Test Bank Ch5 ACCT

Financial Accounting, 10e (Libby)
Chapter 5 Communicating and Interpreting Accounting Information
1) External users of accounting information include decision makers such as investors, creditors,
and financial analysts.
Answer: TRUE
Explanation: Each of the identified decision makers uses accounting information in his/her
decision-making process.
Difficulty: 1 Easy
Topic: Accounting communication process - People
Learning Objective: 05-01 Recognize the people involved in the accounting communication
process (regulators, managers, directors, auditors, information intermediaries, and users), their
roles in the process, and the guidance they receive from legal and professional standards.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
2) The mission of the Securities & Exchange Commission (SEC) is to develop generally
accepted accounting principles.
Answer: FALSE
Explanation: The mission of the SEC is to protect investors and maintain the integrity of the
securities markets.
Difficulty: 1 Easy
Topic: Accounting communication process - Regulators
Bloom's: Remember
3) Independent auditors are advisors who analyze financial statements and other economic
information to formulate forecasts and stock recommendations.
Answer: FALSE
Explanation: Independent auditors provide an opinion with respect to the overall fairness of the
financial statements.
Difficulty: 1 Easy
Bloom's: Remember
1
Copyright © 2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written onsent of McGraw-Hill Education.
4) The Securities & Exchange Commission (SEC) oversees the work of the Financial
Accounting Standards Board (FASB).
Answer: TRUE
Explanation: The SEC has delegated the responsibility for setting GAAP to the FASB.
Difficulty: 1 Easy
Bloom's: Remember
5) The Financial Accounting Standards Board (FASB) oversees the work of the Public Company
Accounting Oversight Board (PCAOB).
Answer: FALSE
Explanation: The Securities & Exchange Commission (SEC) oversees the work of the Public
Company Accounting Oversight Board (PCAOB). The Financial Accounting Standards Board
(FASB) has authority to set generally accepted accounting principles (GAAP).
Difficulty: 1 Easy
Topic: Accounting communication process - Regulators; Accounting standard-setting - FASB
Bloom's: Remember
6) The Public Company Accounting Oversight Board (PCAOB) sets auditing standards for
independent auditors.
Answer: TRUE
Explanation: The Public Company Accounting Oversight Board (PCAOB) is responsible for
setting auditing standards for independent auditors.
Difficulty: 1 Easy
Bloom's: Remember
2
7) The primary responsibility for the information in a corporation's financial statements lies with
the chief executive officer (CEO) and the chief financial officer (CFO).
Answer: TRUE
Explanation: The CEO and the CFO are primarily responsible for the content of the financial
statements.
Difficulty: 1 Easy
Topic: Corporate governance
Bloom's: Remember
AACSB: Ethics
8) The audit committee of the board of directors is responsible for maintaining the integrity of a
company's financial statements and financial reporting.
Answer: TRUE
Explanation: The audit committee of the board of directors is responsible for ensuring that
processes are in place for maintaining the integrity of the company's accounting, financial
statement preparation, and financial reporting.
Difficulty: 1 Easy
Bloom's: Remember
AACSB: Ethics
9) The Securities & Exchange Commission requires publicly traded companies to have their
financial statements audited by their internal auditors.
Answer: FALSE
Explanation: The Securities & Exchange Commission requires a publicly traded company to
have its financial statements audited by an independent registered public accounting firm.
Difficulty: 1 Easy
Bloom's: Remember
3
10) Financial analysts utilize a company's financial reports to assist them in making earnings
forecasts and earnings per share projections.
Answer: TRUE
Explanation: Financial analysts utilize a company's financial reports to assist them in making
forecasts of earnings, earnings per share, and share prices, as well as buy and sell
recommendations.
Difficulty: 1 Easy
Bloom's: Remember
11) Corporate governance refers to the procedures designed to ensure that the company is
managed in the interest of the board of directors who oversee management.
Answer: FALSE
Explanation: Corporate governance refers to the procedures designed to ensure that the company
is managed in the interests of the shareholders.
Difficulty: 2 Medium
Bloom's: Remember
AACSB: Ethics
12) The fraud triangle conditions necessary for financial statement fraud to occur are the
existence of a system of internal control, the ability to invade the system, and rationalization to
commit the fraud.
Answer: FALSE
Explanation: The fraud triangle consists of incentive and opportunity to commit fraud, and
ability to rationalize the fraud misdeed.
Difficulty: 1 Easy
Bloom's: Remember
AACSB: Ethics
4
13) The form 10-Q contains an unaudited set of quarterly financial statements.
Answer: TRUE
Explanation: The form 10-Q is the quarterly report containing a condensed income statement
and balance sheet, marked as unaudited, that publicly traded companies must file with the SEC.
Difficulty: 1 Easy
Topic: Accounting communication process - SEC reporting
Learning Objective: 05-02 Identify the steps in the accounting communication process,
including the issuance of press releases, annual reports, quarterly reports, and SEC filings, as
well as the role of online information services in this process.
Bloom's: Remember
14) The form 10-K is the annual report that publicly traded companies must file with the
Securities & Exchange Commission (SEC).
Answer: TRUE
Explanation: The form 10-K is the annual report that publicly traded companies must file with
the SEC.
Difficulty: 1 Easy
Bloom's: Remember
15) Sales by major product category is a required financial statement disclosure.
Answer: FALSE
Explanation: Sales by major product category is a voluntary disclosure.
Topic: Financial statements - Disclosure notes
Bloom's: Remember
5
16) Information on all contractual agreements is included in notes as a financial statement
disclosure.
Answer: FALSE
Explanation: Information that impacts the company financially but is not shown on the financial
statements might include information about contractual agreements that do not result in an asset
or liability on the balance sheet. All contractual agreements are not included in financial
statement disclosures unless they are material to the fair presentation of the financial statements.
Difficulty: 1 Easy
Bloom's: Remember
17) Inventories are reported on the balance sheet as a current asset.
Answer: TRUE
Explanation: Current assets include cash, accounts receivable, inventories, and other assets that
will be used or turned into cash within one year from the date of the balance sheet.
Difficulty: 1 Easy
Topic: Financial statements - Balance sheet
Learning Objective: 05-03 Recognize and apply the different financial statement and disclosure
formats used by companies in practice and analyze the gross profit percentage.
Bloom's: Remember
18) Intangible assets are reported on the balance sheet as a current asset.
Answer: FALSE
Explanation: Current assets include cash, accounts receivable, inventories, and other assets that
will be used or turned into cash within one year from the date of the balance sheet. Intangible
assets have a long life and are reported as noncurrent assets.
Difficulty: 1 Easy
Bloom's: Remember
6
19) Intangible assets are reported on the balance sheet as noncurrent assets and include goodwill.
Answer: TRUE
Explanation: Intangible assets are reported as noncurrent assets and include patents, trademarks,
franchises, copyrights, and goodwill.
Difficulty: 1 Easy
Bloom's: Remember
20) Comparative financial statements are those of a company in one industry presented with
another company in the same industry.
Answer: FALSE
Explanation: Comparative financial statements are those of one company that simultaneously
present the current period and one or more prior periods.
Difficulty: 1 Easy
Bloom's: Remember
21) An intangible asset has no physical existence and no life.
Answer: FALSE
Explanation: An intangible asset has no physical existence and has a long life.
Difficulty: 1 Easy
Bloom's: Remember
7
22) The essence of reporting the gains on sales of investments separately on an income statement
is that they are not part of the primary operations of the reporting company.
Answer: TRUE
Explanation: Gains and losses on sales of investments are reported as nonoperating (other)
income because they do not pertain to the company's primary operations.
Difficulty: 1 Easy
Topic: Financial statements - Income statement
Bloom's: Remember
23) Net sales plus cost of goods sold is reported on the income statement as income from
continuing operations.
Answer: FALSE
Explanation: Net sales less cost of goods sold is gross profit and is a component of operating
income; income from continuing operations is an additional subtotal used when a company has
discontinued operations.
Difficulty: 1 Easy
Bloom's: Remember
24) Gains and losses on sales of investments are reported on the income statement as a
component of income from operations.
Answer: FALSE
Explanation: Gains and losses on sales of investments are reported in the income statement as
nonoperating (other) income (expense), after income from operations.
Bloom's: Remember
8
25) The summary of significant accounting policies is typically included as one of the first notes
to the financial statements.
Answer: TRUE
Explanation: One of the first disclosure notes is the summary of significant accounting policies.
Difficulty: 1 Easy
Bloom's: Remember
26) Preparers of the statement of cash flow must choose the direct or indirect method for each
classification category on the statement.
Answer: FALSE
Explanation: The choice of direct or indirect method is only for the Cash Flow from Operating
Activities section.
Difficulty: 1 Easy
Topic: Financial statements - Cash flows
Bloom's: Remember
27) The indirect method of reporting cash flow from operating activities on the statement of cash
flow begins with net income and adjusts for cash items.
Answer: FALSE
Explanation: The indirect method begins with net income and adjusts for noncash items to arrive
at cash flows from operating activities.
Difficulty: 1 Easy
Bloom's: Remember
9
28) The gross profit percentage is calculated by dividing net sales by gross profit.
Answer: FALSE
Explanation: The gross profit percentage is calculated by dividing gross profit by net sales.
Difficulty: 1 Easy
Topic: Ratios - Gross profit percentage
Bloom's: Remember
29) The gross profit percentage decreases when operating expenses increase.
Answer: FALSE
Explanation: The gross profit percentage is calculated by dividing gross profit by net sales.
Operating expenses do not affect either gross profit or net sales.
Difficulty: 1 Easy
Topic: Ratios - Effects of transactions
Bloom's: Remember
30) The return on assets ratio is calculated by dividing operating income by average total assets.
Answer: FALSE
Explanation: The return on assets ratio is calculated by dividing net income by average total
assets.
Difficulty: 1 Easy
Topic: Ratios - Return on assets and components
Learning Objective: 05-04 Analyze a company's performance based on return on assets and its
components and the effects of transactions on financial ratios.
Bloom's: Remember
10
31) The return on assets ratio may increase when sales increase.
Answer: TRUE
Explanation: The return on assets ratio calculation may increase when total asset turnover (net
sales divided by average total assets) increases. This is not the only reason for an increase in the
turnover, but it is one possibility.
Bloom's: Analyze
AACSB: Analytical Thinking
32) The return on assets ratio is affected by both the net profit margin ratio and the total asset
turnover ratio.
Answer: TRUE
Explanation: The return on assets ratio is calculated by multiplying the net profit margin ratio
times the total asset turnover ratio, referred to as the DuPont analysis.
Difficulty: 1 Easy
Bloom's: Remember
33) Which of the following tasks is not performed by the Securities & Exchange Commission
(SEC)?
A) Overseeing the work of the Financial Accounting Standards Board (FASB).
B) Overseeing the work of the Public Company Accounting Oversight Board (PCAOB).
C) Taking responsibility for protecting investors and maintaining the integrity of the securities
markets.
D) The development of generally accepted accounting principles.
Answer: D
Explanation: The FASB develops generally accepted accounting principles.
Bloom's: Remember
11
34) Which of the following tasks does the Financial Accounting Standards Board (FASB)
perform?
A) Overseeing the work of the Securities & Exchange Commission (SEC).
B) Overseeing the work of the Public Company Accounting Oversight Board (PCAOB).
C) The responsibility for protecting investors and maintaining the integrity of the securities
markets.
D) The development of generally accepted accounting principles.
Answer: D
Explanation: The FASB develops generally accepted accounting principles.
Topic: Accounting standard-setting - FASB
Bloom's: Remember
35) Which of the following are primarily responsible for the information provided in a
company's financial statements?
A) The internal and external auditors.
B) The Securities & Exchange Commission (SEC) and the external auditors.
C) The chief executive officer (CEO) and the chief financial officer (CFO).
D) The external auditors and the board of directors.
Answer: C
Explanation: The CEO and CFO are primarily responsible for the content of a company's
financial statements.
Bloom's: Remember
12
36) Which of the following is not a responsibility of the chief executive officer (CEO) and the
chief financial officer (CFO)?
A) Overseeing the financial statement external audit.
B) Ensuring the accuracy and completeness of all reports provided to the Securities & Exchange
Commission (SEC).
C) The certification of the strength of the internal control system.
D) The disclosure to the audit committee of any frauds they are aware of.
Answer: A
Explanation: The external auditors are hired by the board of directors and are responsible for
overseeing their own audit.
Bloom's: Remember
37) Which of the following is not true about the audit committee of the board of directors?
A) They meet with the auditors to discuss management's compliance with their financial
reporting responsibilities.
B) They ensure the accuracy and completeness of all reports provided to the Securities &
Exchange Commission (SEC).
C) They are responsible for ensuring that processes are in place for maintaining the integrity of
the financial statement preparation and reporting.
D) They are responsible for hiring the company's external auditors.
Answer: B
Explanation: The CEO and CFO ensure the accuracy and completeness of all reports provided to
the Securities & Exchange Commission (SEC).
Bloom's: Remember
13
38) Which of the following statements is false?
A) The board of directors meets with the external auditors to discuss management's compliance
with their financial reporting obligations.
B) The external auditors are selected by the Securities & Exchange Commission (SEC).
C) The Securities & Exchange Commission (SEC) requires publicly traded companies to have
their financial statements audited by an independent auditor.
D) The external auditors assume some responsibility with respect to the fairness of the financial
statements.
Answer: B
Explanation: The external auditors are selected by the board of directors.
Topic: Accounting communication process - People; Corporate governance
Bloom's: Understand
39) Which of the following is an objective of the external audit of a company's financial
statements?
A) To provide a forecast of the company's future earnings.
B) To assure no fraud has been committed by the company's management.
C) To provide credibility that the financial statements are fairly presented.
D) To detect all accounting errors made by the accounting system and employees.
Answer: C
Explanation: The external audit lends credibility to the financial statements and reduces the risk
that the financial condition of the reporting entity is misrepresented.
Bloom's: Remember
14
40) Which of the following is not included as a primary part of the financial disclosure in Form
10-K?
A) Summarized financial data for a 5-year period.
B) Management's opinion of the financial statements.
C) Business operations and strategy.
D) Four basic financial statements.
Answer: B
Explanation: Management's Discussion and Analysis is an overview of the financial condition
and results of operations but is not an opinion of the financial statements.
Difficulty: 3 Hard
Bloom's: Analyze
41) The Statement of Comprehensive Income includes items in which order?

A) Net income, Other items of net income, Comprehensive income.
B) Comprehensive income, Net income, Other items of Comprehensive income.
C) Net income, Other Fair value items, Comprehensive income.
D) Net income, Other comprehensive income items, Comprehensive income.
Answer: D
Explanation: The statement of comprehensive income reports Net income, Other comprehensive
income items, and Comprehensive income.
Topic: Financial statements - Comprehensive income
Bloom's: Remember
15
42) Which of the following would not be classified as a current asset?
A) Accounts receivable.
B) Goodwill.
C) Inventories.
D) Non-trade receivables.
Answer: B
Explanation: Goodwill is an intangible asset; it is not a current asset.
Difficulty: 1 Easy
Bloom's: Remember
43) Information disclosed in a balance sheet about shares of common stock includes the number
of shares that are:
A) Authorized and Issued.
B) Issued and Outstanding.
C) Authorized, Issued, and Outstanding.
D) Authorized, Issued, Outstanding, and Not Outstanding.
Answer: C
Explanation: Information disclosed in the balance sheet about common stock is the number of
shares that are authorized, issued, and outstanding.
Bloom's: Remember
16
44) Stockholders' equity, also called shareholders' equity, includes which of the following two
accounts?
A) Common stock and Deferred revenue.
B) Common stock and Retained earnings.
C) Liabilities and Retained earnings.
D) Retained earnings and Cash.
Answer: B
Explanation: Stockholders' equity includes common stock and retained earnings.
Difficulty: 1 Easy
Bloom's: Remember
45) Components of other comprehensive income can be reported in combination with the:
A) Balance sheet.
B) Statement of cash flows.
C) Statement of stockholders' equity.
D) Income statement.
Answer: D
Explanation: Other comprehensive income may be reported in a separate statement or may be
combined with the income statement.
Difficulty: 1 Easy
Topic: Financial statements - Comprehensive income
Bloom's: Remember
17
46) Panmar Inc. is preparing a statement of stockholders' equity for 2019. On January 1, 2019,
Panmar started the year with a $200,000 credit balance in its retained earnings account. During
2019, the company earned net income of $140,000. Panmar declared dividends of $80,000 and
paid $50,000 of those dividends. Also, the company received cash of $100,000 for additional
shares of common stock issued and then paid $30,000 to repurchase shares of common stock.
What is the balance in retained earnings on December 31, 2019?
A) $260,000.
B) $290,000.
C) $330,000.
D) $390,000.
Answer: A
Explanation: Retained earnings on December 31, 2019 = $260,000 = $200,000 + $140,000 −
$80,000.
Difficulty: 3 Hard
Topic: Financial statements - Stockholders equity
Bloom's: Apply
AACSB: Knowledge Application
47) Denmark Inc. is preparing a statement of stockholders' equity for 2019. On January 1, 2019,
Denmark started the year with a $100,000 credit balance in its retained earnings account. During
2019, the company earned net income of $70,000 and declared dividends of $10,000. Also, the
company received cash of $15,000 as an additional investment by its owners. What is the
balance in retained earnings on December 31, 2019?
A) $100,000.
B) $170,000.
C) $175,000.
D) $160,000.
Answer: D
Explanation: Retained earnings on December 31, 2019 = $160,000 = $100,000 + $70,000 −
$10,000.
Bloom's: Apply
18
48) Which of the following is true about gross profit (gross margin)?
A) It is net sales minus operating expenses.
B) It is net sales minus cost of goods sold.
C) It is the same as income from continuing operations.
D) It is net sales minus cost of goods sold and operating expenses.
Answer: B
Explanation: Gross profit equals net sales minus cost of goods sold.
Difficulty: 1 Easy
Bloom's: Remember
49) Which of the following best describes operating income?

A) It includes the results of discontinued operations.
B) It is before operating expenses.
C) It is sales minus cost of goods sold and income tax expense.
D) It is net sales minus cost of goods sold and operating expenses.
Answer: D
Explanation: Operating income (also called income from operations) equals net sales minus cost
of goods sold and minus operating expenses.
Bloom's: Remember
19
50) The Callie Company has provided the following information:
Operating expenses were $231,000;

Cost of goods sold was $376,000;
Net sales were $940,000;
Interest expense was $32,000;
Gain on sale of a building was $76,000;
Income tax expense was $151,000.
What was Callie's gross profit?

A) $564,000.
B) $188,000.
C) $333,000.
D) $232,000.
Answer: A
Explanation: Gross profit ($564,000) equals net sales ($940,000) minus cost of goods sold
($376,000).
Difficulty: 1 Easy
Bloom's: Apply
20

Gain on sale of investments was $76,000;
What was Callie's income from operations (operating income)?

A) $188,000.
B) $333,000.
C) $156,000.
D) $232,000.
Answer: B
Explanation: Income from operations ($333,000) equals net sales ($940,000) minus cost of
goods sold ($376,000) and minus operating expenses ($231,000).
Bloom's: Apply
21

Gain on sale of a building was $76,000;
What was Callie's income before taxes?

A) $564,000.
B) $188,000.
C) $377,000.
D) $232,000.
Answer: C
Explanation: Income before taxes ($377,000) equals net sales ($940,000) minus cost of goods
sold ($376,000), minus operating expenses ($231,000), minus interest expense ($32,000), plus
gain on sale ($76,000).
Bloom's: Apply
22
53) Kryton Corp. has provided the following information:
Gross profit was $620,000;

Net income was $400,000.
What was Kryton's gross profit percentage?

A) 40%
B) 61.3%
C) 62%
D) 155%
Answer: C
Explanation: Gross profit ($620,000) equals sales (X) minus cost of goods sold ($380,000).
Therefore, Sales = Gross profit ($620,000) plus Cost of goods sold ($380,000).
Sales = $1,000,000.
Gross profit percentage = Gross profit divided by Sales = $620,000 ÷ $1,000,000 = 62%.
Difficulty: 3 Hard
Bloom's: Apply
23
54) Brimmel Corp. has provided the following information:
Sales were $780,000;

Net income was $195,000.
What was Brimmel's gross profit percentage?

A) 55%
B) 45%
C) 62%
D) 222%
Answer: B
Explanation: Gross profit equals sales ($780,000) minus cost of goods sold ($429,000).
Therefore, Gross profit = $780,000 − $429,000 = $351,000.
Gross profit percentage = Gross profit divided by Sales = $351,000 ÷ $780,000 = 45%.
Bloom's: Apply
55) Which of the following is not reported as an operating expense on the income statement?
A) Administrative expenses.
B) Research and development expense.
C) Interest expense.
D) Selling expenses.
Answer: C
Explanation: Interest expense is a deduction from income from operations (operating income).
Difficulty: 1 Easy
Bloom's: Remember
24
56) The Nellie Company has provided the following information:

What was Nellie's operating income?

A) $514,000.
B) $612,000.
C) $497,000.
D) $298,000.
Answer: A
Explanation: Operating income ($514,000) equals gross profit ($629,000) minus operating
expenses ($115,000).
Bloom's: Apply
25
57) The Nellie Company has provided the following information:

What was Nellie's income before taxes?

A) $514,000.
B) $612,000.
C) $497,000.
D) $298,000.
Answer: C
Explanation: Income before taxes ($497,000) equals gross profit ($629,000) minus operating
expenses ($115,000) and minus interest expense ($17,000).
Bloom's: Apply
26
58) The Willie Company has provided the following information:

Income from operations was $415,000;
Net sales were $1,100,000;
Loss from sale of investments was $87,000;
What was Willie's gross profit?

A) $340,000.
B) $689,000.
C) $818,000.
D) $760,000.
Answer: D
Explanation: Working backward: Gross profit ($760,000) equals operating expenses ($345,000)
plus income from operations ($415,000).
Difficulty: 3 Hard
Bloom's: Apply
27

What was Willie's income before taxes?

A) $344,000.
B) $199,000.
C) $257,000.
D) $286,000.
Answer: C
Explanation: Income before taxes ($257,000) equals income from operations ($415,000) minus
interest expense ($71,000) minus loss from sale of investments ($87,000).
Bloom's: Apply
28

What was Willie's nonoperating income (expense)?

A) ($71,000).
B) ($158,000).
C) $216,000.
D) $257,000.
Answer: B
Explanation: Nonoperating income (expense) ($158,000) is the total of interest expense
($71,000) and loss from the sale of investments ($87,000).
Bloom's: Apply
29

What was Willie's net income?

A) $373,000.
B) $328,000.
C) $199,000.
D) ($156,000).
Answer: C
Explanation: Net income ($199,000) equals income from operations ($415,000) minus interest
expense ($71,000) minus loss from the sale of investments ($87,000) minus income tax
($58,000).
Bloom's: Apply
62) Which of the following would not be used to calculate income from operations?
A) Gross profit.
B) Selling and administrative expenses.
C) Interest income.
D) Research and development expense.
Answer: C
Explanation: Interest income is reported as nonoperating revenue.
Bloom's: Remember
30
63) Which of the following statements regarding earnings per share is false?
A) It is reported on the income statement.
B) It increases when net income increases.
C) It is calculated using the average number of common shares outstanding during the period.
D) It would not be affected by additional shares of common stock issued during the year.
Answer: D
Explanation: Additional shares of common stock issued would change the number of shares
outstanding and would change the average number of shares of common stock outstanding
during the period.
Bloom's: Understand
64) Which of the following would not typically be disclosed in the notes to the financial
statements?
A) Additional detail regarding numbers reported in the financial statements.
B) A summary of significant accounting policies.
C) Commitments under long-term supply agreements.
D) The net income earned for the reporting period.
Answer: D
Explanation: The net income earned for the reporting period is included directly in the financial
statements.
Bloom's: Remember
31
65) Examples of nonoperating items that would appear on an income statement are:
A) Interest income, depreciation expense, gain on sale of land.
B) Cost of sales, interest expense, loss on sale of investments.
C) Interest expense, interest income, loss on sale of investments.
D) Depreciation expense, interest income, interest expense.
Answer: C
Explanation: Nonoperating items are revenues, expenses, gains, and losses that do not relate to
the company's primary operations. Examples include interest expense, interest income, and gains
and losses on the sale of investments.
Bloom's: Understand
66) In which of the following classifications would cash dividend payments to stockholders be
reported in the statement of cash flows?
A) Operating activities.
B) Financing activities.
C) Investing activities.
D) Stockholder activities.
Answer: B
Explanation: Financing activities include dividend payments to stockholders.
Difficulty: 1 Easy
Bloom's: Remember
32
67) Which of the following items is not part of disclosure notes to the financial statements?
A) Descriptions of the significant accounting methods applied in the company's financial
statements.
B) Additional detail of income taxes payable reported in the balance sheet.
C) Names of executive officers and the salaries for each officer listed.
D) Commitments under long-term supply agreements to buy inventory and equipment.
Answer: C
Explanation: Notes to the financial statements include a summary of significant accounting
policies, additional detail supporting reported numbers, and relevant financial information not
disclosed in the financial statements. Names of executive officers and their salaries are not
included in these topics. Executive officers and their compensation are included in the Form 10-
K but not in the financial statement section of the 10-K.
Bloom's: Understand
68) Anjou Company had 10,000 shares of common stock outstanding at December 31, 2018 and
14,000 shares of common stock outstanding at December 31, 2019. Anjou had sales of
$3,600,000 in 2019 and net income of $280,000 in 2019. What is the earnings per share amount
reported for Anjou in 2019?
A) $7.78
B) $9.36
C) $20.00
D) $23.33
Answer: D
Explanation: The earnings per share ($23.33) is net income ($280,000) divided by average
number of shares of common stock outstanding during the year ([10,000 + 14,000] ÷ 2 =
12,000).
Bloom's: Apply
33
69) What additional information is required to be presented on the same page as the income
statement?
A) Cash paid for interest.
B) Deferred revenues.
C) Earnings per share.
D) Profit margin.
Answer: C
Explanation: Earnings per share is required to be presented on the income statement.
Bloom's: Understand
70) When shares of the reporting company's common stock are issued in exchange for cash,
where is this reported on a statement of cash flows?
Answer: B
Explanation: Financing cash flows include the issuance of common stock in exchange for cash.
Difficulty: 1 Easy
Bloom's: Remember
34
71) In what order are cash flow activities presented on the statement of cash flows?
A) Investing activities, Operating activities, Financing activities.
B) Financing activities, Operating activities, Investing activities.
C) Operating activities, Investing activities, Financing activities.
D) Operating activities, Financing activities, Investing activities.
Answer: C
Explanation: The cash flow activities are presented in the order of operating, investing, and
financing activities.
Difficulty: 1 Easy
Bloom's: Remember
72) A company has paid cash to repurchase its common stock that was previously issued. Where
will this cash flow be reported on the statement of cash flows?
Answer: B
Explanation: Financing cash flows include the repurchase of previously issued stock.
Difficulty: 1 Easy
Bloom's: Remember
35
73) Which of the following statements is false when a company sells inventory costing $700 for
$1,200 cash and operating expenses are $200?
A) Cost of goods sold is $700.
B) Gross profit is $500.
C) Stockholders' equity increases by net income of $300.
D) Net sales increase $500.
Answer: D
Explanation: Net sales increase $1,200. Net sales ($1,200) minus cost of goods sold ($700)
equals gross profit ($500) and minus operating expenses ($200) increases stockholders' equity by
$300.
Bloom's: Apply
74) Which of the following statements is false when a company sells inventory costing $900 for
$1,500 cash?
A) Current assets increase $600.
B) Gross profit increases $1,500.
C) Stockholders' equity increases $600.
D) Net sales increases $1,500.
Answer: B
Explanation: Gross profit ($600) is the difference between net sales ($1,500) and cost of goods
sold ($900). Gross profit increases stockholders' equity. Current assets increase ($600) as cash
increases ($1,500) and inventory decreases ($900).
Bloom's: Apply
36
75) Which one of the following statements is true when a company sells inventory costing $800
for $1,400 cash, and operating expenses are $500?
A) There is no change in current assets.
B) Stockholders' equity increases $100.
C) Gross profit increases $100.
D) Net sales increases $2,200.
Answer: B
Explanation: Stockholders' equity increases by net income ($100). Net income is net sales
($1,400) minus cost of goods sold ($800) and minus operating expenses ($500).
Bloom's: Apply
37
76) Huron has provided the following year-end balances:
Cash, $25,000
Patents, $7,900
Accounts receivable, $9,300
Property, plant, and equipment, $98,700
Prepaid insurance, $3,600
Accumulated depreciation, $10,000
Inventory, $37,000
Retained earnings, 15,500
Trademarks, $12,600
Accounts payable, $8,000
Goodwill, $11,000
How much are Huron's current assets?

A) $85,900.
B) $71,300.
C) $74,900.
D) $102,100.
Answer: C
Explanation: Huron's current assets ($74,900) include cash ($25,000), accounts receivable
($9,300), prepaid insurance ($3,600), and inventory ($37,000).
Bloom's: Apply
38
Cash, $25,000
Patents, $7,900
Inventory, $37,000
Retained earnings, 15,500
Trademarks, $12,600
Goodwill, $11,000
How much are Huron's net noncurrent assets?

A) $122,300.
B) $120,200.
C) $123,800.
D) $112,300.
Answer: B
Explanation: Huron's net noncurrent assets ($120,200) include patents ($7,900), property, plant,
and equipment ($98,700), accumulated depreciation (−$10,000), trademarks ($12,600), and
goodwill ($11,000).
Bloom's: Apply
39
Cash, $25,000
Patents, $7,900
Inventory, $37,000
Retained earnings, $15,500
Trademarks, $12,600
Goodwill, $11,000
How much is Huron's stockholders' equity?

A) $33,800.
B) $187,100.
C) $195,100.
D) $202,600.
Answer: B
Explanation: Total stockholders' equity ($187,100) equals total assets ($195,100) minus
total liabilities ($8,000). Total assets equal cash ($25,000), accounts receivable ($9,300),
prepaid insurance ($3,600), inventory ($37,000), patents ($7,900), property, plant, and
equipment ($98,700), accumulated depreciation (−$10,000), trademarks ($12,600), and
goodwill ($11,000). Total liabilities equal accounts payable ($8,000).
Difficulty: 3 Hard
Bloom's: Apply
40
79) Which of the following would not be included on an income statement?
A) Accumulated depreciation.
B) Insurance expense.
C) Cost of goods sold.
D) Discontinued operations.
Answer: A
Explanation: Accumulated depreciation is a balance sheet account.
Difficulty: 1 Easy
Bloom's: Remember
80) Which of the following is true?

A) Income from operations would increase other income.
B) Income before income taxes would be shown as a component of operating income on the
income statement.
C) Gains and losses on the sales of investments are included in nonoperating income (loss).
D) Income tax expense is shown as part of operating expenses.
Answer: C
Explanation: Gains and losses on the sales of investments are included in nonoperating income
(loss) as they are not part of the company's primary operations.
Bloom's: Remember
41
81) Farrell Company has rent expense, wages expense, and utilities expense. Where will the
company present these expenses on the income statement?
A) As a component of net sales.
B) As a component of gross profit.
C) After income from operations.
D) Prior to income from operations.
Answer: D
Explanation: Rent expense, wages expense, and utilities expense are operating expenses and are
presented before the subtotal of operating income (income from operations).
Bloom's: Understand
82) Which of the following statements regarding international financial reporting standards
(IFRS) is false?
A) Common stock is titled as share capital.
B) Property, plant, and equipment can be reported on the balance sheet at either fair value or
historical cost.
C) The last-in first-out (LIFO) inventory method is permitted.
D) Development costs are capitalized.
Answer: C
Explanation: The last-in first-out inventory (LIFO) method is prohibited under IFRS.
Topic: IFRS - International reporting
Bloom's: Remember
AACSB: Diversity
42
83) Which of the following statements does not accurately describe the effect of the sale of
inventory at a profit on the financial statements?
A) Income from operations and current assets both increase.
B) Operating income and gross profit both increase.
C) Net income and earnings per share both increase.
D) Current assets do not change and stockholders' equity increases.
Answer: D
Explanation: Current assets increase because the increase in either cash or accounts receivable is
greater than the decrease in inventory.
Bloom's: Analyze
84) Which of the following statements regarding international financial reporting standards
(IFRS) is false?
A) Research and development costs are expensed.
B) Paid-in capital is titled share premium.
C) Cash payments for interest are reported on the cash flow statement as either an operating or
financing cash flow.
D) Reversal of inventory write-downs is required.
Answer: A
Explanation: Development costs are capitalized under IFRS.
Topic: IFRS - International reporting
Bloom's: Understand
AACSB: Diversity
43
85) Which of the following would not be included within the operating activities section of a
cash flow statement?
A) Cash received from customers.
B) Cash paid for insurance.
C) Cash paid for interest expense.
D) Cash paid to acquire a patent.
Answer: D
Explanation: The cash paid to acquire a patent would be an investing activities cash flow.
Bloom's: Understand
86) Which of the following would be reported in the supplemental cash flows disclosure section
of the statement of cash flows?
A) Sales on account which have not yet been collected.
B) Net income.
C) Cash paid for income taxes.
D) Depreciation expense.
Answer: C
Explanation: Cash paid for income taxes is reported in the supplemental cash flows disclosure
section of the statement of cash flows.
Difficulty: 3 Hard
Bloom's: Analyze
44
87) Which of the following statements is correct?
A) Accumulated depreciation is the amount of depreciation on the income statement.
B) Current liabilities are debts expected to be paid within one year.
C) Current assets are resources of a company that might include cash and copyrights.
D) Patents, goodwill, and deferred revenues are classified as intangible assets on the balance
sheet.
Answer: B
Explanation: Current liabilities are debts expected to be paid within one year from the date of
the balance sheet and are expected to consume current assets.
Difficulty: 1 Easy
Bloom's: Remember
88) Which of the following statements is false?

A) Gross profit percentage is calculated as gross profit divided by net sales.
B) Gross profit percentage should only be viewed for each reporting company and is not useful
in comparing different companies in the same industry.
C) Gross profit is calculated as net sales less cost of sales.
D) A higher gross profit might be strategic in order to afford high research and development
costs.
Answer: B
Explanation: Gross profit percentage is helpful to managers, analysts, and creditors for assessing
a company by itself as well as for comparing companies in the same industry.
Bloom's: Understand
45
89) On January 1, 2019, Gucci Brothers Inc. had a $500,000 credit balance in retained earnings
and $600,000 balance in common stock. During 2019, the company earned net income of
$100,000, declared a dividend of $15,000, and issued additional stock for $25,000. What is total
stockholders' equity on December 31, 2019?
A) $1,100,000.
B) $1,210,000.
C) $1,225,000.
D) $1,240,000.
Answer: B
Explanation: Stockholders' equity on December 31, 2019 = $1,210,000 = $500,000 + $600,000
+ $100,000 − $15,000 + $25,000.
Bloom's: Apply
90) Which of the following transactions results in a decrease in the return on assets ratio?
A) Increasing the sales price of the products sold.
B) An increase in the net profit margin ratio.
C) Purchasing land by signing a long-term note payable.
D) Collecting cash from an account receivable.
Answer: C
Explanation: Return on assets is net income divided by average total assets. Total assets increase
by land purchased and the return on assets ratio therefore decreases.
Difficulty: 3 Hard
Bloom's: Analyze
46
91) Which of the following results in an increase in the return on assets ratio?
A) A decrease in the total asset turnover ratio.
B) An increase in the net profit margin ratio.
C) Purchasing a building by signing a long-term mortgage payable.
D) Using cash to purchase land.
Answer: B
Explanation: Return on assets is net income divided by average total assets or net profit margin
ratio times total asset turnover ratio. An increase in the net profit margin ratio therefore increases
return on assets.
Bloom's: Analyze
92) Marino Company has provided the following information:
Net sales, $480,000

Net income, $24,000
Average total assets, $200,000
What is Marino's net profit margin?

A) 75%
B) 12%
C) 42%
D) 5%
Answer: D
Explanation: The net profit margin ratio (5%) is net income ($24,000) divided by net sales
($480,000).
Bloom's: Apply
47
Net sales, $480,000

Net income, $24,000
What is Marino's total asset turnover?

A) 12.0
B) 8.33
C) 0.42
D) 2.4
Answer: D
Explanation: The total asset turnover ratio (2.4) is net sales ($480,000) divided by average total
assets ($200,000).
Bloom's: Apply
Net sales, $480,000

Net income, $24,000
What is Marino's return on assets?

A) 240%
B) 12%
C) 5%
D) 42%
Answer: B
Explanation: Return on assets (12%) equals net income ($24,000) divided by average total
assets ($200,000). Return on assets (12%) can also be calculated by multiplying the net profit
margin ratio (5%) times the total asset turnover ratio (2.4).
Bloom's: Apply
48
95) Harley Company has provided the following selected financial information.
2018 2019
Total assets $ 3,200,000 $ 3,600,000
Net sales $ 7,200,000 $ 9,000,000
Net income $ 640,000 $ 450,000
What is Harley's 2019 total asset turnover (rounded)?

A) 2.38
B) 2.25
C) 0.132
D) 2.65
Answer: D
Explanation: The total asset turnover ratio (2.65) is net sales for 2019 ($9,000,000) divided by
average total assets ([$3,200,000 + $3,600,000] ÷ 2 = $3,400,000).
Bloom's: Apply
49
2018 2019
Total assets $ 3,200,000 $ 3,600,000
Net sales $ 7,200,000 $ 9,000,000
Net income $ 640,000 $ 450,000
What is Harley's 2019 net profit margin (rounded)?

A) 5.0%
B) 6.1%
C) 6.7%
D) 13.2%
Answer: A
Explanation: The net profit margin ratio (5%) is net income ($450,000) divided by net sales
($9,000,000).
Difficulty: 1 Easy
Bloom's: Remember
50
2018 2019
Total assets $ 3,200,000 $ 3,600,000
Net sales $ 7,200,000 $ 9,000,000
Net income $ 640,000 $ 450,000
What is Harley's 2019 return on assets (rounded)?

A) 12.5%
B) 13.2%
C) 16.0%
D) 25.0%
Answer: B
Explanation: Return on assets (13.2%) equals net income ($450,000) divided by average total
assets ([$3,200,000 + $3,600,000] ÷ 2 = $3,400,000). Return on assets (13.2%) can also be
calculated by multiplying the net profit margin ratio (5%) times the total asset turnover ratio
(2.65).
Bloom's: Apply
98) Which of the following transactions will decrease both the return on assets ratio and the total
asset turnover ratio?
A) Purchasing land by signing a note payable.
B) Accruing interest expense at year-end.
C) Accruing interest revenue at year-end.
D) Collecting cash from an account receivable.
Answer: A
Explanation: The denominator in both ratios is average total assets. Purchasing land increases
average total assets and therefore decreases both ratios.
Difficulty: 3 Hard
Bloom's: Analyze
51
99) Which of the following does not increase the net profit margin ratio?
A) Increasing sales volume.
B) Increasing sales price.
C) Reducing inventory kept on hand.
D) Decreasing operating expenses.
Answer: C
Explanation: The net profit margin ratio is increased by increasing the sales volume and/or the
sales price, or by decreasing the cost of goods sold and/or operating expenses.
Bloom's: Understand
100) Which of the following statements is true?

A) A decrease in net income decreases both the net profit margin ratio and the total asset
turnover ratio.
B) An increase in average total assets results in a decrease in both the total asset turnover ratio
and the net profit margin ratio.
C) A decrease in average total assets results in an increase in the total asset turnover ratio and a
decrease in the net profit margin ratio.
D) An increase in net income increases both the net profit margin ratio and the return on assets
ratio.
Answer: D
Explanation: The numerator for both ratios is net income. Therefore, an increase in net income
results in an increase in both ratios.
Bloom's: Understand
52
101) Which of the following would most likely increase the net profit margin ratio?
A) An increase in the unit selling price.
B) A decrease in the overall sales volume.
C) An increase in operating expenses.
D) An increase in cost of goods sold.
Answer: A
Explanation: The net profit margin ratio is increased by increasing the sales volume and/or the
sales price, or by decreasing the cost of goods sold and/or operating expenses.
Bloom's: Understand
102) Which of the following statements is correct?

A) Income from operations increases when common stock is sold for more than par value.
B) The accrual of research and development costs does not affect the net profit margin ratio.
C) The payment of an accrued liability decreases total asset turnover.
D) The declaration and payment of a cash dividend increases the return on assets ratio.
Answer: D
Explanation: The cash payment decreases average total assets, which increases the total asset
turnover ratio.
Difficulty: 3 Hard
Bloom's: Analyze
53
103) Which of the following statements correctly describes the effect of accruing interest
revenue at year-end?
A) Income from operations increases.
B) The net profit margin ratio does not change.
C) The total asset turnover ratio increases.
D) The return on assets ratio is affected.
Answer: D
Explanation: The accrual of interest revenue increases both total assets and net income, which
are the two components of return on assets.
Difficulty: 3 Hard
Bloom's: Analyze
54
104) The balance sheet for Glenwood Corporation at December 31, 2019 showed the following
subtotals:
Current assets $140,000

Current liabilities 80,000
Buildings and equipment 420,000
Total stockholders' equity 420,000
Retained earnings 120,000
Total liabilities 210,000
Other long-term assets 70,000
Required:
Based on the above data, calculate the following amounts:
A. Total assets _______

B. Long-term liabilities _______
Common stock and Additional
C. paid-in capital _______
Total liabilities and stockholders'
D. equity _______
Answer:
A. $140,000 + $420,000 + $70,000 = $630,000.
B. $210,000 - $80,000 = $130,000.
C. $420,000 - $120,000 = $300,000.
D. $210,000 + $420,000 = $630,000.
Difficulty: 3 Hard
Topic: Financial statements-Balance sheet
Bloom's: Apply
55
105) Ridgetop Corporation reported the following amounts on its balance sheet at December 31,
2019:
Total current assets $1,800,000

Total long-term assets 900,000
Total current liabilities 1,300,000
Total long-term liabilities 500,000
Total stockholders' equity 900,000
Net income 100,000
On January 1, 2019, total assets were $2,000,000, total liabilities were $1,200,000 and total
stockholders' equity was $800,000.
Calculate Ridgetop's return on assets.
Answer: $100,000 ÷ ($2,000,000 + $2,700,000*/2) = 4.26%.

*($1,800,000 + $900,000)
Topic: Ratios-Return on assets and components
Bloom's: Apply
56
106) Complete the following balance sheet by entering the appropriate amounts in the blanks
provided.
ASSETS
Cash $15,000
Accounts receivable (A.) _______
Building $60,000
Accumulated depreciation (B.) _______ 35,000
Total Assets (C.) _______
LIABILITIES
Accounts Payable $11,000
Notes payable, short-term 12,000
Income taxes payable
Total current liabilities (D) _______ $25,000
Mortgage payable 25,000
Total Liabilities 50,000
STOCKHOLDERS'
EQUITY
Common stock $25,000
Retained earnings 15,000
Total Stockholders' Equity (E.) ______
Total Liabilities and
Stockholders' Equity (F.) ______
Answer:
A. $40,000. ($90,000 Total Assets (F) - $35,000 Book Value of Building - $15,000 Cash)
B. $25,000. ($60,000 Building - $35,000 Book Value)
C. $90,000. (Must equal to F.)
D. $2,000. ($25,000 Current liabilities - $11,000 Accounts Payable - $12,000 Notes payable)
E. $40,000. ($25,000 Common stock + $15,000 Retained earnings)
F. $90,000. ($50,000 Total Liabilities + $40,000 Total Stockholders' Equity)
Bloom's: Apply
57
107) FocusMore, Inc., had the following list of accounts taken from its adjusted trial balance at
December 31, 2019:

Accounts Receivable 18,000
Accumulated Depreciation-
Building 26,200
Advertising Expense 12,800
Building 100,000
Common Stock 60,000
Cash 15,000
Cost of Goods Sold 56,500
Depreciation Expense 2,000
Utilities Expense 3,800
Utilities Payable 1,900
Inventory 25,000
Land 30,000
Prepaid Insurance 4,600
Interest Revenue 2,500
Retained Earnings (Jan. 1, 2019) 58,000
Wages Expense 48,000
Wages Payable 4,600
Sales 150,000
Supplies Inventory 1,200
Supplies Expense 2,000
Deferred Rent Revenue 700
Required:
Prepare a multiple step income statement for the year ended December 31, 2019. (Include gross
profit, but ignore income taxes.)
58
Answer: FocusMore, Inc.
Income Statement
For the Year Ended December 31, 2019
Sales $150,000
Cost of Goods Sold 56,500
Gross Profit 93,500
Operating Expenses
Advertising $12,800
Depreciation 2,000
Utilities 3,800
Supplies 2,000
Wages 48,000
Total Operating Expenses 68,600
Income from Operations 24,900
Other Revenue and
Expenses
Interest Revenue 2,500
Net Income $27,400
Topic: Financial statements-Income statement
Bloom's: Apply
59
108) The following data were taken from the adjusted trial balance of Kent Corporation.
Kent Corporation
Adjusted Trial Balance Data
December 31, 2019
Accumulated Depreciation-Building 6,000
Accumulated Depreciation-
Equipment 9,000
Building 60,000
Common Stock 40,000
Cash 24,000
Copyrights 22,000
Dividends Declared 12,000
Equipment 15,000
Land 25,000
Note Payable (10%, due in 5 years) 40,000
Office Supplies 1,000
Retained Earnings (January 1, 2019) 23,000
Wages Payable 2,000
Service Revenue 85,000
Wages Expense 28,000
Utilities Expense 2,000
Depreciation Expense 5,000
Insurance Expense 2,000
Office Supplies Expense 1,000
Interest Expense 4,000
Prepare a classified balance sheet in good form at December 31, 2019. (Ignore income taxes).
60
Answer:
Kent Corporation
Balance Sheet
December 31, 2019
Assets
Current Assets:
Cash $24,000
Office Supplies 1,000
Total Current Assets 41,000
Property, Plant, and
Equipment:
Land $25,000
Building $60,000
Less Accumulated
Depreciation:
Building 6,000 54,000
Equipment 15,000
Less Accumulated
Depreciation:
Equipment 9,000 6,000
Total Property, Plant, and
Equipment 85,000
Intangibles:
Copyrights 22,000
Total Assets $148,000
Liabilities and Stockholders'
Equity
Current Liabilities:
Wages Payable 2,000
Total Current Liabilities $14,000
Long-term Liabilities:
Note Payable (10%, 5 year) 40,000
Total Liabilities $54,000
Stockholders' Equity:
Common Stock 40,000
Retained Earnings* 54,000
Total Stockholders' Equity 94,000
Total Liabilities and
Stockholders' Equity $148,000
61
*$23,000 (January 1 retained earnings) + $43,000 (net income) - $12,000 (dividends declared)
$43,000 net income = $85,000 - $28,000 - $2,000 - $5,000 - $2,000 - $1,000 - $4,000
Bloom's: Apply
109) Anthony Inc. reported the following amounts on its 2018 and 2019 income statements:
2019 2018
Net Sales $20,438 $20,367
Cost of sales 7,943 8,198
A. Compute the gross profit percentage for years 2018 and 2019.
B. Provide at least two potential causes for the change in Anthony's gross profit percentage.
Answer:
A. 2019 = 61.1% = ($12,495 ÷ $20,438).
2018 = 59.7% = ($12,169 ÷ $20,367).
B. Since there has been an increase in the gross profit percentage for 2019 as compared with
2018, Anthony Inc. may have higher sales prices, lower costs of producing their product, or is
experiencing a change in the sales mix of their products toward selling more of the higher margin
products.
Topic: Ratios-Gross profit percentage
Bloom's: Apply
AACSB: Analytical Thinking; Communication; Knowledge Application
62
110) Twin Lakes, Inc. reported the following December 31 amounts in its financial statements:
2019 2018
Sales revenue $250.0 $210.0
Gross profit 75.0 68.0
Net income 28.0 21.0
Total assets 90.0 80.0
Total stockholders' equity 40.0 36.0
Compute the following for the 2019 ratios:

A. Gross profit percentage
B. Net profit margin
C. Total asset turnover
D. Return on assets
Answer:
A. ($75.0 ÷ $250.0) = .30 or 30.0%
B. ($28.0 ÷ $250.0) = .112 or 11.2%
C. ($250.0 ÷ $85.0*) = 2.94
D. ($28.0 ÷ $85.0) = .329 or 32.9%
Or, .329 = B (.112) * C (2.94)
*[($90.0 + $80.0) ÷ 2]
Topic: Ratios-Gross profit percentage; Ratios-Return on assets and components
formats used by companies in practice and analyze the gross profit percentage.; 05-04 Analyze a
company's performance based on return on assets and its components and the effects of
transactions on financial ratios.
Bloom's: Apply
63
111) The following information was taken from the income statement and balance sheet of The
Mickey Company for the years 2018 and 2019:
2019 2018
Sales revenues $30,752 $27,061
Net income 2,345 1,267
Total assets 53,902 49,988
Total stockholders' equity 26,081 23,791
Compute the following ratios for 2019:

A. Net profit margin
B. Total asset turnover
C. Return on assets
Answer: A. Net profit margin ($2,345 ÷ $30,752) = .076 or 7.6%

B. Total asset turnover ($30,752 ÷ $51,945*) = .59
C. Return on assets ($2,345 ÷ $51,945*) = .045 or 4.5%
*[($49,988 + $53,902) ÷ 2]
Or, Return on assets (.045) = Net profit margin (.076) * Total asset turnover (.59)
Bloom's: Apply
64
112) Determine the effect of the following transactions on the identified financial statement
components and ratios. Code your answers as follows:
A: If the transaction results in an increase in the financial statement component or ratio.

B: If the transaction results in a decrease in the financial statement component or ratio.
C: If the transaction does not affect the financial statement component or ratio.
Transaction 1: A company issued common stock at a price in excess of par value.

Revenues _____
Assets _____
Stockholders' equity _____
Return on assets ratio _____
Transaction 2: A company recorded depreciation expense at year-end.

Net income _____
Assets _____
Total asset turnover ratio _____
Answer: Transaction 1: A company issued common stock at a price in excess of par value.
Revenues C
Assets A
Stockholders' equity A
Return on assets ratio B
Transaction 2: A company recorded depreciation expense at year-end.

Net income B
Assets B
Stockholders' equity B
Total asset turnover ratio A
Difficulty: 3 Hard
Topic: Ratios-Effects of transactions
Bloom's: Analyze
65

Transaction 1: A company accrued interest expense at year-end.

Net income _____
Assets _____
Transaction 2: A company declared and paid cash dividends to stockholders.

Net income _____
Assets _____
Answer: Transaction 1: A company accrued interest expense at year-end.

Net income B
Assets C
Total asset turnover ratio C
Transaction 2: A company declared and paid cash dividends to stockholders.

Net income C
Assets B
Return on assets ratio A
Difficulty: 3 Hard
Bloom's: Analyze
66

Transaction 1: A company paid for research and development costs incurred to develop a patent.
Net income _____
Property, plant, and equipment _____
Net profit margin ratio _____
Transaction 2: Inventory was purchased on account.

Net income _____
Current assets _____
Current liabilities _____
Answer: Transaction 1: A company paid for research and development costs incurred to develop
a patent.
Net income B
Property, plant, and equipment C
Net profit margin ratio B
Transaction 2: Inventory was purchased on account.

Net income C
Current assets A
Current liabilities A
Difficulty: 3 Hard
Bloom's: Analyze
67

Transaction 1: A company acquired land by signing a long-term note payable.

Property, plant, and equipment _____
Transaction 2: Cash was used to pay a current liability.

Net income _____
Answer: Transaction 1: A company acquired land by signing a long-term note payable.

Property, plant, and equipment A
Total asset turnover ratio B
Net profit margin ratio C
Transaction 2: Cash was used to pay a current liability.

Net income C
Total asset turnover ratio A
Net profit margin ratio C
Return on assets ratio A
Difficulty: 3 Hard
Bloom's: Analyze
68
116) Determine the effect of the following transactions on the financial statements components
identified. Code your answers as follows:

Transaction 1: A company sold inventory for an amount greater than its cost.
Gross profit _____
Current assets _____
Transaction 2: Advertising expense was recorded but has yet to be paid for.
Net income _____
Gross Profit _____
Answer: Transaction 1: A company sold inventory for an amount greater than its cost.
Gross profit A
Current assets A
Stockholders' equity A
Transaction 2: Advertising expense was recorded but has yet to be paid for.
Net income B
Gross Profit C
Topic: Financial statements-Balance sheet; Financial statements-Income statement; Financial
statements-Stockholders equity
Bloom's: Analyze
69
117) For the year ending December 31, 2019, the accounts of Jackson Corporation showed the
following balances:
Common stock, January 1, 2019 $500,000

Retained earnings, beginning
balance, January 1, 2019 $100,000
Total revenues earned during 2019 $150,000
Total expenses incurred during
2019 $90,000
Total dividends declared during
2019 $10,000
Issuance of stock during 2019 $50,000
Determine the components of stockholders' equity as of December 31, 2019.
Answer: Common stock: $550,000 = $500,000 + $50,000.

Retained earnings: $150,000 = $100,000 + $150,000 - $90,000 - $10,000.
Difficulty: 1 Easy
Topic: Financial statements-Stockholders equity
Bloom's: Remember
70
118) The following income statement was reported for Bauer Inc. for the first year of operations
ending December 31, 2019 reported (in thousands of dollars):
Sales revenue $24,500

Expenses:
Cost of Sales $14,700
Wages 3,300
Rent 700
Utilities 500
Miscellaneous 200
Total Expenses 19,400
Income before taxes 5,100
Income tax expense 1,785
Net income $3,315
A. Calculate gross profit percentage.

B. Calculate net profit margin.
C. Calculate earnings per share if there are 200,000 shares of common stock outstanding.
Answer: A. 40% (Sales $24,500,000) minus Cost of sales ($14,700,000) = Gross profit
($9,800,000). Gross profit ($9,800,000) divided by Sales $24,500,000) equals Gross profit
percentage of 40%.
B. 13.5% (net income $3,315,000 divided by sales revenue $24,500,000).
C. $16.58 per share (net income $3,315,000 divided by common shares outstanding 200,000).
Topic: Financial statements-Income statement; Ratios-Gross profit percentage; Ratios-Return on
assets and components
formats used by companies in practice and analyze the gross profit percentage.; 05-04 Analyze a
company's performance based on return on assets and its components and the effects of
transactions on financial ratios.
Bloom's: Apply
71
119) Describe the return on assets ratio and the DuPont approach for calculating return on assets.
Answer: The return on assets ratio is calculated by dividing net income by average total assets.
The ratio measures the amount of income earned for every dollar invested in assets and is a
measure of profitability and management effectiveness with respect to asset management. The
DuPont formula states that the return on assets ratio has two component ratios, net profit margin
and total asset turnover. The net profit margin ratio measures the net income generated per sales
dollar and the total asset turnover ratio measures the net sales generated for average total assets.
Return on assets equals net profit margin multiplied by total asset turnover. The DuPont formula
implies that return on assets can be improved through both earnings and efficiency of asset use.
Bloom's: Remember
AACSB: Communication
72

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Financial Accounting, 10e (Libby)

Chapter 5 Communicating and Interpreting Accounting Information

15) Sales by major product category is a required financial statement disclosure.

17) Inventories are reported on the balance sheet as a current asset.

21) An intangible asset has no physical existence and no life.

41) The Statement of Comprehensive Income includes items in which order?

49) Which of the following best describes operating income?

Operating expenses were $231,000;

What was Callie's gross profit?

Operating expenses were $231,000;

What was Callie's income from operations (operating income)?

Operating expenses were $231,000;

What was Callie's income before taxes?

Gross profit was $620,000;

What was Kryton's gross profit percentage?

Sales were $780,000;

What was Brimmel's gross profit percentage?

Operating expenses were $115,000;

What was Nellie's operating income?

Operating expenses were $115,000;

What was Nellie's income before taxes?

Operating expenses were $345,000;

What was Willie's gross profit?

Operating expenses were $345,000;

What was Willie's income before taxes?

Operating expenses were $345,000;

What was Willie's nonoperating income (expense)?

Operating expenses were $345,000;

What was Willie's net income?

How much are Huron's current assets?

How much are Huron's net noncurrent assets?

How much is Huron's stockholders' equity?

80) Which of the following is true?

88) Which of the following statements is false?

92) Marino Company has provided the following information:

Net sales, $480,000

What is Marino's net profit margin?

Net sales, $480,000

What is Marino's total asset turnover?

94) Marino Company has provided the following information:

Net sales, $480,000

What is Marino's return on assets?

What is Harley's 2019 total asset turnover (rounded)?

What is Harley's 2019 net profit margin (rounded)?

What is Harley's 2019 return on assets (rounded)?

100) Which of the following statements is true?

102) Which of the following statements is correct?

Current assets $140,000

A. Total assets _______

Total current assets $1,800,000

Calculate Ridgetop's return on assets.

Answer: $100,000 ÷ ($2,000,000 + $2,700,000*/2) = 4.26%.

Accounts Payable $15,000

Compute the following for the 2019 ratios:

Compute the following ratios for 2019:

Answer: A. Net profit margin ($2,345 ÷ $30,752) = .076 or 7.6%

A: If the transaction results in an increase in the financial statement component or ratio.

Transaction 1: A company issued common stock at a price in excess of par value.

Transaction 2: A company recorded depreciation expense at year-end.

Transaction 2: A company recorded depreciation expense at year-end.

A: If the transaction results in an increase in the financial statement component or ratio.

Transaction 1: A company accrued interest expense at year-end.

Transaction 2: A company declared and paid cash dividends to stockholders.

Answer: Transaction 1: A company accrued interest expense at year-end.