Test bank with answers for financial accounting 6e by libby chapter 03

The income statement reports revenues, expenses, gains and losses.. $8,000 would be reported on the statement of cash flows.. $8,000 would appear on the income statement as rent revenue

True / False Questions

5 An example of revenue earned from ongoing operating activities is the sale of an extended warranty contract on a washer and dryer

10 Application of generally accepted accounting principles requires that accrual basis accounting be used for the income statement

14 When a business pays for a two-year insurance policy it has incurred an expense

19 The asset turnover ratio is computed by dividing average total assets by sales revenue

20 Delta Air Lines reports an asset turnover of 52 compared to Harley-Davidson's turnover

of 1.05 Delta Air Lines is less efficient at generating revenues on its asset base because of their significantly higher investment in property, plant and equipment assets

22 The primary difference between revenues and gains is

A gains are increases in net assets from peripheral activities while revenues are increases

from ongoing activities

B generally accepted accounting principles makes no distinction between them since they both increase income

C revenues cause increases in net assets as a result of peripheral activities and gains cause increases through ongoing activities

D both revenues and gains cause a decrease in net assets from ongoing and peripheral

A Faster collection of accounts receivables

B Selling inventory in a shorter period of time

C Increasing the number of customers who paid cash to buy our goods

D All of these would shorten the operating cycle

AACSB Tag: Relative Thinking

Difficulty: Hard

L.O.: 1

24 Which of the following is true about the time period assumption?

A It assumes we value the business properly as of the end of every month

B It is the cutoff point for asset and liability recognition

C It keeps the company's transactions separate and apart from those of the owners

D It assumes we divide the long life of a business into a series of shorter time periods for

accounting and reporting purposes

25 Financial analysts look to the income statement to determine

A whether the company has generated sufficient cash to pay its bills

B if the company has invested too much cash in its inventory

C whether the company has generated income from operations

D if the company has too much debt

AACSB Tag: Analytic

Difficulty: Medium

L.O.: 1

26 The operating cycle of a business is best defined as

A the period of time for which we prepare our financial statements

B the time it takes for a company to purchase and pay for goods or services from suppliers,

sell those goods or services to customers and collect cash from the customers

C the length of time over which property, plant and equipment assets are expected to be used

by the company in generating revenues

D the period of time between borrowing money and repaying it

AACSB Tag: Relative Thinking

Difficulty: Medium

L.O.: 1

27 The effect of shortening the length of the operating cycle is

A increase in operating costs

B decreased cash inflow

28 Which of the following costs is most likely to be the largest expense item on the income statement of a merchandising chain such as Wal-Mart?

A Wage, salary and benefits expense

C A pizza restaurant chain

D A computer chip manufacturer

AACSB Tag: Communications

Difficulty: Medium

L.O.: 2

30 Calculate the effective income tax rate for a company that reports income tax expense of

$142.5 million, net income of $357.5 million, and income before income taxes of $500 million

31 Revenues are defined as

A increases in net assets as a result of peripheral transactions

B decreases in net assets as a result of ongoing operations

C increases in net assets as a result of ongoing operations

D decreases in net assets as a result of peripheral transactions

AACSB Tag: Relative Thinking

Difficulty: Easy

L.O.: 2

32 Which of the following statements is true?

A The balance sheet must disclose earnings per share (EPS)

B The income statement reports revenues, expenses, gains and losses

C A loss causes an increase in net assets resulting from a peripheral transaction

D Dividends are disclosed on the balance sheet

A The sale of inventory to customers

B The sale of old equipment

C The wages and benefits paid to employees

D The payment of dividends to stockholders

34 Which of the following expenses is usually listed last on the income statement?

A $8,000 would be reported on the statement of cash flows

B $8,000 would appear on the balance sheet as rent receivable

C $8,000 would appear on the income statement as rent revenue earned

D $5,000 would appear on the balance sheet as prepaid rent

A revenue recognition and matching principles

B revenue recognition and measurement principles

C cost and matching principles

37 During 2010, Sigma Company earned service revenues amounting to $700,000, of which

$630,000 was collected in cash; the balance will be collected in January 2011 The 2010 income statement of the company should report the following amount for service revenues

A The customer has paid for the goods or services

B Delivery of goods or performance of service has occurred or is scheduled to occur

C The price is fixed or determinable

D The customer has signed a contract

40 Accrued expenses which must be recorded in adjusting entries represent expenses

A incurred and paid

B incurred but not paid

41 Revenue is always recognized when

A expenses are paid

42 Which of the following is not an example of the application of the revenue principle?

A Recording the sale of merchandise on credit in sales revenue

B Recording rent received in advance as unearned rent revenue

C Recording interest collected due to a note receivable

D Reducing the service revenue account for service revenue collected but not yet performed

at the end of the accounting period

43 Which of the following is an example of revenue or expense recognized in the current period's income statement?

A Cash received from a client before the lawyer represents them in court

B Inventory purchased by a retail store

C Wage costs owed to employees who worked during the period

D Cash collected from an accounts receivable

A Delivery has occurred or services have been rendered

B An exchange in the future has been planned

C Collection of receivables from credit sales is reasonably assured

D The price is fixed or determinable

46 Which of the following liability accounts is likely to be satisfied with other than payment

A Cash will be reported on the statement of cash flows for the month of November

B Revenue will be recorded and reported on the income statement for October

C A liability will be reported on the balance sheet at the end of October

D A prepaid asset will be reported on the balance sheet at the end of October

49 A company purchases $20,000 of inventory in February 2011 and will pay for it in March

2011 Which of the following statements is false?

A The company will report an accounts payable of $20,000 in February 2011

B The statement of cash flows will report an operating cash outflow of $20,000 in March

50 Which of the following activities does not violate the revenue recognition principle?

A Recording revenue in December 2009 for units manufactured but not yet sold to customers

B Recording cash received in advance from customers as revenue when the product is not yet shipped

C Not recording interest earned in 2009 until the cash is received in 2010

D Recording revenue in December 2009 for units sold but not yet paid for in full

A No expense will be recognized until the bill is paid in January

B Net income would increase by recording the expense in December

C Recording the expense in December when it is incurred will increase expenses

D Net income will be decreased when we pay the bill in January

52 Which group of accounts contains only those that normally have a credit balance?

A Accounts receivable; Prepaid rent; Fees earned

B Bonds payable; Cash; Contributed capital

C Cash; Inventory; Unearned revenue

D Notes payable; Wages payable; Contributed capital

A decrease stockholders' equity, $75,000; decrease assets, $75,000

B decrease assets, $100,000; decrease stockholders' equity, $100,000

C decrease assets, $100,000; increase liabilities, $25,000; decrease stockholders' equity,

55 Which group of accounts contains only those that normally have a debit balance?

A Prepaid expenses, wages payable, and contributed capital

B Cash, utilities expense, and accounts receivable

C Retained earnings, cost of sales, and wages expense

D Utilities expense, prepaid expenses, and wages payable

AACSB Tag: Relative Thinking

Difficulty: Medium

L.O.: 4

56 If a company records sales revenue,

A net income will decrease

B retained earnings will decrease

C assets will increase

D expenses will increase

59 If Cedar Corporation declared a dividend to its stockholders, which has not been paid, this would

A decrease stockholders' equity and decrease cash

B increase liabilities and decrease retained earnings

C increase liabilities and decrease contributed capital

D decrease assets and decrease liabilities

AACSB Tag: Relative Thinking

Difficulty: Medium

L.O.: 4

60 Which of the following would not cause stockholders' equity to change?

A Sale of additional stock to investors

B Earning revenue for services performed

C Cash payment for dividends previously declared

D Declaration of a cash dividend to stockholders

AACSB Tag: Relative Thinking

Difficulty: Medium

L.O.: 4

61 During 2010, Burlington Company incurred operating expenses amounting to $600,000,

of which $550,000 was paid in cash; the balance will be paid in January 2011 On the 2010 income statement of the company, what amount should be reported for operating expenses?

62 With respect to stockholders' equity, indicate which one of the following statements is correct

A Revenues are recorded as credits to the revenue accounts

B Gains are recorded as debits to the revenue accounts

C Contributions (investments) by owners are recorded as debits to the contributed capital accounts

D Expenses are recorded as credits to the expense accounts

B Sold shares of company stock to investors

C Loss on the disposal of land and building

D Sale of service on credit

A Increased assets and increased liabilities

B Increased assets and increased stockholders' equity

C Increased assets and decreased stockholders' equity

D Decreased liabilities and decreased stockholders' equity

65 For each transaction recorded in an accounting system, the two basic equalities that must

be maintained at all times are

A (1) Assets = Liabilities + Stockholders' Equity (2) Net Income = Revenues + Expenses

B (1) Cash Increase = Cash Inflows Cash Outflows (2) Net income = Revenues +

Expenses

C (1) Assets = Liabilities + Stockholders' Equity (2) Debits = Credits

D (1) Net Income = Revenues + Expenses (2) Debits = Credits

67 On January 1, 2009 Gucci Brothers Inc started the year with a $500,000 credit balance in retained earnings and $600,000 balance in capital stock During 2009, the company earned net income of $100,000, declared a dividend of $15,000, and issued more stock for $25,000 What is total stockholders' equity on December 31, 2009?

A Collected cash from a credit customer

B Borrowed money from the bank

C Paid suppliers from whom purchases had been made on credit

D None of these is cash inflow from an operating activity

70 For a law firm, typically the largest operating cash outflow would be

A payment to suppliers for inventory

B wages and benefits paid to employees

C payment for utilities

D interest paid on notes payable

AACSB Tag: Relative Thinking

Difficulty: Medium

L.O.: 5

71 The following is the correct order for preparing the financial statements

A Balance sheet, statement of retained earnings, income statement, and statement of cash flows

B Statement of cash flows, balance sheet, statement of retained earnings, and income statement

C Balance sheet, income statement, statement of retained earnings, and statement of cash flows

D Income statement, statement of retained earnings, balance sheet, and statement of cash

72 Typically, the largest, continuous cash inflow for a business will come from?

A Sale of our stock to investors

B Bank loans

C Cash collected from customers

D Cash interest received on our investments

AACSB Tag: Relative Thinking

Difficulty: Medium

L.O.: 5

73 For a merchandising company, the largest operating cash outflow would result from

A payments to suppliers for inventory

B payment of benefits to employees

C payment of taxes to the various government entities

D payment of interest on notes payable

AACSB Tag: Relative Thinking

Difficulty: Medium

L.O.: 5

74 Operating cash inflows and outflows are primarily connected to

A acquisitions and sale of long lived assets

B the sale of goods and services to customers and costs incurred to operate the business

C issuance of stock and dividend payments

D bank borrowings and repayments

AACSB Tag: Relative Thinking

Difficulty: Medium

L.O.: 5

75 The asset turnover ratio is used to assess

A whether the company can pay their bills currently due with their existing cash and receivables

B whether the company can borrow money from the bank

C whether the company is using its assets effectively in generating sales revenue

D whether the company keeps old assets for the optimal amount of time

76 Which of the following activities would most likely cause the asset turnover ratio to increase?

77 Which of the following would most likely decrease the asset turnover ratio?

A A decrease in expenses causing net income to increase as a percentage of sales

B An increase in total assets during the year

C An increase in sales revenue

D A decrease in debts owed for asset purchases

79 If Hawks Company reports an asset turnover ratio of 2.57 for 2009 and their competitor reports 2.89 for their 2009 ratio, it means that Hawks

A is better able to pay their current obligations with their current assets

B has been more effective in managing the use and level of its assets

C has been less effective in managing the use and level of its assets

D is less able to pay off their current obligations with their current assets

Essay Questions

80 The Harris TV Store had the following transactions in August:

a Sold $60,000 of goods to customers, receiving $56,000 in cash with the rest on account

b The cost of the inventory sold was $36,000

c The store purchased $16,000 of inventory and paid for $12,000 in cash and the rest on account

d They paid $16,000 in wages to employees who worked in August

e Received a $2,000 bill for utilities for August that will not be paid until September

f Received rent for the adjacent store front for the months of August and September in the amount of $4,000

Complete the following statements: