Chapter 3

Question 1

Current assets include cash and all other assets expected to become cash or be consumed:
a. within a year
b. within one operating cycle
c. within one year or one operating cycle, whichever is shorter
d. within one year or one operating cycle, whichever is longer

Answer 1

d. within one year or one operating cycle, whichever is longer

Question 2

Which of the following represents tangible, long-lived, assets sed in the operations of the business?
a. current assets
b. investments
c. property, plant, and equipment
d. intangible assets

Answer 2

c. property, plant, and equipment

Question 3

Where is management’s discussion and analysis located?
A. Preceding the financial statements and audit report in the annual report
B. In the annual chairman’s letter to shareholders
C. At the end of the annual report as an appendix
d. At the beginning of the proxy statement

Answer 3

A. Preceding the financial statements and audit report in the annual report

Question 4

Which disclosure provides an independent and professional opinion about the fairness of the representations in the financial statements and about the effectiveness of internal controls?
A. auditor’s report
B. Proxy statement
C. Management’s discussion and analysis
D. Summary of significant accounting policies

Answer 4

A. auditor’s report

Question 5

Which of the following transactions would increase a company’s liquidity ratios?
A. Receive cash from customers on accounts receivable
B. Purchase office supplies with cash
C. Pay dividends to shareholders
D. Borrow cash by signing a three-year note

Answer 5

D. Borrow cash by signing a three-year note

Question 6

A Classified Balance sheet is
Multiple Choice

Shows only current assets and current liabilities.

Shows changes in assets, liabilities, revenues and expenses.

Shows subtotals for current assets and current liabilities.

Contains confidential information.

Answer 6

Shows subtotals for current assets and current liabilities.

Question 7

Which of the following is a primary reason a company’s book value is less than its market value?

Multiple Choice:

Management recorded erroneous entries.

Investors tend to be too optimistic about a company’s growth opportunities.

Land and buildings are valued at their fair value.

Many valuable resources of the company are not recorded as assets.

Answer 7

Many valuable resources of the company are not recorded as assets.

Question 8

Long-term solvency refers to the:

Multiple Choice

Profitability of a company over a long-term period of time.

Amount of current assets relative to long-term assets.

Risk that a company will not be able to pay its long-term debt.

Efficiency with which a company manages its resources.

Answer 8

Risk that a company will not be able to pay its long-term debt.

Question 9

Which is a shareholders’ equity account in the balance sheet?

Multiple Choice

Paid-in capital

Salaries payable

Accumulated depreciation

Accounts receivable

Answer 9

Paid in capital

Question 10

Current assets include cash and all other assets expected to become cash or be consumed within:

Multiple Choice

One year or one operating cycle, whichever is shorter.

One operating cycle.

One year or one operating cycle, whichever is longer.

One year.

Answer 10

One year or one operating cycle, whichever is longer.

Question 11

New Oaks Winery requires two months to make wine, two years to age it, one month to bottle it, two months to sell it, and one month to collect the receivable. Its operating cycle is:

Multiple Choice

Twelve months.

Three months.

Six months.

Thirty months.

Answer 11

Thirty Months

Question 12

The following information is provided for a company.

Accounts payable $ 15,000
Buildings 80,000
Cash 10,500
Accounts receivable 9,500
Salaries payable 4,500
Retained earnings 47,500
Supplies 40,000
Notes payable (due in 18 months) 35,000
Interest payable 3,000
Common stock 35,000
What is the amount of current assets, assuming the accounts above reflect normal activity?

Multiple Choice

$140,000
$20,000
$60,000
$175,000

Answer 12

$60,000
Explanation
Total current assets: $10,500 + $9,500 + $40,000 = $60,000

Question 13

The following information is provided for Sacks Company.

Cash $ 12,000
Supplies 4,500
Prepaid rent 2,000
Salaries expense 4,500
Equipment 65,000
Service revenue 30,000
Miscellaneous expenses 20,000
Dividends 3,000
Accounts payable 5,000
Common stock 68,000
Retained earnings 8,000
What is the amount of total assets?

Multiple Choice

$83,500
$68,500
$81,500
$82,500

Answer 13

$83500 Explanation
Total assets:
Cah + Supplies + Prepaid Rent + Equipment
$12,000 + $4,500 + $2,000 + $65,000 = $83,500

Question 14

Cash equivalents would not include:

Multiple Choice

Cash not available for current operations.
U.S. treasury bills.
Money market funds.
Bank drafts.

Answer 14

Cash not available for current operations.

explanation: A cash equivalent is defined as a short-term investment that have a maturity date no longer than three months from the date of purchase.

Question 15

Janson Corporation Company’s trial balance included the following account balances on December 31, 2024:

Accounts receivable $ 12,000
Inventory 40,000
Patent 12,000
Investments 30,000
Prepaid insurance 6,000
Notes receivable, due 2027 50,000
Investments consist of treasury bills that were purchased in November, 2024, and mature in January, 2025. Prepaid insurance is for the next 24 months. What amount should be included in the current assets section of Janson’s December 31, 2024, balance sheet?

Multiple Choice

$85,000
$55,000
$88,000
$135,000

Answer 15

$85,000

Explanation:
AR + Inventory + Investments + 3000
$12,000 + $40,000 + $30,000 + $3,000 ( 1/2 of prepaid insurance) = $85,000.

Question 16

Notes payable that are due in two years are:

Multiple Choice

Long-term liabilities.
Long-term investments.
Current liabilities.
Long-term intangible assets.

Answer 16

Long Term Liabilities

Question 17

The following information is provided for Sacks Company before closing entries.

Cash $ 12,000
Supplies 4,500
Prepaid rent 2,000
Salaries expense 4,500
Equipment 65,000
Service revenue 30,000
Miscellaneous expenses 20,000
Dividends 3,000
Accounts payable 5,000
Common stock 68,000
Retained earnings 8,000
What is the amount of total shareholders’ equity?

Multiple Choice

$68,500
$78,500
$5,000
$83,500

Answer 17

$78,500
Explanation:
Total shareholders’ equity includes common stock plus (ending) retained earnings. Common stock is $68,000. Ending retained earnings = beginning retained earnings ($8,000) plus revenues ($30,000) less expenses ($24,500) less dividends ($3,000) = $10,500.

Total shareholders’ equity = $68,000 + $10,500 = $78,500. Alternatively, total stockholders’ equity = total assets ($83,500) − total liabilities ($5,000).

Question 18

The Management’s Discussion and Analysis section of the annual report can best be described as:

Multiple Choice

Independent but precise.
Biased but informative.
Frank but objective.
Legalistic and lengthy.

Answer 18

Biased but informative

Question 19

An omission in the notes to the financial statements that is so serious that even a qualified opinion is not justified would result in a(n):

Multiple Choice

Unqualified opinion.
Disclaimer of opinion.
Incorrect
A consistency exception.
An adverse opinion.

Answer 19

An adverse opinion

Question 20

When a company accrues salaries at the end of the accounting period, its:

Multiple Choice

Acid-test ratio increases.
Debt to equity ratio decreases.
Debt to equity ratio increases.
Current ratio increases.

Answer 20

Debt to equity ratio increases.

Question 21

When a company sells land for cash and recognizes a $25,000 gain:

Multiple Choice

Its debt to equity ratio decreases.
Its current ratio decreases.
Cannot determine from the given information.
Its acid-test ratio decreases.

Answer 21

Its debt to equity ratio decreases

Question 22

Listed below are year-end account balances ($ in millions) taken from the records of Symphony Stores.

Debit Credit

Accounts receivable $ 710
Building and equipment 920
Cash 39
Interest receivable 30
Inventory 16
Land 150
Notes receivable (long-term) 450
Prepaid rent 20
Supplies 8
Trademark 40
Accounts payable $ 560
Accumulated depreciation 80
Additional paid-in capital 485
Dividends payable 30
Common stock (at par) 15
Income tax payable 65
Notes payable (long-term) 800
Retained earnings 308
Deferred revenue 40
TOTALS $ 2,383 $2,383
What is the amount of working capital for Symphony?

Answer 22

$128 million
Explanation
Current assets:
AR + Cash + Inter. Receivable + Prepaid Rent + Supplies
$710 + $39 + $30 + $16 + $20 + $8 = $ 823
Current liabilities:
Accounts Payable + Dividends Payable + Income Tax Payable + Deferred Revenue
$560 + $30 + $65 + $40 = 695

Working capital = $823 - $695 total: $ 128

Question 23

The balance sheet for Altoid Company is shown below.

ALTOID COMPANY
Balance Sheet
December 31, 2024

Assets:
Cash $ 150
Short-term investments 200
Accounts receivable (net) 300
Inventory 450
Property, plant, and equipment (net) 1,100
Total assets $ 2,200
Liabilities and shareholders’ equity:
Current liabilities $ 450
Long-term liabilities 600
Common stock 150
Retained earnings 1,000
Total liabilities and shareholders’ equity $ 2,200
Selected 2024 income statement information for Altoid Company includes:

Net Sales $ 7,700
Operating expenses 7,110
Income before interest and tax 590
Interest expense 90
Income tax expense 150
Net income $ 350
Required:

Compute Altoid Company’s current ratio for 2024.
Note: Round your answer to 2 decimal places.

Answer 23

Explanation
Current Ration Current Assets / Current Liability
Cash + Short term investments + AR + Inventory /
($150 + $200 + $300 + $450) = $1100

Current Liabilities $450
$1100 / $450

= 2.44 Current ratio

Question 24

The balance sheet for Altoid Company is shown below.

ALTOID COMPANY
Balance Sheet
December 31, 2024
Assets:
Cash $ 150
Short-term investments 200
Accounts receivable (net) 300
Inventory 450
Property, plant, and equipment (net) 1,100
Total assets $ 2,200
Liabilities and shareholders’ equity:
Current liabilities $ 450
Long-term liabilities 600
Common stock 150
Retained earnings 1,000
Total liabilities and shareholders’ equity $ 2,200
Selected 2024 income statement information for Altoid Company includes:

Net Sales $ 7,700
Operating expenses 7,110
Income before interest and tax 590
Interest expense 90
Income tax expense 150
Net income $ 350

Compute Altoid Company’s acid-test ratio for 2024.
Note: Round your answer to 2 decimal places.

Answer 24

Explanation
(cash + short term investments + AR) / current liabilities
($150 + $200 + $300) ÷ $450 = 1.44 Acid-test ratio

Question 25

The balance sheet for Altoid Company is shown below.

ALTOID COMPANY
Balance Sheet
December 31, 2024
Assets:
Cash $ 150
Short-term investments 200
Accounts receivable (net) 300
Inventory 450
Property, plant, and equipment (net) 1,100
Total assets $ 2,200
Liabilities and shareholders’ equity:
Current liabilities $ 450
Long-term liabilities 600
Common stock 150
Retained earnings 1,000
Total liabilities and shareholders’ equity $ 2,200
Selected 2024 income statement information for Altoid Company includes:

Net Sales $ 7,700
Operating expenses 7,110
Income before interest and tax 590
Interest expense 90
Income tax expense 150
Net income $ 350

Required:
Compute Altoid Company’s debt to equity ratio for 2024.

Note: Round your answer to 2 decimal places.

Answer 25

Explanation
(current liabilities + long term liabilities / (Common Stock + Retained Earnings) = Debt to equity ratio

($450 + $600) ÷ $(150 + $1,000) = 0.91 Debt to equity ratio

Answer: .91

Question 26

The balance sheet for Altoid Company is shown below.

ALTOID COMPANY
Balance Sheet
December 31, 2024
Assets:
Cash $ 150
Short-term investments 200
Accounts receivable (net) 300
Inventory 450
Property, plant, and equipment (net) 1,100
Total assets $ 2,200
Liabilities and shareholders’ equity:
Current liabilities $ 450
Long-term liabilities 600
Common stock 150
Retained earnings 1,000
Total liabilities and shareholders’ equity $ 2,200
Selected 2024 income statement information for Altoid Company includes:

Net Sales $ 7,700
Operating expenses 7,110
Income before interest and tax 590
Interest expense 90
Income tax expense 150
Net income $ 350

Required:

Compute Altoid Company’s times interest earned ratio for 2024.
Note: Round your answer to 2 decimal places.

Answer 26

Explanation
Net Income + interest Expense + income taxes / Interest Expense

($350 + $150 + $90) ÷ $90 = 6.56 Times interest earned ratio

Question 27

The balance sheet for Altoid Company is shown below.

ALTOID COMPANY
Balance Sheet
December 31, 2024
Assets:
Cash $ 150
Short-term investments 200
Accounts receivable (net) 300
Inventory 450
Property, plant, and equipment (net) 1,100
Total assets $ 2,200
Liabilities and shareholders’ equity:
Current liabilities $ 450
Long-term liabilities 600
Common stock 150
Retained earnings 1,000
Total liabilities and shareholders’ equity $ 2,200
Selected 2024 income statement information for Altoid Company includes:

Net Sales $ 7,700
Operating expenses 7,110
Income before interest and tax 590
Interest expense 90
Income tax expense 150
Net income $ 350

Required:
Compute Altoid Company’s long-term debt to equity ratio for 2024.

Note: Round your answer to 2 decimal places.

Answer 27

Explanation
Long term liabilities / shareholders equity (common stock + shareholders equity)
$600 ÷ $1,150 = 0.52 Long-term debt to equity

Question 28

Bronco Electronics’ current assets consist of cash, short-term investments, accounts receivable, and inventory. The following data were abstracted from a recent financial statement:

Inventory $ 150,000
Total assets $ 1,400,000
Current ratio 3
Acid-test ratio 2.25
Debt to equity ratio 1.5

Required:
Compute the current assets for Bronco:

Answer 28

Explanation
(Current assets (CA) ÷ Current Liabilities (CL)) = 3; therefore, CA = 3CL

(Quick assets (QA) ÷ Current Liabilities) = 2.25; therefore, QA = 2.25CL

QA = CA − Inventory = CA − $150,000

2.25CL = 3CL − $150,000

0.75CL = $150,000

CL = $200,000

CA = 3CL = $600,000

Question 29

Bronco Electronics’ current assets consist of cash, short-term investments, accounts receivable, and inventory. The following data were abstracted from a recent financial statement:

Inventory $ 150,000
Total assets $ 1,400,000
Current ratio 3
Acid-test ratio 2.25
Debt to equity ratio 1.5

Required:
Compute the shareholders’ equity for Bronco:

Answer 29

Explanation
Total debt + Total equity = Total assets = $1,400,000

Debt ÷ Equity = 1.5; therefore, Total debt = 1.5 Equity

1.5 Equity + 1 Equity = $1,400,000

2.5 Equity = $1,400,000; Shareholders’ equity = $560,000

Question 30

Bronco Electronics’ current assets consist of cash, short-term investments, accounts receivable, and inventory. The following data were abstracted from a recent financial statement:

Inventory $ 150,000
Total assets $ 1,400,000
Current ratio 3
Acid-test ratio 2.25
Debt to equity ratio 1.5

Required:
Compute the long-term assets for Bronco:

Answer 30

Explanation
Total assets = Current assets + Long-term assets

(Current assets (CA) ÷ Current Liabilities (CL)) = 3; therefore, CA = 3CL

(Quick assets (QA) ÷ Current Liabilities) = 2.25; therefore, QA = 2.25CL

QA = CA − Inventory = CA − $150,000

2.25CL = 3CL − $150,000

0.75CL = $150,000

CL = $200,000

CA = 3CL = $600,000

Total assets = $1,400,000 (given)

$1,400,000 = $600,000 + Long-term assets

Long-term assets = $800,000

Question 31

Bronco Electronics’ current assets consist of cash, short-term investments, accounts receivable, and inventory. The following data were abstracted from a recent financial statement:

Inventory $ 150,000
Total assets $ 1,400,000
Current ratio 3
Acid-test ratio 2.25
Debt to equity ratio 1.5

Required:
Compute the long-term liabilities for Bronco:

Answer 31

Explanation
Total debt and equity (1) $ 1,400,000
Total equity (2) 560,000
Total debt $ 840,000
Current liabilities (3) 200,000
Long-term liabilities $ 640,000
(1) Total debt + Total equity = Total assets (given) = $1,400,000

(2) Debt ÷ Equity = 1.5; therefore, Total debt = 1.5 Equity

1.5 Equity + 1 Equity = $1,400,000

2.5 Equity = $1,400,000; Total equity = $560,000

(3) (Current assets (CA) ÷ Current Liabilities (CL)) = 3; therefore, CA = 3CL

(Quick assets (QA) ÷ Current Liabilities) = 2.25; therefore, QA = 2.25CL

QA = CA − Inventory = CA − $150,000

2.25CL = 3CL − $150,000

0.75CL = $150,000

CL = $200,000

Question 32

Indicate whether each of the actions listed below will immediately increase, decrease, or have no effect on the ratios shown. Assume each ratio is greater than 1.0 before the action is taken.

Prepay rent for 3 months
Current Ratio:
Acid Test Ratio:
Total Debt to Equity Ratio:

Answer 32

Prepay rent for 3 months

Current Ratio: Have no affect
Acid Test Ratio: Decrease
Total Debt to Equity Ratio: Have no effect

Question 33

Indicate whether each of the actions listed below will immediately increase, decrease, or have no effect on the ratios shown. Assume each ratio is greater than 1.0 before the action is taken.

Cash Sale of Land for a gain
Current Ratio:
Acid Test Ratio:
Total Debt to Equity Ratio:

Answer 33

Cash Sale of Land for a gain

Current Ratio: Increase
Acid Test Ratio: Increase
Total Debt to Equity Ratio: Decrease

Question 34

Indicate whether each of the actions listed below will immediately increase, decrease, or have no effect on the ratios shown. Assume each ratio is greater than 1.0 before the action is taken.

Purchase of Inventory on Account
Current Ratio:
Acid Test Ratio:
Total Debt to Equity Ratio:

Answer 34

Purchase of Inventory on Account
Current Ratio: Decrease
Acid Test Ratio: Decrease
Total Debt to Equity Ratio: Increase

Question 35

Indicate whether each of the actions listed below will immediately increase, decrease, or have no effect on the ratios shown. Assume each ratio is greater than 1.0 before the action is taken.

Collection of an Account Receivable
Current Ratio:
Acid Test Ratio:
Total Debt to Equity Ratio:

Answer 35

Collection of an Account Receivable
Current Ratio: Have no affect
Acid Test Ratio: Have no affect
Total Debt to Equity Ratio: Have no affect