Reference no: EM1319701

1.If a corporation has assets of $250,000, liabilities of $70,000, and capital stock of $1,000, what is the amount of retained earnings?

a.$30,000
b.$0
c.$60,000
d.$1,000

2. When owners invest money in their business, the effect on the accounting equation is that the investment:

a. increases assets and decreases owners' equity.
b. increases assets and increases liabilities.
c. decreases assets and decreases owners' equity.
d. increases assets and increases owners' equity.

3. The purchase of inventory on credit:

a. increases assets and decreases liabilities.
b. increases liabilities and decreases assets
c. increases assets and increases liabilities.
d. decreases assets and decreases liabilities.

4. A revenue account is increased with:

a. Debits.
b. Credit.
c. Equities.
d. None of the above.

5. A company's retained earnings balance is increased by

a. net income.
b. expenses.
c. investments by owners.
d. the declaration and payment of dividends.

6. The journal entry to record the payment of wages in the amount of $52,000 to workers could include a:

a. debit to wages expense.
b. credit to accounts payable.
c. debit to cash.
d. credit to wages expense.

7. The entry to record the collection of cash from customers would include a:

a. debit to accounts receivable.
b. debit to sales revenue.
c. credit to cash.
d. debit to cash.

8. When a company earns revenue from sales to customers, the effects on the accounting equation may be:

a. assets are increased, equities are decreased.
b. assets are decreased, equities are decreased.
c. assets are decreased, equities are increased.
d. assets are increased, equities are increased.

9. Wagner Inc. had a beginning cash balance of $14,000 on January 1, 05. During January, the company recorded debits of $23,000 and credits of $25,000 to the cash account. The ending cash balance on January 31 would be a:

a. debit balance of $16,000.
b. credit balance of $16,000.
c. debit balance of $12,000.
d. credit balance of $12,000.

10. On March 1, 05, the Cruston Company had a beginning balance in the accounts payable account of $30,000. During March, the company recorded debits of $52,000 and credits of $47,000 to accounts payable. The ending accounts payable balance on March 31 would be a:

a. debit balance of $35,000.
b. credit balance of $35,000.
c. debit balance of $25,000.
d. credit balance of $25,000.

11. The idea that the expenses incurred to generate revenue for a given period should be matched against that revenue is called the:

a. revenue recognition principle.
b. realization concept.
c. time period concept.
d. matching principle.

12. The process of dividing a company's operations into separate and distinct time periods so that reports can be prepared on a timely basis is the:

a. fiscal year concept.
b. revenue recognition principle.
c. matching concept.
d. time period concept.

13.During 05, the Latrex Corporation had cash and credit sales of $47,000 and $45,500 respectively. The company also collected accounts receivable of $26,700 and incurred expenses of $68,500, 80 percent of which were paid during the year. In addition, Latrex paid $24,000 for a 12-month building rental, beginning on July 1, 05. Latrex's accrual-basis net income (loss) for 05 was:

a. $12,000.
b. $25,700.
c. $0.
d. $38,700.

14. A revenue that is collected before it has been earned is called a(n):

a. accrued revenue.
b. unrecorded revenue.
c. deferred revenue.
d. unearned revenue.

15. Expense items that have been incurred during a period but not recorded by the end of the period are:

a. prepaid liabilities.
b. prepaid expenses.
c. deferred expenses.
d. unrecoreded liabilities.

16. On October 1, 05, the Wolfzorn Company was paid $14,000 for a job that would not be completed until March 1, 06. On the date they were paid, Wolfzorn credited a revenue account and debited cash. If Wolfzorn fails to make an adjusting entry on December 31, 05, the effects will be:

a. understatement of revenues and overstatement of assets.
b. understatement of revenues and overstatement of liabilities.
c. overstatement of revenues and overstatement of liabilities.
d. overstatement of revenues and understatement of liabilities.

17. On September 1, 05, Blackburn Corporation prepaid rent for a one-year period, debiting a prepaid rent account. If Blackburn fails to make an adjusting entry on December 31, 05, the effects will be:

a. overstatement of assets and understatement of expenses.
b. overstatement of assets and overstatement of expenses.
c. understatement of assets and understatement of expenses.
d. understatement of assets and overstatement of expenses.

18. At year-end, Grundwerk Company's supplies account had a debit balance of $4,0. However, a count of the supplies revealed that the actual balance was $2,300. The adjusting entry to record supplies used would include a:

a. debit of $2,300 to the supplies expense account.
b. debit of $1,900 to the supplies expense account. 
c. credit of $2,300 to the supplies expense account.
d. credit of $1,900 to the supplies expense account.

19.Which of the following is NOT a nominal account?

a. Advertising expense.
b. Consulting revenue.
c. Rent expense.
d. Retained earnings

20. The set of entries that brings all nominal account balances to zero are called:

a. adjusting entries.
b. journal entries.
c. closing entries.
d. zeroing entries.

21. According to Modigliani and Miller's, as a firm's debt-to-equity ratio increases:

a. its financial risk increases.
b. its operating risk increases.
c. the expected return on equity increases.
d. the expected return on equity decreases.

22. An implicit cost of adding debt to the capital structure is that it:

a. adds interest expense to the operating statement.
b. increases the required return on equity.
c. reduces the expected return on assets.
d. decreases the firm's beta.

23.The "trade-off theory" of capital structure suggests that:

a. firms add leverage whenever interest rates are low.
b. firms with higher operating risk should use less debt.
c. firms should use 50% debt and 50% equity.
d. firms should use debt to overcome high par values of stock.

24. According to pecking order theory, managers will often choose to finance with:

a. new equity rather than debt, due to bankruptcy costs.
b. debt rather than new equity, to avoid reduced share price.
c. debt rather than retained earnings, to lower the WACC.
d. new equity rather than debt, to strengthen EPS.

25. A common-size balance sheet portrays the firm's accounts as a percent of the:

a. industry's assets.
b. firm's net income.
c. firm's total assets.
d. strongest competitor's assets.

26. An asset's liquidity measures its:

a. potential for generating a profit.
b. cash requirements.
c. ease and cost of being converted to cash.
d. proportion of debt financing.

27.When Tri-C Corp. compares its ratios to industry averages, it has a higher current ratio, an average quick ratio, and a low inventory turnover. What might you assume about Tri-C?

a. Its cash balance is too low.
b. Its cost of goods sold is too low.
c. Its current liabilities are too low.
d. Its average inventory is too high.

28. Which of the following would be most detrimental to a firm's current ratio if that ratio is currently 2.0?

a. Buy raw materials on credit.
b. Sell marketable securities at cost.
c. Pay off accounts payable with cash.
d. Pay off a portion of long-term debt with cash.

29. How does the Du Pont formula help identify the determinants of the firm's return on its assets and equity?

a. The formula states that the return on equity is the product of the firm's leverage ratio, asset turnover, operating profit margin, and debt burden.

b. The formula states that the return on assets is the product of the firm's asset turnover and operating profit margin.

a. a.
b. b.
c. both a and b are correct.
d. neither a nor b is correct.

30. Which of the following is incorrect regarding potential pitfalls of ratio analysis based on accounting data?

a. Financial ratio analysis will rarely be useful if practiced mechanically. It requires a large dose of good judgment. Financial ratios often provide answers, and they do help you ask the right questions.

b. Accounting data do not necessarily reflect market values properly, and so must be used with caution.

c. We need a benchmark for assessing a company's financial position.We typically compare financial ratios with the company's ratios in earlier years and with the ratios of other firms in the same business.

a. a
b. b
c. c
d. d

31. Which of the following is not correct regarding the standard measures (and their significance) of a firm's leverage, liquidity, efficiency, and profitability?

a. Leverage ratios measure the indebtedness of the firm. Liquidity ratios measure how easily the firm can obtain cash. Efficiency ratios measure how intensively the firm is using its assets. Profitability ratios measure the firm's return on its investments.

b. Be selective in your choice of these ratios. Different ratios often tell you similar things. Financial ratios crop up repeatedly in financial discussions and arrangements.

c. Banks and bondholders commonly place limits on the borrower's liquidity ratios.

d. Ratings agencies also look at leverage ratios when they decide how highly to rate the firm's bonds.

a. a
b. b
c. c
d. d

32. Which of the following would be most detrimental to a firm's current ratio if that ratio is currently 2.0?

a. Buy raw materials on credit.
b. Sell marketable securities at cost.
c. Pay off accounts payable with cash.
d. Pay off a portion of long-term debt with cash.

33. Which of the following is not likely to cause a reduction in the NWC turnover ratio?

a. Sales have decreased.
b. Average payables have increased.
c. Average inventory has been higher.
d. The firm's cash balance is greater.

34. When financial managers take action to minimize the carrying costs of current assets, they:

a. are likely to maximize profits.
b. also consider spoilage costs.
c. may increase costs due to shortages.
d. engage in the matching of maturities.

35. The goal of managing working capital, such as inventory, should be to minimize the:

a. costs of carrying inventory.
b. opportunity cost of capital.
c. aggregate of carrying and shortage costs.
d. amount of spoilage or pilferage.

36. How do firms develop a short-term financing plan that meets their need for cash?

a. The search for the best short-term financial plan inevitably proceeds by trial and error.

b. The financial manager must explore the consequences of different assumptions about cash requirements, interest rates, limits on financing from particular sources, and so on. Firms are increasingly using computerized financial models to help in this process.

c. Firms often raise money on the strength of their current assets, especially accounts receivable and inventories.

a. a.
b. b
c. c
d. All of the above.