Multiple Choice â (2 points each) select the ONE best answer1. Under the definition of accounting, which of the following is not one of the activities performed on the transactions of a business entity? A. Summarizing.B. Interpreting.C. Classifying.D. Forecasting. 2. Which of the following is a measure of solvency?A. Current ratioB. Price earnings ratioC. Earnings per shareD. Debt to total assets ratio3. Working capital isA. Available to meet the growth needs and non-current obligations of a company.B. Nearly always the same as net income.C. used to evaluate a companyâs solvency and long-term debt paying ability.D. calculated by subtracting current assets from current liabilities.4. Which of the following is not an example of conservatism in accounting?A. Expensing tires when purchased even though they last two years.B. Recording gains in market value of short term investments.C. Recording depreciation on equipment during its useful life rather than waiting to record the loss at the time it is sold.D. Estimating and recording the estimated expense of defending a lawsuit when it is filed.5. A corporation has which of the following set of characteristics?A. Shared control, tax advantages, increased management skills and resourcesB. Simple to set up and maintains control with founderC. Easier to transfer ownership and raise funds, no personal liabilityD. Harder to raise funds and gives owner control6. Retained earnings is the amount ofA. cash that stockholders may withdraw as dividends when neededB. cash left over after all liabilities for the period have been satisfied.C. cash invested by the owners of the businessD. earnings reinvested in the business which the board of directors has not paid out as dividends7. The statement of cash flows would disclose the payment of a dividendA. nowhere on the statement.B. in the operating activities section.C. in the investing activities section.D. in the financing activities section.8. Which of the following financial statements usually prepared first?A. Balance sheet.B. Income statement.C. Retained Earnings statement.D. Statement of cash flows.9. Which of the following is a cash flow from investing activities?A. Purchase of merchandise for resale.B. Sale of inventory to customers.C. Sale of a franchise or a copyright.D. Payment of a note payable.10. On the Statement of Cash Flows paying a dividend to owners is an example ofA. operating activities.B. investing activities.C. financing activities.D. shareholder activities.11. The price earnings ratio is unique among financial ratios becauseA. The lower the ratio, the better the performance of a companyB. It is an indication of expectations rather than historical financial statement information C. It is required to be shown on the face of the income statement of a public company D. It is an outstanding indicator of liquidity12. Which of the following is a transaction which should be recorded in an accounting system? A. Signing a contract to purchase a parcel of landB. Termination of an employee without payC. Pledging to give 10% of your Companyâs annual income to a charityD. Receiving cash of $5,000 for services to be performed in the future.13. If total assets increased by $25000 during a period of time and stockholdersâ equity increased by $5000 during the same period, then the amount and direction (increase or decrease) of the periodâs change in total liabilities is a(n):A. $20,000 decreaseB. $20,000 increaseC. $25,000 increaseD. $30,000 increase14. Which of the following components of an financial statement is an application of the full disclosure principle which clarifies information presented in the financial statements, as well as provides additional detail:A. Auditorâs report.B. Notes to financial statementsC. Management discussion and analysis section.D. Presidentâs state of the company report.15. In the annual report, where would a financial statement reader find out if the companyâs financial statements give a fair depiction of its financial position and operating results?A. Notes to the financial statements.B. Management discussion and analysis section.C. Balance sheet.D. Auditorâs report.16. The going concern assumption underlies theA. Monetary unit assumption B. The cost principleC. The materiality constraintD. Time period assumption 17. A good accountant must have integrity, follow the rules, have basic math skills, and objectively document reality. These characteristics are most like those ofA A scorekeeper in a football gameB A politician in WashingtonC A lawyer in a courtroomD A construction worker after the hurricane18. On a balance sheet, assets are listed in the order of A. Dollar amount (largest first). B. Date of acquisition (earliest first). C. Ease of conversion to cash. D. Importance to the operation of the business.19. Primary responsibility for the information in a corporation’s financial statements rests with A. The shareholders of the corporation. B. The managers of the corporation. C. The Securities and Exchange Commission. D. The certified public accountant who audited the financial statements.20. A business’s balance sheet cannot be used to accurately predict what the business might be sold for because A. it identifies all the revenues and expenses of the business. B. Assets are generally listed on the balance sheet at their historical cost, not their current value. C. it gives the results of operations for the current period. D. some of the assets and liabilities on the balance sheet may actually be those of another entity. Problem I â Financial Statements (30 points)You are provided with the following information for Number Crunchers, Inc, effective as of its December 31, 2004 year end. Accrued income taxes $ 135Accounts payable 553Accounts receivable 810Accumulated depreciation 1,460Cash 570Common stock (900 shares) 900Cost of goods sold 20,820Current portion of long-term debt 640Depreciation expense 435Dividends paid during the year 225Equipment 5,060Income tax expense 105Industrial development bonds 6,000Interest expense 400Inventories 2,052Land 15,400Land Held for future expansion 9,240Long term lease obligation 800Pension expense 81Prepaid expenses 12Retained earnings, beginning 1,400Sales 46,000Supplies 150Short term investments 1,800Trademark 210Unearned Revenue 400Wages expense 1,140Wages payable 222Instructions:a) Prepare an income statement and a retained earnings statement for Number Crunchers, Inc for the year ended December 31, 2004.b) Prepare a classified balance sheet for Number Crunchers, Inc. as of December 31, 2004. Problem II (20 points)The following information is available from the 2004 annual reports of Price Company and Stockton Company. .Both companies manufacture cash registers (Amounts in millions) Price Stockton Sales $26,510 $34,512 Cost of sales 6,610 8,887 Net income 565 1,271 Current assets 11,712 28,447 Beginning total assets 17,102 33,130 Ending total assets 22,088 36,167 Current liabilities 7,966 14,950 Total liabilities 16,136 31,222 Average common shares outstanding 125 240 Year-end share price 50 65 Preferred stock dividends paid -0- -0-The following are the averages for the cash register industry 1. Current ratio (Industry 2.00:1) 2. Debt to total assets ratio 3. Earnings per share (average $3.00) 4. Price-earnings ratio (average 15) Required:1. Based on the above information, evaluate Priceâs solvency compared to Stockton. Defend your answer by calculating the most relevant ratio for both companies and comparing it to the industry average. 2. Based on the above information, comment on the Wall Street expectations for Pricecompared to Stockton and the industry average. Defend your answer by calculating The most relevant ratio for both companies.Short Answer â Question III (10 points)Under accounting principles generally accepted in the United States of America, research and development costs to come up with new inventions, technology or creative works are recorded as an expense when incurred. Several international students visiting your campus comment that such costs are recorded as assets and depreciated over 5 to 10 years in their country. Indicate whether you agree with the United States accounting principle and select one of the following principles, assumptions or constraints to concisely defend your answer (cost, materiality, relevance, consistency, comparability, conservatism, and going concern) .
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