MULTIPLE CHOICE 40. ratios that test liquidity include all except: A. inventory

Question

MULTIPLE CHOICE

40. ratios that test liquidity include all except:

A. inventory turnover

B. acid-test ratio

C. return on assets

D. current ratio

46. If stock is issued for an asset other than cash, the asset should be recorded on the books of the corporation at:

A. fair market value of the asset

B. Par value of the asset

C. book value of the asset

D. fair value of the stock minus the par value of the stock

48. A debtor and a creditor record the same not, respectively, as a:

A. note receivable and note payable

B. note payable and note receivable

C. note receivable and account receivable

D. note payable and account payable

49. A company's balance sheet:

A. lists liabilities before assets

B. has two main categories of liabilities

C. is dated for a period of time

D. has three main categories of assets

50. following the expense recognition principle, recognizing expenses along with related revenues means to:

A. abandon the matching principle

B. add all the expenses paid during the period and call it a net loss

C. add expenses and revenues together to compute net income or net loss

D. subtract expenses from the related revenues to compute net income or net loss

51. A disadvantage of using bonds instead of stock as a method of long-term financing is that with bonds:

A. interest expense is tax deductible

B. issuing bonds results in higher earnings per share than issuing common stock

C. interest must be paid regardless of the level of earnings

D. bonds do not dilute stockholders' proportionate ownership

57. With an accrual of revenue:

A. the cash is paid before the expense is recorded

B. plant assets can create an accrual adjustment

C. prepaid expenses can create an accrual adjustment

D. the cash is received after the revenue is recorded

60. On the statement of cash flows, financing activities involve:

A. lending money

B. issuing notes payable

C. purchasing investments

D. acquiring long-term assets

62. if ending inventory is understated for year 1, then in year 2:

A. cost of goods sold and gross profit will both be understated

B. cost of goods sold will be understated and gross profit will be overstated

C. cost of goods sold will be overstated and gross profit will be understated

D. cost of goods sold and gross profit will both be overstated

66. notes payable due in 6 months are reported as:

A. current assets on the balance sheet

B. long-term liabilities on the balance sheet

C. current liabilities on the balance sheet

D. a reduction to notes receivable on the balance sheet

74. When preparing the financial statements, why is the income statement prepared first?

A. the income statement is used to prepare the balance sheet

B. net income or net loss from the income statement is used for the statement of retained earnings

C. the income statement is easiest to prepare

D. the income statement is the most important statement to investors and creditors

Explanation / Answer

40)

C. return on assets.

Explanation: return on asset is the profitability ratio which reflects the how efficiently the organisation is using its assets to generate profit.

46)

A. fair market value of the asset

The most appropriate basis for valuation of the asset acquired by issuing stock is the fair value of the consideration received and hence the asset should be recorded at fair market value in the books of the company.

48)

A. note receivable and note payable

The debtor will record the note as note payable ( as the debtor has to pay the due to the creditor), whereas the same note will be recorded by the creditor as the notes recivable (as the creditor will receive the due amount from the debtor).

50.

D. subtract expenses from the related revenues to compute net income or net loss

The expense recognition priciple states that the expenses should be recognised in the same period as the revenues to which they relate.

51)

C. interest must be paid regardless of the level of earnings

In case of common stock, the company does not have an commitment to the common stock holders to pay a stipulated dividend (as if happened in case of pref shareholders, especially the cumulative one). But when the company issues bond, the company is under legal obligation to honour the commitment to pay the coupon rate of interest to the bond, irrespective of the level of earning of the company.

57)

D. the cash is received after the revenue is recorded

Revenue is accrued when the service or goods have been provided and recorded in the books of account as an accrued asset (because cash is yet to be paid) against the revenue account. Therefore in case of accured revenue cash is received after the revenue is recorded.

60)

B. issuing notes payable

Lending money is an investing activity in the sense that the company will earn an interest from it.

Financing activities typically involves the borrowing of money issuing shares, bonds of note payable (usually long term) and paying of dividends on the shares issued and outstanding as well as repayment of borrowed capital.

62)

B. cost of goods sold will be understated and gross profit will be overstated

Cost of goods sold = beginning inventory + purchase/cost of production - ending inventory

and

gross profit = sales - cost of goods sold

when opening stock (year 1 ending inventory is the beginning inventory of year 2) is understated then cost of goods sold will be understated and consequently gross profit will be overdtated.

66)

C. current liabilities on the balance sheet

Financial obligation due within 12 months are recorded as the current liability in the balance sheet, even if it is a part of the long term financial obligation.

74)

B. net income or net loss from the income statement is used for the statement of retained earnings

Balance sheet is the statement of assets and liabilities plus the owner’s equity. To prepare the owner's equity section we need to prepare the retained earning statements as retained earnings is a part of owner’s equity. Retained earnings depend on the net income earned by the company during the year for which the balance sheet is being prepared. Therefore the income statement must have to be prepared before the balance sheet so that the owner's equity at the end of the year can be calculated.

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