(Test Bank) Financial Accounting for Executives & MBAs

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Test Bank

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©Cambridge Business Publishers, 2021 Test Bank, Chapter 1 1-1 Chapter 1 The Economic Environment of Accounting Information Takeaways – Coverage by Question Multiple Choice Exercises Problems TA 1 – Describe the role of financial accounting in facilitating a properly functioning capital market. 8, 27, 56 TA 2 – Identify the basic financials statements—the income statement, the balance sheet, the statement of cash flow, and the statement of shareholders’ equity. 2, 5-7, 9,10, 14,17,19-22, 25, 28, 30-40, 43-55, 58-61 1, 3, 6 2- 5 TA 3 – Describe the accounting principles and the role of accounting in investment decisions. 1, 3, 4, 12, 13, 16, 23, 26, 41, 56, 57 2, 4- 6 1- 3, 6 TA 4 – Identify the most common myths about financial accounting. 24 TA 5 – Explain the conflicts of interest that can arise between managers and investors, and the costs associated with the divergent incentives that can arise when management and ownership of a company are separated. 11, 15 8 TA 6 – Understand the purpose of GAAP and identify the ten elements that form the basic building blocks of the financial statements. 3, 18, 27-29, 41, 42, 62 7 6 ©Cambridge Business Publishers, 2021 1-2 Financial Accounting for Executives & MBAs, 5th Edition Multiple Choice TA 3 1. For what reason did generally-accepted accounting principles arise? A. To prevent financial debacles such as Enron, WorldCom, and Global Crossing. B. To benefit capital market participants. C. To facilitate the proper preparation of income tax returns. D. To assess financial risk that may result from a company not paying its debt when due. Answer: B TA 2 2. On which of the following financial statements will you most likely find the amount of cash generated from a company’s core business operations? A. Balance sheet B. Income statement C. Statement of cash flow D. Statement of shareholders’ equity Answer: C TA 3, 6 3. The management of Barnes & Noble determined that any asset whose value equals or exceeds five percent of total assets should be disclosed on its balance sheet. What accounting concept has Barnes & Noble applied? A. Going concern B. Comparability C. Conservatism D. Materiality Answer: D TA 3 4. Which of the following describes an efficient market? A. A marketplace where funds are traded between suppliers of capital and those in need of capital. B. A market in which security prices correctly reflect all publicly-available information. C. A portfolio of funds raised by a particular investor. D. A market in which investors earn a return with a high standard deviation. Answer: B ©Cambridge Business Publishers, 2021 Test Bank, Chapter 1 1-3 TA 2 5. The following information was provided by Kayak Tours, Inc. for its year ending December 31: Economic resources at year-end $25,000,000 Net income for the year 1,500,000 Shareholders' equity at year-end 7,600,000 How much does Kayak Tours, Inc. owe its creditors as of December 31? A. $23,500,000 B. $17,400,000 C. $ 7,600,000 D. $25,000,000 Answer: B Rationale: $25,000,000 - $7,600,000 = $17,400,000 TA 2 6. On which financial statement might an investor find the company’s resources that are expected to provide future benefits? A. Balance sheet B. Income statement C. Statement of cash flow D. Statement of shareholders’ equity Answer: A TA 2 7. In its annual report to shareholders, Zieman Company reported that its shareholders’ equity increased from $131 million as of the beginning of the year to $159 million at year-end. Which of the following is a likely cause of this change in shareholders’ equity? A. The company’s liabilities increased during the year. B. The company was profitable during the year. C. The company distributed more dividends than it earned in profit during the year. D. The company had an operating loss during the year. Answer: B TA 1 8. Which one of the following was mandated by the Sarbanes-Oxley Act? A. Annual audits by Certified Public Accountants. B. Certifications in writing by CFOs that a company’s financial statement information fairly represents the company’s financial condition and results of operations. C. The enforcement of accounting standards used by companies issuing securities. D. The use of generally-accepted accounting principles to prepare financial statements. Answer: B ©Cambridge Business Publishers, 2021 1-4 Financial Accounting for Executives & MBAs, 5th Edition TA 2 9. Which of the following contains only asset accounts? A. Accounts Receivable and Accounts Payable B. Retained Earnings and Cash C. Inventory and Sales Revenue D. Equipment and Accounts Receivable Answer: D TA 2 10. Fey Company reported the following amounts on its balance sheet (in thousands): Year End Assets Liabilities Shareholders' Equity Year 2 $336,000 $110,000 $266,000 Year 1 262,000 76,000 186,000 No dividends were declared and no additional investments of capital were made in the company during Year 2. What is the company’s net income for Year 2 (in thousands)? A. $110,000 B. $156,000 C. $ 80,000 D. Not enough information is provided to determine the answer. Answer: C Rationale: $266,000 - $186,000 = $80,000 TA 5 11. Which one of the following is a conflict that may occur between the managers and shareholders of a company? A. Whether GAAP should be used to prepare a company’s financial statements. B. Whether the incentive contracts between the two parties are acceptable. C. Whether debt covenants are followed. D. Whether the company operates as a partnership or corporation. Answer: B TA 3 12. Why might it be desirable to have a global set of GAAP? A. To avoid the costs of audited financial statements which are required under current U.S. GAAP. B. To enhance comparability and transparency across national borders. C. To decrease the amount of debt incurred by a company. D. To comply with the going-concern concept. Answer: B ©Cambridge Business Publishers, 2021 Test Bank, Chapter 1 1-5 TA 3 13. The beginning-of-year common share price (Pt-1) for Leahy Corporation for the year was $41.10, and its end-of-year common share price (Pt) was $48.35. The company’s annual dividend (Dt) for the year was $2.08. What is the company’s annual rate of return? A. 10.7% B. 22.7% C. 11.4% D. 17.6% Answer: B Rationale: ($48.35 - $41.10+ $2.08) / $41.10 = 22.7% TA 2 14. What information is found on the balance sheet? A. Results of recurring operations for the period. B. Reasons why assets are greater at the end of the year compared to the beginning of the year. C. The financial position of a company as of the balance sheet date. D. The profitability of a company during the period. Answer: C TA 5 15. Why was the development of limited liability significant for corporations? A. It allowed corporations to pay annual income taxes. B. It enabled the separation of company ownership from the day-to-day management of the company. C. It made it easier to transfer ownership. D. It allowed companies to engage independent auditors to audit the company. Answer: B TA 3 16. Assume you are a debt-holder of the Lakeside Boat Equipment Store. For what reason will you most likely use Lakeside’s financial information? A. To determine the company’s return for the year. B. To determine if the company will pay dividends during the year. C. To assess the financial risk of non-payment of interest or principal. D. To determine if the company exercises judgment in its financial statements. Answer: C ©Cambridge Business Publishers, 2021 1-6 Financial Accounting for Executives & MBAs, 5th Edition TA 2 17. Imperial Oak Company reported the following amounts on its statement of cash flow for the year: Net cash provided by operating activities $14,200 Net cash provided by financing activities 8,000 Net cash flow for the year 31,700 Retained earnings at December 31 5,600 How much is the company’s net cash provided by investing activities? A. $14,200 B. $ 3,000 C. $13,600 D. $ 9,500 Answer: D Rationale: $31,700 - $8,000 - $14,200 = $9,500 TA 6 18. Which of the following is considered a probable future sacrifice of an economic benefit? A. Accounts payable B. Accounts receivable C. Common stock D. Sales revenue Answer: A TA 2 19. Which of the financial statements provides amounts as of a particular point in time? A. Income statement B. Statement of shareholders’ equity C. Statement of cash flow D. Balance sheet E. All of the statements provide amounts as of a point in time. Answer: D ©Cambridge Business Publishers, 2021 Test Bank, Chapter 1 1-7 TA 2 20. In its annual report to shareholders, Oxford Company reported the following financial results: • Sales increased from $7,400,000 in Year 1 to $9,600,000 in Year 2. • Net income increased from $990,000 in Year 1 to $1,280,000 in Year 2. • Total assets increased from $3,350,000 in Year 1 to $4,060,000 in Year 2. • Shareholders’ equity increased from $2,010,000 in Year 1 to $2,270,000 in Year 2. Which one of the following is a possible explanation for the financial results of Oxford Company from Year 1 to Year 2? A. An increase in assets caused the company to earn more revenue which caused an increase in profit. B. An increase in sales revenue caused an increase in net income which caused shareholders’ equity to increase. C. An increase in net income caused sales revenue to increase which in turn generated additional cash flow for the company. D. An increase in shareholders’ equity created more invested capital which caused sales and net income to increase. Answer: B TA 2 21. Which of the following best describes the amounts reported as shareholders’ equity? A. Investments by owners and cash received from operations. B. Investments by owners plus net income earned minus dividends distributed to owners since the company began its operations. C. Cash received from operations minus cash paid for operations plus amounts invested by owners. D. Total assets owned by the company minus amounts paid out as dividends since the company began its operations. Answer: B TA 2 22. Fey Company reported total retained earnings at December 31, Year 2 of $802,400. It provided the following information for Year 1 and Year 2: Year 2 Year 1 Retained earnings (beginning) $618,800 $461,900 Revenues 860,500 750,000 Expenses 588,000 514,600 Dividends ? 78,500 How much dividends did the company pay in Year 2? A. $272,500 B. $ 78,500 C. $195,400 D. $ 88,900 Answer: D Rationale: $618,800 + $860,500 - $588,000 - $802,400 = $88,900 ©Cambridge Business Publishers, 2021 1-8 Financial Accounting for Executives & MBAs, 5th Edition TA 3 23. Concord Corporation and Stone Company both have the same beginning of the year share price of $32.49. During the year, Stone Company’s paid annual dividends of $2.25, while Concord Corporation’s paid none. The share price for both companies at year end was $44.31. Why will Stone Company’s return for the year be higher than Concord Corporation’s return? A. Stone Company earned more net income than Concord Corporation. B. Stone Company decreased its net income by paying dividends, while Concord Corporation did not. C. Both the dividends and the change in share price contribute to Stone Company’s return, while only the change in share price contributes to Concord Corporation’s return. D. More information is needed to answer the question. Answer: C TA 4 24. Which statement is true? A. All of a company’s identifiable assets and liabilities appear on the balance sheet. B. The financial statements articulate with each other. C. The basic financial statements reflect a complete, accurate, portrayal of the financial performance of a company. D. The difference between a company’s assets and liabilities should be equal to the market value of the shares owned by investors. Answer: B TA 2 25. Which activity must occur first when starting a new business? A. Investing activities B. Operating activities C. Financing activities D. They must all occur simultaneously Answer: C TA 3 26. How do shareholders earn a return on their investment? A. Through interest payments and the repayment of the initial capital investment B. Through profits earned by a company that are distributed to investors C. Through dividend payments and the appreciation of a company’s share price D. Through companies selling shares in the public capital market Answer: C ©Cambridge Business Publishers, 2021 Test Bank, Chapter 1 1-9 TA 1, 6 27. U.S. generally-accepted accounting principles are: A. A set of voluntary “best business practices” B. A set of laws to prevent financial fraud C. A set of standards for ethical conduct D. A set of guidelines to aid in the financial reporting process Answer: D TA 2, 6 28. Net assets equal: A. Assets minus liabilities B. Assets plus liabilities C. Assets minus shareholders’ equity D. Assets plus shareholders’ equity Answer: A TA 6 29. Increases in shareholders’ equity that a firm earns by providing goods or services to its customers are called: A. Assets B. Revenues C. Expenses D. Liabilities Answer: B TA 2 30. If assets equal $750,000 and liabilities equal $330,000, shareholders’ equity is: A. $1,080,000 B. $ 420,000 C. $ 750,000 D. $ (420,000) Answer: B Rationale: $750,000 - $330,000 = $420,000 TA 2 31. If liabilities equal $193,000 and shareholders’ equity equals $87,000, assets are: A. $ 87,000 B. $193,000 C. $106,000 D. $280,000 Answer: D Rationale: $193,000 + $87,000 = $280,000 ©Cambridge Business Publishers, 2021 1-10 Financial Accounting for Executives & MBAs, 5th Edition TA 2 32. If assets equal $603,000 and shareholders’ equity equals $402,000, liabilities are: A. $ 201,000 B. $ 402,000 C. $1,050,000 D. $ 603,000 Answer: A Rationale: $603,000 - $402,000 = $201,000 TA 2 33. The beginning and ending balances of shareholders’ equity for the year were $150,000 and $210,000, respectively. If dividend distributions during the year were $21,000, how much was net income for the year? A. $21,000 net loss B. $60,000 net income C. $39,000 net income D. $81,000 net income Answer: D Rationale: $210,000 + $21,000 - $150,000 = $81,000 TA 2 34. The following information appears on the balance sheet of Hamilton, Inc. at year-end: Accounts receivable $210,000 Accounts payable 195,000 Supplies 36,000 Cash 155,000 Equipment 760,000 Capital stock 630,000 What is the year-end balance in retained earnings? A. $531,000 B. $336,000 C. $321,000 D. $411,000 Answer: B Rationale: ($210,000 + $36,000 + $155,000 + $760,000) - $195,000 - $630,000 = $336,000 ©Cambridge Business Publishers, 2021 Test Bank, Chapter 1 1-11 TA 2 35. The following information appears on the balance sheet of Hamilton, Inc. at year-end: Accounts receivable $210,000 Accounts payable 195,000 Supplies 36,000 Cash 155,000 Equipment 760,000 Capital stock 630,000 If the beginning of year balance in retained earnings is $207,000 and $24,000 in dividends are paid during the year, net income for the year was: A. $153,000 B. $129,000 C. $105,000 D. $189,000 Answer: A Rationale: ($210,000 + $36,000 + $155,000 + $760,000) - $195,000 - $630,000 = $336,000 year-end balance in retained earnings; $336,000 - $207,000 + $24,000 = $153,000 net income TA 2 36. If the assets of the Hamilton, Inc. are $934,500 and the liabilities are $551,000, shareholders’ equity is: A. $ (383,500) B. $ 383,500 C. $1,485,500 D. $ 934,500 Answer: B Rationale: $934,500 - $551,000 = $383,500 TA 2 37. If the liabilities of the Hamilton, Inc. equal $450,000, the retained earnings are $280,000, and capital stock equals $300,500, the company’s assets are: A. $1,030,500 B. $ 470,500 C. $ 450,000 D. $ 580,500 Answer: A Rationale: $450,000 + $280,000 + $300,500 = $1,030,500 ©Cambridge Business Publishers, 2021 1-12 Financial Accounting for Executives & MBAs, 5th Edition TA 2 38. The following information is taken from the financial records of Jacobsen Company. No additional investments of capital were made during the year. Beginning of Year End of Year During the Year Assets $88,000 $117,000 Liabilities 45,300 60,900 Expenses $33,000 Dividends 15,000 How much were sales revenue during the year? A. $61,400 B. $46,400 C. $29,600 D. $34,600 Answer: A Rationale: $88,000 - $45,300 = $42,700 beg. of year retained earnings; $117,000 - $60,900 = $56,100 end of year retained earnings; $56,100 - $42,700 + $33,000 + $15,000 = $61,400. TA 2 39. The following information is taken from the financial records of Carroll Company. No additional investments of capital were made during the year. Beginning of Year End of Year During the Year Assets $104,000 $122,000 Liabilities 39,000 ? Sales revenue $59,000 Expenses 31,000 Dividends 8,000 Liabilities at the end of the year equal: A. $39,000 B. $45,000 C. $53,000 D. $37,000 Answer: D Rationale: $104,000 - $39,000 = $65,000 beg. of year SE; $65,000 + $59,000 - $31,000 - $8,000 = $85,000 end of year S.E.; $122,000 - $85,000 = $37,000 end of year liabilities ©Cambridge Business Publishers, 2021 Test Bank, Chapter 1 1-13 TA 2 40. The beginning and ending balances of shareholders’ equity for the year were $170,000 and $280,000, respectively. If dividends paid during the year exceed new capital contributions during the year by $19,000, net income for the year was: A. $91,000 net loss B. $91,000 net income C. $110,000 net income D. $129,000 net income Answer: D Rationale: $280,000 - $170,000 + $19,000 = $129,000 TA 3, 6 41. Which of the following are important characteristics of accounting information: A. Relevance B. Consistency C. Faithful representation D. Both A and C are important characteristics of accounting information Answer: D TA 6 42. Which of the following assumptions or concepts is not used under U.S. GAAP? A. Going concern B. Conservatism C. Full disclosure D. Optimism Answer: D TA 2 43. If assets equal $175,000 and liabilities equal $43,000, shareholders’ equity is: A. $ 175,000 B. $ 115,000 C. $ 132,000 D. $ 121,000 Answer: C Rationale: $175,000 - $43,000 = $132,000 TA 2 44. If liabilities equal $85,000 and shareholders’ equity equals $65,000, assets are: A. $ 20,000 B. $ 65,000 C. $150,000 D. $ (20,000) Answer: C Rationale: $85,000 + $65,000 = $150,000 ©Cambridge Business Publishers, 2021 1-14 Financial Accounting for Executives & MBAs, 5th Edition TA 2 45. If assets equal $51,700 and shareholders’ equity equals $12,000, liabilities are: A. $39,700 B. $63,700 C. $37,300 D. $51,700 Answer: A Rationale: $51,700 - $12,000 = $39,700 TA 2 46. The beginning and ending balances of shareholders’ equity for the year were $35,000 and $85,000, respectively. If dividend distributions from shareholders’ equity exceed new capital contributions during the year by $9,000, how much was net income for the year? A. $41,000 net loss B. $59,000 net income C. $50,000 net income D. $41,000 net income Answer: B Rationale: $85,000 - $35,000 + $9,000 = $59,000 TA 2 47. The following information appears on the balance sheet of Stapp Corporation at year-end: Accounts receivable $ 88,500 Accounts payable 25,500 Supplies 14,500 Cash 33,000 Equipment 340,000 Capital stock 255,000 What is the year-end balance in retained earnings? A. $246,500 B. $331,500 C. $195,500 D. $143,500 Answer: C Rationale: ($88,500 + $14,500 + $33,000 + $340,000) - $25,500 - $255,000 = $195,500 ©Cambridge Business Publishers, 2021 Test Bank, Chapter 1 1-15 TA 2 48. The following information appears on the balance sheet of Stapp Corporation at year-end: Accounts receivable $ 88,500 Accounts payable 25,500 Supplies 14,500 Cash 33,000 Equipment 340,000 Capital stock 255,000 If the beginning of year balance in retained earnings is $155,000 and $15,000 in dividends are paid during the year, net income for the year was: A. $55,500 B. $70,500 C. $40,500 D. $85,000 Answer: A Rationale: ($88,500 + $14,500 + $33,000 + $340,000) - $25,500 - $255,000 = $195,500 in retained earnings; $195,500 - $155,000 + $15,000 = $55,500 net income TA 2 49. If the assets of the Winston Corporation are $705,000 and the liabilities are $230,000, shareholders’ equity is: A. $705,000 B. $935,000 C. $475,000 D. The value cannot be calculated. Answer: C Rationale: $705,000 - $230,000 = $475,000 TA 2 50. If the liabilities of the Tremonti Corporation equal $235,000, the retained earnings are $170,000, and capital stock equals $122,500, the company’s assets are: A. $ 187,500 B. $ 527,500 C. $ 357,500 D. $ 405,000 Answer: B Rationale: $235,000 + $170,000 + $122,500 = $527,500