Deck 16: Understanding Corporate Annual Reports: Basic Financial Statements

Question 1

The account Unearned Revenue is found on the income statement of most American companies.

Answer 1

False

Question 2

Treasury stock is a deduction from total stockholders' equity.

Answer 2

True

Question 3

The Allowance for Bad Debts account is added to the Accounts Receivable account on the balance sheet.

Answer 3

False

Question 4

Deferred income tax is a noncurrent liability.

Question 5

Accounts receivable is a current asset.

Question 6

Goodwill is amortized for financial statement purposes.

Question 7

A company's operating cycle can be longer than one year.

Question 8

Research and development costs are expensed when incurred for financial statement purposes.

Question 9

Accounts payable, wages payable, and income taxes payable are all considered current liabilities.

Question 10

Goodwill is a tangible asset.

Question 11

Accelerated depreciation is the most popular depreciation method for financial statement purposes.

Question 12

Intangible assets are amortized.

Question 13

Leasehold improvements are amortized.

Question 14

Natural resource assets are depreciated.

Question 15

Freight and installation are normally added to equipment's basis.

Question 16

The balance sheet usually shows cash equivalents at cost or market price, whichever is higher.

Question 17

Inventory is considered to be a cash equivalent.

Question 18

Par value is the value that is printed on the face of the stock certificate.

Question 19

Working capital = fair market value of current assets less the fair market value of current liabilities.

Question 20

Land is never depreciated.

Question 21

Gross profit is the difference between sales and cost of goods sold.

Question 22

If a company has net income for the current year, then its year-end cash balance must be greater than its beginning of the year cash balance.

Question 23

Preferred stockholders' potential participation in earnings is unlimited.

Question 24

A company does not pay dividends on treasury stock.

Question 25

Under the indirect method, cash received from customers is determined.

Question 26

Operating income is equal to the cash flow from operations on a cash flow statement.

Question 27

The statement of cash flows classifies changes in cash as operating, investing, and financing activities.

Question 28

A company's treasury stock is outstanding but not issued.

Question 29

Preferred stock normally confers voting power to its owners.

Question 30

An example of a financing activity on the statement of cash flows is payment of cash dividends.

Question 31

A company's inventory method affects its income statement and balance sheet.

Question 32

Earnings per share = net income / average number of common and preferred shares outstanding during the year.

Question 33

An example of an investing activity on the statement of cash flows is purchasing fixed assets by issuing debt.

Question 34

An example of an operating activity on the statement of cash flows is federal taxes paid.

Question 35

The statement of cash flows shows the status of an entity at a point in time.

Question 36

Retained earnings reflect the dividend paying ability of a company.

Question 37

An example of a financing activity on the statement of cash flows is the conversion of debt to common stock.

Question 38

An example of an operating activity on the statement of cash flows is cash dividends received.

Question 39

Dividends paid are an addition to retained earnings.

Question 40

Retained earnings are sometimes called retained income.

Question 41

The direct method begins with accrual net income.

Question 42

Current assets are converted to cash or sold or consumed within _____.

A)the longer of one year or one operating cycle
B)the shorter of one year or one operating cycle
C)one fiscal year or one calendar year
D)one calendar year

Question 43

Convertibility allows a bondholder to exchange _____.

A)subordinated debentures for unsubordinated debentures
B)debentures for secured debt
C)bonds for common stock
D)all of these answers are correct

Question 44

During a period of deflation, the LIFO method provides a lower ending inventory amount than does FIFO.

Question 45

Depreciation expense is not a source of cash.

Question 46

The liabilities of Becky Company are listed below: $$\begin{array} { l r } \text { Accounts payable } & \$ 20,000 \\\text { First Mortgage bonds payable } & \$ 100,000 \\\text { Debentures payable } & \$ 80,000\end{array}$$ Becky Company liquidated its assets, receiving $150,000 cash.The debenture holders will receive _____ if the debentures are unsubordinated.

A)$10,000
B)$30,000
C)$40,000
D)$50,000

Question 47

Deferred taxes are only a liability.

Question 48

Growing companies usually have a large cash inflow from investments.

Question 49

A _____ is not considered a cash equivalent.

A)money market fund
B)treasury bill
C)bank account
D)none of these answers is correct

Question 50

During a period of inflation, the LIFO method provides a larger cost of goods amount than does FIFO.

Question 51

Depreciation is used to _____.

A)establish the current market value of an asset
B)allocate the original cost of an asset to particular periods or products
C)accumulate funds to replace an asset
D)all of these answers are correct

Question 52

The operating section of a new company usually shows a net cash outflow.

Question 53

Debentures are _____.

A)short-term liabilities arising from income transactions
B)debt secured by a claim against specific assets
C)debt secured by a general claim against total assets
D)unearned revenues

Question 54

_____ is not a current asset.

A)Accounts Receivable
B)Goodwill
C)Prepaid Expenses
D)None of these answers is correct

Question 55

The indirect and direct methods show the same amount of cash provided by or used for) operating activities.

Question 56

If a company's sales were all for cash and it paid all expenses in cash as incurred, then the cash flows from operating activities would be identical to net income.

Question 57

The liabilities of Sam Company are listed below: Accounts payable $20,000
First Mortgage bonds payable $100,000
Debentures payable $80,000
Sam Company liquidated its assets, receiving $140,000 cash.The debenture holders will receive _____ if the debentures are subordinated.

A)$10,000
B)$20,000
C)$40,000
D)$60,000

Question 58

_____ is not considered in the determination of the operating cycle.

A)Accounts Receivable
B)Merchandise Inventory
C)Cash
D)None of these answers is correct

Question 59

When using the direct method, depreciation is added to net income.

Question 60

The indirect method is by far the more popular of the two methods of constructing the statement of cash flows in the United States.

Question 61

Which one of the following statements is false?

A)The statement of cash flows reports the cash receipts and cash payments of an entity over a period of time.
B)Both the statement of cash flows and the income statement determine the net income for a company.
C)Transactions affecting the sale and the purchase or production of goods and services are reported in the operating activities section of the statement of cash flows.
D)Investing activities in the statement of cash flows include acquiring and selling long?term assets.

Question 62

A company had the following information: $$\begin{array} { l r l r } \text { Cash } & \$ 6,000 & \text { Sales } & \$ 142,000 \\\text { Depreciation expense } & 4,000 & \text { Dividends paid } & 3,000 \\\text { Prepaidrent } & 1,400 & \text { Rent expense } & 3,600 \\\text { Cost of goods sold } & 69,000 & \text { Wage expense } & 41,000\end{array}$$ The net income for the period is_____.

A)$22,400
B)$23,800
C)$24,400
D)$26,800

Question 63

Nonoperating items on the income statement_____.

A)are revenues and expenses arising from adjusting entries
B)reflect the effects of financial management decisions
C)appear only on corporate income statements
D)appear on the income statement immediately after gross profit

Question 64

At the beginning of the current year, Fred Company had the following balances in their stockholders' equity accounts as of December 31, 20X5: Paid-in capital $\quad \$ 43,000$
Retained earnings 27,000
During the year ended December 31, 20X6, Fred Company generated $35,400 in net income, and declared and paid $10,000 in dividends.The ending balance in the Retained Earnings account at December 31, 20X6 is_____.

A)$23,400
B)$27,000
C)$52,400
D)$66,400

Question 65

_____ is the major operating activity that decreases cash.

A)Purchases of inventory on account
B)Equipment purchases
C)Payments for inventory purchases
D)Advance payments for rent

Question 66

Wild Bill Company recently issued 10,000 shares of $1 per value common stock for $35,500.This transaction will affect Wild Bill Company by increasing the_____.

A)Common Stock account by $35,500
B)Capital in Excess of Par account by $35,500
C)Common Stock account by $10,000
D)Retained Earnings account by $25,500

Question 67

The Rebecca Company acquired merchandise inventory costing $10,000 on September 1.The company will not pay for the inventory until October 1.This transaction will affect the Rebecca Company by increasing the Merchandise Inventory account by $10,000 and _____.

A)increasing the Accounts Payable account by $10,000
B)decreasing the Accounts Payable account by $10,000
C)increasing the Capital account by $10,000
D)decreasing the Capital account by $10,000

Question 68

Peace Company's capital stock is currently trading for $22 per share.The Peace Company has the following accounts included within the owners' equity section of the balance sheet: Capital stock, $\$ 5.00$ par value, 10,000 shares issued $\$ 60,000$
Capital in excess of par value $\$ 110,000$ If the only transaction affecting these accounts was the issue of the company's capital stock, the Peace Company originally sold its capital stock for_____.

A)$6.00 per share
B)$11.00 per share
C)$17.00 per share
D)$22.00 per share

Question 69

_____ is the major operating activity that increases cash.

A)Sales on account
B)Collections from sales to customers
C)Advances from customers
D)Proceeds received from issuing stock

Question 70

Which of the following does not correctly state the nature or purpose of par value?

A)Par value is a valuable tool used by both the shareholders and the corporation.
B)Par value is the minimum level of investment by owners required by law in some states.
C)The term "stated value" is conceptually equivalent to par value.
D)Some states permit common stock to be issued without either a par or stated value.

Question 71

The difference between a single and multiple?step income statement is that a single?step income statement_____.

A)groups all revenues together and all expenses together, whereas a multiple?step income statement separates certain revenues and expenses from each other and presents subtotals
B)calculates net income using one method, whereas a multiple?step income statement calculates net income under two or more methods
C)calculates gross profit and operating income, whereas a multiple?step income statement does not
D)shows only one year's net income, whereas a multiple?step income statement shows multiple years' net income

Question 72

Sylvester Company requires clients to pay in advance for legal services.One such client made a $4,000 payment on May 1, and Sylvester Company recorded this transaction in the appropriate liability account.As of May 20, the legal services that the client requested had been completed.The May 20 accounting entry will:

A)decrease assets and increase revenues
B)decrease assets and decrease liabilities
C)increase revenues and increase liabilities
D)decrease liabilities and increase revenues

Question 73

Treasury stock is_____.

A)unissued shares of a corporation's own stock
B)shares of a corporation's stock which have been issued and subsequently repurchased by the corporation
C)ownership rights in other companies held by the corporation for investment purposes
D)shares of a corporation's stock held by the board of directors

Question 74

Selected items from the financial statements from Key Company are listed below: $\begin{array}{lr}\text { Retained Earnings } & \$ 100,000 \\\text { Net Income } & \$ 60,000 \\\text { Dividends } & \$ 75,000\end{array}$ Key Company has 5,000 shares of common stock outstanding.Key's earnings per share are_____.

A)$12.00
B)$15.00
C)$20.00
D)$25.00

Question 75

The ending retained earnings balance of Barney Company was $800,000.During the year net income was $370,000 and dividends declared and distributed was $150,000._____ was the beginning balance in retained earnings.

A)$800,000
B)$580,000
C)$1,060,000
D)An indeterminable amount

Question 76

The statement of cash flows is used for all of the following except_____.

A)showing the relationship of net income to changes in cash
B)determining a company's ability to pay its debts when they are due
C)revealing commitments that may restrict future courses of action
D)evaluating the creditworthiness of the organization

Question 77

The _____ would result in an increase in income under the cash basis but not an increase in income under the accrual basis.

A)credit sale of inventory at a sales price in excess of the inventory's cost
B)cash collection from a credit customer
C)cash sale of inventory at a sales price in excess of the inventory's cost
D)return of defective inventory purchased on account to a supplier where a full credit was given

Question 78

Limited liability means that_____.

A)the creditors of the corporation have claims on only the assets of the corporation and not the assets of the owners of the corporation
B)the creditors of a corporation can receive only up to, and no more than, the amount due to them
C)the company is required to pay only current liabilities in the current year and has no obligation to pay long?term liabilities in the current year
D)corporations can have liabilities up to only a certain amount due to limits on the company's borrowing capability

Question 79

Bob Company reported sales of $200,000, an increase in accounts receivable of $15,000, and a decrease in cash of $20,000.____ was received from Bob Company's customers.

A)$195,000
B)$185,000
C)$200,000
D)$220,000

Question 80

A company had the following information: $$\begin{array} { l r l r } \text { Beginning retained earnings }& \$ 45,000 & \text { Sales } & \$ 194,000 \\\text { Depreciation expense } & 7,000 & \text { Cash } & 11,000 \\\text { Cost of goods sold } & 102,000 & \text { Dividends } & 15,000 \\\text { Paid-in capital } & 26,000 & \text { Wage expense } & 40,000 \\\text { Rent expense } & 12,000 & \text { Prepaid rent } & 2,000\end{array}$$ The ending balance in the Retained Earnings account is_____.

A)$61,000
B)$63,000
C)$65,000
D)$74,000