1. Which of the following is an advantage of corporations relative to partnerships and sole proprietorships?
Reduced legal liability for investors
Harder to transfer ownership
Most common form of organization
2. Dividends _____.
represent an expense and are an operating activity
represent an obligation and are an operating activity
represent a distribution of earnings and are a financing activity
represent an asset and are an investing activity
3. Below is a partial list of account balances for LBJ Company:
Prepaid insurance 5,000
Accounts receivable 2,500
Accounts payable 3,000
Notes payable 6,000
Common stock 10,000
What did LBJ Company show as total debits?
4. Under the accrual basis of accounting, revenues are recorded and reported _____.
when companies receive payments for jobs performed or products provided
when companies have provided products or performed services
when companies receive payments prior to providing products or performing services
when companies receive payments after providing products or performing services
5. In a period of increasing prices, which inventory cost flow assumption will result in the highest amount of net income?
The average cost method
Income tax expense for the period will be the same under all assumptions.
6. Equipment was purchased for $55,000 on January 1, 2011. Freight charges of $2,200 were incurred and there was a cost of $1,800 for installation. It is estimated the equipment will have a $5,500 salvage value at the end of its 5-year useful life. Depreciation expense for 2011 using the straight-line method will be _____.
7. Payne Corporation issues 100 twenty-year, 6%, $1,000 bonds dated July 1, 2010, at 94. The journal entry to record the issuance will show a _____.
debit to Cash of $100,000
credit to Bonds Payable of $94,000
credit to Premium on Bonds Payable of $4,000
debit to Discount on Bonds Payable of $6,000
8. Accounts receivable arising from sales to customers amounted to $80,000 and $120,000 at the beginning and end of the year, respectively. Income reported on the income statement for the year was $2,000,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to be reported on the statement of cash flows is _____.
9. If you are making comparisons within a company to detect changes in financial relationships and significant trends, you are performing what type of analysis?
Industry averages analysis
10. The formula for performing horizontal analysis is _____.
(Current Year Amount minus Base Year Amount) divided by Current Year Amount
Base Year Amount divided by Current Year Amount
Current Year Amount minus Base Year Amount
(Current Year Amount minus Base Year Amount) divided by Base Year Amount
11.Horizontal analysis of comparative financial statements includes the _____.
development of common-size statements
calculation of liquidity ratios
calculation of dollar amount changes and percentage changes from the previous year to the current year
evaluation of financial statement data that expresses each item in a financial statement as a percentage of a base amount
12. A common measure of solvency is the _____.
current cash debt coverage ratio
cash debt coverage ratio
13. Stockholders would be most interested in which of the following ratios?
Days in inventory
Free cash flow
Average collection period
14. To calculate the market value of a bond, we need to _____.
multiply the bond price times the interest rate
calculate the present value of the principal only
calculate the present value of the interest only
calculate the present value of both the principal and interest payments
15. (TCO A) Use the following partial financial statement information below to calculate the liquidity and profitability ratios. This information can be used to correctly solve each of the ratios below.
Average common shares $10,000 Current liabilities $100,000 Capital expenditures 20,000 Net income 21,000
Cash provided by operations 28,000 Net sales 150,000
Common stock dividends paid 5,000 Total liabilities 105,000 Current assets 150,000 Total assets 175,000 Instructions: Compute the following.
a) Current ratio
b) Working capital
c) Earnings per share
d) Debt-to-total-assets ratio
e) Free cash flow
Must show the formula you are using, show your computations, and explain the meaning of each of your ratio results.
(a) Current ratio = Current assets / Current liabilities = $150,000 / $100,000 = 1.50
A current ratio above 1.0 means current assets exceed current liabilities. This is important when determining if a firm has enough current assets to pay its current liabilities. The higher the better.
(b) Working capital = Current assets – Current liabilities = $150,000 – $100,000 = $50,000
Working capital is the amount that would remain if a firm used its current assets to pay its current liabilities. Obviously, the higher the better.
(c) Earnings per share = Net income / Average common shares = $21,000 / 10,000 = $2.10
Earnings per share is the portion of a firm’s net income for each one of its shares. Shareholders are always interested in this figure to help measure a firm’s profitability. Obviously, the higher the better.
(d) Debt-to-total assets = Total liabilities / Total assets = $105,000 / $175,000 = 0.60
The debt-to-total assets ratio specifies the portion of total assets financed by debt. The remaining percentage, then, is the portion of total assets financed by equity. Lower is not always better.
(e) Free cash flow = Operating cash flow – Capital expenditures = $28,000 – $20,000 = $8,000
Free cash flow is the cash flow available to be distributed among all of a firm’s securities holders after it pays its expenses and invests in its growth.
16. (TCOs D, E) Please prepare the following journal entries. Indicate which account should be debited with the abbreviation DR in front of the account name and which account should be credited with the abbreviation CR in front of the account name along with the dollar amount of the debit and credit.
a) Investors invested $600,000 in exchange for 30,000 shares of common stock.
b) Company paid rent of $3,000
c) Company billed $5,000 for services performed
d) Company purchased supplies of $3,000
e) Company received $20,000 for services not yet performed
(a) DR. Cash, $600,000 ….. CR. Common Stock, $600,000
(b) DR. Rent Expense, $3,000 ….. CR. Cash, $3,000
(c) DR. Accounts Receivable, $5,000 ….. CR. Service Revenue, $5,000
(d) DR. Supplies, $3,000 ….. CR. Cash, $3,000
(e) DR. Cash, $20,000 ….. CR. Unearned Service Revenue, $20,000