Test Bank for E-Marketing, 7th Edition

Chapter 2: Financial Statements and the Annual Report Student: ___________________________________________________________________________ 1. What is the primary objective of financial reporting? A. To help investors make credit decisions. B. To help management assess cash flows. C. To protect users from fraudulent financial information. D. To provide useful information for decision making 2. ―Claims to economic resources‖ are known as A. Assets and liabilities B. Liabilities and stockholders’ equity C. Owners’ equity and stockholders’ equity D. Retained earnings and revenues 3. Which of the following is not an objective of financial reporting? A. To reflect prospective cash receipts to investors and creditors. B. To reflect prospective cash flows to an enterprise. C. To reflect resources and claim to resources. D. To reflect current stock prices and information concerning stock markets. 4. Which of the following statements is true concerning external users of financial information? A. External users need detailed records of the business to make informed decisions. B. External users are primarily responsible for the preparation of financial statements. C. External users rely on the financial statements to help make informed decisions. D. External users rely on management to tell them whether the company is a good investment 5. Relevant information can be quantitative or qualitative. In deciding whether to go to college part-time or full-time, which of the following is a qualitative factor for a student? A. The cost of tuition B. The opportunity to make friends C. The price of football tickets D. ―Good Student‖ discounts on auto insurance rates. 6. The preparation of financial statements requires that the information be understandable A. Only to CPAs. B. To those willing to spend the time to understand it. C. Only to those who take an accounting course. D. Only to financial analysts and brokers. 7. Schneider, Inc., a manufacturer of tires, has given you its most recent annual report in an effort to obtain a sizable loan. The company is very profitable and appears to have a sound financial position. Based on a report presented on prime-time television last night, you are aware that Schneider is a defendant in several lawsuits related to its defective tires that cause vehicles to overturn. The information presented on television is an example of financial information that is A. Relevant B. Consistent C. Predictable D. Comparable 8. If an investor can use accounting information for two different companies to evaluate the types and amounts of expenses, the information is said to have the quality of A. Comparability B. Consistency C. Neutrality D. Understandability 9. Cheile Transportation purchases many pieces of office furniture with an individual cost below $200 each. Cheile chooses to account for these expenditures as expenses when acquired rather than reporting them as property, plant, and equipment on its balance sheet. The company’s accountant and independent CPA agree that no accounting principle has been violated. What accounting justification allows Cheile to expense the furniture? A. Conservatism B. Matching C. Materiality D. Verifiability 10. Crouse Company applies the consistency convention. What does this mean? A. Crouse Co. uses the same names for all its expenses as its competitors. B. Crouse Co. has selected certain accounting principles that can never be changed. C. Crouse Co. applies the same accounting principles each accounting period. D. Crouse Co. applies the same accounting principles as it competitors. 11. Information that is material means that an error or alternative method of handling a transaction A. Would possibly affect the judgment of someone relying on the financial statements B. Would not affect the decisions of users C. Might cause a company to understate its earnings for the accounting period D. Could increase the profitability of a company 12. An accountant is uncertain about the best estimate of an amount for a business transaction. If two amounts are about equally likely, the amount least likely to overstate assets and income is selected. Which of the following qualities is characterized by this action? A. Comparability B. Conservatism C. Materiality D. Neutrality 13. The qualitative characteristics of accounting data include A. Assets reported on the balance sheet B. All accounting information C. Cash flows D. Reliability 14. Which of the following is a noncurrent asset? A. Inventories B. Office supplies C. Land D. Accounts receivable 15. Which of the following is a current asset? A. Land B. Buildings C. Store fixtures D. Prepaid insurance 16. Which of the following include only current assets? A. Accounts receivable, cash, inventory, office supplies B. Cash, accounts payable, inventory, office supplies C. Cash, land, accounts receivable, inventory D. Accounts receivable, cash, furniture, office supplies 17. To determine the source of a company’s assets, on which financial statement will you look? A. Balance sheet only B. Income statement only C. Both the balance sheet and the income statement D. Both the income statement and the statement of retained earnings 18. Wood Company Wood Company has provided the following information from its accounting records for the current year: Cash Inventory Accounts payable Retained earnings $ 50,000 60,000 45,000 ? Accounts receivable Land Notes payable (due 2020) $ 40,000 75,000 150,000 Read the information for Wood Corporation. What are Wood’s current assets? A. $ 90,000 B. $ 150,000 C. $ 195,000 D. $ 225,000 19. Read the information for Wood Company. What are Wood’s current liabilities? A. $ 45,000 B. $ 120,000 C. $ 195,000 D. $ 225,000 20. Which one of the following items is reported as a current asset on a classified balance sheet? A. Inventory B. Accounts payable C. Land D. Common stock 21. The following information is given for Wagner Company: Cash Land Plant & Equipment $ 50,000 75,000 150,000 Inventory Accumulated Depreciation Accounts Payable $ 45,000 40,000 60,000 What are the company’s current assets? A. $220,000 B. $155,000 C. $130,000 D. $ 95,000 22. Which of the following accounts are normally reported as current liabilities on a classified balance sheet? A. Accounts payable and bonds payable B. Interest payable and mortgage payable C. Income taxes payable and salaries payable D. Capital stock and accounts payable 23. Which one of the following is not a major category for long-term assets? A. Intangibles B. Property, plant, and equipment C. Receivables D. Goodwill 24. Which of the following would not be considered to be an intangible asset? A. Franchises B. Copyrights C. Investments D. Goodwill 25. Which of the following statements is trueconcerning intangible assets? A. Intangible assets have no economic substance. B. Intangible assets lack physical existence. C. Intangible assets are listed in the stockholders’ equity section of the balance sheet. D. Intangible assets appear in the current assets section of the balance sheet. 26. How are assets which 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) reported on a classified balance sheet? A. Property, plant, and equipment B. Current assets C. Intangible assets D. Current liabilities 27. Which of the following terms characterizes the time period between the investment of cash in merchandise and the collection of cash from the sale of that merchandise? A. Operating cycle B. Natural business year C. Accounting period D. Fiscal period 28. Which set of items below are current assets? A. Accounts receivable, net income, inventory, and dividends B. Cash, accounts receivable, capital stock, and sales C. Net income, cash, office supplies, and inventory D. Cash, accounts receivable, inventory, and office supplies 29. One significant difference between a classified and a non-classified balance sheet is the distinction between which of the following items? A. Assets and liabilities B. Current and noncurrent items C. Liabilities and owners’ equity D. Resources invested by the owners and amounts borrowed from creditors 30. For several years, Shaun Corporation has had a current ratio that was consistent with other companies in its industry. For the most recent year, Shaun’s current ratio was significantly higher than that for the industry. What is the best possible explanation for this situation? A. The other companies in the industry were not as profitable. B. Shaun’s liquidity has improved or is not leveraging financial resources effectively. C. Shaun has less property, plant and equipment than other companies. D. Shaun has too much debt. 31. Guinther & Sons, Inc. Guinther & Sons, Inc. a retailer of men’s clothing, earned a net profit of $77,000 for 2014. The balance sheet for Guinther & Sons includes the following items: Cash Inventory Land Taxes payable Retained earnings $29,000 79,000 90,000 29,000 97,000 Accounts receivable Prepaid insurance Accounts payable Capital stock Long-term notes payable $39,000 $ 3,000 $21,000 $50,000 $43,000 Read the information for Guinther & Sons. Calculate the total amount of current assets for Guinther & Sons. A. $ 100,000 B. $ 147,000 C. $ 150,000 D. $ 249,000 32. Guinther & Sons, Inc. Guinther & Sons, Inc. a retailer of men’s clothing, earned a net profit of $77,000 for 2014. The balance sheet for Guinther & Sons includes the following items: Cash Inventory Land Taxes payable Retained earnings $29,000 79,000 90,000 29,000 97,000 Accounts receivable Prepaid insurance Accounts payable Capital stock Long-term notes payable $39,000 $ 3,000 $21,000 $50,000 $43,000 Read the information for Guinther & Sons, Inc. Calculate the current ratio for Guinther & Sons. A. 2.58 to 1 B. 2.75 to 1 C. 3.00 to 1 D. 2.00 to 1 33. Guinther & Sons, Inc. Guinther & Sons, Inc. a retailer of men’s clothing, earned a net profit of $77,000 for 2014. The balance sheet for Guinther & Sons includes the following items: Cash Inventory Land Taxes payable Retained earnings $29,000 79,000 90,000 29,000 97,000 Accounts receivable Prepaid insurance Accounts payable Capital stock Long-term notes payable $39,000 $ 3,000 $21,000 $50,000 $43,000 Read the information for Guinther & Sons, Inc. The average current ratio for stores such as Guinther & Sons is 2.4 to 1. What does this comparison tell you about its liquidity? A. It is more liquid than its competitors B. It has more long-term assets than its competitors C. Since a rule of thumb for current ratios is 2 to 1, neither Nadia & Sisters nor its competitors is liquid. D. Nadia & Sisters is more profitable than its competitors. 34. Rosu Company has total current assets of $120,000 and total current liabilities of $50,000. What is the amount of working capital for Rosu Company? A. $ 27,000 B. $ 67,000 C. $ 70,000 D. $ 91,000 35. What is the correct method for calculating working capital? A. Total Assets minus Total Liabilities B. Current Assets minus Total Liabilities C. Current Assets minus Current Liabilities D. Current Assets plus Current Liabilities 36. Oreo Company has current assets of $20,000, current liabilities of $8,000, and long-term liabilities of $3,000. Oreo wants to buy new equipment. How much of its existing cash can Oreo use to acquire equipment without allowing its current ratio to decline below 2.0 to 1? A. $ 4,000 B. $ 8,000 C. $ 10,000 D. $ 12,000 37. Excursion Corp. increased its dollar amount of working capital over the past several years. To further evaluate the company’s short-run liquidity, which one of the following measures should be used? A. The current ratio B. An analysis of the company’s long-term debt C. An analysis of the return on stockholders’ equity D. An analysis of retained earnings 38. Which financial statement reports information helpful in assessing working capital? A. Income statement B. Balance sheet C. Statement of retained earnings D. Statement of cash flows 39. Use Rizwi Corporation’s list of accounts at December 31, 2014 to answer the following question. Rizwi Corp oratio n List of Acco unts at Dece mber 31, 2014 Cash Merchandise inventory Land Buildings Accounts receivable $30,000 21,000 40,000 80,000 25,000 Accumulated depreciation Notes payable–Due 12/31/2022 Accounts payable Equipment Notes Payable–Due 07/01/2015 $ 12,000 120,000 14,000 33,000 24,000 What is Rizwi Corp.’s current ratio? A. 0.48 to 1 B. 2.00 to 1 C. 2.55 to 1 D. 2.86 to 1 40. If the current ratio is 3 to 1, net income is $12,000, and current liabilities are $24,000, how much is working capital? A. $ 12,000 B. $ 36,000 C. $ 48,000 D. $ 72,000 41. For which of the following is the current ratio most useful? A. In evaluating a company’s liquidity. B. In evaluating a company’s solvency. C. In evaluating a company’s profitability. D. In evaluating a company’s probability. 42. Which of the following events will cause a company’s current ratio to decrease? A. The sale of inventory for cash. B. The sale of inventory for credit (accounts receivable). C. Issuing stock for cash. D. Paying off long-term debt with cash. 43. Which of the following events will cause a company’s current ratio to increase? A. The collection of an account receivable. B. Selling land for cash at a loss. C. The discharge of an account payable by signing a short-term note payable. D. Paying off a long-term loan. 44. Liquidity relates to a company’s ability to do which of the following? A. The ability to pay its financial obligations as they become due. B. The ability to stay in business over the long run. C. The ability to pay dividends to its stockholders. D. The ability to collect the amount their customers owe the company. 45. Skyline, Inc. The balance sheet of Skyline Inc. includes the following items: Cash Accounts receivable Inventory Prepaid insurance Land Accounts payable Salaries payable Capital stock Retained earnings $ 22,400 11,700 23,300 1,040 80,000 47,500 1,200 84,040 5,700 Read the information about Skyline, Inc. What is Skyline’s current ratio? A. 0.8 to 1 B. 1.6 to 1 C. 1.2 to 1 D. 2.5 to 1 46. Skyline, Inc. The balance sheet of Skyline Inc. includes the following items: Cash Accounts receivable Inventory Prepaid insurance Land Accounts payable Salaries payable Capital stock Retained earnings $ 22,400 11,700 23,300 1,040 80,000 47,500 1,200 84,040 5,700 Read the information about Skyline, Inc. What is Skyline’s working capital? A. $58,440 B. $89,740 C. $84,040 D. $9,740 47. Which of the following would appear on a multiple-step income statement but not on a single-step income statement? A. Net income B. Total expenses C. Total revenues D. Income before income taxes 48. Which of the following would not appear on an income statement? A. Sales revenue B. Cost of goods sold C. Accounts receivable D. Insurance expense 49. Which statement is trueconcerning an income statement? A. The income statement shows how much profit the company has earned since it began operations. B. Net income on the income statement should be equal to the amount of cash on the balance sheet. C. The income statement summarizes the results of operations for a period of time. D. The income statement indicates the liquidity of the company on an annual basis. 50. Which statement is trueconcerning gains and losses? A. Gains and losses are reported on the balance sheet in the Assets and Liabilities sections, respectively. B. Gains and losses are special types of revenues and expenses that are reported on the income statement. C. The amounts of gains and losses are included in the calculation of the current ratio, in the numerator and denominator, respectively. D. Gains and losses are reported only on a multi-step income statement. 51. Which one of the following subtotals or totals would appear in a multiple-step, but not a single-step income statement? A. Income tax expense B. Income from operations C. Cost of goods sold D. Net income 52. What are the two subtotals that distinguish the multi-step income statement from the single-step income statement? A. Income before taxes and income taxes B. Total operating revenues and total operating expenses C. Income from operations and income before taxes D. Total revenues and total expenses 53. A question asked by stockholders is, “How much profit did the company make?” What should the stockholder examine to get the most information that will help evaluate the answer to this question? A. The balance sheet, because retained earnings represents current profits. B. The statement of cash flows, as cash inflows and outflows represents current profits. C. The income statement, since it shows the revenues and expenses for the period. D. The economic resources of the company. 54. Under current accounting principles, how is net income on the income statement measured? A. Net change in owners’ equity during the period. B. Excess of revenues over expenses during the period. C. Net change in the cash balance during the period. D. Excess of revenues over expenses less any dividends paid during the period. 55. Which of the following statements is trueregarding the multiple-step income statement? A. The multiple-step income statement is used only by companies that sell products, not those that provide services. B. The multiple-step income statement is helpful in determining a company’s working capital C. The multiple-step income statement reports the same net income as the single-step income statement. D. The multiple-step income statement is required under generally accepted accounting principles. 56. How is income from operations determined? A. By subtracting the cost of goods sold from sales. B. By subtracting the total operating expenses from sales C. By subtracting the total operating expenses from gross profit. D. By subtracting selling expenses from operating revenues. 57. The following list contains several items that appear on an income statement. 1. 2. 3. 4. Other revenue and expenses Income before taxes Income taxes Operating expenses 5. 6. 7. Net Income Operating revenues Income from operations Select the choice that lists the items in the order they would appear on a multi-step income statement A. 6, 1, 7, 4, 2, 3, 5 B. 7, 6, 1, 4, 2, 3, 5 C. 6, 4, 7, 1, 2, 3, 5 D. 6, 7, 4, 1, 2, 3, 5 58. Webb Company Selected data from the accounting records of Webb Company are listed below: General & administrative expenses Selling expenses Other revenues (expenses) $2,200 1,800 800 Operating revenues Income taxes Dividends paid $6,000 600 1,200 Read the information about Webb Company. What is Webb’s income from operations? A. $ 1,600 B. $ 2,000 C. $ 2,200 D. $ 2,800 59. Read the information about Webb Company. What is Webb’s net income? A. $ 1,600 B. $ 2,000 C. $ 2,200 D. $ 2,800 60. Read the information about Webb Company. By what amount will net income on a single-step income statement differ from net income on a multi-step income statement if Webb Company prepares both formats? A. $ 800 B. $ 600 C. $ 200 D. $ -0- 61. Deal Mart The 2014 income statement of Deal Mart shows operating revenues of $130,800, selling expenses of $37,100, general and administrative expenses of $34,900, interest expense of $900, and income tax expense of $11,430. Deal Mart’s stockholders’ equity was $280,000 at the beginning of the year and $320,000 at the end of the year. The company has 20,000 shares of stock outstanding at December 31, 2014. Read the information about Deal Mart. What is Deal Mart’s net income? A. $80,000 B. $92,190 C. $130,800 D. $46,470 62. Deal Mart The 2014 income statement of Deal Mart shows operating revenues of $130,800, selling expenses of $37,100, general and administrative expenses of $34,900, interest expense of $900, and income tax expense of $11,430. Deal Mart’s stockholders’ equity was $280,000 at the beginning of the year and $320,000 at the end of the year. The company has 20,000 shares of stock outstanding at December 31, 2014. Read the information about Deal Mart. What is Deal Mart’s profit margin (to the closest tenth of a percent)? A. 2.8 B. 35.5 C. 61.2 D. 14.5 63. Dardenelle, Inc. earned $600,000 profit during 2014. On which financial statement(s) will you find the dollar amount of the profit earned by the company? A. Balance sheet and income statement B. Income statement only C. Statement of retained earnings only D. Income statement and statement of retained earnings 64. Grand Stores, Inc. is concerned about its profitability for the current year, since its profit margin has dropped 10% since last year. Which of the following is the least useful comparison in evaluating the drop in Grand Stores’ profit margin? A. Comparison with the industry average for the current year. B. Comparison with its current ratio for the current year C. Comparison with the profit margins for its major competitors for the current year. D. Comparison with its profit margins for the past five years. 65. Assume that you want to determine the profit margin for a company. Which one of the following financial statements is the best source of this information? A. Statement of retained earnings B. Statement of cash flows C. Statement of stockholders’ equity D. Income statement 66. Hopper, Inc. Use the information from Hopper Inc. to answer the following question(s). Operating revenues Operating expenses Income taxes 2014 $1,900,000 1,400,000 200,000 2013 $1,600,000 1,100,000 200,000 Read the information about Hopper. Inc. Which statement best represents Hopper’s performance? A. Hopper’s profit margin ratio decreased. B. Hopper has become more profitable. C. Hopper’s increase in operating revenues increased the company’s net income. D. Hopper’s operating expenses as a percentage of operating revenues remained the same. 67. Hopper, Inc. Use the information from Hopper Inc. to answer the following question(s). Operating revenues Operating expenses Income taxes 2014 $1,900,000 1,400,000 200,000 2013 $1,600,000 1,100,000 200,000 Read the information about Hopper, Inc. Which of the following statements is the best answer regarding the company’s profit margin? A. The profit margin was 15.8% in 2014. B. The profit margin was 15.8% in 2013. C. The profit margin was 31.5% in 2014. D. The profit margin was 31.5% in 2013. 68. Hopper, Inc. Use the information from Hopper Inc. to answer the following question(s). Operating revenues Operating expenses Income taxes 2014 $1,900,000 1,400,000 200,000 2013 $1,600,000 1,100,000 200,000 Read the information about Hopper, Inc. Which ratio are you able to calculate given only the information provided by Hopper? A. Profit margin B. Current ratio C. Working capital D. Gross profit percentage 69. Which one of the following equations represents retained earnings activity? A. Beginning balance + net income + dividends = profits for the year B. Beginning balance + cash inflows – cash outflows = ending balance C. Beginning balance + dividends – net income = ending balance D. Beginning balance + net income – dividends = ending balance 70. Garrison Industries Garrison Industries began operations on January 2, 2014, with an investment of $50,000 by each of its two stockholders. Net income for its first year of business was $240,000. Garrison Industries paid a total of $100,000 in dividends to its stockholders during the year. Read the information about Garrison Industries. What is the company’s retained earnings balance at December 31, 2014? A. $140,000 B. $190,000 C. $240,000 D. $340,000 71. Garrison Industries Garrison Industries began operations on January 2, 2014, with an investment of $50,000 by each of its two stockholders. Net income for its first year of business was $240,000. Garrison Industries paid a total of $100,000 in dividends to its stockholders during the year. Read the information about Garrison Industries. If the company’s revenues were $500,000 for the year ended December 31, 2014, how much were total expenses? A. $160,000 B. $260,000 C. $640,000 D. $740,000 72. Read the information about Garrison Industries. The company’s dividends for the year A. Reduce the amount of capital stock reported by the company. B. Are part of Garrison Industries’ operating costs. C. Are reported on the statement of retained earnings. D. Are an expense of Garrison Industries. 73. A company is not required to prepare both a(n) A. Income statement and statement of stockholders’ equity B. Income statement and statement of retained earnings C. Statement of stockholders’ equity and statement of retained earnings D. Statement of cash flows and statement of retained earnings 74. In preparing the financial statements for December 31, 2014, an accountant improperly classified the payment of prepaid rent as rent expense. Which of the following amounts would not be affected by this improper classification? A. Retained earnings, January 1, 2014 B. Retained earnings, December 31, 2014 C. Net income D. Total assets 75. Carnival Bakery borrowed $500,000 from Front Street Bank. Carnival then hired a contractor to build a new cookie distribution outlet. In which section of Carnival’s statement of cash flows would you find information that indicated that Carnival acquired the new cookie distribution outlet? A. Operating Activities B. Investing Activities C. Financing Activities D. Profit Activities 76. A bank loaned $62 million to Apex Corporation to finance the construction of a new distribution warehouse. In which section of Apex’s statement of cash flows would you be able to determine whether the company repaid any portion of the debt during the year? A. Operating Activities B. Investing Activities C. Financing Activities D. Profit Activities 77. Which of the following categories on a statement of cash flows is used to report the cash flow effects of transactions involving a company’s stock? A. Operating Activities B. Investing Activities C. Financing Activities D. Profit Activities 78. Which one of the following categories on a statement of cash flows is used to report the cash flow effects of buying and selling property, plant, and equipment? A. Operating Activities B. Investing Activities C. Financing Activities D. Profit Activities 79. Which one of the following is considered a financing activity? A. The payment of interest on a note payable to the bank. B. Selling products to customers C. Paying wages to employees D. The payment of a cash dividend. 80. Which one of the following statements is true? A. The two primary sources of financing available to corporations are borrowed funds and funds invested by owners B. Financing activities involve the acquisition of property, plant and equipment. C. Borrowed funds are a more permanent source of financing than funds invested by owners D. Investing activities involve the selling of products or services and the incurring of expenses related to selling these products and services 81. Marvel Shoes Marvel Shoes reported the following items on its statement of cash flows for the current year: Net cash inflows from operating activities Net cash outflows from investing activities Net cash outflows from financing activities Cash balance at the beginning of the year $70,000 (20,000) (40,000) 30,000 Read the information about Marvel Shoes. What was the amount of net increase or decrease in the cash balance for Marvel Shoes for the current year? A. $ 10,000 increase B. $ 30,000 increase C. $ 40,000 increase D. $ 70,000 increase 82. Marvel Shoes Marvel Shoes reported the following items on its statement of cash flows for the current year: Net cash inflows from operating activities Net cash outflows from investing activities Net cash outflows from financing activities Cash balance at the beginning of the year $70,000 (20,000) (40,000) 30,000 Read the information about Marvel Shoes. What was the cash balance for Marvel Shoes at the end of the current year? A. $ 10,000 B. $ 30,000 C. $ 40,000 D. $ 70,000 83. Which financial statement reports the sources and uses of an entity’s cash resources? A. Income statement B. Statement of retained earnings C. Balance sheet D. Statement of cash flows 84. During its fifth year of operations, Bright Creations Company reports a beginning cash balance of $132,000, cash inflows from investing activities of $210,000, cash outflows for financing activities of $79,000, and cash outflows for operating activities of $13,000. What was Bright Creations’ cash balance at the end of the fifth year? A. $ 250,000 B. $ 434,000 C. $ 276,000 D. $ 132,000 85. Which of the following best describes a company’s financing activities? A. Financing activities focus on the sale of products and services. B. Financing activities include selling products. C. Financing activities enable a company to acquire assets needed to run a business. D. Financing activities are represented by the revenues and expenses on the income statement. 86. Which of the following best describes a company’s operating activities? A. Operating activities focus on the sale of products and services. B. Operating activities are necessary to provide the money to start a business. C. Operating activities are needed to provide the valuable assets required to run a business. D. Operating activities represent the right to receive a benefit in the future 87. Which one of the following is an investing activity of a business? A. Paying for purchases of inventory B. Issuing stock for cash C. Borrowing money from a bank. D. Purchasing a manufacturing plant for cash 88. Which one of the following is a financing activity of a business? A. Paying for purchases of inventory B. Issuing stock for cash C. Paying salaries D. Purchasing a manufacturing plant 89. Which one of the following is an operating activity of a business? A. Paying for purchases of inventory B. Issuing stock for cash C. Borrowing money from a bank D. Purchasing a manufacturing plant. 90. Which of the following represents the correct sequence of the three business activities on the Statement of Cash Flows? A. Financing – Operating – Investing B. Investing – Operating – Financing C. Operating – Investing – Financing D. Financing – Investing – Operating 91. Business entities generally carry on: A. Operating, investing, and financing activities B. Operating activities, but only corporations engage in financing and investing activities C. Investing and operating activities, but only corporations engage in financing activities D. Either investing or financing activities, but not both 92. Although businesses engage in a wide variety of activities, all of these activities can be categorized into three types. Which of the following choices best reflects these three types of business activities? A. Operating, financing, reporting B. Investing, reporting, financing C. Operating, financing, investing D. Investing, reporting, operating 93. As used in accounting, the ―Notes to the Financial Statements‖ should be: A. Listed with the liabilities on the balance sheet B. Omitted at the option of the company C. Included as an integral part of the financial statements D. Reported as expenses on the Income Statement 94. Which of the following items will be found in a corporate annual report? A. Company budgets B. Notes to the financial statements C. Selected financial data from competitor companies D. Management’s statement that the auditors are responsible for the financial statements. 95. Which one of the following sections is least likely to be found in a corporate annual report? A. Notes to the Financial Statements B. Forecasts of Cash Flows and Earnings C. Report of the Independent Accountants D. Management’s Discussion and Analysis 96. A discussion of the financial statements with explanations of certain amounts in the statements is most likely found in which of the following sections of a corporate annual report? A. Report of the Independent Accountants B. Notes to the Financial Statements C. Management’s Discussion and Analysis D. Balance Sheet 97. An investor found the following in an annual report: “The financial statements, in our opinion, present fairly the financial position, operating results, and cash flows, in conformity with accounting principles generally accepted in the United States.” In which section of the annual report did the investor find this? A. Balance Sheet B. Notes to the Financial Statements C. Management’s Discussion and Analysis D. Report of the Independent Accountants 98. Which of the following represents one of the purposes of the notes to financial statements? A. To provide a place for management to justify questionable items in the statements. B. To provide comparative ratios for the company’s financial data C. To provide the CPA’s opinion of the fairness of the financial statements. D. To satisfy the need for full disclosure of all the facts relevant to a company’s results and financial position 99. Accountants are the main reason financial statements are prepared. True False 100. The Financial Accounting Standards Board created the objectives of financial reporting. True False 101. The purpose of financial reporting is to provide economic information to external decision makers only. True False 102. An objective of financial reporting is to reflect economic information concerning a company’s cash flows. True False 103. The concept of conservatism is the capacity of information to make a difference in a decision. True False 104. Materiality deals with the size of an error in accounting information. True False 105. Most businesses have an operating cycle of less than one year. True False 106. Current assets, other than cash, are expected to be sold or consumed are during a company’s normal operating cycle. True False 107. Obligations related to operating activities that will be paid within the company’s operating cycle must be reported as current liabilities on a classified balance sheet. True False 108. The operating cycle for all businesses is one year. True False 109. A construction company that builds skyscrapers is likely to have an operating cycle longer than one year. True False 110. Three common categories of long-term assets are: 1) property, plant, and equipment, 2) investments, and 3) intangibles. True False 111. In the stockholders’ equity section of a classified balance sheet, a distinction is made between amounts invested by owners and amounts accumulated from business earnings. True False 112. One primary purpose of a classified balance sheet is to help users evaluate the liquidity of a company. True False 113. Companies prepare classified financial statements because they are required by international accounting principles. True False 114. The current ratio is irrelevant in liquidity analysis for service companies because they do not have inventories among their current assets True False 115. An advantage of the current ratio is that it considers the makeup of the current assets. True False 116. The excess of current assets over current liabilities is referred to as working capital. True False 117. A balance sheet shows cash, $75,000; marketable securities, $115,000; accounts receivable, $150,000 and $222,500 of inventories. Current liabilities are $225,000. The current ratio is 2.5 to 1. True False 118. If a firm has a current ratio of 2, the subsequent receipt of a 60-day note receivable to settle an open account will cause the ratio to decrease. True False 119. The purchase of inventory for cash will cause the current ratio to decrease. True False 120. Income from operations does not include interest revenue and interest expense because these items are considered to be non-operating in nature. True False 121. A 12% change in sales will result in a 12% change in net income. True False 122. Some analysts properly refer to a company’s profit margin as its return on assets. True False 123. Dividends declared and paid reduce a company’s retained earnings balance. True False 124. Dividends paid appears on both the income statement and the statement of retained earnings. True False 125. Investing activities are needed to provide the funds to start a business. True False 126. The statement of cash flows, like the income statement, reports only operating activities of a company. True False 127. Funds raised from financing activities should be invested in assets that can be used to carry on business operations. True False 128. The primary responsibility for the preparation and integrity of the financial statements in an annual report belongs to the company’s independent accountants (CPAs). True False 129. Independent auditors (CPAs) render an opinion that the financial statements do or do not fairly present a company’s financial position, operating results, and cash flows. True False 130. An independent auditor’s (CPA’s) report is a guarantee that the financial statements are free from fraud or material error True False 131. In the independent auditors’ report included with the annual report, management discusses the financial statements and provides the shareholders with explanations for certain amounts reported in the statements. True False 132. ____________________ and ____________________ have claims to an entity’s economic resources. ________________________________________ 133. ____________________ is the magnitude of an omission or misstatement in accounting information that will affect the judgment of someone relying on the information ________________________________________ 134. ____________________ is the capacity of information to make a difference in a decision ________________________________________ 135. ____________________ is the practice of using the least optimistic estimate when two estimates of amounts are about equally likely ________________________________________ 136. ____________________ is the quality of accounting information that makes it comprehensible to those willing to spend the necessary time ________________________________________ 137. ____________________ is the quality of accounting information that makes it dependable in representing the events that it purports to represent ________________________________________ 138. ____________________ is the quality of accounting information that allows a user to analyze two or more companies and look for similarities and differences ________________________________________ 139. ____________________ is the quality of accounting information that allows a user to compare two or more accounting periods for a single company. ________________________________________ 140. ____________________ have claims to an entity’s economic resources ________________________________________ 141. _________________________ are cash and other assets that are reasonably expected to be realized in cash during the normal operating cycle of the business. ________________________________________ 142. Property, plant and equipment is classified as ____________________ assets on the balance sheet. ________________________________________ 143. ____________________ is the process of writing off the cost of tangible assets and ____________________ is the process of writing off the cost of intangible assets. ________________________________________ 144. ______________________________ is a liquidity measure that is calculated by subtracting current assets from current liabilities. ________________________________________ 145. The ability of a company to pay its debt as it comes due relates to ____________________. ________________________________________ 146. In a ____________________-step income statement, all expenses and losses are added together, then deducted from the sum of all revenues and gains. ________________________________________ 147. The statement of ____________________ explains changes in the components of owners’ equity during the period. ________________________________________ 148. On the statement of cash flows, the ______________________________ section involves the acquisition and sale of long-term assets. ________________________________________ 149. On the statement of cash flows, the ______________________________ section involves the purchase and sale of products and services. ________________________________________ 150. On the statement of cash flows, the ______________________________ section involves the issuance and repayment of long term liabilities and stock transactions. ________________________________________ 151. Match the following characteristics with the statements about each qualitative characteristic’s importance. 1. Users must be able to compare accounting information of a firm with its prior year information. 2. Accounting information must be verifiable and faithfully represent actual transactions. 3. This quality allows users to analyze two or more companies and look for similarities and differences. 4. The accounting information must be information that could affect a decision. 5. Accounting information should use the least optimistic estimate. 6. Those willing to spend the time should be provided with comprehensible accounting information. 7. This quality refers to an amount large enough to affect a decision. Understandability ____ Relevance ____ Conservatism ____ Comparability ____ Consistency ____ Reliability ____ Materiality ____ 152. Loren Corporation Listed below is information from the financial records of Loren Corporation at December 31, 2014: Retained earnings Accumulated depreciation Income taxes payable Buildings Cash Accounts receivable Capital stock $37,000 13,000 24,000 48,000 11,000 35,000 60,000 Notes payable–Due July 1, 2017 Interest payable Office supplies Accounts payable Inventory Land Prepaid rent $12,000 1,000 2,000 36,000 33,000 50,000 4,000 Read the information about Loren Corporation. Required: Prepare the current liabilities section of the balance sheet for Loren Corp. at December 31, 2014. You may omit the heading. If the amount of current liabilities were larger, what effect would this have on the current ratio? 153. Loren Corporation Listed below is information from the financial records of Loren Corporation at December 31, 2014: Retained earnings Accumulated depreciation Income taxes payable Buildings Cash Accounts receivable Capital stock $37,000 13,000 24,000 48,000 11,000 35,000 60,000 Notes payable–Due July 1, 2017 Interest payable Office supplies Accounts payable Inventory Land Prepaid rent $12,000 1,000 2,000 36,000 33,000 50,000 4,000 Read the information about Loren Corporation. Required: Prepare the long-term asset section of Loren Corp.’s balance sheet at December 31, 2014. You may omit the heading. Why are these amounts classified as “long-term”? 154. Loren Corporation Listed below is information from the financial records of Loren Corporation at December 31, 2014: Retained earnings Accumulated depreciation Income taxes payable Buildings Cash Accounts receivable Capital stock $37,000 13,000 24,000 48,000 11,000 35,000 60,000 Notes payable–Due July 1, 2017 Interest payable Office supplies Accounts payable Inventory Land Prepaid rent $12,000 1,000 2,000 36,000 33,000 50,000 4,000 Read the information about Loren Corporation. Required: Prepare the current assets section of the balance sheet for Loren Corp. at December 31, 2014. You may omit the heading. How does the concept of liquidity apply? 155. Loren Corporation Listed below is information from the financial records of Loren Corporation at December 31, 2014: Retained earnings Accumulated depreciation Income taxes payable Buildings Cash Accounts receivable Capital stock $37,000 13,000 24,000 48,000 11,000 35,000 60,000 Notes payable–Due July 1, 2017 Interest payable Office supplies Accounts payable Inventory Land Prepaid rent $12,000 1,000 2,000 36,000 33,000 50,000 4,000 Read the information about Loren Corporation. Required: Calculate Manus’ current ratio at December 31, 2014. What does this ratio tell you about the “composition” of the current assets? 156. Loren Corporation Listed below is information from the financial records of Loren Corporation at December 31, 2014: Retained earnings Accumulated depreciation Income taxes payable Buildings Cash Accounts receivable Capital stock $37,000 13,000 24,000 48,000 11,000 35,000 60,000 Notes payable–Due July 1, 2017 Interest payable Office supplies Accounts payable Inventory Land Prepaid rent $12,000 1,000 2,000 36,000 33,000 50,000 4,000 Read the information below about Loren Corporation. Required: Calculate the amount of working capital at December 31, 2014 for Loren Corp. What can you learn from the current ratio that you cannot learn from the amount of working capital? 157. Raponi, Inc. The following balance sheet items from Raponi, Inc. are listed for December 31, 2014: Accounts payable Interest payable Accounts receivable Land Accumulated depreciation—buildings Marketable securities Merchandise inventory Accumulated depreciation—equipment Notes payable, due April 15, 2015 Office supplies Notes payable, due December 31, 2018 Paid-in capital in excess of par value Buildings Patents Capital stock, $1 par value Prepaid rent Cash Retained earnings Equipment Salaries payable Income taxes payable $ 32,650 2,200 26,500 250,000 40,000 15,000 112,900 12,500 6,500 200 251,630 75,000 150,000 45,000 200,000 3,800 60,990 113,510 84,500 7,400 7,500 Read the information about Raponi, Inc. Required: Present the Current Assets section (including the total) of a classified balance sheet. 158. Raponi, Inc. The following balance sheet items from Raponi, Inc. are listed for December 31, 2014: Accounts payable Interest payable Accounts receivable Land Accumulated depreciation—buildings Marketable securities Merchandise inventory Accumulated depreciation—equipment Notes payable, due April 15, 2015 Office supplies Notes payable, due December 31, 2018 Paid-in capital in excess of par value Buildings Patents Capital stock, $1 par value Prepaid rent Cash Retained earnings Equipment Salaries payable Income taxes payable $ 32,650 2,200 26,500 250,000 40,000 15,000 112,900 12,500 6,500 200 251,630 75,000 150,000 45,000 200,000 3,800 60,990 113,510 84,500 7,400 7,500 Read the information about Raponi, Inc. Required: Prepare the Stockholders’ Equity section of the classified balance sheet, including the total stockholders’ equity amount. 159. Raponi, Inc. The following balance sheet items from Raponi, Inc. are listed for December 31, 2014: Accounts payable Interest payable Accounts receivable Land Accumulated depreciation—buildings Marketable securities Merchandise inventory Accumulated depreciation—equipment Notes payable, due April 15, 2015 Office supplies Notes payable, due December 31, 2018 Paid-in capital in excess of par value Buildings Patents Capital stock, $1 par value Prepaid rent Cash Retained earnings Equipment Salaries payable Income taxes payable $ 32,650 2,200 26,500 250,000 40,000 15,000 112,900 12,500 6,500 200 251,630 75,000 150,000 45,000 200,000 3,800 60,990 113,510 84,500 7,400 7,500 Read the information about Raponi, Inc. Required: Present the current liabilities section (including the total) of a classified balance sheet. 160. Raponi, Inc. The following balance sheet items from Raponi, Inc. are listed for December 31, 2014: Accounts payable Interest payable Accounts receivable Land Accumulated depreciation—buildings Marketable securities Merchandise inventory Accumulated depreciation—equipment Notes payable, due April 15, 2015 Office supplies Notes payable, due December 31, 2018 Paid-in capital in excess of par value Buildings Patents Capital stock, $1 par value Prepaid rent Cash Retained earnings Equipment Salaries payable Income taxes payable $ 32,650 2,200 26,500 250,000 40,000 15,000 112,900 12,500 6,500 200 251,630 75,000 150,000 45,000 200,000 3,800 60,990 113,510 84,500 7,400 7,500 Read the information about Raponi, Inc. Required: Compute Raponi’s current ratio. On the basis of your answer, does Raponi appear to be liquid? What other information do you need to fully answer that question? 161. Raponi, Inc. The following balance sheet items from Raponi, Inc. are listed for December 31, 2014: Accounts payable Interest payable Accounts receivable Land Accumulated depreciation—buildings Marketable securities Merchandise inventory Accumulated depreciation—equipment Notes payable, due April 15, 2015 Office supplies Notes payable, due December 31, 2018 Paid-in capital in excess of par value Buildings Patents Capital stock, $1 par value Prepaid rent Cash Retained earnings Equipment Salaries payable Income taxes payable $ 32,650 2,200 26,500 250,000 40,000 15,000 112,900 12,500 6,500 200 251,630 75,000 150,000 45,000 200,000 3,800 60,990 113,510 84,500 7,400 7,500 Read the information about Raponi, Inc. Required: Prepare the Assets section of the classified balance sheet. 162. Read the information about Raponi, Inc. Required: Prepare the Liabilities section of the classified balance sheet, including total liabilities balance. 163. Complete the December 31, 2014 (first year of operation) Balance sheet for Weglein Company using the following information: (a) Retained earnings at December 31, 2014 was $51,000. (b) Total stockholders’ equity at January 1, 2014 was $139,000. (c) On December 30, 2014, additional capital stock was sold for cash, $55,000 (d) The land and building were purchased on December 30, 2014 for $150,000. Weglein Company Balance Sheet December 31, 2014 Assets Cash Liabil ities & Stock holde rs’ Equit y $ 80,000 L ia bi li ti e s: Accounts receivable $ N ot e s p a y a bl e Land 112,000 45, 000 A c c o u nt s p a y a bl e Buildings $ T ot al li a bi li ti e s Equipment 30,000 S to c k h ol d er s’ e q ui ty : $ C a pi ta l S to c k _______ _______ Total assets R et ai n e d e ar ni n g s T ot al li a bi li ti e s a n d $ $390, 000 st o c k h ol d er s’ e q ui ty 164. Ficus Company calculated the following amounts concerning its financial information for the years ending December 31, 2014 and 2013: Current ratio Profit margin 2014 3.1 to 1 22 % 2013 2.0 to 1 18% REQUIRED: Examine Ficus’ ratios. Is the change in the current ratio favorable or not? Explain. 165. Ficus Company calculated the following amounts concerning its financial information for the years ending December 31, 2014 and 2013: Current ratio Profit margin 2014 3.1 to 1 22 % 2013 2.0 to 1 18% REQUIRED: Suppose Ficus Company had a decrease in its cash account from 2013 to 2014. Would the other current asset amounts have increased or decreased? Explain. 166. Fellsmere Corporation Presented below are the condensed balance sheets of Fellsmere Corporation at December 31, 2014 and 2013. Net income for the years ending December 31, 2014 and 2013 is $346,000 and $109,000, respectively. Dec December 31, 2013 emb er 31, 201 4 C u rr e nt a ss et s P r o p er ty , pl a nt , & e q ui p m e nt ( n et ) I nt a n gi bl e s a n d ot h er a ss et s $2,228,186 $2,544,68 3 530,589 376,647 131,206 118,12 1 Tota $2,889,981 l asset s $3,039,45 1 C $1,429,674 u rr e nt li a bi li ti e s L 3,360 o n g -t er m o bl ig at io n s W 112,971 ar ra nt y a n d ot h er li a bi li ti e s Tota $1,546,605 l liabi lities S to c k h ol d er s’ e q ui ty : Com $ 1,566 mon stoc k $1,003,90 6 7,240 98,08 1 $1,109,22 7 $ 501,63 1 Add 365,986 ition al paid -in capit al Reta 980,509 ined earn ings Acc (4,085) umu lated othe r com preh ensi ve loss Tota $1,343,976 l stoc khol ders ’ equi ty T $2,8 $3,039,451 ot89,9 al 81 li a bi li ti e s a n d st o c k h ol d er s’ e q ui ty 799,483 634,509 (5,489 ) $1,930,22 4 Read the information about Fellsmere Corporation. Required: (A) Did Fellsmere’s current ratio increase or decrease from 2013 to 2014? Make any necessary calculations and explain your answer. Which financial statement users are most concerned with this ratio? (B) The balance sheets show a large increase in retained earnings during 2014. Identify the possible reason(s) for this increase. 167. Fellsmere Corporation Presented below are the condensed balance sheets of Fellsmere Corporation at December 31, 2014 and 2013. Net income for the years ending December 31, 2014 and 2013 is $346,000 and $109,000, respectively. Dec December 31, 2013 emb er 31, 201 4 C u rr e nt a ss et s P r o p er ty , pl a nt , & e q ui p m e nt ( n et ) I nt a n gi bl e s a n d ot h er a ss et s $2,228,186 $2,544,68 3 530,589 376,647 131,206 118,12 1 Tota $2,889,981 l asset s $3,039,45 1 C $1,429,674 u rr e nt li a bi li ti e s L 3,360 o n g -t er m o bl ig at io n s W 112,971 ar ra nt y a n d ot h er li a bi li ti e s Tota $1,546,605 l liabi lities S to c k h ol d er s’ e q ui ty : Com $ 1,566 mon stoc k $1,003,90 6 7,240 98,08 1 $1,109,22 7 $ 501,63 1 Add 365,986 ition al paid -in capit al Reta 980,509 ined earn ings Acc (4,085) umu lated othe r com preh ensi ve loss Tota $1,343,976 l stoc khol ders ’ equi ty T $2,8 $3,039,451 ot89,9 al 81 li a bi li ti e s a n d st o c k h ol d er s’ e q ui ty 799,483 634,509 (5,489 ) $1,930,22 4 Read the information about Fellsmere Corporation. Required: (A) Explain the change in Fellsmere’s working capital from 2013 to 2014. Why do users believe the current ratio provides more information than the dollar amount of working capital? Explain. (B) Fellsmere Corporation’s creditors need to know whether its working capital position improved during the year. How would you evaluate this? 168. Crystal, Inc. Crystal, Inc. reported $52,000 of net income for 2014. Crystal’s balance sheet at December 31, 2014 includes the following amounts: Wages payable Prepaid rent Cash Accounts payable Retained earnings $ 1,000 3,000 15,000 25,000 29,000 Inventory Land Accounts receivable Capital stock Income taxes payable $26,000 40,000 22,000 40,000 11,000 Read the information about Crystal, Inc. Which item is most “liquid”? Why is liquidity important? 169. Crystal, Inc. Crystal, Inc. reported $52,000 of net income for 2014. Crystal’s balance sheet at December 31, 2014 includes the following amounts: Wages payable Prepaid rent Cash Accounts payable Retained earnings $ 1,000 3,000 15,000 25,000 29,000 Inventory Land Accounts receivable Capital stock Income taxes payable $26,000 40,000 22,000 40,000 11,000 Read the information about Crystal, Inc. Has Crystal been profitable since it began operations? How do you know? 170. The balance sheet of Evanston Inc. includes the following items: Cash Accounts receivable Inventory Prepaid insurance Land Accounts payable Salaries payable Capital stock Retained earnings $ 21,500 12,400 45,300 1,800 80,000 49,000 1,625 105,100 5,700 Required: (1) Determine the current ratio and working capital. (2) What does the composition of the current assets tell you about Evanston’s liquidity? (3) What other information do you need to fully assess Evanston’s liquidity? 171. Eagle Corporation Presented below are all of the items from Eagle Corporation’s income statement for the years ending December 31, 2014 and 2013. Service fees General and administrative expenses Other income, net Income taxes December 31, 2014 December 31, 2013 $2,300,000 1,900,000 40,000 150,000 $2,100,000 1,500,000 20,000 180,000 Read the information about Eagle Corporation. Required:: How much is net income for the year ended December 31, 2014? If Eagle Corporation had used a single-step statement, by how much would net income be different? Explain. 172. Eagle Corporation Presented below are all of the items from Eagle Corporation’s income statement for the years ending December 31, 2014 and 2013. Service fees General and administrative expenses Other income, net Income taxes December 31, 2014 December 31, 2013 $2,300,000 1,900,000 40,000 150,000 $2,100,000 1,500,000 20,000 180,000 Read the information about Eagle Corporation. Required: Compare the profit margins for 2014 and 2013. Is the company becoming more or less profitable or staying the same? What could be contributing to this? 173. Burke Company The following income statement items are taken from the records of Burke Company for the year ended December 31, 2014: Advertising expense Commission expense Cost of goods sold Depreciation expense – Office Building Income tax expense Insurance expense – sales person’s auto Interest expense Interest revenue Rent revenue Salaries and wages expense – Office Sales Revenue Supplies expense – Office $2,600 3,515 29,200 4,000 190 3,350 1,400 2,340 7,700 13,660 50,300 1,990 Read the information about Burke Company. Required: Prepare a multiple-step income statement for the year ended December 31, 2014. 174. Burke Company The following income statement items are taken from the records of Burke Company for the year ended December 31, 2014: Advertising expense Commission expense Cost of goods sold Depreciation expense – Office Building Income tax expense Insurance expense – sales person’s auto Interest expense Interest revenue Rent revenue Salaries and wages expense – Office Sales Revenue Supplies expense – Office $2,600 3,515 29,200 4,000 190 3,350 1,400 2,340 7,700 13,660 50,300 1,990 Read the information about Burke Company Required: Prepare a single-step income statement for the year ended December 31, 2014. 175. The 2014 income statement of Cigmar Enterprises shows operating revenues of $120,500, selling expenses of $35,200, general and administrative expenses of $29,900, interest expense of $1,500, and income tax expense of $10,520. Cigmar’s stockholders’ equity was $280,000 at the beginning of the year and $320,000 at the end of the year. The company has 20,000 shares of stock outstanding at December 31, 2014. REQUIRED: Compute Cigmar’s profit margin. What other information would you need in order to comment on whether this ratio is favorable? 176. The 2014 income statement of Nasir Inc. shows operating revenues of $135,800, selling expenses of $40,310, general and administrative expenses of $33,990, interest expense of $880, and income tax expense of $13,090. Nasir’s stockholders’ equity was $250,000 at the beginning of the year and $345,000 at the end of the year. The company has 10,000 shares of stock outstanding at December 31, 2014. REQUIRED: Compute Nasir’s profit margin. What other information would you need in order to comment on whether this ratio is favorable? 177. Heidi Corporation’s partial income statement is as follows: Sales Cost of sales Selling expenses General and admin. expenses $2,400,000 900,000 121,600 150,000 Required Determine the profit margin. Would you invest in Heidi Corporation? Explain your answer. 178. Peterson Corporation’s partial income statement is as follows: Sales Cost of sales Selling expenses General and admin. expenses $1,300,000 300,000 210,000 150,000 Required Determine the profit margin. Would you invest in Peterson Corporation? Explain your answer. 179. Posey Corporation began operations on January 2, 2012, with a total investment of $150,000 by its stockholders. Net income for its first year of business was $90,000. During 2013 and 2014, net income increased to $188,000 and to $217,000, respectively. Posey paid $85,000 in dividends to its shareholders in each of the three years. A) In good form, prepare a statement of retained earnings for the year ended December 31, 2013. B) How much is total retained earnings on December 31, 2014? C) Explain the link between the statement of retained earnings and the balance sheet. 180. The following information is taken from Harvey Company’s balance sheet at December 31, 2014: Cash Retained earnings Inventory Equipment Accounts payable Bonds payable Capital stock $ 24,000 14,000 8,000 38,000 7,000 23,000 26,000 REQUIRED: Using the information provided for Harvey Company, answer the following questions: A) How much did creditors provide to Harvey Company? B) On which financial statement would an investor look to see if any stock was issued during the year? 181. Coglin, Inc. incurred a net loss of $20,000 for 2014. The balance sheet at December 31, 2014, for Coglin, Inc., includes the following items: Cash Accounts receivable Inventory Prepaid insurance Land Building Accounts payable Salaries payable Capital stock Retained earnings $ 23,000 13,000 45,000 1,000 21,000 80,000 55,000 2,000 100,000 25,000 A) Determine Coglin’s current ratio and working capital. B) Beyond the information provided in your answers to ―A,‖ what does the composition of Coglin’s current assets tell you about its liquidity. C) What other information would one need to fully access Coglin’s liquidity? 182. During 2014, Wimbrow Images reported $60,000 of net income and generated $80,000 of cash from operations. During the year, Wimbrow Images paid $15,000 to purchase a new delivery truck and also paid dividends in the amount of $30,000. Wimbrow Images borrowed $40,000 cash from the bank. At the beginning of the year, cash amounted to $50,000. A) Prepare a statement of cash flows for the year ended December 31, 2014. B) How much more cash does Wimbrow Images have available at the end of the year than at the beginning? C) Why is there a difference between net income and cash flows from operations? 183. Tradewinds Corporation was organized on January 1, 2014, with the investment of $500,000 in cash by its stockholders. Tradewinds signed a ten-year, $300,000 promissory note at a local bank during 2014 and received cash in the same amount. The company immediately purchased an office building for $800,000, paying in cash. During its first year, Tradewinds generated $35,000 in cash from operations and paid $30,000 in cash dividends. A) In good form, prepare a statement of cash flows for the year ended December 31, 2014. B) What does this statement tell you that an income statement does not? 184. Hindsville Company reported revenues of $165,000 and net income of $20,000 for 2014. Cash generated by operations was $40,000. In addition, Hindsville Company borrowed $24,000 from a bank. During 2014, Hindsville purchased new equipment for $30,000 cash and paid cash dividends of $15,000 to stockholders. Hindsville’s cash balance at the beginning of 2014 was $22,000. A) Identify the amount of cash flows for financing, investing, and operating activities for 2014 by filling in the amounts below. Financing Cash Flows: Investing Cash Flows: Operating Cash Flows: B) Did Hindsville Company’s operating activities generate enough cash to cover its investing and financing activities? Explain. C) How much did Hindsville Company’s cash balance increase or decrease during 2014? 185. Presented below are items from Joplin Shoes statement of cash flows for 2014. Cash flows provided by operating activities Cash flows provided by financing activities Cash at the beginning of the year Cash flows used by investing activities $ 75,000 115,000 60,000 (100,000) A) Determine whether Joplin Shoes’ cash increased or decreased during the year. B) How much cash does Joplin Shoes have at the end of 2014? C) What is the purpose of the statement of cash flows? 186. Mill Valley Corporation was organized on January 1, 2014, with the investment of $225,000 in cash by its stockholders. The company immediately purchased an office building for $300,000, paying $201,000 in cash and signing a three-year promissory note for the balance. Mill Valley signed a five-year, $50,000 promissory note at a local bank during 2014 and received cash in the same amount. During its first year, Mill Valley collected $93,000 from its customers. It paid $60,600 for inventory, $22,400 in salaries and wages, and another $5,100 in taxes. Mill Valley paid $5,300 in cash dividends. Required 1. Prepare a statement of cash flows for the year ended December 31, 2014. 2. What does this statement tell you that an income statement does not? 187. Identify each of the following items as operating (O), investing (I), or financing (F) activities on the statement of cash flows(assuming the indirect method). If an item is not on the statement, please mark it as none of these (N). If the item is an inflow, please indicate by a (+). If the item is an outflow, please indicate by a (-) ____ (a) Paid an account payable for inventory purchased in the previous accounting period. ____ (b) Amortization of debt issuance costs ____ (c) Paid a dividend to stockholders. ____ (d) Paid the interest on a note payable to National Street Bank. ____ (e) Paid the principal amount due on the note payable to National Street Bank. ____ (f) Transferred cash from a checking account into a money market fund. ____ (g) Purchased equipment for cash. 188. Most financial reports contain the following list of basic elements. For each element identify the person(s) who prepared the element and describe the information a user would expect to find in each element. Elements Management Discussion & Analysis Financial Statements Notes to Financial Statements Report of Independent Accountants Prepared By Information Provided 189. Comparative income statements for Gregson Inc. are as follows: Sales Cost of sales Gross profit Operating expenses Operating income Loss on sale of subsidiary Net income (loss) 2014 $2,000,000 800,000 $1,200,000 520,000 $ 680,000 (800,000) $ (120,000) 2013 $600,000 400,000 $200,000 120,000 $ 80,000 0 $ 80,000 Required The president and management believe that the company performed better in 2014 than it did in 2013. Write the president’s letter to be included in the 2014 annual report. Explain why the company is financially sound and why shareholders should not be alarmed by the $120,000 loss in a year when gross profit increased significantly. 190. What financial statement items are investors and creditors most interested in and why? 191. Cory Harper, a newly hired accountant, wanted to impress his boss, so he stayed late one night to analyze the office supplies expense account. He determined the cost by month, for the past 12 months, of each of the following: computer paper, copy paper, fax paper, pencils and pens, note pads, postage, corrections supplies, stationery, and miscellaneous items. Why do companies not include information of this nature in published financial statements? 192. Service-oriented companies have different needs than product-oriented companies when analyzing financial statements. REQUIRED: Why is this true? Give an example of a financial ratio that is meaningless to a service business. 193. Ginger Company claims its financial information is useful. What two qualities must be present in order to have “useful” accounting information? Explain these two qualities. 194. What is the difference between comparability and consistency? 195. What is conservatism and why is it important in accounting? 196. How is a classified balance sheet useful to decision makers? 197. What is the operating cycle of a business? How does this impact the classification of assets into current and noncurrent categories? 198. How does the definition of a current liability relate to that of a current asset? 199. Potential stockholders and lenders are interested in a company’s financial statements. Several financial statement items appear below. Answer the questions that follow. Accounts receivable Cash Common stock Retained earnings Office supplies Unearned revenue Accounts payable Depreciation expense Land held for future expansion Loss on the sale of equipment Patent amortization expense Utilities expense Advertising expense Income taxes Dividends Service revenue Sales A) List the two items from above in which stockholders would be most interested. Explain why the two you selected are important to stockholders. B) In which one item would lenders be most interested? Explain why this item is important. 200. What is the purpose of a statement of stockholders’ equity? How does it differ from the statement of retained earnings? Which statement is required? 201. What is the purpose of a statement of cash flows? Give an example of one of each of the three activities. 202. What information is provided in an annual report in addition to the financial statements? Chapter 2: Financial Statements and the Annual Report Key 1. What is the primary objective of financial reporting? A. To help investors make credit decisions. B. To help management assess cash flows. C. To protect users from fraudulent financial information. D. To provide useful information for decision making 2. ―Claims to economic resources‖ are known as A. Assets and liabilities B. Liabilities and stockholders’ equity C. Owners’ equity and stockholders’ equity D. Retained earnings and revenues 3. Which of the following is not an objective of financial reporting? A. To reflect prospective cash receipts to investors and creditors. B. To reflect prospective cash flows to an enterprise. C. To reflect resources and claim to resources. D. To reflect current stock prices and information concerning stock markets. 4. Which of the following statements is true concerning external users of financial information? A. External users need detailed records of the business to make informed decisions. B. External users are primarily responsible for the preparation of financial statements. C. External users rely on the financial statements to help make informed decisions. D. External users rely on management to tell them whether the company is a good investment 5. Relevant information can be quantitative or qualitative. In deciding whether to go to college part-time or full-time, which of the following is a qualitative factor for a student? A. The cost of tuition B. The opportunity to make friends C. The price of football tickets D. ―Good Student‖ discounts on auto insurance rates. 6. The preparation of financial statements requires that the information be understandable A. Only to CPAs. B. To those willing to spend the time to understand it. C. Only to those who take an accounting course. D. Only to financial analysts and brokers. 7. Schneider, Inc., a manufacturer of tires, has given you its most recent annual report in an effort to obtain a sizable loan. The company is very profitable and appears to have a sound financial position. Based on a report presented on prime-time television last night, you are aware that Schneider is a defendant in several lawsuits related to its defective tires that cause vehicles to overturn. The information presented on television is an example of financial information that is A. Relevant B. Consistent C. Predictable D. Comparable 8. If an investor can use accounting information for two different companies to evaluate the types and amounts of expenses, the information is said to have the quality of A. Comparability B. Consistency C. Neutrality D. Understandability 9. Cheile Transportation purchases many pieces of office furniture with an individual cost below $200 each. Cheile chooses to account for these expenditures as expenses when acquired rather than reporting them as property, plant, and equipment on its balance sheet. The company’s accountant and independent CPA agree that no accounting principle has been violated. What accounting justification allows Cheile to expense the furniture? A. Conservatism B. Matching C. Materiality D. Verifiability 10. Crouse Company applies the consistency convention. What does this mean? A. Crouse Co. uses the same names for all its expenses as its competitors. B. Crouse Co. has selected certain accounting principles that can never be changed. C. Crouse Co. applies the same accounting principles each accounting period. D. Crouse Co. applies the same accounting principles as it competitors. 11. Information that is material means that an error or alternative method of handling a transaction A. Would possibly affect the judgment of someone relying on the financial statements B. Would not affect the decisions of users C. Might cause a company to understate its earnings for the accounting period D. Could increase the profitability of a company 12. An accountant is uncertain about the best estimate of an amount for a business transaction. If two amounts are about equally likely, the amount least likely to overstate assets and income is selected. Which of the following qualities is characterized by this action? A. Comparability B. Conservatism C. Materiality D. Neutrality 13. The qualitative characteristics of accounting data include A. Assets reported on the balance sheet B. All accounting information C. Cash flows D. Reliability 14. Which of the following is a noncurrent asset? A. Inventories B. Office supplies C. Land D. Accounts receivable 15. Which of the following is a current asset? A. Land B. Buildings C. Store fixtures D. Prepaid insurance 16. Which of the following include only current assets? A. Accounts receivable, cash, inventory, office supplies B. Cash, accounts payable, inventory, office supplies C. Cash, land, accounts receivable, inventory D. Accounts receivable, cash, furniture, office supplies 17. To determine the source of a company’s assets, on which financial statement will you look? A. Balance sheet only B. Income statement only C. Both the balance sheet and the income statement D. Both the income statement and the statement of retained earnings 18. Wood Company Wood Company has provided the following information from its accounting records for the current year: Cash Inventory Accounts payable Retained earnings $ 50,000 60,000 45,000 ? Accounts receivable Land Notes payable (due 2020) $ 40,000 75,000 150,000 Read the information for Wood Corporation. What are Wood’s current assets? A. $ 90,000 B. $ 150,000 C. $ 195,000 D. $ 225,000 19. Read the information for Wood Company. What are Wood’s current liabilities? A. $ 45,000 B. $ 120,000 C. $ 195,000 D. $ 225,000 20. Which one of the following items is reported as a current asset on a classified balance sheet? A. Inventory B. Accounts payable C. Land D. Common stock 21. The following information is given for Wagner Company: Cash Land Plant & Equipment $ 50,000 75,000 150,000 Inventory Accumulated Depreciation Accounts Payable $ 45,000 40,000 60,000 What are the company’s current assets? A. $220,000 B. $155,000 C. $130,000 D. $ 95,000 22. Which of the following accounts are normally reported as current liabilities on a classified balance sheet? A. Accounts payable and bonds payable B. Interest payable and mortgage payable C. Income taxes payable and salaries payable D. Capital stock and accounts payable 23. Which one of the following is not a major category for long-term assets? A. Intangibles B. Property, plant, and equipment C. Receivables D. Goodwill 24. Which of the following would not be considered to be an intangible asset? A. Franchises B. Copyrights C. Investments D. Goodwill 25. Which of the following statements is trueconcerning intangible assets? A. Intangible assets have no economic substance. B. Intangible assets lack physical existence. C. Intangible assets are listed in the stockholders’ equity section of the balance sheet. D. Intangible assets appear in the current assets section of the balance sheet. 26. How are assets which 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) reported on a classified balance sheet? A. Property, plant, and equipment B. Current assets C. Intangible assets D. Current liabilities 27. Which of the following terms characterizes the time period between the investment of cash in merchandise and the collection of cash from the sale of that merchandise? A. Operating cycle B. Natural business year C. Accounting period D. Fiscal period 28. Which set of items below are current assets? A. Accounts receivable, net income, inventory, and dividends B. Cash, accounts receivable, capital stock, and sales C. Net income, cash, office supplies, and inventory D. Cash, accounts receivable, inventory, and office supplies 29. One significant difference between a classified and a non-classified balance sheet is the distinction between which of the following items? A. Assets and liabilities B. Current and noncurrent items C. Liabilities and owners’ equity D. Resources invested by the owners and amounts borrowed from creditors 30. For several years, Shaun Corporation has had a current ratio that was consistent with other companies in its industry. For the most recent year, Shaun’s current ratio was significantly higher than that for the industry. What is the best possible explanation for this situation? A. The other companies in the industry were not as profitable. B. Shaun’s liquidity has improved or is not leveraging financial resources effectively. C. Shaun has less property, plant and equipment than other companies. D. Shaun has too much debt. 31. Guinther & Sons, Inc. Guinther & Sons, Inc. a retailer of men’s clothing, earned a net profit of $77,000 for 2014. The balance sheet for Guinther & Sons includes the following items: Cash Inventory Land Taxes payable Retained earnings $29,000 79,000 90,000 29,000 97,000 Accounts receivable Prepaid insurance Accounts payable Capital stock Long-term notes payable $39,000 $ 3,000 $21,000 $50,000 $43,000 Read the information for Guinther & Sons. Calculate the total amount of current assets for Guinther & Sons. A. $ 100,000 B. $ 147,000 C. $ 150,000 D. $ 249,000 32. Guinther & Sons, Inc. Guinther & Sons, Inc. a retailer of men’s clothing, earned a net profit of $77,000 for 2014. The balance sheet for Guinther & Sons includes the following items: Cash Inventory Land Taxes payable Retained earnings $29,000 79,000 90,000 29,000 97,000 Accounts receivable Prepaid insurance Accounts payable Capital stock Long-term notes payable $39,000 $ 3,000 $21,000 $50,000 $43,000 Read the information for Guinther & Sons, Inc. Calculate the current ratio for Guinther & Sons. A. 2.58 to 1 B. 2.75 to 1 C. 3.00 to 1 D. 2.00 to 1 33. Guinther & Sons, Inc. Guinther & Sons, Inc. a retailer of men’s clothing, earned a net profit of $77,000 for 2014. The balance sheet for Guinther & Sons includes the following items: Cash Inventory Land Taxes payable Retained earnings $29,000 79,000 90,000 29,000 97,000 Accounts receivable Prepaid insurance Accounts payable Capital stock Long-term notes payable $39,000 $ 3,000 $21,000 $50,000 $43,000 Read the information for Guinther & Sons, Inc. The average current ratio for stores such as Guinther & Sons is 2.4 to 1. What does this comparison tell you about its liquidity? A. It is more liquid than its competitors B. It has more long-term assets than its competitors C. Since a rule of thumb for current ratios is 2 to 1, neither Nadia & Sisters nor its competitors is liquid. D. Nadia & Sisters is more profitable than its competitors. 34. Rosu Company has total current assets of $120,000 and total current liabilities of $50,000. What is the amount of working capital for Rosu Company? A. $ 27,000 B. $ 67,000 C. $ 70,000 D. $ 91,000 35. What is the correct method for calculating working capital? A. Total Assets minus Total Liabilities B. Current Assets minus Total Liabilities C. Current Assets minus Current Liabilities D. Current Assets plus Current Liabilities 36. Oreo Company has current assets of $20,000, current liabilities of $8,000, and long-term liabilities of $3,000. Oreo wants to buy new equipment. How much of its existing cash can Oreo use to acquire equipment without allowing its current ratio to decline below 2.0 to 1? A. $ 4,000 B. $ 8,000 C. $ 10,000 D. $ 12,000 37. Excursion Corp. increased its dollar amount of working capital over the past several years. To further evaluate the company’s short-run liquidity, which one of the following measures should be used? A. The current ratio B. An analysis of the company’s long-term debt C. An analysis of the return on stockholders’ equity D. An analysis of retained earnings 38. Which financial statement reports information helpful in assessing working capital? A. Income statement B. Balance sheet C. Statement of retained earnings D. Statement of cash flows 39. Use Rizwi Corporation’s list of accounts at December 31, 2014 to answer the following question. Rizwi Corp oratio n List of Acco unts at Dece mber 31, 2014 Cash Merchandise inventory Land Buildings Accounts receivable $30,000 21,000 40,000 80,000 25,000 Accumulated depreciation Notes payable–Due 12/31/2022 Accounts payable Equipment Notes Payable–Due 07/01/2015 $ 12,000 120,000 14,000 33,000 24,000 What is Rizwi Corp.’s current ratio? A. 0.48 to 1 B. 2.00 to 1 C. 2.55 to 1 D. 2.86 to 1 40. If the current ratio is 3 to 1, net income is $12,000, and current liabilities are $24,000, how much is working capital? A. $ 12,000 B. $ 36,000 C. $ 48,000 D. $ 72,000 41. For which of the following is the current ratio most useful? A. In evaluating a company’s liquidity. B. In evaluating a company’s solvency. C. In evaluating a company’s profitability. D. In evaluating a company’s probability. 42. Which of the following events will cause a company’s current ratio to decrease? A. The sale of inventory for cash. B. The sale of inventory for credit (accounts receivable). C. Issuing stock for cash. D. Paying off long-term debt with cash. 43. Which of the following events will cause a company’s current ratio to increase? A. The collection of an account receivable. B. Selling land for cash at a loss. C. The discharge of an account payable by signing a short-term note payable. D. Paying off a long-term loan. 44. Liquidity relates to a company’s ability to do which of the following? A. The ability to pay its financial obligations as they become due. B. The ability to stay in business over the long run. C. The ability to pay dividends to its stockholders. D. The ability to collect the amount their customers owe the company. 45. Skyline, Inc. The balance sheet of Skyline Inc. includes the following items: Cash Accounts receivable Inventory Prepaid insurance Land Accounts payable Salaries payable Capital stock Retained earnings $ 22,400 11,700 23,300 1,040 80,000 47,500 1,200 84,040 5,700 Read the information about Skyline, Inc. What is Skyline’s current ratio? A. 0.8 to 1 B. 1.6 to 1 C. 1.2 to 1 D. 2.5 to 1 46. Skyline, Inc. The balance sheet of Skyline Inc. includes the following items: Cash Accounts receivable Inventory Prepaid insurance Land Accounts payable Salaries payable Capital stock Retained earnings $ 22,400 11,700 23,300 1,040 80,000 47,500 1,200 84,040 5,700 Read the information about Skyline, Inc. What is Skyline’s working capital? A. $58,440 B. $89,740 C. $84,040 D. $9,740 47. Which of the following would appear on a multiple-step income statement but not on a single-step income statement? A. Net income B. Total expenses C. Total revenues D. Income before income taxes 48. Which of the following would not appear on an income statement? A. Sales revenue B. Cost of goods sold C. Accounts receivable D. Insurance expense 49. Which statement is trueconcerning an income statement? A. The income statement shows how much profit the company has earned since it began operations. B. Net income on the income statement should be equal to the amount of cash on the balance sheet. C. The income statement summarizes the results of operations for a period of time. D. The income statement indicates the liquidity of the company on an annual basis. 50. Which statement is trueconcerning gains and losses? A. Gains and losses are reported on the balance sheet in the Assets and Liabilities sections, respectively. B. Gains and losses are special types of revenues and expenses that are reported on the income statement. C. The amounts of gains and losses are included in the calculation of the current ratio, in the numerator and denominator, respectively. D. Gains and losses are reported only on a multi-step income statement. 51. Which one of the following subtotals or totals would appear in a multiple-step, but not a single-step income statement? A. Income tax expense B. Income from operations C. Cost of goods sold D. Net income 52. What are the two subtotals that distinguish the multi-step income statement from the single-step income statement? A. Income before taxes and income taxes B. Total operating revenues and total operating expenses C. Income from operations and income before taxes D. Total revenues and total expenses 53. A question asked by stockholders is, “How much profit did the company make?” What should the stockholder examine to get the most information that will help evaluate the answer to this question? A. The balance sheet, because retained earnings represents current profits. B. The statement of cash flows, as cash inflows and outflows represents current profits. C. The income statement, since it shows the revenues and expenses for the period. D. The economic resources of the company. 54. Under current accounting principles, how is net income on the income statement measured? A. Net change in owners’ equity during the period. B. Excess of revenues over expenses during the period. C. Net change in the cash balance during the period. D. Excess of revenues over expenses less any dividends paid during the period. 55. Which of the following statements is trueregarding the multiple-step income statement? A. The multiple-step income statement is used only by companies that sell products, not those that provide services. B. The multiple-step income statement is helpful in determining a company’s working capital C. The multiple-step income statement reports the same net income as the single-step income statement. D. The multiple-step income statement is required under generally accepted accounting principles. 56. How is income from operations determined? A. By subtracting the cost of goods sold from sales. B. By subtracting the total operating expenses from sales C. By subtracting the total operating expenses from gross profit. D. By subtracting selling expenses from operating revenues. 57. The following list contains several items that appear on an income statement. 1. 2. 3. 4. Other revenue and expenses Income before taxes Income taxes Operating expenses 5. 6. 7. Net Income Operating revenues Income from operations Select the choice that lists the items in the order they would appear on a multi-step income statement A. 6, 1, 7, 4, 2, 3, 5 B. 7, 6, 1, 4, 2, 3, 5 C. 6, 4, 7, 1, 2, 3, 5 D. 6, 7, 4, 1, 2, 3, 5 58. Webb Company Selected data from the accounting records of Webb Company are listed below: General & administrative expenses Selling expenses Other revenues (expenses) $2,200 1,800 800 Operating revenues Income taxes Dividends paid $6,000 600 1,200 Read the information about Webb Company. What is Webb’s income from operations? A. $ 1,600 B. $ 2,000 C. $ 2,200 D. $ 2,800 59. Read the information about Webb Company. What is Webb’s net income? A. $ 1,600 B. $ 2,000 C. $ 2,200 D. $ 2,800 60. Read the information about Webb Company. By what amount will net income on a single-step income statement differ from net income on a multi-step income statement if Webb Company prepares both formats? A. $ 800 B. $ 600 C. $ 200 D. $ -0- 61. Deal Mart The 2014 income statement of Deal Mart shows operating revenues of $130,800, selling expenses of $37,100, general and administrative expenses of $34,900, interest expense of $900, and income tax expense of $11,430. Deal Mart’s stockholders’ equity was $280,000 at the beginning of the year and $320,000 at the end of the year. The company has 20,000 shares of stock outstanding at December 31, 2014. Read the information about Deal Mart. What is Deal Mart’s net income? A. $80,000 B. $92,190 C. $130,800 D. $46,470 62. Deal Mart The 2014 income statement of Deal Mart shows operating revenues of $130,800, selling expenses of $37,100, general and administrative expenses of $34,900, interest expense of $900, and income tax expense of $11,430. Deal Mart’s stockholders’ equity was $280,000 at the beginning of the year and $320,000 at the end of the year. The company has 20,000 shares of stock outstanding at December 31, 2014. Read the information about Deal Mart. What is Deal Mart’s profit margin (to the closest tenth of a percent)? A. 2.8 B. 35.5 C. 61.2 D. 14.5 63. Dardenelle, Inc. earned $600,000 profit during 2014. On which financial statement(s) will you find the dollar amount of the profit earned by the company? A. Balance sheet and income statement B. Income statement only C. Statement of retained earnings only D. Income statement and statement of retained earnings 64. Grand Stores, Inc. is concerned about its profitability for the current year, since its profit margin has dropped 10% since last year. Which of the following is the least useful comparison in evaluating the drop in Grand Stores’ profit margin? A. Comparison with the industry average for the current year. B. Comparison with its current ratio for the current year C. Comparison with the profit margins for its major competitors for the current year. D. Comparison with its profit margins for the past five years. 65. Assume that you want to determine the profit margin for a company. Which one of the following financial statements is the best source of this information? A. Statement of retained earnings B. Statement of cash flows C. Statement of stockholders’ equity D. Income statement 66. Hopper, Inc. Use the information from Hopper Inc. to answer the following question(s). Operating revenues Operating expenses Income taxes 2014 $1,900,000 1,400,000 200,000 2013 $1,600,000 1,100,000 200,000 Read the information about Hopper. Inc. Which statement best represents Hopper’s performance? A. Hopper’s profit margin ratio decreased. B. Hopper has become more profitable. C. Hopper’s increase in operating revenues increased the company’s net income. D. Hopper’s operating expenses as a percentage of operating revenues remained the same. 67. Hopper, Inc. Use the information from Hopper Inc. to answer the following question(s). Operating revenues Operating expenses Income taxes 2014 $1,900,000 1,400,000 200,000 2013 $1,600,000 1,100,000 200,000 Read the information about Hopper, Inc. Which of the following statements is the best answer regarding the company’s profit margin? A. The profit margin was 15.8% in 2014. B. The profit margin was 15.8% in 2013. C. The profit margin was 31.5% in 2014. D. The profit margin was 31.5% in 2013. 68. Hopper, Inc. Use the information from Hopper Inc. to answer the following question(s). Operating revenues Operating expenses Income taxes 2014 $1,900,000 1,400,000 200,000 2013 $1,600,000 1,100,000 200,000 Read the information about Hopper, Inc. Which ratio are you able to calculate given only the information provided by Hopper? A. Profit margin B. Current ratio C. Working capital D. Gross profit percentage 69. Which one of the following equations represents retained earnings activity? A. Beginning balance + net income + dividends = profits for the year B. Beginning balance + cash inflows – cash outflows = ending balance C. Beginning balance + dividends – net income = ending balance D. Beginning balance + net income – dividends = ending balance 70. Garrison Industries Garrison Industries began operations on January 2, 2014, with an investment of $50,000 by each of its two stockholders. Net income for its first year of business was $240,000. Garrison Industries paid a total of $100,000 in dividends to its stockholders during the year. Read the information about Garrison Industries. What is the company’s retained earnings balance at December 31, 2014? A. $140,000 B. $190,000 C. $240,000 D. $340,000 71. Garrison Industries Garrison Industries began operations on January 2, 2014, with an investment of $50,000 by each of its two stockholders. Net income for its first year of business was $240,000. Garrison Industries paid a total of $100,000 in dividends to its stockholders during the year. Read the information about Garrison Industries. If the company’s revenues were $500,000 for the year ended December 31, 2014, how much were total expenses? A. $160,000 B. $260,000 C. $640,000 D. $740,000 72. Read the information about Garrison Industries. The company’s dividends for the year A. Reduce the amount of capital stock reported by the company. B. Are part of Garrison Industries’ operating costs. C. Are reported on the statement of retained earnings. D. Are an expense of Garrison Industries. 73. A company is not required to prepare both a(n) A. Income statement and statement of stockholders’ equity B. Income statement and statement of retained earnings C. Statement of stockholders’ equity and statement of retained earnings D. Statement of cash flows and statement of retained earnings 74. In preparing the financial statements for December 31, 2014, an accountant improperly classified the payment of prepaid rent as rent expense. Which of the following amounts would not be affected by this improper classification? A. Retained earnings, January 1, 2014 B. Retained earnings, December 31, 2014 C. Net income D. Total assets 75. Carnival Bakery borrowed $500,000 from Front Street Bank. Carnival then hired a contractor to build a new cookie distribution outlet. In which section of Carnival’s statement of cash flows would you find information that indicated that Carnival acquired the new cookie distribution outlet? A. Operating Activities B. Investing Activities C. Financing Activities D. Profit Activities 76. A bank loaned $62 million to Apex Corporation to finance the construction of a new distribution warehouse. In which section of Apex’s statement of cash flows would you be able to determine whether the company repaid any portion of the debt during the year? A. Operating Activities B. Investing Activities C. Financing Activities D. Profit Activities 77. Which of the following categories on a statement of cash flows is used to report the cash flow effects of transactions involving a company’s stock? A. Operating Activities B. Investing Activities C. Financing Activities D. Profit Activities 78. Which one of the following categories on a statement of cash flows is used to report the cash flow effects of buying and selling property, plant, and equipment? A. Operating Activities B. Investing Activities C. Financing Activities D. Profit Activities 79. Which one of the following is considered a financing activity? A. The payment of interest on a note payable to the bank. B. Selling products to customers C. Paying wages to employees D. The payment of a cash dividend. 80. Which one of the following statements is true? A. The two primary sources of financing available to corporations are borrowed funds and funds invested by owners B. Financing activities involve the acquisition of property, plant and equipment. C. Borrowed funds are a more permanent source of financing than funds invested by owners D. Investing activities involve the selling of products or services and the incurring of expenses related to selling these products and services 81. Marvel Shoes Marvel Shoes reported the following items on its statement of cash flows for the current year: Net cash inflows from operating activities Net cash outflows from investing activities Net cash outflows from financing activities Cash balance at the beginning of the year $70,000 (20,000) (40,000) 30,000 Read the information about Marvel Shoes. What was the amount of net increase or decrease in the cash balance for Marvel Shoes for the current year? A. $ 10,000 increase B. $ 30,000 increase C. $ 40,000 increase D. $ 70,000 increase 82. Marvel Shoes Marvel Shoes reported the following items on its statement of cash flows for the current year: Net cash inflows from operating activities Net cash outflows from investing activities Net cash outflows from financing activities Cash balance at the beginning of the year $70,000 (20,000) (40,000) 30,000 Read the information about Marvel Shoes. What was the cash balance for Marvel Shoes at the end of the current year? A. $ 10,000 B. $ 30,000 C. $ 40,000 D. $ 70,000 83. Which financial statement reports the sources and uses of an entity’s cash resources? A. Income statement B. Statement of retained earnings C. Balance sheet D. Statement of cash flows 84. During its fifth year of operations, Bright Creations Company reports a beginning cash balance of $132,000, cash inflows from investing activities of $210,000, cash outflows for financing activities of $79,000, and cash outflows for operating activities of $13,000. What was Bright Creations’ cash balance at the end of the fifth year? A. $ 250,000 B. $ 434,000 C. $ 276,000 D. $ 132,000 85. Which of the following best describes a company’s financing activities? A. Financing activities focus on the sale of products and services. B. Financing activities include selling products. C. Financing activities enable a company to acquire assets needed to run a business. D. Financing activities are represented by the revenues and expenses on the income statement. 86. Which of the following best describes a company’s operating activities? A. Operating activities focus on the sale of products and services. B. Operating activities are necessary to provide the money to start a business. C. Operating activities are needed to provide the valuable assets required to run a business. D. Operating activities represent the right to receive a benefit in the future 87. Which one of the following is an investing activity of a business? A. Paying for purchases of inventory B. Issuing stock for cash C. Borrowing money from a bank. D. Purchasing a manufacturing plant for cash 88. Which one of the following is a financing activity of a business? A. Paying for purchases of inventory B. Issuing stock for cash C. Paying salaries D. Purchasing a manufacturing plant 89. Which one of the following is an operating activity of a business? A. Paying for purchases of inventory B. Issuing stock for cash C. Borrowing money from a bank D. Purchasing a manufacturing plant. 90. Which of the following represents the correct sequence of the three business activities on the Statement of Cash Flows? A. Financing – Operating – Investing B. Investing – Operating – Financing C. Operating – Investing – Financing D. Financing – Investing – Operating 91. Business entities generally carry on: A. Operating, investing, and financing activities B. Operating activities, but only corporations engage in financing and investing activities C. Investing and operating activities, but only corporations engage in financing activities D. Either investing or financing activities, but not both 92. Although businesses engage in a wide variety of activities, all of these activities can be categorized into three types. Which of the following choices best reflects these three types of business activities? A. Operating, financing, reporting B. Investing, reporting, financing C. Operating, financing, investing D. Investing, reporting, operating 93. As used in accounting, the ―Notes to the Financial Statements‖ should be: A. Listed with the liabilities on the balance sheet B. Omitted at the option of the company C. Included as an integral part of the financial statements D. Reported as expenses on the Income Statement 94. Which of the following items will be found in a corporate annual report? A. Company budgets B. Notes to the financial statements C. Selected financial data from competitor companies D. Management’s statement that the auditors are responsible for the financial statements. 95. Which one of the following sections is least likely to be found in a corporate annual report? A. Notes to the Financial Statements B. Forecasts of Cash Flows and Earnings C. Report of the Independent Accountants D. Management’s Discussion and Analysis 96. A discussion of the financial statements with explanations of certain amounts in the statements is most likely found in which of the following sections of a corporate annual report? A. Report of the Independent Accountants B. Notes to the Financial Statements C. Management’s Discussion and Analysis D. Balance Sheet 97. An investor found the following in an annual report: “The financial statements, in our opinion, present fairly the financial position, operating results, and cash flows, in conformity with accounting principles generally accepted in the United States.” In which section of the annual report did the investor find this? A. Balance Sheet B. Notes to the Financial Statements C. Management’s Discussion and Analysis D. Report of the Independent Accountants 98. Which of the following represents one of the purposes of the notes to financial statements? A. To provide a place for management to justify questionable items in the statements. B. To provide comparative ratios for the company’s financial data C. To provide the CPA’s opinion of the fairness of the financial statements. D. To satisfy the need for full disclosure of all the facts relevant to a company’s results and financial position 99. Accountants are the main reason financial statements are prepared. FALSE 100. The Financial Accounting Standards Board created the objectives of financial reporting. TRUE 101. The purpose of financial reporting is to provide economic information to external decision makers only. FALSE 102. An objective of financial reporting is to reflect economic information concerning a company’s cash flows. TRUE 103. The concept of conservatism is the capacity of information to make a difference in a decision. FALSE 104. Materiality deals with the size of an error in accounting information. TRUE 105. Most businesses have an operating cycle of less than one year. TRUE 106. Current assets, other than cash, are expected to be sold or consumed are during a company’s normal operating cycle. TRUE 107. Obligations related to operating activities that will be paid within the company’s operating cycle must be reported as current liabilities on a classified balance sheet. TRUE 108. The operating cycle for all businesses is one year. FALSE 109. A construction company that builds skyscrapers is likely to have an operating cycle longer than one year. TRUE 110. Three common categories of long-term assets are: 1) property, plant, and equipment, 2) investments, and 3) intangibles. TRUE 111. In the stockholders’ equity section of a classified balance sheet, a distinction is made between amounts invested by owners and amounts accumulated from business earnings. TRUE 112. One primary purpose of a classified balance sheet is to help users evaluate the liquidity of a company. TRUE 113. Companies prepare classified financial statements because they are required by international accounting principles. FALSE 114. The current ratio is irrelevant in liquidity analysis for service companies because they do not have inventories among their current assets FALSE 115. An advantage of the current ratio is that it considers the makeup of the current assets. FALSE 116. The excess of current assets over current liabilities is referred to as working capital. TRUE 117. A balance sheet shows cash, $75,000; marketable securities, $115,000; accounts receivable, $150,000 and $222,500 of inventories. Current liabilities are $225,000. The current ratio is 2.5 to 1. TRUE 118. If a firm has a current ratio of 2, the subsequent receipt of a 60-day note receivable to settle an open account will cause the ratio to decrease. FALSE 119. The purchase of inventory for cash will cause the current ratio to decrease. FALSE 120. Income from operations does not include interest revenue and interest expense because these items are considered to be non-operating in nature. TRUE 121. A 12% change in sales will result in a 12% change in net income. FALSE 122. Some analysts properly refer to a company’s profit margin as its return on assets. FALSE 123. Dividends declared and paid reduce a company’s retained earnings balance. TRUE 124. Dividends paid appears on both the income statement and the statement of retained earnings. FALSE 125. Investing activities are needed to provide the funds to start a business. FALSE 126. The statement of cash flows, like the income statement, reports only operating activities of a company. FALSE 127. Funds raised from financing activities should be invested in assets that can be used to carry on business operations. TRUE 128. The primary responsibility for the preparation and integrity of the financial statements in an annual report belongs to the company’s independent accountants (CPAs). FALSE 129. Independent auditors (CPAs) render an opinion that the financial statements do or do not fairly present a company’s financial position, operating results, and cash flows. TRUE 130. An independent auditor’s (CPA’s) report is a guarantee that the financial statements are free from fraud or material error FALSE 131. In the independent auditors’ report included with the annual report, management discusses the financial statements and provides the shareholders with explanations for certain amounts reported in the statements. FALSE 132. ____________________ and ____________________ have claims to an entity’s economic resources. Creditors, Investors or investors, creditors or Lenders, Stockholders or stockholders, lenders 133. ____________________ is the magnitude of an omission or misstatement in accounting information that will affect the judgment of someone relying on the information Materiality 134. ____________________ is the capacity of information to make a difference in a decision Relevance 135. ____________________ is the practice of using the least optimistic estimate when two estimates of amounts are about equally likely Conservatism 136. ____________________ is the quality of accounting information that makes it comprehensible to those willing to spend the necessary time Understandability 137. ____________________ is the quality of accounting information that makes it dependable in representing the events that it purports to represent Reliability 138. ____________________ is the quality of accounting information that allows a user to analyze two or more companies and look for similarities and differences Comparability 139. ____________________ is the quality of accounting information that allows a user to compare two or more accounting periods for a single company. Consistency 140. ____________________ have claims to an entity’s economic resources Creditors or Lenders or Investors or Stockholders 141. _________________________ are cash and other assets that are reasonably expected to be realized in cash during the normal operating cycle of the business. Current assets 142. Property, plant and equipment is classified as ____________________ assets on the balance sheet. noncurrent 143. ____________________ is the process of writing off the cost of tangible assets and ____________________ is the process of writing off the cost of intangible assets. Depreciation, amortization 144. ______________________________ is a liquidity measure that is calculated by subtracting current assets from current liabilities. Working capital 145. The ability of a company to pay its debt as it comes due relates to ____________________. liquidity 146. In a ____________________-step income statement, all expenses and losses are added together, then deducted from the sum of all revenues and gains. single 147. The statement of ____________________ explains changes in the components of owners’ equity during the period. stockholders’ equity 148. On the statement of cash flows, the ______________________________ section involves the acquisition and sale of long-term assets. Investing Activities 149. On the statement of cash flows, the ______________________________ section involves the purchase and sale of products and services. Operating Activities 150. On the statement of cash flows, the ______________________________ section involves the issuance and repayment of long term liabilities and stock transactions. Financing Activities 151. Match the following characteristics with the statements about each qualitative characteristic’s importance. 1. Users must be able to compare accounting information of a firm with its prior year information. 2. Accounting information must be verifiable and faithfully represent actual transactions. 3. This quality allows users to analyze two or more companies and look for similarities and differences. 4. The accounting information must be information that could affect a decision. 5. Accounting information should use the least optimistic estimate. 6. Those willing to spend the time should be provided with comprehensible accounting information. 7. This quality refers to an amount large enough to affect a decision. Understandability 6 Relevance 4 Conservatism 5 Comparability 3 Consistency 1 Reliability 2 Materiality 7 152. Loren Corporation Listed below is information from the financial records of Loren Corporation at December 31, 2014: Retained earnings Accumulated depreciation Income taxes payable Buildings Cash Accounts receivable Capital stock $37,000 13,000 24,000 48,000 11,000 35,000 60,000 Notes payable–Due July 1, 2017 Interest payable Office supplies Accounts payable Inventory Land Prepaid rent $12,000 1,000 2,000 36,000 33,000 50,000 4,000 Read the information about Loren Corporation. Required: Prepare the current liabilities section of the balance sheet for Loren Corp. at December 31, 2014. You may omit the heading. If the amount of current liabilities were larger, what effect would this have on the current ratio? Account$ 36,000 s payable Interest 1,000 payable Income 24,000 taxes payable Total $ 61,000 When current liabilities increase, the denominator of the current ratio increases. This causes the current ratio to drop. 153. Loren Corporation Listed below is information from the financial records of Loren Corporation at December 31, 2014: Retained earnings Accumulated depreciation Income taxes payable Buildings Cash Accounts receivable Capital stock $37,000 13,000 24,000 48,000 11,000 35,000 60,000 Notes payable–Due July 1, 2017 Interest payable Office supplies Accounts payable Inventory Land Prepaid rent $12,000 1,000 2,000 36,000 33,000 50,000 4,000 Read the information about Loren Corporation. Required: Prepare the long-term asset section of Loren Corp.’s balance sheet at December 31, 2014. You may omit the heading. Why are these amounts classified as “long-term”? Land Buildings Less: Accumula ted Depreciati on $ $ 48,000 ( 13,000) Total 50,000 35,000 $ 85,000 Long-term assets are those that are expected to benefit the company beyond the current accounting period. Both the land and the buildings are expected to benefit more than one accounting period. Accumulated depreciation is the portion of the building’s benefit used up. 154. Loren Corporation Listed below is information from the financial records of Loren Corporation at December 31, 2014: Retained earnings Accumulated depreciation Income taxes payable Buildings Cash Accounts receivable Capital stock $37,000 13,000 24,000 48,000 11,000 35,000 60,000 Notes payable–Due July 1, 2017 Interest payable Office supplies Accounts payable Inventory Land Prepaid rent $12,000 1,000 2,000 36,000 33,000 50,000 4,000 Read the information about Loren Corporation. Required: Prepare the current assets section of the balance sheet for Loren Corp. at December 31, 2014. You may omit the heading. How does the concept of liquidity apply? Cash $11,000 Accounts 35,000 receivable Inventory 33,000 Prepaid 4,000 rent Office 2,000 supplies Total current assets $85,000 Liquidity is an indicator of how close to cash the company’s assets are. Those assets that are most liquid are listed first. Current assets are expected to be converted into cash or used up within the next accounting period. 155. Loren Corporation Listed below is information from the financial records of Loren Corporation at December 31, 2014: Retained earnings Accumulated depreciation Income taxes payable Buildings Cash Accounts receivable Capital stock $37,000 13,000 24,000 48,000 11,000 35,000 60,000 Notes payable–Due July 1, 2017 Interest payable Office supplies Accounts payable Inventory Land Prepaid rent $12,000 1,000 2,000 36,000 33,000 50,000 4,000 Read the information about Loren Corporation. Required: Calculate Manus’ current ratio at December 31, 2014. What does this ratio tell you about the “composition” of the current assets? Current Assets = $85,000 ($11,000 Cash + $35,000 Accounts receivable + $33,000 Inventory + $4,000 Prepaid Rent + $2,000 Office Supplies = $85,000) Current Liabilities = $61,000 ($36,000 Accounts Payable + $1,000 Interest Payable + $24,000 Income Taxes Payable = $61,000) Current ratio = 1.39 to 1 ($85,000 / $61,000) The current ratio does not provide information about the composition of the current assets. Only totals are used to calculate the current ratio 156. Loren Corporation Listed below is information from the financial records of Loren Corporation at December 31, 2014: Retained earnings Accumulated depreciation Income taxes payable Buildings Cash Accounts receivable Capital stock $37,000 13,000 24,000 48,000 11,000 35,000 60,000 Notes payable–Due July 1, 2017 Interest payable Office supplies Accounts payable Inventory Land Prepaid rent $12,000 1,000 2,000 36,000 33,000 50,000 4,000 Read the information below about Loren Corporation. Required: Calculate the amount of working capital at December 31, 2014 for Loren Corp. What can you learn from the current ratio that you cannot learn from the amount of working capital? Current Assets = $85,000 ($11,000 Cash + $35,000 Accounts receivable + $33,000 Inventory + $4,000 Prepaid Rent + $2,000 Office Supplies = $85,000) Current Liabilities = $61,000 ($36,000 Accounts Payable + $1,000 Interest Payable + $24,000 Income Taxes Payable = $61,000) Working Capital = $24,000 ($85,000 – $61,000) The current ratio indicates the number of times current assets is greater than current liabilities. It is based on a relative relationship, not total dollars, as the amount of working capital is. 157. Raponi, Inc. The following balance sheet items from Raponi, Inc. are listed for December 31, 2014: Accounts payable Interest payable Accounts receivable Land Accumulated depreciation—buildings Marketable securities Merchandise inventory Accumulated depreciation—equipment Notes payable, due April 15, 2015 Office supplies Notes payable, due December 31, 2018 Paid-in capital in excess of par value Buildings Patents Capital stock, $1 par value Prepaid rent Cash Retained earnings Equipment Salaries payable Income taxes payable $ 32,650 2,200 26,500 250,000 40,000 15,000 112,900 12,500 6,500 200 251,630 75,000 150,000 45,000 200,000 3,800 60,990 113,510 84,500 7,400 7,500 Read the information about Raponi, Inc. Required: Present the Current Assets section (including the total) of a classified balance sheet. Current Assets: Cash $ 60,990 Marketable securities 15,000 Accounts receivable 26,500 Merchandise inventory 112,900 Prepaid rent 3,800 Office supplies 200 Total current assets $ 219,390 158. Raponi, Inc. The following balance sheet items from Raponi, Inc. are listed for December 31, 2014: Accounts payable Interest payable Accounts receivable Land Accumulated depreciation—buildings Marketable securities Merchandise inventory Accumulated depreciation—equipment Notes payable, due April 15, 2015 Office supplies Notes payable, due December 31, 2018 Paid-in capital in excess of par value Buildings Patents Capital stock, $1 par value Prepaid rent Cash Retained earnings Equipment Salaries payable Income taxes payable $ 32,650 2,200 26,500 250,000 40,000 15,000 112,900 12,500 6,500 200 251,630 75,000 150,000 45,000 200,000 3,800 60,990 113,510 84,500 7,400 7,500 Read the information about Raponi, Inc. Required: Prepare the Stockholders’ Equity section of the classified balance sheet, including the total stockholders’ equity amount. Stockholders’ Equity Contributed capital: Capital stock, $1 par value, 200,000 shares issued and outstanding Paid-in capital in excess of par value Total contributed capital $275,000 Retained earnings 113,510 Total stockholders’ equity $200,000 75,000 388,510 159. Raponi, Inc. The following balance sheet items from Raponi, Inc. are listed for December 31, 2014: Accounts payable Interest payable Accounts receivable Land Accumulated depreciation—buildings Marketable securities Merchandise inventory Accumulated depreciation—equipment Notes payable, due April 15, 2015 Office supplies Notes payable, due December 31, 2018 Paid-in capital in excess of par value Buildings Patents Capital stock, $1 par value Prepaid rent Cash Retained earnings Equipment Salaries payable Income taxes payable $ 32,650 2,200 26,500 250,000 40,000 15,000 112,900 12,500 6,500 200 251,630 75,000 150,000 45,000 200,000 3,800 60,990 113,510 84,500 7,400 7,500 Read the information about Raponi, Inc. Required: Present the current liabilities section (including the total) of a classified balance sheet. Current liabilities: Accounts payable $ 32,650 Income taxes payable 7,500 Interest payable 2,200 Notes payable, due April 15, 2015 Salaries payable 7,400 Total current liabilities 6,500 $ 56,250 160. Raponi, Inc. The following balance sheet items from Raponi, Inc. are listed for December 31, 2014: Accounts payable Interest payable Accounts receivable Land Accumulated depreciation—buildings Marketable securities Merchandise inventory Accumulated depreciation—equipment Notes payable, due April 15, 2015 Office supplies Notes payable, due December 31, 2018 Paid-in capital in excess of par value Buildings Patents Capital stock, $1 par value Prepaid rent Cash Retained earnings Equipment Salaries payable Income taxes payable $ 32,650 2,200 26,500 250,000 40,000 15,000 112,900 12,500 6,500 200 251,630 75,000 150,000 45,000 200,000 3,800 60,990 113,510 84,500 7,400 7,500 Read the information about Raponi, Inc. Required: Compute Raponi’s current ratio. On the basis of your answer, does Raponi appear to be liquid? What other information do you need to fully answer that question? Current Ratio = Current Assets/Current Liabilities $219,390/$56,250 = 3.9 to 1 From the current ratio alone, Raponi appears to be relatively liquid. In fact, Raponi may be too liquid, because its cash balance is greater than its total current liabilities. This indicates that Raponi may be missing significant investment opportunities by maintaining such a large cash balance. To fully assess its liquidity, you would need to look more specifically at the activity in accounts receivable and merchandise inventory. In other words, how long does it take to collect an account receivable or how long does it take to sell inventory? Also, you would want to compare Raponi’s current ratio at the end of this period with prior periods, and with the current ratio for companies in the same industry. 161. Raponi, Inc. The following balance sheet items from Raponi, Inc. are listed for December 31, 2014: Accounts payable Interest payable Accounts receivable Land Accumulated depreciation—buildings Marketable securities Merchandise inventory Accumulated depreciation—equipment Notes payable, due April 15, 2015 Office supplies Notes payable, due December 31, 2018 Paid-in capital in excess of par value Buildings Patents Capital stock, $1 par value Prepaid rent Cash Retained earnings Equipment Salaries payable Income taxes payable $ 32,650 2,200 26,500 250,000 40,000 15,000 112,900 12,500 6,500 200 251,630 75,000 150,000 45,000 200,000 3,800 60,990 113,510 84,500 7,400 7,500 Read the information about Raponi, Inc. Required: Prepare the Assets section of the classified balance sheet. Assets Current assets: Cash $ 60,990 Marketable securities 15,000 Accounts receivable 26,500 Merchandise inventory 112,900 Prepaid rent 3,800 Office supplies 200 Total current assets $219,390 Property, plant, and equipment: Land $250,000 Buildings $150,000 Less: Accumulated depreciation (40,000) Equipment $ 84,500 Less: Accumulated depreciation (12,500) Total property, plant, and equipment 432,000 Intangible assets: Patents 45,000 Total assets $696,390 110,000 72,000 162. Read the information about Raponi, Inc. Required: Prepare the Liabilities section of the classified balance sheet, including total liabilities balance. Liabilities Current liabilities: Accounts payable $ 32,650 Income taxes payable 7,500 Interest payable 2,200 Notes payable, due April 15, 2015 6,500 Salaries payable 7,400 Total current liabilities $ 56,250 Long-term debt: Notes payable, due December 31, 2018 251,630 Total liabilities $307,880 163. Complete the December 31, 2014 (first year of operation) Balance sheet for Weglein Company using the following information: (a) Retained earnings at December 31, 2014 was $51,000. (b) Total stockholders’ equity at January 1, 2014 was $139,000. (c) On December 30, 2014, additional capital stock was sold for cash, $55,000 (d) The land and building were purchased on December 30, 2014 for $150,000. Weglein Company Balance Sheet December 31, 2014 Assets Cash Liabil ities & Stock holde rs’ Equit y $ 80,000 L ia bi li ti e s: Accounts receivable $ N ot e s p a y a bl e Land 112,000 45, 000 A c c o u nt s p a y a bl e Buildings $ T ot al li a bi li ti e s Equipment 30,000 S to c k h ol d er s’ e q ui ty : $ C a pi ta l S to c k _______ _______ Total assets R et ai n e d e ar ni n g s T ot al li a bi li ti e s a n d $ $390, 000 st o c k h ol d er s’ e q ui ty Weglein Company Balance Sheet December 31, 2014 As set s Ca $ 80,000 sh Ac 130,000 co unt s rec eiv abl e La 112,000 nd Bu 38,000 ildi ng Eq 30,000 uip me nt _______ Tot$390,000 al ass ets Liabilities & Stockholders’ Equity Liabil ities: Not $ es 100,000 payab le Acc 45,000 ounts payab le T $145,0 otal 00 liabili ties Stock holder s’ equity : $194,00 Capit 0 al Stock 51,00 245,000 Retai 0 ned earnin gs Total liabili ties and stoc $390,00 khold 0 ers’ equity Explanation of calculations: Total assets must be equal to total liabilities & stockholders equity of $390,000. $150,000 (cost of land and building) less $112,000 for land = $38,000 for building. Accounts receivable must be $130,000 to achieve total assets of $390,000. $139,000 (capital stock at January 1) plus $55,000 (additional investment). Total liabilities must be $145,000 to achieve total liabilities & stockholders’ equity of $390,000. Notes payable must be $100,000 to achieve total liabilities of $145,000. 164. Ficus Company calculated the following amounts concerning its financial information for the years ending December 31, 2014 and 2013: Current ratio Profit margin 2014 3.1 to 1 22 % 2013 2.0 to 1 18% REQUIRED: Examine Ficus’ ratios. Is the change in the current ratio favorable or not? Explain. The current ratio increased from 2.0 to 1 to 3.1 to 1. This is an unusually large increase for most companies. A larger current ratio means a company is more liquid. This increase is favorable, although care must be taken that the current ratio does not become too large which may indicate an inefficient cash management system. 165. Ficus Company calculated the following amounts concerning its financial information for the years ending December 31, 2014 and 2013: Current ratio Profit margin 2014 3.1 to 1 22 % 2013 2.0 to 1 18% REQUIRED: Suppose Ficus Company had a decrease in its cash account from 2013 to 2014. Would the other current asset amounts have increased or decreased? Explain. Since the current ratio increased from 2013 to 2014, the current assets other than cash would have had to increase substantially to offset the decline in cash. The decline in cash changes the liquidity somewhat, in that the other current assets must be converted to cash prior to paying the current period debt. 166. Fellsmere Corporation Presented below are the condensed balance sheets of Fellsmere Corporation at December 31, 2014 and 2013. Net income for the years ending December 31, 2014 and 2013 is $346,000 and $109,000, respectively. Dec December 31, 2013 emb er 31, 201 4 C u rr e nt a ss et s P r o p er ty , pl a nt , & e q ui p m e nt ( n et ) I nt a n gi bl e s a n d ot h er a ss et s $2,228,186 $2,544,68 3 530,589 376,647 131,206 118,12 1 Tota $2,889,981 l asset s $3,039,45 1 C $1,429,674 u rr e nt li a bi li ti e s L 3,360 o n g -t er m o bl ig at io n s W 112,971 ar ra nt y a n d ot h er li a bi li ti e s Tota $1,546,605 l liabi lities S to c k h ol d er s’ e q ui ty : Com $ 1,566 mon stoc k $1,003,90 6 7,240 98,08 1 $1,109,22 7 $ 501,63 1 Add 365,986 ition al paid -in capit al Reta 980,509 ined earn ings Acc (4,085) umu lated othe r com preh ensi ve loss Tota $1,343,976 l stoc khol ders ’ equi ty T $2,8 $3,039,451 ot89,9 al 81 li a bi li ti e s a n d st o c k h ol d er s’ e q ui ty 799,483 634,509 (5,489 ) $1,930,22 4 Read the information about Fellsmere Corporation. Required: (A) Did Fellsmere’s current ratio increase or decrease from 2013 to 2014? Make any necessary calculations and explain your answer. Which financial statement users are most concerned with this ratio? (B) The balance sheets show a large increase in retained earnings during 2014. Identify the possible reason(s) for this increase. (A) Current ratio for 2014 = 1.56 to 1 ($2,228,186 Current Assets / $1,429,674 Current Liabilities) Current Ratio for 2013 = 2.53 to 1 ($2,544,683 Current Assets / $1,003,906 Current Liabilities) This ratio is an indicator of the company’s ability to pay its current debt when it is due. Felllsmere’s current ratio has declined significantly. A company with decreasing liquidity ratios is not appealing to bankers and creditors, and it may have trouble trying to borrow money, since the decrease indicates the company is less likely able to repay its debts. (B) The amount of retained earnings increases primarily because of net income for a period. A company that has a positive balance in retained earnings over time has cumulative profits in excess of cumulative dividends paid. 167. Fellsmere Corporation Presented below are the condensed balance sheets of Fellsmere Corporation at December 31, 2014 and 2013. Net income for the years ending December 31, 2014 and 2013 is $346,000 and $109,000, respectively. Dec December 31, 2013 emb er 31, 201 4 C u rr e nt a ss et s P r o p er ty , pl a nt , & e q ui p m e nt ( n et ) I nt a n gi bl e s a n d ot h er a ss et s $2,228,186 $2,544,68 3 530,589 376,647 131,206 118,12 1 Tota $2,889,981 l asset s $3,039,45 1 C $1,429,674 u rr e nt li a bi li ti e s L 3,360 o n g -t er m o bl ig at io n s W 112,971 ar ra nt y a n d ot h er li a bi li ti e s Tota $1,546,605 l liabi lities S to c k h ol d er s’ e q ui ty : Com $ 1,566 mon stoc k $1,003,90 6 7,240 98,08 1 $1,109,22 7 $ 501,63 1 Add 365,986 ition al paid -in capit al Reta 980,509 ined earn ings Acc (4,085) umu lated othe r com preh ensi ve loss Tota $1,343,976 l stoc khol ders ’ equi ty T $2,8 $3,039,451 ot89,9 al 81 li a bi li ti e s a n d st o c k h ol d er s’ e q ui ty 799,483 634,509 (5,489 ) $1,930,22 4 Read the information about Fellsmere Corporation. Required: (A) Explain the change in Fellsmere’s working capital from 2013 to 2014. Why do users believe the current ratio provides more information than the dollar amount of working capital? Explain. (B) Fellsmere Corporation’s creditors need to know whether its working capital position improved during the year. How would you evaluate this? (A) Working Capital, 2013 = $1,540,777 ($2,544,683 Current Assets – $1,003,906 Current Liabilities = $1,540,777) Working Capital, 2014 = $798,512 ($2,228,186 Current Assets – $1,429,674 Current Liabilities = $798,512) Decrease in Working Capital = $742,265 ($1,540,777 Working Capital, 2013 – $798,512 Working Capital, 2014 = $742,265) Working capital represents the excess of current assets over current liabilities in total dollars. The current ratio indicates the number of times that current assets exceed the current liabilities. It is possible that $742,265 could pay the current debts of one company easily, but pay for only a small portion of a larger company’s debts. (B) The amount of working capital and the current ratio are the best indicators of a company’s working capital position. While the amount of working capital provides the dollar amount of current assets that exceed the company’s current debt, the current ratio provides a relative indicator of how many times the dollar amount of current assets exceeds currently due debt. In 2013, Fellsmere Corporation’s working capital was $1,540,777. However, this figure declined in 2014 to $798,512. Less current assets are available to cover current liabilities. 168. Crystal, Inc. Crystal, Inc. reported $52,000 of net income for 2014. Crystal’s balance sheet at December 31, 2014 includes the following amounts: Wages payable Prepaid rent Cash Accounts payable Retained earnings $ 1,000 3,000 15,000 25,000 29,000 Inventory Land Accounts receivable Capital stock Income taxes payable $26,000 40,000 22,000 40,000 11,000 Read the information about Crystal, Inc. Which item is most “liquid”? Why is liquidity important? Cash is the most liquid asset. Liquidity is an indicator of a company’s ability to pay its current debts when they come due. A company without cash is most certainly not going to survive. 169. Crystal, Inc. Crystal, Inc. reported $52,000 of net income for 2014. Crystal’s balance sheet at December 31, 2014 includes the following amounts: Wages payable Prepaid rent Cash Accounts payable Retained earnings $ 1,000 3,000 15,000 25,000 29,000 Inventory Land Accounts receivable Capital stock Income taxes payable $26,000 40,000 22,000 40,000 11,000 Read the information about Crystal, Inc. Has Crystal been profitable since it began operations? How do you know? Retained earnings represents the company’s cumulative profits since it began operations less the dividends it paid out. Since Crystal, Inc. has a positive balance in its retained earnings account, it has been profitable over the time it has been in business. Cumulative net income exceeds aggregate net loss and aggregate dividends paid. 170. The balance sheet of Evanston Inc. includes the following items: Cash Accounts receivable Inventory Prepaid insurance Land Accounts payable Salaries payable Capital stock Retained earnings $ 21,500 12,400 45,300 1,800 80,000 49,000 1,625 105,100 5,700 Required: (1) Determine the current ratio and working capital. (2) What does the composition of the current assets tell you about Evanston’s liquidity? (3) What other information do you need to fully assess Evanston’s liquidity? 1. Current Ratio = Current Assets/Current Liabilities = ($21,500 + $12,400 + $45,300 + $1,800)/($49,000 + $1,625) = $81,000/$50,625 = 1.6 to 1 Working Capital = Current Assets – Current Liabilities = $81,000 – $50,625 = $30,375 2. One concern is the relatively large percentage of the current assets tied up in inventory. This asset accounts for $45,300/$81,000, or approximately 56% of the total current assets. What is the normal period of time it takes to sell inventory? Is any part of the inventory slow moving or obsolete? 3. On the basis of the current ratio alone, Evanston appears to be relatively liquid, although it would be important to compare the ratio with those of prior years and with those of other companies in the same industry. 171. Eagle Corporation Presented below are all of the items from Eagle Corporation’s income statement for the years ending December 31, 2014 and 2013. Service fees General and administrative expenses Other income, net Income taxes December 31, 2014 December 31, 2013 $2,300,000 1,900,000 40,000 150,000 $2,100,000 1,500,000 20,000 180,000 Read the information about Eagle Corporation. Required:: How much is net income for the year ended December 31, 2014? If Eagle Corporation had used a single-step statement, by how much would net income be different? Explain. Net Income = $290,000 ($2,300,000 Service Fees + $40,000 Other Income, net – $1,900,000 General and Administrative Expenses – $150,000 Income Taxes = $290,000) Net income is the same under a single-step or a multiple-step income statement. Only subtotals and the order the amounts are listed differ. 172. Eagle Corporation Presented below are all of the items from Eagle Corporation’s income statement for the years ending December 31, 2014 and 2013. Service fees General and administrative expenses Other income, net Income taxes December 31, 2014 December 31, 2013 $2,300,000 1,900,000 40,000 150,000 $2,100,000 1,500,000 20,000 180,000 Read the information about Eagle Corporation. Required: Compare the profit margins for 2014 and 2013. Is the company becoming more or less profitable or staying the same? What could be contributing to this? Profit Margin for 2014 = 12.61% ($290,000 Net Income / $2,300,000 Service Fees = 12.61%) Profit Margin for 2013 = 20.95% ($440,000 Net Income / $2,100,000 Service Fees = 20.95%) The decrease in profit margin is unfavorable and indicates that the company is becoming less profitable. A significant increase in general and administrative expenses seems to be the cause of the decline. 173. Burke Company The following income statement items are taken from the records of Burke Company for the year ended December 31, 2014: Advertising expense Commission expense Cost of goods sold Depreciation expense – Office Building Income tax expense Insurance expense – sales person’s auto Interest expense Interest revenue Rent revenue Salaries and wages expense – Office Sales Revenue Supplies expense – Office $2,600 3,515 29,200 4,000 190 3,350 1,400 2,340 7,700 13,660 50,300 1,990 Read the information about Burke Company. Required: Prepare a multiple-step income statement for the year ended December 31, 2014. BURKE COMPANY INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2014 Sales Cost of goods sold Gross profit Operating expenses: Selling expenses: Advertising Commissions Insurance – salesperson’s auto Total selling expenses General and administrative expenses: Depreciation—office building Salaries and wages—office Supplies—office Total general and administrative expenses Total operating expenses Loss from operations Other revenues and expenses: Interest expense Interest revenue Rent revenue Excess of other revenues over other expenses Income before taxes Income tax expense Net income $50,300 29,200 $21,100 $2,600 3,515 3,350 $9,465 $4,000 13,660 1,990 19,650 29,115 $(8,015) $(1,400) 2,340 7,700 8,640 $625 190 $ 435 174. Burke Company The following income statement items are taken from the records of Burke Company for the year ended December 31, 2014: Advertising expense Commission expense Cost of goods sold Depreciation expense – Office Building Income tax expense Insurance expense – sales person’s auto Interest expense Interest revenue Rent revenue Salaries and wages expense – Office Sales Revenue Supplies expense – Office $2,600 3,515 29,200 4,000 190 3,350 1,400 2,340 7,700 13,660 50,300 1,990 Read the information about Burke Company Required: Prepare a single-step income statement for the year ended December 31, 2014. BURKE COMPANY INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2014 Revenues: Sales Interest revenue Rent revenue Total Revenues Expenses: Advertising Commissions Cost of goods sold Depreciation—office building Income tax expense Insurance – salesperson’s auto Interest expense Salaries and wages—office Supplies—office Total expenses Net income $50,300 2,340 7,700 $60,340 $2,600 3,515 29,200 4,000 190 3,350 1,400 13,660 1,990 59,905 $ 435 175. The 2014 income statement of Cigmar Enterprises shows operating revenues of $120,500, selling expenses of $35,200, general and administrative expenses of $29,900, interest expense of $1,500, and income tax expense of $10,520. Cigmar’s stockholders’ equity was $280,000 at the beginning of the year and $320,000 at the end of the year. The company has 20,000 shares of stock outstanding at December 31, 2014. REQUIRED: Compute Cigmar’s profit margin. What other information would you need in order to comment on whether this ratio is favorable? Profit margin: Net Income/Revenues = $43,380*/$120,500 = 36.0% *$120,500 – $35,200 – $29,900 – $1,500 – $10,520 = $43,380 A profit margin of 36% indicates that for every dollar of sales, Cigmar Enterprises has $0.36 in net income. It would be beneficial to compare the company’s profit margin with some of its competitors and with previous years. 176. The 2014 income statement of Nasir Inc. shows operating revenues of $135,800, selling expenses of $40,310, general and administrative expenses of $33,990, interest expense of $880, and income tax expense of $13,090. Nasir’s stockholders’ equity was $250,000 at the beginning of the year and $345,000 at the end of the year. The company has 10,000 shares of stock outstanding at December 31, 2014. REQUIRED: Compute Nasir’s profit margin. What other information would you need in order to comment on whether this ratio is favorable? Profit margin: Net Income/Revenues = $47,530*/$135,800 = 35.0% *$135,800 – $40,310 – $33,990 – $880 – $13,090 = $47,530 A profit margin of 35% indicates that for every dollar of sales, Nasir Inc. has $0.35 in net income. It would be beneficial to compare the company’s profit margin with some of its competitors and with previous years. 177. Heidi Corporation’s partial income statement is as follows: Sales Cost of sales Selling expenses General and admin. expenses $2,400,000 900,000 121,600 150,000 Required Determine the profit margin. Would you invest in Heidi Corporation? Explain your answer. Profit margin: Net Income/Sales = $1,228,400*/$2,400,000 = 51.2% *$2,400,000 – $900,000 – $121,600 – $150,000 = $1,228,400* Sales – Cost of sales = Gross profit – Total operating expenses = Net income $ 2,400,000 900,000 $ 1,500,000 271,600** $ 1,228,400 * **Total Operating Expenses = Selling Expenses ($121,600) + General and Administrative Expenses ($150,000) = $271,600 Heidi Corporation has been very profitable on the basis of its very high profit margin of 51.2%. Before making an investment, however, you would want to consider how this ratio compares with that of prior years and with that of other companies in the same line of business. 178. Peterson Corporation’s partial income statement is as follows: Sales Cost of sales Selling expenses General and admin. expenses $1,300,000 300,000 210,000 150,000 Required Determine the profit margin. Would you invest in Peterson Corporation? Explain your answer. Profit margin: Net Income/Sales = $640,000*/$1,300,000 = 49.2% *$1,300,000 – $300,000 – $210,000 – $150,000 = $640,000* Sales – Cost of sales = Gross profit – Total operating expenses = Net income $1,300,000 300,000 $ 1,000,000 360,000** $ 640,000* **Total Operating Expenses = Selling Expenses ($210,000) + General and Administrative Expenses ($150,000) = $360,000 Peterson Corporation has been very profitable on the basis of its very high profit margin of 49.2%. Before making an investment, however, you would want to consider how this ratio compares with that of prior years and with that of other companies in the same line of business. 179. Posey Corporation began operations on January 2, 2012, with a total investment of $150,000 by its stockholders. Net income for its first year of business was $90,000. During 2013 and 2014, net income increased to $188,000 and to $217,000, respectively. Posey paid $85,000 in dividends to its shareholders in each of the three years. A) In good form, prepare a statement of retained earnings for the year ended December 31, 2013. B) How much is total retained earnings on December 31, 2014? C) Explain the link between the statement of retained earnings and the balance sheet. A) Posey Corporation Statement of Retained Earnings for the Year Ended December 31, 2013 B $ 5,000* e gi n ni n g b al a n c e, J a n u ar y 1, 2 0 1 3 A 188,000 d d: N et in c o m e f o r 2 0 1 3 L (85,000) e ss : D iv id e n d s p ai d d u ri n g th e y e ar E $108,000 n di n g b al a n c e, D e c e m b er 3 1, 2 0 1 3 * $ 9 0, 0 0 0 N et I n c o m e f o r 2 0 1 2 $ 8 5, 0 0 0 D iv id e n d s p ai d = $ 5, 0 0 0 B al a n c e, J a n u ar y 1, 2 0 1 3 B) Retained earnings at December 31, 2014 = $240,000 ($108,000 Beginning Balance, January 1, 2014 + $217,000 Net Income for 2014 – $85,000 Dividends paid during the year =$240,000) C) The ending balance of the retained earnings statement represents the cumulative earnings less all the dividends declared and paid for the life of the business. This amount appears on the balance sheet as a component of owners’ equity. 180. The following information is taken from Harvey Company’s balance sheet at December 31, 2014: Cash Retained earnings Inventory Equipment Accounts payable Bonds payable Capital stock $ 24,000 14,000 8,000 38,000 7,000 23,000 26,000 REQUIRED: Using the information provided for Harvey Company, answer the following questions: A) How much did creditors provide to Harvey Company? B) On which financial statement would an investor look to see if any stock was issued during the year? A) $30,000 ($7,000 Accounts Payable +$23,000 Bond Payable) B) The primary source for seeing whether any stock was issued during the year would be the Statement of Stockholders’ Equity. While the Balance Sheet may show an amount for ―Capital Stock,‖ this amount is an ending balance, and would not show the results of any transactions involving new issuances of stock during the period. 181. Coglin, Inc. incurred a net loss of $20,000 for 2014. The balance sheet at December 31, 2014, for Coglin, Inc., includes the following items: Cash Accounts receivable Inventory Prepaid insurance Land Building Accounts payable Salaries payable Capital stock Retained earnings $ 23,000 13,000 45,000 1,000 21,000 80,000 55,000 2,000 100,000 25,000 A) Determine Coglin’s current ratio and working capital. B) Beyond the information provided in your answers to ―A,‖ what does the composition of Coglin’s current assets tell you about its liquidity. C) What other information would one need to fully access Coglin’s liquidity? A) Current ratio: 1.44 to 1 ($23,000 Cash + $13,000 Accounts receivable + $45,000 Inventory + $1,000 Prepaid insurance) / ($55,000 Accounts payable + $2,000 Salaries payable) = 1.44 to 1 Working capital: $25,000 ($82,000 Total Current Assets – $57,000 Total Current Liabilities = $25,000) B) The closer an asset is to being converted to cash, the more liquid the asset is. Some assets, like inventory, take much longer to turn into cash because they must be sold before collection of the cash can be made. Prepaid insurance is not as liquid as accounts receivable since it will be consumed as time passes. Receivables are more liquid than inventory because a sale has already occurred C) The statement of cash flows would be helpful to determine the cash inflows and outflows that occurred during the year. The balance sheet represents only the ending balance of the cash account. The statement of cash flows also identifies the sources and uses of cash by business activity and the nature of each particular cash flow 182. During 2014, Wimbrow Images reported $60,000 of net income and generated $80,000 of cash from operations. During the year, Wimbrow Images paid $15,000 to purchase a new delivery truck and also paid dividends in the amount of $30,000. Wimbrow Images borrowed $40,000 cash from the bank. At the beginning of the year, cash amounted to $50,000. A) Prepare a statement of cash flows for the year ended December 31, 2014. B) How much more cash does Wimbrow Images have available at the end of the year than at the beginning? C) Why is there a difference between net income and cash flows from operations? A) Wimbrow Images Statement of Cash Flows for the Year Ended December 31, 2014 Cash flows from opera ting activi ties Cash flows from invest ing activi ties: $ 80,000 Purchase of new truck (15,000) Proceeds from loan made by bank Cash dividends paid 40,000 (30,000) $ 75,000 Cash flows from finan cing activi ties: Incre ase (Decr ease) in cash Cash at the begin ning of the year Cash at the end of the year 50,000 $125,000 B) The company has $75,000 more at the end of the year compared to the beginning of the year C) Net income is calculated using the accrual basis of accounting, whereas cash flows from operating activities represent the net amount of cash flows from operations of the business 183. Tradewinds Corporation was organized on January 1, 2014, with the investment of $500,000 in cash by its stockholders. Tradewinds signed a ten-year, $300,000 promissory note at a local bank during 2014 and received cash in the same amount. The company immediately purchased an office building for $800,000, paying in cash. During its first year, Tradewinds generated $35,000 in cash from operations and paid $30,000 in cash dividends. A) In good form, prepare a statement of cash flows for the year ended December 31, 2014. B) What does this statement tell you that an income statement does not? A) Tradewinds Corporation Statement of Cash Flows for the Year Ended December 31, 2014 Cash flows from opera ting activi ties Cash flows from invest ing activi ties $ 35,000 Purchase office building (800,000) Investment by owners Loan from bank Payment of dividends 500,000 300,000 (30,000) $ 5,000 Cash flows from finan cing activi ties Net increa se in cash for the year B) This statement provides information on the cash inflows and outflows by activity: operating, investing, and financing. The income statement is prepared on the accrual basis that provides information on the revenues earned and the expenses incurred during the period, which may or may not involve cash. The income statement shows the profitability of a company for a period of time. Furthermore, the income statement does not present information regarding all the sources and uses of cash. 184. Hindsville Company reported revenues of $165,000 and net income of $20,000 for 2014. Cash generated by operations was $40,000. In addition, Hindsville Company borrowed $24,000 from a bank. During 2014, Hindsville purchased new equipment for $30,000 cash and paid cash dividends of $15,000 to stockholders. Hindsville’s cash balance at the beginning of 2014 was $22,000. A) Identify the amount of cash flows for financing, investing, and operating activities for 2014 by filling in the amounts below. Financing Cash Flows: Investing Cash Flows: Operating Cash Flows: B) Did Hindsville Company’s operating activities generate enough cash to cover its investing and financing activities? Explain. C) How much did Hindsville Company’s cash balance increase or decrease during 2014? A) Financing Cash Flows = $9,000 ($24,000 Cash borrowed from bank – $15,000 Cash dividends paid = $9,000) Investing Cash Flows = ($30,000) (Purchase of new equipment) Operating Cash Flows = $40,000 (Cash generated by operations) B) Yes. The total of investing and financing activities is an outflow of $21,000. The $40,000 generated from operating activities is sufficient C) $19,000 Increase ($40,000 Cash flow from operations – $30,000 Cash flow from investing + $9,000 Cash flow from financing = $19,000) 185. Presented below are items from Joplin Shoes statement of cash flows for 2014. Cash flows provided by operating activities Cash flows provided by financing activities Cash at the beginning of the year Cash flows used by investing activities $ 75,000 115,000 60,000 (100,000) A) Determine whether Joplin Shoes’ cash increased or decreased during the year. B) How much cash does Joplin Shoes have at the end of 2014? C) What is the purpose of the statement of cash flows? A) $90,000 increase ($75,000 Cash flows provided by operating activities- $100,000 Cash flows used by investing activities + $115,000 Cash flows provided by financing activities = $90,000 increase) B) $150,000 ($60,000 Cash at the beginning of the year + $90,000 increase = $150,000) C) A statement of cash flows summarizes the operating, financing, and investing activities of a company for a period of time 186. Mill Valley Corporation was organized on January 1, 2014, with the investment of $225,000 in cash by its stockholders. The company immediately purchased an office building for $300,000, paying $201,000 in cash and signing a three-year promissory note for the balance. Mill Valley signed a five-year, $50,000 promissory note at a local bank during 2014 and received cash in the same amount. During its first year, Mill Valley collected $93,000 from its customers. It paid $60,600 for inventory, $22,400 in salaries and wages, and another $5,100 in taxes. Mill Valley paid $5,300 in cash dividends. Required 1. Prepare a statement of cash flows for the year ended December 31, 2014. 2. What does this statement tell you that an income statement does not? Mill Valley Corporation Statement of Cash Flows For the Year Ended December 31, 2014 Cash flows from operating activities: Cash collected from customers Cash paid for inventory Cash paid in salaries and wages Cash paid in taxes Net cash provided by operating activities Cash flows from investing activities: Payment on office building Cash flows from financing activities Proceeds from issuance of stock Proceeds from long-term note Dividends declared and paid Net cash provided by financing activities Net increase in cash Cash at beginning of year Cash at end of year $ 93,000 (60,600) (22,400) (5,100) $ 4,900 (201,000) $225,000 50,000 (5,300) 269,700 $ 73,600 ____ 0 $ 73,600 Note: Mill Valley should report one significant noncash activity as supplementary information to its statement of cash flows: the three-year, $99,000 note signed to finance the purchase of the office building. 2. First, the statement of cash flows reports on operations on a cash basis, as opposed to the income statement which is prepared on an accrual basis. Second, investing and financing activities are also reported on a statement of cash flows. For example, information about dividends paid during the year is shown on a statement of cash flows but not on an income statement. It is interesting to note that Mill Valley paid more in dividends, $5,300, than the amount of cash it generated from operations, $4,900. 187. Identify each of the following items as operating (O), investing (I), or financing (F) activities on the statement of cash flows(assuming the indirect method). If an item is not on the statement, please mark it as none of these (N). If the item is an inflow, please indicate by a (+). If the item is an outflow, please indicate by a (-) ____ (a) Paid an account payable for inventory purchased in the previous accounting period. ____ (b) Amortization of debt issuance costs ____ (c) Paid a dividend to stockholders. ____ (d) Paid the interest on a note payable to National Street Bank. ____ (e) Paid the principal amount due on the note payable to National Street Bank. ____ (f) Transferred cash from a checking account into a money market fund. ____ (g) Purchased equipment for cash. a. -O b. +O c. -F d. -O e. -F f. N g. -I 188. Most financial reports contain the following list of basic elements. For each element identify the person(s) who prepared the element and describe the information a user would expect to find in each element. Elements Management Discussion & Analysis Financial Statements Notes to Financial Statements Report of Independent Accountants Prepared By Information Provided Elements Management Discussion & Analysis Prepared By Mgmt. Information Provided Discussion of financial statements and explanations Financial Statements Notes to Financial Statements Report of Independent Accountants Mgmt. Mgmt. Income statement, balance sheet, statement of cash flows, statement of retained earnings Accounting policies and other disclosures Opinion that statements are presented fairly CPA firm. 189. Comparative income statements for Gregson Inc. are as follows: Sales Cost of sales Gross profit Operating expenses Operating income Loss on sale of subsidiary Net income (loss) 2014 $2,000,000 800,000 $1,200,000 520,000 $ 680,000 (800,000) $ (120,000) 2013 $600,000 400,000 $200,000 120,000 $ 80,000 0 $ 80,000 Required The president and management believe that the company performed better in 2014 than it did in 2013. Write the president’s letter to be included in the 2014 annual report. Explain why the company is financially sound and why shareholders should not be alarmed by the $120,000 loss in a year when gross profit increased significantly. Letter from the President to Stockholders of Gregson Inc.: On the surface, 2014 does not appear to have been a successful year for Gregson Inc. However, it was primarily one specific event that caused the net loss we experienced for the year. The sale of a subsidiary resulted in a loss of $800,000. We believe that the sale of this unprofitable unit of the business will allow us to concentrate our future attention on our successful businesses and clear the way for a return to overall profitability in 2013. Aside from the loss experienced on the sale of the subsidiary, 2014 was a really great year for the company. We were able to control our operating expenses, resulting in operating income as a percentage of sales that increased from 13% to 34%. These are clear signals that Gregson Inc. is moving in the right direction and should have a very solid year of operations in 2013. 190. What financial statement items are investors and creditors most interested in and why? Investors are most interested in cash receipts from dividends and the cash they can receive upon selling their stock. Creditors are most interested in cash to be received for interest payments and the repayment of the principal. If a company does not have sufficient cash flows, investors and creditors could suffer as a result. The financial position, shown on the balance sheet, is also a concern for both investors and creditors because even though a company may have what appears to be sufficient cash flows for the current period, the long-run solvency picture could be weak. 191. Cory Harper, a newly hired accountant, wanted to impress his boss, so he stayed late one night to analyze the office supplies expense account. He determined the cost by month, for the past 12 months, of each of the following: computer paper, copy paper, fax paper, pencils and pens, note pads, postage, corrections supplies, stationery, and miscellaneous items. Why do companies not include information of this nature in published financial statements? Companies provide information to users to make decisions. The primary decision makers external to the business are creditors, bankers, stockholders, and potential stockholders. These users need to know that the company can repay its debts, earn a profit, and pay dividends. The cost by month for each item of office supplies does not provide any additional information that would be helpful for any external users. In addition, the time and expense necessary to create the additional detail would outweigh the benefits of the final product. The amounts involved are probably immaterial. 192. Service-oriented companies have different needs than product-oriented companies when analyzing financial statements. REQUIRED: Why is this true? Give an example of a financial ratio that is meaningless to a service business. Because service-oriented companies do not sell a tangible product, they instead must sell their professional expertise and rely on alternative measures of their efficiency in marketing their services. For example, an law firm would keep detailed records of the hours worked on each client’s case, monthly billings to each client, and the ratio of these billings to the average costs incurred on each case.Therefore, ratios like inventory turnover would be meaningless to a service business, like a law firm or a public accounting firm. 193. Ginger Company claims its financial information is useful. What two qualities must be present in order to have “useful” accounting information? Explain these two qualities. To be useful, accounting information must be relevant and reliable. Relevant information has the capacity to make a difference in a decision. Reliable information can be depended on to represent the economic events that it purports to represent. 194. What is the difference between comparability and consistency? Comparability allows comparisons to be made between or among companies. Even though a certain amount of freedom exists in selecting accounting principles, when this information is disclosed in the financial statements, users can still compare the information when they know what principle is used. Consistency involves the relationship between a set of numbers over several periods, but within one company only, unlike comparability that can be between or among companies. 195. What is conservatism and why is it important in accounting? Conservatism is taking the route that will be least likely to overstate assets or income. It is used in situations in which there is uncertainty about how to account for a particular item. In accounting, it is used in the balance sheet and income statement in an effort to provide the least optimistic amount. 196. How is a classified balance sheet useful to decision makers? A classified balance sheet helps evaluate the liquidity of a company by separating the current assets from long-term assets and current liabilities from long-term liabilities. The user can then determine the amount of working capital and the current ratio, which are both useful measures of liquidity. 197. What is the operating cycle of a business? How does this impact the classification of assets into current and noncurrent categories? The operating cycle depends on the nature of a company’s business. It encompasses the period of time from the investment of cash in inventory to the collection of account receivables from the sale of products. This can take a long time, like the production of a cruise ship, or a very short time, like the preparation of restaurant food. Current assets are realized in cash, or sold, or consumed during the operating cycle or within one year if the cycle is shorter than one year. 198. How does the definition of a current liability relate to that of a current asset? Current assets will be realized in cash, or sold, or consumed during the operating cycle or within one year if the cycle is shorter than one year. Current liabilities are obligations that will be satisfied within the operating cycle or within one year if the cycle is shorter. For most companies, both current assets and liabilities are reported on the balance sheet using a one-year time period 199. Potential stockholders and lenders are interested in a company’s financial statements. Several financial statement items appear below. Answer the questions that follow. Accounts receivable Cash Common stock Retained earnings Office supplies Unearned revenue Accounts payable Depreciation expense Land held for future expansion Loss on the sale of equipment Patent amortization expense Utilities expense Advertising expense Income taxes Dividends Service revenue Sales A) List the two items from above in which stockholders would be most interested. Explain why the two you selected are important to stockholders. B) In which one item would lenders be most interested? Explain why this item is important. A) Stockholders are interested in net income and dividends. They want to make sure the company is profitable. If a company is incurring losses, it may not pay dividends. Lenders are most interested in the company’s ability to pay bills when they become due. Cash can be a big problem if a company does not have enough to pay its bills. This includes the company’s ability to repay the lender. B) 200. What is the purpose of a statement of stockholders’ equity? How does it differ from the statement of retained earnings? Which statement is required? A statement of stockholders’ equity summarizes the changes in all owners’ equity amounts during the period. If there are no changes in capital stock during the period, a company can prepare a statement of retained earnings that explains only the changes in the retained earnings account. A company has an option to present either statement. 201. What is the purpose of a statement of cash flows? Give an example of one of each of the three activities. A statement of cash flows summarizes the operating, financing, and investing activities of a company for a period of time. Some examples are: Operating: Collections of cash from customers; Payments to suppliers; Payments for wages Investing: Purchases or sales of plant assets; Purchases or sales of investments Financing: Payment of dividends; Issuance of stock to investors 202. What information is provided in an annual report in addition to the financial statements? An annual report contains the reports of management, the auditor’s report, management’s discussion and analysis of the amounts appearing in the statements, footnotes to the financial statements, and a summary of selected financial data over a period of years.