ACC 557 Week 11 Quiz – Strayer University NEW

ACC/557 Week 11 Quiz – Strayer NEW

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All possible questions with answers

TRUE-FALSE STATEMENTS

Intracompany comparisons of the same financial statement items can often detect changes in financial relationships and significant trends.

Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

Calculating financial ratios is a financial reporting requirement under generally accepted accounting principles.

Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

Measures of a company’s liquidity are concerned with the frequency and amounts of dividend payments.

Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

Analysis of financial statements is enhanced with the use of comparative data.

Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

Comparisons of company data with industry averages can provide some insight into the company’s relative position in the industry.

Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

Vertical and horizontal analyses are concerned with the format used to prepare financial statements.

Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Horizontal, vertical, and circular analyses are the most common tools of financial statement analysis.

Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Horizontal analysis is a technique for evaluating a financial statement item in the current year with other items in the current year.

Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

Another name for trend analysis is horizontal analysis.

Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

If a company has sales of $110 in 2012 and $154 in 2013, the percentage increase in sales from 2012 to 2013 is 140%.

Ans: LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Performance Measurement

In horizontal analysis, if an item has a negative amount in the base year, and a positive amount in the following year, no percentage change for that item can be computed.

Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

Common size analysis expresses each item within a financial statement in terms of a percent of a base amount.

Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

Vertical analysis is a more sophisticated analytical tool than horizontal analysis.

Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

Vertical analysis is useful in making comparisons of companies of different sizes.

Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

Meaningful analysis of financial statements will include either horizontal or vertical analysis, but not both.

Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

Using vertical analysis of the income statement, a company’s net income as a percentage of net sales is 10%; therefore, the cost of goods sold as a percentage of sales must be 90%.

Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Performance Measurement

In the vertical analysis of the income statement, each item is generally stated as a percentage of net income.

Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

A ratio can be expressed as a percentage, a rate, or a proportion.

Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

A solvency ratio measures the income or operating success of an enterprise for a given period of time.

Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

The current ratio is a measure of all the ratios calculated for the current year.

Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

Inventory turnover measures the number of times on the average the inventory was sold during the period.

Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

Profitability ratios are frequently used as a basis for evaluating management’s operating effectiveness.

Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

The rate of return on total assets will be greater than the rate of return on common stockholders’ equity if the company has been successful in trading on the equity at a gain.

Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Performance Measurement

From a creditor’s point of view, the higher the total debt to total assets ratio, the lower the risk that the company may be unable to pay its obligations.

Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Investment Decisions

A current ratio of 1.2 to 1 indicates that a company’s current assets exceed its current liabilities.

Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Performance Measurement

Using borrowed money to increase the rate of return on common stockholders’ equity is called “trading on the equity.”

Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

When the disposal of a significant segment occurs, the income statement should report both income from continuing operations and income (loss) from discontinued operations.

Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communcations, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

An event or transaction should be classified as an extraordinary item if it is unusual in nature or if it occurs infrequently.

Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Variations among companies in the application of generally accepted accounting principles may reduce quality of earnings.

Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Pro forma income usually excludes items that the company thinks are unusual or nonrecurring.

Ans: LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communcations, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The three basic tools of analysis are horizontal analysis, vertical analysis, and ratio analysis.

Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A percentage change can be computed only if the base amount is zero or positive.

Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

In vertical analysis, the base amount in an income statement is usually net sales.

Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Profitability ratios measure the ability of the enterprise to survive over a long period of time.

Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The days in inventory is computed by multiplying inventory turnover by 365.

Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Extraordinary items are reported net of applicable taxes in a separate section of the income statement.

Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

MULTIPLE CHOICE QUESTIONS

Which one of the following is primarily interested in the liquidity of a company?
Federal government
Stockholders
Long-term creditors
Short-term creditors

Ans:LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

Which one of the following is not a characteristic generally evaluated in analyzing financial statements?
Liquidity
Profitability
Marketability
Solvency

Ans:LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

In analyzing the financial statements of a company, a single item on the financial statements
should be reported in bold-face type.
is more meaningful if compared to other financial information.
is significant only if it is large.
should be accompanied by a footnote.

Ans:LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

Short-term creditors are usually most interested in evaluating
solvency.
liquidity.
marketability.
profitability.

Ans:LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

Long-term creditors are usually most interested in evaluating
liquidity and solvency.
solvency and marketability.
liquidity and profitability.
profitability and solvency.

Ans:LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

Stockholders are most interested in evaluating
liquidity and solvency.
profitability and solvency.
liquidity and profitability.
marketability and solvency.

Ans:LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

A stockholder is interested in the ability of a firm to
pay consistent dividends.
appreciate in share price.
survive over a long period.
all of these.

Ans:LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics

Comparisons of financial data made within a company are called
intracompany comparisons.
interior comparisons.
intercompany comparisons.
intramural comparisons.

Ans:LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

A technique for evaluating financial statements that expresses the relationship among selected items of financial statement data is
common size analysis.
horizontal analysis.
ratio analysis.
vertical analysis.

Ans:LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Which one of the following is not a tool in financial statement analysis?
Horizontal analysis
Circular analysis
Vertical analysis
Ratio analysis

Ans:LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

In analyzing financial statements, horizontal analysis is a
requirement.
tool.
principle.
theory.

Ans:LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Horizontal analysis is also called
linear analysis.
vertical analysis.
trend analysis.
common size analysis.

Ans:LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Vertical analysis is also known as
perpendicular analysis.
common size analysis.
trend analysis.
straight-line analysis.

Ans:LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

In ratio analysis, the ratios are never expressed as a
rate.
negative figure.
percentage.
simple proportion.

Ans:LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

The formula for horizontal analysis of changes since the base period is the current year amount
divided by the base year amount.
minus the base year amount divided by the base year amount.
minus the base year amount divided by the current year amount.
plus the base year amount divided by the base year amount.

Ans:LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Horizontal analysis evaluates a series of financial statement data over a period of time
that has been arranged from the highest number to the lowest number.
that has been arranged from the lowest number to the highest number.
to determine which items are in error.
to determine the amount and/or percentage increase or decrease that has taken place.

Ans:LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Horizontal analysis evaluates financial statement data
within a period of time.
over a period of time.
on a certain date.
as it may appear in the future.

Ans:LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Assume the following sales data for a company:
2014 $1,050,000

2013 950,000

2012 800,000

2011 550,000

If 2011 is the base year, what is the percentage increase in sales from 2011 to 2013?

100%
90.9%
72.7%
52.4%

Ans:LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Comparative balance sheets are usually prepared for
one year.
two years.
three years.
four years.

Ans:LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Horizontal analysis is appropriately performed
only on the income statement.
only on the balance sheet.
only on the statement of retained earnings.
on all three of these statements.

Ans:LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

A horizontal analysis performed on a statement of retained earnings would not show a percentage change in
dividends paid.
net income.
expenses.
beginning retained earnings.

Ans:LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Under which of the following cases may a percentage change be computed?
The trend of the balances is decreasing but all balances are positive.
There is no balance in the base year.
There is a positive balance in the base year and a negative balance in the subsequent year.
There is a negative balance in the base year and a positive balance in the subsequent year.

Ans:LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Assume the following sales data for a company:
2014 $945,000

2013 877,500

2012 650,000

If 2012 is the base year, what is the percentage increase in sales from 2012 to 2013?

24%
35%
76%
135%

Ans:LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Assume the following cost of goods sold data for a company:
2014 $1,680,000

2013 1,400,000

2012 1,200,000

If 2012 is the base year, what is the percentage increase in cost of goods sold from 2012 to 2014?

140%
40%
23%
17%

Ans:LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Darius, Inc. has the following income statement (in millions):
DARIUS, INC.

Income Statement

For the Year Ended December 31, 2013

Net Sales $300

Cost of Goods Sold 120

Gross Profit 180

Operating Expenses 44

Net Income $136

Using vertical analysis, what percentage is assigned to Cost of Goods Sold?

30%
40%
100%
None of the above

Ans:LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Darius, Inc. has the following income statement (in millions):
DARIUS, INC.

Income Statement

For the Year Ended December 31, 2012

Net Sales $300

Cost of Goods Sold 120

Gross Profit 180

Operating Expenses 44

Net Income $136

Using vertical analysis, what percentage is assigned to Net Income?

100%
75.6%
45.3%
None of the above

Ans:LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Vertical analysis is also called
common size analysis.
horizontal analysis.
ratio analysis.
trend analysis.

Ans:LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Vertical analysis is a technique which expresses each item within a financial statement
in dollars and cents.
in terms of a percentage of the item in the previous year.
in terms of a percent of a base amount.
starting with the highest value down to the lowest value.

Ans:LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

In common size analysis,
a base amount is required.
a base amount is optional.
the same base is used across all financial statements analyzed.
the results of the horizontal analysis are necessary inputs for performing the analysis.

Ans:LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

In performing a vertical analysis, the base for prepaid expenses is
total current assets.
total assets.
total liabilities and stockholders’ equity.
prepaid expenses.

Ans:LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

In performing a vertical analysis, the base for sales revenues on the income statement is
net sales.
sales.
net income.
cost of goods available for sale.

Ans:LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

In performing a vertical analysis, the base for sales returns and allowances is
sales.
sales discounts.
net sales.
total revenues.

Ans:LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

In performing a vertical analysis, the base for cost of goods sold is
total selling expenses.
net sales.
total revenues.
total expenses.

Ans:LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Each of the following is a liquidity ratio except the
acid-test ratio.
current ratio.
debt to total assets ratio.
inventory turnover.

Ans:LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

A ratio calculated in the analysis of financial statements
expresses a mathematical relationship between two numbers.
shows the percentage increase from one year to another.
restates all items on a financial statement in terms of dollars of the same purchasing power.
is meaningful only if the numerator is greater than the denominator.

Ans:LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

A liquidity ratio measures the
income or operating success of an enterprise over a period of time.
ability of the enterprise to survive over a long period of time.
short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash.
number of times interest is earned.

Ans:LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

The current ratio is
calculated by dividing current liabilities by current assets.
used to evaluate a company’s liquidity and short-term debt paying ability.
used to evaluate a company’s solvency and long-term debt paying ability.
calculated by subtracting current liabilities from current assets.

Ans:LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

The acid-test (quick) ratio
is used to quickly determine a company’s solvency and long-term debt paying ability.
relates cash, short-term investments, and net receivables to current liabilities.
is calculated by taking one item from the income statement and one item from the balance sheet.
is the same as the current ratio except it is rounded to the nearest whole percent.

Ans:LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Harvey Clothing Store had a balance in the Accounts Receivable account of $390,000 at the beginning of the year and a balance of $410,000 at the end of the year. Net credit sales during the year amounted to $3,000,000. The average collection period of the receivables in terms of days was
30 days.
365 days.
274 days.
48.7 days.

Ans:LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Parker Hardware Store had net credit sales of $8,000,000 and cost of goods sold of $5,000,000 for the year. The Accounts Receivable balances at the beginning and end of the year were $600,000 and $700,000, respectively. The receivables turnover was
7.7 times.
4.6 times.
11.4 times.
12.3 times.

Ans:LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Wagon Department Store had net credit sales of $16,000,000 and cost of goods sold of $15,000,000 for the year. The average inventory for the year amounted to $2,000,000. Inventory turnover for the year is
8 times.
15 times.
7.5 times.
5 times.

Ans:LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Wagon Department Store had net credit sales of $16,000,000 and cost of goods sold of $15,000,000 for the year. The average inventory for the year amounted to $2,000,000. The average number of days in inventory during the year was
365 days.
48.7 days.
46 days.
30 days.

Ans:LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Each of the following is included in computing the acid-test ratio except
cash.
inventory.
receivables.
short-term investments.

Ans:LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Which one of the following would not be considered a liquidity ratio?
Current ratio
Inventory turnover
Acid-test ratio
Return on assets

Ans:LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Asset turnover measures
how often a company replaces its assets.
how efficiently a company uses its assets to generate sales.
the portion of the assets that have been financed by creditors.
the overall rate of return on assets.

Ans:LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Profit margin is calculated by dividing
sales by cost of goods sold.
gross profit by net sales.
net income by stockholders’ equity.
net income by net sales.

Ans:LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Stout Corporation had net income of $200,000 and paid dividends to common stockholders of $40,000 in 2012. The weighted average number of shares outstanding in 2012 was 50,000 shares. Stout Corporation’s common stock is selling for $75 per share on the New York Stock Exchange. Stout Corporation’s price-earnings ratio is
3.8 times.
15 times.
18.8 times.
12 times.

Ans:LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Stout Corporation had net income of $200,000 and paid dividends to common stockholders of $40,000 in 2012. The weighted average number of shares outstanding in 2012 was 50,000 shares. Stout Corporation’s common stock is selling for $60 per share on the New York Stock Exchange. Stout Corporation’s payout ratio for 2012 is
$4 per share.
b 25%.

20%.
12.5%.

Ans:LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Flake Company reported the following on its income statement:
Income before income taxes $600,000

Income tax expense 150,000

Net income $450,000

An analysis of the income statement revealed that interest expense was $50,000. Flake Company’s times interest earned was

13 times.
12 times.
6 times.
7 times.

Ans:LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

The debt to total assets ratio measures
the company’s profitability.
whether interest can be paid on debt in the current year.
the proportion of interest paid relative to dividends paid.
the percentage of the total assets provided by creditors.

Ans:LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Trading on the equity (leverage) refers to the
amount of working capital.
amount of capital provided by owners.
use of borrowed money to increase the return to owners.
number of times interest is earned.

Ans:LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

The current assets of Margo Company are $300,000. The current liabilities are $100,000. The current ratio expressed as a proportion is
300%.
3.0 : 1
.33 : 1
$300,000 ÷ $100,000.

Ans:LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

The current ratio may also be referred to as the
short run ratio.
acid-test ratio.
working capital ratio.
contemporary ratio.

Ans:LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

A weakness of the current ratio is
the difficulty of the calculation.
that it doesn’t take into account the composition of the current assets.
that it is rarely used by sophisticated analysts.
that it can be expressed as a percentage, as a rate, or as a proportion.

Ans:LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

A supplier to a company would be most interested in the company’s
asset turnover.
profit margin.
current ratio.
earnings per share.

Ans:LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Which one of the following ratios would not likely be used by a short-term creditor in evaluating whether to sell on credit to a company?
Current ratio
Acid-test ratio
Asset turnover
Receivables turnover

Ans:LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Ratios are used as tools in financial analysis
instead of horizontal and vertical analyses.
because they may provide information that is not apparent from inspection of the individual components of the ratio.
because even single ratios by themselves are quite meaningful.
because they are prescribed by GAAP.

Ans:LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

The ratios that are used to determine a company’s short-term debt paying ability are
asset turnover, times interest earned, current ratio, and receivables turnover.
times interest earned, inventory turnover, current ratio, and receivables turnover.
times interest earned, acid-test ratio, current ratio, and inventory turnover.
current ratio, acid-test ratio, receivables turnover, and inventory turnover.

Ans:LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

A measure of the percentage of each dollar of sales that results in net income is
profit margin.
return on assets.
return on common stockholders’ equity.
earnings per share.

Ans:LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

West Company had $375,000 of current assets and $150,000 of current liabilities before borrowing $75,000 from the bank with a 3-month note payable. What effect did the borrowing transaction have on the amount of West Company’s working capital?
No effect
$75,000 increase
$150,000 increase
$75,000 decrease

Ans:LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

West Company had $375,000 of current assets and $150,000 of current liabilities before borrowing $75,000 from the bank with a 3-month note payable. What effect did the borrowing transaction have on West Company’s current ratio?
The ratio remained unchanged.
The change in the current ratio cannot be determined.
The ratio decreased.
The ratio increased.

Ans:LO: 5, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

If equal amounts are added to the numerator and the denominator of the current ratio, the ratio will always
increase.
decrease.
stay the same.
equal zero.

Ans:LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

The acid-test ratio
is a quick calculation of an approximation of the current ratio.
does not include all current liabilities in the calculation.
does not include inventory as part of the numerator.
does include prepaid expenses as part of the numerator.

Ans:LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

If a company has an acid-test ratio of 1.2:1, what respective effects will the borrowing of cash by short-term debt and collection of accounts receivable have on the ratio?
Short-term Borrowing Collection of Receivable

Increase No effect
Increase Increase
Decrease No effect
Decrease Decrease

Ans:LO: 5, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

A company has a receivables turnover of 10 times. The average receivables during the period are $500,000. What is the amount of net credit sales for the period?
$50,000
$5,000,000
$500,000
Cannot be determined from the information given

Ans:LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

If the average collection period is 60 days, what is the receivables turnover?
6.0 times
6.1 times
12.2 times
None of these

Ans:LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

A general rule to use in assessing the average collection period is that
it should not exceed 30 days.
it can be any length as long as the customer continues to buy merchandise.
it should not greatly exceed the discount period.
it should not greatly exceed the credit term period.

Ans:LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Inventory turnover is calculated by dividing
cost of goods sold by the ending inventory.
cost of goods sold by the beginning inventory.
cost of goods sold by the average inventory.
average inventory by cost of goods sold.

Ans:LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

A company has an average inventory on hand of $40,000 and the days in inventory is 73 days. What is the cost of goods sold?
$200,000
$2,920,000
$400,000
$1,460,000

Ans:LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

A successful grocery store would probably have
a low inventory turnover.
a high inventory turnover.
zero profit margin.
low volume.

Ans:LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

An aircraft company would most likely have
a high inventory turnover.
low profit margin.
high volume.
a low inventory turnover.

Ans:LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Net sales are $6,000,000, beginning total assets are $2,800,000, and the asset turnover is 3.0 times. What is the ending total asset balance?
$2,000,000
$1,200,000
$2,800,000
$2,200,000

Ans:LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Earnings per share is calculated
only for common stock.
only for preferred stock.
for common and preferred stock.
only for treasury stock.

Ans:LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Which of the following is not a profitability ratio?
Payout ratio
Profit margin
Times interest earned
Return on common stockholders’ equity

Ans:LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Times interest earned is also called the
money multiplier.
interest coverage ratio.
coupon coverage ratio.
premium ratio.

Ans:LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

The ratio that uses weighted average common shares outstanding in the denominator is the
price-earnings ratio.
return on common stockholders’ equity.
earnings per share.
payout ratio.

Ans:LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Net income does not appear in the numerator of the
profit margin.
return on assets.
return on common stockholders’ equity.
payout ratio.

Ans:LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Bria Clothing Store had a balance in the Accounts Receivable account of $920,000 at the beginning of the year and a balance of $980,000 at the end of the year. Net credit sales during the year amounted to $7,600,000. The receivables turnover ratio was
8.0 times.
8.4 times.
7.8 times.
8.3 times.

Ans:LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Bria Clothing Store had a balance in the Accounts Receivable account of $810,000 at the beginning of the year and a balance of $850,000 at the end of the year. Net credit sales during the year amounted to $6,640,000. The average collection period of the receivables in terms of days was
91.3 days.
45.6 days.
30 days.
46.7 days.

Ans:LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Donner Corporation had net income of $200,000 and paid dividends to common stockholders of $40,000 in 2013. The weighted average number of shares outstanding in 2013 was 50,000 shares. Donner Corporation’s common stock is selling for $35 per share on the New York Stock Exchange. Donner Corporation’s price-earnings ratio is
5 times.
8.75 times.
4 times.
10.9 times.

Ans:LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Donner Corporation had net income of $400,000 and paid dividends to common stockholders of $40,000 in 2012. The weighted average number of shares outstanding in 2012 was 50,000 shares. Donner Corporation’s common stock is selling for $50 per share on the New York Stock Exchange. Donner Corporation’s payout ratio for 2012 is
$8 per share.
10%.
12.5%.
20%.

Ans:LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Town Company reported the following on its income statement:
Income before income taxes $750,000

Income tax expense 150,000

Net income $600,000

An analysis of the income statement revealed that interest expense was $100,000. Town Company’s times interest earned was

5 times.
8.5 times.
6 times.
7.5 times.

Ans:LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

The following information pertains to Sampson Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.
Assets

Cash and short-term investments $ 45,000

Accounts receivable (net) 25,000

Inventory 20,000

Property, plant and equipment 210,000

Total Assets $300,000

Liabilities and Stockholders’ Equity

Current liabilities $ 50,000

Long-term liabilities 90,000

Stockholders’ equity—common 160,000

Total Liabilities and Stockholders’ Equity $300,000

MC 122. (Cont.)

Income Statement

Sales $ 120,000

Cost of goods sold 66,000

Gross profit 54,000

Operating expenses 30,000

Net income $ 24,000

Number of shares of common stock 6,000

Market price of common stock $20

Dividends per share .50

What is the current ratio for Sampson?

1.80:1
1.30:1
1.40:1
0.64

Ans:LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

The following information pertains to Sampson Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.
Assets

Cash and short-term investments $ 45,000

Accounts receivable (net) 35,000

Inventory 20,000

Property, plant and equipment 210,000

Total Assets $310,000

Liabilities and Stockholders’ Equity

Current liabilities $ 60,000

Long-term liabilities 90,000

Stockholders’ equity—common 160,000

Total Liabilities and Stockholders’ Equity $310,000

Income Statement

Sales $ 105,000

Cost of goods sold 66,000

Gross profit 39,000

Operating expenses 30,000

Net income $ 9,000

Number of shares of common stock 6,000

Market price of common stock $20

Dividends per share .50

What is the receivables turnover for Sampson?

1.5 times
1.1 times
3.0 times
12.9 times

Ans:LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

The following information pertains to Sampson Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.
Assets

Cash and short-term investments $ 45,000

Accounts receivable (net) 25,000

Inventory 11,000

Property, plant and equipment 210,000

Total Assets $291,000

Liabilities and Stockholders’ Equity

Current liabilities $ 50,000

Long-term liabilities 90,000

Stockholders’ equity—common 151,000

Total Liabilities and Stockholders’ Equity $291,000

Income Statement

Sales $ 120,000

Cost of goods sold 55,000

Gross profit 65,000

Operating expenses 30,000

Net income $ 35,000

Number of shares of common stock 6,000

Market price of common stock $20

Dividends per share .50

What is the inventory turnover for Sampson?

3,2 times
5 times
10.9 times
0.20 times

Ans:LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

The following information pertains to Sampson Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.
Assets

Cash and short-term investments $ 45,000

Accounts receivable (net) 25,000

Inventory 20,000

Property, plant and equipment 210,000

Total Assets $300,000

Liabilities and Stockholders’ Equity

Current liabilities $ 50,000

Long-term liabilities 90,000

Stockholders’ equity—common 160,000

Total Liabilities and Stockholders’ Equity $300,000

MC 125. (Cont.)

Income Statement

Sales $ 120,000

Cost of goods sold 66,000

Gross profit 54,000

Operating expenses 30,000

Net income $ 24,000

Number of shares of common stock 6,000

Market price of common stock $20

Dividends per share .50

What is the return on assets for Sampson?

8.0%
7.0%
18.0%
16.0%

Ans:LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

The following information pertains to Sampson Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.
Assets

Cash and short-term investments $ 45,000

Accounts receivable (net) 25,000

Inventory 20,000

Property, plant and equipment 310,000

Total Assets $400,000

Liabilities and Stockholders’ Equity

Current liabilities $ 50,000

Long-term liabilities 90,000

Stockholders’ equity—common 260,000

Total Liabilities and Stockholders’ Equity $400,000

Income Statement

Sales $ 300,000

Cost of goods sold 66,000

Gross profit 234,000

Operating expenses 30,000

Net income $ 204,000

Number of shares of common stock 6,000

Market price of common stock $20

Dividends per share .50

MC 126. (Cont.)

What is the profit margin for Sampson?

115%
28.2%
68%
51%

Ans:LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

The following information pertains to Sampson Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.
Assets

Cash and short-term investments $ 45,000

Accounts receivable (net) 25,000

Inventory 20,000

Property, plant and equipment 230,000

Total Assets $320,000

Liabilities and Stockholders’ Equity

Current liabilities $ 50,000

Long-term liabilities 90,000

Stockholders’ equity—common 180,000

Total Liabilities and Stockholders’ Equity $320,000

Income Statement

Sales $ 150,000

Cost of goods sold 66,000

Gross profit 84,000

Operating expenses 30,000

Net income $ 54,000

Number of shares of common stock 6,000

Market price of common stock $20

Dividends per share .50

What is the return on common stockholders’ equity for Sampson?

30%
46.7%
36%
16.9%

Ans:LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

The following information pertains to Sampson Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.
Assets

Cash and short-term investments $ 45,000

Accounts receivable (net) 25,000

Inventory 20,000

Property, plant and equipment 210,000

Total Assets $300,000

Liabilities and Stockholders’ Equity

Current liabilities $ 50,000

Long-term liabilities 90,000

Stockholders’ equity—common 160,000

Total Liabilities and Stockholders’ Equity $300,000

Income Statement

Sales $ 120,000

Cost of goods sold 66,000

Gross profit 54,000

Operating expenses 18,000

Net income $ 36,000

Number of shares of common stock 6,000

Market price of common stock $33

Dividends per share .50

What is the price-earnings ratio for Sampson?

5.5 times
1.1 times
6 times
6.6 times

Ans:LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

The following information pertains to Eura Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.
Assets

Cash and short-term investments $ 40,000

Accounts receivable (net) 30,000

Inventory 25,000

Property, plant and equipment 215,000

Total Assets $310,000

Liabilities and Stockholders’ Equity

Current liabilities $ 60,000

Long-term liabilities 75,000

Stockholders’ equity—common 175,000

Total Liabilities and Stockholders’ Equity $310,000

MC 129. (Cont.)

Income Statement

Sales $ 90,000

Cost of goods sold 45,000

Gross profit 45,000

Operating expenses 25,000

Net income $ 20,000

Number of shares of common stock 5,000

Market price of common stock $22

Dividends per share 1

What is the return on assets for Eura?

4.8%
9.7%
6.5%
12.9%

Ans:LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

The following information pertains to Eura Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.
Assets

Cash and short-term investments $ 40,000

Accounts receivable (net) 30,000

Inventory 25,000

Property, plant and equipment 215,000

Total Assets $310,000

Liabilities and Stockholders’ Equity

Current liabilities $ 60,000

Long-term liabilities 75,000

Stockholders’ equity—common 175,000

Total Liabilities and Stockholders’ Equity $310,000

Income Statement

Sales $ 135,000

Cost of goods sold 45,000

Gross profit 90,000

Operating expenses 25,000

Net income $ 65,000

Number of shares of common stock 5,000

Market price of common stock $22

Dividends per share 1

What is the profit margin for Eura?

27.8%
51.9%
72.2%
48.1%

Ans:LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

The following information pertains to Eura Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.
Assets

Cash and short-term investments $ 40,000

Accounts receivable (net) 30,000

Inventory 45,000

Property, plant and equipment 215,000

Total Assets $330,000

Liabilities and Stockholders’ Equity

Current liabilities $ 60,000

Long-term liabilities 75,000

Stockholders’ equity—common 195,000

Total Liabilities and Stockholders’ Equity $330,000

Income Statement

Sales $ 90,000

Cost of goods sold 45,000

Gross profit 45,000

Operating expenses 30,000

Net income $ 15,000

Number of shares of common stock 5,000

Market price of common stock $22

Dividends per share 1

What is the return on common stockholders’ equity for Eura?

4.8%
7.7%
23.1%
46.2%

Ans:LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

The following information pertains to Eura Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.
Assets

Cash and short-term investments $ 40,000

Accounts receivable (net) 30,000

Inventory 25,000

Property, plant and equipment 215,000

Total Assets $310,000

Liabilities and Stockholders’ Equity

Current liabilities $ 60,000

Long-term liabilities 75,000

Stockholders’ equity—common 175,000

Total Liabilities and Stockholders’ Equity $310,000

MC 132. (Cont.)

Income Statement

Sales $ 90,000

Cost of goods sold 45,000

Gross profit 45,000

Operating expenses 25,000

Net income $ 20,000

Number of shares of common stock 5,000

Market price of common stock $22

Dividends per share 1.00

What is the price-earnings ratio for Eura?

5 times
4.0 times
7.3 times
5.5 times

Ans:LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

The following information is available for Compton Company:

2012 2011

Accounts receivable $ 460,000 $ 500,000

Inventory 280,000 320,000

Net credit sales 2,470,000 1,400,000

Cost of goods sold 1,860,000 1,060,000

Net income 300,000 170,000

The receivables turnover ratio for 2012 is

1.6 times.
5.4 times.
5.1 times.
3.9 times.

Ans:LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

The following information is available for Compton Company:

2012 2011

Accounts receivable $ 360,000 $ 400,000

Inventory 340,000 420,000

Net credit sales 2,470,000 1,400,000

Cost of goods sold 1,860,000 1,060,000

Net income 300,000 170,000

The inventory turnover ratio for 2012 is

6.2 times.
4.9 times.
5.5 times.
4.4 times.

Ans:LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

The following amounts were taken from the financial statements of Plant Company:
2013 2012

Total assets $800,000 $1,000,000

Net sales 720,000 650,000

Gross profit 352,000 320,000

Net income 126,000 117,000

Weighted average number of common shares outstanding 90,000 90,000

Market price of common stock $35 $39

The return on assets ratio for 2013 is

16%.
14%.
32%.
28%.

Ans:LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

The following amounts were taken from the financial statements of Plant Company:
2013 2012

Total assets $800,000 $1,000,000

Net sales 840,000 650,000

Gross profit 352,000 320,000

Net income 155,400 117,000

Weighted average number of common shares outstanding 90,000 90,000

Market price of common stock $35 $39

The profit margin ratio for 2013 is

19.4%.
44.1%.
18.5%.
10.7%.

Ans:LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

The following amounts were taken from the financial statements of Plant Company:
2013 2012

Total assets $800,000 $1,000,000

Net sales 720,000 650,000

Gross profit 352,000 320,000

Net income 150,000 117,000

Weighted average number of common shares outstanding 60,000 90,000

Market price of common stock $67.50 $39

The price-earnings ratio for 2013 is

27 times.
45 times.
11 times.
2.5 times.

Ans:LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Star Corporation had net income of $300,000 and paid dividends to common stockholders of $40,000 in 2012. The weighted average number of shares outstanding in 2012 was 50,000 shares. Star Corporation’s common stock is selling for $36 per share on the New York Stock Exchange.

Star Corporation’s price-earnings ratio is

5.2 times.
6 times.
18 times.
6.9 times.

Ans:LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Star Corporation had net income of $320,000 and paid dividends to common stockholders of $80,000 in 2012. The weighted average number of shares outstanding in 2012 was 50,000 shares. Star Corporation’s common stock is selling for $30 per share on the New York Stock Exchange.

Star Corporation’s payout ratio for 2012 is

16%.
25%.
9%.
$4 per share.

Ans:LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

The following financial statement information is available for Houser Corporation:
2012 2011

Inventory $ 44,000 $ 43,000

Current assets 81,000 106,000

Total assets 432,000 358,000

Current liabilities 30,000 36,000

Total liabilities 102,000 88,000

The current ratio for 2012 is

.37:1.
2.7:1.
.79:1.
4.24:1.

Ans:LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

The following financial statement information is available for Jones Corporation:
2012 2011

Net sales $784,000 $697,000

Cost of goods sold 406,000 377,000

Net income 112,000 80,000

Tax expense 48,000 29,000

Interest expense 14,000 14,000

The profit margin ratio for 2012 is

14.3%.
16.1%.
48.2%.
11.7%.

Ans:LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

The following financial statement information is available for Henn Corporation:
2013 2012

Stockholders’ equity – common $330,000 $270,000

Net sales 784,000 697,000

Cost of goods sold 406,000 377,000

Net income 112,000 80,000

Inc tax expense 48,000 29,000

Interest expense 14,000 14,000

Dividends paid to preferred

stockholders 22,000 20,000

Dividends paid to common

stockholders 15,000 10,000

The return on common stockholders’ equity for 2013 is

25.0%.
37.3%.
27.3%.
30.0%.

Ans:LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

The following financial statement information is available for Bongo Corporation:
2013 2012

Net income $115,000 $ 80,000

Income tax expense 50,000 29,000

Interest expense 15,000 14,000

Dividends paid to preferred

stockholders 22,000 20,000

Dividends paid to preferred

stockholders 15,000 10,000

The times interest earned for 2013 is

8.8 times.
7.7 times.
12 times.
11 times.

Ans:LO: 5, Bloom: AP, Difficulty: Hard, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Dean Corporation reported net income $48,000, net sales $400,000, and average assets $800,000 for 2013. The 2013 profit margin was:
6%.
12%.
50%.
200%.

Ans:LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Goin Company reports the following amounts for 2012:
Net income $ 150,000

Average stockholders’ equity 2,000,000

Preferred dividends 48,000

Par value preferred stock 200,000

The 2012 rate of return on common stockholders’ equity is:

5.1%.
5.7%.
7.5%.
8.3%.

Ans:LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Gamble Corporation had beginning inventory $100,000, cost of goods purchased $700,000, and ending inventory $140,000. What was Gamble’s inventory turnover?
5 times.
5.5 times.
5.83 times.
6.6 times.

Ans:LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

In 2012 Shum Corporation reported income from operations $180,000, interest expense $50,000, and income tax expense $40,000. Shum’s times interest earned ratio was:
5.4 times.
4.6 times.
4.4 times.
3.6 times.

Ans:LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Reynolds Company has income before taxes of $360,000 and an extraordinary loss of $80,000. If the income tax rate is 30% on all items, the income statement should show income before irregular items and an extraordinary loss, respectively, of:
$360,000 and ($80,000)
$252,000 and ($24,000)
$252,000 and ($56,000)
$108,000 and ($24,000)

Ans:LO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

All of the following statements regarding changes in accounting principles are true except:
Most changes in accounting principles are only reported in current periods when the principle change takes place.
Changes in accounting principles are allowed when new principles are preferable to old ones.
Most changes in accounting principles are retroactively reported.
Consistency is one of the biggest concerns when a change in accounting principle is undertaken.

Ans:LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Alpha’s Bunny Barn has experienced a $60,000 loss due to tornado damage to its inventory. Tornados have never before occurred in this area. Assuming that the company’s tax rate is 30%, what amount will be reported for this loss on the income statement?
$60,000
$42,000
$18,000
$54,000

Ans:LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Wing Company reported income before taxes of $900,000 and an extraordinary loss of $250,000. Assume that the company’s tax rate is 30%. What amounts will be reported on the income statement for income before irregular items and extraordinary items, respectively?
$630,000 and $250,000
$630,000 and $175,000
$650,000 and $250,000
$650,000 and $175,000

Ans:LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Krug Corporation has income before taxes of $900,000 and an extraordinary gain of $300,000. If the income tax rate is 25% on all items, the income statement should show income before irregular items and extraordinary items, respectively, of
$600,000 and $300,000.
$600,000 and $225,000.
$675,000 and $300,000.
$675,000 and $225,000.

Ans:LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Hook Inc. has an investment in non-trading securities of $80,000. This investment experienced an unrealized loss of $5,000 during the current year. Assuming a 35% tax rate, the effect of this loss on comprehensive income will be
no effect.
$80,000 increase.
$28,000 decrease.
$5,000 decrease.

Ans:LO: 6, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

The disposal of a significant component of a business is called
a change in accounting principle.
an extraordinary item.
an other expense.
discontinued operations.

Ans:LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

ACME Company reports income before income taxes of $2,400,000 and had an extra-ordinary loss of $800,000. If the tax rate is 30%,
the income before the extraordinary item is $1,920,000.
the extraordinary loss would be reported on the income statement at $800,000.
the income before the extraordinary item is $1,680,000.
the extraordinary loss will be reported at $240,000.

Ans:LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Eaton, Inc. disposes of an unprofitable segment of its business. The operation of the segment suffered a $360,000 loss in the year of disposal. The loss on disposal of the segment was $180,000. If the tax rate is 30%, and income before income taxes was $2,250,000,
the income tax expense on the income before discontinued operations is $513,000.
the income from continuing operations is $1,575,000.
net income is $1,710,000.
the losses from discontinued operations are reported net of income taxes at $270,000.

Ans:LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

Each of the following is an extraordinary item except the
effects of major casualties, if rare in the area.
effects of a newly enacted law or regulation.
expropriation of property by a foreign government.
losses attributable to labor strikes.

Ans:LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The discontinued operations section of the income statement refers to
discontinuance of a product line.
the income or loss on products that have been completed and sold.
obsolete equipment and discontinued inventory items.
the disposal of a significant segment of a business.

Ans:LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Which one of the following would be classified as an extraordinary item?
Expropriation of property by a foreign government
Losses attributed to a labor strike
Write-down of inventories
Gains or losses from sales of equipment

Ans:LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A loss on the write down of obsolete inventory should be reported as
“other expenses and losses.”
part of discontinued operations.
an operating expense.
an extraordinary item.

Ans:LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

If an item meets one (but not both) of the criteria for an extraordinary item, it
only needs to be disclosed in the footnotes of the financial statements.
may be treated as sales revenue (if it is a gain) and as an operating expense (if it is a loss).
is reported as an “other revenue or gain” or “other expense and loss,” net of tax.
is reported at its gross amount as an “other revenue or gain” or “other expense or loss.”

Ans:LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

The order of presentation of nontypical items that may appear on the income statement is
Extraordinary items, Discontinued operations, Other revenues and expenses.
Discontinued operations, Extraordinary items, Other revenues and expenses.
Other revenues and expenses, Discontinued operations, Extraordinary items.
Other revenues and expenses, Extraordinary items, Discontinued operations.

Ans:LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Each of the following is a factor affecting quality of earnings except
alternative accounting methods.
improper recognition.
pro forma income.
extraordinary items.

Ans:LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Comparisons can be made on each of the following bases except
industry averages.
intercompany basis.
intracompany basis.
Each of these is a basis for comparison.

Ans:LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

165…. Comparisons of data within a company are an example of the following comparative basis:

Industry averages
Intercompany
Intracompany
Interregional

Ans:LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

166…. Center Corporation reported net sales of $200,000, $350,000, and $550,000 in the years 2012, 2013, and 2014 respectively. If 2012 is the base year, what is the trend percentage for 2014?

100%
75%
175%
275%

Ans:LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics

In vertical analysis, the base amount for each income statement item is
gross profit.
net income.
net sales.
sales.

Ans:LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

When performing vertical analysis, the base amount for administrative expense is generally
administrative expense in a previous year.
net sales.
gross profit.
fixed assets.

Ans:LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Ratios that measure the short-term ability of the company to pay its maturing obligations are
liquidity ratios.
profitability ratios.
solvency ratios.
trend ratios.

Ans:LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

What type of ratios best measure the short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash?
Leverage
Solvency
Profitability
Liquidity

Ans:LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

The acid-test ratio is also known as the
current ratio.
quick ratio.
fast ratio.
times interest earned ratio.

Ans:LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

The debt to total assets ratio
is a solvency ratio.
is computed by dividing total assets by total debt.
measures the total assets provided by stockholders.
is a profitability ratio.

Ans:LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

An extraordinary item is one that
occurs infrequently and is uncontrollable in nature.
occurs infrequently and is unusual in nature.
is material and is unusual in nature.
is material and is uncontrollable in nature.

Ans:LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Parrish, Inc. decided on January 1 to discontinue its telescope manufacturing division. On July 1, the division’s assets with a book value of $1,250,000 are sold for $850,000. Operating income from January 1 to June 30 for the division amounted to $125,000. Ignoring income taxes, what total amount should be reported on Parrish’s income statement for the current year under the caption, Discontinued Operations?
$125,000
$275,000 loss
$400,000 loss
$525,000

Ans:LO: 6, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

When there has been a change in accounting principle,
the old principle should be used in reporting the results of operations for the current year.
the cumulative effect of the change should be reported in the current year’s retained earnings statement.
the change should be reported retroactively.
the new principle should be used in reporting the results of operations of the current year, but there is no change to prior years.

Ans:LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting