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Chapter 2

The primary purpose of financial reporting is to:

help users reach decisions in an informed manner.

provide a historical record of a company's performance.

provide the information necessary to prepare a tax return.

None of these choices are correct.


The ______________ shows what obligations will be due in the near future and what assets will be
available to satisfy them.

statement of cash flows

statement of stockholders' equity

income statement

balance sheet
The _________________________ shows where cash came from and how it was used during the
period.

statement of cash flows

statement of stockholders' equity

income statement

balance sheet
All of the following are characteristics that make accounting information useful except:

relevance.

reliability.

materiality.

All of these choices are characteristics of useful accounting information.


The process of allocating the cost of a long-term tangible asset over its useful life is known as

allocation.

depreciation.

amortization.

None of these choices are correct.


The practice of using the least optimistic estimate when two estimates of amounts are about equally
likely is known as

Low-ball accounting.
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pessimistic accounting.

conservatism.

None of these choices are correct.


All of the following are examples of current assets except:

accounts receivable.

cash.

land.

prepaid insurance.
Paid-In Capital In Excess of Par Value appears on the:

statement of retained earnings.

statement of cash flows.

balance sheet.

income statement.
A company has an obligation due in 2016. On a balance sheet prepared at the end of 2012, the
obligation should be classified as:

a current liability.

a current asset.

a long-term debt.

None of these choices are correct.


Working capital is computed by:

deducting current assets from current liabilities.

dividing current liabilities by current assets.

dividing current assets by current liabilities.

deducting current liabilities from current assets.


In general, the higher the current ratio

the more liquid a company is.

the worse off a company is.

the less liquid a company is.

None of these choices are correct.


A company reports current assets of $50,000 and current liabilities of $20,000. Its current ratio is:
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2.50.

0.40.

1.00.

None of these choices are correct.


Rahali Corp had the following amounts reported on their year-end financial statements:

Current Assets $50,000


Total Assets $200,000
Current Liabilities $30,000
Total Liabilities $100,000

What is the amount of working capital for Rahali?

$100,000

$300,000

$20,000

$80,000
Rahali Corp had the following amounts reported on their year-end financial statements:

Current Assets $50,000


Total Assets $200,000
Current Liabilities $30,000
Total Liabilities $100,000

What is the current ratio for Rahali?

.50

1.66

.60

2.0
The primary advantage of the single-step format of an income statement is:

it separates operating from non-operating revenues.

simplicity.

the classification of revenues and expenses.

it allows more ratio analysis.


Chapter 2

Which of the following descriptions would appear on a multiple-step income statement but not on a
single-step income statement?

Total expenses

Income before income taxes

Net income

Total revenues

An income statement in which all expenses are added together and subtracted from all revenues is
known as a

Elementary income statement.

Single-step income statement.

Three-item calculation income statement.

None of these choices are correct.

Designo Co. had the following items reported on its year-end financial statements:

Sales $1,000,000
Cost of Goods Sold $250,000
Depreciation Expense $40,000
Income Tax Expense $80,000
Net Income $630,000

What amount will Designo report as gross profit at year-end?

$370,000

$630,000

$750,000

None of these choices are correct.

Profit margin is computed by

dividing net income by sales.

deducting net income from operating revenues.

dividing operating revenues by net income.

None of these choices are correct.


Chapter 2

In evaluating a company's profit margin, it is important to compare it with:

industry norms.

both prior years and industry norms.

prior years.

neither prior years nor industry norms.

The higher the profit margin,

the better a company can control its costs.

the worse.

the better.

Both "the better" and "the better a company can control its costs".

AMG Co. had the following items reported on its year-end financial statements:

Sales $800,000
Total Assets $1,500,000
Net Income $350,000
Depreciation Expense $50,000

AMG's profit margin at year-end would be:

.14.

.53.

.43.

None of these choices are correct.

Designo Co. had the following items reported on its year-end financial statements:

Beginning Retained Earnings 1/1/xx $1,000,000


Net income for the year $250,000
Dividends declared and paid during the year $100,000
Total Liabilities $80,000
Inventories $630,000
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What amount will Designo report as its retained earnings at year-end?

$650,000

$1,150,000

$(60,000)

None of these choices are correct.

Which of the following indicates the proper treatment of net income and dividends on a statement of
retained earnings?

Net income is added and dividends are added.

Net income is deducted and dividends are deducted.

Net income is deducted and dividends are added.

Net income is added and dividends are deducted.

Dividends are reported on:

the income statement and the statement of retained earnings.

the statement of retained earnings but not the income statement.

the income statement but not the statement of retained earnings.

neither the income statement nor the statement of retained earnings.

Retained earnings and capital stock are the two primary components of

the balance sheet.

statement of cash flows.

the income statement.

stockholders' equity.

AMG Co. had the following items reported on its year-end financial statements:

Beginning retained earnings $800,000


Dividends ?
Net income $350,000
Ending retained earnings $200,000
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AMG's dividends must have been:

$150,000.

$950,000.

$0.

None of these choices are correct.

Baierly Co. had the following items reported on its year-end financial statements:

Beginning Retained Earnings 1/1/xx $1,000,000


Net income for the year $250,000
Dividends declared and paid during the year $100,000
Total Liabilities $80,000
Inventories $630,000

What amount will Baierly report as its retained earnings at year-end?

$650,000

$1,150,000

$(60,000)

None of these choices are correct.

The three categories of activities reported on a statement of cash flows are:

investing, financing, and selling.

operating, investing, and financing.

operating, investing, and producing.

None of these choices are correct.

Operating activities involve:

selling goods and services.

signing contracts.

selling long-term assets.

issuing stock.
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The purchase of new equipment would be reported on a statement of cash flows as:

a financing activity.

an operating activity.

an investing activity.

None of these choices are correct.

AMG Co. had the following items reported on its year-end statement of cash flows:

Sold an asset $800,000


Purchased an asset $300,000
Issued 1,000 shares of stock $50,000
Paid income taxes $20,000

What amount would be reported as net cash provided from investing activities:

$30,000

$500,000

$300,000

None of these choices are correct.

Gordlin's Shoes reported the following items on its statement of cash flows for the current year:

Net cash inflows from operating activities $70,000


Net cash outflows from investing activities (20,000)
Net cash outflows from financing activities (40,000)
Cash balance at the beginning of the year 30,000

What was the amount of net increase or decrease in the cash balance for Gordlin's Shoes for the
current year?

$40,000 increase

$70,000 increase

$10,000 increase

$30,000 increase

The responsibility for the financial statements rests with:


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management.

the SEC.

the IRS.

the independent auditors.

The SEC requires that the annual report include:

balance sheets for the two most recent year-ends and income statements for each of the two most
recent years.

balance sheets for the two most recent year-ends and income statements for each of the three
most recent years.

balance sheets for the three most recent year-ends and income statements for each of the two
most recent years.

balance sheets for the three most recent year-ends and income statements for each of the three
most recent years.

As used in accounting, the "Notes to the Financial Statements" should be:

included as an integral part of the financial statements.

reported as expenses on the Income Statement.

listed with the liabilities on the balance sheet.

omitted at the option of the company.

Which of the following items will be found in a corporate annual report?

Selected financial data from competitor companies

Management's statement that the auditors are responsible for the financial statements.

Company budgets

Notes to the financial statements