Test Bank Chapter 2 A Further Look at Financial Statements - Practice Test Bank | Accounting for Decisions 8e by Paul D. Kimmel. DOCX document preview.
CHAPTER 2
A FURTHER LOOK AT FINANCIAL STATEMENTS
CHAPTER LEARNING OBJECTIVES
1. Identify the sections of a classified balance sheet. In a classified balance sheet, companies classify assets as current assets; long-term investments; property, plant, and equipment; and intangibles. They classify liabilities as either current or long-term. A stockholders’ equity section shows common stock and retained earnings.
2. Use ratios to evaluate a company’s profitability, liquidity, and solvency. Ratio analysis expresses the relationship among selected items of financial statements data. Profitability ratios, such as earnings per share (EPS), measure aspects of the operating success of a company for a given period of time.
Liquidity ratios, such as the current ratio, measure the short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash. Solvency ratios, such as the debt to assets ratio, measure the ability of a company to survive over a long period.
3. Discuss financial reporting concepts. Generally accepted accounting principles are a set of rules and practices recognized as a general guide for financial reporting purposes. The basic objective of financial reporting is to provide information that is useful for decision-making.
To be judged useful, information should have the primary characteristics of relevance and faithful representation. In addition, useful information is comparable, consistent, verifiable, timely, and understandable.
The monetary unit assumption requires that companies include in the accounting records only transaction data that can be expressed in terms of money. The economic entity assumption states that economic events can be identified with a particular unit of accountability. The periodicity assumption states that the economic life of a business can be divided into artificial time periods and that meaningful accounting reports can be prepared for each period. The going concern assumption states that the company will continue in operation long enough to carry out its existing objectives and commitments.
The historical cost principle states that the companies should record assets at their cost. The fair value principle indicates that assets and liabilities should be reported at fair value. The full disclosure principle requires that companies disclose circumstances and events that matter to financial statement users.
The cost constraint weighs the cost that companies incur to provide a type of information against its benefit to financial statement users.
Difficulties:
Easy: 143
Medium: 101
Hard: 6
Question List by Section
Current Assets: 1, 5, 56, 57, 58, 59, 61, 67, 69, 73, 75, 80, 90, 121, 204, 236
Long-term Investments: 6, 71, 77, 82, 92
Property, Plant, and Equipment: 66, 72, 76, 81, 91
Intangible Assets: 7, 60, 62, 70
Current Liabilities: 3, 63, 65, 68
Long-term Liabilities: 64
Stockholders’ Equity: 4, 87, 88, 89, 240
Analyzing the Financial Statements Using Ratios:
Ratio Analysis: 224, 225, 226, 227, 228, 229, 241, 243
Using the Income Statement: 8, 107, 235
Earnings Per Share: 9, 10, 95, 96, 97, 98, 99, 100, 101, 102, 103, 104, 125, 129, 209
Using a Classified Balance Sheet
Liquidity: 11, 20, 22, 106, 108, 110, 111, 118, 120, 133, 143, 206, 214, 230, 237
Working Capital: 15, 78, 83, 93, 113, 114, 119, 122, 123, 127
Current Ratio: 14, 16, 23, 79, 84, 94, 109, 112, 124, 128, 136, 137, 138, 139, 140, 141
Solvency: 12, 17, 19, 25, 115, 116, 132, 134
Debt to Assets Ratio: 18, 21, 24, 126, 130, 131, 135, 142
Financial Reporting Concepts:
The Standard-Setting Environment: 26, 27, 28, 145, 147, 148, 149, 150, 151, 152
Qualities of Useful Information: 29, 30, 31, 32, 33, 34, 49, 51, 54, 144, 155, 159, 160, 161, 162, 163, 164, 165, 166, 167, 168, 178, 198, 207, 208, 244, 247
Enhancing Qualities: 35, 36, 153, 154, 158, 169, 170, 171, 172, 173, 174, 175, 176, 199, 248
Assumptions in Financial Reporting: 37, 40, 41, 42, 43, 44, 45, 46, 48, 55, 156, 157, 179, 180, 182, 184, 185, 186, 187, 188, 189, 200, 201, 209, 210, 232, 233, 245, 246
Principles of Financial Reporting: 238
Measurement Principles: 177, 181
Historical Cost Principle: 38, 190, 191, 192, 193, 196
Fair Value Principle: 39, 53, 194, 195, 197
Full Disclosure Principle: 47, 183, 250
Cost Constraint: 50, 52, 202, 203, 234
TRUE-FALSE STATEMENTS
1. Cash and supplies are both classified as current assets.
2. Long-term investments appear in the property, plant, and equipment section of the balance sheet.
3. A liability is classified as a current liability if it is to be paid within the coming year.
4. Stockholders’ equity consists of two parts: common stock and retained earnings.
5. It is possible for an asset to be a current asset even though the expected conversion of that asset into cash is to be longer than one year or the normal operating cycle.
6. The investment category on the balance sheet normally includes investments that are intended to be held for a short period of time (less than one year).
7. The main difference between intangible assets and property, plant and equipment is the length of the asset’s life.
8. Profitability means having enough funds on hand to pay debts when they fall due.
9. Earnings per share is calculated by dividing net income minus preferred stock dividends for the period by the weighted-average number of common shares outstanding during the period.
10. Earnings per share measures the net income earned on each share of common stock.
11. Liquidity ratios measure the short-term ability of a company to pay its maturing obligations and meet unexpected needs for cash.
12. Solvency ratios measure the ability of a company to survive over a short period of time.
13. Profitability ratios measure the operating success of a company for a given period of time.
14. The current ratio is computed as current liabilities divided by current assets.
15. The excess of current assets over current liabilities is called working capital.
16. The current ratio takes into account the composition of current assets.
17. Solvency ratios measure the short-term ability of the company to pay its maturing obligations.
18. The debt to assets ratio measures the percentage of assets financed by creditors.
19. Solvency is a company's ability to pay interest as it comes due and to repay the balance of a debt due at its maturity.
20. Working capital is a better measure of liquidity than the current ratio.
21. A high debt to asset’s ratio is undesirable from a creditor’s perspective.
22. Some current assets are more liquid than others.
23. A current ratio of less than 1:1 means that a company has fewer current liabilities than current assets.
24. The debt to assets ratio is computed by dividing total liabilities by total assets.
25. The current ratio is considered by creditors to be an indicator of solvency.
26. The primary accounting standard-setting body in the United States is the Securities and Exchange Commission.
27. Generally accepted accounting principles are rules and practices that are recognized as a general guide for financial reporting purposes.
28. GAAP stands for generally accepted accounting procedures.
29. To provide faithful representation, accounting information should predict future events, confirm prior expectations, and be reported on a timely basis.
30. In order for information to be relevant, it must be reported on a monthly basis.
31. For information to be useful, it must be both relevant and demonstrate faithful representation.
32. Consistent use of the same accounting principles and methods is necessary for meaningful analysis of trends within a company.
33. A major function of management is to provide the accountant with relevant and useful information.
34. The advantage of accounting information is that it provides exact and completely reliable measures.
35. Consistency in accounting means that a company uses the same generally accepted accounting principles from one accounting period to the next accounting period.
36. The convention of consistency pertains to the use of the same accounting principles by firms in the same industry.
37. The periodicity assumption states that the business will remain in operation for the foreseeable future.
38. If a building is offered for sale at $100,000 and the buyer pays $95,000 cash for it, the buyer would record the building at $100,000.
39. The most generally accepted value used to report assets in accounting is fair value.
40. For accounting purposes, business transactions should be kept separate from the personal transactions of the stockholders of the business.
41. The economic entity assumption states that economic events can be identified with a particular unit of accountability.
42. The economic entity assumption states that assets should be recorded at their cost.
43. The monetary unit assumption states that transactions that can be measured in terms of money should be recorded in the accounting records.
44. The monetary unit assumption has led to an increase in the notes to financial statements.
45. The going concern assumption is that the business will continue in operation long enough to carry out its existing objectives and commitments.
46. When preparing financial statements, the accountant assumes that the business will stay in business for the foreseeable future.
47. Full disclosure of all important facts aids in overcoming the limitations of accounting information.
48. The economic entity assumption is that a company will remain in operations for the foreseeable future.
49. Materiality is a company-specific aspect of faithful representation.
50. Relevance and cost are two constraints in accounting.
51. Materiality relates to whether an item is large enough to likely influence the decision of an investor or creditor.
52. The cost constraint weighs the cost that companies incur to provide a type of information against its benefit to financial statement users.
53. In general, the FASB indicates that most assets must follow the fair value principle.
54. A material item is one that is likely to influence an investor's decision.
55. The periodicity assumption states that every economic entity can be separately identified and accounted for.
MULTIPLE CHOICE QUESTIONS
56. In a classified balance sheet, assets are usually classified as
a. current assets; long-term assets; property, plant, and equipment; and intangible assets.
b. current assets; long-term investments; property, plant, and equipment; and common stocks.
c. current assets; long-term investments; tangible assets; and intangible assets.
d. current assets; long-term investments; property, plant, and equipment; and intangible assets.
57. On a classified balance sheet, short-term investments are classified as
a. intangible assets.
b. property, plant, and equipment.
c. current assets.
d. long-term investments.
58. A current asset is
a. the last asset purchased by a business.
b. an asset which is currently being used to produce a product or service.
c. usually found as a separate classification in the income statement.
d. expected to be converted to cash or used in the business within one year or one operating cycle, whichever is longer.
59. Which of the following is not usually classified properly as a current asset?
a. Supplies
b. Short-term debt investments
c. A fund to be used to purchase a building within the next year
d. A receivable from the sale of an asset to be collected in two years
60. An intangible asset
a. derives its value from the rights and privileges it provides the owner.
b. is worthless because it has no physical substance.
c. is converted into a tangible asset during the operating cycle.
d. cannot be classified on the balance sheet because it lacks physical substance.
61. Which of the following is not considered an asset?
a. Equipment
b. Dividends
c. Accounts receivable
d. Inventory
62. In which balance sheet section would trademarks be reported?
a. Intangible assets
b. Investments
c. Property, plant, and equipment
d. Current assets
63. Liabilities are generally classified on a balance sheet as
a. small liabilities and large liabilities.
b. present liabilities and future liabilities.
c. tangible liabilities and intangible liabilities.
d. current liabilities and long-term liabilities.
64. Which of the following would not be classified as a long-term liability?
a. Current maturities of long-term debt
b. Bonds payable
c. Mortgage payable
d. Lease liabilities
65. Which of the following is generally not classified as a current liability?
a. Salaries and Wages Payable
b. Accounts Payable
c. Taxes Payable
d. Bonds Payable
66. Buildings are classified on the balance sheet as
a. a current asset.
b. property, plant, and equipment.
c. an intangible asset.
d. a long-term investment.
67. It is not true that current assets are resources that are expected to be
a. realized in cash within one year.
b. sold within one year.
c. consumed within one year.
d. acquired within one year.
68. The operating cycle of a company is the average time that is required to go from cash to
a. sales in producing revenues.
b. cash in producing revenues.
c. inventory in producing revenues.
d. accounts receivable in producing revenues.
69. On a classified balance sheet, companies usually list current assets
a. in alphabetical order.
b. with the largest dollar amounts first.
c. in the order in which they are expected to be converted into cash.
d. in the order of acquisition.
70. On a classified balance sheet, intangible assets are
a. listed directly under current assets on the balance sheet.
b. not listed on the balance sheet because they do not have physical substance.
c. listed after property, plant, and equipment.
d. listed as a long-term investment on the balance sheet.
71. Which statement about long-term investments is not true?
a. They will be held for more than one year.
b. They are not currently used in the operation of the business.
c. They include investments in stock of other companies and land held for future use.
d. They do not include long-term notes receivable.
72. These are selected account balances on December 31, 2025.
Land $150,000
Land (held for future use) 225,000
Buildings 1,200,000
Inventory 300,000
Equipment 675,000
Furniture 150,000
Accumulated Depreciation 450,000
What is the total amount of property, plant, and equipment that will appear on the balance sheet?
a. $2,250,000
b. $1,950,000
c. $2,700,000
d. $1,725,000
73. What is the order in which assets are generally listed on a classified balance sheet?
a. Current and long-term
b. Current; property, plant and equipment; long-term investments; intangibles
c. Current; property, plant and equipment; intangibles; long-term investments
d. Current; long-term investments; property, plant and equipment, intangibles
74. What is the first classification of assets generally listed on a classified balance sheet?
a. Current assets
b. Property, plant and equipment
c. Long-term investments
d. Intangibles
75. Use the following data to determine the total dollar amount of assets to be classified as current assets.
Acme Office Supplies
Balance Sheet
December 31, 2025
Cash $ 195,000 Accounts payable $ 210,000
Accounts receivable 150,000 Salaries and wages payable 30,000
Inventory 165,000 Mortgage payable 240,000
Prepaid insurance 90,000 Total liabilities 480,000
Stock investments (long-term) 255,000
Land 270,000
Buildings $315,000 Common stock $360,000
Less: Accumulated Retained earnings 750,000
depreciation (60,000) 255,000 Total stockholders’ equity 1,110,000
Goodwill 210,000 Total liabilities and
Total assets $1,590,000 stockholders’ equity $1,590,000
a. $855,000
b. $600,000
c. $510,000
d. $435,000
76. Use the following data to determine the total dollar amount of assets to be classified as property, plant, and equipment.
Acme Office Supplies
Balance Sheet
December 31, 2025
Cash $ 195,000 Accounts payable $ 210,000
Accounts receivable 150,000 Salaries and wages payable 30,000
Inventory 165,000 Mortgage payable 240,000
Prepaid insurance 90,000 Total liabilities 480,000
Stock investments (noncurrent) 255,000
Land 270,000
Buildings $315,000 Common stock 360,000
Less: Accumulated Retained earnings 750,000
depreciation (60,000) 255,000 Total stockholders’ equity 1,110,000
Goodwill 210,000 Total liabilities and
Total assets $1,590,000 stockholders’ equity $1 590,000
a. $990,000
b. $525,000
c. $735,000
d. $585,000
77. Use the following data to determine the total dollar amount of assets to be classified as long-term investments.
Acme Office Supplies
Balance Sheet
December 31, 2025
Cash $ 195,000 Accounts payable $ 210,000
Accounts receivable 150,000 Salaries and wages payable 30,000
Inventory 165,000 Mortgage payable 240,000
Prepaid insurance 90,000 Total liabilities 480,000
Stock investments 255,000
Land 270,000
Buildings $315,000 Common stock 360,000
Less: Accumulated Retained earnings 750,000
depreciation (60,000) 255,000 Total stockholders’ equity 1,110,000
Goodwill 210,000 Total liabilities and
Total assets $1,590,000 stockholders’ equity $1,590,000
a. $0
b. $525,000
c. $255,000
d. $465,000
78. Use the following data to determine the total amount of working capital.
Acme Office Supplies
Balance Sheet
December 31, 2025
Cash $ 195,000 Accounts payable $ 210,000
Accounts receivable 150,000 Salaries and wages payable 30,000
Inventory 165,000 Mortgage payable 240,000
Prepaid insurance 90,000 Total liabilities 480,000
Stock investments (noncurrent) 255,000
Land 270,000
Buildings $315,000 Common stock 360,000
Less: Accumulated Retained earnings 750,000
depreciation __(60,000) 255,000 Total stockholders’ equity _1,110,000
Goodwill 210,000 Total liabilities and
Total assets $1,590,000 stockholders’ equity $1,590,000
a. $360,000
b. $390,000
c. $130,000
d. $180,000
79. Use the following data to calculate the current ratio.
Acme Office Supplies
Balance Sheet
December 31, 2025
Cash $ 195,000 Accounts payable $ 210,000
Accounts receivable 150,000 Salaries and wages payable 30,000
Inventory 165,000 Mortgage payable 240,000
Prepaid insurance 90,000 Total liabilities 480,000
Stock investments (noncurrent) 255,000
Land 270,000
Buildings $315,000 Common stock 360,000
Less: Accumulated Retained earnings 750,000
depreciation __(60,000) 255,000 Total stockholders’ equity 1,110,000
Goodwill 210,000 Total liabilities and
Total assets $1,590,000 stockholders’ equity $1,590,000
a. 2.13: 1
b. 1.44: 1
c. 2.86: 1
d. 2.50: 1
80. Use the following data to determine the total dollar amount of assets to be classified as current assets.
A1 Auto Supplies
Balance Sheet
December 31, 2025
Cash and cash equivalents $ 70,000 Accounts payable $ 130,000
Accounts receivable 100,000 Salaries and wages payable 20,000
Inventory 140,000 Bonds payable 180,000
Prepaid insurance 80,000 Total liabilities 330,000
Stock investments (long-term) 180,000
Land 190,000
Buildings $230,000 Common stock 240,000
Less: Accumulated Retained earnings 500,000
depreciation __(60,000) 170,000 Total stockholders’ equity __740,000
Trademarks 140,000 Total liabilities and
Total assets $1,070,000 stockholders’ equity $1,070,000
a. $390,000
b. $250,000
c. $570,000
d. $330,000
81. Use the following data to determine the total dollar amount of assets to be classified as property, plant, and equipment.
A1 Auto Supplies
Balance Sheet
December 31, 2025
Cash and cash equivalents $ 70,000 Accounts payable $ 130,000
Accounts receivable 100,000 Salaries and wages payable 20,000
Inventory 140,000 Bonds payable 180,000
Prepaid insurance 80,000 Total liabilities 330,000
Stock investments 180,000
Land 190,000
Buildings $230,000 Common stock 240,000
Less: Accumulated Retained earnings 500,000
depreciation _(60,000) 170,000 Total stockholders’ equity __740,000
Trademarks 140,000 Total liabilities and
Total assets $1,070,000 stockholders’ equity $1,070,000
a. $540,000
b. $500,000
c. $360,000
d. $420,000
82. Use the following data to determine the total dollar amount of assets to be classified as long-term investments.
A1 Auto Supplies
Balance Sheet
December 31, 2025
Cash and cash equivalents $ 70,000 Accounts payable $ 130,000
Accounts receivable 100,000 Salaries and wages payable 20,000
Inventory 140,000 Bonds payable 180,000
Prepaid insurance 80,000 Total liabilities 330,000
Stock investments (noncurrent) 180,000
Land 190,000
Buildings $230,000 Common stock 240,000
Less: Accumulated Retained earnings 500,000
depreciation _(60,000) 170,000 Total stockholders’ equity __740,000
Trademarks 140,000 Total liabilities and
Total assets $1,070,000 stockholders’ equity $1,070,000
a. $0
b. $320,000
c. $180,000
d. $280,000
83. Use the following data to determine the total amount of working capital.
A1Auto Supplies
Balance Sheet
December 31, 2025
Cash and cash equivalents $ 70,000 Accounts payable $ 130,000
Accounts receivable 100,000 Salaries and wages payable 20,000
Inventory 140,000 Bonds payable 180,000
Prepaid insurance 80,000 Total liabilities 330,000
Stock investments (noncurrent) 180,000
Land 190,000
Buildings $230,000 Common stock 240,000
Less: Accumulated Retained earnings 500,000
depreciation _(60,000) 170,000 Total stockholders’ equity __740,000
Trademarks 140,000 Total liabilities and
Total assets $1,070,000 stockholders’ equity $1,070,000
a. $260,000
b. $240,000
c. $160,000
d. $420,000
84. Use the following data to calculate the current ratio.
A1Auto Supplies
Balance Sheet
December 31, 2025
Cash and cash equivalents $ 70,000 Accounts payable $ 130,000
Accounts receivable 100,000 Salaries and wages payable 20,000
Inventory 140,000 Bonds payable 180,000
Prepaid insurance 80,000 Total liabilities 330,000
Stock investments (noncurrent) 180,000
Land 190,000
Buildings $230,000 Common stock 240,000
Less: Accumulated Retained earnings 500,000
depreciation _ (60,000) 170,000 Total stockholders’ equity __740,000
Trademarks 140,000 Total liabilities and
Total assets $1,070,000 stockholders’ equity $1,070,000
a. 2.07: 1
b. 1.67: 1
c. 3.00: 1
d. 2.60: 1
85. Suppose that Old Navy has assets of $4,200,000, common stock of $1,092,000, and retained earnings of $665,000. What are the creditors’ claims on their assets?
a. $3,773,000
b. $1,757,000
c. $2,443,000
d. $4,627,000
86. Suppose that Forever 21 Corporation has total assets of $3,600,000, common stock of $936,000, and retained earnings of $570,000 at December 31, 2025. What are the creditors’ claims on their assets at that date?
a. $3,234,000
b. $1,506,000
c. $2,094,000
d. $3,966,000
87. Suppose that Forever 21 Corporation has total assets of $3,600,000, common stock of $936,000, and retained earnings of $570,000 at December 31, 2025. What are the stockholders’ claims on their assets at that date?
a. $3,234,000
b. $1,506,000
c. $2,094,000
d. $3,966,000
88. If a company has total assets of $1,600,000, liabilities of $200,000, common stock of $900,000, and retained earnings of $500,000 at December 31, 2025. What are the stockholders’ claims on their assets at that date?
a. $1,600,000
b. $1,400,000
c. $700,000
d. $1,800,000
89. Suppose that a corporation has total assets of $500,000, common stock of $50,000, and retained earnings of $200,000 at December 31, 2025. What are the stockholders’ claims on their assets at that date?
a. $500,000
b. $450,000
c. $250,000
d. $300,000
90. Use the following data to determine the total dollar amount of assets to be classified as current assets.
Ace Supply Company
Balance Sheet
December 31, 2025
Cash $ 126,000 Accounts payable $ 165,000
Accounts receivable 120,000 Salaries and wages payable 30,000
Inventory 210,000 Note payable (due 2028) 270,000
Short-term investments 90,000 Total liabilities 465,000
Land (held for future use) 255,000
Land 285,000
Buildings $339,000 Common stock 360,000
Less: Accumulated Retained earnings 750,000
depreciation _(60,000) 279,000 Total stockholders’ equity _1,110,000
Franchise 210,000 Total liabilities and
Total assets $1,575,000 stockholders’ equity $1,575,000
a. $801,000
b. $336,000
c. $546,000
d. $456,000
91. Use the following data to determine the total dollar amount of assets to be classified as property, plant, and equipment.
Ace Supply Company
Balance Sheet
December 31, 2025
Cash $ 126,000 Accounts payable $ 165,000
Accounts receivable 120,000 Salaries and wages payable 30,000
Inventory 210,000 Note payable (due 2028) __270,000 Short-term investments 90,000 Total liabilities 465,000
Land (held for future use) 255,000
Land 285,000
Buildings $339,000 Common stock 360,000
Less: Accumulated Retained earnings 750,000
depreciation __(60,000) 279,000 Total stockholders’ equity _1,110,000
Franchise 210,000 Total liabilities and
Total assets $1,575,000 stockholders’ equity $1,575,000
a. $1,029,000
b. $774,000
c. $834,000
d. $564,000
92. Use the following data to determine the total dollar amount of assets to be classified as long-term investments.
Ace Supply Company
Balance Sheet
December 31, 2025
Cash $ 126,000 Accounts payable $ 165,000
Accounts receivable 120,000 Salaries and wages payable 30,000
Inventory 210,000 Note payable (due 2028) 270,000
Short-term investments 90,000 Total liabilities 465,000
Land (held for future use) 255,000
Land 285,000
Buildings $339,000 Common stock 360,000
Less: Accumulated Retained earnings 750,000
depreciation __(60,000) 279,000 Total stockholders’ equity _1,110,000
Franchise 210,000 Total liabilities and
Total assets $1,575,000 stockholders’ equity $1,575,000
a. $0
b. $465,000
c. $255,000
d. $585,000
93. Use the following data to determine the total amount of working capital.
Ace Supply Company
Balance Sheet
December 31, 2025
Cash $ 126,000 Accounts payable $ 165,000
Accounts receivable 120,000 Salaries and wages payable 30,000
Inventory 210,000 Note payable (due 2028) 270,000
Short-term investments 90,000 Total liabilities 465,000
Land (held for future use) 255,000
Land 285,000
Buildings $339,000 Common stock 360,000
Less: Accumulated Retained earnings 750,000
depreciation __(60,000) 279,000 Total stockholders’ equity _1,110,000
Franchise 210,000 Total liabilities and
Total assets $1,575,000 stockholders’ equity $1,575,000
a. $606,000
b. $351,000
c. $381,000
d. $261,000
94. Use the following data to calculate the current ratio.
Ace Supply Company
Balance Sheet
December 31, 2025
Cash $ 126,000 Accounts payable $ 165,000
Accounts receivable 120,000 Salaries and wages payable 30,000
Inventory 210,000 Note payable (due 2028) 270,000
Short-term investments 90,000 Total liabilities 465,000
Land (held for future use) 255,000
Land 285,000
Buildings $339,000 Common stock 360,000
Less: Accumulated Retained earnings 750,000
depreciation __(60,000) 279,000 Total stockholders’ equity _1,110,000
Franchise 210,000 Total Liabilities and
Total assets $1,575,000 stockholders’ equity $1,575,000
a. 2.34: 1
b. 2.80: 1
c. 3.31: 1
d. 1.26: 1
95. A measure of profitability is
a. the current ratio.
b. the debt to assets ratio.
c. earnings per share.
d. working capital.
96. For 2025, Acme Co. reported net income of $36,000, net sales $400,000, and weighted-average shares of common stock outstanding of 16,000. No preferred dividends were paid. Earnings per share is
a. $2.25
b. $0.44
c. $25.00
d. $0.09
97. For 2025, Ace Inc. reported net income of $42,000, had weighted-average shares of common stock outstanding of 16,000, paid preferred dividends of $10,000 and common dividends of $5,000. What was 2025 earnings per share?
a. $0.08
b. $0.50
c. $25.00
d. $2.00
98. Earnings per share is calculated by dividing
a. gross profit by weighted-average common shares outstanding.
b. (net income less preferred dividends) by weighted-average common shares outstanding.
c. net income by weighted-average common shares outstanding.
d. net sales by weighted-average common shares outstanding.
99. Earnings per share is a
a. profitability ratio.
b. liquidity ratio.
c. solvency ratio.
d. trending ratio.
100. Which of the following statements is true?
a. Earnings per share is an internal measure and is not used by stockholders.
b. The denominator used in computing earnings per share represents the shares of common stock outstanding on the last day of the accounting period.
c. Net income is not adjusted when computing earnings per share.
d. By comparing earnings per share of a single corporation over time, a stockholder can evaluate the corporation’s relative earnings performance.
101. Earnings available to common stockholders is equal to
a. total revenues
b. net income + preferred dividends.
c. preferred dividends – net income.
d. net income – preferred dividends.
102. Suppose that the following information is available for Home Depot Corporation and Lowes Corporation:
(in millions) | Home Depot Corporation | Lowes Corporation | ||
2025 | 2024 | 2025 | 2024 | |
Preferred dividends | $25 | $10 | $0 | $30 |
Net income | $500 | $480 | $490 | $520 |
Shares outstanding at the end of the year | 200 | 180 | 150 | 200 |
Shares outstanding at the beginning of the year | 180 | 150 | 200 | 220 |
Based on this information, the earnings per share calculations (rounded to two decimals) suggest
a. lower performance in 2024 than in 2025 for Home Depot Corporation.
b. lower performance in 2025 than in 2024 for Home Depot Corporation.
c. less earnings available to Home Depot's common stockholders in 2025 than in 2024.
d. a decrease in the average number of common shares outstanding between 2024 and 2025 for Home Depot Corporation.
2024 Home Depot EPS = ($480 - $10)/((180 + 150)/2) = $470/ 165 = $2.85
2025 Home Depot EPS = ($500 - $25)/((200 + 180)/2) = $475/ 190 = $2.50
103. Suppose that the following information is available for Home Depot Corporation and Lowes Corporation:
(in millions) | Home Depot Corporation | Lowes Corporation | ||
2025 | 2024 | 2025 | 2024 | |
Preferred dividends | $25 | $10 | $0 | $30 |
Net income | $500 | $480 | $490 | $520 |
Shares outstanding at the end of the year | 200 | 180 | 150 | 200 |
Shares outstanding at the beginning of the year | 180 | 150 | 200 | 220 |
Based on this information, which of the following is suggested by the earnings per share calculations (rounded to two decimals) and the information given?
a. There is lower performance in 2024 than in 2025 for Lowes Corporation.
b. There is higher performance in 2024 than in 2025 for Lowes Corporation.
c. There is less earnings available to Lowes common stockholders in 2025 than in 2024.
d. There is an increase in the average number of common shares outstanding between 2024 and 2025 for Lowes.
2024 Loews EPS = ($520 - $30)/((200 + 220)/2) = $2.33
2025 Loews EPS = ($490 - $0)/((200 + 150)/2) = $2.80
104. Suppose that the following information is available for Home Depot Corporation and Lowes Corporation:
(in millions) | Home Depot Corporation | Lowes Corporation | ||
2025 | 2024 | 2025 | 2024 | |
Preferred dividends | $25 | $10 | $0 | $30 |
Net income | $500 | $480 | $490 | $520 |
Shares outstanding at the end of the year | 200 | 180 | 150 | 200 |
Shares outstanding at the beginning of the year | 180 | 150 | 200 | 220 |
Based on this information, what is the amount of Home Depot's earnings per share (rounded to two decimals) for 2025?
a. $2.76
b. $2.50
c. $1.25
d. $1.32
105. Suppose that the following information is available for Home Depot Corporation and Lowes Corporation:
(in millions) | Home Depot Corporation | Lowes Corporation | ||
2025 | 2024 | 2025 | 2024 | |
Preferred dividends | $25 | $10 | $0 | $30 |
Net income | $500 | $480 | $490 | $520 |
Shares outstanding at the end of the year | 200 | 180 | 150 | 200 |
Shares outstanding at the beginning of the year | 180 | 150 | 200 | 220 |
Based on the information for both Home Depot and Lowes over the two-year period, the earnings per share calculations (rounded to two decimals) indicate that
a. Home Depot is seeing a greater performance improvement than Lowes.
b. The earnings available to common stockholders is decreasing for Lowes and increasing for Home Depot.
c. The earnings per share calculations for both companies must assume that changes in shares between 2024 and 2025 occur in the middle of the year.
d. Lowes is more financially stable than Home Depot.
2024 Lowes EPS = ($520 - $30)/((200+220)/2) = $2.33
2025 Lowes EPS = ($490 - $0)/((200+150)/2) = $2.80
2024 Home Depot EPS = ($480 - $10)/((180+150)/2) = 470/165 = $2.85
2025 Home Depot EPS = ($500 - $25)/((200+180)/2) = 475/190= $2.50
106. The relationship between current assets and current liabilities is important in evaluating a company's
a. profitability.
b. liquidity.
c. market value.
d. solvency.
107. Ratios that measure the income or operating success of a company for a given period of time are
a. liquidity ratios.
b. profitability ratios.
c. solvency ratios.
d. trending ratios.
108. Which of the following is a measure of liquidity?
a. Working capital
b. Profit margin
c. Earnings per share
d. Debt to assets ratio
109. Current assets divided by current liabilities is known as the
a. working capital.
b. current ratio.
c. profit margin.
d. capital structure.
110. The information needed to determine if companies can pay their current obligations is the
a. net income for this year.
b. projected net income for next year.
c. relationship between current assets and current liabilities.
d. relationship between short-term and long-term liabilities.
111. A short-term creditor is primarily interested in the __________ of the borrower.
a. liquidity
b. profitability
c. consistency
d. solvency
112. The current ratio is
a. current assets plus current liabilities.
b. current assets minus current liabilities.
c. current assets divided by current liabilities.
d. current assets times current liabilities.
113. Working capital is calculated by taking
a. current assets plus current liabilities.
b. current assets minus current liabilities.
c. current assets divided by current liabilities.
d. current assets times current liabilities.
114. Working capital is a measure of
a. consistency.
b. liquidity.
c. profitability.
d. solvency.
115. Long-term creditors are usually most interested in evaluating
a. liquidity.
b. profitability.
c. solvency.
d. consistency.
116. Which of the following is a meaningful comparison to assess a company’s profitability?
a. An intracompany comparison of net income for a two-year period
b. Industry-average comparison of total assets
c. Year-to-year comparisons of liabilities with a competitor in the same industry
d. Intercompany comparisons of earnings per share for a two-year period
117. Which one of the following is true?
a. Intangible assets are current assets that do not have physical substance.
b. Obligations expected to be paid after one year are classified as expenses.
c. Current assets are assets that a company expects to convert to cash or use up within the longer of one year or its operating cycle.
d. Property, plant, and equipment are assets with relatively short useful lives that are used in the operations of the business.
118. A liquidity ratio measures the
a. income or operating success of a company over a period of time.
b. ability of a company to survive over a long period of time.
c. short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash.
d. percentage of total financing provided by creditors.
119. Working capital is
a. calculated by dividing current assets by current liabilities.
b. used to evaluate a company’s liquidity and short-term debt paying ability.
c. used to evaluate a company’s solvency and long-term debt paying ability.
d. calculated by subtracting current assets from current liabilities.
120. The ability of a business to pay obligations that are expected to become due within the next year or operating cycle is
a. leverage.
b. liquidity.
c. profitability.
d. wealth.
121. Based on the following data, what is the amount of current assets?
Accounts payable……………………………………………………….. $ 62,000
Accounts receivable…………………………………………………….. 100,000
Cash………………………………………………………………………. 70,000
Intangible assets………………………………………………………… 100,000
Inventory…………………………………………………………………. 138,000
Long-term investments…………………………………………………. 160,000
Long-term liabilities……………………………………………………… 200,000
Short-term investments…………………………………………………. 80,000
Notes payable……………………………………………………………. 56,000
Property, plant, and equipment…………………………………………… 1,340,000
Prepaid insurance……………………………………………………….. 2,000
a. $232,000
b. $390,000
c. $252,000
d. $250,000
122. Based on the following data, what is the amount of working capital?
Accounts payable……………………………………………………….. $ 64,000
Accounts receivable…………………………………………………….. 114,000
Cash………………………………………………………………………. 70,000
Intangible assets………………………………………………………… 100,000
Inventory…………………………………………………………………. 138,000
Long-term investments…………………………………………………. 160,000
Long-term liabilities……………………………… ……………………. 200,000
Short-term investments…………………………………………………. 80,000
Notes payable (short-term)……………………………………………… 56,000
Property, plant, and equipment…………………………………………… 1,340,000
Prepaid insurance……………………………………………………….. 2,000
a. $284,000
b. $332,000
c. $370,000
d. $326,000
123. Using the following balance sheet and income statement data, what is the total amount of working capital?
Current assets $ 32,000 Net income $42,000
Current liabilities 16,000 Stockholders’ equity 78,000
Average assets 160,000 Total liabilities 42,000
Total assets 120,000
Average common shares outstanding was 15,000.
a. $8,000
b. $32,000
c. $10,000
d. $16,000
124. Using the following balance sheet and income statement data, what is the current ratio?
Current assets $ 32,000 Net income $42,000
Current liabilities 16,000 Stockholders’ equity 78,000
Average assets 160,000 Total liabilities 42,000
Total assets 120,000
Average common shares outstanding was 15,000.
a. 2.0: 1
b. 2.6: 1
c. 0.5: 1
d. 2.9: 1
125. Using the following balance sheet and income statement data, what is the earnings per share?
Current assets $ 32,000 Net income $42,000
Current liabilities 16,000 Stockholders’ equity 78,000
Average assets 160,000 Total liabilities 42,000
Total assets 120,000
Average common shares outstanding was 15,000.
a. $5.20
b. $8.00
c. $2.80
d. $0.36
126. Using the following balance sheet and income statement data, what is the debt to assets ratio?
Current assets $ 32,000 Net income $42,000
Current liabilities 16,000 Stockholders’ equity 78,000
Average assets 160,000 Total liabilities 42,000
Total assets 120,000
Average common shares outstanding was 15,000.
a. 26 percent
b. 13 percent
c. 65 percent
d. 35 percent
127. Using the following balance sheet and income statement data, what is the total amount of working capital?
Current assets $ 21,000 Net income $45,000
Current liabilities 12,000 Stockholders’ equity 63,000
Average assets 132,000 Total liabilities 27,000
Total assets 90,000
Average common shares outstanding was 15,000.
a. $7,000
b. $5,000
c. $9,000
d. $2,000
128. Using the following balance sheet and income statement data, what is the current ratio?
Current assets $ 21,000 Net income $45,000
Current liabilities 12,000 Stockholders’ equity 63,000
Average assets 132,000 Total liabilities 27,000
Total assets 90,000
Average common shares outstanding was 15,000.
a. 0.78: 1
b. 3.33: 1
c. 0.57: 1
d. 1.75: 1
129. Using the following balance sheet and income statement data, what is the earnings per share?
Current assets $ 21,000 Net income $45,000
Current liabilities 12,000 Stockholders’ equity 63,000
Average assets 132,000 Total liabilities 27,000
Total assets 90,000
Average common shares outstanding was 15,000.
a. $3.00
b. $4.20
c. $0.33
d. $0.50
130. Using the following balance sheet and income statement data, what is the debt to assets ratio?
Current assets $ 21,000 Net income $45,000
Current liabilities 12,000 Stockholders’ equity 63,000
Average assets 132,000 Total liabilities 27,000
Total assets 90,000
Average common shares outstanding was 15,000.
a. 20.5 percent
b. 30 percent
c. 33.3 percent
d. 40.9 percent
131. The debt to assets ratio is computed by dividing
a. long-term liabilities by total assets.
b. long-term liabilities by average assets.
c. total liabilities by total assets.
d. total liabilities by average assets.
132. A useful measure of solvency is the
a. current ratio.
b. earnings per share.
c. return on assets ratio.
d. debt to assets ratio.
133. Which of the following is not considered a measure of liquidity?
a. Current ratio
b. Working capital
c. Debt to assets ratio
134. Which measure would a long-term creditor be most interested in reviewing?
a. Earnings per share
b. Debt to assets ratio
c. Current ratio
d. Working capital measure
135. A1 Motors Corporation has a debt to assets ratio of 73%. This tells the user of the company’s financial statements that
a. A1 is getting a 27% return on its assets.
b. there is a risk that A1 cannot pay its debts as they come due.
c. 73% of the assets are financed by the stockholders.
d. based on this measure, the user should not invest in A1.
136. Ace Company is a retail store. Due to competition, it is having trouble selling its products. Thus, inventory has been building up. Ace’s current ratio has not changed for the past three years, in spite of the inventory buildup. Which of the following statements is true?
a. As long as the current ratio remains constant, there is no need for concern.
b. The composition of current assets and current liabilities does not matter.
c. The management of Ace should consider the effect of slow-moving inventory on its liquidity.
d. Since inventory is a current asset, any increases should automatically cause the current ratio to rise.
137. How can a company improve its current ratio?
a. Work with a creditor to reclassify some current debt into long-term debt
b. Collect accounts receivable
c. Nothing can ethically be done to improve the current ratio
d. Use excess cash to buy new equipment
138. Suppose that Verizon Corporation has current assets of $1,800,000 and current liabilities of $750,000. If they pay $350,000 of their accounts payable, what will their new current ratio be?
a. 3.6:1
b. 2.4:1
c. 4.5:1
d. 2.0:1
139. Suppose that Verizon Corporation has current assets of $1,800,000 and current liabilities of $750,000. If they issue $150,000 of new stock, what will their new current ratio be? (rounded)
a. 2.6:1
b. 2.1:1
c. 2.2:1
d. 2.4:1
140. Suppose that Patagonia Corporation has current assets of $1,600,000 and current liabilities of $750,000. If they pay $350,000 of their accounts payable, what will their new current ratio be?
a. 3.1:1
b. 4.0:1
c. 1.5:1
d. 2.1:1
141. Suppose that Patagonia Corporation has current assets of $1,600,000 and current liabilities of $750,000. If they issue $200,000 of new stock what will their new current ratio be? (rounded)
a. 2.4:1
b. 1.9:1
c. 1.7:1
d. 2.13:1
142. The debt to assets ratio is a
a. liquidity ratio.
b. profitability ratio.
c. solvency ratio.
143. Analysts determined that Amazon has the ability to pay its obligations expected to come due within the next year. What did the analysts measure?
a. Liquidity
b. Profitability
c. Solvency
d. Cash on hand
144. To be relevant, what characteristic must accounting information exhibit?
a. It must be capable of making a difference in a decision.
b. It must be compared with other companies.
c. It must be verifiable.
d. It must be based on the U.S. monetary unit.
145. What is the role of the FASB?
- To regulate U.S. financial markets and accounting standard-setting bodies
- To determine auditing standards in the U.S.
- To establish accounting standards in the U.S.
- To regulate foreign companies that do business in the U.S.
146. Which statement describes the periodicity assumption?
a. The life of a business can be divided into artificial times periods for which useful reports can be prepared.
b. The business will remain in operation for the foreseeable future.
c. Every economic unit can be separately identified and accounted for.
d. Financial reports are issued on a timely basis for decision-making.
147. Which of the following organizations issues accounting standards for countries outside the United States?
a. SEC
b. GAAP
c. IASB
d. FASB
148. Which entity(ies) is/are responsible for establishing accounting standards in the United States?
a. Securities and Exchange Commission
b. International Accounting Standards Board
c. Financial Accounting Standards Board
d. Financial Accounting Standards Board and the International Accounting Standards Board
149. Which statement is false concerning accounting principles in the United States?
a. The Securities and Exchange Commission oversees U.S. financial markets and accounting standard-setting bodies.
b. The International Accounting Standards Board issues accounting standards that must be followed by all companies that engage in international business.
c. The primary auditing standard-setting body in the U.S. is the Financial Accounting Standards Board.
d. The Public Company Accounting Oversight Board determines auditing standards.
150. Generally accepted accounting principles
a. are accounting rules formulated by the Internal Revenue Service.
b. are sound in theory but rarely used in real life.
c. are accounting rules that are recognized as a general guide for financial reporting.
d. have eliminated all errors in accounting.
151. The agency of the United States Government that oversees the U.S. financial markets is the
a. Internal Revenue Service.
b. Security Exchange Commission.
c. Financial Accounting Standards Board.
d. International Auditing Standards Committee.
152. What organization issues U.S. accounting standards?
a. Securities and Exchange Commission
b. International Accounting Standards Committee
c. International Auditing Standards Committee
d. Financial Accounting Standards Board
153. Which one of the following is not an enhancing quality of useful information?
a. Timeliness
b. Understandability
c. Materiality
d. Comparability
154. All of the following are qualities of useful information except
a. faithful representation.
b. materiality.
c. relevance.
d. flexibility.
155. The two fundamental qualities of useful information are
a. relevance and faithful representation.
b. verifiability and timeliness.
c. comparability and flexibility.
d. understandability and consistency.
156. The convention of consistency refers to consistent use of accounting principles
a. among firms.
b. from period to period.
c. throughout the current accounting period.
d. within industries.
157. The quality of consistency is a type of
a. relevance.
b. materiality.
c. comparability.
d. faithful representation.
158. Information that is presented in a clear fashion, so that users of that information can interpret it, is an example of
a. relevance.
b. faithful representation.
c. understandability.
d. comparability.
159. In order for accounting information to be relevant, it must
a. have very little cost.
b. help predict future events or confirm prior expectations.
c. not be reported to the public.
d. be used by many different firms.
160. Accounting information should be verifiable in order to enhance
a. comparability.
b. faithful representation.
c. consistency.
d. relevance.
161. Accounting information is relevant to business decisions because it
a. has been verified by external audit.
b. is prepared on an annual basis.
c. confirms prior expectations.
d. is neutral in its representations.
162. If accounting information has relevance, it is useful in making predictions about
a. future IRS audits.
b. new accounting principles.
c. foreign currency exchange rates.
d. the future events of a company.
163. Relevant accounting information
a. is information that has been audited.
b. must be reported within the operating cycle or one year, whichever is longer.
c. has been objectively determined.
d. is information that is capable of making a difference in a business decision.
164. Which of the following is not a quality associated with faithful representation?
a. Complete
b. Consistency
c. Neutral
165. Accounting information should be neutral in order to enhance
a. faithful representation.
b. consistency.
c. comparability.
d. relevance.
166. Characteristics associated with relevant accounting information are
a. comparability and timeliness.
b. predictive value and confirmatory value.
c. neutral and verifiable.
d. consistency and understandability.
167. Characteristics associated with faithfully representative accounting information are
a. verifiable and timely.
b. verifiable and neutral.
c. complete and neutral.
d. relevance and verifiable.
168. Which of the following statements is not true?
a. Comparability means using the same accounting principles from year to year within a company.
b. Faithful representation is the quality of information that gives assurance that it is free of material error.
c. Relevant accounting information must be capable of making a difference in the decision.
d. The primary objective of financial reporting is to provide financial information that is useful to investors and creditors for making decisions.
169. Financial information is comparable if
a. companies use the same accounting principles to prepare it.
b. a company uses the same accounting practices from one period to the next.
c. the benefits of preparing it outweigh the cost.
d. it is capable of making a difference in an investing decision.
170. An item is considered material if
a. it does not cost a lot of money.
b. it is of a tangible good.
c. its size is likely to influence the decision of an investor or creditor.
d. the cost of reporting the item is greater than its benefits.
171. Information presented in a clear and concise fashion so that users can comprehend its meaning is an application of
a. consistency.
b. timeliness.
c. verifiability.
d. understandability.
172. A company using the same accounting principles from year to year is an application of
a. timeliness.
b. consistency.
c. full disclosure.
d. materiality.
173. Information is _________ if independent measures, using the same methods, obtain similar results.
a. Verifiable
b. Consistent
c. Understandable
d. Relevant
174. Different companies using the same accounting principles is an application of
a. consistency.
b. materiality.
c. full disclosure.
d. comparability.
175. The assumption that requires that only those things that can be expressed in money are included in the accounting records is the
a. economic entity assumption.
b. monetary unit assumption.
c. going concern assumption.
d. periodicity assumption.
176. Which of the following is a constraint in accounting?
a. Comparability
b. Cost
c. Consistency
d. Relevance
177. The accounting concept that indicates assets should be reported at the price that would be received to sell an asset is the
a. economic entity assumption.
b. monetary unit assumption.
c. fair value principle.
d. historical cost principle.
178. For accounting information to have relevance, it must be
a. consistent.
b. timely.
c. verifiable.
d. understandable.
179. The periodicity assumption states that the economic life of a business can be divided into
a. equal time periods.
b. cyclical time periods.
c. artificial time periods.
d. perpetual time periods.
180. Which accounting assumption requires that only those things that can be expressed in dollar values are included in the accounting records?
a. monetary unit assumption.
b. historical cost principle.
c. periodicity assumption.
d. full disclosure principle.
181. The ______________ indicates that assets should be reported at the price that would be received to sell the asset at the balance sheet date.
a. historical cost principle
b. fair value principle
c. full disclosure principle
d. consistency principle
182. Which accounting assumption assumes that an enterprise will continue in operation long enough to carry out its existing objectives and commitments?
a. Monetary unit assumption
b. Economic entity assumption
c. Periodicity assumption
d. Going concern assumption
183. What does the full disclosure principle require?
a. Companies must allow investors and creditors to examine their accounting records.
b. Companies must disclose all circumstances and events that may affect decisions made by investors and other users.
c. Companies must disclose the true value of all resources owned by the company and all amounts owed to creditors.
d. Companies must disclose all transactions as part of their complete set of financial statements.
Source: w34286490-05c8-4926-816f-e365eabbbf59
184. It is assumed that the activities of Ford Motor company can be distinguished from those of General Motors because of the
a. going concern assumption.
b. economic entity assumption.
c. monetary unit assumption.
d. periodicity assumption.
185. The going concern assumption assumes that the business
a. will be liquidated in the near future.
b. will be purchased by another business.
c. is in a growth industry.
d. will remain in operation for the foreseeable future.
186. The economic entity assumption states that economic events
a. of different entities can be combined if all the entities are corporations.
b. must be reported to the Securities and Exchange Commission.
c. of a sole proprietorship cannot be distinguished from the personal economic events of its owners.
d. of every entity can be separately identified and accounted for.
187. The concept that a business has a reasonable expectation of remaining in business for the foreseeable future is called the
a. economic entity assumption.
b. monetary unit assumption.
c. periodicity assumption.
d. going concern assumption.
188. Which of the following is not an accounting assumption?
a. Integrity
b. Going concern
c. Periodicity
d. Economic entity
189. The periodicity assumption states
a. the business will remain in operation for the foreseeable future.
b. the life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared.
c. every economic entity can be separately identified and accounted for.
d. only those things that can be expressed in money are included in the accounting records.
190. Acme Company has five plants nationwide that cost $300 million. The current fair value of the plants is $500 million. The plants will be reported as assets at
a. $200 million.
b. $800 million.
c. $300 million.
d. $500 million.
191. A1 Manufacturing Company has four plants nationwide that cost $450 million. Accumulated depreciation on the plants is $100 million at December 31, 2025. The current fair value of the plants at that date is $300 million. The plants will be reported on the December 31, 2025 balance sheet at
a. $350 million.
b. $700 million.
c. $300 million.
d. $600 million.
192. Suppose that Trek Company has four plants nationwide that cost $950 million. Accumulated depreciation on the plants is $300 million at December 31, 2025. The current fair value of the plants at that date is $800 million. The plants will be reported on the December 31, 2025 balance sheet at
a. $950 million.
b. $800 million.
c. $500 million.
d. $650 million.
193. Suppose that Patagonia Company has five manufacturing facilities nationwide that cost $500 million. The current fair value of the plants is $600 million. The plants will be reported as assets at
a. $100 million.
b. $500 million.
c. $600 million.
d. $900 million.
194. Suppose that Target Corporation has actively-traded investment securities with a cost of $15 million. The current fair value of the investments is $20 million. The investment securities will be reported on the balance sheet at
a. $5 million.
b. $15 million.
c. $20 million.
d. $35 million.
195. Suppose that Ralph Lauren Company has actively-traded investment securities that cost $30 million. The current fair value of the investment securities is $50 million. The securities will be reported on the balance sheet at
a. $20 million.
b. $30 million.
c. $50 million.
d. $80 million.
196. The historical cost principle requires that when assets are acquired, they be recorded at
a. fair market value.
b. the amount paid for them.
c. selling price.
d. list price.
197. Valuing assets at their fair value rather than at their cost is inconsistent with the
a. economic entity assumption.
b. historical cost principle.
c. periodicity assumption.
d. full disclosure principle.
198. Acme Cement Corporation reported $35 million for sales when it only had $20 million of actual sales. Which of the following qualities of useful information has Acme most likely violated?
a. Comparability
b. Relevance
c. Faithful representation
d. Consistency
199. Acme Corporation hired a new accountant. Over the next four years, the accountant used four different accounting methods to record depreciation for Acme's equipment. Which of the following qualities of useful information has Acme most likely violated?
a. Comparability
b. Relevance
c. Faithful representation
d. Consistency
200. Tesla Company prepares quarterly reports, which it distributes to all stockholders and other entities that rely on its accounting information. Which of the following is the best term for the key assumption in financial reporting that Tesla is following?
a. Monetary unit assumption
b. Going concern assumption
c. Economic entity assumption
d. Periodicity assumption.
201. Walmart Company prepares quarterly reports, which it files with the SEC and distributes to all stockholders. Which key assumption in financial reporting is Walmart following?
a. Monetary unit assumption
b. Periodicity assumption.
c. Economic entity assumption
d. Going concern assumption
202. Tesla Company weighs the cost of providing information to stockholders with the benefits of doing so. Tesla is considering the
a. monetary unit assumption.
b. cost constraint.
c. economic entity assumption.
d. periodicity assumption.
203. Walmart Company prepares quarterly reports, which it files with the SEC and distributes to all stockholders. In providing this information, Walmart weighs the cost of providing information to stockholders with the benefits of doing so. Walmart is applying the
a. cost constraint.
b. periodicity assumption.
c. quality of consistency.
d. historical cost principle.
BRIEF Exercises
BE. 204
A list of financial statement items for Acme Manufacturing Company at June 30, 2025 includes the following:
Accounts receivable $19,500 Prepaid insurance $5,400
Cash 22,400 Supplies 1,800
Short-term investments 6,200
Prepare the current assets section of the June 30, 2025 balance sheet listing the items in the proper sequence.
Earnings per share = | $588.7 – $0 | = $1.75 |
336.4 |
Ex. 217
The following information is available for A1 Supply Company for the year ended December 31, 2025:
Accounts payable $ 4,700
Stock investments (long-term) 8,400
Accumulated depreciation, equipment 4,000
Retained earnings 16,000
Common stock 4,800
Intangible assets 2,500
Notes payable (due in 5 years) 6,000
Accounts receivable 1,500
Cash 2,600
Debt investments (short-term) 3,000
Land 10,000
Equipment 7,500
Instructions
Use the above information to prepare a classified balance sheet for the year ended December 31, 2025.
Ex. 218
The following lettered items represent a classification scheme for a balance sheet, and the numbered items represent data found on balance sheets. In the blank next to each account, write the letter indicating to which category it belongs.
A. Current assets
B. Investments
C. Property, plant, and equipment
D. Intangible assets
E. Current liabilities
F. Long-term liabilities
G. Stockholders’ equity
H. Not on the balance sheet
Ex. 219
These items are taken from the financial statements of Acme Manufacturing Company at December 31, 2025.
Buildings $95,800
Accounts receivable 15,600
Prepaid insurance 4,680
Cash 18,840
Equipment 79,400
Land 61,200
Insurance expense 780
Depreciation expense 7,300
Interest expense 2,600
Common stock 57,000
Retained earnings (January 1, 2025) 40,000
Accumulated depreciation—buildings 45,600
Accounts payable 15,500
Mortgage payable 88,600
Accumulated depreciation—equipment 18,720
Interest payable 3,600
Service revenue 17,180
Instructions
Prepare a classified balance sheet. Assume that $13,600 of the mortgage payable will be paid in 2026.
Ex. 220
The following items are taken from the financial statements of Kardashian Company for 2025:
Accounts payable $ 10,000
Accounts receivable 11,000
Accumulated depreciation—equipment 38,000
Advertising expense 21,000
Cash 14,000
Common stock 90,000
Depreciation expense 12,000
Dividends on common stock 15,000
Equipment 210,000
Insurance expense 3,000
Notes payable (due in 2028) 70,000
Prepaid insurance 6,000
Rent expense 17,000
Retained earnings (beginning) 12,000
Salaries and wages expense 34,000
Salaries and wages payable 3,000
Service revenue 130,000
Supplies 4,000
Supplies expense 6,000
Ex. 220 (Cont.)
Instructions
(a) Calculate the net income.
(b) Calculate the retained earnings balance that would appear on a balance sheet at December 31, 2025.
(c) Prepare a classified balance sheet for Kardashian Company at December 31, 2025 assuming the note payable is a long-term liability.
(d) Compute the current ratio, debt to assets ratio, and earnings per share value. The average number of shares outstanding for 2025 was 10,000.
Ex. 221
The following items are taken from the financial statements of Ryan Seacrest Company for the year ending December 31, 2025:
Accounts payable $18,500
Accounts receivable 8,000
Accumulated depreciation-equipment 4,800
Bonds payable 18,000
Cash 24,000
Common stock 25,000
Cost of goods sold 27,000
Depreciation expense 4,800
Dividends on common stock 5,300
Equipment 44,000
Interest expense 2,500
Patents 7,500
Retained earnings, January 1, 2025 16,000
Salaries and wages expense 5,200
Sales revenue 50,500
Supplies 4,500
Instructions
(a) Prepare an income statement and a classified balance sheet for Ryan Seacrest Company.
(b) Compute the following ratios and values:
1. Current ratio
2. Debt to assets ratio
3. Working capital
4. Earnings per share (the company’s average number of shares outstanding during the year was 5,000.)
Ex. 222
These financial statement items are for A1 Auto Supply Corporation at year-end, July 31, 2025.
Salaries and wages payable $ 2,580
Salaries and wages expense 50,700
Utilities expense 22,600
Equipment 21,000
Accounts payable 4,100
Service revenue 62,100
Rent revenue 8,500
Notes payable (due 2027) 1,800
Common stock 16,000
Cash 20,200
Accounts receivable 12,780
Accumulated depreciation—equipment 6,000
Dividends 5,000
Depreciation expense 4,000
Retained earnings (beginning of the year) 35,200
Instructions
(a) Prepare an income statement and a retained earnings statement for the year ended July 31, 2025. A1 Corporation did not issue any new stock during the year.
(b) Prepare a classified balance sheet at July 31, 2025.
Ex. 223
These items are taken from the financial statements of Katy Perry Corporation at December 31, 2025.
Retained earnings (beginning of year) $33,000
Utilities expense 2,000
Equipment 56,000
Accounts payable 15,300
Cash 15,900
Salaries and wages payable 3,000
Common stock 13,000
Dividends 14,000
Service revenue 78,000
Prepaid insurance 3,500
Maintenance and repairs expense 1,800
Depreciation expense 3,300
Accounts receivable 14,200
Insurance expense 2,200
Salaries and wages expense 47,000
Accumulated depreciation—equipment 17,600
Instructions
Prepare an income statement and a retained earnings statement for the year ended December 31, 2025 and a classified balance sheet as of December 31, 2025.
Ex. 224
The following data are taken from the financial statements of Acme Services, Inc. as of the end of the year 2025. The data are in alphabetical order.
Accounts payable $ 28,000 Net income $ 48,000
Accounts receivable 66,000 Other current liabilities 17,000
Cash 24,000 Salaries and wages payable 5,000
Gross profit 160,000 Total assets 250,000
Income before income taxes 54,000 Total liabilities 175,000
Additional information: The average common shares outstanding during the year was 40,000.
Instructions
Compute the following:
(a) Current ratio. (c) Earnings per share.
(b) Working capital. (d) Debts to assets ratio.
Ex. 225
Use the following data to calculate the liquidity and profitability ratios listed below.
Current liabilities $100,000
Capital expenditures 20,000 Net income $ 21,000
Cash provided by operating activities 32,000 Net sales 150,000
Dividends paid on common stock 5,000 Total liabilities 126,000
Current assets 190,000 Total assets 210,000
The average common shares outstanding during the period was 10,000.
Instructions
Compute the following:
(a) Current ratio. (c) Earnings per share.
- Working capital. (d) Debt to assets ratio.
Ex. 226
The following data are taken from the financial statements of Taylor Swift Company. The data are in alphabetical order.
Accounts payable $ 28,000 Net sales $500,000
Accounts receivable 65,000 Other current liabilities 20,000
Average common shares out. 20,000 Salaries and wages payable 7,000
Cash 56,000 Stockholders’ equity 135,000
Gross profit 190,000 Total assets 300,000
Net income 50,000
Instructions
Compute the following:
(a) Current ratio. (c) Earnings per share.
(b) Working capital. (d) Debt to assets ratio.
Ex. 227
Comparative financial statement data for Rodrigo Corporation and Carpenter Corporation, two competitors, appear below. All balance sheet data are as of December 31, 2025.
Rodrigo Corporation Carpenter Corporation
2025 2025
Net sales $1,850,000 $620,000
Cost of goods sold 1,225,000 365,000
Operating expenses 303,000 98,000
Interest expense 9,000 3,800
Income tax expense 85,000 36,800
Current assets 427,200 130,336
Plant assets (net) 532,000 139,728
Current liabilities 66,325 35,348
Long-term liabilities 148,500 29,620
Additional Information:
Cash from operating activities 153,000 44,000
Capital expenditures 90,000 20,000
Dividends paid on common stock 36,000 15,000
Average number of common shares outstanding 100,000 50,000
Instructions
(a) Comment on the relative profitability of the companies by computing the net income and earnings per share for each company for 2025.
(b) Comment on the relative solvency of the companies by computing the debt to assets ratio for each company for 2025.
Ex. 228
For each of the ratios listed below, indicate by the appropriate code letter, whether it is a liquidity ratio, a profitability ratio, or a solvency ratio.
Code:
L = Liquidity ratio
P = Profitability ratio
S = Solvency ratio
1. Debt to assets ratio
2. Earnings per share
3. Current ratio
Ex. 229
The following information is available from the annual reports of Carey Company and Lopez Company.
(amounts in millions)
Carey Lopez
Sales $26,510 $34,512
Gross profit 6,610 8,887
Net income 565 1,221
Current assets 13,712 28,447
Beginning total assets 17,102 33,130
Ending total assets 22,088 36,167
Current liabilities 7,966 13,950
Total liabilities 16,136 29,222
Average common shares outstanding 250 480
Preferred stock dividends paid -0- -0-
Instructions
(a) For each company, compute the following ratios:
1. Current ratio
2. Debt to assets ratio
3. Earnings per share
(b) Based on your calculations, discuss the relative liquidity, solvency, and profitability of the two companies.
Ex. 230
The chief financial officer (CFO) of Ace Cleaning Inc. requested that the accounting department prepare a preliminary balance sheet on December 30, 2025, so that the CFO could get an idea of how the company stood. He knows that certain debt agreements with its creditors require the company to maintain a current ratio of at least 2:1. The preliminary balance sheet is as follows.
ACE CLEANING INC.
Balance Sheet
December 30, 2025
Current assets | Current liabilities | ||||
Cash | $25,000 | Accounts payable | $ 20,000 | ||
Accounts receivable | 20,000 | Sal. and wages payable | 20,000 | $ 40,000 | |
Prepaid insurance | 15,000 | $ 60,000 | Long-term liabilities | ||
Notes payable | 90,000 | ||||
Total liabilities | 130,000 | ||||
Property, plant, and equipment (net) | 210,000 | Stockholders' equity | |||
Total assets | $270,000 | Common stock | 100,000 | ||
Retained earnings | 40,000 | 140,000 | |||
Total liabilities and | $270,000 | ||||
Instructions
(a) Calculate the current ratio and working capital based on the preliminary balance sheet.
(b) Based in the results in (a), the CFO requested that $20,000 of cash be used to pay off the balance of the accounts payable account on December 31, 2025. Calculate the new current ratio and working capital after the company takes these actions.
(a) Current ratio = | $60,000 | = 1.50:1 | (Cash + Acc. rec. + Prep. ins. ÷ Cur. liab.) |
$40,000 |
(b) Current ratio = | $40,000* | = 2.0:1 |
$20,000** |