Questions 1–25: Select the one best answer to each question.
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1. Using risk assessment and control, which of the following risks would be most likely to require the creation of an internal control?
Probability of Amount of Occurrence Potential Loss
A. Low Low
B. Low High
C. High Low
D. High High
Use the following information to prepare a statement of cash flows (direct method) and
answer questions 2 through 6:
Payment of taxes—$18,000
Interest payment on debt—$17,000
Cash from the sale of machinery—$115,000
Contributions from owners—$125,000
Cash from sales to customers—$140,000
The receipt of loan payments—$15,000
Purchases of merchandise for sale—$130,000
Common stock was issued to purchase land valued at $50,000
2. What is the amount of net cash provided by or used by operating activities?
A. $25,000 used by C. $130,000 provided by
B. $75,000 used by D. $180,000 used by
3. What is the amount of net cash provided by or used by investing activities?
A. $115,000 provided by C. $130,000 provided by
B. $125,000 used by D. $180,000 used by
4. What is the amount of net cash provided by or used by financing activities?
A. $75,000 used by C. $130,000 provided by
B. $125,000 provided by D. $175,000 used by
5. How is the land purchase reported on the statement of cash flows?
A. In the cash flows from operating activities section
B. In the cash flows from investing activities section
C. In the cash flows from financing activities section
D. In the supplemental schedule of cash flows
6. If the beginning cash balance is $155,500, what is the ending cash balance?
A. $155,500 C. $385,500
B. $280,000 D. $435,500
7. In looking at your company’s financial statements, you discover that current assets
exceed current liabilities. You’ve just written a check to pay a short-term creditor.
What will this payment do to your company’s current ratio?
A. Decrease both the numerator and the denominator of the current ratio
B. Decrease the numerator of the current ratio and increase the denominator
C. Increase both the numerator and the denominator of the current ratio
D. Increase the numerator of the current ratio and decrease the denominator
Use the following information to calculate the inventory turnover ratio and answer question 8:
Total sales—$155,000
Cost of goods sold—$105,000
Gross profit margin—$50,000
Beginning of the year inventory balance—$58,000
End of the year inventory balance—$70,000
8. If competitors in the industry have an average inventory turnover of 20.8 times, the
inventory turnover for this company
A. indicates the company has too little inventory on hand at the end of the year.
B. indicates the company is pricing its products too low.
C. is equal to the number of days’ sales in the company’s inventory.
D. indicates the company may have a large amount of obsolete inventory or
problems in the sales department.
Use the following information to answer question 9:
Cash sales—$125,000
Credit sales—$120,000
Accounts receivable, beginning—$145,000
Accounts receivable, ending—$135,000
9. What amount of sales revenue was shown on the income statement?
A. $120,000 C. $245,000
B. $125,000 D. $255,000
Use the following information to answer questions 10 and 11:
Sales revenue—$350,000
Cost of goods sold—$250,000
Rent—$50,000
Insurance—$32,500
Operating assets at the beginning of the year—$40,000
Operating assets at the end of the year—$44,000
10. What is the return on investment (ROI)? (Round your answer to two decimals.)
A. 2.38 C. 8.33
B. 5.00 D. 41.67
11. Which of the following would increase the company’s ROI?
A. Increasing sales price or volume
B. Decreasing sales price or volume
C. Increasing operating expenses
D. Increasing investment in operating assets
Use the following information to prepare the operating section of a statement of cash flows using the indirect method and answer questions 12 and 13:
20x8 20x7
Accounts Receivable $54,000 $38,000
Inventory $48,000 $50,000
Prepaid Insurance $25,000 $17,000
Accounts Payable $32,000 $27,000
Wages Payable $21,000 $17,000
Net income for 20x8 is $50,000. Depreciation expense is $12,000. Assume all sales
and purchases are made on account.
12. What is the net cash provided by or used by operations?
A. $37,000 used by C. $69,000 used by
B. $49,000 provided by D. $81,000 provided by
13. If sales to customers were $340,000, what amount would be shown as sales revenue
assuming you prepared the statement of cash flows using the direct method?
A. $306,000 C. $340,000
B. $324,000 D. $356,000
Use the following information to answer question 14:
Total assets—$710,000
Current liabilities—$60,000
Total liabilities—$260,000
Common Stock—$100,000
Retained Earnings—$350,000
14. If the industry debt-to-equity ratio is 0.1 to 1, what can you conclude about this company?
A. The company has relied on stockholders for funds more than other companies in
the same industry.
B. The company is in a better position than others in the industry to meet current
interest payments.
C. Creditors may be concerned about the company’s ability to repay debt.
D. For every $1 of capital that stockholders provided, creditors provided $0.10.
Use the following information to answer question 15:
Cash flow from operating activities—$175,000
Cash flow from financing activities—$75,000
Cash flow from investing activities—$25,000
Interest—$10,000
Taxes—$8,000
Capital expenditures—$15,000
Average amount of debt maturing over the next five years—$150,000
15. What is the cash flow adequacy ratio? (Round your answer to three decimals.)
A. 0.500 C. 1.056
B. 0.947 D. 1.613
Use the following information to prepare a comparative balance sheet for a horizontal analysis and answer question 16:
2008 2007
Cash $175,000$78,500
Accounts receivable $163,900$223,500
Inventory $220,000$275,000
Other current assets $19,600 $13,200
Total assets $3,725,000 $4,450,000
16. Which of the following is a result of the horizontal analysis?
A. Inventory is 5 times larger than accounts receivable in 2008.
B. Inventory is 38.0% of total current assets for 2008.
C. Accounts receivable is 4.4% of total assets for 2008.
D. Accounts receivable decreased $59,600 or –26.7% during 2008.
17. How would you report the collection of interest on a statement of cash flows prepared
using the direct method?
A. In the operating section as a cash inflow
B. In the operating section as a cash outflow
C. In the financing section as a cash inflow
D. In the financing section as a cash outflow
18. CC Corp. had sales of $950,000 and net operating income of $575,000. Operating
assets during the year averaged $450,000. The manager is considering the purchase
of a new machine, which would increase average operating assets by 10%. What will
the return on investment (ROI) be after the purchase, assuming the same amount
of sales?
A. 60.5% C. 127.7%
B. 116.2% D. 211.1%
Use the following information to answer questions 19, 20, and 21:
Cash—$150,000
Accounts Receivable—$130,000
Inventory—$125,000
Prepaid Insurance—$25,000
Long-Term Investments—$110,000
Payroll Payable—$10,000
Accounts Payable—$60,000
Taxes Payable—$10,000
Long-Term Notes Payable—$50,000
19. What is the quick ratio? (Round your answer to three decimals).
A. 3.500C. 5.375
B. 4.154 D. 6.750
20. What is the current ratio? (Round your answer to three decimals).
A. 3.500 C. 5.375
B. 4.154 D. 6.750
21. How could the current ratio be decreased?
A. Loosening credit policies to encourage more sales on account
B. Financing inventory and other purchases with long-term borrowings
C. Refinancing current liabilities with long-term liabilities
D. Investing idle cash in equipment and machinery
22. Which duties would you recommend a company segregate to reduce the potential for fraud?
A. Managerial and financial accounting duties
B. Manufacturing and selling and administrative duties
C. Computerized recordkeeping and manual recordkeeping duties
D. Recordkeeping, custody, and authorization duties
23. Webster Company has no liabilities for insurance at the end of 20x7 or 20x8. The 20x7
ending balance sheet includes an asset called prepaid insurance with a balance of $30,000, which represents prepayments that were made in 20x7 for insurance coverage provided in 20x8. The 20x8 ending balance sheet for the account has a balance of $25,000, which represents cash paid in 20x8 for insurance that will be used in 20x9. What are cash outflows in 20x7 for insurance?
A. $25,000 C. $50,000
B. $30,000 D. $55,000
24. Pablo Company had current assets of $610,000 in 20x8 and $575,000 in 20x7.
Current liabilities were $90,000 for 20x8 and $77,000 for 20x7. From 20x7 to 20x8,
the amount of working capital has
A. increased by $13,000. C. increased by $35,000.
B. increased by $22,000. D. decreased by $35,000.
Use the following information to answer question 25:
Event 1—payments of taxes
Event 2—the payment of dividends
Event 3—purchases of property, plant and equipment
Event 4—payment of interest on debt
Event 5—collection of cash from past sales that were made on credit
25. Which events affect cash flows from operating activities?
A. 1, 3, 5 C. 2, 4
B. 1, 4, 5 D. 3, 4, 5