1. Reasons why an organization reacquires its own stock (treasury stock) include(s):

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1. Reasons why an organization reacquires its own stock (treasury stock) include(s):

a.To reissue shares to officers and employees under bonus and stock compensation plans.

b.To increase trading of the company’s stock in the securities market

c.To have additional shares available for use in acquiring other companies

d.To reduce the number of shares outstanding and thereby increase earnings-per-share (EPS)

e.All of the above

 

2.  Accumulated depreciation will be shown on the balance sheet in what section?

a.Current assets

b.Property, plant, and equipment

c.Intangible assets

d.Long-term investments

e.Other assets

 

3.  A daily cash count of register receipts made by a cashier department supervisor demonstrates an application of which of the following internal control principles?

a.Documentation procedures

b.Segregation of duties

c.Establishment of responsibility

d.Independent internal verification

 

4. Current liabilities are obligations that are reasonably expected to be paid from

   Existing             Creation of Other

Current Assets         Current Liabilities

a.No                         No

b.Yes                         Yes

c.Yes                         No

d.No                        Yes

 

5.  Which of the following combinations presents correct examples of liquidity, profitability, and solvency ratios, respectively?

LiquidityProfitabilitySolvency

a.Inventory turnover     Inventory turnoverTimes interest earned

b.Current ratio     Inventory turnoverDebt to total assets

c.Receivable turnover     Return on assetsTimes interest earned

d.Average days collection     Payout ratioReturn on assets

 

6.  Which of the following pairs of terms in the area of financial statement analysis are synonymous?

a.Ratio — Trend

b.Horizontal — Trend

c.Vertical — Ratio

d.Horizontal — Ratio

 

7.  Which of the following should be classified as an extraordinary item?

a.Effects of major casualties not infrequent in the area

b.Write-off of a significant amount of receivables

c.Loss from the expropriation of facilities by a foreign government

d.Losses due to a bitter, lengthy labor strike

 

8.  Harne Manufacturing declared an 10% stock dividend when it had 150,000 shares of $5 par value common stock outstanding. The market price per common share was $15 per share when the dividend was declared. The entry to record this dividend declaration includes a credit to

a.Retained Earnings of $225,000.

b.Paid-in Capital in Excess of Par for $150,000.

c.Common Stock for $225,000.

d.   Retained Earnings for $75,000.

 

9.  Fison Corp. purchased 15,000 shares of its $2 par common stock at a cost of $12 per share on April 30, 2006. The stock was originally issued at $10 per share. The entry to record the purchase of the stock should include a debit to

a.Common Stock for $30,000.

b.Treasury Stock for $30,000.

c.Common Stock for $180,000.

d.Treasury Stock for $180,000.   solution:  15000 x 12 = 180000

 

10. What is the effect on total paid-in capital of a stock dividend and a stock split, respectively?

Stock DividendStock Split

a.IncreaseNo effect

b.No effectNo effect

c.DecreaseNo effect

d.DecreaseDecrease

 

11.  All the following are principles of internal control except:

a.Having a yearly audit by an independent auditing firm

b.Segregation of duties

c.Documentation procedures

d.Establishment of responsibility

e.Physical, mechanical and electronic controls

 

12.   For a lease to be classified as a capital lease, it must meet all of the following criteria except:

a.Transfers ownership to lessee at the end of the lease

b.Contains a bargain purchase option

c.Lease term equals 90 percent or more of the estimated remaining economic life of the leased property

d.The present value of the minimum lease payment equals or exceeds 90 percent of the fair value

e.  The asset is specific to the firm

 

13.  All of the following are sections of a cash budget except

        a.cash disbursements.

b.cash receipts.

c.financing.

d.operating.

 

14.  The receivables turnover ratio is calculated by dividing

a.net credit sales by average receivables.

b.net credit sales by ending receivables.

c.total sales by average receivables.

d.total sales by ending receivables.

 

15.  The amortization of premium on bonds payable

a.will increase bond interest expense.

b.should take place over a period not to exceed 40 years.

c.will decrease bond interest expense.

d.will increase bond interest revenue.

 

16.  A $200,000, 5%, 20-year bond was issued at 97.  The proceeds received from the bond issuance are

a.$194,000.    

b.$190,400.

c.$200,000.

d.$206,000.

 

17.  The inventory turnover ratio is computed by dividing the average inventories into

a.net sales.

b.   total assets.

c.cost of goods sold.

d.stockholders' equity.

 

18. The best way to study the relationship of the components of financial statements is to prepare

a.common size statements.

b.a trend analysis.

c.profitabiltiy analysis.

d.ratio analysis.

 

19.  In performing a vertical analysis, the base for prepaid expenses is

a.total current assets.

b.total assets.

c.total liabilities.

d.prepaid expenses in a previous year.

 

20.  Which one of the following transactions does not affect cash?

a.Acquisition and retirement of bonds payable

b.Write-off of an uncollectible accounts receivable

c.Acquisition of treasury stock

d.Payment of cash dividend

 

21.  Hepford Company reported the following on its income statement:

Income before income taxes$420,000

Income tax expense  120,000

Net income$300,000

An analysis of the income statement revealed that interest expense was $80,000.  Hepford Company's times interest earned was

a.8 times.

b.5.25 times.

c.6.25 times.  

d.5 times.

 

22.  If year one equals $800, year two equals $840, and year three equals $896, the percentage to be assigned for year three in a trend analysis, assuming that year 1 is the base year, is

a.   112%.   

b.    89%.

c.   105%.

d.   100%.

 

23.  Which of the following most likely would be classified as a current liability?

a.Dividends payable

b.Bonds payable in 5 years

c.Three-year notes payable

d.Mortgage payable as a single payment in 10 years

 

24.  Current liabilities are due

a.but not receivable for more than one year.

b.but not payable for more than one year.

c.and receivable within one year.

d.and payable within one year.

 

25.  As interest is recorded on an interest-bearing note, the Interest Expense account is

a.increased; the Notes Payable account is increased.

b.increased; the Notes Payable account is decreased.

c.increased; the Interest Payable account is increased.

d.decreased; the Interest Payable account is increased.

 

26.  The interest charged on a $100,000 note payable, at the rate of 6%, for a year would be

a.$6,000.   

b.$3,333.

c.$1,500.

d.$500.

 

27.  Interest expense on an interest-bearing note is

a.always equal to zero.

b.accrued over the life of the note.

c.only recorded at the time the note is issued.

d.only recorded at maturity when the note is paid.

 

28.  The current portion of long-term debt should

a.be paid immediately.

b.be reclassified as a current liability.

c.be classified as a long-term liability.

                d.not be separated from the long-term portion of debt.

 

29.  Which one of the following is not an objective of a system of internal controls?

a.Safeguard company assets

b.Overstate liabilities in order to be conservative

c.Enhance the accuracy and reliability of accounting records

d.Reduce the risks of errors

 

30.  All of the following are examples of internal control procedures except

a.using prenumbered documents.

b.reconciling the bank statement.

c.customer satisfaction surveys.

d.insistence that employees take vacations.

 

31.  Internal controls are concerned with

a.only manual systems of accounting.

b.the extent of government regulations.

c.safeguarding assets.

d.preparing income tax returns.

 

32.  Internal controls are not designed to safeguard assets from

a.natural disasters.

b.employee theft.

c.robbery.

d.unauthorized use.

 

33.  When two or more people get together for the purpose of circumventing prescribed controls, it is called

a.a fraud committee.

b.collusion.

c.a division of duties.

d.bonding of employees.

 

34.  A very small company would have the most difficulty in implementing which of the following internal control activities?

a.Separation of duties

b.Limited access to assets

c.Periodic independent verification

d.Sound personnel procedures

 

35.  Which of the following bank reconciliation items would not result in an adjusting entry?

a.Service charge

b.Outstanding checks

c.NSF check of customer

d.Collection of a note by the bank

 

36.  Jones Company had checks outstanding totaling $10,800 on its June bank reconciliation. In July, Jones Company issued checks totaling $77,800. The July bank statement shows that $52,600 in checks cleared the bank in July. A check from one of Jones Company's customers in the amount of $600 was also returned marked "NSF." The amount of outstanding checks on Davis Company's July bank reconciliation should be

a.$25,200.

b.$36,000.  

c.$35,400.

d.$14,400.

 

37.  The term "receivables" refers to

a.amounts due from individuals or companies.

b.merchandise to be collected from individuals or companies.

c.cash to be paid to creditors.

d.cash to be paid to debtors.

 

38. The Allowance for Doubtful Accounts is necessary because

a.when recording uncollectible accounts expense, it is not possible to know which specific accounts will not pay.

b.uncollectible accounts that are written off must be accumulated in a separate account.

c.a liability results when a credit sale is made.

d.management  needs to accumulate all the credit losses over the years.

 

39.  The account Allowance for Doubtful Accounts is classified as a(n)

a.liability.

b.contra account of Bad Debt Expense.

c.expense.

d.contra account to Accounts Receivable.

 

40.  Under the allowance method, writing off an uncollectible account

a.affects only balance sheet accounts.

b.affects both balance sheet and income statement accounts.

c.affects only income statement accounts.

d.is not acceptable practice.

 

41.  If a company fails to record estimated bad debts expense,

a.cash realizable value is understated.

b.expenses are understated.

c.revenues are understated.

                d.receivables are understated.

 

42.  An aging of a company's accounts receivable indicates that $4,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,200 credit balance, the adjustment to record bad debts for the period will require a

a.debit to Bad Debts Expense for $4,000.

b.debit to Allowance for Doubtful Accounts for $2,800.

c.debit to Bad Debts Expense for $2,800.    

d.credit to Allowance for Doubtful Accounts for $4,000.

 

43. The current assets of Sol Company are $180,000. The current liabilities are $120,000. The current ratio expressed as a proportion is

         a.  150%.

b.  1.5:1.  

c.  67:1.

         d.  $180,000 ÷ $120,000.

 

 

Use the following information for questions 44-45.

 

Luthor Corporation had net income of $160,000 and paid dividends to common stockholders of $40,000 in 2007. The weighted average number of shares outstanding in 2007 was 50,000 shares. Luthor Corporation's common stock is selling for $50 per share on the New York Stock Exchange.

 

44.  Luthor Corporation's price-earnings ratio is

a.3.2 times.

b.15.6 times.  

c.10 times.

d.5 times.

 

45.  Luthor Corporation's payout ratio for 2007 is

a.$5 per share.

b.25%.    

c.20%.

d.12.5%.

 

Use the following information for questions 46-47.

 

Charles Department Store had net credit sales of $9,000,000 and cost of goods sold of $6,000,000 for the year.  The average inventory for the year amounted to $2,500,000.

 

46.  The inventory turnover ratio for the year is

a.3.6 times.

b.3.2 times.

c.3.0 times.

d.2.4 times.   

 

47.  The average days in inventory during the year was approximately

a.101 days.

b.114 days.

c.122 days.

d.152 days.   

 

48.  Fall Clothing Store had a balance in the Accounts Receivable account of $810,000 at the beginning of the year and a balance of $850,000 at the end of the year. Net credit sales during the year amounted to $5,814,980. The average collection period of the receivables in terms of days was

a.50 days.

b.52.1 days.  

c.365 days.

d.52.9 days.

 

49.  Rose Hardware Store had net credit sales of $3,920,000 and cost of goods sold of $3,000,000 for the year. The Accounts Receivable balances at the beginning and end of the year were $650,000 and $750,000, respectively. The receivables turnover ratio was

a.6.5 times.

b.6.0 times.

c.5.6 times.   

d.6.2 times.

 

50.  A high receivables turnover ratio indicates 

a.customers are making payments quickly.

b.a large portion of the company’s sales are on credit.

c.many customers are not paying their receivables.

d.the company’s sales have increased.

 

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