Ch.17 – Test Bank + Answers – Understanding Accounting And

Understanding Business, 12e (Nickels)

Chapter 17 Understanding Accounting and Financial Information

1) Accounting is an easy subject for people to understand because almost everyone is exposed to basic accounting concepts in their everyday life.

2) Although managers who work for large firms must know something about accounting, people who run small businesses only need to know the basics of bookkeeping.

3) It is impossible to run a company effectively without the ability to read and understand basic accounting reports and financial statements.

4) With increased computer technology, the ability to read and understand financial statements is no longer an important skill for managers.

5) Accounting provides information about the financial condition and operating performance of a firm.

6) The sole purpose of accounting is to help managers evaluate the financial condition of the firm so that they may make better pricing decisions.

7) Inputs to the accounting system include sales documents.

8) Purchasing insurance, paying employees, and using supplies are examples of financial transactions.

9) Accounting provides financial information that can be useful to owners, creditors, suppliers, employees, and competitors of an organization.

10) Accountants do the work involved in recording financial events and transactions, but the actual classifying and interpreting of this data is left to financial managers.

11) Accounting information is NOT relevant for nonprofit organizations.

12) Churches, schools, and charitable organizations all need accountants.

13) Accounting involves both the recording and the interpreting of financial events.

14) In an effort to maintain a competitive advantage, firms do not share accounting information with people outside of the firm.

15) The U.S. government is a user of a firm's accounting information.

16) Good decisions are based on good information. Organizations need accounting—to provide good financial information.

17) A firm's financial statements represent a health report regarding the condition of the firm.

18) Accounting is NOT important for nonprofit organizations since financial data is not critical to their success.

19) Accounting, as the language of business, is solely concerned with providing information useful to managers of profit-seeking firms.

20) Referring to an accounting system, inputs refers to events and transactions that occur within the business, while outputs refers to the journal entries and ledger categorization that occurs after the events and transactions are recorded.

21) Government organizations such as the IRS and other government regulatory agencies are interested in a firm's accounting information in order to help the firm strategize about ways to cut costs in order to minimize net income before taxes.

22) GAAP refers to a set of standards concerning accounting principles that were established by the Financial Accounting Standards Board.

23) Because each business is unique, the accounting profession recognizes that the accounting principles followed by one company may need to be completely different from the accounting principles followed by another firm.

24) Jeremy thinks his business will be successful as long as he just keeps his customers satisfied. He does NOT need to have a great deal of knowledge about accounting practices.

25) Lyell owns his own small business, but he doesn't want to be bothered with accounting information. He tells his friends, "All I need accounting for is to prepare my income tax return for my business. I'll hire someone to do that for me." Lyell's attitude would be disastrous if he managed a large firm, but it is a reasonable view for a small business owner.

26) Bookkeeping is part of the accounting cycle, but accounting goes far beyond the activities involved in bookkeeping.

27) A major part of a bookkeeper's job is to interpret financial data and suggest strategies for improving the firm.

28) After recording a business's transactions, bookkeepers usually classify the recorded transactions into groups with common characteristics.

29) A bookkeeper's first task is to record the firm's transactions in a journal.

30) The books where accounting data are first entered are called ledgers.

31) Double-entry bookkeeping requires that every transaction be recorded in two places.

32) Double-entry bookkeeping can help identify a recording error made by a bookkeeper.

33) A journal is where the initial record of a day's transactions is entered.

34) The accounting book that provides all the information about a single account in one place is called the ledger.

35) At present, accounting software packages have proven to be too complex and expensive to be useful for owners of small businesses.

36) The accounting cycle is a six-step procedure that results in the preparation and analysis of major financial statements.

37) Posting is a step in the accounting cycle that involves transferring information from the journal into the appropriate accounts in a ledger.

38) There are two major financial statements prepared at the completion of the accounting cycle: the journal and the ledger.

39) The accounting cycle usually involves the work of both the bookkeeper and the accountant.

40) The purpose of a trial balance is to prepare a practice balance sheet.

41) One of the statements prepared in the accounting cycle is the statement of cash flows.

42) Many businesses now use computers and accounting software to simplify the mechanical aspects involved in accounting.

43) Accounting software for small businesses has become so sophisticated that most small business owners will never need to consult with an actual accountant or understand accounting information themselves.

44) Accounting software has proven to be especially helpful for small-business owners.

45) One advantage of the double-entry method of bookkeeping is that it helps to identify mistakes made in recording financial transactions.

46) Computerized accounting programs have eliminated the need to prepare a trial balance.

47) In addition to the tasks of recording and classifying accounting information, the best accounting software programs currently available for small businesses have the ability to make financial decisions, thus eliminating the need for owners of small businesses to consult with accountants or understand accounting terminology.

48) The steps in the accounting cycle do not need to be followed in the order stated. Monthly financial statements can be prepared with a good amount of accuracy, prior to posting in the ledger or preparing the trail balance.

49) Sophie has been a bookkeeper for a small chain of boutiques for nearly four years. Six months ago, the manager retired and a new manager was brought in. The new manager routinely asks her for information and advice about how to interpret the information she records. Sophie's experience as a bookkeeper means she is qualified to provide this type of advice.

50) Barkatorium Pet Supplies recently hired an accountant to make sense of each day's transactions, and keep better financial records for the business. The accountant showed the owner that the ledger in a computerized accounting system would automatically take entries and post them to the correct accounts in the ledger, making the bookkeeping tasks much easier.

51) Sally prepares monthly financial statements for her client, Dent's Auto Body. Now, though, she must summarize the data in the accounting ledgers to determine if the figures are correct and balanced. Sally will prepare a statement of cash flows in order to complete this step of the cycle.

52) Mike is the head of the accounting department at Micro Flash. After completing the trial balance, he will proceed with the preparation of the balance sheet, the income statement, and the statement of cash flows.

53) Josephine has discovered her small business needs a better way to maintain accounting records and analyze business opportunities. Currently, she uses a manual accounting system. These days, any accounting program should do an excellent job of meeting her firm's accounting needs.

54) Isabel created Waterfront Sports at a nearby lake resort. She wanted to combine her accounting degree with her love of the outdoors and kayaking. One of her first business purchases was a computerized accounting program. She learned in her college classes that a good software system will eliminate accounting cycle steps and the time it takes for her to interpret the results. As she put it, "It should make the decisions for me!"

55) The key financial statements are the balance sheet, the income statement, and the statement of cash flows.

56) The income statement reports the difference between a firm's assets and its liabilities as of a certain date.

57) A firm's balance sheet reports its financial condition on a specific date.

58) The balance sheet reports revenues and selling costs for a period of time.

59) An income statement reports what a company owns and owes on a certain day.

60) Assets are reported on the firm's balance sheet.

61) Liabilities are reported on the income statement.

62) Assets are economic resources that are owned by a firm.

63) The fundamental accounting equation is as follows: Assets = Liabilities + Owners' equity.

64) The balance sheet reflects the fact that assets equal the sum of liabilities and owners' equity.

65) A balance sheet is composed of assets, liabilities, and revenues.

66) The cost of goods sold includes all the costs of buying and keeping merchandise available for sale.

67) Rent, salaries, insurance and depreciation are examples of the cost of goods sold.

68) Gross profit represents profit after the deduction of cost of goods sold, and before the deduction of all other selling expenses, general expenses, and tax expense.

69) Rents, salaries, utilities, and insurance are examples of operating expenses.

70) The two major classes of operating expenses are current expenses and long-term expenses.

71) General expenses include office salaries, rent, and insurance.

72) Net income before taxes is found by deducting total operating expenses from gross profit before factoring tax expense.

73) A statement of cash flows summarizes a company's cash receipts and cash payments over a period of time.

74) Cash flow statements identify three sources of cash receipts and disbursements: assets, liabilities, and owners' equity.

75) The statement of cash flows calculates cash flows from operations, investing activities, and financing activities.

76) An analysis of the statement of cash flows can help a firm prevent cash shortages.

77) The statement of cash flows shows a firm's revenues, costs of goods sold, expenses, and net income.

78) The equipment a firm owns and the money it has in its bank account are considered assets.

79) Brand names such as Coca-Cola and McDonald's are examples of intangible assets.

80) Assets are listed on the balance sheet in order of liquidity, with the most liquid assets listed first.

81) The firm's most valuable assets are listed at the top of its balance sheet.

82) Patents and copyrights are examples of intangible assets.

83) Liquidity refers to how quickly liabilities must be paid.

84) Net income is simply the difference between revenue and cost of goods sold.

85) The cost of goods sold reflects the selling price of the merchandise sold over a period of time.

86) The cash a firm raised from issuing new debt or equity capital would be reported on a statement of cash flows.

87) One important source of financing for most small businesses is the owner's savings. If the owner contributes money to the business from his/her personal savings, it will be recorded in the owners' equity account on the balance sheet.

88) The income statement computes net income by subtracting liabilities from assets.

89) Revenue on the income statement represents the dollar amount of what is received for goods sold, services rendered, and/or from other revenue sources.

90) When an accountant writes off the cost of a tangible asset over its estimated lifetime, it is called depreciation.

91) Although a firm may use different inventory valuation methods, generally accepted accounting principles (GAAP) states that these methods must produce the same dollar value for the cost of goods sold.

92) Banks are likely to request a firm's balance sheet when determining whether or not to loan money to the firm. However, banks would have little interest in the firm's income statement since it covers a short period of time.

93) The best way for a firm to avoid serious cash flow problems is to sustain a rapid growth in sales.

94) Cash flow difficulties are unlikely for a firm that is profitable.

95) FIFO and LIFO are two common methods used to compute the depreciation of tangible assets.

96) FIFO is a method of computing net cash flows by subtracting financial inflows from financial outflows.

97) FIFO is a method of inventory valuation that assumes the items most recently purchased are also the items that are sold first.

98) The LIFO method of inventory valuation assumes the newest items in inventory are sold first.

99) According to generally accepted accounting principles (GAAP), a firm must use the inventory valuation method that most accurately reflects the actual movement of goods through its inventory.

100) When valuing items in inventory for financial reporting purposes, generally accepted accounting principles (GAAP) requires firms to value the cost of goods sold by assuming that the items that have been in inventory the longest are the ones that are sold first.

101) If prices of inventory are unchanged throughout the year, LIFO and FIFO inventory valuation methods will produce the same reported net income.

102) During a period of rising prices, the FIFO technique of inventory valuation will result in a lower net income figure than would the LIFO technique.

103) In businesses that handle a lot of perishable items (such as supermarkets) the actual movement of goods through inventory most closely resembles the LIFO inventory valuation technique.

104) If the economy began experiencing a prolonged period of deflation in which the prices of most goods are falling, many firms would find that the LIFO method of inventory valuation would result in higher reported profits.

105) During periods of rising prices, firms that want to report more attractive profits would tend to favor the FIFO technique of inventory valuation.

106) If the goal of a business is to pay lower taxes on its income during an inflationary period, it is likely to use the FIFO inventory costing method.

107) Barkatorium's balance sheet shows: what the business owns, minus what the business owes, which equals the book value (or net worth) of the business.

108) Marshall Manufacturing has recorded its unpaid bill for supplies under a current liabilities account on the balance sheet. This payment will be due to the supplier in less than a year.

109) The Hendry Group wants to know the value of its owners' equity. It will total its assets and subtract its liabilities.

110) The Newport Company balance sheet shows the following items: accounts payable totaling $60,000; salaries payable totaling $85,000; and notes payable totaling $120,000. These are liabilities, or money that the firm owes others.

111) The bottom line of the Cooper Corporation's income statement is equal to the net worth of the firm.

112) Green Goddess Lawn Services will refer to its income statements to determine whether it was profitable, or whether it lost money over the past year.

113) Ronnecker Construction has several trucks that are used in the business. Recently, the owners were told that even though the government permits the firm to depreciate the vehicles, it is not a deductible expense on the income statement.

114) Henderson, Inc. owns land worth $800,000 and has $180,000 worth of cash in its bank account. In the asset section of the balance sheet, Henderson lists its land holdings prior to listing its cash since it is a higher value.

115) Ernesto borrowed money from a friend to acquire a liquor license for his new pub, and gave him a written promise to repay the amount within six months. Ernesto should list this business debt as an operating expense on his pub's balance sheet.

116) Barkatorium Pet Supplies established a line of credit with its local bank and used (borrowed) $95,000 against it to purchase its first year's inventory. Since it is required to repay the money before the end of its fiscal year, the company's accountant lists this liability with the current liabilities on the balance sheet.

117) At this point in time, Barkatorium Pet Supplies' balance sheet shows $100,000 in assets and $90,000 in liabilities. The company's accounting system will show the owners' equity as $190,000.

118) Marissa is taking her first course in accounting this semester. One of the first things she learns is that revenue and net income mean the same thing.

119) Barkatorium Pet Supplies' owner is concerned with how his business decisions affect the bottom line. This is another way of saying that he is concerned with the impact of his decisions on net income after taxes.

120) Money received from tickets sold for the Taylor Swift concert is recorded as net income on the concert promoter's income statement.

121) Harrison, a potential investor, is interested in both Barkatorium's balance sheet and income statement when evaluating whether or not to invest.

122) A hospital emergency room serves several patients from a ten-car pile-up on the local interstate. Most of the victims require bandages, antibiotics, foot and arm casts, topical ointments, and pain pills. These items are part of the costs of goods sold for the hospital emergency room.

123) Portable Pet Care, Inc., a mobile veterinary care clinic, has more appointments than it ever expected to have when it first hit the road. Each week it orders more vaccines, antibiotics, and preventive care supplies from a major veterinary supplier, with the understanding that it will pay for these supplies in one month's time. Most of the company's clients are elderly and on fixed incomes, and often do not pay for services for two or more months. This is not a problem because as long as the company continues to increase its appointments, it will create profits and growth.

124) Cash revenues from the sale of new cars at Five Star Autos would be listed as a cash inflow from operations on Five Star's statement of cash flows.

125) A loan officer at Bigbux Bank is considering a loan application from Portable Pet Care, Inc. He is concerned about the company's ability to make payments on the loan. The loan officer is likely to be interested in Portable Pet Care's statement of cash flows.

126) Portable Pet Care, Inc., successfully took out a loan for $155,000 from Bigbux Bank. It used $90,000 of this loan to pay off an existing loan that had a higher interest rate, and purchased X-ray equipment with the remaining funds. These events were noted as financing and investing activities on its balance sheet.

127) Financial ratios are used to analyze a firm's financial condition and financial performance.

128) Liquidity ratios are of particular importance to stockholders, but have little relevance for creditors.

129) The purpose of liquidity ratios is to indicate the degree to which a firm relies on borrowed funds in its operations.

130) Liquidity refers to how fast an asset can be converted to cash.

131) The current ratio is used to evaluate a firm's ability to pay its short-term debts.

132) The current ratio is found by dividing the firm's total assets by its total liabilities.

133) The current ratio is a good indicator of the degree to which a firm relies on borrowed funds in its operations.

134) Both the current ratio and the acid-test ratio are liquidity ratios.

135) The acid-test ratio is found by dividing inventory by cost of goods sold.

136) For firms that sometimes have difficulty selling their inventory, the current ratio is likely to be a better measure of liquidity than the acid-test ratio.

137) A firm that takes on too much debt could experience problems repaying its lenders or meeting promises made to stockholders.

138) Leverage ratios are concerned with the extent to which a firm relies on borrowed funds in its operations.

139) The debt to owners' equity ratio is a common type of liquidity ratio.

140) Profitability ratios are often used to measure management's earnings performance.

141) A firm's basic earnings per share measures how much profit was earned for each dollar invested by the firm's owners.

142) The return on sales ratio measures a firm's use of leverage.

143) The basic earnings per share ratio does not take stock options, warrants, and preferred stock into account.

144) Activity ratios measure the effectiveness of the firm's management in using its various resources to achieve profits.

145) The inventory turnover ratio measures the speed of inventory moving through the firm and its conversion into sales.

146) An extremely high inventory turnover ratio may represent lost sales due to holding inadequate stocks of merchandise.

147) The acid-test ratio emphasizes the ability to convert inventory quickly into cash.

148) The inventory turnover ratio for all firms should be greater than 2 times.

149) One way to make ratio analysis more meaningful is to compare the ratios of one firm to those of other firms in the same industry.

150) The basic earnings per share and the diluted earnings per share would have quite different values for a firm that relied heavily on preferred stock and convertible debt securities to acquire funds.

151) A lower than average inventory turnover ratio indicates excellent inventory management practices.

152) A debt to owners' equity ratio of 25% indicates that a firm has more debt than equity.

153) Portable Pet Care, Inc., has recorded the following on its income statement for the period ending December 31, 2019:

The return on sales = 34%. This return is outstanding and there is no need to compare this return to competitors in the veterinary services industry.

154) The Barkatorium Pet Supplies accountant has recorded the following: Total current assets = $60,000, including Cash = $24,000; Accounts Receivable = $20,000; and Inventory = $16,000. Total assets = $230,000; Total current liabilities = $48,000; and Total current and long-term liabilities = $98,000. The store's current ratio = 1.25. The store's acid-test ratio = .92

155) There are five key working areas in accounting: financial accounting, managerial accounting, auditing, tax accounting, and governmental and not-for-profit accounting.

156) The accounting profession is divided into two main fields: bookkeeping and auditing.

157) Budget preparation is one aspect of managerial accounting.

158) The work of a certified management accountant is intended to enable people outside of the organization to make investment decisions.

159) Activities of managerial accountants include measuring and reporting the costs of production, marketing, and other functions within the organization.

160) Financial accounting and managerial accounting are similar in that they both provide information intended primarily for people inside the organization.

161) Financial accounting involves activities such as preparing budgets and measuring production costs.

162) Financial accounting is used to provide information and analysis managers within the organization can use to assist them in decision making.

163) Financial accountants prepare reports for owners, creditors, suppliers, and others outside of the organization.

164) A firm's annual report is a yearly statement of the financial condition, progress, and expectations of an organization.

165) An individual who provides accounting services to individuals and businesses on a fee basis is referred to as a private accountant.

166) The job of reviewing and evaluating the information used to prepare a company's financial statements is referred to as auditing.

167) Independent audits are prepared by accountants within the organization to ensure that proper accounting procedures are followed.

168) An independent audit is an evaluation and unbiased opinion about the accuracy of a company's financial statements.

169) A tax accountant is responsible for preparing tax returns and developing tax strategies.

170) The Internal Revenue Service is responsible for establishing accounting standards used by accountants working in government accounting.

171) Taxpayers and special interest groups often have interest in the information generated by government accounting.

172) Information contained in a firm's annual report largely represents work done by managerial accountants.

173) A series of high-profile scandals in the early 2000s put the accounting profession under intense scrutiny.

174) As a certified public accountant, you would be working in the area of managerial accounting.

175) Managers who are concerned about keeping costs under control should be very interested in the information and advice provided by their company's managerial accountants.

176) Recent accounting scandals raised serious questions about the legitimacy of an accounting firm performing both auditing and consulting work for the same company.

177) In large companies, certified internal auditors are usually responsible for preparing tax returns and developing tax strategies for businesses.

178) As the burden of taxes grows, the role of the auditor becomes increasingly important to the organization.

179) The Sarbanes-Oxley Act strengthens the protection for whistleblowers who report wrongful actions of company officers.

180) The Sarbanes-Oxley Act prohibits accounting firms from providing certain nonauditing work (such as consulting services) to companies they audit.

181) According to the Adapting to Change box, the SEC is determined to crack down on and punish those accused of fraud. However, so many auditors and CPAs are trained in how to search for fraud that there are too many cases to prosecute.

182) As mentioned in the Adapting to Change box, accountants that search for fraudulent activities are called forensic accountants.

183) As a certified public accountant (CPA), Elizabeth might become involved in helping her clients select appropriate accounting computer software for their firm.

184) Jerome is an accountant employed full time by The Newport Company. Jerome is an example of a public accountant.

185) Eric holds a bachelor's degree in accounting and additional training in tax law. He is responsible for preparing tax returns and developing tax strategies for his employer, and has done so for the past seven years. Eric is a certified government accountant.

186) Coverall Insurance Corporation's internal accountants can prepare an audit for the company.

187) Sydney is a member of a conservative political group that wants to identify and publicize examples of wasteful government spending. The type of accounting information Sydney and her group will follow most closely is provided by certified public accountants.

188) An important difference between accounting and other business functions, such as marketing and management, is that

A) accounting functions must be performed by an outsider, rather than by an employee of the business, in order to avoid conflicts of interest.

B) accounting offers us insight into whether the business is financially sound.

C) accounting involves mainly clerical activities and thus requires very little analysis.

D) accounting deals exclusively with numbers.

189) To effectively run a business, it is necessary to

A) hire a full-time accountant.

B) use a public accounting firm.

C) understand and use accounting information.

D) make certain that you do not spend too much time on your accounting system.

190) Which of the following is an example of a financial transaction?

A) A firm purchases a fire insurance policy.

B) An internal auditor discovers an error in a firm's inventory valuation.

C) A potential customer accesses a firm's web page.

D) A manager reviews the financial statements prepared by an accountant.

191) Although accounting has several specific uses, the overall purpose of accounting can be summarized as

A) to provide financial information that is useful to decision makers.

B) to meet the legal requirements of the Financial Accounting Standards Board (FASB).

C) to allow the government to track business activity levels.

D) to compute the profit or loss and declared dividend of a business firm.

192) Which of the following responses is the best and most comprehensive? "A company's accounting information is useful to ________."

A) managers within the firm, exclusively

B) marketing research firms for pricing insights

C) primarily the IRS and other government agencies that regulate the firm

D) managers, owners, creditors, employees, and the government

193) Accountants record, classify, and ________ the results of the financial information they gather.

A) interpret

B) sell

C) buy

D) change

194) The reports and financial statements prepared by accountants

A) are more useful for profit-seeking businesses than they are for not-for-profit organizations.

B) are mainly used to help the firm complete its tax forms.

C) provide information that can be used by decision makers both inside and outside the organization.

D) are not as useful now that firms have moved into a more global environment.

195) The accounting profession follows generally accepted accounting principles as defined by

A) GAAP.

B) the PCAOB (Public Company Accounting Oversight Board).

C) the FASB (Financial Accounting Standards Board).

D) the Sarbanes-Oxley Act.

196) A person's pulse rate and blood pressure are indicators of a person's health. Similarly, ________ can help assess the health of a business.

A) financial statements

B) production schedules

C) transactions

D) databases

197) Accounting transactions are very important to a firm's operations. Which of the following activities would affect the firm's account balances?

A) buying and selling goods and services

B) interviewing prospective employees

C) understanding economic reports

D) forecasting consumer demand

198) Given that measuring a firm's financial health is important to its survival, which of the following strategies is good advice for a person just starting a business?

A) Create a method for keeping your books that makes sense to you. Outside agencies such as creditors and suppliers will not evaluate you by the way you keep books.

B) All transactions are important. Separating transactions only serves to create a perception that some transactions are of lesser importance than others.

C) Accounting systems used by big business are not suitable for small businesses.

D) Select an accounting system that helps you make decisions, and helps you report information to others outside your firm.

199) As an accountant, Janice's responsibilities include

A) developing plans to help her company establish a supply chain.

B) setting prices for specific goods and services.

C) summarizing and interpreting financial information needed by her firm's managers.

D) developing a fringe benefit program that improves employee morale.

200) Tracy wants to start her own business, but knows little about how to set up an accounting system or interpret financial information. "I'm not worried about accounting," she tells her friends. "I'll just hire a part-time bookkeeper to handle all that type of stuff, and focus my attention on what I like—finding ways to satisfy my customers." Which of the following is the best response to Tracy's comments?

A) Fine. Just make sure the bookkeeper you hire knows how to use a database, since this type of software is the heart of any efficient accounting system.

B) Although you can hire someone to keep your books, you'll still need to know how to read, understand, and interpret basic accounting reports in order to make good business decisions.

C) Most entrepreneurs would agree with your opinion. The work done by accountants is mainly clerical in nature, so time spent by business owners on accounting tends to take them away from more important tasks.

D) You have a good plan. Only managers of large firms require knowledge of accounting. Owners and managers of small businesses can easily get by with just a part-time bookkeeper.

201) Blake took a marketing class at the local community college before starting his landscape business. He decided that his time would be better utilized in this class because if he could learn to sell his services well, the revenues and profits would follow. Your assessment of his plan might include which of the following?

A) Blake understands that marketing is the lifeblood of the company, and he is right on track with his approach.

B) Blake has elected to operate like a virtual company and leave various parts of the business including accounting, environmental trends scanning, and management to outsourcers.

C) Blake knows that increasing revenues will always keep the business profitable and in a positive cash position.

D) Blake needs to realize that the ability to understand and interpret financial statements provided by his accountant might enhance his profits.

202) Terry is opening a small sports store in his town. At the advice of a friend who is a bookkeeper, he keeps the receipts of everything he purchases for the business in the bottom drawer of his desk, along with all other business expenses, such as his retail license, his rent expense, and insurance expense. You suggest that ________.

A) Terry continue with this procedure, but only until the store opens, at which time he will need an additional drawer for his sales transactions.

B) Terry invest some time in exploring an accounting system that will make it easier to classify and summarize accounting information.

C) Terry continue with this procedure because there is very little difference between one expense and another.

D) Terry stop wasting valuable time saving the receipts because accountants only record sales transactions.

203) As a first step in the accounting cycle, ________ involves the recording of business transactions.

A) marketing

B) bookkeeping

C) auditing

D) economics

204) ________ is the accounting practice of recording each transaction in two places in the accounting journal.

A) Double-entry bookkeeping

B) Trial balancing

C) Account matching

D) Entry duplication

205) A ________ is a specialized accounting book, where transactions are categorized according to type. For example, all utility transactions are recorded in the same category.

A) journal

B) trial balance

C) ledger

D) balance sheet

206) A bookkeeper's first task is to

A) separate all of the firm's transactions into meaningful categories.

B) prepare the firm's financial statements.

C) summarize the firm's financial data.

D) interpret and report data to the firm's management.

207) In the course of their jobs, bookkeepers

A) interpret accounting data.

B) approve decisions about major expenditures.

C) record business transactions.

D) prepare financial statements.

208) The accounting book or computer program where each day's transactions are first recorded is called a

A) posting workbook.

B) general ledger.

C) balance sheet.

D) journal.

209) A ________ summarizes all the data from the account ledgers to verify that they are correct and balanced.

A) ledger statement

B) balance sheet

C) trial balance

D) statement of cash flows

210) The purpose of a trial balance is to

A) affirm whether the figures in the account ledgers are correct and balanced.

B) prepare a mockup of a real balance sheet.

C) review the income statement accounts.

D) meet a reporting requirement of the Securities and Exchange Commission (SEC).

211) The ________ is a six-step procedure that results in the preparation and analysis of the major financial statements.

A) double-entry method

B) financial management process

C) financial performance appraisal

D) accounting cycle

212) Once a trial balance has been prepared, the next step of the accounting cycle involves

A) posting the information to the correct ledger accounts.

B) completing a balance sheet and ratio analysis.

C) preparing financial statements such as the balance sheet, income statement, and statement of cash flows.

D) classifying the transactions into logical categories.

213) One of the key financial statements prepared in the fifth step of the accounting cycle is

A) general journal.

B) statement of cash flows.

C) asset summary.

D) social audit.

214) The balance sheet, the statement of cash flows, and the ________ are three key financial statements prepared by accountants.

A) income statement

B) statement of retained earnings

C) statement of changes in financial position

D) trial balance

215) The sixth and final step in the accounting cycle involves

A) performing a trial balance to verify that the accounting statements are internally consistent.

B) auditing the books to ensure that they were prepared according to generally accepted accounting principles.

C) preparing the income statement.

D) analyzing major accounting statements to evaluate the financial condition of the firm.

216) Careful consideration of the use of computers in accounting indicates that computers

A) will soon eliminate all of the accounting functions.

B) are tools to help the accountant perform his or her job.

C) are of little use to small-business owners that need accounting services.

D) have a very limited use in accounting due to inadequate privacy controls.

217) Today's computerized accounting programs are

A) very helpful for small-business owners who lack strong accounting support within their companies.

B) too expensive and complicated for most small businesses.

C) a poor investment for small start-up companies due to the fact that these programs are seldom needed unless the firm is considered a mid-sized to large company.

D) so sophisticated that they can make most financial decisions without the aid of an accountant.

218) Accountants not only provide financial information to the firm, they

A) replace the firm's need for managers.

B) provide information regarding competitors.

C) assist in interpreting that information.

D) design the computer information systems.

219) A comparison of bookkeeping and accounting indicates that

A) the two are virtually the same in practice.

B) bookkeeping involves recording financial information, while accounting is concerned with classifying, summarizing, and interpreting this information.

C) bookkeeping is more useful for small businesses while accounting is more useful for large businesses.

D) accounting is a subsystem of the process of bookkeeping.

220) Sales receipts, purchase orders, and payroll records are all examples of accounting transactions that would be recorded by a(n)

A) auditor.

B) forensic accountant.

C) bookkeeper.

D) purchasing agent.

221) Which of the following is a key step in the accounting cycle?

A) recording information into journals

B) collecting data from customers

C) forecasting expenses and revenues

D) preparing the advertising message

222) The main reason an accountant would conduct a trial balance is to

A) determine whether account figures in the ledger are correct and balanced.

B) obtain an estimate of the amount of taxes the firm owes.

C) ensure the audit was done correctly.

D) verify the validity of last year's balance sheet before beginning the next accounting cycle.

223) The use of computerized accounting systems ________.

A) makes it possible for most firms to operate without the expense of hiring or consulting with accountants.

B) reduces the pressure on managers in making financial decisions.

C) allows firms to generate financial information almost instantly and whenever the organization needs it.

D) creates an environment in which accounting has become nothing more than glorified bookkeeping, as all accountants are required to do is enter data into the system and monitor the results the program generates.

224) Chloe is categorizing journal entries in order to post to the ________.

A) income statement.

B) balance sheet.

C) working papers.

D) ledger.

225) Diego owns and operates a small business with only four full-time employees and less than $700,000 in annual sales. He currently uses a manual accounting system and relies on a part-time bookkeeper to keep his records in order. In evaluating the possible adoption of a computerized accounting system, Diego will probably discover that

A) the expense of setting up a computerized accounting system would not be affordable at this time.

B) he would be better off hiring a full-time accountant.

C) he could benefit from adopting such a system, but should also consult with an accountant for advice about what's best.

D) a computerized system would be affordable, but that he would have little need for it unless his company became significantly larger.

226) Ivy is a bookkeeper for the Newport Corporation. She takes the firm's transactions and records them in a record book or computer program referred to as

A) a credit account.

B) an asset database.

C) a journal.

D) a debit program.

227) George works in the accounting department at the Green Goddess Lawn Services, where it is his job to record all transactions into journals. After completing this task, the next step in the accounting process is to

A) prepare the firm's financial statements.

B) post the information to the ledger.

C) determine the tax liability of the firm.

D) balance the difference between assets and liabilities.

228) Alex is responsible for recording sales transactions at Perry Enterprises. Alex's company utilizes ________, to help minimize entry errors.

A) auditing

B) capital budgeting

C) double-entry bookkeeping

D) revenue assessment

229) Audrey works in the accounting department of Colorado Manufacturing. Today she will use the firm's ledger to summarize information that was posted over the most recent time period. Her goal is to determine if the accounts are balanced as required by the double-entry method of bookkeeping. To be sure they are correct, Audrey will prepare a(n)

A) account analysis.

B) statement of cash flows.

C) balance sheet.

D) trial balance.

230) Nathan works as an accountant for a mid-sized retail store. He has just completed a trial balance that resulted in no unexpected problems. Nathan's next task is likely to be

A) conducting the full audit.

B) preparing a tax return for the company.

C) preparing the store's balance sheet and other major financial statements.

D) presenting the trial balance to the company owners.

231) Brody has just finished working on the balance sheet, income statement, and statement of cash flows for his company. The next step in the accounting cycle involves

A) posting the results of these statements to the appropriate journal.

B) analyzing the firm's financial statements to evaluate the financial condition of the firm.

C) conducting forensic tests of the data to ensure its accuracy.

D) placing the data used to construct the statements into an archive known as a data warehouse.

232) PharmaONE plans to use its computers to post information from journals to the ledger instantaneously. One obvious benefit of this technology is

A) a reduction in the number of accountants required by the firm.

B) less scrutiny from agencies such as the Internal Revenue Service.

C) to shift financial decision making from people to programmed technology.

D) readily available financial information.

233) Personalized Products is a small manufacturing firm specializing in custom-order tool and die work. A computerized accounting system would help Personalized Products by

A) making key accounting and financial decisions.

B) helping management identify cash flow and other financial difficulties more quickly.

C) eliminating the need to prepare financial statements and other reports.

D) eliminating the need to perform the three middle steps of the accounting cycle.

234) The three important financial statements prepared by accountants are

A) ledger, journal, and trial balance.

B) cash budget, capital budget, and master budget.

C) revenue summary, expense summary, and consolidation statement.

D) balance sheet, income statement, and statement of cash flows.

235) The ________ is an accounting statement that reports the financial condition of a firm at a specific point in time.

A) income statement

B) balance sheet

C) statement of cash flows

D) trial balance

236) A firm's ________ reports the profit or loss for the firm over a specified time period.

A) income statement

B) balance sheet

C) statement of cash flows

D) bank statement

237) The ________ shows the assets, liabilities, and owners' equity of a firm, at a specific point in time.

A) income statement

B) balance sheet

C) statement of cash flows

D) trial balance

238) Which financial statement reports the company's revenues and selling costs over a period of time?

A) income statement

B) balance sheet

C) statement of cash flows

D) trial balance

239) A ________ provides a summary of cash coming into and money going out of a firm from operations activities, financing activities, and investing activities.

A) income statement

B) statement of cash flows

C) cash budget

D) cash receivables and payables report

240) The balance sheet is composed of the following types of accounts:

A) revenue, expenses, and earnings.

B) operating expenses, cash flow, and capital expenditures.

C) capital, cost, and valuation.

D) assets, liabilities, and owners' equity.

241) A balance sheet lists assets in order of their ________.

A) dollar value, from smallest to largest

B) date of acquisition, with the most recently acquired assets listed first

C) liquidity, with the most liquid assets listed first

D) income generating ability

242) ________ refers to how quickly an asset can be converted into cash.

A) Liquidity

B) Velocity

C) Fundability

D) Accessibility

243) When companies owe money to creditors, suppliers, and others, these outstanding amounts are recorded on the balance sheet as ________.

A) contra-assets

B) liabilities

C) owners' equity

D) expenses

244) _______ refers to the value that stockholders or owners have in a company.

A) Assets

B) Liabilities

C) Owners' equity

D) Contra receivables

245) The fundamental accounting equation states: Assets = ________.

A) liabilities minus owners' equity

B) liabilities plus receivables

C) payables plus cash equivalents

D) liabilities plus owners' equity

246) Company resources that are purchased with the intention that they will convert to cash within one year are

A) fixed assets

B) current liabilities

C) current assets

D) owners' equity

247) Resources that a firm owns are called

A) revenues.

B) assets.

C) equities.

D) credits.

248) The most liquid asset is

A) sales.

B) cash.

C) accounts payable.

D) owners' equity.

249) Patents and copyrights are classified as ________ on the Balance Sheet.

A) fixed assets

B) intangible assets

C) current assets

D) owners' equity

250) Debts that are due in one year or less are classified on the balance sheet as

A) current liabilities.

B) bonds payable.

C) callable bonds.

D) immediate expenses.

251) The value of resources the firm owns, minus the amount of money the firm owes to others =

A) liabilities.

B) liquidity.

C) leverage.

D) owners' equity.

252) The ________ account on the balance sheet shows profits that the firm has reinvested in the company.

A) retained earnings

B) stockholder's equity

C) intangible assets

D) notes payable

253) Revenue, minus cost of goods sold =

A) retained earnings.

B) fundamental accounting equation.

C) gross profit.

D) net income.

254) Rent, depreciation, and salaries are examples of

A) current assets.

B) current liabilities.

C) owners' equity.

D) operating expenses.

255) ________ is the monetary value that is received for goods sold, services rendered, and money received from other sources.

A) Revenue

B) Gross margin

C) Net income

D) Cost of goods sold

256) Net profit refers to

A) the result of deducting liabilities from the assets of the firm.

B) the result of subtracting cost of goods sold from revenues.

C) the result of deducting depreciation expense from revenues.

D) the net earnings after the deduction of all expenses, including tax expense.

257) Depreciation is a systematic write-off of the cost of a tangible asset that is listed on

A) the statement of cash flows.

B) the balance sheet.

C) the income statement.

D) the statement of retained earnings.

258) The statement of cash flows identifies cash receipts and disbursements that result

A) from selling goods and/or services, exclusively.

B) solely from a firm's investments.

C) from a firm's operations and investment activities, but not from financing activities.

D) from a firm's operations, investment, and financing activities.

259) The balance sheet is set up to reflect the Fundamental Accounting Equation. This equation shows

A) Assets = Liabilities + Owners' equity.

B) Revenues – Expenses = Gross profit.

C) Cash inflows = Cash outflows.

D) Current assets + Current liabilities = Owners' equity.

260) The bottom line of an income statement shows the firm's

A) retained earnings.

B) gross profit.

C) net income or net loss.

D) owners' equity.

261) Expenses a firm incurs for insurance, office salaries, and rent are classified as

A) selling expenses on an income statement.

B) general expenses on an income statement.

C) current liabilities on a balance sheet.

D) general expenses on a cash flow statement.

262) Debts owed by a business are called

A) revenues.

B) liabilities.

C) equities.

D) assets.

263) ________ is the systematic write-off of the value of a tangible asset over its useful life.

A) Expense structuring

B) Depreciation

C) Capital budgeting

D) Gross margin allocation

264) Accounting recognizes that assets, such as machinery and buildings, lose value over time. Accountants will record a portion of the cost of an asset as an expense each year through the use of

A) asset valuation.

B) asset audits.

C) appreciation.

D) depreciation.

265) The ________ shows how the capital is structured in the business, including the value of assets and the amount the firm owes at a specific point in time.

A) income statement

B) balance sheet

C) statement of cash flows

D) trial balance

266) Use the fundamental accounting equation to solve the following: Assets minus liabilities equals

A) net income.

B) gross margin.

C) owners' equity.

D) cash reserves.

267) Many business decisions are made in hopes of improving a firm's bottom line. Which of the following financial statements will reveal a firm's bottom line?

A) income statement

B) balance sheet

C) statement of cash flows

D) trial balance

268) A company's income statement is important to accountants and other stakeholders. It reveals a

A) company's sources of funding.

B) company's ability to distribute goods or services in a timely manner.

C) company's ability to earn a profit over time.

D) company's capitalized value.

269) When creating the income statement, which of the following statements is accurate?

A) revenues, minus general operating expenses = gross profit.

B) revenues, minus tax expense = gross profit.

C) revenues, minus depreciation expense = gross profit.

D) revenues, minus cost of goods sold = gross profit.

270) Which of the following would be classified as a general expense on an income statement?

A) salaries paid to salespeople

B) dividends paid to stockholders

C) payments made for insurance

D) costs associated with an advertising campaign

271) Rapidly growing companies often buy increasing amounts of merchandise from suppliers on credit, and then sell the goods to their customers on credit. These companies sometimes have difficulty repaying their suppliers when customers who buy on credit don't pay on time. Firms that experience this difficulty need to do a better job of

A) generating revenue.

B) controlling inventory.

C) managing cash flows.

D) balancing assets with liabilities.

272) FIFO and LIFO are two common

A) depreciation strategies.

B) ways to structure a balance sheet.

C) inventory valuation methods.

D) current ratios.

273) The LIFO method of inventory valuation bases the cost of goods sold on the cost of

A) merchandise that has been held in inventory for the longest period of time.

B) most recent merchandise purchased by the firm.

C) actual units customers purchased.

D) merchandise the firm acquired at the lowest cost.

274) During a period of rising prices, using FIFO (first-in, first-out) inventory valuation method will result in ________ net income figures than would LIFO (last-in, first-out).

A) higher

B) lower

C) the same

D) less accurate

275) Retailers attempt to sell older merchandise before more recently acquired merchandise is sold. The assumptions made by the ________ method of inventory valuation are most consistent with this approach.

A) FIFO (first-in, first-out)

B) LIFO (last-in, first-out)

C) average costing

D) accelerated costing

276) During a period of rising prices, if a firm desires to report a low gross profit figure in hopes of reducing their income tax liability, the firm will use the ________ inventory valuation method.

A) FIFO (first-in, first-out)

B) LIFO (last-in, first-out)

C) sliding scale

D) average cost

277) As Jaime was packing to return to college after his summer vacation, he realized that he owned many valuable things such as a laptop computer, a speaker system, and a Blu-ray player. An accountant would list all of these as Jaime's

A) assets.

B) liabilities.

C) owners' equity.

D) intangibles.

278) Ivan will graduate from Great State University this year. He has accumulated $39,000 in student loans during his four years at college. An accountant would classify the loans as

A) assets.

B) liabilities.

C) owners' equity.

D) intangibles.

279) The balance sheet for Greeley Contracting shows assets totaling $207,000 and liabilities totaling $95,000. Which of the following statements is correct?

A) Owners' equity equals $182,000.

B) Current assets are worth $92,000.

C) Net income for the period is $112,000.

D) Owners' equity equals $112,000.

280) When reviewing the balance sheet for Portable Pet Care, Inc., a mobile small animal care business, Ricky noted the following information: Company assets totaling $3.5 million, and liabilities totaling $1.3 million. On paper, the net worth (owners' equity) for this business =

A) $2.2 million.

B) $4.8 million.

C) $3.5 million.

D) $0.2 million.

281) Dirty Dog's Drilling recently issued a corporate bond on which it expects to pay interest for the next twenty years. Dirty Dog's would record this as a ________ on its balance sheet.

A) declining balance asset

B) retained earning

C) long-term liability

D) long-term expense

282) Mallory is running an income statement on her QuickBooks computer accounting program. Which of the following accounts will be used to calculate gross profit?

A) revenues, net sales, depreciation, and operating expenses

B) revenues, general expenses

C) revenues, cost of goods sold, tax expenses, net income before taxes

D) revenues, cost of goods sold

283) At the time the Bieg Plumbing Suppliers prepared its financial statements, it had several customers who bought goods over the past three months on its "90 days same as cash" credit plan. These customers had not yet paid their bills, but they have good credit ratings and Bieg is confident that they will make their payments on time. The amount these credit customers owe would show up as part of the

A) current assets listed on Bieg's balance sheet.

B) current liabilities listed on Bieg's balance sheet.

C) a deferred cash flow on Bieg's statement of cash flows.

D) unrealized revenue reported on Bieg's income statement.

284) Sun Smarts Solar installs solar panels in large newly constructed buildings. The company employs several expert installers who work on a full-time basis. Although the installation team works every day, the company pays them at the end of the month, for the previous month's work. Employee salaries are recorded as ________ on Sun Smarts's balance sheet.

A) capital cash flows

B) current liabilities

C) retained earnings

D) long-term liabilities

285) Andrea is preparing her homework for her accounting class. She is uncertain as to the proper handling of patents and copyrights on a firm's financial statements. Which of the following is correct?

A) Patents and copyrights are included with the firm's intangible assets on the balance sheet.

B) Patents and copyrights are included with the firm's long-term liabilities on the balance sheet.

C) Patents and copyrights are included with the firm's cost of goods sold on the income statement.

D) Patents and copyrights are included with the firm's fixed assets on the balance sheet.

286) Fairlawn Partners Consulting is a management-consulting firm that provides its expertise to businesses that employ its services. Since it does not hold an inventory of goods or produce any goods itself

A) its revenue will equal its net income.

B) its gross profit could be identical to its net revenue.

C) it is unlikely to have any operating expenses.

D) its balance sheet will not record any current assets.

287) Bailey is concerned because during the past four months her company has experienced difficulty in paying its bills on time. She knows if this continues, the firm will have difficulties in accomplishing its goals. What is Bailey concerned with?

A) asset disbursement

B) cash flow

C) profit and loss

D) inventory valuation

288) Paige noted that she disbursed $7,847 in payments for operations in her travel agency and received $7,162 in cash receipts for services rendered. She had no cash receipts or disbursements from investments or financing activities. Thus, Paige had a

A) positive disbursement.

B) negative cash flow.

C) bad debt allowance.

D) tax credit payment.

289) Talk Time Communications is considering the purchase of a new satellite. The firm believes the satellite will help generate future earnings. In addition, the firm recognizes the tax benefits of a lower net income provided by the annual ________ of the asset.

A) inventory valuation

B) declining balance

C) appreciation

D) depreciation

290) Kayla and Kingston run a shuttle service from Water Tower Place to Chicago O'Hare airport. Last month, they recorded the following:

Kayla and Kingston's gross profit for the past month was

A) $682.00

B) Kayla: $341.00; Kingston: $341.00

C) $1250.00

D) $2750.00

291) Kayla and Kingston run a shuttle service from Water Tower Place to Chicago O'Hare airport. Last month, they recorded the following:

If 25% of their net income is paid to the government in taxes, what is their net income after taxes?

A) $1410.00

B) $1160.00

C) $682.00

D) $870.00

292) Day-by-Day Calendar Company's statement of cash flows showed the following activities for the year ended December 31, 2019:

The year-end cash balance for this firm is:

A) $7,000.00

B) $53,000.00

C) $23,000.00

D) $30,000.00

293) Similar to the example of FIFO and LIFO inventory accounting methods in the text, a college store purchased sweatshirts for the upcoming fall semester. Using the following data, where a total of 100 sweatshirts were purchased by the store and placed in inventory, select the correct statement from the following choices.

A) FIFO would provide the least profit.

B) FIFO would provide the most profit.

C) LIFO or FIFO will produce the same amount of profit.

D) LIFO would provide the most profit.

294) The financial ratios that measure a firm's ability to pay its short-term debts are called

A) leverage ratios.

B) liquidity ratios.

C) equity ratios.

D) profitability ratios.

295) The current ratio is a type of ________ ratio.

A) leverage

B) profitability

C) activity

D) liquidity

296) Which of the following ratios is a liquidity ratio?

A) inventory turnover ratio

B) acid-test ratio

C) debt to owners' equity ratio

D) basic earnings per share

297) The purpose of the current ratio is to evaluate the firm's ability to

A) generate sales with a given level of current assets.

B) utilize current assets profitably.

C) pay its bills in the short run.

D) effectively use borrowed funds.

298) The ________ ratio helps determine the ability of a firm to repay its short-term debts even if it has difficulty selling its inventory.

A) acid-test

B) cash flow

C) diluted current asset

D) required reserve

299) Financial ratios that reflect the degree to which a firm relies on borrowed funds are called ________ ratios.

A) leverage

B) liquidity

C) activity

D) profitability

300) Earnings per share, return on sales, and return on equity are examples of

A) leverage ratios.

B) liquidity ratios.

C) equity ratios.

D) profitability ratios.

301) ________ measures the amount of profit earned by a company for each share of outstanding common stock.

A) Basic earnings per share (basic EPS)

B) Diluted earnings per share (diluted EPS)

C) Simple earnings per share (simple EPS)

D) Return on shares outstanding (RSO)

302) ________ earnings per share measures the amount of profit a firm earns per share of outstanding common stock when preferred stock, stock options, warrants, and convertible debt securities are also taken into account.

A) Basic

B) Diluted

C) Restricted

D) Broad-based

303) Generally the higher the risk involved in an activity, the ________ the rate of return expected by investors.

A) higher

B) lower

C) more stable

D) less frequent

304) A firm's efficient use of its assets in running the business is key to maintaining sufficient cash flow. Ratios that accountants utilize to measure the efficient use of assets are called ________ ratios.

A) leverage

B) liquidity

C) activity

D) profitability

305) ________ measures the speed of inventory moving through the firm and its conversion into sales.

A) Asset turnover ratio

B) Inventory turnover ratio

C) Sales turnover ratio

D) Cost of goods sold turnover ratio

306) In order to understand if the results of ratio calculations indicate a financially strong company, the results

A) should be compared to other firms in the same industry.

B) are compared to same size firms in the same geographic region of the country.

C) are compared to the norms established by generally accepted accounting principles.

D) are compared to the largest firms in the country.

307) If a firm has a debt to owners' equity ratio of .75 (or 75%) we can conclude that

A) it has relied more on debt than equity to finance its operations.

B) the firm is likely to have trouble paying its short-term debts when they come due.

C) its total liabilities are less than its owners' equity.

D) the firm has expenses that are exactly 75% of its gross profit.

308) Generally, a high ________ ratio could lead investors and creditors to view the company as being very risky.

A) debt to owners' equity

B) acid-test

C) diluted earnings per share

D) inventory turnover

309) In order to calculate the current ratio for your firm, you divide the total value of current assets by

A) earnings per share.

B) the total value of current liabilities.

C) the total owners' equity.

D) the total cost of goods sold.

310) Leverage ratios indicate the extent to which ________ has been used to fund a business's operations.

A) debt

B) equity

C) owner invested capital

D) profit

311) Music Masters sells a unique assortment of sheet music including just about any published music ever written before 1970. Its customers are high school and college band directors and choir directors who require several copies of the same music, including music written for a variety of instruments. To buy inventory for resale, the business seeks out wholesalers with large inventories. Due to the fact that cash flow is always an important concern, the owner keeps a watchful eye on how quickly various genres of sheet music sell. To help him in this assessment, which of the following ratios would be an important part of this company's financial analysis?

A) asset turnover ratio

B) inventory turnover ratio

C) sales turnover ratio

D) cost of goods sold turnover ratio

312) Your firm is a supplier to a major chain of discount stores. You have heard rumors that this chain of discount stores is struggling financially. Which financial ratios would indicate the discount store's ability or inability to pay its short-term debts?

A) liquidity ratios

B) leverage ratios

C) activity ratios

D) profitability ratios

313) As a bank loan officer, you are considering a loan application by Peak Performance Sporting Goods. The company has provided you with the following information from its balance sheet

Peak Performance's current ratio is:

A) 1.0.

B) 1.5.

C) 2.5.

D) 3.0.

314) Peak Performance Sporting Goods Company has just applied for a bank loan in order to expand the business. Using the most recent balance sheet data provided by the company owner, you calculate that the company's current ratio is 2.5. In your presentation to the company boss, you remark

A) Peak Performance is currently having trouble meeting its short-term obligations.

B) Peak Performance has $2.50 that it owes each month, for every $1.00 of cash that it is generating.

C) Peak Performance has $2.50 of current assets for each $1.00 of current liabilities.

D) Due to the fact that most of Peak Performance's current assets are tied up in inventory, there is no need to worry about whether Peak Performance will be able to make loan payments.

315) As a bank loan officer, you are considering a loan application by Peak Performance Sporting Goods. The company has provided you with the following information:

Peak Performance's debt to owners' equity ratio (rounded to the nearest tenth of a percent) is:

A) 45.4%.

B) 66.7%.

C) 112.5%.

D) 133.3%.

316) The company controller asked Jade to determine if it could borrow more money for an expansion project. When she calculated a leverage ratio, she determined that the company already had 1.5 times as much debt as equity. Do you agree with her assessment that the company should back off with borrowing more funds at this time?

A) Yes, but if the company would increase sales, it could go ahead with borrowing more funds.

B) Not necessarily. She should investigate the debt to equity ratios of other firms in the same industry.

C) Yes, but the firm should pursue equity investment until the ratio equals 1:1.

D) Not necessarily. In poor economic times, it is good financial strategy for a firm to be highly leveraged.

317) You have just calculated the acid-test ratio for Peak Performance Sporting Goods [acid test ratio = 1.0]. As a loan officer for the local bank, you are called into your boss's office to interpret the results of this ratio. Which of the following statements best reflects an understanding of these results?

A) A company with an acid-test ratio = 1.0 demonstrates the ability to operate very conservatively. The bank should anticipate that this firm will always be able to meet its short-term liabilities.

B) This company is already having problems meeting its short-term liabilities.

C) An acid-test ratio = 1.0 means that this firm has $1.00 in current assets for every $2.00 in current liabilities. Peak Performance is a well-run operation, as long as it can continue to sell off its inventory.

D) An acid-test ratio = 1.0 tells us that without adequate inventory turnover, this company may represent a higher risk. Peak Performance's acid-test ratio shows that the firm maintains $1.00 in current assets for every $1.00 in current liabilities.

318) Damian, a recent college graduate with a degree in accounting, is helping a newly formed construction company set up its accounting system. Although the company had purchased accounting software, Damian wants to make certain that future reports will distinguish between current liabilities and long-term liabilities. In the future, he will need to know the amount of total current liabilities in order to

A) know when it is time to make a long-term mortgage payment.

B) calculate if the company has purchased too much inventory for home building.

C) analyze whether the company can afford to make capital purchases such as additional land acquisition.

D) analyze whether the company has enough funds to pay the near-term bills.

319) Peak Performance Sporting Goods Company continues to perform well. Company executives credit this to the strong partnerships it enjoys with category killer and large discount chains. Last week Peak Performance reported basic EPS [earnings per share] = $.80/share. If the firm has 4,000,000 shares outstanding, net income after taxes for the same period =

A) $80,000.

B) $5,000,000.

C) $3,200,000.

D) $32,000.

320) The top managers of Pages and Pages Bookstores want to indicate to the firm's shareholders how effectively they have managed the company. Perhaps the most meaningful way to do this would be by reporting strong

A) liquidity ratios.

B) leverage ratios.

C) activity ratios.

D) profitability ratios.

321) Peak Performance Sporting Goods Company has reported net income after taxes = $3,750,000, with 18,250,000 shares outstanding. Basic Earning per Share for Peak Performance =

A) approximately $.21/share.

B) approximately $20.50/share.

C) approximately $4.87/share.

D) approximately - $2.00/share.

322) Bob Stewart plans to visit his financial planner today to discuss investment strategy. As a young accountant, he knows he can afford to invest in a few riskier investments. Which of the following ratios will be an important measure of profitability for Bob?

A) return on sales

B) return on equity

C) inventory turnover

D) acid test ratio

323) Mayree is the owner of Spines Books, a small eclectic-style bookstore in a bustling college town. Mayree prides herself in selecting hard-to-find books and magazines that her clientele enjoy. Recently, Mayree is experiencing a cash flow shortage, and she is concerned that she may be purchasing too many copies of each title. Having recently completed a business class, you suggest to Mayree that she calculate the ________ ratio for her store, and then compare it to other stores in her industry.

A) current

B) debt to equity

C) return on equity

D) inventory turnover

324) We would expect the inventory turnover ratio for a ski shop to be ________ than the turnover for a convenience store.

A) higher

B) more meaningful

C) lower

D) less helpful

325) The accounting profession is divided into 5 key working areas, two of which are

A) auditing and managerial accounting.

B) forecasting and logistical accounting.

C) inventory control and budgeting.

D) income accounting and expenditure accounting.

326) The area of accounting that provides managers inside the organization with information they need to make decisions is called

A) tax accounting.

B) managerial accounting.

C) informational accounting.

D) financial accounting.

327) The preparation of financial statements for people outside the firm (creditors, unions, suppliers, and others) is the goal of

A) auditing.

B) financial accounting.

C) managerial accounting.

D) cost accounting.

328) A(n) ________ provides accounting services to individuals or firms on a fee basis.

A) contract accountant

B) account agent

C) public accountant

D) independent accountant

329) An accountant who works for a single business or government agency is referred to as a

A) public accountant.

B) private accountant.

C) certified accountant.

D) commission accountant.

330) ________ involves the review and evaluation of the records that are used to prepare the organization's financial statements.

A) Auditing

B) Financial accounting

C) Managerial accounting

D) Certified bookkeeping

331) A(n) ________ is a yearly published statement of the financial condition, progress, and expectations of an organization.

A) balance sheet

B) independent audit

C) mission statement

D) annual report

332) A(n) ________ is an evaluation and unbiased opinion about the accuracy of a firm's financial statements.

A) internal audit

B) annual report

C) independent audit

D) certified audit

333) Skilled professionals who are primarily responsible for the development of strategies to minimize taxes are called

A) tax accountants.

B) certified public accountants.

C) certified management accountants.

D) certified internal auditors.

334) The accounting scandals of the early 2000s led many people to question the legitimacy of

A) ratio analysis as a means of evaluating the performance of a firm.

B) the five-member Public Company Accounting Oversight Board (PCAOB) under the Securities and Exchange Commission (SEC) that had been created to oversee the accounting industry.

C) publishing financial information about a firm on the Internet.

D) allowing an accounting firm to do both consulting and auditing work for the same company.

335) Important provisions of the Sarbanes-Oxley Act

A) approve corporate loans to directors of the company.

B) encourage the destruction of financial documents.

C) require the CEO and CFO of corporations to certify the accuracy of financial reports.

D) encourage outside CPA firms to deliver several services to their clients, including auditing services and consulting services.

336) The ________ sets accounting standards used in government accounting.

A) Federal Accounting Review Board

B) Governmental Accounting Standards Board

C) Academy of Public Sector Accountants

D) Federal Reserve Board

337) As U.S. firms focus on cost cutting in order to stay competitive with producers in low-wage countries, they will rely on ________ to create strategies to help reduce costs.

A) managerial accountants

B) financial accountants

C) government accountants

D) auditors

338) Which of the following agencies would have the greatest impact on the methods used to record, classify, summarize, and interpret accounting information for the State of Kentucky's Department of Transportation?

A) Commission on Accounting Practices for State Governments

B) Government Accounting Standards Board

C) Independent Not-For-Profit Accounting Standards Board

D) Institute for Public Sector Accounting Standards

339) A basic difference between managerial accounting and financial accounting is that managerial accounting

A) adheres to rules set by the GASB, while financial accounting uses a different group of rules set by the FASB.

B) involves the preparation of the balance sheet and income statement while financial accounting involves the preparation of the statement of cash flows.

C) handles recording and classifying information about transactions that have no direct financial impact on the firm, while financial accounting handles the recording and classifying of information about transactions that do have a financial impact.

D) provides information primarily intended for managers and others inside the company, while financial accounting provides information primarily intended for people outside the organization.

340) Calvin works in the accounting department for a textbook publishing firm preparing budgets and reporting production costs. What job does Calvin hold?

A) managerial accountant

B) financial accountant

C) tax accountant

D) auditor

341) Kimberly has been helping Jonah in preparing his personal income tax forms for a couple of years. Jonah's boss recommended Kimberly because she had done a good job setting up the company's new accounting system. Jonah is very satisfied with Kimberly's work and feels that the fees she charges are quite reasonable. Kimberly would be classified as a(n)

A) independent auditor.

B) private accountant.

C) public accountant.

D) accounting broker.

342) Abel just graduated earned a bachelor's degree in accounting. He plans to go to work for the American Red Cross as an accountant. What job will Abel hold?

A) private accountant

B) public accountant

C) forensic accountant

D) independent accountant

343) Coolest Closet, a chain of retail clothing stores, wants to assure investors and other outsiders that its financial statements are accurate. One way to do so would be to hire a public accounting firm to

A) produce an internal audit.

B) take overall stock of its accounting functions.

C) provide a "generally accepted practices" endorsement.

D) perform an independent audit.

344) Valeria, owner of Coolest Closet, has applied for a business loan. Her prospective banker has requested information concerning the financial condition of her business. Which accounting discipline is responsible for providing accounting information to outside stakeholders?

A) management accounting

B) financial accounting

C) tax accounting

D) certified bookkeeping

345) Stockholders of Marshall Manufacturing are concerned about irregularities in the firm's accounting system. One approach to identify problems in the records of the company would be to have a(n) ________ performed.

A) internal audit

B) independent audit

C) unofficial audit

D) GAAP analysis

346) Quinn is an accountant employed by CCDL Enterprises. Recently, she has spent much of her time working on defining measures of costs for the production department and checking to ensure that various departments are staying within their budgets. Quinn is a

A) public accountant whose work is mainly concerned with auditing.

B) public accountant whose work is mainly concerned with financial accounting.

C) private accountant whose work is mainly concerned with managerial accounting.

D) private accountant whose work is mainly concerned with financial accounting.

347) While reviewing the books at his firm, Colin noticed discrepancies between how the firm recorded revenues last year and how it elected to record revenues during the recent quarter of the current year. As a recent business graduate, Colin felt confident that the changes needed clarification. To get another opinion, Colin suggested to the company's controller that the firm solicit

A) the assistance of the Government Accounting Standards Board.

B) the services of a certified internal auditor.

C) the services of a senior executive at the IRS.

D) the services of an independent auditor.

348) Explain the differences between managerial and financial accounting, and give examples of the types of problems and issues examined by each of these areas of accounting.

349) Discuss the role of an independent auditor. Provide information about the types of accounting activities they perform and the recent laws that have emerged to help guide them as they do their job.

350) Thoroughly describe each of six parts of the accounting cycle.

351) What is the difference between a journal and a ledger? How are journals and ledgers incorporated into the accounting cycle?

352) Explain the meaning of the fundamental accounting equation and its relation to the balance sheet. If it is helpful, create an example using numbers.

353) Explain the difference between current, fixed, and intangible assets. Give two examples of each of these different types of assets.

354) Identify the three key financial statements that corporations are required to prepare, and describe the type of information found on each.

355) Identify and explain the differences between LIFO and FIFO inventory valuation methods. What would be the difference in gross margin using FIFO versus LIFO?

356) What is ratio analysis? Explain the four different types of ratios and how each is used.

357) What is the difference between a profit (net income after taxes) on an income statement and the cash balance reflected at the bottom of the statement of cash flows?

Mini-Case

Minnie A. Wright-Hoff works as an accountant for Double Entry Doors, Inc. Her company sells and installs oversized garage doors needed by large vehicles. Most of Minnie's work involves helping department heads and other decision makers by measuring and reporting costs for their departments, and by identifying areas where departments are exceeding their budgets. However, as one of only three accountants employed by Double Entry Doors, Minnie is something of a "jill-of-all-trades" in terms of her accounting assignments. For example, she recently spent several hours summarizing all of the financial data in account ledgers to see if the information was correct and balanced. Her efforts revealed no problems, so she is now ready to start working on the firm's financial statements. Minnie is interested in this part of the accounting cycle because she likes to be one of the first to know the "bottom line" her company will report. She knows that she and the other accountants who work on these statements can influence the results by the choices they make about the way they report certain items.

358) The fact that Minnie spends most of her time measuring costs and checking to see if departments are staying within their budgets suggests that she is often involved in

A) auditing.

B) managerial accounting.

C) bookkeeping.

D) departmental certification.

359) The last major task Minnie completed before getting ready to prepare the firm's financial statements was the preparation of the

A) cash budget.

B) master budget.

C) trial balance.

D) internal audit.

360) The fact that Minnie wants to determine the "bottom line" for Double Entry Doors means that she is particularly interested in preparing her firm's

A) income statement.

B) cash flow statement.

C) master budget.

D) capital budget.

361) Double Entry Door's suppliers maintained very stable prices for many years, but Minnie has noticed that the cost of doors has been rising steadily for the past few years. She is concerned that, given the company's current accounting methods of basing its cost on the most recent doors purchased, this will result in a much lower net income than in the past. The most likely reason for her concern is that Double Entry has apparently been using

A) the FIFO inventory valuation method to determine its cost of goods sold.

B) a great deal of equity financing to purchase the doors.

C) the LIFO inventory valuation method to determine its cost of goods sold.

D) a depreciation method based on the average value of inventory.

362) Minnie knows that Double Entry has a lot of short-term debt coming due in the next year, and wants to make sure that the company will have the ability to make the required payments. Given a troubling downturn in construction activity over the past couple of months, she is not confident that Double Entry can count on selling its current inventory of doors before the debt comes due. Which of the following ratios would be most relevant to Minnie?

A) current ratio

B) debt to equity ratio

C) return on sales

D) acid-test ratio