Deck 17: Understanding Corporate Annual Reports: Basic Financial Statements

Question 1

Constant dollars are defined as:

A) a general decline in the purchasing power of the monetary unit
B) dollar measurements that are restated in terms of current purchasing power
C) generally the cost to replace an asset
D) the amount originally paid to acquire an asset

Answer 1

B

Question 2

Eliminating entries are:

A) made by the subsidiary company to avoid double counting assets and liabilities
B) made by the subsidiary company to avoid double counting assets and equity
C) made by the parent company to avoid double counting assets and liabilities
D) made by the parent company to avoid double counting assets and equity

Answer 2

C

Question 3

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

A) 55.4%
B) 52.0%
C) 49.0%
D) 27.1%

Answer 3

52.0%

Question 4

Presented below are the balance sheets of Monty Company and Hall Company at January 1, 20X6: $\begin{array}{ll}\text { Hall Company Balance } && \text { Monty Company Balance } \\\text { Sheet } && \text { Sheet } \\\text { January 1,20X6 } && \text { January 1,20X6 }\\\text { Cash } & \$ 100 & \text { Cash } &\$ 400 \\\text { Net fixed assets } & \underline{400} & \text { Net fixed assets } & \underline{380} \\\text { Total assets } & \$ 500 & \text { Total assets } &\$ 780 \\\text { Accounts payable Long- } & \$ 20 & \text { Accounts payable } & \$ 120 \\\text { termbonds } & & \text { Long-termbonds } & \\\text { payable } & 220 & \text { payable } &280\\\text { Stockholders' equity }&260&\text { Stockholders' equity }&380\\\text { Total liabilities and }&&\text { Total liabilities and }\\\text { stockholders' equity }&\$500&\text { stockholders' equity }&\$780\end{array}$ On January 1, 20X6, Monty Company acquired 100% of the outstanding common stock of Hall Company for $260 in cash. _ _ is the balance of the cash and other assets on the consolidated balance sheet immediately after the acquisition of Hall's stock.

A) $- 0-
B) $780
C) $1,020
D) $1,280

Question 5

Presented below are the balance sheets of Monty Company and Hall Company at January 1, 20X6: $\begin{array}{ll}\text { Hall Company Balance } & \text { Monty Company Balance } \\\text { Sheet } & \text { Sheet } \\\text { January 1, 20X6 } & \text { J anuary 1, 20X6 }\\\text { Cash } \quad \$ 100 & \text { Cash }\quad \$ 400 \\\text { Net fixed assets } \quad\underline{400} & \text { Net fixed assets } \quad\underline{380} \\\text { Total assets } \quad\$ 500 & \text { Total assets } \quad\$ 780 \\\text { Accounts payable Long- } \quad \$ 20 & \text { Accounts payable } \quad \$ 120 \\\text { term bonds } & \text { Long- termbonds } \\\text { payable } \quad 220 & \text { payable } \quad 280\\\text { Stockholders' equity } \quad \underline{260} & \text { Stockholders' equity } \quad 380 \\\text { Total liabilities and } & \text { Total liabilities and }\\\text { stockholders' equity } \underline{\underline{\$ 500}}& \text { stockholders' equity } \$ 780\end{array}$ On January 1, 20X6, Monty Company acquired 100% of the outstanding common stock of Hall Company for $260 in cash. is the balance of liabilities on the consolidated balance sheet immediately after the acquisition of Hall's stock.

A) $640
B) $380
C) $- 0-
D) $400

Question 6

Rock Company acquired 10% of the voting stock of Hudson Company for $10 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 $11 million. What accounts would be affected on Rock Company's books to reflect the year- end market value and by how much?

A) Cash would increase by $11 million and Stockholders' Equity would increase by $11 million.
B) There is no entry and no effect.
C) Investments would increase by $1 million and Stockholders' Equity would increase by $1 million.
D) Investments would increase by $11 million and Stockholders' Equity would increase by $11 million.

Question 7

Below is the balance sheet for Triple H Company: Triple H Company Balance Sheet Dec ember $31 _ {, }$

$\begin{array}{ccc}&20X6&20X5\\\text { Current as sets: }\\\text { Cash } & \$ 380 & \$ 242 \\\text { Accounts receivable } & 430 & 194 \\\text { Inventory } & 238 & 388 \\\text { Prep aid insur ance } & \underline{32} & \underline{76} \\\text { Total current ass ets } & \$ 1,080 & \$ 900 \\\text { Long-term as sets: } & & \\\text { Fixed assets } & \$ 406 & \$ 452 \\\text { Less: Accumulated depreciation } & \underline{(272)} & \underline{(228)} \\\text { Total long-term assets } & \$ 134 & \$ 224 \\\text { Total assets } & \$ 1.214 & \$ 1.124\\\text { Current liabilities: Accounts }\\\text { pay able } & \$ 176 & \$ 152 \\\text { Wages payable } & \underline{38} & \underline{32} \\\text { Total current liabilities } & \$ 214 & \$ 184 \\\text { Long-term liabilities: } & &\\\text { Notes payable } & \underline{420} & \underline{420} \\\text { Total liabilities } & \underline{\$ 634} & \ \mathbf{\$ 6 0 4} \\\text { Owners' equity: } & &\\\text { Common stock } & \$ 190 & \$ 160 \\\text { Retained income } & \underline{390} & \underline{360} \\\text { Total owner' equity } & \$ 580 & \$ 520 \\\text { Total liabilities and owners' } & \$ 1,214 & \$ 1,124\\\text { equity }\end{array}$ Triple H Company's prepaid insurance increased (decreased) by:

A) (57.9)%
B) 146.7%
C) (146.7)%
D) 57.9%

Question 8

Comparing a company's ratios with the ratios of other companies in the same industry is called a(n):

A) industry analysis
B) cross- sectional comparison
C) intercompany comparison
D) benchmark

Question 9

Jeff Company purchased, as a long- term investment, common stock of Garcia Company. During the current year, Garcia Company earned $4,000,000 and paid dividends of $1,000,000. Assume that Jeff Company owns 10% of the outstanding shares of Garcia Company. Garcia Company's dividend will affect Jeff Company by:

A) increasing cash and decrease investments by $100,000
B) increasing investments and stockholders' equity by $100,000
C) increasing cash and stockholders' equity by $100,000
D) None of these answers is correct.

Question 10

is reported on the financial statements of publicly held companies in the United States.

A) The price- earnings ratio
B) Earnings per share
C) The current ratio
D) All of these answers are correct.

Question 11

A basic knowledge about reporting the effects of changing prices is useful for which of the following reasons?

A) Chances are that higher inflation rates will return to the United States, and readers of financial statements will once again be concerned about inflation- adjusted statements.
B) High inflation is still present in many countries, and most accounting reports in those countries report the effects of inflation.
C) The cumulative effect of even a 2% or 3% rate of inflation is substantial.
D) All of these answers are correct.

Question 12

The statement "total liabilities should not exceed net worth" is an example of a(n):

A) benchmark
B) investing rule
C) industry standard
D) None of these answers is correct.

Question 13

Historical cost is defined as:

A) generally the cost to replace an asset
B) a general decline in the purchasing power of the monetary unit
C) dollar measurements that are restated in terms of current purchasing power
D) the amount originally paid to acquire an asset

Question 14

Which of the following statement(s) describe the principal reason(s) why investors and creditors use financial statement analysis? 1. To assess the risks associated with expected returns
2) To establish recommended dividend and interest payments
3) To evaluate top and middle level management
4) To predict the amount of expected returns

A) 1 and 2
B) 3 and 4
C) 1 and 4
D) 1, 2, and 3

Question 15

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

A) 1.04
B) 0.76
C) 0.96
D) 0.29

Question 16

Which of the following statements is incorrect with respect to creditors and equity investors?

A) Creditors are concerned with assessing the short- term liquidity of a company.
B) Equity investors are concerned about dividend payments.
C) Creditors are concerned with assessing the long- term solvency of a company.
D) Both creditors and equity investors are concerned about security prices.

Question 17

Mel Company holds a minority interest in Gibson Company. Mel Company owns of Gibson Company's stock.

A) less than 50%
B) between 50 and 99%
C) less than 20%
D) between 21 and 49%

Question 18

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

A) 26.9%
B) 21.5%
C) 31.3%
D) 35.2%

Question 19

Common- size statements are particularly useful because:

A) the percentages can be added to and/or subtracted from one another
B) dollars are converted to percentages
C) they are a means of comparing one company to another company within the same industry
D) accounts are aggregated together so the same accounts can be used consistently from year to year

Question 20

Presented below are the balance sheets of Monty Company and Hall Company at January 1, 20X6: $\begin{array}{ll}\text { Hall Company Balance } && \text { Monty Company Balance } \\\text { Sheet } && \text { Sheet } \\\text { January 1,20X6 } && \text { January 1,20X6 }\\\text { Cash } & \$ 100 & \text { Cash } &\$ 400 \\\text { Net fixed assets } & \underline{400} & \text { Net fixed assets } & \underline{380} \\\text { Total assets } & \$ 500 & \text { Total assets } &\$ 780 \\\text { Accounts payable Long- } & \$ 20 & \text { Accounts payable } & \$ 120 \\\text { termbonds } & & \text { Long-termbonds } & \\\text { payable } & 220 & \text { payable } &280\\\text { Stockholders' equity }&260&\text { Stockholders' equity }&380\\\text { Total liabilities and }&&\text { Total liabilities and }\\\text { stockholders' equity }&\$500&\text { stockholders' equity }&\$780\end{array}$ On January 1, 20X6, Monty Company acquired 100% of the outstanding common stock of Hall Company for $260 in cash. The net income for 20X6 was $30 and $40 for Hall Company and Monty Company, respectively. None of the income resulted from intercompany sales. The net income on the consolidated income statement is:

A) $35
B) $- 0-
C) $40
D) $30

Question 21

The following are the income statements and balance sheets for Coors Company: $\begin{array}{ll}&20X2\\\text { Sales (only credit sales) } & \$ 1,606.0 \\\text { Less cost of goods sold } & \underline{1,062.0} \\\text { Gross profit } & \$ 544.0 \\\text { Less operating expenses } & \underline{322.0} \\\text { Operating income } & \$ 222.0 \\\text { Less other expense: Interest } & \underline{9.6} \\\text { Income before tax } & \$ 212.4 \\\text { Less income tax expens e } & \underline{85.0} \\\text { Net income } & \$ 127.4\end{array}$

$\begin{array}{llllll}&20X2&20X1&&20X2&20X1\\\text { Current assets: } & & & \text { Current liab: } \\\text { Cash } & \$ 36 & \$ 38 & \text { Accts payable } & \$ 98 & \$ 64 \\\text { Accts receivable } & 180 & 144 & \text { W ages p ayable } & 18 & 16 \\\text { Inventory } & 120 & 100 & \text { Taxes payable } & 28 & 4 \\\text { Prep aid rent } & 20 & 24 & \text { Current portion } & &\\\begin{array}{l}\text { Total current as sets } \\\text { Long-term as sets: }\end{array} & \$ 356 & \$ 306 & \begin{array}{l}\text { of long- term debt } \\\text { Total current }\end{array} & \underline{30} & \underline{6} \\\text { Fixed ass ets } & \$ 320 & \$ 316 & \text { liabilities } & \$ 174 & \$ 90 \\\text { Accum. deprec. } & (206) & (180) & \text { Long-term liabilities } & 66 & 92\\\text { Total long- term } & \$ 114 & \$ 136 & \text { T otal liabilities } & \$ 240 & \$ 182\\\text { assets }\\&&&\text { Owners' equity: }\\\text { Common stock, } \$ 5 \text { par } &\$ 80 & \$ 80\\&&&\text { Retained income } & \underline{150} & \underline{180} \\&&&\text { T otal owners' equity } & \$ 230 & \$ 260\\&&&\text { T ot al liab. and }\\\text { Total assets } & \$ 470 & \$ 442 & \text { own. equity } & \$ 470 & \$ 442\end{array}$ December 31 market price per share: $120 $106 The price- earnings ratio for Coors Company in 20X2 is:

A) 0.06 times
B) 7.50 times
C) 0.96 times
D) 15.07 times

Question 22

Presented below are the balance sheets of Monty Company and Hall Company at January 1, 20X6: $\begin{array}{ll}\text { Hall Company Balance } && \text { MontyC omp any } \\\text { Sheet } && \text { Balance Sheet } \\\text { January 1, 20X6 } && \text { January 1, 20X6 }\\\text { Cash } & \$ 100 & \text { Cash } & \$ 400 \\\text { Net fixed assets } & \underline{400} & \text { Net fixed assets } & \underline{380} \\\text { Total assets } & \$ 500 & \text { Total assets } & \$ 780\\\text { Accounts payable Long- }& \$ 20& \text { Accounts payable Long- } &\$ 120\\\text { term bonds }&&\text { term bonds }&\\\text { payable }&220&\text { payable }&280\\\text { Stockholders' equity Total } &260 & \text { Stockholders' equity } &380\\\text { liabilities and }&&\text { Total liabilities and }\\\text { stockholders' equity } & \$ 500 & \text { stockholders' equity }&\$ 780\\\end{array}$ On January 1, 20X6, Monty Company acquired 100% of the outstanding common stock of Hall Company for $260 in cash. If Hall Company generated net income during 20X2 of $30, and none of the income resulted from intercompany sales, would be the amount of the elimination entry at the end of 20X6.

A) $230
B) $290
C) $30
D) $- 0-

Question 23

Presented below are the balance sheets of Monty Company and Hall Company at January 1, 20X6: $\begin{array}{lll}\text { Hall Company Balance } && \text { Monty Company Balance } \\\text { Sheet } && \text { Sheet } \\\text { January 1,20X6 } && \text { J anuary 1, 20X6 }\\\text { Cash } & \$ 100 & \text { Cash }& \$ 400 \\\text { Net fixed assets } & \underline{400} & \text { Net fixed assets }&380\\\text { Total assets }&\$500&\text { Total assets }&\$780\\\text { Accounts payable Long- } & \$ 20 & \text { Accounts payable } & \$ 120 \\\text { termbonds } & & \text { Long-termbonds } & \\\text { payable } & 220 & \text { payable } & 280\\\text { Stockholders' equity } & 260 & \text { Stockholders' equity } &380\\\text { Total liabilities and }&&\text { Total liabilities and }\\\text { stockholders' equity }&\$ 500 &\text { stockholders' equity }& \$ 780\end{array}$ On January 1, 20X6, Monty Company acquired 100% of the outstanding common stock of Hall Company for $260 in cash. is the balance of stockholders' equity on the consolidated balance sheet immediately after the acquisition of Hall's stock.

A) $640
B) $380
C) $260
D) $- 0-

Question 24

are investments that are not intended for resale in the near future.

A) Options
B) Available- for sale securities
C) Trading securities
D) Bonds

Question 25

The following information pertains to Barnum Company: Balance Sheet
At December $31,20 \times 2$
$\begin{array}{llll}\text { Current ass ets } & \$ 18,700 & \text { Current liabilities } & \$ 7,600 \\\text { Long- term assets } & \underline{29,700} & \text { Long- term liabilities } & 13,250\\&& \text { Stockholders' equity } & \underline{27,550} \\\text { Total assets } & \$ 48,400 &\text { T otal liabilities and s.e. } & \$ 48,400\end{array}$ Barnum Company Income Statement
For the Year Ended December 31, 20X2
$\begin{array}{ll}\text { Sales } & \$ 106,950 \\\text { Less: Cost of goods sold } & \underline{(61, \$ 00)} \\\text { Gross profit } & \$ 45,150 \\\text { Less: Operating expenses } & \underline{31,700} \\\text { Operatingincome } & \$ 13,450 \\\text { Less other expenses: interest } & \$ 1,300) \\\text { Income before taxes } & \$ 12,150 \\\text { Less: Income tax expense } & \$ 4,850) \\\text { Net income } & \$ 7,300\end{array}$ 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 yield ratio for 20X2 is:

A) 9.7%
B) 68.5%
C) 6.7%
D) 100.0%

Question 26

The following information pertains to Barnum Company: Balance Sheet
At December $31,20X2$
$\begin{array}{llll}\text { Current assets } & \$ 18,700 & \text { Current liabilities } & \$ 7,600 \\\text { Long-term ass ets } & \underline{29,700} & \text { Long- term liabilities } & 13,250 \\& & \text { Stockholders' equity } & \underline{27,550}\\\text { Total as sets } &\$ 48,400& \text { Total liabilities and s.e. }& \$ 48,400\end{array}$
Barnum Company Income Statement
For the Year Ended December $31,20 \times 2$
$\begin{array}{ll}\text { Sales } & \$ 106,950 \\\text { Less: Cost of goods sold } & \underline{(61,800)} \\\text { Gross profit } & \$ 45,150 \\\text { Less: Operating expenses } & \underline{31,700} \\\text { Operating income } & \$ 13,450 \\\text { Less other expenses: interest } & \underline{(1,300)} \\\text { Income before taxes } & \$ 12,150 \\\text { Less: Income tax expense } & \underline{(4,850)} \\\text { Net income } & \$ 7,300\end{array}$ 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 earnings per share for 20X2 is:

A) $0.26
B) $106.95
C) $7.30
D) $3.88

Question 27

In a period of rising prices a company pays dividends equal to its net income for the year. Which statement about this company is true?

A) The company is paying out an amount exactly equal to the company's net income. Therefore, the capital available to the company is exactly equal to the amount of capital available at the beginning of the year.
B) The company is paying out some capital in excess of the return stockholders received through the creation of net income.
C) The company is paying dividends that are less than its net income and is increasing the capital available for the company's use.
D) Without knowing the amount of inflation relative to the company's marginal interest rate on any additional debt which it may incur, it cannot be determined whether the

Question 28

Below is the balance sheet for Triple H Company: Triple H Company Balance Sheet Dec ember $31 _ {, }$

$\begin{array}{ccc}&20X6&20X5\\\text { Current as sets: }\\\text { Cash } & \$ 380 & \$ 242 \\\text { Accounts receivable } & 430 & 194 \\\text { Inventory } & 238 & 388 \\\text { Prep aid insur ance } & \underline{32} & \underline{76} \\\text { Total current ass ets } & \$ 1,080 & \$ 900 \\\text { Long-term as sets: } & & \\\text { Fixed assets } & \$ 406 & \$ 452 \\\text { Less: Accumulated depreciation } & \underline{(272)} & \underline{(228)} \\\text { Total long-term assets } & \$ 134 & \$ 224 \\\text { Total assets } & \$ 1.214 & \$ 1.124\\\text { Current liabilities: Accounts }\\\text { pay able } & \$ 176 & \$ 152 \\\text { Wages payable } & \underline{38} & \underline{32} \\\text { Total current liabilities } & \$ 214 & \$ 184 \\\text { Long-term liabilities: } & &\\\text { Notes payable } & \underline{420} & \underline{420} \\\text { Total liabilities } & \underline{\$ 634} & \ \mathbf{\$ 6 0 4} \\\text { Owners' equity: } & &\\\text { Common stock } & \$ 190 & \$ 160 \\\text { Retained income } & \underline{390} & \underline{360} \\\text { Total owner' equity } & \$ 580 & \$ 520 \\\text { Total liabilities and owners' } & \$ 1,214 & \$ 1,124\\\text { equity }\end{array}$ Triple H Company's accounts receivable increased (decreased) by:

A) (54.88)%
B) (121.65)%
C) 27.44%
D) 121.65%

Question 29

Rock Company acquired 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 at the time Hudson Company reported its earnings and by how much?

A) Investments would increase by $15 million and Stockholders' Equity would increase by $15 million.
B) Investments would increase by $6 million and Stockholders' Equity would increase by $6 million.
C) There is no entry and no effect.
D) Cash would increase by $15 million and Stockholders' Equity would increase by $15 million.

Question 30

Below is a comparative income statement for Samson Company: Sams on Comp any Income Statement
For the Y ears Ended D ecember 31, 20X6 and 20X5
$\begin{array}{lll}&20X6& 20X5\\\text { Sales } & \$ 1,744 & \$ 1,562 \\\text { Less: Cost of goods sold } & 992 & 806 \\\text { Gross profit } & \$ 752 & \$ 756 \\\text { Less operating expenses: } & &\\\text { W age expens e } & \$ 172 & \$ 160 \\\text { Depreciation expense } & 28 & 26 \\\text { Rent expense } & 36 & 36 \\\text { Miscellaneous expens e } & 40 & \underline{40}\\\text { Total operating expenses } & \$ 276 & \$ 292 \\\text { Operating income } & \$ 476 & \$ 464\\\text { Less other expenses: }\\\text { Interest } & \underline{20} & \underline{60} \\\text { Income before tax } & \$ 456 & \$ 404 \\\text { Less: Income tax expense } & \underline{182} & \underline{162} \\\text { Net income } & \$ 274 & \$ 242\\\text { Sales } & \$ \$ 1,744 & \$ 1,562 \\\text { Less: Cost of goods sold } & 992 & \$ 06 \\\text { Gross profit } & \$ 752 & \$ 756\end{array}$ If a common=size income statement were prepared, would be attributable to the 20X6 income tax expense of Samson Company.

A) 11.0%
B) 12.4%
C) 39.9%
D) 10.4%

Question 31

Elway Company acquired 80% of the outstanding shares of Warner Company for $152 in cash. Elway Company's assets prior to the acquisition were $700. Warner Company's assets prior to the acquisition were $400. The total assets that would appear on the consolidated balance sheet prepared immediately after the acquisition of Warner Company's stock is:

A) $948
B) $1,100
C) $400
D) $700

Question 32

Presented below is the income statement for Nicklaus Company. $\begin{array}{ll}\text { Sales (only credit sales) } & \$ 1,606 \\\text { Less: Cost of goods sold } & \underline{1,062.0} \\\text { Gross profit } & \$ 544.0 \\\text { Less: Operating expenses } & \underline{322.0} \\\text { Operating income } & \$ 222.0 \\\text { Less other expens e: Interest } & \underline{9.6} \\\text { Income before tax } & \$ 212.4 \\\text { Less: Income tax expense } & \underline{85.0} \\\text { Net income } & \$ 127.4\end{array}$ The gross profit rate for Nicklaus Company is:

A) 13.8%
B) 23.4%
C) 51.2%
D) 33.9%

Question 33

Company B has 40,000 shares of its common stock outstanding. Company A owns 5,000 shares of Company B stock. Company A should use to account for its investment in Company B.

A) the cost method
B) the consolidated method
C) the equity method
D) the market method

Question 34

Historical cost:

A) implies maintenance of financial capital and is used for internal reporting only
B) implies maintenance of physical capital and is used for internal reporting only
C) implies maintenance of physical capital and is required for financial reporting
D) implies maintenance of financial capital and is required for financial reporting

Question 35

Inflation is defined as:

A) the amount originally paid to acquire an asset
B) dollar measurements that are restated in terms of current purchasing power
C) generally the cost to replace an asset
D) a general decline in the purchasing power of the monetary unit

Question 36

Presented below are the balance sheets of Monty Company and Hall Company at January 1, 20X6: $\begin{array}{lll}\text { Hall Company Balance } && \text { Monty Company Balance } \\\text { Sheet } && \text { Sheet } \\\text { January 1,20X6 } && \text { J anuary 1, 20X6 }\\\text { Cash } & \$ 100 & \text { Cash }& \$ 400 \\\text { Net fixed assets } & \underline{400} & \text { Net fixed assets }&380\\\text { Total assets }&\$500&\text { Total assets }&\$780\\\text { Accounts payable Long- } & \$ 20 & \text { Accounts payable } & \$ 120 \\\text { termbonds } & & \text { Long-termbonds } & \\\text { payable } & 220 & \text { payable } & 280\\\text { Stockholders' equity } & 260 & \text { Stockholders' equity } &380\\\text { Total liabilities and }&&\text { Total liabilities and }\\\text { stockholders' equity }&\$ 500 &\text { stockholders' equity }& \$ 780\end{array}$ On January 1, 20X6, Monty Company acquired 100% of the outstanding common stock of Hall Company for $260 in cash. Which of the following statements regarding the consolidated balance sheet immediately after the acquisition is not correct?

A) Total net fixed assets will be $780.
B) Total cash will be $500.
C) Total liabilities will be $640.
D) Total assets will be $1,280.

Question 37

The historical cost/constant 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.

Question 38

The following are the income statements and balance sheets for Coors Company: $\begin{array}{ll}&20X2\\\text { Sales (only credit sales) } & \$ 1,606.0 \\\text { Less cost of goods sold } & \underline{1,062.0} \\\text { Gross profit } & \$ 544.0 \\\text { Less operating expenses } & \underline{322.0} \\\text { Operating income } & \$ 222.0 \\\text { Less other expense: Interest } & \underline{9.6} \\\text { Income before tax } & \$ 212.4 \\\text { Less income tax expens e } & \underline{85.0} \\\text { Net income } & \$ 127.4\end{array}$
$\begin{array}{llllll}\text { Curpentacsete: } & 20 \times 2 & 20 \times 1 & \text { Curpentliah. } & 20 \times 2 & 20 \times 1\\\text { C ash } & \$ 36 & \$ 38 & \text { Accts payable } & \$ 98 & \$ 64 \\\text { Accts receivable } & 180 & 144 & \text { W ages payable } & 18 & 16 \\\text { Inventory } & 120 & 100 & \text { Taxes payable } & 28 & 4 \\\text { Prep aid rent } & \underline{20} & \underline{24} & \text { Current portion } & &\\\text { Total current as sets } & \$ 356 & \$ 306 & \text { of long-term debt } & 30 & 6\\\text { Long-term assets: }&&&\text { Total current }\\\text { Fixed ass ets } & \$ 320 & \$ 316 & \text { liabilities } & \$ 174 & \$ 90 \\\text { Accum. deprec. } & (206) & (180) & \text { Long-term liabilities } & \underline{66} & \underline{92}\\\text { Total long- term } & \$ 114 & \$ 136 & \text { Total liabilities } & \$ 240 & \$ 182\\\text { assets }&&&\text { Owners' equity: }\\\end{array}$ $\begin{array}{lll}\text { Common stock, } \$ 5 \text { par } & \$ 80 & \$ 80 \\\text { Retained income } & \underline{150} & \underline{180} \\\text { Total owners' equity } & \$ 230 & \$ 260 \\\text { Total liab. }\\\text { and own. equity } & \$ 470 & \$ 442\\\text { Total ass ets } &\$ 470 & \$ 442\\\text { December } 31 \text { market price per share: } & \$ 120& \$ 106\end{array}$ The average collection period in days for Coors Company in 20X2 is:

A) 464.1 days
B) 5.0 days
C) 40.9 days
D) 36.8 days

Question 39

Rock Company acquired 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. The should be used to account for the investment.

A) cost method
B) market method
C) consolidated method
D) equity method

Question 40

The current cost/constant 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.

Question 41

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

Question 42

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.

Question 43

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

Question 44

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

Question 45

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%

Question 46

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

Question 47

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.

Question 48

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.

Question 49

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

Question 50

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%

Question 51

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%

Question 52

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%

Question 53

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

Question 54

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

Question 55

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%

Question 56

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%.

Question 57

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

Question 58

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.

Question 59

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

Question 60

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

Question 61

Vince Company purchased as a long- term investment common stock of Gill Company. During the current year Gill Company earned $4,000,000 and paid dividends of $1,000,000. Assume that Vince Company owns 40% of Gill Company. Gill Company's net income will affect Vince Company by:

A) increasing cash and stockholders' equity $400,000
B) having no effect
C) increasing investments by $1,600,000
D) increasing cash and investments by $2,000,000

Question 62

Concepts of income and capital include all of the following except:

A) income must be generated to allow a company to reinvest in itself so that it can continue to grow at a rate at least as high as has been maintained in the past
B) shareholders invest capital and expect a return on the capital and an eventual return of the capital
C) income is the amount that could be paid out to shareholders at the end of the period and still leave the entity as well off as it was at the beginning of the period
D) income is an entity's increase in wealth during a period

Question 63

On January 1, 20X6, Jane Company acquired 80% of the outstanding shares of Tarzan Company for $152 in cash. Tarzan Company's total assets and total liabilities were $450 and $260, respectively. The balance of the minority interest on the consolidated balance sheet immediately after the acquisition of Tarzan Company's stock is:

A) $190
B) $114
C) $152
D) $38

Question 64

On January 1, 20X6, Jane Company acquired 80% of the outstanding shares of Pauley Company for $152 in cash. The stockholders' equity accounts of Jane Company and Pauley Company were $420 and $190, respectively. The balance in stockholders' equity on the consolidated balance sheet immediately after the acquisition of Pauley Company's stock is:

A) $610
B) $- 0-
C) $420
D) $458

Question 65

Complaints regarding the use of historical cost accounting include all of the following except:

A) historical cost accounting has led to companies overpaying taxes
B) historical cost accounting has led to misleading results during times of rising prices
C) profits have been overstated because of the use of historical cost accounting
D) it is a costly and burdensome method of record keeping to maintain

Question 66

Rock Company acquired 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 at the time Hudson Company paid its dividends and by how much?

A) Cash would increase by $2 million and Stockholders' Equity would increase by $2 million.
B) Cash would increase by $2 million and Investments would decrease by $2 million.
C) Cash would increase by $5 million and Stockholders' Equity would increase by $5 million.
D) There is no entry and no effect.

Question 67

Traditional accounting uses .

A) nominal dollars and historical cost
B) nominal dollars and current cost
C) constant dollars and historical cost
D) constant dollars and current cost

Question 68

Listed below are four methods of measuring income: 1. historical cost/nominal dollars
2) historical cost/constant dollars
3) current cost/nominal
4) dollars current cost/constant dollars
Holding gains arise from the use of methods .

A) 2, 3, and 4
B) 3 and 4
C) 2 and 4
D) 1 and 2

Question 69

Hamandeggs Company owns a 60% interest in Hormel Company. The consolidated balance sheet of Hamandeggs Company, prepared at the beginning of the year, showed a minority interest of $30. The net income of Hamandeggs Company and Hormel Company were $80 and $10, respectively. The ending balance in the Minority Interest account is:

A) $40
B) $30
C) $36
D) $34

Question 70

Julia Company acquired 80% of the outstanding shares of Roberts Company for $190 in cash. Roberts Company's total assets and liabilities were $550 and $400, respectively. The balance of the investment in Roberts Company stock on the consolidated balance sheet immediately after the acquisition of Roberts Company's stock is:

A) $190
B) $- 0-
C) $440
D) $120

Question 71

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 gross profit rate for 20X2 is:

A) 12.6%
B) 6.8%
C) 16.2%
D) 42.2%

Question 72

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

A) 1.6%
B) 4.9%
C) 124.5%
D) 8.2%

Question 73

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

$\begin{array}{llllll}\text { Currentassets: } & {\underline{20 X 2}} & \underline{20 X 1} & \text { Currentliab: } & \underline{20 X 2} & \underline{20 X 1} \\\text { Cash } &\$36 &\$38 & \text { Accts payable }& \$98& \$ 64 \\\text { Accts receivable } & 180 & 144 & \text { Wages payable } & 18 & 16\end{array}$ $\begin{array}{ll}&20X2\\\text { Sales (onlycredit sales) } & \$ 1,606.0 \\\text { Less cost of goods sold } & \underline{1,062.0} \\\text { Gross profit } & \$ 544.0 \\\text { Less operating expenses } & \underline{322.0} \\\text { Operatingincome } & \$ 222.0 \\\text { Less other expense: Interest } & \underline{9.6} \\\text { Income before tax } & \$ 212.4 \\\text { Less income tax expense } & \underline{\$ 5.0} \\\text { Net income } & \$ 127.4\end{array}$

$\begin{array}{llllll}\text { Currentassets: } & {\underline{20 X 2}} & \underline{20 X 1} & \text { Currentliab: } & \underline{20 X 2} & \underline{20 X 1} \\\text { Cash } &\$36 &\$38 & \text { Accts payable }& \$98& \$ 64 \\\text { Accts receivable } & 180 & 144 & \text { Wages payable } & 18 & 16\end{array}$ 32 $\begin{array}{llllll}\text { Inventory } & 120 & 100 & \text { Taxes payable } & 28 & 4 \\\text { Prep aid rent } & \underline{20} & \underline{24} & \text { Current portion } & &\\\text { Total current assets }&\$356&\$306&\text { of long-term debt }&30&6\\\text { Long-term as sets: }&&&\text { Total current }\\\text { Fixed ass ets } & \$ 320 & \$ 316 & \text { liabilities } & \$ 174 & \$ 90 \\\text { Accum. deprec. } & \underline{(200)} & \underline{(180)} & \text { Long-term } & \underline{66} & \underline{92}\\&&&\text { liabilities }\\\text { Total long-term } & \$ 114 & \$ 136 & \text { Total liabilities } & \$ 240 & \$ 182\\\text { assets }\\\end{array}$

The return on sales for Coors Company in 20X2 is:

A) 13.8%
B) 7.9%
C) 33.9%
D) 23.4%

Question 74

are investments that the company buys only with the intent to resell them shortly.

A) Trading securities
B) Options
C) Bonds
D) Available- for- sale securities

Question 75

Consolidated statements combine two or more in a single presentation.

A) legal entities
B) accounts
C) accounting periods
D) financial statements

Question 76

Rock Company acquired 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 at the time they acquire Hudson Company's stock and by how much?

A) Accounts Payable would decrease by $40 million and Investments would increase by $40 million.
B) There is no entry and no effect.
C) Cash would decrease by $40 million and Investments would increase by $40 million.
D) Cash would decrease by $40 million and Stockholders' Equity would increase by $40 million.

Question 77

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 return on sales for 20X2 is:

A) 19.5%
B) 6.8%
C) 25.8%
D) 42.2%

Question 78

are profitability ratios.

A) Earnings per share and dividend yield
B) Price earnings and current ratio
C) Dividend payout and rate of return in invested capital
D) Gross profit rate and return on sales

Question 79

Pretax operating rate of return on total assets can be decomposed into which of the following items? 1. operating income percentage on sales
2) return on sales
3) total asset turnover
4) total debt to total assets

A) 1, 3, and 4
B) 2 and 4
C) 1 and 2
D) 1 and 3

Question 80

Marketable securities can be further classified as:

A) available- for- sale securities and unavailable securities
B) trading securities and available- for- sale securities
C) debt securities and equity securities
D) current securities and long- term securities