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ACCT 311 Ch3

1. The balance sheet reports a company’s financial position at a point in time.
T
2. A company’s market value is generally less than its book value.
F
3. All current assets are either cash or assets that will be converted into cash or consumed within

12 months or the operating cycle, whichever is longer.

T
4. The balance of net receivables represents the amount expected to be collected.
T
5. Prepaid expenses are classified as current assets if the services purchased are expected to

expire within 12 months or the operating cycle, whichever is longer.

T
6. Property, plant, and equipment includes machinery, equipment, and inventories.
F
7. Intangible assets usually are reported in the balance sheet as current assets.
F
8. Accrued salaries and wages in a balance sheet represent salary and wages that have been

earned by employees but not yet paid.

T
9. The criteria for determining which items comprise cash equivalents often is disclosed in the

summary of significant accounting policies.

T
10. Payment terms, interest rates, and other details of long-term liabilities usually are reported in

disclosure notes.

T
11. Subsequent events are significant developments that take place after a firm’s year-end, and

after the financial statements are issued or available to be issued.

F
12. Illegal acts will only need to be disclosed if the impact of the act is material.
F
13. The ultimate responsibility for the financial statements lies with the auditors.
F
14. The compensation of top executives is disclosed in the proxy statement.
T
15. Horizontal analysis involves expressing each item in the financial statements as a percentage

of an appropriate total, or base amount, within the same year.

F
16. Liquidity refers to the riskiness of a company with regard to the amount of liabilities in its capital

structure.

F
17. A payment on account has no effect on working capital but will increase the current ratio if it is

already greater than 1.0.

T
18. Segment reporting requires disclosure of each customer that accounts for more than 5% of

total enterprise revenue.

F
19. The balance sheet reports:

A. Net income at a point in time.

B. Cash flows for a period of time.

C. Assets and equities at a point in time.

D. Assets and liabilities for a period of time.

C
20. Current assets include cash and all other assets expected to become cash or be consumed:

A. Within one year.

B. Within one operating cycle.

C. Within one year or one operating cycle, whichever is shorter.

D. Within one year or one operating cycle, whichever is longer.

D
21. Red Onion Restaurant classifies a six-month prepaid insurance policy as a current asset. Its

rationale is based on:

A. Materiality.

B. Operating cycle.

C. Definition.

D. Liquidity.

C
22. An asset that is not expected to be converted to cash or consumed within one year or the

operating cycle is:

A. Goodwill.

B. Accounts receivable.

C. Inventory.

D. Supplies.

A
23. Which of the following accounts are closed at the end of the accounting period?

A. Allowance for uncollectible accounts.

B. Unearned revenue.

C. Retained earnings.

D. Income tax expense.

D
24. Which is a shareholders’ equity account in the balance sheet?

A. Accumulated depreciation.

B. Paid-in capital.

C. Dividends payable.

D. Marketable securities.

B
25. Rent collected in advance is:

A. An asset account in the balance sheet.

B. A liability account in the balance sheet.

C. A shareholders’ equity account in the balance sheet.

D. A temporary account, not in the balance sheet at all.

B
26. Notes payable:

A. Is a current liability account.

B. Usually has a debit balance.

C. Is a noncurrent liability account.

D. Cannot determine its classification without additional information.

D
27. Which of the following is never a current liability account?

A. Accrued payroll

B. Dividends payable

C. Prepaid rent

D. Subscriptions collected in advance

C
28. New Oaks Winery requires two months to make wine, two years to age it, one month to bottle

it, two months to sell it, and one month to collect the receivable. Its operating cycle is:

A. Twelve months.

B. Thirty months.

C. Six months.

D. Three months.

B
29. Noncurrent assets include:

A. Inventory held for sale.

B. Prepaid rent.

C. Accounts receivable.

D. Land held for a possible future plant site.

D
Listed below are account balances (in $ millions) taken from the records of Symphony Stores.

All of these are permanent accounts, except the last two that have yet to be closed. The

installment receivables are current. Symphony uses a perpetual inventory system.
https://docs.google.com/file/d/0By6mLiFT5J_Bd2JOQ0pibVk2LVU/image?pagenumber=57&w=863

30. What would Symphony report as total current assets?

A. $823.

B. $838.

C. $843.

D. $1,696.

A
Total current assets: ($680 – 20) + 34 + 50 + 30 + 16 + 5 + 20 + 8 = $823
Listed below are account balances (in $ millions) taken from the records of Symphony Stores.

All of these are permanent accounts, except the last two that have yet to be closed. The

installment receivables are current. Symphony uses a perpetual inventory system.
https://docs.google.com/file/d/0By6mLiFT5J_Bd2JOQ0pibVk2LVU/image?pagenumber=57&w=863

31. What would Symphony report as total assets?

A. $2,338.

B. $2,323.

C. $2,318.

D. $2,303.

D
Total assets: ($680 – 20) + ($920 – 80) + 34 + 50 + 30 + 16 + 150 + 450 + 5 + 20 + 8 + 40 =

$2,303

Listed below are account balances (in $ millions) taken from the records of Symphony Stores.

All of these are permanent accounts, except the last two that have yet to be closed. The

installment receivables are current. Symphony uses a perpetual inventory system.
https://docs.google.com/file/d/0By6mLiFT5J_Bd2JOQ0pibVk2LVU/image?pagenumber=57&w=863

32. What would Symphony report as total shareholders’ equity?

A. $323.

B. $808.

C. $838.

D. $928.

B

Total shareholders’ equity: $485 + 15 + 48 – 120 + 380 = $808

Listed below are account balances (in $ millions) taken from the records of Symphony Stores.

All of these are permanent accounts, except the last two that have yet to be closed. The

installment receivables are current. Symphony uses a perpetual inventory system.
https://docs.google.com/file/d/0By6mLiFT5J_Bd2JOQ0pibVk2LVU/image?pagenumber=57&w=863

33. What is the amount of working capital for Symphony?

A. $98.

B. $143.

C. $128.

D. $113.

C

https://docs.google.com/file/d/0By6mLiFT5J_Bd2JOQ0pibVk2LVU/image?pagenumber=59&w=863

34. Assets do not include:

A. Property, plant, and equipment.

B. Investments.

C. Paid-in capital.

D. Unexpired insurance.

C
35. Cash equivalents would not include:

A. Cash not available for current operations.

B. Money market funds.

C. U.S. treasury bills.

D. Bank drafts.

A
36. Cash equivalents would include:

A. Highly liquid equity securities.

B. Accounts receivable from a financial institution.

C. A sinking fund for bonds that mature in three years.

D. Debt instruments with maturity dates of less than three months from the date of the

purchase.

D
37. Accrued expenses:

A. Are generally paid in services rather than cash.

B. Result from payment before services are received.

C. Result from services received before payment.

D. Are deferred charges to expense.

C
38. Janson Corporation Co.’s trial balance included the following account balances at December

31, 2013:

https://docs.google.com/file/d/0By6mLiFT5J_Bd2JOQ0pibVk2LVU/image?pagenumber=61&w=863

Investments consist of treasury bills that were purchased in November and mature in January.

Prepaid insurance is for the next two years. What amount should be included in the current

asset section of Janson’s December 31, 2013, balance sheet?

A. $88.000.

B. $85,000.

C. $55,000.

D. $135,000.

B

$12,000 + 40,000 + 30,000 + 3,000 (1/2 of prepaid insurance) = $85,000.

39. Janson Corporation Co.’s trial balance included the following account balances at December

31, 2013:

https://docs.google.com/file/d/0By6mLiFT5J_Bd2JOQ0pibVk2LVU/image?pagenumber=62&w=863
What amount should be included in the current liability section of Janson’s December 31, 2013,

balance sheet?

A. $63,000.

B. $41,000.

C. $61,000.

D. $101,000.

C

$25,000 + 16,000 + 20,000 = $61,000.

40. The usual difference between accounts payable and notes payable is:

A. Legally enforceable debt.

B. Current-noncurrent classification.

C. Known payment terms.

D. Explicitly stated interest.

D
41. Which of the following would be disclosed in the summary of significant accounting policies

disclosure note?
https://docs.google.com/file/d/0By6mLiFT5J_Bd2JOQ0pibVk2LVU/image?pagenumber=63&w=863

A. Option a

B. Option b

C. Option c

D. Option d

A
42. Which of the following is not a required disclosure for related-party transactions?

A. The nature of the relationship.

B. A description of the transactions.

C. The amounts due from or to related parties.

D. The impact of the transactions on current year’s income.

D
43. Disclosure notes would not include:

A. Depreciation methods used and estimated useful life.

B. Definition of cash equivalents.

C. Details of pension plans.

D. Data to adjust the financial statements so that they are not misleading.

D
44. The principal concern with accounting for related-party transactions is:

A. The size of the transactions.

B. Differences between economic substance and legal form.

C. The absence of legally binding contracts.

D. The lack of accurate data to record transactions.

B
45. A subsequent event for an entity with a December 31, 2013, year-end would not include:

A. A change in the estimated useful lives of equipment in January 2014.

B. An issuance of bonds in January 2014.

C. An acquisition of another company in January 2014.

D. A major uncertainty at December 31, resolved in January 2014.

A
46. How are management’s responsibility and the auditors’ opinion on internal controls represented

in the standard auditor’s report?

https://docs.google.com/file/d/0By6mLiFT5J_Bd2JOQ0pibVk2LVU/image?pagenumber=65&w=863

A. Option a

B. Option b

C. Option c

D. Option d

B
47. The final paragraph of the audit report:

A. Provides the auditors’ opinion on the fairness of the financial statements.

B. Provides the auditor’s opinion on the effectiveness of internal control.

C. Describes the scope of the audit.

D. States management’s responsibility for the financial statements.

B
48. The Management Discussion and Analysis section of the annual report can best be described

as:

A. Frank but objective.

B. Independent but precise.

C. Legalistic and lengthy.

D. Biased but informative.

D
49. An example of fraud would be:

A. Issuing a purchase order without first securing bids.

B. Buying raw materials from an affiliated company.

C. Knowingly classifying a material noncurrent receivable as a current receivable.

D. Forgetting to accrue salaries and wages payable.

C
50. An example of an error would be:

A. Purchasing inventory from a related party.

B. Counting an inventory item twice when taking a physical inventory.

C. Holding back invoices so that accounts payable are understated.

D. Receiving kickbacks in exchange for issuing a purchase order to a vender.

B
51. An exception that is so serious that even a qualified opinion is not justified would result in:

A. A disclaimer.

B. An unqualified opinion.

C. An adverse opinion.

D. A consistency exception.

C
52. Liquidity refers to:

A. The amount of cash on hand at a given time.

B. The readiness of an asset to be converted to cash.

C. The period until cash is used and refinancing becomes necessary.

D. Financial leverage.

B
53. Lack of long-term solvency refers to:

A. Risk of nonpayment relative to liabilities in the capital structure.

B. The length of time before long-term debt becomes due.

C. The ability to refinance long-term debt when it becomes due.

D. Long-term assets.

A
54. The current ratio is given by:

A. Current assets divided by noncurrent assets.

B. Current assets divided by total assets.

C. Current assets divided by current liabilities.

D. Current assets divided by total liabilities.

C
55. The acid-test ratio is also known as the:

A. Current ratio.

B. Debt to equity ratio.

C. Times interest earned ratio.

D. Quick ratio.

D
56. The quick ratio is:

A. The liquidity ratio divided by the equity ratio.

B. Current assets minus inventory divided by current liabilities minus accounts payable.

C. Current assets minus inventory and prepaid items divided by current liabilities.

D. Cash divided by accounts payable.

C
57. Working capital is equal to:

A. Current assets.

B. Current liabilities.

C. Current assets plus current liabilities.

D. Current assets minus current liabilities.

D
58. Which of the following is not a financing ratio?

A. Times interest earned ratio.

B. Debt to equity ratio.

C. Current ratio.

D. All of the above are financing ratios.

C
59. When a company pays its bill from a plumber for previous services on account:

A. Its debt to equity ratio always decreases.

B. Its acid-test ratio always remains unchanged.

C. Its current ratio always remains unchanged.

D. All of the above are correct.

A
60. When a company accrues federal income taxes at the end of the accounting period:

A. Its acid-test ratio increases.

B. Its current ratio increases.

C. Its debt to equity ratio decreases.

D. Its debt to equity ratio increases.

D
61. Assume a company’s liquidity and financing ratios all are less than 1.0 before it purchases

inventory on credit. When it makes the purchase:

A. Its current ratio decreases.

B. Its quick ratio decreases.

C. Its current ratio remains unchanged.

D. Its quick ratio remains unchanged.

B
62. When a company sells land for cash and recognizes 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.

C
The following partial balance sheet ($ in thousands) for Paisano Seafood Inc. is shown below.

https://docs.google.com/file/d/0By6mLiFT5J_Bd2JOQ0pibVk2LVU/image?pagenumber=71&w=863

63. The current ratio is (rounded):

A. 1.98.

B. 1.58.

C. 1.17.

D. 0.66.

B

Current ratio: $505/$320 = 1.58

The following partial balance sheet ($ in thousands) for Paisano Seafood Inc. is shown below.

https://docs.google.com/file/d/0By6mLiFT5J_Bd2JOQ0pibVk2LVU/image?pagenumber=71&w=863

64. Working capital is:

A. $505.

B. $265.

C. $185.

D. $75.

C

Working capital: $505 – 320 = 185

The following partial balance sheet ($ in thousands) for Paisano Seafood Inc. is shown below.

https://docs.google.com/file/d/0By6mLiFT5J_Bd2JOQ0pibVk2LVU/image?pagenumber=71&w=863

65. Quick assets total:

A. $60.

B. $230.

C. $280.

D. $305.

C

Quick assets: $505 – 200 – 25 = 280

The following partial balance sheet ($ in thousands) for Paisano Seafood Inc. is shown below.

https://docs.google.com/file/d/0By6mLiFT5J_Bd2JOQ0pibVk2LVU/image?pagenumber=71&w=863

66. The acid-test ratio is (rounded):

A. 0.25.

B. 0.88.

C. 1.17.

D. 1.58.

B

Acid-test ratio: ($505 – 200 – 25)/$320 = .88

Recent financial statement data for Harmony Health Foods (HHF) Inc. is shown below.

https://docs.google.com/file/d/0By6mLiFT5J_Bd2JOQ0pibVk2LVU/image?pagenumber=73&w=863

67. HHF’s debt to equity ratio is (rounded):

A. 0.75.

B. 1.13.

C. 0.53.

D. 1.80.

B

Debt to equity ratio: $540/$480 = 1.13

Recent financial statement data for Harmony Health Foods (HHF) Inc. is shown below.

https://docs.google.com/file/d/0By6mLiFT5J_Bd2JOQ0pibVk2LVU/image?pagenumber=73&w=863

68. HHF’s times interest earned ratio is (rounded):

A. 3.47.

B. 1.73.

C. 2.47.

D. 10.0.

A

Times interest earned ratio:125/$36 = 3.47

Recent financial statement data for Harmony Health Foods (HHF) Inc. is shown below.

https://docs.google.com/file/d/0By6mLiFT5J_Bd2JOQ0pibVk2LVU/image?pagenumber=73&w=863

69. HHF’s long-term debt to equity ratio equity is:

A. 133.3%.

B. 75%.

C. 180%.

D. 0%.

B

Long-term debt to equity ratio: $360/$480 = 75%

70. Which of the following is not a required segment reporting disclosure according to U.S. GAAP?

A. Segment profit or loss.

B. Segment assets.

C. Segment liabilities.

D. General information about the operating segment.

C
71. Which of the following is not a required segment reporting disclosure according to International

Financial Reporting Standards?

A. Segment profit or loss.

B. Segment assets.

C. Segment liabilities.

D. All are required disclosures.

D
72. Which of the following is not a characteristic that defines a reportable operating segment

according to U.S. GAAP?

A. Operating results are regularly reviewed by the enterprise’s chief operating officer.

B. Discrete financial information is available.

C. Engages in business activities from which it may earn revenues and incur expenses.

D. Represents more than 20% of total company revenues, assets, or net income.

D

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