Deck 15: Financial Statements and Year-End Accounting for a Merchandising Business

Question 1

The purpose of a balance sheet is to summarize the results of operations during an accounting period.

Answer 1

False

Question 2

Current liabilities are those obligations that are due within one year or the normal operating cycle of the business, whichever is longer, and which will require use of current assets.

Answer 2

True

Question 3

Assets that are expected to be used for more than one year in an operation of a business are called property, plant, and equipment.

Answer 3

True

Question 4

Current assets include cash and all other assets that may be reasonably expected to be converted into cash or consumed within one year or the normal operating cycle of the business, whichever is longer.

Question 5

Liquidity refers to the speed with which the assets can be converted to cash.

Question 6

Current assets are listed on the balance sheet from the most liquid to least liquid.

Question 7

Gross sales less sales returns and allowances is called net sales.

Question 8

The single-step form of income statement lists all revenue items and their totals first, followed by all expense items and their totals, to produce a difference that is either net income or net loss.

Question 9

The purpose of an income statement is to summarize the results of operations during an accounting period

Question 10

Net sales less cost of goods sold is called gross profit.

Question 11

Gross profit less operating expenses produces the income from operations.

Question 12

Assets that are used in the operation of a business are called temporary investments.

Question 13

The statement of owner's equity summarizes all changes in the owner's equity during the period.

Question 14

A primary purpose of the work sheet is to serve as an aid in the preparation of the financial statements.

Question 15

The ending balance for merchandise inventory is reported on the balance sheet as a noncurrent asset.

Question 16

The cost of a building less its accumulated depreciation represents the undepreciated cost.

Question 17

Undepreciated cost is the same as the book value of an asset.

Question 18

A formal statement of the changes in owner's equity during an accounting period is called a statement of financial position.

Question 19

The multiple-step form of income statement shows operating income separate from other revenue and other expenses.

Question 20

Working capital is the difference between current assets and current liabilities.

Question 21

A mortgage payable is a written agreement specifying that if the borrower does not repay a debt, the lender has the right to take over the property to satisfy the debt.

Question 22

The number of times the accounts receivable turned over or were collected during the accounting period is called net credit sales for the period.

Question 23

Working capital is the amount of capital the firm has to work with for current operations.

Question 24

The purpose of the post-closing trial balance is to prove that the general ledger is in balance at the beginning of the new accounting period.

Question 25

Quick assets include cash and other noncurrent assets that can be converted into cash quickly.

Question 26

Reversing entries make possible the entering of the transactions of the succeeding accounting period in a routine manner.

Question 27

Long-term liabilities are obligations that will extend beyond one year or the normal operating cycle, whichever is longer.

Question 28

All adjusting entries should be reversed.

Question 29

Current liabilities include those obligations that will extend beyond one year or the normal operating cycle, whichever is longer.

Question 30

A formal statement of the results of the operation of a business during an accounting period is called a(n)

A) statement of owner's equity.
B) balance sheet.
C) statement of financial position.
D) income statement.

Question 31

The ability of a business to meet its current obligations may be evaluated with the return on owner's equity ratio.

Question 32

Entries required at the end of an accounting period to bring certain account balances up-to-date are known as adjusting entries.

Question 33

If inventory is taken only at the end of each accounting period, the average inventory for the period can be calculated by adding the beginning and the ending inventories and dividing their sum by two.

Question 34

Inventory turnover is determined by dividing cost of goods sold for the period by the ending inventory.

Question 35

The quick ratio is determined by subtracting current liabilities from quick assets.

Question 36

Return on owner's equity is the ratio of net income to average owner's equity in the business.

Question 37

The heading on a financial statement includes which of the following information, in the order shown?

A) the name of the business, the period of time the statement covers, and the name of the statement
B) the name of the statement, the period of time the statement covers, and the name of the business
C) the period of time the statement covers, the name of the statement, and the name of the business
D) the name of the business, the name of the statement, and the period of time the statement covers

Question 38

The difference between current assets and current liabilities represents the amount of capital the firm has to work with for current operations.

Question 39

A quick ratio of 1.5 to 1 indicates that quick assets are more than adequate to meet current obligations.

Question 40

The current ratio is determined by subtracting current liabilities from current assets.

Question 41

The following information was taken from the financial statements of Ashley's Linens: Total current assets
$ 53,000
Property, plant, and equipment
6,000
Current liabilities
21,000
Long-term liabilities
4,000
Owner's equity
34,000
Beginning inventory
31,000
Ending inventory
33,000
Cost of goods sold
152,000
Net income
42,000
​
The working capital of Ashley's Linens is

A) $32,000.
B) $33,000.
C) $34,000.
D) $38,000.

Question 42

Closing entries are made in the

A) sales journal.
B) purchases journal.
C) general journal.
D) cash receipts journal.

Question 43

The following information was taken from the financial statements of Brandon's Motor Shop: Total current assets
$ 53,000
Property, plant, and equipment
6,000
Current liabilities
21,000
Long-term liabilities
4,000
Owner's equity
34,000
Beginning inventory
31,000
Ending inventory
33,000
Cost of goods sold
152,000
Net income
42,000
​
The current ratio for Brandon's Motor Shop is closest to

A) 1.3 to 1.
B) 2.4 to 1.
C) 2.5 to 1.
D) 1 to 2.5.

Question 44

The information needed in journalizing the closing entries is obtained from the

A) accounts receivable ledger.
B) adjusting journal entries.
C) work sheet.
D) balance sheet.

Question 45

Assets that are used for several years in the operation of a business are called

A) marketable securities.
B) current assets.
C) investments.
D) property, plant, and equipment.

Question 46

Information needed in journalizing the first three closing entries is obtained from which of the following work sheet columns?

A) Trial Balance
B) Adjustments
C) Adjusted Trial Balance
D) Income Statement

Question 47

Which of the following accounts is used only at the close of the accounting period to adjust the merchandise inventory account and summarize the temporary owner's equity accounts?

A) Owner's Capital
B) Income Summary
C) Cost of Goods Sold
D) Sales

Question 48

Accumulated depreciation amounts are shown as deductions from the

A) cost of building and equipment accounts.
B) accounts receivable account.
C) accounts payable account.
D) prepaid insurance account.

Question 49

The entries that transfer the balances of the temporary owner's equity accounts to the permanent owner's equity account are called

A) adjusting entries.
B) closing entries.
C) reversing entries.
D) general journal entries.

Question 50

Cash and all other assets that may be reasonably expected to be converted to cash or consumed within one year or the normal operating cycle of the business are classified as

A) temporary investments.
B) marketable securities.
C) current assets.
D) investments.

Question 51

The rough "rule of thumb" for a quick ratio is that the ratio should be about

A) 2 to 1.
B) 1 to 1.
C) .1 to 1.
D) 1 to .1.

Question 52

A formal statement of the assets, liabilities, and owner's equity of a business at a specified date is known as a(n)

A) balance sheet.
B) income statement.
C) statement of owner's equity.
D) statement of cash flows.

Question 53

Net sales minus cost of goods sold equals

A) operating income.
B) operating expenses.
C) other expenses.
D) gross profit.

Question 54

The following information was taken from the financial statements of Sunshine City: Total current assets
$ 53,000
Property, plant, and equipment
6,000
Current liabilities
21,000
Long-term liabilities
4,000
Owner's equity
34,000
Beginning inventory
31,000
Ending inventory
33,000
Cost of goods sold
152,000
Net income
42,000
​
The inventory turnover (rounded to one decimal place) for Sunshine City is

A) 2.2 times.
B) 3.0 times.
C) 4.8 times.
D) 5.0 times.

Question 55

The ability of a business to meet its current obligations may be determined by the

A) current ratio.
B) inventory turnover.
C) working ratio.
D) accounts receivable turnover.

Question 56

In a multiple-step income statement, operating expenses are subtracted from gross profit to compute

A) income from operations.
B) net income.
C) other income.
D) net loss.

Question 57

The following information was taken from the financial statements of Collin's Inn: Total current assets
$162,000
Average owner's equity
148,000
Beginning inventory
32,000
Ending inventory
36,000
Cost of goods sold
165,000
Net income
37,000
​
The return on owner's equity for Collin's Inn is

A) 25%.
B) 27%.
C) 80%.
D) 129%.

Question 58

After the temporary owner's equity and drawing accounts are transferred to the permanent owner's equity account, which of the following accounts will have a balance?

A) Expenses
B) Revenues
C) Owner's Capital
D) Income Summary

Question 59

The third step in the closing process is to transfer the balance in which of the following accounts to the permanent owner's equity account?

A) Revenue
B) Expense
C) Income Summary
D) Owner's Capital

Question 60

Those obligations that are due within one year or the normal operating cycle of the business and will be paid with money provided by the current assets are called

A) investments.
B) marketable securities.
C) current liabilities.
D) long-term liabilities.

Question 61

Which of the following serves as an end-of-period accuracy check?

A) statement of owner's equity
B) income statement
C) balance sheet
D) post-closing trial balance

Question 62

Match the terms with the definitions.a.selling expenses
b.quick assets
c.average days to sell inventory
d.book value
e.property, plant, and equipment
f.operating cycle
g.quick ratio
h.general expenses
i.gross profit
j.net sales
k.multiple-step income statement
l.inventory turnover
m.liquidity
Cost of plant and equipment less the accumulated depreciation amounts.

Question 63

Adjusting entries are made in the

A) sales journal.
B) general journal.
C) cash receipts journal.
D) cash payments journal.

Question 64

Match the terms with the definitions.a.selling expenses
b.quick assets
c.average days to sell inventory
d.book value
e.property, plant, and equipment
f.operating cycle
g.quick ratio
h.general expenses
i.gross profit
j.net sales
k.multiple-step income statement
l.inventory turnover
m.liquidity
The length of time generally required for a business to buy inventory, sell it, and collect the cash.

Question 65

Match the terms with the definitions.a.selling expenses
b.quick assets
c.average days to sell inventory
d.book value
e.property, plant, and equipment
f.operating cycle
g.quick ratio
h.general expenses
i.gross profit
j.net sales
k.multiple-step income statement
l.inventory turnover
m.liquidity
The number of days in the year divided by the inventory turnover.

Question 66

Match the terms with the definitions.a.selling expenses
b.quick assets
c.average days to sell inventory
d.book value
e.property, plant, and equipment
f.operating cycle
g.quick ratio
h.general expenses
i.gross profit
j.net sales
k.multiple-step income statement
l.inventory turnover
m.liquidity
Those expenses directly associated with selling activities.

Question 67

Match the terms with the definitions.a.selling expenses
b.quick assets
c.average days to sell inventory
d.book value
e.property, plant, and equipment
f.operating cycle
g.quick ratio
h.general expenses
i.gross profit
j.net sales
k.multiple-step income statement
l.inventory turnover
m.liquidity
Net sales minus cost of goods sold.

Question 68

A trial balance of the general ledger accounts taken after the temporary owner's equity accounts have been closed is usually referred to as a

A) post-closing trial balance.
B) new accounting period trial balance.
C) pre-closing trial balance.
D) subsidiary trial balance.

Question 69

Reversing entries are made in the

A) general journal.
B) sales journal.
C) purchases journal.
D) cash receipts journal.

Question 70

Match the terms with the definitions.a.selling expenses
b.quick assets
c.average days to sell inventory
d.book value
e.property, plant, and equipment
f.operating cycle
g.quick ratio
h.general expenses
i.gross profit
j.net sales
k.multiple-step income statement
l.inventory turnover
m.liquidity
Refers to the speed with which an asset can be converted to cash.

Question 71

The work sheet for Babson's Seafood, a business owned by B. B. Babson, is provided. Year-end adjustments have been made and all required entries journalized and posted to the ledger accounts. From the work sheet, prepare a multiple-step income statement, a statement of owners' equity (assuming no additional investments), and a classified balance sheet. The current year's portion of the mortgage payable is $6,000.

Question 72

Match the terms with the definitions.a.selling expenses
b.quick assets
c.average days to sell inventory
d.book value
e.property, plant, and equipment
f.operating cycle
g.quick ratio
h.general expenses
i.gross profit
j.net sales
k.multiple-step income statement
l.inventory turnover
m.liquidity
This statement shows a step-by-step calculation of net sales, cost of goods sold, gross profit, operating expenses, income from operations, other revenues and expenses, and net income.

Question 73

Match the terms with the definitions.a.selling expenses
b.quick assets
c.average days to sell inventory
d.book value
e.property, plant, and equipment
f.operating cycle
g.quick ratio
h.general expenses
i.gross profit
j.net sales
k.multiple-step income statement
l.inventory turnover
m.liquidity
Cash and all other current assets that can be converted into cash quickly.

Question 74

Match the terms with the definitions.a.selling expenses
b.quick assets
c.average days to sell inventory
d.book value
e.property, plant, and equipment
f.operating cycle
g.quick ratio
h.general expenses
i.gross profit
j.net sales
k.multiple-step income statement
l.inventory turnover
m.liquidity
Those expenses associated with administrative or office operating expenses.

Question 75

The following adjusted trial balance was taken from the work sheet of Babylon Lighting. Assume the owner, Jillian Johnson, made no additional investments during the year. ​
Required:
Prepare a classified balance sheet for Babylon Lighting as of December 31, 20--.

Question 76

The adjusting entries for Down Town Cafe are shown in journal form below. Journalize the reversing entries as of March 1.

Question 77

The Income Statement and Balance Sheet columns below are from the work sheet of a merchandising firm, J. D. Enterprise, for the year ended December 31, 20--.
​
Required:
Prepare the closing entries for the merchandising firm.

Question 78

The Income Statement and Balance Sheet columns below are from the work sheet of the Mandle Company for the year ended December 31, 20--. ​
Required:
Prepare a multi-step income statement for Mandle Company for the current fiscal year. Include separate sections for selling expenses and general expenses under the heading "Operating Expenses" by using the classifications provided in the Account Title column of the work sheet.

Question 79

Match the terms with the definitions.a.selling expenses
b.quick assets
c.average days to sell inventory
d.book value
e.property, plant, and equipment
f.operating cycle
g.quick ratio
h.general expenses
i.gross profit
j.net sales
k.multiple-step income statement
l.inventory turnover
m.liquidity
Assets that are expected to be used for more than one year in the operation of a business.

Question 80

The Income Statement and Balance Sheet columns below are from the work sheet of Bleeker Street Bounty for the year ended December 31, 20--.
Required:
Using the work sheet, compute (a) total current assets, (b) working capital, (c) current ratio, and (d) accounts receivable turnover. (Accounts receivable balance on January 1, 20-- was $23,200). Round to 2 decimal places. All sales are on account.