Balance sheet
1. Which of the following statements accurately describes a classified balance sheet
format?
A. A distinction is made between current and non-current assets and between current and noncurrent liabilities and they are classified separately.
B. Assets and liabilities are broadly presented in order of liquidity.
C. Cash flow from operations is distinguished from cash flow from investing and financing
activities.
2. In a liquidity-based presentation of the balance sheet, which of the following items
would appear first on the side of assets?
A. Cash & cash equivalents
B. Land & property
C. Accounts receivable
3. Which of the following is most likely an essential characteristic of an asset?
A. An asset is tangible.
B. An asset is obtained at a cost.
C. An asset provides future benefits.
4. Which of the following statements about analyzing the balance sheet is most accurate?
A. The value of the firm’s reputation is reported on the balance sheet at amortized cost.
B. Shareholders’ equity is equal to the intrinsic value of the firm.
C. The balance sheet can be used to measure the firm’s capital structure.
5. A vertical common-size balance sheet expresses each category of the balance sheet as
a percentage of:
A. assets.
B. equity.
C. revenue.
6. Which of the following is most likely classified as a current liability?
A. Payment received for a product due to be delivered at least one year after the balance
sheet date
B. Payments for merchandise due at least one year after the balance sheet date but still
within a normal operating cycle
C. Payment on debt due in six months for which the company has the unconditional right
to defer settlement for at least one year after the balance sheet date
7. At the beginning of the year, Parent Company purchased all 500,000 shares of Sub
Incorporated for $15 per share. Just before the acquisition date, Sub’s balance sheet
reported net assets of $6 million. Parent determined the fair value of Sub’s property and
equipment was $1 million higher than reported by Sub. What amount of goodwill should
Parent report as a result of its acquisition of Sub?
A. $0.
B. $500,000.
C. $1,500,000.
Purchase price = 15 per share x 500,000 shares= 7,500,000
Fv = 6,000,000+1,000,000=7,000,000
Goodwill= 500,000
8. ABC Corporation has 150,000 shares of common stock authorized. There are 90,000
shares issued and 80,000 shares outstanding. How many shares of treasury stock does
ABC own?
A. 10,000.
B. 60,000.
C. 70,000.
9. For financial assets classified as available for sale, how are unrealized gains and losses
reflected in shareholders’ equity?
A. They are not recognized.
B. They flow through retained earnings.
C. They are a component of accumulated other comprehensive income.
Income statement
10. Which of the following is least likely a condition necessary for revenue
recognition?
A. Cash has been collected.
B. The goods have been delivered.
C. The price has been determined.
11. Which of the following would least likely increase pretax income?
A. Decreasing the bad debt expense estimate.
B. Increasing the useful life of an intangible asset.
C. Decreasing the residual value of a depreciable tangible asset.
12. Which of the following best describes the impact of depreciating equipment
with a useful life of 6 years using the declining balance method as compared to
the straight-line method?
A. Total depreciation expense will be higher over the life of the equipment.
B. Depreciation expense will be higher in the first year.
C. Scrapping the equipment after five years will result in a larger loss.
13. CC Corporation reported the following inventory transactions (in chronological
order) for the year:
Purchase
Sales
40 units at $30
13 units at $35
20 units at $40
35 units at $45
90 units at $50
60 units at $60
Assuming inventory at the beginning of the year was zero. Calculate the year end
inventory using FIFO and LIFO.
FIFO
LIFO
A. $5,220
$1,040
B. $2,100
$1,280
C. $2,100
$1,040
14. At the beginning of the year, Triple W Corporation purchased a new piece of
equipment to be used in its manufacturing operation. The cost of the equipment was
$25,000. The equipment is expected to be used for 4 years and then sold for $4,000.
Depreciation expense to be reported for the second year using the double-decliningbalance method is closest to:
A. $5,250.
B. $6,250.
C. $7,000.
25,000:4=6250
15. Which of the following transactions would most likely be reported below
income from continuing operations, net of tax?
A. Gain or loss from the sale of equipment used in a firm’s manufacturing
operation.
B. A change from the accelerated method of depreciation to the straight line
method.
C. The operating income of a physically and operationally distinct division
that is currently for sale, but not yet sold.
16. Which of the following transactions affects owners’ equity but does not affect
net income?
A. Foreign currency translation gain.
B. Repaying the face amount on a bond issued at par.
C. Dividends received from available-for-sale securities.
17. Which of the following would most likely result in higher gross profit margin,
assuming no fixed costs?
A. A 10% increase in the number of units sold.
B. A 5% decrease in production cost per unit.
C. A 7% decrease in administrative expenses.
Cash flow
18. Which of the following items is least likely considered a cash flow from financing
activity under U.S. GAAP?
A. Receipt of cash from the sale of bonds.
B. Payment of cash for dividends.
C. Payment of interest on debt.
19. Which of the following would be least likely to cause a change in investing cash
flow?
A. The sale of a division of the company.
B. The purchase of new machinery.
C. An increase in depreciation expense.
20. Depreciation expense would b
A. operating cash flow.
B. investing cash flow.
C. no cash flow impact.
21. In preparing a common-size cash flow statement, each cash flow is expressed
as a percentage of:
A. total assets.
B. total revenues.
C. the change in cash.
22. Continental Corporation reported sales revenue of $150,000 for the current
year. If accounts receivable decreased $10,000 during the year and accounts
payable increased $4,000 during the year, cash collections from sales were:
A. $154,000.
B. $160,000.
C. $164,000.
$150 sales + $10,000 decrease in accounts receivable = $160,000
23. Net income for Monique, Inc. for the year ended December 31, 20X7 was $78,000. Its
accounts receivable balance at December 31, 20X7 was $121,000, and this balance was
$69,000 at December 31, 20X6. The accounts payable balance at December 31, 20X7 was
$72,000 and was $43,000 at December 31, 20X6. Depreciation for 20X7 was $12,000, and
there was an unrealized gain of $15,000 included in 20X7 income from the change in value
of trading securities. Which of the following amounts represents Monique’s cash flow
from operations for 20X7?
A. $52,000.
B. $67,000.
C. $82,000.
Net income $78,000
Depreciation 12,000
Unrealized gain (15,000)
Increase in accounts receivable (52,000)
Increase in accounts payable 29,000
CF from operations = 52,000
24. Martin, Inc. had the following transactions during 20X7:
Purchased new fixed assets for $75,000.
Converted $70,000 worth of preferred shares to common shares.
Received cash dividends of $12,000. Paid cash dividends of $21,000.
Repaid mortgage principal of $17,000.
Assuming Martin follows U.S. GAAP, which of the following amounts represents
Martin’s cash flows from investing and cash flows from financing in 20X7,
respectively?
Cash flows from investing Cash flows from financing
A. ($5,000)
($21,000)
B. ($75,000)
($21,000)
C. ($75,000)
($38,000)
Purchased new fixed assets for $75,000 -- cash outflow from investing
Converted $70,000 of preferred shares to common shares -- noncash transaction
Received dividends of $12,000 -- cash inflow from operations
Paid dividends of $21,000 -- cash outflow from financing
Mortgage repayment of $17,000 -- cash outflow from financing
CFI = (75,000)
CFF = (21,000) + (17,000) = (38,000)
25. Assuming U.S. GAAP, use the following data to answer questions 25.a, 25.b, 25.c
Net income
$45
Depreciation
$75
Taxes paid
$25
Interest paid
$5
Dividends paid
$10
Cash received from sale of company building
$40
Issuance of preferred stock
$35
Repurchase of common stock
$30
Purchase of machinery
$20
Issuance of bonds
$50
Debt retired through issuance of common stock
$45
Paid off long-term bank borrowings
$15
Profit on sale of building
$20
25.a. Cash flow from operations is:
A. $70.
B. $100.
C. $120.
Net income - profit on sale of building + depreciation = 45 - 20 + 75 = $100
25.b. Cash flow from investing activities is:
A. –$30.
B. $20.
C. $50.
Cash from sale of building - purchase of machinery = 40 - 20 = $20
25.c. Cash flow from financing activities is:
A. $30.
B. $55.
C. $75.
Sale of preferred stock + issuance of bonds - principle payments on bank borrowings repurchase of common stock - dividends paid = 35 + 50 - 15 - 30 - 10 = $30