1. (TCO A) Which of the following is an advantage of corporations relative to partnerships and sole proprietorships? (Points: 5)
Reduced legal liability for investors.
Harder to transfer ownership.
Most common form of organization.
2. (TCO A) Buying assets needed to operate a business is an example of a(n) (Points: 5)
3. (TCO A) For 2007 Landford Corporation reported net income of $30,000; net sales $400,000; and average share outstanding 6,000. There were no preferred stock dividends. What was the 2007 earnings per share? (Points: 5)
4. (TCO C) Free cash flow provides an indication of a company’s ability to (Points: 5)
generate cash to invest in new capital expenditures.
generate net income.
generate cash to pay dividends.
both a and c.
5. (TCO C) The dividend account (Points: 5)
is increased with a debit.
is decreased with a credit.
is not an expense account.
all of the above
6. (TCO A, B) Kerner Company showed the following balances at the end of its first year:
Prepaid insurance 1,000
Accounts receivable 5,000
Accounts payable 4,000
Notes payable 6,000
Common stock 2,000
What did Kerner Company show as total credits on its trial balance?
7. (TCO B, E) Under the accrual basis of accounting (Points: 5)
cash must be received before revenue is recognized.
net income is calculated by matching cash outflows against cash inflows.
events that change a company’s financial statements are recognized in the period they occur rather than in the period in which cash is paid or received.
the ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are prepared under generally accepted accounting principles.
8. (TCO A, B) Reese Company purchased office supplies costing $4,000 and debited Office Supplies for the full amount. At the end of the accounting period, a physical count of office supplies revealed $1,600 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be (Points: 5)
Debit Office Supplies Expense, $1,600; Credit Office Supplies, $1,600.
Debit Office Supplies, $2,400; Credit Office Supplies Expense, $2,400.
Debit Office Supplies Expense, $2,400; Credit Office Supplies, $2,400.
Debit Office Supplies, $1,600; Credit Office Supplies Expense, $1,600.
9. (TCO E) Baxtor Company purchased merchandise inventory with an invoice price of $5,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Baxtor Company pays within the discount period? (Points: 5)
10. (TCO B) At the beginning of the year, Midtown Athletic had an inventory of $400,000. During the year, the company purchased goods costing $1,600,000. If Midtown Athletic reported ending inventory of $600,000 and sales of $2,000,000, their cost of goods sold and gross profit rate must be (Points: 5)
$1,000,000 and 50%
$1,400,000 and 30%
$1,000,000 and 30%
$1,400,000 and 70%
11. (TCO D) In a period of increasing prices, which inventory flow assumption will result in the lowest amount of income tax expense? (Points: 5)
Average Cost Method
Income tax expense for the period will be the same under all assumptions.
12. (TCO D) An aircraft company would most likely have a (Points: 5)
high inventory turnover.
low profit margin.
low inventory turnover.
13. (TCO D) A very small company would have the most difficulty in implementing which of the following internal control activities? (Points: 5)
Separation of duties
Limited access to assets
Periodic independent verification by and external auditor.
Sound personnel procedures
14. (TCO D) Which of the following is not a suggested procedure to establish internal control over cash disbursements? (Points: 5)
Anyone can sign the checks.
Different individuals approve and make the payments.
Blank checks are stored with limited access.
The bank statement is reconciled monthly.
15. (TCO A, B, D) An aging of a company’s accounts receivable indicates that $4,000 is estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,200 debit balance, the adjustment to record bad debts for the period will require a (Points: 5)
debit to Bad Debts Expense for $4,000.
debit to Allowance for Doubtful Accounts for $5,200.
debit to Bad Debts Expense for $5,200.
credit to Allowance for Doubtful Accounts for $4,000.
. (TCO A, B, D) Using the percentage of receivables method for recording bad debts expense, estimated uncollectible accounts are $10,000 at the end of the year. If the balance of the Allowance for Doubtful Accounts is $2,000 credit before adjustment; what is the amount of bad debt expense for that period? (Points: 5)
2. (TCO A, E) Brown Clinic purchases land for $120,000 cash. The clinic assumes $1,500 in property taxes due on the land. The title and attorney fees totaled $1,000. The clinic has the land graded for $2,200. What amount does Brown Clinic record as the cost for the land? (Points: 5)
3. (TCO A, E) Equipment was purchased for $60,000. Freight charges amounted to $2,800 and there was a cost of $8,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $12,000 salvage value at the end of its 5-year useful life. Depreciation expense each year using the straight-line method will be (Points: 5)
4. (TCO D) Ron’s Pharmacy has collected $600 in sales taxes during March. If sales taxes must be remitted to the state government monthly, what entry will Ron’s Pharmacy make to show the March remittance? (Points: 5)
Dr Sales Tax Expense 600
Cr Cash 600
Dr Sales Taxes Payable 600
Cr Cash 600
Dr Sales Tax Expense 600
Cr Sales Taxes Payable 600
No entry required.
5. (TCO D) Lopez Corporation issues 500, 10-year, 8%, $1,000 bonds dated January 1, 2007, at 96. The journal entry to record the issuance will show a (Points: 5)
debit to Cash of $500,000.
credit to Discount on Bonds Payable for $20,000.
credit to Bonds Payable for $480,000.
debit to Cash for $480,000.
6. (TCO A) If Kiner Company issues 1,000 shares of $5 par value common stock for $70,000, the account (Points: 5)
Common Stock will be credited for $5,000.
Paid-in Capital in Excess of Par Value will be credited for $5,000.
Paid-in Capital in Excess of Par Value will be credited for $70,000.
Cash will be debited for $65,000.
7. (TCO A, C) Outstanding stock of the Apex Corporation included 20,000 shares of $5 par common stock and 5,000 shares of 6%, $10 par non-cumulative preferred stock. In 2006, Apex declared and paid dividends of $2,000. In 2007, Apex declared and paid dividends of $6,000. How much of the 2007 dividend was distributed to preferred shareholders? (Points: 5)
None of the above
8. (TCO C) Accounts receivable arising from sales to customers amounted to $35,000 and $40,000 at the beginning and end of the year, respectively. Income reported on the income statement for the year was $120,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to be reported on the statement of cash flows is (Points: 5)
9. (TCO C) Wilton Company reported net income of $40,000 for the year. During the year, accounts receivable increased by $7,000, accounts payable decreased by $3,000 and depreciation expense of $5,000 was recorded. Net cash provided by operating activities for the year is (Points: 5)
10. (TCO F) One variation of the horizontal analysis is known as (Points: 5)
common size analysis.
11. (TCO F) Vertical analysis is also known as (Points: 5)
common size analysis.
12. (TCO F) The best way to study the relationships among the components within a financial statement is to prepare (Points: 5)
a vertical analysis.
a trend analysis.
13. (TCO F) In vertical analysis, the base amount for studying salary & wages expense is generally (Points: 5)
salary & wages expense in a previous year.
14. (TCO F) A common measure of profitability is the (Points: 5)
current cash debt coverage ratio.
return on common stockholders’ equity ratio.
debt to total assets.
15. (TCO F) Long-term creditors are usually most interested in evaluating (Points: 5)
(TCO A) The partial financial statement items below were taken from the financial statements of Prone, Inc. This information can be used to correctly solve each of the ratios below. The information is in alphabetical order.
Accounts payable $ 28,000 Net income $ 48,000
Accounts receivable 66,000 Other current liabilities 17,000
Cash 54,000 Total assets 250,000
Gross profit 160,000 Total liabilities 200,000
Income before income taxes 54,000 Wages payable 5,000
Additional information: The number of average common shares outstanding during the year was 40,000.
Instructions: Compute the following:
(a) Current ratio.
(b) Working capital.
(c) Earnings per share.
(d) Debts to total assets ratio.
To earn full credit, you must show the formula you are using, show your computations and explain the meaning of each of your ratio results.
2. (TCO B & E) These financial statement items are for Snyder Corporation at year-end, July 31, 2010.
Salaries payable $ 2,580
Salaries expense 48,700
Utilities expense 22,600
Accounts payable 4,100
Commission revenue 61,100
Rent revenue 8,500
Long-term note payable 1,800
Common stock 16,000
Accounts receivable 9,780
Accumulated depreciation 6,000
Depreciation expense 4,000
Retained earnings (beginning of the year) 35,200
Prepare an income statement and a retained earnings statement for the year.
3. (TCO C) Using the indirect method, calculate the amount of cash flows from operating activities using the indirect method from the following data:
Net income $230,000
Beginning accounts receivable 22,000
Ending accounts receivable 26,000
Beginning prepaid expenses 5,000
Ending prepaid expenses 2,000
Beginning accounts payable 15,000
Ending accounts payable 14,000
Depreciation expense 55,000
Amortization of intangible asset 3,000
Dividends declared and paid 11,000
4. (TCO D) Your friend, Jeff, has opened a movie theater. Jeff states that he does not have time to develop and implement a system of internal controls.
a. Provide Jeff with the objectives of a system of internal control.
b. Explain to Jeff why he should develop a system of internal control. (Points: 25)
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