Practice Test Flashcards
Corporations generally receive more favorable tax treatment than sole proprietorships and corporations.
True False
False
Which is not one of the three forms of business organization?
Corporation Sole proprietorship Partnership Creditorship
Creditorship
Which 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 Increased difficulty of raising funds
Reduced legal liability for investors
Easy transfer of ownership is a characteristic of which form of business organization?
Partnership Corporation Sole proprietorship All of the answer choices are correct
Corporation
In which forms of business organization are the owners personally liable for all the debts of the business?
Sole proprietorships and corporations Sole proprietorships and partnerships Partnership and corporation All of the answer choices are correct
Sole proprietorships and partnerships
The sole proprietorship form of business organization
combines the records of the business with the personal records of the owner.
is classified as a separate legal entity.
must have at least two owners in most states.
generally receives favorable tax treatment relative to a corporation.
generally receives favorable tax treatment relative to a corporation.
Which forms of business organization are considered to be separate accounting entities?
Only corporations
Partnerships and corporations only
Sole proprietorships, corporations, and partnerships
Sole proprietorships and partnerships only
Sole proprietorships, corporations, and partnerships
Internal users of accounting information include a company’s stockholders.
True False
False
To which of the following questions will internal users want answers?
Which product line is most profitable?
Is cash sufficient to pay dividends to
stockholders?
All of the answer choices are correct.
What selling price for our product will maximize the company’s net income?
All of the answer choices are correct.
Which of the following is not an external user of accounting data?
Economic planners Chief Financial Officer Labor unions Customers
Chief Financial Officer
Which statement about users of accounting information is incorrect?
Present creditors are considered external users.
Regulatory authorities are considered internal users.
Management is considered an internal user.
Taxing authorities are considered external users.
Regulatory authorities are considered internal users.
Which of the following did not result from the Sarbanes-Oxley Act?
Tax rates on corporations increased.
Auditors cannot provide non-audit services to the same client.
Top management must now certify the accuracy of financial information.
Penalties for fraudulent activity increased.
Tax rates on corporations increased.
Which of the following is the most appropriate definition of accounting information?
Electronic collection and organization of vast amounts of financial information
The information system that identifies, records, and communicates the economic events of an organization to interested users
The interconnected network of subsystems necessary to operate a business
A means of collecting information
The information system that identifies, records, and communicates the economic events of an organization to interested users
Which of the following is required as a result of SOX?
Companies that go bankrupt must repay shareholders for loss investments.
Public companies must present audited financial statements.
All shareholders now have an oversight role of the company’s financial activities.
Top management must certify the financial statements for their company.
Top management must certify the financial statements for their company.
Interest expense is classified under operating activities on the statement of cash flows.
True False
True
Paying interest expense and receiving interest revenue are examples of
Delivery activities. Investing activities. Financing activities. Operating activities.
Operating activities.
The payment of dividends is an example of a(n)
Delivery activity. Financing activity. Operating activity. Investing activity.
Financing activity.
Which of the following is not one of the three primary business activities?
Investing Financing Operating Advertising
Advertising
Which of the following is an example of a financing activity?
Issuing shares of common stock Buying delivery equipment Selling goods on account Buying inventory
Issuing shares of common stock
Resources owned by a business are referred to as
stockholders’ equity. revenues. liabilities. assets.
assets
In terms of the principal types of business activities, paying salaries expense is an example of
advertising activities. investing activities. operating activities. financing activities.
operating activities.
What kind of classification is cost of goods sold?
Asset Liability Revenue Expense
Expense
Which of the following would not appear on the income statement?
Service revenue Interest expense Dividends paid Net income
Dividends paid
Which of the following would not appear on the retained earnings statement?
Service revenue Beginning retained earnings balance Net income Dividends
Service revenue
Net income will result during a time period when
assets exceed liabilities. expenses exceed revenues. revenues exceed expenses. assets exceed revenues.
revenues exceed expenses.
The financial statements for Harold Corporation contained the following information:
Accounts receivable $ 5,000 Sales revenue 75,000 Cash 15,000 Salaries and wages expense 20,000 Rent expense 10,000
How much was Harold’s net income?
$65,000 $60,000 $45,000 $15,000
$45,000
Net income = Sales revenue($75,000) - Salaries and wages expense ($20,000) - Rent expense($10,000) = $45,000.
The balance sheet reports assets and claims to those assets at a specific point in time.
True False
True
The statement of cash flows reports net income, investing, and financing activities.
True False
False
In which of the following sequences are the financial statements usually prepared?
Income statement, retained earnings statement, balance sheet, and statement of cash flows
Balance sheet, statement of cash flows, income statement and retained earnings statement
Income statement, balance sheet, retained earnings statement, and statement of cash flows
Balance sheet, retained earnings statement, statement of cash flows, and income statement
Income statement, retained earnings statement, balance sheet, and statement of cash flows
Saira’s Maid Service began the year with total assets of $120,000 and stockholders’ equity of $40,000. During the year the company earned $90,000 in net income and paid $20,000 in dividends. Total assets at the end of the year were $215,000. How much was stockholders’ equity at the end of the year?
$130,000 $150,000 $110,000 $135,000
$110,000
The sum of the beginning balance of stockholders’ equity ($40,000) plus net income ($90,000) less the dividends paid ($20,000) during the period results in the ending balance of $110,000.
Which statement presents information as of a specific point in time?
Retained earnings statement Income statement Statement of cash flows Balance sheet
Balance sheet
How is the issuance of common stock reported on the statement of cash flows?
Investing activity Marketing activity Operating activity Financing activity
Financing activity
What section of a cash flow statement shows the cash spent on new equipment during the past accounting period?
The investing section The operating section The financing section The cash flow statement does not give this information
The investing section
Which financial statement reports assets, liabilities, and stockholders’ equity?
Statement of cash flows. Income statement. Retained earnings statement. Balance sheet.
Balance sheet.
The ending retained earnings balance appears on
Both the retained earnings statement and the balance sheet.
The retained earnings statement only.
The balance sheet only.
The income statement and the retained earnings statement.
Both the retained earnings statement and the balance sheet.
Saira’s Maid Service began the year with total assets of $120,000 and stockholders’ equity of $40,000. During the year the company earned $90,000 in net income and paid $20,000 in dividends. Total assets at the end of the year were $215,000. How much are total liabilities at the end of the year?
$110,000 $105,000 $80,000 $90,000
$80,000
The balance sheet
reports the changes in assets, liabilities, and stockholders’ equity over a period of time.
summarizes the changes in total equity for a specific period of time.
reports the assets, liabilities, and stockholders’ equity at a specific date.
presents the revenues and expenses for a specific period of time.
reports the assets, liabilities, and stockholders’ equity at a specific date.
If total liabilities decreased by $15,000 and stockholders’ equity increased by $5,000 during a period of time, then total assets must change by what amount and direction during that same period?
$10,000 decrease $10,000 increase $20,000 increase $15,000 decrease
$10,000 decrease
The accounting equation: Assets = Liabilities + Stockholders’ Equity, can be used to determine the answer. Therefore, change in assets = ($15,000) + $5,000 = ($10,000)
Stockholders’ equity represents
the difference between revenues and expenses.
economics resouces to be used in the future.
claims of owners.
claims of creditors.
claims of owners.
As of December 31, 2014, Stoneland Corporation has assets of $3,500 and stockholders’ equity of $2,000. How much are the liabilities for Stoneland Corporation as of December 31, 2014?
$2,000 $1,000 $2,500 $1,500
$1,500
Using the accounting equation, liabilities can be computed by subtracting stockholders’ equity from assets, or $3,500 - $2,000 = $1,500.
The notes to the financial statements are not required if a company presents all 4 financial statements.
True False
False
Only Certified Public Accountants may perform audits.
True False
True
The segment of a corporation’s annual report that describes the corporation’s accounting methods is the
auditor’s report. income statement. notes to the financial statements. management discussion and analysis.
notes to the financial statements.
The segment of the annual report that presents an opinion regarding the fairness of the presentation of the financial position and results of operations is/are the
auditor’s opinion. financial statements. balance sheet. income statement.
auditor’s opinion.
When the auditor is satisfied that the financial statements provide a fair representation of the company’s financial position and results of operation in accordance with generally accepted accounting principles, the auditor will express
a qualified opinion. unqualified opinion. a disclaimer of opinion. an adverse opinion.
unqualified opinion.
An annual report includes all of the following except
notes to the financial statements.
an auditor’s report.
a listing of all of the stockholders.
a management discussion and analysis section.
a listing of all of the stockholders.
Which section of the annual report presents highlights of favorable or unfavorable trends and identifies significant events and uncertainties affecting a company’s ability to pay near-term obligations, and a company’s ability to fund operations and expansion?
Financial statements Management discussion and analysis Notes to the financial statements Auditor's report
Management discussion and analysis
Which of the following are not considered to be primary users of financial statements in countries outside the U.S.?
Economic advisors Tax authorities Central government planners Private investors
Central government planners
The most common description of IFRS as contrasted to GAAP is that
GAAP is rules based and IFRS is rules based.
GAAP is principles based and IFRS is rules based.
GAAP is rules based and IFRS is principles based.
GAAP is principles based and IFRS is concepts based.
GAAP is rules based and IFRS is principles based.
IFRS stand for:
International Financial Reporting Standards. International Finance Regulatory Stipulations. International Fiscal Regulatory Standards. International Financial Regulatory Schema.
International Financial Reporting Standards.
Current assets are economic resources that are expected to be converted to cash or used up by the business within one year or the normal operating cycle, whichever is shorter.
True
False
False
Current assets are expected to be converted to cash or consumed within the next year or the normal operating cycle, whichever is longer.
In a classified balance sheet, how are assets usually classified?
Current assets; long-term investments; property, plant, and equipment; and intangible assets
Current assets; long-term investments; property, plant, and equipment; and common stock
Current assets; long-term assets; property, plant, and equipment; and intangible assets
Current assets; long-term investments; tangible assets; and intangible assets
Current assets; long-term investments; property, plant, and equipment; and intangible assets
In what order are current assets listed?
Alphabetically
By importance
By liquidity
By longevity
By liquidity
The correct order of presentation in a classified balance sheet for the following current assets is
cash, accounts receivable, inventories, prepaid insurance.
inventories, cash, accounts receivable, prepaid insurance.
accounts receivable, cash, prepaid insurance, inventories.
cash, inventories, accounts receivable, prepaid insurance.
cash, accounts receivable, inventories, prepaid insurance.
A company purchased a tract of land on which it expects to build a production plant on in approximately five years. During the five years before construction, the land will be idle. In what classification should the land be reported?
Property, plant, and equipment Land expense A long-term investment An intangible asset
A long-term investment
Which of the following is not classified as a current asset?
Patents
Inventory
Prepaid expenses
Accounts receivable
Patents
Which of the following is the correct order for listing current assets on the balance sheet?
Cash, accounts receivable, prepaid expenses, inventories, short-term investments
Cash, short-term investments, inventories, prepaid expenses, accounts receivable
Cash, accounts receivable, inventories, short-term investments, prepaid expenses
Cash, short-term investments, accounts receivable, inventories, prepaid expenses
Cash, short-term investments, accounts receivable, inventories, prepaid expenses
Which of the following is an example of an intangible asset?
Property, plant, and equipment
Trademarks
Accounts receivable
Prepaid expenses
Trademarks
Which of the following is considered property, plant, and equipment on a classified balance sheet?
Copyright
Supplies
Investment in Intel Corporation stock
Land
Land
Current liabilities are $10,000, long-term liabilities are $20,000, common stock is $50,000, and retained earnings totals $70,000. How much is total stockholders’ equity?
$140,000
$150,000
$120,000
$70,000
$120,000
Common stock and retained earnings are both elements of stockholders’ equity. Common stock of $50,000 plus retained earnings of $70,000 equals $120,000 in stockholders’ equity.
Which one of the following is not an alternate means of expressing a ratio?
Dollar amount
Proportion
Percentage
Rate
Dollar amount
Earnings per share is computed by dividing net income
less preferred stock dividends by the average common shares outstanding.
less preferred stock dividends by the ending common shares outstanding.
by the average common shares outstanding.
by the ending common shares outstanding.
less preferred stock dividends by the average common shares outstanding.
Which is an indicator of profitability?
Earnings per share
Debt to total assets ratio
Current ratio
Free cash flow
Earnings per share
For 2014, Stoneland Corporation reported net income, $24,000; net sales, $400,000; and average shares outstanding, 6,000. There were no preferred stock dividends. How much was the 2014 earnings per share?
$0.06
$66.67
$16.67
$4.00
$4.00
Net income ($24,000) divided by average shares outstanding (6,000) = $4.00/share.
Net income is $200,000, preferred dividends are $20,000, and average common shares outstanding are 50,000. How much is earnings per share?
$0.28
$0.25
$3.60
$4.00
$3.60
Earnings per share of $3.60 is calculated by dividing earnings available to common stockholders ($200,000 - $20,000) by the average number of common shares outstanding (50,000) = $3.60/share.
Which of the following does not properly reflect a financial ratio?
- 4%
7: 1
$7,200
$0.60 per dollar
$7,200
The following balances and amounts were taken from the financial statements of Ortiz, Inc. The data are presented in alphabetical order.
Accounts payable $35,000 Accounts receivable 37,500 Average common shares 20,000 Average current liabilities 110,000 Average and total assets 600,000 Average total liabilities 320,000 Cash 100,000 Cash provided by operations $90,000 Net income 36,000 Salaries and wages payable 8,000 Stockholders’ equity 240,000 Total current assets 300,000 Total current liabilities 120,000
How much is earnings per share?
$1.20
$0.56
$1.80
$0.15
$1.80
At December 31, 2014, Shorts Company had retained earnings of $2,184,000. During 2014, the company issued stock for $98,000, and paid dividends of $34,000. Net income for 2014 was $402,000. How much was the retained earnings balance at the beginning of 2014?
$1,816,000
$2,552,000
$2,454,000
$1,914,000
$1,816,000
The beginning balance of retained earnings is the ending balance minus net income plus dividends. Working backwards, $X + $402,000 - $34,000 = $2,184,000. Therefore, beginning retained earnings = $1,816,000.
Issuing new shares of common stock will
decrease retained earnings.
decrease common stock.
increase retained earnings.
increase common stock.
increase common stock.
Which statement is used by most corporations instead of the retained earnings statement?
Statement of stockholders’ equity
Statement of cash flows
Balance sheet
Statement of owners’ equity
Statement of stockholders’ equity
Which one of the following does not affect retained earnings?
Issuance of common stock
Dividends
Net income
Net loss
Issuance of common stock
The current ratio is a liquidity ratio that is computed as current assets divided by current liabilities.
True
False
True
The following ratios are available for Leer Inc. and Stable Inc.
Current Ratio Debt to Assets Ratio Earnings per Share
Leer Inc. 2:1 75% $3.50
Stable Inc. 1.5:1 40% $2.75
Compared to Stable Inc., Leer Inc. has
lower liquidity, higher solvency, and higher profitability.
higher liquidity and lower solvency, but profitability cannot be compared based on information provided.
higher liquidity, higher solvency, but profitability cannot be compared based on information provided.
higher liquidity, lower solvency, and higher profitability.
higher liquidity and lower solvency, but profitability cannot be compared based on information provided.
Which of these measures is an evaluation of a company’s ability to pay current liabilities?
None of these answer choices are correct
Both earnings per share and current ratio
Current ratio
Earnings per share
check
