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Test Bank Using Financial Accounting Information The Alternative To Debits and Credits 10th Edition PDF
Test Bank Using Financial Accounting Information The Alternative To Debits and Credits 10th Edition PDF
TEST BANK
1. Financial statements are intended to tell the reader the value of a company.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
REFERENCES: pp.52-53
LEARNING OBJECTIVES: FACC.PONO.18.02-01 - LO: 02-01
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-01-Purpose
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
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Chapter 2
4. The purpose of financial reporting is to provide economic information to external decision makers only.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
REFERENCES: pp. 52-53
LEARNING OBJECTIVES: FACC.PONO.18.02-01 - LO: 02-01
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-01-Purpose
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
5. An objective of financial reporting is to reflect economic information concerning a company's cash flows.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
REFERENCES: pp. 52-53
LEARNING OBJECTIVES: FACC.PONO.18.02-01 - LO: 02-01
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-01-Purpose
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
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Chapter 2
7. There is a standard threshold for materiality set by the Financial Accounting Standards Board for all companies.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
REFERENCES: pp. 53-56
LEARNING OBJECTIVES: FACC.PONO.18.02-02 - LO: 02-02
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-02-GAAP
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
8. The lack of a common depreciation method makes it impossible to compare the performance of companies using
different methods.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
REFERENCES: pp. 53-56
LEARNING OBJECTIVES: FACC.PONO.18.02-02 - LO: 02-02
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-02-GAAP
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
9. The amount of a transaction may be immaterial by company standards but still be considered significant by financial
statement users.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
REFERENCES: pp. 53-56
LEARNING OBJECTIVES: FACC.PONO.18.02-02 - LO: 02-02
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-02-GAAP
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
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Chapter 2
10. The quality of accounting information that allows a user to compare two or more accounting periods for a single
company is known as consistency.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
REFERENCES: pp. 53-56
LEARNING OBJECTIVES: FACC.PONO.18.02-02 - LO: 02-02
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-02-GAAP
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
12. The quality of accounting information that makes it comprehensible to those willing to spend the necessary time is
consistency.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
REFERENCES: pp. 53-56
LEARNING OBJECTIVES: FACC.PONO.18.02-02 - LO: 02-02
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-02-GAAP
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
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Chapter 2
13. The quality of accounting information that allows a user to analyze two or more companies and look for similarities
and differences is known as understandability.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
REFERENCES: pp. 53-56
LEARNING OBJECTIVES: FACC.PONO.18.02-02 - LO: 02-02
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-02-GAAP
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
14. Most businesses have an operating cycle of greater than one year.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
REFERENCES: pp. 56-61
LEARNING OBJECTIVES: FACC.PONO.18.02-03 - LO: 02-03
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
15. Current assets, other than cash, are expected to be sold or consumed beyond a company's normal operating cycle.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
REFERENCES: pp. 56-61
LEARNING OBJECTIVES: FACC.PONO.18.02-03 - LO: 02-03
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
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Chapter 2
16. Obligations related to operating activities that will be paid within the company's operating cycle must be reported as
current liabilities on a classified balance sheet.
a. True
b. False
ANSWER: True
DIFFICULTY: Moderate
REFERENCES: pp. 56-61
LEARNING OBJECTIVES: FACC.PONO.18.02-03 - LO: 02-03
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
18. A construction company that builds skyscrapers is likely to have an operating cycle longer than one year.
a. True
b. False
ANSWER: True
DIFFICULTY: Moderate
REFERENCES: pp. 56-61
LEARNING OBJECTIVES: FACC.PONO.18.02-03 - LO: 02-03
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Applying
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Chapter 2
19. Three common categories of long-term assets are: (1) property, plant, and equipment, (2) investments, and (3)
intangibles.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
REFERENCES: pp. 56-61
LEARNING OBJECTIVES: FACC.PONO.18.02-03 - LO: 02-03
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
20. In the Stockholders' Equity section of a classified balance sheet, a distinction is made between amounts invested by
owners and amounts accumulated from business earnings.
a. True
b. False
ANSWER: True
DIFFICULTY: Moderate
REFERENCES: pp. 56-61
LEARNING OBJECTIVES: FACC.PONO.18.02-03 - LO: 02-03
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
21. One primary purpose of a classified balance sheet is to help users evaluate the liquidity of a company.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
REFERENCES: pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
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Chapter 2
22. The current ratio is irrelevant in liquidity analysis for service companies because they do not have inventories among
their current assets.
a. True
b. False
ANSWER: False
DIFFICULTY: Moderate
REFERENCES: pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
23. An advantage of the current ratio is that it considers the makeup of the current assets.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
REFERENCES: pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
24. The excess of current assets over current liabilities is referred to as working capital.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
REFERENCES: pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
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Chapter 2
25. A balance sheet shows cash, $75,000; marketable securities, $115,000; accounts receivable, $150,000; and $222,500
of inventories. Current liabilities are $225,000. The current ratio is 2.5 to 1.
a. True
b. False
ANSWER: True
RATIONALE: ($75,000 + $115,000 + $150,000 + $222,500)/$225,000 = 2.5
DIFFICULTY: Moderate
REFERENCES: pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Analyzing
26. If a firm has a current ratio of 2, the subsequent receipt of a 60-day note receivable to settle an open account will cause
the ratio to decrease.
a. True
b. False
ANSWER: False
DIFFICULTY: Moderate
REFERENCES: pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Analyzing
27. The purchase of inventory for cash will cause the current ratio to decrease.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
REFERENCES: pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
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Chapter 2
28. Income from operations does not include interest revenue and interest expense because these items are considered to
be non-operating in nature.
a. True
b. False
ANSWER: True
DIFFICULTY: Moderate
REFERENCES: pp. 64-66
LEARNING OBJECTIVES: FACC.PONO.18.02-05 - LO: 02-05
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
29. Some analysts properly refer to a company’s profit margin as its return on assets.
a. True
b. False
ANSWER: False
DIFFICULTY: Moderate
REFERENCES: pp. 66-67
LEARNING OBJECTIVES: FACC.PONO.18.02-06 - LO: 02-06
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
30. Dividends declared and paid reduce a company’s retained earnings balance.
a. True
b. False
ANSWER: True
DIFFICULTY: Moderate
REFERENCES: pp. 67-68
LEARNING OBJECTIVES: FACC.PONO.18.02-07 - LO: 02-07
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
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Chapter 2
31. Dividends paid appear on both the income statement and the statement of retained earnings.
a. True
b. False
ANSWER: False
DIFFICULTY: Moderate
REFERENCES: pp. 67-68
LEARNING OBJECTIVES: FACC.PONO.18.02-07 - LO: 02-07
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
32. The statement of cash flows, like the income statement, reports only operating activities of a company.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
REFERENCES: pp. 68-70
LEARNING OBJECTIVES: FACC.PONO.18.02-08 - LO: 02-08
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-24-Statement of Cash
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
33. The primary responsibility for the preparation and integrity of the financial statements in an annual report belongs to
the company's independent accountants (CPAs).
a. True
b. False
ANSWER: False
DIFFICULTY: Moderate
REFERENCES: pp. 70-73
LEARNING OBJECTIVES: FACC.PONO.18.02-09 - LO: 02-09
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
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Chapter 2
34. Independent auditors (CPAs) render an opinion that the financial statements do or do not fairly present a company's
financial position, operating results, and cash flows.
a. True
b. False
ANSWER: True
DIFFICULTY: Moderate
REFERENCES: pp. 70-73
LEARNING OBJECTIVES: FACC.PONO.18.02-09 - LO: 02-09
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
35. An independent auditor's (CPA's) report is a guarantee that the financial statements are free from fraud or material
error.
a. True
b. False
ANSWER: False
DIFFICULTY: Moderate
REFERENCES: pp. 70-73
LEARNING OBJECTIVES: FACC.PONO.18.02-09 - LO: 02-09
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
36. In the independent auditors' report included with the annual report, management discusses the financial statements and
provides the shareholders with explanations for certain amounts reported in the statements.
a. True
b. False
ANSWER: False
DIFFICULTY: Moderate
REFERENCES: pp. 70-73
LEARNING OBJECTIVES: FACC.PONO.18.02-09 - LO: 02-09
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
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Chapter 2
Multiple Choice
38. In preparing financial statements, accountants should consider all of the following except
a. the objectives of financial reporting.
b. the characteristics that make accounting information useful.
c. the most useful way to display the information found on the financial statements.
d. the presentation of the value of a company.
ANSWER: d
DIFFICULTY: Easy
REFERENCES: pp. 52-53
LEARNING OBJECTIVES: FACC.PONO.18.02-01 - LO: 02-01
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-01-Purpose
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
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Chapter 2
40. Which of the following is not an objective of financial reporting?
a. To reflect prospective cash receipts to investors and creditors.
b. To reflect prospective cash flows to an enterprise.
c. To reflect resources and claims to resources.
d. To reflect current stock prices and information concerning stock markets.
ANSWER: d
DIFFICULTY: Moderate
REFERENCES: pp. 52-53
LEARNING OBJECTIVES: FACC.PONO.18.02-01 - LO: 02-01
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-01-Purpose
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
41. Which of the following is the best description of the purpose of financial reporting?
a. To allow users to access the daily detailed records of a business
b. To help the users reach their decisions in an informed manner
c. To provide users with an assessment of how long the company will continue as a going concern
d. To allow users access to a list of all the individuals who owe the company money
ANSWER: b
DIFFICULTY: Easy
REFERENCES: pp. 52-53
LEARNING OBJECTIVES: FACC.PONO.18.02-01 - LO: 02-01
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-01-Purpose
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
42. Which of the following statements is true concerning external users of financial information?
a. External users need detailed records of the business to make informed decisions.
b. External users are primarily responsible for the preparation of financial statements.
c. External users rely on the financial statements to help make informed decisions.
d. External users rely on management to tell them whether the company is a good investment.
ANSWER: c
DIFFICULTY: Easy
REFERENCES: pp. 52-53
LEARNING OBJECTIVES: FACC.PONO.18.02-01 - LO: 02-01
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-01-Purpose
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
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Chapter 2
43. Relevant information can be quantitative or qualitative. In deciding whether to go to college part time or full time,
which of the following is a qualitative factor for a student?
a. The cost of tuition
b. The opportunity to make friends
c. The price of football tickets
d. “Good Student” discounts on auto insurance rates
ANSWER: b
DIFFICULTY: Easy
REFERENCES: pp. 53-56
LEARNING OBJECTIVES: FACC.PONO.18.02-02 - LO: 02-02
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-01-Purpose
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
44. The preparation of financial statements requires that the information be understandable
a. only to CPAs.
b. to those willing to spend the time to understand it.
c. only to those who take an accounting course.
d. only to financial analysts and brokers.
ANSWER: b
DIFFICULTY: Moderate
REFERENCES: pp. 53-56
LEARNING OBJECTIVES: FACC.PONO.18.02-02 - LO: 02-02
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-01-Purpose
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
45. Jones, Inc., a manufacturer of tires, has given you its most recent annual report in an effort to obtain a sizable loan.
The company is very profitable and appears to have a sound financial position. Based on a report presented on prime-time
television last night, you are aware that Jones is a defendant in several lawsuits related to its defective tires that cause
vehicles to overturn. The information presented on television is an example of financial information that is
a. relevant.
b. consistent.
c. predictable.
d. comparable.
ANSWER: a
DIFFICULTY: Moderate
REFERENCES: pp. 53-56
LEARNING OBJECTIVES: FACC.PONO.18.02-02 - LO: 02-02
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-02-GAAP
AICPA: FN-Reporting
KEYWORDS: Bloom's: Applying
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Chapter 2
46. If an investor can use accounting information for two different companies to evaluate the types and amounts of
expenses, the information is said to have the quality of
a. comparability.
b. consistency.
c. neutrality.
d. understandability.
ANSWER: a
DIFFICULTY: Moderate
REFERENCES: pp. 53-56
LEARNING OBJECTIVES: FACC.PONO.18.02-02 - LO: 02-02
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-02-GAAP
AICPA: FN-Reporting
KEYWORDS: Bloom's: Applying
47. Jackson Transportation purchases many pieces of office furniture with an individual cost below $200 each. Jackson
chooses to account for these expenditures as expenses when acquired rather than reporting them as property, plant, and
equipment on its balance sheet. The company's accountant and independent CPA agree that no accounting principle has
been violated. What accounting justification allows Jackson to expense the furniture?
a. Conservatism
b. Matching
c. Materiality
d. Verifiability
ANSWER: c
DIFFICULTY: Moderate
REFERENCES: pp. 53-56
LEARNING OBJECTIVES: FACC.PONO.18.02-02 - LO: 02-02
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-02-GAAP
AICPA: FN-Reporting
KEYWORDS: Bloom's: Applying
48. You are comparing three companies that use different depreciation methods. Which of the following would help you
the most in making a comparison of the companies?
a. The average earnings per share for the quarter
b. Prospective cash receipts
c. Claims to resources
d. Disclosure of accounting policies
ANSWER: d
DIFFICULTY: Moderate
REFERENCES: pp. 53-56
LEARNING OBJECTIVES: FACC.PONO.18.02-02 - LO: 02-02
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-02-GAAP
AICPA: FN-Reporting
KEYWORDS: Bloom's: Applying
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Chapter 2
49. Tavella Co. applies the consistency convention. What does this mean?
a. Tavella Co. uses the same names for all its expenses as its competitors.
b. Tavella Co. has selected certain accounting principles that can never be changed.
c. Tavella Co. applies the same accounting principles each accounting period.
d. Tavella Co. applies the same accounting principles as its competitors.
ANSWER: c
DIFFICULTY: Easy
REFERENCES: pp. 53-56
LEARNING OBJECTIVES: FACC.PONO.18.02-02 - LO: 02-02
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-02-GAAP
AICPA: FN-Reporting
KEYWORDS: Bloom's: Applying
50. Information that is material means that an error or alternative method of handling a transaction
a. would possibly affect the judgment of someone relying on the financial statements.
b. would not affect the decisions of users.
c. might cause a company to understate its earnings for the accounting period.
d. could increase the profitability of a company.
ANSWER: a
DIFFICULTY: Moderate
REFERENCES: pp. 53-56
LEARNING OBJECTIVES: FACC.PONO.18.02-02 - LO: 02-02
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-02-GAAP
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
51. An accountant is uncertain about the best estimate of an amount for a business transaction. If two amounts are about
equally likely, the amount least likely to overstate assets and income is selected. Which of the following qualities is
characterized by this action?
a. Comparability
b. Conservatism
c. Materiality
d. Neutrality
ANSWER: b
DIFFICULTY: Moderate
REFERENCES: pp. 53-56
LEARNING OBJECTIVES: FACC.PONO.18.02-02 - LO: 02-02
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-02-GAAP
AICPA: FN-Reporting
KEYWORDS: Bloom's: Applying
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Chapter 2
52. Which of the following is a current asset?
a. Building
b. Office Supplies
c. Land
d. Truck
ANSWER: b
DIFFICULTY: Easy
REFERENCES: pp. 56-61
LEARNING OBJECTIVES: FACC.PONO.18.02-03 - LO: 02-03
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
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Chapter 2
55. To determine the source of a company's noncurrent assets, on which financial statement will you look?
a. Income statement only
b. Balance sheet only
c. Both the balance sheet and the income statement
d. Both the income statement and the statement of retained earnings
ANSWER: b
DIFFICULTY: Easy
REFERENCES: pp. 56-61
LEARNING OBJECTIVES: FACC.PONO.18.02-03 - LO: 02-03
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
Bevco Company
Bevco Company has provided the following information from its accounting records for the current year:
56. Read the information for Bevco Company. What are Bevco’ current assets?
a. $100,000
b. $165,000
c. $210,000
d. $240,000
ANSWER: b
RATIONALE: ($55,000 Cash + $45,000 Accounts Receivable + $65,000 Inventory = $165,000)
DIFFICULTY: Easy
REFERENCES: pp. 56-61
LEARNING OBJECTIVES: FACC.PONO.18.02-03 - LO: 02-03
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Measurement
KEYWORDS: Bloom's: Analyzing
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Chapter 2
57. Read the information for Bevco Company. What are Bevco’ current liabilities?
a. $50,000
b. $125,000
c. $200,000
d. $230,000
ANSWER: a
RATIONALE: ($50,000 Accounts Payable)
DIFFICULTY: Easy
REFERENCES: pp. 56-61
LEARNING OBJECTIVES: FACC.PONO.18.02-03 - LO: 02-03
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Measurement
KEYWORDS: Bloom's: Analyzing
58. Which one of the following items is reported as a current asset on a classified balance sheet?
a. Trucks
b. Accounts receivable
c. Land
d. Common stock
ANSWER: b
DIFFICULTY: Easy
REFERENCES: pp. 56-61
LEARNING OBJECTIVES: FACC.PONO.18.02-03 - LO: 02-03
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
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Chapter 2
59. The following information is given for Camino Company:
60. Which of the following accounts are normally reported as long-term liabilities on a classified balance sheet?
a. Notes payable due in five years and bonds payable
b. Interest payable and mortgage payable
c. Income taxes payable and salaries payable
d. Capital stock and accounts payable
ANSWER: a
DIFFICULTY: Moderate
REFERENCES: pp. 56-61
LEARNING OBJECTIVES: FACC.PONO.18.02-03 - LO: 02-03
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
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Chapter 2
61. Which one of the following is not a major category for long-term assets?
a. Receivables
b. Property, plant, and equipment
c. Intangibles
d. Investments
ANSWER: a
DIFFICULTY: Moderate
REFERENCES: pp. 56-61
LEARNING OBJECTIVES: FACC.PONO.18.02-03 - LO: 02-03
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
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Chapter 2
64. How are assets that are expected to be realized in cash, sold, or consumed within the normal operating cycle of a
business or within one year (if the operating cycle is shorter than one year) reported on a classified balance sheet?
a. Property, plant, and equipment
b. Current assets
c. Intangible assets
d. Current liabilities
ANSWER: b
DIFFICULTY: Moderate
REFERENCES: pp. 56-61
LEARNING OBJECTIVES: FACC.PONO.18.02-03 - LO: 02-03
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
65. Which of the following terms characterizes the time period between the investment of cash in merchandise and the
collection of cash from the sale of that merchandise?
a. Operating cycle
b. Natural business year
c. Accounting period
d. Fiscal period
ANSWER: a
DIFFICULTY: Easy
REFERENCES: pp. 56-61
LEARNING OBJECTIVES: FACC.PONO.18.02-03 - LO: 02-03
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
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Chapter 2
67. One significant difference between a classified and a non-classified balance sheet is the distinction between which of
the following items?
a. Assets and liabilities
b. Current and noncurrent (or long-term) items
c. Liabilities and owners’ equity
d. Resources invested by the owners and amounts borrowed from creditors
ANSWER: b
DIFFICULTY: Easy
REFERENCES: pp. 56-61
LEARNING OBJECTIVES: FACC.PONO.18.02-03 - LO: 02-03
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
68. For several years, Bosco Corporation has had a current ratio that was consistent with other companies in its industry.
For the most recent year, Bosco’s current ratio was significantly higher than that for the industry. What is the best possible
explanation for this situation?
a. The other companies in the industry were not as profitable.
b. Bosco’s liquidity has improved or is not leveraging financial resources effectively.
c. Bosco has less property, plant, and equipment than other companies.
d. Bosco has too much debt.
ANSWER: b
DIFFICULTY: Moderate
REFERENCES: pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Applying
Guinther & Sons, Inc., a retailer of men’s clothing, earned a net profit of $77,000 for 2017. The balance sheet for Guinther
& Sons includes the following items:
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Chapter 2
69. Read the information for Guinther & Sons. Calculate the total amount of current assets for Guinther & Sons.
a. $100,000
b. $147,000
c. $150,000
d. $249,000
ANSWER: c
RATIONALE: ($29,000 Cash + $39,000 Accounts Receivable + $79,000 Inventory + $3,000 Prepaid
Insurance = $150,000)
DIFFICULTY: Moderate
REFERENCES: pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements
AICPA: FN-Measurement
KEYWORDS: Bloom's: Analyzing
70. Read the information for Guinther & Sons, Inc. Calculate the current ratio for Guinther & Sons.
a. 2.58 to 1
b. 2.75 to 1
c. 3.00 to 1
d. 2.00 to 1
ANSWER: c
RATIONALE: ($29,000 Cash + $39,000 Accounts Receivable + $79,000 Inventory + $3,000 Prepaid
Insurance)/($21,000 Accounts Payable + $29,000 Taxes Payable) = 3.00 to 1
DIFFICULTY: Moderate
REFERENCES: pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements
AICPA: FN-Measurement
KEYWORDS: Bloom's: Analyzing
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Chapter 2
71. Read the information for Guinther & Sons, Inc. The average current ratio for stores such as Guinther & Sons is 2.4 to
1. What does this comparison tell you about its liquidity?
a. It is more liquid than its competitors.
b. It has more long-term assets than its competitors.
c. Since a rule of thumb for current ratios is 2 to 1, neither Guinther & Sons, Inc. nor its competitors is liquid.
d. Guinther & Sons, Inc. is more profitable than its competitors.
ANSWER: a
RATIONALE: ($29,000 Cash + $39,000 Accounts Receivable + $79,000 Inventory + $3,000 Prepaid
Insurance)/($21,000 Accounts Payable + $29,000 Taxes Payable) = 3.00 to 1 Current
Ratio. 3.00 to 1 is more favorable than the industry’s 2.4 to 1.
DIFFICULTY: Moderate
REFERENCES: pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Analyzing
72. Rosu Company has total current assets of $150,000 and total current liabilities of $50,000. What is the amount of
working capital for Rosu Company?
a. $200,000
b. $100,000
c. $125,000
d. $ 179,000
ANSWER: b
RATIONALE: $150,000 – $50,000 = $100,000
DIFFICULTY: Moderate
REFERENCES: pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements
AICPA: FN-Measurement
KEYWORDS: Bloom's: Analyzing
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Chapter 2
73. What is the correct method for calculating working capital?
a. Total Assets – Total Liabilities
b. Current Assets – Total Liabilities
c. Current Assets – Current Liabilities
d. Current Assets + Current Liabilities
ANSWER: c
DIFFICULTY: Easy
REFERENCES: pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Applying
74. Oreo Company has current assets of $20,000, current liabilities of $8,000, and long-term liabilities of $3,000. Oreo
wants to buy new equipment. How much of its existing cash can Oreo use to acquire equipment without allowing its
current ratio to decline below 2.0 to 1?
a. $4,000
b. $8,000
c. $10,000
d. $12,000
ANSWER: a
RATIONALE: ($8,000 Current Liabilities × 2 = $16,000 = 2.0 to 1; $20,000 – $16,000 = $4,000)
DIFFICULTY: Moderate
REFERENCES: pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements
AICPA: FN-Measurement
KEYWORDS: Bloom's: Analyzing
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Chapter 2
75. Excursion Corp. increased its dollar amount of working capital over the past several years. To further evaluate the
company's short-run liquidity, which one of the following measures should be used?
a. The current ratio
b. An analysis of the company’s long-term debt
c. An analysis of the return on stockholders’ equity
d. An analysis of retained earnings
ANSWER: a
DIFFICULTY: Moderate
REFERENCES: pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Applying
76. Which financial statement reports information helpful in assessing working capital?
a. Income statement
b. Balance sheet
c. Statement of retained earnings
d. Statement of cash flows
ANSWER: b
DIFFICULTY: Easy
REFERENCES: pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
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Chapter 2
77. Use Rizwi Corporation’s list of accounts at December 31, 2017 to answer the following question:
Rizwi Corporation
List of Accounts at December 31, 2017
78. If the current ratio is 2.5 to 1, net income is $6,000, and current liabilities are $18,000, how much is working capital?
a. $ 6,000
b. $ 14,000
c. $ 27,000
d. $ 45,000
ANSWER: c
RATIONALE: ($18,000 Current Liabilities × 2.5 = $45,000 Current Assets; $45,000 – $18,000 =
$27,000)
DIFFICULTY: Moderate
REFERENCES: pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements
AICPA: FN-Measurement
KEYWORDS: Bloom's: Analyzing
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Chapter 2
79. For which of the following is the current ratio most useful?
a. In evaluating a company’s profitability
b. In evaluating a company’s solvency
c. In evaluating a company’s return on assets
d. In evaluating a company’s liquidity
ANSWER: d
DIFFICULTY: Easy
REFERENCES: pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Applying
80. Which of the following events will cause a company’s current ratio to decrease?
a. The sale of inventory for cash
b. The sale of inventory for credit (accounts receivable)
c. Issuing stock for cash
d. Paying off long-term debt with cash
ANSWER: d
DIFFICULTY: Moderate
REFERENCES: pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Applying
81. Which of the following events will cause a company’s current ratio to rise?
a. The collection of an account receivable
b. Selling land for cash
c. The discharge of an account payable by signing a short-term note payable
d. None of these are correct
ANSWER: b
DIFFICULTY: Moderate
REFERENCES: pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Applying
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Chapter 2
82. Liquidity relates to a company's ability to do which of the following?
a. The ability to pay its financial obligations as they become due.
b. The ability to stay in business over the long run.
c. The ability to pay dividends to its stockholders.
d. The ability to collect the amount its customers owe the company.
ANSWER: a
DIFFICULTY: Easy
REFERENCES: pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
Jobston, Inc.
Cash $22,400
Accounts receivable 11,700
Inventory 23,300
Prepaid insurance 1,040
Land 80,000
Accounts payable 47,500
Salaries payable 1,200
Capital stock 84,040
Retained earnings 5,700
83. Read the information about Jobston, Inc. What is Jobston’s current ratio?
a. 0.8 to 1
b. 1.6 to 1
c. 1.2 to 1
d. 2.5 to 1
ANSWER: c
RATIONALE: Current Ratio = Current Assets/Current Liabilities = ($22,400 + $11,700 + $23,300 +
$1,040)/($47,500 + $1,200) = $58,440/$48,700 = 1.2 to 1
DIFFICULTY: Moderate
REFERENCES: pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Analyzing
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Chapter 2
84. Read the information about Jobston, Inc. What is Jobston’s working capital?
a. $58,440
b. $89,740
c. $84,040
d. $9,740
ANSWER: d
RATIONALE: Working Capital = Current Assets – Current Liabilities = ($22,400 + $11,700 + $23,300
+ $1,040) – ($47,500 + $1,200) = $58,440 – $48,700 = $9,740
DIFFICULTY: Moderate
REFERENCES: pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Analyzing
85. Which of the following would appear on a multiple-step income statement but not on a single-step income statement?
a. Net income
b. Total expenses
c. Total revenues
d. Income before income taxes
ANSWER: d
DIFFICULTY: Moderate
REFERENCES: pp. 64-66
LEARNING OBJECTIVES: FACC.PONO.18.02-05 - LO: 02-05
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
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Chapter 2
87. Which statement is true concerning an income statement?
a. The income statement shows how much profit the company has earned since it began operations.
b. Net income on the income statement should be equal to the amount of cash on the balance sheet.
c. The income statement summarizes the results of operations for a point in time.
d. None of these are correct.
ANSWER: d
DIFFICULTY: Moderate
REFERENCES: pp. 64-66
LEARNING OBJECTIVES: FACC.PONO.18.02-05 - LO: 02-05
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
89. Which one of the following subtotals or totals would appear in a multiple-step, but not a single-step, income
statement?
a. Income tax expense
b. Income from operations
c. Cost of goods sold
d. Net income
ANSWER: b
DIFFICULTY: Moderate
REFERENCES: pp. 64-66
LEARNING OBJECTIVES: FACC.PONO.18.02-05 - LO: 02-05
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
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Chapter 2
90. What are the two subtotals that distinguish the multiple-step income statement from the single-step income statement?
a. Income before taxes and income taxes
b. Total operating revenues and total operating expenses
c. Income from operations and income before taxes
d. Total revenues and total expenses
ANSWER: c
DIFFICULTY: Moderate
REFERENCES: pp. 64-66
LEARNING OBJECTIVES: FACC.PONO.18.02-05 - LO: 02-05
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
91. A question asked by stockholders is, "How much profit did the company make?" What should the stockholder
examine to get the most information that will help evaluate the answer to this question?
a. The balance sheet, because retained earnings represents current profits
b. The statement of cash flows, as cash inflows and outflows represents current profits
c. The income statement, since it shows the revenues and expenses for the period
d. The economic resources of the company
ANSWER: c
DIFFICULTY: Moderate
REFERENCES: pp. 64-66 and pp. 66-67
LEARNING OBJECTIVES: FACC.PONO.18.02-05 - LO: 02-05
FACC.PONO.18.02-06 - LO: 02-06
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
92. Under current accounting principles, how is net income on the income statement measured?
a. Net change in owners’ equity during the period
b. Excess of revenues over expenses during the period
c. Net change in the cash balance during the period
d. Excess of revenues over expenses less any dividends paid during the period
ANSWER: b
DIFFICULTY: Easy
REFERENCES: pp. 64-66
LEARNING OBJECTIVES: FACC.PONO.18.02-05 - LO: 02-05
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
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Chapter 2
93. Which of the following statements is true regarding the multiple-step income statement?
a. The multiple-step income statement is used only by companies that sell products, not those that provide
services.
b. The multiple-step income statement is helpful in determining a company's working capital.
c. The multiple-step income statement reports the same net income as the single-step income statement.
d. The multiple-step income statement is required under generally accepted accounting principles.
ANSWER: c
DIFFICULTY: Moderate
REFERENCES: pp. 64-66
LEARNING OBJECTIVES: FACC.PONO.18.02-05 - LO: 02-05
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
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Chapter 2
95. The following list contains several items that appear on an income statement.
Cobb Company
Selected data from the accounting records of Cobb Company are listed below.
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Chapter 2
97. Read the information about Cobb Company. What is Cobb’s net income?
a. $1,600
b. $2,000
c. $2,200
d. $2,800
ANSWER: c
RATIONALE: ($6,000 Operating Revenues – $1,800 Selling Expenses – $2,200 General and
Administrative Expenses = $2,000 + $800 Other Revenues (Expenses) – $600 Income
Taxes = $2,200)
DIFFICULTY: Easy
REFERENCES: pp. 64-66
LEARNING OBJECTIVES: FACC.PONO.18.02-05 - LO: 02-05
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Measurement
KEYWORDS: Bloom's: Analyzing
98. Read the information about Cobb Company. By what amount will net income on a single-step income statement differ
from net income on a multiple-step income statement if Cobb Company prepares both formats?
a. $800
b. $600
c. $200
d. $0
ANSWER: d
DIFFICULTY: Easy
REFERENCES: pp. 64-66
LEARNING OBJECTIVES: FACC.PONO.18.02-05 - LO: 02-05
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Analyzing
Seikoson
The 2017 income statement of Seikoson shows operating revenues of $130,800, selling expenses of $37,100, general and
administrative expenses of $34,900, interest expense of $900, and income tax expense of $11,430. Seikoson’s
stockholders’ equity was $280,000 at the beginning of the year and $320,000 at the end of the year. The company has
20,000 shares of stock outstanding at December 31, 2017.
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Chapter 2
99. Read the information about Seikoson. What is Seikoson’s net income?
a. $80,000
b. $92,190
c. $130,800
d. $46,470
ANSWER: d
RATIONALE: Net Income = $130,800 – $37,100 – $34,900 – $900 – $11,430 = $46,470
DIFFICULTY: Moderate
REFERENCES: pp. 64-66
LEARNING OBJECTIVES: FACC.PONO.18.02-05 - LO: 02-05
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Analyzing
100. Read the information about Seikoson. What is Seikoson’s profit margin (to the closest tenth of a percent)?
a. 2.8%
b. 35.5%
c. 61.2%
d. 14.5%
ANSWER: b
RATIONALE: Profit Margin: Net Income/Revenues = $46,470*/$130,800 = 35.5%
*$130,800 – $37,100 – $34,900 – $900 – $11,430 = $46,470
DIFFICULTY: Moderate
REFERENCES: pp. 66-67
LEARNING OBJECTIVES: FACC.PONO.18.02-06 - LO: 02-06
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Analyzing
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Chapter 2
101. Forman, Inc. earned $600,000 profit during 2017. On which financial statement(s) will you find the dollar amount of
the profit earned by the company?
a. Balance sheet and income statement
b. Income statement only
c. Statement of retained earnings only
d. Income statement and statement of retained earnings
ANSWER: d
DIFFICULTY: Easy
REFERENCES: pp. 64-66
LEARNING OBJECTIVES: FACC.PONO.18.02-05 - LO: 02-05
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
102. Lottony, Inc. is concerned about its profitability for the current year, since its profit margin has dropped 10% since
last year. Which of the following is the least useful comparison in evaluating the drop in Lottony’s profit margin?
a. Comparison with the industry average for the current year
b. Comparison with its current ratio for the current year
c. Comparison with the profit margins for its major competitors for the current year
d. Comparison with its profit margins for the past five years
ANSWER: b
DIFFICULTY: Moderate
REFERENCES: pp. 66-67
LEARNING OBJECTIVES: FACC.PONO.18.02-06 - LO: 02-06
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Applying
103. Assume that you want to determine the profit margin for a company. Which one of the following financial statements
is the best source of this information?
a. Statement of retained earnings
b. Statement of cash flows
c. Statement of stockholders’ equity
d. Income statement
ANSWER: d
DIFFICULTY: Easy
REFERENCES: pp. 66-67
LEARNING OBJECTIVES: FACC.PONO.18.02-06 - LO: 02-06
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
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Chapter 2
Hopper, Inc.
Use the information from Hopper, Inc. to answer the following question.
2018 2017
Operating revenues $1,900,000 $1,600,000
Operating expenses 1,400,000 1,100,000
Income taxes 200,000 200,000
104. Read the information about Hopper, Inc. Which statement best represents Hopper’s performance?
a. Hopper’s profit margin ratio decreased.
b. Hopper has become more profitable.
c. Hopper’s increase in operating revenues increased the company’s net income.
d. Hopper’s operating expenses as a percentage of operating revenues remained the same.
ANSWER: a
DIFFICULTY: Moderate
REFERENCES: pp. 66-67
LEARNING OBJECTIVES: FACC.PONO.18.02-06 - LO: 02-06
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Analyzing
105. Read the information about Hopper, Inc. Which of the following statements is the best answer regarding the
company’s profit margin?
a. The profit margin was 15.8% in 2018.
b. The profit margin was 15.8% in 2017.
c. The profit margin was 31.5% in 2018.
d. The profit margin was 31.5% in 2017.
ANSWER: a
RATIONALE: [$300,000 (or $1,900,000 Operating Revenues – $1,400,000 Operating Expenses –
$200,000 Income Taxes)/$1,900,000 = 15.8%]
DIFFICULTY: Moderate
REFERENCES: pp. 66-67
LEARNING OBJECTIVES: FACC.PONO.18.02-06 - LO: 02-06
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements
AICPA: FN-Measurement
KEYWORDS: Bloom's: Analyzing
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Chapter 2
106. Read the information about Hopper, Inc. Which ratio are you able to calculate given only the information provided
by Hopper?
a. Profit margin
b. Current ratio
c. Working capital
d. Gross profit percentage
ANSWER: a
DIFFICULTY: Moderate
REFERENCES: pp. 66-67
LEARNING OBJECTIVES: FACC.PONO.18.02-06 - LO: 02-06
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements
AICPA: FN-Measurement
KEYWORDS: Bloom's: Applying
107. Which one of the following equations represents retained earnings activity?
a. Beginning Balance + Net Income + Dividends = Profits for the Year
b. Beginning Balance + Cash Inflows – Cash Outflows = Ending Balance
c. Beginning Balance + Dividends – Net Income = Ending Balance
d. Beginning Balance + Net Income – Dividends = Ending Balance
ANSWER: d
DIFFICULTY: Moderate
REFERENCES: PP. 67-68
LEARNING OBJECTIVES: FACC.PONO.18.02-07 - LO: 02-07
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
Moore Industries
Moore Industries began operations on January 2, 2017, with an investment of $50,000 by each of its two stockholders. Net
income for its first year of business was $240,000. Moore Industries paid a total of $100,000 in dividends to its
stockholders during the year.
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Chapter 2
108. Read the information about Moore Industries. What is the company’s retained earnings balance at December 31,
2017?
a. $140,000
b. $190,000
c. $240,000
d. $340,000
ANSWER: a
RATIONALE: ($0 Beginning Balance + $240,000 Net Income – $100,000 Dividends = $140,000)
DIFFICULTY: Moderate
REFERENCES: pp. 67-68
LEARNING OBJECTIVES: FACC.PONO.18.02-07 - LO: 02-07
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Analyzing
109. Read the information about Moore Industries. If the company’s revenues were $500,000 for the year ended
December 31, 2017, how much were total expenses?
a. $160,000
b. $260,000
c. $640,000
d. $740,000
ANSWER: b
RATIONALE: ($500,000 Revenues – $240,000 Net Income = $260,000)
DIFFICULTY: Easy
REFERENCES: pp. 64-66
LEARNING OBJECTIVES: FACC.PONO.18.02-05 - LO: 02-05
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Analyzing
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Chapter 2
110. Read the information about Moore Industries. The company’s dividends for the year
a. reduce the amount of capital stock reported by the company.
b. are part of Moore Industries' operating costs.
c. are reported on the statement of retained earnings.
d. are an expense of Moore Industries.
ANSWER: c
DIFFICULTY: Easy
REFERENCES: pp. 67-68
LEARNING OBJECTIVES: FACC.PONO.18.02-07 - LO: 02-07
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Applying
111. If there are no changes in a company’s capital stock during a period, the company may choose to prepare
a. an income statement instead of a statement of stockholders’ equity.
b. an income statement instead of a statement of retained earnings.
c. a statement of stockholders’ equity instead of a statement of retained earnings.
d. a statement of cash flows instead of a statement of retained earnings.
ANSWER: c
DIFFICULTY: Moderate
REFERENCES: pp. 67-68
LEARNING OBJECTIVES: FACC.PONO.18.02-07 - LO: 02-07
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
112. In preparing the financial statements for December 31, 2017, an accountant improperly classified the payment of
prepaid rent as rent expense. Which of the following amounts would not be affected by this improper classification?
a. Retained earnings, January 1, 2017
b. Retained earnings, December 31, 2017
c. Net income
d. Total assets
ANSWER: a
DIFFICULTY: Easy
REFERENCES: pp. 67-68
LEARNING OBJECTIVES: FACC.PONO.18.02-07 - LO: 02-07
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
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Chapter 2
113. Carnival Bakery borrowed $500,000 from Front Street Bank. Carnival then hired a contractor to build a new Jonesie
distribution outlet. In which section of Carnival’s statement of cash flows would you find information that indicated that
Carnival acquired the new Jonesie distribution outlet?
a. Operating Activities
b. Investing Activities
c. Financing Activities
d. Profit Activities
ANSWER: b
DIFFICULTY: Easy
REFERENCES: pp. 68-70
LEARNING OBJECTIVES: FACC.PONO.18.02-08 - LO: 02-08
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-24 - Statement of Cash Flows
AICPA: FN-Reporting
KEYWORDS: Bloom's: Applying
114. A bank loaned $62 million to Apex Corporation to finance the construction of a new distribution warehouse. In
which section of Apex’s statement of cash flows would you be able to determine whether the company repaid any portion
of the debt during the year?
a. Operating Activities
b. Investing Activities
c. Financing Activities
d. Profit Activities
ANSWER: c
DIFFICULTY: Moderate
REFERENCES: pp. 68-70
LEARNING OBJECTIVES: FACC.PONO.18.02-08 - LO: 02-08
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-24 - Statement of Cash Flows
AICPA: FN-Reporting
KEYWORDS: Bloom's: Applying
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Chapter 2
115. Which of the following sections on a statement of cash flows is used to report the cash flow effects of transactions
involving a company's stock?
a. Operating Activities
b. Investing Activities
c. Financing Activities
d. Profit Activities
ANSWER: c
DIFFICULTY: Easy
REFERENCES: pp. 68-70
LEARNING OBJECTIVES: FACC.PONO.18.02-08 - LO: 02-08
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-24 - Statement of Cash Flows
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
116. Which one of the following sections on a statement of cash flows is used to report the cash flow effects of buying
and selling property, plant, and equipment?
a. Operating Activities
b. Investing Activities
c. Financing Activities
d. Profit Activities
ANSWER: b
DIFFICULTY: Easy
REFERENCES: pp. 68-70
LEARNING OBJECTIVES: FACC.PONO.18.02-08 - LO: 02-08
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-24 - Statement of Cash Flows
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
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Chapter 2
118. Which one of the following statements is true?
a. The two primary sources of financing available to corporations are borrowed funds and funds invested by
owners.
b. Financing activities involve the acquisition of property, plant and equipment.
c. Borrowed funds are a more permanent source of financing than funds invested by owners.
d. Investing activities involve the selling of products or services and the incurring of expenses related to selling
these products and services.
ANSWER: a
DIFFICULTY: Moderate
REFERENCES: pp. 68-70
LEARNING OBJECTIVES: FACC.PONO.18.02-08 - LO: 02-08
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-24 - Statement of Cash Flows
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
Marvel Shoes
Marvel Shoes reported the following items on its statement of cash flows for the current year:
119. Read the information about Marvel Shoes. What was the amount of net increase or decrease in the cash balance for
Marvel Shoes for the current year?
a. $10,000 increase
b. $30,000 increase
c. $40,000 increase
d. $70,000 increase
ANSWER: a
RATIONALE: ($70,000 Operating Activities – $20,000 Investing Activities – $40,000 Financing
Activities = $10,000)
DIFFICULTY: Moderate
REFERENCES: pp. 68-70
LEARNING OBJECTIVES: FACC.PONO.18.02-08 - LO: 02-08
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-24 - Statement of Cash Flows
AICPA: FN-Measurement
KEYWORDS: Bloom's: Analyzing
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Chapter 2
120. Read the information about Marvel Shoes. What was the cash balance for Marvel Shoes at the end of the current
year?
a. $10,000
b. $30,000
c. $40,000
d. $70,000
ANSWER: c
RATIONALE: ($30,000 Beginning Balance + $10,000 Increase in Cash = $40,000)
DIFFICULTY: Moderate
REFERENCES: pp. 68-70
LEARNING OBJECTIVES: FACC.PONO.18.02-08 - LO: 02-08
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-24 - Statement of Cash Flows
AICPA: FN-Measurement
KEYWORDS: Bloom's: Analyzing
121. Which financial statement reports the sources and uses of an entity's cash resources?
a. Income statement
b. Statement of retained earnings
c. Balance sheet
d. Statement of cash flows
ANSWER: d
DIFFICULTY: Easy
REFERENCES: pp. 68-70
LEARNING OBJECTIVES: FACC.PONO.18.02-08 - LO: 02-08
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-24 - Statement of Cash Flows
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
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Chapter 2
122. During its fifth year of operations, Bright Creations Company reports a beginning cash balance of $132,000, cash
inflows from investing activities of $210,000, cash outflows for financing activities of $79,000, and cash outflows for
operating activities of $13,000. What was Bright Creations’ cash balance at the end of the fifth year?
a. $250,000
b. $434,000
c. $276,000
d. $132,000
ANSWER: a
RATIONALE: ($132,000 Beginning Balance – $13,000 Cash Flow from Operating Activities +
$210,000 Cash Flows from Investing Activities – $79,000 Cash Flows from Financing
Activities = $250,000)
DIFFICULTY: Moderate
REFERENCES: pp. 68-70
LEARNING OBJECTIVES: FACC.PONO.18.02-08 - LO: 02-08
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-24 - Statement of Cash Flows
AICPA: FN-Measurement
KEYWORDS: Bloom's: Analyzing
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Chapter 2
124. Which of the following best describes a company’s operating activities?
a. Operating activities focus on the sale of products and services.
b. Operating activities are necessary to provide the money to start a business.
c. Operating activities are needed to provide the valuable assets required to run a business.
d. Operating activities represent the right to receive a benefit in the future.
ANSWER: a
DIFFICULTY: Easy
REFERENCES: pp. 68-70
LEARNING OBJECTIVES: FACC.PONO.18.02-08 - LO: 02-08
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-24 - Statement of Cash Flows
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
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Chapter 2
127. Which one of the following is an operating activity of a business?
a. Paying for purchases of inventory
b. Issuing stock for cash
c. Borrowing money from a bank
d. Purchasing a manufacturing plant
ANSWER: a
DIFFICULTY: Moderate
REFERENCES: pp. 68-70
LEARNING OBJECTIVES: FACC.PONO.18.02-08 - LO: 02-08
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-24 - Statement of Cash Flows
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
128. Which of the following represents the correct sequence of the three business activities on the statements of cash
flows?
a. Financing, Operating,Investing
b. Investing, Operating, Financing
c. Operating, Investing, Financing
d. Financing, Investing, Operating
ANSWER: c
DIFFICULTY: Easy
REFERENCES: pp. 68-70
LEARNING OBJECTIVES: FACC.PONO.18.02-08 - LO: 02-08
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-24 - Statement of Cash Flows
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
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Chapter 2
130. Although businesses engage in a wide variety of activities, all of these activities can be categorized into three types.
Which of the following choices best reflects these three types of business activities?
a. Operating, financing, reporting
b. Investing, reporting, financing
c. Operating, financing, investing
d. Investing, reporting, operating
ANSWER: c
DIFFICULTY: Easy
REFERENCES: pp. 68-70
LEARNING OBJECTIVES: FACC.PONO.18.02-08 - LO: 02-08
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-24 - Statement of Cash Flows
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
132. Which of the following items will be found in a corporate annual report?
a. Company budgets
b. Notes to the financial statements
c. Selected financial data from competitor companies
d. Management’s statement that the auditors are responsible for the financial statements
ANSWER: b
DIFFICULTY: Easy
REFERENCES: pp. 70-73
LEARNING OBJECTIVES: FACC.PONO.18.02-09 - LO: 02-09
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
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Chapter 2
133. Which one of the following sections is least likely to be found in a corporate annual report?
a. Notes to the Financial Statements
b. Forecasts of Cash Flows and Earnings
c. Report of Independent Accountants
d. Management’s Discussion and Analysis
ANSWER: b
DIFFICULTY: Moderate
REFERENCES: pp. 70-73
LEARNING OBJECTIVES: FACC.PONO.18.02-09 - LO: 02-09
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
134. Supplementary disclosures required by GAAP that help explain detail behind the accounting treatment of certain
items in the financial statements is most likely found in which of the following sections of a corporate annual report?
a. Report of Independent Accountants
b. Notes to the Financial Statements
c. Management’s Discussion and Analysis
d. Balance sheet
ANSWER: b
DIFFICULTY: Moderate
REFERENCES: pp. 70-73
LEARNING OBJECTIVES: FACC.PONO.18.02-09 - LO: 02-09
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
135. An investor found the following in an annual report: "The financial statements, in our opinion, present fairly the
financial position, operating results, and cash flows, in conformity with accounting principles generally accepted in the
United States." In which section of the annual report did the investor find this?
a. Balance sheet
b. Notes to the Financial Statements
c. Management’s Discussion and Analysis
d. Report of Independent Accountants
ANSWER: d
DIFFICULTY: Moderate
REFERENCES: pp. 70-73
LEARNING OBJECTIVES: FACC.PONO.18.02-09 - LO: 02-09
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
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Chapter 2
136. Which of the following represents one of the purposes of the notes to financial statements?
a. To provide a place for management to justify questionable items in the statements
b. To provide comparative ratios for the company's financial data
c. To provide the CPA's opinion of the fairness of the financial statements
d. To satisfy the need for full disclosure of all the facts relevant to a company's results and financial position
ANSWER: d
DIFFICULTY: Moderate
REFERENCES: pp. 70-73
LEARNING OBJECTIVES: FACC.PONO.18.02-09 - LO: 02-09
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
137. Which of the following is generally supplementary information required by GAAP concerning the accounting
treatments used by a company?
a. A year-end worksheet
b. Management’s Discussion and Analysis
c. Report of Independent Accountants
d. Notes to the Consolidated Financial Statements
ANSWER: d
DIFFICULTY: Moderate
REFERENCES: pp. 70-73
LEARNING OBJECTIVES: FACC.PONO.18.02-09 - LO: 02-09
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
Completion
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Chapter 2
139. ____________________ is the magnitude of an omission or misstatement in accounting information that will affect
the judgment of someone relying on the information.
ANSWER: Materiality
DIFFICULTY: Moderate
REFERENCES: pp. 53-56
LEARNING OBJECTIVES: FACC.PONO.18.02-02 - LO: 02-02
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-02-GAAP
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
141. ____________________ is the practice of using the least optimistic estimate when two estimates of amounts are
about equally likely.
ANSWER: Conservatism
DIFFICULTY: Moderate
REFERENCES: pp. 53-56
LEARNING OBJECTIVES: FACC.PONO.18.02-02 - LO: 02-02
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-02-GAAP
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
142. ____________________ is the quality of accounting information that makes it comprehensible to those willing to
spend the necessary time.
ANSWER: Understandability
DIFFICULTY: Moderate
REFERENCES: pp. 53-56
LEARNING OBJECTIVES: FACC.PONO.18.02-02 - LO: 02-02
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-02-GAAP
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
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Chapter 2
143. ____________________ is the quality of accounting information that makes it dependable in representing the events
that it purports to represent.
ANSWER: Reliability
DIFFICULTY: Moderate
REFERENCES: pp. 53-56
LEARNING OBJECTIVES: FACC.PONO.18.02-02 - LO: 02-02
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-02-GAAP
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
144. ____________________ is the quality of accounting information that allows a user to analyze two or more
companies and look for similarities and differences.
ANSWER: Comparability
DIFFICULTY: Moderate
REFERENCES: pp. 53-56
LEARNING OBJECTIVES: FACC.PONO.18.02-02 - LO: 02-02
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-02-GAAP
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
145. . ____________________ is the quality of accounting reporting that allows a user to compare two or more
accounting periods for a single business.
ANSWER: Consistency
DIFFICULTY: Moderate
REFERENCES: pp. 53-56
LEARNING OBJECTIVES: FACC.PONO.18.02-02 - LO: 02-02
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-02-GAAP
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
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Chapter 2
147. _________________________ are cash and other assets that are reasonably expected to be converted to cash during
the normal operating cycle of the business.
ANSWER: Current assets
DIFFICULTY: Moderate
REFERENCES: pp. 56-61
LEARNING OBJECTIVES: FACC.PONO.18.02-03 - LO: 02-03
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
149. ____________________ is the process of writing off the cost of tangible assets and ____________________ is the
process of writing off the cost of intangible assets.
ANSWER: Depreciation, amortization
DIFFICULTY: Moderate
REFERENCES: pp. 56-61
LEARNING OBJECTIVES: FACC.PONO.18.02-03 - LO: 02-03
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
150. ______________________________ is a liquidity measure that is calculated by subtracting current assets from
current liabilities.
ANSWER: Working capital
DIFFICULTY: Easy
REFERENCES: pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
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Chapter 2
151. The ability of a company to pay its debt when due refers to ____________________.
ANSWER: liquidity
DIFFICULTY: Moderate
REFERENCES: pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
152. In a ____________________-step income statement, all expenses and losses are added together and then deducted
from the sum of all revenues and gains.
ANSWER: single
DIFFICULTY: Easy
REFERENCES: pp. 64-66
LEARNING OBJECTIVES: FACC.PONO.18.02-05 - LO: 02-05
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
153. The statement of ____________________ explains changes in the components of owners’ equity during the period.
ANSWER: stockholders’ equity
DIFFICULTY: Moderate
REFERENCES: pp. 67-68
LEARNING OBJECTIVES: FACC.PONO.18.02-07 - LO: 02-07
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
154. On the statement of cash flows, the ______________________________ section involves the acquisition and sale of
long-term assets.
ANSWER: Investing Activities
DIFFICULTY: Easy
REFERENCES: pp. 68-70
LEARNING OBJECTIVES: FACC.PONO.18.02-08 - LO: 02-08
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-24 - Statement of Cash Flows
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
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Chapter 2
155. On the statement of cash flows, the ______________________________ section involves the purchase and sale of
products and services.
ANSWER: Operating Activities
DIFFICULTY: Easy
REFERENCES: pp. 68-70
LEARNING OBJECTIVES: FACC.PONO.18.02-08 - LO: 02-08
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-24 - Statement of Cash Flows
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
156. On the statement of cash flows, the ______________________________ section involves the issuance and
repayment of long-term liabilities and stock transactions.
ANSWER: Financing Activities
DIFFICULTY: Easy
REFERENCES: pp. 68-70
LEARNING OBJECTIVES: FACC.PONO.18.02-08 - LO: 02-08
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-24 - Statement of Cash Flows
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
Matching
Match the following characteristics with the statements about each qualitative characteristic’s importance.
a. Consistency
b. Materiality
c. Conservatism
d. Comparability
e. Reliability
f. Relevance
g. Understandability
DIFFICULTY: Moderate
REFERENCES: pp. 53-56
LEARNING OBJECTIVES: FACC.PONO.18.02-02 - LO: 02-02
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements
AICPA: FN-Reporting
TOPICS: Example 2-2
KEYWORDS: Bloom's: Remembering
157. Those willing to spend the time should be provided with comprehensible accounting information.
ANSWER: g
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Chapter 2
158. The accounting information must be information that could affect a decision.
ANSWER: f
160. This quality allows users to analyze two or more companies and look for similarities and differences.
ANSWER: d
161. Users must be able to compare accounting information of a firm with its prior year information.
ANSWER: a
162. Accounting information must be verifiable and faithfully represent actual transactions.
ANSWER: e
For each item listed, select the section of the balance sheet in which the item would be reported. Answers may be used
more than once.
a. Current Assets
b. Property, Plant, and Equipment
c. Current Liabilities
d. Long-Term Liabilities
e. Stockholders’ Equity
DIFFICULTY: Moderate
REFERENCES: pp. 56-61
LEARNING OBJECTIVES: FACC.PONO.18.02-03 - LO: 02-03
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
164. Cash
ANSWER: a
167. Land
ANSWER: b
170. Equipment
ANSWER: b
Match the selected items from a classified balance sheet and multiple-step income statement to the section in which they
would appear on the classified balance sheet or the income statement.
a. Current Assets (balance sheet)
b. Property, Plant, and Equipment (balance sheet)
c. Current Liabilities (balance sheet)
d. Long-Term Liabilities (balance sheet)
e. Stockholders’ Equity (balance sheet)
f. Operating Revenue (income statement)
g. Operating Expenses (income statement)
h. Other Revenue and Expenses (income statement)
i. Income Taxes (income statement)
DIFFICULTY: Moderate
REFERENCES: pp. 56-61 and pp. 64-66
LEARNING OBJECTIVES: FACC.PONO.18.02-03 - LO: 02-03
FACC.PONO.18.02-05 - LO: 02-05
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
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Chapter 2
178. Buildings
ANSWER: b
181. Land
ANSWER: b
From the following choices, select the answer that describes the effect on working capital as a result of the transaction.
a. Working capital will increase
b. Working capital will decrease
c. Working capital will not change
DIFFICULTY: Moderate
REFERENCES: pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
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Chapter 2
190. Borrowed cash using a long-term note
ANSWER: a
From the following list, select the proper section from the statement of cash flows in which it would be classified.
a. Operating Activities
b. Investing Activities
c. Financing Activities
DIFFICULTY: Moderate
REFERENCES: pp. 68-70
LEARNING OBJECTIVES: FACC.PONO.18.02-08 - LO: 02-08
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-24 - Statement of Cash Flows
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
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Chapter 2
Subjective Short Answer
Smith Corporation
Listed below is information from the financial records of Smith Corporation at December 31, 2017:
Required:
Prepare the Current Liabilities section of the balance sheet for Smith Corporation at December 31, 2017. You may omit
the heading. If the amount of current liabilities were larger, what effect would this have on the current ratio?
ANSWER:
Accounts payable $ 46,000
Interest payable 1,000
Income taxes payable 24,000
Total $ 71,000
When current liabilities increase, the denominator of the current ratio increases. This
causes the current ratio to drop.
DIFFICULTY: Moderate
REFERENCES: pp. 56-61 and pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-03 - LO: 02-03
FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements
AICPA: FN-Measurement
TOPICS: Example 2-5
KEYWORDS: Bloom's: Analyzing
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Chapter 2
202. Read the information about Smith Corporation.
Required:
Prepare the Long-Term Assets section of Smith Corporations's balance sheet at December 31, 2017. You may omit the
heading. Why are these amounts classified as "long-term"?
ANSWER:
Land $50,000
Buildings $48,000
Less: Accumulated Depreciation (13,000) 35,000
Total $85,000
Long-term assets are those that are expected to benefit the company beyond the current
accounting period. Both the land and the buildings are expected to benefit more than one
accounting period. Accumulated depreciation is the portion of the building’s benefit used
up.
DIFFICULTY: Moderate
REFERENCES: pp. 56-61
LEARNING OBJECTIVES: FACC.PONO.18.02-03 - LO: 02-03
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Measurement
TOPICS: Example 2-4
KEYWORDS: Bloom's: Analyzing
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Chapter 2
204. Read the information about Smith Corporation.
Required:
Calculate Smith’s current ratio at December 31, 2017. What does this ratio tell you about the "composition" of the current
assets?
ANSWER: Current Assets = $85,000
($11,000 Cash + $35,000 Accounts Receivable + $33,000 Inventory + $4,000 Prepaid
Rent + $2,000 Office Supplies = $85,000)
Current Liabilities = $71,000
($46,000 Accounts Payable + $1,000 Interest Payable + $24,000 Income Taxes
Payable = $71,000)
Current ratio = 1.20 to 1
($85,000 / $71,000)
The current ratio does not provide information about the composition of the current
assets. Only totals are used to calculate the current ratio.
DIFFICULTY: Moderate
REFERENCES: pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements
AICPA: FN-Measurement
TOPICS: Example 2-5
KEYWORDS: Bloom's: Analyzing
2018 2017
Current ratio 3.1 to 1 2.0 to 1
Profit margin 22 % 18%
Required:
Examine Harrison’s ratios. Is the change in the current ratio favorable or not? Explain.
ANSWER: The current ratio increased from 2.0 to 1 to 3.1 to 1. This is an unusually large increase
for most companies. A larger current ratio means a company is more liquid. This increase
is favorable, although care must be taken that the current ratio does not become too large
which may indicate an inefficient cash management system.
DIFFICULTY: Moderate
REFERENCES: pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements
AICPA: FN-Measurement
TOPICS: Example 2-5
KEYWORDS: Bloom's: Analyzing
Fasoli, Inc.
The following balance sheet items from Fasoli, Inc. are listed for December 31, 2017:
Required
Prepare the Liabilities section of the classified balance sheet, including total liabilities balance.
ANSWER: Liabilities:
Current Liabilities:
Accounts Payable $ 32,650
Income Taxes Payable 7,500
Interest Payable 2,200
Notes Payable, due April 15,
6,500
2018
Salaries Payable 7,400
Total Current Liabilities $ 56,250
Long-Term Debt:
Notes payable, due December
251,630
31, 2021
Total Liabilities $ 307,880
DIFFICULTY: Moderate
REFERENCES: pp. 55-61
LEARNING OBJECTIVES: FACC.PONO.18.02-03 - LO: 02-03
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Measurement
TOPICS: Example 2-4
KEYWORDS: Bloom's: Analyzing
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Chapter 2
208. Read the information about Fasoli, Inc.
Required
Present the Current Assets section (including the total) of a classified balance sheet.
ANSWER: Current assets:
Cash $ 60,990
Marketable securities 15,000
Accounts receivable 26,500
Merchandise inventory 112,900
Prepaid rent 3,800
Office supplies 200
Total current assets $ 219,390
DIFFICULTY: Moderate
REFERENCES: pp. 56-61
LEARNING OBJECTIVES: FACC.PONO.18.02-03 - LO: 02-03
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Measurement
TOPICS: Example 2-4
KEYWORDS: Bloom's: Analyzing
Required
Prepare the Stockholders’ Equity section of the classified balance sheet, including the total stockholders’ equity amount.
ANSWER: Stockholders’ Equity
Contributed capital:
Capital stock, $1 par value, 200,000
shares issued and outstanding $ 200,000
Paid-in capital in excess of par value 75,000
Total contributed capital $ 275,000
Retained earnings 113,510
Total stockholders’ equity $ 388,510
DIFFICULTY: Moderate
REFERENCES: pp. 56-61
LEARNING OBJECTIVES: FACC.PONO.18.02-03 - LO: 02-03
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Measurement
TOPICS: Example 2-4
KEYWORDS: Bloom's: Analyzing
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Chapter 2
210. Read the information about Fasoli, Inc.
Required
Present the Current Liabilities section (including the total) of a classified balance sheet.
ANSWER: Current liabilities:
Accounts payable $ 32,650
Income taxes payable 7,500
Interest payable 2,200
Notes payable, due April 15, 2018 6,500
Salaries payable 7,400
Total current liabilities $ 56,250
DIFFICULTY: Moderate
REFERENCES: pp. 56-61
LEARNING OBJECTIVES: FACC.PONO.18.02-03 - LO: 02-03
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Measurement
TOPICS: Example 2-4
KEYWORDS: Bloom's: Analyzing
Required
Compute Fasoli’s current ratio. On the basis of your answer, does Fasoli appear to be liquid? What other information do
you need to fully answer that question?
ANSWER: Current Ratio = Current Assets/Current Liabilities
$219,390/$56,250 = 3.9 to 1
From the current ratio alone, Fasoli appears to be relatively liquid. In fact, Fasoli may be
too liquid, because its cash balance is greater than its total current liabilities. This
indicates that Fasoli may be missing significant investment opportunities by maintaining
such a large cash balance. To fully assess its liquidity, you would need to look more
specifically at the activity in accounts receivable and merchandise inventory. In other
words, how long does it take to collect an account receivable, or how long does it take to
sell inventory? Also, you would want to compare Fasoli’s current ratio at the end of this
period with prior periods and with the current ratio for companies in the same industry.
DIFFICULTY: Moderate
REFERENCES: pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Measurement
TOPICS: Example 2-5
KEYWORDS: Bloom's: Analyzing
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Chapter 2
212. Read the information about Fasoli, Inc.
Required
Prepare the Assets section of the classified balance sheet.
ANSWER: Assets
Current assets:
Cash $ 60,990
Marketable securities 15,000
Accounts receivable 26,500
Merchandise inventory 112,900
Prepaid rent 3,800
Office supplies 200
Total current assets $219,390
Property, plant, and equipment:
Land $250,000
Buildings $150,000
Less: Accumulated depreciation (40,000) 110,000
Equipment $ 84,500
Less: Accumulated depreciation (12,500) 72,000
Total property, plant, and equipment $432,000
Intangible assets:
Patents 45,000
Total assets $696,390
DIFFICULTY: Moderate
REFERENCES: pp. 56-61
LEARNING OBJECTIVES: FACC.PONO.18.02-03 - LO: 02-03
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Measurement
TOPICS: Example 2-4
KEYWORDS: Bloom's: Analyzing
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Chapter 2
213. Complete the December 31, 2017 (first year of operation) balance sheet for Lincoln Company using the following
information:
(a) Retained earnings at December 31, 2017 was $51,000.
(b) Total stockholders’ equity at January 1, 2017 was $139,000.
(c) On December 30, 2017, additional capital stock was sold for cash, $55,000.
(d) The land and building were purchased on December 30, 2017 for $150,000.
Lincoln Company
Balance Sheet
December 31, 2017
Assets Liabilities & Stockholders’ Equity
Cash $ 80,000
Liabilities:
Accounts receivable ? Notes payable ?
Land 112,000 Accounts payable 45,000
Building ? Total liabilities ?
Equipment 30,000
Stockholders’ equity:
Capital stock ?
Retained earnings ?
Total liabilities and
Total assets $ stockholders’ equity $ 390,000
ANSWER: Lincoln Company
Balance Sheet
December 31, 2017
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
Explanation of calculations:
Total assets must be equal to total liabilities & stockholders' equity of $390,000.
$150,000 (cost of land and building) less $112,000 for land = $38,000 for building.
Accounts receivable must be $130,000 to achieve total assets of $390,000.
$139,000 (capital stock at January 1) plus $55,000 (additional investment).
Total liabilities must be $145,000 to achieve total liabilities & stockholders’ equity of
$390,000.
Notes payable must be $100,000 to achieve total liabilities of $145,000.
DIFFICULTY: Moderate
REFERENCES: pp. 56-61
LEARNING OBJECTIVES: FACC.PONO.18.02-03 - LO: 02-03
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Measurement
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Chapter 2
TOPICS: Example 2-4
KEYWORDS: Bloom's: Analyzing
214. Harrison Company calculated the following amounts concerning its financial information for the years ending
December 31, 2017 and 2016:
2018 2017
Current ratio 3.1 to 1 2.0 to 1
Profit margin 22 % 18%
Required
Suppose Harrison Company had a decrease in its cash account from 2017 to 2018. Would the other current asset amounts
have increased or decreased? Explain.
ANSWER: Since the current ratio increased from 2017 to 2018, the current assets other than cash
would have had to increase substantially to offset the decline in cash. The decline in cash
changes the liquidity somewhat, in that the other current assets must be converted to cash
prior to paying the current period debt.
DIFFICULTY: Moderate
REFERENCES: pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements
AICPA: FN-Reporting
TOPICS: Example 2-5
Example 2-8
KEYWORDS: Bloom's: Analyzing
Fellsmere Corporation
Presented below are the condensed balance sheets of Fellsmere Corporation at December 31, 2018 and 2017. Net income
for the years ending December 31, 2018 and 2017 is $346,000 and $109,000, respectively.
(B) The balance sheets show a large increase in retained earnings during 2018. Identify the possible reason(s) for this
increase.
ANSWER: (A) Current ratio for 2018 = 1.56 to 1
($2,228,186 Current Assets/$1,429,674 Current Liabilities)
Current Ratio for 2017 = 2.53 to 1
($2,544,683 Current Assets/$1,003,906 Current Liabilities)
This ratio is an indicator of the company's ability to pay its current debt when it is due.
Fellsmere’s current ratio has declined significantly. A company with decreasing liquidity
ratios is not appealing to bankers and creditors, and it may have trouble trying to borrow
money, since the decrease indicates the company is less likely able to repay its debts.
(B) The amount of retained earnings increases primarily because of net income for a
period. A company that has a positive balance in retained earnings over time has
cumulative profits in excess of cumulative dividends paid.
DIFFICULTY: Moderate
REFERENCES: pp. 62-64 and pp. 67-68
LEARNING OBJECTIVES: FACC.PONO.18.02-04 - LO: 02-04
FACC.PONO.18.02-07 - LO: 02-07
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements
AICPA: FN-Measurement
TOPICS: Example 2-4
Example 2-5
KEYWORDS: Bloom's: Analyzing
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Chapter 2
216. Read the information about Fellsmere Corporation.
Required
(A) Explain the change in Fellsmere’s working capital from 2017 to 2018. Why do users believe the current ratio provides
more information than the dollar amount of working capital? Explain.
(B) Fellsmere Corporation's creditors need to know whether its working capital position improved during the year. How
would you evaluate this?
ANSWER: (A) Working Capital, 2017 = $1,540,777
($2,544,683 Current Assets – $1,003,906 Current Liabilities = $1,540,777)
Working Capital, 2018 = $798,512
($2,228,186 Current Assets – $1,429,674 Current Liabilities = $798,512)
Decrease in Working Capital = $742,265
($1,540,777 Working Capital, 2017 – $798,512 Working Capital, 2018 = $742,265)
Working capital represents the excess of current assets over current liabilities in total
dollars. The current ratio indicates the number of times that current assets exceed the
current liabilities. It is possible that $742,265 could pay the current debts of one company
easily, but pay for only a small portion of a larger company's debts.
(B) The amount of working capital and the current ratio are the best indicators of a
company's working capital position. While the amount of working capital provides the
dollar amount of current assets that exceed the company's current debt, the current ratio
provides a relative indicator of how many times the dollar amount of current assets
exceeds currently due debt. In 2017, Fellsmere Corporation’s working capital was
$1,540,777. However, this figure declined in 2018 to $798,512. Less current assets are
available to cover current liabilities.
DIFFICULTY: Moderate
REFERENCES: pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements
AICPA: FN-Measurement
TOPICS: Example 2-4
Example 2-5
KEYWORDS: Bloom's: Analyzing
Crystal, Inc.
Crystal, Inc. reported $52,000 of net income for 2017. Crystal’s balance sheet at December 31, 2017, includes the
following amounts:
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Chapter 2
217. Read the information about Crystal, Inc. Which item is most "liquid"? Why is liquidity important?
ANSWER: Cash is the most liquid asset. Liquidity is an indicator of a company's ability to pay its
current debts when they come due. A company without cash is most certainly not going
to survive.
DIFFICULTY: Easy
REFERENCES: pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements
AICPA: FN-Reporting
TOPICS: Example 2-5
KEYWORDS: Bloom's: Analyzing
218. Read the information about Crystal, Inc. Has Crystal been profitable since it began operations? How do you know?
ANSWER: Retained earnings represents the company's cumulative profits since it began operations
less the dividends it paid out. Since Crystal, Inc. has a positive balance in its retained
earnings account, it has been profitable over the time it has been in business. Cumulative
net income exceeds aggregate net loss and aggregate dividends paid.
DIFFICULTY: Moderate
REFERENCES: pp. 64-66 and pp. 67-68
LEARNING OBJECTIVES: FACC.PONO.18.02-05 - LO: 02-05
FACC.PONO.18.02-07 - LO: 02-07
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements
AICPA: FN-Measurement
TOPICS: Example 2-9
KEYWORDS: Bloom's: Analyzing
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Chapter 2
219. The balance sheet of Delray Inc. includes the following items:
Cash $ 21,500
Accounts receivable 12,400
Inventory 45,300
Prepaid insurance 1,800
Land 80,000
Accounts payable 49,000
Salaries payable 1,625
Capital stock 105,100
Retained earnings 5,700
Required
(1) Determine the current ratio and working capital.
(2) What does the composition of the current assets tell you about Delray’s liquidity?
(3) What other information do you need to fully assess Delray’s liquidity?
ANSWER:
1. Current Ratio = Current Assets/Current Liabilities
= ($21,500 + $12,400 + $45,300 + $1,800)/($49,000 + $1,625)
= $81,000/$50,625 = 1.6 to 1
Working Capital = Current Assets – Current Liabilities
= $81,000 – $50,625 = $30,375
2. One concern is the relatively large percentage of the current assets tied up in inventory.
This asset accounts for $45,300/$81,000, or approximately 56% of the total current
assets. What is the normal period of time it takes to sell inventory? Is any part of the
inventory slow moving or obsolete?
3. On the basis of the current ratio alone, Delray appears to be relatively liquid, although
it would be important to compare the ratio with those of prior years and with those of
other companies in the same industry.
DIFFICULTY: Moderate
REFERENCES: pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Measurement
TOPICS: Example 2-5
KEYWORDS: Bloom's: Analyzing
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Chapter 2
Huntington Corporation
Presented below are all of the items from Huntington Corporation’s income statement for the years ending December 31,
2018 and 2017.
Required
How much is net income for the year ended December 31, 2018? If Huntington Corporation had used a single-step
statement, by how much would net income be different? Explain.
ANSWER: Net Income = $290,000
($2,300,000 Service Fees + $40,000 Other Income, net – $1,900,000 General and
Administrative Expenses – $150,000 Income Taxes = $290,000)
Net income is the same under a single- or multiple-step income statement. Only subtotals
and the order the amounts are listed differ.
DIFFICULTY: Moderate
REFERENCES: pp. 64-66
LEARNING OBJECTIVES: FACC.PONO.18.02-05 - LO: 02-05
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
TOPICS: Example 2-6
Example 2-7
KEYWORDS: Bloom's: Analyzing
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Chapter 2
221. Read the information about Huntington Corporation.
Required
Compare the profit margins for 2018 and 2017. Is the company becoming more or less profitable or staying the same?
What could be contributing to this?
ANSWER: Profit Margin for 2018 = 12.61%
($290,000 Net Income/$2,300,000 Service Fees = 12.61%)
Profit Margin for 2017 = 20.95%
($440,000 Net Income/$2,100,000 Service Fees = 20.95%)
The decrease in profit margin is unfavorable and indicates that the company is becoming
less profitable. A significant increase in general and administrative expenses seems to be
the cause of the decline.
DIFFICULTY: Moderate
REFERENCES: pp. 66-67
LEARNING OBJECTIVES: FACC.PONO.18.02-06 - LO: 02-06
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements
AICPA: FN-Measurement
TOPICS: Example 2-8
KEYWORDS: Bloom's: Analyzing
Burke Company
The following income statement items are taken from the records of Burke Company for the year ended December 31,
2017:
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Chapter 2
222. Read the information about Burke Company.
Required
Prepare a multiple-step income statement for the year ended December 31, 2017.
ANSWER: BURKE COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2017
Sales $50,300
Cost of goods sold 29,200
Gross profit $21,100
Operating expenses:
Selling expenses:
Advertising $ 2,600
Commissions 3,515
Insurance—salesperson's auto 3,350
Total selling expenses $ 9,465
General and administrative expenses:
Depreciation—office building $ 4,000
Salaries and wages—office 13,660
Supplies—office 1,990
Total general and administrative expenses 19,650
Total operating expenses 29,115
Loss from operations $(8,015)
Other revenues and expenses:
Interest expense $(1,400)
Interest revenue 2,340
Rent revenue 7,700
Excess of other revenues over other expenses 8,640
Income before taxes $ 625
Income tax expense 190
Net income $ 435
DIFFICULTY: Moderate
REFERENCES: pp. 64-66
LEARNING OBJECTIVES: FACC.PONO.18.02-05 - LO: 02-05
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Measurement
KEYWORDS: Bloom's: Analyzing
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Chapter 2
223. Read the information about Burke Company
Required
Prepare a single-step income statement for the year ended December 31, 2017.
ANSWER: BURKE COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2017
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
DIFFICULTY: Moderate
REFERENCES: pp. 64-66
LEARNING OBJECTIVES: FACC.PONO.18.02-05 - LO: 02-05
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Measurement
KEYWORDS: Bloom's: Analyzing
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Chapter 2
224. The 2016 income statement of Kellyson Enterprises shows operating revenues of $120,500, selling expenses of
$35,200, general and administrative expenses of $29,900, interest expense of $1,500, and income tax expense of $10,520.
Kellyson’s stockholders’ equity was $280,000 at the beginning of the year and $320,000 at the end of the year. The
company has 20,000 shares of stock outstanding at December 31, 2017.
Required
Compute Kellyson’s profit margin. What other information would you need in order to comment on whether this ratio is
favorable?
ANSWER:
Profit margin:
Net Income/Revenues = $43,380*/$120,500 = 36%
*$120,500 – $35,200 – $29,900 – $1,500 – $10,520 = $43,380
A profit margin of 36% indicates that for every dollar of sales, Kellyson Enterprises has
$0.36 in net income. It would be beneficial to compare the company’s profit margin with
some of its competitors and with previous years.
DIFFICULTY: Moderate
REFERENCES: pp. 66-67
LEARNING OBJECTIVES: FACC.PONO.18.02-06 - LO: 02-06
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Measurement
TOPICS: Example 2-8
KEYWORDS: Bloom's: Analyzing
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Chapter 2
225. The 2017 income statement of Nasir Inc. shows operating revenues of $135,800, selling expenses of $40,310, general
and administrative expenses of $33,990, interest expense of $880, and income tax expense of $13,090. Nasir’s
stockholders’ equity was $250,000 at the beginning of the year and $345,000 at the end of the year. The company has
10,000 shares of stock outstanding at December 31, 2017.
Required
Compute Nasir’s profit margin. What other information would you need in order to comment on whether this ratio is
favorable?
ANSWER: Profit margin:
Net Income/Revenues = $47,530*/$135,800 = 35%
*$135,800 – $40,310 – $33,990 – $880 – $13,090 = $47,530
A profit margin of 35% indicates that for every dollar of sales, Nasir Inc. has $0.35 in net
income. It would be beneficial to compare the company’s profit margin with some of its
competitors and with previous years.
DIFFICULTY: Moderate
REFERENCES: pp. 66-67
LEARNING OBJECTIVES: FACC.PONO.18.02-06 - LO: 02-06
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Measurement
TOPICS: Example 2-8
KEYWORDS: Bloom's: Analyzing
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Chapter 2
226. Hammar Corporation’s partial income statement is as follows:
Sales $2,400,000
Cost of sales 900,000
Selling expenses 121,600
General and administrative
150,000
expenses
Required
Determine the profit margin. Would you invest in Hammar Corporation? Explain your answer.
ANSWER: Profit margin:
Net Income/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
– Cost of sales 900,000
= Gross profit $1,500,000
– Total operating expenses 271,600**
= Net income $1,228,400*
DIFFICULTY: Moderate
REFERENCES: pp. 64-66 and pp. 66-67
LEARNING OBJECTIVES: FACC.PONO.18.02-05 - LO: 02-05
FACC.PONO.18.02-06 - LO: 02-06
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Measurement
TOPICS: Example 2-7
Example 2-8
KEYWORDS: Bloom's: Analyzing
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Chapter 2
227. Vance Corporation’s partial income statement is as follows:
Sales $1,300,000
Cost of sales 300,000
Selling expenses 210,000
General and administrative
150,000
expenses
Required
Determine the profit margin. Would you invest in Vance Corporation? Explain your answer.
ANSWER: Profit margin:
Net Income/Sales = $640,000*/$1,300,000 = 49.2%
*$1,300,000 – $300,000 – $210,000 – $150,000 = $640,000*
Sales $1,300,000
– Cost of sales 300,000
= Gross profit $1,000,000
– Total operating expenses 360,000**
= Net income $ 640,000*
**Total Operating Expenses = Selling Expenses ($210,000) + General and
Administrative Expenses ($150,000) = $360,000
Vance Corporation has been very profitable on the basis of its high profit margin of
49.2%. Before making an investment, however, you would want to consider how this
ratio compares with that of prior years and other companies in the same line of business.
DIFFICULTY: Moderate
REFERENCES: pp. 64-66 and pp. 66-67
LEARNING OBJECTIVES: FACC.PONO.18.02-05 - LO: 02-05
FACC.PONO.18.02-06 - LO: 02-06
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Measurement
TOPICS: Example 2-7
Example 2-8
KEYWORDS: Bloom's: Analyzing
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Chapter 2
228. Powder Corporation began operations on January 2, 2016, with a total investment of $150,000 by its stockholders.
Net income for its first year of business was $90,000. During 2017 and 2018, net income increased to $188,000 and
$217,000, respectively. Powder paid $85,000 in dividends to its shareholders in each of the three years.
A) In good form, prepare a statement of retained earnings for the year ended December 31, 2017.
C) Explain the link between the statement of retained earnings and the balance sheet.
ANSWER: A)
Powder Corporation
Statement of Retained Earnings
For the Year Ended December 31, 2017
Beginning balance, January 1, 2017 $ 5,000*
Add: Net income for 2017 188,000
Less: Dividends paid during the year (85,000)
Ending balance, December 31, 2017 $108,000
$90,000 Net Income for 2016 – $85,000 Dividends Paid = $5,000 Balance,
*
January 1, 2017
B) Retained earnings at December 31, 2018 = $240,000
($108,000 Beginning Balance, January 1, 2018 + $217,000 Net Income for
2018 – $85,000 Dividends paid during the year = $240,000)
C)
The ending balance of the retained earnings statement represents the
cumulative earnings less all the dividends declared and paid for the life of the
business. This amount appears on the balance sheet as a component of owners'
equity.
DIFFICULTY: Challenging
REFERENCES: pp. 67-68
LEARNING OBJECTIVES: FACC.PONO.18.02-07 - LO: 02-07
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Measurement
TOPICS: Example 2-9
KEYWORDS: Bloom's: Analyzing
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Chapter 2
229. The following information is taken from Harvey Company’s balance sheet at December 31, 2016:
Cash $14,000
Retained earnings 14,000
Inventory 8,000
Equipment 38,000
Accounts payable 7,000
Bonds payable 23,000
Capital stock 26,000
Required
Using the information provided for Harvey Company, answer the following questions:
B) On which financial statement would an investor look to see if any stock was issued during the year?
ANSWER: A) $30,000
($7,000 Accounts Payable + $23,000 Bond Payable)
The primary source for seeing whether any stock was issued during the year would
B)
be the statement of stockholders’ equity. While the balance sheet may show an
amount for “Capital Stock,” this amount is an ending balance and would not show
the results of any transactions involving new issuances of stock during the period.
DIFFICULTY: Moderate
REFERENCES: pp. 67-68
LEARNING OBJECTIVES: FACC.PONO.18.02-07 - LO: 02-07
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Measurement
TOPICS: Example 2-1
KEYWORDS: Bloom's: Analyzing
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Chapter 2
230. Coglin, Inc. incurred a net loss of $20,000 for 2017. The balance sheet at December 31, 2017, for Coglin, Inc.
includes the following items:
Cash $ 23,000
Accounts receivable 13,000
Inventory 45,000
Prepaid insurance 1,000
Land 14,000
Building 80,000
Accounts payable 55,000
Salaries payable 2,000
Capital stock 100,000
Retained earnings 25,000
A) Determine Coglin’s current ratio and working capital.
B) Beyond the information provided in your answers to “A,” what does the composition of Coglin’s
current assets tell you about its liquidity?
C) What other information would one need to fully access Coglin’s liquidity?
ANSWER: A) Current ratio: 1.44 to 1
($23,000 Cash + $13,000 Accounts Receivable + $45,000 Inventory + $1,000
Prepaid Insurance)/($55,000 Accounts Payable + $2,000 Salaries Payable)
= 1.44 to 1
Working capital: $25,000
($82,000 Total Current Assets – $57,000 Total Current Liabilities = $25,000)
The closer an asset is to being converted to cash, the more liquid the asset is. Some
B)
assets, like inventory, take much longer to turn into cash because they must be sold
before collection of the cash can be made. Prepaid insurance is not as liquid as
accounts receivable since it will be consumed as time passes. Receivables are
more liquid than inventory because a sale has already occurred.
The statement of cash flows would be helpful to determine the cash inflows and
C)
outflows that occurred during the year. The balance sheet represents only the
ending balance of the cash account. The statement of cash flows also identifies the
sources and uses of cash by business activity and the nature of each particular cash
flow.
DIFFICULTY: Moderate
REFERENCES: pp.62-64 and pp. 68-70
LEARNING OBJECTIVES: FACC.PONO.18.02-04 - LO: 02-04
FACC.PONO.18.02-08 - LO: 02-08
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-23 - Financial Statements
AICPA: FN-Measurement
TOPICS: Example 2-10
Example 2-4
Example 2-5
KEYWORDS: Bloom's: Analyzing
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Chapter 2
231. During 2017, Wimbrow Images reported $60,000 of net income and generated $80,000 of cash from operations.
During the year, Wimbrow Images paid $15,000 to purchase a new delivery truck and also paid dividends in the amount
of $30,000. Wimbrow Images borrowed $40,000 cash from the bank. At the beginning of the year, cash amounted to
$50,000.
A) Prepare a statement of cash flows for the year ended December 31, 2017.
B) How much more cash does Wimbrow Images have available at the end of the year than at the beginning?
C) Why is there a difference between net income and cash flows from operations?
ANSWER: A)
Wimbrow Images
Statement of Cash Flows
For the Year Ended December 31, 2017
Cash flows from operating activities $ 80,000
Cash 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)
Net increase in cash $ 75,000
Cash at beginning of the year 50,000
Cash at end of the year $ 125,000
B) The company has $75,000 more at the end of the year compared to the beginning
of the year.
Net income is calculated using the accrual basis of accounting, whereas cash
C)
flows from operating activities represent the net amount of cash flows from
operations of the business.
DIFFICULTY: Moderate
REFERENCES: pp. 68-70
LEARNING OBJECTIVES: FACC.PONO.18.02-08 - LO: 02-08
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-24 - Statement of Cash Flows
AICPA: FN-Measurement
TOPICS: Example 2-10
KEYWORDS: Bloom's: Analyzing
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Chapter 2
232. Tradewinds Corporation was organized on January 1, 2017, with the investment of $500,000 in cash by its
stockholders. Tradewinds signed a ten-year, $300,000 promissory note at a local bank during 2017 and received cash in
the same amount. The company immediately purchased an office building for $800,000, paying in cash. During its first
year, Tradewinds generated $35,000 in cash from operations and paid $30,000 in cash dividends.
A) In good form, prepare a statement of cash flows for the year ended December 31, 2017.
B) What does this statement tell you that an income statement does not?
ANSWER: A)
Tradewinds Corporation
Statement of Cash Flows
For the Year Ended December 31, 2017
Cash flows from operating activities $ 35,000
Cash flows from investing activities:
Purchase of 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 cash provided by financing activities 770,000
Net increase in cash $ 5,000
Cash at beginning of year 0
Cash at end of year $ 5,000
B) This statement provides information on the cash inflows and outflows by activity:
operating, investing, and financing. The income statement is prepared on the accrual
basis that provides information on the revenues earned and the expenses incurred during
the period, which may or may not involve cash. The income statement shows the
profitability of a company for a period of time. Furthermore, the income statement does
not present information regarding all the sources and uses of cash.
DIFFICULTY: Moderate
REFERENCES: pp. 68-70
LEARNING OBJECTIVES: FACC.PONO.18.02-08 - LO: 02-08
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-24 - Statement of Cash Flows
AICPA: FN-Measurement
TOPICS: Example 2-10
KEYWORDS: Bloom's: Analyzing
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Chapter 2
233. Hindsville Company reported revenues of $165,000 and net income of $20,000 for 2017. Cash generated by
operations was $40,000. In addition, Hindsville Company borrowed $24,000 from a bank. During 2018, Hindsville
purchased new equipment for $30,000 cash and paid cash dividends of $15,000 to stockholders. Hindsville’s cash balance
at the beginning of 2017 was $22,000.
Identify the amount of cash flows for financing, investing, and operating activities for
A)
2017 by filling in the amounts below.
Financing Cash Flows:
Did Hindsville Company's operating activities generate enough cash to cover its
B)
investing and financing activities? Explain.
C) How much did Hindsville Company's cash balance increase or decrease during 2016?
ANSWER: A) Financing Cash Flows = $9,000
($24,000 Cash Borrowed from Bank – $15,000 Cash Dividends Paid = $9,000)
Yes. The total of investing and financing activities is an outflow of $21,000. The
B)
$40,000 generated from operating activities is sufficient.
$19,000 Increase C)
($40,000 Cash Flow from Operations – $30,000 Cash Flow from Investing +
$9,000 Cash Flow from Financing = $19,000)
DIFFICULTY: Moderate
REFERENCES: pp. 68-70
LEARNING OBJECTIVES: FACC.PONO.18.02-08 - LO: 02-08
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-24 - Statement of Cash Flows
AICPA: FN-Measurement
TOPICS: Example 2-10
KEYWORDS: Bloom's: Analyzing
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Chapter 2
234. Presented below are items from Joplin Shoes' statement of cash flows for 2017.
B) How much cash does Joplin Shoes have at the end of 2016?
B) $150,000
($60,000 Cash at the Beginning of the Year + $90,000 Increase = $150,000)
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Chapter 2
235. Unideno Corporation was organized on January 1, 2017, with the investment of $225,000 in cash by its stockholders.
The company immediately purchased an office building for $300,000, paying $201,000 in cash and signing a three-year
promissory note for the balance. Unideno signed a five-year, $50,000 promissory note at a local bank during 2017 and
received cash in the same amount. During its first year, Unideno collected $93,000 from its customers. It paid $60,600 for
inventory, $22,400 in salaries and wages, and another $5,100 in taxes. Unideno paid $5,300 in cash dividends.
Required
1. Prepare a statement of cash flows for the year ended December 31, 2017.
2. What does this statement tell you that an income statement does not?
ANSWER: Unideno Corporation
Statement of Cash Flows
For the Year Ended December 31, 2017
Cash flows from operating activities:
Cash collected from customers $ 93,000
Cash paid for inventory (60,600)
Cash paid in salaries and wages (22,400)
Cash paid in taxes (5,100)
Net cash provided by operating activities $ 4,900
Cash flows from investing activities:
Payment on office building (201,000)
Cash flows from financing activities
Proceeds from issuance of stock $225,000
Proceeds from long-term note 50,000
Dividends declared and paid (5,300)
Net cash provided by financing activities 269,700
Net increase in cash $ 73,600
Cash at beginning of year 0
Cash at end of year $ 73,600
Note: Unideno should report one significant noncash activity as supplementary
information to its statement of cash flows: the three-year, $99,000 note signed to finance
the purchase of the office building.
2. First, the statement of cash flows reports on operations on a cash basis, as opposed to
the income statement which is prepared on an accrual basis. Second, investing and
financing activities are also reported on a statement of cash flows. For example,
information about dividends paid during the year is shown on a statement of cash flows
but not on an income statement. It is interesting to note that Unideno paid more in
dividends, $5,300, than the amount of cash it generated from operations, $4,900.
DIFFICULTY: Moderate
REFERENCES: pp. 68-70
LEARNING OBJECTIVES: FACC.PONO.18.02-08 - LO: 02-08
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-24 - Statement of Cash Flows
AICPA: FN-Reporting
TOPICS: Example 2-10
KEYWORDS: Bloom's: Analyzing
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Chapter 2
236. Identify each of the following items as operating (O), investing (I), or financing (F) activities on the statement of
cash flows(assuming the indirect method). If an item is not on the statement, please mark it as none of these (N). If the
item is an inflow, please indicate by a (+), (e.g. O+, I+ or F+). If the item is an outflow, please indicate by brackets (e.g.,
<O> for operating outflow, <I> for investing outflow, and <F> for financing outflow):
____ (a) Paid an account payable for inventory purchased in the previous accounting period.
____ (b) Received cash from a customer
____ (c) Paid a dividend to stockholders.
____ (d) Paid the interest on a note payable to National Street Bank.
____ (e) Paid the principal amount due on the note payable to National Street Bank.
____ (f) Transferred cash from a checking account into a money market fund.
____ (g) Purchased equipment for cash.
ANSWER: a. <O> b. O+ c. <F> d. <O> e. <F> f. N g. <I>
DIFFICULTY: Moderate
REFERENCES: pp. 68-70
LEARNING OBJECTIVES: FACC.PONO.18.02-08 - LO: 02-08
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-24 - Statement of Cash Flows
AICPA: FN-Reporting
TOPICS: Example 2-10
KEYWORDS: Bloom's: Analyzing
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Chapter 2
237. Most financial reports contain the following list of basic elements. For each element identify the person(s) who
prepared the element and describe the information a user would expect to find in each element.
Notes to Financial
Statements
Report of
Independent
Accountants
ANSWER:
Information
Elements Prepared By
Provided
Management
Discussion of financial statements
Discussion & Management
and explanations
Analysis
Income statement, balance sheet,
Financial Statements Management statement of cash flows, statement of
retained earnings
Notes to Financial
Management Accounting policies and other disclosures
Statements
Report of
Opinion that statements are presented
Independent CPA firm
fairly
Accountants
DIFFICULTY: Moderate
REFERENCES: pp. 70-73
LEARNING OBJECTIVES: FACC.PONO.18.02-09 - LO: 02-09
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Analyzing
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Chapter 2
238. Comparative income statements for Jameson Inc. are as follows:
2018 2017
Sales $2,000,000 $600,000
Cost of sales 800,000 400,000
Gross profit $1,200,000 $200,000
Operating expenses 520,000 120,000
Operating income $ 680,000 $ 80,000
Loss on sale of subsidiary (800,000) 0
Net income (loss) $ (120,000) $ 80,000
Required
The president and management believe that the company performed better in 2018 than it did in 2017. Write the
president’s letter to be included in the 2018 annual report. Explain why the company is financially sound and why
shareholders should not be alarmed by the $120,000 loss in a year when gross profit increased significantly.
ANSWER: Letter from the President to Stockholders of Jameson Inc.:
On the surface, 2017 does not appear to have been a successful year for Jameson Inc.
However, it was primarily one specific event that caused the net loss we experienced for
the year. The sale of a subsidiary resulted in a loss of $800,000. We believe that the sale
of this unprofitable unit of the business will allow us to concentrate our future attention
on our successful businesses and clear the way for a return to overall profitability in
2018.
Aside from the loss experienced on the sale of the subsidiary, 2017 was a really great
year for the company. We were able to control our operating expenses, resulting in
operating income as a percentage of sales that increased from 13% to 34%. These are
clear signals that Jameson Inc. is moving in the right direction and should have a very
solid year of operations in 2018.
DIFFICULTY: Moderate
REFERENCES: pp. 70-73
LEARNING OBJECTIVES: FACC.PONO.18.02-09 - LO: 02-09
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Measurement
TOPICS: Example 2-6
KEYWORDS: Bloom's: Analyzing
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Chapter 2
Essay
239. What financial statement items are investors and creditors most interested in and why?
ANSWER: Investors are most interested in cash receipts from dividends and the cash they can
receive upon selling their stock. Creditors are most interested in cash to be received for
interest payments and the repayment of the principal. If a company does not have
sufficient cash flows, investors and creditors could suffer as a result. The financial
position, shown on the balance sheet, is also a concern for both investors and creditors
because even though a company may have what appears to be sufficient cash flows for
the current period, the long-run solvency picture could be weak.
DIFFICULTY: Moderate
REFERENCES: pp. 52-53
LEARNING OBJECTIVES: FACC.PONO.18.02-01 - LO: 02-01
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-24 - Statement of Cash Flows
AICPA: FN-Reporting
KEYWORDS: Bloom's: Applying
240. Cory Harper, a newly hired accountant, wanted to impress his boss, so he stayed late one night to analyze the office
supplies expense account. He determined the cost by month, for the past 12 months, of each of the following: computer
paper, copy paper, fax paper, pencils and pens, note pads, postage, stationery, and miscellaneous items. Why do
companies not include information of this nature in published financial statements?
ANSWER: Companies provide information to users to make decisions. The primary decision makers
external to the business are creditors, bankers, stockholders, and potential stockholders.
These users need to know that the company can repay its debts, earn a profit, and pay
dividends. The cost by month for each item of office supplies does not provide any
additional information that would be helpful for any external users. In addition, the time
and expense necessary to create the additional detail would outweigh the benefits of the
final product. The amounts involved are probably immaterial.
DIFFICULTY: Moderate
REFERENCES: pp. 52-53
LEARNING OBJECTIVES: FACC.PONO.18.02-01 - LO: 02-01
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Applying
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Chapter 2
241. Service-oriented companies have different needs than product-oriented companies when analyzing financial
statements.
Required
Why is this true? Give an example of a financial ratio that is meaningless to a service business.
ANSWER: Because service-oriented companies do not sell a tangible product, they instead must sell
their professional expertise and rely on alternative measures of their efficiency in
marketing their services. For example, a law firm would keep detailed records of the
hours worked on each client’s case, monthly billings to each client, and the ratio of these
billings to the average costs incurred on each case. Therefore, ratios like inventory
turnover would be meaningless to a service business, like a law firm or a public
accounting firm.
DIFFICULTY: Moderate
REFERENCES: pp. 52-53 and pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-01 - LO: 02-01
FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Analytic
ACCREDITING STANDARDS: ACBSP: APC-02-GAAP
AICPA: FN-Reporting
KEYWORDS: Bloom's: Applying
242. Ginger Company claims its financial information is useful. What two qualities must be present in order to have
"useful" accounting information? Explain these two qualities.
ANSWER: To be useful, accounting information must be relevant and reliable. Relevant information
has the capacity to make a difference in a decision. Reliable information can be depended
on to represent the economic events that it purports to represent.
DIFFICULTY: Moderate
REFERENCES: pp. 53-56
LEARNING OBJECTIVES: FACC.PONO.18.02-02 - LO: 02-02
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-02-GAAP
AICPA: FN-Reporting
KEYWORDS: Bloom's: Applying
246. What is the operating cycle of a business? How does this impact the classification of assets into current and
noncurrent categories?
ANSWER: The operating cycle depends on the nature of a company's business. It encompasses the
period of time from the investment of cash in inventory to the collection of accounts
receivable from the sale of products. This can take a long time, like the production of a
cruise ship, or a very short time, like the preparation of restaurant food. Current assets are
realized in cash, sold, or consumed during the operating cycle or within one year if the
cycle is shorter than one year.
DIFFICULTY: Moderate
REFERENCES: pp. 56-61
LEARNING OBJECTIVES: FACC.PONO.18.02-03 - LO: 02-03
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-03-Business Forms
AICPA: FN-Reporting
KEYWORDS: Bloom's: Applying
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Chapter 2
247. How does the definition of a current liability relate to that of a current asset?
ANSWER: Current assets will be realized in cash, sold, or consumed during the operating cycle or
within one year if the cycle is shorter than one year. Current liabilities are obligations that
will be satisfied within the operating cycle or within one year if the cycle is shorter. For
most companies, both current assets and liabilities are reported on the balance sheet using
a one-year time period
DIFFICULTY: Moderate
REFERENCES: pp. 56-61
LEARNING OBJECTIVES: FACC.PONO.18.02-03 - LO: 02-03
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-02-GAAP
AICPA: FN-Reporting
KEYWORDS: Bloom's: Applying
248. Potential stockholders and lenders are interested in a company's financial statements. Several financial statement
items appear below. Answer the questions that follow.
A) Which two items would stockholders be most interested in that can either be computed from the
above data or are included in the items listed above? Explain why the two you selected are
important to stockholders.
B) In which one item would lenders be most interested? Explain why this item is important.
ANSWER:
A) Stockholders are interested in net income and dividends. They want to make sure the
company is profitable. If a company is incurring losses, it may not pay dividends.
B) Lenders are most interested in the company's ability to pay bills when they become
due. Cash can be a big problem if a company does not have enough to pay its bills.
This includes the company's ability to repay the lender.
DIFFICULTY: Moderate
REFERENCES: pp. 56-61 and pp. 62-64
LEARNING OBJECTIVES: FACC.PONO.18.02-03 - LO: 02-03
FACC.PONO.18.02-04 - LO: 02-04
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Applying
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Chapter 2
249. What is the purpose of a statement of stockholders' equity? How does it differ from the statement of retained
earnings? Which statement is required?
ANSWER: A statement of stockholders' equity summarizes the changes in all owners' equity
amounts during the period. If there are no changes in capital stock during the period, a
company can prepare a statement of retained earnings that explains only the changes in
the retained earnings account. A company has an option to present either statement.
DIFFICULTY: Easy
REFERENCES: pp. 67-68
LEARNING OBJECTIVES: FACC.PONO.18.02-07 - LO: 02-07
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Applying
250. What is the purpose of a statement of cash flows? Give an example of one of each of the three activities.
ANSWER: A statement of cash flows summarizes the operating, financing, and investing activities of
a company for a period of time. Some examples are:
Operating: Collections of cash from customers; payments to suppliers; payments for
wages
Investing: purchases or sales of plant assets; purchases or sales of investments
Financing: payment of dividends; issuance of stock to investors
DIFFICULTY: Moderate
REFERENCES: pp. 68-70
LEARNING OBJECTIVES: FACC.PONO.18.02-08 - LO: 02-08
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-24 - Statement of Cash Flows
AICPA: FN-Reporting
KEYWORDS: Bloom's: Applying
251. What information is provided in an annual report in addition to the financial statements?
ANSWER: An annual report contains the reports of management, the auditor's report, management
discussion and analysis of the amounts appearing in the statements, footnotes to the
financial statements, and a summary of selected financial data over a period of years.
DIFFICULTY: Easy
REFERENCES: pp. 70-73
LEARNING OBJECTIVES: FACC.PONO.18.02-09 - LO: 02-09
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-09 - Financial Statements
AICPA: FN-Reporting
KEYWORDS: Bloom's: Applying
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