ACCT2010 - Test 3

A productive asset

is used to produce goods or services that will be sold to customers

Sunny Sky paid $30,000 cash for piece of land to be used for a new corporate headquarters building. What is the effect of this transaction on the accounting equation?

One asset increases, while another asset decreases.

Tangible assets are first recorded at

cost minus residual (or salvage) value

the amount of cash paid for them

all costs to acquire them and prepare them for use

current market value or resale value

all costs to acquire them and prepare them for use

X-it Company, signed a $500,000, 5-year note payable to buy a new industrial machine. The company paid $2,000 cash for transportation of the machine and $1,000 cash for installation costs. The journal entry to record this transaction will include a Blank______. (Check all that apply.)

Multiple select question.

$3,000 credit to Cash

$500,000 debit to Machinery

$1,000 debit to Installation Expense

$503,000 debit to Machinery

$500,000 credit to Note Payable

$2,000 debit to Freight-in

$3,000 credit to Cash

$500,000 credit to Note Payable

• $503,000 debit to Machinery

The journal entry to record depreciation include which of the following?

Multiple select question.

Debit Accumulated Depreciation

Credit Depreciation Expense

Credit Accumulated Depreciation

Debit Depreciation Expense

Credit Accumulated Depreciation

Debit Depreciation Expense

Which of the following is a long-lived asset?

Multiple choice question.

Retained Earnings

Land purchased for resale next month

Cash

Land on which to build a new store

Land on which to build a new store

Matching part of the cost of a long-lived asset with the revenues generated by the asset is

depreciation

not required by IFRS

a basket purchase

not required by GAAP

depreciation

Sunny Sky paid $30,000 cash for a piece of land to be used for a new corporate headquarters building. The journal entry to record this transaction will include a $30,000

credit to Land

debit to Cash

debit to Land Expense

credit to Cash

debit to Land

debit to Building

• credit to Cash

• debit to Land

Sunny Skys, Inc. bought a derelict hunting lodge, which it tore down at a cost of $45,000 and replaced with a new lodge. The demolition cost should be

capitalized

Amortizing intangible assets affects the accounting equation by causing

assets to decrease

stockholders' equity to increase

liabilities to decrease

stockholders' equity to decrease

assets to increase

liabilities to increase

• assets to decrease

• stockholders' equity to decrease

The entry to record the purchase of $10,000 of equipment by signing an $8,000 note and paying the rest with cash causes total assets to

• Machinery, an asset, increases $503,000.

• Total liabilities increase $500,000.

• Total assets increase $500,000.

Which account is debited in an adjusting entry to record depreciation on machinery?

Machinery

Cash

Accumulated Depreciation

Depreciation Expense

Depreciation Expense

Dew Drop Inn had net revenue of $117,000 in 2024 and $100,000 in 2025. Its fixed assets were $400,000 at the end of 2013, $380,000 at the end of 2024, and $360,000 at the end of 2025. In which year was the fixed asset turnover ratio better?

2024, because the ratio was higher.

2024, because the ratio was lower.

2025, because the ratio was higher.

2025, because the ratio was lower.

2024, because the ratio was higher.

Depreciation allocates the cost of a long-lived asset to

Impairment Loss as the value of the asset decreases

Depreciation Expense over the periods the asset is used to generate revenue

a capitalized asset account as the asset decreases in value

a loss account as the asset decreases in value

Depreciation Expense over the periods the asset is used to generate revenue

Assuming straight-line depreciation is used, a higher estimated useful life will result in a(n) ______ depreciation expense per year and a(n) ______ net income.

• lower

• higher

Accountants say costs have been ________ when they are recorded as assets rather than as expenses.

capitalized

Which of the following financial statement totals are reduced by the adjusting entry to record amortization? (Check all that apply.)

Total assets on the balance sheet

Total stockholders' equity on the balance sheet

Cash from operating activities on the statement of cash flows

Total liabilities on the balance sheet

Net income on the income statement

• Total assets on the balance sheet

• Total stockholders' equity on the balance sheet

• Net income on the income statement

The entry to record the purchase of $10,000 of equipment by signing an $8,000 note and paying the rest with cash is recorded with a Blank______.

$10,000 debit to Equipment and $8,000 credit to Notes Payable and $2,000 credit to Cash

$8,000 debit to Notes Payable and $8,000 credit to Equipment

$6,000 debit to Equipment and $2,000 debit to Cash and $8,000 credit to Notes Payable

$2,000 debit to Equipment and $2,000 credit to Cash

$10,000 debit to Equipment and $8,000 credit to Notes Payable and $2,000 credit to Cash

On January 1, Whittle, Inc. purchased timber rights for $2,000,000, which are expected to produce a total of 2,000,000 cords of wood over 4 years, after which it will be sold for $500,000. The cords of wood cut were 200,000 in the 1st year and 280,000 in the 2nd year. Depletion for the 1st year equals ______.

$200,000

$400,000

$150,000

$275,000

$500,000

$150,000

The formula for the fixed asset turnover ratio equals _____.

net revenue/average net fixed assets

net income/average total assets

average net fixed assets/total assets

net revenue/total assets

net revenue/average net fixed assets

Which of the following may lead to a revision of an estimate of a company's depreciation expense? (Check all that apply.)

A change in the estimated amount of property taxes

A change in the estimated useful life

A change in the estimated residual value

Extraordinary repairs that significantly extend the asset's usefulness

• A change in the estimated useful life

• A change in the estimated residual value

• Extraordinary repairs that significantly extend the asset's usefulness

Both Spam Am Airlines and TWB Airlines used straight-line depreciation for a $20 million jet. Spam Am used an estimated 35 year useful life and TWB Airlines used an estimated 25 year life for its planes but estimated similar residual values. As result of the differences in useful lives, which company will appear more profitable?

Multiple choice question.

Neither, the estimated useful lives will not affect their profitability.

TWB

Spam Am

Spam Am

On-a-Roll, Inc. amortizes its patent of $20,000 over 20 years. The adjusting entry to record amortization results in a(n) _____. (Check all that apply.)

increase to liabilities on the balance sheet

decrease to assets on the balance sheet

increase to assets on the balance sheet

decrease to net income on the income statement

increase to net income on the income statement

• decrease to assets on the balance sheet

• decrease to net income on the income statement

Which method should be used to calculate depletion for a natural resource company?

Multiple choice question.

Declining-balance

Straight-line

Accelerated

Units-of-production

Units of production - matches depletion expense with revenue generated by the resource extraction. It calculates a depletion rate per unit by dividing the total cost of the resource by the estimated recoverable units.

Assuming straight-line is used, which of the following is the formula for calculating revised annual depreciation?

Multiple choice question.

(Book value-new residual value) x (1/life)

(Cost-residual value) x (1/remaining life)

(Book value-new residual value) x (1/remaining Useful life)

(Cost-residual value) x (1/life)

(Book value-new residual value) x (1/remaining Useful life)

On-a-Roll, Inc. amortizes its copyright of $20,000 over 20 years. Miss Hap, the bookkeeper, forgot to record the amortization in the current year. The effect of this mistake causes

• net income to be overstated

• assets to be overstated

For investors, credit rating agencies provide independent, easy-to-use measurements of relative credit risk. The most well-known credit rating agencies are Blank______. (Check all that apply.)

Multiple select question.

Moody's

Standard & Poor's

Sarbanes-Oxley

Securities and Exchanges

• Moody's

  • Standard & Poor's

Liabilities are classified as current if they Blank______.

Multiple choice question.

are less than the current assets

are greater than the current assets

will be paid using noncurrent assets

will be paid within the company's operating cycle or within 1 year, whichever is longer

will be paid within the company's operating cycle or within 1 year, whichever is longer

Acme Enterprises began the new year owing its suppliers $3,000 for merchandise purchased last year. Acme then sold half of this merchandise for $5,000 on account. Two weeks later, Acme paid its suppliers $1,000 and bought another $4,000 of merchandise on account. Acme now has an Accounts Payable balance of Blank______.

Multiple choice question.

$6,000

$5,500

$4,500

$11,000

$1,000

6000 (3,000 - 1,000 + 4,000)

The entry to record the payment of previous purchases made on account includes a ______. (Select all that apply.)

Multiple select question.

credit to Accounts Payable

credit to Cash

debit to Accounts Payable

• credit to Cash

  • debit to Accounts Payable

For an investor, bonds are attractive investments because Blank______.

Multiple select question.

they can be traded on established bond exchanges

they are less risky than bank savings accounts

interest is higher than bank savings accounts

the dividends are higher than stock dividends

• they can be traded on established bond exchanges

• interest is higher than bank savings accounts

For investors, the ______ provide independent, easy-to-use measurements of relative credit risk.

Multiple choice question.

Sarbanes-Oxley

Securities & Exchange Commission

Financial Accounting Standards Board

credit rating agencies

credit rating agencies

True or false: A classified balance sheet separates liabilities into current and non-current categories.

True 

During the year, a $1,000,000 lawsuit was filed against a US company for unsafe working conditions. Management and the attorneys feel that it is not likely that the company will lose the case. The plaintiff who filed the lawsuit has offered to settle for $600,000. Management estimates that lawsuits for unsafe working conditions are generally settled for $300,000. What amount of contingent liability would be recorded for this lawsuit on the current balance sheet?

Multiple choice question.

$0

$100,000

$300,000

$500,000

$600,000

$0 - If liability is probable and measurable, it's recorded. Otherwise, it's noted in financial statements, awaiting resolution.

A liability is first recorded at the amount of cash a creditor would accept to immediately settle the liability, which ______ interest.

Multiple choice question.

includes

excludes

excludes

The debt-to-asset ratio is calculated by dividing total liabilities by total ______

assets

_________ is a current liability that represents the amount owed for goods or services purchased on credit and is generally interest free.

accounts payable

The debt-to-asset ratio indicates ______. (Check all that apply.)

Multiple select question.

a higher ratio means greater financing risk

a higher ratio means better performance

a higher ratio means lower financing risk

the percentage of assets financed by debt

• a higher ratio means greater financing risk

• the percentage of assets financed by debt

Bonds are financial ________ that outline the future payments a company promises to make in exchange for receiving a sum of money now.

instruments 

Which type of contingent liability would most likely be found on a balance sheet prepared under US GAAP?

Multiple choice question.

Reasonably possible contingent liability

Probable contingent liability that can be estimated

Remote contingent liability

Probable contingent liability that can be estimated

At the beginning of the year, a firm had $120,000 in total assets and a debt-to-assets ratio of 0.5 or 50%. During the year, the firm's assets increased by $40,000, and its liabilities increased by $36,000. What is the debt-to-assets ratio at the end of the year?

Multiple choice question.

0.6 or 60%

1.7 or 170%

0.9 or 90%

There is not enough information to determine the debt-to-assets ratio.

0.4 or 40%

0.6 or 60%

What effect will issuing more bonds have on the times interest earned ratio over time?

Multiple choice question.

It will have no effect.

It will increase.

It will decrease.

It will decrease - A higher ratio suggests a sturdier net, providing more security against financial falls.

A company's debt-to-assets ratio is 0.7 or 70%. If the company issues common stock for cash, then the debt-to-assets ratio will Blank______.

Multiple choice question.

decrease

stay the same

increase

decrease - assets increase

The effective interest method applies the accrual concept by

Multiple choice question.

recording interest expense for the amount of cash interest paid.

recording interest expense at the stated rate.

recording interest expense periodically at the effective rate.

recording interest expense periodically at the effective rate.

From the issuing company's perspective, a bond is a liability. From a bondholder's perspective, the bond is a(n) ______

asset

______ Liabilities are potential liabilities that arise as a result of past transactions or events and are reported on the balance sheet if the loss will probably occur and can be reasonably estimated. (Enter one word per blank.)

Contingent

When the times interest earned ratio is less than 1.0, a company is ______.

Multiple choice question.

generating enough income to cover its interest expense

unlikely to experience financial distress

not generating enough income to cover its interest expense

not generating enough income to cover its interest expense

The effective interest method requires that

Multiple select question.

the stated rate is used to determine cash interest payments.

the market rate is used to measure interest revenue/expense.

the stated rate is used to value the note and the transaction.

the market rate is used to value the note and the transaction.

the market rate is used to determine cash interest payments.

• the stated rate is used to determine cash interest payments.

• the market rate is used to measure interest revenue/expense.

• the market rate is used to value the note and the transaction.

When preparing the balance sheet for Papago Company for December 31, 2024, which item would not be classified as a current liability?

Multiple Choice

• Notes payable due March 1, 2026

• Accounts payable

• Income taxes due on September 15, 2025

• The current portion of a 30-year mortgage

• Notes payable due March 1, 2026

During one pay period, Star Valley Company distributes $234,900 to employees as net pay. The income tax withholdings were $34,200 and the FICA withholdings were $9,000. Total payroll costs to the company for this pay period, excluding any unemployment taxes, was:

Multiple Choice

• $269,100.

• $234,900.

• $278,100.

• $287,100.

$287,100

Harry owns 1,000 shares of stock in X-it Corporation. What is the effect on X-it Corporation if Harry dies?

Multiple choice question.

X-it will have 3 months to resell the stock.

X-it must reorganize to reflect the change in ownership.

X-it will cancel Harry's shares of stock.

A stockholder's death has no effect on a corporation.

A stockholder's death has no effect on a corporation.

A corporation is a separate _______ entity and can own assets, incur liabilities, and enter into contracts.

legal

Transactions between a company and its stockholders affect the company's Blank______ accounts only.

Multiple choice question.

liability

income statement

balance sheet

asset

Balance Sheet

Corporations can raise large amounts of money because Blank______.

Multiple choice question.

the unlimited liability feature makes corporate ownership attractive to investors

all investments in corporate stock earn money for investors

shares of stock in public companies can easily be bought and sold by investors

corporate earnings are not taxed

shares of stock in public companies can easily be bought and sold by investors

Contributed capital of $1,000,000 is found in the Blank______ section of the Blank______.

Multiple choice question.

retained earnings; balance sheet

stockholders' equity; balance sheet

operating income; income statement

retained earnings; income statement

stockholders' equity; balance sheet

If a business cannot pay its debts, creditors can expect the owner(s) to pay the debts with their personal assets if the business is a Blank______. (Check all that apply.)

Multiple select question.

general partnership

sole proprietorship

corporation

• general partnership

• sole proprietorship

When a corporation buys back its own stock, the stock is reported on the balance sheet as Blank______.

Multiple choice question.

Dividends

Retained Earnings

Common Stock

Treasury Stock

Preferred Stock

Treasury Stock

True or false: A corporation exists separate and apart from its owners, which means it doesn't die when its owners die.

True false question.

True

False

True

Similar to a stock split, a stock _______ also distributes additional shares of stock to existing stockholders on a pro rata basis at no cost to the stockholders. (Enter one word per blank.)

dividend

Which of these is a separate legal entity?

Multiple choice question.

Corporation

Partnership

Sole proprietorship

Corporation

Preferred stock generally ______ preference as to dividends.

Multiple choice question.

does not have

has

has

True or false: When a corporation declares a dividend, its net Income on the income statement is reduced.

 

True false question.

True

False

False - all transactions between a company and its stockholders do not affect the income statement. Dividends don’t affect Net Income.

Contributed capital of $1,000,000 represents Blank______.

Multiple choice question.

the amount stockholders have invested in exchange for stock

donations received from creditors

accumulated earnings minus accumulated dividends

the accumulated profits earned on stockholders' investment

the amount stockholders have invested in exchange for stock

Treasury stock is reported in the Blank______.

Multiple choice question.

liability section of the balance sheet

stockholders' equity section of the balance sheet

financing section of the income statement

operating section of the income statement

contra-asset section of the balance sheet

stockholders' equity section of the balance sheet - contra-equity account 

If a company's EPS (Earnings Per Share) falls from $5 to $3, then investors may expect Blank______.

Multiple choice question.

that the company will reissue treasury shares

that the company will increase its financial leverage

a reduction in the stock price

a reduction in stock price

A stock dividend Blank______.

Multiple select question.

increases a stockholders' percentage ownership in the corporation.

causes retained earnings to decrease.

causes total stockholders' equity to decrease.

distributes additional shares of stock to existing stockholders on a pro rata basis.

• causes retained earnings to decrease.

• distributes additional shares of stock to existing stockholders on a pro rata basis.

A higher ROE (return on equity) means ______. (Check all that apply.)

Multiple select question.

stockholders may enjoy higher returns

the P/E ratio must have decreased

the company used financial leverage to its stockholders' advantage

more shares of stock have been issued

• stockholders may enjoy higher returns

  • the company used financial leverage to its stockholders' advantage

Investors who acquire preferred stock Blank______. (Check all that apply.)

Multiple select question.

have preference over creditors

will always receive more dividends than common stockholders

have preference over common stockholders

have preference as to dividends

• have preference over common stockholders

• have preference as to dividends

If Squid Roe Inc.'s P/E ratio is 12 and Lox, Stock and Bagel's is 20, then investors expect Blank______.

Multiple choice question.

Squid Roe's stock price to fall

Squid Roe's earnings to increase at a slower rate than its price

Lox, Stock and Bagel's earnings to grow at a faster rate than Squid Roe's

Lox, Stock and Bagel's stock price to fall

Lox, Stock and Bagel's earnings to grow at a faster rate than Squid Roe's

______ capital, also called paid-in capital, reports the amount of capital the company received from investors.

Contributed

An increase in EPS is an indicator of Blank______.

Multiple choice question.

higher profitability

lower financial leverage

lower profitability

lower return on equity

higher profitability

Squid Roe, Inc.'s ROE increased two percentage points to 12%. This increase may have happened because Squid Roe Blank______. (Check all that apply.)

Multiple select question.

had an increase in interest expense relative to profits

generated more profits than the interest incurred on its borrowed funds

borrowed more funds at 12%

replaced its 12% debt with 10% debt

replaced its 10% debt with 12% debt

• generated more profits than the interest incurred on its borrowed funds

• replaced its 12% debt with 10% debt

A Blank______ P/E ratio indicates investors anticipate an improvement in the company's future results.

Multiple choice question.

constant

lower

higher

higher

The risk from financial leverage Blank______. (Check all that apply.)

Multiple select question.

increases when a company's current ratio increases

increases when a company reduces its borrowing

decreases when a company issues new shares of stock

increases when the cost of borrowing is greater than the return

• decreases when a company issues new shares of stock

• increases when the cost of borrowing is greater than the return

A higher ROE means Blank______.

• stockholders may enjoy higher returns

• the company used financial leverage to its stockholders' advantage

Flint Corporation’s Contributed Capital totals $54,000, Retained Earnings equals $117,000, Treasury Stock equals $32,400, and Common Stock equals $18,000. If the company does not have any Accumulated Other Comprehensive Income (Loss), what is the total amount of stockholders' equity?

$156,600 - Total Equity = Contributed Capital + Common Stock + Retained Earnings - Treasury Stock

Geronimo Company issued 20,000 shares of $1 par value common stock at $10 per share. Ms. Elgin, the bookkeeper, recorded this transaction with a $200,000 debit to Cash and a $200,000 credit to Common Stock. As a result of this entry:

Multiple Choice

• total assets will be overstated.

• Additional Paid-In Capital will be understated.

• total stockholders' equity will be understated.

• equity will be overstated.

• Additional Paid-In Capital will be understated.

Netpass Company has 300,000 shares of common stock authorized, 270,000 shares issued, and 100,000 shares of treasury stock. The company’s board of directors declares a dividend of $1 per share of common stock.

Required:

What is the total amount of the dividend that will be paid?

$170,000

At the end of its first year of operations, Alder Company had 150,000 shares of preferred stock, 5% cumulative, $100 par value. It also has 1,000,000 shares of common stock $0.01 par value. (The share information represents the numbers of shares issued and outstanding for both types of stock.) If sufficient dividends are declared, what is the per share dividend that will be paid on the preferred stock?

Multiple Choice

• $0.01 per share

• $100.00 per share

• $5.00 per share

• $7.50 per share

• $5.00 per share

On September 1, Primrose Industries with 100,000 shares of $5 par value common stock and $2,000,000 of Retained Earnings issues a 2-for-1 stock split. The market price of the stock on that date is $24 per share. Which of the following statements is correct concerning this stock split?

Multiple Choice

• Contributed capital will increase by $500,000.

• Retained Earnings will decrease by $2,400,000.

• Dividends payable will increase by $500,000.

• No entry will be made for this transaction.

No entry will be made for this transaction. - stock split is a non-monetary transaction that changes the structure of ownership units but not the total value of shareholders' equity.

A stock dividend:

Multiple Choice

• is accounted for like a stock split.

• will reduce stockholders’ equity similar to a cash dividend.

• will not change any of the accounts within stockholders’ equity.

• will reduce Retained Earnings similar to a cash dividend.

• will reduce stockholders’ equity similar to a cash dividend.

Barbur, Incorporated reported net income of $12 million. During the year the average number of common shares outstanding was 3 million. The price of a share of common stock at the end of the year was $5. There were 400,000 shares of preferred stock outstanding on average and no dividends were declared and the preferred stock is noncumulative.

The EPS is:

Multiple Choice

• $0.80.

• $3.52.

• $3.72.

• $4.00.

$4.00 - preferred Div = 0 

All other things being equal, when a company repurchases its common stock:

Multiple Choice

• EPS decreases and ROE increases.

• EPS increases and ROE stays the same.

• EPS increases and ROE decreases.

• EPS and ROE both increase.

• EPS and ROE both increase.

Financial statement analysis is useful for ______.

Multiple choice question.

evaluating a company's success in meeting challenges

selecting the most appropriate accounting rules to follow

comparing US companies with foreign companies

determining the market price of a company's stock

evaluating a company's success in meeting challenges

Horizontal Analysis

compares individual financial statement line items from one period to the next

vertical analysis

compares the relative contribution made by each financial statement line time by expressing line items as a % of another total, such as total assets, or line item, such as sales

Ratio analysis

compares relationships among various financial statement line items within the same period and over multiple periods

To analyze changes in a company's sales over the last 5 years, you should perform a Blank______.

Multiple choice question.

horizontal analysis

ratio analysis

vertical analysis

horizontal analysis

______ analysis identifies the relative contribution made by each financial statement line item.

Multiple choice question.

Ratio

Vertical

Horizontal

Vertical

Ratio analysis Blank______.

Multiple choice question.

allows you to evaluate how well a company has performed relative to other different-sized companies within the same industry

is required by GAAP as part of every company's income statement and balance sheet

will always identify the best investment decision

will tell you how a company will perform in the future

allows you to evaluate how well a company has performed relative to other different-sized companies within the same industry

Often loan agreements require the borrower to comply with certain requirements, such as maintaining a particular current ratio or limiting future borrowing. To decide if a company has complied with its loan agreements, you should look at its ______.

Multiple choice question.

charter

financial statements

bank statements

chart of accounts

financial statements

Ratio analyses must be Blank______.

Multiple choice question.

included in the financial statements

audited by certified public accountants

computed by financial analysts outside of the company to ensure objectivity

compared to benchmarks, such as prior-years' results and industry averages, to properly interpret the results

compared to benchmarks, such as prior-years' results and industry averages, to properly interpret the results

Analyzing the percent change in Accounts Receivable from one period to the next is an example of Blank______ analysis.

Multiple choice question.

vertical

horizontal

longitudinal

latitudinal

horizontal

Horizontal analysis Blank______.

Multiple choice question.

is used to identify trends over time

provides an understanding of the relationships among various items on financial statements

identifies the relative contribution made by each financial statement line item

is used to identify trends over time

Vertical analysis Blank______.

Multiple choice question.

provides an understanding of the relationships among various items on financial statements by expressing the differences in terms of dollars

identifies the relative contribution made by each financial statement line item

identifies trends over time

identifies the relative contribution made by each financial statement line item

Ratio analysis is useful for

• comparing a company's performance with itself over time

• evaluating a company's performance given the level of its other resources

  • comparing two companies of different size in the same industry

_____ are points of reference against which a company's ratio can be compared. They include competitor ratios, industry averages, and prior year results. (Enter one word per blank.)

Benchmarks

Calculating the proportion of each individual asset balance sheet to total assets is an example of Blank______ analysis.

Multiple choice question.

latitudinal

longitudinal

horizontal

vertical

vertical

Which of these are the same as horizontal analysis? (Check all that apply.)

Multiple select question.

vertical analysis

trend analysis

time-series analysis

ratio analysis

• trend analysis

  • time-series analysis