Accounting III Chapter 13 Objective Questions
True/False
Indicate whether the statement is true or false.
____
1. If the acceptable component percentage for cost of merchandise sold is "Not more than 60%" and the actual
component percentage is 58%, the company achieved an acceptable component percentage.
____
2. The price-earnings ratio is included at the end of the balance sheet for use by investors.
____
3. Creditors use financial statement information to determine whether the corporation is paying too much or too
little in dividends.
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4. The rate earned on average stockholders' equity equals net income after federal income tax divided by average
stockholders' equity.
____
5. The share of net income assigned to common stock equals total net income minus dividends paid.
____
6. In order for a corporation to be dissolved, all its assets are liquidated, taxes are paid, and then the correct
paperwork is filed with the state. The state notifies all investors and creditors that the corporation has been
dissolved.
____
7. The number of shares of stock outstanding equals the number of shares issued plus the number of shares held
as treasury stock.
____
8. The federal income tax paid by corporations is based on a percentage of the net income before federal income
tax.
____
9. Dividends declared appears in the Other Expenses section of the income statement.
____ 10. When managers identify a negative result for one of the component percentages, they plan changes that will
bring the component percentage to an acceptable level.
____ 11. Corporations use the same tax form as individuals to report their income to the Internal Revenue Service.
____ 12. The amount of net income belonging to a single share of stock is called earnings per share.
____ 13. The amount of total stockholders' equity belonging to a single share of stock is called equity per share.
____ 14. The statement of stockholders' equity is used to analyze equity per share and to determine the price earnings
ratio.
____ 15. The price at which a share of stock may be sold on the stock market is called the price-earnings ratio.
____ 16. The two sections of the statement of stockholders' equity are Paid-in Capital and Retained Earnings.
____ 17. Recognizing a portion of an expense for intangible assets in each of several years is known as depreciation.
____ 18. When a corporation replaces that statement of stockholders' equity with a statement of retained earnings, it
places the information about paid-in capital on the balance sheet.
____ 19. Net sales is the basis for calculating component percentages on the income statement.
____ 20. The equity per share of common stock equals its total par (or stated) value divided by the number of shares of
common stock outstanding.
____ 21. The share of net income that is assigned to preferred stockholders can be determined by dividing the total par
value of preferred by the par value of the stock.
____ 22. The market value of a company's stock is not recorded in the financial records of the business.
____ 23. Balance sheet information is used to analyze component percentages and earnings per share.
____ 24. In order for a corporation to dissolve, all the current stockholders must agree to sell their stock and liquidate
the assets.
____ 25. Managers should investigate when there is a negative result for one or more of the component percentages.
____ 26. The relationship between net income and average total assets is called the accounts receivable turnover ratio.
____ 27. The board of directors uses the information found in the financial statements to determine whether to declare
a dividend.
____ 28. Earnings per share for common stock equals the share of net income assigned to the common stock divided by
the number of shares of stock outstanding.
____ 29. The accounts receivable turnover ratio equals net sales on account divided by the average book value of
inventory.
____ 30. If the acceptable component percentage for income from operations is "Not less than 16%" and the actual
component percentage is 15%, the company achieved an acceptable component percentage.
____ 31. Acceptable component percentages are often based on industry standards and component percentages of the
corporation's previous year's income statement.
____ 32. The total selling expenses component percentage is calculated by dividing total selling expenses by net sales.
____ 33. If a corporation pays estimated federal income tax quarterly, an annual income tax report does not have to be
submitted to the IRS.
____ 34. The entry to close Dividends–Common and Dividends–Preferred is a debit to Retained Earnings and credits
to Dividends–Common and Dividends–Preferred.
____ 35. The entry to reverse the accrual of interest income is a debit to Interest Receivable and a credit to Interest
Income.
Multiple Choice
Identify the choice that best completes the statement or answers the question.
The following information is taken from the financial statements of EarthWorking, Inc.:
Net income$60,000.00
Dividend rate on preferred stock10%
Total value of preferred stock $180,000.00
Number of shares of preferred stock outstanding 1,800
Total value of common stock $368,400.00
Number of shares of common stock outstanding10,000
____ 36. Refer to the EarthWorking Inc. Scenario. The share of net income that is assigned to preferred stock is ____.
a. $33.33
c. $18,000.00
b. $6,000.00
d. $60,000.00
____ 37. Refer to the EarthWorking Inc. Scenario. The share of net income that is assigned to common stock is ____.
a. $18,000.00
c. $50,000.00
b. $42,000.00
d. $60,000.00
____ 38. Refer to the EarthWorking Inc. Scenario. The earnings per share on common stock is ____.
____ 39.
____ 40.
____ 41.
____ 42.
____ 43.
____ 44.
____ 45.
____ 46.
____ 47.
____ 48.
____ 49.
____ 50.
a. $3.33
c. $6.00
b. $4.20
d. $6.14
Refer to the EarthWorking Inc. Scenario. The equity per share on preferred stock is ____.
a. $100.00
c. $18.00
b. $36.84
d. $6.00
Refer to the EarthWorking Inc. Scenario. The equity per share on common stock is ____.
a. $100.00
c. $18.00
b. $36.84
d. $6.00
Halocontour Co. has equity per share of $16.00, earnings per share of $3.20, and a market price per share of
$32.00. What is the company's price-earnings ratio?
a. 2 times
c. 100 times
b. 20 times
d. 10 times
Gross profit on operations appears on which financial statement?
a. balance sheet
c. retained earnings statement
b. income statement
d. statement of stockholders' equity
The second closing entry is recorded for income statement accounts with debit balances. These accounts
include ____.
a. cost, expense, and dividend accounts
b. cost, contra revenue, and expense accounts
c. revenue and expense accounts
d. revenue and contra cost accounts
Nuggets, Inc., has average total assets of $600,000.00, and its rate earned on the average total assets is 12%.
What is the company's net income after federal income tax?
a. $6,000.00
c. $72,000.00
b. $36,000.00
d. cannot be determined
Total paid-in capital is found on which financial statement?
a. balance sheet
c. retained earnings statement
b. income statement
d. statement of stockholders' equity
The first closing entry is recorded for income statement accounts with credit balances. These accounts include
____.
a. cost, expense, and dividend accounts
b. cost, contra revenue, and expense accounts
c. revenue and expense accounts
d. revenue and contra cost accounts
The total value of capital stock issued is shown on which financial statement?
a. balance sheet
c. retained earnings statement
b. income statement
d. statement of stockholders' equity
Land's Beginning has net sales on account of $500,000.00 and an accounts receivable turnover ratio of 8
times. What is the company's average book value of accounts receivable?
a. $31,250.00
c. $4,500,000.00
b. $62,500.00
d. cannot be determined
Intangible assets are listed on which financial statement?
a. balance sheet
c. retained earnings statement
b. income statement
d. statement of stockholders' equity
If the rate earned on average stockholders' equity is 15% and the average stockholders' equity is $750,000.00,
the net income after federal income tax must be ____.
a. $56,250.00
c. $112,500.00
b. $75,000.00
d. $5,000,000.00
The following information is taken from the financial statements of CinderBlock, Inc.
Net income$50,000.00
Dividend rate on preferred stock12%
Total value of preferred stock $200,000.00
Number of shares of preferred stock outstanding 2,000
Total value of common stock $752,000.00
Number of shares of common stock outstanding 100,000
____ 51. Refer to the CinderBlock, Inc. Scenario. The share of net income that is assigned to preferred stock is ____.
a. $2,000.00
c. $26,000.00
b. $24,000.00
d. $50,000.00
____ 52. Refer to the CinderBlock, Inc. Scenario. The share of net income that is assigned to common stock is ____.
a. $2,000.00
c. $26,000.00
b. $24,000.00
d. $50,000.00
____ 53. Refer to the CinderBlock, Inc. Scenario. The earnings per share on common stock is ____.
a. $0.26
c. $2.60
b. $0.24
d. $6.00
____ 54. Refer to the CinderBlock, Inc. Scenario. The equity per share on preferred stock is ____.
a. $7.52
c. $60.00
b. $15.04
d. $100.00
____ 55. Refer to the CinderBlock, Inc. Scenario. The equity per share on common stock is ____.
a. $7.52
c. $60.00
b. $15.04
d. $100.00
____ 56. The amount of stockholders' equity belonging to a single share of stock is the ____.
a. earnings per share
c. market value per share
b. equity per share
d. price-earnings ratio
____ 57. The price at which a share of stock may be sold on the stock market is the ____.
a. earnings per share
c. market value
b. equity per share
d. price-earnings ratio
____ 58. The relationship between net income and average stockholders' equity is the ____.
a. rate earned on average stockholders' equity
b. rate earned on average net income
c. rate earned on average total assets
d. price-earnings ratio
____ 59. The relationship between the market value per share and earnings per share of a stock is ____.
a. rate earned on average stockholders' equity
b. rate earned on average net income
c. rate earned on average total assets
d. price-earnings ratio
____ 60. Organization costs are classified as ____.
a. current assets
c. intangible assets
b. current liabilities
d. intangible liabilities
Accounting III Chapter 13 Objective Questions
Answer Section
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36. ANS: C
37. ANS: B
38. ANS: B
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