Question 1

Why is the cash basis of accounting not used when preparing general purpose financial statements? What is used instead?

Accepted Answer

The answer of Why is the cash basis of accounting...

Question 2

If a company used some cash and a long-term loan to buy land and a building, what would be the effect on the company's current ratio and debt-to-equity ratio? 
$\begin{array}{ll}
&\text { Current } & \text { Debt-to-Equity } \
&\text { Ratio } & \text { Ratio } \
A.&\text { increase } & \text { increase } \
B.&\text { increase } & \text { decrease } \
C.&\text { decrease } & \text { increase } \
D.&\text { decrease } & \text { decrease }
\end{array}$

Accepted Answer

A) Option A 
B) Option B 
C) Option C 
D) Option D

Question 3

Which of the following statements about general purpose financial statements is correct?

Accepted Answer

A) General purpose financial statements are designed to meet the information needs of 
B) every stakeholder in every situation. 
C) General purpose financial statements provide information to all stakeholders. 
D) General purpose financial statements are intended for specific use only. 
E) The financial statements of non-public companies are general purpose financial statements.

Question 4

Which of the following correctly describes an asset?

Accepted Answer

A) An obligation of the entity 
B) An investment the owners have made 
C) An economic resource that provides future benefits 
D) An economic sacrifice made to earn revenue

Question 5

Prepare a proper balance sheet for Wawa Corporation from the following list of accounts on June 30,
2012: $$\begin{array} { l r l r } 
\text { Accounts payable } & 105,000 & \text { Land } & 175,000 \
\text { Accounts receivable } & 52,500 & \text { Long-term loan } & 150,000 \
\text { Advances received from } & & \text { Plant and equipment } & 375,000 \
\text { customers in advance } & 35,000 & \text { Rent paid in advance } & 15,000 \
\text { Capital Stock } & 250,000 & \text { Retained earnings } & 144,000 \
\text { Cash } & 15,000 & \text { Wages and salaries owing } & 18,500 \
\text { Current portion of long-term loan } & 50,000 & & \
\text { Inventory } & 120,000 & &
\end{array}$$

Accepted Answer

The answer of Prepare a proper balance sheet for Wawa...

Question 6

Lennox Limited reported sales of $5,000,000, cost of goods sold of $3,200,000, operating expenses of $1,400,000, and income tax expense of $160,000 for the year.What is the gross profit percentage for the year?

Accepted Answer

A) 4.8% 
B) 8% 
C) 36% 
D) 64%

Question 7

The best description of the financial statements that a public company prepares is:

Accepted Answer

A) tax-based financial statements. 
B) specific purpose financial statements. 
C) general principle financial statements. 
D) general purpose financial statements.

Question 8

What would a creditor calculate to assess liquidity?

Accepted Answer

A) Operating cycle 
B) Gross margin 
C) Current ratio 
D) Debt-to-equity ratio

Question 9

Show the effect that each of the following independent transactions has on the elements of the accounting equation.Specify the type of asset, liability or owners' equity account that would be affected.  A) Sells $100,000 worth of goods, 60% on credit, the rest for cash
B) Buys $55,000 of goods on account
C) Collects $25,000 owing from customers.D) Makes $10,000 loan payment
E) Borrows $35,000 from shareholders

Accepted Answer

The answer of Show the effect that each of the...

Question 10

What does the term "deficit" mean in the context of general purpose financial statements?

Accepted Answer

A) A deficit is when the net income is negative. 
B) A deficit is when the retained earnings balance is negative. 
C) A deficit is when the current liabilities exceed the current assets. 
D) A deficit is when a company borrows money.

Question 11

Which of the following statements about an operating cycle is true?

Accepted Answer

A) For all businesses the operating cycle is a year or less. 
B) The operating cycle is useful in defining current assets. 
C) The operating cycle is the difference between revenues and operating expenses. 
D) An operating cycle is the time it takes from the sale of inventory until the collection of cash.

Question 12

Sherbrooke Inc.reported sales of $10,000,000, net income of $800,000, and dividends of $200,000.What is the increase in their retained earnings for the year?

Accepted Answer

A) $600,000 
B) $800,000 
C) $1,000,000 
D) $10,000 000

Question 13

Which of the following correctly identifies one of the links among the four financial statements?

Accepted Answer

A) Net income from the income statement goes directly to the balance sheet. 
B) Net income from the income statement goes to the statement of changes in equity. 
C) Other comprehensive income goes to the statement of cash flows. 
D) Retained earnings from the balance sheet goes to the income statement.

Question 14

Differentiate between an asset and an expense.Use the example of a table and chairs and explain how each could be either an asset or an expense.

Accepted Answer

The answer of Differentiate between an asset and an expense.Use...

Question 15

Creditors who are expecting to be paid are most interested in which of the following for an entity?

Accepted Answer

A) Liquidity 
B) Operating cycle 
C) Gross margin 
D) Profitability

Question 16

Which of the following is a non-current asset?

Accepted Answer

A) Accounts receivable 
B) Inventory 
C) Prepaid rent 
D) Intangible assets

Question 17

Which of the following industries would most likely have an operating cycle longer than a year?

Accepted Answer

A) A grocery store 
B) A wine producer 
C) A soft drinks producer 
D) A car manufacturer

Question 18

The following is a partial list of accounts and balances for Hatley Hotels Ltd.for the year ended
October 31, 2013. $$\begin{array} { l r } 
\text { Capital stock } & \$ 1,500,000 \
\text { Dividends paid } & \$ 60,000 \
\text { Net income for the year } & \$ 600,000 \
\text { Retained earnings balance November } 1,2012 & \$ 2,755,400
\end{array}$$ A) Prepare the Retained Earnings section of the Statement of Changes in Equity for Hatley for the year.B) What portion of their earnings did they pay out to shareholders in 2013?
C) How much of their income was retained in the business?
D) What was the shareholders' total direct investment in Hatley? What has been their total indirect investment on the company?
E) How do you think companies decide how much of their income to pay out?

Accepted Answer

The answer of The following is a partial list of...

Question 19

Which of the following statements best describes the Statement of Changes in Equity?

Accepted Answer

A) It provides information about the financial position of an entity at a specific point in time. 
B) It measures the economic performance of the entity over a period of time. 
C) It summarizes the changes to shareholders' equity during a period. 
D) It shows how an entity managed its cash during the reporting period.

Question 20

In 2012, Smith's Corner Store had an increase in gross margin of $28,000; however, the gross margin percentage decreased.This is most likely caused by:

Accepted Answer

A) a decrease in volume and a decrease in selling price 
B) an increase in volume and an increase in selling price. 
C) an increase in volume and a decrease in selling price. 
D) a decrease in volume and an increase in selling price.

Exam 2: Financial Statements: a Window on an Entity