Test bank For Financial Accounting 4th Edition by Robert Libby, Patricia Libby , Daniel G Short

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Test bank For Financial Accounting 4th Edition by Robert Libby, Patricia Libby , Daniel G Short

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WITH ANSWERS
Financial Accounting 4th Edition by Robert Libby, Patricia Libby , Daniel G Short  Test bank 

 

ch03

 

Student: ___________________________________________________________________________

 

  1. The operating cycle is the time it takes for a company to purchase goods, pay for the goods, sell them to customers, and collect the cash from the customers.

True   False

 

  1. According to the periodicity assumption, to measure and report financial information periodically, we assume the long life of the company can be cut into shorter periods.

True   False

 

  1. The operating cycle is of a similar duration for most companies. True False

 

  1. The division of business activities into a series of equal periods for accounting purposes is known as the periodicity assumption.

True   False

 

  1. The income statement provides investors with information about a companys investing activities. True False

 

  1. A Taco Bell restaurant would most likely have a longer operating cycle than Walmart. True False

 

  1. When a growing company finds they need to buy more inventory before cash has been collected from customers, they often use short term credit such as accounts or notes payable to finance the inventory purchases.

 

True   False

 

  1. Revenues are decreases in assets or settlements of liabilities from ongoing operations. True False

 

  1. The net income of a business is computed by subtracting revenues from expenses. True False

 

  1. Losses are decreases in assets or increases in liabilities from peripheral activities. True False

 

  1. Income tax expense will appear on the balance sheet. True False

 

  1. A common source of revenue for a restaurant chain such as Arbys is franchise royalties and fees. True False

 

  1. A gain causes an increase in income as a result of normal operating activities. True False

 

  1. Cost of sales is usually the largest expense for manufacturing or merchandising companies. True False

 

  1. Accrual basis accounting records revenues when earned and expenses when incurred, regardless of when the related cash is received or paid.

True   False

 

  1. Using the accrual basis of accounting, a company recognizes expenses when they are paid. True False
  1. The revenue principle recognizes revenues when the earnings process is complete or nearly complete, an exchange has taken place, and collection is probable.

True   False

 

  1. Cash basis accounting is often adequate for very small businesses such as a small retail store or a doctors office.

True   False

 

  1. Accrual basis accounting recognizes revenues when cash is received from the customer. True False

 

  1. Expenses incurred, but not yet paid, create a receivable (i.e., an asset) until payment occurs. True False

 

  1. Accrued in the case of expenses means paid in advance, and deferred in the case of expenses means not yet paid.

True   False

 

  1. Deferred in the case of revenues means collected in advance of being earned and accrued in the case of revenues means not yet collected.

True   False

 

  1. Expenses are recognized when an exchange takes place of productive assets, the earnings process is complete or nearly complete, and collection is likely.

True   False

 

  1. The matching process recognizes liabilities when incurred in earning revenue. True False

 

  1. Transactions where cash is received before being earned often result in adjusting entries at the end of the period to record income in the proper period.

True   False

 

  1. The revenue principle recognizes revenue from the sale of goods when ownership passes from the seller to the buyer. In the sale of services, revenue is recognized when the services are completed.

True   False

 

  1. The sale of merchandise on credit and the collection from the customer ten days later constitutes one transaction for accounting purposes.

True   False

 

  1. Revenue recognition most commonly occurs at the point of delivery of goods or services to the customer.

True   False

 

  1. A company that ships product to its customers in January 20B but records them as revenue in December 20A has not violated the revenue principle because they were manufactured and ready for sale before the accounting year end.

 

True   False

 

  1. We record insurance as an expense when we pay for a three year policy. True False

 

  1. Shareholders equity is increased by investments of the owners and is decreased by net income. True False

 

  1. Revenue collected in advance of being earned represents a liability until it is earned. True False

 

  1. Utilities expense and wages payable are both elements of the income statement. True False
  1. The sale of merchandise for cash usually will increase assets. True False

 

  1. Revenues increase shareholders equity, so they are recorded with credits. True False

 

  1. Revenues earned decrease assets and shareholders equity. True False

 

  1. Expenses incurred but not paid decrease assets and shareholders equity. True False

 

  1. The balance sheet is affected by the sale of merchandise for cash. True False

 

  1. An increase in revenue represents an increase in shareholders equity. True False

 

  1. An increase in expenses represents an increase in shareholders equity. True False

 

  1. When the board of directors declares a cash dividend to be paid to shareholders, shareholders equity increases.

True   False

 

  1. Revenue accounts normally have debit balances because they represent assets received while expense accounts normally have credit balances because they represent assets used.

True   False

 

  1. Usually, the market price of shares is not adversely affected by lower than expected quarterly earnings.

True   False

 

  1. Collection of a customers account has an impact on total assets. True False

 

  1. The income statement reports income or loss at a point in time. True False

 

  1. A company can experience difficulty even if it does not report a loss. True False

 

  1. Unadjusted financial statements do not reflect revenues earned or expenses incurred in the accounting period if the receipt or payment of cash occurs in a different period.

True   False

 

  1. Profit differs from cash flow from operations because the revenue recognition and matching processes result in the recognition of revenues and related expenses that are independent of the timing of cash receipts and payments.

 

True   False

 

  1. A high asset turnover signifies efficient management of assets; a low asset turnover ratio signifies less efficient management.

True   False

 

  1. In a well-run business, creditors expect the total asset turnover ratio to fluctuate due to seasonal upswings and downturns.

True   False

  1. The periodicity assumption is the basis for which of the following?
    1. dividing the activities of a business into a series of time periods for accounting and reporting purposes.
    2. the cut-off of revenue recognition only.

 

  1. keeping the companys transactions separate from the owners transactions.

 

  1. the cut-off of expense recognition only.

 

  1. Financial analysts look to the income statement to determine which of the following?
    1. whether the company has generated income from operations

 

  1. if the company has invested too much cash in its inventory

 

  1. whether the company has generated sufficient cash to pay its bills

 

  1. if the company is collecting its receivables on time

 

  1. The operating cycle of a business is best defined as which of the following?
    1. the period of time for which we prepare our financial statements

 

B.the length of time over which our plant and equipment assets are expected to be used by the company in generating revenues

 

Cthe time it takes for a company to purchase and pay for goods or services from suppliers, sell those . goods or services to customers and collect cash from the customers

  1. one year

 

  1. Which of the following businesses would most likely have the shortest operating cycle?
    1. A retail chain such as Walmart

 

  1. A jewellery manufacturer such as Mappins

 

  1. A grocery chain such as Loblaws
  2. A pizza franchise such as Pizza Pizza

 

  1. If total revenues are the same as total expenses, then a company has which of the following?
    1. a net loss.
    2. a net profit.

 

  1. neither a profit nor a loss.

 

  1. negative net income.

 

  1. Which of the following costs is most likely to be the largest expense item on the income statement of a merchandising chain such as Walmart?
    1. Wage, salary and benefits expense

 

  1. Advertising

 

  1. Cost of Sales
  2. Income tax expense

 

  1. Which of the following is not considered an asset?
    1. Equipment
    2. Dividends

 

  1. Accounts receivable

 

  1. Inventory

 

  1. Calculate the effective tax rate for a company that reports an income tax expense of $3.0 million, net income of $7.5 million, and income before taxes of $10.5 million.
    1. 5%

 

  1. 35%

 

  1. 40%
  2. It cannot be computed with the above information

 

  1. Which of the following activities will most likely result in a reported loss on the income statement?
    1. The sale of inventory to customers
    2. The sale of old equipment

 

  1. The wages and benefits paid to employees

 

  1. Interest expense
  1. Which of the following expenses is usually listed last on the income statement?
    1. Advertising expense
    2. Cost of sales

 

  1. General administrative expenses

 

  1. Income tax expense

 

  1. Why is the cash basis of accounting not appropriate for use by publicly traded corporations?
    1. the OSC (Ontario Securities Commission) does not allow its use

 

B.no assets or liabilities other than cash would ever appear on the balance sheet, giving a distorted picture of financial position

 

Cthe income reported could not be distorted if a large customer paid for goods in advance or we . postponed paying for goods or services until the next accounting period

  1. the cash basis is not permitted for tax purposes

 

  1. The matching principle states that expenses should be matched with revenues because
    1. efforts should be matched with accomplishments.

 

  1. dividends should be matched with shareholder investments.

 

  1. cash payments should be matched with cash receipts.

 

  1. assets should be matched with liabilities.

 

  1. During 20B, New Company earned service revenues amounting to $200,000, of which $120,000 were collected in cash; the balance will be collected in January 20C. The 20B income statement of the company should report which of the following amounts for service revenues?

 

  1. $80,000.
  2. $120,000.

 

  1. $200,000.

 

  1. $320,000.

 

  1. At the end of December, the owner of an apartment complex realized that the December rent had not been collected from one of the tenants. December 31 was the end of the accounting year; therefore, the owner made the appropriate adjusting entry at that time. When the December rent was collected in January of the following year, the entry made by the apartment owner should include which of the following?

 

  1. debit to Rent revenue receivable.
  2. credit to Rent revenue receivable.

 

  1. debit to Rent revenue collected in advance.

 

  1. credit to Rent revenue.

 

  1. Under the accrual basis of accounting
    1. cash must be received before revenue is recognized.

 

  1. net earnings are calculated by matching cash outflows against cash inflows.

 

C the ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are

.  prepared under generally accepted accounting principles.

D events that change a companys financial statements are recognized in the period they occur rather than

.  in the period in which cash is paid or received.

 

  1. Accrued expenses which must be recorded in adjusting entries represent which of the following?
    1. expenses incurred but not yet paid.

 

  1. expenses incurred but not recorded or paid.

 

  1. expenses paid in advance.

 

  1. expenses paid in advance and not recorded.

 

  1. Revenue is always recognized when which of the following occurs?
    1. expenses are paid.

 

  1. cash is collected.

 

  1. it is earned.
  2. the end of the period arrives.
  1. Which of the following is not an example of the application of the revenue principle?
    1. Recording the sale of merchandise on credit in sales revenue.
    2. Recording rent received in advance in unearned rent revenue.

 

  1. Recording interest collected on unearned rent revenue.

 

D.Reducing the service revenue account for service revenue collected but not yet performed at the end of the accounting period.

 

  1. In applying the revenue principle to a given transaction, the most important moment or period in time is when which of the following happens?
    1. related cash inflows occur.

 

  1. related expenses are incurred.
  2. sales transaction is completed (i.e., ownership passes) or services are rendered.

 

  1. the service contract is signed regarding service to be performed.

 

  1. Which principle holds that all of the expenses incurred in earning revenue should be identified with the revenue recognized and reported for the same period?
    1. revenue principle.

 

  1. matching principle.

 

  1. timing principle.

 

  1. liability principle.

 

  1. During the accounting period, Luxor Company had the following data:

 

Sales of products:

 

Expenses:

This is the first year of business.

 

 

 

 

What were the sales revenue and expenses?

  1. Choice A

 

  1. Choice B

 

  1. Choice C

 

  1. Choice D

 

  1. Which of the following is not normally a condition that must be met for revenue to be recognized (recorded) under the revenue principle?
    1. The earnings process is complete or nearly complete

 

  1. The promise to perform an exchange in the future has been made
  2. Collection of receivables from credit sales is reasonably assured

 

  1. All cash must be received in advance of exchanging the goods

 

  1. Which of the following liability accounts is likely to be satisfied with other than payment of cash?
    1. Wages payable

 

  1. Deferred subscriptions revenue

 

  1. Accounts Payable

 

  1. Income taxes payable

 

  1. Tonys Tune-Up Shop Ltd. follows the revenue recognition principle. Tony services a car on May 31. The customer picks up the vehicle on June 1 and mails the payment to Tony on June 5. Tony receives the cheque in the mail on June 6. When should Tony show that the revenue was earned?

 

  1. May 31
  2. June 5

 

  1. June 1

 

  1. June 6
  1. A company receives a $25,000 cash deposit from a customer on March 15 but will not deliver the goods until April 20. Which of the following statements is false?
    1. Cash will be reported on the statement of cash flows for the month of March

 

  1. Revenue will be recorded and reported on the income statement for April

 

  1. A liability will be reported on the balance sheet at the end of March

 

  1. Revenue will be recorded and reported on the income statement for March

 

  1. Which of the following activities does not violate the revenue recognition principle?
    1. Recording revenue in December 2009 for units manufactured but not yet sold to customers

 

  1. Recording cash received in advance from customers as revenue when the product is not yet shipped

 

  1. Not recording interest earned in 2009 until the cash is received in 2010
  2. Recording cash received in advance from customers as a liability when the product is not yet shipped

 

  1. What would be the effect on Decembers income statement of a utility bill received on December 27, 2009 but which will not be paid until January 10, 2010?
    1. No expense will be recognized until the bill is paid in January

 

  1. We would cause an increase in income by recording the expense in December

 

  1. Recording the expense in December when it is incurred will increase expenses

 

  1. Income will be decreased when we pay the bill in January

 

  1. Which group of accounts contains only those that normally have a debit balance?
    1. Accounts receivable; Accumulated depreciation; Fees earned.

 

  1. Bond investment; Cash; Share capital.

 

  1. Cash; Inventory; Prepaid insurance.
  2. Notes receivable; Wages payable; Operating expenses.

 

  1. During 20B, Blue Corporation incurred operating expenses amounting to $100,000, of which $75,000 were paid in cash; the balance will be paid in January 20C. Transaction analysis of operating expenses for 20B, should reflect which of the following?

 

  1. decrease shareholders equity, $75,000; decrease assets, $75,000.

 

  1. decrease assets, $100,000; decrease shareholders equity, $100,000.

 

  1. decrease assets, $100,000; increase liabilities, $25,000; decrease shareholders equity, $100,000.

 

  1. decrease shareholders equity, $100,000; decrease assets, $75,000; increase liabilities, $25,000.

 

  1. Which of the following phases of the accounting information processing cycle is performed at the end of the accounting period?
    1. Adjusting entries.
    2. Peer reviews.

 

 

  1. Transaction entries.

 

  1. When a corporation pays a dividend, the
    1. expense account will be increased with a debit.

 

  1. dividends account will be increased with a credit.

 

  1. retained Earnings account will be directly increased with a debit.

 

  1. dividends account will be increased with a debit.

 

  1. If Global Company paid $500 for the telephone bill, this would do which of the following?
    1. decrease assets.

 

  1. increase assets.
  2. decrease expenses.

 

  1. increase liabilities.

 

  1. If Golden Corporation declared a dividend to its shareholders which has not been paid, this would
    1. increase liabilities.

 

  1. increase shareholders equity.

 

  1. decrease liabilities.

 

  1. increase assets.
  1. Which of the following items has no effect on retained earnings?
    1. dividends
    2. revenue

 

  1. hiring a new employee

 

  1. expense

 

  1. During 20B, Melon Company incurred operating expenses amounting to $250,000, of which $120,000 were paid in cash; the balance will be paid in January 20C. On the 20B income statement of the company, what amount should be reported for operating expenses?

 

  1. $120,000.

 

  1. $130,000.
  2. $250,000.

 

  1. $370,000.

 

  1. With respect to shareholders equity, indicate which one of the following statements is correct.

 

  1. Revenues are recorded as credits to the revenue accounts and expenses are recorded as debits to the expense accounts.

 

  1. Revenues are recorded as debits to the revenue accounts and expenses are recorded as credits to the expense accounts.
  2. Contributions (investments) by owners are recorded as debits to the share capital accounts.
  3. Withdrawals by owners are recorded as credits to the share capital accounts.

 

  1. Hills Copy Service performed photocopy services during December, 20A, but had not collected any cash (or other assets) from its customers by the end of the accounting period, December 31, 20A. What effect did performing these services have on the fundamental accounting model?

 

  1. Increased assets and increased liabilities.

 

  1. Increased assets and increased shareholders equity.

 

  1. Increased assets and decreased shareholders equity.

 

  1. Decreased liabilities and decreased shareholders equity.

 

  1. The statement of retained earnings is dependent on the results of
    1. the balance sheet.

 

  1. the income statement.
  2. a companys share capital.

 

  1. the cash flow statement.

 

  1. On December 31, 20A, Ted Corporation paid $2,000 for next years insurance coverage. How should this

 

 

 

 

 

 

 

transaction be recorded by Ted Corporation?

  1. Choice A

 

  1. Choice B
  2. Choice C

 

  1. Choice D

 

  1. On January 1, 20B, Grover Inc., started the year with a $22,000 credit balance in its retained earnings account. During 20B, the company earned net income of $40,000 and declared and paid dividends of $10,000. Also, the company received cash of $15,000 as an additional investment by its owners. Therefore, the balance in retained earnings on December 31, 20B, would be which of the following?
    1. $42,000.

 

  1. $52,000.
  2. $57,000.

 

  1. $67,000.
  1. Golden Company had these transactions during the accounting period. Sold merchandise for $600; its cost was $400.

 

Collected $400 from an account receivable. The account was established in the previous year. Used office supplies of $50.

Goldens net income for the period would be which of the following?

 

  1. $50.

 

  1. $150.
  2. $600.

 

  1. $900.

 

  1. Cash receipts from interest and dividends are classified as
    1. financing activities.

 

  1. investing activities.

 

  1. operating activities.

 

  1. either financing or investing activities.

 

  1. The category that is generally considered to be the best measure of a companys ability to continue as a going concern is
    1. cash flows from investing activities.

 

  1. cash flows from operating activities.
  2. cash flows from financing activities.

 

  1. usually different from year to year.

 

  1. For a merchandising company, the largest operating cash outflow would result from which of the following?
    1. payments to suppliers from whom we have purchased inventory on credit

 

  1. payment of wages and benefits to employees

 

  1. payment of taxes to the various government entities

 

  1. payment of interest on notes payable

 

  1. Operating cash inflows and outflows are primarily connected to which of the following?
    1. acquisitions and sale of long lived assets

 

  1. the sale of goods and services to customers and costs incurred to operate the business
  2. issuance of shares, bank borrowings and repayments, and dividend payments

 

  1. purchase and sale of long-term investments

 

  1. Asset turnover measures
    1. how often a company replaces its assets.

 

  1. how efficiently a company uses its assets to generate sales.

 

  1. the portion of the assets that have been financed by creditors.

 

  1. the overall rate of return on assets.

 

  1. A company reports sales revenue of $120 million this year and $110 million last year. Their total assets in the current year are $80 million and last years total assets were $75 million. What is the current years asset turnover ratio?

 

  1. 46
  2. 50

 

  1. 55

 

  1. 61

 

  1. If Pizza Pizza reports an asset turnover ratio of 2.34 for 2010 and their competitor Pizza Hut reports 3.79 for their 2010 ratio, it means which of the following?
    1. Pizza Pizza is better able to pay their current obligations with their current assets

 

  1. Pizza Pizza has been more effective in managing the use and level of its assets

 

  1. Pizza Pizza has been less effective in managing the use and level of its assets
  2. Pizza Pizza is less able to pay off their current obligations with their current assets
  1. The Upton Country Store had the following transactions in April:
    1. Sold $25,000 of goods to customers and received $22,000 in cash and the rest are on account
    2. The cost of the inventory sold was $13,000

 

  1. The store purchased $8,000 of inventory and paid for $4,000 in cash and the rest were bought on account
  2. They paid $7,000 in wages for the month

 

  1. Received a $600 bill for utilities for the month that will not be paid until May

 

  1. Received rent for the adjacent store front for the months of April and May in the amount of $3,000 Complete the following statements:

Cash Basis Income Statement

 

 

 

 

 

Revenues:

Accrual Basis

 

Income Statement

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

100.Small Company rendered services to customers amounting to $6,000 during 20A; the related cash was collected as follows: $4,000 in 20A; $2,000 in 20B. During 20A, $3,000 was incurred for wages expense; the related cash payments were made as follows: $1,200 in 20A; in 20B, $1,800. Based only on these

 

 

data, provide the following amounts:

 

 

 

 

 

 

 

 

 

 

101.Explain why a $500 revenue collected in advance for service would be recorded as a debit to cash and a credit to a liability account.

102.Why might managers be tempted to violate the revenue principle and the matching principle in financial reporting?

 

 

 

 

 

 

 

 

 

 

103.Complete the chart below for McRae Corporation by entering check marks in the appropriate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

spaces.

 

 

 

 

 

 

 

 

 

 

104.Indicate the sequential order of the following steps in the accounting information processing cycle by entering numbers to the left. The earliest step will be 1 and the last step will be 6. ______ Analyzing transactions ______ Preparing financial statements ______ Developing a trial balance ______ Collecting original data ______ Posting to the accounts ______ Journalizing transactions

105.Part A. Perform transaction analysis for Cress Company regarding the following transactions for May.

Indicate an increase (+) or decrease (-) to the account in front of the amount.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Part B. Determine whether the transactions (A)-(F) above affected cash flows. If so, determine the type of activity as an operating activity, an investing activity, or a financing activity. If cash is not affected use no effect. Place a check mark under the appropriate column for each transaction

106.Immediately after the adjusting entries were journalized and posted for the 20B year, the accounts of Way Corporation showed the following

 

 

 

 

 

 

 

 

 

 

 

balances:

 

 

 

 

 

 

 

 

 

 

107.The following accounts for Juliet Enterprises, Inc., are listed in alphabetical order. Enter the number associated with each to identify the accounts that would be used in the journal entry for each transaction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

given below.

108.On June 1, 20A, Global Services, Inc., was started with $50,000 invested by the owners as share capital. On June 30, the accounting records contained the following

 

 

 

 

 

 

 

 

 

 

 

 

amounts:

 

 

 

 

 

 

 

 

 

 

109.Explain why the net income reported on the income statement is usually not equal to net cash flows from operating activities on the statement of cash flows.

 

 

 

 

 

 

 

 

 

 

110.The following data is from Gauthier Machine

 

 

 

 

 

Shop:

Compute Gauthier Machine Shops asset turnover ratio for the two most recent years

  • 20C __________
  • 20B __________

 

 

 

 

 

 

 

 

 

 

111.Match the following statements with the terms given below by entering the appropriate letter in the blank space.

1. Deferred An expense incurred, but not yet recorded nor ____
expense paid.  
2. Accrued An expense paid, but not yet incurred. ____
revenue    
3. Deferred revenue earned, but not yet recorded nor ____
revenue collected.  
4. Accrued A revenue collected, but not yet earned. ____
expense    

 

ch03 Key

 

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  1. C

 

  1. C

 

  1. (a) $22,000, (b) $3,000, (c) $4,000, (d) $7,000, (e) $14,000, (f) $25,000, (g) $1,500, (h) $13,000, (i) $7,000, (j) $600, (k) $5,900

 

 

 

 

100.

 

  1. A debit is recorded to cash because a receipt of cash increases this asset account. A corresponding credit to a liability account (unearned revenue) is appropriate because the customer is owed services in the future. If the services are not performed, the customer would get a refund.

 

  1. Managers want their companies to appear successful when financial statements are issued. With revenues as high as possible and expenses as low as possible, net income will be elevated. Managers might be tempted to report revenues even though the earnings process is not complete. Also, if some expenses can be put off until a later time, net income will appear larger. Many times manager bonuses are calculated based on net income. Lower net income could cause an adverse reaction in the market place regarding share prices. This could cause some managers to lose their jobs.

 

 

 

 

 

 

 

 

 

 

103.

 

  1. 2-6-5-1-4-3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

105.

 

 

 

 

 

106.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

107.

 

 

 

 

 

 

 

 

108.

 

  1. Net income on the income statement is an application of the accrual basis of accounting. Revenues are reported when earned and expenses incurred are matched to those earned revenues. The net cash flows from operating activities on the statement of cash flows are reported on the cash basis of accounting. That is, amounts received from customers and amounts paid for expenses are on the statement of cash flows. Therefore, the difference in net income and net cash from operating activities is a timing issue.

 

  1. (a) 2.05, (b) 1.95

 

  1. Accrued expense :: An expense incurred, but not yet recorded nor paid. and  Deferred expense :: An expense paid, but not yet

 

incurred. and Accrued revenue :: revenue earned, but not yet recorded nor collected. and Deferred revenue :: A revenue collected, but not yet earned.

ch03 Summary

 

  Category   # of Questions
Difficulty: Easy 18
Difficulty: Hard 15
Difficulty: Medium 78
Learning Objective: 1 11
Learning Objective: 2 14
Learning Objective: 3 37
Learning Objective: 4 33
Learning Objective: 5 10
Learning Objective: 6 6
Libby Chapter 03 111

ch09

 

Student: ___________________________________________________________________________

 

  1. Tangible operational assets differ from intangible operational assets in that tangible assets have physical substance whereas intangible assets have no physical substance.

True   False

 

  1. A corporation may choose to list its operational assets in the current asset section of the balance sheet.

True   False

 

  1. Intangible assets have value to a business because they represent rights that are useful to the business. True False

 

  1. Noncurrent assets are those that a business retains for long periods of time for use in the course of normal operations rather than for sale.

True   False

 

  1. One of the most important challenges facing managers is forecasting the level of productive capacity (fixed assets) needed in the long run to meet customer demand.

True   False

 

  1. Because of its large investment in equipment, West Jet closely monitors the unused seats on flights since it may be more profitable to reduce fares to fill more seats thereby using more of the capacity.

True   False

 

  1. The cost allocation method utilized affects the amount of net property, plant, and equipment that is used in the computation of the fixed asset turnover ratio.

True   False

 

  1. Building and equipment are recorded at their cost at acquisition and are subsequently reported at cost less accumulated amortization.

True   False

 

  1. When an operational asset is acquired for noncash consideration, the cost of the asset received always is measured as the book value of the noncash consideration given up.

True   False

 

  1. If a second-hand machine is purchased for operational use in a business, all renovation and repair costs on the used machine incurred by the purchaser prior to its operational use should be excluded from the cost of the asset.

 

True   False

 

  1. Acquisition cost of property, plant, and equipment is the cash-equivalent purchase price plus all reasonable and necessary expenditures made to acquire and prepare the asset for its intended use. True False

 

  1. Expenditures made after the asset is in use are always capital expenditures. True False

 

  1. Behren Company purchased a building and the parcel of land on which the building was located for a total purchase price of $810,000. To record the acquisition, the account, Building, should be debited for $810,000.

 

True   False

 

  1. Because of depreciation, the net carrying amount of an asset declines over time and profit is reduced by the amount of the expense.

True   False

 

  1. When a company acquires land by issuing 10,000 of its common shares currently trading for $20 per share, the company must get an appraisal of the land and recognize a gain if the appraised value is more than the $200,000 value of the shares issued.

 

True   False

 

  1. A company that is self-constructing a new store, which will open upon completion, is allowed to capitalize the interest during the period of construction if they finance the construction with actual loans.

 

True   False

 

  1. In conformity with the historical cost principle, cost (less any estimated residual value) is allocated to periodic expense over the periods benefited.

True   False

 

  1. The cost of a major addition to an operational asset should be recorded as an asset and amortized over its useful life.

True   False

 

  1. All tangible operational assets (classified as property, plant, and equipment) are subject to amortization.

True   False

 

  1. When events or changes in circumstances reduce the estimated future cash flows of long-lived assets below their book value, the book values should be written down (by recording a loss) to the fair value of the assets.

 

True   False

 

  1. In accounting for amortization, acquisition cost and useful life usually are known quantities, whereas residual value is an estimate because it relates to an amount in the future.

True   False

 

  1. Revenue expenditures on operational assets are accounted for as expenses, while capital expenditures are accounted for as assets.

True   False

 

  1. Extraordinary repairs on operational assets are classified as capital expenditures if they extend the life of the asset.

True   False

 

  1. Ordinary repairs and maintenance of operational assets should be capitalized and amortized over the remaining useful life of the related asset.

True   False

 

  1. Only the actual acquisition cost, the estimated useful life, and the method of amortization of an operational asset are required to compute the amortization expense for a period.

True   False

 

  1. Amortization and depletion conceptually are different because they apply to different kinds of operational assets.

True   False

 

  1. One example of a capital expenditure is ordinary maintenance cost such as an oil change for a company truck.

True   False

 

  1. If an accountant calculates amortization expense on an asset without taking into account the assets residual value of $5,000, amortization expense for the periods will be lower than it should have been. True False

 

  1. No clear line distinguishes capital expenditures (assets) from revenue expenditures (expenses); therefore, it requires managers to exercise judgment in making a subjective decision.

True   False

 

  1. When Ford Motor Company expenses a $200 tool used in manufacturing, instead of capitalizing its cost as an asset, it does so because of the conservatism convention.

True   False

 

  1. The estimated useful life is the total years we expect an asset to be used by all potential users. True False

 

  1. The declining-balance method of amortization is based on the assumption that amortization expenses can be regarded as a constant function of time.

True   False

 

  1. The book value of an operational asset initially declines less rapidly under the straight-line method than under the declining-balance method.

True   False

 

  1. When using the declining-balance method of amortization, a declining percentage is applied to a constant book value.

True   False

 

  1. The straight-line amortization method assumes an approximately equal decline in the economic usefulness of the asset each period and provides greater tax benefits early in the useful life of the asset.

 

True   False

 

  1. Accelerated amortization methods are not desirable from the income tax point of view because the asset will produce a greater net income when it is new (the early years) than when it is older (the later years).

 

True   False

 

  1. When either the estimated useful life or estimated residual value (or both) of an operational asset are changed, all prior financial statements are reissued reflecting the correction retroactively.

True   False

 

  1. A change in the estimated useful life of a tangible operational asset may be required due to economic or technological changes.

True   False

 

  1. The declining-balance method of amortization is appropriate for companies that expect their equipment or other assets to become obsolete fairly rapidly.

True   False

 

  1. Regardless of the method of amortization used under generally accepted accounting principles (GAAP), the ending book value will be the same at the end of the assets economic life.

True   False

 

  1. The estimate of residual value made at the beginning of the useful life has no relationship to the book value at the end of the assets useful life.

True   False

 

  1. Since the Capital Cost Allowance is used by most corporations for tax reporting, the majority of corporations no longer use accelerated methods for financial reporting since there is no tax advantage to be gained by using those methods.

 

True   False

 

  1. While estimated residual value is not used to calculate annual amortization expense under the double declining-balance method, it is used in calculating the assets book value at the end of its estimated useful life.

 

True   False

 

  1. The consistency principle requires we use only one method of amortization for all our types of operational assets.

True   False

 

  1. Use of an accelerated amortization method would lead to a higher reported expense and lower income in the first year of an assets life in comparison to a non-accelerated method.

True   False

 

  1. It is illegal to maintain two sets of books so we must adopt the same amortization method for both financial reporting and tax reporting.

True   False

 

  1. Companies cannot change the method of amortization adopted for a group of assets. True False

 

  1. Amortization expense, as computed for financial reporting, has a direct effect on a corporations cash flow.

True   False

 

  1. Acquiring and disposing of long-lived assets are financing activities on the cash flow statement. True False

 

  1. Depreciation expense is a noncash expense that has no effect on cash. True False

 

  1. The fixed asset turnover ratio is computed by dividing net income by the average fixed assets amount.

True   False

 

  1. When assets are disposed of through sale or abandonment, recognize any gains or losses when the assets net carrying amount is not equal to the cash received.

True   False

 

  1. When assets are disposed of through sale or abandonment, record additional depreciation since the last adjustment was made.

True   False

 

  1. The fixed asset turnover ratio measures how much net income is generated by use of operational (fixed) assets.

True   False

 

  1. A company with relatively small amounts of long-lived operational assets but which has a high level of inventory would most likely have a lower total asset turnover but a higher fixed asset turnover ratio. True False

 

  1. Use of straight-line amortization will lead to reporting a higher fixed asset turnover in the early years of an assets life in comparison to using an accelerated amortization method.

True   False

 

  1. An expanding company that is acquiring more operational assets most likely will experience a decrease in its asset turnover ratio until higher future sales are generated.

True   False

 

  1. The cost principle should be applied in recording the acquisition of natural resources and intangible assets.

True   False

 

  1. Natural resources should be depleted (usually by the units-of-production method) usually with the amount of the depletion expense capitalized to a revenue account.

True   False

 

  1. Intangibles with definite useful lives are amortized using the straight-line method. True False

 

  1. Most companies do not estimate a residual value for intangible assets since the legal benefits they provide are completely used up at the end of their useful or legal lives, whichever is shorter.

True   False

 

  1. Operational assets do not include which of the following kinds of assets?
    1. Plant and equipment in use.

 

  1. Land held for resale.
  2. Patents in use.

 

  1. Mineral deposits being mined.

 

  1. Wilson, Inc., a manufacturing company, is preparing their annual financial statements. Which of the following accounts would not be grouped under operational assets?

 

  1. Land on which the building is located.

 

 

  1. Finished goods inventory.

 

  1. What are operational assets that have physical substance called?
    1. Long-term investments.

 

  1. Tangible assets.
  2. Intangible assets.

 

  1. Current assets.

 

  1. Tangible assets include which of the following?
    1. Land, buildings, and leaseholds.

 

  1. Land, buildings, and natural resources.

 

  1. Natural resources, buildings, and franchises.

 

  1. Licenses, trademarks, and land.

 

  1. Intangible assets include which of the following?
    1. Natural resources, patents, and trademarks.

 

  1. Accounts receivable, franchises, and trademarks.

 

  1. Copyrights, licenses, and land.
  2. Leaseholds, patents, and copyrights.

 

  1. Depletion is recorded for which of the following?
    1. Uncollectible accounts receivable.
    2. Natural resources.

 

  1. Intangible assets.

 

  1. Land and buildings.

 

  1. Which of the following would be classified as an operational (fixed) asset?
    1. Land purchased and held for sale by a realtor.
    2. Land purchased and held for development by Wal-Mart as a new store site.

 

  1. Land and buildings owned by Toys R Us that are store sites closed due to restructuring and consolidating operations.
  2. A Ford Motor Company manufacturing plant used to manufacture the Taurus line in Oakville, Ontario.

 

  1. On March 1, Chapine Company purchased a new stamping machine for $5,000. Chapine paid cash for the machine. Other costs associated with the machine were: transportation costs, $300; sales tax paid, $200; and installation cost, $100. What cost was recorded for the machine?

 

  1. $5,000
  2. $5,200

 

  1. $5,500

 

  1. $5,600

 

  1. To which account should the amount of sales tax paid on the purchase of new machinery should be debited?
    1. A sales tax expense account.

 

  1. A separate deferred charge account.

 

  1. The machinery account.
  2. Accumulated depreciation for machinery.

 

  1. Airbury Company acquired manufacturing equipment at an invoice price of $80,000 and paid $750 to have it deliver

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