Accounting Exam 2

Question 1

Which of the following is a limitation of the balance sheet?

a. Many items that are of financial value are omitted.
b. Judgments and estimates are used.
c. Current fair value is not reported.
d. All of these

Answer 1

All of these

Question 2

The balance sheet is useful for analyzing all of the following except

a. liquidity.
b. solvency.
c. profitability.
d. financial flexibility.

Answer 2

Profitability

Question 3

Balance sheet information is useful for all of the following except to

a. compute rates of return
b. analyze cash inflows and outflows for the period
c. evaluate capital structure
d. assess future cash flows

Answer 3

Analyze cash inflows and outflows for the period

Question 4

Balance sheet information is useful for all of the following except

a. assessing a company’s risk
b. evaluating a company’s liquidity
c. evaluating a company’s financial flexibility
d. determining free cash flows.

Answer 4

Determining free cash flows

Question 5

A limitation of the balance sheet that is not also a limitation of the income statement is

Answer 5

Valuation of items at historical cost

Question 6

The balance sheet contributes to financial reporting by providing a basis for all of the following except

a. computing rates of return.
b. evaluating the capital structure of the enterprise.
c. determining the increase in cash due to operations.
d. assessing the liquidity and financial flexibility of the enterprise.

Answer 6

Determining the increase in cash due to operations

Question 7

One criticism not normally aimed at a balance sheet prepared using current accounting and reporting standards is

Answer 7

The extensive use of separate classifications

Question 8

The amount of time that is expected to elapse until an asset is realized or otherwise converted into cash is referred to as

Answer 8

Liquidity

Question 9

The net assets of a business are equal to

a. current assets minus current liabilities.
b. total assets plus total liabilities.
c. total assets minus total stockholders’ equity.
d. none of these.

Answer 9

None of these

Question 10

The correct order to present current assets is

Answer 10

cash, accounts receivable, inventories, prepaid items

Question 11

The basis for classifying assets as current or noncurrent is conversion to cash within

Answer 11

The operating cycle or one year, whichever is longer

Question 12

The basis for classifying assets as current or noncurrent is the period of time normally required by the accounting entity to convert cash invested in

Answer 12

inventory back into cash, or 12 months, whichever is longer

Question 13

During 2012 the DLD Company had a net income of $55,000. In addition, selected accounts showed the following changes:
Accounts Receivable $3,000 increase
Accounts Payable 1,000 increase
Building 4,000 decrease
Depreciation Expense 1,500 increase
Bonds Payable 8,000 increase
What was the amount of cash provided by operating activities?

Answer 13

$54,500

Question 14

Harding Corporation reports the following information:
Net income $450,000
Depreciation expense 140,000
Increase in accounts receivable 60,000
Harding should report cash provided by operating activities of

Answer 14

$530,000

Question 15

Sauder Corporation reports the following information:
Net income $300,000
Depreciation expense 70,000
Increase in accounts receivable 30,000
Sauder should report cash provided by operating activities of

Answer 15

$340,000

Question 16

Packard Corporation reports the following information:
Net cash provided by operating activities	$235,000 
Average current liabilities	150,000
Average long-term liabilities	100,000 
Dividends declared	60,000
Capital expenditures	110,000
Payments of debt	35,000
Packard’s cash debt coverage ratio is

Answer 16

0.94

Question 17

Packard Corporation reports the following information:
Net cash provided by operating activities	$235,000 
Average current liabilities	150,000
Average long-term liabilities	100,000 
Dividends paid	60,000
Capital expenditures	110,000
Payments of debt	35,000
Packard’s free cash flow is

Answer 17

$65,000

Question 18

Pedigo Corporation reports the following information:
Net cash provided by operating activities	$275,000 
Average current liabilities	150,000
Average long-term liabilities	100,000
Dividends paid	60,000
Capital expenditures	110,000
Payments of debt	35,000
Pedigo’s cash debt coverage ratio is

Answer 18

1.10

Question 19

Pedigo Corporation reports the following information:
Net cash provided by operating activities	$275,000 
Average current liabilities	150,000
Average long-term liabilities	100,000
Dividends paid	60,000
Capital expenditures	110,000
Payments of debt	35,000
Pedigo free cash flow is

Answer 19

$105,000

Question 20

An amount is deposited for eight years at 8%. If compounding occurs quarterly, then the table value is found at

Answer 20

2% for 32 periods

Question 21

If the number of periods is known, the interest rate is determined by

Answer 21

dividing the future value by the present value and looking for the quotient in the future value of 1 table.

Question 22

Present value is

a. the value now of a future amount.
b. the amount that must be invested now to produce a known future value.
c. always smaller than the future value.
d. all of these.

Answer 22

All of these

Question 23

Which of the following statements is true?

a. The higher the discount rate, the higher the present value.
b. The process of accumulating interest on interest is referred to as discounting.
c. If money is worth 10% compounded annually, $1,100 due one year from today is equivalent to $1,000 today.
d. If a single sum is due on December 31, 2012, the present value of that sum decreases as the date draws closer to December 31, 2012.

Answer 23

c. If money is worth 10% compounded annually, $1,100 due one year from today is equivalent to $1,000 today.

Question 24

What is the primary difference between an ordinary annuity and an annuity due?

Answer 24

The timing of the periodic payment.

Question 25

What is the relationship between the future value of one and the present value of one?

Answer 25

The present value of one equals one divided by the future value of one.

Question 26

Peter invests $100,000 in a 3-year certificate of deposit earning 3.5% at his local bank. Which time value concept would be used to determine the maturity value of the certificate?

Answer 26

Future value of one.

Question 27

Jerry recently was offered a position with a major accounting firm. The firm offered Jerry either a signing bonus of $23,000 payable on the first day of work or a signing bonus of $26,000 payable after one year of employment. Assuming that the relevant interest rate is 10%, which option should Jerry choose?

Answer 27

The signing bonus of $26,000 payable after one year of employment.

Question 28

If Jethro wanted to save a set amount each month in order to buy a new pick-up truck when the new models are next available, which time value concept would be used to determine the monthly payment?

Answer 28

Future value of an ordinary annuity.

Question 29

Betty wants to know how much she should begin saving each month to fund her retirement. What kind of problem is this?

Answer 29

Future value of an ordinary annuity.

Question 30

Charlie Corp. is purchasing new equipment with a cash cost of $150,000 for an assembly line. The manufacturer has offered to accept $34,440 payment at the end of each of the next six years. How much interest will Charlie Corp. pay over the term of the loan?

Answer 30

$56,640

Question 31

If a savings account pays interest at 4% compounded quarterly, then the amount of $1 left on deposit for 8 years would be found in a table using

Answer 31

32 periods at 1%

Question 32

Given below are the future value factors for 1 at 8% for one to five periods. Each of the items 65 to 68 is based on 8% interest compounded annually.
	Periods	Future Value of 1 at 8%
	     1	                      1.080
	     2	                      1.166
	     3	                      1.260
	     4	                      1.360
	     5	                      1.469

What amount should be deposited in a bank account today to grow to $10,000 three years from today?

Answer 32

$10,000 ÷ 1.260

Question 33

Given below are the future value factors for 1 at 8% for one to five periods. Each of the items 65 to 68 is based on 8% interest compounded annually.
	Periods	Future Value of 1 at 8%
	    1	                       1.080
	    2	                       1.166
	    3	                       1.260
	    4	                       1.360
	    5	                       1.469

If $3,000 is put in a savings account today, what amount will be available three years from today?

Answer 33

$3,000 × 1.260

Question 34

Given below are the future value factors for 1 at 8% for one to five periods. Each of the items 65 to 68 is based on 8% interest compounded annually.
	Periods	Future Value of 1 at 8%
	     1	                       1.080
	     2                        1.166
	     3	                       1.260
	     4	                       1.360
	     5	                       1.469

What amount will be in a bank account three years from now if $6,000 is invested each year for four years with the first investment to be made today?

Answer 34

($6,000 × 1.260) + ($6,000 × 1.166) + ($6,000 × 1.080) + $6,000

Question 35

Given below are the future value factors for 1 at 8% for one to five periods. Each of the items 65 to 68 is based on 8% interest compounded annually.
	Periods	Future Value of 1 at 8%
	     1	                       1.080
	     2	                       1.166
	     3	                       1.260
	     4	                       1.360
	     5	                       1.469

If $4,000 is put in a savings account today, what amount will be available six years from now?

Answer 35

$4,000 × 1.080 × 1.469

Question 36

Given below are the present value factors for $1.00 discounted at 10% for one to five periods. Each of the items 69 to 72 is based on 10% interest compounded annually.
			Present Value of $1
Periods	Discounted at 10% per Period
   1	                           0.909
   2	                           0.826
   3	                           0.751
   4	                           0.683
   5	                           0.621

If an individual put $4,000 in a savings account today, what amount of cash would be available two years from today?

Answer 36

$4,000 ÷ 0.826

Question 37

Which of the following is not considered cash for financial reporting purposes?

a. Petty cash funds and change funds
b. Money orders, certified checks, and personal checks
c. Coin, currency, and available funds
d. Postdated checks and I.O.U.’s

Answer 37

Postdated checks and I.O.U.’s

Question 38

Which of the following is considered cash?

a. Certificates of deposit (CDs)
b. Money market checking accounts
c. Money market savings certificates
d. Postdated checks

Answer 38

Money market checking accounts

Question 39

Travel advances should be reported as

Answer 39

none of these.

Question 40

Which of the following items should not be included in the Cash caption on the balance sheet?

a. Coins and currency in the cash register
b. Checks from other parties presently in the cash register
c. Amounts on deposit in checking account at the bank
d. Postage stamps on hand

Answer 40

Postage stamps on hand

Question 41

All of the following may be included under the heading of “cash” except

a. currency.
b. money market funds.
c. checking account balance.
d. savings account balance.

Answer 41

money market funds.

Question 42

In which account are post-dated checks received classified?

Answer 42

Receivables.

Question 43

In which account are postage stamps classified?

Answer 43

Office supplies.

Question 44

What is a compensating balance?

Answer 44

Minimum deposits required to be maintained in connection with a borrowing arrangement.

Question 45

Under which section of the balance sheet is “cash restricted for plant expansion” reported?

Answer 45

Non-current assets.

Question 46

A cash equivalent is a short-term, highly liquid investment that is readily convertible into known amounts of cash and

Answer 46

is so near its maturity that it presents insignificant risk of changes in interest rates.

Question 47

Kaniper Company has the following items at year-end:

Cash in bank $30,000
Petty cash $300
Short-term paper with maturity of 2 months $5,500
Postdated checks $1,400

Kaniper should report cash and cash equivalents of:

Answer 47

$35,800

Question 48

Lawrence Company has cash in bank of $22,000, restricted cash in a separate account of $4,000, and a bank overdraft in an account at another bank of $2,000. Lawrence should report cash of:

Answer 48

$22,000

Question 49

Steinert Company has the following items at year-end:

Cash in bank $35,000
Petty cash $ 500
Short-term paper with maturity of 2 months $8,200
Postdated checks $2,100

Steinert should report cash and cash equivalents of:

Answer 49

$43,700

Question 50

If a company purchases merchandise on terms of 1/10, n/30, the cash discount available is equivalent to what effective annual rate of interest (assuming a 360-day year)?

Answer 50

18%

Question 51

AG Inc. made a $15,000 sale on account with the following terms: 1/15, n/30. If the company uses the net method to record sales made on credit, how much should be recorded as revenue?

Answer 51

$14,850

Question 52

AG Inc. made a $15,000 sale on account with the following terms: 1/15, n/30. If the company uses the gross method to record sales made on credit, what is/are the debit(s) in the journal entry to record the sale?

Answer 52

Debit Accounts Receivable for $15,000

Question 53

AG Inc. made a $15,000 sale on account with the following terms: 2/10, n/30. If the company uses the net method to record sales made on credit, what is/are the debit(s) in the journal entry to record the sale?

Answer 53

Debit Accounts Receivable for $14,700