EXTRA PRACTICE TEXTBOOK

Question 1

Preferred stock is called preferred because it usually has two preferences over common stock. These preferences relate to:

A. Distribution of assets if the corporation is dissolved and payment of dividends.

B. Distribution of assets if the corporation is dissolved and higher par value.

C. Payment of dividends and voting rights.

D. Higher par value and payment of dividends.

Answer 1

A. Distribution of assets if the corporation is dissolved and payment of dividends.

Question 2

Authorized stock is the number of shares that have been sold to investors.

T/F

Answer 2

False

Authorized stock is the total number of shares available to sell, stated in the company’s articles of incorporation. Issued stock is the number of shares that have been sold to investors.

Question 3

The purchase of treasury stock is classified in the statement of cash flows as a(n):

A. Noncash activity.
B. Investing Activity
C. Operating Activity
D. Financing Activity

Answer 3

D. Financing Activity

Question 4

Strikers, Incorporated sells soccer goals to customers over the Internet. History has shown that 2% of Strikers’ goals will need repair under the warranty program. For the year, Strikers has sold 4,000 goals and 45 have been repaired. If the estimated cost to repair a goal is $200, what would be the warranty expense for the year?

A. 9,000
B. 16,000
C. 0
D. 7000

Answer 4

16,000

(4,000 goals × 2%) × $200 = $16,000

Question 5

At the beginning of the period, Utilities Payable equals $500. At the end of the period, Utilities Payable equals $700. If Utilities Expense for the period equals $1,500, what was the cash paid for utilities for the period?

A. 500
B. 1300
C. 700
D. 1500

Answer 5

B. 1300

Utilities Expense $ 1,500
− Increase in Utilities Payable (200)
= Cash paid for utilities $ 1,300

Question 6

Common examples of cash equivalents are money market funds, Treasury bills, and certificates of deposit.

T/F

Answer 6

True

Question 7

Typically, current liabilities are payable within one year from the balance sheet date, and long-term liabilities are payable in more than one year.

T/F

Answer 7

True

Question 8

A company issued 1,600 shares of $3 par value preferred stock for $4 per share. What is true about the journal entry to record the issuance?

A. Credit Cash $6,400
B. Credit Additional Paid-In Capital $1,600
C. Credit Preferred Stock $6,400
D. Debit Preferred Stock $6,400

Answer 8

B. Credit Additional Paid-In Capital $1,600

The journal entry would be:

Account Title Debit Credit
Cash 6,400
Preferred Stock 4,800
Additional Paid-in Capital 1,600

Question 9

Goodwill is:

A. The value of a company as a whole, over and above the value of its net identifiable assets.
B. Only reported by the seller of a company.
C. Reported when created internally through advertising expense.
D. Amortized over the greater of its estimated life or forty years.

Answer 9

A. The value of a company as a whole, over and above the value of its net identifiable assets.

Question 10

We report dividends received as a financing activity.

T/F

Answer 10

We report dividends received as an operating activity.

Question 11

Which of the following is not a correct practice when adjusting net income to net operating cash flows?

A. Add decrease in Accounts Receivable.
B. Add depreciation expense.
C. Subtract decrease in Accounts Payable.
D. Subtract stock-based compensation expense.

Answer 11

D. Subtract stock-based compensation expense.

Question 12

Sammy’s Pizza had the following financial information for the year as follows ($ in millions):

Net income $ 9,200
Obtain loan from the bank 4,600
Depreciation expense 1,800
Purchase equipment 5,400
Increase in accounts receivable 3,900
Pay cash dividends 2,200
Increase in salaries payable 1,700
Sale of land 3,500
Sammy’s Pizza would report net cash inflows (outflows) from operating activities in the amount of:

A. 7000
B. 6600
C. 7400
D. 8800

Answer 12

D. 8800

$8,800 = $9,200 + $1,800 − $3,900 + $1,700

Net income + Depreciation - Increase in accounts receivable + Increase in salaries payable

Question 13

A company purchased a three-acre tract of land for a building site for $350,000. The company demolished the old building at a cost of $12,000, but was able to sell scrap from the building for $1,500. The cost of title insurance was $900 and attorney fees for reviewing the contract was $500. Property taxes paid were $3,000, of which $250 covered the period after the purchase date. The total capitalized cost of the land is:

A. $231,150.
B. $366,150.
C. $364,650.
D. $366,400.

Answer 13

C. $364,650.

Costs necessary to get land ready for use:

Purchase price $ 350,000
Demolition costs 12,000
Scrap sold (1,500)
Title insurance 900
Legal fees 500
Property taxes ($3,000 − $250) 2,750
Total capitalized cost of land $ 364,650

Property taxes paid for the seller’s unpaid taxes in previous years are necessary to get title clearance for the land. Any property taxes for the current period after the purchase are not included and instead expensed as incurred.

Question 14

A company purchased a commercial dishwasher by paying cash of $5,300. The dishwasher’s fair value on the date of the purchase was $5,670. The company incurred $400 in transportation costs, $370 installation fees, and paid a $140 fine for illegal parking while the dishwasher was being delivered. For what amount will the company report the dishwasher?

A. $6,210
B. $5,670
C. $6,440
D. $6,070

Answer 14

D. $6,070

Include Cost + Transpo + Installation, but do not include the fine and disregard the FV.

$5,300 + $400 + $370 = $6,070. The parking ticket should be expensed as incurred since it is not a cost necessary to get the asset ready for use.

Question 15

The term “capitalize” is used to describe accounting for an expenditure as an expense.

T/F

Answer 15

False

We use the term capitalize to describe accounting for an expenditure as an asset.

Question 16

Which of the following is true with regard to how to account for company A’s investment in company B’s common stock?

A. The fair value method is used when A owns more than 50% of B.
B. The equity method is used when A owns from 20% to 50% of B.
C. Consolidated financial statements are prepared when A owns less than 20% of B.
D. All of the other answer choices are correct.

Answer 16

B. The equity method is used when A owns from 20% to 50% of B.

Question 17

Which of the following statements is true?

A. Dividends paid are classified as a cash outflow from operating activities in the statement of cash flows.
B. Repayment of long-term debt is classified as a cash outflow from investing activities in the statement of cash flows.
C. Investment in another company’s common stock is classified as a cash outflow from financing activities in the statement of cash flows.
D. Losses on the sale of long-term assets are an adjustment reported in the operating activities section of the statement of cash flows under the indirect method.

Answer 17

D. Losses on the sale of long-term assets are an adjustment reported in the operating activities section of the statement of cash flows under the indirect method.

Question 18

Retained earnings represent the earnings of the corporation that have not been distributed as dividends to stockholders.

T/F

Answer 18

True

Question 19

Young Company is involved in a lawsuit. The liability that could arise as a result of this lawsuit should be reported on the books if the probability of Young owing money as a result of the lawsuit is:

A. Probable and the amount is not reasonably estimable.
B. Remote and the amount is reasonably estimable.
C. Reasonably possible and the amount is reasonably estimable.
D. Probable and the amount is reasonably estimable.

Answer 19

D. Probable and the amount is reasonably estimable.

Question 20

Healthy Life Company purchased 1,000 shares (4%) of stock in Silver’s Gym for $30 per share. By the end of the year, the stock price has decreased to $28 per share. How would the change in stock price affect Healthy Life’s net income?

A. Decrease net income by $28,000
B. Decrease net income by $30,000
C. Decrease net income by $2,000
D. No effect.

Answer 20

C. Decrease net income by $2,000

30 - 28 = 2
2*1,000 = $2000

Question 21

Selected financial data for Burton Company is provided below:
($ in millions)

Sales $ 50,000
Interest expense 1,000
Income tax expense 2,000
Net income 7,000
Total assets 60,000
Interest-bearing debt 16,000
Other liabilities 8,000
Total stockholders’ equity 36,000

What is the debt to equity ratio for Burton Company?

A. 0.67
B. 0.22
C. 2.25
D. 0.44

Answer 21

D. 0.44

$16,000 ÷ $36,000 = 0.44 (rounded)

Question 22

Sports Spectacular purchased 1,800 shares (8%) of stock in The Athletic Warehouse for $40 per share. By the end of the year, the stock price has increased to $42 per share. How would the change in stock price affect Sports Spectacular’s net income?

A. Increase net income by $75,600.
B. Increase net income by $72,000.
C. Increase net income by $3,600.
D. No effect.

Answer 22

C. Increase net income by $3,600.

42-40 = 2
2*1,800 = $3600

Notice increase in stock price corresponds to an increase in Net income

Question 23

The three primary categories of cash flows are cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities.

T/F

Answer 23

True

Question 24

Libby Company purchased 10% of the equity securities in another company for $100,000. At the end of the year, the fair value of the securities was $105,000. How should the investment be reported in the year-end financial statements?

A. An unrealized holding gain of $5,000 would be reported as a separate component of stockholders’ equity.
B. The investment in equity securities would be reported in the balance sheet at its $105,000 fair value.
C. The investment in equity securities would be reported in the balance sheet at its $105,000 fair value; an unrealized holding gain of $5,000 would be reported as a separate component of stockholders’ equity.
D. The investment in equity securities would be reported in the balance sheet at its $100,000 cost.

Answer 24

B. The investment in equity securities would be reported in the balance sheet at its $105,000 fair value.

Question 25

Babble Company signs a five-year installment note on January 1, 2024. At which of the following dates would the carrying value be the highest?

A. December 31, 2025
B. April 30, 2027
C. August 1, 2024
D. November 30, 2026

Answer 25

C. August 1, 2024

Each installment payment includes both an amount that represents interest and an amount that represents a reduction of the outstanding loan balance. The carrying value of the note decreases over time.

Question 26

Which depreciation method generally will result in the greatest amount of depreciation expense in the first year of the asset’s life?

A. Capitalization
B. Activity-based
C. Straight-line
D. Double-declining balance

Answer 26

D. Double-declining balance

Question 27

A.
B.
C.
D.

Question 28

The Common Stock account in a company’s balance sheet is measured as:

A. The number of common shares outstanding × the stock’s current market value per share.
B. The number of common shares outstanding × the stock’s par value per share.
C. The number of common shares issued × the stock’s par value per share.
D. The number of common shares issued × the stock’s current market value per share.

Answer 28

C. The number of common shares issued × the stock’s par value per share.

Question 29

The current portion of long-term debt should be:

A. Reported as a current liability in the balance sheet.
B. Paid immediately.
C. Combined with the rest of the long-term debt in the balance sheet.
D. Reported as a long-term liability in the balance sheet.

Answer 29

A. Reported as a current liability in the balance sheet.

Question 30

Kansas Enterprises purchased equipment for $81,500 on January 1, 2024. The equipment is expected to have a ten-year service life, with a residual value of $6,900 at the end of ten years.

Using the straight-line method, the book value at December 31, 2024, would be:

A. $73,350.
B. $74,040.
C. $74,600.
D. $67,140.

Answer 30

B. $74,040.

Depreciation expense = (($81,500 − $6,900) ÷ 10 years) = $7,460

Book value = $81,500 − $7,460 = $74,040

Question 31

Which of the following definitions describes a term bond?

A. Matures in installments.
B. Secured only by the “full faith and credit” of the issuing corporation.
C. Supported by specific assets pledged as collateral by the issuer.
D. Matures on a single date.

Answer 31

D. Matures on a single date.

Question 32

A company purchased a machine for $100,000 on October 1, 2024. The estimated service life is 10 years with a $10,000 residual value. The company calculates partial-year depreciation based on the number of months in service. Depreciation expense for the year ended December 31, 2024, using straight-line depreciation, is:

A. $1,500.
B. $2,500.
C. $2,250.
D. $7,500.

Answer 32

C. $2,250.

Depreciation expense = [($100,000 − $10,000) ÷ 10 years] × 3 ÷ 12 = $2,250

Question 33

Which of the following definitions describes a secured bond?

A. Secured only by the “full faith and credit” of the issuing corporation.
B. Supported by specific assets pledged as collateral by the issuer.
C. Matures in installments.
D. Matures on a single date.

Answer 33

B. Supported by specific assets pledged as collateral by the issuer.

Question 34

A company purchased $100,000 of 5%, 2-year bonds on July 1, 2024. The bonds were purchased at face amount. What is the amount of interest revenue as of December 31, 2024?

A. $2,500
B. $5,000
C. $10,000
D. None of these answer choices are correct.

Answer 34

A. $2,500

$100,000 × 5% × ½ year = $2,500

Question 35

The long-term assets section of the balance sheet is the place to look for investing activities.

T/F

Answer 35

True

Question 36

Assume net income was $100,000, depreciation expense was $8,000, accounts receivable decreased by $7,500, and accounts payable decreased by $2,500. The amount of net cash flows from operating activities is:

A. $103,000.
B. $100,000.
C. $108,000.
D. $113,000.

Answer 36

D. $113,000.

$100,000 + $8,000 + $7,500 − $2,500 = $113,000.

Question 37

Many intangible assets are not reported in the balance sheet at their estimated values.

T/F

Answer 37

True

Question 38

A company purchases its inventory from suppliers on account. During the year, its inventory account increased by $10 million and its accounts payable to suppliers decreased by $3 million. If cost of goods sold was $440 million, its cash outflows to inventory suppliers totaled:

A. $433 million.
B. $447 million.
C. $427 million.
D. $453 million.

Answer 38

D. $453 million.

Cost of goods sold $ 440
+ Increase in inventory 10
= Purchases 450
+ Decrease in accounts payable 3
= Cash paid to suppliers $ 453

Question 39

The cost of an engine tune-up is an example of which of the following expenditures after acquisition?

A. Improvements
B. Additions
C. Capitalized costs
D. Ordinary repairs and maintenance

Answer 39

D. Ordinary repairs and maintenance

Question 40

The purchase of treasury stock can boost earnings per share by:

A. Decreasing the company’s obligation to pay dividends.
B. Reducing the number of shares outstanding.
C. Increasing the number of shares outstanding.
D. Increasing profits.

Answer 40

B. Reducing the number of shares outstanding.

Question 41

When a company issues 25,000 shares of $1 par value common stock for $10 per share, this issuance would be reported as a(n):

A. Decrease to Additional Paid-in Capital for $25,000.
B. Increase to Common Stock for $25,000.
C. Increase to Cash for $25,000.
D. Increase to Additional Paid-in Capital for $250,000.

Answer 41

B. Increase to Common Stock for $25,000.

The transaction results in an increase in Cash of $250,000 ($10 × 25,000); increase in Common Stock of $25,000 ($1 × 25,000); and an increase in Additional Paid-in Capital of $225,000 ($250,000 − $225,000).

Question 42

When preparing a statement of cash flows using the indirect method, a decrease in accounts payable is subtracted from net income.

T/F

Answer 42

True

Question 43

Book value is equal to the original cost of the asset minus the current balance in Accumulated Depreciation.

T/F

Answer 43

True

Question 44

Consolidated financial statements combine the separate financial statements of the purchasing company and the acquired company into a single set of financial statements.

T/F

Answer 44

True

Question 45

Clothing Emporium was organized on January 1, 2024. The firm was authorized to issue 100,000 shares of $5 par value common stock. During 2024, Clothing Emporium had the following transactions relating to stockholders’ equity:

Issued 30,000 shares of common stock at $7 per share
Issued 20,000 shares of common stock at $8 per share
Reported a net income of $100,000
Paid dividends of $50,000

What is total paid-in capital at the end of 2024?

A. $370,000
B. $470,000
C. $420,000
D. $320,000

Answer 45

A. $370,000

[(30,000 × $7) + (20,000 × $8)] = $370,000

Question 46

Wealthy individuals willing to risk investment funds on a promising business venture.

Answer 46

Angel investors

Question 47

The amount invested by stockholders.

Answer 47

Paid-in capital

Question 48

Shares actually sold.

Answer 48

Issued stock

Question 49

Shares available to sell.

Answer 49

Authorized stock

Question 50

A negative balance in Retained Earnings.

Answer 50

Accumulated deficit

Question 51

The legal capital assigned per share of stock.

Answer 51

Par value

Question 52

The earnings not paid out in dividends.

Answer 52

Retained earnings

Question 53

Stockholders can lose no more than the amount they invested in the company.

Answer 53

Limited liability

Question 54

The corporation’s own stock that it acquired.

Answer 54

Treasury stock

Question 55

Shares held by investors.

Answer 55

Outstanding stock

Question 56

The balance sheet of Sand Sportswear reports total equity of $500,000 and $650,000 at the beginning and end of the year, respectively. The return on equity for the year is 20%. What is Sand Sportswear’s net income for the year?

A.$115,000
B. $100,000
C. $2,875,000
D. $130,000

Answer 56

A.$115,000

Net income divided by average total equity = 20%. Average total equity = $575,000 [($500,000 + $650,000) ÷ 2]; therefore, net income must be $115,000 ($575,000 × 20%).

Question 57

Which of the following would result in an increase in the current ratio, but not necessarily the acid-test ratio?

A. Decrease in current liabilities
B. Increase in quick assets
C. Decrease in current assets
D. Increase in current assets

Answer 57

D. Increase in current assets

Current Ratio: This is calculated as
Current Assets/Current Liabilities

An increase in the numerator (current assets) will increase the ratio, assuming current liabilities remain constant.

Acid-Test Ratio: Also known as the quick ratio, it is calculated as
Quick Assets/Current Liabilities
​
Where quick assets are current assets minus inventories and other non-liquid current assets.

Question 58

Under the indirect method, an increase in prepaid rent is added to net income to arrive at net cash flows from operating activities.

T/F

Answer 58

False

We would subtract an increase in prepaid rent from net income to arrive at net cash flows from operating activities under the indirect method.

Question 59

A line of credit is an informal agreement that permits a company to borrow up to a prearranged limit without having to follow formal loan procedures and paperwork.

T/F

Answer 59

True

Question 60

A statement of cash flows provides a summary of cash inflows and cash outflows during the reporting period.

T/F

Answer 60

True

Question 60

Consider the following items:

(a) Decrease in accounts receivable
(b) Issuance of common stock
(c) Increase in interest receivable
(d) Purchase of land
(e) Decrease in accounts payable
(f) Gain on the sale of equipment
(g) Depreciation expense
(h) Payment of dividends
(i) Decrease in utilities payable
(j) Increase in inventory

How many of these items would be added to net income when using the indirect method to prepare the operating activities section of the statement of cash flows?

A. 4
B. 3
C. 1
D. 2

Answer 60

D. 2

(a) Decrease in accounts receivable: Added back to net income. When accounts receivable decrease, it means cash has been received, increasing cash flow.

(b) Issuance of common stock: Not included in the operating activities section. It’s a financing activity.

(c) Increase in interest receivable: Not typically added back to net income in the operating activities section.

(d) Purchase of land: Not included in the operating activities section. It’s an investing activity.

(e) Decrease in accounts payable: Deducted from net income. A decrease in accounts payable implies that cash has been used to settle debts, reducing cash flow.

(f) Gain on the sale of equipment: Deducted from net income. Gains are added back to net income in the income statement but need to be removed for cash flow purposes since they don’t involve actual cash inflow.

(g) Depreciation expense: Added back to net income. It’s a non-cash expense that reduces net income but does not affect cash flow.

(h) Payment of dividends: Not included in the operating activities section. It’s a financing activity.

(i) Decrease in utilities payable: Similar to accounts payable, a decrease here would be deducted from net income for cash flow purposes.

(j) Increase in inventory: Deducted from net income. An increase in inventory is a use of cash.

So, the items that would be added back to net income when preparing the cash flow statement using the indirect method are: (a) Decrease in accounts receivable, and (g) Depreciation expense.

Therefore, the answer is 2.

Question 61

We report treasury stock at the cost of the shares acquired.

T/F

Answer 61

True

Question 62

Investments in equity securities are reported at fair value when a company has an insignificant influence over another company in which it invests.

T/F

Answer 62

True.

When a company invests in equity securities of another company and has an insignificant influence over that company, the investment is typically reported at fair value. This is in accordance with financial reporting standards such as the International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) in the U.S.

In cases where the investor does not have significant influence or control (typically interpreted as owning less than 20% of the investee’s voting stock), the investment is accounted for using the fair value method. Changes in the fair value of these securities are usually recognized in the income statement, reflecting gains or losses due to market fluctuations.

Question 63

On September 1, 2024, Daylight Donuts signed a $100,000, 9%, six-month note payable with the amount borrowed plus accrued interest due six months later on March 1, 2025. Daylight Donuts should report interest payable at December 31, 2024, in the amount of:

A. $4,500
B. $3,000
C. $1,500
D. $0

Answer 63

B. $3,000

($100,000 × 9%) × 4 ÷ 12 = $3,000

Question 64

Under the indirect method, when there is an increase in accounts receivable, the corresponding amount of sales revenue needs to be added to net income so that only the cash portion of sales revenue remains.

T/F

Answer 64

False

An increase in accounts receivable represents sales to customers (accrual-basis revenue) that have not yet been collected (no operating cash inflow). We need to remove this amount of revenue from net income so that only the cash portion of sales revenue remains.

Question 64

Cash received from the sale of salvaged materials increases the total capitalized cost of land.

T/F

Answer 64

False

Cash received from the sale of salvaged materials decreases the total capitalized cost of land.

Question 64

Cash flows from investing activities do not include cash flows from:

A. Borrowing
B. The purchase of land and buildings.
C. The sale of equipment.
D. Lending.

Answer 64

A. Borrowing

Question 65

Assuming net income for the year is $220,000 and consider the following information, what is the net cash flows from operating activities?

Increase in salaries payable $ 18,000
Depreciation expense 7,500
Increase in prepaid rent 29,000
Loss on sale of asset 1,250
Increase in accounts payable 28,500
Increase in inventory 61,000

A. $214,250
B. $185,250
C. $221,750
D. $308,750

Answer 65

B. $185,250

Net income $ 220,000
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation expense 7,500
Loss on sale of asset 1,250
Increase in prepaid rent (29,000)
Increase in inventory (61,000)
Increase in accounts payable 28,500
Increase in salaries payable 18,000
Net cash flows from operating activities $ 185,250

Question 65

Property, plant, and equipment are types of tangible assets.

T/F

Answer 65

True

Question 65

If Pop Company exercises significant influence over Son Company and owns 40% of its common stock, then Pop Company:

A. Would report dividends received from Son Company as investment revenue.
B. Would increase Investments account when Son Company declares dividends.
C. Would report 40% of the net income of Son Company as equity income each year.
D. All of these answer choices are correct.

Answer 65

C. Would report 40% of the net income of Son Company as equity income each year.

Question 66

Which of the following financing alternatives has the highest preference for dividends/interest payments?

A. Common stock
B. Preferred stock
C. Bonds
D. All of the other answer choices have equal preference.

Answer 66

C. Bonds

Question 67

All of the other answer choices have equal preference.

T/F

Answer 67

True

Issued stock is the number of shares that have been sold to investors. Outstanding stock is the number of shares held by investors. Issued stock includes treasury stock. Outstanding stock excludes treasury stock.

Question 67

One of the primary reasons for investing in debt securities includes:

A. Receiving dividend payments.
B. Deducting interest payments for tax purposes.
C. Acquiring significant influence.
D. Earning interest revenue.

Answer 67

D. Earning interest revenue.

Question 68

Financing activities include cash receipts and cash payments for transactions relating to revenue and expense activities.

T/F

Answer 68

False

Operating activities include cash receipts and cash payments for transactions relating to revenue and expense activities.

Question 68

Which of the following is correct about the statement of cash flows?

A. Collecting interest earned from a note receivable creates a cash inflow from investing activities.
B. The repayment of long-term debt is a cash inflow from financing activities.
C. Paying dividends to investors creates a cash outflow from financing activities.
D. A company with a net loss will always have a net cash outflow from operating activities.

Answer 68

C. Paying dividends to investors creates a cash outflow from financing activities.

Question 69

Why would a corporation purchase its own stock?

A. To distribute surplus cash without paying dividends.
B. To boost earnings per share.
C. To satisfy employee stock ownership plans.
D. All of the other answer choices are correct.

Answer 69

D. All of the other answer choices are correct.

Question 70

We report a long-term asset at its cost less all expenditures necessary to get the asset ready for use.

T/F

Answer 70

False

We report a long-term asset at its cost plus all expenditures necessary to get the asset ready for use.

Question 71

In preparing a statement of cash flows under the indirect method, adjustments to net income include:

A. Removing noncash revenues and noncash expenses.
B. Removing nonoperating gains and nonoperating losses.
C. Adjusting for changes in current assets and changes in current liabilities.
D. All of these answers are adjustments needed under the indirect method.

Answer 71

D. All of these answers are adjustments needed under the indirect method.

Question 71

The balance sheet of Logan Company reports total assets of $750,000 and $800,000 at the beginning and end of the year, respectively. Sales revenues are $1.5 million ($1.2 million in the previous year), net income is $150,000, and net cash flows from operating activities are $175,000. What is Logan’s cash return on assets?

A. 22.6%
B. 18.8%
C. 21.9%
D. 19.4%

Answer 71

A. 22.6%

Operating Cash Flows ÷ Average Total Assets = Cash Return on Assets
$ 175,000 ÷ ($750,000 + $800,000) ÷ 2 = 22.6% (rounded)

Question 71

Unified Airlines is being sued by Northeast Airlines for $5,000,000. At the end of the year, Unified feels it is probable that it will pay $5,000,000 at some point in the following year. What should Unified and Northeast report at the end of the year concerning the lawsuit?

A. Unified reports a $5,000,000 loss; Northeast does not report any gain.
B. Neither company reports a loss or gain.
C. Unified does not report any loss; Northeast reports a $5,000,000 gain.
D. Unified reports a $5,000,000 loss; Northeast reports a $5,000,000 gain.

Answer 71

A. Unified reports a $5,000,000 loss; Northeast does not report any gain.

Question 72

Under the indirect method, a decrease in accounts receivable is added to net income to arrive at net cash flows from operating activities.

T/F

Answer 72

True

Question 72

Under the equity method, the investor includes in net income its portion of the investee’s net income.

T/F

Answer 72

True

Question 73

_____________blank is an investing cash flow and _____________blank is a financing cash flow, as reported in the statement of cash flows.

A. Issuing bonds; selling investments
B. Receiving cash from the sale of inventory; paying cash dividends
C. Purchasing treasury stock; lending cash to an employee
D. Purchasing land; repaying a bank loan

Answer 73

D. Purchasing land; repaying a bank loan

Question 73

In the operating activities section of the statement of cash flows, we start with net income when using:

A. The indirect method.
B. Both the direct and the indirect method.
C. The direct method.
D. Neither the direct nor the indirect method.

Answer 73

A. The indirect method.

Question 73

Investing activities include cash transactions involving the purchase and sale of long-term assets and current investments.

T/F

Answer 73

True

Question 74

A bond issue with a face amount of $500,000 bears interest at the rate of 7%. The current market rate of interest is 6%. These bonds will sell at a price that is:

A. Equal to $500,000.
B. Less than $500,000.
C. The answer cannot be determined from the information provided.
D. More than $500,000.

Answer 74

D. More than $500,000.

Here’s why:

Coupon Rate vs. Market Rate: The bond issue has a coupon interest rate of 7%, while the current market interest rate is 6%. The coupon rate is higher than the market rate.

Pricing of Bonds: Bonds are priced based on how their coupon rate compares to the market rate of interest. If the bond’s coupon rate is higher than the current market rate, the bond offers a more attractive return than what’s currently available in the market. This higher return makes the bond more valuable to investors.

Premium Pricing: As a result, investors are willing to pay more than the face value of the bond to secure this higher interest income. Therefore, the bonds will sell at a premium, which means their selling price will be more than the face amount of $500,000.

In summary, the higher coupon rate compared to the market rate makes the bond more desirable and leads to it being sold at a price above its face value.

Question 74

Kansas Enterprises purchased equipment for $60,000 on January 1, 2024. The equipment is expected to have a five-year service life, with a residual value of $5,000 at the end of five years.

Using the straight-line method, depreciation expense for 2025 and the book value at December 31, 2025, would be:

A. $12,000 and $31,000, respectively.
B. $11,000 and $38,000, respectively.
C. $12,000 and $36,000, respectively.
D. $11,000 and $33,000, respectively.

Answer 74

B. $11,000 and $38,000, respectively.

Depreciation expense = (($60,000 − $5,000) ÷ 5 years) = $11,000

Book value = $60,000 − ($11,000 × 2 years) = $38,000

Question 75

The payment of salaries is classified in the statement of cash flows as a(n):

A. Financing activity.
B. Noncash activity.
C. Operating activity.
D. Investing activity.

Answer 75

C. Operating activity.

Question 75

Capital expenditures (or CAPEX) represent investments in capital assets and are included in financing activities.

T/F

Answer 75

False

Capital expenditures are included in investing activities, not financing activities.

Question 76

The mixture of liabilities and stockholders’ equity a business uses is called its capital structure.

T/F

Answer 76

True

Question 77

When an investment is made in another corporation’s common stock, what is the effect on total stockholders’ equity?

A. Decrease
B. Increase
C. No effect
D. Cannot determine from the given information

Answer 77

C. No effect

Question 78

During the year, Next Tec Corporation had the following cash flows: receipt from customers, $10,000; receipt from the bank for long-term borrowing, $6,000; payment to suppliers, $5,000; payment of dividends, $1,000; payment to workers, $2,000; and payment for machinery, $8,000. What amount would be reported for net investing cash inflows (outflows) in the statement of cash flows?

A. ($8,000).
B. $2,000.
C. $6,000.
D. $5,000.

Answer 78

A. ($8,000).

Question 79

On January 1, 2024, Nana Company paid $100,000 for 8,000 shares (10%) of the common stock of Papa Company. Papa reported net income of $52,000 for the year ended December 31, 2024. The fair value of the Papa common stock on that date was $45 per share. What amount will be reported in the balance sheet of Nana Company for the investment in Papa at December 31, 2024?

A. $284,400
B. $360,000
C. $300,000
D. $315,600

Answer 79

B. $360,000

$45 × 8,000 shares = $360,000

Question 80

Jannette Corporation reports net income of $520,000 that includes depreciation expense of $78,000 and stock-based compensation expense of $89,000. Also, cash of $48,000 was borrowed on a six-year note payable. Based on this data, total cash inflows from operating activities are:

A. $568,000.
B. $646,000.
C. $687,000.
D. $442,000.

Answer 80

C. $687,000.

$520,000 + $78,000 + $89,000 = $687,000. The $48,000 cash borrowed is a financing activity.

Question 80

When a company declares and pays a cash dividend, its balance sheet is impacted on the:

A. record date and payment date.
B. declaration date, record date, and payment date.
C. declaration date and record date.
D. declaration date and payment date.

Answer 80

D. declaration date and payment date.

Question 81

The Treasury Stock account:

A. increases stockholders’ equity.
B. decreases stockholders’ equity.
C. is reported as an investment.
D. normally is reported in the income statement.

Answer 81

B. decreases stockholders’ equity.

Question 82

Which of the following is added to net income as an adjustment under the indirect method of preparing the statement of cash flows?

A. Gain on the sale of land.
B. Inventory increase.
C. Accounts receivable increase.
D. Salaries payable increase.

Answer 82

D. Salaries payable increase.

Question 83

In the event a corporation is dissolved, common stockholders receive preference over preferred stockholders in the distribution of assets.

T/F

Answer 83

False

Preferred stockholders received preference over common stockholders in the distribution of assets in the event the corporation is dissolved.

Question 84

A liability is an obligation of a company to transfer some economic benefit in the future.

T/F

Answer 84

True

Question 85

An investor owns 40% of the common voting shares in the company and can exercise significant influence.

Answer 85

Equity method

Question 86

Debt security that is reported at historical cost (or at amortized cost if the bonds were issued at a discount or premium).

Answer 86

Held-to-maturity securities

Question 87

Investor owns 2% of the outstanding shares of another company’s common voting shares.

Answer 87

Fair value method

Question 88

An investor owns over 50% of the common voting shares in the company.

Answer 88

Consolidated financial statements

Question 89

Debt investments that the investor expects to sell (trade) in the near future.

Answer 89

Trading securities

Question 90

Allows the issuer to pay off the bonds early at a fixed price.

Answer 90

Callable bond

Question 91

Allows the investor to transfer each bond into shares of common stock.

Answer 91

Convertible bond

Question 92

Includes underwriting, legal, accounting, registration, and printing fees.

Answer 92

Bond issue costs

Question 93

Sale of debt securities directly to a single investor.

Answer 93

Private placement

Question 94

When insignificant influence exists, an investment in equity securities should be accounted for by the equity method.

T/F

Answer 94

False

When insignificant influence exists, the investment should be accounted for by the fair value method.

Question 95

Earnings per share (EPS) measures the net income earned per share of common stock outstanding.

T/F

Answer 95

True

Question 96

The collection of cash from customers would be classified as which type of cash flow on the statement of cash flows?

A. Operating
B. Investing
C. Financing
D. Not Reported on the Statement of Cashflows

Answer 96

A. Operating

Question 97

One of the primary reasons for investing in equity securities includes:

A. Earning interest revenue.
B. Deducting dividend payments for tax purposes.
C. Appreciation in the value of the stock.
D. Acquiring debt of competing companies.

Answer 97

C. Appreciation in the value of the stock.

Question 98

The factors used to compute depreciation expense are an asset’s:

A. Cost, residual value, and service life
B. Cost, residual value, and physical life
C. Cost, replacement value, and service life
D. Fair value, residual value, and economic life

Answer 98

A. Cost, residual value, and service life

Question 99

When a company delivers a product or service for which a customer has previously paid, the company recognizes a(n):

A. Decrease in revenues and increase in liabilities
B. Increase in revenues and increase in liabilities
C. Increase in revenues and decrease in liabilities
D. Decrease in revenues and decrease in liabilities

Answer 99

C. Increase in revenues and decrease in liabilities