Question 1

Nominal dollars are defined as:
A) the amount originally paid to acquire an asset
B) the value of goods and services exchanged in a barter economy
C) dollar measurements that are restated in terms of current purchasing power
D) those dollars that are not restated for fluctuations in the general purchasing power of the monetary unit

Accepted Answer

Nominal dollars refer to the face value of money without adjusting for inflation or changes in purchasing power.

Question 2

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

Accepted Answer

Rock Company uses the equity method for its investment in Hudson Company, as it owns 40% of the voting stock. Under the equity method, the investment is adjusted for Rock's share of Hudson's net income and dividends, not market value changes. Therefore, there is no entry to reflect the year-end market value.

Question 3

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 to account for its investment in Company B.
A) the market method
B) the cost method
C) the consolidated method
D) the equity method

Accepted Answer

Company A owns 37.5% (15,000/40,000) of Company B's stock, which is significant influence, so the equity method is appropriate.

Question 4

The following are the income statements and balance sheets for Coors Company: $\begin{array}{ll}&20X2\
\text { Sales (only credit sales) } & \$ 1,606.0 \
\text { Less cost of goods sold } & \underline{1,062.0} \
\text { Gross profit } & \$ 544.0 \
\text { Less operating expenses } & \underline{322.0} \
\text { Operating income } & \$ 222.0 \
\text { Less other expense:Interest } & \underline{9.6} \
\text { Income before tax } & \$ 212.4 \
\text { Less income tax expense } & \underline{\$ 5.0} \
\text { Net income } & \$ \underline{\$ 127.4}
\end{array}$

$\begin{array}{lllllll}
\text { Currentassets: } & \underline{20 \times 2} & & 20 \times 1 & 20 \times 2 & 20 \times 1 \
\text { Cash } & \$ 36 & \$ 38 & \text { Accts payable } & \$ 98 & \$ 64\\text { Accts receivable } & 180 & 144 & \text { Wages payable } & 18 & 16 \
\text { Inventory } & 120 & 100 & \text { Taxes payable } & 28 & 4 \
\text { Prepaid rent } & \underline{20} & \underline{24} & \text { Current portion } & &\
\text { Total current assets }&\$356&\$306&\text { of long-term debt }&30&6
\end{array}$ $\begin{array}{ll}&20X2\
\text { Sales (only credit sales) } & \$ 1,606.0 \
\text { Less cost of goods sold } & \underline{1,062.0} \
\text { Gross profit } & \$ 544.0 \
\text { Less operating expenses } & \underline{322.0} \
\text { Operating income } & \$ 222.0 \
\text { Less other expense:Interest } & \underline{9.6} \
\text { Income before tax } & \$ 212.4 \
\text { Less income tax expense } & \underline{\$ 5.0} \
\text { Net income } & \$ \underline{\$ 127.4}
\end{array}$

$\begin{array}{lllllll}
\text { Currentassets: } & \underline{20 \times 2} & & 20 \times 1 & 20 \times 2 & 20 \times 1 \
\text { Cash } & \$ 36 & \$ 38 & \text { Accts payable } & \$ 98 & \$ 64\\text { Accts receivable } & 180 & 144 & \text { Wages payable } & 18 & 16 \
\text { Inventory } & 120 & 100 & \text { Taxes payable } & 28 & 4 \
\text { Prepaid rent } & \underline{20} & \underline{24} & \text { Current portion } & &\
\text { Total current assets }&\$356&\$306&\text { of long-term debt }&30&6
\end{array}$ $\begin{array}{llllll}
\text { Long- term assets: } & &&{\text { Total current }} & \
\text { Fixed ass ets } & \$ 320 & \$ 316 & \text { liabilities } & \$ 174 & \$ 90 \
\text { Accum. deprec. } & (206) & (180) & \text { Long- termliabilities } & 66 & 92 \
\text { Total long- term } & \$ 114 & \$ 136 & \text { Total liabilities } & \$ 240 & \$ 182\\text { assets }
\end{array}$

$\begin{array}{lll}\text { Orners' equity: }\
\text { Common stock, } \$ 5 \text { par }&\$80&\$80\
\text { Retainedinc ome } & 150 & 180 \
\text { Total owners' equity } & \$ 230 & \$ 260\\text { Total liab. and }\\text { own. equity }& \$ 470& \$ 442\
\text { Total assets }& \$ 470 &\$ 42\\text { December } 31 \text { market price per share: }&\$120&\$106
\end{array}$ The earnings per share for Coors Company in 20X2 is:
A) $1.04
B) $1.56
C) $7.96
D) $7.50

Accepted Answer

Earnings per share (EPS) is calculated as Net Income divided by the number of shares outstanding. Net Income is $127.4. The number of shares outstanding is calculated by dividing the common stock value ($80) by the par value ($5), which gives 16 shares. Therefore, EPS = $127.4 / 16 = $7.96.

Question 5

The following information pertains to Barnum Company: Balance Sheet
At D ecember $31,20 \times 2$
$\begin{array}{llll}
\text { Current assets } & \$ 18,700 & \text { Current liabilities } & \$ 7,600 \
\text { Long-term assets } & \underline{29,700} & \text { Long- term liabilities } & 13,250 \
& & \text { Stockholders' eauity } & 27,550\\text { Total assets }& \$ 8400 & \text { Total liabilities and s.e. } &\$ 48,400\
\end{array}$

Barnum Company Income Statement 
For the Year Ended December 31, 20X2
$\begin{array}{ll}
\text { Sales } & \$ 106,950 \
\text { Less: Cost of goods sold } & (61,800) \
\text { Gross profit } & \$ 45,150 \
\text { Less: Operating expenses } & \underline{31,700} \
\text { Operatingincome } & \$ 13,450 \
\text { Less other expenses: interest } & (1,300) \
\text { Income before taxes } & \$ 12,150 \
\text { Less: Income tax expense } & \underline{(4,850)} \
\text { Net income } & \$ 7,300
\end{array}$ There were 1,000 shares of common stock outstanding with a market value of $75 as of December 31, 20X2. Dividends declared and paid was $5 per share. The current- debt- to- equity ratio for 20X2 is:
A) 15.7%
B) 43.1%
C) 75.7%
D) 27.6%

Accepted Answer

The answer of The following information pertains to Barnum Company:...

Question 6

All other things being equal, a higher current ratio indicates that:
A) the company has excess cash
B) the company's long- term debt is due soon
C) a customer is likely to pay in full and on time
D) a creditor is likely to be paid in full and on time

Accepted Answer

A higher current ratio indicates that a company has more current assets relative to its current liabilities, suggesting it is more capable of paying off its short-term obligations, making it more likely that creditors will be paid in full and on time.

Question 7

Below is a comparative income statement for Samson Company: Sams on Comp any Income Statement 
For the Years Ended 
December 31, 20X6 and 20X5
$\begin{array}{lll}&20X6&20X5\
\text { Sales } & \$ 1,744 & \$ 1,562 \
\text { Less: Cost of goods sold } & \underline{992} & \underline{806} \
\text { Gross profit } & \$ 752 & \$ 756 \
\text { Less op erating expenses: } & &\\text { Wage expense } & \$ 172 & \$ 160 \
\text { Depreciation expense } & 28 & 26 \
\text { Rent expens } & 36 & 36 \
\text { Miscellaneous expense } & \underline{40} & \underline{70} \
\text { Total operating expenses } & \$ 276 & \$ 292\\text { Operating income }&\$476&\$464\
\text { Less other expenses: }\\text { Interest } & \underline{20} & \underline{60} \
\text { Income before tax } & \$ 456 & \$ 404 \
\text { Less: Income tax expense } & \underline{182} & \underline{162} \
\text { Net income } & \$ 274 & \$ 242
\end{array}$ Identify the issue that would be of most concern or source of optimism, on behalf of financial analysts of Samson Company.
A) Income taxes increased 12.3%.
B) There was a 23.1% increase in cost of goods sold with only an 11.7% increase in sales.
C) Wages expense was approximately 10% of sales.
D) There was a 12.9% increase in income before taxes.

Accepted Answer

There was a 23.1% increase in cost of goods sold with only an 11.7% increase in sales.

Question 8

The current cost/nominal dollars method adjusts historical costs using:
A) the general price index only
B) the specific price index only
C) both a general price index and a specific price index
D) None of these answers is correct.

Accepted Answer

The answer of The current cost/nominal dollars method adjusts historical...

Question 9

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) $100
C) $96
D) $116

Accepted Answer

The consolidated net income includes the net income of the parent company (Fisher) and the net income of the subsidiary (Gibbs) attributable to the parent. Since Fisher owns 80% of Gibbs, 80% of Gibbs' net income ($20) is added to Fisher's net income ($100), resulting in $116.

Question 10

Below is the balance sheet for Triple H Company: $\text { Triple H Company Balance Sheet December 31, }$
\(\begin{array}{lll}&20X6&20X5\
\text { Current assets: }\
\text { Cash } & \$ 380 & \$ 242 \
\text { Accounts receivable } & 430 & 194 \
\text { Inventory } & 238 & 388 \
\text { Prep aid insurance } & \underline{32} & \underline{76} \
\text { Total current ass ets } & \$ 1,080 & \$ 900 \
\text { Long-term assets: } & &\\text { Fixed ass ets } & \$ 406 & \$ 452 \
\text { Less: Accumulated depreciation } & \underline{(272)} & \underline{(228)} \
\text { Total long- term assets } & \$ 134 & \$ 224 \
\text { Total assets } &{\underline{\$ 1,214}} & \$ 1.124\
\text { Current liabilities: Accounts }\\text { payable } & \$ 176 & \$ 152 \\text { Wages payable } &38&32\
\text { Total current liabilities } & \$ 184&\$184\\text { Long-term liabilities: }\
\text { Notes payable } & \underline{420} & \underline{420} \
\text { Total liabilities } & \$ 634 & \$ 604\
\text { Owners' equity: } \\text { Common stock } & \$ 190 & \$ 160 \
\text { Retained income } & \underline{390} & \underline{360} \
\text { Total owners' equity } & \$ 580 & \$ 520 \
\text { Total liabilities and owners' } & \$ 1,214 & \$ 1,124\\text { equity }
\end{array}\) If a common- size balance sheet were prepared, would be attributable to the 20X5 accounts payable of Triple H Company.
A) 62.3%
B) 86.3%
C) 25.2%
D) 13.5%

Accepted Answer

A common-size balance sheet expresses each item as a percentage of total assets. For 20X5, accounts payable is $152 and total assets are $1,124. The percentage is ($152 / $1,124) * 100 = 13.5%.

Question 11

The following are the income statements and balance sheets for Coors Company: $\begin{array}{ll}&20X2\
\text { Sales (only credit sales) } & \$ 1,606.0 \
\text { Less cost of goods sold } & \underline{1,062.0} \
\text { Gross profit } & \$ 544.0 \
\text { Less operating expenses } & \underline{322.0} \
\text { Operatingincome } & \$ 222.0 \
\text { Less other expense: Interest } & \underline{9.6} \
\text { Income before tax } & \$ 212.4 \
\text { Less income tax expense } & \$85.0
\end{array}$ $\begin{array}{ll}&20X2\
\text { Sales (only credit sales) } & \$ 1,606.0 \
\text { Less cost of goods sold } & \underline{1,062.0} \
\text { Gross profit } & \$ 544.0 \
\text { Less operating expenses } & \underline{322.0} \
\text { Operatingincome } & \$ 222.0 \
\text { Less other expense: Interest } & \underline{9.6} \
\text { Income before tax } & \$ 212.4 \
\text { Less income tax expense } & \$85.0
\end{array}$ Net income $ \quad\quad\quad\quad\$ 127.4 $
\(\begin{array}{llllll}&20X2&20X1&&20X2&20X1\
\text { Current assets: } & & & \text { Current liab: } \
\text { Cash } & \$ 36 & \$ 38 & \text { Accts payable } & \$ 98 & \$ 64 \
\text { Accts receivable } & 180 & 144 & \text { W ages p ayable } & 18 & 16 \
\text { Inventory } & 120 & 100 & \text { Taxes payable } & 28 & 4 \
\text { Prep aid rent } & 20 & 24 & \text { Current portion } & &\
\begin{array}{l}
\text { Total current as sets } \
\text { Long-term as sets: }
\end{array} & \$ 356 & \$ 306 & \begin{array}{l}
\text { of long- term debt } \
\text { Total current }
\end{array} & \underline{30} & \underline{6} \\text { Fixed ass ets } & \$ 320 & \$ 316 & \text { liabilities } & \$ 174 & \$ 90 \
\text { Accum. deprec. } & (206) & (180) & \text { Long-term liabilities } & 66 & 92\\text { Total long- term } & \$ 114 & \$ 136 & \text { T otal liabilities } & \$ 240 & \$ 182\\text { assets }\&&&\text { Owners' equity: }\
\text { Common stock, } \$ 5 \text { par } &\$ 80 & \$ 80\&&&\text { Retained income } & \underline{150} & \underline{180} \
&&&\text { T otal owners' equity } & \$ 230 & \$ 260
\
&&&\text { T ot al liab. and }\\text { Total assets } & \$ 470 & \$ 442 & \text { own. equity } & \$ 470 & \$ 442
\end{array}\)
$\text { December } 31 \text { market price per share: } \quad \$ 120 \quad \$ 106$ The dividend- payout ratio for Coors Company in 20X2 is:
A) 105.0%
B) 24.1%
C) 123.5%
D) 103.7%

Accepted Answer

The answer of The following are the income statements and...

Question 12

The following information pertains to Barnum Company: Balance Sheet 
At December $ 31,20 \times 2 $
$\begin{array}{llll}
\text { Current assets } & \$ 18,700 & \text { Current liabilities } & \$ 7,600 \
\text { Long- term ass ets } & 29,700 & \text { Long-term liabilities } & 13,250 \
& & \text { Stockholders' equity } & \underline{27,550}\
\text { Total assets }&\$48,400&\text { Total liabilities and s.e. }&\$48,400
\end{array}$
Barnum Company Income Statement 
For the Year Ended Decemb er 31, $ 20 \times 2 $
$\begin{array}{ll}
\text { Sales } & \$ 106,950 \
\text { Less: Cost of goods sold } & (61,800) \
\text { Gross profit } & \$ 45,150 \
\text { Less: Operating expenses } & \underline{31,700} \
\text { Operating income } & \$ 13,450 \
\text { Less other expenses: interest } & \underline{(1,300)} \
\text { Income before taxes } & \$ 12,150 \
\text { Less: Income tax expense } & \$ 4,850) \
\text { Net income } & \$ 7,300
\end{array}$ There were 1,000 shares of common stock outstanding with a market value of $75 as of December 31, 20X2. Dividends declared and paid was $5 per share. The dividend payout ratio for 20X2 is:
A) 100.0%
B) 9.7%
C) 68.5%
D) 6.7%

Accepted Answer

The dividend payout ratio is calculated as (Dividends per share / Earnings per share). Dividends per share is $5, and Earnings per share is $7.30 ($7,300 net income / 1,000 shares). Thus, the ratio is ($5 / $7.30) = 68.5%.

Question 13

The following information pertains to Barnum Company: Balance Sheet
At December $31,20 \times 2$
$\begin{array}{llll}
\text { Current assets } & \$ 18,700 & \text { Current liabilities } & \$ 7,600 \
\text { Long-term assets } & \underline{29,700} & \text { Long-term liabilities } & 13,250 \
& & \text { Stockholders' equity } & \underline{27,550}\\text { Total assets }& \$ 48,400& \text { Total liabilities and s.e. } &\$ 48,400
\end{array}$

Barnum Company Income Statement 
For the Year Ended December 31, 20X2
$\begin{array}{ll}
\text { Sales } & \$ 106,950 \
\text { Less: Cost of goods sold } & \underline{(61,800)} \
\text { Gross profit } & \$ 45,150 \
\text { Less: Operating expenses } & \underline{31,700}\\text { Operating income } & \$ 13,450 \
\text { Less other expenses: interest } & (1,300) \
\text { Income before taxes } & \$ 12,150 \
\text { Less: Inc ome tax expense } & \underline{(4,850)} \
\text { Net income } & \$ 7,300
\end{array}$ There were 1,000 shares of common stock outstanding with a market value of $75 as of December 31, 20X2. Dividends declared and paid was $5 per share. The price- earnings ratio for 20X2 is:
A) 19.3 times
B) 10.3 times
C) 0.7 times
D) $75

Accepted Answer

The answer of The following information pertains to Barnum Company:...

Question 14

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

Accepted Answer

Financial statements do not require formal projections of management's assessment of future financial results; they primarily report past performance and current financial position.

Question 15

Below is a comparative income statement for Samson Company: Sams on Comp any Income Statement 
For the Years Ended 
December 31, 20X6 and 20X5
$\begin{array}{lll}&20X6&20X5\
\text { Sales } & \$ 1,744 & \$ 1,562 \
\text { Less: Cost of goods sold } & \underline{992} & \underline{806} \
\text { Gross profit } & \$ 752 & \$ 756 \
\text { Less op erating expenses: } & &\\text { Wage expense } & \$ 172 & \$ 160 \
\text { Depreciation expense } & 28 & 26 \
\text { Rent expens } & 36 & 36 \
\text { Miscellaneous expense } & \underline{40} & \underline{70} \
\text { Total operating expenses } & \$ 276 & \$ 292\\text { Operating income }&\$476&\$464\
\text { Less other expenses: }\\text { Interest } & \underline{20} & \underline{60} \
\text { Income before tax } & \$ 456 & \$ 404 \
\text { Less: Income tax expense } & \underline{182} & \underline{162} \
\text { Net income } & \$ 274 & \$ 242
\end{array}$ If a common- size income statement were prepared, would be attributable to the 20X5 wage expense of Samson Company.
A) 66.1%
B) 10.2%
C) 9.8%
D) 34.4%

Accepted Answer

The answer of Below is a comparative income statement for...

Question 16

Below is the balance sheet for Triple H Company: $\text { Triple H Company Balance Sheet December 31, }$
\(\begin{array}{lll}&20X6&20X5\
\text { Current assets: }\
\text { Cash } & \$ 380 & \$ 242 \
\text { Accounts receivable } & 430 & 194 \
\text { Inventory } & 238 & 388 \
\text { Prep aid insurance } & \underline{32} & \underline{76} \
\text { Total current ass ets } & \$ 1,080 & \$ 900 \
\text { Long-term assets: } & &\\text { Fixed ass ets } & \$ 406 & \$ 452 \
\text { Less: Accumulated depreciation } & \underline{(272)} & \underline{(228)} \
\text { Total long- term assets } & \$ 134 & \$ 224 \
\text { Total assets } &{\underline{\$ 1,214}} & \$ 1.124\
\text { Current liabilities: Accounts }\\text { payable } & \$ 176 & \$ 152 \\text { Wages payable } &38&32\
\text { Total current liabilities } & \$ 184&\$184\\text { Long-term liabilities: }\
\text { Notes payable } & \underline{420} & \underline{420} \
\text { Total liabilities } & \$ 634 & \$ 604\
\text { Owners' equity: } \\text { Common stock } & \$ 190 & \$ 160 \
\text { Retained income } & \underline{390} & \underline{360} \
\text { Total owners' equity } & \$ 580 & \$ 520 \
\text { Total liabilities and owners' } & \$ 1,214 & \$ 1,124\\text { equity }
\end{array}\) What issue would be of most concern or source of optimism on behalf of financial analysts of Triple H Company?
A) Both common stock and retained earnings increased by the same dollar amount.
B) Cash and accounts receivable increased 58% and 122%, respectively.
C) The long- term notes payable remained unchanged
D) Fixed assets decreased 10%.

Accepted Answer

Cash and accounts receivable increased significantly, indicating a positive trend in the company's liquidity and revenue generation.

Question 17

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 to account for its investment in Company B.
A) the consolidated method
B) the market method
C) the cost method
D) the equity method

Accepted Answer

The answer of Company B has 40,000 shares of its...

Question 18

Under the equity method, the investor recognizes as income:
A) the dividends paid by the investee company
B) the change in market value of investee company stock
C) a portion of the income earned by the investee company
D) All of these answers are correct.

Accepted Answer

Under the equity method, the investor recognizes a portion of the income earned by the investee company, proportional to their ownership stake, rather than dividends or market value changes.

Question 19

The following information has been extracted from the books of the Salem's Lot Company: Currentassets:
Currentliabilities:
Cash $\quad \$ 86\quad $ Accts payable $\quad \$ 78 $
Accounts receivable $\quad 130 \quad $ Wages payable $\quad \quad 68 $
$\begin{array}{l}
\text { Inventory } \quad\underline{140} \
\text { Taxes payable }\quad \underline{\mathbf{2 8}} \
\text { Total } \quad\$ 356 \
\text { Total } \quad\$ 174
\end{array}$ The current ratio for Salem's Lot Company is:
A) 2.05
B) 1.48
C) 0.76
D) 2.51

Accepted Answer

The current ratio is calculated by dividing current assets by current liabilities. Here, $ \frac{356}{174} \approx 2.05 $.

Question 20

Brian Company purchased as a long- term investment 10% of the outstanding shares of Wilson Company. 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) having no effect
B) increasing stockholders' equity and decreasing investments
C) increasing assets and stockholders' equity
D) increasing investments and cash

Accepted Answer

The increase in market value of the shares will be recorded as an unrealized gain, which increases assets (investment value) and stockholders' equity (through other comprehensive income or retained earnings, depending on the accounting treatment).

Quiz 17: Understanding Corporate Annual Reports: Basic Financial Statements

Nominal dollars are defined as:

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 to account for its investment in Company B.

All other things being equal, a higher current ratio indicates that:

The current cost/nominal dollars method adjusts historical costs using:

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:

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

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 to account for its investment in Company B.

Under the equity method, the investor recognizes as income:

Brian Company purchased as a long- term investment 10% of the outstanding shares of Wilson Company. 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: