An aging of accounts receivable schedule is based on the premise that the longer the period an account remains unpaid, the greater the probability that it will eventually be collected.
Goods that have been purchased FOB destination but are in transit, should be excluded from a physical count of goods by the buyer.
To obtain maximum benefit from a bank reconciliation, the reconciliation should be prepared by the employee authorized to sign checks.
The economic resources that are owned by a business are called stockholders’ equity.
Solvency ratios measure the short-term ability of the company to pay its maturing obligations.
An advantage of using the periodic inventory system is that it requires less record keeping than the perpetual inventory system.
Use the following data to calculate the current ratio.
Carne Auto Supplies
December 31, 2014
Cash $ 35,000 Accounts payable $ 65,000
Accounts receivable 50,000 Salaries and wages payable 10,000
Inventory 70,000 Mortgage payable 90,000
Prepaid insurance 40,000 Total liabilities $165,000
Long Term Stock investments 80,000
Buildings $100,000 Common stock $120,000
Less: Accumulated Retained earnings 250,000
depreciation (30,000) 85,000 Total stockholders’ equity $370,000
Trademarks 70,000 Total liabilities and
Total assets $535,000 stockholders’ equity $535
2.07 : 1
1.67 : 1
3.00 : 1
2.60 : 1
Bathlinks Corporation has a debt to assets ratio of 73%. This tells the user of Bathlinks’s financial statements that
Bathlinks is getting a 27% return on its assets.
there is a risk that Bathlinks cannot pay its debts as they come due.
73% of the assets are financed by the stockholders.
based on this measure, the user should not invest in Bathlinks.
Management may choose any inventory costing method it desires as long as the cost flow assumption chosen is consistent with the physical movement of goods in the company.
Which of the following would not be classified as a long-term liability?
Current maturities of long-term debt
Requiring employees to take vacations is a weakness in the system of internal controls because it does not promote operational efficiency.
Marvin Services Corporation had the following accounts and balances:
Accounts payable $18,000 Equipment $21,000
Accounts receivable 3,000 Land 21,000
Buildings ? Unearned service revenue 6,000
Cash 9,000 Total stockholders’ equity ?
If the balance of the Buildings account was $45,000 and the equipment was sold for $21,000, what would be the total of stockholders’ equity?
The revenue recognition principle dictates that revenue be recognized in the accounting period in which the performance obligation is satisfied.
Financing activities include the purchase or sale of long-lived assets or the purchase or sale of investment securities.
Consistent use of the same accounting principles and methods is necessary for meaningful analysis of trends within a company.
Expense recognition is tied to revenue recognition.
The multiple-step income statement is considered more useful than the single-step income statement because it highlights the components of net income.
The best definition of assets is the
cash owned by the company.
collections of resources belonging to the company and the claims on these resources.
owners’ investment in the business.
resources belonging to a company that have future benefit to the company.
Owners of business firms are the only people who need accounting information.
Lankston Company began the year by issuing $90,000 of common stock for cash. The company recorded revenues of $825,000, expenses of $720,000, and paid dividends of $45,000. What was Lankston’s net income for the year?
Which of the following is not a common way that managers use the balance sheet?
To analyze the balances of assets, liabilities, and stockholders’ equity throughout the accounting period
To determine if the cash balance is sufficient for future needs
To analyze the balance between debt and common stock financing
To analyze the balance of accounts receivable on the last day of the accounting period
Source documents can provide evidence that a transaction has occurred.
A concentration of credit risk is a threat of nonpayment from a single customer or class of customers that could adversely affect the financial health of the company.
Which of the following is the least likely consideration that management uses when deciding whether to pay a dividend?
Does the company have more cash than it has opportunities?
Is the company’s average number of common shares outstanding decreasing?
Does the company have uses for cash that will increase its value?
What are the company’s cash needs?
The partnership form of business organization
is a separate legal entity.
is a common form of organization for service-type businesses.
enjoys an unlimited life.
has limited liability.
A trial balance proves
the mathematical equality of debits and credits after the posting process.
the ledger is posted correctly.
that all transactions have been recorded correctly.
that all transactions have been posted.
Which of these would cause the inventory turnover ratio to increase the most?
Increasing the amount of inventory on hand.
Keeping the amount of inventory on hand constant but increasing sales.
Keeping the amount of inventory on hand constant but decreasing sales.
Decreasing the amount of inventory on hand and increasing sales.
Which of the following is least likely to help a company minimize losses as credit standards are relaxed?
Require potential customers to provide bank guarantees.
Ask a potential customer for references regarding payment history.
Increase the estimate of uncollectible accounts at the end of each period.
Check a potential customer’s credit rating.
Regions Inc. pays its rent of $48,000 annually on January 1 and makes monthly adjusting entries. If the February 28 monthly adjusting entry for prepaid rent is omitted, which of the following are true?
Failure to make the adjustment does not affect the February financial statements.
Expenses will be overstated by $4,000 and net income and stockholders’ equity will be understated by $4,000.
Assets will be overstated by $8,000 and net income and stockholders’ equity will be understated by $8,000.
Assets will be overstated by $4,000 and net income and stockholders’ equity will be overstated by $4,000.
Smithson Corporation’s unadjusted trial balance includes the following balances (assume normal balances):
• Accounts Receivable $3,357,000
• Allowances for Doubtful Accounts $ 63,900
Bad debts are estimated to be 6% of outstanding receivables. What amount of bad debt expense will the company record?
Olympus Climbers Company has the following inventory data:
July 1 Beginning inventory 20 units at $19 $ 380
7 Purchases 70 units at $20 1,400
22 Purchases 10 units at $22 220
A physical count of merchandise inventory on July 30 reveals that there are 32 units on hand. sing the FIFO inventory method, the amount allocated to cost of goods sold for July is
A merchandiser will earn an operating income of exactly $0 when
net sales equals cost of goods sold.
cost of goods sold equals gross margin.
operating expenses equal net sales.
gross profit equals operating expenses.
A revenue generally
increases assets and liabilities.
increases assets and stockholders’ equity.
increases assets and decreases stockholders’ equity.
leaves total assets unchanged.
Management usually wants ________ financial statements and the IRS requires all businesses to file _________ tax returns.
The primary difference between accrued revenues and unearned revenues is that accrued revenues have:
not been recognized and accrued revenues have been.
been paid and unearned revenues have not.
been recorded and unearned revenues have not.
not been recorded and unearned revenues have.
Independent internal verification of the physical inventory process occurs when
the employee is required to count all items twice for sake of verification.
the items counted are compared to the inventory account balance.
a second employee counts the inventory and compares the result to the count made by the first employee.
all prenumbered inventory tags are accounted for.
Bad Debt Expense is considered
an avoidable cost in doing business on a credit basis.
an internal control weakness.
a necessary risk of doing business on a credit basis.
avoidable unless there is a recession.
Two companies report the same cost of goods available for sale but each employs a different inventory costing method. If the price of goods has increased during the period, then the company using
LIFO will have the highest ending inventory.
FIFO will have the highest cost of goods sold.
FIFO will have the highest ending inventory.
LIFO will have the lowest cost of goods sold.
A company usually determines the amount of supplies used during a period by:
adding the supplies on hand to the balance of the Supplies account.
summing the amount of supplies purchased during the period.
taking the difference between the supplies purchased and the supplies paid for during the period.
taking the difference between the balance of the Supplies account and the cost of supplies on hand.
If a company is given credit terms of 2/10, n/30, it should
hold off paying the bill until the end of the credit period, while investing the money at 10% annual interest during this time.
pay within the discount period and recognize a savings.
pay within the credit period but don’t take the trouble to invest the cash while waiting to pay the ill.
recognize that the supplier is desperate for cash and withhold payment until the end of the credit period while negotiating a lower sales price.
If Morris Corporation has a negative $131 million free cash flow, which of the following statements is most likely true?
Morris’ capital expenditures plus its cash dividends are less than its cash provided by operations.
This free cash flow indicates that Morris is in good shape to repay its long-term obligations when they come due.
This free cash flow indicates that Morris presents good cash generating ability to retire stock.
Morris’ cash provided by operations is less than its cash dividends plus capital expenditures.
What is an advantage of using the multiple-step income statement?
It highlights the components of net income.
Gross profit is not a separate item.
It is easier to prepare than the single-step income statement.
Net income will be higher than net income computed using the single-step income statement.
All of the following are characteristics of every accounting information system except it is a system
that collects transaction data.
that processes transaction data.
that communicates financial information to decision makers.
of data storage hardware for the chart of accounts.
Which statement is incorrect?
Dividends represent a distribution by a corporation to its stockholders.
Dividends are shown on the income statement.
Dividends reduce stockholders’ equity, thus the Dividends account increases on the left side.
The Dividends account has a normal debit balance.
Dobler Company gathered the following reconciling information in preparing its June bank reconciliation:
Cash balance per books, 6/30 $8,400
Deposits in transit 600
Notes receivable and interest collected by bank 1,480
Bank charge for check printing 50
Outstanding checks 3,000
NSF check 280
The adjusted cash balance per books on June 30 is
Fehr Company sells merchandise on account for $5,000 to Kelly Company with credit terms of 2/10, n/30. Kelly Company returns $1,000 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check?
Which one of the following is not an objective of a system of internal controls?
Safeguard company assets.
Overstate liabilities in order to be conservative.
Enhance the accuracy and reliability of accounting records.
Reduce the risks of errors.
one of the most liquid assets and thus are always considered current assets.
claims that are expected to be collected in cash.
shown on the income statement at cash realizable value.
always the result of revenue recognition.
At Emerson Company, one bookkeeper prepares the cash deposits while the other bookkeeper enters the collections in the journal and ledger. Which of the following is the best explanation of this type of internal control principle over cash receipts?
Segregation of duties.
All of the following are true regarding the management and monitoring of cash except
companies may have plenty of sales, but insufficient cash to support operations.
the cash to cash operating cycle for a manufacturer is generally shorter than that of a merchandising company.
manufacturers may experience a significant lag between the purchase of raw materials and the receipt of cash from customers.
companies should have sufficient cash to meet payments but minimize the amount of non-revenue-generating cash on hand.
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