1. (TCO A) Which of the following is an advantage of the sole proprietorship relative to the corporate form of business organization
Limited liability of investor
Transferability of ownership
Simple to establish
2. (TCO A) The payment of cash dividends is recorded in the _____.
operating section of the statement of cash flows
investing section of the statement of cash flows
financing section of the statement of cash flows
noncash investing and financing section of the statement of cash flows
3. (TCOs A, B) Below is a partial list of account balances for Landon Company::
Prepaid insurance 700
Accounts receivable 3,500
Accounts payable 2,800
Notes payable 4,200
Common stock 1,400
What did Landon Company show as total debits
4. (TCOs B, E) Under the accrual basis of accounting, revenues are recorded and reported _____.
when companies receive payments for jobs performed or products provided
when companies have provided products or performed services
when companies receive payments prior to providing products or performing services
when companies receive payments after providing products or performing services
5. (TCO D) Three companies report the same cost of goods available for sale, but each employs a different inventory costing method. If the price of goods has increased during the period, then the company using _____.
FIFO will have the highest income tax expense
average cost will have the income tax expense
LIFO will have the highest income tax expense
All three methods will result in the same income tax expense.
6. (TCOs A, E) Equipment with a cost of $212,000 has an estimated salvage value of $12,000 and an estimated life of 5 years or 15,000 hours. It is to be depreciated by the straight-line method. What is the amount of depreciation for the first full year, during which the equipment was used 6,000 hours?
7. (TCO D, G) Payne Corporation issues 100 twenty-year, 6%, $1,000 bonds dated July 1, 2010, at 105. The journal entry to record the issuance will show a _____.
debit to Discount on Bonds Payable of $5,000
debit to Premium on Bonds Payable of $5,000
credit to Discount on Bonds Payable of $5,000
credit to Premium on Bonds Payable of $5,000
8. (TCO C) Accounts receivable arising from sales to customers amounted to $80,000 and $120,000 at the beginning and end of the year, respectively. Income reported on the income statement for the year was $2,000,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to be reported on the statement of cash flows is _____.
9. (TCO F) If you are making comparisons with other companies to provide insight into a company’s competitive position, you are performing what type of analysis
Industry average analysis
10. (TCO F) In a common size income statement, the 100% figure is _____.
Total Stockholders’ Equity
11. (TCO F) Horizontal analysis of comparative financial statements includes the _____.
development of common-size statements
calculation of liquidity ratios
calculation of dollar amount changes and percentage changes from the previous year to the current year
evaluation of financial statement data that expresses each item in a financial statement as a percentage of a base amount
12. (TCO F) A common measure of solvency is the _____.
current cash debt coverage ratio
cash debt coverage ratio
13. (TCO F) Short-term creditors would be most interested in which of the following ratios?
Average collection period
Times interest earned
Cash debt coverage
Free cash flow
14. (TCO G) To calculate the market value of a bond, we need to _____.
multiply the bond price times the interest rate
calculate the present value of the principal only
calculate the present value of the interest only
calculate the present value of both the principal and interest payments
1. (TCO A) The partial financial statement items below were taken from the financial statements of Calibar Company. This account information can be used to correctly solve each of the ratios below. The information is in alphabetical order.
Accounts payable $5,000 Net sales $100,000
Accounts receivable $18,000 Other current liabilities $4,000
Average common shares outstanding 5,000 Salaries payable $4,000
Cash $8,000 Stockholder’s equity $33,000
Gross profit $38,000 Total assets $66,000
Net income $10,000
Instructions: Compute the following.
a) Current ratio
b) Working capital
c) Earnings per share
d) Debt-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 D) The Oxford Company has budgeted sales revenues as follows.
Oct Nov Dec
Credit sales $120,000 $96,000 $72,000
Cash sales 72,000 204,000 156,000
Total sales 192,000 300,000 228,000
Past experience indicates that 60% of the credit sales will be collected in the month of sale and the remaining 40% will be collected in the following month. Purchases of inventory are all on credit, with 60% paid in the month of purchase and 40% in the month following purchase. Budgeted inventory purchases are $260,000 in October, 180,000 in November, and $84,000 in December.
Other budgeted cash receipts include (a) the sale of plant assets for $49,400 in November and (b) the sale of new common stock for $67,400 in December. Other budgeted cash disbursements include (a) operating expenses of $27,000 each month, (b) selling and administrative expenses of $50,000 each month, (c) dividends of $76,000 to be paid in November, and (d) purchase of equipment for $24,000 cash in December.
The company has a cash balance of $40,000 at the beginning of December and wishes to maintain a minimum cash balance of $40,000 at the end of each month. An open line of credit is available at the bank and carries an annual interest rate of 12%. Assume that all borrowing is done on the first day of the month in which financing is needed and that all repayments are made on the last day of the month in which excess cash is available. Also assume that $14,000 of financing was obtained on November 1.
Use this information to prepare a schedule of expected cash payments for purchases of inventory for the months of November and December only.
3. (TCOs B, E) The following items are taken from the financial statements of LBJ Company for 2010.
Accounts payable $26,500
Accounts receivable 6,000
Accumulated depreciation 9,600
Bonds payable 28,000
Common stock 35,000
Cost of goods sold 19,000
Depreciation expense 4,800
Interest expense 3,500
Retained earnings, January 1 20,000
Salaries expense 7,200
Sales revenue 38,500
Instructions: Prepare an income statement and a retained earnings statement for LBJ Company.
4. (TCO D) Your friend Cynthia has hired you to evaluate the following internal control procedures.
a) Explain to your friend whether each of the numbered items below is an internal control strength or weakness. You must also state which principle relates to each of the internal controls.
b) For the weaknesses, you also need to state a recommendation for improvement.
1. All checks are printed using indelible ink.
2. Cash register tapes are used.
3. The company accountant handles deposits and reconciles the bank account.
4. All over-the-counter receipts are registered by two clerks who share a cash drawer.
5. The office manager is in charge of petty cash.
5. (TCOs D, E) Please prepare the following journal entries. Indicate which account should be debited with the abbreviation DR in front of the account name and which account should be credited with the abbreviation CR in front of the account name along with the dollar amount of the debit and credit.
a) Investors invested $150,000 in exchange for 10,000 shares of common stock.
b) Company made payment on account for $10,000
c) Company received $15,000 for services not yet performed
d) Company purchased $7,500 worth of equipment
e) Company billed $5,000 for services performed
6. (TCO C) Please indicate which section of the statement of cash flows should contain each of the following items and whether each item would result in an inflow or outflow of cash. The sections are Operating, Investing, and Financing.
a) Received bank loan
b) Sold equipment at book value
c) Increase in accounts receivable
d) Decrease in accounts payable
e) Amortization of a patent