Test Bank for Cornerstones of Financial Accounting 3rd Edition

What is the primary objective of financial reporting?

1. a. To help investors make credit decisions.
2. b. To help management assess cash flows.
3. c. To protect users from fraudulent financial information.
4. d. To provide useful information for decision making.


"Economic resources" are known as

1. a. assets.
2. b. liabilities and stockholders' equity.
3. c. owners' equity and stockholders' equity.
4. d. retained earnings and revenues.
External users of financial information

1. a. need detailed records of the business to make informed decisions.
2. b. are primarily responsible for the preparation of financial statements.
3. c. rely on the financial statements to help make informed decisions.
4. d. rely on management to tell them whether the company is a good
investment.
Net Income appears on which financial statement(s)?

1. a. Balance Sheet only
2. b. Income Statement only
3. c. Both the Balance Sheet and the Income Statement
4. d. The Income Statement, Statement of Cash Flows using the indirect method
and the Statement of Retained Earnings
Refer to Benchmark Surveyors. Calculate Current Assets.

1. a. $498,000
2. b. $401,000


3. c. $854,000
4. d. $709,000
Refer to Benchmark Surveyors. Calculate Current Liabilities.

1. a. $ 97,000
2. b. $211,000
3. c. $354,000
4. d. $143,000
Which one of the following items is reported as a current stockholders' equity
on a classified balance sheet?

1. a. Net Income
2. b. Accounts Payable
3. c. Land
4. d. Common Stock
Barnes Restaurant reports the following amounts: Cash $125,000 Inventory
$215,000 Land 275,000 Unearned Revenue 117,000 Equipment 350,000
Common Stock 300,000 Calculate Current Assets.

1. a. $457,000
2. b. $615,000
3. c. $125,000
4. d. $340,000



Which of the following accounts are normally reported as current liabilities on
a classified balance sheet?

1. a. Accounts Payable and Prepaid Insurance
2. b. Interest Payable and Interest Receivable
3. c. Income Taxes Payable and Salaries Payable
4. d. Capital Stock and Accounts Payable
Which one of the following is not a major category for long-term assets?

1. a. intangibles
2. b. property, plant, and equipment
3. c. inventory
4. d. patents
Which of the following would not be considered to be an intangible
asset?

1. a. franchises
2. b. copyrights
3. c. investments
4. d. trademarks
If assets are expected to be realized in cash, sold, or consumed within the
normal operating cycle of a business or within one year (if the operating cycle
is shorter than one year), how are they reported on a classified balance
sheet?

1. a. property, plant, and equipment


2. b. current assets
3. c. intangible assets

4. d. current liabilities
Which set of items below are current assets?

1. a. Accounts Receivable, Net Income, Inventory, and Dividends
2. b. Cash, Accounts Receivable, Capital Stock, and Sales
3. c. Net Income, Cash, Office Supplies, and Inventory
4. d. Cash, Accounts Receivable, Inventory, and Office Supplies
A non-classified balance sheet typically does not have a distinction between
which of the following items?

1. a. assets and liabilities
2. b. current and noncurrent items
3. c. liabilities and stockholders' equity
4. d. Resources invested by the owners and amounts borrowed from creditors.
For the most recent year, a company's current ratio was significantly lower
than its industry average. What is the best possible explanation for this
situation?

1. a. The company’s competitors were profitable.
2. b. The company’s liquidity has improved.
3. c. The company has less equity than the rest of the industry.
4. d. The company’s liquidity is worse than the rest of the industry.


Refer to Bass Tours. Calculate the total current assets.

1. a. $ 842,000
2. b. $1,022,000
3. c. $ 732,000
4. d. $ 842,000

Refer to Bass Tours. Calculate the current ratio.

1. a. 3.00 to 1
2. b. 2.75 to 1
3. c. 2.52 to 1
4. d. 2.10 to 1
Refer to Bass Tours. If the average current ratio for similar companies is 2.0
to 1, what does this tell you about this company’s liquidity?

1. a. The company is more liquid than its competitors.
2. b. The company has more long-term assets than its competitors.
3. c. The company is bankrupt.
4. d. The company is more profitable than its competitors.
If a company has current assets of $2,100,000 and current liabilities of
$500,000, calculate its working capital.

1. a. $2,100,000
2. b. $2,600,000


3. c. $1,600,000
4. d. $ 500,000
Working capital is calculated by which of the following?

1. a. Current assets divided by current liabilities.
2. b. Total assets minus total liabilities.
3. c. Current assets minus current liabilities.
4. d. Current assets plus current liabilities.
A company has current assets of $100,000, total assets of $250,000, current
liabilities of $20,000, and long-term liabilities of $50,000. How much of its

existing cash can the company use to acquire equipment without allowing its
current ratio to decline below 2.0 to 1?

1. a. $ 40,000
2. b. $150,000
3. c. $180,000
4. d. $ 60,000
A company increased its dollar amount of working capital over the past
several years. Which one of the following measures should be used to further
evaluate the company’s short-run liquidity?

1. a. The Asset Ratio
2. b. An analysis of the company's long-term debt
3. c. An analysis of the return on stockholders' equity
4. d. The Current Ratio


Which financial statement reports information helpful in assessing working
capital?

1. a. Balance Sheet
2. b. Capital Statement
3. c. Statement of Retained Earnings
4. d. Statement of Cash Flows
Barrett Oil Company reported the following balances as of December 31,
2013: Accounts Receivable $125,000 Unearned Revenue $ 5,000 Cash 150,000
Notes Payable (due in 6 months) 115,000 Land 200,000 Accounts Payable
70,000 Building 400,000 Equipment 165,000 Inventories 105,000 Notes
Payable (due 07/01/2020) 600,000 What is the company’s current ratio?


1. a. 0.48 to 1
2. b. 2.00 to 1
3. c. 2.55 to 1
4. d. 2.86 to 1
If the current ratio is 2 to 1 and current assets equal $200,000, how much is
working capital?

1. a. $0
2. b. $100,000
3. c. $200,000
4. d. $300,000


For which of the following is the working capital and current ratio is most
useful?

1. a. In evaluating a company's liquidity.
2. b. In evaluating a company's solvency.
3. c. In evaluating a company's profitability.
4. d. In evaluating a company's revenues.
Liquidity

1. a. measures the ability of the firm to pay financial obligations as they become
due.
2. b. can be measured in terms of working capital.
3. c. can be assessed by the current ratio.
4. d. All of the above.
Which of the following would appear on an income statement?

1. a. unearned revenue

2. b. cost of sales
3. c. retained earnings
4. d. dividends
The Income Statement shows

1. a. how much profit the company has earned since it began operations.
2. b. net Income equal to the amount of cash on the Balance Sheet.


3. c. a summary of the results of operations for a period of time.
4. d. the liquidity of the company on an annual basis.
Which of the following items would not be reported on a multiple-step income
statement after income from operations?

1. a. income taxes
2. b. interest income
3. c. selling expenses
4. d. interest expense
A question frequently asked by investors is, "How much debt does this
company have?" Which financial statement answers this question?

1. a. single step income statement
2. b. cash flow statement
3. c. multiple-step income statement
4. d. classified balance sheet
On a multiple-step income statement, operating income results from
subtracting total operating expenses from which of the following
amounts?

1. a. gross margin

2. b. cost of goods sold
3. c. income before taxes
4. d. net sales


The list below contains several items that appear on a multiple-step income
statement. 1. other income and expense 2. income before income taxes 3. net
Income 4. operating expenses 5. gross margin 6. net sales 7. income from
operations Select the choice that lists the items in the order they would
appear on a multiple-step income statement.

1. a. 6, 5, 4, 7, 1, 2, 3
2. b. 7, 6, 1, 4, 2, 3, 5
3. c. 6, 5, 4, 1, 7, 2, 3
4. d. 6, 7, 4, 1, 2, 3, 5
Refer to Bellweather Times. What is the company's income from
operations?

1. a. $280,000
2. b. $220,000
3. c. $100,000
4. d. $40,000
Refer to Bellweather Times. What is the company’s Net Income?

1. a. $280,000
2. b. $220,000
3. c. $100,000
4. d. $40,000



Refer to Bellweather Times. By what amount will net income on a single-step
income statement differ from net income on a multiple-step income
statement if the company prepares both formats?

1. a. $0
2. b. $2,000
3. c. $6,000
4. d. $8,000
The Earnings Per Share measure appears on which of the following financial
statements?

1. a. Statement of Cash Flows
2. b. Retained Earnings Statement
3. c. Income Statement
4. d. Balance Sheet
A company reported the following income statement amounts: 2013 2012
Sales revenues $950,000 $800,000 Operating expenses $700,000 $550,000
Income taxes $100,000 100,000 Which of the following best describes the
company’s performance?

1. a. The company’s operating profit as a percentage of operating revenues
decreased.
2. b. The company has become more profitable.
3. c. The increase in operating revenues increased the company's net income.
4. d. The operating expenses as a percentage of operating revenues remained
the same.


Which one of the following equations represents the Statement of Retained
Earnings activity?


1. a. Beginning retained earnings + net income + dividends = ending retained
earnings
2. b. Beginning retained earnings + cash inflows − cash outflows = ending
retained earnings
3. c. Beginning retained earnings + dividends − net income = ending retained
earnings
4. d. Beginning retained earnings + net income − dividends = ending retained
earnings
Refer to Been There Used Furniture. Calculate the retained earnings balance
at December 31, 2013.

1. a. $150,000
2. b. $200,000
3. c. $500,000
4. d. $650,000
Refer to Been There Used Furniture. The dividends for the year

1. a. increase the amount of capital stock reported by the company.
2. b. are part of the company's operating expense.
3. c. are reported on the Statement of Retained Earnings.
4. d. are reported on the Income Statement.


Refer to Been There Used Furniture. If the company’s revenues were $500,000
for the year ended December 31, 2013, how much were total expenses?

1. a. $300,000
2. b. $250,000
3. c. $350,000

4. d. $800,000
Which one of the following is not one of the activities on the Statement of
Cash Flows?

1. a. operating activities
2. b. investing activities
3. c. business activities
4. d. financing activities
Which of the following best describes a company's operating activities?

1. a. Operating activities are cash flows directly related to earning income.
2. b. Operating activities are necessary to provide the money to start a
business.
3. c. Operating activities are needed to provide the valuable assets required to
run a business.
4. d. Operating activities represent the right to receive a benefit in the future.
As used in accounting, the "Notes to the Financial Statements" should be

1. a. shown at the bottom of the Income Statement.


2. b. excluded, as they are not an integral part of the financial statements.
3. c. included as an integral part of the financial statements.
4. d. considered an optional part of the financial statements.
Which of the following items will be found in a corporate annual report?

1. a. industry standards
2. b. notes to the financial statements
3. c. selected financial data from non-competitor companies
4. d. management’s statement that the auditors are responsible for the financial

statements.
Which one of the following items is least likely to be found in a corporate
annual report?

1. a. Notes to the Financial Statements
2. b. Internal Budget Reports
3. c. Report of the Independent Accountants
4. d. Management's Discussion and Analysis
Management's Discussion and Analysis

1. a. is a report of the independent accountants.
2. b. can be a substituted for the notes to the financial statements.
3. c. provides a discussion and explanation of various items reported in the
financial statements.
4. d. provides assurances that the auditors are responsible for the financial
statements.


In which section of the annual report would you find: "The financial
statements, in our opinion, present fairly the financial position, operating
results, and cash flows, in conformity with generally accepted accounting
principles"?

1. a. Management report
2. b. Notes to the Financial Statements
3. c. Management's Discussion and Analysis
4. d. Report of the Independent Accountants
Which of the following represents one of the purposes of the Auditor's
Report?


1. a. To provide a place for management to justify questionable items in the
statements.
2. b. To provide comparative ratios for the company's financial data
3. c. To provide the CPA's opinion of the fairness of the financial statements.
4. d. To satisfy the need for full disclosure of all the facts relevant to a
company's results and financial position.
Which one of the following is an internal user of financial information?

1. a. company management
2. b. governments
3. c. creditors
4. d. investors


Which one of the following is not an external user of financial
statements?

1. a. Internal Revenue Service
2. b. creditors
3. c. stockholders
4. d. the Company's President
Which one of the following groups is considered an internal user of financial
statements?

1. a. A supplier considering selling to the company on credit.
2. b. The labor union representing employees of a company that is involved in
labor negotiations
3. c. The financial analysts for a brokerage firm who are preparing
recommendations for the firm's brokers on companies in a certain industry,
4. d. Managers of the company that supervise production workers.

What is the name for a person who lends funds to a business entity and
expects repayment with interest?

1. a. creditor
2. b. owner
3. c. proprietor
4. d. stockholder


What is the name of the branch of accounting concerned with providing
outside decision makers with information to assess the amounts, timing and
uncertainties of the company's future cash flows?

1. a. financial accounting
2. b. auditing
3. c. managerial accounting
4. d. bookkeeping
Which of the following invests funds into a business and is considered an
owner?

1. a. stockholders
2. b. creditors
3. c. bankers
4. d. lenders
Which of the following is not a form of a business entity?

1. a. sole proprietorship
2. b. partnership
3. c. cooperative
4. d. corporation

In which form of organization are the owners' legal responsibility for the debt
of the business limited to the amount they invested in the business?

1. a. cooperative


2. b. corporation
3. c. partnership
4. d. proprietorship
Businesses engage in which of the following three main activity
categories?

1. a. Financing, Investing, Operating
2. b. Cash, Credit, Noncash
3. c. Financing, Credit, Operating
4. d. Financing, Management, Operating
"Revenues" are best described as

1. a. decreases in assets resulting from the sale of goods or services.
2. b. increases in assets resulting from the sale of products or services.
3. c. assets used or consumed in the sale of products or services.
4. d. an increase in the financing activities.
What is unearned revenue?

1. a. stockholders’ equity
2. b. liability
3. c. asset
4. d. revenue



Which of the following best describes the term "expenses"?

1. a. The cost of assets used in the investing activities of a business.
2. b. The amount of interest or claim that the owners have in the business.
3. c. The future economic resources of a business entity.
4. d. The cost of assets used in the operations of a business.
Which one of the following is not one of the three business activities?

1. a. financing
2. b. operating
3. c. investing
4. d. measuring
You are a potential creditor and are concerned that a particular company you
are ready to give a loan to might have too much debt. Which financial
statement would provide you information needed in order to evaluate your
concern?

1. a. Balance Sheet
2. b. Income Statement
3. c. Statement of Retained Earnings
4. d. Statement of Public Accounting
Which financial statement would you analyze to assess a firm’s operating
performance for the past year?

1. a. Balance Sheet


2. b. Statement of Retained Earnings
3. c. Income Statement
4. d. Statement of Public Accounting

Which financial statement would you refer to in order to determine how much
resources (assets) the company owned?

1. a. Balance Sheet
2. b. Statement of Retained Earnings
3. c. Income Statement
4. d. Statement of Cash Flows
Which one of the following financial statements show the end of the year cash
balance for a business entity?

1. a. Income Statement and Statement of Retained Earnings
2. b. Balance Sheet and Statement of Cash Flows
3. c. Statement of Retained Earnings and Statement of Cash Flows
4. d. Balance Sheet and Statement of Retained Earnings
On January 1, 2013, a company reported assets of $1,000,000 and liabilities of
$600,000. During 2013, assets decreased by $100,000 and Stockholders'
Equity decreased $200,000. What is the amount of liabilities at December 31,
2013?

1. a. $200,000
2. b. $500,000
3. c. $600,000
4. d. $700,000


Which one of the following correctly represents one of the basic financial
statement models?

1. a. Assets − Liabilities = Net Income
2. b. Assets + Liabilities = Total Assets

3. c. Revenues + Expenses = Net Income
4. d. Beginning Retained Earnings + Net Income − Dividends = Ending Retained
Earnings
Which one of the following is a correct fundamental accounting equation?

1. a. Assets + Liabilities = Stockholders' Equity
2. b. Assets + Retained Earnings = Stockholders' Equity
3. c. Assets + Stockholders' Equity = Liabilities
4. d. Assets = Liabilities + Stockholders' Equity
How is the Balance Sheet linked to the other financial statements?

1. a. The amount of retained earnings is reported on the Balance Sheet as a
liability.
2. b. Retained earnings is added to total assets and reported on the Balance
Sheet.
3. c. Retained earnings is reported on the Balance Sheet.
4. d. There is no link between the Balance Sheet and other statements, as each
contains different accounts and provides different information.


Bennett Motors is facing the following business decisions. Which decision will
least likely require financial information?

1. a. A local bank is reviewing the company’s loan application.
2. b. The company is attempting to sell its stock to the public.
3. c. The labor union representing the company's employees is negotiating a
pay raise as part of a new labor agreement.
4. d. The company's management is deciding whether to detail its vehicles
today or tomorrow.
Which of the following best describes the term "retained earnings" of a

company?

1. a. The amount of total profits earned by a company since it began operations.
2. b. The amount of claim that the owners have on the assets of the company.
3. c. The future economic resources of a company.
4. d. The accumulated net income of a company that has not been distributed
to owners in the form of dividends.
Which of the following best describes the term "current assets"?

1. a. The amount of total profits earned by a business since it began operations
plus all other resources.
2. b. The amount of claim that the owners have in the business in the current
year.
3. c. Assets expected to be converted into cash within one year or one
operating cycle, whichever is longer.
4. d. The cumulative profits earned by a business less any dividends distributed
in the current period.


Which one of the following items is a classification on the Classified Balance
Sheet?

1. a. operating accounts
2. b. stockholders' equity
3. c. revenues and expenses
4. d. net income and dividends
Which of the following are Noncurrent assets?

1. a. machinery and equipment
2. b. accounts receivable

3. c. inventories
4. d. unearned revenues
Which one of the following items appears on a balance sheet?

1. a. service revenue
2. b. unearned revenue
3. c. dividends
4. d. cash flow from operations
Which one of the following financial statements reports an entity's financial
position at a specific date?

1. a. Balance Sheet
2. b. Statement of Retained Earnings


3. c. Income Statement
4. d. Both the Income Statement and the Balance Sheet
Another term for Short Term Investments is

1. a. inventories.
2. b. accounts receivable.
3. c. contributed capital.
4. d. marketable securities.
Which of the following terms best describes a distribution of the net income
of a corporation to its owners?

1. a. retained earnings
2. b. dividends
3. c. liquidation of assets
4. d. monetary unit

Which of the following is the correct date format for the financial statement
heading?

1. a. Balance Sheet for the Year Ended June 30, 2013
2. b. Income Statement at December 31, 2013
3. c. Income Statement for the Year Ended December 31, 2013
4. d. Statement of Retained Earnings at December 31, 2013