Deck 17: Understanding and Analyzing Consolidated Financial Statements

Question 1

Goodwill can be recognized only when one company is acquired by another company.

Answer 1

True

Question 2

The market method is the method of accounting for investments in equity securities used when one company owns less than 20% of the common stock of another company.

Answer 2

True

Question 3

Intercompany eliminations avoid double counting on consolidated financial statements

Answer 3

True

Question 4

Goodwill is not considered to have a perpetual life.

Question 5

The parent-subsidiary relationship requires special accounting treatment.

Question 6

When a parent company owns less than 50% of a subsidiary company, the companies must prepare consolidated financial statements.

Question 7

Trading securities are investments where there is no intention to sell in the near future.

Question 8

If a company uses the equity method to account for long?term equity investments, the company recognizes income from the investee when the investee pays a dividend.

Question 9

If the fair market value of the subsidiary's assets is greater than the book value of those assets on the date that the subsidiary is acquired, the assets of the subsidiary are written up to their fair market value.

Question 10

The Investments in Affiliates account appears on the consolidated balance sheet of the subsidiary company.

Question 11

The evaluation of operating performance should exclude extraordinary items.

Question 12

The investor's method of accounting for long?term equity securities depends on the ability of the investor to influence the operations of the investee.

Question 13

When a company is acquired and becomes a subsidiary of another company, the books of the subsidiary are unaffected on the date of the acquisition.

Question 14

Common-size statements are expressed in component percentages.

Question 15

Minority interest appears on the consolidated balance sheet when a company owns more than 50% but less than 100% of a subsidiary company's stock.

Question 16

Liquidity focuses on whether there are sufficient current assets to satisfy current liabilities as they become due.

Question 17

A subsidiary is a company that owns more than 50% of another business's stock.

Question 18

An efficient capital market is one in which an order to trade can be placed and executed in a relatively short period.

Question 19

Minority interests affect only the balance sheet of the consolidated financial statements.

Question 20

Since research indicates that investors are apparently not fooled by the format of the information, accounting regulators should focus on disclosure issues.

Question 21

Vince Company purchased common stock of Gill Company as a long-term investment.During the current year, Gill Company earned $4,000,000 and paid dividends of $1,000,000.Assume that Vince Company owns 30% of Gill Company.The dividend paid by Gill Company will affect Vince Company by _____.

A)increasing cash and stockholders' equity by $300,000
B)increasing investments and stockholders' equity by $300,000
C)increasing cash and decreasing investments by $300,000
D)having no effect

Question 22

_____ are investments that the company buys only with the intent to resell them shortly.

A)Bonds
B)Trading securities
C)Available-for-sale securities
D)Options

Question 23

Company B has 40,000 shares of its common stock outstanding.Company A owns 15,000 shares of Company B stock.Company A should use the _____ method to account for its investment in Company B.

A)market
B)equity
C)cost
D)consolidated

Question 24

Rock Company acquired 10% of the voting stock of Hudson Company for $10 million.In year 1, Hudson Company reports net income of $15 million and pays cash dividends of $5 million.At the end of the year the market value of Rock Company's investment in Hudson Company is $11 million.What accounts would be affected on Rock Company's books to reflect the year-end market value and by how much?

A)There is no entry and no effect.
B)Cash would increase by $11 million and Stockholders' Equity would increase by $11 million.
C)Investments would increase by $11 million and Stockholders' Equity would increase by $11 million.
D)Investments would increase by $1 million and Stockholders' Equity would increase by $1 million.

Question 25

Jeff Company purchased, as a long-term investment, common stock of Garcia Company.During the current year, Garcia Company earned $4,000,000 and paid dividends of $1,000,000.Assume that Jeff Company owns 10% of the outstanding shares of Garcia Company.Garcia Company's net income will affect Jeff Company by _____.

A)increasing cash and investments by $400,000
B)increasing stockholders' equity and investments by $400,000
C)increasing cash and stockholders' equity by $400,000
D)none of these answers is correct

Question 26

Historical cost/nominal dollars is the traditional method of measuring income.

Question 27

Vince Company purchased common stock of Gill Company as a long-term investment.During the current year, Gill Company earned $4,000,000 and paid dividends of $1,000,000.Assume that Vince Company owns 40% of Gill Company.Gill Company's net income will affect Vince Company by _____.

A)increasing investments by $1,600,000
B)increasing cash and stockholders' equity $400,000
C)increasing cash and investments by $2,000,000
D)having no effect

Question 28

Company B has 40,000 shares of its common stock outstanding.Company A owns 35,000 shares of Company B stock.Company A should use the _____ method to account for its investment in Company B.

A)market
B)equity
C)cost
D)consolidated

Question 29

Consolidated statements combine two or more _____ in a single presentation.

A)accounting periods
B)financial statements
C)legal entities
D)accounts

Question 30

_____ are investments that are not intended for resale in the near future.

A)Bonds
B)Trading securities
C)Available-for sale securities
D)Options

Question 31

The financial maintenance concept focuses on recovering the investor's original capital.

Question 32

The effects of price changes in marketable securities are reported _____.

A)as a gain or loss on the income statement
B)as an increase or decrease in stockholders' equity
C)either as a gain or loss on the income statement or the balance sheet, depending upon the classification of the securities
D)either as a gain or loss on the income statement, depending upon the number of shares owned

Question 33

Jeff Company purchased common stock of Garcia Company as a long-term investment.During the current year, Garcia Company earned $4,000,000 and paid dividends of $1,000,000.Assume that Jeff Company owns 10% of the outstanding shares of Garcia Company.Garcia Company's dividend will affect Jeff Company by _____.

A)increasing cash and stockholders' equity by $100,000
B)increasing investments and stockholders' equity by $100,000
C)increasing cash and decrease investments by $100,000
D)none of these answers is correct

Question 34

Brian Company purchased 40% of the outstanding shares of Wilson Company as a long-term investment.At the end of the year the market value of the shares had increased. The increase in market value of Wilson Company shares will affect Brian Company by_____.

A)increasing assets and stockholders' equity
B)increasing stockholders' equity and investments
C)increasing investments and cash
D)having no effect

Question 35

When prices of resources do not change, financial capital maintenance and physical capital maintenance give identical measures of income.

Question 36

Marketable securities can be further classified as _____.

A)trading securities and available-for-sale securities
B)available-for-sale securities and unavailable securities
C)debt securities and equity securities
D)current securities and long-term securities

Question 37

Under the equity method, the investor recognizes as income _____.

A)a portion of the income earned by the investee company
B)the dividends paid by the investee company
C)the change in market value of investee company stock
D)all of these answers are correct

Question 38

There is general agreement among most accountants that restatements in constant dollars would overcome the disadvantages of using an unstable measuring unit.

Question 39

Company B has 40,000 shares of its common stock outstanding.Company A owns 5,000 shares of Company B stock.Company A should use the _____ method to account for its investment in Company B.

A)market
B)equity
C)cost
D)consolidated

Question 40

Brian Company purchased 10% of the outstanding shares of Wilson Company as a long-term investment.At the end of the year the market value of the shares had increased. The increase in market value of Wilson Company shares will affect Brian Company by _____.

A)increasing assets and stockholders' equity
B)increasing stockholders' equity and decreasing investments
C)increasing investments and cash
D)having no effect

Question 41

Eliminating entries are made by the _____company to avoid double counting assets and _____.

A)parent, equity
B)parent, liabilities
C)subsidiary, liabilities
D)subsidiary, equity

Question 42

Presented below are the balance sheets of Monty Company and Hall Company at January 1, 20X6: $\begin{array}{lrlr}\text { Hall Company } && \text { Monty Company } \\\text { Balance Sheet } && \text { Balance Sheet } \\\text { January } 1,20 \mathrm{X} 6 && \text { January } 1,20 \mathrm{X} 6\\\text { Cash } & \$ 100 & \text { Cash } & \$ 400 \\\text { Net fixed assets } & 400 & \text { Net fixed assets } & 380 \\\text { Total assets } & \$ 500 & \text { Total assets } & \$ 780\\\text { Accounts payable } & \$ 20 &\text { Accounts payable }&\$120\\\text { Long-term bonds }&&\text { Long-term bonds }\\\text { payable } & 220 & \text { payable } & 280 \\\text { Stockholders' equity } & \underline{260} & \text { Stockholders' equity } & \underline{380}\\\text { Total liabilities and } & - & \text { Total liabilities and } & \\\text { stockholders' equity } & \$ 500 & \text { stockholders' equity } & \$ 780\end{array}$ On January 1, 20X6, Monty Company acquired 100% of the outstanding common stock of Hall Company for $260 in cash._____ is the balance of liabilities on the consolidated balance sheet immediately after the acquisition of Hall's stock.

A)$-0-
B)$640
C)$380
D)$400

Question 43

Presented below are the balance sheets of Monty Company and Hall Company at January 1, 20X6: $\begin{array}{lrlr}\text { Hall Company } && \text { Monty Company } \\\text { Balance Sheet } && \text { Balance Sheet } \\\text { January } 1,20 \mathrm{X} 6 && \text { January } 1,20 \mathrm{X} 6\\\text { Cash } & \$ 100 & \text { Cash } & \$ 400 \\\text { Net fixed assets } & 400 & \text { Net fixed assets } & 380 \\\text { Total assets } & \$ 500 & \text { Total assets } & \$ 780\\\text { Accounts payable } & \$ 20 &\text { Accounts payable }&\$120\\\text { Long-term bonds }&&\text { Long-term bonds }\\\text { payable } & 220 & \text { payable } & 280 \\\text { Stockholders' equity } & \underline{260} & \text { Stockholders' equity } & \underline{380}\\\text { Total liabilities and } & - & \text { Total liabilities and } & \\\text { stockholders' equity } & \$ 500 & \text { stockholders' equity } & \$ 780\end{array}$ On January 1, 20X6, Monty Company acquired 100% of the outstanding common stock of Hall Company for $260 in cash.If Hall Company generated net income during 20X2 of $30, and none of the income resulted from intercompany sales, _____ would be the amount of the elimination entry at the end of 20X6.

A)$-0-
B)$30
C)$230
D)$290

Question 44

Presented below are the balance sheets of Monty Company and Hall Company at January 1, 20X6: $\begin{array}{lrlr}\text { Hall Company } && \text { Monty Company } \\\text { Balance Sheet } && \text { Balance Sheet } \\\text { January } 1,20 \mathrm{X} 6 && \text { January } 1,20 \mathrm{X} 6\\\text { Cash } & \$ 100 & \text { Cash } & \$ 400 \\\text { Net fixed assets } & 400 & \text { Net fixed assets } & 380 \\\text { Total assets } & \$ 500 & \text { Total assets } & \$ 780\\\text { Accounts payable } & \$ 20 &\text { Accounts payable }&\$120\\\text { Long-term bonds }&&\text { Long-term bonds }\\\text { payable } & 220 & \text { payable } & 280 \\\text { Stockholders' equity } & \underline{260} & \text { Stockholders' equity } & \underline{380}\\\text { Total liabilities and } & - & \text { Total liabilities and } & \\\text { stockholders' equity } & \$ 500 & \text { stockholders' equity } & \$ 780\end{array}$ On January 1, 20X6, Monty Company acquired 100% of the outstanding common stock of Hall Company for $260 in cash.Which of the following statements regarding the consolidated balance sheet immediately after the acquisition is not correct?

A)Total assets will be $1,020.
B)Total cash will be $500.
C)Total liabilities will be $640.
D)Total net fixed assets will be $780.

Question 45

On January 1, 20X6, Parent Company acquired 80% of the outstanding shares of Subsidiary Company.At the time of the acquisition, Parent Company's current and long-term liabilities were $30 and $180, respectively.Subsidiary Company's current and long-term liabilities were $80 and $200, respectively.The balance in liabilities on the consolidated balance sheet immediately after the acquisition of Subsidiary Company's stock is _____.

A)$?0
B)$490
C)$338
D)$280

Question 46

Rock Company acquired 40% of the voting stock of Hudson Company for $40 million.In year 1, Hudson Company reports net income of $15 million and pays cash dividends of $5 million.At the end of the year the market value of Rock Company's investment in Hudson Company is $44 million.What accounts would be affected on Rock Company's books at the time Hudson Company paid its dividends and by how much?

A)There is no entry and no effect.
B)Cash would increase by $2 million and Stockholders' Equity would increase by $2 million.
C)Cash would increase by $5 million and Stockholders' Equity would increase by $5 million.
D)Cash would increase by $2 million and Investments would decrease by $2 million.

Question 47

On January 1, 20X6, Jane Company acquired 80% of the outstanding shares of Pauley Company for $152 in cash.The stockholders' equity accounts of Jane Company and Pauley Company were $420 and $190, respectively.The balance in stockholders' equity on the consolidated balance sheet immediately after the acquisition of Pauley Company's stock is _____.

A)$?0
B)$610
C)$420
D)$458

Question 48

Rock Company acquired 40% of the voting stock of Hudson Company for $40 million.In year 1, Hudson Company reports net income of $15 million and pays cash dividends of $5 million.At the end of the year the market value of Rock Company's investment in Hudson Company is $44 million.The _____ method should be used to account for the investment.

A)market
B)equity
C)consolidated
D)cost

Question 49

Hamandeggs Company owns a 60% interest in Hormel Company.The consolidated balance sheet of Hamandeggs Company, prepared at the beginning of the year, showed a minority interest of $30.The net income of Hamandeggs Company and Hormel Company were $80 and $10, respectively.The ending balance in the Minority Interest account is _____.

A)$30
B)$34
C)$36
D)$40

Question 50

Elway Company acquired 80% of the outstanding shares of Warner Company for $152 in cash.Elway Company's assets prior to the acquisition were $700.Warner Company's assets before the acquisition were $400.The total assets that would appear on the consolidated balance sheet prepared immediately after the acquisition of Warner Company's stock is: _____.

A)$400
B)$1,100
C)$700
D)$948

Question 51

On January 1, 20X6, Jane Company acquired 80% of the outstanding shares of Tarzan Company for $152 in cash.Tarzan Company's total assets and total liabilities were $450 and $260, respectively.The balance of the minority interest on the consolidated balance sheet immediately after the acquisition of Tarzan Company's stock is _____.

A)$38
B)$152
C)$190
D)$114

Question 52

Fisher Company acquired 80% of the outstanding shares of Gibbs Company for $152 in cash.The net income was $100 and $20 for Fisher Company and Gibbs Company, respectively.None of the income resulted from intercompany sales.The net income on the consolidated income statement is_____.

A)$80
B)$96
C)$100
D)$116

Question 53

Presented below are the balance sheets of Monty Company and Hall Company at January 1, 20X6: $\begin{array}{lrlr}\text { Hall Company } && \text { Monty Company } \\\text { Balance Sheet } && \text { Balance Sheet } \\\text { January } 1,20 \mathrm{X} 6 && \text { January } 1,20 \mathrm{X} 6\\\text { Cash } & \$ 100 & \text { Cash } & \$ 400 \\\text { Net fixed assets } & 400 & \text { Net fixed assets } & 380 \\\text { Total assets } & \$ 500 & \text { Total assets } & \$ 780\\\text { Accounts payable } & \$ 20 &\text { Accounts payable }&\$120\\\text { Long-term bonds }&&\text { Long-term bonds }\\\text { payable } & 220 & \text { payable } & 280 \\\text { Stockholders' equity } & \underline{260} & \text { Stockholders' equity } & \underline{380}\\\text { Total liabilities and } & - & \text { Total liabilities and } & \\\text { stockholders' equity } & \$ 500 & \text { stockholders' equity } & \$ 780\end{array}$ On January 1, 20X6, Monty Company acquired 100% of the outstanding common stock of Hall Company for $260 in cash._____ is the balance of the cash and other assets on the consolidated balance sheet immediately after the acquisition of Hall's stock.

A)$-0-
B)$1,280
C)$780
D)$1,020

Question 54

Rock Company acquired 40% of the voting stock of Hudson Company for $40 million.In year 1, Hudson Company reports net income of $15 million and pays cash dividends of $5 million.At the end of the year the market value of Rock Company's investment in Hudson Company is $44 million.What accounts would be affected on Rock Company's books at the time they acquire Hudson Company's stock and by how much?

A)There is no entry and no effect.
B)Cash would decrease by $40 million and Investments would increase by $40 million.
C)Cash would decrease by $40 million and Stockholders' Equity would increase by $40 million.
D)Accounts Payable would decrease by $40 million and Investments would increase by $40 million.

Question 55

Presented below are the balance sheets of Monty Company and Hall Company at January 1, 20X6: $\begin{array}{lrlr}\text { Hall Company } && \text { Monty Company } \\\text { Balance Sheet } && \text { Balance Sheet } \\\text { January } 1,20 \mathrm{X} 6 && \text { January } 1,20 \mathrm{X} 6\\\text { Cash } & \$ 100 & \text { Cash } & \$ 400 \\\text { Net fixed assets } & 400 & \text { Net fixed assets } & 380 \\\text { Total assets } & \$ 500 & \text { Total assets } & \$ 780\\\text { Accounts payable } & \$ 20 &\text { Accounts payable }&\$120\\\text { Long-term bonds }&&\text { Long-term bonds }\\\text { payable } & 220 & \text { payable } & 280 \\\text { Stockholders' equity } & \underline{260} & \text { Stockholders' equity } & \underline{380}\\\text { Total liabilities and } & - & \text { Total liabilities and } & \\\text { stockholders' equity } & \$ 500 & \text { stockholders' equity } & \$ 780\end{array}$ On January 1, 20X6, Monty Company acquired 100% of the outstanding common stock of Hall Company for $260 in cash._____ is the balance of the Investment in Hall Stock on the consolidated balance sheet immediately after the acquisition of Hall's stock.

A)$-0-
B)$260
C)$380
D)$500

Question 56

Julia Company acquired 80% of the outstanding shares of Roberts Company for $190 in cash.Roberts Company's total assets and liabilities were $550 and $400, respectively.The balance of the investment in Roberts Company stock on the consolidated balance sheet immediately after the acquisition of Roberts Company's stock is _____.

A)$?0
B)$440
C)$190
D)$120

Question 57

Presented below are the balance sheets of Monty Company and Hall Company at January 1, 20X6: $\begin{array}{lrlr}\text { Hall Company } && \text { Monty Company } \\\text { Balance Sheet } && \text { Balance Sheet } \\\text { January } 1,20 \mathrm{X} 6 && \text { January } 1,20 \mathrm{X} 6\\\text { Cash } & \$ 100 & \text { Cash } & \$ 400 \\\text { Net fixed assets } & 400 & \text { Net fixed assets } & 380 \\\text { Total assets } & \$ 500 & \text { Total assets } & \$ 780\\\text { Accounts payable } & \$ 20 &\text { Accounts payable }&\$120\\\text { Long-term bonds }&&\text { Long-term bonds }\\\text { payable } & 220 & \text { payable } & 280 \\\text { Stockholders' equity } & \underline{260} & \text { Stockholders' equity } & \underline{380}\\\text { Total liabilities and } & - & \text { Total liabilities and } & \\\text { stockholders' equity } & \$ 500 & \text { stockholders' equity } & \$ 780\end{array}$ On January 1, 20X6, Monty Company acquired 100% of the outstanding common stock of Hall Company for $260 in cash._____ is the balance of stockholders' equity on the consolidated balance sheet immediately after the acquisition of Hall's stock.

A)$-0-
B)$260
C)$380
D)$640

Question 58

Rock Company acquired 40% of the voting stock of Hudson Company for $40 million.In year 1, Hudson Company reports net income of $15 million and pays cash dividends of $5 million.At the end of the year the market value of Rock Company's investment in Hudson Company is $44 million.What accounts would be affected on Rock Company's books at the time Hudson Company reported its earnings and by how much?

A)There is no entry and no effect.
B)Investments would increase by $15 million and Stockholders' Equity would increase by $15 million.
C)Cash would increase by $15 million and Stockholders' Equity would increase by $15 million.
D)Investments would increase by $6 million and Stockholders' Equity would increase by $6 million.

Question 59

Presented below are the balance sheets of Monty Company and Hall Company at January 1, 20X6: $\begin{array}{lrlr}\text { Hall Company } && \text { Monty Company } \\\text { Balance Sheet } && \text { Balance Sheet } \\\text { January } 1,20 \mathrm{X} 6 && \text { January } 1,20 \mathrm{X} 6\\\text { Cash } & \$ 100 & \text { Cash } & \$ 400 \\\text { Net fixed assets } & 400 & \text { Net fixed assets } & 380 \\\text { Total assets } & \$ 500 & \text { Total assets } & \$ 780\\\text { Accounts payable } & \$ 20 &\text { Accounts payable }&\$120\\\text { Long-term bonds }&&\text { Long-term bonds }\\\text { payable } & 220 & \text { payable } & 280 \\\text { Stockholders' equity } & \underline{260} & \text { Stockholders' equity } & \underline{380}\\\text { Total liabilities and } & - & \text { Total liabilities and } & \\\text { stockholders' equity } & \$ 500 & \text { stockholders' equity } & \$ 780\end{array}$ On January 1, 20X6, Monty Company acquired 100% of the outstanding common stock of Hall Company for $260 in cash.The net income for 20X6 was $30 and $40 for Hall Company and Monty Company, respectively.None of the income resulted from intercompany sales.The net income on the consolidated income statement is_____.

A)$-0-
B)$30
C)$35
D)$40

Question 60

Suppose Rock Company acquires 40% of the voting stock of Hudson Company for $40 million.In year 1, Hudson Company reports net income of $15 million and pays cash dividends of $5 million.At the end of the year the market value of Rock Company's investment in Hudson Company is $44 million.What accounts would be affected on Rock Company's books to reflect the year-end market value and by how much?

A)There is no entry and no effect.
B)Cash would increase by $44 million and Stockholders' Equity would increase by $44 million.
C)Investments would increase by $44 million and Stockholders' Equity would increase by $44 million.
D)Investments would increase by $4 million and Stockholders' Equity would increase by $4 million.

Question 61

Below is the balance sheet for Donald Company: Donald Company
Balance Sheet
December 31 ,
$\begin{array}{lrr}&20X6&20X5\\\text { Current assets: }\\\text { Cash } & \$ 380 & \$ 242 \\\text { Accounts receivable } & 430 & 194 \\\text { Inventory } & 238 & 388 \\\text { Prepaid insurance } & 32 & 76\\\text { Total current assets }&\$1,080&\$900\\\text { Long-term assets: }\\\quad \text { Fixed assets } & \$ 406 & \$ 452 \\\quad \text { Less: Accumulated depreciation } & \underline{272)} & \underline{228)} \\\text { Total long-term assets } & \underline{\$ 134} & \$ 224 \\\text { Total assets } & \$ 1,214 & \$ 1,124\\\text { Current liabilities: }\\\text { Accounts payable } & \$ 176 & \$ 152 \\\text { Wages payable } & \underline{38} & \underline{32} \\\text { total current liabilities } & \$ 214 & \$ 184\\\text { Long-term liabilities: }\\\text { Notes payable } & \underline{420} & \underline{420} \\\text { Total liabilities } & \underline{\$ 634} & \underline{604}\\\text { Owners' equity: } & & \\\text { Common stock } & \$ 190 & \$ 160 \\\text { Retained income } & 390 & 360\\\text { Total owners' equity } & \underline{\$ 580}&\$520 \\\text { Total liabilities and owners' equity } & \underline{\$ 1,214} & \underline{\$ 1,214}\end{array}$ What issue would be of most concern or source of optimism to financial analysts of Donald Company?

A)Both common stock and retained earnings increased by the same dollar amount.
B)The long?term notes payable remained unchanged
C)Cash and accounts receivable increased 58% and 122%, respectively.
D)Fixed assets decreased 10%.

Question 62

Which of the following statements regarding goodwill is false?

A)Goodwill indicates that a company has acquired strong and well?established companies.
B)Current United States' generally accepted accounting principles GAAP) allow for the amortization of goodwill to be up to 10 years.
C)The periods over which goodwill can be amortized vary from country to country.
D)Goodwill amortization amounts are often relatively small as compared to net income.

Question 63

_____ are profitability ratios.

A)Gross profit rate and return on sales
B)Dividend payout and rate of return in invested capital
C)Earnings per share and dividend yield
D)Price earnings and current ratio

Question 64

Which of the following statements is incorrect with respect to creditors and equity investors?

A)Both creditors and equity investors are concerned about security prices.
B)Creditors are concerned with assessing the short?term liquidity of a company.
C)Creditors are concerned with assessing the long?term solvency of a company.
D)Equity investors are concerned about dividend payments.

Question 65

The following are the income statements and balance sheets for Marvin Company: $\begin{array}{lr}&20X2\\\text { Sales only credit sales)}&\$1,606.0\\\text {Less cost of goods sold }&1,062.0\\\text {Gross profit }&\$544.0\\\text {Less operating expenses }&322.0\\\text {Operating income }&\$222.0\\\text { Less other expense: Interest}&9.6\\\text {Income before tax }&\$212.4\\\text {Less income tax expense }&85.0\\\text { Net income}&\$127.4\\\end{array}$


$\begin{array}{lrrlrr}&20X2&20X1&&20X2&20X1\\\text { Current assets: } &&&{\text { Current liabilities: }} \\\text { Cash } & \$ 36 & \$ 38 & \text { Accts payable } & \$ 98 & \$ 64 \\\text { Accts receivable } & 180 & 144 & \text { Wages payable } & 18 & 16 \\\text { Inventory } & 120 & 100 & \text { Taxes payable } & 28 & 4 \\\text { Prepaid rent } & 20 & 24 & \text { Current portion } & &\\\text { Total current assets }&\$356&\$306&\text { of long-term debt }&30&6\\\text { Long-term assets: } & & & \text { Total current } & & \\\text { Fixed assets } & \$ 320 & \$ 316 & \text { liabilities } & \$ 174 & \$ 90 \\\text { Accum. deprec. } & \underline{206}) & \underline{180}) & \text { Long-term liabilities } & \underline{66} & \underline{92}\\\text { Total long-term assets }&\$114&\$136&\text { Total liabilities }&\$240&\$182\\&&&\text { Owners' equity: }\\&&&\text { Common stock, } \$ 5 \text { par }&\$80&\$80\\&&&\text { Retained income } & 150 & 180\\&&&\text { Total owners' equity }&\$230&\$260\\\text { Total assets }&\$470&\$442&\text { Total liab. and own. equity }&\$470&\$442\\\\\end{array}$
$\text {December 31 market price per share:}\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\$120\quad\quad\$106$ The earnings per share for Marvin Company in 20X2 is _____.

A)$1.04
B)$1.56
C)$7.50
D)$7.96

Question 66

Below is a comparative income statement for Melissa Company: Melissa Company
Income Statement
For the Years Ended December 31,20X6 and 20X5
$\begin{array}{lrr}&20X6&20X5\\\text { Sales } & \$ 1,744 & \$ 1,562 \\\text { Less: Cost of goods sold } & 992 & 806 \\\text { Gross profit } & \$ 752 & \$ 756 \\\text { Less operating expenses: }\\\text { Wage expense } & \$ 172 & \$ 160 \\\text { Depreciation expense } & 28 & 26 \\\text { Rent expense } & 36 & 36 \\\text { Miscellaneous expense } & 40 & 70 \\\text { Total operating expenses } & \$ 276 & \$ 292\\\text { Operating income } & \$ 476 & \$ 464 \\\text { Less other expenses: } & & \\\quad \text { Interest } & 20 & 60\\\text { Income before tax } & \$ 456 & \$ 404 \\\text { Less: Income tax expense } & 182 & 162 \\\text { Net income } & \$ 274 & \$ 242\end{array}$ If a common-size income statement were prepared, _____ would be attributable to the 20X5 wage expense of Melissa Company.

A)10.2%
B)9.8%
C)66.1%
D)34.4%

Question 67

Common-size statements are particularly useful because _____.

A)accounts are aggregated together so the same accounts can be used consistently from year to year
B)dollars are converted to percentages
C)they are a means of comparing one company to another company within the same industry
D)the percentages can be added to and/or subtracted from one another

Question 68

Below is the balance sheet for Andrew Company: Andrew Company
Balance Sheet
December 31 ,
$\begin{array}{lrr}&20X6&20X5\\\text { Current assets: }\\\text { Cash } & \$ 380 & \$ 242 \\\text { Accounts receivable } & 430 & 194 \\\text { Inventory } & 238 & 388 \\\text { Prepaid insurance } & 32 & 76\\\text { Total current assets }&\$1,080&\$900\\\text { Long-term assets: }\\\quad \text { Fixed assets } & \$ 406 & \$ 452 \\\quad \text { Less: Accumulated depreciation } & \underline{272)} & \underline{228)} \\\text { Total long-term assets } & \underline{\$ 134} & \$ 224 \\\text { Total assets } & \$ 1,214 & \$ 1,124\\\text { Current liabilities: }\\\text { Accounts payable } & \$ 176 & \$ 152 \\\text { Wages payable } & \underline{38} & \underline{32} \\\text { total current liabilities } & \$ 214 & \$ 184\\\text { Long-term liabilities: }\\\text { Notes payable } & \underline{420} & \underline{420} \\\text { Total liabilities } & \underline{\$ 634} & \underline{604}\\\text { Owners' equity: } & & \\\text { Common stock } & \$ 190 & \$ 160 \\\text { Retained income } & 390 & 360\\\text { Total owners' equity } & \underline{\$ 580}&\$520 \\\text { Total liabilities and owners' equity } & \underline{\$ 1,214} & \underline{\$ 1,214}\end{array}$ Andrew Company's prepaid insurance increased decreased) by _____.

A)57.9%
B)146.7)%
C)57.9)%
D)146.7%

Question 69

The following are the income statements and balance sheets for Allen Company: $\begin{array}{lr}&20X2\\\text { Sales only credit sales)}&\$1,606.0\\\text {Less cost of goods sold }&1,062.0\\\text {Gross profit }&\$544.0\\\text {Less operating expenses }&322.0\\\text {Operating income }&\$222.0\\\text { Less other expense: Interest}&9.6\\\text {Income before tax }&\$212.4\\\text {Less income tax expense }&85.0\\\text { Net income}&\$127.4\\\end{array}$


$\begin{array}{lrrlrr}&20X2&20X1&&20X2&20X1\\\text { Current assets: } &&&{\text { Current liabilities: }} \\\text { Cash } & \$ 36 & \$ 38 & \text { Accts payable } & \$ 98 & \$ 64 \\\text { Accts receivable } & 180 & 144 & \text { Wages payable } & 18 & 16 \\\text { Inventory } & 120 & 100 & \text { Taxes payable } & 28 & 4 \\\text { Prepaid rent } & 20 & 24 & \text { Current portion } & &\\\text { Total current assets }&\$356&\$306&\text { of long-term debt }&30&6\\\text { Long-term assets: } & & & \text { Total current } & & \\\text { Fixed assets } & \$ 320 & \$ 316 & \text { liabilities } & \$ 174 & \$ 90 \\\text { Accum. deprec. } & \underline{206}) & \underline{180}) & \text { Long-term liabilities } & \underline{66} & \underline{92}\\\text { Total long-term assets }&\$114&\$136&\text { Total liabilities }&\$240&\$182\\&&&\text { Owners' equity: }\\&&&\text { Common stock, } \$ 5 \text { par }&\$80&\$80\\&&&\text { Retained income } & 150 & 180\\&&&\text { Total owners' equity }&\$230&\$260\\\text { Total assets }&\$470&\$442&\text { Total liab. and own. equity }&\$470&\$442\\\\\end{array}$
$\text {December 31 market price per share:}\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\$120\quad\quad\$106$ The price?earnings ratio for Allen Company in 20X2 is _____times.

A)0.06
B)0.96
C)15.07
D)7.50

Question 70

Goodwill is recognized when _____.

A)a company's actual earnings exceeds competitor's earnings
B)a company's actual earnings exceeds budgeted earnings
C)the purchase price of a company exceeds the fair market value of its net identifiable assets
D)the purchase price of a company exceeds the book value of its net identifiable assets

Question 71

Below is a comparative income statement for Zachary Company: azchary Company
Income Statement
For the Years Ended December 31,20X6 and 20X5
$\begin{array}{lrr}&20X6&20X5\\\text { Sales } & \$ 1,744 & \$ 1,562 \\\text { Less: Cost of goods sold } & 992 & 806 \\\text { Gross profit } & \$ 752 & \$ 756 \\\text { Less operating expenses: }\\\text { Wage expense } & \$ 172 & \$ 160 \\\text { Depreciation expense } & 28 & 26 \\\text { Rent expense } & 36 & 36 \\\text { Miscellaneous expense } & 40 & 70 \\\text { Total operating expenses } & \$ 276 & \$ 292\\\text { Operating income } & \$ 476 & \$ 464 \\\text { Less other expenses: } & & \\\quad \text { Interest } & 20 & 60\\\text { Income before tax } & \$ 456 & \$ 404 \\\text { Less: Income tax expense } & 182 & 162 \\\text { Net income } & \$ 274 & \$ 242\end{array}$ If a common-size income statement were prepared, _____ would be attributable to the 20X6 income tax expense of Zachary Company.

A)10.4%
B)11.0%
C)12.4%
D)39.9%

Question 72

Below is the balance sheet for Scott Company: Scott Company
Balance Sheet
December 31 ,
$\begin{array}{lrr}&20X6&20X5\\\text { Current assets: }\\\text { Cash } & \$ 380 & \$ 242 \\\text { Accounts receivable } & 430 & 194 \\\text { Inventory } & 238 & 388 \\\text { Prepaid insurance } & 32 & 76\\\text { Total current assets }&\$1,080&\$900\\\text { Long-term assets: }\\\quad \text { Fixed assets } & \$ 406 & \$ 452 \\\quad \text { Less: Accumulated depreciation } & \underline{272)} & \underline{228)} \\\text { Total long-term assets } & \underline{\$ 134} & \$ 224 \\\text { Total assets } & \$ 1,214 & \$ 1,124\\\text { Current liabilities: }\\\text { Accounts payable } & \$ 176 & \$ 152 \\\text { Wages payable } & \underline{38} & \underline{32} \\\text { total current liabilities } & \$ 214 & \$ 184\\\text { Long-term liabilities: }\\\text { Notes payable } & \underline{420} & \underline{420} \\\text { Total liabilities } & \underline{\$ 634} & \underline{604}\\\text { Owners' equity: } & & \\\text { Common stock } & \$ 190 & \$ 160 \\\text { Retained income } & 390 & 360\\\text { Total owners' equity } & \underline{\$ 580}&\$520 \\\text { Total liabilities and owners' equity } & \underline{\$ 1,214} & \underline{\$ 1,214}\end{array}$ If a common-size balance sheet were prepared, _____ would be attributable to the 20X6 cash of Scott Company.

A)31.3%
B)26.9%
C)35.2%
D)21.5%

Question 73

Which of the following statements) describe the principal reasons) why investors and
creditors use financial statement analysis?

1. To assess the risks associated with expected returns
2. To establish recommended dividend and interest payments
3. To evaluate top and middle level management
4. To predict the amount of expected returns

A)1 and 2
B)1 and 4
C)3 and 4
D)1, 2, and 3

Question 74

The following are the income statements and balance sheets for Thomas Company: $\begin{array}{lr}&20X9\\\text { Sales only credit sales) } & \$ 1,606.0 \\\text { Less cost of goods sold } & \underline{1,062.0}\\\text { Gross profit } & \$ 544.0 \\\text { Less operating expenses } & 322.0\\\text { Operating income } & \$ 222.0 \\\text { Less other expense: Interest } & 9.6\\\text { Income before tax } & \$ \overline{212.4} \\\text { Lessincome tax expense } & {85.0} \\\text { Net income } & \$ {127.4}\end{array}$ $\begin{array}{lrrlrr}&20X9&20X8&&20X9&20X8\\\text { Current assets: } &&&{\text { Current liabilities: }} \\\text { Cash } & \$ 36 & \$ 38 & \text { Accts payable } & \$ 98 & \$ 64 \\\text { Accts receivable } & 180 & 144 & \text { Wages payable } & 18 & 16 \\\text { Inventory } & 120 & 100 & \text { Taxes payable } & 28 & 4 \\\text { Prepaid rent } & 20 & 24 & \text { Current portion } & &\\\text { Total current assets }&\$356&\$306&\text { of long-term debt }&30&6\\\text { Long-term assets: } & & & \text { Total current } & & \\\text { Fixed assets } & \$ 320 & \$ 316 & \text { liabilities } & \$ 174 & \$ 90 \\\text { Accum. deprec. } & \underline{206}) & \underline{180}) & \text { Long-term liabilities } & \underline{66} & \underline{92}\\\text { Total long-term assets }&\$114&\$136&\text { Total liabilities }&\$240&\$182\\&&&\text { Owners' equity: }\\&&&\text { Common stock, } \$ 5 \text { par }&\$80&\$80\\&&&\text { Retained income } & 150 & 180\\&&&\text { Total owners' equity }&\$230&\$260\\\text { Total assets }&\$470&\$442&\text { Total liab. and own. equity }&\$470&\$442\\\\\end{array}$
$\text {December 31 market price per share:}\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\$120\quad\quad\$106$ The dividend?payout ratio for Thomas Company in 20X9 is _____.

A)24.1%
B)103.7%
C)105.0%
D)123.5%

Question 75

Below is the balance sheet for Janice Company: Janice Company
Balance Sheet
December 31 ,
$\begin{array}{lrr}&20X6&20X5\\\text { Current assets: }\\\text { Cash } & \$ 380 & \$ 242 \\\text { Accounts receivable } & 430 & 194 \\\text { Inventory } & 238 & 388 \\\text { Prepaid insurance } & 32 & 76\\\text { Total current assets }&\$1,080&\$900\\\text { Long-term assets: }\\\quad \text { Fixed assets } & \$ 406 & \$ 452 \\\quad \text { Less: Accumulated depreciation } & \underline{272)} & \underline{228)} \\\text { Total long-term assets } & \underline{\$ 134} & \$ 224 \\\text { Total assets } & \$ 1,214 & \$ 1,124\\\text { Current liabilities: }\\\text { Accounts payable } & \$ 176 & \$ 152 \\\text { Wages payable } & \underline{38} & \underline{32} \\\text { total current liabilities } & \$ 214 & \$ 184\\\text { Long-term liabilities: }\\\text { Notes payable } & \underline{420} & \underline{420} \\\text { Total liabilities } & \underline{\$ 634} & \underline{604}\\\text { Owners' equity: } & & \\\text { Common stock } & \$ 190 & \$ 160 \\\text { Retained income } & 390 & 360\\\text { Total owners' equity } & \underline{\$ 580}&\$520 \\\text { Total liabilities and owners' equity } & \underline{\$ 1,214} & \underline{\$ 1,214}\end{array}$ If a common-size balance sheet were prepared, _____ would be attributable to the 20X5 accounts payable of Janice Company.

A)13.5%
B)62.3%
C)25.2%
D)86.3%

Question 76

Orlando Company acquired all of the shares of Tampa Company for $100.The fair values of Tampa Company's assets and liabilities at the time of acquisition were $200 and $120, respectively.On the consolidated balance sheet of Orlando Company, goodwill is _____.

A)$-0-
B)$20)
C)$20
D)$100)

Question 77

Below is the balance sheet for Marie Company: Marie Company
Balance Sheet
December 31 ,
$\begin{array}{lrr}&20X6&20X5\\\text { Current assets: }\\\text { Cash } & \$ 380 & \$ 242 \\\text { Accounts receivable } & 430 & 194 \\\text { Inventory } & 238 & 388 \\\text { Prepaid insurance } & 32 & 76\\\text { Total current assets }&\$1,080&\$900\\\text { Long-term assets: }\\\quad \text { Fixed assets } & \$ 406 & \$ 452 \\\quad \text { Less: Accumulated depreciation } & \underline{272)} & \underline{228)} \\\text { Total long-term assets } & \underline{\$ 134} & \$ 224 \\\text { Total assets } & \$ 1,214 & \$ 1,124\\\text { Current liabilities: }\\\text { Accounts payable } & \$ 176 & \$ 152 \\\text { Wages payable } & \underline{38} & \underline{32} \\\text { total current liabilities } & \$ 214 & \$ 184\\\text { Long-term liabilities: }\\\text { Notes payable } & \underline{420} & \underline{420} \\\text { Total liabilities } & \underline{\$ 634} & \underline{604}\\\text { Owners' equity: } & & \\\text { Common stock } & \$ 190 & \$ 160 \\\text { Retained income } & 390 & 360\\\text { Total owners' equity } & \underline{\$ 580}&\$520 \\\text { Total liabilities and owners' equity } & \underline{\$ 1,214} & \underline{\$ 1,214}\end{array}$ Marie Company's accounts receivable increased decreased) by _____.

A)121.65)%
B)54.88)%
C)27.44%
D)121.65%

Question 78

Financial statements are helpful to predict the future performance of a company for all of the following reasons except _____.

A)the evaluation of management's past performance gives clues to its ability to generate future returns
B)the assets and liabilities of a company provide clues to a company's future prospects
C)financial statements are required to give formal projections of management's assessment of the next period's financial results
D)past performance is often a good indicator of future performance

Question 79

Mel Company holds a minority interest in Gibson Company.Mel Company owns _____ of Gibson Company's stock.

A)less than 20%
B)between 21 and 49%
C)less than 50%
D)between 50 and 99%

Question 80

Below is a comparative income statement for Joshua Company: Joshua Company
Income Statement
For the Years Ended December 31,20X6 and 20X5
$\begin{array}{lrr}&20X6&20X5\\\text { Sales } & \$ 1,744 & \$ 1,562 \\\text { Less: Cost of goods sold } & 992 & 806 \\\text { Gross profit } & \$ 752 & \$ 756 \\\text { Less operating expenses: }\\\text { Wage expense } & \$ 172 & \$ 160 \\\text { Depreciation expense } & 28 & 26 \\\text { Rent expense } & 36 & 36 \\\text { Miscellaneous expense } & 40 & 70 \\\text { Total operating expenses } & \$ 276 & \$ 292\\\text { Operating income } & \$ 476 & \$ 464 \\\text { Less other expenses: } & & \\\quad \text { Interest } & 20 & 60\\\text { Income before tax } & \$ 456 & \$ 404 \\\text { Less: Income tax expense } & 182 & 162 \\\text { Net income } & \$ 274 & \$ 242\end{array}$ Identify the issue that would be of most concern or source of optimism to financial analysts of Joshua Company.

A)Income taxes increased 12.3%.
B)Wages expense was approximately 10% of sales.
C)There was a 12.9% increase in income before taxes.
D)There was a 23.1% increase in cost of goods sold with only an 11.7% increase in sales.