1-16 True or False
Problem 1. The future value of a single amount is the value at a future date of a given amount invested assuming compound interest.
Problem 2. Discounting of present or future values may be done on an annual basis or over shorter periods of time such as semiannually.
Problem 3. Special journals are used to record unique transactions which do not occur very often.
Problem 4. Using special journals can save time in posting because column totals are often posted rather than individual entries.
Problem 5. The statement of cash flows is a required statement that must be prepared along with an income statement, balance sheet, and retained earnings statement.
Problem 6. Non-cash investing and financing activities must be reported in the body of a statement of cash flows.
Problem 7. The sale of land for cash would be classified as a cash inflow from an investing activity.
Problem 8. All major financing and investing activities affect cash.
Problem 9. Cash provided by operations is generally equal to operating income.
Problem 10. Intra-company comparisons of the same financial statement items can often detect changes in financial relationships and significant trends.
Problem 11. Measures of a company's liquidity are concerned with the frequency and amounts of dividend payments.
Problem 12. Horizontal analysis is a technique for evaluating a financial statement item in the current year with other items in the current year.
Problem 13. If a company has sales of $110 in 2002 and $143 in 2003, the percentage increase in sales from 2002 to 2003 is 130%.
Problem 14. In horizontal analysis, if an item has a negative amount in the base year, and a positive amount in the following year, no percentage change for that item can be computed.
Problem 15. Common size analysis expresses each item within a financial statement in terms of a percent of a base amount.
Problem 16. A contingent liability is a liability that may occur if some future event takes place.
Problem 17. The statement of cash flows
a. must be prepared on a daily basis.
b. summarizes the operating, financing, and investing activities of an entity.
c. is another name for the income statement.
d. is a special section of the income statement.
Problem 18. The primary purpose of the statement of cash flows is to
a. provide information about the investing and financing activities during a period.
b. prove that revenues exceed expenses if there is a net income.
c. provide information about the cash receipts and cash payments during a period.
d. facilitate banking relationships.
Problem 19. If a company reports a net loss, it
a. may still have a net increase in cash.
b. will not be able to pay cash dividends.
c. will not be able to get a loan.
d. will not be able to make capital expenditures.
Problem 20. Cash equivalents do not include
a. short-term corporate notes.
b. treasury bills.
c. money market funds.
d. 2-year certificate of deposits.
Problem 21. The acquisition of land by issuing common stock is
a. a noncash transaction which is not reported in the body of a statement of cash flows.
b. a cash transaction and would be reported in the body of a statement of cash flows.
c. a noncash transaction and would be reported in the body of a statement of cash flows.
d. only reported if the statement of cash flows is prepared using the direct method.
Problem 22. The order of presentation of activities on the statement of cash flows is
a. operating, investing, and financing.
b. operating, financing, and investing.
c. financing, operating, and investing.
d. financing, investing, and operating.
Problem 23. Generally, the most important category on the statement of cash flows is cash flows from
a. operating activities.
b. investing activities.
c. financing activities.
d. significant noncash activities.
Problem 24. The category that is generally considered to be the best measure of a company's ability to continue as a going concern is
a. cash flows from operating activities.
b. cash flows from investing activities.
c. cash flows from financing activities.
d. usually different from year to year.
Problem 25. Of the items below, the one that appears first on the statement of cash flows is
a. noncash investing and financing activities.
b. net increase (decrease) in cash.
c. cash at the end of the period.
d. cash at the beginning of the period.
Problem 26. If accounts receivable have increased during the period,
a. revenues on an accrual basis are less than revenues on a cash basis.
b. revenues on an accrual basis are greater than revenues on a cash basis.
c. revenues on an accrual basis are the same as revenues on a cash basis.
d. expenses on an accrual basis are greater than expenses on a cash basis.
Problem 27. Which one of the following affects cash during a period?
a. Recording depreciation expense
b. Declaration of a cash dividend
c. Write-off of an uncollectible account receivable
d. Payment of an accounts payable
Problem 28. Which of the following adjustments to convert net income to net cash provided by operating activities is not added to net income?
a. Gain on Sale of Equipment
b. Depreciation Expense
c. Patent Amortization Expense
d. Depletion Expense
Problem 29. The statement of cash flows
a. is prepared instead of an income statement under generally accepted accounting principles.
b. is used to assess an entity's ability to pay dividends and meet obligations.
c. is prepared from comparative income statements.
d. reflects earnings per share figures on a cash basis and on an accrual basis in the body of the statement.
Problem 30. In preparing the statement of cash flows, determining the net increase or decrease in cash requires the use of
a. the adjusted trial balance.
b. the current period's retained earnings statement.
c. a comparative balance sheet.
d. a comparative income statement.
Problem 31. Cash receipts from customers are greater than sales revenues when there is a(n)
a. increase in accounts receivable.
b. decrease in accounts receivable.
c. increase in cost of goods sold.
d. decrease in cost of goods sold.
Problem 32. Which one of the following is not a characteristic generally evaluated in analyzing financial statements?
a. Liquidity
b. Profitability
c. Marketability
d. Solvency
Problem 33. A stockholder is interested in the ability of a firm to
a. pay consistent dividends.
b. appreciate in share price.
c. survive over a long period.
d. all of these.
Problem 34. Comparisons of financial data made within a company are called
a. intracompany comparisons.
b. interior comparisons.
c. intercompany comparisons.
d. intramural comparisons.
Problem 35. Horizontal analysis is a technique for evaluating a series of financial statement data over a period of time
a. that has been arranged from the highest number to the lowest number.
b. that has been arranged from the lowest number to the highest number.
c. to determine which items are in error.
d. to determine the amount and/or percentage increase or decrease that has taken place.
Problem 36. Assume the following sales data for a company:
2004 $1,200,000
2003 1,020,000
2002 840,000
2001 600,000
If 2001 is the base year, what is the percentage increase in sales from 2001 to 2003?
a. 100.0%
b. 160.0%
c. 70.0%
d. 62.5%
Problem 37. Under which of the following cases may a percentage change be computed?
a. The trend of the balances is decreasing but all balances are positive.
b. There is no balance in the base year.
c. There is a negative balance in the base year and a negative balance in the subsequent year.
d. There is a negative balance in the base year and a positive balance in the subsequent year.
Problem 38. In common size analysis,
a. a base amount is required.
b. a base amount is optional.
c. the same base is used across all financial statements analyzed.
d. the results of the horizontal analysis are necessary inputs for performing the analysis.
Problem 39. Walker Clothing Store had a balance in the Accounts Receivable account of $390,000 at the beginning of the year and a balance of $410,000 at the end of the year. Net credit sales during the year amounted to $4,000,000. The average collection period of the receivables in terms of days was
a. 30 days.
b. 365 days.
c. 73 days.
d. 37 days.
Problem 40. Profit margin is calculated by dividing
a. sales by cost of goods sold.
b. gross profit by net sales.
c. net income by stockholders' equity.
d. net income by net sales.
Problem 41. A weakness of the current ratio is
a. the difficulty of the calculation.
b. that it doesn't take into account the composition of the current assets.
c. that it is rarely used by sophisticated analysts.
d. that it can be expressed as a percentage, as a rate, or as a proportion.
Problem 42. If the average collection period is 30 days, what is the receivables turnover?
a. 11.1 times
b. 12.2 times
c. 6.1 times
d. None of these
Problem 43. A successful grocery store would probably have
a. a low inventory turnover.
b. a high inventory turnover.
c. zero profit margin.
d. low volume.
Problem 44. The discontinued operations section of the income statement refers to
a. discontinuance of a product line.
b. the income or loss on products that have been completed and sold.
c. obsolete equipment and discontinued inventory items.
d. the disposal of a significant segment of a business.
Problem 45. If an item meets one (but not both) of the criteria for an extraordinary item, it
a. only needs to be disclosed in the footnotes of the financial statements.
b. may be treated as sales revenue (if it is a gain) and as an operating expense (if it is a loss).
c. is reported as an "other revenue or gain" or "other expense and loss," net of tax.
d. is reported at its gross amount as an "other revenue or gain" or "other expense or loss."
Problem 46. When equipment is sold for cash, the amount received is reflected as a cash
a. inflow in the operating section.
b. inflow in the financing section.
c. inflow in the investing section.
d. outflow in the operating section.
Problem 47. The statement of cash flows will not report the
a. amount of checks outstanding at the end of the period.
b. sources of cash in the current period.
c. uses of cash in the current period.
d. change in the cash balance for the current period.
The corporate charter of Gordon Corporation allows the issuance of a maximum of 2,000,000 shares of $1 par value common stock. During its first three years of operation, Gordon issued 1,200,000 shares at $15 per share. It later acquired 30,000 of these shares as treasury stock for $20 per share.
Instructions
Based on the above information, answer the following questions:
Problem 48. How many shares were authorized?
Problem 49. How many shares were issued?
Problem 50. How many shares are outstanding?
Problem 51. What is the balance of the Common Stock account?
Problem 52. What is the balance of the Treasury Stock account?
Selected data for Nancy's Store appear below.
2003 2002
Net sales $800,000 $520,000
Cost of goods sold 600,000 345,000
Inventory at end of year 65,000 85,000
Accounts receivable at end of year 90,000 70,000
Instructions:
Compute the following for 2003:
Problem 53. Gross profit rate.
Problem 54. Inventory turnover.
Problem 55. Receivables turnover.
Comparative information taken from the Wells Company financial statements is shown below:
2003 2002
Problem 56. Accounts receivable 182,000 140,000
Problem 57. Sales 900,000 750,000
Problem 58. Operating expenses 170,000 200,000
Instructions:
Using horizontal analysis, show the percentage change from 2002 to 2003 with 2002 as the base year for each of the listed accounts.
Selected transactions of Elway Company are listed below.
Problem 59. Interest on a short-term note receivable is collected.
Problem 60. Land is sold for cash at book value.
Problem 61. Cash is paid to purchase inventory.
Problem 62. Equipment is purchased by signing a 3-year, 10% note payable.
Problem 63. Cash dividends on common stock are declared and paid.
Problem 64. 100 shares of XYZ common stock are purchased for cash.
Problem 65. Merchandise is sold to customers for cash.
Problem 66. Bonds payable are converted into common stock.
Instructions:
Classify each transaction as either (a) an operating activity, (b) an investing activity, (c) a financing activity, or (d) a noncash investing and financing activity.