ch5

ch5Student: ___________________________________________________________________________

1. External users of accounting information include decision makers such as investors, creditors, and financial analysts. True False

2. The mission of the Securities & Exchange Commission (SEC) is to develop generally accepted accounting

principles. True False

3. Independent auditors are advisors who analyze financial statements and other economic information to

formulate forecasts and stock recommendations. True False

4. The Securities & Exchange Commission (SEC) oversees the work of the Financial Accounting Standards

Board (FASB). True False

5. The Financial Accounting Standards Board (FASB) oversees the work of the Public Company Accounting

Oversight Board (PCAOB). True False

6. The Public Company Accounting Oversight Board (PCAOB) sets auditing standards for independent

auditors. True False

7. The primary responsibility for the information in a corporation's financial statements lies with the chief

executive officer (CEO) and the chief financial officer (CFO). True False

8. The board of directors is responsible for maintaining the integrity of a company's financial statements and

financial reporting. True False

9. The Securities & Exchange Commission requires publically traded companies to have their financial

statements audited by their internal auditors. True False

10. Financial analysts utilize a company's financial reports to assist them in making earnings projections and

earnings per share projections. True False

11. For financial information to be relevant it must be verifiable and accurate. True False

12. In order for financial information to be consistent, similar accounting methods need to be used from one

period to the next. True False

13. In order for financial information to be reliable, it should be timely and verifiable.

True False

14. In order for financial information to be relevant, it should be timely and accurate.

True False

15. The form 10-Q contains an unaudited set of quarterly financial statements containing a condensed income

statement and balance sheet. True False

16. The form 10-K is the annual report that publically traded companies must file with the Securities &

Exchange Commission (SEC). True False

17. Recent stock price information is a financial statement disclosure.

True False

18. A listing of a company's directors and officers is a financial statement disclosure.

True False

19. Inventories are reported on the balance sheet as a current asset.

True False

20. Intangible assets are reported on the balance sheet as a current asset.

True False

21. Intangible assets are reported on the balance sheet as a noncurrent asset and include goodwill.

True False

22. Additional-paid in capital is reported on the balance sheet as a component of shareholders' equity.

True False

23. Common stock and additional-paid in capital are both reported on the balance sheet as a component of

shareholders' equity. True False

24. Common stock and additional-paid in capital represent the capital contributed by shareholders. True False

25. Net sales less cost of goods sold is reported on the income statement as income from continuing operations.

True False

26. Discontinued operations and extraordinary items are reported on the income statement as a component of

income from continuing operations. True False

27. The summary of significant accounting policies is a required financial statement disclosure.

True False

28. The return on assets ratio is calculated by dividing income from continuing operations by average total

assets. True False

29. The return on assets ratio will increase when sales increase.

True False

30. The return on assets ratio is affected by both the net profit margin ratio and the asset turnover ratio.

True False

31. Which of the following tasks does the Securities & Exchange Commission (SEC) not perform?

A. Overseeing the work of the Financial Accounting Standards Board (FASB).B. Overseeing the work of the Public Company Accounting Oversight Board (PCAOB).C. The responsibility for protecting investors and maintaining the integrity of the securities markets.D. The development of generally accepted accounting principles.

32. Which of the following tasks does the Financial Accounting Standards Board (FASB) perform?

A. Overseeing the work of the Securities & Exchange Commission (SEC).B. Overseeing the work of the Public Company Accounting Oversight Board (PCAOB).C. The responsibility for protecting investors and maintaining the integrity of the securities markets.D. The development of generally accepted accounting principles.

33. Which of the following are primarily responsible for the information provided in a company's financial

statements? A. The internal and external auditors.B. The Securities & Exchange Commission (SEC) and the external auditors.C. The chief executive officer (CEO) and the chief financial officer (CFO).D. The external auditors and the board of directors.

34. Which of the following is not a responsibility of the chief executive officer (CEO) and the chief financial officer (CFO)? A. The responsibility to oversee the financial statement external audit.B. To ensure the accuracy and completeness of all reports provided to the Securities & Exchange

Commission (SEC).C. The certification of the strength of the internal control system.D. The disclosure to the auditor committee of any frauds they are aware of.

35. Which of the following is not true about the board of directors?

A. They are elected by stockholders.B. They ensure the accuracy and completeness of all reports provided to the Securities & Exchange

Commission (SEC).C. They are responsible for ensuring that processes are in place for maintaining the integrity of the financial

statements.D. They are responsible for hiring the company's external auditors.

36. Which of the following statements is false?

A.

The board of directors meets with the external auditors to discuss management's compliance with their financial reporting obligations.

B. The external auditors are selected by the Securities & Exchange Commission (SEC).C.

The Securities & Exchange Commission (SEC) requires publically traded companies to have their financial statements audited by an independent accountant.

D. The external auditors assume some responsibility with respect to the fairness of the financial statements. 37. For accounting information to be useful, it must be which of the following?

A. It must be consistent and comparable.B. It must be relevant and reliable.C. It must be comparable and reliable.D. It must be relevant and consistent.

38. Conservatism requires that special care must be taken to avoid which of the following?

A. Overstating assets and liabilities and understating revenues and expenses.B. Understating assets and liabilities and overstating revenues and expenses.C. Overstating assets and revenues and understating liabilities and expenses.D. Understating assets and revenues and overstating liabilities and expenses.

39. Which of the following is an objective of the external audit of a company's financial statements?

A. To provide a forecast of the company's future earnings.B. To assure no fraud has been committed by the company's management.C.

To provide credibility and assurance that the financial statement information conforms with generally accepted accounting principles in all material respects.

D. To detect all accounting errors made by the accounting system and employees.

40. Which of the following describes the conservatism constraint? A. A business should avoid overstating assets and revenues and avoid understating expenses and liabilities.B. The benefits of accounting for and reporting information should outweigh the costs.C. If the dollar amounts involved are large enough to influence a user's decisions the data is considered to

be relevant.D. The conservatism constraint produces a higher net income and stockholders' equity.

41. Which of the following is false?

A. Relevance is the characteristic of accounting information that says the information would make a

difference in a user's decision.B. Accounts receivable would normally be classified as a current asset.C. Accumulated depreciation would normally appear on the income statement.D.

The matching principle holds that all expenses incurred in the generation of revenue should be recognized in the same period as the revenue is earned.

42. The Securities and Exchange Commission's (SEC) report that is required to be filed if any special event

occurs is which of the following? A. Form 10KB. Form 8KC. Form 10QD. Form 8Q

43. In what order are current assets usually reported on the balance sheet?

A. From the most liquid to the least liquid.B. From the least liquid to the most liquid.C. In alphabetical order of accounts.D. From the largest balance to the smallest balance.

44. Which of the following would not be classified as a current asset?

A. Accounts receivableB. PatentsC. Merchandise inventoryD. Cash

45. What account is credited when a corporation issues stock at an amount over the stock's par value?

A. Gain on sale of stockB. Loss on sale of stockC. Additional paid- in capitalD. Retained earnings

46. Contributed capital consists of which of the following two accounts?

A. Common stock and Additional paid in capitalB. Common stock and Retained earningsC. Additional paid in capital and Retained earningsD. Retained earnings and Cash

47. Which of the following are the criteria used to determine whether an item is extraordinary? A. It is unusual in nature and occurs frequently.B. It is unusual in nature and occurs infrequently.C. It is unusual in nature or occurs infrequently.D. It is infrequent in occurrence only.

48. Which of the following journal entries is correct when common stock is sold for cash at a price greater than

par value? A. Option AB. Option BC. Option CD. Option D


A. The common stock account has a credit balance.B. The additional paid-in capital account has a credit balance.C. Contributed capital consists of common stock and additional paid-in capital.D. The par value of a stock represents the stock's fair value.

50. Which of the following is true about gross profit (gross margin)?

A. It is net sales minus operating expenses.B. It is net sales minus cost of goods sold.C. It is the same as income from continuing operations.D. It is net sales minus cost of goods sold and operating expenses.

51. Which of the following best describes income from operations?

A. It includes the results of discontinued operations.B. It includes extraordinary items.C. It is sales minus cost of goods sold and income tax expense.D. It is net sales minus cost of goods sold and operating expenses.

52. The Callie Company has provided the following information: • Operating expenses were $231,000;• Cost of goods sold was $376,000;• Net sales were $940,000;• Interest expense was $32,000;• Gain on sale of a building was $76,000;• Income tax expense was $151,000.What was Callie's gross profit? A. $564,000B. $188,000C. $333,000D. $232,000

53. The Callie Company has provided the following information:

• Operating expenses were $231,000;• Cost of goods sold was $376,000;• Net sales were $940,000;• Interest expense was $32,000;• Gain on sale of a building was $76,000;• Income tax expense was $151,000.What was Callie's income from operations? A. $333,000B. $188,000C. $156,000D. $232,000

54. The Callie Company has provided the following information:

• Operating expenses were $231,000;• Cost of goods sold was $376,000;• Net sales were $940,000;• Interest expense was $32,000;• Gain on sale of a building was $76,000;• Income tax expense was $151,000.What was Callie's income before taxes? A. $564,000B. $188,000C. $377,000D. $232,000

55. Which of the following is not reported as an operating expense on the income statement?

A. Administrative expensesB. Research and development expenseC. Interest expenseD. Selling expenses

56. The Nellie Company has provided the following information: • Operating expenses were $115,000;• Gross profit was $629,000;• Cost of goods sold was $470,000• Interest expense was $17,000;• Extraordinary loss was $29,000;• Income tax expense was $199,000.What was Nellie's operating income? A. $514,000B. $54,000C. $497,000D. $298,000

57. The Nellie Company has provided the following information:

• Operating expenses were $115,000;• Gross profit was $629,000;• Cost of goods sold was $470,000• Interest expense was $17,000;• Extraordinary loss was $29,000;• Income tax expense was $199,000.What was Nellie's income before taxes? A. $514,000B. $54,000C. $497,000D. $298,000

58. The Willie Company has provided the following information:

• Operating expenses were $345,000;• Income from operations was $215,000;• Net sales were $1,100,000;• Interest expense was $71,000;• Discontinued operations loss was $87,000;• Income tax expense was $58,000.What was Willie's cost of gross profit? A. $540,000B. $469,000C. $618,000D. $560,000

59. The Willie Company has provided the following information: • Operating expenses were $345,000;• Income from operations was $215,000;• Net sales were $1,100,000;• Interest expense was $71,000;• Discontinued operations loss was $87,000;• Income tax expense was $58,000.What was Willie's income before taxes? A. $144,000B. $57,000C. $215,000D. $539,000

60. Which of the following would not be a component of income from operations?

A. Gross profitB. Selling and administrative expensesC. Dividend incomeD. Research and development expense

61. Which of the following statements regarding earnings per share is false?

A. It can be reported on the income statement.B. It increases when net income increases.C. It is based on the average number of common shares outstanding.D. It would not be affected by an extraordinary loss.

62. Which of the following would not typically be disclosed in the notes to the financial statements?

A. Additional detail regarding reported numbers.B. A summary of significant accounting policies.C. Revenues reported by business segments.D. The net income earned by the business to date.


A. Relevant information has the ability to influence an investor's decision.B. Reliable information is accurate, verifiable and unbiased.C. Consistency refers to the use of the same accounting principles from one period to the next.D. Comparability refers to the use of conservatism within different time periods by a particular business.

64. In which of the following classifications would cash dividend payments to stockholders be reported?

A. Operating activitiesB. Financing activitiesC. Investing activitiesD. Stockholder activities

65. A company issued 1,000 shares of $10 par value common stock in exchange for $15,000. Which of the following correctly describes the impact of this transaction on the financial statements? A. A $15,000 gain is reported on the income statement.B. Contributed capital in the amount of $10,000 is reported on the balance sheet.C. Common stock is reported on the balance sheet at $15,000.D. Additional paid-in capital of $5,000 is reported on the balance sheet.

66. Where are stock issues in exchange for cash reported on a statement of cash flows?


67. Where are acquisitions of previously issued stock for cash reported on a statement of cash flows?


68. Which of the following statements is false when a company sells inventory costing $700 for $1,200?

A. Cost of goods sold increases $700.B. Gross profit increases $500.C. Stockholders' equity increases $500.D. Net sales increases $500.

69. Which of the following statements is false when a company sells inventory costing $900 for $1,500 cash?

A. Current assets increase $600.B. Gross profit increases $1,500.C. Stockholders' equity increases $600.D. Net sales increases $1,500.

70. Superior has provided the following information for its recent year of operation:

• The common stock account balance at the beginning of the year was $20,000 and the year-end balance was $25,000.• The additional paid-in capital account balance increased $2,500 during the year.• The retained earnings balance at the beginning of the year was $75,000 and the year-end balance was $91,000.• Net income was $26,000.How much were Superior's dividend declarations during its recent year of operation? A. $10,000.B. $42,000.C. $26,000.D. The dividend declarations can't be determined given the above information.

71. Superior has provided the following information for its recent year of operation: • The common stock account balance at the beginning of the year was $20,000 and the year-end balance was $25,000.• The additional paid-in capital account balance increased $2,500 during the year.• The retained earnings balance at the beginning of the year was $75,000 and the year-end balance was $91,000.• Net income was $26,000.How much did Superior sell its common stock for during the year? A. $5,000.B. $2,500.C. $7,500.D. $25,000.

72. Huron has provided the following year-end balances:

• Cash, $25,000• Patents, $7,900• Accounts receivable, $9,300• Property, plant, and equipment, $98,700• Prepaid insurance, $3,600• Accumulated depreciation, $10,000• Inventory, $37,000• Trademarks, $12,600• Goodwill, $11,000How much are Huron's current assets? A. $85,900.B. $71,300.C. $74,900.D. $102,100.

73. Huron has provided the following year-end balances:

• Cash, $25,000• Patents, $7,900• Accounts receivable, $9,300• Property, plant, and equipment, $98,700• Prepaid insurance, $3,600• Accumulated depreciation, $10,000• Inventory, $37,000• Trademarks, $12,600• Goodwill, $11,000How much are Huron's net noncurrent assets? A. $122,300.B. $120,200.C. $123,800.D. $112,300.

74. Which of the following would not be included on an income statement? A. Accumulated depreciationB. Insurance expenseC. Cost of goods soldD. Extraordinary loss

75. Which of the following would not be included within the operations section of a cash flow statement?

A. Cash paid for research and development.B. Cash paid for insurance.C. Cash paid for interest expense.D. Cash paid to legalize a patent.

76. Which of the following would not be added to net income in the determination of net cash flow from

operations? A. An increase in accounts payable.B. A decrease in accounts receivable.C. A decrease in prepaid expenses.D. An increase in inventory.

77. Which of the following statements is true?

A. Accumulated depreciation is the amount of depreciation on the income statement for the current year

only.B. Current liabilities are debts expected to be paid within the next year.C. Current assets are resources of a company that might include cash and copyrights.D. Patents, copyrights, and research and development expense are classified as intangible assets on the

balance sheet. 78. Which of the following statements is false?

A. Accumulated depreciation is a contra-account on the balance sheet.B. A stock's par value represents the minimum selling price of the stock.C. Retained earnings is the accumulated net income less the accumulated dividends declared.D. Research and development costs for a patent are reported on the balance sheet.

79. Centex, Inc. issued 50,000 shares of its $1 par value common stock for $20 per share. The journal entry to

record the stock issue would include which of the following? A. A credit to cash for $1,000,000.B. A credit to additional paid-in capital for $1,000,000.C. A credit to additional paid-in capital for $50,000.D. A credit to common stock for $50,000.

80. Which of the following transactions results in a decrease in the return on assets ratio?

A. Increasing the sales price of the products sold.B. An increase in the net profit margin ratio.C. Purchasing land by signing a long-term note payable.D. Collecting cash from an account receivable.

81. Which of the following results in an increase in the return on assets ratio? A. A decrease in the asset turnover ratio.B. An increase in the net profit margin ratio.C. Purchasing a building by signing a long-term mortgage payable.D. Using cash to purchase land.

82. Marino Company has provided the following information:

• Net sales, $480,000• Net income, $24,000• Average total assets, $200,000What is Marino's net profit margin ratio? A. 75%B. 12%C. 42%D. 5%


• Net sales, $480,000• Net income, $24,000• Average total assets, $200,000What is Marino's asset turnover ratio? A. 12.0B. 8.33C. .42D. 2.4


• Net sales, $480,000• Net income, $24,000• Average total assets, $200,000What is Marino's return on assets ratio? A. 240%B. 12%C. 5%D. 42%

85. Which of the following transactions will decrease both the return on assets ratio and the asset turnover

ratio? A. Purchasing land by signing a note payable.B. Accruing interest expense at year-end.C. Accruing interest revenue at year-end.D. Collecting cash from an account receivable.

86. Which of the following statements is false? A. A decrease in the asset turnover ratio results in a decrease in the return on assets ratio.B. An increase in average total assets results in a decrease in both the asset turnover ratio and return on

assets ratio.C. A decrease in the asset turnover ratio results in a decrease in the net profit margin ratio.D. An increase in the net profit margin ratio results in an increase in the return on assets ratio.

87. Which of the following statements is true?

A. A decrease in net income decreases both the net profit margin ratio and the asset turnover ratio.B. An increase in average total assets results in a decrease in both the asset turnover ratio and the net profit

margin ratio.C. A decrease in average total assets results in an increase in the asset turnover ratio and a decrease in the

net profit margin ratio.D. An increase in net income increases both the net profit margin ratio and the return on assets ratio.

88. Which of the following would most likely increase the net profit margin ratio?

A. An increase in the unit selling price.B. A decrease in the overall sales volume.C. An increase in operating expenses.D. An increase in cost of goods sold.

89. Which of the following is true?

A. An extraordinary gain would increase income before taxes.B. Discontinued operations would be shown as a component of continuing operations on the income

statement.C. Discontinued operations are shown on the income statement net of income tax effects.D. Results from discontinued operations may be used to predict future company results.

90. Polk Company suffered a loss from earthquake damage at its plant in Nebraska. The loss meets the criteria

for an extraordinary item. Where will the company present the extraordinary item on the income statement? A. As a component of income from continuing operations.B. As a component of gross profit.C. After income from continuing operations but before net income.D. Prior to income from continuing operations before taxes.

91. Which of the following statements regarding international financial reporting standards (IFRS) is false?

A. The reporting of extraordinary items is prohibited.B. Property, plant, and equipment can be reported on the balance sheet at either fair value or historical cost.C. The last-in first-out inventory method is permitted.D. Inventory write-downs are permitted.

92. Which of the following statements does not accurately describe the affect of the sale of inventory at a profit

on the financial statements? A. Income from operations and current assets both increase.B. Operating income and gross profit both increase.C. Net income and earnings per share both increase.D. Current assets don't change and stockholders' equity increases.

93. Which of the following statements regarding international financial reporting standards (IFRS) is false? A. Research and development costs are expensed.B. Research costs are expensed and development costs are capitalized.C. Cash payments for interest are reported on the cash flow statement either an operating or financing cash

flow.D. Reversal of inventory write-downs is permitted.

94. Which of the following statements is correct?

A. Income from operations increases when common stock is sold for more than par value.B. The accrual of research and development costs does not affect the net profit margin ratio.C. The payment of an accrued liability decreases asset turnover.D. The declaration and payment of a cash dividend increases the return on assets ratio.

95. Which of the following statements correctly describe the effect of accruing interest revenue at year-end?

A. Income from operations increases.B. The net profit margin ratio does not change.C. The asset turnover ratio increases.D. The return on assets ratio is affected.

96. The balance sheet for Glenwood Corporation at December 31, 2011, showed the following subtotals:

Based on the above data, calculate the following amounts:

97. Ridgetop Corporation reported the following amounts on its balance sheet at December 31, 2011:

On January 1, 2011, total assets were $2,000,000, total liabilities were $1,200,000 and total equity was $800,000. Calculate Ridgetop's return on assets.

98. Complete the following balance sheet by entering the appropriate amounts in the blanks provided.

99. FocusMore, Inc., had the following alphabetical list of accounts taken from its adjusted trial balance at December 31, 2011:

Required:Prepare a multiple step income statement for 2011. (Include gross profit, but ignore income taxes.)

100.The following data were taken from the adjusted trial balance of Kent Corporation.

Required:Prepare a classified balance sheet in good form at December 31, 2011. (Ignore income taxes).

101.At the beginning of 2011, Jeffrey Company disposed of a segment of its business and incurred a pretax loss

of $40,000 on the disposal. In the same year, a flood caused $15,000 of damages to the building. The flood damage qualified as an extraordinary item. Income from continuing operations before taxes was $100,000 for 2011 and a 20% tax rate applied to all of the items above. Prepare a partial income statement starting with income from continuing operations before taxes for the year ending 2011 and concluding with net income.

102.Dakota Equipment, Inc issued 4,000 shares of its $1 par value common stock for $20 per share on January 1, 2011. On the same day, the company purchased a piece of land costing $10,000 and a building costing $40,000. The yearly depreciation on the building is $2,000.Required: Prepare the general journal entries to record the stock issue and the purchase of the land and building on January 1 and the depreciation expense on December 31, 2011 (assuming that no adjusting entries were made during the year).

103.Twin Lakes, Inc. reported the following December 31 amounts in its financial statements:

Compute the following for the 2011:A. Net profit marginB. Asset turnoverC. Return on assets

104.The following information was taken from the income statement and balance sheet of The Mickey

Company for the years 2010 and 2011:

Compute the following ratios for 2011: Net profit margin, Asset turnover, and Return on assets.

105.Determine the effect of the following transactions on the identified financial statement components and ratios. Code your answers as follows: A. If the transaction results in an increase in the financial statement component or ratio.B. If the transaction results in a decrease in the financial statement component or ratio.C. If the transaction does not affect the financial statement component or ratio.

106.Determine the effect of the following transactions on the identified financial statement components and

ratios. Code your answers as follows: A. If the transaction results in an increase in the financial statement component or ratio.B. If the transaction results in a decrease in the financial statement component or ratio.C. If the transaction does not affect the financial statement component or ratio.

107.Determine the effect of the following transactions on the identified financial statement components and

ratios. Code your answers as follows: A. If the transaction results in an increase in the financial statement component or ratio.B. If the transaction results in a decrease in the financial statement component or ratio.C. If the transaction does not affect the financial statement component or ratio.

108.Determine the effect of the following transactions on the identified financial statement components and ratios. Code your answers as follows: A. If the transaction results in an increase in the financial statement component or ratio.B. If the transaction results in a decrease in the financial statement component or ratio.C. If the transaction does not affect the financial statement component or ratio.

109.Determine the effect of the following transactions on the financial statements components identified. Code

your answers as follows: A. If the transaction results in an increase in the financial statement component or ratio.B. If the transaction results in a decrease in the financial statement component or ratio.C. If the transaction does not affect the financial statement component or ratio.

110.Describe relevance and reliability as they pertain to financial reporting.

111.Describe the return on assets ratio and the DuPont approach for calculating return on assets.

ch5 Key

1. External users of accounting information include decision makers such as investors, creditors, and financial analysts. TRUEEach of the identified decision makers uses accounting information in their decision making process.

AACSB: Reflective Thinking

AICPA BB: Critical ThinkingAICPA FN: Reporting

Blooms: RememberDifficulty: Easy

Learning Objective: 05-01 Recognize the people involved in the accounting communication process (regulators; managers; directors; auditors; information intermediaries; and users); their roles in the process; and the guidance they receive from legal and professional standards.

Libby - Chapter 05 #1Topic Area: Players In The Accounting Communication Process

2. The mission of the Securities & Exchange Commission (SEC) is to develop generally accepted accounting principles. FALSEThe mission of the SEC is to protect investors and maintain the integrity of the securities markets.


AICPA BB: LegalAICPA FN: Reporting




3. Independent auditors are advisors who analyze financial statements and other economic information to formulate forecasts and stock recommendations. FALSEIndependent auditors provide an opinion with respect to the overall fairness of the financial statements.






4. The Securities & Exchange Commission (SEC) oversees the work of the Financial Accounting Standards Board (FASB). TRUEThe SEC has delegated the responsibility for setting GAAP to the FASB.






5. The Financial Accounting Standards Board (FASB) oversees the work of the Public Company Accounting Oversight Board (PCAOB). FALSEThe Securities & Exchange Commission (SEC) oversees the work of the Public Company Accounting Oversight Board (PCAOB).






6. The Public Company Accounting Oversight Board (PCAOB) sets auditing standards for independent auditors. TRUEThe Public Company Accounting Oversight Board (PCAOB) is responsible for setting auditing standards for independent auditors.






7. The primary responsibility for the information in a corporation's financial statements lies with the chief executive officer (CEO) and the chief financial officer (CFO). TRUEThe CEO and the CFO are primarily responsible for the content of the financial statements.






8. The board of directors is responsible for maintaining the integrity of a company's financial statements and financial reporting. TRUEThe board of directors is responsible for ensuring that processes are in place for maintaining the integrity of the company's accounting, financial statement preparation, and financial reporting.






9. The Securities & Exchange Commission requires publically traded companies to have their financial statements audited by their internal auditors. FALSEThe Securities & Exchange Commission requires publically traded companies to have their financial statements audited by an independent registered public accounting firm.






10. Financial analysts utilize a company's financial reports to assist them in making earnings projections and earnings per share projections. TRUEFinancial analysts utilize a company's financial reports to assist them in making earnings projections, earnings per share projections, share price predictions, as well buy and sell recommendations.






11. For financial information to be relevant it must be verifiable and accurate. FALSEFor financial information to be relevant it must be timely and have both predictive value and feedback value.






12. In order for financial information to be consistent, similar accounting methods need to be used from one period to the next. TRUEConsistency refers to the use of the same or similar accounting methods from one period to the next.






13. In order for financial information to be reliable, it should be timely and verifiable. FALSEIn order for financial information to be reliable it should be accurate, unbiased, and verifiable.






14. In order for financial information to be relevant, it should be timely and accurate. FALSEFor financial information to be relevant it must be timely and have both predictive value and feedback value.






15. The form 10-Q contains an unaudited set of quarterly financial statements containing a condensed income statement and balance sheet. TRUEThe form 10-Q is the quarterly report containing a condensed income statement and balance sheet that publically traded companies must file with the SEC.




Learning Objective: 05-02 Identify the steps in the accounting communication process; including the issuance of press releases; annual reports; quarterly reports; and SEC filings; as well as the role of electronic information services in this process.

Libby - Chapter 05 #15Topic Area: The Disclosure Process

16. The form 10-K is the annual report that publically traded companies must file with the Securities & Exchange Commission (SEC). TRUEThe form 10-K is the annual report that publically traded companies must file with the SEC.






17. Recent stock price information is a financial statement disclosure. TRUEFinancial statement disclosures include recent stock price information, summaries of unaudited quarterly financial data, as well as a listing of officers and directors, etc.






18. A listing of a company's directors and officers is a financial statement disclosure. TRUEFinancial statement disclosures include recent stock price information, summaries of unaudited quarterly financial data, as well as a listing of officers and directors, etc.






19. Inventories are reported on the balance sheet as a current asset. TRUECurrent assets include cash, accounts receivable, inventories, etc.




Learning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Libby - Chapter 05 #19

Topic Area: A Closer Look At Financial Statement Formats And Notes

20. Intangible assets are reported on the balance sheet as a current asset. FALSECurrent assets include cash, accounts receivable, inventories, etc. Intangible assets are reported as noncurrent assets.






21. Intangible assets are reported on the balance sheet as a noncurrent asset and include goodwill. TRUEIntangible assets are reported as noncurrent assets and include patents, trademarks, franchises, copyrights, and goodwill.






22. Additional-paid in capital is reported on the balance sheet as a component of shareholders' equity. TRUEShareholders' equity includes common stock, additional paid-in capital, and retained earnings.






23. Common stock and additional-paid in capital are both reported on the balance sheet as a component of shareholders' equity. TRUEShareholders' equity includes common stock, additional paid-in capital, and retained earnings.





Topic Area: A Closer Look At Financial Statement Formats And Notes.

24. Common stock and additional-paid in capital represent the capital contributed by shareholders. TRUEContributed capital consists of common stock and additional paid-in capital.






25. Net sales less cost of goods sold is reported on the income statement as income from continuing operations. FALSENet sales less cost of goods sold is gross profit and is a component of income from continuing operations.






26. Discontinued operations and extraordinary items are reported on the income statement as a component of income from continuing operations. FALSEDiscontinued operations and extraordinary items are reported on the income statement as a deduction from income from operations.



Blooms: RememberDifficulty: Medium



27. The summary of significant accounting policies is a required financial statement disclosure. TRUEOne of the first disclosures is the summary of significant accounting policies.






28. The return on assets ratio is calculated by dividing income from continuing operations by average total assets. FALSEThe return on assets ratio is calculated by dividing net income by average total assets.




Learning Objective: 05-04 Analyze a companys performance based on return on assets and its components.Libby - Chapter 05 #28

Topic Area: Return On Assets Analysis

29. The return on assets ratio will increase when sales increase. TRUEThe return on assets ratio calculation increases when asset turnover (net sales divided by average total assets) increases.

AACSB: Analytic

AICPA BB: Critical ThinkingAICPA FN: Reporting, Measurement




30. The return on assets ratio is affected by both the net profit margin ratio and the asset turnover ratio. TRUEThe return on assets ratio is calculated by multiplying the net profit margin ratio times the asset turnover ratio.






31. Which of the following tasks does the Securities & Exchange Commission (SEC) not perform? A. Overseeing the work of the Financial Accounting Standards Board (FASB).B. Overseeing the work of the Public Company Accounting Oversight Board (PCAOB).C. The responsibility for protecting investors and maintaining the integrity of the securities markets.D. The development of generally accepted accounting principles.

The FASB develops generally accepted accounting principles.






32. Which of the following tasks does the Financial Accounting Standards Board (FASB) perform? A. Overseeing the work of the Securities & Exchange Commission (SEC).B. Overseeing the work of the Public Company Accounting Oversight Board (PCAOB).C. The responsibility for protecting investors and maintaining the integrity of the securities markets.D. The development of generally accepted accounting principles.

The FASB develops generally accepted accounting principles.






33. Which of the following are primarily responsible for the information provided in a company's financial statements? A. The internal and external auditors.B. The Securities & Exchange Commission (SEC) and the external auditors.C. The chief executive officer (CEO) and the chief financial officer (CFO).D. The external auditors and the board of directors.

The CEO and CFO are primarily responsible for the content of a company's financial statements.






34. Which of the following is not a responsibility of the chief executive officer (CEO) and the chief financial officer (CFO)? A. The responsibility to oversee the financial statement external audit.B. To ensure the accuracy and completeness of all reports provided to the Securities & Exchange

Commission (SEC).C. The certification of the strength of the internal control system.D. The disclosure to the auditor committee of any frauds they are aware of.

The external auditors are hired by the board of directors and are responsible for overseeing their own audit.






35. Which of the following is not true about the board of directors? A. They are elected by stockholders.B. They ensure the accuracy and completeness of all reports provided to the Securities & Exchange

Commission (SEC).C. They are responsible for ensuring that processes are in place for maintaining the integrity of the

financial statements.D. They are responsible for hiring the company's external auditors.

The CEO and CFO ensure the accuracy and completeness of all reports provided to the Securities & Exchange Commission (SEC).






36. Which of the following statements is false? A. The board of directors meets with the external auditors to discuss management's compliance with

their financial reporting obligations.B. The external auditors are selected by the Securities & Exchange Commission (SEC).C.

The Securities & Exchange Commission (SEC) requires publically traded companies to have their financial statements audited by an independent accountant.

D. The external auditors assume some responsibility with respect to the fairness of the financial statements.

The external auditors are selected by the board of directors.






37. For accounting information to be useful, it must be which of the following? A. It must be consistent and comparable.B. It must be relevant and reliable.C. It must be comparable and reliable.D. It must be relevant and consistent.

Relevance and reliability are the characteristics which allow accounting information to be useful.






38. Conservatism requires that special care must be taken to avoid which of the following? A. Overstating assets and liabilities and understating revenues and expenses.B. Understating assets and liabilities and overstating revenues and expenses.C. Overstating assets and revenues and understating liabilities and expenses.D. Understating assets and revenues and overstating liabilities and expenses.

Conservatism is concerned with overstating revenues and assets and with understating expenses and liabilities.






39. Which of the following is an objective of the external audit of a company's financial statements? A. To provide a forecast of the company's future earnings.B. To assure no fraud has been committed by the company's management.C.

To provide credibility and assurance that the financial statement information conforms with generally accepted accounting principles in all material respects.

D. To detect all accounting errors made by the accounting system and employees.

The external audit lends credibility to the financial statements and assesses whether the financial statements are in compliance with generally accepted accounting principles.






40. Which of the following describes the conservatism constraint? A. A business should avoid overstating assets and revenues and avoid understating expenses and

liabilities.B. The benefits of accounting for and reporting information should outweigh the costs.C. If the dollar amounts involved are large enough to influence a user's decisions the data is considered

to be relevant.D. The conservatism constraint produces a higher net income and stockholders' equity.

Conservatism is concerned with overstating revenues and assets and with understating expenses and liabilities.






41. Which of the following is false? A. Relevance is the characteristic of accounting information that says the information would make a

difference in a user's decision.B. Accounts receivable would normally be classified as a current asset.C. Accumulated depreciation would normally appear on the income statement.D.

The matching principle holds that all expenses incurred in the generation of revenue should be recognized in the same period as the revenue is earned.

Accumulated depreciation is a balance sheet account.






42. The Securities and Exchange Commission's (SEC) report that is required to be filed if any special event occurs is which of the following? A. Form 10KB. Form 8KC. Form 10QD. Form 8Q

The form 8-K is used to disclose material events not reported previously which are relevant to investors.






43. In what order are current assets usually reported on the balance sheet? A. From the most liquid to the least liquid.B. From the least liquid to the most liquid.C. In alphabetical order of accounts.D. From the largest balance to the smallest balance.

Current assets are reported on the balance sheet in order of liquidity.





Topic Area: A Closer Look At Financial Statement Format And Notes

44. Which of the following would not be classified as a current asset? A. Accounts receivableB. PatentsC. Merchandise inventoryD. Cash

A patent is an intangible asset.






45. What account is credited when a corporation issues stock at an amount over the stock's par value? A. Gain on sale of stockB. Loss on sale of stockC. Additional paid- in capitalD. Retained earnings

Additional paid-in capital is credited when a company sells its stock for more than par value.






46. Contributed capital consists of which of the following two accounts? A. Common stock and Additional paid in capitalB. Common stock and Retained earningsC. Additional paid in capital and Retained earningsD. Retained earnings and Cash

Contributed capital consists of common stock and additional paid-in capital.






47. Which of the following are the criteria used to determine whether an item is extraordinary? A. It is unusual in nature and occurs frequently.B. It is unusual in nature and occurs infrequently.C. It is unusual in nature or occurs infrequently.D. It is infrequent in occurrence only.

Extraordinary items occur infrequently and are unusual in nature.






48. Which of the following journal entries is correct when common stock is sold for cash at a price greater

than par value? A. Option AB. Option BC. Option CD. Option D

Common stock and additional paid-in capital are both credited when common stock is sold for more than par value.






49. Which of the following statements is false? A. The common stock account has a credit balance.B. The additional paid-in capital account has a credit balance.C. Contributed capital consists of common stock and additional paid-in capital.D. The par value of a stock represents the stock's fair value.

The par value represents the minimum amount a stockholder must contribute.






50. Which of the following is true about gross profit (gross margin)? A. It is net sales minus operating expenses.B. It is net sales minus cost of goods sold.C. It is the same as income from continuing operations.D. It is net sales minus cost of goods sold and operating expenses.

Gross profit equals net sales minus cost of goods sold.






51. Which of the following best describes income from operations? A. It includes the results of discontinued operations.B. It includes extraordinary items.C. It is sales minus cost of goods sold and income tax expense.D. It is net sales minus cost of goods sold and operating expenses.

Income from operations equals net sales minus cost of goods sold and operating expenses.






52. The Callie Company has provided the following information: • Operating expenses were $231,000;• Cost of goods sold was $376,000;• Net sales were $940,000;• Interest expense was $32,000;• Gain on sale of a building was $76,000;• Income tax expense was $151,000.What was Callie's gross profit? A. $564,000B. $188,000C. $333,000D. $232,000

Gross profit ($564,000) equals net sales ($940,000) minus cost of goods sold ($376,000).

AACSB: Analytic


Blooms: ApplyDifficulty: Easy



53. The Callie Company has provided the following information: • Operating expenses were $231,000;• Cost of goods sold was $376,000;• Net sales were $940,000;• Interest expense was $32,000;• Gain on sale of a building was $76,000;• Income tax expense was $151,000.What was Callie's income from operations? A. $333,000B. $188,000C. $156,000D. $232,000

Income from operations ($333,000) equals net sales ($940,000) minus the sum of cost of goods sold ($376,000) and operating expenses ($231,000).

AACSB: Analytic


Blooms: ApplyDifficulty: Medium



54. The Callie Company has provided the following information: • Operating expenses were $231,000;• Cost of goods sold was $376,000;• Net sales were $940,000;• Interest expense was $32,000;• Gain on sale of a building was $76,000;• Income tax expense was $151,000.What was Callie's income before taxes? A. $564,000B. $188,000C. $377,000D. $232,000

Income before taxes ($377,000) equals net sales ($940,000) minus cost of goods sold ($376,000), minus operating expenses ($231,000), minus interest expense ($32,000), plus gain on sale ($76,000).

AACSB: Analytic





55. Which of the following is not reported as an operating expense on the income statement? A. Administrative expensesB. Research and development expenseC. Interest expenseD. Selling expenses

Interest expense is a deduction from income from continuing operations.






56. The Nellie Company has provided the following information: • Operating expenses were $115,000;• Gross profit was $629,000;• Cost of goods sold was $470,000• Interest expense was $17,000;• Extraordinary loss was $29,000;• Income tax expense was $199,000.What was Nellie's operating income? A. $514,000B. $54,000C. $497,000D. $298,000

Operating income ($514,000) equals gross profit ($629,000) minus operating expenses ($115,000).

AACSB: Analytic





57. The Nellie Company has provided the following information: • Operating expenses were $115,000;• Gross profit was $629,000;• Cost of goods sold was $470,000• Interest expense was $17,000;• Extraordinary loss was $29,000;• Income tax expense was $199,000.What was Nellie's income before taxes? A. $514,000B. $54,000C. $497,000D. $298,000

Income before taxes ($497,000) equals gross profit ($629,000) minus operating expenses ($115,000) and interest expense ($17,000).

AACSB: Analytic





58. The Willie Company has provided the following information: • Operating expenses were $345,000;• Income from operations was $215,000;• Net sales were $1,100,000;• Interest expense was $71,000;• Discontinued operations loss was $87,000;• Income tax expense was $58,000.What was Willie's cost of gross profit? A. $540,000B. $469,000C. $618,000D. $560,000

Gross profit ($560,000) equals operating expenses ($345,000) plus income from operations ($215,000).

AACSB: Analytic


Blooms: ApplyDifficulty: Hard



59. The Willie Company has provided the following information: • Operating expenses were $345,000;• Income from operations was $215,000;• Net sales were $1,100,000;• Interest expense was $71,000;• Discontinued operations loss was $87,000;• Income tax expense was $58,000.What was Willie's income before taxes? A. $144,000B. $57,000C. $215,000D. $539,000

Income before taxes ($144,000) equals income from operations ($215,000) minus interest expense ($71,000).

AACSB: Analytic





60. Which of the following would not be a component of income from operations? A. Gross profitB. Selling and administrative expensesC. Dividend incomeD. Research and development expense

Dividend income is reported as nonoperating revenue.






61. Which of the following statements regarding earnings per share is false? A. It can be reported on the income statement.B. It increases when net income increases.C. It is based on the average number of common shares outstanding.D. It would not be affected by an extraordinary loss.

Extraordinary losses reduce net income and therefore earnings per share.






62. Which of the following would not typically be disclosed in the notes to the financial statements? A. Additional detail regarding reported numbers.B. A summary of significant accounting policies.C. Revenues reported by business segments.D. The net income earned by the business to date.

The net income earned by the business to date is included within retained earnings.






63. Which of the following statements is false? A. Relevant information has the ability to influence an investor's decision.B. Reliable information is accurate, verifiable and unbiased.C. Consistency refers to the use of the same accounting principles from one period to the next.D. Comparability refers to the use of conservatism within different time periods by a particular

business.

Comparability refers to the use of similar accounting methods across businesses.






64. In which of the following classifications would cash dividend payments to stockholders be reported? A. Operating activitiesB. Financing activitiesC. Investing activitiesD. Stockholder activities

Financing activities include dividend payments to stockholders.






65. A company issued 1,000 shares of $10 par value common stock in exchange for $15,000. Which of the following correctly describes the impact of this transaction on the financial statements? A. A $15,000 gain is reported on the income statement.B. Contributed capital in the amount of $10,000 is reported on the balance sheet.C. Common stock is reported on the balance sheet at $15,000.D. Additional paid-in capital of $5,000 is reported on the balance sheet.

Additional paid-in capital ($5,000) represents the excess of the selling price ($15,000) above the stock's par value ($10,000).

AACSB: Analytic





66. Where are stock issues in exchange for cash reported on a statement of cash flows? A. Operating activitiesB. Financing activitiesC. Investing activitiesD. Stockholder activities

Financing cash flows include the sale of common stock in exchange for cash.






67. Where are acquisitions of previously issued stock for cash reported on a statement of cash flows? A. Operating activitiesB. Financing activitiesC. Investing activitiesD. Stockholder activities

Financing cash flows include the acquisition of previously issued stock.






68. Which of the following statements is false when a company sells inventory costing $700 for $1,200? A. Cost of goods sold increases $700.B. Gross profit increases $500.C. Stockholders' equity increases $500.D. Net sales increases $500.

Net sales will increase $1,200.

AACSB: Analytic





69. Which of the following statements is false when a company sells inventory costing $900 for $1,500 cash? A. Current assets increase $600.B. Gross profit increases $1,500.C. Stockholders' equity increases $600.D. Net sales increases $1,500.

Gross profit ($600) is the difference between net sales ($1,500) and cost of goods sold ($900).

AACSB: Analytic





70. Superior has provided the following information for its recent year of operation: • The common stock account balance at the beginning of the year was $20,000 and the year-end balance was $25,000.• The additional paid-in capital account balance increased $2,500 during the year.• The retained earnings balance at the beginning of the year was $75,000 and the year-end balance was $91,000.• Net income was $26,000.How much were Superior's dividend declarations during its recent year of operation? A. $10,000.B. $42,000.C. $26,000.D. The dividend declarations can't be determined given the above information.

Ending retained earnings ($91,000) = Beginning retained earnings ($75,000) + Net income ($26,000) - Dividends declared ($10,000).

AACSB: Analytic





71. Superior has provided the following information for its recent year of operation: • The common stock account balance at the beginning of the year was $20,000 and the year-end balance was $25,000.• The additional paid-in capital account balance increased $2,500 during the year.• The retained earnings balance at the beginning of the year was $75,000 and the year-end balance was $91,000.• Net income was $26,000.How much did Superior sell its common stock for during the year? A. $5,000.B. $2,500.C. $7,500.D. $25,000.

The increase in the common stock account ($5,000) plus the increase in additional paid-in capital ($2,500) equals the selling price of the common stock ($7,500).

AACSB: Analytic





72. Huron has provided the following year-end balances: • Cash, $25,000• Patents, $7,900• Accounts receivable, $9,300• Property, plant, and equipment, $98,700• Prepaid insurance, $3,600• Accumulated depreciation, $10,000• Inventory, $37,000• Trademarks, $12,600• Goodwill, $11,000How much are Huron's current assets? A. $85,900.B. $71,300.C. $74,900.D. $102,100.

Huron's current assets ($74,900) include cash ($25,000), accounts receivable ($9,300), prepaid insurance ($3,600), and inventory ($37,000).

AACSB: Analytic





73. Huron has provided the following year-end balances: • Cash, $25,000• Patents, $7,900• Accounts receivable, $9,300• Property, plant, and equipment, $98,700• Prepaid insurance, $3,600• Accumulated depreciation, $10,000• Inventory, $37,000• Trademarks, $12,600• Goodwill, $11,000How much are Huron's net noncurrent assets? A. $122,300.B. $120,200.C. $123,800.D. $112,300.

Huron's net noncurrent assets ($120,200) include patents ($7,900), property, plant, and equipment ($98,700), accumulated depreciation (-$10,000), trademarks ($12,600), and goodwill ($11,000).

AACSB: Analytic





74. Which of the following would not be included on an income statement? A. Accumulated depreciationB. Insurance expenseC. Cost of goods soldD. Extraordinary loss

Accumulated depreciation is a balance sheet account.






75. Which of the following would not be included within the operations section of a cash flow statement? A. Cash paid for research and development.B. Cash paid for insurance.C. Cash paid for interest expense.D. Cash paid to legalize a patent.

The cash paid to legalize a patent would be an investing cash flow.






76. Which of the following would not be added to net income in the determination of net cash flow from operations? A. An increase in accounts payable.B. A decrease in accounts receivable.C. A decrease in prepaid expenses.D. An increase in inventory.

An increase in inventory is deducted from net income to arrive at net cash flow from operations.

AACSB: Analytic





77. Which of the following statements is true? A. Accumulated depreciation is the amount of depreciation on the income statement for the current year

only.B. Current liabilities are debts expected to be paid within the next year.C. Current assets are resources of a company that might include cash and copyrights.D. Patents, copyrights, and research and development expense are classified as intangible assets on the

balance sheet.

Current liabilities are debts expected to be paid within the next year and expected to consume current assets.






78. Which of the following statements is false? A. Accumulated depreciation is a contra-account on the balance sheet.B. A stock's par value represents the minimum selling price of the stock.C. Retained earnings is the accumulated net income less the accumulated dividends declared.D. Research and development costs for a patent are reported on the balance sheet.

Research and development costs are expenses and are reported on the income statement.






79. Centex, Inc. issued 50,000 shares of its $1 par value common stock for $20 per share. The journal entry to record the stock issue would include which of the following? A. A credit to cash for $1,000,000.B. A credit to additional paid-in capital for $1,000,000.C. A credit to additional paid-in capital for $50,000.D. A credit to common stock for $50,000.

The credit to common stock is for the par value of the shares issued.

AACSB: Analytic


Blooms: ApplyDifficulty: Easy



80. Which of the following transactions results in a decrease in the return on assets ratio? A. Increasing the sales price of the products sold.B. An increase in the net profit margin ratio.C. Purchasing land by signing a long-term note payable.D. Collecting cash from an account receivable.

Return on assets is net income divided by average total assets. Total assets increase and the return on assets ratio therefore decreases.

AACSB: Analytic





81. Which of the following results in an increase in the return on assets ratio? A. A decrease in the asset turnover ratio.B. An increase in the net profit margin ratio.C. Purchasing a building by signing a long-term mortgage payable.D. Using cash to purchase land.

Return on assets is net income divided by average total assets or net profit margin ratio times asset turnover ratio. An increase in the net profit margin ratio therefore increases return on assets.

AACSB: Analytic





82. Marino Company has provided the following information: • Net sales, $480,000• Net income, $24,000• Average total assets, $200,000What is Marino's net profit margin ratio? A. 75%B. 12%C. 42%D. 5%

The net profit margin ratio (5%) is net income ($24,000) divided by net sales ($480,000).

AACSB: Analytic

AICPA BB: Critical ThinkingAICPA FN: Measurement




83. Marino Company has provided the following information: • Net sales, $480,000• Net income, $24,000• Average total assets, $200,000What is Marino's asset turnover ratio? A. 12.0B. 8.33C. .42D. 2.4

The asset turnover ratio (2.4) is net sales ($480,000) divided by average total assets ($200,000).

AACSB: Analytic





84. Marino Company has provided the following information: • Net sales, $480,000• Net income, $24,000• Average total assets, $200,000What is Marino's return on assets ratio? A. 240%B. 12%C. 5%D. 42%

Return on assets (12%) equals net income ($24,000) divided by average total assets ($200,000). Return on assets (12%) can also be calculated by multiplying the net profit margin ratio (5%) times the asset turnover ratio (2.4).

AACSB: Analytic





85. Which of the following transactions will decrease both the return on assets ratio and the asset turnover ratio? A. Purchasing land by signing a note payable.B. Accruing interest expense at year-end.C. Accruing interest revenue at year-end.D. Collecting cash from an account receivable.

The denominator in both ratios is average total assets. Purchasing land increases average total assets and therefore decreases both ratios.

AACSB: Analytic





86. Which of the following statements is false? A. A decrease in the asset turnover ratio results in a decrease in the return on assets ratio.B. An increase in average total assets results in a decrease in both the asset turnover ratio and return on

assets ratio.C. A decrease in the asset turnover ratio results in a decrease in the net profit margin ratio.D. An increase in the net profit margin ratio results in an increase in the return on assets ratio.

The asset turnover ratio and net profit margin ratio aren't directly related to each other.

AACSB: Analytic





87. Which of the following statements is true? A. A decrease in net income decreases both the net profit margin ratio and the asset turnover ratio.B. An increase in average total assets results in a decrease in both the asset turnover ratio and the net

profit margin ratio.C. A decrease in average total assets results in an increase in the asset turnover ratio and a decrease in

the net profit margin ratio.D. An increase in net income increases both the net profit margin ratio and the return on assets ratio.

The numerator for both ratios is net income. Therefore an increase in net income results in an increase in both ratios.

AACSB: Analytic





88. Which of the following would most likely increase the net profit margin ratio? A. An increase in the unit selling price.B. A decrease in the overall sales volume.C. An increase in operating expenses.D. An increase in cost of goods sold.

An increase in the unit selling price will increase net income by a greater amount proportionately relative to the increase in net sales.

AACSB: Analytical





89. Which of the following is true? A. An extraordinary gain would increase income before taxes.B. Discontinued operations would be shown as a component of continuing operations on the income

statement.C. Discontinued operations are shown on the income statement net of income tax effects.D. Results from discontinued operations may be used to predict future company results.

Both extraordinary items and discontinued operations are reported on the income statement net of tax.




Learning Objective: 05-SLibby - Chapter 05 #89

Topic Area: Chapter Supplement

90. Polk Company suffered a loss from earthquake damage at its plant in Nebraska. The loss meets the criteria for an extraordinary item. Where will the company present the extraordinary item on the income statement? A. As a component of income from continuing operations.B. As a component of gross profit.C. After income from continuing operations but before net income.D. Prior to income from continuing operations before taxes.

Both extraordinary items and discontinued operations are reported on the income statement net of tax after income from continuing operations.




Learning Objective: 05-SLibby - Chapter 05 #90

Topic Area: Chapter Supplement

91. Which of the following statements regarding international financial reporting standards (IFRS) is false? A. The reporting of extraordinary items is prohibited.B. Property, plant, and equipment can be reported on the balance sheet at either fair value or historical

cost.C. The last-in first-out inventory method is permitted.D. Inventory write-downs are permitted.

The last-in first-out inventory method is prohibited under IFRS.






92. Which of the following statements does not accurately describe the affect of the sale of inventory at a profit on the financial statements? A. Income from operations and current assets both increase.B. Operating income and gross profit both increase.C. Net income and earnings per share both increase.D. Current assets don't change and stockholders' equity increases.

Current assets increase because the increase in either cash or accounts receivable is greater than the decrease in inventory.

AACSB: Analytic





93. Which of the following statements regarding international financial reporting standards (IFRS) is false? A. Research and development costs are expensed.B. Research costs are expensed and development costs are capitalized.C. Cash payments for interest are reported on the cash flow statement either an operating or financing

cash flow.D. Reversal of inventory write-downs is permitted.

Development costs are capitalized.






94. Which of the following statements is correct? A. Income from operations increases when common stock is sold for more than par value.B. The accrual of research and development costs does not affect the net profit margin ratio.C. The payment of an accrued liability decreases asset turnover.D. The declaration and payment of a cash dividend increases the return on assets ratio.

The cash payment decreases average total assets which increases the asset turnover ratio.

AACSB: Analytic



Learning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.Learning Objective: 05-04 Analyze a companys performance based on return on assets and its components.

Libby - Chapter 05 #94Topic Area: A Closer Look At Financial Statement Formats And Notes, Return On Assets Analysis

95. Which of the following statements correctly describe the effect of accruing interest revenue at year-end? A. Income from operations increases.B. The net profit margin ratio does not change.C. The asset turnover ratio increases.D. The return on assets ratio is affected.

The accrual of interest revenue increases both total assets and net income which are the two components of return on assets.

AACSB: Analytic





96. The balance sheet for Glenwood Corporation at December 31, 2011, showed the following subtotals:

Based on the above data, calculate the following amounts:

Answers will varyFeedback: A. $140,000 + $420,000 + $70,000 = $630,000.B. $210,000 - $80,000 = $130,000.C. $420,000 - $120,000 = $300,000.D. $210,000 + $420,000 = $630,000.

AACSB: Analytic





97. Ridgetop Corporation reported the following amounts on its balance sheet at December 31, 2011:

On January 1, 2011, total assets were $2,000,000, total liabilities were $1,200,000 and total equity was $800,000. Calculate Ridgetop's return on assets. Answers will varyFeedback: $100,000 ÷ ($2,000,000 + $2,700,000*/2) = 4.26%.*($1,800,000 + $900,000)

AACSB: Analytical





98. Complete the following balance sheet by entering the appropriate amounts in the blanks provided.

Answers will varyFeedback: A. $40,000. ($90,000 Total Assets (F) - $35,000 Book Value of Building - $15,000 Cash)B. $25,000. ($60,000 Building - $35,000 Book Value)C. $90,000. (Must equal to F.)D. $2,000. ($25,000 Current liabilities - $11,000 Accounts Payable - $12,000 Notes payable)E. $40,000. ($25,000 Contributed capital + $15,000 Retained earnings)F. $90,000. ($50,000 Total Liabilities + $40,000 Total Stockholders' Equity)

AACSB: Analytic





99. FocusMore, Inc., had the following alphabetical list of accounts taken from its adjusted trial balance at December 31, 2011:

Required:Prepare a multiple step income statement for 2011. (Include gross profit, but ignore income taxes.) Answers will vary

Feedback:

AACSB: Analytic





100. The following data were taken from the adjusted trial balance of Kent Corporation.

Required:Prepare a classified balance sheet in good form at December 31, 2011. (Ignore income taxes). Answers will vary

Feedback: *$23,000 (January 1 retained earnings) + $43,000 (net income) - $12,000 (dividends declared)

AACSB: Analytic





101. At the beginning of 2011, Jeffrey Company disposed of a segment of its business and incurred a pretax loss of $40,000 on the disposal. In the same year, a flood caused $15,000 of damages to the building. The flood damage qualified as an extraordinary item. Income from continuing operations before taxes was $100,000 for 2011 and a 20% tax rate applied to all of the items above. Prepare a partial income statement starting with income from continuing operations before taxes for the year ending 2011 and concluding with net income. Answers will vary

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AACSB: Analytic



Learning Objective: 05-03 (S)Learning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.

Libby - Chapter 05 #101Topic Area: A Closer Look At Financial Statement Formats And Notes

102. Dakota Equipment, Inc issued 4,000 shares of its $1 par value common stock for $20 per share on January 1, 2011. On the same day, the company purchased a piece of land costing $10,000 and a building costing $40,000. The yearly depreciation on the building is $2,000.Required: Prepare the general journal entries to record the stock issue and the purchase of the land and building on January 1 and the depreciation expense on December 31, 2011 (assuming that no adjusting entries were made during the year). Answers will vary

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103. Twin Lakes, Inc. reported the following December 31 amounts in its financial statements:

Compute the following for the 2011:A. Net profit marginB. Asset turnoverC. Return on assets Answers will varyFeedback: A. ($28.0/$250.0) = .112 or 11.2%B. ($250.0/$85.0*) = 2.94C. ($28.0/$85.0) = .329 or 32.9%Or, .329 = A (.112) × B (2.94)*[($90.0 + $80.0) ÷ 2

AACSB: Analytical





104. The following information was taken from the income statement and balance sheet of The Mickey Company for the years 2010 and 2011:

Compute the following ratios for 2011: Net profit margin, Asset turnover, and Return on assets. Answers will varyFeedback: Net profit margin ($2,345/$30,752) = .076 or 7.6%Asset turnover ($30,752/$51,945) = .59Return on assets ($2,345/$51,945*) = .045 or 4.5%*($49,988 + $53,902)/2Or, Return on assets (.045) = Net profit margin (.076) × Asset turnover (.59)

AACSB: Analytical





105. Determine the effect of the following transactions on the identified financial statement components and ratios. Code your answers as follows: A. If the transaction results in an increase in the financial statement component or ratio.B. If the transaction results in a decrease in the financial statement component or ratio.C. If the transaction does not affect the financial statement component or ratio. Transaction 1: A company issued common stock at a price in excess of par value.Revenues ______ Assets ______ Stockholders' equity ______ Return on assets ratio ______ Transaction 2: A company recorded depreciation expense at year-end.Net income ______ Assets ______ Stockholders' equity ______ Asset turnover ratio ______

AACSB: Analytic





106. Determine the effect of the following transactions on the identified financial statement components and ratios. Code your answers as follows: A. If the transaction results in an increase in the financial statement component or ratio.B. If the transaction results in a decrease in the financial statement component or ratio.C. If the transaction does not affect the financial statement component or ratio. Transaction 1: A company accrued interest expense at year-end.Net income_____Assets_____Stockholders' equity_____Asset turnover ratio_____Transaction 2: A company declared and paid dividends to stockholders.Net income_____Assets_____Stockholders' equity_____Return on assets ratio_____

AACSB: Analytic





107. Determine the effect of the following transactions on the identified financial statement components and ratios. Code your answers as follows: A. If the transaction results in an increase in the financial statement component or ratio.B. If the transaction results in a decrease in the financial statement component or ratio.C. If the transaction does not affect the financial statement component or ratio. Transaction 1: A company paid for research and development costs incurred to develop a patent.Net income_____Property, plant, and equipment_____Stockholders' equity_____Net profit margin ratio_____Transaction 2: Inventory was purchased on account.Net income_____Current assets_____Current liabilities_____Return on assets ratio_____

AACSB: Analytic





108. Determine the effect of the following transactions on the identified financial statement components and ratios. Code your answers as follows: A. If the transaction results in an increase in the financial statement component or ratio.B. If the transaction results in a decrease in the financial statement component or ratio.C. If the transaction does not affect the financial statement component or ratio. Transaction 1: A company acquired land by signing a long-term note payable.Property, plant, and equipment_____Asset turnover ratio_____Net profit margin ratio_____Return on assets ratio_____Transaction 2: Cash was used to pay a current liability.Net income_____Asset turnover ratio_____Net profit margin ratio_____Return on assets ratio_____

AACSB: Analytic





109. Determine the effect of the following transactions on the financial statements components identified. Code your answers as follows: A. If the transaction results in an increase in the financial statement component or ratio.B. If the transaction results in a decrease in the financial statement component or ratio.C. If the transaction does not affect the financial statement component or ratio. Transaction 1: A company sold inventory for an amount greater than its cost.Gross profit_____Current assets_____Stockholders' equity_____Transaction 2: Advertising expense was recorded but has yet to be paid for.Net income_____Gross Profit_____Stockholders' equity_____

AACSB: Analytic





110. Describe relevance and reliability as they pertain to financial reporting. Answers will varyFeedback: Financial data is considered to be relevant when the data has the ability to influence a decision. Relevant data is timely and has both predictive value and feedback value. Financial data is reliable when it is verifiable, accurate, and unbiased. For accounting information to be useful, the information should be both relevant and reliable.






111. Describe the return on assets ratio and the DuPont approach for calculating return on assets. Answers will varyFeedback: The return on assets ratio is calculated by dividing net income by average total assets. The ratio measures the amount of income earned for every dollar invested in assets and is a measure of profitability and management effectiveness with respect to asset management. The DuPont formula states that the return on assets ratio has two component ratios, net profit margin and asset turnover. The net profit margin ratio measures the net income generated per sales dollar and the asset turnover ratio measures the net sales generated for average total assets. Return on assets equals net profit margin multiplied by asset turnover. The DuPont formula implies that return on assets can be improved through both earnings and efficiency of asset use.






ch5 Summary

Category # of Questions

AACSB: Analytic 38

AACSB: Analytical 4

AACSB: Reflective Thinking 69

AICPA BB: Critical Thinking 102

AICPA BB: Legal 9

AICPA FN: Measurement 10

AICPA FN: Reporting 68

AICPA FN: Reporting, Measurement 33

Blooms: Apply 40

Blooms: Remember 71

Difficulty: Easy 46

Difficulty: Hard 10

Difficulty: Medium 55


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5

Learning Objective: 05-03 (S) 1

Learning Objective: 05-03 Recognize and apply the different financial statement and disclosure formats used by companies in practice.

59

Learning Objective: 05-04 Analyze a companys performance based on return on assets and its components. 22

Learning Objective: 05-S 2

Libby - Chapter 05 111

Topic Area: A Closer Look At Financial Statement Format And Notes 30

Topic Area: A Closer Look At Financial Statement Formats And Notes 22

Topic Area: A Closer Look At Financial Statement Formats And Notes, Return On Assets Analysis 6

Topic Area: A Closer Look At Financial Statement Formats And Notes. 1

Topic Area: Chapter Supplement 2

Topic Area: Players In The Accounting Communication Process 29

Topic Area: Return On Assets Analysis 16

Topic Area: The Disclosure Process 5

ch5

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