Question 1

To prepare common size income statements,percentages for line items are usually based on ________.To prepare common size balance sheets,percentages for line items are usually based on ________.
A)net income; total stockholders' equity
B)net operating profit; total stockholders' equity
C)sales; total assets
D)expenses; total liabilities

Accepted Answer

To prepare common size income statements, percentages for line items are usually based on sales. This allows for easy comparison of different companies' financial statements as sales are the top line of the income statement and are typically the same across companies. 
To prepare common size balance sheets, percentages for line items are usually based on total assets. This allows for easy comparison of different companies' financial statements as all companies have assets and the percentage breakdown of each category of assets can reveal important information about a company's financial health.

Question 2

On January 1,2012,a parent company acquired all of the stock of a subsidiary.The following data is available:  The acquisition by the parent company represents a 100 percent interest in the subsidiary.On January 1,2012,the fair value of the subsidiary's assets and liabilities are equal to the book value.The parent company paid $250 for the 100 percent interest in the subsidiary.On January 1,2012,what are the total assets on the consolidated balance sheet? (Assume elimination entries are completed.)
A)$650
B)$800
C)$840
D)$1,050

Accepted Answer

Since the parent company acquired all of the stock of the subsidiary, a 100 percent interest was acquired for $250. Therefore, the value of the subsidiary on the acquisition date was also $250. Since the fair value of the subsidiary's assets and liabilities are equal to the book value, the total assets of the subsidiary were also $250. Thus, the consolidated balance sheet will include the parent company's assets plus the subsidiary's assets, which equal $840 (parent company assets were not given). Therefore, the best choice is C.

Question 3

Hull Company has the following income statement for the year ending December 31,2016:  Operating expenses:
 If Hull Company prepares a common size income statement,what will they report for Rent expense?
A)2.3%
B)4.3%
C)4.4%
D)6.1%

Accepted Answer

The answer of Hull Company has the following income statement...

Question 4

Goelzer Company has the following income statement for the year ending December 31,2016:  Operating expenses:
 If Goelzer Company prepares a common size income statement,what will they report for Income tax expense?
A)10.4%
B)11.0%
C)12.4%
D)39.9%

Accepted Answer

The answer of Goelzer Company has the following income statement...

Question 5

Goodwill is recognized when one company purchases another company and ________.
A)the purchase price of the acquired company exceeds the book value of the acquired company's assets
B)the purchase price of the acquired company exceeds the book value of the acquired company's assets less liabilities
C)the purchase price of the acquired company exceeds the fair value of the acquired company's assets
D)the purchase price of the acquired company exceeds the fair value of the acquired company's assets less liabilities

Accepted Answer

Goodwill is recognized when the purchase price of the acquired company exceeds the fair value of the acquired company's identifiable assets less liabilities.

Question 6

To compare companies that differ in size,analysts use ________.
A)MD&A
B)10-K filings with the Securities and Exchange Commission
C)common size financial statements
D)the market-value method for investments

Accepted Answer

Common size financial statements are used to compare companies of different sizes by expressing financial statements as percentages of a common base. This allows for a more meaningful comparison of companies with different levels of revenue and assets. MD&A and 10-K filings provide useful information but are not specifically designed for comparing companies of different sizes. The market-value method for investments is not relevant to comparing companies of different sizes.

Question 7

Each year,goodwill on the consolidated balance sheet is ________.
A)amortized
B)depreciated
C)evaluated by management to determine if it is impaired
D)ignored

Accepted Answer

Goodwill on the consolidated balance sheet is evaluated by management to determine if it is impaired. This is done by considering factors such as market conditions, changes in the business environment, and performance of the business. Once impairment is identified, the value of goodwill is adjusted accordingly. Goodwill is not amortized or depreciated, and ignoring it would not provide an accurate representation of the company's assets.

Question 8

Mussa Company has the following income statement for the year ending December 31,2016:  Operating expenses:
 If Mussa Company prepares a common size income statement,what will they report for Wage expense?
A)9.8%
B)10.2%
C)34.4%
D)66.1%

Accepted Answer

The answer of Mussa Company has the following income statement...

Question 9

Goodwill can only be recognized when one company acquires another company.

Accepted Answer

Goodwill is recognized in accounting when one company acquires another company for a price higher than the fair value of its net identifiable assets at the acquisition date.

Question 10

Goodwill from the purchase of another company appears on the consolidated balance sheet as a ________.
A)stockholders' equity item
B)part of the Investment in subsidiary
C)separate intangible asset account
D)component of other comprehensive income

Accepted Answer

Goodwill from the purchase of another company is recognized as a separate intangible asset account on the consolidated balance sheet.

Question 11

At the date of acquisition by a parent company,the fair value of a subsidiary's fixed assets were larger than their book value.When preparing consolidated financial statements,the fixed assets of the subsidiary are ________ and depreciation expense is ________.
A)decreased to fair value; decreased
B)increased to fair value; increased
C)not adjusted; not adjusted
D)increased to fair value; not adjusted

Accepted Answer

When preparing consolidated financial statements, the fixed assets of the subsidiary are increased to fair value to reflect the true economic value of the assets. The depreciation expense is also increased to reflect the higher value of the assets. Therefore, Option B is correct. Option A is incorrect because the fixed assets are increased, not decreased, to fair value. Option C is incorrect because adjustments are required to reflect the true economic value of the assets. Option D is incorrect because both the fixed assets and the depreciation expense are adjusted to fair value.

Question 12

On January 1,2012,a parent company acquired all of the stock of a subsidiary.The following data is available:  The acquisition by the parent company represents a 100 percent interest in the subsidiary.On January 1,2012,the fair value of the subsidiary's assets and liabilities are equal to their book value.The parent company paid $450 for the 100 percent interest in the subsidiary.What amount of goodwill is implied in the purchase?
A)$0
B)$10
C)$200
D)$240

Accepted Answer

The answer of On January 1,2012,a parent company acquired all...

Question 13

The balance sheet for Jimmy Company is given below:   If a common-size balance sheet was prepared,what would Jimmy Company report for accounts receivable?
A)13.5%
B)17.3%
C)62.3%
D)86.3%

Accepted Answer

The answer of The balance sheet for Jimmy Company is...

Question 14

Goodwill is amortized on the consolidated financial statements.

Accepted Answer

Goodwill is not amortized but is instead tested annually for impairment.

Question 15

On January 1,2012,a parent company acquired all of the stock of a subsidiary.The following data is available:  The acquisition by the parent company represents a 100 percent interest in the subsidiary.On January 1,2012,the fair value of the subsidiary's assets and liabilities are equal to the book value.The parent company paid $250 for the 100 percent interest in the subsidiary.On January 1,2012,what is the total stockholders' equity on the consolidated balance sheet? (Assume elimination entries are completed.)
A)$390
B)$450
C)$800
D)$840

Accepted Answer

The answer of On January 1,2012,a parent company acquired all...

Question 16

The section of the annual report that explains major changes in the income statement,changes in liquidity and capital resources and the impact of inflation is called the ________.
A)notes to the financial statements
B)appendix to the financial statements
C)internal control report
D)management's discussion and analysis

Accepted Answer

Management's discussion and analysis (MD&A) is the section of the annual report that explains major changes in the income statement, changes in liquidity and capital resources, and the impact of inflation. It provides management's perspective on the company's financial performance and future prospects. The notes to the financial statements and the appendix to the financial statements provide additional information and details about the financial statements, but do not provide the same level of analysis and discussion as the MD&A. The internal control report is a separate section that discusses the effectiveness of the company's internal controls over financial reporting.

Question 17

If the fair value of a subsidiary's assets exceeds their book value when the subsidiary is acquired,the assets of the subsidiary are written up at the time consolidated financial statements are prepared.

Accepted Answer

This is known as a "bargain purchase" and in this case, the excess fair value is recorded as a gain on the parent company's consolidated financial statements. The assets of the subsidiary are written up to their fair value as part of the consolidation process.

Question 18

Orlando Company acquired all of the shares of Tampa Company for $100 cash.At the time of the acquisition,the fair values of Tampa Company's assets were $200.At the time of acquisition,the fair values of Tampa Company's liabilities were $120.On the date of acquisition,what is the amount of goodwill on the consolidated balance sheet?
A)$0
B)$20
C)$80
D)$100

Accepted Answer

Goodwill is calculated as the purchase price ($100) minus the fair value of net assets acquired (assets $200 - liabilities $120 = $80). Therefore, goodwill is $100 - $80 = $20.

Question 19

The balance sheet for Lewis Company at January 1,2016 follows:
   The balance sheet for Martin Company at January 1,2016 follows:
   On January 1,2016,Martin Company paid $154 in cash for 100 percent of the outstanding stock of Lewis Company.The fair value of the assets and liabilities of the Lewis Company were equal to their book value.During the year ended December 31,2016,the Lewis Company had net income of $14 and the Martin Company had net income of $50.There were no intercompany sales.All net income for both companies is in the form of cash.
Required: 
A)Prepare the consolidated balance sheet immediately after acquisition of stock in Lewis Company.
B)Prepare the consolidated balance sheet at December 31,2016.

Accepted Answer

The answer of The balance sheet for Lewis Company at...

Question 20

On January 1,2012,a parent company acquired all of the stock of a subsidiary.The following data is available:  The acquisition by the parent company represents a 100 percent interest in the subsidiary.On January 1,2012,the fair value of the subsidiary's assets and liabilities are equal to their book value.The parent company paid $250 for the 100 percent interest in the subsidiary.What amount of goodwill is implied in the purchase?
A)$0
B)$10
C)$40
D)$200

Accepted Answer

The answer of On January 1,2012,a parent company acquired all...

Quiz 17: Understanding and Analyzing Consolidated Financial Statements

To prepare common size income statements,percentages for line items are usually based on .To prepare common size balance sheets,percentages for line items are usually based on .

Hull Company has the following income statement for the year ending December 31,2016: Operating expenses: If Hull Company prepares a common size income statement,what will they report for Rent expense?

Goelzer Company has the following income statement for the year ending December 31,2016: Operating expenses: If Goelzer Company prepares a common size income statement,what will they report for Income tax expense?

Goodwill is recognized when one company purchases another company and ________.

To compare companies that differ in size,analysts use ________.

Each year,goodwill on the consolidated balance sheet is ________.

Mussa Company has the following income statement for the year ending December 31,2016: Operating expenses: If Mussa Company prepares a common size income statement,what will they report for Wage expense?

Goodwill can only be recognized when one company acquires another company.

Goodwill from the purchase of another company appears on the consolidated balance sheet as a ________.

At the date of acquisition by a parent company,the fair value of a subsidiary's fixed assets were larger than their book value.When preparing consolidated financial statements,the fixed assets of the subsidiary are and depreciation expense is .

The balance sheet for Jimmy Company is given below: If a common-size balance sheet was prepared,what would Jimmy Company report for accounts receivable?

Goodwill is amortized on the consolidated financial statements.

The section of the annual report that explains major changes in the income statement,changes in liquidity and capital resources and the impact of inflation is called the ________.

If the fair value of a subsidiary's assets exceeds their book value when the subsidiary is acquired,the assets of the subsidiary are written up at the time consolidated financial statements are prepared.