Financial Accounting 6th Edition By Libby – Test Bank

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Financial Accounting 6th Edition By Libby – Test Bank

 

Sample  Questions

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

 

 

True / False Questions

 

 

  1. Accounting is a system that collects and processes financial information about an organization and reports that information to decision makers.

 

TRUE

 

 

 

AACSB Tag: Communications

 

Difficulty: Easy

L.O.: 1

 

 

  1. Assets on the balance sheet are recorded at market value or replacement cost.

 

FALSE

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Easy

L.O.: 1

 

 

  1. In accounting and reporting for a business entity, the accounting and reporting for the business must be kept separate from other economic affairs of its owners.

 

TRUE

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Easy

L.O.: 1

 

 

  1. The accounting period in which service revenue is recognized (i.e., revenue for services rendered) is generally the period in which the cash is collected.

 

FALSE

 

 

 

AACSB Tag: Reflective Thinking

Difficulty: Medium

 

L.O.: 1

 

 

 

 

 

 

 

 

 

 

 

 

1-1

 

 

 

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Chapter 001: Financial Statements and Business Decisions

 

 

 

 

  1. Total assets are $70,000, total liabilities, $40,000 and contributed capital is $20,000; therefore, retained earnings are $15,000.

 

FALSE

 

 

 

AACSB Tag: Analytic

Difficulty: Medium

 

L.O.: 1

 

 

  1. The payment of a cash dividend to stockholders increases stockholders’ equity.

 

FALSE

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Medium

 

L.O.: 1

 

 

  1. The accounting model for the balance sheet is: Assets + Liabilities = Stockholders’ Equity.

 

FALSE

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Easy

 

L.O.: 1

 

 

  1. A decision maker who wants to understand a company’s financial statements must carefully read the notes to the financial statements because the notes provide useful supplemental information.

 

TRUE

 

 

 

AACSB Tag: Communications

 

Difficulty: Easy

 

L.O.: 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-2

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

 

 

  1. The financial statement that shows an entity’s economic resources and its liabilities is the statement of cash flows.

 

FALSE

 

 

 

AACSB Tag: Reflective Thinking

Difficulty: Medium

 

L.O.: 1

 

 

  1. Companies prepare financial statements at the end of each year and more often as needed.

 

TRUE

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Easy

 

L.O.: 1

 

 

  1. A note payable is a borrowing instrument that generally does not involve the payment of interest.

 

FALSE

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Hard

 

L.O.: 1

 

 

  1. The amount of cash paid by a business for office utilities would be reported on the statement of cash flows as an operating activity.

 

TRUE

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Hard

 

L.O.: 1

 

 

  1. The income statement equation is Expenses Revenues = Net Income.

 

FALSE

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Easy

 

L.O.: 1

 

 

 

 

1-3

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

 

 

  1. Generally accepted accounting principles almost never change once created.

 

FALSE

 

 

 

AACSB Tag: Reflective Thinking

Difficulty: Easy

 

L.O.: 2

 

 

  1. The Financial Accounting Standards Board (FASB) is an agency of the federal government that establishes generally accepted accounting principles for businesses.

 

FALSE

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Medium

 

L.O.: 2

 

 

  1. Since 2002, there has been substantial movement to develop international financial reporting standards.

 

TRUE

 

 

 

AACSB Tag: Diversity

 

Difficulty: Medium

 

L.O.: 2

 

 

  1. An audit guarantees that the financial statements are free of all misstatements.

 

FALSE

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Medium

 

L.O.: 3

 

 

  1. An auditor who fails to detect a material misstatement of a business’s financial statements may be sued by anyone who suffered a loss from relying on the financial statements.

 

TRUE

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Medium

 

L.O.: 4

 

 

 

 

1-4

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

 

 

  1. In terms of economic importance, partnerships are the dominant form of organization in the U.S. because of their ease of formation.

 

FALSE

 

 

 

AACSB Tag: Reflective Thinking

Difficulty: Medium

 

L.O.: Sup A

 

 

  1. One of the advantages of a corporation when compared to a partnership is the limited liability of the owners.

 

TRUE

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Easy

 

L.O.: Sup A

 

 

Multiple Choice Questions

 

 

  1. The primary purpose of the balance sheet is to
  2. measure the net income of a business up to a particular point in time.
  3. report the difference between cash inflows and cash outflows for the period.
  4. report the financial position of the reporting entity at a particular point in time.
  5. report the current value of the business.

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Easy

L.O.: 1

 

 

  1. The Beta Corporation had 2009 revenues of $200,000, expenses of $140,000, and an income tax rate of 30 percent. Net income after taxes would be

 

  1. $60,000. B. $18,000. C. $42,000. D. $48,000.

 

 

 

AACSB Tag: Analytic

 

Difficulty: Hard

L.O.: 1

 

 

 

1-5

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

 

 

  1. Atlantic Corporation reported the following amounts at the end of the first year of operations: contributed capital $100,000; sales revenue $400,000; total assets $300,000; $20,000 dividends; and total liabilities $160,000. Retained earnings and total expenses would be

 

  1. retained earnings $40,000 and expenses $340,000. B. retained earnings $60,000 and expenses $320,000. C. retained earnings $140,000 and expenses $240,000. D. retained earnings $160,000 and expenses $220,000.

 

 

 

AACSB Tag: Analytic

 

Difficulty: Hard

 

L.O.: 1

 

 

  1. The financial statement that reports the financial position of a business is the A. income statement.

 

  1. balance sheet.
  2. statement of cash flows.
  3. footnotes to the financial statements.

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Easy

 

L.O.: 1

 

 

  1. Which of the following reports the cash inflows, cash outflows, and change in cash for period?

 

  1. Income statement. B. Balance sheet.

 

  1. Statement of cash flows. D. Auditor’s report.

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Easy

 

L.O.: 1

 

 

 

 

 

 

 

 

 

 

 

 

 

1-6

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

 

 

  1. For a business, a supplier
  2. is a company or individual that owns shares of the business.
  3. is a company or individual to whom the business sells goods or services.
  4. provides goods and services used by the business.
  5. makes loans to the company to help finance its activities.

 

 

 

AACSB Tag: Reflective Thinking

Difficulty: Easy

 

L.O.: 1

 

 

  1. For a business, an example of an internal decision maker is A. a loan officer at a bank.

 

  1. a supplier who sells goods to the company on account. C. one of the business’s long-term customers.

 

  1. one of the business’s managers.

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Easy

 

L.O.: 1

 

 

  1. Financial accounting
  2. provides information primarily for external decision makers.
  3. is required for corporations but probably would not be done by other business entities.
  4. provides information primarily for the use of managers of the company.
  5. has been practiced in this country for approximately the last 15 years.

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Easy

 

L.O.: 1

 

 

  1. Accounting information developed primarily for internal decision makers is called A. management accounting.

 

  1. risk accounting. C. auditing.

 

  1. financial accounting.

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Easy

 

L.O.: 1

 

 

 

1-7

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

 

 

  1. What financial statement would you look at to determine the dividends declared by a business?

 

  1. income statement.

 

  1. statement of retained earnings. C. statement of cash flows.

 

  1. balance sheet.

 

 

 

AACSB Tag: Reflective Thinking

Difficulty: Easy

 

L.O.: 1

 

 

  1. Which of Chao’s financial statements would you look at to determine whether Chao will be able to pay for the goods when payment is due in 30 days?

 

  1. income statement. B. balance sheet.

 

  1. statement of retained earnings. D. statement of cash flows.

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Medium

 

L.O.: 1

 

 

  1. Which of the following is not considered to be a liability? A. accounts payable

 

  1. notes payable C. wages payable D. cost of goods sold

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Medium

 

L.O.: 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-8

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

 

 

  1. A business’s assets are
  2. equal to liabilities minus stockholders’ equity.
  3. the economic resources of the business.
  4. Reported at current cost.
  5. Reported on the income statement.

 

 

 

AACSB Tag: Reflective Thinking

Difficulty: Easy

 

L.O.: 1

 

 

  1. Assets for a particular business might include A. cash, accounts payable, and notes payable.

 

  1. cash, retained earnings, and accounts receivable. C. cash, accounts receivable, and inventory.

 

  1. inventories, property and equipment, and contributed capital.

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Medium

 

L.O.: 1

 

 

  1. A business’s balance sheet cannot be used to accurately predict what the business might be sold for because

 

  1. it identifies all the revenues and expenses of the business.

 

  1. assets are generally listed on the balance sheet at their historical cost, not their current value.

 

  1. it gives the results of operations for the current period.

 

  1. some of the assets and liabilities on the balance sheet may actually be those of another entity.

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Hard

 

L.O.: 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-9

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

 

 

  1. Liabilities and stockholders’ equity are
  2. sources of financing for economic resources.
  3. economic resources used by a business entity.
  4. increases in assets resulting from profitable operations.
  5. shown on the income statement in calculating net income.

 

 

 

AACSB Tag: Reflective Thinking

Difficulty: Medium

 

L.O.: 1

 

 

  1. The accounting equation (balance sheet equation) is A. Assets + Liabilities = Stockholders’ equity.

 

  1. Assets + Stockholder’s equity = Liabilities. C. Assets = Liabilities + Stockholders’ equity. D. Revenues Expenses = Net income.

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Easy

 

L.O.: 1

 

 

  1. Downard Bank, in deciding whether to make a loan to Rodney Company, would be interested in the amount of liabilities Rodney has on its balance sheet because

 

  1. the liabilities represent resources that could be used to repay the loan.

 

  1. if Rodney already has many other obligations, it might not be able to repay the loan. C. existing liabilities give an indication of how profitable Rodney has been in the past. D. Downard would be interested in the amount of Rodney’s assets but not the amount of liabilities.

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Medium

 

L.O.: 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-10

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

 

 

  1. The two categories of stockholders’ equity usually found on the balance sheet of a corporation are

 

  1. contributed capital and long-term liabilities.

 

  1. contributed capital and property, plant, and equipment. C. retained earnings and notes payable.

 

  1. contributed capital and retained earnings.

 

 

 

AACSB Tag: Reflective Thinking

Difficulty: Easy

 

L.O.: 1

 

 

  1. Which financial statement for a business would you look at to determine the company’s earnings performance during an accounting period?

 

  1. balance sheet.

 

  1. statement of retained earnings. C. income statement.

 

  1. statement of cash flows.

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Easy

 

L.O.: 1

 

 

  1. The income statement equation is
  2. Assets Liabilities = Stockholders’ Equity.
  3. Assets + Stockholders’ equity = Liabilities.
  4. Net income = Revenues Expenses.
  5. Expenses Net income = Revenues.

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Easy

 

L.O.: 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-11

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

 

 

  1. Most businesses earn revenues
  2. when they collect accounts receivable.
  3. through sales of goods or services to customers.
  4. by borrowing money from a bank.
  5. by selling shares of stock to stockholders.

 

 

 

AACSB Tag: Reflective Thinking

Difficulty: Medium

 

L.O.: 1

 

 

  1. Accounts receivable represents:
  2. amounts which are owed to the company by its customers resulting from credit sales.
  3. amounts which are owed by the company to its suppliers for past purchases.
  4. amounts which have been borrowed to finance operations.
  5. amounts which are due to stockholders.

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Medium

 

L.O.: 1

 

 

  1. Inventories A. are an asset.

 

  1. result from paying for a product that has now been sold to a customer. C. will result in a liability being charged sometime in the future.

 

  1. are an expense.

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Medium

 

L.O.: 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-12

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

 

 

  1. The amount of revenue recognized in the income statement by a company that sells goods to customers would be

 

  1. the cash collected from customers during the current period. B. total sales, both cash and credit sales, for the period.

 

  1. total sales minus beginning amount of accounts receivable.
  2. the amount of cash collected plus the beginning amount of accounts receivable.

 

 

 

AACSB Tag: Reflective Thinking

Difficulty: Medium

 

L.O.: 1

 

 

  1. On January 1, 2009 Mammoth Corporation had retained earnings of $4,000,000. During 2009, they reported net income of $750,000 and dividends of $100,000. What is the amount of Mammoth’s retained earnings at the end of 2009?

 

  1. $4,000,000 B. $4,450,000 C. $4,650,000 D. $4,850,000

 

 

 

AACSB Tag: Analytic

 

Difficulty: Medium

 

L.O.: 1

 

 

  1. What are the categories of cash flows that appear on a statement of cash flows? A. cash flows from investing, financing, and service activities

 

  1. 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

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Easy

 

L.O.: 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-13

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

 

 

  1. On the statement of cash flows, an amount paid for utilities would be classified as A. an operating activity.

 

  1. an investing activity. C. a financing activity. D. a production activity.

 

 

 

AACSB Tag: Reflective Thinking

Difficulty: Medium

 

L.O.: 1

 

 

  1. A company would report a net loss when
  2. retained earnings decreased due to paying dividends to stockholders.
  3. its assets decreased during an accounting period.
  4. its liabilities increased during an accounting period.
  5. its expenses exceeded its revenues for an accounting period.

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Easy

 

L.O.: 1

 

 

  1. The amount of insurance expense reported on the income statement is A. the amount of cash paid for insurance in the current period.

 

  1. the amount of cash paid for insurance in the current period less any unpaid insurance at the end of the period.

 

  1. the amount of insurance used up (incurred) in the current period to help generate revenue. D. an increase in net income.

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Medium

 

L.O.: 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-14

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

 

 

  1. What events cause changes in a corporation’s retained earnings? A. Net income or net loss and declaration of dividends.

 

  1. Declaration of dividends and issuance of stock to new stockholders. C. Net income, issuance of stock, and borrowing from a bank.

 

  1. Declaration of dividends and purchase of new machinery.

 

 

 

AACSB Tag: Reflective Thinking

Difficulty: Medium

 

L.O.: 1

 

 

  1. The operating activities section is often believed to be the most important part of a statement of cash flows because

 

  1. it gives the most information about how operations have been financed. B. it shows the dividends that have been paid to stockholders.

 

  1. it indicates a company’s ability to generate cash from sales to meet current cash payments for goods or services.

 

  1. it shows the net increase or decrease in cash during the period.

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Hard

 

L.O.: 1

 

 

  1. If you wanted to know what accounting rules a company follows related to its inventory, where would you look?

 

  1. the balance sheet
  2. the income statement
  3. the notes to the financial statements
  4. the headings to the financial statements

 

 

 

AACSB Tag: Communications

 

Difficulty: Easy

 

L.O.: 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-15

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

 

 

  1. At the beginning of 2009, Buck Corporation had assets of $540,000 and liabilities of

 

$320,000. During the year, assets increased by $50,000 and liabilities decreased by $10,000. What was the total amount of stockholders’ equity at the end of 2009?

 

  1. $220,000
  2. $280,000
  3. $380,000
  4. $500,000

 

 

 

AACSB Tag: Analytic

 

Difficulty: Medium

 

L.O.: 1

 

 

  1. The term used for economic resources owned by an entity as a result of past transactions

is

  1. assets.

 

  1. liabilities. C. revenues.

 

  1. retained earnings.

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Easy

 

L.O.: 1

 

 

  1. How are the differing claims of creditors and investors recognized by a corporation? A. The claims of creditors are liabilities; those of investors are assets.

 

  1. The claims of both creditors and investors are liabilities, but only the claims of investors are considered to be long term.

 

  1. The claims of creditors are liabilities; the claims of investors are recorded as stockholders’ equity.

 

  1. The claims of creditors and investors are considered to be essentially equivalent.

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Easy

 

L.O.: 1

 

 

 

 

 

 

 

 

 

 

 

 

1-16

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

 

 

  1. In what order would the items on the balance sheet appear? A. assets, retained earnings, liabilities, contributed capital

 

  1. contributed capital, retained earnings, liabilities, assets C. assets, liabilities, contributed capital, retained earnings D. contributed capital, assets, liabilities, retained earnings

 

 

 

AACSB Tag: Reflective Thinking

Difficulty: Medium

 

L.O.: 1

 

 

  1. Which of the following would increase retained earnings? A. an increase to an expense

 

  1. an increase to a revenue C. a cash dividend

 

  1. issuance of additional common stock

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Hard

 

L.O.: 1

 

 

  1. The ending retained earnings balance of Juan’s Mexican Restaurant chain increased by $3.2 million from the beginning of the year. The company had declared a dividend of $1.3 million during the year. What was the net income earned during the year?

 

  1. $1.9 million B. $3.2 million C. $4.5 billion

 

  1. There is not enough information given to determine net income.

 

 

 

AACSB Tag: Analytic

 

Difficulty: Hard

 

L.O.: 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-17

 

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

 

 

  1. Which of the following items is an expense? A. Accounts Payable

 

  1. Cost of Goods Sold C. Accounts Receivable D. Sales Revenue

 

 

 

AACSB Tag: Reflective Thinking

Difficulty: Medium

 

L.O.: 1

 

 

  1. Which of the following activities would cause investors to overpay for the acquisition of a company from its current owners?

 

  1. Overstated accounts payable and understated inventory B. Understated revenues and overstated expenses

 

  1. Understated assets and overstated expenses
  2. Overstated accounts payable and overstated inventory

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Hard

 

L.O.: 1

 

 

  1. The government regulatory agency that has the legal authority to prescribe financial reporting requirements for corporations that sell their securities to the public is the

 

  1. FASB. B. FTC. C. SEC. D. APB.

 

 

 

AACSB Tag: Communications

 

Difficulty: Easy

 

L.O.: 2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-18

 

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

 

 

  1. The part of the federal government that has broad powers to determine measurement rules for financial statements of public companies is

 

  1. the Internal Revenue Service.

 

  1. the Securities and Exchange Commission. C. the General Accounting Office.

 

  1. the Supreme Court.

 

 

 

AACSB Tag: Communications

Difficulty: Easy

 

L.O.: 2

 

 

  1. Identify the potential economic consequences of the public learning a company did not follow generally accepted accounting principles (GAAP).

 

  1. It could increase the stock price of the company.

 

  1. It could increase management and employee bonuses. C. It could result in legal liability for the company.

 

  1. It could increase a company’s market share.

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Medium

 

L.O.: 2

 

 

  1. The nature of generally accepted accounting principles (GAAP) is important to large corporations because

 

  1. a change in GAAP will not likely affect the selling price of the company’s stock.

 

  1. a change in GAAP will not likely affect the amount of bonuses paid to managers and employees.

 

  1. a change in GAAP will not likely affect a corporation’s competitive position. D. a change in GAAP will likely affect a company’s financial statements

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Medium

 

L.O.: 2

 

 

 

 

 

 

 

 

 

 

 

 

 

1-19

 

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

 

 

  1. The International Accounting Standards Board has worked to develop global accounting standards known as

 

  1. generally accepted accounting principles. B. globally accepted financial standards.

 

  1. international financial reporting standards. D. worldwide financial standards.

 

 

 

AACSB Tag: Diversity

Difficulty: Medium

 

L.O.: 2

 

 

  1. Which of the following statements is true about the price earnings (P/E) ratio? A. It is a ratio of importance to creditors.

 

  1. A high P/E ratio indicates investors have little confidence in the future earnings potential of the company.

 

  1. The P/E ratio could be used to approximate the value investors would be willing to pay for the company’s acquisition from existing owners.

 

  1. The P/E ratio is of value is estimating future dividend payments.

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Medium

 

L.O.: 3

 

 

  1. Charlie Company bought Tolar Company for $2,000,000. If Tolar’s income was understated by $10,000 and the P/E ratio is 5, how much should Charlie have paid for Tolar? A. $2,000,000

 

  1. $2,050,000 C. $1,950,000 D. $1,990,000

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Medium

 

L.O.: 3

 

 

 

 

 

 

 

 

 

 

 

 

 

1-20

 

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

 

 

  1. What is another name for the P/E ratio? A. Price/earnings margin

 

  1. Price/earnings multiple C. Payment/equity margin D. Payment/equity multiple

 

 

 

AACSB Tag: Reflective Thinking

Difficulty: Easy

 

L.O.: 3

 

 

  1. An examination of the financial statements of a business to ensure that they conform with generally accepted accounting principles is called

 

  1. a certification. B. an audit.

 

  1. a verification. D. a validation.

 

 

 

AACSB Tag: Ethics

 

Difficulty: Easy

 

L.O.: 3

 

 

  1. The purpose of an audit is to
  2. prove the accuracy of an entity’s financial statements.
  3. lend credibility to an entity’s financial statements.
  4. endorse the quality of leadership that managers provide for a corporation.
  5. establish that a corporation’s stock is a sound investment.

 

 

 

AACSB Tag: Ethics

 

Difficulty: Easy

 

L.O.: 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-21

 

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

 

 

  1. Why do the managers of a corporation hire independent auditors? A. To guarantee annual and quarterly financial statements.

 

  1. To handle some personnel issues and problems.
  2. To audit and report on the fairness of financial statement presentation.
  3. To lobby the FASB for changes in generally accepted accounting principles.

 

 

 

AACSB Tag: Ethics

Difficulty: Easy

 

L.O.: 3

 

 

  1. The CPA’s role in performing audits is important to our society because A. auditors provide direct financial advice to potential investors.

 

  1. auditors have the primary responsibility for the information contained in financial statements.

 

  1. auditors issue reports on the accuracy of each financial transaction.

 

  1. an audit of financial statements helps investors and others to know that they can rely on the information presented in the financial statements.

 

 

 

AACSB Tag: Ethics

 

Difficulty: Easy

 

L.O.: 3

 

 

  1. Which of the following is NOT one of the three steps taken by a corporation to ensure the accuracy of its records?

 

  1. implementing a system of controls B. hiring an independent auditor

 

  1. hiring a financial analyst
  2. forming a committee made up of board of directors’ members to oversee the records

 

 

 

AACSB Tag: Ethics

 

Difficulty: Medium

 

L.O.: 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-22

 

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

 

 

  1. Which of the following groups has primary responsibility for the information contained in the financial statements?

 

  1. the company’s management B. the company’s auditor

 

  1. the company’s investors D. the SEC

 

 

 

AACSB Tag: Ethics

Difficulty: Medium

 

L.O.: 3

 

 

  1. The private sector body recently given the primary responsibility to work out detailed auditing standards is called the:

 

  1. FASB. B. SEC.

 

  1. PCAOB. D. AICPA.

 

 

 

AACSB Tag: Ethics

 

Difficulty: Medium

 

L.O.: 4

 

 

  1. Which group maintains the professional code of ethics to which CPAs must adhere?

 

  1. AICPA B. FASB C. AAA D. FTC

 

 

 

AACSB Tag: Ethics

 

Difficulty: Medium

 

L.O.: 4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-23

 

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

 

 

  1. One of the disadvantages of a corporation when compared to a partnership is that A. the stockholders have limited liability.

 

  1. the corporation is treated as a separate legal entity from the stockholders. C. the corporation and its stockholders are subject to double taxation.

 

  1. the corporation must account for the business’s transactions separate and apart from those of the owners.

 

 

 

AACSB Tag: Reflective Thinking

Difficulty: Medium

 

L.O.: Sup A

 

 

  1. Which of the following statements is true about a sole proprietorship?

 

  1. The owner and the business are separate legal entities but not separate accounting entities.
  2. The owner and the business are separate accounting entities but not separate legal entities.
  3. the owner and the business are separate legal entities and separate accounting entities.
  4. most large businesses in this country are organized as sole proprietorships.

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Medium

 

L.O.: Sup A

 

 

  1. For a business organized as a general partnership, which statement is true? A. The owners and the business are separate legal entities.

 

  1. Each partner is potentially responsible for the debts of the business.

 

  1. 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.

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Medium

 

L.O.: Sup A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-24

 

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

 

 

Essay Questions

 

 

  1. Using the income statement model and the balance sheet model, fill-in the missing amounts for each independent case below. Assume the amounts given are at the end of the company’s first year of operation.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AACSB Tag: Analytic

Difficulty: Medium

 

L.O.: 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-25

 

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

 

 

  1. Gertie’s Greenhouse, Inc., a small retail store which sells house plants, started business on January 1, 2009. At the end of January, 2009, the following information was available:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. Using the above information, prepare the income statement for Gertie’s Greenhouse for the month ended January 31, 2009.

 

  1. What is the amount of cash flows provided by operating activities to be presented on the statement of cash flows?

 

A.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. 38,300 – 15,000 + 1,000 = $24,300

OR $75,000 – 45,000 – 5,000 – 250 – 150 – 300 = $24,300

 

 

 

AACSB Tag: Analytic

 

Difficulty: Hard

 

L.O.: 1

 

 

 

 

 

1-26

 

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

 

 

  1. Indicate on which financial statement you would expect to find each of the following. If an item can be found on more than one statement, list each statement.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AACSB Tag: Reflective Thinking

Difficulty: Easy

 

L.O.: 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-27

 

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

 

 

  1. For each of the following items that appear on the balance sheet, identify each as an asset (A), liability (L), or element of stockholders’ equity (SE). For any item that would not appear on the balance sheet, write the letter, N.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Easy

L.O.: 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-28

 

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

  1. Ryan Corporation began operations at the start of 2008. During the year, it made cash and credit sales totaling $500,000 and collected $420,000 in cash from its customers. It purchased inventory costing $250,000, paid $15,000 for dividends and the cost of goods sold was $210,000. The corporation incurred the following expenses:

 

 

 

 

 

 

 

 

 

 

 

Required:

 

  1. Prepare an income statement showing revenues, expenses, pretax income, income tax expense, and net income for the year ended December 31, 2008.

 

  1. Based on the above information, what is the amount of accounts receivable on the balance sheet prepared at the end of 2008?

 

  1. Based on the above information, what is the amount of retained earnings on the balance sheet prepared at the end of 2008?

 

1.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. $500,000 – 420,000 = $80,000 Accounts receivable at the end of the year.
  2. $0 beginning balance + $161,000 net income $15,000 dividends = $146,000.

 

 

 

AACSB Tag: Analytic

 

Difficulty: Hard

L.O.: 1

 

 

 

1-29

 

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

  1. Cosmos Corporation was established on December 31, 2008, by a group of investors who invested a total of $1,000,000 for shares of the new corporation’s stock. During the month of January, 2009, Cosmos provided services to customers for which the total revenue was $100,000. Of this amount, $10,000 had not been collected by the end of January. Cosmos recorded salary expense of $20,000, of which 90% had been paid by the end of the month; rent expense of $5,000, which had been paid on January 1; and other expenses of $12,000, which had been paid by check. On January 31, 2009, Cosmos purchased a van by paying cash of $30,000. There were no other events that affected cash.

 

Required:

 

  1. In which section of the statement of cash flows would the amount of cash paid for rent be reported?

 

  1. In which section of the statement of cash flows would the amount of cash paid for the van be reported?

 

  1. By how much did Cosmos’s cash increase or decrease during January?

 

  1. Assuming that the amount of cash was $150,000 at the beginning of January, how much cash did Cosmos have at the end of the month?

 

  1. What was Cosmos’s net income or net loss (after income tax expense) for the month of January? The income tax rate was 30%.

 

  1. Explain why the net increase or decrease in cash for a business generally will be different than the net income, or net loss, for the same period.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-30

 

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. Net income or net loss for a period is equal to revenues minus expenses; it is not equal to the change in cash. Revenues are reported on the income statement when the goods or services are sold to the customer, which may be before or after the period in which cash is received from the customer. Expenses are reported on the income statement in the period they are used to earn revenues. Again, the payment of cash may occur before or after the period when an expense appears on the income statement.

 

 

 

AACSB Tag: Analytic

Difficulty: Hard

 

L.O.: 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-31

 

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

 

 

  1. Parker Pool Supply, Inc. reported the following items for the year ended December 31, 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

Required:

Prepare an income statement for the year.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note: Accounts receivable of $27,000 would appear on the balance sheet, not the income statement.

 

 

 

AACSB Tag: Analytic

 

Difficulty: Medium

 

L.O.: 1

 

 

 

 

 

 

 

 

 

 

1-32

 

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

  1. National Shops, Inc. reported the following amounts on its balance sheet on December 31, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Required:

  1. What is the amount of National’s total assets at the end of 2009?
  2. Identify the items listed above that are liabilities.
  3. What is the amount of National’s retained earnings at the end of 2009?
  4. Prepare a balance sheet for National Shops as of December 31, 2009.

 

  1. National Shops wishes to purchase merchandise from your company on account. The amount of the purchases would probably be about $10,000 per month, and the terms would require National to make payment in full within 30 days. Would you recommend that your company grant credit to National under these terms? Explain the reasoning for your response.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-33

 

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

  1. Total assets = $325,000 + 150,000 + 600,000 + 30,000 = $1,105,000
  2. Liabilities: Accounts payable and Notes payable.
  3. Assets = Liabilities + Stockholders’ equity

$1,105,000 = (100,000 + 45,000 + Stockholders’ equity)

Stockholders’ equity = $960,000 = Contributed capital + retained earnings

$750 + retained earnings = $960,000

Retained earnings = $210,000

 

4.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. The balance sheet of National Shops shows that the company is capable of paying its short-term liabilities. There is cash of $150,000, more than enough to settle the accounts payable of $45,000. I would recommend that my company grant credit to National Shops.

 

 

 

AACSB Tag: Analytic

 

Difficulty: Medium

L.O.: 1

 

 

 

 

 

 

 

 

 

 

 

 

 

1-34

 

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

  1. During 2009, Winterset Company performed services for which customers paid or promised to pay $587,000. Of this amount, $552,000 had been collected by year end. Winterset paid $340,000 in cash for employee wages and owed the employees $15,000 at the end of the year for work that had been done but had not paid for. Winterset paid interest expense of $3,000 and $195,000 for other service expenses. The income tax rate was 35%, and income taxes had not yet been paid at the end of the year. Winterset declared and paid dividends of $20,000. There were no other events that affected cash.

 

Required:

  1. What was the amount of the increase or decrease in cash during the year?
  2. Prepare an income statement for Winterset for the year.

 

  1. At the start of 2009, Winterset reported retained earnings totaling $90,000. Prepare a statement of retained earnings.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-35

 

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AACSB Tag: Analytic

 

Difficulty: Hard

L.O.: 1

 

 

 

 

 

 

 

 

 

 

 

 

1-36

 

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

 

 

  1. Alfred Company manufactures men’s clothing. During 2009, the company reported the following items that affected cash. Indicate whether each of these items is a cash flow from operating activities (O), investing activities (I), or financing activities (F).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchased equipment by paying cash: I

Collected cash on account from customers: O

Paid dividends to stockholders: F

Paid cash for supplies: O

Paid suppliers for fabric: O

Borrowed money from bank on a long-term note: F

Paid interest to bank on the note: O

Paid wages to employees: O

Sold shares of stock to new stockholders: F

 

 

 

AACSB Tag: Reflective Thinking

Difficulty: Medium

 

L.O.: 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-37

 

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

  1. Fulton Company was established at the beginning of 2009 when several investors paid a total of $200,000 to purchase Fulton stock. No additional investments in stock were made during the year. By the end of that year, Fulton had cash on hand of $45,000, office equipment (net) of $40,000, inventories of $156,000, and accounts payable of $10,000. Sales for the year were $812,000. Of this amount, customers still owed $20,000. Fulton paid dividends of $25,000 to its stockholders.

 

Required:

 

  1. Based on the information above, prepare a balance sheet for Fulton Company as of December 31, 2009. In the process of preparing the balance sheet, you must calculate the ending balance in retained earnings.

 

  1. Prepare a statement of retained earnings. (The beginning amount of retained earnings was $0.)

 

  1. What was the amount of Fulton’s net income for the year?
  2. Was Fulton successful during its first year in operation?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-38

 

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. $76,000 (see statement of retained earnings above)

 

  1. Yes, Fulton’s first year was successful. The company earned a healthy amount of income, and many new companies have losses during their early years of operations. Also, it was able to pay dividends to its stockholders. At the end of the first year, the company has just $10,000 in liabilities. It appears to be in sound financial condition.

 

 

 

AACSB Tag: Analytic

 

Difficulty: Hard

L.O.: 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-39

 

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

 

 

  1. For Glad Rags Shops, the following information is available for the year ended December 31, 2008:

 

 

 

 

 

 

 

 

 

 

 

The income tax rate is 30%.

Required:

Prepare an income statement for Glad Rags Shops.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AACSB Tag: Analytic

 

Difficulty: Easy

 

L.O.: 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-40

 

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

  1. Baseline Corporation was formed two years ago to manufacture fitness equipment. It has been profitable and is growing rapidly. It currently has 150 stockholders and 90 employees; most of the employees own at least a few shares of Baseline’s stock. The company has received financing from two banks. It will sell additional shares of stock within the next three months and will also seek additional loans and hire new employees to support its continued growth.

 

Required:

 

  1. Explain who relies on the information in financial statements prepared by Baseline Corporation.

 

  1. Why is compliance with generally accepted accounting principles and accuracy in accounting important for Baseline?

 

  1. A new accountant who tried to prepare Baseline’s financial statements at the end of the current year made several errors. For each of the following items, indicate how the income statement and balance sheet are affected by the error and the nature of the effect. (For example, an error might cause revenues and net income on the income statement and retained earnings and assets on the balance sheet to be overstated). Ignore the effects of income taxes. A. The company had sales for cash of $3,000,000. It also had sales on account of $1,800,000 that had been collected by the end of the year, and sales on account of $200,000 that are expected to be collected early the following year. The accountant reported total sales revenue of $4,800,000.

 

  1. The company had total inventories of $600,000 at the end of the year. Of this amount, inventory reported at $30,000 was obsolete and will have to be scrapped. The balance sheet prepared by the accountant showed total inventories of $600,000.

 

  1. The company has a bank loan for which interest expense during the year of $10,000 will be paid early in January of the next year. The accountant recorded neither the interest expense nor the interest payable.

 

  1. An insurance policy was listed as an asset of $6,000 at the beginning of the year. The entire amount of the policy was for the current year and the policy has expired. The accountant took no action to recognize the expiration of the policy.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-41

 

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

  1. Various external decision makers rely on the financial statements of a corporation. For Baseline, these decision makers include the bankers who have loaned money to the company. These creditors would monitor the performance of Baseline to estimate the likelihood that Baseline will be able to repay existing loans when they come due, and to decide whether to make additional loans to Baseline in the future. Current stockholders would want to review Baseline’s financial statements to decide whether they wanted to continue to own Baseline’s stock. Potential stockholders and creditors would use the information to decide whether they wanted to purchase Baseline’s stock or loan money to the company in the future. Baseline anticipates hiring additional workers in the near future; potential employees might use information in the financial statements to evaluate the company as an employer.

 

  1. Compliance with generally accepted accounting principles and accuracy in accounting are important to Baseline because they are important to the people who use Baseline’s financial statements. To maintain the credibility of its financial statements, Baseline must comply with GAAP and must ensure the accuracy of its accounting records.

 

  1. A. On the income statement, revenues and net income is understated by $200,000. On the balance sheet, accounts receivable and retained earnings are understated by $200,000.

 

  1. On the balance sheet, inventory and retained earnings are overstated by $30,000. On the income statement, expenses are understated and the net income is overstated.

 

  1. On the income statement, expenses are understated and net income is overstated by $10,000. On the balance sheet, interest payable is understated and retained earnings is overstated by $10,000.

 

  1. On the balance sheet, prepaid insurance and retained earnings are overstated by $6,000. On the income statement, expenses are understated and net income is overstated by $6,000.

 

 

 

AACSB Tag: Analytic

 

Difficulty: Hard

L.O.: 1

 

 

  1. Larson Company ends the first year of operations with $3.5 million in retained earnings when no dividends were paid out. Since the company began operations on January 1st of the current year ending December 31st, calculate the amount of beginning retained earnings and explain your answer.

 

The beginning balance of retained earnings is zero because a new business would not have generated income from prior operations. Retained earnings represents the net income generated through operations not distributed in the form of a dividend. A company just beginning operations could not have any earnings so there would always be a zero beginning balance for new companies.

 

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Easy

L.O.: 1

 

 

 

 

 

1-42

 

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

 

 

  1. Mallard Corp. has just published their financial information for the year on the company’s website. Their reported earnings are $30.0 million and average common shares outstanding are 3.0 million. Answer the following:

 

(a) How much is earnings per share on the common stock?

 

(b) If the website shows the common stock is currently trading at $140 per share, what is the price earnings (P/E) ratio?

 

(c) A group of investors is seeking to buy all the Mallard shares. Using the above information, determine an offering price.

 

(a)          The earnings per share is $10 per share computed by dividing the net income of $30 million by the number of shares outstanding, 3.0 million shares. (b) The price earnings ratio is 14 to 1 computed by dividing the market price per share by the earnings per share amount ($140 divided by $10). (c) The investors could take the current level of earnings $30 million multiplied times the price earnings ratio of 14 to estimate a beginning price in negotiating the purchase of the company of $420 million.

 

 

 

AACSB Tag: Analytic

 

Difficulty: Hard

 

L.O.: 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-43

 

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

Matching Questions

 

 

  1. Match the model with the financial statement.

 

  1. Beg. Bal. + NI – Dividends = End. Bal. Balance sheet    2
  2. A = L + SE Statement of retained earnings                1
  3. R – E = NI Income statement          3

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Medium

L.O.: 1

 

 

  1. Match each definition with its related term or abbreviation.

 

A system that collects and processes financial information

  1. Publicly about an organization and reports that information to decision

traded  makers.                6

  1. Audit report Certified Public Accountant.        4

A report that describes the auditors’ opinion of the fairness

of the financial statement presentations and the evidence

  1. Cost principle gathered to support that opinion.            2

Initial recording of financial statement elements at

  1. CPA acquisition cost.                3
  2. Sole

proprietorship   An unincorporated business owned by one person.        5

Company that can be bought and sold by investors on

  1. Accounting established stock exchanges.     1

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Medium

L.O.: 1

 

 

  1. Match each definition with its related term or abbreviation.

 

  1. SEC Securities and Exchange Commission      1
  2. CPA American Institute of Certified Public Accountants.          4
  3. FASB Financial Accounting Standards Board     3
  4. AICPA Certified Public Accountant         2
  5. GAAP Generally accepted accounting principles             5

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Easy

L.O.: 2

 

 

 

 

1-44

 

 

 

 

 

Chapter 001: Financial Statements and Business Decisions

 

 

 

 

  1. Match the characteristics with the type of business.

 

  1. Ownership is limited to one person Sole proprietorship         1
  2. Ownership is represented by shares of capital stock Corporation        2
  3. Each owner is responsible for the debts of the entity Partnership        3

 

 

AACSB Tag: Reflective Thinking

Difficulty: Easy

 

L.O.: Sup A

 

 

  1. Match each element with its financial statement.

 

  1. Statement of Retained Earnings Assets   2
  2. Balance Sheet Revenues            4
  3. Statement of Cash Flows Cash flow from operating activities          3
  4. Income Statement Dividends 1

 

 

AACSB Tag: Reflective Thinking

 

Difficulty: Easy

 

L.O.: 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-45

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

 

 

True / False Questions

 

 

  1. The operating cycle is the time it takes for a company to purchase goods, pay for the goods, sell them to customers, and collect the cash from the customers.

 

TRUE

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

L.O.: 1

 

 

  1. Wal-Mart would likely have a shorter operating cycle than General Motors.

 

TRUE

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Easy

L.O.: 1

 

 

  1. The time period assumption allows a company to meet the qualitative characteristic of relevance by allowing for timelier reporting of financial information.

 

TRUE

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Hard

L.O.: 1

 

 

  1. An example of ongoing operations is revenue earned through the sale of a new automobile by a car dealership.

 

TRUE

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Easy

 

L.O.: 2

 

 

 

 

 

 

 

 

 

 

 

 

3-1

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

 

 

  1. An example of revenue earned from ongoing operating activities is the sale of an extended warranty contract on a washer and dryer.

 

FALSE

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Hard

 

L.O.: 2

 

 

  1. Revenues are inflows of net assets from peripheral transactions.

 

FALSE

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Easy

 

L.O.: 2

 

 

  1. Income tax expense will appear on the balance sheet.

 

FALSE

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 2

 

 

  1. Interest expense connected to notes payable is an example of a non-operating or peripheral expense.

 

TRUE

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 2

 

 

  1. Under accrual accounting, interest expense would be recognized when the interest has accrued with the passage of time even though cash has not been paid.

 

TRUE

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Easy

 

L.O.: 3

 

 

 

 

3-2

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

 

 

  1. Application of generally accepted accounting principles requires that accrual basis accounting be used for the income statement.

 

TRUE

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Medium

 

L.O.: 3

 

 

  1. Revenues are recognized when delivery has occurred or services have been rendered, there is persuasive evidence of an arrangement for customer payment, the price is fixed or determinable and collection is reasonably assured.

 

TRUE

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 3

 

 

  1. The matching principle states that expenses are recognized when incurred in generating revenue.

 

TRUE

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 3

 

 

  1. The revenue principle recognizes revenue from the sale of goods when ownership passes from the seller to the buyer. In the sale of services, revenue is recognized when the services are completed.

 

TRUE

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Hard

 

L.O.: 3

 

 

 

 

 

 

 

 

 

 

 

3-3

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

 

 

  1. When a business pays for a two-year insurance policy it has incurred an expense.

 

FALSE

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Medium

 

L.O.: 3

 

 

  1. Revenue collected in advance of being earned represents a liability until it is earned.

 

TRUE

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 4

 

 

  1. Expense accounts are debited to recognize an incurred expense and not usually credited.

 

TRUE

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 4

 

 

  1. The balance sheet is always prepared before the income statement.

 

FALSE

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Easy

 

L.O.: 5

 

 

  1. The statement of cash flows is prepared last and is the only financial statement which shows the cash inflows and outflows from transactions.

 

TRUE

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 5

 

 

 

 

 

 

 

3-4

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

 

 

  1. The asset turnover ratio is computed by dividing average total assets by sales revenue.

 

FALSE

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Medium

 

L.O.: 6

 

 

  1. Delta Air Lines reports an asset turnover of .52 compared to Harley-Davidson’s turnover of 1.05. Delta Air Lines is less efficient at generating revenues on its asset base because of their significantly higher investment in property, plant and equipment assets.

 

TRUE

 

 

 

AACSB Tag: Analytic

 

Difficulty: Medium

 

L.O.: 6

 

 

Multiple Choice Questions

 

 

  1. The principle that requires us to record a transaction when we provide service to a client and bill them is

 

  1. historical cost principle B. cost principle.

 

  1. full disclosure.
  2. revenue recognition.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Easy

L.O.: 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-5

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

 

 

  1. The primary difference between revenues and gains is

 

  1. gains are increases in net assets from peripheral activities while revenues are increases from ongoing activities.

 

  1. generally accepted accounting principles makes no distinction between them since they both increase income.

 

  1. revenues cause increases in net assets as a result of peripheral activities and gains cause increases through ongoing activities.

 

  1. both revenues and gains cause a decrease in net assets from ongoing and peripheral transactions respectively.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 1

 

 

  1. Which of the following would shorten the operating cycle causing an improvement in cash flows?

 

  1. Faster collection of accounts receivables.
  2. Selling inventory in a shorter period of time.

 

  1. Increasing the number of customers who paid cash to buy our goods. D. All of these would shorten the operating cycle.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Hard

 

L.O.: 1

 

 

  1. Which of the following is true about the time period assumption?
  2. It assumes we value the business properly as of the end of every month.

 

  1. It is the cutoff point for asset and liability recognition.
  2. It keeps the company’s transactions separate and apart from those of the owners.

 

  1. It assumes we divide the long life of a business into a series of shorter time periods for accounting and reporting purposes.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 1

 

 

 

 

 

 

 

 

 

 

 

3-6

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

 

 

  1. Financial analysts look to the income statement to determine
  2. whether the company has generated sufficient cash to pay its bills.
  3. if the company has invested too much cash in its inventory.
  4. whether the company has generated income from operations.
  5. if the company has too much debt.

 

 

 

AACSB Tag: Analytic

Difficulty: Medium

 

L.O.: 1

 

 

  1. The operating cycle of a business is best defined as
  2. the period of time for which we prepare our financial statements.

 

  1. the time it takes for a company to purchase and pay for goods or services from suppliers, sell those goods or services to customers and collect cash from the customers.

 

  1. the length of time over which property, plant and equipment assets are expected to be used by the company in generating revenues.

 

  1. the period of time between borrowing money and repaying it.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 1

 

 

  1. The effect of shortening the length of the operating cycle is A. increase in operating costs.

 

  1. decreased cash inflow. C. increased profits.

 

  1. increased debt.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Hard

 

L.O.: 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-7

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

 

 

  1. Which of the following costs is most likely to be the largest expense item on the income statement of a merchandising chain such as Wal-Mart?

 

  1. Wage, salary and benefits expense B. Cost of Sales

 

  1. Advertising
  2. Income tax expense

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Medium

 

L.O.: 2

 

 

  1. Which of the following businesses would not report cost of sales on their income statements?

 

  1. A large law firm

 

  1. An automobile dealership C. A pizza restaurant chain
  2. A computer chip manufacturer

 

 

 

AACSB Tag: Communications

 

Difficulty: Medium

 

L.O.: 2

 

 

  1. Calculate the effective income tax rate for a company that reports income tax expense of $142.5 million, net income of $357.5 million, and income before income taxes of $500 million.

 

  1. 33 1/3% B. 25% C. 28.5% D. 71.5%.

 

 

 

AACSB Tag: Analytic

 

Difficulty: Medium

 

L.O.: 2

 

 

 

 

 

 

 

 

 

 

 

 

 

3-8

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

 

 

  1. Revenues are defined as
  2. increases in net assets as a result of peripheral transactions.
  3. decreases in net assets as a result of ongoing operations.
  4. increases in net assets as a result of ongoing operations.
  5. decreases in net assets as a result of peripheral transactions.

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Easy

 

L.O.: 2

 

 

  1. Which of the following statements is true?
  2. The balance sheet must disclose earnings per share (EPS).
  3. The income statement reports revenues, expenses, gains and losses.
  4. A loss causes an increase in net assets resulting from a peripheral transaction.
  5. Dividends are disclosed on the balance sheet.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 2

 

 

  1. Which of the following activities will most likely result in a reported gain on the income statement?

 

  1. The sale of inventory to customers B. The sale of old equipment

 

  1. The wages and benefits paid to employees D. The payment of dividends to stockholders

 

 

 

AACSB Tag: Communications

 

Difficulty: Hard

 

L.O.: 2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-9

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

 

 

  1. Which of the following expenses is usually listed last on the income statement? A. Cost of sales

 

  1. Salaries and benefits expense C. Advertising expense

 

  1. Income tax expense

 

 

 

AACSB Tag: Communications

Difficulty: Medium

 

L.O.: 2

 

 

  1. A landlord received $5,000 cash for December 2011’s rent but the tenant’s rent for December is $8,000. Which of the following is true for year ended 2011?

 

  1. $8,000 would be reported on the statement of cash flows. B. $8,000 would appear on the balance sheet as rent receivable.

 

  1. $8,000 would appear on the income statement as rent revenue earned. D. $5,000 would appear on the balance sheet as prepaid rent.

 

 

 

AACSB Tag: Analytic

 

Difficulty: Hard

 

L.O.: 3

 

 

  1. Two basic accounting principles determine when revenues and expenses are to be recorded under accrual basis accounting. They are

 

  1. revenue recognition and matching principles.

 

  1. revenue recognition and measurement principles. C. cost and matching principles.

 

  1. none of these.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-10

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

 

 

  1. During 2010, Sigma Company earned service revenues amounting to $700,000, of which $630,000 was collected in cash; the balance will be collected in January 2011. The 2010 income statement of the company should report the following amount for service revenues A. $ 630,000.

 

  1. $ 700,000. C. $ 70,000. D. $1,330,000.

 

 

 

AACSB Tag: Analytic

 

Difficulty: Easy

 

L.O.: 3

 

 

  1. The owner of an office building should report rent collected in advance as a debit to cash and a credit to

 

  1. a liability.

 

  1. an asset other than cash. C. a revenue.

 

  1. an expense.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 3

 

 

  1. The revenue principle requires four conditions to be met. Which of the following is one of the four conditions?

 

  1. The customer has paid for the goods or services.

 

  1. Delivery of goods or performance of service has occurred or is scheduled to occur. C. The price is fixed or determinable.

 

  1. The customer has signed a contract.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Hard

 

L.O.: 3

 

 

 

 

 

 

 

 

 

 

 

 

 

3-11

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

 

 

  1. Accrued expenses which must be recorded in adjusting entries represent expenses A. incurred and paid.

 

  1. incurred but not paid. C. paid in advance.

 

  1. paid in advance and not recorded.

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Easy

 

L.O.: 3

 

 

  1. Revenue is always recognized when A. expenses are paid.

 

  1. cash is collected. C. it is earned.

 

  1. the end of the period arrives.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 3

 

 

  1. Which of the following is not an example of the application of the revenue principle? A. Recording the sale of merchandise on credit in sales revenue.

 

  1. Recording rent received in advance as unearned rent revenue. C. Recording interest collected due to a note receivable.

 

  1. Reducing the service revenue account for service revenue collected but not yet performed at the end of the accounting period.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-12

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

 

 

  1. Which of the following is an example of revenue or expense recognized in the current period’s income statement?

 

  1. Cash received from a client before the lawyer represents them in court. B. Inventory purchased by a retail store.

 

  1. Wage costs owed to employees who worked during the period. D. Cash collected from an accounts receivable.

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Hard

 

L.O.: 3

 

 

  1. The principle which holds that all of the expenses incurred in earning revenue should be identified with the revenue recognized and reported for the same period is the

 

  1. revenue principle. B. liability principle. C. timing principle.

 

  1. matching principle.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 3

 

 

  1. Which of the following is not normally a condition that must be met for revenue to be recognized (recorded under the revenue principle)?

 

  1. Delivery has occurred or services have been rendered. B. An exchange in the future has been planned.

 

  1. Collection of receivables from credit sales is reasonably assured. D. The price is fixed or determinable.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-13

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

 

 

  1. Which of the following liability accounts is likely to be satisfied with other than payment of cash?

 

  1. Wages payable

 

  1. Unearned subscriptions revenue C. Accounts payable

 

  1. Taxes payable

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Medium

 

L.O.: 3

 

 

  1. An example of an asset account that would be created at the end of the accounting period because revenue has been earned but not collected or recorded yet would be?

 

  1. Rent receivable B. Inventory

 

  1. Prepaid rent D. Unearned rent

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 3

 

 

  1. A company receives a $50,000 cash deposit from a customer on October 15 but will not deliver the goods until November 20. Which of the following statements is true?

 

  1. 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

 

  1. A liability will be reported on the balance sheet at the end of October
  2. A prepaid asset will be reported on the balance sheet at the end of October

 

 

 

AACSB Tag: Analytic

 

Difficulty: Medium

 

L.O.: 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-14

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

 

 

  1. A company purchases $20,000 of inventory in February 2011 and will pay for it in March 2011. Which of the following statements is false?

 

  1. The company will report an accounts payable of $20,000 in February 2011.

 

  1. The statement of cash flows will report an operating cash outflow of $20,000 in March 2011.

 

  1. The income statement will report the $20,000 as cost of goods sold in February 2011 when it was purchased.

 

  1. The company will record $20,000 in inventory purchased in February 2011.

 

 

 

AACSB Tag: Analytic

 

Difficulty: Hard

 

L.O.: 3

 

 

  1. Which of the following activities does not violate the revenue recognition principle?

 

  1. 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

 

  1. Not recording interest earned in 2009 until the cash is received in 2010
  2. Recording revenue in December 2009 for units sold but not yet paid for in full

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 3

 

 

  1. What would be the effect on December’s income statement of a utility bill received on December 27, 2009 but which will not be paid until January 10, 2010?

 

  1. No expense will be recognized until the bill is paid in January
  2. Net income would increase by recording the expense in December

 

  1. Recording the expense in December when it is incurred will increase expenses D. Net income will be decreased when we pay the bill in January

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 3

 

 

 

 

 

 

 

 

 

 

 

 

3-15

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

 

 

  1. Which group of accounts contains only those that normally have a credit balance? A. Accounts receivable; Prepaid rent; Fees earned.

 

  1. Bonds payable; Cash; Contributed capital. C. Cash; Inventory; Unearned revenue.
  2. Notes payable; Wages payable; Contributed capital.

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Medium

 

L.O.: 4

 

 

  1. During 2010, Sensa Corporation incurred operating expenses amounting to $100,000 of which $75,000 was paid in cash; the balance will be paid in January 2011. Transaction analysis of operating expenses for 2010 should reflect only the following:

 

  1. decrease stockholders’ equity, $75,000; decrease assets, $75,000. B. decrease assets, $100,000; decrease stockholders’ equity, $100,000.

 

  1. decrease assets, $100,000; increase liabilities, $25,000; decrease stockholders’ equity, $100,000.

 

  1. decrease stockholders’ equity, $100,000; decrease assets, $75,000; increase liabilities, $25,000.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Hard

 

L.O.: 4

 

 

  1. Which of these accounts would normally have a debit balance? A. Prepaid expenses

 

  1. Unearned Revenue C. Wages Payable D. Retained earnings

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Easy

 

L.O.: 4

 

 

 

 

 

 

 

 

 

 

 

 

 

3-16

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

 

 

  1. Which group of accounts contains only those that normally have a debit balance? A. Prepaid expenses, wages payable, and contributed capital

 

  1. Cash, utilities expense, and accounts receivable
  2. Retained earnings, cost of sales, and wages expense
  3. Utilities expense, prepaid expenses, and wages payable

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Medium

 

L.O.: 4

 

 

  1. If a company records sales revenue, A. net income will decrease.

 

  1. retained earnings will decrease. C. assets will increase.

 

  1. expenses will increase.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 4

 

 

  1. Which of the following is not one of the elements in the transaction analysis model? A. Stockholders’ equity

 

  1. Liabilities C. Gains D. Expenses

 

 

 

AACSB Tag: Communications

 

Difficulty: Medium

 

L.O.: 4

 

 

  1. If Royal Company paid $2,000 for wages to its employees, this would A. decrease assets.

 

  1. increase assets.

 

  1. decrease expenses. D. increase liabilities.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 4

 

 

 

3-17

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

 

 

  1. If Cedar Corporation declared a dividend to its stockholders, which has not been paid, this would

 

  1. decrease stockholders’ equity and decrease cash. B. increase liabilities and decrease retained earnings. C. increase liabilities and decrease contributed capital. D. decrease assets and decrease liabilities.

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Medium

 

L.O.: 4

 

 

  1. Which of the following would not cause stockholders’ equity to change? A. Sale of additional stock to investors.

 

  1. Earning revenue for services performed.

 

  1. Cash payment for dividends previously declared. D. Declaration of a cash dividend to stockholders.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 4

 

 

  1. During 2010, Burlington Company incurred operating expenses amounting to $600,000, of which $550,000 was paid in cash; the balance will be paid in January 2011. On the 2010 income statement of the company, what amount should be reported for operating expenses? A. $550,000.

 

  1. $560,000. C. $600,000. D. $1,150,000.

 

 

 

AACSB Tag: Analytic

 

Difficulty: Medium

 

L.O.: 4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-18

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

 

 

  1. With respect to stockholders’ equity, indicate which one of the following statements is correct.

 

  1. Revenues are recorded as credits to the revenue accounts. B. Gains are recorded as debits to the revenue accounts.

 

  1. Contributions (investments) by owners are recorded as debits to the contributed capital accounts.

 

  1. Expenses are recorded as credits to the expense accounts.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 4

 

 

  1. Which of the following would cause retained earnings to increase? A. Payment of expenses.

 

  1. Sold shares of company stock to investors. C. Loss on the disposal of land and building. D. Sale of service on credit.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 4

 

 

  1. Boone’s Cleaning Service performed cleaning services during December, 2009, but had not collected any cash (or other assets) from its customers by the end of the accounting period, December 31, 2009. What effect did performing these services have on the accounting equation?

 

  1. Increased assets and increased liabilities.

 

  1. Increased assets and increased stockholders’ equity. C. Increased assets and decreased stockholders’ equity.

 

  1. Decreased liabilities and decreased stockholders’ equity.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 4

 

 

 

 

 

 

 

 

 

 

 

 

3-19

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

 

 

  1. For each transaction recorded in an accounting system, the two basic equalities that must be maintained at all times are

 

  1. (1) Assets = Liabilities + Stockholders’ Equity. (2) Net Income = Revenues + Expenses. B. (1) Cash Increase = Cash Inflows Cash Outflows. (2) Net income = Revenues + Expenses.

 

  1. (1) Assets = Liabilities + Stockholders’ Equity. (2) Debits = Credits. D. (1) Net Income = Revenues + Expenses. (2) Debits = Credits.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Easy

 

L.O.: 4

 

 

  1. On December 31, 2009, Avery Corporation paid $10,000 for next year’s insurance policy. This transaction should be recorded as follows by Avery:

 

 

 

 

 

 

 

AACSB Tag: Analytic

 

Difficulty: Medium

L.O.: 4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-20

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

 

 

  1. On January 1, 2009 Gucci Brothers Inc. started the year with a $500,000 credit balance in retained earnings and $600,000 balance in capital stock. During 2009, the company earned net income of $100,000, declared a dividend of $15,000, and issued more stock for $25,000.

 

What is total stockholders’ equity on December 31, 2009? A. $1,100,000

 

  1. $1,210,000 C. $1,225,000 D. $1,240,000

 

 

 

AACSB Tag: Analytic

 

Difficulty: Medium

 

L.O.: 5

 

 

  1. On January 1, 2010, Denmark Inc., started the year with a $200,000 credit balance in its retained earnings account. During 2010, the company earned net income of $70,000 and declared and paid dividends of $10,000. Also, the company received cash of $15,000 as an additional investment by its owners. Therefore, the balance in retained earnings on December 31, 2010, would be

 

  1. $200,000. B. $270,000. C. $245,000. D. $260,000.

 

 

 

AACSB Tag: Analytic

 

Difficulty: Medium

 

L.O.: 5

 

 

  1. Which of the following transactions would most likely create cash inflow from an operating activity?

 

  1. Collected cash from a credit customer B. Borrowed money from the bank

 

  1. Paid suppliers from whom purchases had been made on credit D. None of these is cash inflow from an operating activity

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 5

 

 

 

 

 

 

 

 

3-21

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

 

 

  1. For a law firm, typically the largest operating cash outflow would be A. payment to suppliers for inventory.

 

  1. wages and benefits paid to employees. C. payment for utilities.

 

  1. interest paid on notes payable.

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Medium

 

L.O.: 5

 

 

  1. The following is the correct order for preparing the financial statements.

 

  1. Balance sheet, statement of retained earnings, income statement, and statement of cash flows.

 

  1. Statement of cash flows, balance sheet, statement of retained earnings, and income statement.

 

  1. Balance sheet, income statement, statement of retained earnings, and statement of cash flows.

 

  1. Income statement, statement of retained earnings, balance sheet, and statement of cash flows.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 5

 

 

  1. Typically, the largest, continuous cash inflow for a business will come from? A. Sale of our stock to investors

 

  1. Bank loans
  2. Cash collected from customers
  3. Cash interest received on our investments

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 5

 

 

 

 

 

 

 

 

 

 

 

 

 

3-22

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

 

 

  1. For a merchandising company, the largest operating cash outflow would result from A. payments to suppliers for inventory.

 

  1. payment of benefits to employees.

 

  1. payment of taxes to the various government entities. D. payment of interest on notes payable.

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Medium

 

L.O.: 5

 

 

  1. Operating cash inflows and outflows are primarily connected to A. acquisitions and sale of long lived assets.

 

  1. the sale of goods and services to customers and costs incurred to operate the business. C. issuance of stock and dividend payments.

 

  1. bank borrowings and repayments.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 5

 

 

  1. The asset turnover ratio is used to assess

 

  1. whether the company can pay their bills currently due with their existing cash and receivables.

 

  1. whether the company can borrow money from the bank.
  2. whether the company is using its assets effectively in generating sales revenue.
  3. whether the company keeps old assets for the optimal amount of time.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-23

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

 

 

  1. Which of the following activities would most likely cause the asset turnover ratio to increase?

 

  1. A decrease in sales.

 

  1. Buying facilities instead of renting or leasing them. C. A decrease in inventory.

 

  1. An increase in assets.

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Hard

 

L.O.: 6

 

 

  1. Which of the following would most likely decrease the asset turnover ratio? A. A decrease in expenses causing net income to increase as a percentage of sales. B. An increase in total assets during the year.

 

  1. An increase in sales revenue.
  2. A decrease in debts owed for asset purchases.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Hard

 

L.O.: 6

 

 

  1. A company reports sales revenue of $200 million the current year and $180 million last year. Their total assets in the current year are $150 million and last year’s total assets were $130 million. What is the current year’s asset turnover ratio?

 

  1. 1.48 B. 1.33 C. 1.36 D. 1.43

 

 

 

AACSB Tag: Analytic

 

Difficulty: Hard

 

L.O.: 6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-24

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

 

 

  1. If Hawks Company reports an asset turnover ratio of 2.57 for 2009 and their competitor reports 2.89 for their 2009 ratio, it means that Hawks

 

  1. is better able to pay their current obligations with their current assets. B. has been more effective in managing the use and level of its assets. C. has been less effective in managing the use and level of its assets.

 

  1. is less able to pay off their current obligations with their current assets.

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Medium

 

L.O.: 6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-25

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

 

 

Essay Questions

 

 

  1. The Harris TV Store had the following transactions in August:
  2. Sold $60,000 of goods to customers, receiving $56,000 in cash with the rest on account.
  3. The cost of the inventory sold was $36,000.

 

  1. The store purchased $16,000 of inventory and paid for $12,000 in cash and the rest on account.

 

  1. They paid $16,000 in wages to employees who worked in August.

 

  1. Received a $2,000 bill for utilities for August that will not be paid until September.

 

  1. Received rent for the adjacent store front for the months of August and September in the amount of $4,000.

 

Complete the following statements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)          $56,000, (b) $4,000, (c) $12,000, (d) $16,000, (e) $32,000, (f) $60,000, (g) $2,000, (h) $36,000, (i) $16,000, (j) $2,000, (k) $8,000

 

 

 

AACSB Tag: Analytic

Difficulty: Medium

 

L.O.: 3

 

 

 

3-26

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

 

 

  1. Zone Company rendered services to customers amounting to $20,000 during 2009; the related cash was collected as follows: $16,000 in 2009; $4,000 in 2010. During 2009, $8,000 was incurred for wages expense; the related cash payments were made as follows: $6,000 in 2009; in 2010 $2,000. Based only on these data, provide the following amounts:

 

  1. Amount to be reported for revenue in 2009 and 2010. b. Amount to be reported for expense in 2009 and 2010.

 

  1. 2009 $20,000, 2010 $0. b. 2009    $8,000, 2010    0.

 

 

 

AACSB Tag: Analytic

 

Difficulty: Medium

 

L.O.: 3

 

 

  1. Explain why a $5,000 revenue collected in advance for service would be recorded as a debit to cash and a credit to a liability account.

 

A debit is recorded to cash because a receipt of cash increases this asset account. A corresponding credit to a liability account (unearned revenue) is appropriate because the customer is “owed” services in the future. If the services are not performed, the customer would get a refund. The revenue can not be recognized until all of the conditions of the revenue principle have been met.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 3

 

 

  1. Why might managers be tempted to violate the revenue principle and the matching principle in financial reporting?

 

Managers want their companies to appear successful when financial statements are issued. With revenues as high as possible and expenses as low as possible, net income will be elevated. Managers might be tempted to report revenues even though the earnings process is not complete. Also, if some expenses can be put off until a later time, net income will appear larger. Many times manager bonuses are calculated based on net income. In addition, earnings expectations in the marketplace create tremendous pressures for those expectations to be met. Lower net income could cause an adverse reaction in the market place regarding stock prices.

 

 

 

AACSB Tag: Ethics

 

Difficulty: Hard

L.O.: 3

 

 

 

3-27

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

 

 

  1. Complete the chart below for Monticello Corporation by entering check marks in the appropriate spaces to indicate how the transaction should be recorded.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AACSB Tag: Analytic

 

Difficulty: Medium

 

L.O.: 3

 

 

 

 

 

 

 

3-28

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

 

 

  1. Indicate the sequential order of the following steps in the accounting information processing cycle.

 

Analyzing transactions Preparing financial statements Developing a trial balance Collecting original data Posting to the accounts Journalizing transactions

 

Collecting original data

Analyzing transactions

Journalizing transactions

Posting to the accounts

Preparing financial statements

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-29

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

  1. Part A. Perform transaction analysis for Blake Company regarding the following transactions for March. Indicate the account affected by the transaction as well as the increase

 

(+) or decrease (   ) to the components of the accounting equation and the amount.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Part B. Determine whether the transactions A-F above affected cash flows. If so, determine the type of activity as an operating activity, an investing activity, or a financing activity. If cash is not affected use “no effect.” Place a check mark under the appropriate column for each transaction.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-30

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AACSB Tag: Analytic

 

Difficulty: Medium

 

L.O.: 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-31

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

 

 

  1. For the year ending December 31, 2010, the accounts of Jackson Corporation showed the following balances:

 

 

 

 

 

 

 

 

 

 

 

 

Give the amount that should be shown in each of the following accounts at the beginning of 2011:

 

 

 

 

 

 

 

 

 

 

 

 

Contributed Capital: $550,000 = $500,000 + $50,000

Retained earnings: $150,000 = $100,000 + $150,000     $90,000    $10,000

 

 

 

AACSB Tag: Analytic

 

Difficulty: Medium

 

L.O.: 4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-32

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

  1. The following accounts for Carthage Enterprises, Inc. are listed in alphabetical order. Enter the number associated with each to identify the accounts that would be used in the journal entry for each transaction given below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-33

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AACSB Tag: Analytic

 

Difficulty: Hard

 

L.O.: 4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-34

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

 

 

  1. On October 1, 2009, World Services, Inc. was started with $100,000 invested by the owners as contributed capital. On October 31, the accounting records contained the following amounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Prepare an income statement in good form for October 31, 2009 which is the first month of operations. Ignore income taxes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AACSB Tag: Analytic

 

Difficulty: Medium

 

L.O.: 4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-35

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

 

 

  1. Explain why the net income reported on the income statement is usually not equal to net cash flows from operating activities on the statement of cash flows.

 

Net income on the income statement is an application of the accrual basis of accounting. Revenues are reported when earned and expenses incurred are matched to those earned revenues. The net cash flows from operating activities on the statement of cash flows are reported on the cash basis of accounting. That is, amounts received from customers and amounts paid for expenses are on the statement of cash flows. Therefore, the difference in net income and net cash from operating activities is a timing issue.

 

 

 

AACSB Tag: Analytic

 

Difficulty: Medium

 

L.O.: 4

 

 

  1. Patti’s Pizza reported revenues of $728.1 million for 2007 and $654.6 million for 2006. Their total assets were $612.0 million in 2007 and $582.9 million in 2006. Compute and interpret their asset turnover ratio for 2007.

 

1.22 = $728.1 million divided by ($612.0 + $582.9)/2. This means that for each $1 of total assets owned by Patti’s Pizza, the company generates $1.22 in sales revenue during the year.

 

 

 

AACSB Tag: Analytic

 

Difficulty: Medium

 

L.O.: 6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-36

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

 

 

Chapter 003: Operating Decisions and the Income Statement

 

 

 

 

  1. The following data is from Gauthier Machine Shop

 

 

 

 

 

 

 

 

 

 

 

 

Compute Gauthier Machine Shop’s asset turnover ratio for the two most recent years

(A)          2011 __________

(B)          2010 __________

 

(A) 2.05, (B) 1.95

 

 

 

AACSB Tag: Analytic

 

Difficulty: Medium

 

L.O.: 6

 

Matching Questions

 

 

  1. Match the following statements with the terms given below by entering the appropriate letter in the blank space.

 

  1. D. A revenue earned, but not yet recorded nor

collected              Unearned revenue         2

  1. A. A revenue collected, but not yet earned Accrued expense             4
  2. C. An expense paid, but not yet incurred Prepaid expense              3
  3. B. An expense incurred, but not yet recorded nor paid Accrued revenue             1

 

 

AACSB Tag: Relative Thinking

Difficulty: Medium

 

L.O.: 3

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

True / False Questions

 

 

  1. Outstanding shares of stock are those shares which a corporation has the ability to issue as documented in its charter in the state where incorporated.

 

FALSE

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

L.O.: 1

 

 

  1. A major advantage a corporation has over a proprietorship or partnership is that it allows individuals to participate in ownership by purchasing small amounts of stock.

 

TRUE

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Easy

L.O.: 1

 

 

  1. The shares issued can be less than those outstanding when the corporation has repurchased some of their shares which are called treasury shares.

 

FALSE

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

L.O.: 1

 

 

  1. Kansas City Company has 2,000,000 shares issued and 100,000 treasury shares. They report net income of $5,200,000 in 2009. Earnings per share equals $2.60.

 

FALSE

 

 

 

AACSB Tag: Analytic

Difficulty: Medium

 

L.O.: 2

 

 

 

 

 

 

 

 

 

 

 

11-1

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. Treasury stock is a corporation’s own stock that was sold, issued, repurchased, and is still held by the corporation.

 

TRUE

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Easy

 

L.O.: 3

 

 

  1. When a company repurchases some of its shares of stock (treasury stock), the number of shares issued is reduced.

 

FALSE

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 3

 

 

  1. To pay a cash dividend, a corporation needs adequate cash, authorization from the board of directors, and adequate retained earnings.

 

TRUE

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 4

 

 

  1. A company has 5,000,000 shares issued and 400,000 held in the treasury. If the board of directors declares a $16 million cash dividend, then the dividends per share would be $3.20.

 

FALSE

 

 

 

AACSB Tag: Analytic

 

Difficulty: Medium

 

L.O.: 4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-2

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. On the date of payment of a cash dividend, the company would debit retained earnings and credit cash.

 

FALSE

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Medium

 

L.O.: 4

 

 

  1. The dividend yield ratio is a measure of the immediate return investors are receiving from dividends stated as a percentage of market price.

 

TRUE

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Easy

 

L.O.: 5

 

 

  1. A company reported earnings per share of $3.50 and dividends per share of $1.00 when the market price of the stock was $80.00. The dividend yield is 20%.

 

FALSE

 

 

 

AACSB Tag: Analytic

 

Difficulty: Medium

 

L.O.: 5

 

 

  1. A stock split results in the reduction of the par or stated value per share and a proportionate increase in the number of shares outstanding.

 

TRUE

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-3

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. The most common reason a company would declare a stock split is to reduce the market price of its stock to increase the trading activity.

 

TRUE

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Medium

 

L.O.: 6

 

 

  1. Preferred stock often has a preference in the distribution of assets over common stock in the event of dissolution of the corporation.

 

TRUE

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Easy

 

L.O.: 7

 

 

  1. When preferred stock is cumulative and the board of directors passes on a dividend, the arrearage must be shown as a liability on the balance sheet and a reduction from retained earnings on the statement of stockholders’ equity and the balance sheet.

 

FALSE

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 7

 

 

  1. Restrictions on retained earnings usually occur when a company borrows money and the creditor wants to restrict the amount of dividends that can be distributed.

 

TRUE

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Easy

 

L.O.: 7

 

 

 

 

 

 

 

 

 

 

 

 

 

11-4

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. When a company reissues treasury stock, it creates cash inflow from an investing activity because treasury stock is an investment asset on the balance sheet.

 

FALSE

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Medium

 

L.O.: 8

 

 

  1. Payment of a cash dividend creates a cash outflow from an operating activity.

 

FALSE

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 8

 

 

  1. Partnerships, sole proprietorships, and corporations are three basic forms of business organizations.

 

TRUE

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Easy

 

L.O.: Sup A

 

 

  1. All businesses pay income taxes.

 

FALSE

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: Sup A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-5

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

Multiple Choice Questions

 

 

  1. Advantages of a corporation include all of the following except A. ease of participating in ownership

 

  1. stockholders are not liable for a corporation’s debts.

 

  1. the ownership rights of corporations are easily transferred. D. stockholders have a mutual agency relationship.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Easy

L.O.: 1

 

 

  1. From an investor’s viewpoint, in today’s litigious environment, what would be considered the most advantageous characteristic of the corporate form of organization?

 

  1. Taxation.
  2. Ease of capital assembly.

 

  1. Continuity of life for the corporation. D. Limited liability for stockholders.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Easy

L.O.: 1

 

 

  1. Which of the following statements about a corporation is false?

 

  1. Corporations are the dominant form of business organization in terms of volume of operations.

 

  1. Their owners have limited liability.

 

  1. Corporations allow even small investors to participate in ownership.
  2. Corporations are separate legal entities from their owners.

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Medium

 

L.O.: 1

 

 

 

 

 

 

 

 

 

 

 

 

 

11-6

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. Which of the following is true about the corporate form of business but is not true for a proprietorship or partnership?

 

  1. It is a separate economic entity from its owners.
  2. Investment in a corporation’s stock is less risky than investing in bonds.

 

  1. It is easier for individuals to become owners in a corporation by buying small amounts of stock than it is to own a proprietorship or partnership share.

 

  1. A corporation is easier to form than a partnership.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 1

 

 

  1. Which of the following statements is false?

 

  1. Most small shareholders do not attend the corporation’s annual meeting so they cast their vote by proxy card.

 

  1. Corporations are created by application to a specific state not the federal government.

 

  1. Most large corporations are chartered out of Delaware since it has very favorable laws of incorporation.

 

  1. Corporations have a limited life.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 1

 

 

  1. Which of the following represents the maximum shares of stock issuable to the public? A. Authorized shares

 

  1. Issued shares

 

  1. Outstanding shares D. Unissued shares

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Easy

 

L.O.: 1

 

 

 

 

 

 

 

 

 

 

 

 

 

11-7

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. Which of the following represents the shares currently in the hands of investors? A. Authorized shares

 

  1. Issued shares

 

  1. Outstanding shares D. Unissued shares

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Medium

 

L.O.: 1

 

 

  1. Which of the following represents the shares sold in either an initial public offering or subsequent seasoned new issuances?

 

  1. Authorized shares B. Issued shares

 

  1. Outstanding shares D. Unissued shares

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 1

 

 

  1. Which of the following about earnings per share is true?

 

  1. It indicates the portion of earnings distributed to the owners as an immediate return on their investment.

 

  1. Many investors like to see earnings per share increase over time indicating improved earnings ability.

 

  1. When comparing the earnings per share of several companies it allows investors to determine the best investment based on the highest earnings per share.

 

  1. If earnings per share equals $5.00, then the maximum dividend payment would be $5.00.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 2

 

 

 

 

 

 

 

 

 

 

 

 

 

11-8

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. Which of the following statements about earnings per share is true? A. Increased net income would cause earnings per share to decrease.

 

  1. Issuance of more common shares would cause earnings per share to increase. C. Repurchase of treasury shares would cause earnings per share to decrease. D. None of the other answers is true.

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Hard

 

L.O.: 2

 

 

  1. The par value of common stock is the
  2. average market price of the stock during the period in which it is sold.
  3. ceiling (maximum) amount above which the stock may not be sold initially.
  4. nominal value per share established in the corporate charter.
  5. selling price of the stock at the date it was issued by the corporation.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 3

 

 

  1. Depot Company has one class of capital stock issued. It is A. common stock.

 

  1. preferred stock, voting.

 

  1. preferred stock, noncumulative. D. common stock, nonvoting.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Easy

 

L.O.: 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-9

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. If Hayes Corporation sells and issues 100 shares of its $1 par value common stock at $15 per share, the entry to record the sale will not include a

 

  1. Debit to cash of $1,500.

 

  1. Credit to capital in excess of par of $1,400. C. Credit to common stock of $100.

 

  1. Credit to retained earnings of $1,500.

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Medium

 

L.O.: 3

 

 

  1. Choose the correct definition for par value from the following:

 

  1. The amount that a corporation must pay when it exercises its right to convert shares of stock.

 

  1. The equity of one share of outstanding stock in the issuing corporation’s net assets as recorded in the corporation’s accounts.

 

  1. An arbitrary value placed on a share of stock at the time the stock is authorized in the corporate charter.

 

  1. The costs of bringing a corporation into existence, such as legal fees, promoter’s fees, and amounts paid to the state to secure a charter.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Easy

 

L.O.: 3

 

 

  1. Irish Corporation issued (sold) 10,000 shares of its no par common stock for $70 per share. The bylaws established a stated value of $10 per share. The transaction would increase common stock by

 

  1. zero

 

  1. $600,000 C. $100,000 D. $700,000

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 3

 

 

 

 

 

 

 

 

 

11-10

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. Which of the following statements about stock option plans is true?

 

  1. Offering stock options to a company’s managers reduces the likelihood they will not always act in the best interest of the investors.

 

  1. Stock option plans are often a major part of an executive’s compensation plan.
  2. Stock options usually have a grant price equal to the market price of the stock when the

options are first offered to the executives.

  1. All of these are true.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Hard

 

L.O.: 3

 

 

  1. Which of the following statements about treasury stock transactions is true? 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.

 

  1. 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.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 3

 

 

  1. The balance sheet of Werther Company showed the following data about its common stock, par $1: authorized shares, 10,000,000; outstanding shares, 4,300,000; and issued shares 4,700,000. Therefore, the number of treasury stock shares was

 

  1. 0.

 

  1. 4,700,000. C. 4,300,000. D. 400,000.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 3

 

 

 

 

 

 

 

 

 

 

 

 

 

11-11

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. Which of the following is a “contra” stockholders’ equity account? A. Retained earnings.

 

  1. Preferred Stock. C. Treasury stock.
  2. Capital in excess of par value.

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Easy

 

L.O.: 3

 

 

  1. During 2008, Thomas Corporation repurchased some shares of its own common stock. It records treasury stock at cost. What effect did this transaction have on 2008 stockholders’ equity and earnings per share, respectively?

 

 

 

 

 

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Medium

 

L.O.: 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-12

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. McGuire Company had the following stockholders’ equity section:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At what amount per share was the treasury stock purchased?

  1. $17.00.
  2. $10.00.
  3. $12.75.
  4. $15.00.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-13

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. Which of the following entries would be recorded when a company reissues 1,000 shares of treasury stock for $50 per share when they were repurchased at a cost of $47 per share and have a $1 par value?

 

 

 

 

 

 

B.

 

 

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-14

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. Which of the following entries would be recorded when a company reissues 1,000 shares of treasury stock for $40 per share when they were repurchased at a cost of $44 per share and have a $1 par value?

 

 

 

 

A.

 

 

 

 

 

 

C.

 

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 3

 

 

  1. In the case of a cash dividend, a dividend liability comes into existence on the A. date of declaration.

 

  1. date of record.
  2. date of dividend payment.
  3. last day of the month in which the dividend is declared.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Easy

 

L.O.: 4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-15

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. Shares of stock eligible for dividends are A. the number of shares of authorized.

 

  1. the number of shares issued.

 

  1. the number of shares outstanding. D. the number of treasury shares.

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Easy

 

L.O.: 4

 

 

  1. Mosiman 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. Additional capital stock was issued for $100,000. Therefore, the net income (or net loss) for 2010 was

 

  1. $400,000
  2. $480,000
  3. $350,000
  4. $300,000

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Hard

 

L.O.: 4

 

 

  1. Accounting entries associated with a cash dividend usually are made on the A. record date and payment date.

 

  1. payment date only.

 

  1. declaration date and record date. D. declaration date and payment date.

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Medium

 

L.O.: 4

 

 

 

 

 

 

 

11-16

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. On December 15, 2009, the board of directors of Cross Corporation declared a cash dividend, payable on January 8, 2010 of $.80 per share on the 2,000,000 common shares outstanding. The accounting period ends December 31. Because of this action, on December 15, 2009, Cross Corporation should

 

  1. make no journal entry because the event had no effect on the corporation’s financial position until 2010.

 

  1. decrease retained earnings $1.6 million and increase contributed capital $1.6 million. C. decrease retained earnings $1.6 million and increase liabilities by $1.6 million.

 

  1. decrease cash $1.6 million and decrease retained earnings $1.6 million.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 4

 

 

  1. The declaration and payment of a cash dividend
  2. reduces retained earnings and increases liabilities by the amount of the dividend.
  3. reduces retained earnings and increases contributed capital by the same amount.
  4. reduces assets and increases liabilities each by the amount of the dividend.
  5. reduces assets and retained earnings each by the amount of the dividend.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Easy

 

L.O.: 4

 

 

  1. In 2008, Fast Franks had a dividend yield of .1% and Blazing Burgers was .2%. Which of the following is false?

 

  1. Dividend yield will usually drop when the market price per share drops.

 

  1. They pay very little in dividends because they reinvest their earnings in expansion of operations.

 

  1. They provide very little immediate return to their investors.
  2. Dividend yield will usually drop when the market price per share rises.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Hard

 

L.O.: 5

 

 

 

 

 

 

 

 

 

 

 

11-17

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. When a stock dividend (on par value stock) is declared and issued
  2. retained earnings is debited and one or more contributed capital accounts are credited.
  3. capital in excess of par value is debited and retained earnings is credited.
  4. the number of shares outstanding increases while the par value of each share decreases.
  5. .the number of shares outstanding decreases while the par value of each share increases.

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Medium

 

L.O.: 6

 

 

  1. A stock dividend
  2. results in a transfer of retained earnings to contributed capital.

 

  1. increases the number of shares outstanding and involves a pro rata reduction in the par value per share.

 

  1. is accounted for in exactly the same manner as a stock split.

 

  1. results in a transfer of retained earnings to contributed capital and also increases the number of shares outstanding and involves a pro rata reduction in the par value per share.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 6

 

 

  1. Chicago Clock Corporation issued a 3-for-2 stock split (i.e., three new shares in exchange for each two old shares turned in) 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 common stock account?

 

  1. Par value of $100 per share.
  2. Market value per share on the issue date.

 

  1. Half of the previous total amount in the common stock account(s). D. None should be transferred.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 6

 

 

 

 

 

 

 

 

 

 

 

 

11-18

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. Which of the following statements is false?
  2. Stock splits shuffle amounts between retained earnings and contributed capital accounts.
  3. Both stock splits and stock dividends increase the common shares issued.
  4. Both stock splits and stock dividends increase the common shares outstanding.

 

  1. Both stock splits and stock dividends have the impact of reducing the market price of the stock.

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Medium

 

L.O.: 6

 

 

  1. A company has 4 million common shares authorized, 2.5 million shares issued and 100,000 treasury shares. Their par value is $1 per share and the market price is $30 when the company declares a 4/1 stock split. Which of the following is true?

 

  1. There will be a transfer of $2.4 million from retained earnings to contributed capital.

 

  1. Only the shares outstanding will quadruple to 4.8 million and the par value will be reduced to $.25 per share.

 

  1. The shares authorized, issued, outstanding, and held in treasury will all quadruple while the par value will be reduced to $.25 per share.

 

  1. The company will be unable to declare a 4/1 split because they do not have enough authorized shares to issue the needed 4.8 million shares.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Hard

 

L.O.: 6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-19

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. A company declares a 40% stock dividend when there are 4.0 million common shares outstanding with a $1 par value. Their current market price is $20 per share. Which of the following will be the effect of the stock dividend?

 

  1. Retained earnings will decrease by $1.6 million and contributed capital will increase by $1.6 million.

 

  1. Contributed capital will decrease by $1.6 million and retained earnings will increase by $1.6 million.

 

  1. Retained earnings will decrease by $32 million and contributed capital will increase by $32 million.

 

  1. Contributed capital will decrease by $32 million and retained earnings will increase by $32 million.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 6

 

 

  1. The following information is available for the Davidson Company. They have 10,000,000 common shares issued, 500,000 million shares held in treasury, par value of $2 per share, and current market price of $25 per share. They declare a 15% stock dividend. Which of the following is true?

 

  1. Retained earnings will decrease and common stock will increase by $3 million. B. Retained earnings will decrease and common stock will increase by $2.85 million. C. Retained earnings will decrease and common stock will increase by $35.625 million D. Retained earnings will decrease and common stock will increase by $36.0 million.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Hard

 

L.O.: 6

 

 

  1. With respect to preferred stock, select the statement that is correct. A. It must have a par value.

 

  1. It cannot exist unless there also is common stock. C. It is never issued without voting privileges.

 

  1. It always provides for a fixed payment to be made to the stockholders even for years when no dividends have been declared.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 7

 

 

 

 

 

11-20

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. The conversion feature on convertible preferred stock enables the stockholder to convert it

to

 

  1. convertible bonds. B. cash.

 

  1. common stock.
  2. products of the company.

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Easy

 

L.O.: 7

 

 

  1. What is the correct entry for the sale of 1,000 shares of $10 par preferred stock for $50,000?

 

 

 

 

 

 

C.

 

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Medium

 

L.O.: 7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-21

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. Which is false about preferred stock?
  2. Preferred stock has a higher priority status relative to common stock.

 

  1. The same capital accounts are used to record the issuance of preferred stock and common stock.

 

  1. It usually does not carry voting rights.
  2. Preferred stockholders receive dividends in arrears only if the shares are cumulative.

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Easy

 

L.O.: 7

 

 

  1. Which of the following statements is true?
  2. Common stock has a dividend rate fixed by the stock contract.

 

  1. Preferred stock has a volatile market value; therefore, it is a more risky investment than common stock.

 

  1. As a company’s profits and cash flow increases, the board of directors may choose to increase the dividends received by common stockholders.

 

  1. All other answers are false.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 7

 

 

  1. Assume the following shares outstanding:

 

Preferred stock, 6%, $50 par value, cumulative, 1,000 shares with dividends in arrears 3 years, for 2006, 2007, and 2008.

 

Common stock, $100 par value, 2,000 shares.

 

Total dividends declared in 2009 were $50,000. The total amount of dividends to which common stockholders are entitled is

 

  1. $62,000.
  2. $50,000.
  3. $45,000.
  4. $38,000.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 7

 

 

 

 

 

11-22

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. Slickers, Inc. had the following shares outstanding during 2008:

 

Preferred stock, 7%, $50 par value, cumulative, 1,000 shares with dividends in arrears for 2006 and 2007.

 

Common stock, $100 par value, 2,000 shares.

 

The total dividends declared for the current year were $50,000. The total amount of dividends to which the preferred stockholders are entitled is

 

  1. $ 3,500.

 

  1. $ 7,000.
  2. $10,500.
  3. $12,000.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 7

 

 

  1. At January 1, 2009, Grabowski Corporation had outstanding capital stock as shown below. On December 31, 2009, it declared and paid cash dividends of $48,000 to the preferred stockholders.

 

Common stock—1,000,000 shares outstanding, $1 par value.

 

Preferred stock—2,000 shares outstanding, $75 par, 8%, cumulative. The stock was issued at a price of $15 per share.

 

At December 31, 2009, how many years were the preferred dividends in arrears?

  1. One year.
  2. Two years.
  3. Three years.

 

  1. Four years.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Hard

 

L.O.: 7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-23

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. What is the difference between cumulative and noncumulative preferred stock? A. They both receive dividends in arrears.

 

  1. Cumulative stock’s undeclared dividends accumulate each year until paid, while noncumulative stock’s right to receive dividends is forfeited in any year that dividends are not declared.

 

  1. Cumulative does not receive dividends but noncumulative does.

 

  1. Cumulative preferred stock’s right to receive dividends is forfeited in any year that dividends are not declared. However, noncumulative stock’s undeclared dividends accumulate each year until paid.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 7

 

 

  1. Cornhusker Corporation plans to raise $10 million cash on January 1, 2009, by issuing either bonds payable (8% interest rate) or cumulative preferred stock (8% dividend rate). The accounting period ends December 31. How would the annual interest amount or annual preferred dividend amount (if paid) affect the net income for the year ended December 31, 2009?

 

  1. Net income would be reduced by the annual interest and by the preferred stock dividends. B. Net income would be reduced by the interest but not by the preferred stock dividends.

 

  1. Net income would not be reduced by the annual interest nor by the preferred stock dividends.

 

  1. Net income would be reduced by the preferred dividends but not by the interest

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Hard

 

L.O.: 7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-24

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. The Candle Barn has the following classes of stock:

 

Preferred stock, 8%, $100 par, 100,000 shares issued and outstanding, cumulative.

Common stock, par $5, 100,000 shares issued 50,000 shares outstanding.

 

It paid no dividends in its first year of existence. In 2010, its second year of existence, the board of directors of The Candle Barn declared a total dividend of $1,800,000 that was paid to the holders of preferred and common stock. What was the amount of the dividend paid in 2010 on each share of preferred stock?

 

  1. $16.00
  2. $ 8.00
  3. $12.00
  4. None of these is correct.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 7

 

 

  1. Retained earnings A. is an asset.

 

  1. has a debit balance for a successful corporation.
  2. represents the future dividend liability of the company.

 

  1. represents the income that has been earned by the company, less any dividends declared since the first day of operations.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Easy

 

L.O.: 7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-25

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. CBA Company reported total stockholders’ equity of $85,000 on its balance sheet dated December 31, 2008. During the year ended December 31, 2009, it reported a net income of $10,000, declared and paid a cash dividend of $2,000, and issued additional capital stock of $20,000. Therefore, total stockholders’ equity at December 31, 2010, was

 

  1. $117,000. B. $113,000. C. $109,000. D. $101,000.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 7

 

 

  1. Raceway Company reported the following balance sheet amounts at December 31, 2009

 

 

 

 

 

 

 

 

 

 

 

The total amount of retained earnings on December 31, 2009, was

  1. $50,000.
  2. $40,000.
  3. $30,000.
  4. $20,000.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

L.O.: 7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-26

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. Before the journal entry to record income tax and before the closing entries were recorded at the end of the accounting period (December 31, 2009), the following data were taken from the accounts of BestDeals Corporation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The total amount of stockholders’ equity that should be reported on the balance sheet dated December 31, 2009, is

 

  1. $278,000.
  2. $398,000.
  3. $576,000.
  4. $614,000.

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Hard

 

L.O.: 7

 

 

  1. Which of the following statements is false?
  2. Issuance of stock creates cash inflow connected to financing activities.
  3. Payment of a cash dividend creates cash outflow connected to investing activities.

 

  1. Repurchase of the company’s stock, called treasury stock, creates cash outflow connected to financing activities.

 

  1. All other answers are false.

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Medium

 

L.O.: 8

 

 

 

 

 

 

 

 

 

 

 

 

11-27

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. Which of the following is true?
  2. Cash dividends reduce cash from operating activities.
  3. Cash from financing activities will increase when treasury shares are reissued.
  4. Issuance of stock would reduce cash from financing activities.
  5. Repurchase of treasury shares would create a decrease in cash from investing activities.

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Medium

 

L.O.: 8

 

 

  1. Which of the following is false?
  2. Cash from financing activities increases when treasury shares are reissued.
  3. Cash dividends decrease cash from financing activities.
  4. Cash from investing activities decreases when we reacquire treasury shares.
  5. Issuance of a seasoned new issuance of stock increases cash flow from financing activities.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 8

 

 

  1. The following information was available for General Tech in 2009. What was the net effect on cash flows connected to financing activities of the following amounts?

 

 

 

 

 

 

  1. $768,280 increase.

 

  1. $768,280 decrease.
  2. $468,896 decrease.
  3. $617,224 decrease.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 8

 

 

 

 

 

 

 

 

 

 

 

 

11-28

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. Which of the following accounts would appear in the general ledger of a partnership? A. Retained earnings account.

 

  1. Dividends paid account. C. Common stock accounts. D. Drawings accounts.

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Easy

 

L.O.: Sup A

 

 

  1. A primary advantage of a general partnership, compared with a corporation, does not include

 

  1. ease of formation.
  2. limited liability for the owners.

 

  1. no income tax on the business itself. D. complete control by the partners.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Easy

 

L.O.: Sup A

 

 

  1. Which of the following is true about a proprietorship?
  2. The capital account is used to record only the investments of the owner.
  3. The drawing account records distribution of assets to the proprietor.
  4. A proprietorship is a separate legal entity from the owner.
  5. A proprietorship is subject to income tax.

 

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: Sup A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-29

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. Which of the following is true about a partnership?
  2. One capital and drawing account is used for each partnership.

 

  1. The capital account is used to record each partner’s investment and their designated share of the earnings.

 

  1. Partnerships are subject to income taxes.
  2. The drawings account is closed to retained earnings at the end of the period.

 

 

 

AACSB Tag: Relative Thinking

Difficulty: Medium

 

L.O.: Sup A

 

 

Essay Questions

 

 

  1. Constance Corporation reported a $750,000 balance in its par value common stock account at the end of 2009. The company held 50,000 shares of its own stock and had 700,000 shares outstanding. Calculate the par value per share of the company’s stock.

 

$750,000/ (50,000 + 700,000) = $1.00 per share

 

 

 

AACSB Tag: Analytic

 

Difficulty: Medium

L.O.: 3

 

 

  1. The charter of Delta Corporation specified a maximum of 25,000 shares of common stock. At the current date, 5,000 shares remain unissued, and 2,000 of the issued shares have been repurchased and are still held by Delta. Calculate the number of shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

AACSB Tag: Analytic

 

Difficulty: Medium

 

L.O.: 3

 

 

 

 

 

 

 

11-30

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. DRP, Inc., sold and issued 50,000 shares of its own preferred stock (par $50) at $110, and 200,000 shares of its own common stock (no par) at $40. Cash was collected in full and all of the stock was issued. Give the required journal entry.

 

 

 

 

 

 

 

 

 

 

 

 

AACSB Tag: Analytic

 

Difficulty: Medium

L.O.: 3

 

 

  1. The balance sheet at December 31, 2009, showed the following data for ASC Corporation:

 

 

 

 

 

 

Calculate the number of shares:

  1. Issued
  2. Unissued
  3. Treasury stock
  4. Authorized
  5. Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

AACSB Tag: Analytic

 

Difficulty: Easy

 

L.O.: 3

 

 

 

 

 

 

 

 

 

 

 

 

11-31

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

  1. Three dates are described below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AACSB Tag: Analytic

 

Difficulty: Medium

 

L.O.: 4

 

 

 

 

11-32

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. At the end of 2008, Washington Corporation reported a $40,000 balance in its common stock account (par value $1 per share). The treasury stock account showed $720 (cost $6 per share). No dividends were paid during the first two years. During 2008 the company declared and paid a cash dividend at $1.50 per share. Calculate the total amount of the 2008 cash dividend.

 

[($40,000/$1 per share)    ($720/ $6)]     $1.50 = $59,820

 

 

 

AACSB Tag: Analytic

 

Difficulty: Medium

 

L.O.: 4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-33

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. Survivor Company was formed on January 1, 2008 by selling and issuing 20,000 shares of common stock at $15 per share. On December 1, 2009, the company declared a cash dividend of $10,000 which will be paid in cash on January 15, 2010. The annual accounting period ends December 31.

 

  1. Give the journal entry to record the sale and issuance of the common stock on January 1, 2008, for each of the following independent assumptions:

 

  1. The common stock has a par value of $10 per share.
  2. The common stock was no par with a stated value of $5 per share.
  3. The common stock was no par and no stated value.

 

  1. Give the journal entry to record the dividend declaration on December 1, 2009. C. Show the journal entry to record payment of the dividend on January 15, 2010.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AACSB Tag: Analytic

 

Difficulty: Medium

L.O.: 4

 

 

 

 

 

 

 

 

 

 

 

11-34

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. Contrast the economic effects of a cash dividend (declared and paid) with a stock dividend (declared and issued) on the distributing corporation by completing the following chart by placing “X” where appropriate.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AACSB Tag: Analytic

Difficulty: Medium

 

L.O.: 4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-35

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. The following information is available for Bradford Bikes for the years 2009 and 2008:

 

 

 

 

 

 

 

 

 

  1. Calculate the dividend yield ratio for both 2009 and 2008.

 

  1. Interpret the yield ratio in terms of whether it is high or low, whether it indicates a steady dividend policy, and whether Bradford Bikes appears to be growing or stagnant.

 

  1. Dividend yield in 2009 is 1.6% ($.85/$53.00) and 2008 is 1.5% ($.63/$41.50)

 

  1. The dividend yield paid as an immediate return to Bradford Bikes’s stockholders is low in comparison to the market price investors are willing to pay for their shares of stock. However, they are paying out about 30% of their current earnings as dividend return to their investors. It appears Bradford Bikes increased their dividends to boost the market price of their stock.

 

 

 

AACSB Tag: Analytic

 

Difficulty: Medium

L.O.: 5

 

 

  1. The following information is available for Italiano Ices for the years 2009 and 2008:

 

 

 

 

 

 

 

 

 

  1. Calculate the dividend yield for both 2009 and 2008.

 

  1. Does the dividend yield appear to be low, moderate or high and what caused the change in the yield from 2008 to 2009?

 

  1. In 2009, the dividend yield was 2.6% and in 2008, it was 2.0%.

 

  1. The yield appears to be on the low side, which means the company is reinvesting in growth of operations and earnings to improve the price performance. The ratio increased primarily because the market price of the stock dropped almost $5 per share in 2009 even though the dividends went up $.12 per share.

 

 

 

AACSB Tag: Analytic

 

Difficulty: Medium

 

L.O.: 5

 

 

 

11-36

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

  1. Tractor Corporation was just formed. The following accounts of Tractor Corporation, with code letters, are needed to record the transactions given below. You are to indicate the appropriate journal entry for each transaction by entering the code letters and the correct amounts. The transactions are independent unless otherwise stated.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-37

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AACSB Tag: Analytic

Difficulty: Medium

 

L.O.: 6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-38

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

  1. HighRise Company reported the following amounts of contributed capital in the stockholders’ equity accounts as of January 1, 2010:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indicate the journal entry required to record each of the following transactions by entering the letter code corresponding to each account to be debited and credited and the amount of each debit and credit. The transactions are independent unless otherwise stated.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-39

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AACSB Tag: Analytic

 

Difficulty: Medium

L.O.: 6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-40

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

  1. On January 1, 2008, the stockholders’ equity section of Gibbons Corporation’s balance sheet showed the following

 

 

 

 

 

 

 

 

 

During the year, 2008, the accounts showed the following summarized transactions (assume they occurred in the order given):

 

(1)          Issued a 10% stock dividend; 1,000 shares issued when the market price was $12.

(2)          Purchased treasury stock (200 shares at $11).

(3)          Declared and paid a cash dividend of $19,800.

(4)          Net income, $30,000.

 

The stockholders’ equity section of the balance sheet at December 31, 2008, should report the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-41

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*$160,000     $19,800 – (1,000 shares     $12) + $30,000 = $158,200

 

 

 

AACSB Tag: Analytic

 

Difficulty: Hard

 

L.O.: 6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-42

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. On January 1, 2009, the accounts of Mac Corporation showed the following:

 

 

 

 

 

 

 

 

During 2009, the following transactions occurred affecting stockholders’ equity (in the order given):

 

  1. Issued a 100% stock dividend when the market price was at $5 per share.
  2. Purchased treasury stock, 1,000 shares at a total cost of $8,000.
  3. Declared and paid cash dividends, $15,000.
  4. Net income for 2009, $25,000.

 

Required:

 

The stockholders’ equity section of the balance sheet for the company must be prepared for the December 31, 2009 balance sheet. It is given below with certain amounts missing. Supply the missing amounts by entering them in the blanks.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)          ($60,000/$2) = 30,000 shares     100% stock dividends = 60,000 shares

(2)          60,000 shares     $1 = $60,000

(3)          $60,000

(4)          $60,000 + $60,000 = $120,000

 

(5)          $140,000   (stock dividend, 30,000 shares   $1)   (cash dividend, $15,000) + net income, $25,000 = $120,000

 

(6)          Treasury stock, shares, 1,000

(7)          $8,000 (cost)

(8)          $120,000 + $120,000    $8,000 = $232,000

 

 

 

AACSB Tag: Analytic

 

Difficulty: Medium

 

L.O.: 6

 

 

 

 

11-43

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. In December 31, 2009, Brave Corporation reported the following on its balance sheet:

 

 

 

 

 

 

 

 

 

 

 

 

Fill in all the blanks for the stockholders’ equity section of the balance sheet.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AACSB Tag: Analytic

Difficulty: Medium

 

L.O.: 7

 

 

 

 

 

 

 

 

11-44

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. Lopez Corporation reported the following in its December 31, 2009, balance sheet:

 

 

 

 

 

 

 

 

Fill in all the blanks for the stockholders’ equity section of the balance sheet.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AACSB Tag: Analytic

 

Difficulty: Medium

L.O.: 7

 

 

 

 

 

 

 

 

11-45

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. During 2009, Sanders Corporation made the following journal entry to record the declaration and payment of a cash dividend:

 

 

 

 

 

 

 

 

The total par values of common and preferred stock outstanding were $70,000 and $40,000, respectively. No dividends were declared or paid during 2008. There are 1,000 shares of common treasury stock.

 

  1. If the preferred stock is noncumulative, calculate the current dividend rate on the preferred stock.

 

  1. If the preferred stock is cumulative, calculate the current dividend rate on the preferred stock.

 

  1. $40,000 Rate = $3,600; Rate = 9%
  2. 2 ($40,000 Rate) = $3,600

($40,000     Rate) = $1,800

Rate = 4.5% or 9% [from part (A.]/2 = 4.5%

 

 

 

AACSB Tag: Analytic

 

Difficulty: Medium

L.O.: 7

 

 

  1. Wedge Corporation has the following capital stock outstanding: Common stock, par $1, 250,000 shares.

 

8% preferred stock, par $100, 5,000 shares, cumulative, with 2 years in arrears excluding the current year.

 

Cash dividends of $150,000 were declared and paid near the end of the current year. A. Calculate total dividends received by the preferred stockholders.

 

  1. Calculate total dividends received by the common stockholders.

 

  1. Preferred: (5,000 shares $100 8%)     3 = $120,000
  2. Common: $150,000 $120,000 = $30,000

 

 

 

AACSB Tag: Analytic

Difficulty: Medium

 

L.O.: 7

 

 

 

 

 

 

 

 

11-46

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. Marlin, Inc., declared a cash dividend of $40,000 in 2009 when the following stocks were outstanding:

 

 

 

 

 

 

No dividends were declared or paid during the prior year. Compute the amount of cash that would be paid to each stockholder group under each of the following separate cases.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AACSB Tag: Analytic

 

Difficulty: Medium

 

L.O.: 7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-47

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. Identify the effects on cash flow from financing activities of the following activities as increasing (+), decreasing ( ) or having no effect on financing cash flows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AACSB Tag: Analytic

Difficulty: Hard

 

L.O.: 8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-48

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

Matching Questions

 

 

  1. Match the items with the definitions.

 

  1. Stock that may, at the option of the holder, be

turned in for another security    Convertible stock             1

  1. The difference between total shares issued and

total shares authorized Treasury stock   6

  1. The difference between the issue price and par

value     Preferred stock                5

  1. Stock on which dividends in arrears must be paid Capital in excess of

prior to any current dividends    par value             3

  1. Stock that has specified rights over common stock Unissued shares               2
  2. Stock that has been issued, repurchased, and is

held by the corporation                Cumulative stock             4

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

L.O.: 2

 

 

  1. Match the terms with the descriptions below.

 

  1. That portion of corporate capital required by statute to be

retained in the business for protection of creditors          Total assets        2

  1. Represents the total interests of all parties in the

properties of the business. It is the sum of the liabilities and       Contributed

stockholders’ equity       capital   4

  1. The total equity at any given time of the legal owners of Stockholders’

the enterprise   equity   3

  1. The investment made by the owners of the corporation Legal capital        1

 

 

AACSB Tag: Relative Thinking

Difficulty: Easy

 

L.O.: 2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-49

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. Match the terms with the definitions below.

 

  1. No par stock with an assigned “value” None of the answers     7
  2. Stock with specified differences from the basic

stock     None of the answers     5

  1. Stock that is limited to a specified dividend rate Preferred stock,

per year               noncumulative  3

  1. Stock having no minimum amount that must be

paid in at first sale and issuance No par stock       4

  1. Authorized but unissued shares of stock Common stock  6

Preferred stock,

  1. The basic issue of stock; the residual equity cumulative          8
  2. Stock that has been issued, repurchased, and is No par, stated value

held by the corporation                stock     1

  1. Stock on which dividends in arrears must be paid

before current dividends can be paid     Preferred stock                2

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 7

 

 

  1. This question relates to stockholders’ equity. For each item listed, indicate its best description.

 

  1. Preferred stock None of the answers     4

Represents the residual equity and is voting

  1. Retained earnings stock.    8
  2. No par stock Specified by state law.   5

The basic concept followed in accounting and

  1. Contributed capital reporting stockholders’ equity.  10
  2. Legal capital Distinguished by special equity provisions. 1
  3. Cumulative dividends

not yet paid        Does not create capital in excess of par value.    3

  1. Treasury stock The legal document authorizing a corporation.   9

The corporation’s own stock; issued,

  1. Common stock repurchased, and still held.         7

Cumulative net income less cumulative

  1. Charter dividends declared. 2
  2. By source Dividends in arrears. 6

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: 7

 

 

 

 

11-50

 

 

 

 

 

Chapter 011: Reporting and Interpreting Owner’s Equity

 

 

 

 

  1. Match the type of business with their characteristics below.

 

Partnership and sole

  1. Uses a dividends declared account proprietorship   10

Partnership and sole

  1. Has only one owner proprietorship   4
  2. Issues stock certificates Corporation        8
  3. Uses owner capital accounts Corporation        1
  4. Involves more than one owner but has no

state charter      Partnership        9

  1. Has a board of directors Corporation        7
  2. Requires a state charter Corporation        3
  3. Uses retained earnings account Sole proprietorship         2
  4. Uses a profit ratio to allocate earnings

among the owners          Corporation        6

  1. Uses withdrawal accounts or drawing

accounts              Partnership        5

 

 

AACSB Tag: Relative Thinking

 

Difficulty: Medium

 

L.O.: Sup A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-51

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-37

 

©2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

 

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