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Sample Test

Chapter 03

The Balance Sheet and Financial Disclosures

 

True / False Questions

1.	The balance sheet reports a company’s financial position at a point in time. True    False

 

2.	A company’s market value is generally less than its book value. True    False

 

3.	All current assets are either cash or assets that will be converted into cash or consumed within 12 months or the operating cycle, whichever is longer. True    False

 

4.	The balance of net receivables represents the amount expected to be collected. True    False

 

5.	Prepaid expenses are classified as current assets if the services purchased are expected to expire within 12 months or the operating cycle, whichever is longer. True    False

 

6.	Assets classified as property, plant, and equipment include machinery, equipment, and inventories. True    False

 

7.	Intangible assets usually are reported in the balance sheet as current assets. True    False

 

8.	Accrued salaries and wages in a balance sheet represent salaries and wages that have been earned by employees but not yet paid. True    False

 

9.	The criteria for determining which items comprise cash equivalents often is disclosed in the summary of significant accounting policies. True    False

 

10.	Payment terms, interest rates, and other details of long-term liabilities usually are reported in disclosure notes. True    False

 

11.	Subsequent events are significant developments that take place after a firm’s year-end, and after the financial statements are issued or available to be issued. True    False

 

12.	Illegal acts will only need to be disclosed if the impact of the act is material. True    False

 

13.	The ultimate responsibility for the financial statements lies with the auditors. True    False

 

14.	The compensation of top executives is disclosed in the proxy statement. True    False

 

15.	Horizontal analysis involves expressing each item in the financial statements as a percentage of an appropriate total, or base amount, within the same year. True    False

 

16.	Liquidity refers to the riskiness of a company with regard to the amount of liabilities in its capital structure. True    False

 

17.	A payment on account has no effect on working capital but will increase the current ratio if it is already greater than 1.0. True    False

 

18.	Segment reporting requires disclosure of each customer that accounts for more than 5% of total enterprise revenue. True    False

 

 

Multiple Choice Questions

19.	The balance sheet reports: A. Net income at a point in time.   B. Cash flows for a period of time.   C. Assets and equities at a point in time.   D. Assets and liabilities for a period of time.

 

20.	Current assets include cash and all other assets expected to become cash or be consumed: A. Within one year.   B. Within one operating cycle.   C. Within one year or one operating cycle, whichever is shorter.   D. Within one year or one operating cycle, whichever is longer.

 

21.	Red Onion Restaurant would classify a six-month prepaid insurance policy as: A. Property, plant, and equipment.   B. Investment.   C. Current asset.   D. Goodwill.

 

22.	An asset that is generally not expected to be converted to cash or consumed within one year or the operating cycle is: A. Building.   B. Accounts receivable.   C. Inventory.   D. Supplies.

 

23.

Long-term solvency refers to: A. The efficiency with which a company manages its resources.   B. The profitability of a company for a period of time.   C. The amount of current assets relative to long-term assets.   D. The riskiness of a company with regard to the amount of liabilities in its capital structure.

 

24.	Which is a shareholders’ equity account in the balance sheet? A. Accumulated depreciation.   B. Paid-in capital.   C. Salaries payable.   D. Accounts receivable.

 

25.	Rent collected in advance is: A. An asset account in the balance sheet.   B. A liability account in the balance sheet.   C. A shareholders’ equity account in the balance sheet.   D. A temporary account, not in the balance sheet at all.

 

26.	Notes payable that are due in two years are: A. Current liabilities.   B. Long-term intangible assets.   C. Long-term liabilities.   D. Long-term investments.

 

27.	Which of the following is never a current liability account? A. Accrued payroll.   B. Dividends payable.   C. Prepaid rent.   D. Subscriptions collected in advance from customers.

 

28.	New Oaks Winery requires two months to make wine, two years to age it, one month to bottle it, two months to sell it, and one month to collect the receivable. Its operating cycle is: A. Twelve months.   B. Thirty months.   C. Six months.   D. Three months.

 

29.	Long-term assets generally include: A. Inventory held for sale.   B. Prepaid rent.   C. Accounts receivable.   D. Land held for a possible future plant site.

 

30.	Listed below are year-end account balances (in $ millions) taken from the records of Symphony Stores.   Debit Credit Accounts receivable–trade 730   Building and equipment 920   Cash–checking 34   Interest receivable 30   Inventory 16   Land 150   Notes receivable (long-term) 450   Petty cash fund 5   Prepaid rent 20   Supplies 8   Trademark 40   Accounts payable–trade   560 Accumulated depreciation    80 Additional paid-in capital   485 Allowance for uncollectible accounts   20 Cash dividends payable   30 Common stock, at par   15 Income tax payable   65 Notes payable (long-term)   800 Retained earnings   308 Deferred revenues    40       TOTALS  2,403 2,403 What would Symphony report as total current assets? A. $823.   B. $838.   C. $843.   D. $1,696.
31.	Listed below are year-end account balances (in $ millions) taken from the records of Symphony Stores.   Debit  Credit Accounts receivable–trade 730   Building and equipment 920   Cash–checking 34   Interest receivable 30   Inventory 16   Land 150   Notes receivable (long-term) 450   Petty cash fund 5   Prepaid rent 20   Supplies 8   Trademark 40   Accounts payable–trade   560 Accumulated depreciation    80 Additional paid-in capital   485 Allowance for uncollectible accounts   20 Cash dividends payable   30 Common stock, at par   15 Income tax payable   65 Notes payable (long-term)   800 Retained earnings   308 Deferred revenues    40       TOTALS  2,403 2,403 What would Symphony report as total assets? A. $2,338.   B. $2,323.   C. $2,318.   D. $2,303.
32.	Listed below are year-end account balances (in $ millions) taken from the records of Symphony Stores.   Debit  Credit Accounts receivable–trade 730   Building and equipment 920   Cash–checking 34   Interest receivable 30   Inventory 16   Land 150   Notes receivable (long-term) 450   Petty cash fund 5   Prepaid rent 20   Supplies 8   Trademark 40   Accounts payable–trade   560 Accumulated depreciation    80 Additional paid-in capital   485 Allowance for uncollectible accounts   20 Cash dividends payable   30 Common stock, at par   15 Income tax payable   65 Notes payable (long-term)   800 Retained earnings   308 Deferred revenues    40       TOTALS  2,403 2,403 What would Symphony report as total shareholders’ equity? A. $323.   B. $808.   C. $838.   D. $928.
33.	Listed below are year-end account balances (in $ millions) taken from the records of Symphony Stores.   Debit  Credit Accounts receivable–trade 730   Building and equipment 920   Cash–checking 34   Interest receivable 30   Inventory 16   Land 150   Notes receivable (long-term) 450   Petty cash fund 5   Prepaid rent 20   Supplies 8   Trademark 40   Accounts payable–trade   560 Accumulated depreciation    80 Additional paid-in capital   485 Allowance for uncollectible accounts   20 Cash dividends payable   30 Common stock, at par   15 Income tax payable   65 Notes payable (long-term)   800 Retained earnings   308 Deferred revenues    40       TOTALS  2,403 2,403 What is the amount of working capital for Symphony? A. $98.   B. $143.   C. $128.   D. $113.

 

34.	Assets do not include: A. Property, plant, and equipment.   B. Investments.   C. Paid-in capital.   D. Unexpired insurance.

 

35.	Cash equivalents would not include: A. Cash not available for current operations.   B. Money market funds.   C. U.S. treasury bills.   D. Bank drafts.

 

36.	Cash equivalents would include: A. Highly liquid equity securities.   B. Accounts receivable from a financial institution.   C. Restricted funds for bonds that mature in three years.   D. Debt instruments with maturity dates of less than three months from the date of the purchase.

 

37.	Accrued liabilities: A. Are generally paid in services rather than cash.   B. Result from payment before services are received.   C. Result from services received before payment.   D. Are deferred charges to expense.

 

38.

Janson Corporation Co.’s trial balance included the following account balances at December 31, 2016: Accounts receivable $12,000 Inventories 40,000 Patent 12,000 Investments 30,000 Prepaid insurance 6,000 Note receivable, due 2019 50,000 Investments consist of treasury bills that were purchased in November and mature in January. Prepaid insurance is for the next two years. What amount should be included in the current asset section of Janson’s December 31, 2016, balance sheet? A. $88,000.   B. $85,000.   C. $55,000.   D. $135,000.

 

39.

Janson Corporation Co.’s trial balance included the following account balances at December 31, 2016: Accounts payable $25,000 Bond payable, due 2025 22,000 Salaries payable 16,000 Note payable, due 2017 20,000 Note payable, due 2021 40,000 What amount should be included in the current liability section of Janson’s December 31, 2016, balance sheet? A. $63,000.   B. $41,000.   C. $61,000.   D. $101,000.

 

40.	The usual difference between accounts payable and notes payable is: A. Legally enforceable debt.   B. Current-noncurrent classification.   C. Known payment terms.   D. Explicitly stated interest.

 

41.	Which of the following would be disclosed in the summary of significant accounting policies disclosure note?     Compositionof Long-term debt Depreciation Method a. No Yes b. Yes No c. Yes Yes d. No No     A. Option a   B. Option b   C. Option c   D. Option d

 

42.	Which of the following is not a required disclosure for related-party transactions? A. The nature of the relationship.   B. A description of the transactions.   C. The amounts due from or to related parties.   D. The impact of the transactions on current year’s income.

 

43.	Disclosure notes would not include: A. Depreciation methods used and estimated useful life.   B. Definition of cash equivalents.   C. Details of pension plans.   D. Data to adjust the financial statements so that they are not misleading.

 

44.	The principal concern with accounting for related-party transactions is: A. The size of the transactions.   B. Differences between economic substance and legal form.   C. The absence of legally binding contracts.   D. The lack of accurate data to record transactions.

 

45.

A subsequent event for an entity with a December 31, 2016, year-end would not include: A. A change in the estimated useful lives of equipment in January 2017.   B. An issuance of bonds in January 2017.   C. An acquisition of another company in January 2017.   D. A major uncertainty at December 31, resolved in January 2017.

 

46.

How are management’s responsibility and the auditors’ opinion on internal controls represented in the standard auditor’s report?   Management  Responsibility Auditors’ Responsibility a. Implicitly Explicitly b. Explicitly Explicitly c. Implicitly Implicitly d. Explicitly Implicitly     A. Option a   B. Option b   C. Option c   D. Option d

 

47.

The final paragraph of the audit report: A. Provides the auditors’ opinion on the fairness of the financial statements.   B. Provides the auditor’s opinion on the effectiveness of internal control.   C. Describes the scope of the audit.   D. States management’s responsibility for the financial statements.

 

48.	The Management Discussion and Analysis section of the annual report can best be described as: A. Frank but objective.   B. Independent but precise.   C. Legalistic and lengthy.   D. Biased but informative.

 

49.	An example of fraud would be: A. Issuing a purchase order without first securing bids.   B. Buying raw materials from an affiliated company.   C. Knowingly classifying a material noncurrent receivable as a current receivable.   D. Forgetting to accrue salaries and wages payable.

 

50.	An example of an error would be: A. Purchasing inventory from a related party.   B. Counting an inventory item twice when taking a physical inventory.   C. Holding back invoices so that accounts payable are understated.   D. Receiving kickbacks in exchange for issuing a purchase order to a vender.

 

51.	An exception that is so serious that even a qualified opinion is not justified would result in: A. A disclaimer.   B. An unqualified opinion.   C. An adverse opinion.   D. A consistency exception.

 

52.	Liquidity refers to: A. The amount of cash on hand at a given time.   B. The readiness of an asset to be converted to cash.   C. The period until cash is used and refinancing becomes necessary.   D. Financial leverage.

 

53.	Lack of long-term solvency refers to: A. Risk of nonpayment relative to liabilities in the capital structure.   B. The length of time before long-term debt becomes due.   C. The ability to refinance long-term debt when it becomes due.   D. Long-term assets.

 

54.	The current ratio is calculated as: A. Current assets divided by noncurrent assets.   B. Current assets divided by total assets.   C. Current assets divided by current liabilities.   D. Current assets divided by total liabilities.

 

55.	The acid-test ratio is also known as the: A. Current ratio.   B. Debt to equity ratio.   C. Times interest earned ratio.   D. Quick ratio.

 

56.	The quick ratio is: A. The liquidity ratio divided by the equity ratio.   B. Current assets minus inventory divided by current liabilities minus accounts payable.   C. Current assets minus inventory and prepaid items divided by current liabilities.   D. Cash divided by accounts payable.

 

57.	Working capital is equal to: A. Current assets.   B. Current liabilities.   C. Current assets plus current liabilities.   D. Current assets minus current liabilities.

 

58.	Which of the following is not a financing ratio? A. Times interest earned ratio.   B. Debt to equity ratio.   C. Current ratio.   D. Return on shareholders’ equity.

 

59.	When a company pays its bill from a plumber for previous services on account: A. Its debt to equity ratio always decreases.   B. Its acid-test ratio always remains unchanged.   C. Its current ratio always remains unchanged.   D. Its return on shareholders’ equity always decreases.

 

60.	When a company accrues federal income taxes at the end of the accounting period: A. Its acid-test ratio increases.   B. Its current ratio increases.   C. Its debt to equity ratio decreases.   D. Its debt to equity ratio increases.

 

61.	Assume a company’s liquidity ratios all are less than 1.0 before it purchases inventory on credit. When it makes the purchase: A. Its current ratio decreases.   B. Its quick ratio decreases.   C. Its current ratio remains unchanged.   D. Its quick ratio remains unchanged.

 

62.	When a company sells land for cash and recognizes a $25,000 gain: A. Its acid-test ratio decreases.   B. Its current ratio decreases.   C. Its debt to equity ratio decreases.   D. Cannot determine from the given information.

 

63.

The following partial balance sheet ($ in thousands) for Paisano Seafood Inc. is shown below. Current assets:     Current liabilities:              Cash $ 60    Accounts payable $240  Accounts receivable (net) 170    Other liabilities     80  Notes receivable 50    Total current liabilities 320  Inventories 200    Long-term liabilities 110  Prepaid expenses  25         Total liabilities 430      Total current assets 505    Shareholders’ equity:    Plant assets (net) 255    Capital stock 150        Retained earnings  180        Total shareholders’ equity  330 Total assets $760    Total liabilities and equity $760 The current ratio is (rounded): A. 1.98.   B. 1.58.   C. 1.17.   D. 0.66.

 

64.

The following partial balance sheet ($ in thousands) for Paisano Seafood Inc. is shown below. Current assets:     Current liabilities:              Cash $ 60    Accounts payable $240  Accounts receivable (net) 170    Other liabilities     80  Notes receivable 50    Total current liabilities 320  Inventories 200    Long-term liabilities  110  Prepaid expenses  25         Total liabilities  430      Total current assets 505    Shareholders’ equity:    Plant assets (net) 255    Capital stock 150        Retained earnings  180        Total shareholders’ equity  330 Total assets $760    Total liabilities and equity $760 Working capital is: A. $505.   B. $265.   C. $185.   D. $75.

 

65.

The following partial balance sheet ($ in thousands) for Paisano Seafood Inc. is shown below. Current assets:     Current liabilities:              Cash $ 60    Accounts payable $240  Accounts receivable (net) 170    Other liabilities   80  Notes receivable 50    Total current liabilities 320  Inventories 200    Long-term liabilities 110  Prepaid expenses  25         Total liabilities 430      Total current assets 505    Shareholders’ equity:    Plant assets (net) 255    Capital stock 150        Retained earnings  180        Total shareholders’ equity 330 Total assets $760    Total liabilities and equity $760 Quick assets total: A. $60.   B. $230.   C. $280.   D. $305.

 

66.

The following partial balance sheet ($ in thousands) for Paisano Seafood Inc. is shown below. Current assets:     Current liabilities:              Cash $ 60    Accounts payable $240  Accounts receivable (net) 170    Other liabilities     80  Notes receivable 50    Total current liabilities 320  Inventories 200    Long-term liabilities  110  Prepaid expenses  25         Total liabilities  430      Total current assets 505    Shareholders’ equity:    Plant assets (net) 255    Capital stock 150        Retained earnings  180        Total shareholders’ equity  330 Total assets $760    Total liabilities and equity $760 The acid-test ratio is (rounded): A. 0.25.   B. 0.88.   C. 1.17.   D. 1.58.

 

67.

Recent financial statement data for Harmony Health Foods (HHF) Inc. is shown below. Current liabilities $   180   Income before interest and taxes $ 125 10% Bonds, long-term      360   Interest expense      36 Total liabilities     540   Income before tax 89 Shareholders’ equity     Income tax     27 Capital stock 200   Net income $  62 Retained earnings     280       Total shareholders’ equity    480       Total liabilities and equity $1,020       HHF’s debt to equity ratio is (rounded): A. 0.75.   B. 1.13.   C. 0.53.   D. 1.80.

 

68.

Recent financial statement data for Harmony Health Foods (HHF) Inc. is shown below. Current liabilities $   180   Income before interest and taxes $ 125 10% Bonds, long-term     360   Interest expense      36 Total liabilities    540   Income before tax 89 Shareholders’ equity     Income tax     27 Capital stock 200   Net income $  62 Retained earnings     280       Total shareholders’ equity    480       Total liabilities and equity $1,020       HHF’s times interest earned ratio is (rounded): A. 3.47.   B. 1.73.   C. 2.47.   D. 10.0.

 

69.

Recent financial statement data for Harmony Health Foods (HHF) Inc. is shown below. Current liabilities $   180   Income before interest and taxes $ 125 10% Bonds, long-term    360   Interest expense    36 Total liabilities   540   Income before tax 89 Shareholders’ equity     Income tax     27 Capital stock 200   Net income $  62 Retained earnings     280       Total shareholders’ equity    480       Total liabilities and equity $1,020       HHF’s long-term debt to equity ratio equity is: A. 133.3%.   B. 75%.   C. 180%.   D. 0%.

 

70.	Which of the following is not a required segment reporting disclosure according to U.S. GAAP? A. Segment profit or loss.   B. Segment assets.   C. Segment liabilities.   D. General information about the operating segment.

 

71.	Which of the following is not a required segment reporting disclosure according to International Financial Reporting Standards? A. Segment profit or loss.   B. Segment assets.   C. Segment liabilities.   D. All are required disclosures.

 

72.

Which of the following is not a characteristic that defines a reportable operating segment according to U.S. GAAP? A. Operating results are regularly reviewed by the enterprise’s chief operating officer.   B. Discrete financial information is available.   C. Engages in business activities from which it may recognize revenues and incur expenses.   D. Represents more than 20% of total company revenues, assets, or net income.

 

 

Matching Questions

73.

Listed below are 5 terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the correct term.   1. Unqualified opinion a. Independent and professional report about the fairness of the financial statements.   2. Disclaimer   3. Auditors’ report b. Given by an auditor when there is a limitation of audit procedures or a departure from GAAP.   4. Qualified opinion   5. Adverse opinion c. Given by an auditor when financial statements are presented fairly in conformity with GAAP.         d. Given by an auditor when there are substantial reporting errors and a qualified opinion is not appropriate.         e. Given by an auditor when information is insufficient to express an opinion.

 

74.

Listed below are 5 terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the correct term.   1. Current ratio a. Also known as the quick ratio.   2. Acid-test ratio b. Refers to riskiness of a company with regard to the amount of liabilities in its capital structure.   3. Long-term solvency   4. Liquidity c. Relates to the amount of time before an asset is converted to cash or a liability is paid.   5. Debt to equity ratio     d. If four to one, 80% of assets are debt-financed.     e. Current assets divided by current liabilities.

 

75.

Listed below are 5 terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the correct term.   1. Long-term liabilities a. Obligations payable in more than one year or longer than the operating cycle.   2. Current liabilities   3. Intangible asset b. Ownership of an exclusive right.   4. Current assets c. Items expected to be converted to cash or consumed within one year or the operating cycle.   5. Property, plant, and equipment     d. Obligations payable within one year or the operating cycle.     e. Includes buildings and land used in operations.

 

76.

Listed below are 5 terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the correct term.   1. Notes receivable a. Insurance premiums paid in advance.   2. Short-term investments b. Goods to be sold in the ordinary course of business.   3. Inventories   4. Accounts receivable c. Due from customers in the ordinary course of business.   5. Prepaid expenses     d. Formal agreement that specifies customer’s payment terms.     e. Liquid investments not classified as cash equivalents.

 

77.

Listed below are 5 terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the correct term.   1. Subsequent events a. Management’s views on its operations, liquidity, and capital resources.   2. Proxy statement   3. MD&A b. Includes disclosures of executive compensation.   4. Auditors’ report c. Independent and professional opinion about the fairness of the financial statements.   5. Summary of significant accounting policies   d. Occurs after the fiscal year-end, but before the statements are issued.         e. Information about the company’s choices from among various alternative accounting methods.

 

78.

Listed below are 5 terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the correct term.   1. Paid-in capital a. Accumulated net income less dividends since the inception of the corporation.   2. Accumulated deficit   3. Deferred revenue b. Cash received from a customer for goods or services to be provided in a future period.   4. Operating cycle   5. Retained earnings c. Converting cash to inventory to receivables to cash.     d. A negative retained earnings balance.     e. Amounts investedby shareholders in the corporation.

 

79.

Listed below are ten terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the correct term.   1. Related-party transactions a. Material events that occur after the end of the fiscal year and before the statements are issued.   2. Deferred revenues   3. Accounts receivable b. Obligations to suppliers of merchandise or of services purchased on account.   4. Inventories   5. Accounts payable c. Transactions with owners, managers, and affiliated companies.   6. Prepaid expense d. Net income less dividends since inception of the corporation.   7. Retained earnings e. Management’s views on significant events.   8. Subsequent events f. Amounts due from customers.   9. MD&A g. Goods to be sold in the ordinary course of business.   10. Franchise h. Asset recorded when an expense is paid for in advance.     i. Cash received from a customer in advance of providing a good or service.     j. An intangible asset.

 

 

 

 

 

Short Answer Questions

80.

Carter Appliances is preparing its annual report for the current fiscal year. The company’s controller has asked for your help in determining how best to disclose information about the following items: 1. A subsequent event. 2. Inventory costing method. 3. Composition of accrued liabilities. 4. Useful lives of depreciable assets. 5. Information on long-term leases. 6. Allowance for uncollectible accounts. 7. Revenue recognition policy. 8. Pension plans. Required: Indicate whether the above items should be disclosed (a) in the summary of significant accounting policies note, (b) in a separate disclosure note, or (c) on the face of the balance sheet

 

81.

As controller for Henderson, you are attempting to reconstruct and revise the following balance sheet prepared by a staff accountant. Henderson Manufacturing Company Balance Sheet At December 31, 2016 ($ in 000s)   Assets Current assets:     Cash   $ 1,600 Accounts receivable   4,300 Allowance for uncollectible accounts   (500) Finished goods inventory   5,000 Prepaid expenses    2,400       Total current assets   12,800 Noncurrent assets:       Investments   2,000   Raw materials and work in process inventory   3,200 Equipment   18,000 Accumulated depreciation–equipment   (8,000) Franchise           ? Total assets   $      ?   Liabilities and Shareholders’ Equity Current liabilities:     Accounts payable   $6,200 Note payable   8,000 Interest payable–note   200 Deferred revenue    2,400      Total current liabilities   16,800 Long-term liabilities:       Bonds payable   7,000   Interest payable–bonds   200 Shareholders’ equity:       Common stock $   ?     Retained earnings     ?       ?   Total liabilities and shareholders’ equity         ? Additionalinformation($in000s): 1. Certain records that included the account balances for the franchise and shareholders’ equity items were lost. However, a complete, preliminary balance sheet prepared before the records were lost showed a debt to equity ratio of 1.5. That is, total liabilities are 150% of total shareholders’ equity. Retained earnings at the beginning of the year was $4,300. Net income for 2016 was $2,500, and $800 in cash dividends were declared and paid to shareholders. 2. The investments represent treasury bills purchased in December 2016 that mature in January 2017. These are considered cash equivalents. 3. Interest on both the note and the bonds is payable annually. 4. The note payable is due in annual installments of $800 each. 5. Deferred revenue will be earned equally over the next 18 months. 6. The common stock represents 500,000 shares of no par stock authorized, 300,000 shares issued and outstanding. Required: Prepare a complete, corrected, classified balance sheet.

 

 

82.

You recently joined the internal auditing department of Kaitlyn Sportswear Corporation. As one of your first assignments, you are examining a balance sheet prepared by a staff accountant. Kaitlyn Sportswear Corporation Balance Sheet At December 31, 2016 Assets Current assets:     Cash   $   220,000  Accounts receivable, net   340,000   Note receivable   80,000   Inventories   600,000   Prepaid expenses          40,000  Total current assets   1,280,000 Other assets:       Land    $ 500,000     Buildings, net 2,200,000     Equipment, net 400,000     Investments 50,000     Patent      60,000    Total other assets     3,156,000     Total assets   $4,346,000 Liabilities and Shareholders’ Equity Current liabilities:     Accounts payable   $ 165,000   Salaries payable   75,000   Interest payable       45,000  Total current liabilities   285,000 Long-term liabilities:       Note payable $300,000     Bonds payable   500,000     Deferred revenue     80,000    Total long-term liabilities       880,000 Shareholders’ equity:       Common stock $2,000,000     Retained earnings  1,181,000     Total shareholders’ equity    3,181,000     Total liabilities and              shareholders’ equity   $4,346,000 In the course of your examination you uncover the following information pertaining to the balance sheet: 1. The land and buildings represent the corporate headquarters and manufacturing facilities. 2. The note receivable is due in 2018. The balance of $80,000 includes $5,000 of accrued interest. The next interest payment is due in July 2017. 3. The note payable is due in installments of $50,000 per year. Interest on both the notes and bonds is payable annually. 4. The company’s investments consist of marketable equity securities of other corporations. Management does not intend to liquidate any investments in the coming year. 5. Deferred revenue will be earned ratably (equally) over the next two years. Required: Identify and explain the deficiencies in the statement prepared by the company’s accountant. Include in your answer items that require additional disclosure, either on the face of the statement or in a note.

 

 

83.

Presented below is a partial trial balance for the Messenger Corporation at December 31, 2016. Account Title Debits Credits Cash and cash equivalents 30,000   Accounts receivable 195,000   Raw materials inventory 36,000   Note receivable 120,000   Interest receivable 4,000   Interest payable   7,000 Marketable securities 48,000   Land 100,000   Buildings 1,500,000   Accumulated depreciation–buildings   740,000 Work in process inventory 38,000   Finished goods inventory 98,000   Equipment 400,000   Accumulated depreciation–equipment   230,000 Franchise (net of amortization) 120,000   Prepaid insurance (for the next year) 60,000   Deferred revenue   48,000 Accounts payable   240,000 Note payable   500,000 Salaries payable   6,000 Cash restricted for payment of note Payable 100,000   Allowance for uncollectible accounts   24,000 Sales revenue   900,000 Cost of goods sold 500,000   Salaries expense 48,000   Additionalinformation: 1. The note receivable, along with any accrued interest, is due on November 1, 2017. 2. The note payable is due in 2021. Interest is payable annually. 3. The marketable securities consist of equity securities of other corporations. Management does not intend to sell any of the securities in the next year. 4. Deferred revenue will be earned equally over the next 18 months. Required: Determine the company’s working capital (current assets minus current liabilities) at December 31, 2016.

 

84.

The December 31, 2016, post-closing trial balance ($ in thousands) for Libby Corporation is presented below:    Debits Credits Cash 22,500   Investments (long-term) 55,000   Accounts receivable 30,000   Allowance for uncollectible accounts   7,500 Prepaid insurance 4,500   Inventories 100,000   Land 45,000   Buildings 140,000   Accumulated depreciation–buildings   50,000 Equipment 132,500   Accumulated depreciation–equipment   30,000 Patents (unamortized balance)  5,000   Accounts payable   37,500 Notes payable, due 2017   65,000 Interest payable   10,000 Bonds payable, due 2026   120,000 Common stock, no par, 20,000 shares authorized, issued, and outstanding   150,000 Retained earnings                64,500 Totals 534,500 534,500 Required: Prepare a classified balance sheet for Libby Corporation at December 31, 2016.

85.

The condensed balance sheet and income statement for Marjoram Company are presented below. Marjoram Company Balance Sheet At December 31, 2016 Cash $ 19,000 Temporary investments in marketable securities 35,000 Accounts receivable (net) 48,400 Merchandise inventory 70,600 Property, plant, and equipment (net) 250,000 Intangible assets   12,400       Total assets  $435,400     Current liabilities $108,400 11% Bonds payable, long-term 100,000 Paid-in capital 70,000 Retained earnings  157,000       Total liabilities and equity $435,400   Marjoram Company Income Statement For the Year ended December 31, 2016 Sales $704,000 Cost of goods sold  422,400 Gross profit $281,600 Operating expenses  166,200 Operating income $115,400 Interest expense    11,000 Income before income taxes $104,400 Income taxes    31,320      Net income $  73,080 Compute the current ratio for Marjoram Company. Round your answer to two decimal places.

 

86.

The condensed balance sheet and income statement for Marjoram Company are presented below. Marjoram Company Balance Sheet At December 31, 2016 Cash $ 19,000 Temporary investments in marketable securities 35,000 Accounts receivable (net) 48,400 Merchandise inventory 70,600 Property, plant, and equipment (net) 250,000 Intangible assets   12,400       Total assets  $435,400     Current liabilities $108,400 11% Bonds payable, long-term 100,000 Paid-in capital 70,000 Retained earnings  157,000       Total liabilities and equity $435,400   Marjoram Company Income Statement For the Year ended December 31, 2016 Sales $704,000 Cost of goods sold  422,400 Gross profit $281,600 Operating expenses  166,200 Operating income $115,400 Interest expense    11,000 Income before income taxes $104,400 Income taxes    31,320      Net income $  73,080 Compute the acid-test ratio for Marjoram Company. Round your answer to two decimal places.

 

87.

The condensed balance sheet and income statement for Marjoram Company are presented below. Marjoram Company Balance Sheet At December 31, 2016 Cash $ 19,000 Temporary investments in marketable securities 35,000 Accounts receivable (net) 48,400 Merchandise inventory 70,600 Property, plant, and equipment (net) 250,000 Intangible assets   12,400       Total assets  $435,400     Current liabilities $108,400 11% Bonds payable, long-term 100,000 Paid-in capital 70,000 Retained earnings  157,000       Total liabilities and equity $435,400   Marjoram Company Income Statement For the Year ended December 31, 2016 Sales $704,000 Cost of goods sold  422,400 Gross profit $281,600 Operating expenses  166,200 Operating income $115,400 Interest expense    11,000 Income before income taxes $104,400 Income taxes    31,320      Net income $  73,080 Compute the acid-test ratio for Marjoram Company. Round your answer to two decimal places.

88.

The condensed balance sheet and income statement for Marjoram Company are presented below. Marjoram Company Balance Sheet At December 31, 2016 Cash $ 19,000 Temporary investments in marketable securities 35,000 Accounts receivable (net) 48,400 Merchandise inventory 70,600 Property, plant, and equipment (net) 250,000 Intangible assets   12,400       Total assets  $435,400     Current liabilities $108,400 11% Bonds payable, long-term 100,000 Paid-in capital 70,000 Retained earnings  157,000       Total liabilities and equity $435,400   Marjoram Company Income Statement For the Year ended December 31, 2016 Sales $704,000 Cost of goods sold  422,400 Gross profit $281,600 Operating expenses  166,200 Operating income $115,400 Interest expense    11,000 Income before income taxes $104,400 Income taxes    31,320      Net income $  73,080 Compute the debt to equity ratio for Marjoram Company. Round your answer to two decimal places.

 

89.

The condensed balance sheet and income statement for Marjoram Company are presented below. Marjoram Company Balance Sheet At December 31, 2016 Cash $ 19,000 Temporary investments in marketable securities 35,000 Accounts receivable (net) 48,400 Merchandise inventory 70,600 Property, plant, and equipment (net) 250,000 Intangible assets   12,400       Total assets  $435,400     Current liabilities $108,400 11% Bonds payable, long-term 100,000 Paid-in capital 70,000 Retained earnings  157,000       Total liabilities and equity $435,400   Marjoram Company Income Statement For the Year ended December 31, 2016 Sales $704,000 Cost of goods sold  422,400 Gross profit $281,600 Operating expenses  166,200 Operating income $115,400 Interest expense    11,000 Income before income taxes $104,400 Income taxes    31,320      Net income $ 73,080 Compute the times interest earned ratio for Marjoram Company. Round your answer to two decimal places.

 

90.

The condensed balance sheet and income statement for Marjoram Company are presented below. Marjoram Company Balance Sheet At December 31, 2016 Cash $ 19,000 Temporary investments in marketable securities 35,000 Accounts receivable (net) 48,400 Merchandise inventory 70,600 Property, plant, and equipment (net) 250,000 Intangible assets   12,400       Total assets  $435,400     Current liabilities $108,400 11% Bonds payable, long-term 100,000 Paid-in capital 70,000 Retained earnings  157,000       Total liabilities and equity $435,400   Marjoram Company Income Statement For the Year ended December 31, 2016 Sales $704,000 Cost of goods sold  422,400 Gross profit $281,600 Operating expenses  166,200 Operating income $115,400 Interest expense    11,000 Income before income taxes $104,400 Income taxes    31,320      Net income $  73,080 Compute the return on shareholders’ equity ratio for Marjoram Company. Round your answer to two decimal places.

 

Chapter 05

Revenue Recognition and Profitability Analysis

 

True / False Questions

1.	Companies recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for those goods or services. True    False

 

2.	Companies always recognize revenue when goods or services are transferred to customers for the amount the company expects to receive in exchange for those goods or services. True    False

 

3.	“Determine whether it is probable the seller will collect the consideration it is entitled to receive” is one of the five steps to applying the core revenue recognition principle. True    False

 

4.	Staff Accounting Bulletin No. 101 was issued by the FASB to clarify its guidelines on revenue recognition. True    False

 

5.	A transfer of goods or services is complete when the customer has control over the goods or services. True    False

 

6.	Revenue always is recognized once the buyer has physical possession of goods. True    False

 

7.	Sellers should recognize revenue over time for a long term contract in which the seller is receiving periodic payments for progress to date but may need to refund those payments in the event the contract is cancelled. True    False

 

8.	A common output method used to measure progress towards completion is to compare cost incurred to date to total costs estimated to complete the job. True    False

 

9.	Revenue should be recognized over time for the construction of an annex to a building that the customer owns, even if the seller will not receive payment until the annex is completed. True    False

 

10.	A common output method used to measure progress towards completion is to determine the proportion of promised goods and services that have been transferred to date. True    False

 

11.	No allocation of contract price is required if the transaction involves a performance obligation to be satisfied over time. True    False

 

12.	The transaction price should be allocated to the contract’s performance obligations in proportion to the stand-alone selling prices of the performance obligations. True    False

 

13.	No allocation of contract price is required if the transaction involves multiple performance obligations that are satisfied at different points in time. True    False