Ch18 Company Performance Owners’ Equity And Test Bank

Chapter 18

Company Performance: Owners’ Equity and Financial Position

MATCHING

1. Match the following with the numbered terms below:

A. A correction of a previously undetected error in a year before the current year.

B. Long-term prepayments (also called deferrals)

C. Events that could create negative financial results

D. A minimum cash balance that the depositor company must maintain

E. Borrowing money in ways to avoid recording the liability

_____ 1. Compensating Balances

_____ 2. Off-Balance-Sheet Financing

_____ 3. Contingent Liabilities

_____ 4. Prior Period Adjustments

_____ 5. Deferred Charges

3. Match the following balance sheet classifications with the accounts listed below.

A. Current Assets

B. Investments

C. Property, Plant, and Equipment

D. Intangible Assets

E. Current Liabilities

F. Long-Term Liabilities

G. Contributed Capital

H. Retained Earnings

I. Accumulated Comprehensive Income

J. Does not appear on the Balance Sheet

_____ 1. Accounts Receivable

_____ 2. Note Payable due in 60 days

_____ 3. Paid-in Capital in Excess of Par

_____ 4. Cash

_____ 5. Copyright

_____ 6. Accumulated Depreciation

_____ 7. Trading Securities

_____ 8. Premium on Bonds Payable

_____ 9. Land

_____ 10. Accounts Payable

_____ 11. Unrealized Gains on Investments

_____ 12. Inventory

_____ 13. Bonds Payable

_____ 14. Available-for-Sale Securities

_____ 15. Paid-in Capital from Treasury Stock

_____ 16. Foreign Currency Translations

_____ 17. Interest Expense

_____ 18. Equipment

_____ 19. Dividend Payable

_____ 20. Discount on Note Payable (note due in 5 years)

12. A; 13. F; 14. B; 15. G; 16. H; 17. J; 18. C; 19. E; 20. F

4. Match the following balance sheet classifications with the accounts listed below.

A. Current Assets

B. Investments

C. Property, Plant, and Equipment

D. Intangible Assets

E. Current Liabilities

F. Long-Term Liabilities

G. Contributed Capital

H. Retained Earnings

I. Accumulated Comprehensive Income

_____ 1. Accounts Payable

_____ 2. Available for Sale Securities

_____ 3. Preferred Stock

_____ 4. Premium on Bonds Payable

_____ 5. Prepaid Rent

_____ 6. Patent

_____ 7. Equipment

_____ 8. Unrealized Gains on Investments

_____ 9. Note Payable (due in 3 years)

_____10. Paid-in-Capital from Treasury Stock

Answers: 1. E; 2. B; 3. G; 4. F; 5. A; 6. D; 7. C; 8. I; 9. F; 10. G

1. Match the following three financial statements with the items below (some items may appear in more than one statement).

A. Income Statement

B. Balance Sheet

C. Statement of Changes in Owners’ Equity

_____ 1. Issuance of Common Stock

_____ 2. Treasury Stock

_____ 3. Changes in shares outstanding

_____ 4. Cost of Goods Sold

_____ 5. Bonds Payable

_____ 6. Earnings Per Share

_____ 7. Prior Period Adjustment

_____ 8. Net Income

_____ 9. Comprehensive Income

_____10. Preferred Stock

Answers: 1. C; 2. B andC; 3. C; 4. A; 5. B; 6. A; 7. C; 8. A and C; 9. C; 10. B and C

6. Match the following three financial statements with the items below.

A. Income Statement

B. Balance Sheet

_____ 1. Common Stock

_____ 2. Treasury Stock

_____ 3. Extraordinary Loss

_____ 4. Cost of Goods Sold

_____ 5. Bonds Payable

_____ 6. Goodwill

_____ 7. Accumulated Depreciation

_____ 8. Premium on Bonds Payable

_____ 9. Interest Expense

_____10. Preferred Stock

Answers: 1. B; 2. B; 3. A; 4. A; 5. B; 6. B; 7. B; 8. B; 9. A; 10. B

MULTIPLE CHOICE

7. The more formal name for a balance sheet is:

A) statement of net worth.

B) statement of financial position.

C) statement of stockholders’ equity.

D) statement of financial operations.

8. The accounting equation is presented on the:

A) balance sheet.

B) income statement.

C) statement of cash flows.

D) statement of stockholders’ equity.

9. The assets on the balance sheet are listed:

1. in alphabetical order.
2. in order of liquidity.
3. in financial order.
4. in order of their function.

10. Which of the following statements is prepared as of a given point in time?

A) Balance sheet

B) Income statement

C) Statement of cash flows

D) Statement of stockholders’ equity

11. A minimum cash balance that a company must maintain in a bank account to continue to earn interest or to avoid service charges is referred to as a:

A) petty cash balance.

B) connecting balance.

C) compensating balance.

D) nonsufficient-funds balance.

12. A compensating balance is generally reported on a company’s balance sheet as a:

A) cash equivalent.

B) long-term investment.

C) short-term investment.

D) part of the total cash balance.

13. Trading securities are reported on the balance sheet at their:

A) market value.

B) stated value.

C) net realizable value.

D) lower of cost or market value.

14. Accounts receivable are reported on the balance sheet at their:

A) fair value.

B) stated value.

C) net realizable value.

D) lower of cost or market value.

15. Available-for-sale securities are reported on the balance sheet in the:

A) Investments classification at their historic cost.

B) Current Assets classification at their market value.

C) Investments classification at their market value.

D) Stockholders’ Equity section at their market value.

16. The method chosen by a company to account for its inventories would generally be disclosed in the:

A) auditor’s report accompanying the financial statements.

B) summary of significant accounting policies note.

C) management’s letter to the stockholders.

D) current asset section of the balance sheet.

17. Plant assets are reported on the balance sheet at their:

A) fair value.

B) book value.

C) net realizable value.

D) lower of cost or market value.

18. Borrowing money in a manner designed to avoid having to record the resulting obligation as a liability in the financial statements is referred to as:

A) compensating balance financing.

B) off-balance sheet financing.

C) contingent financing.

D) deferred financing.

19. Potential events that could create negative financial results for a company, which are required to be recorded when the event is both probable and reasonably estimated in terms of its monetary effects, are referred to as:

A) deferred charges.

B) cumulative effects.

C) contingent liabilities.

D) prior period adjustments.

20. Inventory would be reported on the balance sheet as a(n):

A) plant asset.

B) investment.

C) current asset.

D) intangible asset.

21. The allowance for Uncollectible Accounts would be reported on the balance sheet in the:

A) plant asset section.

B) investment section.

C) current asset section.

D) intangible asset section.

22. Prepaid Insurance would generally be reported on the balance sheet as a(n):

A) plant asset.

B) investment

C) current asset.

D) intangible asset.

23. Which of the following would not appear on the Balance Sheet?

A) Common Stock

B) Prior Period Adjustment

C) Retained Earnings

D) Paid-in Capital in Excess of Par

24. Which of the following would appear on both the Balance Sheet and the Statement of

Changes in Owners’ Equity?

A) Net Income

B) Prior Period Adjustment

1. Paid-in Capital in Excess of Par
2. Common Stock Dividends

25. Which of the following would not appear on both the Balance Sheet and the Statement of

Changes in Owners’ Equity?

A) Common Stock

B) Accumulated Comprehensive Income

C) Prior Period Adjustment

D) Preferred Stock

26. Trading Securities would be reported on the balance sheet as a(n):

A) plant asset.

B) current asset.

C) intangible asset.

D) long-term investment.

27. Available-for-Sale Securities that management expects to hold for several years would be reported on the balance sheet as a(n):

A) plant asset.

B) current asset.

C) intangible asset.

D) long-term investment.

28. Equipment would be reported on the balance sheet as a(n):

A) long-term investment.

B) intangible asset.

C) current asset.

D) property, plant, and equipment asset.

29. Which of the following is not an intangible asset?

A) Patent

B) Goodwill

C) Oil Lease

D) Copyright

30. Accumulated Depreciation-Buildings would be reported on the balance sheet in the:

A) long-term investment section.

B) intangible asset section.

C) current asset section.

D) plant asset section.

31. Copyrights would be reported on the balance sheet as a(n):

A) plant asset.

B) intangible assets.

C) current asset.

D) investments.

32. Goodwill would be reported on the balance sheet as a(n):

A) intangible asset.

B) current asset.

C) investment.

D) plant asset.

33. Which of the following would be the correct order that these assets would be reported on the balance sheet?

1. Building, patent, prepaid rent, investment in IBM common stock
2. Prepaid rent, building, investment in IBM common stock, patent
3. Investment in IBM common stock, building, patent, prepaid rent
4. Prepaid rent, investment in IBM common stock, building, patent

34. The assets on the balance sheet are listed

A) in alphabetical order.

B) in order of significance.

C) by dollar value.

D) in order of liquidity.

35. Customer deposits would generally be reported on the balance sheet as a(n):

A) investment.

B) current asset.

C) current liability.

D) long-term liability.

36. Accounts payable would be reported on the balance sheet as a(n):

A) long-term liability.

B) current liability.

C) other liability.

D) current asset.

37. Lease obligations that are reported on the balance sheet would generally be classified as:

A) a plant asset.

B) a current liability.

C) a long-term liability.

D) other owners’ equity.

38. A discount on bonds payable would be reported on the balance sheet as part of the:

A) long-term investment section.

B) other owners’ equity section.

C) long-term liability section.

D) current liability section.

39. Deferred Income Tax Payable would generally be reported on the balance sheet as a(n):

A) other asset.

B) other liability.

C) current liability.

D) adjustment to stockholders’ equity.

40. Preferred Stock issued by a company would be reported on that company’s balance sheet as:

A) retained earnings.

B) contributed capital.

C) other owners’ equity.

D) a long-term investment.

41. Paid-in-Capital in Excess of Par would be reported on the balance sheet as:

A) a long-term investment.

B) other owners’ equity.

C) contributed capital.

D) retained earnings.

42. The term “Deficit” would most likely appear on the balance sheet in the:

A) retained earnings section.

B) contributed capital section.

C) other owners’ equity section.

D) long-term investment section.

43. Which of the following would not be reported as part of stockholders’ equity on the balance sheet?

1. Treasury Stock
2. Premium on Bonds
3. Retained Earnings
4. Paid-in-capital from common stock

44. Unrealized Gains and Losses would be reported on the balance sheet as an adjustment to:

A) retained earnings.

B) contributed capital.

C) comprehensive income.

D) a long-term investment.

45. Which of the following accounts has a debit balance and is reported in the liability classification?

A) Treasury stock

B) Premium on Bonds Payable

C) Paid-in-capital from Treasury stock

D) Discount on Bonds Payable

46. Which of the following has a credit balance and is reported in the asset section of the balance sheet?

A) Accumulated Depreciation

B) Premium on Bonds Payable

C) Depreciation Expense

D) Paid-in-Capital in excess of Par

47. Treasury Stock would be reported on the balance sheet as:

A) retained earnings.

B) contributed capital.

C) reduction to stockholders’ equity.

D) a long-term investment.

48. Which of the following would not be classified as a current asset?

A) Held-to-maturity securities

B) Accounts receivable

C) Inventory

D) Cash

49. Which of the following would be classified as an investment?

A) Prepaid expenses

B) Trading securities

C) Estimated pension obligation

D) Land held for sale in the future

50. If a firm failed to classify the portion of long-term debt that is due within one year as a current liability, which of the following ratios would not be overstated?

A) Quick ratio

B) Current ratio

C) Debt to equity ratio

D) Current-debt-to-cash ratio

51. Which of the following assets is most likely to be omitted from the balance sheet?

A) Land

B) Inventory

C) Goodwill generated by the firm

D) Deferred tax asset

52. Matrix and Associates reports depreciation expense of $100,000 but deducts $150,000 depreciation on its tax return. Which of the following statements is correct?

A) Matrix is breaking the law.

B) Matrix will report a deferred tax asset.

C) Matrix will report a deferred tax liability.

D) Matrix will report income tax expense equal to income tax payable.

53. Cassiopeia Corporation acquired an asset in a transaction, which resulted in a noncancelable obligation to make future payments. The transaction was classified as an operating lease. What is the term for this procedure?

A) Off-the-balance-sheet financing

B) Compound financing

C) Phantom financing

D) Illegal financing

54. Assets are shown on the balance sheet at

A) historical cost.

B) fair market value.

C) net realizable value.

D) all the above.

55. The balance sheet cannot provide valuable information about

A) the length of the operating cycle.

B) priority of creditors’ claims if the firm were liquidated.

C) the ability to realize cash from the sale of noncurrent assets.

D) all the above.

56. The correction of a previously undetected error relating to the net income or loss of a prior accounting period is reported as:

A) an extraordinary item.

B) discontinued operations.

C) a prior period adjustment.

D) a cumulative accounting adjustment.

57. Belmont Industries is subject to a 35 percent tax rate and has a December 31 year-end. During 2010, the accountant discovered an error made in 2009 relative to a capital expenditure that was incorrectly expensed. The total pretax amount of the error was $67,500. The prior period adjustment to beginning retained earnings will equal:

A) $(67,500).

B) $(23,625).

C) $ 67,500.

D) $ 43,875.

58. Colby Enterprises is subject to a 30 percent tax rate and has a December 31 year-end. During 2010, the accountant discovered an error made in 2009 relative to an expenditure that was incorrectly classified as an asset when it should have been expensed. The total pretax amount of the error was $70,000. The prior period adjustment to beginning retained earnings will be ______ by $_______.

A) reduced $49,000

B) reduced $21,000

C) increased $70,000

D) increased $49,000

59. Big River Enterprises is subject to a 40 percent tax rate and has a December 31 year-end. During 2010, the accountant discovered that in 2009 some interest expense relative to a note payable had not been accrued. The amount of omitted interest totaled $53,800. The prior period adjustment to beginning retained earnings will equal:

A) $(32,280).

B) $(53,800).

C) $ 21,520.

D) $ 53,800.

60. Brentwood, Inc.’s Statement of Changes in Owners’ Equity for the year ended December 31, 2010 showed a reduction to prior period adjustment, net of taxes, equal to $41,250. The company has an effective tax rate of 45 percent. The gross amount of the error was an:

A) understatement of income in the prior year of $18,563.

B) overstatement of income in the prior year of $75,000.

C) understatement of income in the current year of $22,688.

D) overstatement of income in the prior year of $91,667.

61. In 2010, MacFee Inc. discovered that its ending inventory in 2007 was too big by $45,000. How much will MacFee’s beginning retained earnings (Jan. 1, 2010) need to be adjusted to correct this error given a tax rate of 30 percent?

1. Increase retained earnings $31,500.
2. Do not adjust retained earnings.
3. Decrease retained earnings by $45,000.
4. Decrease retained earnings $31,500.

62. In 2010 Townsend Inc. discovered that its ending inventory in 2009 was too big by $95,000. How much will Townsend’s beginning retained earnings (Jan. 1, 2010) need to be adjusted to correct this error given a tax rate of 30 percent?

1. Increase retained earnings $66,500.
2. Do not adjust retained earnings.
3. Decrease retained earnings by $95,000.
4. Decrease retained earnings $66,500.

63. What item would not be included in comprehensive income?

A) Foreign currency translation adjustments

B) Unrealized gains and losses

C) Dividends to stockholders

D) All would be included in comprehensive income

64. Name the asset that will most likely pay for a company’s accounts payable.

A) Intangible asset

B) Accounts receivable

C) Equipment

D) Prepaid insurance

65. Which of the following answers would not be classified as a current asset?

A) Inventory

B) Prepaid insurance

C) Common stock

D) Cash

66. What order are current assets classified?

A) Liquidity

B) Value

C) Assets

D) Age

67. What is the value of current assets?

A) $ 50,000

B) $ 58,000

C) $ 85,000

D) $ 115,000

68. What is the value of current liabilities?

A) $ 30,000

B) $ 39,000

C) $ 42,000

D) $ 44,000

69. A company has 30,000 shares authorized and 13,000 shares issued (common stock). The par value equals $1.00 per share. What value will be placed in the account “paid-in capital in excess of par”?

A) $ 13,000

B) $ 30,000

C) $ 43,000

D) Not enough information to answer the question

70. What account would not be found in the stockholders’ equity section of the balance sheet?

A) Paid-in-capital

B) Common stock

C) Retained earnings

D) Treasury stock

E) Bonds payable

71. Evaluate the lower-of-cost-or-market method of reporting inventory in terms of conservatism and consistency.

72. Explain how reporting a long-term, noncancelable lease that provides most of the benefits of ownership as an operating lease instead of a capital lease affects the usefulness of the lessee’s balance sheet.

73. Comment on this statement: “Dividends are paid out of retained earnings; so, obviously, retained earnings is the cash generated by earnings.”

74. How can a balance sheet predict a company’s future net income?

75. Why would a banker demand a company’s assets and liabilities to be properly classified?

76. Why would a banker reject a company’s application for a one-year loan based on information taken from the company’s balance sheet?

77. Given the following list of general ledger accounts for the Shenghai Company, choose the appropriate accounts and show how they would be reported (using the proper headings and format) in the current asset and current liability sections of the statement of financial position.

Accounts Receivable

Accounts Payable

Accumulated Depreciation–Buildings

Administrative Expenses

Allowance for Uncollectible Accounts

Available-for-Sale Securities

Bonds Payable

Buildings

Cash

Common Stock

Cost of Goods Sold

Customer Deposits

Deferred Income Tax Payable

Discount on Bonds Payable

Gain on Sale of Equipment

Income Tax Payable

Interest Income

Lease Obligations

Loss on Sale of Bonds

Market Adjustment–Trading Securities

Merchandise Inventory

Note Payable (due in 6 months)

Prepaid Expenses

Retained Earnings

Sales

Selling Expenses

Trading Securities

Treasury Stock

Unrealized Gains and Losses

Wages Payable

Answers:

Current Assets:

Cash

Trading Securities

“Add” or “Less”: Market Adjustment

Accounts Receivable

Less: Allowance for Uncollectible Accounts

Merchandise Inventory

Prepaid Expenses

Total Current Assets

Current Liabilities:

Accounts Payable

Note Payable

Wages Payable

Customer Deposits

Income Tax Payable

Total Current Liabilities

78. Given the following list of general ledger accounts for the Castinet Company, pick the appropriate accounts and show how they would be reported (using the proper headings and format) in the stockholders’ equity section of the statement of financial position.

Accounts Receivable

Accounts Payable

Accumulated Depreciation–Buildings

Administrative Expenses

Allowance for Uncollectible Accounts

Available-for-Sale Securities

Bonds Payable

Buildings

Cash

Common Stock

Cost of Goods Sold

Customer Deposits

Deferred Income Tax Payable

Discount on Bonds Payable

Finished Goods

Gain on Sale of Equipment

Income Tax Payable

Interest Income

Lease Obligations

Loss on Sale of Bonds

Paid-in Capital in Excess of Par

Paid-in Capital from Treasury Stock Transactions

Preferred Stock

Prepaid Expenses

Retained Earnings

Sales

Selling Expenses

Trading Securities

Treasury Stock

Unrealized Gains and Losses

79. Given the following list of general ledger accounts, prepare a statement of financial position for Populus Corporation as of December 31, 2010:

80. Create the stockholders’ equity section of the balance sheet. Must include the appropriate heading, two types of stock with at least one with a par value and treasury stock.

81. Using only the appropriate accounts below, create a stockholders’ equity section of the balance sheet.

82. Create the current asset section of the balance sheet. Include a heading and a list of at least five accounts typically found in the current asset section of the balance sheet.

83. Create the liabilities (current and long-term) section of the balance sheet. Include a heading and at least three current liability accounts and two long-term liability accounts, and one other liabilities account found in the liabilities section of the balance sheet.

84. Given the following accounts, create the current assets total (show your work).

85. Given the following accounts, create the current liabilities total (show your work).