Question 1

During a period of rising prices,FIFO (first in,first out)inventory valuation method will result in ________ net income figures than would LIFO (last in,first out).

Accepted Answer

In a period of rising prices, the FIFO method assumes that the earliest units purchased are the first ones sold, resulting in lower cost of goods sold and higher net income figures compared to the LIFO method which assumes that the latest units purchased are the first ones sold, resulting in higher cost of goods sold and lower net income figures.

Question 2

The financial ratios that measure a firm's ability to pay its short-term debts are called:

Accepted Answer

Liquidity ratios measure a firm's ability to pay its short-term debts. These ratios include the current ratio, quick ratio, and cash ratio. Leverage ratios measure a firm's ability to meet its long-term obligations and include debt-to-equity ratio and interest coverage ratio. Equity ratios measure a firm's financial leverage and include the debt-to-equity ratio and equity multiplier. Profitability ratios measure a firm's ability to generate profits and include return on equity and profit margin.

Question 3

Carlisle Communications is preparing its cash flow statement.Among other things,this statement will show:

Accepted Answer

The cash flow statement shows the cash inflows and outflows that resulted from operating, investing, and financing activities. Therefore, choice C is the correct answer as it directly relates to the purpose of the cash flow statement. Choices A, B, and D are not relevant to the cash flow statement.

Question 4

The LIFO method of inventory valuation bases the cost of goods sold on the cost to the firm of the:

Accepted Answer

LIFO (last-in, first-out) assumes that the most recent merchandise purchased by the firm is the first to be sold, and therefore the cost of goods sold is based on that cost. This can result in a higher cost of goods sold and lower net income compared to other inventory valuation methods.

Question 5

Accountants at Rextech are seriously considering a change in the methods they use to depreciate equipment and value inventory.If they do so,the changes they make:

Accepted Answer

Any changes in accounting methods must be clearly disclosed to readers of financial statements in order to enable them to properly interpret the financial statements. This is a requirement of Generally Accepted Accounting Principles (GAAP) and is necessary for transparency and accuracy in financial reporting.

Question 6

_________ is the systematic write-off of the value of a tangible asset over its useful life.

Accepted Answer

Amortization is the systematic write-off of the value of a tangible asset over its useful life. The other options (expense structuring, capital budgeting, gross margin allocation) do not involve the systematic write-off of asset value.

Question 7

During a period of rising prices,if a firm desired to report a low net income figure in hopes of reducing their income tax liability,the firm would use the ________ inventory valuation method.

Accepted Answer

LIFO assumes that the last items purchased are the first items sold, which means that the cost of goods sold will reflect the higher prices of the newer inventory. This results in a lower reported net income, which reduces the tax liability. This method is particularly effective during a period of rising prices because it matches the higher costs of goods sold with the higher revenues earned during that period. Therefore, the best choice is B) LIFO.

Question 8

The way accountants handle amortization could have an impact on:

Accepted Answer

The answer of The way accountants handle amortization could have...

Question 9

When it comes to the treatment of amortization and valuation of inventory,generally accepted accounting principles:

Accepted Answer

GAAP allows for different methods of amortization (such as straight-line or declining balance) and inventory valuation (such as FIFO, LIFO, or weighted average).

Question 10

ElecTech Industries had in inventory two transformers,one purchased in February for $11,800 and the other acquired in September for $13,300.In December,they sold one of the transformers to Ram Enterprises for $16,400 and reported a gross margin of $3,100.Tiger Industries evidently uses the ________ inventory valuation method.

Accepted Answer

Since ElecTech Industries reported a gross margin of $3,100, it means that the cost of goods sold was $13,300 (the cost of the transformer sold to Ram Enterprises). Since the cost of goods sold was higher than the selling price of the transformer, it suggests that ElecTech Industries used the LIFO (Last In, First Out) inventory valuation method, as it assumes that the most recently purchased items are the first ones to be sold. This results in a higher cost of goods sold and a lower net income, which is reflected in the gross margin.

Question 11

Retailers attempt to sell older merchandise before more recently acquired merchandise is sold.The assumptions made by the _______ method of inventory valuation are most consistent with this approach.

Accepted Answer

FIFO assumes that the first items purchased or produced are the first to be sold, which is consistent with retailers attempting to sell older merchandise before more recently acquired merchandise is sold.

Question 12

Art works as a private accountant for Conwell AeroSpace.He currently is considering the choice of an amortization method for some new manufacturing equipment.Art should realize that:

Accepted Answer

The choice of amortization method will affect the amount of amortization expense reported on the income statement, which in turn will impact net income. Choosing a method that results in a greater amortization charge this year will cause reported net income to be lower. Therefore, Art should consider the impact of his choice on the company's net income.

Question 13

FIFO and LIFO are two common:

Accepted Answer

FIFO (first-in, first-out) and LIFO (last-in, first-out) are two common inventory valuation methods that determine the cost of goods sold and the value of inventory on a company's balance sheet. FIFO assumes that the first items purchased are the first items sold, while LIFO assumes that the most recent items purchased are the first items sold. These methods can have a significant impact on a company's financial statements and tax liabilities, and choosing between them requires careful consideration of a company's specific circumstances.

Question 14

McCartney Consulting Group is a management-consulting firm that provides its expertise to businesses that employ its services.Since it does not hold an inventory of goods or produce any goods itself:

Accepted Answer

Since the company does not hold an inventory of goods or produce any goods itself, its revenue will reflect the fees it charges for its consulting services. Therefore, its gross profit could be identical to its net revenue. However, the company will still have operating expenses such as salaries, rent, and utilities. Its balance sheet will record current assets such as cash, accounts receivable, and prepaid expenses.

Question 15

The supplier of coffee beans to the local coffee shop now demands to be paid on a cash basis for all purchases.The supplier has done this because:

Accepted Answer

The supplier's demand for cash payment indicates that the coffee shop has been slow in paying for previous purchases.

Question 16

Cindy is concerned because during the past four months her company has experienced cash shortages.She knows if this continues,the firm will have difficulties in accomplishing its goals.Cindy is concerned with:

Accepted Answer

Cindy's concern about cash shortages indicates that she is focused on the company's cash flow, which is the movement of cash in and out of the business. While assets, profits, and inventory valuation are all important aspects of business performance, they may not directly address the issue that Cindy is facing with cash shortages.

Question 17

Our Gang Transfer Company has shown consistent profits over the past five years.However,the company has recently found itself in financial trouble due to cash shortages.This indicates that:

Accepted Answer

The fact that the company has consistent profits but is experiencing cash shortages indicates that an accounting profit (profit calculated using accounting principles) does not always guarantee a positive cash flow. This could be due to factors such as slow-paying customers or inefficient use of cash. It is important for companies to not only focus on accounting profits but also on managing their cash flow effectively.

Question 18

Over the past month,Monica noted that she disbursed $6,347 in payments for operations in her travel agency and received $6,189 in cash receipts for services rendered.She had no cash receipts or disbursements from investments or financing activities.Thus,Monica had a:

Accepted Answer

Monica had a negative cash flow as she disbursed more in payments than she received in cash receipts.

Question 19

Accounting recognizes that assets,such as machinery and buildings,lose value over time.Accountants will record a portion of the cost of an asset as an expense each year through the use of:

Accepted Answer

The process of recording a portion of the cost of an asset as an expense each year is called amortization. This is done to reflect the fact that assets lose value over time. Asset valuation and audits are processes for determining the value of an asset, while appreciation refers to an increase in the value of an asset over time.

Question 20

ABC Communications is considering the purchase of a new satellite.The firm believes the satellite will help generate future earnings.In addition,the firm recognizes the tax benefits of a lower net income provided by the annual ________ of the asset.

Accepted Answer

Amortization refers to the annual depreciation of an intangible asset, such as a patent or trademark. This reduces the net income and therefore decreases the taxes owed by the company. Since a satellite is also a type of intangible asset, amortization would be the appropriate method to account for its decline in value over time.

Quiz 16: Understanding Accounting and Financial Information

During a period of rising prices,FIFO (first in,first out) inventory valuation method will result in ________ net income figures than would LIFO (last in,first out) .