Chapter 2: Financial Statements and the Annual Report

Chapter 2: Financial Statements and the Annual Report

1.Whatistheprimaryobjectiveoffinancialreporting?

a.Tohelpinvestorsmakecreditdecisions.

b.Tohelpmanagementassesscashflows.

c.Toprotectusersfromfraudulentfinancialinformation.

d.Toprovideusefulinformationfordecisionmaking

ANSWER: d

2.“Claimstoeconomicresources”areknownas

a.Assetsandliabilities

b.Liabilitiesandstockholders’equity

c.Owners’equityandstockholders’equity

d.Retainedearningsandrevenues

ANSWER: b

3.Whichofthefollowingisnotanobjectiveoffinancialreporting?

a.Toreflectprospectivecashreceiptstoinvestorsandcreditors.

b.Toreflectprospectivecashflowstoanenterprise.

c.Toreflectresourcesandclaimtoresources.

d.Toreflectcurrentstockpricesandinformationconcerningstockmarkets.

ANSWER: d

4.Whichofthefollowingstatementsistrueconcerningexternalusersoffinancialinformation?

a.Externalusersneeddetailedrecordsofthebusinesstomakeinformeddecisions.

b.Externalusersareprimarilyresponsibleforthepreparationoffinancialstatements.

c.Externalusersrelyonthefinancialstatementstohelpmakeinformeddecisions.

d.Externalusersrelyonmanagementtotellthemwhetherthecompanyisagoodinvestment

ANSWER: c

5.Relevantinformationcanbequantitativeorqualitative.Indecidingwhethertogotocollegepart-timeorfull-time,whichofthefollowingisaqualitativefactorforastudent?

a.Thecostoftuition

b.Theopportunitytomakefriends

c.Thepriceoffootballtickets

d.“GoodStudent”discountsonautoinsurancerates.

ANSWER: b

6.Thepreparationoffinancialstatementsrequiresthattheinformationbeunderstandable

a.OnlytoCPAs.

b.Tothosewillingtospendthetimetounderstandit.

c.Onlytothosewhotakeanaccountingcourse.

d.Onlytofinancialanalystsandbrokers.

ANSWER: b

7.Cook,Inc.,amanufactureroftires,hasgivenyouitsmostrecentannualreportinanefforttoobtainasizableloan.Thecompanyisveryprofitableandappearstohaveasoundfinancialposition.Basedonareportpresentedonprime-timetelevisionlastnight,youareawarethatCookisadefendantinseverallawsuitsrelatedtoitsdefectivetiresthatcausevehiclestooverturn.Theinformationpresentedontelevisionisanexampleoffinancialinformationthatis

a.Relevant

b.Consistent

c.Predictable

d.Comparable

ANSWER: a

8.Ifaninvestorcanuseaccountinginformationfortwodifferentcompaniestoevaluatethetypesandamountsofexpenses,theinformationissaidtohavethequalityof

a.Comparability

b.Consistency

c.Neutrality

d.Understandability

ANSWER: a

9.ButtonTransportationpurchasesmanypiecesofofficefurniturewithanindividualcostbelow$200each.Buttonchoosestoaccountfortheseexpendituresasexpenseswhenacquiredratherthanreportingthemasproperty,plant,andequipmentonitsbalancesheet.Thecompany'saccountantandindependentCPAagreethatnoaccountingprinciplehasbeenviolated.WhataccountingjustificationallowsButtontoexpensethefurniture?

a.Conservatism

b.Matching

c.Materiality

d.Verifiability

ANSWER: c

10.MaddenCompanyappliestheconsistencyconvention.Whatdoesthismean?

a.MaddenCo.usesthesamenamesforallitsexpensesasitscompetitors.

b.MaddenCo.hasselectedcertainaccountingprinciplesthatcanneverbechanged.

c.MaddenCo.appliesthesameaccountingprincipleseachaccountingperiod.

d.MaddenCo.appliesthesameaccountingprinciplesasitcompetitors.

ANSWER: c

11.Informationthatismaterialmeansthatanerrororalternativemethodofhandlingatransaction

a.Wouldpossiblyaffectthejudgmentofsomeonerelyingonthefinancialstatements

b.Wouldnotaffectthedecisionsofusers

c.Mightcauseacompanytounderstateitsearningsfortheaccountingperiod

d.Couldincreasetheprofitabilityofacompany

ANSWER: a

12.Anaccountantisuncertainaboutthebestestimateofanamountforabusinesstransaction.Iftwoamountsareaboutequallylikely,theamountleastlikelytooverstateassetsandincomeisselected.Whichofthefollowingqualitiesischaracterizedbythisaction?

a.Comparability

b.Conservatism

c.Materiality

d.Neutrality

ANSWER: b

13.Thequalitativecharacteristicsofaccountingdatainclude

a.Assetsreportedonthebalancesheet

b.Allaccountinginformation

c.Cashflows

d.Reliability

ANSWER: d

14.Whichofthefollowingisanoncurrentasset?

a.Inventories

b.Officesupplies

c.Land

d.Accountsreceivable

ANSWER: c

15.Whichofthefollowingisacurrentasset?

a.Land

b.Buildings

c.Storefixtures

d.Prepaidinsurance

ANSWER: d

16.Whichofthefollowingincludeonlycurrentassets?

a.Accountsreceivable,cash,inventory,officesupplies

b.Cash,accountspayable,inventory,officesupplies

c.Cash,land,accountsreceivable,inventory

d.Accountsreceivable,cash,furniture,officesupplies

ANSWER: a

17.Todeterminethesourceofacompany'sassets,onwhichfinancialstatementwillyoulook?

a.Balancesheetonly

b.Incomestatementonly

c.Boththebalancesheetandtheincomestatement

d.Boththeincomestatementandthestatementofretainedearnings

ANSWER: a

MossCompany

MossCompanyhasprovidedthefollowinginformationfromitsaccountingrecordsforthecurrentyear:

18.ReadtheinformationforMossCorporation.WhatareMoss’currentassets?

a.$100,000

b.$165,000

c.$210,000

d.$240,000

ANSWER:b

RATIONALE: ($55,000Cash+$45,000AccountsReceivable+$65,000Inventory=$165,000)

19.ReadtheinformationforMossCompany.WhatareMoss’currentliabilities?

a.$50,000

b.$125,000

c.$200,000

d.$230,000

ANSWER:a

RATIONALE: ($50,000AccountsPayable)

20.Whichoneofthefollowingitemsisreportedasacurrentassetonaclassifiedbalancesheet?

a.Inventory

b.Accountspayable

c.Land

d.Commonstock

ANSWER: a

21.ThefollowinginformationisgivenforSegoCompany:

Whatarethecompany’scurrentassets?

a.$220,000

b.$155,000

c.$130,000

d.$95,000

ANSWER: d

RATIONALE: ($50,000Cash+$45,000Inventory=$95,000)

22.Whichofthefollowingaccountsarenormallyreportedascurrentliabilitiesonaclassifiedbalancesheet?

a.Accountspayableandbondspayable

b.Interestpayableandmortgagepayable

c.Incometaxespayableandsalariespayable

d.Capitalstockandaccountspayable

ANSWER: c

23.Whichoneofthefollowingisnotamajorcategoryforlong-termassets?

a.Intangibles

b.Property,plant,andequipment

c.Receivables

d.Goodwill

ANSWER: c

24.Whichofthefollowingwouldnotbeconsideredtobeanintangibleasset?

a.Franchises

b.Copyrights

c.Investments

d.Goodwill

ANSWER: c

25.Whichofthefollowingstatementsistrueconcerningintangibleassets?

a.Intangibleassetshavenoeconomicsubstance.

b.Intangibleassetslackphysicalexistence.

c.Intangibleassetsarelistedinthestockholders’equitysectionofthebalancesheet.

d.Intangibleassetsappearinthecurrentassetssectionofthebalancesheet.

ANSWER: b

26.Howareassetswhichareexpectedtoberealizedincash,sold,orconsumedwithinthenormaloperatingcycleofabusinessorwithinoneyear(iftheoperatingcycleisshorterthanoneyear)reportedonaclassifiedbalancesheet?

a.Property,plant,andequipment

b.Currentassets

c.Intangibleassets

d.Currentliabilities

ANSWER: b

27.Whichofthefollowingtermscharacterizesthetimeperiodbetweentheinvestmentofcashinmerchandiseandthecollectionofcashfromthesaleofthatmerchandise?

a.Operatingcycle

b.Naturalbusinessyear

c.Accountingperiod

d.Fiscalperiod

ANSWER: a

28.Whichsetofitemsbelowarecurrentassets?

a.Accountsreceivable,netincome,inventory,anddividends

b.Cash,accountsreceivable,capitalstock,andsales

c.Netincome,cash,officesupplies,andinventory

d.Cash,accountsreceivable,inventory,andofficesupplies

ANSWER: d

29.Onesignificantdifferencebetweenaclassifiedandanon-classifiedbalancesheetisthedistinctionbetweenwhichofthefollowingitems?

a.Assetsandliabilities

b.Currentandnoncurrentitems

c.Liabilitiesandowners’equity

d.Resourcesinvestedbytheownersandamountsborrowedfromcreditors

ANSWER: b

30.Forseveralyears,FlameCorporationhashadacurrentratiothatwasconsistentwithothercompaniesinitsindustry.Forthemostrecentyear,Flame’scurrentratiowassignificantlyhigherthanthatfortheindustry.Whatisthebestpossibleexplanationforthissituation?

a.Theothercompaniesintheindustrywerenotasprofitable.

b.Flame’sliquidityhasimprovedorisnotleveragingfinancialresourceseffectively.

c.Flamehaslessproperty,plantandequipmentthanothercompanies.

d.Flamehastoomuchdebt.

ANSWER: b

GuintherSons,Inc.

GuintherSons,Inc.aretailerofmen’sclothing,earnedanetprofitof$77,000for2014.ThebalancesheetforGuintherSonsincludesthefollowingitems:

31.ReadtheinformationforGuintherSons.CalculatethetotalamountofcurrentassetsforGuintherSons.

a.$100,000

b.$147,000

c.$150,000

d.$249,000

ANSWER:c

RATIONALE: ($29,000Cash+$39,000AccountsReceivable+$79,000Inventory+$3,000PrepaidInsurance=$150,000)

32.ReadtheinformationforGuintherSons,Inc.CalculatethecurrentratioforGuintherSons.

a.2.58to 1

b.2.75to1

c.3.00to 1

d.2.00to1

ANSWER:c

RATIONALE: ($29,000Cash+$39,000AccountsReceivable+$79,000Inventory+$3,000PrepaidInsurance)/($21,000AccountsPayable+$29,000TaxesPayable)=3.00to1

33.ReadtheinformationforGuintherSons,Inc.TheaveragecurrentratioforstoressuchasGuintherSonsis2.4to1.Whatdoesthiscomparisontellyouaboutitsliquidity?

a.Itismoreliquidthanitscompetitors.

b.Ithasmorelong-termassetsthanitscompetitors.

c.Sincearuleofthumbforcurrentratiosis2to1,neitherGuintherSons,Inc.noritscompetitorsisliquid.

d.GuintherSons,Inc.ismoreprofitablethanitscompetitors.

ANSWER: a

34.LamarCompanyhastotalcurrentassetsof$122,000andtotalcurrentliabilitiesof$57,000.WhatistheamountofworkingcapitalforLamarCompany?

a.$57,000

b.$65,000

c.$122,000

d.$179,000

ANSWER: b

35.Whatisthecorrectmethodforcalculatingworkingcapital?

a.TotalAssetsminusTotalLiabilities

b.CurrentAssetsminusTotalLiabilities

c.CurrentAssetsminusCurrentLiabilities

d.CurrentAssetsplusCurrentLiabilities

ANSWER: c

36.OreoCompanyhascurrentassetsof$20,000,currentliabilitiesof$8,000,andlong-termliabilitiesof$3,000.Oreowantstobuynewequipment.HowmuchofitsexistingcashcanOreousetoacquireequipmentwithoutallowingitscurrentratiotodeclinebelow2.0to1?

a.$4,000

b.$8,000

c.$10,000

d.$12,000

ANSWER:a

RATIONALE: ($16,000/$8,000=2.0to1;$20,000-$16,000=$4,000)

37.ExcursionCorp.increaseditsdollaramountofworkingcapitaloverthepastseveralyears.Tofurtherevaluatethecompany'sshort-runliquidity,whichoneofthefollowingmeasuresshouldbeused?

a.Thecurrentratio

b.Ananalysisofthecompany’slong­termdebt

c.Ananalysisofthereturnonstockholders’equity

d.Ananalysisofretainedearnings

ANSWER: a

38.Whichfinancialstatementreportsinformationhelpfulinassessingworkingcapital?

a.Incomestatement

b.Balancesheet

c.Statementofretainedearnings

d.Statementofcashflows

ANSWER: b

39.UseRizwiCorporation’slistofaccountsatDecember31,2015toanswerthefollowingquestion.

RizwiCorporation

ListofAccountsatDecember31,2015

WhatisRizwiCorp.’scurrentratio?

a.0.48to 1

b.2.00to1

c.2.55to 1

d.2.86to1

ANSWER:b

RATIONALE: ($30,000Cash+$21,000MerchandiseInventory+$25,000AccountsReceivable)/($14,000AccountsPayable+$24,000NotesPayable--Due07/01/2015)=2.00to1

40.Ifthecurrentratiois2.5to1,netincomeis$6,000,andcurrentliabilitiesare$18,000,howmuchisworkingcapital?a.$6,000

b.$24,000

c.$27,000

d.$45,000

ANSWER:c

RATIONALE: ($18,000CurrentLiabilitiesX2.5=$45,000CurrentAssets;$45,000-$18,000=$27,000)

41.Forwhichofthefollowingisthecurrentratiomostuseful?

a.Inevaluatingacompany’sliquidity

b.Inevaluatingacompany’ssolvency

c.Inevaluatingacompany’sprofitability

d.Inevaluatingacompany’sprobability

ANSWER: a

42.Whichofthefollowingeventswillcauseacompany’scurrentratiotodecrease?

a.Thesaleofinventoryforcash

b.Thesaleofinventoryforcredit(accountsreceivable)

c.Issuingstockforcash

d.Payingofflong-termdebtwithcash

ANSWER: d

43.Whichofthefollowingeventswillcauseacompany’scurrentratiotoincrease?

a.Thecollectionofanaccountreceivable

b.Sellinglandforcashataloss

c.Thedischargeofanaccountpayablebysigningashort-termnotepayable

d.Payingoffalong-termloan

ANSWER: b

44.Liquidityrelatestoacompany'sabilitytodowhichofthefollowing?

a.Theabilitytopayitsfinancialobligationsastheybecomedue

b.Theabilitytostayinbusinessoverthelongrun

c.Theabilitytopaydividendstoitsstockholders

d.Theabilitytocollecttheamounttheircustomersowethecompany

ANSWER: a

Skyline,Inc.

ThebalancesheetofSkylineInc.includesthefollowingitems:

45.ReadtheinformationaboutSkyline,Inc.WhatisSkyline’scurrentratio?

a.0.8to1

b.1.6to1

c.1.2to1

d.2.5to1

ANSWER: c

RATIONALE: CurrentRatio=CurrentAssets/CurrentLiabilities=($22,400+$11,700+$23,300+$1,040)/($47,500+$1,200)=$58,440/48,700=1.2to1

46.ReadtheinformationaboutSkyline,Inc.WhatisSkyline’sworkingcapital?

a.$58,440

b.$89,740

c.$84,040

d.$9,740

ANSWER: d

RATIONALE: CurrentRatio=CurrentAssets/CurrentLiabilities=($22,400+$11,700+$23,300+$1,040)/($47,500+$1,200)=$58,440/48,700=1.2to1WorkingCapital = Current Assets –Current Liabilities= $58,440 –$48,700=$9,740

47.Whichofthefollowingwouldappearonamultiple-stepincomestatementbutnotonasingle-stepincomestatement?

a.Netincome

b.Totalexpenses

c.Totalrevenues

d.Incomebeforeincometaxes

ANSWER: d

48.Whichofthefollowingwouldnotappearonanincomestatement?

a.Salesrevenue

b.Costofgoodssold

c.Accountsreceivable

d.Insuranceexpense

ANSWER: c

49.Whichstatementistrueconcerninganincomestatement?

a.Theincomestatementshowshowmuchprofitthecompanyhasearnedsinceitbeganoperations.

b.Netincomeontheincomestatementshouldbeequaltotheamountofcashonthebalancesheet.

c.Theincomestatementsummarizestheresultsofoperationsforaperiodoftime.

d.Theincomestatementindicatestheliquidityofthecompanyonanannualbasis.

ANSWER: c

50.Whichstatementistrueconcerninggainsandlosses?

a.GainsandlossesarereportedonthebalancesheetintheAssetsandLiabilitiessections,respectively.

b.Gainsandlossesarespecialtypesofrevenuesandexpensesthatarereportedontheincomestatement.

c.Theamountsofgainsandlossesareincludedinthecalculationofthecurrentratio,inthenumeratoranddenominator,respectively.

d.Gainsandlossesarereportedonlyonamulti-stepincomestatement.

ANSWER: b

51.Whichoneofthefollowingsubtotalsortotalswouldappearinamultiple-step,butnotasingle-stepincomestatement?

a.Incometaxexpense

b.Incomefromoperations

c.Costofgoodssold

d.Netincome

ANSWER: b

52.Whatarethetwosubtotalsthatdistinguishthemulti-stepincomestatementfromthesingle-stepincomestatement?

a.Incomebeforetaxesandincometaxes

b.Totaloperatingrevenuesandtotaloperatingexpenses

c.Incomefromoperationsandincomebeforetaxes

d.Totalrevenuesandtotalexpenses

ANSWER: c

53.Aquestionaskedbystockholdersis,"Howmuchprofitdidthecompanymake?"Whatshouldthestockholderexaminetogetthemostinformationthatwillhelpevaluatetheanswertothisquestion?

a.Thebalancesheet,becauseretainedearningsrepresentscurrentprofits

b.Thestatementofcashflows,ascashinflowsandoutflowsrepresentscurrentprofits

c.Theincomestatement,sinceitshowstherevenuesandexpensesfortheperiod

d.Theeconomicresourcesofthecompany

ANSWER: c

54.Undercurrentaccountingprinciples,howisnetincomeontheincomestatementmeasured?

a.Netchangeinowners’equityduringtheperiod

b.Excessofrevenuesoverexpensesduringtheperiod

c.Netchangeinthecashbalanceduringtheperiod

d.Excessofrevenuesoverexpenseslessanydividendspaidduringtheperiod

ANSWER: b

55.Whichofthefollowingstatementsistrueregardingthemultiple-stepincomestatement?

a.Themultiple-stepincomestatementisusedonlybycompaniesthatsellproducts,notthosethatprovideservices.

b.Themultiple-stepincomestatementishelpfulindeterminingacompany'sworkingcapital.

c.Themultiple-stepincomestatementreportsthesamenetincomeasthesingle-stepincomestatement.

d.Themultiple-stepincomestatementisrequiredundergenerallyacceptedaccountingprinciples.

ANSWER: c

56.Howisincomefromoperationsdetermined?

a.Bysubtractingthecostofgoodssoldfromsales

b.Bysubtractingthetotaloperatingexpensesfromsales

c.Bysubtractingthetotaloperatingexpensesfromgrossprofit

d.Bysubtractingsellingexpensesfromoperatingrevenues

ANSWER: c

57.Thefollowinglistcontainsseveralitemsthatappearonanincomestatement.

Selectthechoicethatliststheitemsintheordertheywouldappearonamulti-stepincomestatement.

a.6,1,7,4,2,3,5

b.7,6,1,4,2,3,5

c.6,4,7,1,2,3,5

d.6,7,4,1,2,3,5

ANSWER: c

WebbCompany

SelecteddatafromtheaccountingrecordsofWebbCompanyarelistedbelow:

58.ReadtheinformationaboutWebbCompany.WhatisWebb’sincomefromoperations?

a.$1,600

b.$2,000

c.$2,200

d.$2,800

ANSWER:b

RATIONALE: ($6,000OperatingRevenues-$2,200GeneralAdministrativeExpenses-$1,800Selling Expenses=$2,000)

59.ReadtheinformationaboutWebbCompany.WhatisWebb’snetincome?

a.$1,600

b.$2,000

c.$2,200

d.$2,800

ANSWER:c

RATIONALE: ($6,000OperatingRevenues-$2,200GeneralAdministrativeExpenses-$1,800Selling Expenses=$2,000+$800OtherRevenues(Expenses)-$600IncomeTaxes=$2,200)

60.ReadtheinformationaboutWebbCompany.Bywhatamountwillnetincomeonasingle-stepincomestatementdifferfromnetincomeonamulti-stepincomestatementifWebbCompanypreparesbothformats?

a.$800

b.$600

c.$200

d.$-0-

ANSWER: d

DealMart

The2014incomestatementofDealMartshowsoperatingrevenuesof$130,800,sellingexpensesof$37,100,generalandadministrativeexpensesof$34,900,interestexpenseof$900,andincometaxexpenseof$11,430.DealMart’sstockholders’equitywas$280,000atthebeginningoftheyearand$320,000attheendoftheyear.Thecompanyhas20,000sharesofstockoutstandingatDecember31,2014.

61.ReadtheinformationaboutDealMart.WhatisDealMart’snetincome?

a.$80,000

b.$92,190

c.$130,800

d.$46,470

ANSWER:d

RATIONALE:NetIncome =$130,800– $37,100–$34,900 –$900– $11,430= $46,470

62.ReadtheinformationaboutDealMart.WhatisDealMart’sprofitmargin(totheclosesttenthofapercent)?

a.2.8

b.35.5

c.61.2

d.14.5

ANSWER:b

RATIONALE: Profitmargin:NetIncome/Revenues=$46,470*/$130,800=35.5%

*$130,800 – $37,100 – $34,900 – $900 – $11,430 = $46,470

63.Forman,Inc.earned$600,000profitduring2015.Onwhichfinancialstatement(s)willyoufindthedollaramountoftheprofitearnedbythecompany?

a.Balancesheetandincomestatement

b.Incomestatementonly

c.Statementofretainedearningsonly

d.Incomestatementandstatementofretainedearnings

ANSWER: d

64.GrandStores,Inc.isconcernedaboutitsprofitabilityforthecurrentyear,sinceitsprofitmarginhasdropped10%sincelastyear.WhichofthefollowingistheleastusefulcomparisoninevaluatingthedropinGrandStores’profitmargin?

a.Comparisonwiththeindustryaverageforthecurrentyear

b.Comparisonwithitscurrentratioforthecurrentyear

c.Comparisonwiththeprofitmarginsforitsmajorcompetitorsforthecurrentyear

d.Comparisonwithitsprofitmarginsforthepastfiveyears

ANSWER: b

65.Assumethatyouwanttodeterminetheprofitmarginforacompany.Whichoneofthefollowingfinancialstatementsisthebestsourceofthisinformation?

a.Statementofretainedearnings

b.Statementofcashflows

c.Statementofstockholders’equity

d.Incomestatement

ANSWER: d

Hopper,Inc.

UsetheinformationfromHopperInc.toanswerthefollowingquestion(s).

66.ReadtheinformationaboutHopper.Inc.WhichstatementbestrepresentsHopper’sperformance?

a.Hopper’sprofitmarginratiodecreased.

b.Hopperhasbecomemoreprofitable.

c.Hopper’sincreaseinoperatingrevenuesincreasedthecompany’snetincome.

d.Hopper’soperatingexpensesasapercentageofoperatingrevenuesremainedthesame.

ANSWER: a

67.ReadtheinformationaboutHopper,Inc.Whichofthefollowingstatementsisthebestanswerregardingthecompany’sprofitmargin?

a.Theprofitmarginwas15.8%in2014.

b.Theprofitmarginwas15.8%in2013.

c.Theprofitmarginwas31.5%in2014.

d.Theprofitmarginwas31.5%in2013.

ANSWER:a

RATIONALE: ($300,000(or$1,900,000Operatingrevenues-$1,400,000Operatingexpenses-$200,000Incometaxes)/$1,900,000=15.8%)

68.ReadtheinformationaboutHopper,Inc.WhichratioareyouabletocalculategivenonlytheinformationprovidedbyHopper?

a.Profitmargin

b.Currentratio

c.Workingcapital

d.Grossprofitpercentage

ANSWER: a

69.Whichoneofthefollowingequationsrepresentsretainedearningsactivity?

a.Beginningbalance+netincome+dividends=profitsfortheyear

b.Beginningbalance+cashinflows–cashoutflows=endingbalance

c.Beginningbalance+dividends–netincome=endingbalance

d.Beginningbalance+netincome–dividends=endingbalance

ANSWER: d

Bartlett Industries

BartlettIndustriesbeganoperationsonJanuary2,2015,withaninvestmentof$50,000byeachofitstwostockholders.Netincomeforitsfirstyearofbusinesswas$240,000.BartlettIndustriespaidatotalof$100,000individendstoitsstockholdersduringtheyear.

70.ReadtheinformationaboutBartlettIndustries.Whatisthecompany’sretainedearningsbalanceatDecember31,2015?

a.$140,000

b.$190,000

c.$240,000

d.$340,000

ANSWER: a

RATIONALE: ($-0-BeginningBalance+$240,000NetIncome-$100,000Dividends=$140,000)

71.ReadtheinformationaboutBartlettIndustries.Ifthecompany’srevenueswere$500,000fortheyearendedDecember31,2015,howmuchweretotalexpenses?

a.$160,000

b.$260,000

c.$640,000

d.$740,000

ANSWER: b

RATIONALE: ($500,000Revenues-$240,000NetIncome=$260,000)

72.ReadtheinformationaboutBartlettIndustries.Thecompany’sdividendsfortheyear

a.Reducetheamountofcapitalstockreportedbythecompany.

b.ArepartofBartlettIndustries'operatingcosts.

c.Arereportedonthestatementofretainedearnings.

d.AreanexpenseofBartlettIndustries.

ANSWER: c

73.Acompanyisnotrequiredtopreparebotha(n)

a.Incomestatementandstatementofstockholders’equity.

b.Incomestatementandstatementofretainedearnings.

c.Statementofstockholders’equityandstatementofretainedearnings.

d.Statementofcashflowsandstatementofretainedearnings.

ANSWER: c

74.InpreparingthefinancialstatementsforDecember31,2015,anaccountantimproperlyclassifiedthepaymentofprepaidrentasrentexpense.Whichofthefollowingamountswouldnotbeaffectedbythisimproperclassification?

a.Retainedearnings,January1,2015

b.Retainedearnings,December31,2015

c.Netincome

d.Totalassets

ANSWER: a

75.CarnivalBakeryborrowed$500,000fromFrontStreetBank.Carnivalthenhiredacontractortobuildanewcookiedistributionoutlet.InwhichsectionofCarnival’sstatementofcashflowswouldyoufindinformationthatindicatedthatCarnivalacquiredthenewcookiedistributionoutlet?

a.OperatingActivities

b.InvestingActivities

c.FinancingActivities

d.ProfitActivities

ANSWER: b

76.Abankloaned$62milliontoApexCorporationtofinancetheconstructionofanewdistributionwarehouse.InwhichsectionofApex’sstatementofcashflowswouldyoubeabletodeterminewhetherthecompanyrepaidanyportionofthedebtduringtheyear?

a.OperatingActivities

b.InvestingActivities

c.FinancingActivities

d.ProfitActivities

ANSWER: c

77.Whichofthefollowingcategoriesonastatementofcashflowsisusedtoreportthecashfloweffectsoftransactionsinvolvingacompany'sstock?

a.OperatingActivities

b.InvestingActivities

c.FinancingActivities

d.ProfitActivities

ANSWER: c

78.Whichoneofthefollowingcategoriesonastatementofcashflowsisusedtoreportthecashfloweffectsofbuyingandsellingproperty,plant,andequipment?

a.OperatingActivities

b.InvestingActivities

c.FinancingActivities

d.ProfitActivities

ANSWER: b

79.Whichoneofthefollowingisconsideredafinancingactivity?

a.Thepaymentofinterestonanotepayabletothebank

b.Sellingproductstocustomers

c.Payingwagestoemployees

d.Thepaymentofacashdividend

ANSWER: d

80.Whichoneofthefollowingstatementsistrue?

a.Thetwoprimarysourcesoffinancingavailabletocorporationsareborrowedfundsandfundsinvestedbyowners.

b.Financingactivitiesinvolvetheacquisitionofproperty,plantandequipment.

c.Borrowedfundsareamorepermanentsourceoffinancingthanfundsinvestedbyowners.

d.Investingactivitiesinvolvethesellingofproductsorservicesandtheincurringofexpensesrelatedtosellingtheseproductsandservices.

ANSWER: a

MarvelShoes

MarvelShoesreportedthefollowingitemsonitsstatementofcashflowsforthecurrentyear:

Netcashinflows fromoperatingactivities$70,000

Netcashoutflows frominvesting activities(20,000)

Netcash outflows from financingactivities(40,000)

Cash balance at thebeginning of the year30,000

81.ReadtheinformationaboutMarvelShoes.WhatwastheamountofnetincreaseordecreaseinthecashbalanceforMarvelShoesforthecurrentyear?

a.$10,000increase

b.$30,000increase

c.$40,000increase

d.$70,000increase

ANSWER:a

RATIONALE: ($70,000OperatingActivities-$20,000InvestingActivities-$40,000FinancingActivities=$10,000)

82.ReadtheinformationaboutMarvelShoes.WhatwasthecashbalanceforMarvelShoesattheendofthecurrentyear?

a.$10,000

b.$30,000

c.$40,000

d.$70,000

ANSWER:c

RATIONALE: ($30,000BeginningBalance+$10,000IncreaseinCash=$40,000)

83.Whichfinancialstatementreportsthesourcesandusesofanentity'scashresources?

a.Incomestatement

b.Statementofretainedearnings

c.Balancesheet

d.Statementofcashflows

ANSWER: d

84.Duringitsfifthyearofoperations,BrightCreationsCompanyreportsabeginningcashbalanceof$132,000,cashinflowsfrominvestingactivitiesof$210,000,cashoutflowsforfinancingactivitiesof$79,000,andcashoutflowsforoperatingactivitiesof$13,000.WhatwasBrightCreations’cashbalanceattheendofthefifthyear?

a.$250,000

b.$434,000

c.$276,000

d.$132,000

ANSWER:a

RATIONALE: ($132,000BeginningBalance-$13,000CashFlowfromOperatingActivities+$210,000CashFlowsfromInvestingActivities-$79,000CashFlowsfromFinancingActivities=$250,000)

85.Whichofthefollowingbestdescribesacompany’sfinancingactivities?

a.Financingactivitiesfocusonthesaleofproductsandservices.

b.Financingactivitiesincludesellingproducts.

c.Financingactivitiesenableacompanytoacquireassetsneededtorunabusiness.

d.Financingactivitiesarerepresentedbytherevenuesandexpensesontheincomestatement.

ANSWER: c

86.Whichofthefollowingbestdescribesacompany’soperatingactivities?

a.Operatingactivitiesfocusonthesaleofproductsandservices.

b.Operatingactivitiesarenecessarytoprovidethemoneytostartabusiness.

c.Operatingactivitiesareneededtoprovidethevaluableassetsrequiredtorunabusiness.

d.Operatingactivitiesrepresenttherighttoreceiveabenefitinthefuture.

ANSWER: a

87.Whichoneofthefollowingisaninvestingactivityofabusiness?

a.Payingforpurchasesofinventory

b.Issuingstockforcash

c.Borrowingmoneyfromabank

d.Purchasingamanufacturingplantforcash

ANSWER: d

88.Whichoneofthefollowingisafinancingactivityofabusiness?

a.Payingforpurchasesofinventory

b.Issuingstockforcash

c.Payingsalaries

d.Purchasingamanufacturingplant

ANSWER: b

89.Whichoneofthefollowingisanoperatingactivityofabusiness?

a.Payingforpurchasesofinventory

b.Issuingstockforcash

c.Borrowingmoneyfromabank

d.Purchasingamanufacturingplant

ANSWER: a

90.WhichofthefollowingrepresentsthecorrectsequenceofthethreebusinessactivitiesontheStatementofCashFlows?

a.Financing-Operating-Investing

b.Investing-Operating-Financing

c.Operating-Investing-Financing

d.Financing-Investing-Operating

ANSWER: c

91.Businessentitiesgenerallycarryon:

a.Operating,investing,andfinancingactivities

b.Operatingactivities,butonlycorporationsengageinfinancingandinvestingactivities

c.Investingandoperatingactivities,butonlycorporationsengageinfinancingactivities

d.Eitherinvestingorfinancingactivities,butnotboth

ANSWER: a

92.Althoughbusinessesengageinawidevarietyofactivities,alloftheseactivitiescanbecategorizedintothreetypes.Whichofthefollowingchoicesbestreflectsthesethreetypesofbusinessactivities?

a.Operating,financing,reporting

b.Investing,reporting,financing

c.Operating,financing,investing

d.Investing,reporting,operating

ANSWER: c

93.Asusedinaccounting,the“NotestotheFinancialStatements”shouldbe:

a.Listedwiththeliabilitiesonthebalancesheet

b.Omittedattheoptionofthecompany

c.Includedasanintegralpartofthefinancialstatements

d.ReportedasexpensesontheIncomeStatement

ANSWER: c

94.Whichofthefollowingitemswillbefoundinacorporateannualreport?

a.Companybudgets

b.Notestothefinancialstatements

c.Selectedfinancialdatafromcompetitorcompanies

d.Management’sstatementthattheauditorsareresponsibleforthefinancialstatements

ANSWER: b

95.Whichoneofthefollowingsectionsisleastlikelytobefoundinacorporateannualreport?

a.NotestotheFinancialStatements

b.ForecastsofCashFlowsandEarnings

c.ReportoftheIndependentAccountants

d.Management’sDiscussionandAnalysis

ANSWER: b

96.SupplementarydisclosuresrequiredbyGAAPthathelpexplaindetailbehindtheaccountingtreatmentofcertainitemsinthefinancialstatementsismostlikelyfoundinwhichofthefollowingsectionsofacorporateannualreport?

a.ReportoftheIndependentAccountants

b.NotestotheFinancialStatements

c.Management’sDiscussionandAnalysis

d.BalanceSheet

ANSWER: b

97.Aninvestorfoundthefollowinginanannualreport:"Thefinancialstatements,inouropinion,presentfairlythefinancialposition,operatingresults,andcashflows,inconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStates."Inwhichsectionoftheannualreportdidtheinvestorfindthis?

a.BalanceSheet

b.NotestotheFinancialStatements

c.Management’sDiscussionandAnalysis

d.ReportoftheIndependentAccountants

ANSWER: d

98.Whichofthefollowingrepresentsoneofthepurposesofthenotestofinancialstatements?

a.Toprovideaplaceformanagementtojustifyquestionableitemsinthestatements

b.Toprovidecomparativeratiosforthecompany'sfinancialdata

c.ToprovidetheCPA'sopinionofthefairnessofthefinancialstatements

d.Tosatisfytheneedforfulldisclosureofallthefactsrelevanttoacompany'sresultsandfinancialposition

ANSWER: d

99.Financialstatementsareintendedtotellthereaderthevalueofacompany.

a.True

b.False

ANSWER: False

100.Accountantsarethemainreasonfinancialstatementsareprepared.

a.True

b.False

ANSWER: False

101.TheFinancialAccountingStandardsBoardcreatedtheobjectivesoffinancialreporting.

a.True

b.False

ANSWER: True

102.Thepurposeoffinancialreportingistoprovideeconomicinformationtoexternaldecisionmakersonly.

a.True

b.False

ANSWER: False

103.Anobjectiveoffinancialreportingistoreflecteconomicinformationconcerningacompany'scashflows.

a.True

b.False

ANSWER: True

104.Theconceptofconservatismisthecapacityofinformationtomakeadifferenceinadecision.

a.True

b.False

ANSWER: False

105.Materialitydealswiththesizeofanerrorinaccountinginformation.

a.True

b.False

ANSWER: True

106.Mostbusinesseshaveanoperatingcycleoflessthanoneyear.

a.True

b.False

ANSWER: True

107.Currentassets,otherthancash,areexpectedtobesoldorconsumedareduringacompany'snormaloperatingcycle.

a.True

b.False

ANSWER: True

108.Obligationsrelatedtooperatingactivitiesthatwillbepaidwithinthecompany'soperatingcyclemustbereportedascurrentliabilitiesonaclassifiedbalancesheet.

a.True

b.False

ANSWER: True

109.Theoperatingcycleforallbusinessesisoneyear.

a.True

b.False

ANSWER: False

110.Aconstructioncompanythatbuildsskyscrapersislikelytohaveanoperatingcyclelongerthanoneyear.

a.True

b.False

ANSWER: True

111.Threecommoncategoriesoflong-termassetsare:1)property,plant,andequipment,2)investments,and3)intangibles.

a.True

b.False

ANSWER: True

112.Inthestockholders'equitysectionofaclassifiedbalancesheet,adistinctionismadebetweenamountsinvestedbyownersandamountsaccumulatedfrombusinessearnings.

a.True

b.False

ANSWER: True

113.Oneprimarypurposeofaclassifiedbalancesheetistohelpusersevaluatetheliquidityofacompany.

a.True

b.False

ANSWER: True

114.Companiesprepareclassifiedfinancialstatementsbecausetheyarerequiredbyinternationalaccountingprinciples.

a.True

b.False

ANSWER: False

115.Thecurrentratioisirrelevantinliquidityanalysisforservicecompaniesbecausetheydonothaveinventoriesamongtheircurrentassets

a.True

b.False

ANSWER: False

116.Anadvantageofthecurrentratioisthatitconsidersthemakeupofthecurrentassets.

a.True

b.False

ANSWER: False

117.Theexcessofcurrentassetsovercurrentliabilitiesisreferredtoasworkingcapital.

a.True

b.False

ANSWER: True

118.Abalancesheetshowscash,$75,000;marketablesecurities,$115,000;accountsreceivable,$150,000and$222,500ofinventories.Currentliabilitiesare$225,000.Thecurrentratiois2.5to1.

a.True

b.False

ANSWER: True

119.Ifafirmhasacurrentratioof2,thesubsequentreceiptofa60-daynotereceivabletosettleanopenaccountwillcausetheratiotodecrease.

a.True

b.False

ANSWER: False

120.Thepurchaseofinventoryforcashwillcausethecurrentratiotodecrease.

a.True

b.False

ANSWER: False

121.Incomefromoperationsdoesnotincludeinterestrevenueandinterestexpensebecausetheseitemsareconsideredtobenon-operatinginnature.

a.True

b.False

ANSWER: True

122.A12%changeinsaleswillresultina12%changeinnetincome.

a.True

b.False

ANSWER: False

123.Someanalystsproperlyrefertoacompany’sprofitmarginasitsreturnonassets.

a.True

b.False

ANSWER: False

124.Dividendsdeclaredandpaidreduceacompany’sretainedearningsbalance.

a.True

b.False

ANSWER: True

125.Dividendspaidappearsonboththeincomestatementandthestatementofretainedearnings.

a.True

b.False

ANSWER: False

126.Investingactivitiesareneededtoprovidethefundstostartabusiness.

a.True

b.False

ANSWER: False

127.Thestatementofcashflows,liketheincomestatement,reportsonlyoperatingactivitiesofacompany.

a.True

b.False

ANSWER: False

128.Fundsraisedfromfinancingactivitiesshouldbeinvestedinassetsthatcanbeusedtocarryonbusinessoperations.

a.True

b.False

ANSWER: True

129.Theprimaryresponsibilityforthepreparationandintegrityofthefinancialstatementsinanannualreportbelongstothecompany'sindependentaccountants(CPAs).

a.True

b.False

ANSWER: False

130.Independentauditors(CPAs)renderanopinionthatthefinancialstatementsdoordonotfairlypresentacompany'sfinancialposition,operatingresults,andcashflows.

a.True

b.False

ANSWER: True

131.Anindependentauditor's(CPA's)reportisaguaranteethatthefinancialstatementsarefreefromfraudormaterialerror

a.True

b.False

ANSWER: False

132. Intheindependentauditors'reportincludedwiththeannualreport,managementdiscussesthefinancialstatementsandprovidestheshareholderswithexplanationsforcertainamountsreportedinthestatements.

a.True

b.False

ANSWER: False

133.______and______haveclaimstoanentity’seconomicresources.

ANSWER: Creditors,Investors

investors,creditorsLenders,Stockholdersstockholders,lenders

134.isthemagnitudeofanomissionormisstatementinaccountinginformationthatwillaffectthejudgmentofsomeonerelyingontheinformation.

ANSWER: Materiality

135.isthecapacityofinformationtomakeadifferenceinadecision.

ANSWER: Relevance

136.______isthepracticeofusingtheleastoptimisticestimatewhentwoestimatesofamountsareaboutequallylikely.

ANSWER: Conservatism

137.isthequalityofaccountinginformationthatmakesitcomprehensibletothosewillingtospendthenecessarytime.

ANSWER: Understandability

138.isthequalityofaccountinginformationthatmakesitdependableinrepresentingtheeventsthatitpurportstorepresent.

ANSWER: Reliability

139.isthequalityofaccountinginformationthatallowsausertoanalyzetwoormorecompaniesandlookforsimilaritiesanddifferences.

ANSWER: Comparability

140.isthequalityofaccountinginformationthatallowsausertocomparetwoormoreaccountingperiodsforasinglecompany.

ANSWER: Consistency

141.haveclaimstoanentity’seconomicresources.

ANSWER: Creditors

LendersInvestorsStockholders

142.arecashandotherassetsthatarereasonablyexpectedtoberealizedincashduringthenormaloperatingcycleofthebusiness.

ANSWER: Currentassets

143.Property,plantandequipmentisclassifiedasassetsonthebalancesheet.

ANSWER: noncurrent

144.______istheprocessofwritingoffthecostoftangibleassetsand______istheprocessofwritingoffthecostofintangibleassets.

ANSWER: Depreciation,amortization

145.isaliquiditymeasurethatiscalculatedbysubtractingcurrentassetsfromcurrentliabilities.

ANSWER: Workingcapital

146.Theabilityofacompanytopayitsdebtasitcomesduerelatesto.

ANSWER: liquidity

147.Ina-stepincomestatement,allexpensesandlossesareaddedtogether,thendeductedfromthesumofallrevenuesandgains.

ANSWER: single

148.Thestatementofexplainschangesinthecomponentsofowners’equityduringtheperiod.

ANSWER: stockholders’equity

149.Onthestatementofcashflows,thesectioninvolvestheacquisitionandsaleoflong-termassets.

ANSWER: InvestingActivities

150.Onthestatementofcashflows,thesectioninvolvesthepurchaseandsaleofproductsandservices.

ANSWER: OperatingActivities

151.Onthestatementofcashflows,thesectioninvolvestheissuanceandrepaymentoflongtermliabilitiesandstocktransactions.

ANSWER: FinancingActivities

CargoCorporation

ListedbelowisinformationfromthefinancialrecordsofCargoCorporationatDecember31,2015:

152.ReadtheinformationaboutCargoCorporation.

Required:

PreparethecurrentliabilitiessectionofthebalancesheetforCargoCorp.atDecember31,2015.Youmayomittheheading.Iftheamountofcurrentliabilitieswerelarger,whateffectwouldthishaveonthecurrentratio?

ANSWER:

Whencurrentliabilitiesincrease,thedenominatorofthecurrentratioincreases.Thiscausesthecurrentratiotodrop.

153.ReadtheinformationaboutCargoCorporation.

Required:

Preparethelong-termassetsectionofCargoCorp.'sbalancesheetatDecember31,2015.Youmayomittheheading.Whyaretheseamountsclassifiedas"long-term"?

ANSWER:

Long-termassetsarethosethatareexpectedtobenefitthecompanybeyondthecurrentaccountingperiod.Boththelandandthebuildingsareexpectedtobenefitmorethanoneaccountingperiod.Accumulateddepreciationistheportionofthebuilding’sbenefitusedup.

154.ReadtheinformationaboutCargoCorporation.

Required:

PreparethecurrentassetssectionofthebalancesheetforCargoCorp.atDecember31,2015.Youmayomittheheading.Howdoestheconceptofliquidityapply?

ANSWER:

Liquidityisanindicatorofhowclosetocashthecompany’sassetsare.Thoseassetsthataremostliquidarelistedfirst.Currentassetsareexpectedtobeconvertedintocashorusedupwithinthenextaccountingperiod.

155.ReadtheinformationaboutCargoCorporation.

Required:

CalculateCargo’scurrentratioatDecember31,2015.Whatdoesthisratiotellyouaboutthe"composition"ofthecurrentassets?

ANSWER: CurrentAssets=$85,000

($11,000Cash+$35,000Accountsreceivable+$33,000Inventory+$4,000PrepaidRent+

$2,000OfficeSupplies=$85,000)

CurrentLiabilities=$61,000

($36,000AccountsPayable+$1,000InterestPayable+$24,000IncomeTaxesPayable=

$61,000)

Currentratio=1.39to1($85,000/$61,000)

Thecurrentratiodoesnotprovideinformationaboutthecompositionofthecurrentassets.Onlytotalsareusedtocalculatethecurrentratio

156.ReadtheinformationbelowaboutCargoCorporation.

Required:

CalculatetheamountofworkingcapitalatDecember31,2015forCargoCorp.Whatcanyoulearnfromthecurrentratiothatyoucannotlearnfromtheamountofworkingcapital?

ANSWER: CurrentAssets=$85,000

($11,000Cash+$35,000Accountsreceivable+$33,000Inventory+$4,000PrepaidRent+

$2,000OfficeSupplies=$85,000)

CurrentLiabilities=$61,000

($36,000AccountsPayable+$1,000InterestPayable+$24,000IncomeTaxesPayable=

$61,000)

WorkingCapital=$24,000($85,000-$61,000)

Thecurrentratioindicatesthenumberoftimescurrentassetsisgreaterthancurrentliabilities.Itisbasedonarelativerelationship,nottotaldollars,astheamountofworkingcapitalis.

157.HarrisonCompanycalculatedthefollowingamountsconcerningitsfinancialinformationfortheyearsendingDecember31,2015and2014:

Required:

ExamineHarrison’sratios.Isthechangeinthecurrentratiofavorableornot?Explain.

ANSWER: Thecurrentratioincreasedfrom2.0to1to3.1to1.Thisisanunusuallylargeincreaseformostcompanies.Alargercurrentratiomeansacompanyismoreliquid.Thisincreaseisfavorable,althoughcaremustbetakenthatthecurrentratiodoesnotbecometoolargewhichmayindicateaninefficientcashmanagementsystem.

158.ReadtheinformationaboutFasoli,Inc.

Required:

PreparetheLiabilitiessectionoftheclassifiedbalancesheet,includingtotalliabilitiesbalance.

ANSWER: Liabilities

Currentliabilities:

Fasoli,Inc.

ThefollowingbalancesheetitemsfromFasoli,Inc.arelistedforDecember31,2015:

159.ReadtheinformationaboutFasoli,Inc.

Required:

PresenttheCurrentAssetssection(includingthetotal)ofaclassifiedbalancesheet.

ANSWER: CurrentAssets:

Cash$ 60,990

Marketablesecurities15,000

Accounts receivable26,500

Merchandiseinventory112,900

Prepaid rent3,800

Officesupplies200

Totalcurrentassets$219,390

160.ReadtheinformationaboutFasoli,Inc.

Required:

PreparetheStockholders’Equitysectionoftheclassifiedbalancesheet,includingthetotalstockholders’equityamount.

ANSWER:Stockholders’Equity

Contributedcapital:

161.ReadtheinformationaboutFasoli,Inc.

Required:

Presentthecurrentliabilitiessection(includingthetotal)ofaclassifiedbalancesheet.

ANSWER: Currentliabilities:

Accountspayable$ 32,650

Income taxespayable7,500

Interestpayable2,200

Notespayable,dueApril15,20166,500

Salariespayable7,400

Totalcurrentliabilities$ 56,250

162.ReadtheinformationaboutFasoli,Inc.

Required:

ComputeFasoli’scurrentratio.Onthebasisofyouranswer,doesFasoliappeartobeliquid?Whatotherinformationdoyouneedtofullyanswerthatquestion?

ANSWER: CurrentRatio=CurrentAssets/CurrentLiabilities

$219,390/$56,250=3.9to1

Fromthecurrentratioalone,Fasoliappearstoberelativelyliquid.Infact,Fasolimaybetooliquid,becauseitscashbalanceisgreaterthanitstotalcurrentliabilities.ThisindicatesthatFasolimaybemissingsignificantinvestmentopportunitiesbymaintainingsuchalargecashbalance.Tofullyassessitsliquidity,youwouldneedtolookmorespecificallyattheactivityinaccountsreceivableandmerchandiseinventory.Inotherwords,howlongdoesittaketocollectanaccountreceivableorhowlongdoesittaketosellinventory?Also,youwouldwanttocompareFasoli’scurrentratioattheendofthisperiodwithpriorperiods,andwiththecurrentratioforcompaniesinthesameindustry.

163.ReadtheinformationaboutFasoli,Inc.

Required:

PreparetheAssetssectionoftheclassifiedbalancesheet.

ANSWER: Assets

Currentassets:

164.CompletetheDecember31,2015(firstyearofoperation)BalancesheetforWegleinCompanyusingthefollowinginformation:

(a)RetainedearningsatDecember31,2015was$51,000.

(b)Totalstockholders’equityatJanuary1,2015was$139,000.

(c)OnDecember30,2015,additionalcapitalstockwassoldforcash,$55,000

(d)ThelandandbuildingwerepurchasedonDecember30,2015for$150,000.

ANSWER:

Explanationofcalculations:

Totalassetsmustbeequaltototalliabilitiesstockholders’equityof$390,000.

$150,000(costoflandandbuilding)less$112,000forland=$38,000forbuilding.Accountsreceivablemustbe$130,000toachievetotalassetsof$390,000.

$139,000(capitalstockatJanuary1)plus$55,000(additionalinvestment).

Totalliabilitiesmustbe$145,000toachievetotalliabilitiesstockholders’equityof$390,000.

Notespayablemustbe$100,000toachievetotalliabilitiesof$145,000.

165.HarrisonCompanycalculatedthefollowingamountsconcerningitsfinancialinformationfortheyearsendingDecember31,2015and2014:

Required:

SupposeHarrisonCompanyhadadecreaseinitscashaccountfrom2014to2015.Wouldtheothercurrentassetamountshaveincreasedordecreased?Explain.

ANSWER: Sincethecurrentratioincreasedfrom2014to2015,thecurrentassetsotherthancashwouldhavehadtoincreasesubstantiallytooffsetthedeclineincash.Thedeclineincashchangestheliquiditysomewhat,inthattheothercurrentassetsmustbeconvertedtocashpriortopayingthecurrentperioddebt.

FellsmereCorporation

PresentedbelowarethecondensedbalancesheetsofFellsmereCorporationatDecember31,2014and2013.NetincomefortheyearsendingDecember31,2014and2013is$346,000and$109,000,respectively.

166.ReadtheinformationaboutFellsmereCorporation.

Required:

(A)DidFellsmere’scurrentratioincreaseordecreasefrom2013to2014?Makeanynecessarycalculationsandexplainyouranswer.Whichfinancialstatementusersaremostconcernedwiththisratio?

(B)Thebalancesheetsshowalargeincreaseinretainedearningsduring2014.Identifythepossiblereason(s)forthisincrease.

ANSWER: (A)Currentratiofor2014=1.56to1

($2,228,186CurrentAssets/$1,429,674CurrentLiabilities)

CurrentRatiofor2013=2.53to1

($2,544,683CurrentAssets/$1,003,906CurrentLiabilities)

Thisratioisanindicatorofthecompany'sabilitytopayitscurrentdebtwhenitisdue.Fellsmere’scurrentratiohasdeclinedsignificantly.Acompanywithdecreasingliquidityratiosisnotappealingtobankersandcreditors,anditmayhavetroubletryingtoborrowmoney,sincethedecreaseindicatesthecompanyislesslikelyabletorepayitsdebts.

(B)Theamountofretainedearningsincreasesprimarilybecauseofnetincomeforaperiod.Acompanythathasapositivebalanceinretainedearningsovertimehascumulativeprofitsinexcessofcumulativedividendspaid.

167.ReadtheinformationaboutFellsmereCorporation.

Required:

(A)ExplainthechangeinFellsmere’sworkingcapitalfrom2013to2014.Whydousersbelievethecurrentratioprovidesmoreinformationthanthedollaramountofworkingcapital?Explain.

(B)FellsmereCorporation'screditorsneedtoknowwhetheritsworkingcapitalpositionimprovedduringtheyear.Howwouldyouevaluatethis?

ANSWER: (A)WorkingCapital,2013=$1,540,777

($2,544,683CurrentAssets–$1,003,906CurrentLiabilities=$1,540,777)

WorkingCapital,2014=$798,512

($2,228,186CurrentAssets–$1,429,674CurrentLiabilities=$798,512)

DecreaseinWorkingCapital=$742,265

($1,540,777WorkingCapital,2013–$798,512WorkingCapital,2014=$742,265)

Workingcapitalrepresentstheexcessofcurrentassetsovercurrentliabilitiesintotaldollars.Thecurrentratioindicatesthenumberoftimesthatcurrentassetsexceedthecurrentliabilities.Itispossiblethat$742,265couldpaythecurrentdebtsofonecompanyeasily,butpayforonlyasmallportionofalargercompany'sdebts.

(B)Theamountofworkingcapitalandthecurrentratioarethebestindicatorsofacompany'sworkingcapitalposition.Whiletheamountofworkingcapitalprovidesthedollaramountofcurrentassetsthatexceedthecompany'scurrentdebt,thecurrentratioprovidesarelativeindicatorofhowmanytimes thedollaramountofcurrentassetsexceedscurrentlyduedebt.In2013,FellsmereCorporation’sworkingcapitalwas$1,540,777.However,thisfiguredeclinedin2014to$798,512.Lesscurrentassetsareavailabletocovercurrentliabilities.

Crystal,Inc.

Crystal,Inc.reported$52,000ofnetincomefor2014.Crystal’sbalancesheetatDecember31,2014includesthefollowingamounts:

168.ReadtheinformationaboutCrystal,Inc.Whichitemismost"liquid"?Whyisliquidityimportant?

ANSWER: Cashisthemostliquidasset.Liquidityisanindicatorofacompany'sabilitytopayitscurrentdebtswhentheycomedue.Acompanywithoutcashismostcertainlynotgoingtosurvive.

169.ReadtheinformationaboutCrystal,Inc.HasCrystalbeenprofitablesinceitbeganoperations?Howdoyouknow?

ANSWER: Retainedearningsrepresentsthecompany'scumulativeprofitssinceitbeganoperationslessthedividendsitpaidout.SinceCrystal,Inc.hasapositivebalanceinitsretainedearningsaccount,ithasbeenprofitableoverthetimeithasbeeninbusiness.Cumulativenetincomeexceedsaggregatenetlossandaggregatedividendspaid.

170.ThebalancesheetofEvanstonInc.includesthefollowingitems:

(1)Determinethecurrentratioandworkingcapital.

(2)WhatdoesthecompositionofthecurrentassetstellyouaboutEvanston’sliquidity?

(3)WhatotherinformationdoyouneedtofullyassessEvanston’sliquidity?

ANSWER:

1.CurrentRatio=CurrentAssets/CurrentLiabilities

=($21,500+$12,400+$45,300+$1,800)/($49,000+$1,625)

=$81,000/$50,625=1.6to1

WorkingCapital=CurrentAssets–CurrentLiabilities

= $81,000 – $50,625 = $30,375

2.Oneconcernistherelativelylargepercentageofthecurrentassetstiedupininventory.Thisassetaccountsfor$45,300/$81,000,orapproximately56%ofthetotalcurrentassets.Whatisthenormalperiodoftimeittakestosellinventory?Isanypartoftheinventoryslowmovingorobsolete?

3.Onthebasisofthecurrentratioalone,Evanstonappearstoberelativelyliquid,althoughitwouldbeimportanttocomparetheratiowiththoseofprioryearsandwiththoseofothercompaniesinthesameindustry.

EagleCorporation

PresentedbelowarealloftheitemsfromEagleCorporation’sincomestatementfortheyearsendingDecember31,2014and2013.

171.ReadtheinformationaboutEagleCorporation.

Required:

HowmuchisnetincomefortheyearendedDecember31,2014?IfEagleCorporationhadusedasingle-stepstatement,byhowmuchwouldnetincomebedifferent?Explain.

ANSWER: NetIncome=$290,000

($2,300,000ServiceFees+$40,000OtherIncome,net–$1,900,000GeneralandAdministrativeExpenses–$150,000IncomeTaxes=$290,000)

Netincomeisthesameunderasingle-steporamultiple-stepincomestatement.Onlysubtotalsandtheordertheamountsarelisteddiffer.

172.ReadtheinformationaboutEagleCorporation.

Required:

Comparetheprofitmarginsfor2014and2013.Isthecompanybecomingmoreorlessprofitableorstayingthesame?Whatcouldbecontributingtothis?

ANSWER: ProfitMarginfor2014=12.61%

($290,000NetIncome/$2,300,000ServiceFees=12.61%)ProfitMarginfor2013=20.95%

($440,000NetIncome/$2,100,000ServiceFees=20.95%)

Thedecreaseinprofitmarginisunfavorableandindicatesthatthecompanyisbecominglessprofitable.Asignificantincreaseingeneralandadministrativeexpensesseemstobethecauseofthedecline.

BurkeCompany

ThefollowingincomestatementitemsaretakenfromtherecordsofBurkeCompanyfortheyearendedDecember31,2014:

173.ReadtheinformationaboutBurkeCompany.

Required:

Prepareamultiple-stepincomestatementfortheyearendedDecember31,2014.

ANSWER:BURKE COMPANY

INCOME STATEMENT

FORTHEYEARENDEDDECEMBER31,2014

Sales$50,300

Costofgoodssold29,200

Grossprofit$21,100

Operatingexpenses:Sellingexpenses:

Advertising$2,600

Commissions3,515

Insurance-salesperson'sauto3,350

Totalsellingexpenses$9,465

Generalandadministrativeexpenses:

Depreciation—officebuilding$4,000

Salariesandwages—office13,660

Supplies—office1,990

Totalgeneraland administrativeexpenses19,650

Totaloperatingexpenses29,115

Lossfromoperations$(8,015)

Otherrevenuesandexpenses:

Interestexpense$(1,400)

Interestrevenue2,340

Rent revenue7,700

Excessofotherrevenuesoverotherexpenses8,640

Incomebeforetaxes$625

Incometaxexpense190

Netincome$435

174.ReadtheinformationaboutBurkeCompany

Required:

Prepareasingle-stepincomestatementfortheyearendedDecember31,2014.

ANSWER:BURKE COMPANY

INCOME STATEMENT

FORTHEYEARENDEDDECEMBER31,2014

175.The2015incomestatementofCigmarEnterprisesshowsoperatingrevenuesof$120,500,sellingexpensesof$35,200,generalandadministrativeexpensesof$29,900,interestexpenseof$1,500,andincometaxexpenseof$10,520.Cigmar’sstockholders’equitywas$280,000atthebeginningoftheyearand$320,000attheendoftheyear.Thecompanyhas20,000sharesofstockoutstandingatDecember31,2015.

Required:

ComputeCigmar’sprofitmargin.Whatotherinformationwouldyouneedinordertocommentonwhetherthisratioisfavorable?

ANSWER: Profitmargin:

NetIncome/Revenues=$43,380*/$120,500=36.0%

*$120,500– $35,200 – $29,900 – $1,500 – $10,520 = $43,380

Aprofitmarginof36%indicatesthatforeverydollarofsales,CigmarEnterpriseshas$0.36innetincome.Itwouldbebeneficialtocomparethecompany’sprofitmarginwithsomeofitscompetitorsandwithpreviousyears.

176.The2014incomestatementofNasirInc.showsoperatingrevenuesof$135,800,sellingexpensesof$40,310,generalandadministrativeexpensesof$33,990,interestexpenseof$880,andincometaxexpenseof$13,090.Nasir’sstockholders’equitywas$250,000atthebeginningoftheyearand$345,000attheendoftheyear.Thecompanyhas10,000sharesofstockoutstandingatDecember31,2014.

Required:

ComputeNasir’sprofitmargin.Whatotherinformationwouldyouneedinordertocommentonwhetherthisratioisfavorable?

ANSWER: Profitmargin:

NetIncome/Revenues=$47,530*/$135,800=35.0%

*$135,800 – $40,310 – $33,990 – $880 – $13,090 = $47,530

Aprofitmarginof35%indicatesthatforeverydollarofsales,NasirInc.has$0.35innetincome.Itwouldbebeneficial to comparethe company’s profitmargin with someof itscompetitors and withprevious years.

177.HammarCorporation’spartialincomestatementisasfollows:

Determinetheprofitmargin.WouldyouinvestinHammarCorporation?Explainyouranswer.

ANSWER: Profitmargin:

NetIncome/Sales=$1,228,400*/$2,400,000=51.2%

*$2,400,000–$900,000–$121,600–$150,000=$1,228,400*

**TotalOperatingExpenses=SellingExpenses($121,600)+GeneralandAdministrativeExpenses($150,000)=$271,600

HammarCorporationhasbeenveryprofitableonthebasisofitsveryhighprofitmarginof51.2%.Beforemakinganinvestment,however,youwouldwanttoconsiderhowthisratiocompareswiththatofprioryearsandwiththatofothercompaniesinthesamelineofbusiness.

178.PetersonCorporation’spartialincomestatementisasfollows:

Required:

Determinetheprofitmargin.WouldyouinvestinPetersonCorporation?Explainyouranswer.

ANSWER: Profitmargin:

NetIncome/Sales=$640,000*/$1,300,000=49.2%

*$1,300,000–$300,000–$210,000–$150,000=$640,000*

Sales $1,300,000

–Costofsales 300,000

=Grossprofit $1,000,000

–Totaloperatingexpenses 360,000**

=Netincome$ 640,000*

**TotalOperatingExpenses=SellingExpenses($210,000)+GeneralandAdministrativeExpenses($150,000)=$360,000

PetersonCorporationhasbeenveryprofitableonthebasisofitsveryhighprofitmarginof49.2%.Beforemakinganinvestment,however,youwouldwanttoconsiderhowthisratiocompareswiththatofprioryearsandwiththatofothercompaniesinthesamelineofbusiness.

179.PowderCorporationbeganoperationsonJanuary2,2013,withatotalinvestmentof$150,000byitsstockholders.Netincomeforitsfirstyearofbusinesswas$90,000.During2014and2015,netincomeincreasedto$188,000andto$217,000,respectively.Powderpaid$85,000individendstoitsshareholdersineachofthethreeyears.

A)Ingoodform,prepareastatementofretainedearningsfortheyearendedDecember31,2014.

B)HowmuchistotalretainedearningsonDecember31,2015?

C)Explainthelinkbetweenthestatementofretainedearningsandthebalancesheet.

ANSWER: A)

PowderCorporation

StatementofRetainedEarnings

FortheYearEndedDecember31,2014

*$90,000NetIncomefor2013-$85,000Dividendspaid=$5,000Balance,January1,2014

B)RetainedearningsatDecember31,2015=$240,000

($108,000BeginningBalance,January1,2015+$217,000NetIncomefor2015–$85,000

Dividendspaidduringtheyear=$240,000)

C)Theendingbalanceoftheretainedearningsstatementrepresentsthecumulativeearningslessallthedividendsdeclaredandpaidforthelifeofthebusiness.Thisamountappearsonthebalancesheetasacomponentofowners'equity.

180.ThefollowinginformationistakenfromHarveyCompany’sbalancesheetatDecember31,2014:

Required:

UsingtheinformationprovidedforHarveyCompany,answerthefollowingquestions:

A)HowmuchdidcreditorsprovidetoHarveyCompany?

B)Onwhichfinancialstatementwouldaninvestorlooktoseeifanystockwasissuedduringtheyear?

ANSWER: A)$30,000

($7,000AccountsPayable+$23,000BondPayable)

B)TheprimarysourceforseeingwhetheranystockwasissuedduringtheyearwouldbetheStatementofStockholders’Equity.WhiletheBalanceSheetmayshowanamountfor“CapitalStock,”thisamountisanendingbalance,andwouldnotshowtheresultsofanytransactionsinvolvingnewissuancesofstockduringtheperiod.

181.Coglin,Inc.incurredanetlossof$20,000for2014.ThebalancesheetatDecember31,2014,forCoglin,Inc.,includesthefollowingitems:

A)DetermineCoglin’scurrentratioandworkingcapital.

B)Beyondtheinformationprovidedinyouranswersto“A,”whatdoesthecompositionofCoglin’scurrentassetstellyouaboutitsliquidity.

C)WhatotherinformationwouldoneneedtofullyaccessCoglin’sliquidity?

ANSWER: A)Currentratio:1.44to1

($23,000Cash+$13,000Accountsreceivable+$45,000Inventory+$1,000Prepaid

insurance)/($55,000Accountspayable+$2,000Salariespayable)=1.44to1

Workingcapital:$25,000

($82,000TotalCurrentAssets–$57,000TotalCurrentLiabilities=$25,000)

B)Thecloseranassetistobeingconvertedtocash,themoreliquidtheassetis.Someassets,likeinventory,takemuchlongertoturnintocashbecausetheymustbesoldbeforecollectionofthecashcanbemade.Prepaidinsuranceisnotasliquidasaccountsreceivablesinceitwillbeconsumedastimepasses.Receivablesaremoreliquidthaninventorybecauseasalehasalreadyoccurred

C)Thestatementofcashflowswouldbehelpfultodeterminethecashinflowsandoutflowsthatoccurredduringtheyear.Thebalancesheetrepresentsonlytheendingbalanceofthecashaccount.Thestatementofcashflowsalsoidentifiesthesourcesandusesofcashbybusinessactivityandthenatureofeachparticularcashflow

182.During2014,WimbrowImagesreported$60,000ofnetincomeandgenerated$80,000ofcashfromoperations.Duringtheyear,WimbrowImagespaid$15,000topurchaseanewdeliverytruckandalsopaiddividendsintheamountof$30,000.WimbrowImagesborrowed$40,000cashfromthebank.Atthebeginningoftheyear,cashamountedto$50,000.

A)PrepareastatementofcashflowsfortheyearendedDecember31,2014.

B)HowmuchmorecashdoesWimbrowImageshaveavailableattheendoftheyearthanatthebeginning?

C)Whyisthereadifferencebetweennetincomeandcashflowsfromoperations?

ANSWER: A)

Wimbrow Images

Statement of Cash Flows

For the Year Ended December 31, 2014

B)Thecompanyhas$75,000moreattheendoftheyearcomparedtothebeginningoftheyear

C)Netincomeiscalculatedusingtheaccrualbasisofaccounting,whereascashflowsfromoperatingactivitiesrepresentthenetamountofcashflowsfromoperationsofthebusiness

183.TradewindsCorporationwasorganizedonJanuary1,2014,withtheinvestmentof$500,000incashbyitsstockholders.Tradewindssignedaten-year,$300,000promissorynoteatalocalbankduring2014andreceivedcashinthesameamount.Thecompanyimmediatelypurchasedanofficebuildingfor$800,000,payingincash.Duringitsfirstyear,Tradewindsgenerated$35,000incashfromoperationsandpaid$30,000incashdividends.

A)Ingoodform,prepareastatementofcashflowsfortheyearendedDecember31,2014.

B)Whatdoesthisstatementtellyouthatanincomestatementdoesnot?

ANSWER: A)

Tradewinds Corporation

Statement of Cash Flows

For the Year Ended December 31, 2014

B)Thisstatementprovidesinformationonthecashinflowsandoutflowsbyactivity:operating,investing,andfinancing.Theincomestatementispreparedontheaccrualbasisthatprovidesinformationontherevenuesearnedandtheexpensesincurredduringtheperiod,whichmayormaynotinvolvecash.Theincomestatementshowstheprofitabilityofacompanyforaperiodoftime.Furthermore,theincomestatementdoesnotpresentinformationregardingallthesourcesandusesofcash.

184.HindsvilleCompanyreportedrevenuesof$165,000andnetincomeof$20,000for2014.Cashgeneratedbyoperationswas$40,000.Inaddition,HindsvilleCompanyborrowed$24,000fromabank.During2014,Hindsvillepurchasednewequipmentfor$30,000cashandpaidcashdividendsof$15,000tostockholders.Hindsville’scashbalanceatthebeginningof2014was$22,000.

ANSWER: