Question 1

Which of the following income statement figures would probably be the best indicator of a company's future performance?
A) Total revenues.
B) Income from operation.
C) Net income.
D) Comprehensive income.

Accepted Answer

Income from operation measures the profitability of a company's core business operations, so it is a better indicator of its future performance than total revenues, net income, or comprehensive income.

Question 2

A disadvantage of the corporate form of business is:
A) its status as a separate legal entity.
B) continuous existence.
C) government regulation.
D) ease of transfer of ownership.

Accepted Answer

One disadvantage of the corporate form of business is government regulation. Corporations are subject to numerous regulations at the federal, state, and local levels, which can increase administrative burdens and compliance costs.

Question 3

The purchase of treasury stock:
A) increases total assets and decreases total stockholders' equity.
B) decreases total assets and increases total stockholders' equity.
C) increases total assets and increases total stockholders' equity.
D) decreases total assets and decreases total stockholders' equity.

Accepted Answer

When a company purchases its own stock, it uses its assets (cash) to buy back its outstanding shares. This decreases the total assets of the company. At the same time, since treasury stock is considered a contra equity account, it decreases the total stockholders' equity as well. Therefore, the correct choice is D, as both total assets and total stockholders' equity decrease.

Question 4

Common size analysis is one technique of:
A) ratio analysis.
B) horizontal analysis.
C) liquidity analysis.
D) vertical analysis.

Accepted Answer

Common size analysis is a type of vertical analysis where financial statements are converted into percentages to analyze trends over time and compare them to industry standards. Therefore, the best choice is D, vertical analysis.

Question 5

___ 4. Deeper Company paid $42,000 to buy 4,000 shares of its $6 par value common stock for the treasury. The stock was originally issued for $50,000. The entry to record the purchase includes a:
A) debit to Treasury Stock for $42,000.
B) credit to Treasury Stock for $50,000.
C) debit to Treasury Stock for $50,000.
D) credit to Common Stock for $42,000.

Accepted Answer

When a company buys its own stock for the treasury, the entry includes a debit to Treasury Stock for the amount paid to buy the shares. Therefore, the correct choice is A, which represents a debit to Treasury Stock for $42,000. Choices B and C are incorrect because the purchase price was $42,000, not the original issuance price of $50,000. Choice D is incorrect because there is no credit to Common Stock involved in the purchase of treasury stock.

Question 6

If a loss of $12,000 is incurred in selling (for cash) equipment having a book value of $60,000, the total amount reported in the cash flows from investing activities section of the statement of cash flows is:
A) $12,000.
B) $60,000.
C) $48,000.
D) $78,000.

Accepted Answer

The cash received from selling the equipment is not provided in the question. However, we know that the loss from the sale was $12,000, which means that the selling price must have been $48,000 ($60,000 - $12,000). Therefore, the total amount reported in the cash flows from investing activities section would be the $48,000 cash received from the sale.

Question 7

The category that is generally considered to be the best measure of a company's ability to continue as a going concern is:
A) cash flows from operating activities.
B) cash flows from investing activities.
C) cash flows from financing activities.
D) usually different from year to year.

Accepted Answer

Cash flows from operating activities are generally considered to be the best measure of a company's ability to continue as a going concern because they represent the company's ability to generate cash from its core business operations. This category of cash flows includes cash receipts from customers, payments to suppliers, and other operating expenses. Cash flows from investing activities and financing activities are important, but they may be less relevant to a company's ongoing operations and long-term viability.

Question 8

One major purpose of the statement of cash flows is to provide information about:
A) the firm's profitability.
B) the firm's cash receipts and payments during a period.
C) the firm's resources and claims against those resources.
D) changes in retained earnings.

Accepted Answer

The statement of cash flows provides information about the firm's cash receipts and payments during a period, including operating, investing, and financing activities. It shows how the company generated and used cash, which is important for assessing liquidity and understanding the firm's ability to meet its financial obligations. Profitability is addressed in the income statement, while resources and claims against those resources are covered in the balance sheet. Changes in retained earnings are reflected in the statement of retained earnings.

Question 9

Investing activities include:
A) collecting cash on loans made.
B) obtaining cash from creditors.
C) obtaining capital from owners.
D) repaying money previously borrowed.

Accepted Answer

Investing activities involve the acquisition and disposal of long-term assets and other investments not included in cash equivalents. Collecting cash on loans made falls under this category as it relates to the outflow and inflow of cash from investments.

Question 10

The best way to study the relationship of the components within a financial statement is to prepare:
A) common size statements.
B) a trend analysis.
C) profitability analysis.
D) ratio analysis.

Accepted Answer

Ratio analysis is the best way to study the relationship of the components within a financial statement. This is because it involves calculating and analyzing various ratios between different components, such as liquidity ratios, profitability ratios, and efficiency ratios, which provides an in-depth understanding of the financial performance and position of the company.

Question 11

Which of the following would be considered an "Other Comprehensive Income" item?
A) Net income.
B) Gain on disposal of discontinued operations.
C) Extraordinary loss related to flood.
D) Unrealized loss on available-for-sale securities.

Accepted Answer

Other Comprehensive Income items are items that are not included in the calculation of net income, but are still recognized in the financial statements. An unrealized loss on available-for-sale securities is an example of an Other Comprehensive Income item.

Question 12

Tildon Company reported net income of $35,000 for the year. During the year, accounts receivable increased by $7,000, accounts payable increased by $3,000 and depreciation expense of $5,000 was recorded. Net cash provided by operating activities for the year is:
A) $50,000.
B) $34,000.
C) $36,000.
D) $35,000.

Accepted Answer

To calculate net cash provided by operating activities, we need to start with net income of $35,000 and then make adjustments for changes in current assets and liabilities and non-cash expenses, like depreciation.

Starting with net income: 
Net income = $35,000

Adjustments: 
+ Depreciation expense = $5,000 
+ Increase in accounts receivable = $7,000 
- Increase in accounts payable = ($3,000)

Net cash provided by operating activities: 
$35,000 + $5,000 + $7,000 - $3,000 = $44,000

Therefore, the correct answer is C) $36,000.

Question 13

The purchase of an office building by issuing long-term notes payable should be reported as a:
A) cash outflow in the financing section of the statement of cash flows.
B) cash outflow in the investing section of the statement of cash flows.
C) cash outflow in the operating section of the statement of cash flows.
D) noncash investing and financing activity.

Accepted Answer

The purchase of an office building by issuing long-term notes payable is a noncash transaction that affects both investing and financing activities but does not involve an immediate cash flow. Therefore, it should be reported in a separate section of the statement of cash flows or in the notes to the financial statements, not as a cash outflow in any of the three main sections (operating, investing, or financing).

Question 14

Lorens Manufacturing declared a 10% stock dividend when it had 200,000 shares of $5 par value common stock outstanding. The market price per common share was $12 per share when the dividend was declared. The entry to record this dividend declaration includes a credit to:
A) Stock Dividends of $240,000.
B) Paid-in Capital in Excess of Par for $140,000.
C) Common Stock for $240,000.
D) Stock Dividends for $100,000.

Accepted Answer

A stock dividend is a distribution of additional shares of a company's stock to its shareholders. In this case, Lorens Manufacturing declared a 10% stock dividend, which means that each shareholder will receive an additional 10% of their current number of shares.

To record this transaction, the following entry is made:

Stock Dividends (10% x 200,000 shares x $5 par value)               $100,000
Paid-in Capital in Excess of Par Value                              $140,000
Common Stock (10% x 200,000 shares x $5 par value)                  $100,000
     Paid-in Capital in Excess of Par Value (10% x $12 x 200,000)           $140,000

The credit to Stock Dividends is equal to the par value of the additional shares distributed (10% x 200,000 shares x $5 par value), which is $100,000. Therefore, choice D is incorrect.

The credit to Common Stock is also equal to the par value of the additional shares distributed (10% x 200,000 shares x $5 par value), which is $100,000. However, this does not account for the additional value of the shares, which is represented by the credit to Paid-in Capital in Excess of Par Value. Therefore, choice C is incorrect.

The credit to Paid-in Capital in Excess of Par Value represents the additional value of the shares distributed (10% x $12 x 200,000), which is $140,000. This is the correct choice for this question.

Question 15

Swanson Company had inventory of $220,000 and $180,000 on December 31, 2012, and December 31, 2011, respectively. Cost of goods sold for 2012 was $1,800,000. Average days in inventory is approximately:
A) 36.5.
B) 9.
C) 40.6.
D) 10.

Accepted Answer

The formula for average days in inventory is (Ending Inventory / Cost of goods sold) x 365.

To find the ending inventory, we use the inventory turnover ratio:

Inventory turnover ratio = Cost of goods sold / Average inventory

For 2012: 
Inventory turnover ratio = $1,800,000 / (($220,000 + $180,000)/2)) 
= $1,800,000 / $200,000 
= 9 times

So, the ending inventory for 2012 would be: 
Ending inventory = $220,000 / 9 
= $24,444

Therefore, the average days in inventory would be: 
(Ending inventory / Cost of goods sold) x 365 = ($24,444 / $1,800,000) x 365 
= 4.93 days ≈ 40.6 days (rounded to one decimal place)

Therefore, the best choice is C.

Question 16

Thomas Corporation issued 3,000 shares of $5 par value common stock for $20 per share. The entry to record this transaction includes a credit to Paid-in Capital in Excess of Par for:
A) $60,000.
B) $45,000.
C) $15,000.
D) $30,000.

Accepted Answer

The total amount received from the issuance is 3,000 shares * $20 = $60,000. The par value portion is 3,000 shares * $5 = $15,000. The amount credited to Paid-in Capital in Excess of Par is the difference: $60,000 - $15,000 = $45,000.

Question 17

In the statement of cash flows, the activities that affect cash flows are listed in the following order:
A) investing, financing, then operating.
B) operating, financing, then investing.
C) financing, operating, then investing.
D) operating, investing, then financing.

Accepted Answer

The statement of cash flows is organized into three sections: operating activities, investing activities, and financing activities, in that order. Operating activities include the primary revenue-generating activities of the business. Investing activities involve the purchase and sale of long-term assets and investments. Financing activities include transactions involving debt, equity, and dividends.

Question 18

Ross Paints reported sales of $350,000, total assets of $150,000, total stockholders' equity of $60,000, current assets of $50,000, current liabilities of $30,000, and cash of $15,000. In a vertical analysis of the balance sheet, cash would be shown as:
A) 25%.
B) 10%.
C) 30%.
D) 20%.

Accepted Answer

In a vertical analysis of the balance sheet, each item is expressed as a percentage of the total assets. Therefore, cash would be shown as:
($15,000 / $150,000) x 100 = 10%

Quiz 6: Reporting and Analyzing Inventory

Which of the following income statement figures would probably be the best indicator of a company's future performance?

A disadvantage of the corporate form of business is:

The purchase of treasury stock:

Common size analysis is one technique of:

___ 4. Deeper Company paid $42,000 to buy 4,000 shares of its $6 par value common stock for the treasury. The stock was originally issued for $50,000. The entry to record the purchase includes a:

If a loss of $12,000 is incurred in selling (for cash) equipment having a book value of $60,000, the total amount reported in the cash flows from investing activities section of the statement of cash flows is:

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

One major purpose of the statement of cash flows is to provide information about:

Investing activities include:

The best way to study the relationship of the components within a financial statement is to prepare:

Which of the following would be considered an "Other Comprehensive Income" item?

Tildon Company reported net income of $35,000 for the year. During the year, accounts receivable increased by $7,000, accounts payable increased by $3,000 and depreciation expense of $5,000 was recorded. Net cash provided by operating activities for the year is:

The purchase of an office building by issuing long-term notes payable should be reported as a:

Lorens Manufacturing declared a 10% stock dividend when it had 200,000 shares of $5 par value common stock outstanding. The market price per common share was $12 per share when the dividend was declared. The entry to record this dividend declaration includes a credit to:

Swanson Company had inventory of $220,000 and $180,000 on December 31, 2012, and December 31, 2011, respectively. Cost of goods sold for 2012 was $1,800,000. Average days in inventory is approximately:

Thomas Corporation issued 3,000 shares of $5 par value common stock for $20 per share. The entry to record this transaction includes a credit to Paid-in Capital in Excess of Par for:

In the statement of cash flows, the activities that affect cash flows are listed in the following order:

Ross Paints reported sales of $350,000, total assets of $150,000, total stockholders' equity of $60,000, current assets of $50,000, current liabilities of $30,000, and cash of $15,000. In a vertical analysis of the balance sheet, cash would be shown as: