount on bonds payable ($30,000 - $29,100) ÷ 20semi-annual interest payments.The November 1, 2010 book value ($29,190) = The initial issue price ($29,100) + Two periods ofdiscount amortization (2 Å~ $45).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 10-03 Report bonds payable and interest expense for bonds sold at a discount.Libby - Chapter 10 #49Topic Area: Reporting Bond Transactions

50. On November 1, 2009, Davis Company issued $30,000, ten-year, 7% bonds for $29,100. The bondswere dated November 1, 2009, and interest is payable each November 1 and May 1. Which of thefollowing is incorrect assuming the straight-line method of amortization is utilized?A. The market rate of interest exceeded the stated rate of interest when the bonds were issued.B. The semi-annual interest expense is $1,095.C. The book value of the bonds increases $45 every six months.D. The semi-annual interest expense is less than the semi-annual cash interest payment.The straight-line discount amortization ($45) = Discount on bonds payable ($30,000 - $29,100) ÷ 20semi-annual interest payments.Semi-annual interest expense ($1,095) = Semi-annual cash payment ($30,000 Å~ .07 Å~ 6/12) + Discounton bonds payable amortization ($45).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: Apply

Difficulty: HardLearning Objective: 10-03 Report bonds payable and interest expense for bonds sold at a discount.Libby - Chapter 10 #50Topic Area: Reporting Bond Transactions

51. On January 1, 2010, Tonika Corporation issued a four-year, $10,000, 7% bond. The interest is payableannually each December 31. The issue price was $9,668 based on an 8% effective interest rate.Assuming effective-interest amortization is used, how much is the interest expense on the incomestatement for the year ended December 31, 2010 (to the nearest dollar)?A. $677B. $883C. $773D. $7002010 interest expense ($773) = Initial issue price, which is the 1/1/2010 book value ($9,668) Å~ Market(effective) interest rate (.08).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 10-03 Report bonds payable and interest expense for bonds sold at a discount.Libby - Chapter 10 #51Topic Area: Reporting Bond Transactions

52. On January 1, 2010, Tonika Corporation issued a four-year, $10,000, 7% bond. The interest is payableannually each December 31. The issue price was $9,668 based on an 8% effective interest rate.Assuming effective-interest amortization is used, which of the following journal entries correctlyrecords the 2010 interest expense (to the nearest dollar)?A.B.C.D.2010 interest expense ($773) = Initial issue price, which is the 1/1/2010 book value ($9,668) Å~ Market(effective) interest rate (.08).Cash interest payment ($700) = Maturity value of the bond ($10,000) Å~ Stated interest rate (.07)Discount on bonds payable amortization ($73) = Interest expense ($773) - Interest cash payment ($700).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 10-03 Report bonds payable and interest expense for bonds sold at a discount.Libby - Chapter 10 #52Topic Area: Reporting Bond Transactions

53. On January 1, 2010, Tonika Corporation issued a four-year, $10,000, 7% bond. The

interest is payableannually each December 31. The issue price was $9,668 based on an 8% effective interest rate.Assuming effective-interest amortization is used, what is the book value of the bonds as of December31, 2010 (to the nearest dollar)?A. $8,968B. $9,945C. $9,641D. $9,7412010 interest expense ($773) = Initial issue price, which is the 1/1/2010 book value ($9,668) Å~ Market(effective) interest rate (.08).Cash interest payment ($700) = Maturity value of the bond ($10,000) Å~ Stated interest rate (.07)Discount on bonds payable amortization ($73) = Interest expense ($773) - Interest cash payment ($700).December 31, 2010 book value ($9,741) = January 1, 2010 book value ($9,668) + Discount on bondspayable amortization ($73).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 10-03 Report bonds payable and interest expense for bonds sold at a discount.Libby - Chapter 10 #53Topic Area: Reporting Bond Transactions

54. On January 1, 2010, Tonika Corporation issued a four-year, $10,000, 7% bond. The interest is payableannually each December 31. The issue price was $9,668 based on an 8% effective interest rate.Assuming effective-interest amortization is used, what is the 2011 interest expense (to the nearestdollar)?A. $779B. $796C. $677D. $7002010 interest expense ($773) = Initial issue price, which is the 1/1/2010 book value ($9,668) Å~ Market(effective) interest rate (.08).Cash interest payment ($700) = Maturity value of the bond ($10,000) Å~ Stated interest rate (.07)Discount on bonds payable amortization ($73) = Interest expense ($773) - Interest cash payment ($700).December 31, 2010 book value ($9,741) = January 1, 2010 book value ($9,668) + Discount on bondspayable amortization ($73).

2011 interest expense ($779) = 12/31/2010 book value ($9,741) Å~ Market (effective) interest rate (.08).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 10-03 Report bonds payable and interest expense for bonds sold at a discount.Libby - Chapter 10 #54Topic Area: Reporting Bond Transactions

55. On January 1, 2010, Tonika Corporation issued a four-year, $10,000, 7% bond. The interest is payableannually each December 31. The issue price was $9,668 based on an 8% effective interest rate.Assuming effective-interest amortization is used, what is the December 31, 2011 book value after theDecember 31, 2011 interest payment was made (to the nearest dollar)?A. $9,662B. $9,820C. $9,668D. $9,7232010 interest expense ($773) = Initial issue price, which is the 1/1/2010 book value ($9,668) Å~ Market(effective) interest rate (.08).Cash interest payment ($700) = Maturity value of the bond ($10,000) Å~ Stated interest rate (.07)Discount on bonds payable amortization ($73) = Interest expense ($773) - Interest cash payment ($700).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 10-03 Report bonds payable and interest expense for bonds sold at a discount.Libby - Chapter 10 #55Topic Area: Reporting Bond Transactions

56. On January 1, 2010, Broker Corp. issued $3,000,000 par value 12%, 10 year bonds which pay interesteach December 31. If the market rate of interest was 14%, what was the issue price of the bonds? (Thepresent value factor for $1 in 10 periods at 12% is .3220 and at 14% is .2697. The present value of anannuity of $1 factor for 10 periods at 12% is 5.6502 and at 14% is 5.2161.)A. $3,339,084B. $2,843,172C. $3,000,000D. $2,686,896Bond issue price ($2,686,896) = Present value of the bond maturity value ($3,000,000 Å~ .2697) + Present value of the bonds interest payments ($3,000,000 Å~ .12) Å~ 5.2161AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Measurement

Bloom's: ApplyDifficulty: MediumLearning Objective: 10-03 Report bonds payable and interest expense for bonds sold at a discount.Libby - Chapter 10 #56Topic Area: Reporting Bond Transactions

57. On January 1, 2009, Jason Company issued $5 million of 10-year bonds at a 10% stated interest rate tobe paid annually. The following present value factors have been provided:What was the issuance price of the bonds if the market rate of interest was 8%?A. $5,000,000B. $5,670,000C. $5,387,500D. $5,712,500Bond issue price ($5,670,000) = Present value of the bond maturity value ($5,000,000 Å~ .463) + Presentvalue of the bond interest payments ($5,000,000 Å~ .10) Å~ 6.710AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 10-04 Report bonds payable and interest expense for bonds sold at a premium.Libby - Chapter 10 #57Topic Area: Reporting Bond Transactions

58. On January 1, 2009, Jason Company issued $5 million of 10-year bonds at a 10% stated interest rate tobe paid annually. The following present value factors have been provided:Calculate the issuance price if the market rate of interest is 12%.A. $4,427,500B. $4,477,500C. $4,435,000D. $5,000,000Bond issue price ($4,435,000) = Present value of the bond maturity value ($5,000,000 Å~ .322) + Presentvalue of the bond interest payments ($5,000,000 Å~ .10) Å~ 5.650AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 10-03 Report bonds payable and interest expense for bonds sold at a discount.Libby - Chapter 10 #58Topic Area: Reporting Bond Transactions

59. On January 1, 2009, Jason Company issued $5 million of 10-year bonds at a 10% stated interest rate tobe paid annually. The following present value factors have been provided:Calculate the issuance price if the market rate of interest was 10%.A. $5,427,000B. $4,477,000C. $4,435,000D. $5,000,000Bond issue price ($5,000,000) = Present value of the bond maturity value ($5,000,000 Å~ .386) + Present

value of the bond interest payments ($5,000,000 Å~ .10) Å~ 6.140When the market rate equals the stated rate, the bond will always be issued at its maturity value.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 10-02 Report bonds payable and interest expense for bonds sold at par and analyze the times interest earned ratio.Libby - Chapter 10 #59Topic Area: Reporting Bond Transactions

60. Gammell Company issued $50,000 of 9% bonds with annual interest payments. The bonds maturein ten years. The bonds were issued at $48,000. Gammel Company uses the straight-line method ofamortization. How much is the annual interest expense?A. $4,700B. $4,300C. $4,500D. $4,680The straight-line discount amortization ($200) = Discount on bonds payable ($50,000 - $48,000) ÷ 10annual interest payments.Annual interest expense ($4,700) = Annual cash payment ($50,000 Å~ .09) + Discount on bonds payableamortization ($200).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 10-03 Report bonds payable and interest expense for bonds sold at a discount.Libby - Chapter 10 #60Topic Area: Reporting Bond Transactions

61. Gammell Company issued $50,000 of 9% bonds with annual interest payments. The bonds maturein ten years. The bonds were issued at $48,000. Gammel Company uses the straight-line method ofamortization. Which of the following statements is incorrect?A. The market rate of interest exceeded the stated rate of interest when the bonds were issued.B. The annual interest expense exceeds the annual cash interest payment by $200.C. The annual increase in the bond book value is $200.D. The annual interest expense is $4,300.The straight-line discount amortization ($200) = Discount on bonds payable ($50,000 - $48,000) ÷ 10annual interest payments.Annual interest expense ($4,700) = Annual cash payment ($50,000 Å~ .09) + Discount on bonds payableamortization ($200).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, Measurement

Bloom's: ApplyDifficulty: MediumLearning Objective: 10-03 Report bonds payable and interest expense for bonds sold at a discount.Libby - Chapter 10 #61Topic Area: Reporting Bond Transactions

62. Which of the following statements incorrectly describes the accounting for bonds that were issued at apremium?A. The market rate of interest is less than the stated interest rate.B. The interest expense over the life of the bonds will be less than the cash interest payments.C. The present value of the bonds' future cash flows is less than the bonds' maturity value.D. The book value of the bond liability decreases when interest payments are made on the due dates.When a bond sells at a premium, the issue price (present value of future cash flows) exceeds the bondmaturity value.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 10-04 Report bonds payable and interest expense for bonds sold at a premium.Libby - Chapter 10 #62Topic Area: Reporting Bond Transactions

63. Which of the following statements correctly describes the accounting for bonds that were issued at apremium?A. The interest expense over the life of the bond is less than the cash interest payments.B.The interest expense over the life of the bonds increases as the bonds mature when the effectiveinterest method is used.C.The amortization of the premium on bonds payable account decreases as the bonds mature when theeffective interest method is used.D.The book value of the bond liability increases when interest payments are made on the due dateswhen the effective interest method of amortization is used.When bonds are issued at a premium, interest expense over the life of the bonds equals the totalpayments for interest minus the premium on bonds payable initial account balance.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 10-04 Report bonds payable and interest expense for bonds sold at a premium.Libby - Chapter 10 #63Topic Area: Reporting Bond Transactions

64. Assuming no adjusting journal entries have been made during the year, the journal entry to record the

cash interest payment on the due date for bonds issued at a premium results in which of the following?A. An increase in expenses and a decrease in liabilities.B. An increase in expenses and an increase in liabilities.C. A decrease in both liabilities and stockholders' equity.D. A decrease in both assets and liabilities.The journal entry to record the cash payment of interest on the due date increases interest expense anddecreases the premium on bonds payable account, an adjunct-liability account. Decreasing an adjunctliabilityaccount decreases the book value of the bonds.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 10-04 Report bonds payable and interest expense for bonds sold at a premium.Libby - Chapter 10 #64Topic Area: Reporting Bond Transactions

65. On July 1, 2010, Garden Works, Inc. issued $300,000 of ten-year, 7% bonds for $303,000. The bondswere dated July 1, 2010, and semi-annual interest will be paid each December 31 and June 30. GardenWorks Inc. uses the straight-line method of amortization. How much is the semi-annual interestexpense?A. $14,000B. $14,150C. $10,350D. $11,000The straight-line premium amortization ($150) = Premium on bonds payable ($303,000 - $300,000) ÷ 20semi-annual interest payments.Semi-annual interest expense ($10,350) = Semi-annual cash payment ($300,000 Å~ .07 Å~ 6/12) - Discounton bonds payable amortization ($150).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 10-04 Report bonds payable and interest expense for bonds sold at a premium.Libby - Chapter 10 #65Topic Area: Reporting Bond Transactions

66. On July 1, 2010, Garden Works, Inc. issued $300,000 of ten-year, 7% bonds for $303,000. The bondswere dated July 1, 2010, and semi-annual interest will be paid each December 31 and June 30. GardenWorks Inc. uses straight-line amortization. What is the bond liability to be reported on the December31, 2010 balance sheet?A. $300,000

B. $302,850C. $302,700D. $303,000The straight-line premium amortization ($150) = Premium on bonds payable ($303,000 - $300,000) ÷ 20semi-annual interest payments.December 31, 2010 bond liability ($302,850) = July 1, 2010 book value ($303,000) - December 31, 2010premium on bond payable amortization ($150).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 10-04 Report bonds payable and interest expense for bonds sold at a premium.Libby - Chapter 10 #66Topic Area: Reporting Bond Transactions

67. On July 1, 2010, Garden Works, Inc. issued $300,000 of ten-year, 7% bonds for $303,000. The bondswere dated July 1, 2010, and semi-annual interest will be paid each December 31 and June 30. GardenWorks Inc. uses straight-line amortization. What is the bond liability to be reported on the December31, 2011 balance sheet?A. $300,000B. $302,550C. $302,700D. $303,000The straight-line premium amortization ($150) = Premium on bonds payable ($303,000 - $300,000) ÷ 20semi-annual interest payments.December 31, 2011 bond liability ($302,550) = Initial issue price ($303,000) - Premium on bond payableamortization ($150 Å~ 3).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 10-04 Report bonds payable and interest expense for bonds sold at a premium.Libby - Chapter 10 #67Topic Area: Reporting Bond Transactions

68. On July 1, 2010, Garden Works, Inc. issued $300,000 of ten-year, 7% bonds for $303,000. The bondswere dated July 1, 2010, and semi-annual interest will be paid each December 31 and June 30. GardenWorks Inc. uses straight-line amortization. Which of the following statements is incorrect?A. The market rate of interest was less than the stated rate of interest on July 1, 2010.B.The interest expense during the life of the bonds is $3,000 less than the cash interest payments duringthe life of the bonds.

C. The book value of the bond liability decreases by $300 per year.D. The semi-annual interest expense is $300 less than the semi-annual interest payment.The straight-line premium amortization ($150) = Premium on bonds payable ($303,000 - $300,000) ÷ 20semi-annual interest payments. The semi-annual interest expense is therefore $150 less than the semiannualcash interest payment.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 10-04 Report bonds payable and interest expense for bonds sold at a premium.Libby - Chapter 10 #68Topic Area: Reporting Bond Transactions

69. Mayberry, Inc., issued $100,000 of 10 year, 12% bonds dated April 1, 2009, for $102,360 on April 1,2009. The bonds pay interest annually on April 1. Straight-line amortization is used by the company.What entry is needed at April 1, 2010 for the first interest payment?A. Option AB. Option BC. Option CD. Option DThe straight-line premium amortization ($236) = Premium on bonds payable ($102,360 - $100,000) ÷ 10annual interest payments.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 10-04 Report bonds payable and interest expense for bonds sold at a premium.Libby - Chapter 10 #69Topic Area: Reporting Bond Transactions

70. On January 1, 2010, a corporation issued a $400,000, 12% bond. The interest is payable semi-annuallyon June 30 and December 31. The issue price was $413,153 based on a 10% market interest rate.Assuming the effective-interest method of amortization is used, what is the interest expense for the sixmonthperiod ending June 30, 2010 (to the nearest dollar)?A. $24,000B. $24,789C. $20,000D. $20,658Interest expense ($20,658) = January 1, 2010 book value ($413,153) Å~ Six-month market rate of interest(10% Å~ 6/12)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: Apply

Difficulty: MediumLearning Objective: 10-04 Report bonds payable and interest expense for bonds sold at a premium.Libby - Chapter 10 #70Topic Area: Reporting Bond Transactions

71. On January 1, 2010, a corporation issued a $400,000, 12% bond. The interest is payable semi-annuallyon June 30 and December 31. The issue price was $413,153 based on a 10% effective (market) interestrate. Assuming the effective-interest method of amortization is used, what is the book value of the bondliability as of June 30, 2010 (to the nearest dollar)?A. $400,000B. $416,495C. $409,811D. $403,342June 30, 2010 interest expense ($20,658) = January 1, 2010 book value ($413,153) Å~ Six-month marketrate of interest (10% Å~ 6/12)June 30, 2010 book value ($409,811) = January 1, 2010 book value ($413,153) - June 30, 2010 premiumon bonds payable amortization [Interest expense ($20,658) - Cash interest payment ($400,000 Å~ .12 Å~ 6/12)]AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 10-04 Report bonds payable and interest expense for bonds sold at a premium.Libby - Chapter 10 #71Topic Area: Reporting Bond Transactions

72. On January 1, 2010, a corporation issued a $400,000, 12% bond. The interest is payable semi-annuallyon June 30 and December 31. The issue price was $413,153. Assuming the effective-interest method ofamortization is used, which of the following statements is incorrect?A. The market rate of interest on the sale date was less than the stated rate of interest.B. The book value of the bond will decrease as the bond matures.C. The interest expense will decrease as the bond matures.D. The amortization of the premium on bonds payable will decrease as the bond matures.The amortization of the premium on bonds payable increases over time because of the decreasinginterest expense relative to the constant cash payment.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 10-04 Report bonds payable and interest expense for bonds sold at a premium.Libby - Chapter 10 #72Topic Area: Reporting Bond Transactions

73. On January 1, 2010, a corporation issued a $400,000, 12% bond. The interest is payable semi-annually

on June 30 and December 31. The issue price was $413,153 based on a 10% effective (market) interestrate. Assuming the effective-interest method of amortization is used, what is the interest expense for thesix-month period ending December 31, 2010 (to the nearest dollar)?A. $24,000B. $20,491C. $20,000D. $20,825June 30, 2010 interest expense ($20,658) = January 1, 2010 book value ($413,153) Å~ Six-month marketrate of interest (10% Å~ 6/12).June 30, 2010 book value ($409,811) = January 1, 2010 book value ($413,153) - June 30, 2010 premiumon bonds payable amortization [Interest expense ($20,658) - Cash interest payment ($400,000 Å~ .12 Å~ 6/12)].December 31, 2010 interest expense ($20,491) = June 30, 2010 book value ($409,811) Å~ Six-monthmarket rate of interest (10% Å~ 6/12).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 10-04 Report bonds payable and interest expense for bonds sold at a premium.Libby - Chapter 10 #73Topic Area: Reporting Bond Transactions

74. On January 1, 2010, a corporation issued a $400,000, 12% bond. The interest is payable semi-annuallyon June 30 and December 31. The issue price was $413,153 based on a 10% effective (market) interestrate. Assuming the effective-interest method of amortization is used, what is the book value of the bondliability on December 31, 2010 (to the nearest dollar)?A. $400,000B. $413,320C. $406,302D. $407,432June 30, 2010 interest expense ($20,658) = January 1, 2010 book value ($413,153) Å~ Six-month marketrate of interest (10% Å~ 6/12).June 30, 2010 book value ($409,811) = January 1, 2010 book value ($413,153) - June 30, 2010 premiumon bonds payable amortization [Interest expense ($20,658) - Cash interest payment ($400,000 Å~ .12 Å~ 6/12)].December 31, 2010 interest expense ($20,491) = June 30, 2010 book value ($409,811) Å~ Six-month

market rate of interest (10% Å~ 6/12).December 31, 2010 book value ($406,302) = June 30, 2010 book value ($409,811) - December 31, 2010premium on bonds payable amortization [Interest expense ($20,491) - Cash interest payment ($400,000Å~ .12 Å~ 6/12)].AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 10-04 Report bonds payable and interest expense for bonds sold at a premium.Libby - Chapter 10 #74Topic Area: Reporting Bond Transactions

75. Which of the following statements regarding the effective-interest method of amortization is incorrect?A. The amount of interest expense is different each period.B. The amount of discount or premium that is amortized increases each period.C. It is one of the options according to generally accepted accounting principles.D.The total interest expense over the life of a bond is the same as that reported under the straight-linemethod of amortization.The effective-interest method of amortization is required by generally accepted accounting principlesunless the amounts are immaterial.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 10-03 Report bonds payable and interest expense for bonds sold at a discount.Learning Objective: 10-04 Report bonds payable and interest expense for bonds sold at a premium.Libby - Chapter 10 #75Topic Area: Reporting Bond Transactions

76. Skylar Corporation issued $50,000,000 of its 10% bonds at par on January 1, 2010. On December 31,2010 the bonds were trading on the bond exchange at 102.5. Since the issue date, what has happened tothe market rate of interest?A. The market rate increased.B. The market rate decreased.C. The market rate stayed the same.D. The change in the market rate can't be determined.Given that the bonds sold for par value on January 1, 2010, the stated interest rate equaled the marketrate of interest. As of December 31, 2010, the bonds were selling at a premium, which means that thestated rate was greater than the market rate on December 31, 2010, therefore the market rate of interestdecreased.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Measurement

Bloom's: ApplyDifficulty: HardLearning Objective: 10-04 Report bonds payable and interest expense for bonds sold at a premium.Libby - Chapter 10 #76Topic Area: Reporting Bond Transactions

77. Straight-line amortization of a premium related to a bond issuance would result in which of thefollowing?A. Interest expense to be calculated by multiplying the market interest rate times the book value of thebonds.B. Higher premium amortization in the early years and lower interest expense over the life of the bonds.C.Calculating the constant amount of premium to be amortized and then deducting it from cash interestto calculate interest expense.D.Lower premium amortization in the early years and higher interest expense over the life of thebonds.Interest expense = Cash interest payment - Equal premium amortizationAACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 10-04 Report bonds payable and interest expense for bonds sold at a premium.Libby - Chapter 10 #77Topic Area: Reporting Bond Transactions

78. Eaton Company issued $5 million of bonds. The stated rate of interest was 10% and the market rate was11%. Which of the following statements is correct?A. The bonds were issued at a premium.B. Annual interest expense will exceed the company's actual cash payments for interest.C. Annual interest expense will be $500,000.D. The book value of the bond will decrease as the bond matures.Given that the market rate of interest exceeded the stated rate of interest, the bonds sold at a discount.The annual interest expense exceeds the cash interest payments by the initial amount of discount onbonds payable.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 10-04 Report bonds payable and interest expense for bonds sold at a premium.Libby - Chapter 10 #78Topic Area: Reporting Bond Transactions

79. A company issued bonds when the stated rate of interest was 10% and the market rate was 8%. Whichof the following statements is incorrect?A. The bonds were issued at a premium.B. Annual interest expense will be less than the company's annual cash payments for

interest.C. The book value of the bonds will decrease as the bond matures.D. The annual interest expense will increase if the effective-interest method of amortization was used.Given that the market rate of interest was less than the stated rate of interest, the bonds sold at apremium. Therefore, the book value decreases as the premium on bond payable account is amortized, asa result interest expense decreases.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 10-04 Report bonds payable and interest expense for bonds sold at a premium.Libby - Chapter 10 #79Topic Area: Reporting Bond Transactions

80. A company issued bonds when the stated rate of interest was 10% and the market rate was 10%. Whichof the following statements is incorrect?A. The bonds were issued at par.B. Annual interest expense will equal the company's annual cash payments for interest.C. The book value of the bonds will decrease as cash interest payments are made.D.Annual interest expense is the same regardless of whether the effective- interest or straight-linemethod of amortization is used.The cash payment of interest on the due date increases expenses and decreases assets. The paymentdoes not affect the book value of the bond liability.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 10-02 Report bonds payable and interest expense for bonds sold at par and analyze the times interest earned ratio.Libby - Chapter 10 #80Topic Area: Reporting Bond Transactions

81. A company prepared the following journal entry:Interest expenseDiscount on bonds payableCashWhich of the following statements correctly describes the effect of this journal entry on the financialstatements?A. The bonds payable book value increases by the amount of the credit to discount on bonds payable.B. The bonds payable book value decreases by the amount of the credit to cash.C. Stockholders' equity decreases by the amount of the credit to cash.D. The cash payment is reported as a cash flow from financing activities.The bond payable book value increases as the discount on bond payable account is amortized (credited).AACSB: Reflective Thinking

AICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 10-03 Report bonds payable and interest expense for bonds sold at a discount.Learning Objective: 10-07Libby - Chapter 10 #81Topic Area: Reporting Bond Transactions

82. A company prepared the following journal entry:Interest expensePremium on bonds payableCashWhich of the following statements incorrectly describes the effect of this journal entry on the financialstatements?A. The bonds payable book value decreases by the amount of the debit to premium on bonds payable.B. Assets decrease by the amount of the credit to cash.C. Stockholders' equity decreases by the amount of the debit to interest expense.D. The cash payment is reported as a cash flow from financing activities.The cash payment is reported as a cash flow from operating activities.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 10-04 Report bonds payable and interest expense for bonds sold at a premium.Learning Objective: 10-07Libby - Chapter 10 #82Topic Area: Reporting Bond Transactions

83. A company prepared the following journal entry:CashDiscount on bonds payableBonds payableWhich of the following statements incorrectly describes the effect of this journal entry on the financialstatements?A. Total liabilities increase by the amount of the credit to bonds payable.B. Discount on bonds payable is reported on the balance sheet as a contra-liability account.C. Assets increase by the amount of the debit to cash.D. The cash inflow (debit) is reported as a cash flow from financing activities.Total liabilities increase by the amount of the debit to cash.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 10-03 Report bonds payable and interest expense for bonds sold at a discount.Learning Objective: 10-07Libby - Chapter 10 #83Topic Area: Reporting Bond Transactions

84. A company prepared the following journal entry:CashPremium on bonds payable

Bonds payableWhich of the following statements correctly describes the effect of this journal entry on the financialstatements?A. Total liabilities increase by the amount of the debit to cash.B. Premium on bonds payable is reported on the balance sheet as a contra-liability account.C. Total liabilities increase by the amount of the credit to bonds payable.D. The credit to bonds payable is the amount reported as a cash flow from financing activities.Total liabilities increase by the amount of the debit to cash.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 10-03 Report bonds payable and interest expense for bonds sold at a discount.Learning Objective: 10-07Libby - Chapter 10 #84Topic Area: Reporting Bond Transactions

85. During 2010, Patty's Pizza reported net income of $4,212 million, interest expense of $167 million andincome tax expense of $1,372 million. During 2009, they reported net income of $3,568 million, interestexpense of $163 million and income tax expense of $1,424 million. What was the times interest earnedratio for 2010 and 2009 respectively?A. 32.2 and 29.4 timesB. 28.4 and 23.8 timesC. 34.4 and 31.6 timesD. 34.1 and 26.6 timesTimes interest earned = (Net income + Interest expense + Income tax expense) ÷ Interest expense2010 times interest earned (34.4) = ($4,212 + $167 + $1,372) ÷ $1672009 times interest earned (31.6) = ($3,568 + $163 + $1,424) ÷ $163AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 10-02 Report bonds payable and interest expense for bonds sold at par and analyze the times interest earned ratio.Libby - Chapter 10 #85Topic Area: Reporting Bond Transactions

86. When a bond payable is issued at a discount, subsequent amortization of the discount doesn't do whichof the following?A. Increase interest expense.B. Increase the book value of the bonds.C.Increase in amount amortized for each year the bond gets older when the effective-interest method isused.D. Increase the amount reported as a cash flow from operating activities.

The amount reported as a cash flow is the cash payment which is unaffected by amortization of thediscount.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 10-03 Report bonds payable and interest expense for bonds sold at a discount.Learning Objective: 10-07Libby - Chapter 10 #86Topic Area: Reporting Bond Transactions

87. Which of the following is correct when using the effective-interest method of amortizing the discounton bonds payable?A. Interest expense is computed by adding the portion of amortized discount to the cash interest paid.B. The amount of interest expense recognized each period increases over time.C. The amount of discount amortized each period decreases over time.D. The book value of the bonds payable liability decreases.The bonds payable book value increases as the discount is amortized. As the book value increases,interest expense increases when the effective-interest method is used.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 10-03 Report bonds payable and interest expense for bonds sold at a discount.Libby - Chapter 10 #87Topic Area: Reporting Bond Transactions

88. When a bond payable is issued at a premium, subsequent amortization of the premium does which ofthe following?A. Increase interest expense.B. Decrease the book value of the bonds.C.Decrease in amount amortized for each year the bond gets older when the effective-interest method isused.D. Decrease the amount reported as a cash flow from operating activities.Premium on bonds payable is an adjunct-liability account; amortization of the premium thereforedecreases the bonds payable book value.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 10-04 Report bonds payable and interest expense for bonds sold at a premium.Libby - Chapter 10 #88Topic Area: Reporting Bond Transactions

89. If a bond is issued at 101, the stated rate of interest wasA. higher than the market rate of interest.B. lower than the market rate of interest.C. equal to the market rate of interest.

D. not related to the market rate of interest.When a bond is issued at a premium, the stated rate of interest exceeds the market rate of interest.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 10-04 Report bonds payable and interest expense for bonds sold at a premium.Libby - Chapter 10 #89Topic Area: Reporting Bond Transactions

90. If a bond is issued at 98, the stated rate of interest wasA. higher than the market rate of interest.B. lower than the market rate of interest.C. equal to the market rate of interest.D. not related to the market rate of interest.When a bond is issued at a discount, the stated rate of interest is less than the market rate of interest.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 10-03 Report bonds payable and interest expense for bonds sold at a discount.Libby - Chapter 10 #90Topic Area: Reporting Bond Transactions

91. Which of the following statements regarding the debt to equity ratio is correct?A. A high ratio means that the company is primarily financed through stockholder investments.B. A higher ratio is preferred.C. It is a measure of a company's ability to pay its debt.D. It is a measure of investor and creditor risk.The debt to equity ratio measures debt relative to equity and is an assessment of investor and creditorrisk.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 10-03 Report bonds payable and interest expense for bonds sold at a discount.Libby - Chapter 10 #91Topic Area: Reporting Bond Transactions

92. On July 1, 2011, immediately after recording interest payments, Salsa, Inc. retired one fifth of its$500,000 of bonds payable for $97,500. The bonds were originally issued at par value in 2006. Whichof the following statements is correct?A. Stockholders' equity is not affected by the bond retirement.B. A gain of $2,500 will be reported on the income statement.C. A loss of $2,500 will be reported on the income statement.D. A gain of $402,500 will be reported on the income statement.The gain ($2,500) occurs because the cash payment ($97,500) is less than the bond payable book value

($100,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 10-03 Report bonds payable and interest expense for bonds sold at a discount.Libby - Chapter 10 #92Topic Area: Reporting Bond Transactions

93. A company prepared the following journal entry:Bonds payablePremium on bonds payableLoss on bond retirementCashWhich of the following statements is correct?A. The book value of the bonds was less than the cash payment.B. The increase in stockholders' equity equals the loss on the bond retirement.C.The decrease in assets is greater than the decrease in liabilities, therefore stockholders' equitydecreases.D. The net cash flow from financing activities decreases by the bonds payable book value.The decrease in stockholders' equity is the amount of the loss on bonds retirement.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 10-06 Report the early retirement of bonds.Learning Objective: 10-07Libby - Chapter 10 #93Topic Area: Reporting Bond Transactions

94. A company prepared the following journal entry:Bonds payablePremium on bonds payableGain on bond retirementCashWhich of the following statements is incorrect?A. The book value of the bonds was less than the cash payment.B. The increase in stockholders' equity equals the gain on the bond retirement.C. The decrease in assets is less than the decrease in liabilities.D. The net cash flow from financing activities decreases by the cash payment.Bond transactions are reported within the cash flow from financing activities section of a cash flowstatement.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 10-06 Report the early retirement of bonds.Learning Objective: 10-07Libby - Chapter 10 #94Topic Area: Reporting Bond Transactions

95. On March 31, 2010, Bundy Corporation retired $10,000,000 of bonds which have an

unamortizedpremium of $500,000, by repurchasing them for $9,850,000. How much was the gain or loss on theretirement of the bonds?A. $150,000 lossB. $150,000 gainC. $650,000 gainD. $350,000 lossA gain on bond retirement ($650,000) occurs because the amount paid ($9,850,000) is less than the bookvalue of the bonds ($10,000,000 + $500,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 10-06 Report the early retirement of bonds.Libby - Chapter 10 #95Topic Area: Reporting Bond Transactions

96. A corporation retired $500,000 of bonds which have an unamortized discount of $10,000, byrepurchasing them for $500,000. How much was the gain or loss on the retirement of the bonds?A. There was no gain or loss.B. There was a $10,000 loss.C. There was a $10,000 gain.D. There was a $500,000 loss.A loss on bond retirement ($10,000) occurs because the amount paid ($500,000) is greater than the bookvalue of the bonds ($500,000 - $10,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 10-06 Report the early retirement of bonds.Libby - Chapter 10 #96Topic Area: Reporting Bond Transactions

97. A corporation retired $900,000 of bonds which have an unamortized discount of $30,000, byrepurchasing them for $920,000. How much was the gain or loss on the retirement of the bonds?A. There was a $50,000 loss.B. There was a $10,000 loss.C. There was a $10,000 gain.D. There was a $20,000 loss.A loss on bond retirement ($50,000) occurs because the amount paid ($920,000) is greater than the bookvalue of the bonds ($900,000 - $30,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: Apply

Difficulty: MediumLearning Objective: 10-06 Report the early retirement of bonds.Libby - Chapter 10 #97Topic Area: Reporting Bond Transactions

98. A corporation retired $200,000 of bonds which have an unamortized premium of $8,000, byrepurchasing them for $210,000. How much was the gain or loss on the retirement of the bonds?A. There was a $10,000 loss.B. There was a $2,000 loss.C. There was a $10,000 gain.D. There was an $18,000 loss.A loss on bond retirement ($2,000) occurs because the amount paid ($210,000) is greater than the bookvalue of the bonds ($200,000 + $8,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 10-06 Report the early retirement of bonds.Libby - Chapter 10 #98Topic Area: Reporting Bond Transactions

99. Which of the following statements is correct?A. An outflow of cash for interest payments is reported as a cash flow from financing activities.B. The conversion of bonds to stock is reported as a cash flow from financing activities.C.An outflow of cash when callable bonds are recalled by the issuer is reported as a cash flow fromfinancing activities.D.Amortization of discounts and premiums on bonds payable are reported as a cash flow fromfinancing activities.Bond transactions involving a cash flow are reported within the cash flow from financing activitiessection of a cash flow statement.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 10-06 Report the early retirement of bonds.Learning Objective: 10-07Libby - Chapter 10 #99Topic Area: Reporting Bond Transactions

100. Which of the following statements is incorrect?A.It is common for companies to both retire debt and issue new bonds in the same year as a way toreplace higher interest rate debt with lower interest rate issuances.B. The cash payment of interest is reported as a cash flow from operating activities.C.Repurchasing bonds with cash creates a cash flow from investing activities when the issuing

corporation buys back the bonds.D.The cash payment to call an outstanding bond issue is reported as a cash flow from financingactivities.

ch11 Key1. Outstanding shares of stock are those shares which a corporation has the ability to issue as documentedin its charter in the state where incorporated.FALSEAuthorized shares of stock are those shares which a corporation has the ability to issue as documentedin its charter in the state where incorporated.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 11-01 Explain the role of stock in the capital structure of a corporation. Explain the role of stock in the capital structure of a corporation.Libby - Chapter 11 #1Topic Area: Understanding The Business

2. There would be 100,000 shares of common stock outstanding when the number of shares authorizedwas 150,000, issued shares totaled 120,000, and 20,000 shares were being held in the treasury.TRUEThe number of shares outstanding (100,000) equals the number of shares issued (120,000) minus thenumber of treasury shares (20,000).AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: MediumLearning Objective: 11-01 Explain the role of stock in the capital structure of a corporation. Explain the role of stock in the capital structure of a corporation.Libby - Chapter 11 #2Topic Area: Understanding The Business

3. Earnings per share are calculated by dividing net income by the number of outstanding shares ofcommon stock at year-end.FALSEEarnings per share are calculated by dividing net income by the average number of outstanding sharesof common stock during the period.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: RememberDifficulty: EasyLearning Objective: 11-02 Analyze the earnings per share ratio.Libby - Chapter 11 #3Topic Area: Key Ratio Analysis

4. Treasury stock is a corporation's own stock that was issued and then repurchased, and is still held by thecorporation.TRUEStock bought back and being held by the issuing company is called treasury stock.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 11-01 Explain the role of stock in the capital structure of a corporation. Explain the role of stock in the capital structure of a corporation.Libby - Chapter 11 #4Topic Area: Understanding The Business

5. Earnings per share increases when a company purchases treasury stock.TRUEThe earnings per share denominator is the average number of common shares outstanding. Purchasingtreasury stock reduces the number of outstanding shares and therefore increases earnings per share.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: MediumLearning Objective: 11-02 Analyze the earnings per share ratio.Libby - Chapter 11 #5Topic Area: Key Ratio Analysis

6. The issue of $5 par value common stock for $10 per share results in a $10 credit to the common stockaccount for each share issued.FALSEThe common stock account is credited for the par value ($5) of the issued shares.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: UnderstandDifficulty: EasyLearning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock.Libby - Chapter 11 #6Topic Area: Common Stock Transactions

7. The issue of $1 par value common stock for $10 per share results in a $9 credit to the capital in excessof par value account for each share issued.TRUEThe capital in excess of par value account is credited for $9; the excess of the selling price ($10) over thepar value ($1) of the issued shares.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: UnderstandDifficulty: EasyLearning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock.Libby - Chapter 11 #7Topic Area: Common Stock Transactions

8. Stockholders' equity decreases when a company purchases treasury stock.

TRUETreasury stock is reported on the balance sheet as a contra-equity account.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock.Libby - Chapter 11 #8Topic Area: Common Stock Transactions

9. Net income increases when treasury stock is sold for an amount in excess of its cost.FALSETreasury stock transactions do not affect net income.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock.Libby - Chapter 11 #9Topic Area: Common Stock Transactions

10. Total stockholders' equity increases when treasury stock is sold for an amount less than its cost.TRUETotal stockholders' equity increases by the treasury stock selling price.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock.Libby - Chapter 11 #10Topic Area: Common Stock Transactions

11. Net income decreases when treasury stock is sold for an amount less than its cost.FALSETreasury stock transactions do not affect net income.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock.Libby - Chapter 11 #11Topic Area: Common Stock Transactions

12. Total stockholders' equity of Grasse Company is not affected when a stockholder sells shares of GrasseCompany stock to another stockholder.TRUEA stock transaction between investors doesn't affect the stockholders' equity of Grasse Company.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock.Libby - Chapter 11 #12Topic Area: Common Stock Transactions

13. Total assets remain the same when a company uses cash to purchase treasury stock.FALSE

Total assets decrease by the amount of the cash payment; treasury stock is reported on the balance sheetas a contra-equity account.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock.Libby - Chapter 11 #13Topic Area: Common Stock Transactions

14. Common stockholders have voting rights and can declare cash dividends.FALSECommon stockholders do have voting rights; the board of directors declares dividends.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock.Libby - Chapter 11 #14Topic Area: Common Stock Transactions

15. Shares of stock held as treasury stock do not have voting rights or the right to receive dividends.TRUETreasury stock doesn't have stockholder rights.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock.Libby - Chapter 11 #15Topic Area: Common Stock Transactions

16. Most investors that are retired prefer to receive their return on investment in the form of stock priceappreciation rather in dividends.FALSEMost retired people tend to prefer their return on investment to be in the form of dividends.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 11-04 Discuss dividends and analyze transactions.Libby - Chapter 11 #16Topic Area: Common Stock Transactions

17. The dividend yield ratio is dividends per share divided by the number of shares outstanding.FALSEThe dividend yield ratio is dividends per share divided by the market price per share.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: RememberDifficulty: EasyLearning Objective: 11-05 Analyze the dividend yield ratio.Libby - Chapter 11 #17Topic Area: Key Ratio Analysis

18. The dividend yield ratio increases when the market price per share increases.FALSEThe dividend yield ratio is dividends per share divided by the market price per share. Therefore, theratio decreases when the market price per share increases.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: RememberDifficulty: MediumLearning Objective: 11-05 Analyze the dividend yield ratio.Libby - Chapter 11 #18Topic Area: Key Ratio Analysis

19. The dividend yield ratio increases when a cash dividend is paid.FALSEThe dividend yield ratio is dividends per share divided by the market price per share. The ratio increaseswhen a cash dividend is declared.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: RememberDifficulty: MediumLearning Objective: 11-05 Analyze the dividend yield ratio.Libby - Chapter 11 #19Topic Area: Key Ratio Analysis

20. A company's assets and stockholders' equity decrease when a cash dividend is declared by its board ofdirectors.FALSELiabilities increase and stockholders' equity decreases when a cash dividend is declared.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 11-04 Discuss dividends and analyze transactions.Libby - Chapter 11 #20Topic Area: Common Stock Transactions

21. A company's assets and liabilities decrease when they pay a previously declared cash dividend.TRUEAssets (cash) decrease and liabilities (dividends payable) decrease when a previously declared cashdividend is paid.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 11-04 Discuss dividends and analyze transactions.Libby - Chapter 11 #21Topic Area: Common Stock Transactions

22. The declaration of a common stock dividend by a corporation's board of directors creates a liability onthe declaration date.FALSE

The declaration of a common stock dividend doesn't create a liability. The declaration affectsstockholder equity accounts only.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions.Libby - Chapter 11 #22Topic Area: Common Stock Transactions

23. The declaration and distribution of a common stock dividend results in a reduction of the issuingcorporation's total stockholders' equity.FALSERetained earnings decrease and common stock related accounts increase by equal amounts; therefore,total stockholders' equity doesn't change.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions.Libby - Chapter 11 #23Topic Area: Common Stock Transactions

24. The declaration and distribution of a 2-for-1 stock split results in a reduction of retained earnings.FALSEStock splits do not affect retained earnings. Stock splits reduce the par value per share of the stock andincrease the number of shares outstanding.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions.Libby - Chapter 11 #24Topic Area: Common Stock Transactions

25. A stock split results in the reduction of the par or stated value per share and a proportionate increase inthe number of shares outstanding.TRUEStock splits reduce the par value per share of the stock and increase the number of shares outstanding.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions.Libby - Chapter 11 #25Topic Area: Common Stock Transactions

26. Preferred stock often has a preference in the distribution of assets over common stock in the event ofdissolution of the corporation.

TRUEPreferred stockholders have a preference with respect to payment when a company is being dissolved.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: EasyLearning Objective: 11-07 Describe the characteristics of preferred stock and analyze transactions affecting preferred stock.Libby - Chapter 11 #26Topic Area: Preferred Stock

27. Preferred stockholders don't have voting rights but do have a preference with respect to dividendpayments.TRUEPreferred stockholders have a preference with respect to dividend payments, but don't have votingrights.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 11-07 Describe the characteristics of preferred stock and analyze transactions affecting preferred stock.Libby - Chapter 11 #27Topic Area: Preferred Stock

28. When a company reissues treasury stock, it creates a cash inflow from an investing activity becausetreasury stock is an investment asset on the balance sheet.FALSETreasury stock is reported on the balance sheet as a contra-equity account. Reissuing treasury stockcreates a cash flow from financing activities.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 11-08 Discuss the impact of captial stock transactions on cash flows.Libby - Chapter 11 #28Topic Area: Focus On Cash Flows

29. When a company issues common stock in exchange for cash, a cash inflow from a financing activity isreported.TRUEIssuing common or preferred stock in exchange for cash results in a cash inflow from financingactivities.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 11-08 Discuss the impact of captial stock transactions on cash flows.Libby - Chapter 11 #29Topic Area: Focus On Cash Flows

30. When a company pays its previously declared cash dividend, an investing cash

outflow is reported.FALSECash payments of dividends results in a cash outflow from financing activities.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: EasyLearning Objective: 11-08 Discuss the impact of captial stock transactions on cash flows.Libby - Chapter 11 #30Topic Area: Focus On Cash Flows

31. Which of the following statements is false?A. Stockholders have a residual claim on assets in the event of liquidation.B.Shares of stock held in the treasury are deducted from the number of issued shares in thedetermination of the number of outstanding shares.C. Common stockholders have voting rights at annual stockholder meetings.D. Corporations are governed by their stockholders.Corporations are governed by their board of directors.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 11-01 Explain the role of stock in the capital structure of a corporation. Explain the role of stock in the capital structure of a corporation.Libby - Chapter 11 #31Topic Area: Understanding The Business

32. RKJ Company has provided the following:• 100,000 shares of $5 par value common stock are authorized;• 70,000 shares have been issued;• 65,000 shares are outstanding.Which of the following statements is correct?A. RKJ has 35,000 shares of treasury stock.B. RKJ has 30,000 shares of treasury stock.C. RKJ can reissue an additional 35,000 shares of common stock.D. RKJ can issue an additional 30,000 shares of common stock.RKJ can issue an additional 30,000 shares of common stock (100,000 shares authorized minus 70,000shares already issued).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 11-01 Explain the role of stock in the capital structure of a corporation. Explain the role of stock in the capital structure of a corporation.Libby - Chapter 11 #32Topic Area: Understanding The Business

33. RKJ Company has provided the following:• 100,000 shares of $5 par value common stock are authorized;• 70,000 shares were issued for $9 per share;• 65,000 shares are outstanding.Which of the following statements is correct based only on the above facts?A. Common stock is reported at $630,000 on the balance sheet.

B. Additional-paid in capital is reported at $260,000 on the balance sheet.C. Common stock is reported at $350,000 on the balance sheet.D. Treasury stock is reported at $45,000 on the balance sheet.Common stock ($350,000) = Issued shares (70,000) Å~ Par value ($5)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock.Libby - Chapter 11 #33Topic Area: Common Stock Transactions

34. Which of the following represents the maximum number of shares of stock issuable to the public?A. Authorized sharesB. Issued sharesC. Outstanding sharesD. Treasury sharesThe maximum number of shares that can be issued equals the number of authorized shares.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 11-01 Explain the role of stock in the capital structure of a corporation. Explain the role of stock in the capital structure of a corporation.Libby - Chapter 11 #34Topic Area: Understanding The Business

35. Which of the following statements regarding earnings per share (EPS) is correct?A. It equals net income divided by the number of authorized common shares.B. It equals net income divided by the number of outstanding common shares.C. It equals net income divided by the number of issued common shares.D. It equals net income divided by the number of treasury shares.EPS is calculated by dividing net income by the number of outstanding shares of common stock.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: RememberDifficulty: MediumLearning Objective: 11-02 Analyze the earnings per share ratio.Libby - Chapter 11 #35Topic Area: Understanding The Business

36. Which of the following statements regarding earnings per share (EPS) is false?A. It increases when treasury stock is acquired.B. It increases when net income increases.C. It decreases when additional shares of common stock are issued.D. It decreases when the number of shares of common stock authorized increases.The EPS denominator is the number of outstanding shares, not the number of authorized shares.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: UnderstandDifficulty: MediumLearning Objective: 11-02 Analyze the earnings per share ratio.

Libby - Chapter 11 #36Topic Area: Understanding The Business

37. Which of the following statements regarding earnings per share (EPS) is correct?A. EPS can't be used to compare different size companies.B. Investors expect a higher EPS for companies with higher stock prices.C. It is calculated by dividing net income by the number of common shares issued.D. It increases when the number of shares of common stock outstanding increases.Generally speaking, a higher EPS is expected when the market price of a stock is relatively higher.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: UnderstandDifficulty: MediumLearning Objective: 11-02 Analyze the earnings per share ratio.Libby - Chapter 11 #37Topic Area: Understanding The Business

38. Which of the following represents the number of shares currently in the hands of investors?A. Authorized sharesB. Issued sharesC. Outstanding sharesD. Treasury sharesThe outstanding shares of stock represent stock currently held by investors.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: RememberDifficulty: MediumLearning Objective: 11-01 Explain the role of stock in the capital structure of a corporation. Explain the role of stock in the capital structure of a corporation.Libby - Chapter 11 #38Topic Area: Understanding The Business

39. Rye Company has provided the following information:• Number of issued common shares, 225,000;• Net income, $500,000;• Number of authorized common shares, 400,000;• Number of treasury shares, 25,000.What is Rye's earnings per share?A. $2.50B. $1.25C. $2.22D. $1.33Earnings per share ($2.50) = Net income ($500,000) ÷ Outstanding shares (225,000 - 25,000)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 11-02 Analyze the earnings per share ratio.Libby - Chapter 11 #39Topic Area: Understanding The Business

40. Kirova Company has provided the following information:• Number of issued common shares, 900,000;

• Net income, $1,000,000;• Number of authorized common shares, 1,000,000;• Number of outstanding common shares, 800,000• Number of treasury shares, 100,000.What is Kirova's earnings per share?A. $1.43B. $1.25C. $1.11D. $1.00Earnings per share ($1.25) = Net income ($1,000,000) ÷ Outstanding shares (800,000)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 11-02 Analyze the earnings per share ratio.Libby - Chapter 11 #40Topic Area: Understanding The Business

41. Which of the following statements about earnings per share is correct?A. Increased net income would cause earnings per share to decrease.B. Issuance of more common shares would cause earnings per share to increase.C. Purchasing treasury shares would cause earnings per share to decrease.D. It is calculated using the number of common shares of stock outstanding.The earnings per share denominator is the number of common shares outstanding.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: UnderstandDifficulty: MediumLearning Objective: 11-02 Analyze the earnings per share ratio.Libby - Chapter 11 #41Topic Area: Understanding The Business

42. CGJ Company has provided the following:• 200,000 shares of $5 par value common stock are authorized;• 140,000 shares of common stock were issued for $11 per share;• 130,000 shares are outstanding.Which of the following statements is false?A. Common stock is reported at $700,000 on the balance sheet.B. Additional-paid in capital is reported at $840,000 on the balance sheet.C. Stockholders' equity decreased $110,000 when the treasury stock was purchased.D. There are 10,000 shares of treasury stock.The amount paid for the treasury stock is not known.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock.Libby - Chapter 11 #42Topic Area: Common Stock Transactions

43. Which of the following journal entries doesn't reflect the initial cash sale of shares of common stock?A.B.

C.D.Gains and losses on the issue of stock are not recognized.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock.Libby - Chapter 11 #43Topic Area: Common Stock Transactions

44. Which of the following journal entries is correct when no-par common stock is initially issued for cash?A.B.C.D.Common stock is credited for the cash selling price when the stock doesn't have a par value (no-par).AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock.Libby - Chapter 11 #44Topic Area: Common Stock Transactions

45. Which of the following journal entries is correct when common stock is initially issued for cash at aprice in excess of the stock's stated value?A.B.C.D.Common stock is credited for stated value and capital in excess of par is credited for the excess of theselling price above stated value.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock.Libby - Chapter 11 #45Topic Area: Common Stock Transactions

46. Irish Corporation issued (sold) 10,000 shares of its no par common stock for $70 per share. The bylawsestablished a stated value of $10 per share. The transaction would increase the common stock accounton the balance sheet by how much?A. $0B. $600,000C. $100,000D. $700,000

Common stock is credited for stated value ($100,000) and capital in excess of par is credited for theexcess of the selling price above stated value ($600,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock.Libby - Chapter 11 #46Topic Area: Common Stock Transactions

47. Which of the following statements about treasury stock transactions is correct?A. The total number of shares issued increases when treasury stock is purchased.B. The total number of shares authorized changes when treasury stock is purchased.C. Gains and losses on treasury stock transactions are reported on the income statement.D. A stockholders' equity account is debited when treasury stock is purchased.Treasury stock is a contra-equity account with a debit balance.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock.Libby - Chapter 11 #47Topic Area: Common Stock Transactions

48. Watson Company has provided the following data about its common stock: par value per share, $1;authorized shares, 10,000,000; outstanding shares, 4,300,000; and issued shares 4,700,000. How manyshares of treasury stock are there?A. 0B. 5,700,000C. 5,300,000D. 400,000Outstanding shares (4,300,000) = Issued shares (4,700,000) - Treasury shares (400,000)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock.Libby - Chapter 11 #48Topic Area: Common Stock Transactions

49. During 2010, Thomas Corporation repurchased some shares of its own common stock. What effect didthis transaction have on 2010 stockholders' equity and earnings per share, respectively?A. Option AB. Option BC. Option CD. Option DTreasury stock is a contra-equity account, which therefore reduces stockholders' equity. Purchasingtreasury stock reduces the number of shares outstanding, which increases earnings per share given that

the number of outstanding shares is the earnings per share denominator.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock.Libby - Chapter 11 #49Topic Area: Common Stock Transactions

50. Which of the following entries would be recorded when a company reissues 1,000 shares of treasurystock for $50 per share when they were repurchased at a cost of $47 per share and have a $1 par value?A. Option AB. Option BC. Option CD. Option DTreasury stock is credited for its original cost ($47,000) and capital in excess of par value is credited for$3,000, the difference between the selling price ($50,000) and the original cost ($47,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock.Libby - Chapter 11 #50Topic Area: Common Stock Transactions

51. Which of the following entries would be recorded when a company reissues 1,000 shares of treasurystock for $40 per share when they were repurchased at a cost of $44 per share and have a $1 par value?A. Option AB. Option BC. Option CD. Option DTreasury stock is credited for its original cost ($44,000) and capital in excess of par value is debited for$4,000, the difference between the selling price ($40,000) and the original cost ($44,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock.Libby - Chapter 11 #51Topic Area: Common Stock Transactions

52. A company reported the following asset and liability balances at the end of 2009 and 2010:During 2010, cash dividends of $50,000 were declared and paid, and common stock was issued for$100,000. How much was the 2010 net income?A. $400,000B. $480,000

C. $350,000D. $300,000(1) 2009 stockholders' equity ($3,600,000) = Assets ($6,800,000) - Liabilities ($3,200,000).(2) 2010 stockholders' equity ($4,000,000) = Assets ($7,600,000) - Liabilities ($3,600,000).(3) The change in stockholders' equity during 2010 ($400,000) = 2010 equity ($4,000,000) - 2009 equity($3,600,000).(4) The change in stockholders' equity during 2010 ($400,000) = The change in contributed capital($100,000) + The change in retained earnings ($300,000)(5) The change in retained earnings ($300,000) = Net income ($350,000) - Dividends ($50,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 11-04 Discuss dividends and analyze transactions.Libby - Chapter 11 #52Topic Area: Common Stock Transactions

53. On December 15, 2009, the board of directors of Cross Corporation declared a cash dividend, payableon January 8, 2010 of $.80 per share on the 2,000,000 common shares outstanding. On December 15,2009, Cross Corporation shouldA.not prepare a journal entry because the event had no effect on the corporation's financial positionuntil 2010.B. decrease retained earnings $1.6 million and increase expenses $1.6 million.C. decrease retained earnings $1.6 million and increase liabilities by $1.6 million.D. decrease cash $1.6 million and decrease retained earnings $1.6 million.Retained earnings is debited (decreased) and dividends payable, a liability, is credited (increased) for$1.6 million (2,000,000 shares Å~ $.80).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 11-04 Discuss dividends and analyze transactions.Libby - Chapter 11 #53Topic Area: Common Stock Transactions

54. The declaration and payment of a cash dividendA. reduces retained earnings and increases liabilities by the amount of the dividend.B. reduces retained earnings and increases contributed capital by the same amount.C. reduces assets and increases liabilities by the amount of the dividend.D. reduces both assets and retained earnings by the amount of the dividend.Dividends are distributions of retained earnings and therefore decrease retained earnings. The cashpayment reduces assets.

AACSB: UnderstandAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: ApplyDifficulty: MediumLearning Objective: 11-04 Discuss dividends and analyze transactions.Libby - Chapter 11 #54Topic Area: Common Stock Transactions

55. Which of the following correctly describes the affect of declaring and distributing a common stockdividend?A. Total stockholders' equity decreases.B. Total stockholders' equity remains the same.C. The number of shares outstanding increases while the par value of each share decreases.D. The number of shares outstanding decreases while the par value of each share increases.The declaration and distribution affects stockholder equity accounts only; retained earnings decreases,common stock and capital in excess of par increases in total by an amount equal to the retained earningsdecrease.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions.Libby - Chapter 11 #55Topic Area: Financial Analysis

56. A stock dividendA. results in a transfer of retained earnings to contributed capital.B.increases the number of shares outstanding and involves a pro rata reduction in the par value pershare.C. is accounted for in exactly the same manner as a stock split.D.results in a transfer of retained earnings to contributed capital and also increases the number of sharesoutstanding and involves a pro rata reduction in the par value per share.The declaration and distribution of a stock dividend affects stockholder equity accounts only; retainedearnings decreases, common stock and capital in excess of par (the sum of these two accounts iscontributed capital) increases in total by an amount equal to the retained earnings decrease.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions.Libby - Chapter 11 #56Topic Area: Financial Analysis

57. DORA Company declared and distributed a 10% stock dividend on 20,000 shares of issued andoutstanding $5 par value common stock. The market price per share on the declaration date was $9and was $10 on the distribution date. Which of the following correctly describes the accounting for thedeclaration and distribution of the stock dividend?A. Retained earnings decreased $20,000.B. Capital in excess of par increased $10,000.C. Common stock increased $18,000.D. Retained earnings decreased $18,000.The retained earnings decrease ($18,000) equals the number of shares issued (20,000 Å~ 10%) multipliedby the market price per share ($9) on the declaration date.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: ApplyDifficulty: MediumLearning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions.Libby - Chapter 11 #57Topic Area: Financial Analysis

58. Chicago Clock Corporation issued a 3-for-2 stock split of its common stock, which had a par value of$100 before the split. What dollar amount of retained earnings should be transferred to the commonstock account?A. Par value of $100 per share.B. Market value per share on the issue date.C. Half of the previous total amount in the common stock account.D. Retained earnings aren't transferred to the common stock account.Retained earnings and common stock are unaffected by stock splits. Stock splits reduce the par valueper share and increase the number of common shares authorized, issued and outstanding.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions.Libby - Chapter 11 #58Topic Area: Financial Analysis

59. Which of the following statements is false?A. Stock splits reallocate amounts between retained earnings and contributed capital accounts.B. Both stock splits and stock dividends increase the common shares issued.C. Both stock splits and stock dividends increase the common shares outstanding.D. Both stock splits and stock dividends have the impact of reducing the market price of the stock.Retained earnings is unaffected by stock splits.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting

Blooms: UnderstandDifficulty: MediumLearning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions.Libby - Chapter 11 #59Topic Area: Financial Analysis

60. A company has 4 million common shares authorized, 2.5 million shares issued and 100,000 treasuryshares. The par value is $1 per share and the market price is $30 when the company declares a 4-for-1stock split. Which of the following is correct?A. There will be a transfer of $2.4 million from retained earnings to contributed capital.B.Only the shares outstanding will quadruple to 49.86 million and the par value will be reduced to $.25per share.C.The shares authorized, issued, outstanding, and held in treasury will all quadruple while the par valuewill be reduced to $.25 per share.D.The company will be unable to declare a 4-for-1 split because they do not have enough authorizedshares to issue the needed 49.86 million shares.Four shares of $.25 par value common stock will be issued for every share of $1 par value commonstock.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions.Libby - Chapter 11 #60Topic Area: Financial Analysis

61. A company declares a 40% stock dividend when there were 4 million common shares outstanding witha $1 par value. The current market price is $20 per common share. Which of the following will be theeffect of the stock dividend?A. Retained earnings will decrease by $1.6 million and contributed capital will increase by $1.6 million.B. Contributed capital will decrease by $1.6 million and retained earnings will increase by $1.6 million.C. Retained earnings will decrease by $32 million and contributed capital will increase by $32 million.D. Contributed capital will decrease by $32 million and retained earnings will increase by $32 million.For a large stock dividend, the retained earnings decrease ($1.6 million) and contributed capital increase($1.6 million) equals the number of shares issued (4 million Å~ 40%) multiplied by the par value pershare ($1) on the declaration date.

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions.Libby - Chapter 11 #61Topic Area: Financial Analysis

62. Davidson Company has 10,000,000 common shares issued and 500,000 shares of treasury stock. Thestock's par value is $2 per share and its current market price is $25 per share. Which of the following iscorrect when a 15% stock dividend is declared and distributed?A. Retained earnings will decrease $37.5 million.B. Retained earnings will decrease $35.625 million.C. Retained earnings will decrease $3 million.D. Retained earnings will decrease $2.85 million.The retained earnings decrease ($35.625 million) equals the number of shares issued {(10,000,000 -500,000) Å~ 15%} multiplied by the market price per share ($25).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions.Libby - Chapter 11 #62Topic Area: Financial Analysis

63. Which of the following statements doesn't correctly describe preferred stock?A. Preferred shareholders have a preference with respect to dividend payments.B. Preferred shareholders have a preference with respect to assets in the event of liquidation.C. Preferred shareholders have voting rights on a per share basis.D. Preferred stock typically has a fixed dividend rate.Preferred stock doesn't provide voting rights.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: UnderstandDifficulty: MediumLearning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions.Libby - Chapter 11 #63Topic Area: Financial Analysis

64. What is the correct entry for the sale of 1,000 shares of $10 par value preferred stock for $50,000 cash?A. Option AB. Option BC. Option CD. Option DThe preferred stock credit is for par value (1,000 Å~ $10) and the capital in excess of par credit is for theexcess of the selling price over par value {($50 - $10) Å~ 1,000}.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: Apply

Difficulty: MediumLearning Objective: 11-07 Describe the characteristics of preferred stock and analyze transactions affecting preferred stock.Libby - Chapter 11 #64Topic Area: Financial Analysis

65. Which of the following doesn't correctly describe preferred stock?A. Preferred stock has a higher priority status relative to common stock.B. Preferred shareholders are guaranteed to receive dividends.C. Preferred stock usually does not carry voting rights.D. Preferred stockholders receive dividends in arrears only if the shares are cumulative.Preferred shareholders only are entitled to dividends when they are declared. There is no guarantee theywill receive dividends.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: ApplyDifficulty: MediumLearning Objective: 11-07 Describe the characteristics of preferred stock and analyze transactions affecting preferred stock.Libby - Chapter 11 #65Topic Area: Financial Analysis

66. Assume the following capital structure:Preferred stock, 6%, $50 par value, 1,000 shares issued and outstanding with dividends in arrears forthree prior years (2007 - 2009).Common stock, $100 par value, 2,000 shares issued and outstanding.Total dividends declared and paid in 2010 were $50,000. How much of the 2010 dividend will be paidto the common stockholders assuming the preferred stock is cumulative?A. $12,000B. $50,000C. $47,000D. $38,000The preferred stock annual dividend ($3,000) = Preferred stock par value (1,000 Å~ $50) multiplied times6%.The 2010 dividend payment to the preferred stockholders ($12,000) equals the annual dividend ($3,000)multiplied by four years (2007 - 2010).The 2010 dividend payment to the common stockholders ($38,000) equals the 2010 dividenddeclaration ($50,000) minus the dividend payment to the preferred stockholders ($12,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 11-07 Describe the characteristics of preferred stock and analyze transactions affecting preferred stock.Libby - Chapter 11 #66Topic Area: Financial Analysis

67. Assume the following capital structure:Preferred stock, 6%, $50 par value, 1,000 shares issued and outstanding with dividends in arrears for

three prior years (2007 - 2009).Common stock, $100 par value, 2,000 shares issued and outstanding.Total dividends declared and paid in 2010 were $50,000. How much of the 2010 dividend will be paidto the preferred stockholders assuming the preferred stock is cumulative?A. $12,000B. $3,000C. $47,000D. $38,000The preferred stock annual dividend ($3,000) = Preferred stock par value (1,000 Å~ $50) multiplied times6%.The 2010 dividend payment to the preferred stockholders ($12,000) equals the annual dividend ($3,000)multiplied by four years (2007 - 2010).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 11-07 Describe the characteristics of preferred stock and analyze transactions affecting preferred stock.Libby - Chapter 11 #67Topic Area: Financial Analysis

68. Assume the following capital structure:Preferred stock, 6%, $50 par value, 1,000 shares issued and outstanding with dividends in arrears forthree prior years (2007 - 2009).Common stock, $100 par value, 2,000 shares issued and outstanding.Total dividends declared and paid in 2010 were $50,000. How much of the 2010 dividend will be paidto the preferred stockholders assuming the preferred stock is noncumulative?A. $12,000B. $3,000C. $47,000D. $38,000The preferred stock annual dividend ($3,000) = Preferred stock par value (1,000 Å~ $50) multiplied times6%. The preferred stockholders do not receive the dividends in arrears because the preferred stock isnoncumulative.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 11-07 Describe the characteristics of preferred stock and analyze transactions affecting preferred stock.Libby - Chapter 11 #68Topic Area: Financial Analysis

69. Assume the following capital structure:Preferred stock, 6%, $50 par value, 1,000 shares issued and outstanding with dividends in arrears forthree prior years (2007 - 2009).

Common stock, $100 par value, 2,000 shares issued and outstanding.Total dividends declared and paid in 2010 were $50,000. How much of the 2010 dividend will be paidto the common stockholders assuming the preferred stock is noncumulative?A. $12,000B. $3,000C. $47,000D. $38,000The preferred stock annual dividend ($3,000) = Preferred stock par value (1,000 Å~ $50) multiplied times6%. The preferred stockholders do not receive the dividends in arrears because the preferred stock isnoncumulative.The 2010 dividend payment to the common stockholders ($47,000) equals the 2010 dividenddeclaration ($50,000) minus the dividend payment to the preferred stockholders ($3,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 11-07 Describe the characteristics of preferred stock and analyze transactions affecting preferred stock.Libby - Chapter 11 #69Topic Area: Financial Analysis

70. Slickers, Inc. had the following capital structure during 2010:Preferred stock, 7%, $50 par value, 1,000 shares issued and outstanding with dividends in arrears for2008 and 2009.Common stock, $100 par value, 2,000 shares issued and outstanding.The total dividends declared and paid during 2010 totaled $25,000. How much of the dividend is paid tothe preferred stockholders during 2010 assuming the preferred stock is cumulative?A. $3,500B. $7,000C. $10,500D. $14,500The preferred stock annual dividend ($3,500) = Preferred stock par value (1,000 Å~ $50) multiplied times7%. The 2010 dividend payment to the preferred stockholders ($10,500) equals the annual dividend($3,500) multiplied by three years (2008 - 2010).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 11-07 Describe the characteristics of preferred stock and analyze transactions affecting preferred stock.Libby - Chapter 11 #70Topic Area: Financial Analysis

71. Slickers, Inc. had the following capital structure during 2010:Preferred stock, 7%, $50 par value, 1,000 shares issued and outstanding with dividends in arrears for

2008 and 2009.Common stock, $100 par value, 2,000 shares issued and outstanding.The total dividends declared and paid during 2010 totaled $25,000. How much of the dividend is paid tothe preferred stockholders during 2010 assuming the preferred stock is noncumulative?A. $3,500B. $7,000C. $10,500D. $14,500The preferred stock annual dividend ($3,500) = Preferred stock par value (1,000 Å~ $50) multiplied times7%. The preferred stockholders do not receive the dividends in arrears because the preferred stock isnoncumulative.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 11-07 Describe the characteristics of preferred stock and analyze transactions affecting preferred stock.Libby - Chapter 11 #71Topic Area: Financial Analysis

72. Slickers, Inc. had the following capital structure during 2010:Preferred stock, 7%, $50 par value, 1,000 shares issued and outstanding with dividends in arrears for2008 and 2009.Common stock, $100 par value, 2,000 shares issued and outstanding.The total dividends declared and paid during 2010 totaled $25,000. How much of the dividend is paid tothe common stockholders during 2010 assuming the preferred stock is noncumulative?A. $3,500B. $7,000C. $21,500D. $14,500The preferred stock annual dividend ($3,500) = Preferred stock par value (1,000 Å~ $50) multiplied times7%. The preferred stockholders do not receive the dividends in arrears because the preferred stock isnoncumulative. The 2010 dividend payment to the common stockholders ($21,500) equals the 2010dividend declaration ($25,000) minus the dividend payment to the preferred stockholders ($3,500).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 11-07 Describe the characteristics of preferred stock and analyze transactions affecting preferred stock.Libby - Chapter 11 #72Topic Area: Financial Analysis

73. Slickers, Inc. had the following capital structure during 2010:Preferred stock, 7%, $50 par value, 1,000 shares issued and outstanding with dividends in

arrears for2008 and 2009.Common stock, $100 par value, 2,000 shares issued and outstanding.The total dividends declared and paid during 2010 totaled $25,000. How much of the dividend is paid tothe common stockholders during 2010 assuming the preferred stock is cumulative?A. $3,500B. $7,000C. $22,500D. $14,500The preferred stock annual dividend ($3,500) = Preferred stock par value (1,000 Å~ $50) multiplied times7%. The 2010 dividend payment to the preferred stockholders ($10,500) equals the annual dividend($3,500) multiplied by three years (2008 - 2010).The 2010 dividend payment to the common stockholders ($14,500) equals the 2010 dividenddeclaration ($25,000) minus the dividend payment to the preferred stockholders ($10,500).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 11-07 Describe the characteristics of preferred stock and analyze transactions affecting preferred stock.Libby - Chapter 11 #73Topic Area: Financial Analysis

74. Which of the following is a correct statement about cumulative and noncumulative preferred stock?A. They both receive dividends in arrears.B.Cumulative stock's undeclared dividends accumulate each year until paid, while noncumulativestock's right to receive dividends is forfeited in any year that dividends are not declared.C. Cumulative preferred stock is guaranteed to receive their dividends.D.Cumulative preferred stock's right to receive dividends is forfeited in any year that dividends are notdeclared. However, noncumulative stock's undeclared dividends accumulate each year until paid.Cumulative preferred stockholders have the right to receive dividends in arrears when dividends aresubsequently declared.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: UnderstandDifficulty: MediumLearning Objective: 11-07 Describe the characteristics of preferred stock and analyze transactions affecting preferred stock.Libby - Chapter 11 #74Topic Area: Financial Analysis

75. Cornhusker Corporation plans to raise $10 million cash on January 1, 2010, by issuing either bondspayable (8% interest rate) or cumulative preferred stock (8% dividend rate). How would the annualinterest amount on the bonds or annual preferred dividend amount (if paid) affect the net income for theyear ended December 31, 2010?A.Net income would be reduced by the annual interest on the bonds and by the annual preferred stockdividends.B.Net income would be reduced by the annual interest on the bonds but not by the annual preferredstock dividends.C.Net income would not be reduced by either the annual interest on the bonds or the annual preferredstock dividends.D.Net income would be reduced by the annual preferred dividends but not by the annual interest on thebonds.Annual interest on bonds is reported as interest expense on the income statement and would reduce netincome. Preferred stock dividends are not reported on the income statement.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 11-07 Describe the characteristics of preferred stock and analyze transactions affecting preferred stock.Libby - Chapter 11 #75Topic Area: Financial Analysis

76. CBA Company reported total stockholders' equity of $85,000 on its balance sheet dated December31, 2010. During the year ended December 31, 2011, CBA reported net income of $10,000, declaredand paid a cash dividend of $2,000, and issued additional common stock for $20,000. What is totalstockholders' equity as of December 31, 2011?A. $117,000B. $113,000C. $109,000D. $101,000December 31, 2011 stockholders' equity ($113,000) = December 31, 2010 stockholders' equity($85,000) + 2011 net income ($10,000) - 2011 dividend declarations ($2,000) + 2011 common stockissued ($20,000)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: Medium

Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock.Libby - Chapter 11 #76Topic Area: Common Stock Transactions

77. A company reported total stockholders' equity of $170,000 on its balance sheet dated December31, 2010. During the year ended December 31, 2011, the company reported net income of $20,000,declared and paid a cash dividend of $4,000, declared and distributed a 10% stock dividend with a$5,000 total market value, and issued additional common stock for $40,000. What is total stockholders'equity as of December 31, 2011?A. $234,000B. $226,000C. $231,000D. $221,000December 31, 2011 stockholders' equity ($226,000) = December 31, 2010 stockholders' equity($170,000) + 2011 net income ($20,000) - 2011 cash dividend declarations ($4,000) + 2011 commonstock issued ($40,000). Stock dividends do not affect total stockholders' equity.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock.Libby - Chapter 11 #77Topic Area: Common Stock Transactions

78. A company reported total stockholders' equity of $340,000 on its balance sheet dated December31, 2010. During the year ended December 31, 2011, the company reported net income of $40,000,declared and paid a cash dividend of $8,000, declared and distributed a 10% stock dividend with a$10,000 total market value, purchased treasury stock costing $12,000, and issued additional commonstock for $60,000. What is total stockholders' equity as of December 31, 2011?A. $432,000B. $410,000C. $444,000D. $420,000December 31, 2011 stockholders' equity ($420,000) = December 31, 2010 stockholders' equity($340,000) + 2011 net income ($40,000) - 2011 cash dividend declarations ($8,000) - treasury stockpurchase ($12,000) + 2011 common stock issue ($60,000). Stock dividends do not affect totalstockholders' equity.AACSB: AnalyticAICPA BB: Critical Thinking

AICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock.Libby - Chapter 11 #78Topic Area: Common Stock Transactions

79. A company reported total stockholders' equity of $540,000 on its balance sheet dated December31, 2010. During the year ended December 31, 2011, the company reported net income of $60,000,declared and paid a cash dividend of $18,000, declared and distributed a 10% stock dividend with a$15,000 total market value, sold treasury stock costing $12,000 for $15,000, and issued additionalcommon stock for $70,000. What is total stockholders' equity as of December 31, 2011?A. $650,000B. $670,000C. $667,000D. $655,000December 31, 2011 stockholders' equity ($667,000) = December 31, 2010 stockholders' equity($540,000) + 2011 net income ($60,000) - 2011 cash dividend declarations ($18,000) + treasury stocksale ($15,000) + 2011 common stock issue ($70,000).Stock dividends do not affect total stockholders' equity.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock.Libby - Chapter 11 #79Topic Area: Common Stock Transactions

80. Wendell Company provided the following pertaining to its recent year of operation:• Common stock with a $10,000 par value was sold for $50,000 cash.• Cash dividends totaling $20,000 were declared, of which $15,000 were paid.• Net income was $70,000.• A 5% stock dividend resulted in a common stock distribution, which had a $5,000 par value and a$23,000 market value.• Treasury stock costing $9,000 was sold for $7,000.How much did Wendell's total stockholders' equity increase during the recent year of operation?A. $107,000B. $84,000C. $80,000D. $112,000Stockholders' equity increase ($107,000) = Common stock issue ($50,000) - Cash dividends declared($20,000) + Net income ($70,000) + Treasury stock sale ($7,000)AACSB: AnalyticAICPA BB: Critical Thinking

AICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock.Libby - Chapter 11 #80Topic Area: Common Stock Transactions

81. Wendell Company provided the following pertaining to its recent year of operation:• Common stock with a $10,000 par value was sold for $50,000 cash.• Cash dividends totaling $20,000 were declared, of which $15,000 were paid.• Net income was $70,000.• A 5% stock dividend resulted in a common stock distribution, which had a $5,000 par value and a$23,000 market value.• Treasury stock costing $9,000 was sold for $7,000.How much did Wendell's retained earnings increase during the recent year of operation?A. $32,000B. $45,000C. $29,000D. $27,000Retained earnings increase ($27,000) = Net income ($70,000) - Cash dividends declared ($20,000) -Market value of stock dividend ($23,000)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock.Libby - Chapter 11 #81Topic Area: Common Stock Transactions

82. Wendell Company provided the following pertaining to its recent year of operation:• Common stock with a $10,000 par value was sold for $50,000 cash.• Cash dividends totaling $20,000 were declared, of which $15,000 were paid.• Net income was $70,000.• A 5% stock dividend resulted in a common stock distribution, which had a $5,000 par value and a$23,000 market value.• Treasury stock costing $9,000 was sold for $7,000.How much did Wendell's contributed capital increase during the recent year of operation?A. $15,000B. $73,000C. $58,000D. $75,000Contributed capital increase ($73,000) = Common stock cash issue ($50,000) + Common stockdividend ($23,000)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock.Libby - Chapter 11 #82Topic Area: Common Stock Transactions

83. Wendell Company provided the following pertaining to its recent year of operation:• Common stock with a $10,000 par value was sold for $50,000 cash.• Cash dividends totaling $20,000 were declared, of which $15,000 were paid.• Net income was $70,000.• A 5% stock dividend resulted in a common stock distribution, which had a $5,000 par value and a$23,000 market value.• Treasury stock costing $9,000 was sold for $7,000.How much did Wendell's capital in excess of par increase during the recent year of operation?A. $60,000B. $58,000C. $67,000D. $24,000Capital in excess of par increase ($60,000) = Common stock cash issue ($50,000 - $10,000) + Commonstock dividend ($23,000 - $5,000) + Treasury stock sale ($9,000 - $7,000)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: HardLearning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock.Libby - Chapter 11 #83Topic Area: Common Stock Transactions

84. Which of the following statements is not correct?A. Issuance of common stock creates a financing activities cash inflow.B. Payment of a common stock cash dividend creates an operating activities cash outflow.C. Purchase of treasury stock creates a financing activities cash outflow.D. Issuance of preferred stock creates a financing activities cash inflow.Cash dividends are financing activities cash outflows.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 11-08 Discuss the impact of captial stock transactions on cash flows.Libby - Chapter 11 #84Topic Area: Focus On Cash Flows

85. Which of the following statements is not correct?A. Cash flow from financing activities increases when treasury shares are reissued.B. Cash dividends decrease cash flow from financing activities.C. Cash flow from investing activities decreases when treasury shares are purchased.D. Issuance of a seasoned new issuance of stock increases cash flow from financing activities.E. AACSB Tag: Relative ThinkingTreasury stock transactions are financing activities cash flows.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 11-08 Discuss the impact of captial stock transactions on cash flows.

Libby - Chapter 11 #85Topic Area: Focus On Cash Flows

86. Which of the following transactions doesn't result in an increase in stockholders' equity?A. Sale of no par common stock for cash.B. Declaration and distribution of a common stock dividend.C. Sale of preferred stock for cash at par value.D. Sale of treasury stock for cash at a price less than its cost.The declaration and distribution of a common stock dividend decreases retained earnings and increasescontributed capital by equal amounts.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock.Libby - Chapter 11 #86Topic Area: Common Stock Transactions

87. Which of the following statements is false?A. The declaration of a cash dividend creates a liability as of the date of record.B. The date of record is irrelevant with respect to recording of a liability pertaining to a cash dividend.C. The dividend payment date is when the dividend liability is reduced.D. The dividend liability for a cash dividend is created on the declaration date.The declaration date is when the liability is created.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBlooms: UnderstandDifficulty: MediumLearning Objective: 11-04 Discuss dividends and analyze transactions.Libby - Chapter 11 #87Topic Area: Common Stock Transactions

88. A company purchased treasury stock for $19,000; the treasury stock was initially issued for $12,000 andhad a $5,000 par value. Which of the following statements correctly describes the effects of the treasurystock purchase?A. Net income increases by $7,000.B. Net income decreases by $7,000.C. Stockholders' equity increases $12,000.D. Stockholders' equity decreases $19,000.Stockholders' equity is reduced by the $19,000 cost of the treasury stock. Treasury stock is reported onthe balance sheet as a contra-equity account.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 11-04 Discuss dividends and analyze transactions.Libby - Chapter 11 #88Topic Area: Common Stock Transactions

89. A company purchased 1,000 shares of treasury stock for $38,000 cash; the treasury

stock was initiallyissued for $24,000 and had a $9,000 par value. Which of the following statements incorrectly describesthe effect of treasury stock purchase?A. Net income is unchanged.B. Earnings per share increases.C. Total assets remain the same.D. Stockholders' equity decreases.Treasury stock is reported on the balance sheet as a contra-equity account. Assets decrease because ofthe use of cash to acquire the treasury stock.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 11-04 Discuss dividends and analyze transactions.Libby - Chapter 11 #89Topic Area: Common Stock Transactions

90. Which of the following statements is correct?A. A 2-for-1 common stock split decreases both earnings per share and total stockholders' equity.B. A 10% common stock dividend decreases both earnings per share and total stockholders' equity.C.A 2-for-1 common stock split increases both the number of common shares outstanding and totalstockholders' equity.D.A 30% common stock dividend increases the number of common shares outstanding and does notaffect total stockholders' equity.Stock dividends increase the number of shares outstanding and don't affect total stockholders' equitybecause the retained earnings reduction is transferred to contributed capital.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: UnderstandDifficulty: MediumLearning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions.Libby - Chapter 11 #90Topic Area: Financial Analysis

91. Which of the following statements is correct?A.A treasury stock purchase for less than its original issue cost results in a decrease in totalstockholders' equity.B.A treasury stock purchase for less than its original issue cost results in an increase in totalstockholders' equity.C.A treasury stock purchase for an amount equal to its original issue cost results in no change to totalstockholders' equity.D.A treasury stock purchase for more than its original issue cost results in an increase in

totalstockholders' equity.All treasury stock purchases result in a decrease in total stockholders' equity.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: UnderstandDifficulty: MediumLearning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock.Libby - Chapter 11 #91Topic Area: Common Stock Transactions

92. Atkins Company had 20,000 shares of $5 par value common stock outstanding prior to a 10% commonstock dividend declaration and distribution. The market value of the common stock on the declarationdate was $11. Which of the following statements correctly describes the affect of the common stockdividend and declaration?A. Retained earnings decreased $22,000.B. Retained earnings decreased $10,000.C. Total stockholders' equity decreased $22,000.D. Total stockholders' equity decreased $10,000.The decrease in retained earnings ($22,000) equals the market value of the common shares issued(20,000 Å~ 10%) Å~ $11, the increase in retained earnings. So there is no effect on stockholders' equity.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: UnderstandDifficulty: MediumLearning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions.Libby - Chapter 11 #92Topic Area: Financial Analysis

93. Katie Company had 40,000 shares of $2 par value common stock outstanding prior to a 40% commonstock dividend declaration and distribution. The market value of the common stock on the declarationdate was $10. Which of the following statements incorrectly describes the affect of the common stockdividend and declaration?A. Retained earnings decreased $32,000.B. Capital in excess of par remained the same.C. Contributed capital increased $128,000.D. Total stockholders' equity remained the same.Large stock dividends are recorded at par value. Therefore, contributed capital would increase by$32,000 (40,000 Å~ .40 Å~ $2).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBlooms: ApplyDifficulty: MediumLearning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions.

Libby - Chapter 11 #93Topic Area: Financial Analysis

94. Which of the following statements is correct?A. The dividend yield and earnings per share both have the same denominator.B. The dividend yield and earnings per share both have the same numerator.C. Dividends per share are used in calculation of both earnings per share and dividend yield.D.Net income is used in the calculation of earnings per share but not in the calculation of dividendyield.Earnings per share equal net income divided by the average number of common shares outstanding.Dividend yield equals dividends per share divided by market price per share.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: MediumLearning Objective: 11-02 Analyze the earnings per share ratio.Learning Objective: 11-05 Analyze the dividend yield ratio.Libby - Chapter 11 #94Topic Area: Key Ratio Analysis

95. Which of the following statements correctly describes either the dividend yield or earnings per share?A. The dividend yield decreases when net income increases.B. Earnings per share are per share of both common and preferred stock.C. The dividend yield increases when the market price per share decreases.D. Earnings per share decreases when dividends per share decrease.Dividend yield equals dividends per share divided by market price per share. Therefore, the dividendyield increases when the market price per share decreases.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: MediumLearning Objective: 11-02 Analyze the earnings per share ratio.Learning Objective: 11-05 Analyze the dividend yield ratio.Libby - Chapter 11 #95Topic Area: Key Ratio Analysis

96. Which of the following statements incorrectly describes earnings per share?A. Earnings per share are per common share.B. An increase in the market price per common share does not result in a decrease in earnings per share.C. An increase in dividends per share results in an increase in earnings per share.D. The reissue of treasury stock decreases earnings per share.Earnings per share are calculated by dividing net income by the average number of common sharesoutstanding. Therefore, dividends per share do not affect earnings per share.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: MeasurementBlooms: UnderstandDifficulty: MediumLearning Objective: 11-02 Analyze the earnings per share ratio.

Learning Objective: 11-05 Analyze the dividend yield ratio.Libby - Chapter 11 #96Topic Area: Key Ratio Analysis

97. Which of the following is not a primary advantage of a general partnership relative to a corporation?A. The ease of formation.B. The limited liability for the owners.C. There isn't income taxation on the business itself.D. The complete control of the business given to the partners.Limited liability is a corporation characteristic, not a characteristic of a partnership.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: UnderstandDifficulty: MediumLearning Objective: Chapter Supplement ALibby - Chapter 11 #97Topic Area: Accounting For Sole Proprietorships And Partnerships

98. Which of the following is true about a proprietorship?A. The capital account is used to record only the investments of the owner.B. The drawing account records distribution of assets to the proprietor.C. A proprietorship is a separate legal entity from the owner.D. A proprietorship is subject to income tax.The drawing account is used to record proprietor asset withdrawals.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: UnderstandDifficulty: MediumLearning Objective: Chapter Supplement ALibby - Chapter 11 #98Topic Area: Accounting For Sole Proprietorships And Partnerships

99. Which of the following statements is true about a partnership?A. One capital and drawing account is used for each partnership.B.The capital account is used to record each partner's investment and their designated share of theearnings.C. Partnerships are subject to income taxes.D. The drawings account is closed to retained earnings at the end of the period.The capital account in a partnership keeps track of each partner's capital balance and is affected bypartner investments and withdrawals as well as net income.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisBlooms: UnderstandDifficulty: MediumLearning Objective: Chapter Supplement ALibby - Chapter 11 #99Topic Area: Accounting For Sole Proprietorships And Partnerships

100. Which of the following statements is true about partnership accounting?A. A particular partner's capital account is debited when a withdrawal takes place by that partner.B.The process of closing, through the closing entry process, a positive net income results in an increase

in overall partner capital.C. The drawings account balances are deducted to arrive at the net income to allocate to the partners.D. The drawings account is closed to retained earnings at the end of the period.

ch12 Key1. The extent of influence and control over another company is a critical factor in determining the propermethod of accounting for a long-term investment in the common stock of another company.TRUEThe percentage of ownership has significant influence on the method chosen to account for theinvestment.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: EasyLearning Objective: 12-01 Analyze and report investments in debt securities held to maturity.Libby - Chapter 12 #1Topic Area: Types Of Investments And Accounting Methods

2. Investments in bonds intended to be sold before they reach maturity should be reported under themarket value method.TRUEBonds intended to be sold are reported on the balance sheet at market value.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 12-01 Analyze and report investments in debt securities held to maturity.Libby - Chapter 12 #2Topic Area: Debt Held to Maturity: Amortized Cost Method

3. Management must have the intent and ability to hold a bond investment until maturity if it is to beclassified as a held-to-maturity security.TRUEManagement must demonstrate the intent and ability in order to use the held-to-maturity classification.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 12-01 Analyze and report investments in debt securities held to maturity.Libby - Chapter 12 #3Topic Area: Debt Held to Maturity: Amortized Cost Method

4. If a bond is bought at a discount, then interest revenue will be less than the cash payment.FALSEAmortizing investment bond discount increases interest revenue relative to the cash payment.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 12-01 Analyze and report investments in debt securities held to maturity.Libby - Chapter 12 #4Topic Area: Debt Held to Maturity: Amortized Cost Method

5. If a bond is bought at a premium, the amortized book value of the bond investment will decrease as thebond matures.FALSEAmortizing investment bond premium reduces the book value of the bond investment.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: UnderstandDifficulty: MediumLearning Objective: 12-01 Analyze and report investments in debt securities held to maturity.Libby - Chapter 12 #5Topic Area: Debt Held to Maturity: Amortized Cost Method

6. Held-to-maturity bond investments have to be reported on the balance sheet at fair value.FALSEThey are reported on the balance sheet at amortized cost or fair value if the election is made.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 12-01 Analyze and report investments in debt securities held to maturity.Libby - Chapter 12 #6Topic Area: Debt Held to Maturity: Amortized Cost Method

7. Investments classified other than as held-to-maturity bond investments have to be reported on thebalance sheet at fair value.TRUEThey are reported on the balance sheet at fair value.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 12-02 Analyze and report passive investments in securities using the fair value method.Libby - Chapter 12 #7Topic Area: Passive Investments: The Fair Value Method

8. A realized gain or loss is reported on the income statement when a fair value adjustment is made.FALSEFair value adjustments create unrealized holding gains or losses.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 12-02 Analyze and report passive investments in securities using the fair value method.Libby - Chapter 12 #8Topic Area: Passive Investments: The Fair Value Method

9. An unrealized holding gain is reported on the income statement when the fair value of

an available-forsalesecurity exceeds its cost.FALSEThe unrealized holding gains and losses pertaining to the available-for-sale portfolio are reported on thebalance sheet, not the income statement.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 12-02 Analyze and report passive investments in securities using the fair value method.Libby - Chapter 12 #9Topic Area: Passive Investments: The Fair Value Method

10. An unrealized holding gain is reported within other comprehensive income when the fair value of atrading security exceeds its cost.FALSEThe unrealized holding gains and losses pertaining to the trading security portfolio are reported on theincome statement, not the balance sheet.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 12-02 Analyze and report passive investments in securities using the fair value method.Libby - Chapter 12 #10Topic Area: Passive Investments: The Fair Value Method

11. An unrealized holding loss is reported on the income statement when the fair value of a trading securityis less than its cost.TRUEThe unrealized holding gains and losses pertaining to the trading security portfolio are reported on theincome statement.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 12-02 Analyze and report passive investments in securities using the fair value method.Libby - Chapter 12 #11Topic Area: Passive Investments: The Fair Value Method

12. A realized gain or loss is reported on the income statement when a trading security is sold.TRUEGains and losses are realized and reported on the income statement when the investment is sold.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 12-02 Analyze and report passive investments in securities using the fair value method.Libby - Chapter 12 #12Topic Area: Passive Investments: The Fair Value Method

13. A decline in the fair value of the available-for-sale portfolio reduces assets and net income.FALSEGains and losses pertaining to the available-for-sale portfolio are reported on the balance sheet, not theincome statement.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 12-02 Analyze and report passive investments in securities using the fair value method.Libby - Chapter 12 #13Topic Area: Passive Investments: The Fair Value Method

14. An increase in the fair value of the trading securities portfolio increases both assets and net income.TRUETrading security portfolio gains increase the investment account and net income; trading securityportfolio gains are reported on the income statement.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 12-02 Analyze and report passive investments in securities using the fair value method.Libby - Chapter 12 #14Topic Area: Passive Investments: The Fair Value Method

15. The sale of a stock from the available-for-sale portfolio creates a gain or loss on the income statementbased on the difference between the stock's original cost and its selling price.TRUEGains and losses pertaining to the available-for-sale portfolio are reported on the income statement atthe time of sale and are based on the difference between the selling price and original cost.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 12-02 Analyze and report passive investments in securities using the fair value method.Libby - Chapter 12 #15Topic Area: Passive Investments: The Fair Value Method

16. The only income reported on the income statement for a stock from the available-for-sale portfolio priorto its sale is dividend revenue.TRUEGains and losses pertaining to the available-for-sale portfolio are reported on the balance sheet prior tothe time of sale; dividend revenue is the only income source for the available-for-sale portfolio while itis being held.AACSB: Reflective ThinkingAICPA BB: Critical Thinking

AICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 12-02 Analyze and report passive investments in securities using the fair value method.Libby - Chapter 12 #16Topic Area: Passive Investments: The Fair Value Method

17. The equity method is required to be used when an investor has the ability to exert significant influenceover the investee.TRUEThe equity method is required to be used when an investor has the ability to exert significant influenceover the investee, regardless of the ownership level.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 12-03 Analyze and report investments involving significant influence using the equity method.Libby - Chapter 12 #17Topic Area: Investments For Significant Influence: The Equity Method

18. Use of the equity method is required for investments between 20 and 50% of a company's commonstock regardless of the investor's ability to influence the investee.FALSEThe equity method is required to be used only when an investor has the ability to exert significantinfluence over the investee, a 20 to 50% investment doesn't guarantee significant influence.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 12-03 Analyze and report investments involving significant influence using the equity method.Libby - Chapter 12 #18Topic Area: Investments For Significant Influence: The Equity Method

19. The equity method requires the recognition of investment revenue for dividends received.FALSEDividend receipts result in a decrease in the investment account when the equity method is used.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 12-03 Analyze and report investments involving significant influence using the equity method.Libby - Chapter 12 #19Topic Area: Investments For Significant Influence: The Equity Method

20. Ocean Corporation owns 30% of Woods Corp. for which they paid $5.5 million and uses the equitymethod to account for the investment. Woods Corp. paid a $100,000 dividend; the investment in WoodsCorp. account will decrease by $30,000, which is Ocean's proportionate share of the dividend.

TRUEDividend receipts result in a decrease in the investment account when the equity method is used.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 12-03 Analyze and report investments involving significant influence using the equity method.Libby - Chapter 12 #20Topic Area: Investments For Significant Influence: The Equity Method

21. An investment accounted for under the equity method would record a reduction in the investmentaccount for the proportionate share of the investee's reported net loss.TRUEThe investor's share of investee net income is reported as investor net income and as an adjustment tothe investment account.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 12-03 Analyze and report investments involving significant influence using the equity method.Libby - Chapter 12 #21Topic Area: Investments For Significant Influence: The Equity Method

22. An investment accounted for under the equity method would record an increase in the investmentaccount and create net income for an amount equal to the proportionate share of the investee's reportednet income.TRUEThe investor's share of investee net income is reported as investor net income and as an adjustment tothe investment account.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 12-03 Analyze and report investments involving significant influence using the equity method.Libby - Chapter 12 #22Topic Area: Investments For Significant Influence: The Equity Method

23. An investment accounted for under the equity method is always reported on the balance sheet at fairvalue.FALSEEquity method investments are not reported at fair value unless the investment value is permanentlyimpaired.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 12-03 Analyze and report investments involving significant influence using the equity method.Libby - Chapter 12 #23

Topic Area: Investments For Significant Influence: The Equity Method

24. When an investment accounted for under the equity method is sold, the gain or loss reported on theincome statement is the difference between the selling price and its original cost.FALSEThe gain or loss is the difference between the selling price and book value.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 12-03 Analyze and report investments involving significant influence using the equity method.Libby - Chapter 12 #24Topic Area: Investments For Significant Influence: The Equity Method

25. Any unrealized gains or losses on trading securities would have to be added back to or deducted fromnet income on the statement of cash flows under the indirect method of determining cash flows fromoperating activities.TRUEThe unrealized gain or loss doesn't involve a cash flow and as a result net income must be adjusted.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 12-03 Analyze and report investments involving significant influence using the equity method.Libby - Chapter 12 #25Topic Area: Investments For Significant Influence: The Equity Method

26. Madison Inc. acquires 100% of the voting stock of Allison Corp. for $10.0 million. Allison's totalassets at fair value equaled $12.5 million and Allison had liabilities at fair value equal to $3.4 million.Madison will report goodwill of $0.9 million.TRUEGoodwill ($.9 million) is the excess of the amount paid ($10 million) over the fair value of the net assets($12.5 million - $3.4 million).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 12-04 Analyze and report investments in controlling interests.Libby - Chapter 12 #26Topic Area: Controlling Interests: Mergers And Acquisitions

27. When the acquiring company purchases 100% of the investee's stock, the investee's assets and liabilitieswill be consolidated with those of the acquiring company at their book values.FALSEThe acquired assets and liabilities are recorded at their market values.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: Remember

Difficulty: MediumLearning Objective: 12-04 Analyze and report investments in controlling interests.Libby - Chapter 12 #27Topic Area: Controlling Interests: Mergers And Acquisitions

28. Subsequent to a merger, any revenues and expenses of the subsidiary would be combined with those ofthe parent company on the consolidated income statement.TRUEThe income statements of the parent company and subsidiary are reported as one, they are consolidated.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 12-04 Analyze and report investments in controlling interests.Libby - Chapter 12 #28Topic Area: Controlling Interests: Mergers And Acquisitions

29. Goodwill is reported on a consolidated balance sheet only if it was acquired in the merger oracquisition.TRUEGoodwill is only recognized if it is acquired and paid for at the time of merger or acquisition.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 12-04 Analyze and report investments in controlling interests.Libby - Chapter 12 #29Topic Area: Controlling Interests: Mergers And Acquisitions

30. The assets of the subsidiary are depreciated and amortized over their useful lives as a part of theconsolidation process.TRUEThe subsidiary's assets are depreciated and amortized within the consolidated financial statements.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 12-04 Analyze and report investments in controlling interests.Libby - Chapter 12 #30Topic Area: Controlling Interests: Mergers And Acquisitions

31. Which of the following is the best description of investments in trading securities?A. Investments in bonds that management intends to hold to maturity.B.Investments in stocks or bonds that are held primarily for the purpose of selling them in the nearfuture.C. Investments in more than fifty percent of the voting stock of another company.D. Investments that provides the investor significant influence over the investee, but not control over theinvestee.The trading securities classification is used for those investments intended to be sold in

the short-run.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 12-01 Analyze and report investments in debt securities held to maturity.Libby - Chapter 12 #31Topic Area: Types Of Investments And Accounting Methods

32. Piano Company owns 55% of the voting common stock shares of Keys Corporation. Which of thefollowing is true?A. The investment would be accounted for using the equity method.B. The investment would be accounted for by consolidation.C. The investment would be accounted for under the market value method.D. The investment would be accounted for under the amortized cost method.An investment of more than 50% of the outstanding voting stock requires the parent company to use theconsolidation method.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 12-01 Analyze and report investments in debt securities held to maturity.Libby - Chapter 12 #32Topic Area: Types Of Investments And Accounting Methods

33. Which of the following is the best description of investments in available-for-sale securities?A. Investments in bonds that management intends to hold to maturity.B.Investments in stocks or bonds that are held primarily for the purpose of selling them in the nearfuture.C. Investments in more than fifty percent of the voting stock of another company.D.Investments in securities that are accounted for under the market value method other than tradingsecurities and held-to-maturity investments.Available-for-sale securities are passive investments other than trading securities and held-to-maturitydebt.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 12-01 Analyze and report investments in debt securities held to maturity.Libby - Chapter 12 #33Topic Area: Types Of Investments And Accounting Methods

34. Chang Corp. purchased $1,000,000 of bonds at par value on April 1, 2010. The bonds pay interest at therate of 10%. Chang intends to hold these bonds to maturity. Which of the following statements is false?A. Since the bonds were issued at par value, the cash interest will be the same as interest

revenue.B. The bonds will earn $75,000 of interest by December 31, 2010.C. The bond investment must be accounted for using the fair value approach.D.Since they were classified as held-to-maturity, the company would recognize no unrealized gains orlosses on the bonds over their lifetime.The fair value approach is optional when accounting for held-to-maturity investments.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 12-01 Analyze and report investments in debt securities held to maturity.Libby - Chapter 12 #34Topic Area: Debt Held to Maturity: Amortized Cost Method

35. Significant influence over the operating and financial policies of another company may be indicated byA. participation on its board of directors.B. participation in its policy-making process.C. evidence of material transactions between the two companies.D. all of the above responses.Each of the situations may create significant influence over the investee..AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 12-01 Analyze and report investments in debt securities held to maturity.Libby - Chapter 12 #35Topic Area: Types Of Investments And Accounting Methods

36. Use of the consolidated financial statement method of accounting for a long-term investment incommon stock of another company is required when the ownership of its voting stock isA. 20% or more.B. less than 20%.C. between 20% and 50%.D. more than 50%.An investment of more than 50% of the outstanding voting stock results in consolidation accounting.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 12-01 Analyze and report investments in debt securities held to maturity.Libby - Chapter 12 #36Topic Area: Types Of Investments And Accounting Methods

37. Miller Corp. purchased $1,000,000 of bonds at 105. The bonds pay interest at the rate of 10%. Millerintends to hold these bonds to maturity. Which of the following statements is false?A. Since the bonds were issued at a premium, the cash interest will be greater than interest revenue.B. Since the bonds were issued at a premium, the book value of the bond investment will

decrease.C. The bond investment must be accounted for using the held-to-maturity classification.D.The company would recognize unrealized gains or losses on the bonds under the fair value approachwithin the income statement.The bond is reported at amortized cost unless the fair value approach is used, unrealized gains/lossesassociated with use of the fair value approach are not reported within the income statement for held-tomaturitysecurities.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 12-02 Analyze and report passive investments in securities using the fair value method.Libby - Chapter 12 #37Topic Area: Debt Held to Maturity: Amortized Cost Method

38. Miller Corp. purchased $1,000,000 of bonds at 96. The bonds pay interest at the rate of 10%. Millerintends to hold these bonds to maturity. Which of the following statements is correct?A. Since the bonds were purchased at a premium, the cash interest will be less than interest revenue.B. Since the bonds were purchased at a discount, the book value of the bond investment will increase.C. The bond investment must be accounted for using the trading securities classification.D. The company would not recognize unrealized gains or losses on the bonds.A bond investment's book value increases as the bond investment discount is amortized.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 12-01 Analyze and report investments in debt securities held to maturity.Libby - Chapter 12 #38Topic Area: Debt Held to Maturity: Amortized Cost Method

39. Idaho Company purchased 30% of the outstanding preferred stock (nonvoting) of Potato Corporationas a long-term investment. Which of the following classifications should be used by Idaho Company inaccounting for the investment?A. Trading securities.B. Held-to-maturity.C. Available-for-sale.D. Consolidation.If the investment can't be classified as either trading or held-to-maturity, the available-for-saleclassification is used.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 12-01 Analyze and report investments in debt securities held to maturity.

Libby - Chapter 12 #39Topic Area: Types Of Investments And Accounting Methods

40. Gilman Company purchased 100,000 of the 250,000 shares of common stock of Burke Corporation onJanuary 1, 2010, at $40 per share as a long-term investment. The records of Burke Corporation showedthe following on December 31, 2010:At what amount should Gilman Company report the Burke investment on the December 31, 2010balance sheet?A. $4,218,000B. $4,000,000C. $4,124,000D. $3,800,000Investment in Burke ($4,218,000) = Initial cost ($4,000,000) + Proportionate share of Burke's netincome ($575,000 Å~ 100,000/250,000) - Proportionate share of Burke's dividends ($30,000 Å~ 100,000/250,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: ApplyDifficulty: MediumLearning Objective: 12-03 Analyze and report investments involving significant influence using the equity method.Libby - Chapter 12 #40Topic Area: Investments For Significant Influence: Equity Method

41. Gilman Company purchased 100,000 of the 250,000 shares of common stock of Burke Corporation onJanuary 1, 2010, at $40 per share as a long-term investment. The records of Burke Corporation showedthe following on December 31, 2010:How much should Gilman Company report as investment income from the Burke investment during2010?A. $230,000B. $218,000C. $12,000D. $30,0002010 investment income ($230,000) = Proportionate share of Burke's net income ($575,000 Å~ 100,000/250,000)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: ApplyDifficulty: MediumLearning Objective: 12-03 Analyze and report investments involving significant influence using the equity method.Libby - Chapter 12 #41Topic Area: Investments For Significant Influence: Equity Method

42. On January 1, 2010, Entertainment Company acquired 15% of the outstanding voting stock of Rocker

Company as a long-term investment in available-for-sale securities. During 2010, Rocker Companyreported net income of $1,500,000 and dividends declared and paid of $250,000. How much incomewill be reported during 2010 from the Rocker investment?A. $225,000B. $37,500C. $187,500D. $250,0002010 investment (dividend) income ($37,500) = Proportionate share of Rocker's dividends ($250,000Å~ .15)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: ApplyDifficulty: MediumLearning Objective: 12-02 Analyze and report passive investments in securities using the fair value method.Libby - Chapter 12 #42Topic Area: Passive Investments: The Fair Value Method

43. Which of the following statements is correct?A.Any unrealized holding gain or loss on investments in trading securities is reported on the incomestatement.B.Any unrealized holding gain or loss on investments in available-for-sale securities is reported on theincome statement.C.All unrealized gains and losses are reported on the income statement regardless of the method used toaccount for the investment.D.Any unrealized holding gain or loss on investments in trading securities or in available-for-salesecurities is reported on the income statement.Trading security unrealized gains and losses are reported on the income statement.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 12-02 Analyze and report passive investments in securities using the fair value method.Libby - Chapter 12 #43Topic Area: Passive Investments: The Fair Value Method

44. Lyrical Company purchased equity securities for $500,000 and classified them as trading securities onSeptember 15, 2010. On December 31, 2010, the current market value of the securities was $481,000.How should the investment be reported within the 2010 financial statements?A.The investment in trading securities would be reported in the balance sheet at its $481,000 marketvalue.B. The investment in trading securities would be reported in the balance sheet at its

$500,000 cost.C. A realized holding loss on the trading securities would be reported on the income statement.D.The investment in trading securities would be reported in the balance sheet at its $481,000 marketvalue and a realized holding loss on the trading securities would be reported on the income statement.Trading securities are reported on the balance sheet at fair value and the loss should be reported as anunrealized holding loss.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 12-02 Analyze and report passive investments in securities using the fair value method.Libby - Chapter 12 #44Topic Area: Passive Investments: The Fair Value Method

45. Libby Company purchased equity securities for $100,000 and classified them as available-for-salesecurities on September 15, 2010. At December 31, 2010, the current market value of the securities was$105,000. How should the investment be reported in the 2010 financial statements?A.The investment in available-for-sale securities would be reported on the balance sheet at its $100,000cost.B. The $5,000 unrealized gain is reported within the income statement.C. The $5,000 realized gain is reported within the income statement.D.The investment in available for sale securities would be reported in the balance sheet at its $105,000market value and an unrealized holding gain on available-for-sale securities would be reported in thestockholders' equity section of the balance sheet.Available-for-sale security unrealized gains and losses are reported on the balance within stockholders'equity; the investment account is reported on the balance sheet at fair value.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 12-02 Analyze and report passive investments in securities using the fair value method.Libby - Chapter 12 #45Topic Area: Passive Investments: The Fair Value Method

46. On January 1, 2010, Short Company purchased as an available-for-sale investment, 20,000 shares(15% of the outstanding voting shares) of Daniel Corporation's $1 par value common stock at acost of $50 per share. During November 2010, Daniel declared and paid a cash dividend of $2

per share. At December 31, 2010, end of the accounting period, Daniel's shares were selling at$48. The 2010 financial statements for Short Company should report the following amounts:A. Option AB. Option BC. Option CD. Option DAvailable-for-sale security unrealized gains and losses ($2 Å~ 20,000) are reported on the balancewithin stockholders' equity; the investment account is reported on the balance sheet at fair value ($48 Å~20,000); the investment revenue is the dividend revenue ($2 Å~ 20,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 12-02 Analyze and report passive investments in securities using the fair value method.Libby - Chapter 12 #46Topic Area: Passive Investments: The Fair Value Method

47. JDR Company purchased 40% of the common stock of YRK Corporation on January 1, 2010, for$2,000,000 as a long-term investment. The records of YRK Corporation showed the following onDecember 31, 2010:At what amount should JDR report the YRK investment on the December 31, 2010 balance sheet?A. $2,116,000B. $2,000,000C. $4,124,000D. $2,108,000Investment in YRK ($2,108,000) = Initial cost ($2,000,000) + Proportionate share of YRK's net income($290,000 Å~ 40%) - Proportionate share of YRK's dividends ($20,000 Å~ 40%).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 12-03 Analyze and report investments involving significant influence using the equity method.Libby - Chapter 12 #47Topic Area: Investments For Significant Influence: Equity Method

48. JDR Company purchased 40% of the common stock of YRK Corporation on January 1, 2010, for$2,000,000 as a long-term investment. The records of YRK Corporation showed the following onDecember 31, 2010:How much investment income should JDR report from the YRK investment during 2010?A. $290,000B. $30,000

C. $116,000D. $12,0002010 investment income ($116,000) = Proportionate share of YRK's net income ($290,000 Å~ 40%)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 12-03 Analyze and report investments involving significant influence using the equity method.Libby - Chapter 12 #48Topic Area: Investments For Significant Influence: Equity Method

49. On July 1, 2010, as a long-term investment in available-for-sale securities, Wildlife Supply Companypurchased 6,000 shares of the preferred stock (nonvoting) of Nature Company for $30 per share (18,000shares outstanding). The records of Nature Company reflect the following:The amount reported on the balance sheet by Wildlife Company for its investment at December 31,2010 would be which of the following?A. $160,000B. $162,000C. $182,000D. $200,000Available-for-sale securities are reported on the balance sheet at fair value ($27 Å~ 6,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 12-02 Analyze and report passive investments in securities using the fair value method.Libby - Chapter 12 #49Topic Area: Passive Investments: The Fair Value Method

50. On July 1, 2010, Surf Company purchased long-term investments in available-for-sale securities asfollows:Blue Corporation common stock (par $5) 2,000 shares at $16 per share.Black Company preferred stock (par $20) 1,500 shares at $30 per share.The quoted market prices per share on December 31, 2010 were as follows:Blue Corporation stock, $15 per shareBlack Company stock, $30 per shareEach of the long-term investments represents 10% of the total shares outstanding. The combinedcarrying value of the long-term investments reported in the balance sheet at December 31, 2010 wouldbe which of the following?A. $77,000B. $73,500C. $71,500D. $75,000Available-for-sale securities are reported on the balance sheet at fair value ($15 Å~

2,000) + ($30 Å~1,500).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 12-02 Analyze and report passive investments in securities using the fair value method.Libby - Chapter 12 #50Topic Area: Passive Investments: The Fair Value Method

51. When accounting for investments in trading securities, any decline in market value below cost of theinvestments is reported in which of the following ways?A. On the income statement as a realized loss.B. On the income statement as an unrealized holding loss.C. On the balance sheet as a realized loss.D. On the balance sheet as an unrealized holding loss in the stockholders' equity section.Trading security unrealized gains and losses are reported within the income statement.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 12-02 Analyze and report passive investments in securities using the fair value method.Libby - Chapter 12 #51Topic Area: Passive Investments: The Fair Value Method

52. The primary difference in accounting for available-for-sale investments in stock and accounting fortrading investments in stock is which of the following?A.Measuring the market value of the long-term and short-term investment portfolios on the balancesheet.B. Determination of the acquisition cost.C. Where the unrealized holding loss or gain on investments is reported within the financial statements.D. Determination of the unrealized holding gain or loss.Available-for-sale security unrealized gains and losses are reported on the balance within stockholders'equity; whereas trading security unrealized gains and losses are reported on the income statement.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 12-02 Analyze and report passive investments in securities using the fair value method.Libby - Chapter 12 #52Topic Area: Passive Investments: The Fair Value Method

53. On July 1, 2010, Carter Company purchased trading securities as follows:Dark Corporation common stock (par $1) 10,000 shares at $25 per share.Janvrin Corporation preferred stock (par $100) 2,000 shares at $105 per share.The quoted market prices per share on December 31, 2010 were as follows:Dark Corporation stock, $27 per shareJanvrin Corporation stock, $104 per share

Each of the investments represented 5% of the total shares outstanding. The carrying value amount ofthe investments at December 31, 2010 should beA. $478,000B. $460,000C. $458,000D. $480,000Trading securities are reported on the balance sheet at fair value ($27 Å~ 10,000) + ($104 Å~ 2,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 12-02 Analyze and report passive investments in securities using the fair value method.Libby - Chapter 12 #53Topic Area: Passive Investments: The Fair Value Method

54. Which of the following is true about passive investments?A.The investing company usually owns less than 20% of the voting stock in the investee and they arereported on the balance sheet at cost.B. These investments must not have any voting rights.C. The market value method requires realized gains and losses to be recognized on the income.D.The investing company must usually own less than 20% of the voting stock in the investee and theseinvestments must be reported at market value on the balance sheet even though the historical costprincipal is violated.Passive investments are usually less than 20% of the voting stock and are reported on the balance sheetat fair market value.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 12-02 Analyze and report passive investments in securities using the fair value method.Libby - Chapter 12 #54Topic Area: Passive Investments: The Fair Value Method

55. Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock whichconstitutes 10% of Martin's voting stock on June 30, 2010 for $42 per share. Phillips' intent is to keepthese shares beyond the current year. On December 20, 2010, Martin paid a $4,000,000 cash dividend.On December 31, Martin's stock was trading at $45 per share and their reported 2010 net income was$52 million. What method of accounting will Phillips use to account for this investment?A. Amortized cost method.

B. Equity method.C. Fair value method.D. Consolidation.Passive investments are usually less than 20% of the voting stock, are reported on the balance sheet atfair market value, and are accounted for using the fair value method.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 12-02 Analyze and report passive investments in securities using the fair value method.Libby - Chapter 12 #55Topic Area: Passive Investments: The Fair Value Method

56. Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock whichconstitutes 10% of Martin's voting stock on June 30, 2010 for $42 per share. Phillips' intent is to keepthese shares beyond the current year. On December 20, 2010, Martin paid a $4,000,000 cash dividend.On December 31, Martin's stock was trading at $45 per share and their reported 2010 net income was$52 million. What effect will the dividend have on Phillips' 2010 financial statements?A. It would increase cash and increase investment income.B. It would increase cash and decrease investment in associated companies.C. It would increase cash and increase net unrealized gains/losses.D. It would increase cash and increase the allowance to value at market account.The dividend is reported as investment (dividend) income under the fair value method of accountingfor investments. Passive investments are usually less than 20% of the voting stock, are reported on thebalance sheet at fair market value, and are accounted for using the fair value method.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 12-02 Analyze and report passive investments in securities using the fair value method.Libby - Chapter 12 #56Topic Area: Passive Investments: The Fair Value Method

57. Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock whichconstitutes 10% of Martin's voting stock on June 30, 2010 for $42 per share. Phillips' intent is tokeep these shares beyond the current year. On December 20, 2010, Martin paid a previously declared$4,000,000 cash dividend. On December 31, Martin's stock was trading at $45 per share and theirreported 2010 net income was $52 million. What investment value will be reflected on Phillips' balancesheet at December 31, 2010?A. $42,000,000

B. $45,000,000C. $46,800,000D. $47,200,000The investment is reported at fair value ($45 Å~ 1,000,000).AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 12-02 Analyze and report passive investments in securities using the fair value method.Libby - Chapter 12 #57Topic Area: Passive Investments: The Fair Value Method

58. When is the equity method used to account for long-term investments in stocks?A.When the investment is between 20 - 50% of the voting stock, regardless of whether or not significantinfluence can be achieved.B.When the investment is greater than 50% of the voting stock, regardless of whether or not significantinfluence can be achieved.C.When the investment is greater than 50% of the voting stock and significant influence can beachieved.D.When the investment is between 20 - 50% of the voting stock and significant influence can beachieved.The investment must be between 20 to 50% of the voting stock and significant influence must beachieved.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 12-03 Analyze and report investments involving significant influence using the equity method.Libby - Chapter 12 #58Topic Area: Investments For Significant Influence: Equity Method

59. Which of the following statements regarding the accounting for an investment using the equity methodis incorrect?A.It is used for investments between 20 - 50% of the outstanding voting stock when the investor has theability to exert significant influence.B. The investment account is increased by the proportionate share of investee net income.C. The investment account is decreased by the proportionate share of investee dividends.D. Investment income equals the proportionate share of investee dividends.Investment income equals the proportionate share of investee net income.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 12-03 Analyze and report investments involving significant influence using the equity method.Libby - Chapter 12 #59

Topic Area: Investments For Significant Influence: Equity Method

60. Heartfelt Company owns a 40% interest in the voting common stock of Candle Corporation, accountedfor using the equity method. During 2010, Candle Corporation reported net income of $100,000and declared and paid cash dividends of $10,000. The carrying value of the Candle investment was$500,000 on January 1, 2010. How much income should Heartfelt report during 2010 from the Candleinvestment?A. $200,000.B. $40,000.C. $4,000.D. $10,000.Investment income ($40,000) = Investee net income ($100,000) Å~ Ownership percentage (40%)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 12-03 Analyze and report investments involving significant influence using the equity method.Libby - Chapter 12 #60Topic Area: Investments For Significant Influence: Equity Method

61. Heartfelt Company owns a 40% interest in the voting common stock of Candle Corporation, accountedfor using the equity method. During 2010, Candle Corporation reported net income of $100,000and declared and paid cash dividends of $10,000. The carrying value of the Candle investment was$500,000 on January 1, 2010. At what amount is the Candle investment reported on the December 31,2010 balance sheet?A. $500,000.B. $540,000.C. $496,000.D. $536,000.Candle investment ($536,000) = January 1, 2010 carrying value ($500,000) + Investment income[Investee net income ($100,000) Å~ Ownership percentage (40%)] - Proportionate share of investeedividends ($10,000 Å~ 40%)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 12-03 Analyze and report investments involving significant influence using the equity method.Libby - Chapter 12 #61Topic Area: Investments For Significant Influence: Equity Method

62. On January 1, 2010, Palmer, Inc. bought 40% of the outstanding shares of Arnold Corporation at a

cost of $137,000. The equity method of accounting for this investment is used. During 2010, ArnoldCorporation reported $30,000 of net income and paid $10,000 in cash dividends. At the end of 2010, theshares had a market value of $150,000. At what amount should the Arnold investment be reported at onthe December 31, 2010 balance sheet?A. $150,000B. $158,000C. $145,000D. $148,000Arnold investment ($145,000) = January 1, 2010 cost ($137,000) + Investment income [Investee netincome ($30,000) Å~ Ownership percentage (40%)] - Proportionate share of investee dividends ($10,000Å~ 40%)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 12-03 Analyze and report investments involving significant influence using the equity method.Libby - Chapter 12 #62Topic Area: Investments For Significant Influence: Equity Method

63. On January 1, 2010, Palmer, Inc. bought 40% of the outstanding shares of Arnold Corporation at acost of $137,000. The equity method of accounting for this investment is used. During 2010, ArnoldCorporation reported $30,000 of net income and paid $10,000 in cash dividends. At the end of 2010,the shares had a market value of $150,000. How much income will Palmer report from the Arnoldinvestment during 2010?A. $12,000B. $30,000C. $10,000D. $4,000Investment income ($12,000) = Investee net income ($30,000) Å~ Ownership percentage (40%)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 12-03 Analyze and report investments involving significant influence using the equity method.Libby - Chapter 12 #63Topic Area: Investments For Significant Influence: Equity Method

64. On January 1, 2010, Calas Company acquired 40% of the outstanding voting stock of Nick Companyas a long-term investment. During 2010, Nick reported net income of $10,000 and declared and paiddividends of $4,000. During 2010, Calas Company should report "Income from investee

earnings" ofA. $3,000.B. $4,000.C. $2,400.D. $10,000.Income from investee earnings ($4,000) = Investee net income ($10,000) Å~ Ownership percentage(40%)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 12-03 Analyze and report investments involving significant influence using the equity method.Libby - Chapter 12 #64Topic Area: Investments For Significant Influence: Equity Method

65. On January 1, 2010, Turtle Inc. bought 30% of the outstanding shares of Shell Corporation at a cost of$150,000. The equity method of accounting for this investment is used. During 2010, Shell Corporationreported $40,000 of net income and paid $5,000 in cash dividends. At the end of 2010, the shares had amarket value of $160,000. How much investment income will Turtle report from the Shell investmentduring 2010?A. $12,000B. $40,000C. $5,000D. $1,500Investment income ($12,000) = Investee net income ($40,000) Å~ Ownership percentage (30%)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 12-03 Analyze and report investments involving significant influence using the equity method.Libby - Chapter 12 #65Topic Area: Investments For Significant Influence: Equity Method

66. On January 1, 2010, Turtle Inc. bought 30% of the outstanding shares of Shell Corporation at a cost of$150,000. The equity method of accounting for this investment is used. During 2010, Shell Corporationreported $40,000 of net income and paid $5,000 in cash dividends. At the end of 2010, the shares hada market value of $160,000. What investment balance will be reported on Turtle's December 31, 2010balance sheet?A. $150,000B. $160,000C. $160,500D. $162,000

Shell investment ($160,500) = January 1, 2010 cost ($150,000) + Investment income [Investee netincome ($40,000) Å~ Ownership percentage (30%)] - Proportionate share of investee dividends ($5,000 Å~30%)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 12-03 Analyze and report investments involving significant influence using the equity method.Libby - Chapter 12 #66Topic Area: Investments For Significant Influence: Equity Method

67. When is the equity method not used to account for long-term investments in stocks?A. When the investment is 30% of the voting stock and significant influence can be achieved.B. When the investment is 15% and significant influence can be achieved.C. When the investment is greater than 50% of the voting stock and control is achieved.D. When the investment is 40% of the voting stock and significant influence can be achieved.The investment must be less than or equal to 50% of the voting stock and significant influence must beachieved.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 12-03 Analyze and report investments involving significant influence using the equity method.Libby - Chapter 12 #67Topic Area: Investments For Significant Influence: Equity Method

68. Which of the following statements is false?A. Dividends received from stock investments increase cash flows from investing activities.B. Income from investments accounted for using the equity method doesn't create cash flows.C. Sale of stock investments is a cash inflow from investing activities.D.Dividends received from stock investments accounted for using the equity method don't create netincome but do create cash flows.Dividends received from stock investments increase cash flows from operating activities.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 12-03 Analyze and report investments involving significant influence using the equity method.Libby - Chapter 12 #68Topic Area: Investments For Significant Influence: Equity Method

69. Which of the following statements is correct?A.When the equity method is used to account for an investment in an investee, the reported share ofinvestee income must be added to net income on the statement of cash flows.

B.When the equity method is used to account for an investment in an investee, the cash dividendsreceived are cash inflow from investing activities.C.Any realized or unrealized gains or losses that were reported on the income statement under themarket value method must be removed from net income in the operating activities section of thestatement of cash flows.D.When the equity method is used to account for an investment in an investee, the reported share ofinvestee dividends must be deducted from net income on the statement of cash flows.Unrealized gains and losses don't create cash flows and must be removed from net income.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 12-03 Analyze and report investments involving significant influence using the equity method.Libby - Chapter 12 #69Topic Area: Investments For Significant Influence: Equity Method

70. Photo Finish Corporation bought a 40% interest in the voting stock of Click It Corporation's $1 parvalue common stock for $20 million (2 million shares at a $10 market price) on March 31, 2011. OnDecember 31, 2011, Click It paid a $1 million cash dividend declared earlier in 2011 and reported netincome for the year ended 2011 of $10 million. On December 31, 2011, Click It's stock was trading at$11.50 per share.What effect will the dividend have on Photo Finish's financial statements?A. It would increase cash and increase investment income.B. It would increase cash and decrease investment in Click It.C. It would increase cash and increase net unrealized gains/losses.D. It would increase cash and increase the allowance to value at market account.Dividends received from stock investments increase cash flows, but result in a decrease in theinvestment account.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: UnderstandDifficulty: MediumLearning Objective: 12-03 Analyze and report investments involving significant influence using the equity method.Libby - Chapter 12 #70Topic Area: Investments For Significant Influence: Equity Method

71. Photo Finish Corporation bought a 40% interest in the voting stock of Click It Corporation's $1 parvalue common stock for $20 million (2 million shares at a $10 market price) on March 31, 2011. OnDecember 31, 2011, Click It paid a $1 million cash dividend declared earlier in 2011 and reported netincome for the year ended 2011 of $10 million. On December 31, 2011, Click It's stock was trading at$11.50 per share. At what amount will the Click It investment be reported on Photo Finish's December31, 2011 balance sheet?A. $20,000,000B. $23,000,000C. $23,600,000D. $24,000,000Click It investment ($23.6 million) = March 31, 2011 cost ($20 million) + Investment income [Investeenet income ($10 million) Å~ Ownership percentage (40%)] - Proportionate share of investee dividends($1 million Å~ 40%)AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 12-03 Analyze and report investments involving significant influence using the equity method.Libby - Chapter 12 #71Topic Area: Investments For Significant Influence: Equity Method

72. Fun with Florals Corporation acquired all the voting shares of Crafts to Go Corporation under thepurchase method. Which of the following statements about the consolidated statements is true?A.The assets and liabilities of Crafts to Go Corporation would be not revalued and disclosed at theirmarket values on the date of acquisition.B. Fun with Florals will use the equity method of accounting for this investment.C.Fun with Florals will report Crafts to Go Corporation's revenues and expenses on a consolidatedincome statement.D. Fun with Florals will use the market value method of accounting for this investment.The investment will be accounted for as an acquisition, as a result the revenues and expenses of bothcompanies are consolidated.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 12-04 Analyze and report investments in controlling interests.Libby - Chapter 12 #72Topic Area: Controlling Interests: Mergers And Acquisitions

73. The balance sheet of Mini Company was as follows immediately before it was acquired by MaxiCompany:On January 1, 2010, Maxi Company paid $350,000 in cash for 100% of the outstanding common stockof Mini Company. The current market value of Mini Company's plant and equipment was $140,000on the date of acquisition. If the market value and book value are the same for Mini's remaining assets,what was the amount of goodwill purchased by Maxi Company?A. $20,000B. $40,000C. $50,000D. $60,000Goodwill ($40,000) = Amount paid ($350,000) - Fair value of acquired net assets [Stockholders' equity($270,000) + Plant and equipment differential ($140,000 - $100,000)]AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 12-04 Analyze and report investments in controlling interests.Libby - Chapter 12 #73Topic Area: Controlling Interests: Mergers And Acquisitions

74. On January 1, 2010, Shelley Company paid $650,000 cash for 100% of the outstanding common stockof SCD Company; SCD's stockholders equity on the date of acquisition was $500,000. The currentmarket value of SCD's plant and equipment was $100,000 in excess of the equipment's book value.If the market value and book value are the same for SCD's remaining assets, what was the amount ofgoodwill purchased by Shelley Company?A. $150,000B. $40,000C. $50,000D. $250,000Goodwill ($50,000) = Amount paid ($650,000) - Fair value of acquired net assets [Stockholders' equity($500,000) + Plant and equipment differential ($100,000)]AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 12-04 Analyze and report investments in controlling interests.Libby - Chapter 12 #74Topic Area: Controlling Interests: Mergers And Acquisitions

75. On January 1, 2010, Sheldon Company paid $750,000 cash for 100% of the outstanding common stockof Mullen Company; Mullen's stockholders equity on the date of acquisition was

$550,000. The currentmarket value of Mullen's net assets was $70,000 in excess of their book value. What was the amount ofgoodwill purchased by Sheldon Company?A. $200,000B. $130,000C. $480,000D. $270,000Goodwill ($130,000) = Amount paid ($750,000) - Fair value of acquired net assets [Stockholders'equity ($550,000) + Net asset differential ($70,000)]AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 12-04 Analyze and report investments in controlling interests.Libby - Chapter 12 #75Topic Area: Controlling Interests: Mergers And Acquisitions

76. The balance sheet of Mini Company was as follows immediately before it was acquired by MaxiCompany:On January 1, 2010, Maxi Company paid $350,000 in cash for 100% of the outstanding common stockof Mini Company. The current market value of Mini Company's plant and equipment was $140,000on the date of acquisition. If the market value and book value are the same for Mini's remaining assets,what is the net increase in Maxi's assets as a result of the merger with Mini?A. $430,000B. $470,000C. $120,000D. $390,000Net increase in assets ($120,000) = Fair value of acquired assets {(Total assets, $390,000) + (Equipmentdifferential ($140,000 - $100,000) + (Goodwill*, 40,000) - (Cash paid, $350,000). *Goodwill ($40,000)= Amount paid ($350,000) - Fair value of acquired net assets [Stockholders' equity ($270,000) + Plantand equipment differential ($140,000 - $100,000)]AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: HardLearning Objective: 12-04 Analyze and report investments in controlling interests.Libby - Chapter 12 #76Topic Area: Controlling Interests: Mergers And Acquisitions

77. Paxton Corporation acquired all of the outstanding voting stock of Stanley Company. How shouldthe assets and liabilities of the acquired company be reported on the consolidated financial statements

immediately after the acquisition?A. Nominal estimated values determined by the parent company.B. Market values on the date of the acquisition.C. The previously reported book values.D. Market values on the date of the acquisition less accumulated depreciation.The acquired net assets are recorded based on their market values on the acquisition date.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 12-04 Analyze and report investments in controlling interests.Libby - Chapter 12 #77Topic Area: Controlling Interests: Mergers And Acquisitions

78. During 2010, Manning Corporation purchased 100% of the outstanding voting shares of BradyCorporation for $4.0 million. Brady's assets had a book value of $5.0 million and fair market value of$6.5 million. The book value as well as fair market value of Brady's liabilities equaled $3.2 million.How much was paid for goodwill?A. $0B. $2,200,000C. $700,000D. $1,000,000Goodwill ($700,000) = Amount paid ($4.0 million) - Fair value of acquired net assets [Assets ($6.5million) - Liabilities ($3.2 million]AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 12-04 Analyze and report investments in controlling interests.Libby - Chapter 12 #78Topic Area: Controlling Interests: Mergers And Acquisitions

79. How is goodwill accounted for subsequent to acquisition?A. It should be written off as soon as possible against retained earnings.B. It should not be amortized because it has an indefinite life.C. It should be written off as soon as possible as an expense.D. It is amortized over its estimated useful life.Goodwill is not amortized, it is written down when it has been impaired.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 12-04 Analyze and report investments in controlling interests.Libby - Chapter 12 #79Topic Area: Controlling Interests: Mergers And Acquisitions

80. Which of the following is the primary justification for reporting the acquisition of a controlling intereston a consolidated basis?A. The companies are legally and in economic substance separate.

B. The companies are legally and in economic substance one entity.C. The companies are legally one entity but they are separate in economic substance.D. The companies are legally separate but they are one entity in economic substance.The companies are legally separate because each of the entities is a legal entity in its own. But they areone entity in economic substance because the parent company controls the subsidiary company.AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: ReportingBloom's: RememberDifficulty: MediumLearning Objective: 12-04 Analyze and report investments in controlling interests.Libby - Chapter 12 #80Topic Area: Controlling Interests: Mergers And Acquisitions

81. On January 1, 2010, Red Company purchased Patriot Shop for $400,000 cash. Red Company receivedthe assets listed below and assumed accounts payable (owed by Patriot) amounting to $30,000.What amount of Goodwill will be recorded in the transaction?A. $35,000B. $20,500C. $50,000D. $45,000Goodwill ($45,000) = Amount paid ($400,000) - Fair value of acquired net assets [Assets ($280,000 +$73,000 + $32,000) - Liabilities ($30,000]AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 12-04 Analyze and report investments in controlling interests.Libby - Chapter 12 #81Topic Area: Controlling Interests: Mergers And Acquisitions

82. McGinn Company purchased 10% of RJ Company's common stock during 2010 for $100,000. The 10%investment in RJ had a $90,000 fair value at the end of 2010 and a $105,000 fair value at the end of2011. Which of the following statements is incorrect if McGinn classifies the investment as availablefor-sale security?A. The 2010 unrealized loss is $10,000, but is not included in McGinn's 2010 net income.B. The 2011 unrealized gain is $15,000, but is not included in McGinn's 2011 net income.C. The 2011 unrealized gain is $10,000 and is included in McGinn's 2011 net income.D.The 2010 unrealized loss is $10,000 and is reported on McGinn's balance sheet as a component ofstockholders' equity.The 2011 unrealized gain is $15,000 and is not included in McGinn's 2011 net income.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, Measurement

Bloom's: ApplyDifficulty: MediumLearning Objective: 12-02 Analyze and report passive investments in securities using the fair value method.Libby - Chapter 12 #82Topic Area: Passive Investments: The Fair Value Method

83. McGinn Company purchased 10% of RJ Company's common stock during 2010 for $100,000. The10% investment in RJ had a $90,000 fair value at the end of 2010 and a $105,000 fair value at the endof 2011. Which of the following statements is correct if McGinn classifies the investment as a tradingsecurity?A. The 2010 unrealized loss is $10,000, but is not included in McGinn's 2010 net income.B. The 2011 unrealized gain is $15,000, but is not included in McGinn's 2011 net income.C. The 2011 unrealized gain is $15,000 and is included in McGinn's 2011 net income.D.The 2010 unrealized loss is $10,000 and is reported on McGinn's balance sheet as a component ofstockholders' equity and is not reported on the income statement.The 2011 unrealized gain is $15,000 and is included within McGinn's 2011 income statement.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 12-02 Analyze and report passive investments in securities using the fair value method.Libby - Chapter 12 #83Topic Area: Passive Investments: The Fair Value Method

84. McGinn Company purchased 10% of RJ Company's common stock during 2010 for $100,000. The10% investment in RJ had a $90,000 fair value at the end of 2010 and a $105,000 fair value at the endof 2011. Which of the following statements is correct if McGinn classified the investment as a tradingsecurity and sold it at the beginning of 2012 for $102,000?A. The 2012 realized loss reported on the income statement is $3,000.B. The 2012 realized gain reported on the income statement is $2,000.C. The 2012 unrealized gain reported on the income statement is $2,000.D. The 2012 unrealized loss reported on the income statement is $3,000.The 2012 realized loss is $3,000 and is included within McGinn's 2012 income statement. The loss isthe difference between the selling price ($102,000) and the 2011 year-end fair value ($105,000), whenthe investment is a trading security.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 12-02 Analyze and report passive investments in securities using the fair value method.Libby - Chapter 12 #84

Topic Area: Passive Investments: The Fair Value Method

85. McGinn Company purchased 10% of RJ Company's common stock during 2010 for $100,000. The 10%investment in RJ had a $90,000 fair value at the end of 2010 and a $105,000 fair value at the end of2011. Which of the following statements is correct if McGinn classified the investment as an availablefor-sale security and sold it at the beginning of 2012 for $102,000?A. The 2012 realized loss reported on the income statement is $3,000.B. The 2012 realized gain reported on the income statement is $2,000.C. The 2012 unrealized gain reported on the income statement is $2,000.D. The 2012 unrealized loss reported on the income statement is $3,000.The 2012 realized gain is $2,000 and is included within McGinn's 2012 income statement. The gainis the difference between the selling price ($102,000) and the original cost ($100,000), when theinvestment is classified as available-for-sale.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 12-02 Analyze and report passive investments in securities using the fair value method.Libby - Chapter 12 #85Topic Area: Passive Investments: The Fair Value Method

86. Rye Company purchased 15% of Lena Company's common stock during 2010 for $150,000. The 15%investment in Lena had a $160,000 fair value at the end of 2010 and a $140,000 fair value at the end of2011. Which of the following statements is incorrect if Rye classifies the investment as an available-forsalesecurity?A. The 2010 unrealized gain is $10,000, but is not included in Lena's 2010 net income.B. The 2011 unrealized loss is $20,000, but is not included in Lena's 2011 net income.C. The 2011 unrealized loss is $10,000 and is included in Lena's 2011 net income.D.The 2010 unrealized gain is $10,000 and is reported on Lena's balance sheet as a component ofstockholders' equity.The 2011 unrealized loss is $20,000 and is not included in Rye's 2011 net income.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 12-02 Analyze and report passive investments in securities using the fair value method.Libby - Chapter 12 #86Topic Area: Passive Investments: The Fair Value Method

87. Rye Company purchased 15% of Lena Company's common stock during 2010 for $150,000. The 15%investment in Lena had a $160,000 fair value at the end of 2010 and a $140,000 fair value at the end of2011. Which of the following statements is correct if Rye classifies the investment as a

trading security?A. The 2010 unrealized gain is $10,000 and is included in Lena's 2010 net income.B. The 2011 unrealized loss is $20,000, but is not included in Lena's 2011 net income.C. The 2011 unrealized loss is $10,000 and is included in Lena's 2011 net income.D.The 2010 unrealized gain is $10,000 and is reported on Lena's balance sheet as a component ofstockholders' equity and is not reported within the income statement.The 2010 unrealized gain is $10,000 and is included in Rye's 2010 net income.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 12-02 Analyze and report passive investments in securities using the fair value method.Libby - Chapter 12 #87Topic Area: Passive Investments: The Fair Value Method

88. Rye Company purchased 15% of Lena Company's common stock during 2010 for $150,000. The 15%investment in Lena had a $160,000 fair value at the end of 2010 and a $140,000 fair value at the end of2011. Which of the following statements is correct if Rye classifies the investment as a trading securityand sold it at the beginning of 2012 for $148,000?A. The 2012 realized loss reported on the income statement is $2,000.B. The 2012 realized gain reported on the income statement is $8,000.C. The 2012 unrealized gain reported on the income statement is $8,000.D. The 2012 unrealized loss reported on the income statement is $2,000.The 2012 realized gain is $8,000 and is included within Rye's 2012 income statement. The gain is thedifference between the selling price ($148,000) and the 2011 year-end fair value ($140,000), when theinvestment is a trading security.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 12-02 Analyze and report passive investments in securities using the fair value method.Libby - Chapter 12 #88Topic Area: Passive Investments: The Fair Value Method

89. Rye Company purchased 15% of Lena Company's common stock during 2010 for $150,000. The 15%investment in Lena had a $160,000 fair value at the end of 2010 and a $140,000 fair value at the end of2011. Which of the following statements is correct if Rye classifies the investment as an available-forsalesecurity and sold it at the beginning of 2012 for $148,000?A. The 2012 realized loss reported on the income statement is $2,000.B. The 2012 realized gain reported on the income statement is $8,000.C. The 2012 unrealized gain reported on the income statement is $8,000.D. The 2012 unrealized loss reported on the income statement is $2,000.

The 2012 realized loss is $2,000 and is included within Ryes 2012 income statement. The loss is thedifference between the selling price ($148,000) and the initial cost ($150,000), when the investment isan available-for-sale security.AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: Reporting, MeasurementBloom's: ApplyDifficulty: MediumLearning Objective: 12-02 Analyze and report passive investments in securities using the fair value method.Libby - Chapter 12 #89Topic Area: Passive Investments: The Fair Value Method

90. Which of the following accounts is only created as the result of acquiring a controlling interest inanother company?A. PatentsB. GoodwillC. Acquisition expenseD. Acquisition revenue