_______ 1. For a business, the advantage of offering credit to customers is that it:
A. increases the amount of sales.
B. increases cash flow from financing activities.
C. decreases cost of goods sold.
D. decreases the amount of inventory the company needs to carry.
_______ 2. The net realizable value of accounts receivable is calculated,
A. Accounts Receivable + Uncollectible Accounts Expense
B. Accounts Receivable + Notes Receivable
C. Accounts Receivable – Allowance for Doubtful Accounts
D. 365/Accounts Receivable
_______ 3. To estimate the amount of its uncollectible accounts receivable, a company might
A. consult industry publications.
B. look at its past history of uncollectible accounts.
C. take into account the current condition of the economy.
D. all of these.
_______ 4. Which of the following is not an advantage of accepting credit cards from retail customers?
A. The acceptance of credit cards tends to increase sales.
B. There are fees charged for the privilege of accepting credit cards.
C. The credit card company performs credit worthiness assessments.
D. The credit card company assumes the cost of slow collections and write-offs.
_______ 5. The accounting records of the Schaller Company and Quimby Company contained the following account balances:
Select the true statement from the following options:
A. The accounts receivable for Schaller Company turned over 6 times per year.
B. The company with the higher turnover ratio will also have the longer average number of days to collect accounts receivable.
C. Quimby Company is likely to incur lower costs from extending credit to customers than Schaller Company.
D. The average number of days to collect accounts receivable for Schaller is 73 days.
_______ 6. Which of the following businesses would most likely have the longest operating cycle?
A. A chain of pizza restaurants.
B. A national pharmacy chain.
C. A producer of wine.
D. A discount store.
_______ 7. The face value of Accounts Receivable less the balance in the Allowance for Doubtful Accounts is equal to the net realizable value of the receivables.
True False
_______ 8. A company that uses the allowance write-off method of accounting for uncollectible accounts does not prepare a year-end adjusting entry to estimate its uncollectibles.
True False
_______ 9. Which of the following would be classified as a long-term operational asset?
A. Accounts Receivable.
B. Prepaid Insurance.
C. Office Equipment.
D. Inventory.
_______ 10. Which of the following terms is used to identify the process of expense recognition for buildings and equipment?
A. Amortization
B. Depletion
C. Depreciation
D. Revision
_______ 11. On January 1, 2009, Rowley Company purchased a truck that cost $22,000. The truck had an expected useful life of 5 years and a $4,000 salvage value. The amount of depreciation expense recognized in 2010 assuming that Rowley uses the double declining balance method is:
A. $4,320.
B. $5,280.
C. $7,200.
D. $8,800.
_______ 12. Philips Corporation purchased a truck that cost $26,000. The company expected to drive the truck 100,000 miles. The truck had an estimated salvage value of $2,000. If the truck is driven 36,000 miles in the current accounting period, which of the following amounts should be recognized as depreciation expense?
A. $8,280.
B. $9,360.
C. $8,000.
D. $8,640.
_______ 13. Zabrinski Company purchased oil rights on July 1, 2010 for $3,200,000. If 200,000 barrels of oil are expected to be extracted over the asset’s life and 30,000 barrels are extracted and sold in 2010, the amount of depletion expense recorded on December 31, 2010 would be:
A. $480,000.
B. $540,000.
C. $320,000.
D. $200,000.
_______ 14. Which of the following terms is used to identify the expense recognition for intangible assets?
A. amortization.
B. depletion.
C. depreciation.
D. allocation.
_______ 15. The fair value of the assets and liabilities for Zane’s Restaurant were $450,000 and $160,000, respectively. If Reiner Company pays $325,000 cash for the restaurant and assumes its existing liabilities, what amount of goodwill would Reiner record?
A. $25,000.
B. $35,000.
C. $55,000.
D. $125,000.
_______ 16. Intangible assets include patents, copyrights, and natural resources.
True False
_______ 17. Land differs from other property because it is not subject to depreciation.
True False
_______ 18. Double-declining-balance depreciation produces more depreciation in the later years of an asset’s life than does the straight-line method.
True False
On January 1, 2010, Fleming Company borrowed $160,000 cash from the First Trust Bank by issuing a five-year 8 % term note. The principal and interest are repaid by making annual payments beginning on December 31, 2010. The annual payment on the loan was $40,074.
_______ 19. The amount of principal repayment included in the December 31, 2010 payment is:
A. $27,274.
B. $27,615.
C. $37,329.
D. $40,575.
_______ 20. How does the amortization of the principal balance affect the amount of interest expense recorded each succeeding year?
A. Has no effect on interest expense each succeeding year
B. Increases the amount of interest expense each succeeding year
C. Reduces the amount of interest expense each succeeding year
D. The effect depends on the interest rate.
_______ 21. A current ratio of 1.73 to 1 indicates that a company’s current liabilities are greater than its current assets.
True False
_______ 22. Which of the following is a disadvantage of a sole proprietorship?
A. Entrenched management.
B. Unlimited liability of the owner.
C. Double taxation.
D. Excessive regulation.
_______ 23. The term “double taxation” refers to which of the following:
A. Sole proprietorships must pay income taxes on their net incomes and the owners are also required to pay income taxes on their withdrawals.
B. In a partnership, both partners are required to claim their share of net income on their tax returns.
C. Corporations must pay income taxes on their net income and their stockholders pay income tax on the dividends they receive.
D. Limited Liability Companies are forced to pay income taxes to both the state and the federal governments.
_______ 24. Which form of business organization is established as a separate legal entity from its owners?
A. Sole proprietorship
B. Corporation
C. Partnership
D. None of these
_______ 25. Which of the following is not considered an advantage of the corporate form of business organization?
A. Ability to raise large amounts of capital.
B. Government regulation.
C. Ease of transferability of ownership.
D. Continuity of existence.
_______ 26. The par value of common stock
A. changes in proportion to market value.
B. is not directly related to market value.
C. is greater than market value.
D. is less than market value.
_______ 27. Establishing a sole proprietorship generally requires the owner to get a charter from the state government.
True False
_______ 28. The Securities and Exchange Commission was established in response to the accounting scandals that occurred in 2001 and 2002.
True False
_______ 29. A small, closely-held corporation can avoid double taxation by electing S Corporation status.
True False
_______ 30. Pakeham Company has cash of $10,000, accounts receivable of $34,000, inventory of $26,000, and, equipment of $50,000. Assuming current liabilities of $24,000, this company’s working capital is
A. $ 6,000.
B. $22,000.
C. $46,000.
D. $72,000.
_______ 31. Mitchell Company has total current assets of $65,000 including inventory of $10,000, and current liabilities of $25,000. The company’s current ratio is
A. 3.1
B. 2.6
C. 3.6
D. 1.9
_______ 32. The Decker Company reported the following income for 2010:
What is the company’s number of times interest is earned?
A. 4 times
B. 6 times
C. 7 times
D. 10 times
33. At the end of 2010, Delta Company reported total current assets of $450,000 and total current liabilities of $320,000. At the same time, Omega Company had current assets of $319,000 and current liabilities of $180,000.
Required:
a) Calculate the current ratio for Delta Company.
b) Calculate the current ratio for Omega Company.
c) Which company would you consider to have higher liquidity at the end of 2010?
34. Marchant Company’s balance sheet and income statement are provided below:
The company paid cash dividends of $2.00 per share during 2010. On December 31, 2010, the stock was listed on the stock exchange at a price of $75.25 per share.
Required:
Compute the following ratios for 2010:
a) accounts receivable turnover
b) average number of days to collect receivables
c) inventory turnover
d) average number of days to sell inventory
e) debt to assets ratio
f) debt to equity ratio
g) net margin
h) asset turnover
$539,000 / [($840,000 + $867,000) / 2] = 0.63
i) return on investment
$90,000 / [($840,000 + $867,000) / 2] = 10.54%
j) dividend yield
$2.00 / $75.25 = 2.66%
