1. The Retained Earnings account is comprised of
a. Cash retained in the business
b. Cash reinvested in the business by shareholders
c. The cumulative earnings less dividends since the inception of the corporation
d. The earnings of the corporation for the current year
2. A company’s long-term ability to generate cash internally or from external sources in order to satisfy plant capacity needs, fuel growth, and repay debt when due is
d. Credit risk
Use the following information provided in the Sanchez Company’s annual report to answer question 3.
2004__ 2003__ 2002__
Sales $178,400 $162,500 $155,500
Cost of Goods Sold 115,000 102,500 100,000
Operating Expenses 50,000 50,000 45,000
Net income 13,400 10,000 10,500
3. In a trend income statement (horizontal analysis) for 2004, where 2002 is the base year, Sanchez Company’s sales is expressed as
Use the following information taken from Wenzel Corporation’s condensed balance sheets to answer questions 4.
Assets 2004__ 2003__ 2002__
Current Assets $ 55,000 $ 56,500 $ 70,000
Plant and Equipment (net) 495,000 410,000 440,000
Intangible Assets (net) 20,000 27,500 40,000
Total Assets $570,000 $494,000 $550,000
Liabilities & Stockholders’ Equity
Current Liabilities $ 40,000 $ 35,000 $ 32,500
Long-Term Liabilities 395,000 310,000 375,000
Stockholders’ Equity 135,000 149,000 142,500
Total Liabilities & Stockholders’ Equity $570,000 $494,000 $550,000
4. In a common size balance sheet (vertical analysis) for 2003, Wenzel Corporation’s Plant and Equipment (net) is expressed as
5. Under the matching principle, the apportionment of the cost of a copyright to future periods is called
6. When a company has an operating lease for its primary premises, it would report a lease asset on the balance sheet equal to
b. the present value of the future lease payments
c. the sum of the future lease payments
d. the lesser of the fair market value of the asset or the present value of the future lease payments
7. If a corporation signs a 15 year lease for a building and the present value of the lease payments is $350,000, the lease is a capital lease if the
a. fair value of the building is $400,000
b. remaining useful life of the building on the date the lease is signed is 19 years
c. lessee can purchase the building for $575,000 at the end of the lease
d. building reverts back to the lessor at the end of the lease
8. When accounting for a capital lease, which of the following expenses would be reported in the income statement?
a. Depreciation expense
b. Depletion expense
c. Rent expense
d. Lease operating expense
9. When a specific accounts receivable is written off against allowance for doubtful accounts
a. Net accounts receivable decreases
b. The current ratio decreases
c. Gross accounts receivable decreases
d. The current ratio increases
10. All the following are principles of internal control except:
a. Having a yearly audit by an independent auditing firm
b. Segregation of duties
c. Documentation procedures
d. Establishment of responsibility
e. Physical, mechanical and electronic controls
11. The expense for cost of goods sold is equal to
a. Cost of beginning inventory plus net purchases
b. Cost of goods available for sale less beginning inventory
c. Cost of goods available for sale less ending inventory
d. Net purchases less cost of ending inventory
12. Current assets are those assets that are expected to be converted into cash within
a. One year
b. The operating cycle
c. The operating cycle or one year, whichever is longer
d. The operating cycle or one year, whichever is shorter
13. The quick ratio is equal to
a. Current assets divided by current liabilities
b. Current assets minus inventory divided by current liabilities
c. Current assets plus inventory divided by current liabilities
d. Cash, short term investments and receivables divided by current liabilities
(Some text book used Option B as well)
14. Poulo Company reports the following account balances on its balance sheet:
Accounts Receivable 500
Allowance for Doubtful Accounts 25
How much is Poulo’s total current assets?
15. Which of the following should not be included in cash balances?
a. Certified checks
b. Demand deposits
c. Post-dated checks
d. Petty cash
16. Which of the following items is not a liability?
a. Accrued estimated warranty costs
b. Dividends payable in a company’s own stock
c. Advances from customers on contracts
d. The portion of long-term debt due within one year
17. If a discount on bonds payable is amortized by the effective interest method, the reported interest expense will
a. Increase over the term of the bonds
b. Decrease over the term of the bonds
c. Remain the same, while the amount of amortization decreases each period
d. Decrease for several years and then increase
18. STU made the following journal entry at the end of the first lease year:
RENT EXPENSE 1,500
STU must have a(n):
a. sales-type lease
b. direct financing lease
c. capital lease
d. operating lease
19. On February 1, 20×1, Hogue Corp., a newly formed company, had the following stock issued and outstanding:
• Common stock, no par, $1 stated value, 10,000 shares originally issued for $15 per share
• Preferred stock, $10 par value, 3,000 shares originally issued for $25 per share
Hogue’s February 1, 20×1 statement of stockholders’ equity should report
Common Preferred Paid-in
Stock Stock Capital
a. $ 10,000 $ 75,000 $ 140,000
b. $ 10,000 $ 30,000 $ 185,000
c. $ 150,000 $ 30,000 $ 45,000
d. $ 150,000 $ 75,000 $ -0-
True/False (2 points each): Circle T for true and F for false
20. T False Rent received in advance is an example of an asset.
21. True F Liabilities arise from past transactions or events
22. T False A balance sheet reflects the resources, obligations, and equity of an enterprise over a period of one year or one operating cycle, whichever is longer
23. True F Aging accounts receivable emphasizes the balance sheet valuation of accounts receivable over the amount of bad debt expense reported in the income statement.
24. T False Investments in stocks that are expected to be held for the long term are listed in the stockholder’s equity section of the balance sheet.
25. T False. Federal income taxes withheld from employees is not a current liability of the employer because under federal income tax law the employer is required to withhold the tax.
26. True F The total amount of interest expense over the life of a bond that was issued at a discount is equal to the total amount of the interest payments plus the amount of the discount.
27. T False All long-term leases should be capitalized in the accounts of the lessee.
28. True F When comparing two companies of different sizes, the current ratio is a better measure to determine one company’s liquidity than is working capital.
29. Selected data of the Rau Company follows (7 points) :
2002 2003 2004
Sales $250,000 $300,000
Cost of goods sold 100,000 125,000
Inventory $ 30,000 35,000 45,000
Inventory Turnover Ratio
(Industry Average) 6.0 times 5.8 times
A. For Rau Co., the Inventory Turnover Ratio is ________ ________
Calculate answers to 3 decimal places.
2003 = (100000/32500) = 3.077
2004 = (125000/40000)= 3.125
B. The numbers in (A) identify a ‘red flag’ that merits further investigation Yes / No
C. Why or why not?
We should investigate further as the inventory turnover ratio for company is less that Industry Average.
Classify the following ratios in the appropriate category (L, P or S):
(1 point each)
L Short-term Liquidity
S Long-term Solvency Risk
__L___ 30. Accounts Receivable Turnover
__L___ 31. Quick Ratio
__P___ 32. Return on Assets
___S__ 33. Interest Coverage Ratio
___P__ 34. Profit Margin Ratio
__L___ 35. Inventory Turnover
___P__ 36. Return on Equity
37. (7 points)
Mavis Company purchased a truck for $100,000 on January 2, 2004. The truck has an expected salvage value of $5,000 at the end of its five year useful life. For double declining balance depreciation, assume the company switches to the straight-line method after 3 years.
A. Depreciation Expense in 2008 under straight line depreciation is
$ 2008 Depreciation = (21600-5000)/2 = 8300
Year Amount Depreciation
1 100000 40000
2 60000 24000
3 36000 14400
B. Depreciation Expense in 2004 under double-declining balance depreciation is
$ 2004 Depreciation = 40000
Year Amount Depreciation
1 100000 40000
2 60000 24000
3 36000 14400
38. (1 point each) A retail store has completed certain transactions that management believes may have caused current liabilities. Indicate by check mark whether the following items should be classified as current liabilities at December 31.
Classified as a Current Liability?
Yes No Unknown
(a) Accrued interest on a bond. Interest is payable on March 31, next year YES
(b) Unremitted (unpaid) amounts withheld from employees for hospital insurance YES
(if the amount is to be passed to insurance company)
(c) Obligation on gift certificates redeemable during next year YES
(If we are sure certificates would be redeemed next year)
(d) Unremitted (i.e. unpaid) sales tax collected YES
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