Deck 6: Operating Transactions Revenues, Expenses, and Working Capital

Question 1

Martin Corporation reported a cumulative effect of the change in accounting (net of tax) in the amount of $30,000 in its income statement for 2009.Martin's income tax rate is 25%.The gross amount of the effect of the change in accounting was

A) $30,000.
B) $37,500.
C) $40,000.
D) $120,000.

Answer 1

$40,000.

Question 2

Le Casa Corporation reported net income before extraordinary items and taxes of $200,000 for the year 2009.During 2009, the average number of common shares outstanding was 35,000.Basic net earnings per share for 2009 are reported to be only $2.00.Le Casa's income tax rate is 30%.How much was Le Casa's extraordinary gain or loss (before tax) from a major theft that was perpetrated by Le Casa's payroll clerk? The theft loss was the only item that was reported net of tax in the income statement for 2009.

A) $70,000.
B) $100,000.
C) $130,000.
D) none of the above

Answer 2

$100,000.

Question 3

Ursula Clothing has cost of goods sold of $12,000 with beginning and ending inventories of $4,000 and $2,000, respectively.Purchases during the period are

A) $ 8,000.
B) $ 9,000.
C) $10,000.
D) $11,000.
E) $12,000.

Answer 3

$10,000.

Question 4

Beginning inventory is valued at $7,000, purchases are $15,000 and ending inventory is valued at $8,000.Cost of goods sold is

A) $23,000.
B) $16,000.
C) $30,000.
D) $14,000.
E) $16,000

Question 5

One of Villager Corp's employees invented a revolutionary coffee lid that cools coffee as you drink it in order to prevent burns.Two children ordered coffee and burned their mouths after failing to properly secure the lids.The children's parents sued.Villager Corp's.lawyers believe that it is highly probable that judgment will be rendered against Villager Corp and it is likely a payment in excess of $2 million will be incurred.The proper accounting treatment of the lawsuit will

A) decrease total liabilities.
B) increase total liabilities.
C) increase the current ratio.
D) require accountants to wait until the suit is settled to account for the event.

Question 6

Given below are several items that will be reported on a company's financial statements.Select the letter of the proper financial statement reporting section listed as a through f.You may use each letter more than once or not at all.

-A loss incurred by Maranda Corporation due to a strike by employees of the company

A) Income from continuing operations section of the income statement
B) Discontinued operations section of the income statement
C) Extraordinary items section of the income statement
D) Cumulative effect of a change in accounting principle section of the income statement
E) A separate comprehensive income item
F) Not reported on the income statement or comprehensive income statement

Question 7

Given below are several items that will be reported on a company's financial statements.Select the letter of the proper financial statement reporting section listed as a through f.You may use each letter more than once or not at all.

-A large loss of inventory incurred by a meat-packing factory due to a government FDA inspection which found dangerously high levels of bacteria; no previous situations in the company's history

A) Income from continuing operations section of the income statement
B) Discontinued operations section of the income statement
C) Extraordinary items section of the income statement
D) Cumulative effect of a change in accounting principle section of the income statement
E) A separate comprehensive income item
F) Not reported on the income statement or comprehensive income statement

Question 8

Given below are several items that will be reported on a company's financial statements.Select the letter of the proper financial statement reporting section listed as a through f.You may use each letter more than once or not at all.

-Manufacturing circuits were determined obsolete and had to be written down to a nominal scrap value due to an improved manufacturing process

A) Income from continuing operations section of the income statement
B) Discontinued operations section of the income statement
C) Extraordinary items section of the income statement
D) Cumulative effect of a change in accounting principle section of the income statement
E) A separate comprehensive income item
F) Not reported on the income statement or comprehensive income statement

Question 9

Given below are several items that will be reported on a company's financial statements.Select the letter of the proper financial statement reporting section listed as a through f.You may use each letter more than once or not at all.

-A loss due to a decline in market value on an available-for-sale investment

A) Income from continuing operations section of the income statement
B) Discontinued operations section of the income statement
C) Extraordinary items section of the income statement
D) Cumulative effect of a change in accounting principle section of the income statement
E) A separate comprehensive income item
F) Not reported on the income statement or comprehensive income statement

Question 10

Given below are several items that will be reported on a company's financial statements.Select the letter of the proper financial statement reporting section listed as a through f.You may use each letter more than once or not at all.

-Losses due to hurricane damage

A) Income from continuing operations section of the income statement
B) Discontinued operations section of the income statement
C) Extraordinary items section of the income statement
D) Cumulative effect of a change in accounting principle section of the income statement
E) A separate comprehensive income item
F) Not reported on the income statement or comprehensive income statement

Question 11

Given below are several items that will be reported on a company's financial statements.Select the letter of the proper financial statement reporting section listed as a through f.You may use each letter more than once or not at all.

-Financial impacts of the adoption of a new FASB standard on goodwill.

A) Income from continuing operations section of the income statement
B) Discontinued operations section of the income statement
C) Extraordinary items section of the income statement
D) Cumulative effect of a change in accounting principle section of the income statement
E) A separate comprehensive income item
F) Not reported on the income statement or comprehensive income statement

Question 12

Given below are several items that will be reported on a company's financial statements.Select the letter of the proper financial statement reporting section listed as a through f.You may use each letter more than once or not at all.

-The financial effects of outsourcing the company's industrial product division

A) Income from continuing operations section of the income statement
B) Discontinued operations section of the income statement
C) Extraordinary items section of the income statement
D) Cumulative effect of a change in accounting principle section of the income statement
E) A separate comprehensive income item
F) Not reported on the income statement or comprehensive income statement

Question 13

For each transaction provided in items , select the proper section of the statement of cash flows in which it should be reported using the indirect method from the reporting categories provided in a through h below.If the item is not required to be reported on the statement of cash flows, place an 'X' in the space provided.

-Retired long-term debt before its maturity date

A) Cash flows from operating activities-will be added to net income
B) Cash flows from operating activities-will be subtracted from net income
C) Cash flows from investing activities-increase as a result of cash inflows
D) Cash flows from investing activities-decrease as a result of cash outflows
E) Cash flows from financing activities-increase as a result of cash inflows
F) Cash flows from financing activities-decrease as a result of cash outflows
G) Disclosed as a non-cash transaction in the notes
H) Appears in operating activities only under the direct method

Question 14

For each transaction provided in items , select the proper section of the statement of cash flows in which it should be reported using the indirect method from the reporting categories provided in a through h below.If the item is not required to be reported on the statement of cash flows, place an 'X' in the space provided.

-Cash paid for income taxes

A) Cash flows from operating activities-will be added to net income
B) Cash flows from operating activities-will be subtracted from net income
C) Cash flows from investing activities-increase as a result of cash inflows
D) Cash flows from investing activities-decrease as a result of cash outflows
E) Cash flows from financing activities-increase as a result of cash inflows
F) Cash flows from financing activities-decrease as a result of cash outflows
G) Disclosed as a non-cash transaction in the notes
H) Appears in operating activities only under the direct method

Question 15

For each transaction provided in items , select the proper section of the statement of cash flows in which it should be reported using the indirect method from the reporting categories provided in a through h below.If the item is not required to be reported on the statement of cash flows, place an 'X' in the space provided.

-Recognized loss on the sale of equipment

A) Cash flows from operating activities-will be added to net income
B) Cash flows from operating activities-will be subtracted from net income
C) Cash flows from investing activities-increase as a result of cash inflows
D) Cash flows from investing activities-decrease as a result of cash outflows
E) Cash flows from financing activities-increase as a result of cash inflows
F) Cash flows from financing activities-decrease as a result of cash outflows
G) Disclosed as a non-cash transaction in the notes
H) Appears in operating activities only under the direct method

Question 16

For each transaction provided in items , select the proper section of the statement of cash flows in which it should be reported using the indirect method from the reporting categories provided in a through h below.If the item is not required to be reported on the statement of cash flows, place an 'X' in the space provided.

-Declared cash dividends

A) Cash flows from operating activities-will be added to net income
B) Cash flows from operating activities-will be subtracted from net income
C) Cash flows from investing activities-increase as a result of cash inflows
D) Cash flows from investing activities-decrease as a result of cash outflows
E) Cash flows from financing activities-increase as a result of cash inflows
F) Cash flows from financing activities-decrease as a result of cash outflows
G) Disclosed as a non-cash transaction in the notes
H) Appears in operating activities only under the direct method

Question 17

For each transaction provided in items , select the proper section of the statement of cash flows in which it should be reported using the indirect method from the reporting categories provided in a through h below.If the item is not required to be reported on the statement of cash flows, place an 'X' in the space provided.

-Amortization of patent

A) Cash flows from operating activities-will be added to net income
B) Cash flows from operating activities-will be subtracted from net income
C) Cash flows from investing activities-increase as a result of cash inflows
D) Cash flows from investing activities-decrease as a result of cash outflows
E) Cash flows from financing activities-increase as a result of cash inflows
F) Cash flows from financing activities-decrease as a result of cash outflows
G) Disclosed as a non-cash transaction in the notes
H) Appears in operating activities only under the direct method

Question 18

For each item numbered below, identify the letter of the best description by selecting from items a through e below.You may use each letter more than once or not at all.

-Current liabilities

A) Intention is to convert into cash within one year
B) Current assets/current liabilities
C) Current assets - current liabilities
D) Must pay within one year
E) (Cash + marketable securities + accounts receivable) divided by current liabilities

Question 19

For each item numbered below, identify the letter of the best description by selecting from items a through e below.You may use each letter more than once or not at all.

-Current assets

A) Intention is to convert into cash within one year
B) Current assets/current liabilities
C) Current assets - current liabilities
D) Must pay within one year
E) (Cash + marketable securities + accounts receivable) divided by current liabilities

Question 20

For each item numbered below, identify the letter of the best description by selecting from items a through e below.You may use each letter more than once or not at all.

-Quick ratio

A) Intention is to convert into cash within one year
B) Current assets/current liabilities
C) Current assets - current liabilities
D) Must pay within one year
E) (Cash + marketable securities + accounts receivable) divided by current liabilities

Question 21

For each item numbered below, identify the letter of the best description by selecting from items a through e below.You may use each letter more than once or not at all.

-Working capital

A) Intention is to convert into cash within one year
B) Current assets/current liabilities
C) Current assets - current liabilities
D) Must pay within one year
E) (Cash + marketable securities + accounts receivable) divided by current liabilities

Question 22

For each item numbered below, identify the letter of the best description by selecting from items a through e below.You may use each letter more than once or not at all.

-Current ratio

A) Intention is to convert into cash within one year
B) Current assets/current liabilities
C) Current assets - current liabilities
D) Must pay within one year
E) (Cash + marketable securities + accounts receivable) divided by current liabilities

Question 23

For each item listed in, place the letter (a through e) of the accounting effect in the space provided.You may use each letter more than once or not at all.

-During a period of increasing inventory and rising prices, a company decides to use FIFO instead of LIFO.

A) Assets and net income increase
B) Assets and net income decrease
C) Assets decrease and net income increases
D) Assets increase and net income decreases
E) Assets and net income are not affected

Question 24

For each item listed in, place the letter (a through e) of the accounting effect in the space provided.You may use each letter more than once or not at all.

-During a period of increasing inventory and rising prices, a company decides to use averaging instead of FIFO.

A) Assets and net income increase
B) Assets and net income decrease
C) Assets decrease and net income increases
D) Assets increase and net income decreases
E) Assets and net income are not affected

Question 25

For each item listed in, place the letter (a through e) of the accounting effect in the space provided.You may use each letter more than once or not at all.

-During a period of increasing inventory and increasing prices, a company uses the LIFO method, which creates the largest cost of goods sold.

A) Assets and net income increase
B) Assets and net income decrease
C) Assets decrease and net income increases
D) Assets increase and net income decreases
E) Assets and net income are not affected

Question 26

For each item listed in, place the letter (a through e) of the accounting effect in the space provided.You may use each letter more than once or not at all.

-A company applies lower-of-cost-or-market for valuing ending inventory when market price is less than cost.

A) Assets and net income increase
B) Assets and net income decrease
C) Assets decrease and net income increases
D) Assets increase and net income decreases
E) Assets and net income are not affected

Question 27

For each item listed in, place the letter (a through e) of the accounting effect in the space provided.You may use each letter more than once or not at all.

-A company applies lower-of-cost-or-market for valuing ending inventory when cost is less than market price.

A) Assets and net income increase
B) Assets and net income decrease
C) Assets decrease and net income increases
D) Assets increase and net income decreases
E) Assets and net income are not affected

Question 28

For each item listed in, place the letter (a through e) of the accounting effect in the space provided.You may use each letter more than once or not at all.

-Transportation-in is properly expensed instead of being added to the cost of ending inventory.

A) Assets and net income increase
B) Assets and net income decrease
C) Assets decrease and net income increases
D) Assets increase and net income decreases
E) Assets and net income are not affected

Question 29

For each item listed in, place the letter (a through e) of the accounting effect in the space provided.You may use each letter more than once or not at all.

-During an extended period of constant prices, a company adopts LIFO instead of FIFO.

A) Assets and net income increase
B) Assets and net income decrease
C) Assets decrease and net income increases
D) Assets increase and net income decreases
E) Assets and net income are not affected

Question 30

For each item numbered below, select the appropriate effect on liabilities listed in a through e that each transaction describes.You may use each letter more than once or not at all.In some cases, two effects are correct.

-Purchased supplies on account.

A) Decrease current liabilities
B) Increase current liabilities
C) No effect on recorded current liabilities
D) Accrued contingent liability
E) Contingent liability disclosed in the notes only

Question 31

For each item numbered below, select the appropriate effect on liabilities listed in a through e that each transaction describes.You may use each letter more than once or not at all.In some cases, two effects are correct.

-Paid accounts payable.

A) Decrease current liabilities
B) Increase current liabilities
C) No effect on recorded current liabilities
D) Accrued contingent liability
E) Contingent liability disclosed in the notes only

Question 32

For each item numbered below, select the appropriate effect on liabilities listed in a through e that each transaction describes.You may use each letter more than once or not at all.In some cases, two effects are correct.

-Issued a $1,000 short-term note payable for $970.

A) Decrease current liabilities
B) Increase current liabilities
C) No effect on recorded current liabilities
D) Accrued contingent liability
E) Contingent liability disclosed in the notes only

Question 33

For each item numbered below, select the appropriate effect on liabilities listed in a through e that each transaction describes.You may use each letter more than once or not at all.In some cases, two effects are correct.

-Amortized the discount of the short-term note payable.

A) Decrease current liabilities
B) Increase current liabilities
C) No effect on recorded current liabilities
D) Accrued contingent liability
E) Contingent liability disclosed in the notes only

Question 34

For each item numbered below, select the appropriate effect on liabilities listed in a through e that each transaction describes.You may use each letter more than once or not at all.In some cases, two effects are correct.

-A portion of long-term debt is due next year.

A) Decrease current liabilities
B) Increase current liabilities
C) No effect on recorded current liabilities
D) Accrued contingent liability
E) Contingent liability disclosed in the notes only

Question 35

For each item numbered below, select the appropriate effect on liabilities listed in a through e that each transaction describes.You may use each letter more than once or not at all.In some cases, two effects are correct.

-Declared cash dividends to holders of stock.

A) Decrease current liabilities
B) Increase current liabilities
C) No effect on recorded current liabilities
D) Accrued contingent liability
E) Contingent liability disclosed in the notes only

Question 36

For each item numbered below, select the appropriate effect on liabilities listed in a through e that each transaction describes.You may use each letter more than once or not at all.In some cases, two effects are correct.

-Paid the cash dividend previously declared.

A) Decrease current liabilities
B) Increase current liabilities
C) No effect on recorded current liabilities
D) Accrued contingent liability
E) Contingent liability disclosed in the notes only

Question 37

For each item numbered below, select the appropriate effect on liabilities listed in a through e that each transaction describes.You may use each letter more than once or not at all.In some cases, two effects are correct.

-Received money from customers prior to delivery of the product to the customer.

A) Decrease current liabilities
B) Increase current liabilities
C) No effect on recorded current liabilities
D) Accrued contingent liability
E) Contingent liability disclosed in the notes only

Question 38

For each item numbered below, select the appropriate effect on liabilities listed in a through e that each transaction describes.You may use each letter more than once or not at all.In some cases, two effects are correct.

-Delivered products to a customer who previously paid for that product.

A) Decrease current liabilities
B) Increase current liabilities
C) No effect on recorded current liabilities
D) Accrued contingent liability
E) Contingent liability disclosed in the notes only

Question 39

For each item numbered below, select the appropriate effect on liabilities listed in a through e that each transaction describes.You may use each letter more than once or not at all.In some cases, two effects are correct.

-Collected sales tax on behalf of the state government.

A) Decrease current liabilities
B) Increase current liabilities
C) No effect on recorded current liabilities
D) Accrued contingent liability
E) Contingent liability disclosed in the notes only

Question 40

For each item numbered below, select the appropriate effect on liabilities listed in a through e that each transaction describes.You may use each letter more than once or not at all.In some cases, two effects are correct.

-Accrued payroll taxes that the firm has to pay to the federal government within three months.

A) Decrease current liabilities
B) Increase current liabilities
C) No effect on recorded current liabilities
D) Accrued contingent liability
E) Contingent liability disclosed in the notes only

Question 41

For each item numbered below, select the appropriate effect on liabilities listed in a through e that each transaction describes.You may use each letter more than once or not at all.In some cases, two effects are correct.

-Accrued a bonus amounting to 5% on reported income to the CEO.

A) Decrease current liabilities
B) Increase current liabilities
C) No effect on recorded current liabilities
D) Accrued contingent liability
E) Contingent liability disclosed in the notes only

Question 42

For each item numbered below, select the appropriate effect on liabilities listed in a through e that each transaction describes.You may use each letter more than once or not at all.In some cases, two effects are correct.

-In a lawsuit filed against the firm, counsel indicates that the potential $10,000 loss is remote.

A) Decrease current liabilities
B) Increase current liabilities
C) No effect on recorded current liabilities
D) Accrued contingent liability
E) Contingent liability disclosed in the notes only

Question 43

For each item numbered below, select the appropriate effect on liabilities listed in a through e that each transaction describes.You may use each letter more than once or not at all.In some cases, two effects are correct.

-In a lawsuit filed against the firm, counsel indicates that the potential $10,000 loss is reasonably possible.

A) Decrease current liabilities
B) Increase current liabilities
C) No effect on recorded current liabilities
D) Accrued contingent liability
E) Contingent liability disclosed in the notes only

Question 44

For each item numbered below, select the appropriate effect on liabilities listed in a through e that each transaction describes.You may use each letter more than once or not at all.In some cases, two effects are correct.

-In a lawsuit filed against the firm, counsel indicates that the potential $10,000 loss is highly probable.

A) Decrease current liabilities
B) Increase current liabilities
C) No effect on recorded current liabilities
D) Accrued contingent liability
E) Contingent liability disclosed in the notes only

Question 45

For each item numbered below, select the appropriate effect on liabilities listed in a through e that each transaction describes.You may use each letter more than once or not at all.In some cases, two effects are correct.

-Accrued warranty expense.

A) Decrease current liabilities
B) Increase current liabilities
C) No effect on recorded current liabilities
D) Accrued contingent liability
E) Contingent liability disclosed in the notes only

Question 46

Page Inc., a computer manufacturer located in Texas, lost an uninsured building due to the infrequent and unusual occurrence of a hurricane.The building has a balance sheet value of $30,000 and will cost $165,000 to rebuild.Page's income tax rate is 40%.Calculate the amount of any extraordinary loss that should be reported on Page's income statement.Prepare a partial income statement that shows how the item will be presented.

Question 47

Profiles Corp.had the following infrequent income statement items during 2009:
·$44,000 of dividends received from a stock investment
·$20,000 gain on the sale of a plant asset which became outdated because of new technology
·$19,000 loss due to the sale of treasury stock at a price less than its original cost
·$34,000 fair value adjustment increase to market for available-for-sale investments
·$50,000 interest expense for the year of which only $42,000 was actually paid
How much should Profiles report as a component of 'income from continuing operations'?

Question 48

The following are the revenue and expense accounts of the current year for ABCO Corporation:

All items are before income taxes.The income tax rate is 20%.Calculate any extraordinary gain or loss that should be disclosed on the income statement.

Question 49

At the beginning of 2010, Kacie Corp.'s allowance for doubtful accounts is $9,000.During 2010, $7,000 was written off as uncollectible.At December 31, the company used an aging schedule of accounts receivable and determined that $8,000 of the accounts receivable would probably be uncollectible.Calculate bad debts expense to be reported on Kacie's 2010 income statement.

Question 50

Before adjusting entries, Kelvin's accounts receivable and allowance for doubtful accounts are $65,000 and $1,500, respectively.Using an aging schedule of accounts receivable, it is determined that $3,000 of the accounts receivable would probably be uncollectible.Calculate bad debts expense to be reported on Kelvin's current year's income statement?

Question 51

Yakir Company began business on August 1, 2004.During August, Yakir made the following purchases:
Calculate Yakir's August 31 ending inventory under the FIFO and LIFO cost flow assumptions.

Question 52

Nakita Inc.reported beginning inventory of $90,000, ending inventory of $23,000, purchases of $128,000, purchase returns of $2,000, and transportation-in of $3,000.Calculate cost of goods sold.

Question 53

Bradley Incorporated owns a chain of retail stores.During December of 2009, a customer slipped in a doorway of its Missouri store and broke his ribs.He is suing Bradley for $200,000 for negligence.Bradley's legal counsel believes that it is only reasonably probable that Bradley will lose its defense of the lawsuit because, although the doorway was icy due to an ice storm that was occurring at the time of the fall, a sign on the door warned customers that the doorway was slippery when icy.On December 30, 2009, before considering the effects of this lawsuit, Bradley's current assets, total assets, current liabilities, and total liabilities were $420,000, $840,000, $100,000, and $300,000, respectively.After this event is properly accounted for, calculate Bradley's debt/equity ratio on December 31, 2009.

Question 54

Patrick Incorporated owns a chain of retail stores.During December of 2009, a customer slipped in a doorway of its Nebraska store and broke his ribs.He is suing Patrick for $200,000 for negligence.Patrick's legal counsel believes that it is remote that Patrick will lose its defense of the lawsuit because the doorway recently was rebuilt with all weather traction stripping and a sign on the door warned customers that the doorway was slippery when icy.On December 30, 2009, before considering the effects of this lawsuit, Patrick's current assets, total assets, current liabilities, and total liabilities were $420,000, $840,000, $100,000, and $300,000, respectively.After this event is properly accounted for, calculate Patrick's debt/equity ratio on December 31, 2009.

Question 55

Preston Bank has $50 million of loans outstanding on December 31 of the current year, in which it recorded net income of $770,000.Preston did not provide for any uncollectible loans because all of its loans are collateralized by real estate.That is, if the loans were to default, Preston would obtain the title to the real estate for which the loans were made.However, during the audit of Preston's financial statements, the auditing company determined that $5 million of the outstanding loans would probably be dishonored (uncollectible).Because during the last three years real estate values have deteriorated, they also investigated the real estate that backed these collateralized loans.The market value of that real estate is negligible.
Recalculate Preston's loans receivable on December 31 and current net income to an amount that would be acceptable to the auditors.

Question 56

The following is a partial balance sheet for Que Company dated December 31, 2010:
During 2010, $4,000 of accounts receivable were written off and bad debts expense recognized on Que's 2010 net income statement was $8,000.However, the president of the company believes that $2,500 of these receivables were written off too soon.She correctly believes that there is a good chance that they will be collected next year.
The reason for her position is that Que has a debt covenant requiring it to maintain a current ratio of 1.5.The president believes that by reversing the write-off of $2,500 of accounts receivable, the current assets will be $97,500 and the current ratio will be 1.5.However, the chief financial officer states that a better approach is to pay off some accounts payable.If the company paid $5,000 of accounts payable, the current ratio would become the minimum 1.5 required by the debt covenant.
Comment, with numerical illustration, on the president's and chief financial officer's positions.

Question 57

A major airline issues frequent flyer credits that allow the passenger to receive credit toward future flights.For every ticket sold the customer receives a credit which, when 40 are collected, can be exchanged for a free ticket.During the year, the airline company recorded revenues of $60 million, which represented 100,000 tickets.The airline did not recognize the flyer credits on its income statement or its balance sheet.In the context of contingent liabilities, comment on the airline's accounting procedures.

Question 58

What three characteristics should all liabilities that appear on the balance sheet have in common?