MULTIPLE CHOICE QUESTIONS



MULTIPLE CHOICE QUESTIONS

Chp 13

31. Corporations invest in other companies for all of the following reasons except to

a. house excess cash until needed.

b. generate earnings.

c. meet strategic goals.

d. increase trading of the other companies’ stock.

32. A typical investment to house excess cash until needed is

a. stocks of companies in a related industry.

b. debt securities.

c. low-risk, highly liquid securities.

d. stock securities.

33. A company may purchase a noncontrolling interest in another firm in a related industry

a. to house excess cash until needed.

b. to generate earnings.

c. for strategic reasons.

d. for speculative reasons.

34. At the time of acquisition of a debt investment,

a. no journal entry is required.

b. the cost principle applies.

c. the Stock Investments account is debited when bonds are purchased.

d. the investment account is credited for its cost plus brokerage fees.

35. Any premium or discount on a long-term debt investment is amortized

a. to interest expense over the remaining term of the bonds.

b. only if the effective-interest method is used.

c. to interest revenue over the remaining term of the bonds.

d. if the investor owns 20% or more of the bonds.

Use the following information for questions 36 – 38.

On January 1, 2003, Sanders Company purchased at face value, a $1,000, 6%, bond that pays interest on January 1 and July 1. Sanders Company has a calendar year end.

36. The entry for the receipt of interest on July 1, 2003, is

a. Cash 30

Interest Revenue 30

b. Cash 60

Interest Revenue 60

c. Interest Receivable 30

Interest Revenue 30

d. Interest Receivable 60

Interest Revenue 60

37. The adjusting entry on December 31, 2003, is

a. not required.

b. Cash 30

Interest Revenue 30

c. Interest Receivable 30

Interest Revenue 30

d. Interest Receivable 30

Debt Investments 30

38. The entry for the receipt of interest on January 1, 2004 is

a. Cash 60

Interest Revenue 60

b. Cash 60

Interest Receivable 60

c. Cash 30

Interest Revenue 30

d. Cash 30

Interest Receivable 30

39. On January 1, Calvin Company purchased as a short-term investment a $1,000, 8%, bond, for $1,040. The bond pays interest on January 1 and July 1. The bond is sold on October 1 for $1,060 plus accrued interest. Interest has not been accrued since the last interest payment date. What is the entry to record the cash proceeds at the time the bond is sold?

a. Cash 1,060

Debt Investments 1,060

b. Cash 1,080

Debt Investments 1,040

Gain on Sale of Debt Investments 20

Interest Revenue 20

c. Cash 1,080

Debt Investments 1,060

Interest Revenue 20

d. Cash 1,060

Debt Investments 1,040

Interest Revenue 20

40. Which of the following is not a true statement about the accounting for long-term debt investments?

a. The investment is initially recorded at cost.

b. The cost includes any brokerage fees.

c. The accounting for long-term debt investments is similar to the accounting for short-term debt investments.

d. The cost includes any accrued interest.

41. If a short-term debt investment is sold, the investment account is

a. debited for the book value of the bonds at the sale date.

b. credited for the cost of the bonds at the sale date.

c. credited for the fair value of the bonds at the sale date.

d. debited for the cost of the bonds at the sale date.

42. Under the equity method, the Stock Investments account is credited when the

a. investee reports net income.

b. investee reports a net loss.

c. investment is originally acquired.

d. investee reports net income and when the investment is originally acquired.

43. When a company holds stock of several different corporations, the group of securities is identified as a(n)

a. affiliated investment.

b. consolidated portfolio.

c. investment portfolio.

d. controlling interest.

44. King Corporation makes a short-term investment in 300 shares of Renfro Company's common stock. The stock is purchased for $30 a share plus brokerage fees of $400. The entry for the purchase is

a. Debt Investments 9,000

Cash 9,000

b. Stock Investments 9,400

Cash 9,400

c. Stock Investments 9,000

Brokerage Fee Expense . 400

Cash 9,400

d. Stock Investments 9,000

Cash 9,000

45. Baden Corporation sells 200 shares of common stock being held as a short-term investment. The shares were acquired six months ago at a cost of $50 a share. Baden sold the shares for $45 a share. The entry to record the sale is

a. Cash 9,000

Loss on Sale of Stock Investments 1,000

Stock Investments 10,000

b. Cash 10,000

Gain on Sale of Stock Investments 1,000

Stock Investments 9,000

c. Cash 9,000

Stock Investments 9,000

d. Stock Investments 9,000

Loss on Sale of Stock Investments 1,000

Cash 10,000

46. For accounting purposes, the method used to account for long-term investments in common stock is determined by

a. the amount paid for the stock by the investor.

b. the extent of an investor's influence on the operating and financial affairs of the investee.

c. whether the stock has paid dividends in past years.

d. whether the acquisition of the stock by the investor was "friendly" or "hostile."

47. If an investor owns less than 20% of the common stock of another corporation as a long-term investment,

a. the equity method of accounting for the investment should be employed.

b. no dividends can be expected.

c. it is presumed that the investor has relatively little influence on the investee.

d. it is presumed that the investor has significant influence on the investee.

48. If the cost method is used to account for a long-term investment in common stock, dividends received should be

a. credited to the Stock Investments account.

b. credited to the Dividend Revenue account.

c. debited to the Stock Investments account.

d. recorded only when 20% or more of the stock is owned.

49. If 10% of the common stock of an investee company is purchased as a long-term investment, the appropriate method of accounting for the investment is

a. the cost method.

b. the equity method.

c. the preparation of consolidated financial statements.

d. determined by agreement with whomever owns the remaining 90% of the stock.

50. The cost method of accounting for long-term investments in stock should be employed when the

a. investor owns more than 50% of the investee's stock.

b. investor has significant influence on the investee and the stock held by the investor are marketable equity securities.

c. market value of the shares held is greater than their historical cost.

d. investor's influence on the investee is insignificant.

51. When an investor owns between 20% and 50% of the common stock of a corporation, it is generally presumed that the investor

a. has insignificant influence on the investee and that the cost method should be used to account for the investment.

b. should apply the cost method in accounting for the investment.

c. will prepare consolidated financial statements.

d. has significant influence on the investee and that the equity method should be used to account for the investment.

52. Under the equity method of accounting for long-term investments in common stock, when a dividend is received from the investee company,

a. the Dividend Revenue account is credited.

b. the Stock Investments account is increased.

c. the Stock Investments account is decreased.

d. no entry is necessary.

53. On January 1, 2003, Belle Corporation purchased 25% of the common stock outstanding of Mann Corporation for $200,000. During 2003, Mann Corporation reported net income of $80,000 and paid cash dividends of $40,000. The balance of the Stock Investments—Mann account on the books of Belle Corporation at December 31, 2003 is

a. $200,000.

b. $210,000.

c. $220,000.

d. $190,000.

54. Under the equity method, the Stock Investments account is increased when the

a. investee company reports net income.

b. investee company pays a dividend.

c. investee company reports a loss.

d. stock investment is sold at a gain.

55. The account, Stock Investments, is

a. a subsidiary ledger account.

b. a long-term liability account.

c. a general ledger control account.

d. another name for Debt Investments.

56. Which of the following would not be considered a motive for making a stock investment in another corporation?

a. Appreciation in the market value of the stock investment

b. Use of the investment for expanding its own operations

c. Use of the investment to diversify its own operations

d. An increase in the amount of interest revenue from the stock investment

57. Which of the following is the correct matching concerning an investor's influence on the operations and financial affairs of an investee?

% of Investor Ownership Presumed Influence

a. Less than 20% Short-term

b. Between 20%-50% Significant

c. More than 50% Long-term

d. Between 20%-50% Controlling

58. Which of the following is the correct matching concerning the appropriate accounting for long-term stock investments?

% of Investor Ownership Accounting Guidelines

a. Less than 20% Cost method

b. Between 20%-50% Cost method

c. More than 50% Cost or equity method

d. Between 20%-50% Consolidated financial statements

59. If the cost method is used to account for a long-term investment in common stock,

a. it is presumed that the investor has significant influence on the investee.

b. the earning of net income by the investee is considered a proper basis for recognition of income by the investor.

c. net income of the investee is not considered earned by the investor until dividends are declared by the investee.

d. the investment account may be, at times, greater than the acquisition cost.

60. If a company acquires a 40% common stock interest in another company,

a. the equity method is usually applicable.

b. all influence is classified as controlling.

c. the cost method is usually applicable.

d. the ability to exert significant influence over the activities of the investee does not exist.

61. If a stock investment is sold at a gain, the gain

a. is reported as operating revenue.

b. is reported under a special section, "Discontinued investments," on the income statement.

c. is reported in the Other Revenue and Gain section of the income statement.

d. contributes to gross profit on the income statement.

62. If the equity method is being used, cash dividends received

a. are credited to Dividend Revenue.

b. require no entry because investee net income has already been recorded at the proper proportion on the investor's books.

c. are credited to the Stock Investments account.

d. are credited to the Revenue from Investment in Stock account.

63. If the equity method is being used, the Revenue from Investment in Stock account is

a. just another name for a Dividend Revenue account.

b. credited when dividends are declared by the investee.

c. credited when net income is reported by the investee.

d. debited when dividends are declared by the investee.

64. When a company owns more than 50% of the common stock of another company,

a. affiliated financial statements are prepared.

b. consolidated financial statements are prepared.

c. controlling financial statements are prepared.

d. significant financial statements are prepared.

65. Consolidated financial statements present all of the following except the

a. individual assets and liabilities of the parent company.

b. individual assets and liabilities of the subsidiary.

c. total revenues and expenses of the subsidiary.

d. All of these are presented in consolidated financial statements.

66. The company whose stock is owned by the parent company is called the

a. controlled company.

b. subsidiary company.

c. investee company.

d. sibling company.

67. A company that owns more than 50% of the common stock of another company is known as the

a. charge company.

b. subsidiary company.

c. parent company.

d. management company.

68. If one company owns more than 50% of the common stock of another company,

a. the cost method should be used to account for the investment.

b. a partnership exists.

c. a parent-subsidiary relationship exists.

d. the company whose stock is owned must be liquidated.

69. If a parent company has two wholly owned subsidiaries, how many legal and economic entities are there from the viewpoint of the shareholders of the parent company?

Legal Economic

a. 3 3

b. 1 2

c. 3 1

d. 2 1

70. The balance sheet presentation of an unrealized loss on an available-for-sale security is similar to the statement presentation of

a. treasury stock.

b. discount on bonds payable.

c. allowance for doubtful accounts.

d. prepaid expenses.

71. Short-term investments are listed on the balance sheet immediately below

a. cash.

b. inventory.

c. accounts receivable.

d. prepaid expenses.

72. Short-term stock Investments should be valued on the balance sheet at

a. the lower of cost or fair value.

b. the higher of cost or fair value.

c. cost.

d. fair value.

73. In recognizing a decline in the fair value of short-term stock investments, an unrealized loss account is debited because

a. management intends to realize this loss in the near future.

b. the securities have not been sold.

c. the stock market is volatile.

d. management cannot determine the exact amount of the loss in value.

74. The Market Adjustment account

a. is set up for each security in the company's portfolio.

b. relates to the entire portfolio of securities held by the company.

c. is closed at the end of each accounting period.

d. appears on the income statement as Other Expenses and Losses.

75. The contra-account, Market Adjustment, is also called a(n)

a. offset account.

b. adjustment account.

c. valuation account.

d. opposite account.

76. Reporting investments at fair value is

a. applicable to stock securities only.

b. applicable to debt securities only.

c. applicable to both debt and stock securities.

d. a conservative approach because only losses are recognized.

Use the following information for questions 77 – 78.

Greer Corporation's trading portfolio at the end of the year is as follows:

Security Cost Market Value

Common Stock A $10,000 $11,000

Common Stock B 9,000 6,000

$19,000 $17,000

77. At the end of the year, Greer Corporation should

a. set up a Market Adjustment account for Stock B.

b. set up a Market Adjustment account for the portfolio.

c. recognize an Unrealized Gain or Loss—Income for $3,000.

d. report a loss on the income statement for $3,000 under "Other Expenses and Losses."

78. Greer subsequently sells Stock B for $11,000. What entry is made to record the sale?

a. Cash 11,000

Stock Investments 11,000

b. Cash 11,000

Market Adjustment 2,000

Stock Investments 9,000

c. Cash 11,000

Stock Investments 9,000

Gain on Sale of Stock Investments 2,000

d. Cash 11,000

Stock Investments 6,000

Gain on Sale of Stock Investments 5,000

79. Which of the following would not be reported under "Other Revenues and Gains" on the income statement?

a. Unrealized gain on available-for-sale securities

b. Dividend revenue

c. Interest revenue

d. Gain on sale of short-term debt investments

80. The balance in the Unrealized Loss—Equity account will

a. appear on the balance sheet as a contra asset.

b. appear on the income statement under Other Expenses and Losses.

c. appear as a deduction in the stockholders' equity section.

d. not be shown on the financial statements until the securities are sold.

81. If the cost of an available-for-sale security exceeds its fair value by $40,000, the entry to recognize the loss

a. is not required since the share prices will likely rebound in the long run.

b. will show a debit to an expense account.

c. will show a credit to a contra-asset account that appears in the stockholders’ equity section of the balance sheet.

d. will show a debit to an unrealized loss account that is deducted in the stockholders' equity section of the balance sheet.

82. Which one of the following would not be classified as a short-term investment?

a. Marketable stock securities

b. Marketable merchandise

c. Marketable debt securities

d. Short-term paper

83. Short-term investments are securities that are readily marketable and intended to be converted into cash within the next

a. year.

b. two years.

c. year or operating cycle, whichever is shorter.

d. year or operating cycle, whichever is longer.

84. Which of the following would not be classified as a short-term investment?

a. Short-term commercial paper

b. Idle cash in a bank checking account

c. Marketable stock securities

d. Marketable debt securities

Chp 14

MULTIPLE CHOICE QUESTIONS

31. The statement of cash flows

a. must be prepared on a daily basis.

b. summarizes the operating, financing, and investing activities of an entity.

c. is another name for the income statement.

d. is a special section of the income statement.

32. Which one of the following items is not generally used in preparing a statement of cash flows?

a. Adjusted trial balance

b. Comparative balance sheets

c. Current income statement

d. Additional information

33. The primary purpose of the statement of cash flows is to

a. provide information about the investing and financing activities during a period.

b. prove that revenues exceed expenses if there is a net income.

c. provide information about the cash receipts and cash payments during a period.

d. facilitate banking relationships.

34. If a company reports a net loss, it

a. may still have a net increase in cash.

b. will not be able to pay cash dividends.

c. will not be able to get a loan.

d. will not be able to make capital expenditures.

35. In addition to the three basic financial statements, which of the following is also a required financial statement?

a. the "Cash Budget"

b. Statement of Cash Flows

c. Statement of Cash Inflows and Outflows

d. the "Cash Reconciliation"

36. The statement of cash flows will not report the

a. amount of checks outstanding at the end of the period.

b. sources of cash in the current period.

c. uses of cash in the current period.

d. change in the cash balance for the current period.

37. Cash equivalents do not include

a. short-term corporate notes.

b. treasury bills.

c. money market funds.

d. 2-year certificate of deposits.

38. Which of the following characteristics do not apply to cash equivalents?

a. Short-term

b. Highly-liquid

c. Readily convertible into cash

d. Sensitive to interest rate changes

39. Cash equivalents are generally investments with maturities of

a. $1,000 or more.

b. three months or less.

c. at least six months.

d. one year or the operating cycle, whichever is less.

40. The acquisition of land by issuing common stock is

a. a noncash transaction which is not reported in the body of a statement of cash flows.

b. a cash transaction and would be reported in the body of a statement of cash flows.

c. a noncash transaction and would be reported in the body of a statement of cash flows.

d. only reported if the statement of cash flows is prepared using the direct method.

41. The order of presentation of activities on the statement of cash flows is

a. operating, investing, and financing.

b. operating, financing, and investing.

c. financing, operating, and investing.

d. financing, investing, and operating.

42. Financing activities involve

a. lending money.

b. acquiring investments.

c. issuing debt.

d. acquiring long-lived assets.

43. Investing activities include

a. collecting cash on loans made.

b. obtaining cash from creditors.

c. obtaining capital from owners.

d. repaying money previously borrowed.

44. Generally, the most important category on the statement of cash flows is cash flows from

a. operating activities.

b. investing activities.

c. financing activities.

d. significant noncash activities.

45. The category that is generally considered to be the best measure of a company's ability to continue as a going concern is

a. cash flows from operating activities.

b. cash flows from investing activities.

c. cash flows from financing activities.

d. usually different from year to year.

46. Cash receipts from interest and dividends are classified as

a. financing activities.

b. investing activities.

c. operating activities.

d. either financing or investing activities.

47. If a company has both an inflow and outflow of cash related to property, plant, and equipment, the

a. two cash effects can be netted and presented as one item in the investing activities section.

b. cash inflow and cash outflow should be reported separately in the investing activities section.

c. two cash effects can be netted and presented as one item in the financing activities section.

d. cash inflow and cash outflow should be reported separately in the financing activities section.

48. Of the items below, the one that appears first on the statement of cash flows is

a. noncash investing and financing activities.

b. net increase (decrease) in cash.

c. cash at the end of the period.

d. cash at the beginning of the period.

49. Which of the following transactions does not affect cash during a period?

a. Write-off of an uncollectible account

b. Collection of an accounts receivable

c. Sale of treasury stock

d. Exercise of the call option on bonds payable

50. Significant noncash transactions would not include

a. conversion of bonds into common stock.

b. asset acquisition through bond issuance.

c. treasury stock acquisition.

d. exchange of plant assets.

51. In preparing a statement of cash flows, a conversion of bonds into common stock will be reported in

a. the financing section.

b. the "extraordinary" section.

c. a separate schedule or note to the financial statements.

d. the stockholders' equity section.

52. Which one of the following items is not necessary in preparing a statement of cash flows?

a. Determine the change in cash

b. Determine the cash provided by operations

c. Determine cash from financing and investing activities

d. Determine the cash in all bank accounts

53. If accounts receivable have increased during the period,

a. revenues on an accrual basis are less than revenues on a cash basis.

b. revenues on an accrual basis are greater than revenues on a cash basis.

c. revenues on an accrual basis are the same as revenues on a cash basis.

d. expenses on an accrual basis are greater than expenses on a cash basis.

54. If accounts payable have increased during a period,

a. revenues on an accrual basis are less than revenues on a cash basis.

b. expenses on an accrual basis are less than expenses on a cash basis.

c. expenses on an accrual basis are greater than expenses on a cash basis.

d. expenses on an accrual basis are the same as expenses on a cash basis.

55. Which one of the following affects cash during a period?

a. Recording depreciation expense

b. Declaration of a cash dividend

c. Write-off of an uncollectible account receivable

d. Payment of an accounts payable

56. In calculating cash flows from operating activities using the indirect method, a gain on the sale of equipment is

a. added to net income.

b. deducted from net income.

c. ignored because it does not affect cash.

d. not reported on a statement of cash flows.

57. Meyer Company reported net income of $40,000 for the year. During the year, accounts receivable increased by $14,000, accounts payable decreased by $6,000 and depreciation expense of $10,000 was recorded. Net cash provided by operating activities for the year is

a. $30,000.

b. $70,000.

c. $38,000.

d. $40,000.

58. Flynn Company reported a net loss of $10,000 for the year ended December 31, 2003. During the year, accounts receivable decreased $10,000, merchandise inventory increased $16,000, accounts payable increased by $20,000, and depreciation expense of $10,000 was recorded. During 2003, operating activities

a. used net cash of $14,000.

b. used net cash of $24,000.

c. provided net cash of $14,000.

d. provided net cash of $24,000.

59. Starting with net income and adjusting it for items that affected reported net income but which did not affect cash is called the

a. direct method.

b. indirect method.

c. working capital method.

d. cost-benefit method.

60. In calculating net cash provided by operating activities using the indirect method, an increase in prepaid expenses during a period is

a. deducted from net income.

b. added to net income.

c. ignored because it does not affect income.

d. ignored because it does not affect expenses.

61. Using the indirect method, patent amortization expense for the period

a. is deducted from net income.

b. causes cash to increase.

c. causes cash to decrease.

d. is added to net income.

62. In developing the cash flows from operating activities, most companies in the U. S.

a. use the direct method.

b. use the indirect method.

c. present both the indirect and direct methods in their financial reports.

d. prepare the operating activities section on the accrual basis.

63. Which of the following would be subtracted from net income using the indirect method?

a. Depreciation expense

b. An increase in accounts receivable

c. An increase in accounts payable

d. A decrease in prepaid expenses

64. Which of the following would be added to net income using the indirect method?

a. An increase in accounts receivable

b. An increase in prepaid expenses

c. Depreciation expense

d. A decrease in accounts payable

65. Which of the following would not be an adjustment to net income using the indirect method?

a. Depreciation Expense

b. An increase in Prepaid Insurance

c. Amortization Expense

d. An increase in Land

66. In calculating cash flows from operating activities using the indirect method, a loss on the sale of equipment will appear as

a. a subtraction from net income.

b. an addition to net income.

c. an addition to cash flow from investing activities.

d. a subtraction from cash flow from investing activities.

67. Which of the following adjustments to convert net income to net cash provided by operating activities is correct?

Add to Net Income Deduct from Net Income

a. Accounts Receivable increase decrease

b. Prepaid Expenses increase decrease

c. Inventory decrease increase

d. Taxes Payable decrease increase

68. Which of the following adjustments to convert net income to net cash provided by operating activities is incorrect?

Add to Net Income Deduct from Net Income

a. Accounts Receivable decrease increase

b. Prepaid Expenses increase decrease

c. Inventory decrease increase

d. Accounts Payable increase decrease

69. Which of the following adjustments to convert net income to net cash provided by operating activities is not added to net income?

a. Gain on Sale of Equipment

b. Depreciation Expense

c. Patent Amortization Expense

d. Depletion Expense

70. Using the indirect method, if equipment is sold at a gain, the

a. sale proceeds received are deducted in the operating activities section.

b. sale proceeds received are added in the operating activities section.

c. amount of the gain is added in the operating activities section.

d. amount of the gain is deducted in the operating activities section.

71. A company had net income of $420,000. Depreciation expense is $52,000. During the year, Accounts Receivable and Inventory increased $30,000 and $80,000, respectively. Prepaid Expenses and Accounts Payable decreased $4,000 and $8,000, respectively. There was also a loss on the sale of equipment of $6,000. How much cash was provided by operating activities?

a. $352,000.

b. $364,000.

c. $512,000.

d. $536,000.

72. On the statement of cash flows using the indirect method, patent amortization expense will

a. be added to net income in the operating section.

b. be deducted from net income in the operating section.

c. appear as an inflow of cash in the investing section.

d. appear as an outflow of cash in the investing section.

73. The indirect and direct methods of preparing the statement of cash flows are identical except for the

a. significant noncash activity section.

b. operating activities section.

c. investing activities section.

d. financing activities section.

74. If $500,000 of bonds are issued during the year but $300,000 of old bonds are retired during the year, the statement of cash flows will show a(n)

a. net increase in cash of $200,000.

b. net decrease in cash of $200,000.

c. increase in cash of $500,000 and a decrease in cash of $300,000.

d. net gain on retirement of bonds of $200,000.

75. Which of the following changes in retained earnings during a period will be reported in the financing activities section of the statement of cash flows?

1. Declaration of a cash dividend paid during the period.

2. Net income for the period.

a. 1

b. 2

c. Neither 1 nor 2.

d. Both 1 and 2.

76. The statement of cash flows

a. is prepared instead of an income statement under generally accepted accounting principles.

b. is used to assess an entity's ability to pay dividends and meet obligations.

c. is prepared from comparative income statements.

d. reflects earnings per share figures on a cash basis and on an accrual basis in the body of the statement.

77. In preparing the statement of cash flows, determining the net increase or decrease in cash requires the use of

a. the adjusted trial balance.

b. the current period's retained earnings statement.

c. a comparative balance sheet.

d. a comparative income statement.

78. To determine the net cash provided (used) by operating activities, it is necessary to analyze

a. the current year's income statement.

b. a comparative balance sheet.

c. additional information.

d. all of these.

79. Which of the following would not be needed to determine net cash provided by operating activities?

a. Depreciation expense

b. Change in accounts receivable

c. Payment of cash dividends

d. Change in prepaid expenses

80. When equipment is sold for cash, the amount received is reflected as a cash

a. inflow in the operating section.

b. inflow in the financing section.

c. inflow in the investing section.

d. outflow in the operating section.

81. The statement of cash flows will not provide insight into

a. why dividends were not increased.

b. whether cash flow is greater than net income.

c. the exact proceeds of a future bond issue.

d. how the retirement of debt was accomplished.

82. Which of the following transactions would not be classified as a financing activity?

a. Purchase of treasury stock

b. Payment of dividends

c. Issuance of bonds at a discount

d. Purchase of a long-term investment in bonds

83. Which of the following statements concerning the statement of cash flows is true?

a. The statement of cash flows is usually more accurate when using the indirect method.

b. If the direct method is used, a supplementary schedule reconciling the net income to a net cash from operating activities must still be provided.

c. The statement of cash flows reflects both earnings per share and cash per share.

d. The statement of cash flows is an optional financial statement for external reporting purposes.

84. Boone Company reports the following:

End of Year Beginning of Year

Inventory $25,000 $40,000

Accounts Payable 30,000 10,000

If cost of goods sold for the year is $250,000, the amount of cash paid to suppliers is

a. $255,000.

b. $245,000.

c. $215,000.

d. $285,000.

85. During the year, Salaries Payable decreased by $8,000. If Salary Expense amounted to $160,000 for the year, the cash paid to employees (including deductions from gross pay) is

a. $168,000.

b. $160,000.

c. $152,000.

d. $176,000.

86. Garner Company reports a $30,000 increase in inventory and a $10,000 increase in accounts payable during the year. Cost of Goods Sold for the year was $500,000. The cash payments made to suppliers were

a. $500,000.

b. $520,000.

c. $460,000.

d. $490,000.

87. Rader Company had credit sales of $650,000. The beginning accounts receivable balance was $40,000 and the ending accounts receivable balance was $140,000. What were the cash collections from customers during the period?

a. $750,000.

b. $650,000.

c. $550,000.

d. $690,000.

88. Cash receipts from customers are greater than sales revenues when there is a(n)

a. increase in accounts receivable.

b. decrease in accounts receivable.

c. increase in cost of goods sold.

d. decrease in cost of goods sold.

89. Reese Company had a cost of purchases of $450,000. The comparative balance sheet analysis revealed a $10,000 decrease in inventory and a $20,000 increase in accounts payable. What were Reese's cash payments to suppliers?

a. $430,000.

b. $420,000.

c. $460,000.

d. $480,000.

90. Vick Company had an increase in inventory of $40,000. The cost of goods sold was $120,000. There was a $5,000 decrease in accounts payable from the prior period. What were Vick's cash payments to suppliers?

a. $165,000.

b. $115,000.

c. $155,000.

d. $125,000.

91. Which of the following items does not appear in the statement of cash flows under the direct method?

a. Cash payments to suppliers

b. Cash collections from customers

c. Depreciation Expense

d. Cash from the sale of equipment

92. Norris Company has other operating expenses of $60,000. There has been a decrease in prepaid expenses of $4,000 during the year, and accrued liabilities are $6,000 larger than in the prior period. What were Norris's cash payments for operating expenses?

a. $62,000.

b. $58,000.

c. $50,000.

d. $60,000.

93. Allen Corporation shows income tax expense of $90,000. There has been a $5,000 decrease in federal income taxes payable and a $7,000 increase in state income taxes payable during the year. What was Allen's cash payment for income taxes?

a. $90,000.

b. $88,000.

c. $85,000.

d. $92,000.

94. Which of the following would not appear in the operating activities section of a statement of cash flows prepared under the direct method?

a. Cash receipts from customers

b. Cash paid for income taxes

c. Gain on sale of equipment

d. Cash paid to employees

95. The cash based ratio that is the counterpart of profit margin percentage is the

a. current cash debt coverage ratio.

b. cash return on sales ratio.

c. cash debt coverage ratio.

d. cash flow ratio.

96. The current cash debt coverage ratio is used to evaluate

a. solvency.

b. profitability.

c. liquidity.

d. earning power.

97. The cash debt coverage ratio is computed by dividing net cash provided by operating activities by

a. average current liabilities.

b. net sales.

c. average long-term liabilities.

Chp 15

MULTIPLE CHOICE QUESTIONS

31. Which one of the following is not a characteristic generally evaluated in analyzing financial statements?

a. Liquidity

b. Profitability

c. Marketability

d. Solvency

32. In analyzing the financial statements of a company, a single item on the financial statements

a. should be reported in bold-face type.

b. is more meaningful if compared to other financial information.

c. is significant only if it is large.

d. should be accompanied by a footnote.

33. Short-term creditors are usually most interested in evaluating

a. solvency.

b. liquidity.

c. marketability.

d. profitability.

34. Long-term creditors are usually most interested in evaluating

a. liquidity and solvency.

b. solvency and marketability.

c. liquidity and profitability.

d. profitability and solvency.

35. Stockholders are most interested in evaluating

a. liquidity and solvency.

b. profitability and solvency.

c. liquidity and profitability.

d. marketability and solvency.

36. A stockholder is interested in the ability of a firm to

a. pay consistent dividends.

b. appreciate in share price.

c. survive over a long period.

d. all of these.

37. Comparisons of financial data made within a company are called

a. intracompany comparisons.

b. interior comparisons.

c. intercompany comparisons.

d. intramural comparisons.

38. Which one of the following is not a tool in financial statement analysis?

a. Horizontal analysis

b. Circular analysis

c. Vertical analysis

d. Ratio analysis

39 In analyzing financial statements, horizontal analysis is a

a. requirement.

b. tool.

c. principle.

d. theory.

40. Horizontal analysis is also known as

a. linear analysis.

b. vertical analysis.

c. trend analysis.

d. common size analysis.

41. Vertical analysis is also known as

a. perpendicular analysis.

b. common size analysis.

c. trend analysis.

d. straight-line analysis.

42. In ratio analysis, the ratios are never expressed as a

a. rate.

b. negative figure.

c. percentage.

d. simple proportion.

43. Horizontal analysis is a technique for evaluating a series of financial statement data over a period of time

a. that has been arranged from the highest number to the lowest number.

b. that has been arranged from the lowest number to the highest number.

c. to determine which items are in error.

d. to determine the amount and/or percentage increase or decrease that has taken place.

44. Horizontal analysis is a technique for evaluating financial statement data

a. within a period of time.

b. over a period of time.

c. on a certain date.

d. as it may appear in the future.

45. Assume the following sales data for a company:

2004 $1,200,000

2003 1,020,000

2002 840,000

2001 600,000

If 2001 is the base year, what is the percentage increase in sales from 2001 to 2003?

a. 100%

b. 160%

c. 70%

d. 62.5%

46. Comparative balance sheets are usually prepared for

a. one year.

b. two years.

c. three years.

d. four years.

47. Horizontal analysis is appropriately performed

a. only on the income statement.

b. only on the balance sheet.

c. only on the statement of retained earnings.

d. on all three of these statements.

48. A horizontal analysis performed on a statement of retained earnings would not show a percentage change in

a. dividends paid.

b. net income.

c. expenses.

d. beginning retained earnings.

49. Under which of the following cases may a percentage change be computed?

a. The trend of the balances is decreasing but all balances are positive.

b. There is no balance in the base year.

c. There is a negative balance in the base year and a negative balance in the subsequent year.

d. There is a negative balance in the base year and a positive balance in the subsequent year.

50. Vertical analysis is a technique which expresses each item within a financial statement

a. in dollars and cents.

b. in terms of a percentage of the item in the previous year.

c. in terms of a percent of a base amount.

d. starting with the highest value down to the lowest value.

51. In common size analysis,

a. a base amount is required.

b. a base amount is optional.

c. the same base is used across all financial statements analyzed.

d. the results of the horizontal analysis are necessary inputs for performing the analysis.

52. In performing a vertical analysis, the base for prepaid expenses is

a. total current assets.

b. total assets.

c. total liabilities.

d. prepaid expenses in a previous year.

53. In performing a vertical analysis, the base for sales revenues on the income statement is

a. net sales.

b. sales.

c. net income.

d. cost of goods available for sale.

54. In performing a vertical analysis, the base for sales returns and allowances is

a. sales.

b. sales discounts.

c. net sales.

d. total revenues.

55. In performing a vertical analysis, the base for cost of goods sold is

a. total selling expenses.

b. net sales.

c. total revenues.

d. total expenses.

56. A ratio calculated in the analysis of financial statements

a. expresses a mathematical relationship between two numbers.

b. shows the percentage increase from one year to another.

c. restates all items on a financial statement in terms of dollars of the same purchasing power.

d. is meaningful only if the numerator is greater than the denominator.

57. A liquidity ratio measures the

a. income or operating success of an enterprise over a period of time.

b. ability of the enterprise to survive over a long period of time.

c. short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash.

d. number of times interest is earned.

58. The current ratio is

a. calculated by dividing current liabilities by current assets.

b. used to evaluate a company's liquidity and short-term debt paying ability.

c. used to evaluate a company's solvency and long-term debt paying ability.

d. calculated by subtracting current liabilities from current assets.

59. The acid-test (quick) ratio

a. is used to quickly determine a company's solvency and long-term debt paying ability.

b. relates cash, marketable securities, and net receivables to current liabilities.

c. is calculated by taking one item from the income statement and one item from the balance sheet.

d. is the same as the current ratio except it is rounded to the nearest whole percent.

60. Walker Clothing Store had a balance in the Accounts Receivable account of $390,000 at the beginning of the year and a balance of $410,000 at the end of the year. Net credit sales during the year amounted to $4,000,000. The average collection period of the receivables in terms of days was

a. 30 days.

b. 365 days.

c. 73 days.

d. 37 days.

61. Parr Hardware Store had net credit sales of $6,500,000 and cost of goods sold of $5,000,000 for the year. The Accounts Receivable balances at the beginning and end of the year were $600,000 and $700,000, respectively. The receivables turnover was

a. 7.7 times.

b. 10.8 times.

c. 9.3 times.

d. 10 times.

Use the following information for questions 62 – 63.

Waters Department Store had net credit sales of $16,000,000 and cost of goods sold of $12,000,000 for the year. The average inventory for the year amounted to $2,000,000.

62. Inventory turnover for the year is

a. 8 times.

b. 14 times.

c. 6 times.

d. 4 times.

63. The average number of days to sell the inventory during the year was

a. 91 days.

b. 61 days.

c. 46 days.

d. 26 days.

64. Which one of the following would not be considered a liquidity ratio?

a. Current ratio

b. Inventory turnover

c. Quick ratio

d. Return on assets

65. Asset turnover measures

a. how often a company replaces its assets.

b. how efficiently a company uses its assets to generate sales.

c. the portion of the assets that have been financed by creditors.

d. the overall rate of return on assets.

66. Profit margin is calculated by dividing

a. sales by cost of goods sold.

b. gross profit by net sales.

c. net income by stockholders' equity.

d. net income by net sales.

Use the following information for questions 67 – 68.

Terry Corporation had net income of $200,000 and paid dividends to common stockholders of $40,000 in 2003. The weighted average number of shares outstanding in 2003 was 50,000 shares. Terry Corporation's common stock is selling for $60 per share on the New York Stock Exchange.

67. Terry Corporation's price-earnings ratio is

a. 3.8 times.

b. 15 times.

c. 18.8 times.

d. 6 times.

68. Terry Corporation's payout ratio for 2003 is

a. $4 per share.

b. 25%.

c. 20%.

d. 12.5%.

69. Grand Company reported the following on its income statement:

Income before income taxes $400,000

Income tax expense 100,000

Net income $300,000

An analysis of the income statement revealed that interest expense was $100,000. Grand Company's times interest earned was

a. 5 times.

b. 4 times.

c. 3.5 times.

d. 3 times.

70. The debt to total asset ratio measures

a. the company's profitability.

b. whether interest can be paid on debt in the current year.

c. the proportion of interest paid relative to dividends paid.

d. the percentage of the total assets provided by creditors.

71. Trading on the equity (leverage) refers to the

a. amount of working capital.

b. amount of capital provided by owners.

c. use of borrowed money to increase the return to owners.

d. number of times interest is earned.

72. The current assets of Kiley Company are $150,000. The current liabilities are $100,000. The current ratio expressed as a proportion is

a. 150%.

b. 1.5:1

c. .67:1

d. $150,000 ÷ $100,000.

73. The current ratio may also be referred to as the

a. short run ratio.

b. acid-test ratio.

c. working capital ratio.

d. contemporary ratio.

74. A weakness of the current ratio is

a. the difficulty of the calculation.

b. that it doesn't take into account the composition of the current assets.

c. that it is rarely used by sophisticated analysts.

d. that it can be expressed as a percentage, as a rate, or as a proportion.

75. A supplier to a company would be most interested in the company’s

a. asset turnover.

b. profit margin.

c. current ratio.

d. earnings per share.

76. Which one of the following ratios would not likely be used by a short-term creditor in evaluating whether to sell on credit to a company?

a. Current ratio

b. Acid-test ratio

c. Asset turnover

d. Receivables turnover

77. Ratios are used as tools in financial analysis

a. instead of horizontal and vertical analyses.

b. because they may provide information that is not apparent from inspection of the individual components of the ratio.

c. because even single ratios by themselves are quite meaningful.

d. because they are prescribed by GAAP.

78. The ratios that are used to determine a company's short-term debt paying ability are

a. asset turnover, times interest earned, current ratio, and receivables turnover.

b. times interest earned, inventory turnover, current ratio, and receivables turnover.

c. times interest earned, acid-test ratio, current ratio, and inventory turnover.

d. current ratio, acid-test ratio, receivables turnover, and inventory turnover.

Use the following information for questions 79 – 80.

Reed Company had $375,000 of current assets and $150,000 of current liabilities before borrowing $75,000 from the bank with a 3-month note payable.

79. What effect did the borrowing transaction have on the amount of Reed Company's working capital?

a. No effect

b. $75,000 increase

c. $150,000 increase

d. $75,000 decrease

80. What effect did the borrowing transaction have on Reed Company's current ratio?

a. The ratio remained unchanged.

b. The change in the current ratio cannot be determined.

c. The ratio decreased.

d. The ratio increased.

81. If equal amounts are added to the numerator and the denominator of the current ratio, the ratio will always

a. increase.

b. decrease.

c. stay the same.

d. equal zero.

82. The acid-test ratio

a. is a quick calculation of an approximation of the current ratio.

b. does not include all current liabilities in the calculation.

c. does not include inventory as part of the numerator.

d. does include prepaid expenses as part of the numerator.

83. If a company has an acid-test ratio of 1.2:1, what respective effects will the borrowing of cash by short-term debt and collection of accounts receivable have on the ratio?

Short-term Borrowing Collection of Receivable

a. Increase No effect

b. Increase Increase

c. Decrease No effect

d. Decrease Decrease

84. A company has a receivables turnover ratio of 10. The average net receivables during the period are $400,000. What is the amount of net credit sales for the period?

a. $40,000.

b. $4,000,000.

c. $480,000.

d. Cannot be determined from the information given.

85. If the average collection period is 30 days, what is the receivables turnover?

a. 11.1 times

b. 12.2 times

c. 6.1 times

d. None of these

86. A general rule to use in assessing the average collection period is

a. that it should not exceed 30 days.

b. it can be any length as long as the customer continues to buy merchandise.

c. that it should not greatly exceed the discount period.

d. that it should not greatly exceed the credit term period.

87. Inventory turnover is calculated by dividing

a. cost of goods sold by the ending inventory.

b. cost of goods sold by the beginning inventory.

c. cost of goods sold by the average inventory.

d. average inventory by cost of goods sold.

88. A company has an average inventory on hand of $40,000 and the average days to sell inventory is 73 days. What is the cost of goods sold?

a. $200,000.

b. $2,920,000.

c. $400,000.

d. $1,460,000.

89. A successful grocery store would probably have

a. a low inventory turnover.

b. a high inventory turnover.

c. zero profit margin.

d. low volume.

90. An aircraft company would most likely have

a. high inventory turnover.

b. low profit margin.

c. high volume.

d. low inventory turnover.

91. Net sales are $6,000,000, beginning total assets are $2,800,000, and the asset turnover is 3.0. What is the ending total asset balance?

a. $2,000,000.

b. $1,200,000.

c. $2,800,000.

d. $1,600,000.

92. The discontinued operations section of the income statement refers to

a. discontinuance of a product line.

b. the income or loss on products that have been completed and sold.

c. obsolete equipment and discontinued inventory items.

d. the disposal of a significant segment of a business.

93. Which one of the following would be classified as an extraordinary item?

a. Expropriation of property by a foreign government

b. Losses attributed to a labor strike

c. Write-down of inventories

d. Gains or losses from sales of equipment

94. When a change in accounting principle occurs,

a. all prior years' financial statements should be changed to reflect the newly adopted principle.

b. the new principle should be used in reporting the results of operations of the current year.

c. the cumulative effect of the change in principle should be reflected on the income statement as of the beginning of the next year.

d. the cumulative effect of the change in accounting principle should be classified as an extraordinary item on the income statement.

95. If an item meets one (but not both) of the criteria for an extraordinary item, it

a. only needs to be disclosed in the footnotes of the financial statements.

b. may be treated as sales revenue (if it is a gain) and as an operating expense (if it is a loss).

c. is reported as an "other revenue or gain" or "other expense and loss," net of tax.

d. is reported at its gross amount as an "other revenue or gain" or "other expense or loss."

96. The order of presentation of nontypical items that may appear on the income statement is

a. Extraordinary items, Discontinued operations, Change in accounting principle.

b. Discontinued operations, Extraordinary items, Change in accounting principle.

c. Change in accounting principle, Discontinued operations, Extraordinary items.

d. Change in accounting principle, Extraordinary items, Discontinued operations.

97. A limitation in calculating ratios in financial statement analysis is that

a. it requires a calculator.

b. no one other than management would be interested in them.

c. some account balances may reflect atypical data at year end.

d. they seldom identify problem areas in a company.

98. Which of the following is not a limitation of financial statement analysis?

a. The cost basis

b. The use of estimates in accounting

c. The diversification of firms

d. The availability of information

99. The use of alternative accounting methods

a. is not a problem in ratio analysis because the footnotes disclose the method used.

b. may be a problem in ratio analysis even if disclosed.

c. is not a problem in ratio analysis since eventually all methods will lead to the same end.

d. is only a problem in ratio analysis with respect to inventory.

100. Traditional financial statements are based on

a. unadjusted cost.

b. price-level adjusted cost.

c. the lower of cost or price-level adjusted historical cost.

d. fair market value.

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