Financial Accounting 3rd Edition Test Bank Spiceland

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Financial Accounting 3rd Edition Test Bank Spiceland

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File: Chapter 012 Financial Statement Analysis

True/False

[QUESTION]
1. We can use ratios to help evaluate a firms performance and financial position.
Answer: True
Learning Objective: 12-01
Difficulty: Easy
AACSB: Reflective Thinking
AICPA: FN Decision Making
Blooms: Remember
Topic: Comparison of Financial Accounting Information

[QUESTION]
2. Vertical analysis expresses each item in a financial statement as a percentage of the same base amount.
Answer: True
Learning Objective: 12-01
Difficulty: Easy
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Remember
Topic: Vertical Analysis

[QUESTION]
3. Vertical analysis calculates the amount and percentage change of an account over time.
Answer: False
Feedback: Horizontal analysis calculates the amount and percentage change of an account over time.
Learning Objective: 12-01
Difficulty: Easy
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Remember
Topic: Vertical Analysis

[QUESTION]
4. We use vertical analysis for income statement accounts, but not balance sheet accounts.
Answer: False
Feedback: We use vertical analysis for income statement and balance sheet accounts.
Learning Objective: 12-01
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Understand
Topic: Vertical Analysis

[QUESTION]
5. We use vertical analysis to express each income statement item as a percentage of sales.
Answer: True
Learning Objective: 12-01
Difficulty: Easy
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Remember
Topic: Vertical Analysis

[QUESTION]
6. For vertical analysis, we express each balance sheet item as a percentage of sales.
Answer: False
Feedback: For vertical analysis, we express each balance sheet item as a percentage of total assets.
Learning Objective: 12-01
Difficulty: Easy
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Remember
Topic: Vertical Analysis

[QUESTION]
7. Horizontal analysis analyzes trends in financial statement data for a single company over time.
Answer: True
Learning Objective: 12-02
Difficulty: Easy
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Remember
Topic: Horizontal Analysis

[QUESTION]
8. If the base-year amount is zero, we cant calculate a percentage change under horizontal analysis.
Answer: True
Learning Objective: 12-02
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Understand
Topic: Horizontal Analysis

[QUESTION]
9. Using horizontal analysis, if the base year is negative and the following year is positive, the percentage change is just as useful as if the base year and the following year were both positive.
Answer: False
Feedback: If the base year is negative and the following year is positive, the percentage change is not useful.
Learning Objective: 12-02
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Decision Making
Blooms: Understand
Topic: Horizontal Analysis

[QUESTION]
10. We use horizontal analysis to analyze trends in financial statement data, such as the dollar amount of change and the percentage change, for one company over time.
Answer: True
Learning Objective: 12-02
Difficulty: Easy
AACSB: Reflective Thinking
AICPA: FN Decision Making
Blooms: Remember
Topic: Horizontal Analysis

[QUESTION]
11. We measure income statement accounts at a point in time and balance sheet accounts over a period of time.
Answer: False
Feedback: We measure income statement accounts over a period of time and balance sheet accounts at a point in time.
Learning Objective: 12-03
Learning Objective: 12-04
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Understand
Topic: Ratio Analysis

[QUESTION]
12. Ratios that compare an income statement account with a balance sheet account should express the balance sheet account as an average of the beginning and ending balances.
Answer: True
Learning Objective: 12-03
Difficulty: Easy
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Remember
Topic: Ratio Analysis

[QUESTION]
13. Every liquidity ratio is calculated using one or more current asset accounts.
Answer: True
Learning Objective: 12-03
Difficulty: Easy
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Remember
Topic: Liquidity Ratios

[QUESTION]
14. Solvency refers to a companys ability to pay its current liabilities while liquidity refers to a companys ability to pay its long-term liabilities.
Answer: False
Feedback: Liquidity refers to a companys ability to pay its current liabilities. Solvency refers to a companys ability to pay its long-term liabilities.
Learning Objective: 12-03
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Understand
Topic: Liquidity Ratios
Topic: Solvency Ratios

[QUESTION]
15. The receivables turnover ratio measures how many times, on average, a company collects its receivables during the year.
Answer: True
Learning Objective: 12-03
Difficulty: Easy
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Remember
Topic: Receivables Turnover Ratio

[QUESTION]
16. A low receivables turnover ratio is a positive sign that a company can quickly turn its receivables into cash.
Answer: False
Feedback: A high receivables turnover ratio is a positive sign that a company can quickly turn its receivables into cash.
Learning Objective: 12-03
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Decision Making
Blooms: Understand
Topic: Receivables Turnover Ratio

[QUESTION]
17. The average collection period converts the receivables turnover ratio into days.
Answer: True
Learning Objective: 12-03
Difficulty: Easy
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Remember
Topic: Average Collection Period

[QUESTION]
18. A low inventory turnover ratio usually is a positive sign and indicates that inventory is selling quickly.
Answer: False
Feedback: A high inventory turnover ratio usually is a positive sign and indicates that inventory is selling quickly.
Learning Objective: 12-03
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Decision Making
Blooms: Understand
Topic: Inventory Turnover Ratio

[QUESTION]
19. An extremely high inventory turnover ratio may be a signal that the company is losing sales due to inventory shortages.
Answer: True
Learning Objective: 12-03
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Decision Making
Blooms: Understand
Topic: Inventory Turnover Ratio

[QUESTION]
20. The average days in inventory converts the inventory turnover ratio into days.
Answer: True
Learning Objective: 12-03
Difficulty: Easy
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Remember
Topic: Average Days in Inventory

[QUESTION]
21. A low current ratio indicates that a company has sufficient current assets to pay current liabilities as they become due.
Answer: False
Feedback: A high current ratio indicates that a company has sufficient current assets to pay current liabilities as they become due.
Learning Objective: 12-03
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Decision Making
Blooms: Understand
Topic: Current Ratio

[QUESTION]
22. The acid-test ratio is always smaller than the current ratio.
Answer: True
Learning Objective: 12-03
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Understand
Topic: Acid-Test Ratio

[QUESTION]
23. Other things being equal, the higher the debt to equity ratio, the higher the risk of bankruptcy.
Answer: True
Learning Objective: 12-03
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Decision Making
Blooms: Understand
Topic: Debt to Equity Ratio

[QUESTION]
24. We use the times interest earned ratio to compare interest payments with a companys income available to pay those charges.
Answer: True
Learning Objective: 12-03
Difficulty: Easy
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Remember
Topic: Times Interest Earned Ratio

[QUESTION]
25. We calculate the times interest earned ratio by dividing net income by interest expense.
Answer: False
Feedback: We calculate the times interest earned ratio by dividing net income before interest expense and income taxes by interest expense.
Learning Objective: 12-03
Difficulty: Easy
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Remember
Topic: Times Interest Earned Ratio

[QUESTION]
26. The gross profit ratio is calculated as gross profit divided by net sales.
Answer: True
Learning Objective: 12-04
Difficulty: Easy
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Remember
Topic: Gross Profit Ratio

[QUESTION]
27. Return on assets is calculated as net income divided by ending total assets.
Answer: False
Feedback: Return on assets is calculated as net income divided by average total assets.
Learning Objective: 12-04
Difficulty: Easy
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Remember
Topic: Return on Assets

[QUESTION]
28. Profit margin measures the income earned on each dollar of sales, and is calculated by dividing net income by net sales.
Answer: True
Learning Objective: 12-04
Difficulty: Easy
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Remember
Topic: Profit Margin

[QUESTION]
29. Asset turnover measures sales volume in relation to the investment in assets, and is calculated as net sales divided by average total assets.
Answer: True
Learning Objective: 12-04
Difficulty: Easy
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Remember
Topic: Asset Turnover

[QUESTION]
30. Return on equity is calculated by dividing the stock return by average stockholders equity.
Answer: False
Feedback: Return on equity is calculated by dividing net income by average stockholders equity.
Learning Objective: 12-04
Difficulty: Easy
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Remember
Topic: Return on Equity

[QUESTION]
31. The price-earnings (PE) ratio compares a companys share price with its earnings per share.
Answer: True
Learning Objective: 12-04
Difficulty: Easy
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Remember
Topic: Price-Earnings Ratio

[QUESTION]
32. Growth stocks have high expectations of future earnings growth, and therefore, usually trade at higher PE ratios.
Answer: True
Learning Objective: 12-04
Difficulty: Easy
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Remember
Topic: Growth Stocks
Topic: Price-Earnings Ratio

[QUESTION]
33. Value stocks have lower share prices in relationship to their fundamental ratios, and therefore, trade at lower PE ratios.
Answer: True
Learning Objective: 12-04
Difficulty: Easy
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Remember
Topic: Value Stocks
Topic: Price-Earnings Ratio

[QUESTION]
34. A discontinued operation is the sale or disposal of any long-term asset.
Answer: False
Feedback: A discontinued operation is the sale or disposal of a significant component of a business.
Learning Objective: 12-05
Difficulty: Easy
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Remember
Topic: Discontinued Operations

[QUESTION]
35. We report any profits or losses on discontinued operations in the current year, separately from profits and losses on the portion of the business that will continue.
Answer: True
Learning Objective: 12-05
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Reporting
Blooms: Understand
Topic: Discontinued Operations

[QUESTION]
36. To be an extraordinary item, an event that produces a gain or loss must be either unusual in nature or infrequent in occurrence.
Answer: False
Feedback: To be an extraordinary item, an event that produces a gain or loss must be both unusual in nature and infrequent in occurrence.
Learning Objective: 12-05
Difficulty: Easy
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Remember
Topic: Extraordinary Items

[QUESTION]
37. We report extraordinary items separately, net of taxes, near the bottom of the income statement just below discontinued operations.
Answer: True
Learning Objective: 12-05
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Reporting
Blooms: Understand
Topic: Extraordinary Items

[QUESTION]
38. If an item meets one but not both criteria for extraordinary item treatment, it is correctly excluded from extraordinary items and included with other revenue and expenses.
Answer: True
Learning Objective: 12-05
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Reporting
Blooms: Understand
Topic: Extraordinary Items
Topic: Other Revenues and Expenses

[QUESTION]
39. The location where a loss is reported in the income statement does not really matter as long as the loss is reported.
Answer: False
Feedback: The location of a loss in the income statement does matter as investors attempt to determine if the loss is recurring or a one-time occurrence.
Learning Objective: 12-05
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Reporting
Blooms: Understand
Earnings Persistence versus One-Time Income Items

[QUESTION]
40. When using a companys current earnings to estimate future earnings performance, investors normally should exclude discontinued operations and extraordinary items.
Answer: True
Learning Objective: 12-05
Difficulty: Hard
AACSB: Reflective Thinking
AICPA: FN Decision Making
Blooms: Apply
Topic: Discontinued Operations
Topic: Extraordinary Items

[QUESTION]
41. Conservative accounting practices are those that result in reporting higher income, higher assets, and lower liabilities.
Answer: False
Feedback: Conservative accounting practices are those that result in reporting lower income, lower assets, and higher liabilities.
Learning Objective: 12-06
Difficulty: Hard
AACSB: Reflective Thinking
AICPA: FN Reporting
Blooms: Apply
Topic: Conservative Accounting Practices

[QUESTION]
42. Conservative accounting practices are those that result in reporting lower income, lower assets, and higher liabilities.
Answer: True
Learning Objective: 12-06
Difficulty: Hard
AACSB: Reflective Thinking
AICPA: FN Reporting
Blooms: Apply
Topic: Conservative Accounting Practices

[QUESTION]
43. A larger estimation of the allowance for uncollectible accounts, the write-down of overvalued inventory and the use of a shorter useful life for depreciation are all examples of conservative accounting.
Answer: True
Learning Objective: 12-06
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Reporting
Blooms: Understand
Topic: Conservative Accounting Practices

[QUESTION]
44. Use of a longer useful life for depreciation is an example of conservative accounting.
Answer: False
Feedback: Use of a shorter useful life for depreciation is an example of conservative accounting.
Learning Objective: 12-06
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Reporting
Blooms: Understand
Topic: Conservative Accounting Practices

[QUESTION]
45. Aggressive accounting practices result in reporting higher income, higher assets, and lower liabilities.
Answer: True
Learning Objective: 12-06
Difficulty: Hard
AACSB: Reflective Thinking
AICPA: FN Reporting
Blooms: Apply
Topic: Aggressive Accounting Practices

[QUESTION]
46. Changes in accounting estimates usually have no effect on a companys underlying cash flows.
Answer: True
Learning Objective: 12-06
Difficulty: Hard
AACSB: Reflective Thinking
AICPA: FN Reporting
Blooms: Apply
Topic: Conservative Accounting Practices
Topic: Aggressive Accounting Practices

Multiple Choice

[QUESTION]
47. Which of the following is not a common type of comparison in accounting?
a. Comparisons of sales growth between companies.
b. Comparisons of earnings per share between companies.
c. Comparisons of earnings this year with earnings for the same company last year.
d. Comparisons to industry.
Answer: b
Learning Objective: 12-01
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Understand
Topic: Comparison of Financial Accounting Information

[QUESTION]
48. When using vertical analysis,we express income statement accounts as a percentage of
a. Net income.
b. Gross profit.
c. Sales.
d. Total assets.
Answer: c
Learning Objective: 12-01
Difficulty: Easy
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Remember
Topic: Vertical Analysis

[QUESTION]
49. When using vertical analysis, we express balance sheet accounts as a percentage of
a. Sales.
b. Total assets.
c. Total liabilities.
d. Total stockholders equity.
Answer: b
Learning Objective: 12-01
Difficulty: Easy
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Remember
Topic: Vertical Analysis

[QUESTION]
50. Which of the following is an example of vertical analysis?
a. Comparing gross profit across companies.
b. Comparing income statement items as a percentage of sales.
c. Comparing debt with industry averages.
d. Comparing the change in sales over time.
Answer: b
Learning Objective: 12-01
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Decision Making
Blooms: Understand
Topic: Vertical Analysis

[QUESTION]
51. Comparing operating expenses as a percentage of sales is an example of:
a. Vertical analysis.
b. Horizontal analysis.
c. Diagonal analysis.
d. Both vertical and horizontal analysis.
Answer: a
Learning Objective: 12-01
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Decision Making
Blooms: Understand
Topic: Vertical Analysis

[QUESTION]
52. The following is an example of:
Amount %
Cash $ 300,000 6.0
Accounts receivable 500,000 10.0
Inventory 800,000 16.0
Long-term assets 3,400,000 68.0
Total assets $5,000,000 100.0

a. Vertical analysis.
b. Horizontal analysis.
c. Diagonal analysis.
d. Both vertical and horizontal analysis.
Answer: a
Learning Objective: 12-01
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Understand
Topic: Vertical Analysis

[QUESTION]
53. The following is an example of:
Year Increase (Decrease)
2015 2014 Amount %
Cash $ 300,000 $ 800,000 $ (500,000) (62.5)
Accounts receivable 500,000 200,000 300,000 150.0
Inventory 800,000 700,000 100,000 14.3
Long-term assets 3,400,000 2,300,000 1,100,000 47.8
Total assets $5,000,000 $4,000,000 $1,000,000 25.0

a. Vertical analysis.
b. Horizontal analysis.
c. Diagonal analysis.
d. Both vertical and horizontal analysis.
Answer: b
Learning Objective: 12-02
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Understand
Topic: Horizontal Analysis

[QUESTION]
54. Horizontal analysis examines trends in a company
a. Over time.
b. Between income statement accounts in the same year.
c. Between balance sheet accounts in the same year.
d. Between income statement and balance sheet accounts in the same year.
Answer: a
Learning Objective: 12-02
Difficulty: Easy
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Remember
Topic: Horizontal Analysis

[QUESTION]
55. Which of the following is an example of horizontal analysis?
a. Comparing COGS with sales.
b. Comparing net income across companies.
c. Comparing debt with equity.
d. Comparing the growth in sales over time.
Answer: d
Learning Objective: 12-02
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Understand
Topic: Horizontal Analysis

[QUESTION]
56. Which of the following is an example of horizontal analysis?
a. Comparing gross profit across companies.
b. Comparing gross profit with operating expenses.
c. Comparing assets with equity.
d. Comparing the change in sales over time.
Answer: d
Learning Objective: 12-02
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Understand
Topic: Horizontal Analysis

[QUESTION]
57. Comparing changes in net income for one company over time is an example of:
a. Vertical analysis.
b. Horizontal analysis.
c. Diagonal analysis.
d. Both vertical and horizontal analysis.
Answer: b
Learning Objective: 12-02
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Understand
Topic: Horizontal Analysis

[QUESTION]
58. Which of the following is correct?
a. The receivables turnover ratio depicts the companys frequency of cash collections.
b. The inventory turnover ratio can be used to assess the companys frequency of selling inventory.
c. The current ratio reflects the companys ability to pay current debt.
d. All of the other options are correct.
Answer: d
Learning Objective: 12-03
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Understand
Topic: Receivables Turnover Ratio
Topic: Inventory Turnover Ratio
Topic: Current Ratio

[QUESTION]
59. Which of the following ratios is most useful in evaluating liquidity?
a. Return on assets.
b. Return on equity.
c. Debt to equity ratio.
d. Current ratio.
Answer: d
Learning Objective: 12-03
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Decision Making
Blooms: Understand
Topic: Liquidity Ratios

[QUESTION]
60. Which of the following ratios is most useful in evaluating liquidity?
a. Acid-test ratio.
b. Return on equity.
c. Profit marginy ratio.
d. Asset turnover.
Answer: a
Learning Objective: 12-03
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Decision Making
Blooms: Understand
Topic: Liquidity Ratios

[QUESTION]
61. Which of the following ratios is most useful in evaluating solvency?
a. Debt to equity ratio.
b. Current ratio.
c. Receivables turnover ratio.
d. Inventory turnover ratio.
Answer: a
Learning Objective: 12-03
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Decision Making
Blooms: Understand
Topic: Solvency Ratios

[QUESTION]
62. Which of the following is a sign that a company can quickly turn its receivables into cash?
a. A low receivables turnover ratio.
b. A high receivables turnover ratio.
c. A high average collection period.
d. Both a low receivables turnover ratio and a high average collection period.
Answer: b
Learning Objective: 12-03
Difficulty: Hard
AACSB: Reflective Thinking
AICPA: FN Decision Making
Blooms: Evaluate
Topic: Receivables Turnover Ratio
Topic: Average Collection Period

[QUESTION]
63. Which of the following is a sign that a company cannot quickly turn its receivables into cash?
a. A high receivables turnover ratio.
b. A low receivables turnover ratio.
c. A low average collection period.
d. Both a high receivables turnover ratio and a low average collection period.
Answer: b
Learning Objective: 12-03
Difficulty: Hard
AACSB: Reflective Thinking
AICPA: FN Decision Making
Blooms: Evaluate
Topic: Receivables Turnover Ratio
Topic: Average Collection Period

[QUESTION]
64. Which of the following is a negative sign that a company is not selling its inventory quickly?
a. A low inventory turnover ratio.
b. A high inventory turnover ratio.
c. A low average days in inventory.
d. Both a high inventory turnover ratio and a low average days in inventory.
Answer: a
Learning Objective: 12-03
Difficulty: Hard
AACSB: Reflective Thinking
AICPA: FN Decision Making
Blooms: Evaluate
Topic: Inventory Turnover Ratio
Topic: Average Days in Inventory

[QUESTION]
65. Which of the following is a positive sign that a company is selling its inventory quickly?
a. A low inventory turnover ratio.
b. A high inventory turnover ratio.
c. A low average days in inventory.
d. Both a high inventory turnover ratio and a low average days in inventory.
Answer: d
Learning Objective: 12-03
Difficulty: Hard
AACSB: Reflective Thinking
AICPA: FN Decision Making
Blooms: Evaluate
Topic: Inventory Turnover Ratio
Topic: Average Days in Inventory

[QUESTION]
66. The current ratio is calculated as:
a. Current assets divided by noncurrent assets.
b. Current assets divided by current liabilities.
c. Current liabilities divided by noncurrent liabilities.
d. Current liabilities divided by current assets.
Answer: b
Learning Objective: 12-03
Difficulty: Easy
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Remember
Topic: Current Ratio

[QUESTION]
67. The acid-test ratio is most similar to the:
a. Current ratio.
b. Debt to equity ratio.
c. Times interest earned ratio.
d. Inventory turnover ratio.
Answer: a
Learning Objective: 12-03
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Decision Making
Blooms: Understand
Topic: Acid-Test Ratio

[QUESTION]
68. The acid-test ratio is:
a. The liquidity ratio divided by the equity ratio.
b. Current assets minus inventory divided by current liabilities minus accounts payable.
c. Cash, net receivables, and current investments divided by current liabilities.
d. Cash divided by accounts payable.
Answer: c
Learning Objective: 12-03
Difficulty: Easy
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Remember
Topic: Acid-Test Ratio

[QUESTION]
69. Which of the following is not a solvency ratio?
a. Time interest earned ratio.
b. The debt to equity ratio.
c. The current ratio.
d. All of the other options are solvency ratios.
Answer: c
Learning Objective: 12-03
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Decision Making
Blooms: Understand
Topic: Solvency Ratios

[QUESTION]
70. When a company with a current ratio of 1.2 pays a current liability:
a. Its current ratio decreases.
b. Its current ratio increases.
c. Its current ratio remains unchanged.
d. Its debt to equity ratio increases.
Answer: b
Learning Objective: 12-03
Difficulty: Hard
AACSB: Reflective Thinking
AICPA: FN Decision Making
Blooms: Evaluate
Topic: Current Ratio

[QUESTION]
71. Assuming a current ratio of 1.0, how will the purchase of inventory with cash affect the ratio?
a. Increase the current ratio.
b. No change to the current ratio.
c. Decrease the current ratio.
d. Could either increase or decrease the current ratio.
Answer: b
Learning Objective: 12-03
Difficulty: Hard
AACSB: Reflective Thinking
AICPA: FN Decision Making
Blooms: Evaluate
Topic: Current Ratio

[QUESTION]
72. Assuming an acid-test ratio of 1.0, how will the purchase of inventory with cash affect the ratio?
a. Increase the acid-test ratio.
b. No change to the acid-test ratio.
c. Decrease the acid-test ratio.
d. Could either increase or decrease the acid-test ratio.
Answer: c
Learning Objective: 12-03
Difficulty: Hard
AACSB: Reflective Thinking
AICPA: FN Decision Making
Blooms: Evaluate
Topic: Acid-Test Ratio

[QUESTION]
73. Assuming a current ratio of 1.0 and an acid-test ratio of 0.75, how will the purchase of inventory with cash affect each ratio?
a. Increase the current ratio and increase the acid-test ratio.
b. No change to the current ratio and decrease the acid-test ratio.
c. Decrease the current ratio and decrease the acid-test ratio.
d. Increase the current ratio and decrease the acid-test ratio.
Answer: b
Learning Objective: 12-03
Difficulty: Hard
AACSB: Reflective Thinking
AICPA: FN Decision Making
Blooms: Evaluate
Topic: Current Ratio
Topic: Acid-Test Ratio

[QUESTION]
74. When a company sells land for cash and makes a $25,000 gain:
a. Its acid-test ratio decreases.
b. Its current ratio decreases.
c. Its debt to equity ratio decreases.
d. Cannot determine from the given information.
Answer: c
Learning Objective: 12-03
Difficulty: Hard
AACSB: Reflective Thinking
AICPA: FN Decision Making
Blooms: Evaluate
Topic: Liquidity Ratios
Topic: Solvency Ratios

[QUESTION]
75. Assume a companys current ratio and acid-test ratio are less than 1.0 before it purchases inventory on credit. When it makes the purchase:
a. Its current ratio decreases.
b. Its acid-test ratio decreases.
c. Its current ratio remains unchanged.
d. Its acid-test ratio remains unchanged.
Answer: b
Learning Objective: 12-03
Difficulty: Hard
AACSB: Reflective Thinking
AICPA: FN Decision Making
Blooms: Evaluate
Topic: Current Ratio
Topic: Acid-Test Ratio

Use the following information to answer the next three questions:
A partial balance sheet ($s in thousands) for Captain Ds Sportswear is shown below.

Assets: Liabilities:
Cash $ 60 Accounts payable $240
Accounts receivable (net) 170 Other liabilities 80
Investments 50 Total current liabilities 320
Inventory 200 Long-term liabilities 110
Prepaid rent 25 Total liabilities 430
Total current assets 505 Stockholders equity:
Property & Equipment, (net) 255 Common stock 150
Retained earnings 180
Total stockholders equity 330
Total assets $760 Total liabilities and equity $760

[QUESTION]
76. The current ratio is:
a. 1.98.
b. 1.58.
c. 1.17.
d. 0.66.
Answer: b
Feedback: $505 / $320 = 1.58.
Learning Objective: 12-03
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Current Ratio

[QUESTION]
77. The acid-test ratio is:
a. 0.25.
b. 0.88.
c. 1.17.
d. 1.58.
Answer: b
Feedback: ($505 $200 $25) / $320 = .88.
Learning Objective: 12-03
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Acid-Test Ratio

[QUESTION]
78. The debt to equity ratio is:
a. 0.33.
b. 0.77.
c. 1.17.
d. 1.30.
Answer: d
Feedback: $430 / $330 = 1.30.
Learning Objective: 12-03
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Debt to Equity Ratio

Use the following information to answer the next two questions:
Recent financial statement data for Harmony Health Foods (HHF) Inc. is shown below.

Current liabilities $ 180 Income before interest and taxes $ 125
10% Bonds, long-term 360 Interest expense 36
Total liabilities 540 Income before tax 89
Stockholders equity Income tax 27
Common stock 200 Net income $ 62
Retained earnings 280
Total stockholders equity 480
Total liabilities and equity $1,020

[QUESTION]
79. HHFs debt to equity ratio is:
a. 0.75.
b. 1.13.
c. 0.38.
d. 1.80.
Answer: b
Feedback: $540 / $480 = 1.13.
Learning Objective: 12-03
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Debt to Equity Ratio

[QUESTION]
80. HHFs times interest earned ratio is:
a. 3.47.
b. 1.72.
c. 2.47.
d. 10.0.
Answer: a
Feedback: $125 / $36 = 3.47.
Learning Objective: 12-03
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Times Interest Earned Ratio

Use the following information to answer the next ten questions:
Excerpts from Stealth Companys December 31, 2015 and 2014, financial statements are presented below:
2015 2014
Accounts receivable $ 40,000 $ 36,000
Inventory 28,000 35,000
Net sales 190,000 186,000
Cost of goods sold 114,000 108,000
Total assets 425,000 405,000
Total stockholders equity 240,000 225,000
Net income 32,500 28,000

[QUESTION]
81. Stealth Companys 2015 receivables turnover ratio is:
a. 2.85.
b. 4.70.
c. 5.00.
d. 10.63.
Answer: c
Feedback:
Learning Objective: 12-03
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Receivables Turnover Ratio

[QUESTION]
82. Stealth Companys 2015 average collection period is:
a. 73 days.
b. 104 days.
c. 109 days.
d. 128 days.
Answer: a
Feedback:
Average collection period = 365 / 5.0 = 73 days
Learning Objective: 12-03
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Average Collection Period

[QUESTION]
83. Stealth Companys 2015 inventory turnover is:
a. 3.62 times.
b. 3.96 times.
c. 4.07 times.
d. 6.03 times.
Answer: a
Feedback:
Learning Objective: 12-03
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Inventory Turnover Ratio

[QUESTION]
84. Stealth Companys 2015 average days in inventory is:
a. 60.5 days.
b. 92.2 days.
c. 100.8 days.
d. 89.7 days.
Answer: c
Feedback:
Average days in inventory = 365 / 3.62 = 100.8 days.
Learning Objective: 12-03
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Average Days in Inventory

[QUESTION]
85. Stealth Companys 2015 debt to equity ratio is:
a. 77.1%.
b. 80.0%.
c. 40.0%.
d. 60.0%.
Answer: a
Feedback:
Assets = Liabilities + Stockholders Equity.
$425,000 = Liabilities + $240,000.
So, Liabilities = $185,000.
Debt to equity ratio = $185,000 / $240,000 = 77.1%.
Learning Objective: 12-03
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Debt to Equity Ratio

[QUESTION]
86. Stealth Companys 2015 gross profit ratio is:
a. 77.1%.
b. 80.0%.
c. 40.0%.
d. 60.0%.
Answer: c
Feedback: ($190,000 $114,000) / $190,000 = 40.0%.
Learning Objective: 12-04
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Gross Profit Ratio

[QUESTION]
87. Stealth Companys 2015 return on assets is:
a. 7.1%.
b. 7.8%.
c. 13.5%.
d. 44.7%.
Answer: b
Feedback:
Learning Objective: 12-04
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Return on Assets

[QUESTION]
88. Stealth Companys 2015 profit margin is:
a. 17.1%.
b. 13.5%.
c. 7.6%.
d. 4.5%.
Answer: a
Feedback: $32,500 / $190,000 = 17.1%.
Learning Objective: 12-04
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Profit Margin

[QUESTION]
89. Stealth Companys 2015 asset turnover is:
a. 3.7 times.
b. 2.8 times.
c. 2.2 times.
d. 0.5 times.
Answer: d
Feedback:
Learning Objective: 12-04
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Asset Turnover

[QUESTION]
90. Stealth Companys 2015 return on equity is:
a. 17.1%.
b. 14.0%.
c. 12.6%.
d. 7.1%.
Answer: b
Feedback:
Learning Objective: 12-04
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Return on Equity

Use the following information to answer the next ten questions:
Excerpts from TPX Companys December 31, 2015 and 2014, financial statements are presented below:
2015 2014
Accounts receivable $ 80,000 $ 72,000
Inventory 84,000 70,000
Net sales 400,000 372,000
Cost of goods sold 254,000 216,000
Total assets 850,000 810,000
Total stockholders equity 500,000 450,000
Net income 75,000 56,000

[QUESTION]
91. TPX Companys 2015 receivables turnover ratio is:
a. 5.3 times.
b. 5.6 times.
c. 5.0 times.
d. 0.2 times.
Answer: a
Feedback:
Learning Objective: 12-03
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Receivables Turnover Ratio

[QUESTION]
92. TPX Companys 2015 average collection period is:
a. 69 days.
b. 65 days.
c. 73 days.
d. 1,825 days.
Answer: a
Feedback:
Average collection period = 365 / 5.3 = 69 days.
Learning Objective: 12-03
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Average Collection Period

[QUESTION]
93. TPX Companys 2015 inventory turnover is:
a. 3.0 times.
b. 5.2 times.
c. 3.3 times.
d. 3.6 times.
Answer: c
Feedback:
Learning Objective: 12-03
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Inventory Turnover Ratio

[QUESTION]
94. TPX Companys 2015 average days in inventory is:
a. 121.7 days.
b. 70.2 days.
c. 110.6 days.
d. 101.4 days.
Answer: c
Feedback:
Average days in inventory = 365 / 3.3 = 110.6 days.
Learning Objective: 12-03
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Average Days in Inventory

[QUESTION]
95. TPX Companys 2015 debt to equity ratio is:
a. 50.0%.
b. 60.0%.
c. 70.0%.
d. 80.0%.
Answer: c
Feedback:
Assets = Liabilities + Stockholders Equity.
$850,000 = Liabilities + $500,000.
So, Liabilities = $350,000.
Debt to equity ratio = $350,000 / $500,000 = 70.0%.
Learning Objective: 12-03
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Debt to Equity Ratio

[QUESTION]
96. TPX Companys 2015 gross profit ratio is:
a. 57.5%.
b. 36.5%.
c. 63.5%.
d. 60.0%.
Answer: b
Feedback: ($400,000 $254,000) / $400,000 = 36.5%.
Learning Objective: 12-04
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Gross Profit Ratio

[QUESTION]
97. TPX Companys 2015 return on assets is:
a. 48.2%.
b. 9.3%.
c. 8.8%.
d. 9.0%.
Answer: d
Feedback:
Learning Objective: 12-04
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Return on Assets

[QUESTION]
98. TPX Companys 2015 profit margin is:
a. 18.8%.
b. 9.0%.
c. 19.4%.
d. 15.1%.
Answer: a
Feedback: $75,000 / $400,000 = 18.8%.
Learning Objective: 12-04
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Profit Margin

[QUESTION]
99. TPX Companys 2015 asset turnover is:
a. 3.7 times.
b. 2.8 times.
c. 2.2 times.
d. 0.5 times.
Answer: d
Feedback:
Learning Objective: 12-04
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Asset Turnover

[QUESTION]
100. TPX Companys 2015 return on equity is:
a. 16.7%.
b. 15.0%.
c. 15.8%.
d. 21.4%.
Answer: c
Feedback:
Learning Objective: 12-04
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Return on Equity

[QUESTION]
101. Given the information below, what is the companys gross profit?
Sales Revenue $320,000
Accounts Receivable $50,000
Ending Inventory $100,000
Cost of Goods Sold $250,000
Sales Returns $20,000

a. $250,000.
b. $70,000.
c. $220,000.
d. $50,000.
Answer: d
Feedback: [($320,000 $20,000) $250,000] = $50,000.
Learning Objective: 12-04
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Gross Profit

[QUESTION]
102. Return on assets equals:
a. Gross profit ratio x Inventory turnover.
b. Profit margin x Inventory turnover.
c. Gross profit ratio x Asset turnover.
d. Profit margin x Asset turnover.
Answer: d
Learning Objective: 12-04
Difficulty: Easy
AACSB: Reflective Thinking
AICPA: FN Measurement
Blooms: Remember
Topic: Return on Assets

[QUESTION]
103. Nerf Mania reports net income of $500,000, net sales of $4,000,000, and average assets of $2,000,000. The return on assets is:
a. 200%.
b. 25%.
c. 50%.
d. 12.5%.
Answer: b
Feedback: $500,000 / $2,000,000 = 25%.
Learning Objective: 12-04
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Return on Assets

[QUESTION]
104. Nerf Mania reports net income of $500,000, net sales of $4,000,000, and average assets of $2,000,000. The profit margin is:
a. 12.5%.
b. 25%.
c. 50%.
d. 8 times
Answer: a
Feedback: $500,000 / $4,000,000 = 12.5%.
Learning Objective: 12-04
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Profit Margin

[QUESTION]
105. Nerf Mania reports net income of $500,000, net sales of $4,000,000, and average assets of $2,000,000. The asset turnover is:
a. 0.25 times.
b. 0.5 times.
c. 2 times.
d. 8 times.
Answer: c
Feedback: $4,000,000 / $2,000,000 = 2 times.
Learning Objective: 12-04
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Asset Turnover

[QUESTION]
106. Richards Sporting Goods reports net income of $100,000, net sales of $500,000, and average assets of $1,000,000. The return on assets is:
a. 10%.
b. 20%.
c. 50%.
d. 5 times.
Answer: a
Feedback: $100,000 / $1,000,000 = 10%.
Learning Objective: 12-04
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Return on Assets

[QUESTION]
107. Richards Sporting Goods reports net income of $100,000, net sales of $500,000, and average assets of $1,000,000. The profit margin is:
a. 10%.
b. 20%.
c. 50%.
d. 5 times.
Answer: b
Feedback: $100,000 / $500,000 = 20%.
Learning Objective: 12-04
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Profit Margin

[QUESTION]
108. Richards Sporting Goods reports net income of $100,000, net sales of $500,000, and average assets of $1,000,000. The asset turnover is:
a. 0.1 times.
b. 0.5 times.
c. 2 times.
d. 5 times.
Answer: b
Feedback: $500,000 / $1,000,000 = 0.5 times.
Learning Objective: 12-04
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Asset Turnover

[QUESTION]
109. The sale or disposal of a significant component of a companys operations is referred to as:
a. A discontinued operation.
b. An extraordinary item.
c. Other revenues and expenses.
d. Gain or loss on sale of assets.
Answer: a
Learning Objective: 12-05
Difficulty: Easy
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Remember
Topic: Discontinued Operations

[QUESTION]
110. A discontinued operation refers to:
a. The sale or disposal of a significant component of a companys operations.
b. Discontinued inventory items.
c. Inventory items that have been completed and sold.
d. The sale of most long-term assets.
Answer: a
Learning Objective: 12-05
Difficulty: Easy
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Remember
Topic: Discontinued Operations

[QUESTION]
111. An extraordinary item must meet which of the following criteria?
a. Unusual in nature.
b. Infrequent in occurrence.
c. Unusual in nature and infrequent in occurrence.
d. Unusual in nature or infrequent in occurrence.
Answer: c
Learning Objective: 12-05
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Understand
Topic: Extraordinary Items

[QUESTION]
112. Extraordinary items:
a. Include very large gains or losses from ordinary business activities.
b. Are both unusual in nature and infrequent in occurrence.
c. Are shown on the income statement before the tax effect.
d. Are either unusual in nature or infrequent in occurrence.
Answer: b
Learning Objective: 12-05
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
Blooms: Understand
Topic: Extraordinary Items

[QUESTION]
113. Which of the following items is most likely to be reported as an extraordinary loss?
a. Losses due to the write-down of inventory.
b. Losses on the sale of long-term assets.
c. Losses due to business restructuring.
d. Uninsured losses from a natural disaster.
Answer: d
Learning Objective: 12-05
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Reporting
Blooms: Understand
Topic: Extraordinary Items

[QUESTION]
114. What is the correct order to present the following items on the income statement?
a. Other revenues and expenses, income tax expense, discontinued operations, extraordinary items.
b. Other revenues and expenses, income tax expense, extraordinary items, discontinued operations.
c. Discontinued operations, extraordinary items, other revenues and expenses, income tax expense.
d. Discontinued operations, extraordinary items, income tax expense, other revenues and expenses.
Answer: a
Learning Objective: 12-05
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Reporting
Blooms: Understand
Topic: Presentation of Other Revenues and Expenses
Topic: Presentation of Income Tax Expense
Topic: Presentation of Discontinued Operations
Topic: Presentation of Extraordinary Items

[QUESTION]
115. Popson Inc. incurred a material loss, which was not unusual in character, but was clearly an infrequent occurrence. This loss should be reported as:
a. An extraordinary loss.
b. A loss from discontinued operations.
c. Other revenues and expenses.
d. A separate line item in retained earnings.
Answer: c
Learning Objective: 12-05
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Reporting
Blooms: Understand
Topic: Other Revenues and Expenses

[QUESTION]
116. The financial statements of a firm that uses more conservative accounting practices would be likely to report:
a. Higher profitability.
b. Higher dividends.
c. Higher liabilities.
d. Higher stockholders equity.
Answer: c
Learning Objective: 12-06
Difficulty: Hard
AACSB: Reflective Thinking
AICPA: FN Reporting
Blooms: Evaluate
Topic: Conservative Accounting Practices

[QUESTION]
117. The financial statements of a firm that uses more aggressive accounting practices would be likely to report:
a. Higher profitability.
b. Higher dividends.
c. Higher liabilities.
d. Fewer total assets.
Answer: a
Learning Objective: 12-06
Difficulty: Hard
AACSB: Reflective Thinking
AICPA: FN Reporting
Blooms: Evaluate
Topic: Aggressive Accounting Practices

[QUESTION]
118. Which of the following is NOT an example of applying conservatism in accounting?
a. Recording contingent losses that are probable.
b. Expensing all research and development costs are they are incurred.
c. Using the lower-of-cost-or-market rules for inventory accounting.
d. Increasing the useful life used in calculating depreciation.
Answer: d
Learning Objective: 12-06
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Reporting
Blooms: Understand
Topic: Conservative Accounting Practices

[QUESTION]
119. Which of the following is a conservative accounting practice?
a. The use of a longer service life for depreciation.
b. Waiting to record a litigation loss.
c. Adjust the allowance for uncollectible accounts to a smaller amount.
d. The write-down of overvalued inventory.
Answer: d
Learning Objective: 12-06
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Reporting
Blooms: Understand
Topic: Conservative Accounting Practices

[QUESTION]
120. Which of the following is an aggressive accounting practice?
a. The use of a shorter service life for depreciation.
b. Waiting to record a litigation loss.
c. Adjust the allowance for uncollectible accounts to a larger amount.
d. The write-down of overvalued inventory.
Answer: b
Learning Objective: 12-06
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Reporting
Blooms: Understand
Topic: Aggressive Accounting Practice

[QUESTION]
121. Which of the following is a conservative accounting practice?
a. Change from double-declining balance to straight-line depreciation.
b. Record sales revenue before it is actually earned.
c. Adjust the allowance for uncollectible accounts to a larger amount.
d. Record inventory at market rather than lower of cost or market.
Answer: c
Learning Objective: 12-06
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Reporting
Blooms: Understand
Topic: Conservative Accounting Practices

[QUESTION]
122. Which of the following is an aggressive accounting practice?
a. Change from straight-line to double-declining balance depreciation.
b. Record sales revenue before it is actually earned.
c. Adjust the allowance for uncollectible accounts to a larger amount.
d. Record inventory at lower of cost or market rather than at cost.
Answer: b
Learning Objective: 12-06
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Reporting
Blooms: Understand
Topic: Aggressive Accounting Practices

Problems

[QUESTION]
123. Perform a vertical analysis on the following information:

2015 2014
Cash $ 500,000 $ 200,000
Accounts receivable 900,000 800,000
Inventory 700,000 500,000
Long-term assets 2,200,000 2,500,000
Total assets $4,300,000 $4,000,000

Answer:
2015 2014
Amount % Amount %
Cash $ 500,000 11.6 $ 200,000 5.0
Accounts receivable 900,000 20.9 800,000 20.0
Inventory 700,000 16.3 500,000 12.5
Long-term assets 2,200,000 51.2 2,500,000 62.5
Total assets $4,300,000 100.0 $4,000,000 100.0

Learning Objective: 12-01
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Vertical Analysis

[QUESTION]
124. Perform a horizontal analysis on the following information providing both the dollar amount and percentage change:

2015 2014
Cash $ 500,000 $ 200,000
Accounts receivable 900,000 800,000
Inventory 700,000 500,000
Long-term assets 2,200,000 2,500,000
Total assets $4,300,000 $4,000,000

Answer:
Year Increase (Decrease)
2015 2014 Amount %
Cash $ 500,000 $ 200,000 $ 300,000 150.0
Accounts receivable 900,000 800,000 100,000 12.5
Inventory 700,000 500,000 200,000 40.0
Long-term assets 2,200,000 2,500,000 (300,000) (12.0)
Total assets $4,300,000 $4,000,000 $300,000 7.5

Learning Objective: 12-02
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Horizontal Analysis

[QUESTION]
125. Assume a companys sales are $1.6 million in 2014, $1.8 million in 2015, and $1.7 million in 2016. What is the percentage change from 2014 to 2015? What is the percentage change from 2015 to 2016? Be sure to indicate whether the percentage change is an increase or a decrease.
Answer:
% change from 2014 to 2015 = ($1.8 million $1.6 million) / $1.6 million = 12.5% increase.
% change from 2015 to 2016 = ($1.7 million $1.8 million) / $1.8 million = 5.6% decrease.
Learning Objective: 12-02
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Horizontal Analysis

[QUESTION]
126. If a companys sales are $648,000 in 2015, and this represents an 8% increase over sales in 2014, what were sales in 2014?
Answer:
$648,000 / 1.08 = $600,000.
Learning Objective: 12-02
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Horizontal Analysis

[QUESTION]
127. United Products began the year with an Accounts Receivable balance of $250,000, and had a year-end balance of $280,000. Credit sales of $800,000 generated a gross profit of $150,000. Calculate the receivables turnover ratio for the year.
Answer:
Receivables turnover ratio $800,000
($250,000 + $280,000) / 2 = 3.0 times
Learning Objective: 12-03
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Receivables Turnover Ratio

[QUESTION]
128. United Products began the year with an Inventory balance of $180,000, and had a year-end balance of $200,000. Sales of $800,000 generated a gross profit of $150,000. Calculate the inventory turnover ratio for the year.
Answer:
Inventory turnover ratio $650,000*
($180,000 + $200,000) / 2 = 3.4 times
*$800,000 (sales) $150,000 (gross profit) = $650,000 COGS.
Learning Objective: 12-03
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Inventory Turnover Ratio

[QUESTION]
129. BC Training reports sales revenue of $2,200,000. Average inventory during the year was $200,000. The inventory turnover ratio for the year is 8.0. What amount of gross profit would the company report in its income statement?
Answer:
Inventory turnover ratio COGS*
$200,000 = 8.0 times
*COGS = $200,000 x 8.0 = $1,600,000.
Given sales of $2,200,000 and calculating COGS of $1,600,000, gross profit is $600,000.

Sales $2,200,000
Cost of goods sold 1,600,000
= Gross profit $600,000

Learning Objective: 12-03
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Inventory Turnover Ratio
Topic: Gross Profit

[QUESTION]
130. LeBrons Kids Camps has a current ratio of 0.75 to 1, based on current assets of $3 million and current liabilities of $4 million. How, if at all, will a $500,000 cash purchase of inventory affect the current ratio? How, if at all, will a $500,000 purchase of inventory on account affect the current ratio?
Answer:
A cash purchase of inventory will not affect the current ratio, but a purchase of inventory on account will increase the current ratio as shown below:

Current ratio before purchase of inventory:
$3,000,000
$4,000,000 = 0.75 to 1
Current ratio after $500,000 cash purchase of inventory:

$3,000,000 + $500,000 inventory $500,000 cash
$4,000,000 = 0.75 to 1
Current ratio after $500,000 purchase of inventory on account:

$3,000,000 + $500,000 inventory
$4,000,000 + $500,000 accounts payable = 0.78 to 1

Learning Objective: 12-03
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Current Ratio

[QUESTION]
131. The following income statement and balance sheets for Laser World are provided:
Laser World
Income Statement
For the year-ended December 31, 2015

Sales revenue $ 2,200,000
Cost of goods sold 1,500,000
Gross profit 700,000
Expenses:
Operating expenses 350,000
Depreciation expense 70,000
Loss on sale of land 5,000
Interest expense 25,000
Income tax expense 60,000
Total expenses 510,000
Net income $ 190,000

Laser World
Balance Sheets
December 31

Assets
2015
2014
Current assets:
Cash $ 120,000 $ 112,000
Accounts receivable 90,000 70,000
Inventory 120,000 100,000
Prepaid rent 10,000 10,000
Long-term assets:
Land 260,000 200,000
Equipment 350,000 210,000
Accumulated depreciation (70,000) (42,000)
Total assets $ 880,000 $ 660,000

Liabilities and Stockholders Equity
Current liabilities:
Accounts payable $ 55,000 $ 75,000
Interest payable 8,000 7,000
Income tax payable 15,000 12,000
Long-term liabilities:
Notes payable 400,000 300,000
Stockholders equity:
Common stock 200,000 200,000
Retained earnings 202,000 66,000
Total liabilities and equity $ 880,000 $ 660,000

Assuming that all sales were on account, calculate the following risk ratios for 2015:
1. Receivables turnover ratio 5. Current ratio
2. Average collection period 6. Acid-test ratio
3. Inventory turnover ratio 7. Debt to equity ratio
4. Average days in inventory 8. Times interest earned ratio

Answer:
Risk Ratios Calculations

1. Receivables turnover ratio $2,200,000
($90,000 + $70,000) / 2 = 27.5 times

2. Average collection period 365
27.5 = 13.3 days

3. Inventory turnover ratio $1,500,000
($120,000 + $100,000) / 2 = 13.6 times

4. Average days in inventory 365
13.6 = 26.8 days

5. Current ratio $340,000
$78,000 = 4.4 to 1

6. Acid-test ratio $120,000 + $90,000
$78,000 = 2.7 to 1

7. Debt to equity ratio $478,000
$402,000 = 118.9%

8. Times interest earned ratio $190,000 + $25,000 + $60,000
$25,000 = 11.0 times
Learning Objective: 12-03
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Risk Ratios

[QUESTION]
132. The following income statement and balance sheets for Laser World are provided:

Laser World
Income Statement
For the year-ended December 31, 2015

Sales revenue $ 2,200,000
Cost of goods sold 1,500,000
Gross profit 700,000
Expenses:
Operating expenses 350,000
Depreciation expense 70,000
Loss on sale of land 5,000
Interest expense 25,000
Income tax expense 60,000
Total expenses 510,000
Net income $ 190,000

Laser World
Balance Sheet
December 31

Assets
2015
2014
Current assets:
Cash $ 120,000 $ 112,000
Accounts receivable 90,000 70,000
Inventory 120,000 100,000
Prepaid rent 10,000 10,000
Long-term assets:
Land 260,000 200,000
Equipment 350,000 210,000
Accumulated depreciation (70,000) (42,000)
Total assets $ 880,000 $ 660,000

Liabilities and Stockholders Equity
Current liabilities:
Accounts payable $ 55,000 $ 75,000
Interest payable 8,000 7,000
Income tax payable 15,000 12,000
Long-term liabilities:
Notes payable 400,000 300,000
Stockholders equity:
Common stock 200,000 200,000
Retained earnings 202,000 66,000
Total liabilities and equity $ 880,000 $ 660,000

Earnings per share for the year-ended December 31, 2015, is $1.90. The closing stock price on December 31, 2015, is $30.40.

Calculate the following profitability ratios for 2015:
1. Gross profit ratio 4. Asset turnover
2. Return on assets 5. Return on equity
3. Profit margin 6. Price-earnings ratio

Answer:
Profitability Ratios Calculations

1. Gross profit ratio $700,000
$2,200,000 = 31.8%

2. Return on assets $190,000
($880,000 + $660,000) / 2 = 24.7%

3. Profit margin $190,000
$2,200,000 = 8.6%

4. Asset turnover $2,200,000
($880,000 + $660,000) / 2 = 2.9 times

5. Return on equity $190,000
($402,000 + $266,000) / 2 = 56.9%

6. Price-earnings ratio $30.40
$1.90 = 16.0

Learning Objective: 12-04
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Profitability Ratios

[QUESTION]
133. Barrys BBQ had sales revenue for the year of $200 million and net income of $20 million.. Total assets were $70 million at the beginning of the year, and $80 million at the end of the year. Calculate Barrys return on assets, profit margin, and asset turnover ratios.
Answer:
Return on assets (dollars in millions)
$20
($70 + $80) / 2 = 26.7%

Profit margin $20
$200 = 10.0%

Asset turnover $200
($70 + $80) / 2 = 2.7 times

Learning Objective: 12-04
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Return on Assets
Topic: Profit Margin
Topic: Asset Turnover

[QUESTION]
134. Paul Pierce Enterprises reports net income of $800,000, average total assets of $2,400,000, and average total liabilities of $400,000. Calculate the return on assets and return on equity ratios.
Answer:
Return on assets $800,000
$2,400,000 = 33.3%

Return on equity $800,000
($2,400,000 $400,000) = 40.0%

Learning Objective: 12-04
Difficulty: Hard
AACSB: Analytic
AICPA: FN Measurement
Blooms: Analyze
Topic: Return on Assets
Topic: Return on Equity

[QUESTION]
135. Phillips Fun Center has go-karts, miniature golf, bumper boats, paintball, and laser tag. Determine whether the company should report each of the following items as discontinued operations, extraordinary items, or other expenses:
1. Uninsured losses of $200,000 were incurred due to a hurricane that swept through the area for the first time in 50 years.
2. The company sold its old go-karts at a loss of $25,000 and replaced them with all new go-karts.
3. The company sold its laser tag center at a loss of $10,000 to focus on the other more profitable segments. Laser tag is considered to be a separate business segment.
4. The company restructured its business at a cost of $75,000, replacing some employee positions with automated equipment.
Answer:
1. Extraordinary items.
2. Other expenses.
3. Discontinued operations.
4. Other expenses.
Learning Objective: 12-05
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Reporting
Blooms: Understand
Topic: Discontinued Operations
Topic: Extraordinary Items
Topic: Other Expenses

[QUESTION]
136. Classify each of the following accounting practices as conservative or aggressive:
1. Increase the allowance for uncollectible accounts.
2. When costs are rising, change from FIFO to LIFO.
3. Increase the estimated useful life of equipment.
Answer:
1. Conservative
2. Conservative
3. Aggressive
Learning Objective: 12-06
Difficulty: Medium
AACSB: Reflective Thinking
AICPA: FN Reporting
Blooms: Understand
Topic: Conservative Accounting Practices
Topic: Aggressive Accounting Practices

[QUESTION]
137. Classify each of the following accounting practices as

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