Full file at
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:
Cash / $ 55,000 / Accountsreceivable / $ 45,000Inventory / 65,000 / Land / 75,000
Accountspayable / 50,000 / Notespayable(due2020) / 150,000
Retainedearnings / ? / Capitalstock / 20,000
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:
Cash / $ 50,000 / Inventory / $ 45,000Land / 75,000 / AccumulatedDepreciation / 40,000
PlantEquipment / 150,000 / AccountsPayable / 60,000
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
Guinther&Sons,Inc.
GuintherSons,Inc.aretailerofmen’sclothing,earnedanetprofitof$77,000for2014.ThebalancesheetforGuintherSonsincludesthefollowingitems:
Cash / $29,000 / Accountsreceivable / $39,000Inventory / 79,000 / Prepaidinsurance / 3,000
Land / 90,000 / Accountspayable / 21,000
Taxespayable / 29,000 / Capitalstock / 50,000
Retainedearnings / 97,000 / Long-termnotespayable / 43,000
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
Cash / $30,000 / Accumulateddepreciation / $ 12,000Merchandiseinventory / 21,000 / Notespayable—Due12/31/2022 / 120,000
Land / 40,000 / Accountspayable / 14,000
Buildings / 80,000 / Equipment / 33,000
Accountsreceivable / 25,000 / NotesPayable—Due07/01/2016 / 24,000
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:
Cash / $ 22,400Accountsreceivable / 11,700
Inventory / 23,300
Prepaidinsurance / 1,040
Land / 80,000
Accountspayable / 47,500
Salariespayable / 1,200
Capitalstock / 84,040
Retainedearnings / 5,700
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.
1. / Otherrevenueandexpenses / 5. / NetIncome2. / Incomebeforetaxes / 6. / Operatingrevenues
3. / Incometaxes / 7. / Incomefromoperations
4. / Operatingexpenses
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:
Generaladministrativeexpenses / $2,200 / Operatingrevenues / $6,000Sellingexpenses / 1,800 / Incometaxes / 600
Otherrevenues(expenses) / 800 / Dividendspaid / 1,200
58.ReadtheinformationaboutWebbCompany.WhatisWebb’sincomefromoperations?
a.$1,600
b.$2,000
c.$2,200
d.$2,800
ANSWER:b
RATIONALE:($6,000OperatingRevenues-$2,200General&AdministrativeExpenses-$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-$2,200General&AdministrativeExpenses-$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).
2014 / 2013Operatingrevenues / $1,900,000 / $1,600,000
Operatingexpenses / 1,400,000 / 1,100,000
Incometaxes / 200,000 / 200,000
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:
Retainedearnings / $37,000 / Notespayable--DueJuly1,2018 / $12,000Accumulateddepreciation / 13,000 / Interestpayable / 1,000
Incometaxespayable / 24,000 / Officesupplies / 2,000
Buildings / 48,000 / Accountspayable / 36,000
Cash / 11,000 / Inventory / 33,000
Accountsreceivable / 35,000 / Land / 50,000
Capitalstock / 60,000 / Prepaidrent / 4,000
152.ReadtheinformationaboutCargoCorporation.
Required:
PreparethecurrentliabilitiessectionofthebalancesheetforCargoCorp.atDecember31,2015.Youmayomittheheading.Iftheamountofcurrentliabilitieswerelarger,whateffectwouldthishaveonthecurrentratio?
ANSWER:
Accounts payable / $ 36,000Interest payable / 1,000
Income taxes payable / 24,000
Total / $ 61,000
Whencurrentliabilitiesincrease,thedenominatorofthecurrentratioincreases.Thiscausesthecurrentratiotodrop.
153.ReadtheinformationaboutCargoCorporation.
Required:
Preparethelong-termassetsectionofCargoCorp.'sbalancesheetatDecember31,2015.Youmayomittheheading.Whyaretheseamountsclassifiedas"long-term"?
ANSWER:
Land / $50,000Buildings / $ 48,000
Less: Accumulated Depreciation / (13,000) / 35,000
Total / $85,000
Long-termassetsarethosethatareexpectedtobenefitthecompanybeyondthecurrentaccountingperiod.Boththelandandthebuildingsareexpectedtobenefitmorethanoneaccountingperiod.Accumulateddepreciationistheportionofthebuilding’sbenefitusedup.
154.ReadtheinformationaboutCargoCorporation.
Required:
PreparethecurrentassetssectionofthebalancesheetforCargoCorp.atDecember31,2015.Youmayomittheheading.Howdoestheconceptofliquidityapply?
ANSWER:
Cash / $11,000Accounts receivable / 35,000
Inventory / 33,000
Prepaid rent / 4,000
Office supplies / 2,000
Total current assets / $85,000
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:
2015 / 2014Currentratio / 3.1to1 / 2.0to1
Profitmargin / 22% / 18%
Required:
ExamineHarrison’sratios.Isthechangeinthecurrentratiofavorableornot?Explain.
ANSWER: Thecurrentratioincreasedfrom2.0to1to3.1to1.Thisisanunusuallylargeincreaseformostcompanies.Alargercurrentratiomeansacompanyismoreliquid.Thisincreaseisfavorable,althoughcaremustbetakenthatthecurrentratiodoesnotbecometoolargewhichmayindicateaninefficientcashmanagementsystem.
158.ReadtheinformationaboutFasoli,Inc.
Required:
PreparetheLiabilitiessectionoftheclassifiedbalancesheet,includingtotalliabilitiesbalance.
ANSWER: Liabilities
Currentliabilities:
Accountspayable / $ 32,650Incometaxespayable / 7,500
Interestpayable / 2,200
Notespayable,dueApril15,2016 / 6,500
Salariespayable / 7,400
Totalcurrentliabilities / $ 56,250
Long-termdebt:
Notespayable,dueDecember31,2019 / 251,630
Totalliabilities / $307,880
Fasoli,Inc.
ThefollowingbalancesheetitemsfromFasoli,Inc.arelistedforDecember31,2015:
Accountspayable / $ 32,650Interestpayable / 2,200
Accountsreceivable / 26,500
Land / 250,000
Accumulateddepreciation—buildings / 40,000
Marketablesecurities / 15,000
Merchandiseinventory / 112,900
Accumulateddepreciation—equipment / 12,500
Notespayable,dueApril15,2016 / 6,500
Officesupplies / 200
Notespayable,dueDecember31,2019 / 251,630
Paid-incapitalinexcessofparvalue / 75,000
Buildings / 150,000
Patents / 45,000
Capitalstock,$1parvalue / 200,000
Prepaidrent / 3,800
Cash / 60,990
Retainedearnings / 113,510
Equipment / 84,500
Salariespayable / 7,400
Incometaxespayable / 7,500
159.ReadtheinformationaboutFasoli,Inc.
Required:
PresenttheCurrentAssetssection(includingthetotal)ofaclassifiedbalancesheet.
ANSWER: CurrentAssets:
Cash$ 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:
Capitalstock,$1parvalue,200,000sharesissuedandoutstanding / $200,000
Paid-incapitalinexcessofparvalue / 75,000
Totalcontributedcapital / $275,000
Retainedearnings / 113,510
Totalstockholders’equity / $388,510
161.ReadtheinformationaboutFasoli,Inc.
Required:
Presentthecurrentliabilitiessection(includingthetotal)ofaclassifiedbalancesheet.
ANSWER: Currentliabilities:
Accountspayable$ 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:
Cash / $ 60,990Marketablesecurities / 15,000
Accountsreceivable / 26,500
Merchandiseinventory / 112,900
Prepaidrent / 3,800
Officesupplies / 200
Totalcurrentassets / $219,390
Property,plant,andequipment:
Land / $250,000
Buildings / $150,000
Less:Accumulateddepreciation / (40,000) / 110,000
Equipment / $ 84,500
Less:Accumulateddepreciation / (12,500) / 72,000
Totalproperty,plant,andequipment / 432,000
Intangibleassets:
Patents / 45,000
Totalassets / $696,390
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.
Weglein CompanyBalance Sheet
December 31, 2015
Assets / Liabilities & Stockholders’ Equity
Cash / $ 80,000 / Liabilities:
Accounts receivable / Notes payable / $
Land / 112,000 / Accounts payable / 45,000
Buildings / Total liabilities / $
Equipment / 30,000 / Stockholders’ equity:
Capital Stock / $
Retained earnings / ______
______/ Total liabilities and
Total assets / $ / stockholders’ equity / $390,000
ANSWER:
Weglein CompanyBalance Sheet
December 31, 2015
Assets / Liabilities & Stockholders’ Equity
Cash / $ 80,000 / Liabilities:
Accounts receivable / 130,000 / Notes payable / $100,000
Land / 112,000 / Accounts payable / 45,000
Building / 38,000 / Total liabilities / $145,000
Equipment / 30,000 / Stockholders’ equity:
Capital stock / $194,000
Retained earnings / 51,000 / 245,000
______/ Total liabilities and
Total assets / $390,000 / stockholders’ equity / $390,000
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:
2015 / 2014Currentratio / 3.1to1 / 2.0to1
Profitmargin / 22% / 18%
Required:
SupposeHarrisonCompanyhadadecreaseinitscashaccountfrom2014to2015.Wouldtheothercurrentassetamountshaveincreasedordecreased?Explain.
ANSWER: Sincethecurrentratioincreasedfrom2014to2015,thecurrentassetsotherthancashwouldhavehadtoincreasesubstantiallytooffsetthedeclineincash.Thedeclineincashchangestheliquiditysomewhat,inthattheothercurrentassetsmustbeconvertedtocashpriortopayingthecurrentperioddebt.
FellsmereCorporation
PresentedbelowarethecondensedbalancesheetsofFellsmereCorporationatDecember31,2014and2013.NetincomefortheyearsendingDecember31,2014and2013is$346,000and$109,000,respectively.
December 31, 2014 / December 31, 2013Current assets / $2,228,186 / $2,544,683
Property, plant, & equipment (net) / 530,589 / 376,647
Intangibles and other assets / 131,206 / 118,121
Total assets / $2,889,981 / $3,039,451
Current liabilities / $1,429,674 / $1,003,906
Long-term obligations / 3,360 / 7,240
Warranty and other liabilities / 112,971 / 98,081
Total liabilities / $1,546,605 / $1,109,227
Stockholders’ equity:
Common stock / $ 1,566 / $ 501,631
Additional paid-in capital / 365,986 / 799,483
Retained earnings / 980,509 / 634,509
Accumulated other comprehensive loss / (4,085) / (5,489)
Total stockholders’ equity / $1,343,976 / $1,930,224
Total liabilities and stockholders’ equity / $2,889,981 / $3,039,451
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,thecurrentratioprovidesarelativeindicatorofhowmanytimesthedollaramountofcurrentassetsexceedscurrentlyduedebt.In2013,FellsmereCorporation’sworkingcapitalwas$1,540,777.However,thisfiguredeclinedin2014to$798,512.Lesscurrentassetsareavailabletocovercurrentliabilities.
Crystal,Inc.
Crystal,Inc.reported$52,000ofnetincomefor2014.Crystal’sbalancesheetatDecember31,2014includesthefollowingamounts:
Wagespayable / $1,000 / Inventory / $26,000Prepaidrent / 3,000 / Land / 40,000
Cash / 15,000 / Accountsreceivable / 22,000
Accountspayable / 25,000 / Capitalstock / 40,000
Retainedearnings / 29,000 / Incometaxespayable / 11,000
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:
Cash / $ 21,500Accountsreceivable / 12,400
Inventory / 45,300
Prepaidinsurance / 1,800
Land / 80,000
Accountspayable / 49,000
Salariespayable / 1,625
Capitalstock / 105,100
Retainedearnings / 5,700
Required:
(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.
December31,2014 / December31,2013Servicefees / $2,300,000 / $2,100,000
Generalandadministrativeexpenses / 1,900,000 / 1,500,000
Otherincome,net / 40,000 / 20,000
Incometaxes / 150,000 / 180,000
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:
Advertisingexpense / $2,600Commissionexpense / 3,515
Costofgoodssold / 29,200
Depreciationexpense-OfficeBuilding / 4,000
Incometaxexpense / 190
Insuranceexpensesalesperson’sauto / 3,350
Interestexpense / 1,400
Interestrevenue / 2,340
Rentrevenue / 7,700
Salariesandwagesexpense-Office / 13,660
SalesRevenue / 50,300
Suppliesexpense-Office / 1,990
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
Revenues:Sales / $50,300
Interest revenue / 2,340
Rent revenue / 7,700
Total Revenues / $60,340
Expenses:
Advertising / $ 2,600
Commissions / 3,515
Cost of goods sold / 29,200
Depreciation—office building / 4,000
Income tax expense / 190
Insurance—salesperson's auto / 3,350
Interest expense / 1,400
Salaries and wages—office / 13,660
Supplies—office / 1,990
Total expenses / 59,905
Net income / $ 435
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:
Sales / $2,400,000Costofsales / 900,000
Sellingexpenses / 121,600
Generalandadmin.expenses
Required: / 150,000
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*
Sales / $2,400,000–Costofsales / 900,000
=Grossprofit / $1,500,000
–Totaloperatingexpenses / 271,600**
=Netincome / $1,228,400*
**TotalOperatingExpenses=SellingExpenses($121,600)+GeneralandAdministrativeExpenses($150,000)=$271,600
HammarCorporationhasbeenveryprofitableonthebasisofitsveryhighprofitmarginof51.2%.Beforemakinganinvestment,however,youwouldwanttoconsiderhowthisratiocompareswiththatofprioryearsandwiththatofothercompaniesinthesamelineofbusiness.
178.PetersonCorporation’spartialincomestatementisasfollows:
Sales / $1,300,000Costofsales / 300,000
Sellingexpenses / 210,000
Generalandadmin.expenses / 150,000
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
Beginning balance, January 1, 2014 / $ 5,000*Add: Net income for 2014 / 188,000
Less: Dividends paid during the year / (85,000)
Ending balance, December 31, 2014 / $108,000
*$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:
Cash / $ 24,000Retainedearnings / 14,000
Inventory / 8,000
Equipment / 38,000
Accountspayable / 7,000
Bondspayable / 23,000
Capitalstock / 26,000
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:
Cash / $ 23,000Accountsreceivable / 13,000
Inventory / 45,000
Prepaidinsurance / 1,000
Land / 21,000
Building / 80,000
Accountspayable / 55,000
Salariespayable / 2,000
Capitalstock / 100,000
Retainedearnings / 25,000
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
Cash flows from operating activities / $ 80,000Cash flows from investing activities:
Purchase of new truck / (15,000)
Cash flows from financing activities:
Proceeds from loan made by bank / 40,000
Cash dividends paid / (30,000)
Increase (Decrease) in cash / $ 75,000
Cash at the beginning of the year / 50,000
Cash at the end of the year / $125,000
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
Cash flows from operating activities / $ 35,000Cash flows from investing activities
Purchase office building / (800,000)
Cash flows from financing activities
Investment by owners / 500,000
Loan from bank / 300,000
Payment of dividends / (30,000)
Net increase in cash for the year / $ 5,000
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.
A) / Identify the amount of cash flows for financing, investing, and operating activities for 2014 by filling in the amounts below.Financing Cash Flows:
Investing Cash Flows:
Operating Cash Flows:
B) / Did Hindsville Company's operating activities generate enough cash to cover its investing and financing activities? Explain.
C) / How much did Hindsville Company's cash balance increase or decrease during 2014?
ANSWER:
A) / Financing Cash Flows = $9,000($24,000 Cash borrowed from bank - $15,000 Cash dividends paid = $9,000)
Investing Cash Flows = ($30,000)
(Purchase of new equipment)
Operating Cash Flows = $40,000
(Cash generated by operations)
B) / Yes. The total of investing and financing activities is an outflow of $21,000. The $40,000 generated from operating activities is sufficient
C) / $19,000 Increase
($40,000 Cash flow from operations - $30,000 Cash flow from investing + $9,000 Cash flow from financing = $19,000)
185.PresentedbelowareitemsfromJoplinShoesstatementofcashflowsfor2014.